<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997
------------------
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 33-95042
--------
PEGASUS MEDIA & COMMUNICATIONS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2778525
------------------------------ ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
c/o Pegasus Communications Management Company
5 Radnor Corporate Center; Suite 454, Radnor, PA 19087
- - ------------------------------------------------ ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (610) 341-1801
--------------
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 October 31, 1997:
Class A, Common Stock, $0.01 par value 161,500
Class B, Common Stock, $0.01 par value 8,500
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
Form 10-Q
Table of Contents
For the Quarterly Period Ended September 30, 1997
<TABLE>
<CAPTION>
Page
----
Part I. Financial Information
<S> <C> <C>
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1996 and September 30, 1997 3
Consolidated Statements of Operations
Three months ended September 30, 1996 and 1997 4
Consolidated Statements of Operations
Nine months ended September 30, 1996 and 1997 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 22
Part II. Other Information
Item 6 Exhibits and Reports on Form 8-K 23
Signature 24
</TABLE>
2
<PAGE>
Pegasus Media & Communications, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,416,778 $ 5,365,844
Accounts receivable, less allowance for doubtful
accounts of $243,000 and $296,000, respectively 6,030,697 6,017,311
Program rights 1,289,437 1,588,392
Inventory 697,957 --
Deferred taxes 1,290,397 1,290,397
Prepaid expenses and other 717,664 597,432
------------- -------------
Total current assets 18,442,930 14,859,376
Property and equipment, net 23,823,489 25,856,499
Intangible assets, net 82,500,306 73,768,896
Program rights 1,294,985 1,747,621
Investment in affiliate -- 3,703,000
Deposits and other 166,498 102,412
------------- -------------
Total assets $ 126,228,208 $ 120,037,804
============= =============
LIABILITIES AND EQUITY
Current liabilities:
Notes payable $ 48,610
Current portion of long-term debt 306,975 $ 3,313,033
Accounts payable 6,111,411 2,227,239
Accrued interest 5,592,083 3,190,246
Accrued expenses 5,303,652 5,941,372
Current portion of program rights payable 601,205 897,687
------------- -------------
Total current liabilities 17,963,936 15,569,577
Long-term debt, net 115,155,610 82,631,241
Program rights payable 1,365,284 1,242,102
Deferred taxes 1,339,859 1,389,859
------------- -------------
Total liabilities 135,824,689 100,832,779
Commitments and contingent liabilities -- --
Total equity (deficiency):
Class A common stock 1,615 1,615
Class B common stock 85 85
Additional paid-in capital 7,880,848 38,368,348
Accumulated deficit (17,479,029) (19,165,023)
------------- -------------
Total equity (deficiency) (9,596,481) 19,205,025
------------- -------------
Total liabilities and equity (deficiency) $ 126,228,208 $ 120,037,804
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Pegasus Media & Communications, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------
1996 1997
------------ -------------
(unaudited)
<S> <C> <C>
Revenues:
Broadcasting revenue,
net of agency commissions $ 5,020,614 $ 5,504,782
Barter programming revenue 1,337,643 1,453,300
Basic and satellite service 3,853,157 3,668,896
Premium services 540,565 446,806
Other 158,164 219,373
------------ ------------
Total revenues 10,910,143 11,293,157
------------ ------------
Operating expenses:
Barter programming expense 1,337,643 1,453,300
Programming 2,198,216 1,957,219
General and administrative 1,540,193 1,382,695
Technical and operations 838,474 967,639
Marketing and selling 1,518,797 1,363,004
Incentive compensation 315,625 188,711
Corporate expenses 599,260 311,047
Depreciation and amortization 3,553,217 2,571,134
------------ ------------
Income (loss) from operations (991,282) 1,098,408
Interest expense (3,354,213) (2,923,225)
Interest income 20,026 10,871
Other expenses, net (14,952) (102,274)
------------ ------------
Loss before income taxes (4,340,421) (1,916,220)
Provision for income taxes 22,756 --
------------ ------------
Loss before extraordinary items (4,363,177) (1,916,220)
Extraordinary loss from extinguishment of debt, net (250,603) --
------------ ------------
Net loss ($ 4,613,780) ($ 1,916,220)
============ ============
Loss per share:
Loss before extraordinary items ($ 25.67) ($ 11.27)
Extraordinary loss (1.47) --
------------ ------------
Net loss ($ 27.14) ($ 11.27)
============ ============
Weighted average shares outstanding 170,000 170,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
Pegasus Media & Communications, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1996 1997
------------- -------------
(unaudited)
<S> <C> <C>
Revenues:
Broadcasting revenue,
net of agency commissions $ 14,347,439 $ 16,950,204
Barter programming revenue 3,820,000 4,507,600
Basic and satellite service 9,964,424 13,513,453
Premium services 1,488,513 1,573,705
Other 415,808 615,330
------------ ------------
Total revenues 30,036,184 37,160,292
------------ ------------
Operating expenses:
Barter programming expense 3,820,000 4,507,600
Programming 5,862,461 7,014,831
General and administrative 4,037,383 4,827,097
Technical and operations 2,462,164 2,849,615
Marketing and selling 3,893,414 4,604,797
Incentive compensation 605,390 659,549
Corporate expenses 1,695,195 1,034,032
Depreciation and amortization 8,404,652 8,733,161
------------ ------------
Income (loss) from operations (744,475) 2,929,610
Interest expense (8,914,918) (8,943,640)
Interest income 171,513 92,864
Other expenses, net (76,493) (166,148)
Gain on sale of cable system -- 4,451,320
------------ ------------
Loss before income taxes (9,564,373) (1,635,994)
Provision (benefit) for income taxes (110,000) 50,000
------------ ------------
Loss before extraordinary items (9,454,373) (1,685,994)
Extraordinary loss from extinquishment of debt, net (250,603) --
------------ ------------
Net loss ($ 9,704,976) ($ 1,685,994)
============ ============
Loss per share:
Loss before extraordinary items ($ 55.61) ($ 9.92)
Extraordinary loss (1.47) --
------------ ------------
Net loss ($ 57.09) ($ 9.92)
============ ============
Weighted average shares outstanding 170,000 170,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
Pegasus Media & Communications, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1996 1997
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 9,704,976) ($ 1,685,994)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Extraordinary loss on
extinguishment of debt, net 250,603 --
Depreciation and amortization 8,404,652 8,733,161
Program rights amortization 1,063,439 1,214,289
Accretion on discount of bonds 294,066 295,486
Gain on sale of cable system -- (4,451,320)
Bad debt expense (92,413) 249,374
Deferred income taxes (110,000) 50,000
Change in assets and liabilities:
Accounts receivable 510,413 (930,995)
Inventory 867,270 49,303
Prepaid expenses and other (1,164,568) 101,853
Accounts payable and accrued expenses 3,430,344 1,335,059
Accrued interest (2,288,579) (2,401,837)
Deposits and other (74,173) (32,906)
------------ ------------
Net cash provided by operating activities 1,386,078 2,525,473
------------ ------------
Cash flows from investing activities:
Acquisitions (43,050,514) --
Capital expenditures (2,584,446) (8,090,652)
Purchase of intangible assets (843,210) (2,858,623)
Payments of programming rights (1,319,343) (1,792,580)
Proceeds from sale of cable system -- 6,945,270
Other -- (300,953)
------------ ------------
Net cash used for investing activities (47,797,513) (6,097,538)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 247,736 --
Repayments of long-term debt (8,870,653) (142,764)
Borrowings on revolving credit facilities 40,400,000 526,250
Repayments of revolving credit facilities -- (30,126,250)
Contributions by parent -- 30,487,500
Restricted cash 9,875,818 --
Debt issuance costs (1,383,670) --
Capital lease repayments (206,937) (223,605)
------------ ------------
Net cash provided by financing activities 40,062,294 521,131
------------ ------------
Net increase (decrease) in cash and cash equivalents (6,349,141) (3,050,934)
Cash and cash equivalents, beginning of year 11,966,567 8,416,778
------------ ------------
Cash and cash equivalents, end of period $ 5,617,426 $ 5,365,844
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Pegasus Media & Communications, Inc. ("Pegasus", or together with its
subsidiaries stated below, the "Company"), is a diversified media and
communications company whose subsidiaries consist of Pegasus Broadcast
Television, Inc. ("PBT"), Pegasus Cable Television, Inc. ("PCT"), Pegasus
Broadcast Associates, L.P. ("PBA"), Pegasus Satellite Television, Inc. ("PST"),
PST Holdings, Inc. ("PSTH"), MCT Cablevision, L.P. ("MCT") and Pegasus Cable
Television of San German, Inc. ("PST-SG"). PBT owns and operates broadcast
television ("TV") stations affiliated with the Fox Broadcasting Company ("Fox"),
United Paramount Network ("UPN") and The Warner Brothers Television Network
("WB") television networks. PCT, together with its subsidiaries, Pegasus Cable
Television of Connecticut, Inc. ("PCT-CT"), MCT and PCT-SG, operate cable
television ("Cable") systems that provide service to individual and commercial
subscribers in New England and Puerto Rico. PBA holds a television station
license which simulcasts programming from a station operated by PBT. On July 9,
1997, the Company transferred the stock of PST, which provides direct broadcast
satellite ("DBS") services to customers in the New England area, to a newly
formed subsidiary of the Company, PSTH, and PSTH transferred the PST stock to
Pegasus Satellite Holdings, Inc. ("PSH"), a subsidiary of Pegasus Communications
Corporation ("PCC"), the Company's parent (the "PST/PSH Exchange"). In exchange,
PSTH received $27.8 million of preferred equity in PSH. An independent appraisal
was performed to ascertain the fair market value of PST.
Prior to October 21, 1997, PSH was a DBS holding company whose
subsidiaries provided DBS services to customers in certain rural areas, which,
as of September 30, 1997, encompassed portions of twenty-five states. On October
21, 1997, all of the assets of PSH were conveyed to PM&C in the Subsidiaries
Combination (as defined) (see Note 8).
Prior to October 8, 1996, the Company was a direct subsidiary of
Pegasus Communications Holdings, Inc. ("PCH"). Effective October 8, 1996, the
Company became a direct subsidiary of PCC as a result of PCC's initial public
offering (the "Initial Public Offering") of its Class A Common Stock. On
December 30, 1996, as a result of a registered exchange offer made to holders of
Pegasus' Class B Common Stock, Pegasus became a wholly-owned subsidiary of PCC.
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements include
the accounts of Pegasus and all of its subsidiaries. All intercompany
transactions and balances have been eliminated.
The unaudited consolidated financial statements reflect all adjustments
consisting of normal recurring items which are, in the opinion of management,
necessary for a fair presentation, in all material respects, of the financial
position of the Company and the results of its operations and its cash flows for
the interim period.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and the disclosure of contingencies. Actual results could differ
from those estimates. Significant estimates relate to barter transactions and
the useful lives and recoverability of intangible assets.
7
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies (continued):
Inventories:
Inventories consist of equipment held for resale to customers and
installation supplies. Inventories are stated at the lower of cost or market on
a first-in, first-out basis.
Revenue:
The Company operates in two industry segments: multichannel television
(DBS and Cable) and broadcast television (TV). The Company recognizes revenue in
its multichannel operations when video and audio services are provided. The
Company recognizes revenue in its broadcast operations when advertising spots
are broadcast.
Barter Programming:
The Company obtains a portion of its TV programming, including pre-sold
advertisements, through its network affiliation agreements with Fox, UPN and WB,
and also through independent producers. The Company does not make any direct
payments for this programming. For running network programming, the Company
receives payments from Fox, UPN and WB. For running independent producers'
programming, the Company receives no direct payments. Instead, the Company
retains a portion of the available advertisement spots to sell on its own
account. Barter programming revenue and the related expense are recognized when
the pre-sold advertisements are broadcast. These amounts are presented gross as
barter programming revenue and expense in the accompanying consolidated
statements of operations.
Advertising Costs:
Advertising costs are charged to operations in the period incurred.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid investments purchased
with an initial maturity of three months or less. The Company has cash balances
in excess of the federally insured limits at various banks.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base, and
their dispersion across different businesses and geographic regions.
3. Common Stock:
On December 30, 1996, the Company, through a registered exchange offer,
exchanged all of the Pegasus Class B Common Stock for 191,775 shares in the
aggregate of PCC's Class A Common Stock.
Under the terms of the Series B Notes, Pegasus' ability to pay
dividends on the Company's common stock is subject to certain restrictions.
8
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Common Stock (continued):
At December 31, 1996 and September 30, 1997 common stock consists of
the following:
Pegasus Class A common stock, $0.01 par value;
230,000 shares authorized; 161,500 issued and
outstanding ................................. $1,615
Pegasus Class B common stock, $0.01 par value;
20,000 shares authorized; 8,500 issued and
outstanding ................................. 85
------
Total common stock .......................... $1,700
======
4. Investment in Affiliate:
As a result of the PST/PSH Exchange on July 9, 1997 (see Note 1), the
Company had no DBS operations or DBS operating assets during the third quarter
of 1997. The $3.7 million investment in affiliate represents the carrying value,
at cost, of the $27.8 million of preferred equity in PSH received by PSTH in the
PST/PSH Exchange. The Company's consolidated statements of operations for the
nine months ended September 30, 1997 include the results of the Company's New
England DBS operations for the six month period ended June 30, 1997 only. The
Company's consolidated statements of operations for the three months ended
September 30, 1997 do not include any results of the Company's New England DBS
operations.
5. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ ------------
<S> <C> <C>
Series B Notes payable by Pegasus, due 2005,
interest at 12.5%, payable semi-annually in
arrears on January 1 and July 1, net of
unamortized discount of $3,412,222 and
$3,116,736 as of December 31, 1996 and
September 30, 1997, respectively .............. $ 81,587,778 $ 81,883,264
Senior-seven year revolving credit facility,
interest at the Company's option at either
the banks prime rate, plus an applicable margin
or LIBOR, plus an applicable margin ........... 29,600,000 --
Mortgage payable, due 2000, interest at
8.75% ......................................... 498,468 483,036
Note payable, due 1998, interest at
10.0% ......................................... 3,050,000 3,050,000
Capital leases and other .......................... 726,339 527,974
------------ ------------
115,462,585 85,944,274
Less current maturities ........................... 306,975 3,313,033
------------ ------------
Long-term debt .................................... $115,155,610 $ 82,631,241
============ ============
</TABLE>
9
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Long-Term Debt (continued):
In July 1995, the Company sold 85,000 units consisting of $85.0 million
in aggregate of 12 1/2% Series A Senior Subordinated Notes due 2005 (the "Series
A Notes" and, together with the Series B Notes, the "Notes") and 8,500 shares of
the Company's Class B Common Stock (the "Note Offering"). The Class B Common
Stock was subsequently exchanged for PCC Class A Common Stock (see Note 3). In
November 1995, the Company exchanged its Series A Notes for the Series B Notes.
The Series B Notes have substantially the same terms and provisions as the
Series A Notes. The Series B Notes are guaranteed on a full, unconditional,
senior subordinated basis, jointly and severally by a majority of the wholly
owned direct and indirect subsidiaries of Pegasus. The Company's indebtedness
contains certain financial and operating covenants, including restrictions on
the Company to incur additional indebtedness, create liens and to pay dividends.
In August 1996, the Company entered into a $50.0 million seven-year
senior revolving credit facility (the "Old Credit Facility"), which is
collateralized by substantially all of the Company's assets. Outstanding
balances under the Old Credit Facility were repaid by PCC, the Company's parent.
The Old Credit Facility is subject to certain financial covenants as defined in
the loan agreement, including a debt to adjusted cash flow covenant.
In October 1997, the Company received a commitment letter for a fully
underwritten, $180.0 million six-year, secured, reducing revolving credit
facility (the "New Credit Facility"). Upon the closing of the New Credit
Facility, outstanding balances under the Old Credit Facility, if any, will be
repaid, and commitments under the Old Credit Facility will be terminated. The
New Credit Facility will be subject to certain financial covenants as defined in
the loan agreement, including a debt to adjusted cash flow covenant. The New
Credit Facility will be used to finance future acquisitions, working capital,
capital expenditures and for general corporate purposes.
6. Commitments and Contingent Liabilities:
Legal Matters:
From time to time the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
consolidated operations, cash flows or financial position of the Company.
7. Disposition/Exchange:
Effective January 31, 1997, the Company sold substantially all the
assets of its New Hampshire cable system to State Cable TV Corporation for
approximately $6.9 million in cash, net of certain selling costs. The Company
recognized a gain on the transaction of approximately $4.5 million.
On July 9, 1997, the Company transferred the stock of PST, which
provides DBS services to customers in the New England area, to PSTH, and PSTH
transferred the PST stock to PSH in exchange for $27.8 million of preferred
equity in PSH (see Note 1).
The following unaudited summary, prepared on a pro forma basis,
combines the results of operations as if the above cable system/DBS territory
had been sold/exchanged as of the beginning of the periods presented, after
including the impact of certain adjustments, such as the Company's reduced
commission rate, payments to related parties, amortization of intangibles,
interest expense and related income tax effects. The pro forma information does
not purport to be indicative of what would have occurred had the
disposition/exchange been made on those dates or of results which may occur in
the future.
10
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Disposition/Exchange (continued):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(in thousands, except earnings per share) (unaudited)
-----------
1996 1997
---- ----
<S> <C> <C>
Net revenues .................................. $30,898 $ 33,930
======= ========
Operating income .............................. $ 651 $ 2,290
======= ========
Net loss ...................................... ($3,019) ($ 1,450)
======= ========
Net loss per share ............................ ($17.76) ($ 8.53)
======= ========
</TABLE>
8. Other Events:
On January 27, 1997, PCC, the Company's parent, completed a unit
offering (the "Unit Offering") in which it sold 100,000 shares of its 12 3/4%
Series A Cumulative Exchangeable Preferred Stock and Warrants to purchase
193,600 shares of its Class A Common Stock at an exercise price of $15 per
share, to the public at a price of $1,000 per unit. A portion of the proceeds
from the Unit Offering were used to repay all outstanding indebtedness under the
Old Credit Facility as indicated in Note 5.
On August 1, 1997, the Company launched TV station WPME, which is
affiliated with UPN. WPME is in the Portland, Maine Designated Market Area
("DMA") and is being operated under a local marketing agreement ("LMA"). WPME's
offices, studio and transmission facilities are co-located with WPXT, a TV
station in the Portland market the Company has owned and operated since January
1996.
On October 17, 1997, the Company launched TV station WGFL, which is
affiliated with WB. WGFL is in the Gainesville, Florida DMA and is being
operated under a LMA.
On October 21, 1997, PCC, the Company's parent, completed an offering
in which it sold $115.0 million of 9.625% Senior Notes (the "Senior Notes
Offering"). Prior to October 21, 1997, PCC had two principal operating
subsidiaries: Pegasus and PSH. Upon consummation of the Senior Notes Offering,
Pegasus acquired the assets of PSH (the "Subsidiaries Combination"), which
assets consisted of the stock of its subsidiaries that hold the rights to all of
the Company's DBS territories. As a result of the Subsidiaries Combination,
Pegasus is the direct or indirect parent of all of PCC's subsidiaries that
operate PCC's TV, DBS and cable businesses.
9. Other Information (unaudited):
As defined in the indenture governing the Series B Notes (the
"Indenture"), the Company is required to provide Adjusted Operating Cash Flow
data for Pegasus and its Restricted Subsidiaries, on a consolidated basis, where
Adjusted Operating Cash Flow is defined as, "for the four most recent fiscal
quarters for which internal financial statements are available, Operating Cash
Flow of such Person and its Restricted Subsidiaries less DBS Cash Flow
(Satellite Segment Operating Cash Flow) for the most recent four-quarter period
plus DBS Cash Flow for the most recent quarterly period, multiplied by four."
Operating Cash Flow is income from operations before income taxes, depreciation
and amortization, interest expense, extraordinary items and non-cash management
fees and incentive compensation. Restricted Subsidiaries carries the same
meaning as in the Indenture. As a result of the PST/PSH Exchange on July 9, 1997
(see Note 1), the Company had no DBS operations or DBS operating assets during
the third quarter of 1997 and, under the terms of the PST/PSH Exchange, PSTH is
designated as an Unrestricted Subsidiary.
11
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Other Information (unaudited - continued):
Four Quarters
Ended
(in thousands) September 30, 1997
--------------------
Net revenues $53,321
Direct operating expenses, excluding incentive
compensation and management fees 33,507
-------
Income from operations before incentive
compensation, management fees and
depreciation and amortization 19,814
Allowable cash portion of incentive
compensation and management fees 1,384
-------
Operating cash flow 18,430
Less DBS cash flow, last four quarters --
Plus DBS cash flow, last quarter annualized --
-------
Adjusted operating cash flow $18,430
=======
10. Subsidiary Guarantees (unaudited):
The Series B Notes are guaranteed on a full, unconditional, senior
subordinated basis, jointly and severally by each of the wholly-owned direct and
indirect subsidiaries of Pegasus with the exception of certain subsidiaries as
described below (the "Guarantor Subsidiaries"). PSTH, WTLH License Corp., WTLH,
Inc., Pegasus Anasco Holdings, Inc. and PCT-CT, subsidiaries of Pegasus, are not
guarantors of the Series B Notes ("Non-guarantor Subsidiaries"). As the result
of these subsidiaries not being guarantors of the Series B Notes, the following
condensed combining financial statements have been provided. The Company
believes separate financial statements and other disclosures concerning the
Guarantor Subsidiaries are not deemed material to investors.
12
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
10. Subsidiary Guarantees (unaudited - continued):
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor
As of September 30, 1997 Subsidiaries Subsidiaries Pegasus Eliminations Totals
------------ ------------- ------- ------------ ------
Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $3,220 $2,019 $127 $5,366
Accounts receivable, net 6,016 1 6,017
Other current assets 3,405 71 3,476
-------------------------------------------------------------------------------------
Total current assets 12,641 2,091 127 14,859
Property and equipment, net 23,343 2,513 25,856
Intangible assets, net 66,106 3,270 4,393 73,769
Other assets 1,785 66 1,851
Investment in subsidiaries and affiliates 3,703 88,016 ($88,016) 3,703
-------------------------------------------------------------------------------------
Total assets $103,875 $11,577 $92,602 ($88,016) $120,038
=====================================================================================
Liabilities and total equity:
Current portion of long-term debt $223 $3,090 $3,313
Accounts payable 1,155 1,072 2,227
Other current liabilities 9,218 812 ($15,444) $15,444 10,030
-------------------------------------------------------------------------------------
Total current liabilities 10,596 4,974 (15,444) 15,444 15,570
Long-term debt 99,779 4,429 81,883 (103,460) 82,631
Other liabilities 1,740 310 582 2,632
-------------------------------------------------------------------------------------
Total liabilities 112,115 9,713 67,021 (88,016) 100,833
Total equity (deficit) (8,240) 1,864 25,581 19,205
-------------------------------------------------------------------------------------
Total liabilities and equity $103,875 $11,577 $92,602 ($88,016) $120,038
=====================================================================================
As of December 31, 1996
Assets:
Cash and cash equivalents $6,171 $807 $1,439 $8,417
Restricted cash
Accounts receivable, net 6,036 (5) 6,031
Other current assets 3,673 639 ($317) 3,995
-------------------------------------------------------------------------------------
Total current assets 15,880 1,441 1,439 (317) 18,443
Property and equipment, net 21,293 2,530 23,823
Intangible assets, net 75,463 3,176 3,861 82,500
Other assets 1,462 1,462
Investment in subsidiaries and affiliates 68,297 (68,297) 0
-------------------------------------------------------------------------------------
Total assets $114,098 $7,147 $73,597 ($68,614) $126,228
=====================================================================================
Liabilities and total equity:
Current portion of long-term debt $224 $83 $307
Accounts payable 5,681 598 $149 ($317) 6,111
Other current liabilities 11,128 369 (8,769) 8,818 11,546
-------------------------------------------------------------------------------------
Total current liabilities 17,033 1,050 (8,620) 8,501 17,964
Long-term debt 103,018 7,665 81,588 (77,115) 115,156
Other liabilities 2,237 307 161 2,705
-------------------------------------------------------------------------------------
Total liabilities 122,288 9,022 73,129 (68,614) 135,825
Total equity (deficit) (8,190) (1,875) 468 (9,597)
-------------------------------------------------------------------------------------
Total liabilities and equity $114,098 $7,147 $73,597 ($68,614) $126,228
=====================================================================================
</TABLE>
13
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
10. Subsidiary Guarantees (unaudited - continued):
Condensed Consolidated Statements of Operations
For the Nine Months ended September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations Totals
------------ ------------ ------- ------------ ------
<S> <C> <C> <C> <C> <C>
Total revenue $31,795 $5,440 ($75) $37,160
Total operating expenses 28,777 5,221 $307 (75) 34,230
------------------------------------------------------------------------------------
Income (loss) from operations 3,018 219 (307) 2,930
Interest expense 11,487 236 5,037 (7,816) 8,944
Other (4,409) 31 (4,378)
------------------------------------------------------------------------------------
Income (loss) before income
taxes (4,060) (17) (5,375) 7,816 (1,636)
Provision for income taxes 50 50
------------------------------------------------------------------------------------
Net income (loss) ($4,110) ($17) ($5,375) $7,816 ($1,686)
====================================================================================
</TABLE>
Condensed Consolidated Statements of Operations
For the Nine Months ended September 30, 1996
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations Totals
------------ ------------ ------- ------------ ------
<S> <C> <C> <C> <C> <C>
Total revenue $27,970 $2,141 ($75) $30,036
Total operating expenses 28,795 1,755 $305 (75) 30,780
------------------------------------------------------------------------------------
Income (loss) from operations (825) 386 (305) (744)
Interest expense 7,688 322 5,495 (4,590) 8,915
Other 77 (172) (95)
------------------------------------------------------------------------------------
Income (loss) before income
taxes (8,590) 64 (5,628) 4,590 (9,564)
Provision for income taxes (110) (110)
------------------------------------------------------------------------------------
Income (loss) before
extraordinary item (8,480) 64 (5,628) 4,590 (9,454)
Extraordinary loss on
extinguishment of debt (251) (251)
------------------------------------------------------------------------------------
Net income (loss) ($8,480) $64 ($5,879) $4,590 ($9,705)
====================================================================================
</TABLE>
14
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
10. Subsidiary Guarantees (unaudited - continued):
Condensed Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations Totals
------------ ------------ ------- ------------ ------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($4,110) ($17) ($5,375) $7,816 ($1,686)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 6,679 1,747 307 8,733
Program rights amortization 1,214 1,214
Change in assets and liabilities:
Accounts receivable (931) (931)
Accounts payable and accrued expenses 5,664 917 (149) (7,499) (1,067)
Prepaids and other (427) 562 (66) 69
Other (8,268) 4,779 (317) (3,806)
---------------------------------------------------------------------
Net cash provided (used) by operating activities (179) 3,209 (504) 2,526
Cash flows from investing activities:
Capital expenditures (7,605) (486) (8,091)
Purchase of intangible assets (769) (1,282) (808) (2,859)
Other 4,852 4,852
---------------------------------------------------------------------
Net cash provided (used) by investing activities (3,522) (1,768) (808) (6,098)
Cash flows from financing activities:
Proceeds from debt 526 526
Repayment of debt (138) (229) (30,126) (30,493)
Other 888 29,600 30,488
---------------------------------------------------------------------
Net cash provided (used) by financing activities 750 (229) 521
Net increase (decrease) in cash and cash equivalents (2,951) 1,212 (1,312) (3,051)
Cash and cash equivalents, beginning of year 6,171 807 1,439 8,417
---------------------------------------------------------------------
Cash and cash equivalents, end of period $3,220 $2,019 $127 $5,366
=====================================================================
</TABLE>
15
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
10. Subsidiary Guarantees (unaudited - continued):
Condensed Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 1996
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations Totals
------------ ------------ ------- ------------ ------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($8,480) $64 ($5,879) $4,590 ($9,705)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary loss on extinguishment
of debt 251 251
Depreciation and amortization 7,613 487 305 8,405
Program rights amortization 1,063 1,063
Change in assets and liabilities:
Accounts receivable 533 (23) 510
Accounts payable and accrued expenses 9,599 453 113 (6,735) 3,430
Prepaids and other (1,159) (13) 7 (1,165)
Other (1,884) 481 (1,403)
---------------------------------------------------------------------
Net cash provided (used) by operating activities 7,536 968 (4,973) (2,145) 1,386
Cash flows from investing activities:
Capital expenditures (1,909) (675) (2,584)
Purchase of intangible assets (812) (9) (22) (843)
Other (44,213) (158) (44,371)
---------------------------------------------------------------------
Net cash provided (used) by investing activities (46,934) (684) (180) (47,798)
Cash flows from financing activities:
Proceeds from debt 40,622 26 40,648
Repayment of debt (9,055) (23) (9,078)
Other 1,000 (506) 5,853 2,145 8,492
---------------------------------------------------------------------
Net cash provided (used) by financing activities 32,567 (503) 5,853 2,145 40,062
Net increase (decrease) in cash and cash equivalents (6,831) (219) 700 (6,350)
Cash and cash equivalents, beginning of year 11,316 651 11,967
---------------------------------------------------------------------
Cash and cash equivalents, end of period $4,485 $432 $700 $5,617
=====================================================================
</TABLE>
16
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to the Company that are based on the beliefs of the
management of the Company, as well as assumptions made by and information
currently available to the Company's management. When used in this Report, the
words "estimate," "project," "believe," "anticipate," "intend," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as the date hereof. The Company
sdoes 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.
General
The Company is a diversified media and communications company operating
in two business segments: multichannel television and broadcast television.
Pegasus Multichannel Television includes DBS and cable businesses. Prior to July
9, 1997, DBS operations consisted of providing DIRECTV(R) ("DIRECTV") services
in certain rural areas of New England (Connecticut, Massachusetts, New Hampshire
and New York) in which the Company holds the exclusive right to provide such
services. On July 9, 1997, the Company transferred the stock of PST, which held
all of the Company's DBS operations, to a newly formed subsidiary of the
Company, PSTH, and PSTH transferred the PST stock to PSH. In exchange, PSTH
received $27.8 million of preferred equity in PSH. On October 21, 1997, the
Company acquired the assets of PSH in the Subsidiaries Combination, which assets
consisted of the stock of its subsidiaries that hold the rights to all of the
Company's DBS territories. As a result of the Subsidiaries Combination, the
Company is the direct or indirect parent of all of PCC's subsidiaries that
operate PCC's TV, DBS and cable businesses. Its cable operations consist of
systems in New England (Connecticut and Massachusetts) and Puerto Rico. The
Company sold its New Hampshire cable system effective January 31, 1997. Pegasus
Broadcast Television owns and operates five TV stations affiliated with FOX and
operates one affiliated with UPN and another affiliated with WB. It has entered
into an agreement to operate an additional TV station which will be affiliated
with WB and is to commence operations in 1998.
Multichannel revenues are derived from monthly customer subscriptions,
pay-per-view services, subscriber equipment rentals, home shopping commissions,
advertising time sales and installation charges. Broadcast revenues are derived
from the sale of broadcast air time to local and national advertisers.
The Company's location operating expenses consist of (i) programming
expenses, (ii) marketing and selling costs, including advertising and promotion
expenses, local sales commissions, and ratings and research expenditures, (iii)
technical and operations costs, and (iv) general and administrative expenses.
Multichannel programming expenses consist of amounts paid to program suppliers,
DSS authorization charges and satellite control fees, each of which is paid on a
per subscriber basis, and DIRECTV royalties which are equal to 5% of DBS program
service revenues. Broadcast programming expenses include the amortization of
long-term program rights purchases, music license costs and "barter" programming
expenses which represent the value of broadcast air time provided to television
program suppliers in lieu of cash.
Location Cash Flow is defined as net revenues less location operating
expenses. Although Location Cash Flow is not a measure of performance under
generally accepted accounting principles, the Company believes that Location
Cash Flow is accepted within the Company's business segments as a generally
recognized measure of performance and is used by analysts who report publicly on
the performance of companies operating in such segments. Nevertheless, this
measure should not be considered in isolation or as a substitute for income from
operations, net income, net cash provided by operating activities or any other
measure for determining the Company's operating performance or liquidity which
is calculated in accordance with generally accepted accounting principles.
17
<PAGE>
Results of Operations
Three months ended September 30, 1997 compared to three months ended September
30, 1996
The Company's net revenues increased by approximately $382,000 or 4%
for the three months ended September 30, 1997 as compared to the same period in
1996. Multichannel Television net revenues decreased $214,000 or 5% and
Broadcast Television net revenues increased $596,000 or 9%. The net revenues
decreased as a result of (i) a $1.0 million decrease in DBS revenues due to the
PST/PSH Exchange on July 9, 1997 (and the resulting absence of DBS operations
during the three months ended September 30, 1997), (ii) a $819,000 or 24%
increase in Cable revenues which was the net result of a $262,000 or 11%
increase in same system revenues due primarily to rate increases and new
combined service packages, a $1.0 million increase due to the system acquired
effective September 1, 1996 and a $478,000 reduction due to the sale of the
Company's New Hampshire cable system effective January 31, 1997, and (iii) a
$596,000 or 9% increase in TV revenues of which $543,000 or 91% was due to
ratings growth which the Company was able to convert into higher revenues and
$53,000 or 9% was due to a new station launched on August 1, 1997.
The Company's total location operating expenses decreased by
approximately $311,000 or 4% for the three months ended September 30, 1997 as
compared to the same period in 1996. Multichannel Television location operating
expenses decreased $706,000 or 24% and Broadcast Television location operating
expenses increased $395,000 or 9%. The location operating expenses increased as
a result of (i) a $1.1 million decrease in DBS operating expenses due to the
PST/PSH Exchange on July 9, 1997, (ii) a $404,000 or 22% increase in Cable
operating expenses as the net result of a $89,000 or 7% increase in same system
direct operating expenses due primarily to increases in programming costs
associated with the new combined service packages, a $563,000 increase
attributable to the system acquired effective September 1, 1996 and a $248,000
reduction due to the sale of the Company's New Hampshire cable system effective
January 31, 1997, and (iii) a $395,000 or 9% increase in TV operating expenses
as the result of a $280,000 or 6% increase in same station direct operating
expenses and a $115,000 increase attributable to the new station launched on
August 1, 1997. The Company no longer requires new DBS customers to sign a
one-year programming contract and, as a result, subscriber acquisition costs,
which were capitalized and amortized over a twelve-month period, will be charged
to operations in the period incurred. This change will become effective October
1, 1997.
As a result of these factors, Location Cash Flow increased by $693,000
or 20% for the three months ended September 30, 1997 as compared to the same
period in 1996. Multichannel Television Location Cash Flow increased $492,000 or
32% and Broadcast Television Location Cash Flow increased $201,000 or 10%.
Location Cash Flow increased as a result of (i) a $77,000 increase in DBS
Location Cash Flow, (ii) a $415,000 or 26% increase in Cable Location Cash Flow
which was the net result of a $174,000 or 15% increase in same system Location
Cash Flow, a $471,000 increase due to the system acquired effective September 1,
1996 and a $230,000 reduction due to the sale of the Company's New Hampshire
cable system effective January 31, 1997, and (iii) a $201,000 or 10% increase in
TV Location Cash Flow as the net result of a $263,000 or 13% increase in same
station Location Cash Flow and a $62,000 decrease attributable to the new
station launched on August 1, 1997.
Incentive compensation, which is calculated from increases in Pro forma
Location Cash Flow, decreased by approximately $126,000 or 40% for the three
months ended September 30, 1997 as compared to the same period in 1996 mainly
due to the PST/PSH Exchange on July 9, 1997.
Corporate expenses decreased by $288,000 or 48% for the three months
ended September 30, 1997 as compared to the same period in 1996.
Depreciation and amortization expense decreased by approximately
$983,000 or 28% for the three months ended September 30, 1997 as compared to the
same period in 1996 as the net result of the Company increasing its fixed and
intangible asset base as a result of three completed acquisitions during 1996
and the PST/PSH Exchange on July 9, 1997.
18
<PAGE>
As a result of these factors, income from operations increased
approximately $2.1 million for the three months ended September 30, 1997 as
compared to the same period in 1996.
Interest expense decreased by approximately $430,000 or 13% for the
three months ended September 30, 1997 as compared to the same period in 1996 as
the net result of debt associated with the cable system acquired effective
September 1, 1996 being paid off and an increase in debt associated with the
Company's other acquisitions.
The Company reported a net loss of approximately $1.9 million for the
three months ended September 30, 1997 as compared to a net loss of approximately
$4.6 million for the same period in 1996. The $2.7 million change was the net
result of an increase in income from operations of approximately $2.1 million, a
decrease in interest expense of $430,000, a decrease in the provision for income
taxes of $23,000, an increase in other expenses of approximately $96,000 and a
decrease in the extraordinary loss on extinguishment of debt of $251,000.
Nine months ended September 30, 1997 compared to nine months ended September 30,
1996
The Company's net revenues increased by approximately $7.1 million or
24% for the nine months ended September 30, 1997 as compared to the same period
in 1996. Multichannel Television net revenues increased $3.8 million or 33% and
Broadcast Television net revenues increased $3.3 million or 18%. The net
revenues increased as a result of (i) a $497,000 or 19% increase in DBS revenues
as the net result of a $1.5 million or 98% increase in DBS revenues for the
comparable six month periods ended June 30 mainly due to increased revenue per
subscriber and the increased number of DBS subscribers and a $1.0 million
decrease due to the PST/PSH Exchange on July 9, 1997, (ii) a $3.3 million or 37%
increase in Cable revenues which was the net result of a $564,000 or 8% increase
in same system revenues due primarily to rate increases and new combined service
packages, a $3.9 million increase due to the system acquired effective September
1, 1996 and a $1.1 million reduction due to the sale of the Company's New
Hampshire cable system effective January 31, 1997, and (iii) a $3.3 million or
18% increase in TV revenues of which $1.9 million or 58% was due to ratings
growth which the Company was able to convert into higher revenues, $1.3 million
or 40% was the result of acquisitions made in the first quarter of 1996 and
$53,000 or 2% was due to the new station launched on August 1, 1997.
The Company's total location operating expenses increased by
approximately $3.7 million or 19% for the nine months ended September 30, 1997
as compared to the same period in 1996. Multichannel Television location
operating expenses increased $1.9 million or 26% and Broadcast Television
location operating expenses increased $1.8 million or 14%. The location
operating expenses increased as a result of (i) a $226,000 or 10% increase in
DBS operating expenses as the net result of a $1.3 million or 106% increase for
the comparable six month periods ended June 30 generated by the Company's DBS
operations due to a same territory increase in programming costs of $659,000 and
increases in other operating costs totaling $677,000, all generated from the
increased number of DBS subscribers and a $1.1 million decrease due the PST/PSH
Exchange on July 9, 1997, (ii) a $1.7 million or 34% increase in Cable operating
expenses as the net result of a $183,000 or 5% increase in same system direct
operating expenses due primarily to increases in programming costs associated
with the new combined service packages, a $2.1 million increase attributable to
the system acquired effective September 1, 1996 and a $616,000 reduction due to
the sale of the Company's New Hampshire cable system effective January 31, 1997,
and (iii) a $1.8 million or 14% increase in TV operating expenses as the result
of a $552,000 or 5% increase in same station direct operating expenses, a $1.2
million increase attributable to stations acquired in the first quarter of 1996
and a $115,000 increase attributable due to the new station launched on August
1, 1997.
19
<PAGE>
As a result of these factors, Location Cash Flow increased by $3.4
million or 34% for the nine months ended September 30, 1997 as compared to the
same period in 1996. Multichannel Television Location Cash Flow increased $1.9
million or 44% and Broadcast Television Location Cash Flow increased $1.5
million or 27%. Location Cash Flow increased as a result of (i) a $271,000 or
118% increase in DBS Location Cash Flow, (ii) a $1.6 million or 40% increase in
Cable Location Cash Flow which was the net result of a $381,000 or 11% increase
in same system Location Cash Flow, a $1.8 million increase due to the system
acquired effective September 1, 1996 and a $513,000 reduction due to the sale of
the Company's New Hampshire cable system effective January 31, 1997, and (iii) a
$1.5 million or 27% increase in TV Location Cash Flow as the net result of a
$1.4 million or 30% increase in same station Location Cash Flow, a $186,000
increase attributable to stations acquired in the first quarter of 1996 and a
$62,000 decrease attributable to the new station launched on August 1, 1997.
Incentive compensation, which is calculated from increases in Pro forma
Location Cash Flow, increased by approximately $55,000 or 9% for the nine months
ended September 30, 1997 as compared to the same period in 1996.
Corporate expenses decreased by $661,000 or 39% for the nine months
ended September 30, 1997 as compared to the same period in 1996.
Depreciation and amortization expense increased by approximately
$328,000 or 4% for the nine months ended September 30, 1997 as compared to the
same period in 1996 as the net result of the Company increasing its fixed and
intangible asset base as a result of three completed acquisitions during 1996
and the PST/PSH Exchange on July 9, 1997.
As a result of these factors, income from operations increased
approximately $3.7 million for the nine months ended September 30, 1997 as
compared to the same period in 1996.
Interest expense increased by approximately $29,000 for the nine months
ended September 30, 1997 as compared to the same period in 1996.
The Company reported a net loss of approximately $1.7 million for the
nine months ended September 30, 1997 as compared to a net loss of approximately
$9.7 million for the same period in 1996. The $8.0 million change was the net
result of an increase in income from operations of approximately $3.7 million,
an increase in interest expense of $29,000, an increase in the provision for
income taxes of $160,000, an increase in other expenses of approximately
$168,000, a decrease in the extraordinary loss on extinguishment of debt of
$251,000 and a gain on the sale of the New Hampshire cable system of
approximately $4.5 million.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been the net cash
provided by its TV and cable operations and credit available under its credit
facilities. The Company's principal uses of its cash have been to fund
acquisitions, to meet its debt service obligations, to fund investments in its
TV and cable technical facilities and fund investments in multichannel customer
premises equipment.
During the nine months ended September 30, 1997, net cash provided by
operating activities was approximately $2.5 million, which together with $8.4
million of cash on hand, $6.9 million of net proceeds from the sale of the New
Hampshire cable system and $521,000 of net cash provided by the Company's
financing activities was used to fund other investing activities of
approximately $13.0 million. Investing activities, net of the proceeds from the
sale of the New Hampshire cable system, consisted of (i) broadcast television
transmitter, tower and facility constructions and upgrades totaling
approximately $4.2 million, (ii) the interconnection and expansion of the Puerto
Rico cable systems amounting to approximately $1.3 million, (iii) DBS subscriber
acquisition costs, which are being amortized over a twelve-month period, of
approximately $701,000, (iv) payments of programming rights amounting to $1.8
million, and (v) maintenance and other capital expenditures and intangibles
totaling approximately $5.1 million. As of September 30, 1997, the Company's
cash on hand approximated $5.4 million.
20
<PAGE>
In October 1997, the Company received a commitment letter for a fully
underwritten, $180.0 million six-year, secured, reducing revolving credit
facility (see Note 5). Upon the closing of the New Credit Facility, outstanding
balances under the Old Credit Facility, if any, will be repaid, and commitments
under the Old Credit Facility will be terminated. The New Credit Facility will
be subject to certain financial covenants as defined in the loan agreement,
including a debt to adjusted cash flow covenant. The New Credit Facility will be
used to finance future acquisitions, working capital, capital expenditures and
for general corporate purposes.
The Company believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations. The
Company believes that cash on hand, together with available borrowings under the
Old Credit Facility, the New Credit Facility and future indebtedness which may
be incurred by the Company and its subsidiaries will give the Company the
ability to fund acquisitions and other capital requirements in the future.
However, there can be no assurance that the future cash flows of the Company
will be sufficient to meet all of the Company's obligations and commitments.
The Company closely monitors conditions in the capital markets to
identify opportunities for the effective and prudent use of financial leverage.
In financing its future expansion and acquisition requirements, the Company
would expect to avail itself of such opportunities and thereby increase its
indebtedness which could result in increased debt service requirements. There
can be no assurance that such debt financing can be completed on terms
satisfactory to the Company or at all. The Company may also issue additional
equity to fund its future expansion and acquisition requirements.
Capital Expenditures
The Company's capital expenditures aggregated $6.2 million in 1996. The
Company expects recurring renewal and refurbishment capital expenditures to
total approximately $2.0 million per year. In addition to these maintenance
capital expenditures, the Company's 1997 capital projects include (i) DBS
expenditures of approximately $230 per new subscriber, for the first two
quarters of 1997, prior to the disposition of the Company's DBS operations in
the PST/PSH exchange, (ii) cable expenditures of approximately $1.3 million for
the completion of the interconnection of the Puerto Rico cable systems and fiber
upgrades in Puerto Rico and New England, and (iii) approximately $6.5 million to
$7.5 million of TV expenditures for broadcast television transmitter, tower and
facility constructions and upgrades. The Company no longer requires new DBS
customers to sign a one-year programming contract and, as a result, subscriber
acquisition costs, which were being capitalized and amortized over a
twelve-month period, will be charged to operations in the period incurred. This
change will become effective October 1, 1997. The Company launched two new TV
stations, WPME on August 1, 1997 and WGFL on October 17, 1997 and its plans are
to commence operations of an additional station in 1998. For the nine month
period ended September 30, 1997, the Company incurred $8.1 million in capital
expenditures. There can be no assurance that the Company's capital expenditure
plans will not change in the future.
Other
Under the terms of the Indenture, PM&C is prohibited from paying
dividends prior to July 1, 1998. The payment of dividends subsequent to July 1,
1998 will be subject to the satisfaction of certain financial conditions set
forth in the Indenture, and will also be subject to lender consent under the
terms of the Old Credit Facility. Under the terms of the New Credit Facility,
the Company will be restricted from paying dividends.
The Company's ability to incur additional indebtedness is limited under
the terms of the Indenture and the Old Credit Facility. The Company's ability to
incur additional indebtedness will be limited under the terms of the New Credit
Facility. These limitations take the form of certain leverage ratios and are
dependent upon certain measures of operating profitability. Under the terms of
both the Old Credit Facility and the New Credit Facility, capital expenditures
and business acquisitions that do not meet certain criteria will require lender
consent.
21
<PAGE>
The Company's revenues vary throughout the year. As is typical in the
broadcast television industry, the Company's first quarter generally produces
the lowest revenues for the year, and the fourth quarter generally produces the
highest revenues for the year. The Company's operating results in any period may
be affected by the incurrence of advertising and promotion expenses that do not
necessarily produce commensurate revenues in the short-term until the impact of
such advertising and promotion is realized in future periods.
The Company believes that inflation has not been a material factor
affecting the Company's business. In general, the Company's revenues and
expenses are impacted to the same extent by inflation. Substantially all of the
Company's indebtedness bear interest at a fixed rate.
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This statement establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held common
stock or potential common stock. This statement is effective for financial
statements issued for periods ending after December 15, 1997, earlier
application is not permitted. This statement requires restatement of all
prior-period EPS data presented. The Company does not expect that the
implementation of this standard will have a significant effect on its
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and in its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This statement is
effective for financial statements issued for periods beginning after December
15, 1997. This statement requires an enterprise to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial position. The Company does not expect that the implementation of
this standard will have a significant effect on its consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for the way public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographical areas and major customers. This statement is
effective for financial statements issued for periods beginning after December
15, 1997. The Company does not expect that the implementation of this standard
will have a significant effect on its consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
22
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter
ended September 30, 1997.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pegasus Media & Communications, Inc.
Date November 13, 1997 By /s/ Robert N. Verdecchio
- - ---------------------- -----------------------------------------
Robert N. Verdecchio
Senior Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
24
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