<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1998
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from__________ to __________
Commission File Number 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: (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 July 31, 1998:
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 June 30, 1998
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
Part I. Financial Information
Item 1 Combined Financial Statements
Combined Balance Sheets
December 31, 1997 and June 30, 1998 3
Combined Statements of Operations
Three months ended June 30, 1997 and 1998 4
Combined Statements of Operations
Six months ended June 30, 1997 and 1998 5
Combined Statements of Cash Flows
Six months ended June 30, 1997 and 1998 6
Notes to Combined Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 22
Part II. Other Information
Item 5 Other Information 23
Item 6 Exhibits and Reports on Form 8-K 23
Signature 24
</TABLE>
2
<PAGE>
Pegasus Media & Communications, Inc.
Combined Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------- --------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,010,315 $ 22,772,092
Restricted cash -- 600,000
Accounts receivable, less allowance for doubtful
accounts of $319,000 and $221,000, respectively 13,074,636 14,077,882
Program rights 2,059,346 1,457,256
Inventory 974,920 1,883,484
Deferred taxes 2,602,453 2,602,453
Prepaid expenses and other 767,482 1,005,521
------------- -------------
Total current assets 36,489,152 44,398,688
Property and equipment, net 27,382,713 27,844,436
Intangible assets, net 272,164,370 310,393,461
Program rights 2,262,299 1,612,299
Deposits and other 624,629 624,629
------------- -------------
Total assets $ 338,923,163 $ 384,873,513
============= =============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 6,328,463 $ 2,000,953
Accounts payable 5,207,719 6,642,188
Accrued interest 6,025,004 6,217,569
Accrued satellite programming and fees 6,089,389 4,408,359
Accrued expenses 11,134,589 12,747,085
Current portion of program rights payable 1,418,581 808,761
------------- -------------
Total current liabilities 36,203,745 32,824,915
Long-term debt, net 86,979,613 141,662,645
Advances from affiliates 9,845,583 --
Program rights payable 1,416,446 801,446
Deferred taxes 2,652,454 2,777,454
------------- -------------
Total liabilities 137,097,841 178,066,460
------------- -------------
Commitments and contingent liabilities -- --
Minority interest 3,000,000 3,000,000
------------- -------------
Common stockholder's equity:
Class A common stock 1,615 1,615
Class B common stock 85 85
Additional paid-in capital 227,221,423 248,643,636
Accumulated deficit (28,397,801) (44,838,283)
------------- -------------
Total stockholder's equity 198,825,322 203,807,053
------------- -------------
Total liabilities and stockholder's equity $ 338,923,163 $ 384,873,513
============= =============
</TABLE>
See accompanying notes to combined financial statements
3
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------
1997 1998
------------ ------------
(unaudited)
<S> <C> <C>
Revenues:
Basic and satellite service $ 5,077,085 $ 21,714,378
Premium services 561,427 2,828,616
Broadcasting revenue,
net of agency commissions 6,168,318 6,809,541
Barter programming revenue 1,603,500 1,787,200
Other 182,473 1,322,325
------------ ------------
Total revenues 13,592,803 34,462,060
Operating expenses:
Barter programming expense 1,603,500 1,787,200
Programming 2,633,038 11,656,548
General and administrative 1,638,171 5,569,626
Technical and operations 915,181 1,012,775
Marketing and selling 1,791,368 6,353,123
Incentive compensation 215,963 521,453
Corporate expenses 346,731 770,797
Depreciation and amortization 2,981,125 10,142,104
------------ ------------
Income (loss) from operations 1,467,726 (3,351,566)
Interest expense (2,867,451) (3,438,181)
Interest income 37,856 45,721
Other expenses, net (168,745) (96,394)
Loss before income taxes (1,530,614) (6,840,420)
Provision for income taxes 50,000 50,000
------------ ------------
Net loss ($ 1,580,614) ($ 6,890,420)
============ ============
</TABLE>
See accompanying notes to combined financial statements
4
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------
1997 1998
------------ ------------
(unaudited)
<S> <C> <C>
Revenues:
Basic and satellite service $ 9,844,557 $ 39,740,849
Premium services 1,126,899 5,637,382
Broadcasting revenue,
net of agency commissions 11,445,422 12,151,659
Barter programming revenue 3,054,300 3,246,700
Other 395,957 2,422,806
------------ ------------
Total revenues 25,867,135 63,199,396
Operating expenses:
Barter programming expense 3,054,300 3,246,700
Programming 5,057,612 21,867,804
General and administrative 3,444,402 10,505,258
Technical and operations 1,881,976 2,087,550
Marketing and selling 3,241,793 12,739,922
Incentive compensation 470,838 930,658
Corporate expenses 722,985 1,438,102
Depreciation and amortization 6,162,027 19,793,182
------------ ------------
Income (loss) from operations 1,831,202 (9,409,780)
Interest expense (6,020,415) (6,821,991)
Interest income 81,993 120,255
Other expenses, net (63,874) (203,966)
Gain on sale of cable system 4,451,320 --
------------ ------------
Income (loss) before income taxes 280,226 (16,315,482)
Provision for income taxes 50,000 125,000
------------ ------------
Net income (loss) $ 230,226 ($16,440,482)
============ ============
</TABLE>
See accompanying notes to combined financial statements
5
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------
1997 1998
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 230,226 ($16,440,482)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 6,162,027 19,793,182
Program rights amortization 781,125 1,251,490
Accretion on discount of bonds 196,872 197,824
Gain on sale of cable system (4,451,320) --
Bad debt expense 188,387 568,168
Change in assets and liabilities:
Accounts receivable (1,427,055) (1,460,700)
Inventory 49,303 (908,564)
Prepaid expenses and other 286,945 (238,039)
Accounts payable and accrued expenses 2,139,961 651,696
Accrued interest 178,438 192,565
Capitalized subscriber acquisition costs (700,520) --
Deposits and other (32,906) --
------------ ------------
Net cash provided by operating activities 3,601,483 3,607,140
------------ ------------
Cash flows from investing activities:
Acquisitions -- (42,252,899)
Capital expenditures (5,097,948) (3,448,023)
Purchase of intangible assets (1,491,687) (1,498,090)
Payments of programming rights (1,287,725) (1,224,220)
Proceeds from sale of cable system 6,945,270 --
------------ ------------
Net cash used by investing activities (932,090) (48,423,232)
------------ ------------
Cash flows from financing activities:
Repayments of long-term debt (110,768) (5,360,660)
Borrowings on bank credit facilities 526,250 46,000,000
Repayments of bank credit facilities (30,126,250) --
Contributions by Parent 30,487,500 20,522,254
Net repayments of borrowings from affiliates -- (9,845,583)
Restricted cash -- (600,000)
Capital lease repayments (161,883) (138,142)
------------ ------------
Net cash provided by financing activities 614,849 50,577,869
------------ ------------
Net increase in cash and cash equivalents 3,284,242 5,761,777
Cash and cash equivalents, beginning of year 8,416,778 17,010,315
------------ ------------
Cash and cash equivalents, end of period $ 11,701,020 $ 22,772,092
============ ============
</TABLE>
See accompanying notes to combined financial statements
6
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED 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 direct subsidiaries consist of Pegasus Broadcast
Television, Inc. ("PBT"), Pegasus Cable Television, Inc. ("PCT"), PST Holdings,
Inc. ("PSTH") and Pegasus Satellite Development Corporation ("PSDC"). PBT,
together with its subsidiaries, own and operate broadcast television ("TV")
stations affiliated with the Fox Broadcasting Company ("Fox") and operate,
pursuant to local marketing agreements, stations affiliated with United
Paramount Network ("UPN") and The WB Television Network ("WB"). PCT, together
with its subsidiaries, own and operate cable television ("Cable") systems that
provide service to individual and commercial subscribers in New England and
Puerto Rico. PSTH, together with its subsidiaries, provide direct broadcast
satellite television ("DBS") services to customers in certain rural areas in the
United States. PSDC provides capital for various satellite initiatives such as
subscriber acquisition costs.
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 Pegasus Communications Corporation ("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.
In July 1997, the Company transferred the stock of Pegasus Satellite
Television, Inc. ("PST"), which provided DBS services to customers in the New
England area, to a newly formed subsidiary of the Company, PSTH. PSTH
transferred the PST stock to Pegasus Satellite Holdings, Inc. ("PSH"), a
subsidiary of PCC, in exchange for $27.8 million of preferred equity in PSH (the
"PST/PSH Exchange").
In October 1997, the Company acquired the assets of PSH (the
"Subsidiaries Combination"), which assets consisted of the stock of its
subsidiaries that hold the rights to all of its DBS territories. As a result of
the Subsidiaries Combination, the Company was the direct or indirect parent of
all of PCC's subsidiaries that operate the TV, DBS and cable businesses. In
April 1998, PCC acquired significant other DBS properties in a merger with
Digital Television Services, Inc. ("DTS"). DTS and Pegasus are both direct
subsidiariesof PCC and each of them operates in the DBS business.
2. Basis of Presentation:
The accompanying unaudited combined financial statements have
been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The unaudited combined financial statements reflect all
adjustments consisting of normal recurring items which are, in the opinion of
management, necessary for a fair presentation, in all material respects, of the
financial position of the Company and the results of its operations and its cash
flows for the interim period. For further information, refer to the combined
financial statements and footnotes thereto for the year ended December 31, 1997
included in the Company's Form 10-K for the year then ended. The accompanying
combined financial statements include the accounts of Pegasus and all of its
subsidiaries and the accounts of Pegasus Development Corporation ("PDC"). All
intercompany transactions and balances have been eliminated.
PDC, a subsidiary of PCC, provided capital for various satellite
initiatives such as subscriber acquisition costs from October 1, 1997 through
March 31, 1998. The accounts of PDC have been included in the accompanying
combined financial statements since subscriber acquisition costs are an integral
part of the DBS operations and their inclusion is necessary for a fair
presentation of the financial position of the Company and the results of its
operations and its cash flows.
7
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
3. Common Stock:
At December 31, 1997 and June 30, 1998 common stock consists of the
following:
<TABLE>
<CAPTION>
<S> <C>
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
======
</TABLE>
The Company's ability to pay dividends on its Common Stock is subject
to certain restrictions (see footnote 4 - Long-Term Debt).
4. Long-Term Debt:
<TABLE>
<CAPTION>
December 31, June 30,
Long-term debt consists of the following: 1997 1998
------------- ------------
<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 $3,018,003 and $2,820,179 as of December 31, 1997
and June 30, 1998, respectively.......................................... $ 81,981,997 $ 82,179,821
Senior six-year $180.0 million revolving credit facility, payable by Pegasus,
interest at the Company's option at either the bank's base rate plus an
applicable margin or LIBOR plus an applicable margin .................... -- 46,000,000
Mortgage payable, due 2000, interest at 8.75% ............................... 477,664 464,664
Note payable, due 1998, interest at 10% ..................................... 3,050,000 --
Sellers' notes, various maturities and interest rates ....................... 7,171,621 14,493,961
Capital leases and other .................................................... 626,794 525,152
------------ ------------
93,308,076 143,663,598
Less current maturities ..................................................... 6,328,463 2,000,953
------------ ------------
Long-term debt .............................................................. $ 86,979,613 $141,662,645
============ ============
</TABLE>
In December 1997, the Company entered into a $180.0 million six-year
senior revolving credit facility (the "New Credit Facility"), which is
collateralized by substantially all of the assets of Pegasus and its
subsidiaries. Interest on the New Credit Facility is, at the Company's option,
at either the bank's base rate plus an applicable margin or LIBOR plus an
applicable margin. The New Credit Facility is subject to certain financial
covenants as defined in the loan agreement, including a debt to adjusted cash
flow covenant. The New Credit Facility will be used to finance future
acquisitions and for working capital, capital expenditures and general corporate
purposes.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company's ability to incur additional
indebtedness, create liens and pay dividends.
8
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
5. Net Income (Loss) Per Share:
Calculation of Basic and Diluted Earnings Per Share:
The following table sets forth the computation of the number of shares
used in the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------
1997 1998
---- ----
<S> <C> <C>
Net income (loss) ................. ($ 1,580,614) ($ 6,890,420)
============ ============
Weighted average shares outstanding 170,000 170,000
============ ============
Six Months Ended June 30,
---------------------------------------
1997 1998
---- ----
Net income (loss) ................. $ 230,226 ($16,440,482)
============ ============
Weighted average shares outstanding 170,000 170,000
============ ============
</TABLE>
For the three and six months ended June 30, 1997 and 1998, net income
(loss) per share was determined by dividing net income (loss) by applicable
shares outstanding. The total shares used for the calculation of basic and
diluted net income (loss) per share were the same as there are no securities
that have not been issued.
6. Acquisitions:
As of January 7, 1998, the Company acquired, from an independent
DIRECTV(R) ("DIRECTV") provider, the rights to provide DIRECTV programming in
certain rural areas of Minnesota and the related assets in exchange for total
consideration of approximately $1.9 million, which consisted of $1.8 million in
cash and $32,000 in assumed liabilities.
As of March 9, 1998, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Nebraska and Texas and the related assets in exchange for total consideration of
approximately $15.6 million, which consisted of $5.9 million in cash, $105,000
in assumed liabilities, a $9.4 million note, payable over four years; and
$75,000 in cash and a $150,000 obligation, payable over two years, for
consultancy and non-compete agreements.
As of April 9, 1998, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
New Mexico and Texas and the related assets in exchange for total consideration
of approximately $14.3 million, which consisted of $13.1 million in cash,
$298,000 in assumed liabilities and 37,304 shares of PCC's Class A Common Stock
(amounting to $900,000 at the time of issuance).
9
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
6. Acquisitions (continued):
As of May 11, 1998, the Company acquired, from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Idaho and Oregon and the related assets in exchange for total
consideration of approximately $9.3 million, which consisted of $9.2 million in
cash and $140,000 in assumed liabilities.
As of June 10, 1998, the Company acquired, from four independent
DIRECTV providers, the rights to provide DIRECTV programming in certain areas of
Idaho, South Dakota and Texas and the related assets in exchange for total
consideration of approximately $12.5 million, which consisted of $12.2 million
in cash, $154,000 in assumed liabilities, and a $120,000 obligation, payable
over three years, for a non-compete agreement.
The following unaudited summary, prepared on a pro forma basis,
combines the results of operations as if the above DBS territories had been
acquired as of the beginning of the periods presented, after including the
impact of certain adjustments, such as the Company's payments to related
parties, amortization of intangibles, interest expense and related income tax
effects. The pro forma information does not purport to be indicative of what
would have occurred had the acquisitions been made on those dates or of results
which may occur in the future. This pro forma information does not include any
acquisitions that occurred subsequent to June 30, 1998.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
(in thousands, except per share data) (unaudited)
1997 1998
---- ----
<S> <C> <C>
Net revenues .................... $ 53,347 $ 67,100
-------- --------
Operating loss ................... ($13,569) ($13,040)
-------- --------
Net loss before extraordinary item ($26,383) ($21,405)
-------- --------
Net loss per share ............... ($155.19) ($125.91)
======== ========
</TABLE>
7. 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
combined operations, liquidity, cash flows or financial position of the Company.
8. Other Events:
Effective July 1, 1998, the Company sold substantially all the assets
of its remaining New England cable systems to Avalon Cable of New England LLC
for approximately $30 million in cash. The Company expects to recognize a
nonrecurring gain of approximately $26 million in the third quarter of 1998
relating to this transaction.
As of July 10, 1998, the Company acquired, from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Alabama, Nebraska and South Dakota and the related assets in exchange
for total consideration of approximately $17.9 million, which consisted of $17.8
million in cash; and a $125,000 obligation, payable over one year, for a
consultancy and non-compete agreement.
10
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
8. Other Events (continued):
On July 23, 1998, the Company entered into an agreement to purchase a
cable system serving Aguadilla, Puerto Rico and neighboring communities for a
purchase price of approximately $42 million in cash. The Aguadilla cable system
serves approximately 21,500 subscribers and passes approximately 81,000 of the
90,000 homes in the franchise area. The Aquadilla cable system is contiguous to
the Company's existing Puerto Rico cable system and, upon completion of the
purchase, the Company intends to consolidate the Aquadilla cable system with its
existing cable system. The closing of this acquisition is subject to regulatory
and other approvals, as well as customary conditions. The Company expects this
transaction to close in the fourth quarter of 1998 or the first quarter of 1999.
In July 1998, Pegasus commenced operations of TV station WFXU, which
simulcasts the signal of WTLH, a TV station owned by the Company which is
affiliated with Fox. WFXU is in the Tallahassee, Florida Designated Market Area
("DMA") and is being operated under a local marketing agreement ("LMA").
9. Subsidiary Guarantees:
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"). WTLH License Corp., WTLH, Inc.,
Pegasus Anasco Holdings, Inc., PSDC and PCT-CT, all of which are direct or
indirect 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.
11
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
9. Subsidiary Guarantees (continued):
Condensed Combined Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------ ------- ------------ --------
<S> <C> <C> <C> <C>
As of June 30, 1998
Assets:
Cash and cash equivalents $ 14,751 $3,471 $1,689 $19,911
Accounts receivable, net 14,100 (22) 14,078
Other current assets 6,844 105 6,949
--------------------------------------------------------------------------------
Total current assets 35,695 3,554 1,689 40,938
Property and equipment, net 25,698 2,144 27,842
Intangible assets, net 302,853 3,086 4,418 310,357
Other assets 1,747 66 1,813
Investment in subsidiaries and affiliates 265,634 ($265,634)
--------------------------------------------------------------------------------
Total assets $365,993 $8,784 $271,807 ($265,634) $380,950
================================================================================
Liabilities and total equity:
Current portion of long-term debt $1,986 $15 $2,001
Accounts payable 4,898 1,744 6,642
Other current liabilities 23,998 182 ($13,682) $13,682 24,180
--------------------------------------------------------------------------------
Total current liabilities 30,882 1,941 (13,682) 13,682 32,823
Long-term debt 334,370 4,429 82,180 (279,316) 141,663
Other liabilities (800) 3,989 369 3,558
--------------------------------------------------------------------------------
Total liabilities 364,452 10,359 68,867 (265,634) 178,044
Minority interest 3,000 3,000
Total equity (deficit) (1,459) (1,575) 202,940 199,906
--------------------------------------------------------------------------------
Total liabilities and equity $365,993 $8,784 $271,807 ($265,634) $380,950
================================================================================
As of December 31, 1997
Assets:
Cash and cash equivalents $9,170 $2,511 $5,329 $17,010
Accounts receivable, net 13,074 1 13,075
Other current assets 6,340 64 6,404
--------------------------------------------------------------------------------
Total current assets 28,584 2,576 5,329 36,489
Property and equipment, net 25,159 2,224 27,383
Intangible assets, net 263,039 3,416 5,709 272,164
Other assets 2,396 66 2,462
Investment in subsidiaries and affiliates 270,212 ($270,212)
--------------------------------------------------------------------------------
Total assets $319,178 $8,216 $281,316 ($270,212) $338,498
================================================================================
Liabilities and total equity:
Current portion of long-term debt $3,244 $3,084 $6,328
Accounts payable 3,894 1,314 5,208
Other current liabilities 23,838 831 ($14,102) $14,102 24,669
--------------------------------------------------------------------------------
Total current liabilities 30,976 5,229 (14,102) 14,102 36,205
Long-term debt 284,883 4,429 81,982 (284,314) 86,980
Other liabilities 13,061 307 546 13,914
--------------------------------------------------------------------------------
Total liabilities 328,920 9,965 68,426 (270,212) 137,099
Minority interest 3,000 3,000
Total equity (deficit) (12,742) (1,749) 212,890 198,399
--------------------------------------------------------------------------------
Total liabilities and equity $319,178 $8,216 $281,316 ($270,212) $338,498
================================================================================
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C>
As of June 30, 1998
Assets:
Cash and cash equivalents $2,861 $22,772
Accounts receivable, net 14,078
Other current assets 600 7,549
--------------------------------------------------
Total current assets 3,461 44,399
Property and equipment, net 2 27,844
Intangible assets, net 36 310,393
Other assets 425 2,238
Investment in subsidiaries and affiliates
--------------------------------------------------
Total assets $3,924 $384,874
==================================================
Liabilities and total equity:
Current portion of long-term debt $2,001
Accounts payable 6,642
Other current liabilities $2 24,182
--------------------------------------------------
Total current liabilities 2 32,825
Long-term debt 141,663
Other liabilities 21 3,579
--------------------------------------------------
Total liabilities 23 178,067
Minority interest 3,000
Total equity (deficit) 3,901 203,807
--------------------------------------------------
Total liabilities and equity $3,924 $384,874
==================================================
As of December 31, 1997
Assets:
Cash and cash equivalents $17,010
Accounts receivable, net 13,075
Other current assets 6,404
--------------------------------------------------
Total current assets 36,489
Property and equipment, net 27,383
Intangible assets, net 272,164
Other assets $425 2,887
Investment in subsidiaries and affiliates
--------------------------------------------------
Total assets $425 $338,923
==================================================
Liabilities and total equity:
Current portion of long-term debt $6,328
Accounts payable 5,208
Other current liabilities ($1) 24,668
--------------------------------------------------
Total current liabilities (1) 36,204
Long-term debt 86,980
Other liabilities 13,914
--------------------------------------------------
Total liabilities (1) 137,098
Minority interest 3,000
Total equity (deficit) 426 198,825
--------------------------------------------------
Total liabilities and equity $425 $338,923
==================================================
</TABLE>
12
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
9. Subsidiary Guarantees (continued):
Condensed Combined Statements of Operations
For the Six Months ended June 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Total revenue $61,551 $2,172 ($524) $63,199
Total operating expenses 63,464 5,499 $299 (524) 68,738
------------------------------------------------------------------------------------------
Income (loss) from operations (1,913) (3,327) (299) (5,539)
Interest expense 5,856 47 6,049 (5,130) 6,822
Other 27 2 29
------------------------------------------------------------------------------------------
Income (loss) before income
taxes (7,796) (3,374) (6,350) 5,130 (12,390)
Provision for income taxes 125 125
------------------------------------------------------------------------------------------
Net income (loss) ($7,921) ($3,374) ($6,350) $5,130 ($12,515)
==========================================================================================
</TABLE>
Condensed Combined Statements of Operations
For the Six Months ended June 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Total revenue $24,402 $1,515 ($50) $25,867
Total operating expenses 22,501 1,380 $205 (50) 24,036
------------------------------------------------------------------------------------------
Income (loss) from operations 1,901 135 (205) 1,831
Interest expense 8,705 157 2,263 (5,105) 6,020
Other (4,481) 12 (4,469)
------------------------------------------------------------------------------------------
Income (loss) before income
taxes (2,323) (22) (2,480) 5,105 280
Provision for income taxes 50 50
------------------------------------------------------------------------------------------
Net income (loss) ($2,373) ($22) ($2,480) $5,105 $230
==========================================================================================
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C> <C>
Total revenue $328 ($328) $63,199
Total operating expenses 4,199 (328) 72,609
--------------------------------------------
Income (loss) from operations (3,871) (9,410)
Interest expense 6,822
Other 54 83
--------------------------------------------
Income (loss) before income
taxes (3,925) (16,315)
Provision for income taxes 125
--------------------------------------------
Net income (loss) ($3,925) ($16,440)
============================================
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
Total revenue $25,867
Total operating expenses 24,036
--------------------------------------------
Income (loss) from operations 1,831
Interest expense 6,020
Other (4,469)
--------------------------------------------
Income (loss) before income
taxes 280
Provision for income taxes 50
--------------------------------------------
Net income (loss) $230
============================================
</TABLE>
13
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
9. Subsidiary Guarantees (continued):
Condensed Combined Statements of Cash Flows
For the Six Months ended June 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($7,921) ($3,374) ($6,350) $5,130 ($12,515)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 18,993 501 299 19,793
Program rights amortization 1,251 1,251
Change in assets and liabilities:
Accounts receivable (1,461) (1,461)
Accounts payable and accrued expenses 6,194 (219) (5,130) 845
Prepaids and other (220) (18) (238)
Other (608) 441 (167)
-----------------------------------------------------------------------
Net cash provided (used) by operating activities 16,228 (3,110) (5,610) 7,508
Cash flows from investing activities:
Acquisitions (42,253) (42,253)
Capital expenditures (3,180) (266) (3,446)
Purchase of intangible assets (1,437) (25) (1,462)
Other (6,942) 148 5,570 (1,224)
-----------------------------------------------------------------------
Net cash provided (used) by investing activities (53,812) (143) 5,570 (48,385)
Cash flows from financing activities:
Proceeds from debt 46,000 46,000
Repayment of debt (2,430) (3,069) (5,499)
Other (405) 7,282 (3,600) 3,277
-----------------------------------------------------------------------
Net cash provided (used) by financing activities 43,165 4,213 (3,600) 43,778
Net increase (decrease) in cash and cash equivalents 5,581 960 (3,640) 2,901
Cash and cash equivalents, beginning of year 9,170 2,511 5,329 17,010
-----------------------------------------------------------------------
Cash and cash equivalents, end of period $14,751 $3,471 $1,689 $19,911
=======================================================================
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($3,925) ($16,440)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 19,793
Program rights amortization 1,251
Change in assets and liabilities:
Accounts receivable (1,461)
Accounts payable and accrued expenses 845
Prepaids and other (238)
Other 24 (143)
---------------------------------------------
Net cash provided (used) by operating activities (3,901) 3,607
Cash flows from investing activities:
Acquisitions (42,253)
Capital expenditures (2) (3,448)
Purchase of intangible assets (36) (1,498)
Other (1,224)
---------------------------------------------
Net cash provided (used) by investing activities (38) (48,423)
Cash flows from financing activities:
Proceeds from debt 46,000
Repayment of debt (5,499)
Other 6,800 10,077
---------------------------------------------
Net cash provided (used) by financing activities 6,800 50,578
Net increase (decrease) in cash and cash equivalents 2,861 5,762
Cash and cash equivalents, beginning of year 17,010
---------------------------------------------
Cash and cash equivalents, end of period $2,861 $22,772
=============================================
</TABLE>
14
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
9. Subsidiary Guarantees (continued):
Condensed Combined Statements of Cash Flows
For the Six Months ended June 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($2,373) ($22) ($2,480) $5,105 $230
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 5,464 493 205 6,162
Program rights amortization 781 781
Change in assets and liabilities:
Accounts receivable (1,377) (50) (1,427)
Accounts payable and accrued expenses 6,962 510 (149) (5,055) 2,268
Prepaids and other (258) 578 (66) 254
Other (12,176) 7,509 (4,667)
---------------------------------------------------------------------------
Net cash provided (used) by operating activities (2,977) 1,559 5,019 3,601
Cash flows from investing activities:
Acquisitions
Capital expenditures (4,698) (400) (5,098)
Purchase of intangible assets (512) (171) (808) (1,491)
Other 5,657 5,657
---------------------------------------------------------------------------
Net cash provided (used) by investing activities 447 (571) (808) (932)
Cash flows from financing activities:
Proceeds from debt 526 526
Repayment of debt (59) (214) (30,126) (30,399)
Other 888 29,600 30,488
---------------------------------------------------------------------------
Net cash provided (used) by financing activities 829 (214) 615
Net increase (decrease) in cash and cash equivalents (1,701) 774 4,211 3,284
Cash and cash equivalents, beginning of year 6,171 807 1,439 8,417
---------------------------------------------------------------------------
Cash and cash equivalents, end of period $4,470 $1,581 $5,650 $11,701
===========================================================================
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
<S> <C>
Cash flows from operating activities:
Net income (loss) $230
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 6,162
Program rights amortization 781
Change in assets and liabilities:
Accounts receivable (1,427)
Accounts payable and accrued expenses 2,268
Prepaids and other 254
Other (4,667)
------------------------------------------
Net cash provided (used) by operating activities 3,601
Cash flows from investing activities:
Acquisitions
Capital expenditures (5,098)
Purchase of intangible assets (1,491)
Other 5,657
------------------------------------------
Net cash provided (used) by investing activities (932)
Cash flows from financing activities:
Proceeds from debt 526
Repayment of debt (30,399)
Other 30,488
------------------------------------------
Net cash provided (used) by financing activities 615
Net increase (decrease) in cash and cash equivalents 3,284
Cash and cash equivalents, beginning of year 8,417
------------------------------------------
Cash and cash equivalents, end of period $11,701
==========================================
</TABLE>
15
<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. For a discussion of such risks, see the information contained in the
section captioned "Risk Factors" (pages 12-21) of PCC's Proxy
Statement/Prospectus dated April 14, 1998, filed as part of PCC's Registration
Statement in Form S-4, File No. 333-44929 (the "Proxy Statement/Prospectus"),
which section is incorporated by reference herein. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
the date hereof. The Company does not undertake any obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Unless otherwise defined, all defined terms used herein
have the same meaning as in the footnotes to the Combined Financial Statements
included herein.
General
The Company is a diversified company operating in growing segments of
the media and communications industries: multichannel television and broadcast
television. Pegasus Multichannel Television includes DBS and cable businesses.
As of June 30, 1998, the Company's DBS operations consisted of providing DIRECTV
services to approximately 179,000 subscribers in certain rural areas of the
United States in which the Company holds the exclusive right to provide such
services. Its cable operations consist of a system in Puerto Rico. The Company
sold its New Hampshire cable system effective January 31, 1997. The Company sold
its remaining New England cable systems (Connecticut and Massachusetts)
effective July 1, 1998. Pegasus Broadcast Television owns and operates six TV
stations affiliated with Fox and operates one affiliated with UPN and another
affiliated with WB. It has entered into an agreement to operate two additional
TV stations, which will be affiliated with WB and will commence operations in
the second half of 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 airtime to local and national advertisers.
The Company's location operating expenses consist of (i) programming
expenses, (ii) marketing and selling costs, including advertising and promotion
expenses, local sales commissions and ratings and research expenditures, (iii)
technical and operations costs, (iv) general and administrative expenses, and
(v) expensed subscriber acquisition costs. Multichannel programming expenses
consist of amounts paid to program suppliers, 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.
The Company no longer requires new DBS customers to sign a one-year
programming contract and, as a result, subscriber acquisition costs ("SAC"),
which were being capitalized and amortized over a twelve-month period, are
currently being charged to operations in the period incurred. This change became
effective October 1, 1997. Subscriber acquisition costs charged to operations
are excluded from pre-marketing location operating expenses.
16
<PAGE>
Results of Operations
Three months ended June 30, 1998 compared to three months ended June 30, 1997
The Company's net revenues increased by approximately $20.9 million or
154% for the three months ended June 30, 1998 as compared to the same period in
1997. Multichannel Television net revenues increased approximately $20.1 million
or 349% and Broadcast Television net revenues increased $817,000 or 10%. The net
revenues increased as a result of (i) a $19.6 million or 1190% increase in DBS
revenues of which $674,000 or 3% was due to the increased number of DBS
subscribers in territories owned at the beginning of 1997 and $18.9 million or
97% resulted from acquisitions made in 1997 and 1998, (ii) a $472,000 or 12%
increase in Cable revenues which was primarily due to same system rate increases
and increased subscriber levels, and (iii) a $817,000 or 10% increase in TV
revenues which was the result of a $410,000 or 5% increase in same station
revenues due primarily to increases in local advertising sales and a $407,000
increase due to the two new stations launched in August 1997 and October 1997.
The Company's total pre-marketing location operating expenses, as
described above (before DBS subscriber acquisition costs), increased by
approximately $13.9 million or 165% for the three months ended June 30, 1998 as
compared to the same period in 1997. Multichannel Television pre-marketing
location operating expenses increased $13.2 million or 396% and Broadcast
Television location operating expenses increased $677,000 or 13%. The
pre-marketing location operating expenses increased as a result of (i) a $13.1
million or 1183% increase in operating expenses of the Company's DBS operations
due to a same territory increase in programming and other operating costs
totaling $327,000 (resulting from the increased number of DBS subscribers in
territories owned at the beginning of 1997) and a $12.8 million increase
attributable to territories acquired in 1997 and 1998, (ii) a $93,000 or 4%
increase in Cable operating expenses due primarily to increases in same system
programming costs, and (iii) a $677,000 or 13% increase in TV operating expenses
as the result of a $185,000 or 4% increase in same station operating expenses
and a $492,000 increase attributable to the two new stations launched in August
1997 and October 1997.
DBS subscriber acquisition costs, which consist of regional sales
costs, advertising and promotion, and commissions and subsidies, totaled
approximately $4.1 million or $276 per gross subscriber addition for the three
months ended June 30, 1998 as compared to $2.1 million or $384 per gross
subscriber addition for the three months ended June 30, 1997.
Incentive compensation, which is calculated from increases in pro forma
Location Cash Flow, increased by $306,000 or 142% for the three months ended
June 30, 1998 as compared to the same period in 1997.
Corporate expenses increased by $424,000 or 122% for the three months
ended June 30, 1998 as compared to the same period in 1997 primarily due to
increased staffing as a result of internal and acquisition related growth,
enhanced public relations activities and additional public reporting
requirements for the Company.
Depreciation and amortization expense increased by approximately $7.2
million or 240% for the three months ended June 30, 1998 as compared to the same
period in 1997 as the Company increased its fixed and intangible asset base as a
result of the Subsidiaries Combination and four completed acquisitions during
1997, and twelve completed acquisitions in the first half of 1998.
As a result of these factors, the Company reported a loss from
operations of approximately $3.4 million for the three months ended June 30,
1998 as compared to income from operations of approximately $1.5 million for the
same period in 1997.
Interest expense increased by $571,000 or 20% for the three months
ended June 30, 1998 as compared to the same period in 1997 as a result of an
increase in debt associated with the Company's acquisitions.
17
<PAGE>
The Company reported a net loss of approximately $6.9 million for the
three months ended June 30, 1998 as compared to a net loss of approximately $1.6
million for the same period in 1997. The $5.3 million change was the net result
of an increase in the loss from operations of approximately $4.8 million, an
increase in interest expense of $571,000 and a decrease in other expenses of
$81,000.
Six months ended June 30, 1998 compared to six months ended June 30, 1997
The Company's net revenues increased by approximately $37.3 million or
144% for the six months ended June 30, 1998 as compared to the same period in
1997. Multichannel Television net revenues increased approximately $36.4 million
or 324% and Broadcast Television net revenues increased $902,000 or 6%. The net
revenues increased as a result of (i) a $35.6 million or 1149% increase in DBS
revenues of which $1.3 million or 4% was due to the increased number of DBS
subscribers in territories owned at the beginning of 1997 and $34.3 million or
96% resulted from acquisitions made in 1997 and 1998, (ii) a $838,000 or 10%
increase in Cable revenues which was the net result of a $971,000 or 12%
increase in same system revenues due primarily to rate increases and increased
subscriber levels, and a $133,000 reduction due to the sale of the Company's New
Hampshire cable system effective January 31, 1997, and (iii) a $902,000 or 6%
increase in TV revenues which was the result of a $179,000 or 1% increase in
same station revenues due primarily to increases in local advertising sales and
a $723,000 increase due to the two new stations launched in August 1997 and
October 1997.
The Company's total pre-marketing location operating expenses, as
described above (before DBS subscriber acquisition costs), increased by
approximately $25.8 million or 158% for the six months ended June 30, 1998 as
compared to the same period in 1997. Multichannel Television pre-marketing
location operating expenses increased approximately $24.5 million or 367% and
Broadcast Television location operating expenses increased approximately $1.3
million or 14%. The pre-marketing location operating expenses increased as a
result of (i) a $24.1 million or 1050% increase in operating expenses of the
Company's DBS operations due to a same territory increase in programming and
other operating costs totaling $490,000 (resulting from the increased number of
DBS subscribers in territories owned at the beginning of 1997) and a $23.6
million increase attributable to territories acquired in 1997 and 1998, (ii) a
$361,000 or 8% increase in Cable operating expenses as the net result of a
$427,000 or 10% increase in same system operating expenses due primarily to
increases in programming costs and a $66,000 reduction due to the sale of the
Company's New Hampshire cable system effective January 31, 1997, and (iii) a
$1.3 million or 14% increase in TV operating expenses as the result of a
$290,000 or 3% increase in same station operating expenses and a $1.0 million
increase attributable to the two new stations launched in August 1997 and
October 1997.
DBS subscriber acquisition costs, which consist of regional sales
costs, advertising and promotion, and commissions and subsidies, totaled
approximately $8.3 million or $280 per gross subscriber addition for the six
months ended June 30, 1998 as compared to $3.7 million or $355 per gross
subscriber addition for the three months ended June 30, 1997.
Incentive compensation, which is calculated from increases in pro forma
Location Cash Flow, increased by $460,000 or 98% for the six months ended June
30, 1998 as compared to the same period in 1997.
Corporate expenses increased by $715,000 or 99% for the six months
ended June 30, 1998 as compared to the same period in 1997 primarily due to
increased staffing as a result of internal and acquisition related growth,
enhanced public relations activities and additional public reporting
requirements for the Company.
Depreciation and amortization expense increased by approximately $13.6
million or 221% for the six months ended June 30, 1998 as compared to the same
period in 1997 as the Company increased its fixed and intangible asset base as a
result of the Subsidiaries Combination and four completed acquisitions during
1997, and twelve completed acquisitions in the first half of 1998.
18
<PAGE>
As a result of these factors, the Company reported a loss from
operations of approximately $9.4 million for the six months ended June 30, 1998
as compared to income from operations of approximately $1.8 million for the same
period in 1997.
Interest expense increased by $802,000 or 13% for the six months ended
June 30, 1998 as compared to the same period in 1997 as a result of an increase
in debt associated with the Company's acquisitions.
The Company reported a net loss of approximately $16.4 million for the
six months ended June 30, 1998 as compared to net income of $230,000 for the
same period in 1997. The $16.7 million change was the net result of an increase
in the loss from operations of approximately $11.2 million, an increase in
interest expense of $802,000, an increase in the provision for income taxes of
$75,000, an increase in other expenses of $101,000 and a nonrecurring gain on
the sale of the New Hampshire cable system of approximately $4.5 million during
the first quarter of 1997.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been the net cash
provided by its TV and cable operations, credit available under its credit
facilities and proceeds from public and private offerings. The Company's
principal use of its cash has been to fund acquisitions, to meet debt service
obligations, to fund investment in its TV and cable technical facilities and to
fund DBS subscriber acquisition costs.
Pre-Marketing Location Cash Flow increased by approximately $7.0
million or 135% for the three months ended June 30, 1998 as compared to the same
period in 1997. Multichannel Television Pre-Marketing Location Cash Flow
increased approximately $6.8 million or 283% and Broadcast Television Location
Cash Flow increased $140,000 or 5%. Pre-Marketing Location Cash Flow increased
as a result of (i) a $6.5 million or 1203% increase in DBS Pre-Marketing
Location Cash Flow of which $347,000 or 5% was due to an increase in same
territory Pre-Marketing Location Cash Flow and $6.1 million or 95% was
attributable to territories acquired in 1997 and 1998, (ii) a $379,000 or 20%
increase in same system Cable Location Cash Flow, and (iii) a $140,000 or 5%
increase in TV Location Cash Flow as the net result of a $225,000 or 8% increase
in same station Location Cash Flow and a $85,000 decrease attributable to the
two new stations launched in August 1997 and October 1997.
Pre-Marketing Location Cash Flow increased by approximately $11.5
million or 121% for the six months ended June 30, 1998 as compared to the same
period in 1997. Multichannel Television Pre-Marketing Location Cash Flow
increased approximately $11.9 million or 261% and Broadcast Television Location
Cash Flow decreased $423,000 or 9%. Pre-Marketing Location Cash Flow increased
as a result of (i) a $11.5 million or 1433% increase in DBS Pre-Marketing
Location Cash Flow of which $845,000 or 7% was due to an increase in same
territory Pre-Marketing Location Cash Flow and $10.6 million or 93% was
attributable to territories acquired in 1997 and 1998, (ii) a $477,000 or 13%
increase in Cable Location Cash Flow which was the net result of a $544,000 or
15% increase in same system Location Cash Flow and a $67,000 reduction due to
the sale of the Company's New Hampshire cable system effective January 31, 1997,
and (iii) a $423,000 or 9% decrease in TV Location Cash Flow as a result of a
$111,000 or 2% decrease in same station Location Cash Flow, primarily as a
result of the cash flow generated by the Super Bowl in the first quarter of
1997, and a $312,000 decrease attributable to the two new stations launched in
August 1997 and October 1997.
19
<PAGE>
During the six months ended June 30, 1998, net cash provided by
operating activities was approximately $3.6 million which, together with $17.0
million of cash on hand and $50.6 million of net cash provided by the Company's
financing activities, was used to fund investing activities of $48.4 million.
Investing activities consisted of (i) the acquisition of DBS assets from three
independent DIRECTV providers during the first quarter of 1998 for approximately
$7.8 million, (ii) the acquisition of DBS assets from nine independent DIRECTV
providers during the second quarter of 1998 for approximately $34.5 million,
(iii) broadcast television transmitter, tower and facility upgrades totaling
approximately $2.2 million, (iv) payments of programming rights amounting to
$1.2 million, and (v) maintenance and other capital expenditures and intangibles
totaling approximately $2.8 million. Financing activities consisted of (i)
borrowings on bank credit facilities totaling $46.0 million, (ii) $20.5 million
of contributions by PCC, (iii) repayment of $9.8 million of borrowings from
affiliates, (iv) repayment of approximately $5.5 million of long-term debt and
capital leases, and (v) placing $600,000 in restricted cash to collateralize
letters of credit. As of June 30, 1998, the Company's cash on hand approximated
$22.8 million.
As defined in the Indenture governing the Series B Notes, the Company
is required to provide Adjusted Operating Cash Flow data for Pegasus and its
Restricted Subsidiaries, on a combined basis, where Adjusted Operating Cash Flow
is defined as "for the four most recent fiscal quarters for which internal
financial statements are available, Operating Cash Flow of such Person and its
Restricted Subsidiaries, less DBS Cash Flow (Satellite Segment Operating Cash
Flow) for the most recent four-quarter period, plus DBS Cash Flow for the most
recent quarterly period multiplied by four." Operating Cash Flow is income from
operations before income taxes, depreciation and amortization, interest expense,
extraordinary items and non-cash charges. Although Adjusted Operating Cash Flow
is not a measure of performance under generally accepted accounting principles,
the Company believes that Pre-Marketing Cash Flow, Operating Cash Flow and
Adjusted Operating Cash Flow are accepted within the Company's business segments
as generally recognized measures of performance and are used by analysts who
report publicly on the performance of companies operating in such segments.
Restricted Subsidiaries carries the same meaning as in the Indenture. Pro forma
for the twelve completed DBS acquisitions occurring in the first half of 1998,
as if such acquisitions occurred on January 1, 1998, Adjusted Operating Cash
Flow would have been approximately $41.8 million, as follows:
<TABLE>
<CAPTION>
Four Quarters
Ended
(in thousands) June 30,1998
--------------------
<S> <C>
Revenues $137,074
Direct operating expenses, excluding depreciation,
amortization and other non-cash charges 92,897
--------------------
Income from operations before incentive compensation,
corporate expenses, depreciation, amortization and
other non-cash charges 44,177
Corporate expenses 2,334
--------------------
Adjusted operating cash flow $41,843
====================
</TABLE>
The Indenture and the New Credit Facility contain certain financial and
operating covenants, including restrictions on the Company's ability to incur
additional indebtedness, create liens and to pay dividends.
20
<PAGE>
Pre-Marketing Location Cash Flow is defined as net revenues less
location operating expenses before subscriber acquisition costs. Location Cash
Flow is defined as net revenues less location operating expenses. Although
Pre-Marketing Location Cash Flow and Location Cash Flow are not measures of
performance under generally accepted accounting principles, the Company believes
that Pre-Marketing Location Cash Flow and Location Cash Flow are accepted within
the Company's business segments as generally recognized measures of performance
and are used by analysts who report publicly on the performance of companies
operating in such segments. Nevertheless, these measures should not be
considered in isolation or as a substitute for income from operations, net
income, net cash provided by operating activities or any other measures for
determining the Company's operating performance or liquidity which is calculated
in accordance with generally accepted accounting principles.
The Company believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations. The
Company engages in discussions with respect to acquisition opportunities in
media and communications businesses on a regular basis. The Company believes
that cash on hand together with available borrowings under the New Credit
Facility and future indebtedness which may be incurred by the Company and its
subsidiaries will give the Company the ability to fund acquisitions and other
capital requirements in the future. However, there can be no assurance that the
future cash flows of the Company will be sufficient to meet all of the Company's
obligations and commitments.
The Company closely monitors conditions in the capital markets to
identify opportunities for the effective and prudent use of financial leverage.
In financing its future expansion and acquisition requirements, the Company
would expect to avail itself of such opportunities and thereby increase its
indebtedness, which could result in increased debt service requirements. There
can be no assurance that such debt financing can be completed on terms
satisfactory to the Company or at all. The Company may also issue additional
equity to fund its future expansion and acquisition requirements.
Capital Expenditures
The Company's capital expenditures aggregated $9.4 million in 1997. The
Company expects recurring renewal and refurbishment capital expenditures to
total approximately $2.0 million per year. In addition to these maintenance
capital expenditures, the Company's 1998 capital projects include (i) DBS
facility upgrades of approximately $500,000 and (ii) approximately $2.6 million
of TV expenditures for broadcast television transmitter, tower and facility
constructions and upgrades. The Company commenced the programming of three new
TV stations, WPME in August 1997, WGFL in October 1997 and WFXU in July 1998 and
its plans are to commence programming of two additional stations in the second
half of 1998. There can be no assurance that the Company's capital expenditure
plans will not change in the future.
Effective October 1, 1997, the Company no longer requires new DBS
customers to sign a one-year programming contract and, as a result, subscriber
acquisition costs, which were being capitalized through September 30, 1997 and
amortized over a twelve-month period, will be charged to operations in the
period incurred. The Company's policy is to capitalize subscriber acquisition
costs directly related to new subscribers, such as commission and equipment
subsidies, who sign a programming contract. These costs are amortized over the
life of the contract. The Company expenses its subscriber acquisition costs when
no new contract is obtained. The Company currently does not require new DBS
customers to sign programming contracts and, as a result, subscriber acquisition
costs are currently being charged to operations in the period incurred.
21
<PAGE>
Other
The Company has reviewed all of its systems as to the Year 2000 issue. The
Company has in the past three years replaced or upgraded, or is in the process
of replacing or upgrading, all of its TV traffic systems, cable billing systems
and corporate accounting systems. All of these new systems will be in place by
the third quarter of 1998. The Company relies on outside vendors for the
operation of its DBS satellite control and billing systems, including DIRECTV,
the NRTC and their respective vendors. The Company has established a policy to
ensure that its vendors are currently in compliance with the Year 2000 issue or
have a plan in place to be in compliance with the Year 2000 issue by the first
quarter of 1999. Costs to be incurred beyond June 30, 1998 relating to the Year
2000 issue are not expected to be significant.
Effective July 1, 1998, the Company sold substantially all the assets
of its remaining New England cable systems to Avalon Cable of New England LLC
for approximately $30 million in cash. The Company expects to recognize a
nonrecurring gain of approximately $26 million in the third quarter of 1998
relating to this transaction.
On July 23, 1998, the Company entered into an agreement to purchase a
cable system serving Aguadilla, Puerto Rico and neighboring communities for a
purchase price of approximately $42 million in cash. As of June 30, 1998, the
Aguadilla cable system serves approximately 21,500 subscribers and passes
approximately 81,000 of the 90,000 homes in the franchise area. The closing of
this acquisition is subject to regulatory and other approvals, as well as
customary conditions. The Company expects this transaction to close in the
fourth quarter of 1998 or the first quarter of 1999.
PM&C's ability to incur additional indebtedness is limited under the
terms of the Indenture and the New Credit Facility. These limitations take the
form of certain leverage ratios and are dependent upon certain measures of
operating profitability. Under the terms of the New Credit Facility, capital
expenditures and business acquisitions in excess of certain agreed upon levels
will require lender consent.
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 bears interest at a fixed rate.
In June 1998, the Financial Accounting Standards Board("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities. In February 1998, the FASB issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits". The Company has reviewed the provisions of SFAS No. 133 and SFAS No.
132 and the implementation of the above standards is not expected to have any
significant impact on its combined financial statements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
22
<PAGE>
Part II. Other Information
Item 5: Other Information
New England Cable Sale. Effective July 1, 1998, the Company sold
substantially all the assets of its remaining New England cable systems to
Avalon Cable of New England LLC for approximately $30 million in cash. The
Company expects to recognize a nonrecurring gain of approximately $26 million in
the third quarter of 1998 relating to this transaction.
Puerto Rico Cable Acquisition. On July 23, 1998, a subsidiary of
Pegasus entered into a definitive agreement to purchase a cable system serving
Aguadilla, Puerto Rico and neighboring communities for a purchase price of
approximately $42 million in cash. The Aguadilla system services approximately
21,500 subscribers and passes approximately 81,000 of the 90,000 homes in the
franchised area. The Aguadilla system is contiguous to the Company's existing
Puerto Rico cable system and, upon completion of the purchase, the Company
intends to consolidate the Aquadilla cable system with its existing cable
system. The closing of the acquisition is subject to regulatory and other
approvals, as well as customary conditions, and the Company expects this
transaction to close in the fourth quarter of 1998 or the first quarter of 1999
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Asset Purchase Agreement made as of July 23, 1998 by and among
Pegasus Cable Television, Inc., Cable Systems USA, Partners, J&J
Cable Partners, Inc., and PS&G Cable Partners, Inc. (which is
incorporated by reference to Exhibit 2.1 to Pegasus Communications
Corporation's Form 10-Q for the quarterly period ended June 30,
1998).
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter
ended June 30, 1998.
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 August 13, 1998 By /s/ Robert N. Verdecchio
----------------------------------
Robert N. Verdecchio
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
24
<PAGE>
EXHIBIT INDEX
Exhibit 27.1 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
BALANCE SHEETS OF PEGASUS MEDIA & COMMUNICATION, INC. AS OF DECEMBER 31, 1997
AND JUNE 30, 1998 (UNAUDITED) AND THE RELATED COMBINED STATEMENTS OF OPERATIONS
AND CASH FLOWS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND
JUNE 30, 1998 (UNAUDITED). THIS INFORMATION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000948590
<NAME> PEGASUS MEDIA & COMMUNICATIONS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 22,772,092 22,772,092
<SECURITIES> 0 0
<RECEIVABLES> 14,298,882 14,298,882
<ALLOWANCES> 221,000 221,000
<INVENTORY> 1,883,484 1,883,484
<CURRENT-ASSETS> 44,398,688 44,398,688
<PP&E> 54,983,142 54,983,142
<DEPRECIATION> 27,138,706 27,138,706
<TOTAL-ASSETS> 384,873,513 384,873,513
<CURRENT-LIABILITIES> 32,824,915 32,824,915
<BONDS> 82,179,821 82,179,821
0 0
3,000,000 3,000,000
<COMMON> 1,700 1,700
<OTHER-SE> 203,805,353 203,805,353
<TOTAL-LIABILITY-AND-EQUITY> 384,873,513 384,873,513
<SALES> 34,462,060 63,199,396
<TOTAL-REVENUES> 34,462,060 63,199,396
<CGS> 0 0
<TOTAL-COSTS> 37,813,626 72,609,176
<OTHER-EXPENSES> 50,673 83,711
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,438,181 6,821,991
<INCOME-PRETAX> (6,840,420) (16,315,482)
<INCOME-TAX> 50,000 125,000
<INCOME-CONTINUING> (6,890,420) (16,440,482)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,890,420) (16,440,482)
<EPS-PRIMARY> (40.53) (96.71)
<EPS-DILUTED> (40.53) (96.71)
</TABLE>
