<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, 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 October 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 September 30, 1998
<TABLE>
<CAPTION>
Page
----
Part I. Financial Information
<S> <C>
Item 1 Combined Financial Statements
Combined Balance Sheets
December 31, 1997 and September 30, 1998 3
Combined Statements of Operations
Three months ended September 30, 1997 and 1998 4
Combined Statements of Operations
Nine months ended September 30, 1997 and 1998 5
Combined Statements of Cash Flows
Nine months ended September 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 23
Part II. Other Information
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
Signature 25
</TABLE>
2
<PAGE>
Pegasus Media & Communications, Inc.
Combined Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,010,315 $ 29,845,057
Restricted cash -- 600,000
Accounts receivable, less allowance for doubtful
accounts of $319,000 and $368,000, respectively 13,074,636 15,745,433
Program rights 2,059,346 3,767,113
Inventory 974,920 3,555,089
Deferred taxes 2,602,453 2,602,453
Prepaid expenses and other 767,482 846,312
------------- -------------
Total current assets 36,489,152 56,961,457
Property and equipment, net 27,382,713 25,580,815
Intangible assets, net 272,164,370 360,105,131
Program rights 2,262,299 3,468,484
Deposits and other 624,629 565,065
------------- -------------
Total assets $338,923,163 $446,680,952
============= =============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 6,328,463 $ 10,215,567
Accounts payable 5,207,719 3,216,158
Accrued interest 6,025,004 3,783,035
Accrued satellite programming and fees 6,089,389 8,993,696
Accrued expenses 11,134,589 12,143,786
Current portion of program rights payable 1,418,581 1,278,641
------------- -------------
Total current liabilities 36,203,745 39,630,883
Long-term debt 86,979,613 179,595,668
Advances from affiliates 9,845,583 --
Program rights payable 1,416,446 4,786,628
Deferred taxes 2,652,454 2,827,454
------------- -------------
Total liabilities 137,097,841 226,840,633
------------- -------------
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) (31,805,017)
------------- -------------
Total stockholder's equity 198,825,322 216,840,319
------------- -------------
Total liabilities and stockholder's equity $338,923,163 $446,680,952
============= =============
</TABLE>
See accompanying notes to combined financial statements
3
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------
1997 1998
------------ ------------
(unaudited)
<S> <C> <C>
Revenues:
Basic and satellite service $ 3,668,896 $ 22,921,836
Premium services 446,806 3,570,167
Broadcasting revenue,
net of agency commissions 5,504,782 6,139,214
Barter programming revenue 1,453,300 1,615,200
Other 219,373 1,752,027
------------ ------------
Total revenues 11,293,157 35,998,444
Operating expenses:
Barter programming expense 1,453,300 1,615,200
Programming 1,957,219 13,203,129
General and administrative 1,382,695 6,497,466
Technical and operations 967,639 874,700
Marketing and selling 1,363,004 9,747,514
Incentive compensation 188,711 367,299
Corporate expenses 311,047 916,861
Depreciation and amortization 2,571,134 10,218,550
------------ ------------
Income (loss) from operations 1,098,408 (7,442,275)
Interest expense (2,923,225) (4,530,075)
Interest income 10,871 277,709
Other expenses, net (102,274) (124,377)
Gain on sale of cable system -- 24,902,284
------------ ------------
Income (loss) before income taxes (1,916,220) 13,083,266
Provision for income taxes -- 50,000
------------ ------------
Net income (loss) ($ 1,916,220) $ 13,033,266
============ ============
</TABLE>
See accompanying notes to combined financial statements
4
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1997 1998
------------ ------------
(unaudited)
<S> <C> <C>
Revenues:
Basic and satellite service $13,513,453 $62,662,685
Premium services 1,573,705 9,207,549
Broadcasting revenue,
net of agency commissions 16,950,204 18,290,873
Barter programming revenue 4,507,600 4,861,900
Other 615,330 4,174,833
------------ ------------
Total revenues 37,160,292 99,197,840
Operating expenses:
Barter programming expense 4,507,600 4,861,900
Programming 7,014,831 35,070,933
General and administrative 4,827,097 17,002,724
Technical and operations 2,849,615 2,962,250
Marketing and selling 4,604,797 22,487,436
Incentive compensation 659,549 1,297,957
Corporate expenses 1,034,032 2,354,963
Depreciation and amortization 8,733,161 30,011,732
------------ ------------
Income (loss) from operations 2,929,610 (16,852,055)
Interest expense (8,943,640) (11,352,066)
Interest income 92,864 397,964
Other expenses, net (166,148) (328,343)
Gain on sale of cable system 4,451,320 24,902,284
------------ ------------
Loss before income taxes (1,635,994) (3,232,216)
Provision for income taxes 50,000 175,000
------------ ------------
Net loss ($ 1,685,994) ($ 3,407,216)
============ ============
</TABLE>
See accompanying notes to combined financial statements
5
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
1997 1998
------------ --------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 1,685,994) ($ 3,407,216)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation and amortization 8,733,161 30,011,732
Program rights amortization 1,214,289 1,914,072
Accretion on discount of bonds 295,486 296,915
Gain on sale of cable system (4,451,320) (24,902,284)
Bad debt expense 249,374 1,148,605
Change in assets and liabilities:
Accounts receivable (930,995) (3,408,898)
Inventory 49,303 (2,579,269)
Prepaid expenses and other 101,853 (109,947)
Accounts payable and accrued expenses 1,385,059 212,239
Accrued interest (2,401,837) (2,241,969)
Capitalized subscriber acquisition costs (700,520) --
Deposits and other (32,906) 59,564
------------ ------------
Net cash provided (used) by operating activities 1,824,953 (3,006,456)
------------ ------------
Cash flows from investing activities:
Acquisitions -- (89,815,402)
Capital expenditures (8,090,652) (5,318,664)
Purchase of intangible assets (2,158,103) (3,612,262)
Cash acquired from acquisitions -- 171,900
Payments of programming rights (1,792,580) (1,597,782)
Proceeds from sale of cable system 6,945,270 30,132,826
Other (300,953) --
------------ ------------
Net cash used by investing activities (5,397,018) (70,039,384)
------------ ------------
Cash flows from financing activities:
Repayments of long-term debt (142,764) (5,514,004)
Borrowings on bank credit facilities 526,250 81,500,000
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 (223,605) (182,085)
------------ ------------
Net cash provided by financing activities 521,131 85,880,582
------------ ------------
Net increase (decrease) in cash and cash equivalents (3,050,934) 12,834,742
Cash and cash equivalents, beginning of year 8,416,778 17,010,315
------------ ------------
Cash and cash equivalents, end of period $ 5,365,844 $ 29,845,057
============ ============
</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 and
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 and its subsidiaries own and operate a
cable television ("Cable") system that provides service to individual and
commercial subscribers in Puerto Rico. PSTH and 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
subsidiaries of 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 September 30, 1998 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
=======
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, September 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 $2,721,088 as of December 31, 1997 and September 30,
1998, respectively............................................ $81,981,997 $82,278,912
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............................... - 81,500,000
Mortgage payable, due 2000, interest at 8.75%..................... 477,664 460,827
Note payable, due 1998, interest at 10%........................... 3,050,000 -
Sellers' notes, various maturities and interest rates............. 7,171,621 25,090,287
Capital leases and other.......................................... 626,794 481,209
------------ ------------
93,308,076 189,811,235
Less current maturities........................................... 6,328,463 10,215,567
------------ ------------
Long-term debt.................................................... $86,979,613 $179,595,668
============ ============
</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:
Three Months Ended September 30,
--------------------------------
1997 1998
---- ----
Net income (loss) ($1,916,220) $13,033,266
=========== ===========
Weighted average shares outstanding 170,000 170,000
=========== ===========
Nine Months Ended September 30,
--------------------------------
1997 1998
---- ----
Net income (loss) ($1,685,994) ($3,407,216)
=========== ===========
Weighted average shares outstanding 170,000 170,000
=========== ===========
For the three and nine months ended September 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 and Disposition:
As of January 7, 1998, the Company acquired, from an independent
DIRECTV(R) ("DIRECTV") provider, the rights to provide DIRECTV programming in
certain rural areas of Minnesota and the related assets in exchange for total
consideration of approximately $1.9 million, which consisted of $1.8 million in
cash and $32,000 in assumed liabilities.
As of March 9, 1998, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Nebraska and Texas and the related assets in exchange for total consideration of
approximately $15.6 million, which consisted of $5.9 million in cash, $105,000
in assumed liabilities, a $9.4 million note, payable over four years and an
aggregate of $225,000 for consultancy and non-compete agreements (consisting of
$75,000 in cash and a $150,000 obligation, payable over two years).
As of April 9, 1998, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
New Mexico and Texas and the related assets in exchange for total consideration
of approximately $14.3 million, which consisted of $13.1 million in cash,
$298,000 in assumed liabilities and 37,304 shares of 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 and Disposition (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.
Effective July 1, 1998, the Company sold substantially all the assets
of its remaining New England cable systems to Avalon Cable of New England, LLC
for approximately $30.1 million in cash. The Company recognized a nonrecurring
gain of approximately $24.9 million in the third quarter of 1998 relating to
this transaction.
As of July 10, 1998, the Company acquired, from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Alabama, Nebraska and South Dakota and the related assets in exchange
for total consideration of approximately $18.6 million, which consisted of $18.1
million in cash, $81,000 in assumed liabilities and an aggregate of $425,000 for
consultancy and non-compete agreements (consisting of $62,000 in cash, a $63,000
obligation, payable over one year, and a $300,000 obligation, payable over three
years).
As of August 10, 1998, the Company acquired, from an independent
DIRECTV provider, the rights to provide DIRECTV programming in certain rural
areas of Oregon and the related assets in exchange for total consideration of
approximately $3.0 million, which consisted of $2.8 million in cash, $34,000 in
assumed liabilities and a $200,000 obligation, payable over two years, for
consultancy and non-compete agreements.
As of September 10, 1998, the Company acquired, from four independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Alabama, Illinois, Minnesota and Texas and the related assets in
exchange for total consideration of approximately $37.1 million, which consisted
of $26.5 million in cash, $464,000 in assumed liabilities and $10.2 million in
notes, payable over seven years.
The following unaudited summary, prepared on a pro forma basis,
combines the results of operations as if the above DBS territories and cable
systems had been acquired/sold as of the beginning of the periods presented,
after including the impact of certain adjustments, such as the Company's
payments to related parties, amortization of intangibles, interest expense and
related income tax effects. The pro forma information does not purport to be
indicative of what would have occurred had the acquisitions/disposition been
made on those dates or of results which may occur in the future. This pro forma
information does not include any acquisitions that occurred subsequent to
September 30, 1998.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(in thousands, except per share data) (unaudited)
1997 1998
---- ----
<S> <C> <C>
Net revenues.............................. $85,818 $110,213
-------- ---------
Operating loss............................. ($21,119) ($21,258)
======== =========
Net loss before extraordinary item......... ($35,899) ($35,717)
======== =========
Net loss per share......................... ($211.17) ($210.10)
======== =========
</TABLE>
10
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
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:
On July 23, 1998, the Company entered into an agreement to purchase a
cable system serving Aguadilla, Puerto Rico and neighboring communities for a
purchase price of approximately $42 million in cash. The Aguadilla cable system
serves approximately 21,500 subscribers and passes approximately 81,000 of the
90,000 homes in the franchise area. The Aquadilla cable system is contiguous to
the Company's existing Puerto Rico cable system and, upon completion of the
purchase, the Company intends to consolidate the Aquadilla cable system with its
existing cable system. The closing of this acquisition is subject to regulatory
and other approvals, as well as customary conditions, and the Company expects
this transaction to close by the end of the first quarter of 1999.
In July 1998, Pegasus commenced operations of TV station WFXU, which
simulcasts the signal of WTLH, a TV station owned by the Company which is
affiliated with Fox. WFXU is in the Tallahassee, Florida Designated Market Area
("DMA") and is being operated under a local marketing agreement ("LMA").
As of October 9, 1998, the Company acquired from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
South Dakota and the related assets in exchange for total consideration of
approximately $1.1 million, which consisted of $1.1 million in cash and $14,000
in assumed liabilities.
As of November 9, 1998, the Company acquired from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Oklahoma, South Dakota and Texas and the related assets in exchange for
total consideration of approximately $12.5 million in cash.
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
<TABLE>
<CAPTION>
(in thousands)
Guarantor Non-guarantor Pegasus
As of September 30, 1998 Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $23,039 $16,583 ($10,024) $29,598
Accounts receivable, net 13,243 13,243
Other current assets 10,753 18 10,771
----------------------------------------------------------------------------------
Total current assets 47,035 16,601 (10,024) 53,612
Property and equipment, net 25,579 25,579
Intangible assets, net 353,053 2,694 4,266 360,013
Other assets 3,544 65 3,609
Investment in subsidiaries and affiliates 264,131 ($264,131)
----------------------------------------------------------------------------------
Total assets $429,211 $19,295 $258,438 ($264,131) $442,813
==================================================================================
Liabilities and total equity:
Current portion of long-term debt $10,216 $10,216
Accounts payable 3,215 1 3,216
Other current liabilities 26,189 9 ($16,324) $16,324 26,198
----------------------------------------------------------------------------------
Total current liabilities 39,620 10 (16,324) 16,324 39,630
Long-term debt 373,343 4,429 82,279 (280,455) 179,596
Other liabilities 3,255 3,989 370 7,614
----------------------------------------------------------------------------------
Total liabilities 416,218 8,428 66,325 (264,131) 226,840
Minority interest 3,000 3,000
Total equity (deficit) 9,993 10,867 192,113 212,973
----------------------------------------------------------------------------------
Total liabilities and equity $429,211 $19,295 $258,438 ($264,131) $442,813
==================================================================================
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 9,983 1,314 11,297
Other current liabilities 17,749 831 ($14,102) $14,102 18,580
----------------------------------------------------------------------------------
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>
<TABLE>
<CAPTION>
(in thousands) Pegasus
Development
As of September 30, 1998 Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C> <C>
Assets:
Cash and cash equivalents $247 $29,845
Accounts receivable, net 2,502 15,745
Other current assets 600 11,371
---------------------------------------------
Total current assets 3,349 56,961
Property and equipment, net 2 25,581
Intangible assets, net 92 360,105
Other assets 425 4,034
Investment in subsidiaries and affiliates
---------------------------------------------
Total assets $3,868 $446,681
=============================================
Liabilities and total equity:
Current portion of long-term debt $10,216
Accounts payable 3,216
Other current liabilities $1 26,199
---------------------------------------------
Total current liabilities 1 39,631
Long-term debt 179,596
Other liabilities 7,614
---------------------------------------------
Total liabilities 1 226,841
Minority interest 3,000
Total equity (deficit) 3,867 216,840
---------------------------------------------
Total liabilities and equity $3,868 $446,681
=============================================
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 11,297
Other current liabilities ($1) 18,579
---------------------------------------------
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 Nine Months ended September 30, 1998
<TABLE>
<CAPTION>
(in thousands)
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------- ------- ------------ --------
<S> <C> <C> <C> <C>
Total revenue $97,575 $2,947 ($1,324) $99,198
Total operating expenses 100,296 12,754 $453 (1,324) 112,179
-----------------------------------------------------------------------------------------
Income (loss) from operations (2,721) (9,807) (453) (12,981)
Interest expense 8,695 47 10,310 (7,700) 11,352
Other (12,596) (12,478) 14 (25,060)
-----------------------------------------------------------------------------------------
Income (loss) before income
taxes 1,180 2,624 (10,777) 7,700 727
Provision for income taxes 175 175
-----------------------------------------------------------------------------------------
Net income (loss) $1,005 $2,624 ($10,777) $7,700 $552
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
(in thousands) Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C> <C>
Total revenue $328 ($328) $99,198
Total operating expenses 4,199 (328) 116,050
-------------------------------------------------
Income (loss) from operations (3,871) (16,852)
Interest expense 11,352
Other 88 (24,972)
-------------------------------------------------
Income (loss) before income
taxes (3,959) (3,232)
Provision for income taxes 175
-------------------------------------------------
Net income (loss) ($3,959) ($3,407)
=================================================
</TABLE>
<PAGE>
Condensed Combined Statements of Operations
For the Nine Months ended September 30, 1997
<TABLE>
<CAPTION>
(in thousands)
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>
<TABLE>
<CAPTION>
(in thousands) Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C> <C>
Total revenue $37,160
Total operating expenses 34,230
--------------------------------------------------
Income (loss) from operations 2,930
Interest expense 8,944
Other (4,378)
--------------------------------------------------
Income (loss) before income
taxes (1,636)
Provision for income taxes 50
--------------------------------------------------
Net income (loss) ($1,686)
==================================================
</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 Nine Months ended September 30, 1998
<TABLE>
<CAPTION>
(in thousands)
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $1,005 $2,624 ($10,777) $7,700 $552
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 29,008 551 453 30,012
Program rights amortization 1,914 1,914
Change in assets and liabilities:
Accounts receivable (908) 1 (907)
Accounts payable and accrued expenses 7,805 (2,135) (7,700) (2,030)
Prepaids and other (96) 46 (50)
Other (10,980) (12,504) (2,554) (26,038)
--------------------------------------------------------------------------
Net cash provided (used) by operating activities 27,748 (11,417) (12,878) 3,453
Cash flows from investing activities:
Acquisitions (89,815) (89,815)
Capital expenditures (5,051) (266) (5,317)
Purchase of intangible assets (3,495) (25) (3,520)
Other 6,000 15,182 7,525 28,707
--------------------------------------------------------------------------
Net cash provided (used) by investing activities (92,361) 14,891 7,525 (69,945)
Cash flows from financing activities:
Proceeds from debt 81,500 81,500
Repayment of debt (2,612) (3,084) (5,696)
Other (406) 13,682 (10,000) 3,276
--------------------------------------------------------------------------
Net cash provided (used) by financing activities 78,482 10,598 (10,000) 79,080
Net increase (decrease) in cash and cash equivalents 13,869 14,072 (15,353) 12,588
Cash and cash equivalents, beginning of year 9,170 2,511 5,329 17,010
--------------------------------------------------------------------------
Cash and cash equivalents, end of period $23,039 $16,583 ($10,024) $29,598
==========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(in thousands) Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($3,959) ($3,407)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 30,012
Program rights amortization 1,914
Change in assets and liabilities:
Accounts receivable (2,502) (3,409)
Accounts payable and accrued expenses (2,030)
Prepaids and other (50)
Other 2 (26,036)
------------------------------------------------
Net cash provided (used) by operating activities (6,459) (3,006)
Cash flows from investing activities:
Acquisitions (89,815)
Capital expenditures (2) (5,319)
Purchase of intangible assets (92) (3,612)
Other 28,707
------------------------------------------------
Net cash provided (used) by investing activities (94) (70,039)
Cash flows from financing activities:
Proceeds from debt 81,500
Repayment of debt (5,696)
Other 6,800 10,076
------------------------------------------------
Net cash provided (used) by financing activities 6,800 85,880
Net increase (decrease) in cash and cash equivalents 247 12,835
Cash and cash equivalents, beginning of year 17,010
------------------------------------------------
Cash and cash equivalents, end of period $247 $29,845
================================================
</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 Nine Months ended September 30, 1997
<TABLE>
<CAPTION>
(in thousands)
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------- ------- ------------ --------
<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:
Acquisitions
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>
<PAGE>
<TABLE>
<CAPTION>
(in thousands) Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($1,686)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 8,733
Program rights amortization 1,214
Change in assets and liabilities:
Accounts receivable (931)
Accounts payable and accrued expenses (1,067)
Prepaids and other 69
Other (4,507)
-----------------------------------------
Net cash provided (used) by operating activities 1,825
Cash flows from investing activities:
Acquisitions
Capital expenditures (8,091)
Purchase of intangible assets (2,158)
Other 4,852
-----------------------------------------
Net cash provided (used) by investing activities (5,397)
Cash flows from financing activities:
Proceeds from debt 526
Repayment of debt (30,493)
Other 30,488
-----------------------------------------
Net cash provided (used) by financing activities 521
Net increase (decrease) in cash and cash equivalents (3,051)
Cash and cash equivalents, beginning of year 8,417
-----------------------------------------
Cash and cash equivalents, end of period $5,366
=========================================
</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 September 30, 1998, the Company's DBS operations consisted of providing
DIRECTV services to approximately 224,100 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. One station will commence
operations in the fourth quarter of 1998 and the other in the first half of
1999.
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 September 30, 1998 compared to three months ended September
30, 1997
The Company's net revenues increased by approximately $24.7 million or
219% for the three months ended September 30, 1998 as compared to the same
period in 1997. Multichannel Television net revenues increased approximately
$23.9 million or 559% and Broadcast Television net revenues increased $853,000
or 12%. The net revenues increased as a result of (i) a $25.3 million increase
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) and
acquisitions made in 1997 and 1998, (ii) a $1.4 million or 33% decrease in Cable
revenues which was the net result of a $180,000 or 7% increase in Puerto Rico
same system revenue, due primarily to rate increases and increased subscriber
levels, and a $1.6 million reduction due to the sale of the Company's New
England cable systems effective July 1, 1998, and (iii) a $853,000 or 12%
increase in TV revenues which was the result of a $471,000 or 7% increase in
same station revenues due primarily to increases in local advertising sales and
a $382,000 increase due to the three new stations launched in August 1997,
October 1997 and July 1998.
The Company's total pre-marketing location operating expenses, as
described above (before DBS subscriber acquisition costs), increased by
approximately $17.6 million or 247% for the three months ended September 30,
1998 as compared to the same period in 1997. Multichannel Television
pre-marketing location operating expenses increased $17.1 million or 765% and
Broadcast Television location operating expenses increased $549,000 or 11%. The
pre-marketing location operating expenses increased as a result of (i) a $17.7
million increase in operating expenses of the Company's DBS operations 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) and territories
acquired in 1997 and 1998, (ii) a $644,000 or 29% decrease in Cable operating
expenses as the net result of a $162,000 or 11% increase in Puerto Rico same
system operating expenses, due primarily to increases in programming costs, and
a $806,000 reduction due to the sale of the Company's New England cable systems
effective July 1, 1998, and (iii) a $549,000 or 11% increase in TV operating
expenses as the result of a $176,000 or 4% increase in same station operating
expenses and a $373,000 increase attributable to the three new stations launched
in August 1997, October 1997 and July 1998.
DBS subscriber acquisition costs, which consist of regional sales
costs, advertising and promotion, and commissions and subsidies, totaled
approximately $7.2 million or $346 per gross subscriber addition for the three
months ended September 30, 1998.
Incentive compensation, which is calculated from increases in pro forma
Location Cash Flow, increased by $178,000 or 94% for the three months ended
September 30, 1998 as compared to the same period in 1997.
Corporate expenses increased by $606,000 or 195% for the three months
ended September 30, 1998 as compared to the same period in 1997 primarily due to
increased staffing as a result of internal and acquisition related growth,
enhanced public relations activities and additional public reporting
requirements for the Company.
Depreciation and amortization expense increased by approximately $7.6
million or 297% for the three months ended September 30, 1998 as compared to the
same period in 1997 as the Company increased its fixed and intangible asset base
as a result of the Subsidiaries Combination, four completed acquisitions during
1997 and twenty completed acquisitions in the first three quarters of 1998.
As a result of these factors, the Company reported a loss from
operations of approximately $7.4 million for the three months ended September
30, 1998 as compared to income from operations of approximately $1.1 million for
the same period in 1997.
17
<PAGE>
Interest expense increased by $1.6 million or 55% for the three months
ended September 30, 1998 as compared to the same period in 1997 as a result of
an increase in debt associated with the Company's acquisitions.
The Company reported net income of approximately $13.0 million for the
three months ended September 30, 1998 as compared to a net loss of approximately
$1.9 million for the same period in 1997. The $14.9 million change was the net
result of an increase in the loss from operations of approximately $8.5 million,
an increase in interest expense of $1.6 million, an increase in the provision
for income taxes of $50,000, a decrease in other expenses of $244,000 and a
nonrecurring gain on the sale of the New England cable systems of approximately
$24.9 million during the third quarter of 1998.
Nine months ended September 30, 1998 compared to nine months ended September 30,
1997
The Company's net revenues increased by approximately $62.0 million or
167% for the nine months ended September 30, 1998 as compared to the same period
in 1997. Multichannel Television net revenues increased approximately $60.3
million or 389% and Broadcast Television net revenues increased $1.8 million or
8%. The net revenues increased as a result of (i) a $60.9 million or 1965%
increase in DBS revenues as the result of a $1.3 million or 43% increase for the
comparable six month periods ended June 30, due to the increased number of DBS
subscribers in territories owned at the beginning of 1997, and a $59.5 million
increase resulting from acquisitions made in 1997 and 1998, net of the effect of
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 $580,000 or
5% decrease in Cable revenues which was the net result of a $865,000 or 11%
increase in Puerto Rico same system revenues, due primarily to rate increases
and increased subscriber levels, a $133,000 reduction due to the sale of the
Company's New Hampshire cable system effective January 31, 1997 and a $1.3
million reduction due to the sale of the Company's remaining New England cable
systems effective July 1, 1998 , and (iii) a $1.8 million or 8% increase in TV
revenues which was the result of a $649,000 or 3% increase in same station
revenues due primarily to increases in local advertising sales and a $1.1
million increase due to the three new stations launched in August 1997, October
1997 and July 1998.
The Company's total pre-marketing location operating expenses, as
described above (before DBS subscriber acquisition costs), increased by
approximately $43.4 million or 185% for the nine months ended September 30, 1998
as compared to the same period in 1997. Multichannel Television pre-marketing
location operating expenses increased approximately $41.6 million or 467% and
Broadcast Television location operating expenses increased approximately $1.9
million or 13%. The pre-marketing location operating expenses increased as a
result of (i) a $41.8 million or 1821% increase in operating expenses of the
Company's DBS operations as the result of a $490,000 or 21% increase for the
comparable six month periods ended June 30, due to a same territory increase in
programming and other operating costs (resulting from the increased number of
DBS subscribers in territories owned at the beginning of 1997), and a $41.4
million increase attributable to territories acquired in 1997 and 1998, net of
the effect of 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
$283,000 or 4% decrease in Cable operating expenses as the net result of a
$553,000 or 13% increase in Puerto Rico same system operating expenses, due
primarily to increases in programming costs, a $66,000 reduction due to the sale
of the Company's New Hampshire cable system effective January 31, 1997 and a
$770,000 reduction due to the sale of the Company's remaining New England cable
systems effective July 1, 1998, and (iii) a $1.9 million or 13% increase in TV
operating expenses as the result of a $465,000 or 3% increase in same station
operating expenses and a $1.4 million increase attributable to the three new
stations launched in August 1997, October 1997 and July 1998.
DBS subscriber acquisition costs, which consist of regional sales
costs, advertising and promotion, and commissions and subsidies, totaled
approximately $15.4 million or $307 per gross subscriber addition for the nine
months ended September 30, 1998 as compared to $1.0 million or $305 per gross
subscriber addition for the nine months ended September 30, 1997.
18
<PAGE>
Incentive compensation, which is calculated from increases in pro forma
Location Cash Flow, increased by $639,000 or 97% for the nine months ended
September 30, 1998 as compared to the same period in 1997.
Corporate expenses increased by $1.3 million or 128% for the nine
months ended September 30, 1998 as compared to the same period in 1997 primarily
due to increased staffing as a result of internal and acquisition related
growth, enhanced public relations activities and additional public reporting
requirements for the Company.
Depreciation and amortization expense increased by approximately $21.3
million or 244% for the nine months ended September 30, 1998 as compared to the
same period in 1997 as the Company increased its fixed and intangible asset base
as a result of the Subsidiaries Combination and four completed acquisitions
during 1997, and twenty completed acquisitions in the first three quarters of
1998.
As a result of these factors, the Company reported a loss from
operations of approximately $16.9 million for the nine months ended September
30, 1998 as compared to income from operations of approximately $2.9 million for
the same period in 1997.
Interest expense increased by $2.4 million or 27% for the nine months
ended September 30, 1998 as compared to the same period in 1997 as a result of
an increase in debt associated with the Company's acquisitions.
The Company reported a net loss of approximately $3.4 million for the
nine months ended September 30, 1998 as compared to a net loss of $1.7 million
for the same period in 1997. The $1.7 million change was the net result of an
increase in the loss from operations of approximately $19.8 million, an increase
in interest expense of approximately $2.4 million, an increase in the provision
for income taxes of $125,000, an decrease in other expenses of $143,000, a
nonrecurring gain on the sale of the New Hampshire cable system of approximately
$4.5 million during the first quarter of 1997 and a nonrecurring gain on the
sale of the Company's remaining New England cable systems of approximately $24.9
million during the third quarter of 1998.
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 $7.1
million or 170% for the three months ended September 30, 1998 as compared to the
same period in 1997. Multichannel Television Pre-Marketing Location Cash Flow
increased approximately $6.8 million or 333% and Broadcast Television Location
Cash Flow increased $304,000 or 14%. Pre-Marketing Location Cash Flow increased
as a result of (i) a $7.6 million increase in DBS Pre-Marketing Location Cash
Flow 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) and territories
acquired in 1997 and 1998, (ii) a $775,000 or 38% decrease in Cable Location
Cash Flow which was the net result of a $18,000 or 1% increase in Puerto Rico
same system Location Cash Flow and a $793,000 reduction due to the sale of the
Company's New England cable systems effective July 1, 1998, and (iii) a $304,000
or 14% increase in TV Location Cash Flow as a result of a $295,000 or 13%
increase in same station Location Cash Flow and a $9,000 increase attributable
to the three new stations launched in August 1997, October 1997 and July 1998.
19
<PAGE>
Pre-Marketing Location Cash Flow increased by approximately $18.6
million or 136% for the nine months ended September 30, 1998 as compared to the
same period in 1997. Multichannel Television Pre-Marketing Location Cash Flow
increased approximately $18.7 million or 284% and Broadcast Television Location
Cash Flow decreased $119,000 or 2%. Pre-Marketing Location Cash Flow increased
as a result of (i) a $19.0 million or 2377% increase in DBS Pre-Marketing
Location Cash Flow as the result of a $845,000 or 106% increase for the
comparable six month periods ended June 30, due to an increase in same territory
Pre-Marketing Location Cash Flow, and a $18.2 million increase was attributable
to territories acquired in 1997 and 1998, net of the effect of 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 $297,000 or 5% decrease in Cable
Location Cash Flow which was the net result of a $312,000 or 9% increase in
Puerto Rico same system Location Cash Flow, a $67,000 reduction due to the sale
of the Company's New Hampshire cable system effective January 31, 1997 and a
$542,000 reduction due to the sale of the Company's remaining New England cable
systems effective July 1, 1998, and (iii) a $119,000 or 2% decrease in TV
Location Cash Flow as the net result of a $184,000 or 3% increase in same
station Location Cash Flow and a $303,000 decrease attributable to the three new
stations launched in August 1997, October 1997 and July 1998.
During the nine months ended September 30, 1998, $17.0 million of cash
on hand, together with $30.1 million of proceeds from the sale of the Company's
remaining New England cable systems, $200,000 of cash acquired from acquisitions
and $85.9 million of net cash provided by the Company's financing activities,
was used to fund operating activities of approximately $3.0 million and other
investing activities of $100.3 million. Investing activities, net of cash
acquired from acquisitions and proceeds from the sale of the New England cable
systems, consisted of (i) the acquisition of DBS assets from three independent
DIRECTV providers during the first quarter of 1998 for approximately $7.8
million, (ii) the acquisition of DBS assets from nine independent DIRECTV
providers during the second quarter of 1998 for approximately $34.5 million,
(iii) the acquisition of DBS assets from eight independent DIRECTV providers
during the third quarter of 1998 for approximately $47.6 million (iv) broadcast
television transmitter, tower and facility upgrades totaling approximately $3.2
million, (v) payments of programming rights amounting to $1.6 million, and (vi)
maintenance and other capital expenditures and intangibles totaling
approximately $5.6 million. Financing activities consisted of (i) borrowings on
bank credit facilities totaling $81.5 million, (ii) $20.5 million of
contributions by PCC, (iii) repayment of $9.8 million of borrowings from
affiliates, (iv) repayment of approximately $5.7 million of long-term debt and
capital leases, and (v) placing $600,000 in restricted cash to collateralize
letters of credit. As of September 30, 1998, the Company's cash on hand
approximated $29.8 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 twenty completed DBS acquisitions occurring in the first three quarters
of 1998 and the disposition of the New England cable systems, as if such
acquisitions/disposition had occurred as of the beginning of the period,
Adjusted Operating Cash Flow for Pegasus and its Restricted Subsidiaries would
have been approximately $42.4 million, as follows:
20
<PAGE>
<TABLE>
<CAPTION>
Four Quarters
Ended
(in thousands) September 30,1998
-------------------
<S> <C>
Revenues $159,881
Direct operating expenses, excluding depreciation,
amortization and other non-cash charges 114,583
---------------------
Income from operations before incentive compensation,
corporate expenses, depreciation, amortization and
other non-cash charges 45,298
Corporate expenses 2,940
---------------------
Adjusted operating cash flow $ 42,358
=====================
</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.
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.
21
<PAGE>
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 $4.5 million
of TV expenditures for broadcast television transmitter, tower and facility
constructions and upgrades. The Company commenced the programming of three new
TV stations, WPME in August 1997, WGFL in October 1997 and WFXU in July 1998 and
its plans are to commence programming of two additional stations - one in the
fourth quarter of 1998 and the other in the first half of 1999. There can be no
assurance that the Company's capital expenditure plans will not change in the
future.
Effective October 1, 1997, the Company no longer requires new DBS
customers to sign a one-year programming contract and, as a result, subscriber
acquisition costs, which were being capitalized through September 30, 1997 and
amortized over a twelve-month period, will be charged to operations in the
period incurred. The Company's policy is to capitalize subscriber acquisition
costs directly related to new subscribers who sign a programming contract, such
as commission and equipment subsidies. These costs are amortized over the life
of the contract. The Company expenses its subscriber acquisition costs when no
new contract is obtained. The Company currently does not require new DBS
customers to sign programming contracts and, as a result, subscriber acquisition
costs are currently being charged to operations in the period incurred.
Other
The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the Year 2000
approaches and is reached. These problems generally arise from the fact that
most computer hardware and software have historically used only two digits to
identify the year in a date, often resulting in the computer failing to
distinguish dates in the "2000's" from dates in the "1900's." These problems may
also arise from additional sources, such as the use of special codes and
conventions in software utilizing the date field.
The Company has reviewed all of its systems as to the Year 2000 issue.
The Company's primary focus has been on its own internal systems. The Company
has in the past three years replaced or upgraded, or is in the process of
replacing or upgrading, all of its TV traffic systems, cable billing systems and
corporate accounting systems. All of these new systems will be in place by the
end of 1998. However, if any necessary changes are not made or completed in a
timely fashion or unanticipated problems arise, the Year 2000 issue may take
longer for the Company to address and may have a material impact on the
Company's financial condition and its results of operations.
The Company relies on outside vendors for the operation of its DBS
satellite control and billing systems, including DIRECTV, the NRTC and their
respective vendors. The Company has established a policy to ensure that these
vendors are currently in compliance with the Year 2000 issue or have a plan in
place to be in compliance with the Year 2000 issue by the first quarter of 1999.
In addition, the Company has had initial communications with certain of its
other significant suppliers, distributors, financial institutions, lessors and
parties with which it conducts business to evaluate their Year 2000 compliance
plans and state of readiness and to determine the extent to which the Company's
systems may be affected by the failure of others to remediate their own Year
2000 issues. To date, however, the Company has received only preliminary
feedback from such parties and has not independently confirmed any information
received from other parties with respect to the Year 2000 issue. As such, there
can be no assurance that such other parties will complete their Year 2000
conversion in a timely fashion or will not suffer a Year 2000 business
disruption that may adversely affect the Company's financial condition and its
results of operations.
22
<PAGE>
Because the Company's Year 2000 conversion is expected to be completed
prior to any potential disruption to the Company's business, the Company has not
yet completed the development of a comprehensive Year 2000-specific contingency
plan. However, as part of its Year 2000 contingency planning effort, information
received from external sources is examined for date integrity before being
brought into the Company's internal systems. If the Company determines that its
business or a segment thereof is at material risk of disruption due to the Year
2000 issue or anticipates that its Year 2000 conversion will not be completed in
a timely fashion, the Company will work to enhance its contingency plan. Costs
to be incurred beyond September 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 $30.1 million in cash. The Company recognized a nonrecurring
gain of approximately $24.9 million in the third quarter of 1998 relating to
this transaction.
On July 23, 1998, the Company entered into an agreement to purchase a
cable system serving Aguadilla, Puerto Rico and neighboring communities for a
purchase price of approximately $42 million in cash. The Aguadilla cable system
serves approximately 21,500 subscribers and passes approximately 81,000 of the
90,000 homes in the franchise area. The closing of this acquisition is subject
to regulatory and other approvals, as well as customary conditions and the
Company expects this transaction to close by the end of the first quarter of
1999.
On September 22, 1998, service to Pegasus' cable subscribers was
interrupted by Hurricane Georges which struck the island of Puerto Rico. The
Company suffered modest damage to its cable headend and approximately 3% of its
780 miles of cable plant. The Company estimates that it will incur approximately
$300,000 in capital expenditures related to hurricane damage. Repairs will be
substantially completed by December 1, 1998. Hurricane Georges had a negligible
impact on Pegasus' third quarter operating results and the Company anticipates
approximately a 2% reduction in pre-marketing cash flow for the quarter ending
December 31, 1998, primarily as a result of lost subscribers.
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. A majority of the
Company's indebtedness bears interest at a fixed rate.
In February 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." In June 1998, the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company has reviewed the provisions of SFAS No. 132 and SFAS
No. 133 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
23
<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 $30.1 million in cash. The
Company recognized a nonrecurring gain of approximately $24.9 million in the
third quarter of 1998 relating to this transaction.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the
quarter ended September 30, 1998.
24
<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, 1998 By /s/ Robert N. Verdecchio
----------------------- -----------------------------------------------
Robert N. Verdecchio
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
25
<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 September 30, 1998 (unaudited) and the related combined statements of
operations and cash flows for the three and nine months ended September 30, 1997
(unaudited) and September 30, 1998 (unaudited). This information is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 29,845,057 29,845,057
<SECURITIES> 0 0
<RECEIVABLES> 16,113,433 16,113,433
<ALLOWANCES> 368,000 368,000
<INVENTORY> 3,555,089 3,555,089
<CURRENT-ASSETS> 56,961,457 56,961,457
<PP&E> 46,792,831 46,792,831
<DEPRECIATION> 21,212,016 21,212,016
<TOTAL-ASSETS> 446,680,952 446,680,952
<CURRENT-LIABILITIES> 39,630,883 39,630,883
<BONDS> 82,278,912 82,278,912
0 0
3,000,000 3,000,000
<COMMON> 1,700 1,700
<OTHER-SE> 216,838,619 216,838,619
<TOTAL-LIABILITY-AND-EQUITY> 446,680,952 446,680,952
<SALES> 35,998,444 99,197,840
<TOTAL-REVENUES> 35,998,444 99,197,840
<CGS> 0 0
<TOTAL-COSTS> 43,440,719 116,049,895
<OTHER-EXPENSES> (25,055,616) (24,971,905)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,530,075 11,352,066
<INCOME-PRETAX> 13,083,266 (3,232,216)
<INCOME-TAX> 50,000 175,000
<INCOME-CONTINUING> 13,033,266 (3,407,216)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 13,033,266 (3,407,216)
<EPS-PRIMARY> 76.67 (20.04)
<EPS-DILUTED> 76.67 (20.04)
</TABLE>
