<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 March 31, 1999
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from__________ to __________
Commission File Number 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;
225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004
------------------------------------------------ ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
--------------
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes_X_ No___
Number of shares of each class of the Registrant's common stock
outstanding as of May 10, 1999:
Class A, Common Stock, $0.01 par value 161,500
Class B, Common Stock, $0.01 par value 8,500
The Registrant meets the conditions set forth in General Instruction H
(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
Form 10-Q
Table of Contents
For the Quarterly Period Ended March 31, 1999
Page
Part I. Financial Information ----
Item 1 Combined Financial Statements
Combined Balance Sheets
December 31, 1998 and March 31, 1999 3
Combined Statements of Operations
Three months ended March 31, 1998 and 1999 4
Combined Statements of Cash Flows
Three months ended March 31, 1998 and 1999 5
Notes to Combined Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 21
Part II. Other Information
Item 6 Exhibits and Reports on Form 8-K 21
Signature 22
2
<PAGE>
Pegasus Media & Communications, Inc.
Combined Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ --------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $22,706,767 $13,987,561
Restricted cash 1,000,000 -
Accounts receivable, less allowance for doubtful
accounts of $384,000 and $491,000, respectively 16,736,558 15,099,153
Inventory 4,693,450 4,583,190
Program rights 3,156,715 2,868,071
Deferred taxes 2,602,453 2,073,248
Net advances to affiliates - 57,652
Prepaid expenses and other 722,420 743,920
------------- -------------
Total current assets 51,618,363 39,412,795
Property and equipment, net 28,785,294 32,297,346
Intangible assets, net 369,745,145 423,888,988
Program rights 3,428,382 3,103,382
Deferred taxes 7,167,379 7,167,379
Deposits and other 872,386 872,386
------------- -------------
Total assets $461,616,949 $506,742,276
============= =============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $10,332,061 $8,247,207
Accounts payable 3,246,132 1,895,013
Accrued interest 6,188,829 3,549,411
Accrued satellite programming and fees 11,272,599 12,720,954
Accrued expenses 12,496,547 12,700,662
Current portion of program rights payable 2,431,515 2,140,828
------------- -------------
Total current liabilities 45,967,683 41,254,075
Long-term debt 124,812,182 98,895,154
Net advances from affiliates 8,880,953 -
Program rights payable 2,472,367 2,197,367
Deferred taxes 14,315,249 13,871,044
------------- -------------
Total liabilities 196,448,434 156,217,640
------------- -------------
Commitments and contingent liabilities - -
Minority interest 3,000,000 3,000,000
Common stockholder's equity:
Class A common stock; $0.01 par value; 230,000 shares
authorized; 161,500 issued and outstanding 1,615 1,615
Class B common stock; $0.01 par value; 20,000 shares
authorized; 8,500 issued and outstanding 85 85
Additional paid-in capital 314,010,492 415,656,130
Deficit (51,843,677) (68,133,194)
------------- -------------
Total stockholder's equity 262,168,515 347,524,636
------------- -------------
Total liabilities and stockholder's equity $461,616,949 $506,742,276
============= =============
</TABLE>
See accompanying notes to combined financial statements
3
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1999
------------- ------------
(unaudited)
<S> <C> <C>
Net revenues:
DBS $17,464,162 $34,336,007
Broadcast 6,878,663 7,902,734
Cable 4,394,511 3,070,984
------------ -------------
Total net revenues 28,737,336 45,309,725
Operating expenses:
DBS
Programming, technical, general and administrative 12,194,388 23,795,691
Marketing and selling 4,199,406 11,797,492
Incentive compensation 360,000 325,000
Depreciation and amortization 6,644,127 9,921,901
Broadcast
Programming, technical, general and administrative 3,884,961 4,936,598
Marketing and selling 1,384,801 1,466,609
Incentive compensation - 155,542
Depreciation and amortization 1,320,083 1,184,087
Cable
Programming, technical, general and administrative 2,297,341 1,665,968
Marketing and selling 107,066 108,878
Incentive compensation 49,205 22,935
Depreciation and amortization 1,542,378 1,084,580
Corporate expenses 667,305 940,903
Corporate depreciation and amortization 144,490 173,804
------------ -------------
Loss from operations (6,058,214) (12,270,263)
Interest expense (3,383,810) (3,968,123)
Interest income 74,534 158,385
Other expense, net (107,572) (124,516)
------------ -------------
Loss before income taxes (9,475,062) (16,204,517)
Provision for income taxes 75,000 85,000
------------ -------------
Net loss ($9,550,062) ($16,289,517)
============ =============
</TABLE>
See accompanying notes to combined financial statements
4
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1999
------------- -------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($9,550,062) ($16,289,517)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 9,651,078 12,364,372
Program rights amortization 601,129 783,158
Accretion on discount of bonds 98,853 99,330
Stock incentive compensation 409,205 503,477
Bad debt expense 272,379 640,732
Change in assets and liabilities:
Accounts receivable 1,794,198 1,314,109
Inventory (159,490) 281,260
Prepaid expenses and other (138,981) 51,968
Accounts payable and accrued expenses (544,660) (632,120)
Accrued interest (3,040,338) (2,639,418)
Amounts due seller 2,261,790 -
Deposits and other (2,000,000) -
----------- -------------
Net cash used for operating activities (344,899) (3,522,649)
----------- -------------
Cash flows from investing activities:
Acquisitions (7,777,494) (65,776,010)
Capital expenditures (1,468,350) (1,464,565)
Purchase of intangible assets (741,049) (576,602)
Payments for programming rights (626,308) (735,201)
----------- -------------
Net cash used for investing activities (10,613,201) (68,552,378)
----------- -------------
Cash flows from financing activities:
Repayments of long-term debt (5,329,852) (6,817,763)
Borrowings on bank credit facilities - 26,500,000
Repayments of bank credit facilities - (50,000,000)
Contributions by Parent 7,400,000 101,645,638
Net proceeds (repayments) of borrowings from affiliates 5,690,991 (8,938,605)
Restricted cash (600,000) 1,000,000
Capital lease repayments (52,821) (33,449)
----------- -------------
Net cash provided by financing activities 7,108,318 63,355,821
----------- -------------
Net decrease in cash and cash equivalents (3,849,782) (8,719,206)
Cash and cash equivalents, beginning of year 17,010,315 22,706,767
----------- -------------
Cash and cash equivalents, end of period $13,160,533 $13,987,561
=========== =============
</TABLE>
See accompanying notes to combined financial statements
5
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
1. The Company:
Pegasus Media & Communications, Inc. ("Pegasus" or together with its
subsidiaries, the "Company") operates in growing segments of the media industry
and is a direct subsidiary of Pegasus Communications Corporation ("PCC" or the
"Parent"). Pegasus' significant direct operating subsidiaries are Pegasus
Broadcast Television, Inc. ("PBT"), Pegasus Cable Television, Inc. ("PCT") and
PST Holdings, Inc. ("PSTH").
Pegasus' subsidiaries provide direct broadcast satellite television
("DBS") services to customers in certain rural areas of the United States; own
and/or program broadcast television ("Broadcast" or "TV") stations affiliated
with the Fox Broadcasting Company ("Fox"), United Paramount Network ("UPN") and
The WB Television Network ("WB"); and own and operate cable television ("Cable")
systems that provide service to individual and commercial subscribers in Puerto
Rico.
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 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.
Certain amounts for 1998 have been reclassified for comparative purposes.
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, 1998 included
in the Company's Annual Report on Form 10-K for the year then ended.
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.
3. Common Stock:
In October 1996, the Company became a direct subsidiary of PCC as a
result of PCC's initial public offering of its Class A Common Stock. In December
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.
The Company's ability to pay dividends on its Common Stock is subject
to certain restrictions.
6
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
4. Long-Term Debt:
<TABLE>
<CAPTION>
Long-term debt consists of the following : December 31, March 31,
1998 1999
---- ----
<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
$2,621,878 and $2,522,548 as of December 31, 1998
and March 31, 1999, respectively........................... $82,378,122 $82,477,452
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 pplicable margin or
LIBOR plus an applicable margin............................ 27,500,000 4,000,000
Mortgage payable, due 2000, interest at 8.75%.................. 454,965 448,989
Sellers' notes, due 1999 to 2005, interest at 3% to 8%......... 24,376,107 19,814,320
Capital leases and other....................................... 435,049 401,600
------------ -----------
135,144,243 107,142,361
Less current maturities........................................ 10,332,061 8,247,207
------------ -----------
Long-term debt................................................. $124,812,182 $98,895,154
============ ===========
</TABLE>
The Company maintains a $180.0 million senior revolving credit facility
(the "PM&C Credit Facility") which expires in 2003 and is collateralized by
substantially all of the assets of Pegasus and its subsidiaries. The PM&C Credit
Facility is subject to certain financial covenants as defined in the loan
agreement, including a debt to adjusted cash flow covenant. As of March 31,
1999, $30.9 million of stand-by letters of credit were issued pursuant to the
PM&C Credit Facility, including $16.8 million collateralizing certain of the
Company's outstanding sellers' notes.
The Company's 12.5% Series B Notes due 2005 (the "12.5% Series B
Notes") may be redeemed, at the option of the Company, in whole or in part, at
various points in time after July 1, 2000 at the redemption prices specified in
the indenture governing the 12.5% Series B Notes, plus accrued and unpaid
interest thereon.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company's ability to incur additional
indebtedness, create liens and pay dividends.
5. Acquisitions:
In the first quarter of 1999, the Company acquired from six independent
DIRECTV(R) ("DIRECTV") providers, the rights to provide DIRECTV programming in
certain rural areas of Colorado, Illinois, Indiana, Minnesota and Texas and the
related assets in exchange for total consideration of $26.1 million, which
consisted of $23.7 million in cash, $2.3 million in promissory notes, payable
over one year, and $198,000 in assumed liabilities.
Effective March 31, 1999, the Company purchased a cable system serving
Aguadilla, Puerto Rico and neighboring communities for a purchase price of
approximately $42.1 million in cash. The Aguadilla cable system serves
approximately 21,000 subscribers and passes approximately 81,000 of the 90,000
homes in the franchise area. The Aguadilla cable system is contiguous to the
Company's other Puerto Rico cable system and the Company intends to consolidate
the Aguadilla cable system with its existing cable system.
7
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
6. Supplemental Cash Flow Information:
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1998 1999
---- ----
<S> <C> <C>
Barter revenue and related expense....................................... $1,459,500 $1,682,500
Acquisition of program rights and assumption of related program payables - 169,514
Acquisition of plant under capital leases................................ 36,500 -
Notes payable and related acquisition of intangibles..................... 9,500,000 2,250,000
</TABLE>
For the three months ended March 31, 1998 and 1999, the Company paid
cash for interest in the amount of $6.4 million and $6.6 million, respectively.
The Company paid no federal income taxes for the three months ended March 31,
1998 and 1999.
7. Commitments and Contingent Liabilities:
Legal Matters:
In connection with the pending license renewal application of one of
the Company's television stations, it has come to the attention of the Company
that, at that station, there were violations of the FCC's rules establishing
limits on the amount of commercial material in programs directed to children.
The Company was notified that is has been sued in Indiana for allegedly
charging DBS subscribers excessive fees for late payments. The plaintiffs, who
purport to represent a class consisting of residential DIRECTV customers in
Indiana, seek unspecified damages for the purported class and modification of
the Company's late-fee policy. The Company is advised that similar suits have
been brought against DIRECTV and various cable operators in other parts of the
United States.
From time to time the Company is involved with claims that arise in the
normal course of business.
In the opinion of management, the ultimate liability with respect to
the aforementioned claims and matters will not have a material adverse effect on
the combined operations, liquidity, cash flows or financial position of the
Company.
8. Industry Segments:
The Company operates in growing segments of the media industry: DBS,
Broadcast and Cable. DBS consists of providing direct broadcast satellite
television services to customers in certain rural areas of 30 states. Broadcast
consists of nine television stations affiliated with Fox, UPN and the WB, all
located in the eastern United States. Cable consists of providing cable
television services to individual and commercial subscribers in Puerto Rico.
All of the Company's revenues are derived from external customers.
Capital expenditures for the Company's DBS segment were $77,000 and $322,000 for
the three months ended March 31, 1998 and 1999, respectively. Capital
expenditures for the Company's Broadcast segment were $1.0 million and $251,000
for the three months ended March 31, 1998 and 1999, respectively. Capital
expenditures for the Company's Cable segment were $280,000 and $892,000 for the
three months ended March 31, 1998 and 1999, respectively. Identifiable total
assets for the Company's DBS segment were $330.3 million and $342.8 million as
of December 31, 1998 and March 31, 1999, respectively. Identifiable total assets
for the Company's Broadcast segment were $67.0 million and $65.7 million as of
December 31, 1998 and March 31, 1999, respectively. Identifiable total assets
for the Company's Cable segment were $46.9 million and $86.2 million as of
December 31, 1998 and March 31, 1999, respectively.
8
<PAGE>
9. Other Events:
In April 1999, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Nebraska and Ohio and the related assets in exchange for $5.0 million in cash,
warrants to purchase a total of 25,000 shares of PCC's Class A Common Stock and
$2.0 million in promissory notes, payable over two years.
10. Subsidiary Guarantees:
The 12.5% 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., Pegasus Satellite Development
Corporation ("PSDC") and Pegasus Cable Television of Connecticut, Inc.
("PCT-CT"), all of which are direct or indirect subsidiaries of Pegasus, are not
guarantors of the 12.5% Series B Notes ("Non-guarantor Subsidiaries"). As the
result of these subsidiaries not being guarantors of the 12.5% 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.
9
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
10. Subsidiary Guarantees: - (Continued)
Condensed Combined Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor
As of March 31, 1999 Subsidiaries Subsidiaries Pegasus Eliminations
------------ ------------- ------- ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $12,936 $479 $442
Accounts receivable, net 12,009
Other current assets 10,318 8
-------------------------------------------------------------------
Total current assets 35,263 487 442
Property and equipment, net 32,295
Intangible assets, net 417,624 2,592 3,438
Other assets 2,937 7,781
Investment in subsidiaries and affiliates 405,132 ($405,132)
-------------------------------------------------------------------
Total assets $488,119 $3,079 $416,793 ($405,132)
===================================================================
Liabilities and total equity:
Current portion of long-term debt $8,247
Accounts payable 1,865
Other current liabilities 31,142 ($32) $2,983 ($2,983)
-------------------------------------------------------------------
Total current liabilities 41,254 (32) 2,983 (2,983)
Long-term debt 414,138 4,429 82,477 (402,149)
Other liabilities 15,902 (12,436) 12,603
-------------------------------------------------------------------
Total liabilities 471,294 (8,039) 98,063 (405,132)
Minority interest 3,000
Total equity (deficit) 13,825 11,118 318,730
-------------------------------------------------------------------
Total liabilities and equity $488,119 $3,079 $416,793 ($405,132)
===================================================================
As of December 31, 1998
Assets:
Cash and cash equivalents $14,143 $3,092 $5,318
Accounts receivable, net 13,631
Other current assets 12,166 8
-------------------------------------------------------------------
Total current assets 39,940 3,100 5,318
Property and equipment, net 28,783
Intangible assets, net 363,345 2,643 3,591
Other assets 11,202 (158)
Investment in subsidiaries and affiliates 340,753 ($340,753)
-------------------------------------------------------------------
Total assets $443,270 $5,743 $349,504 ($340,753)
===================================================================
Liabilities and total equity:
Current portion of long-term debt $10,332
Accounts payable 3,246
Other current liabilities 32,417 ($29) $5,595 ($5,595)
--------------------------------------------------------------------
Total current liabilities 45,995 (29) 5,595 (5,595)
Long-term debt 373,163 4,429 82,378 (335,158)
Other liabilities 35,140 (9,814) 342
--------------------------------------------------------------------
Total liabilities 454,298 (5,414) 88,315 (340,753)
Minority interest 3,000
Total equity (deficit) (14,028) 11,157 261,189
-------------------------------------------------------------------
Total liabilities and equity $443,270 $5,743 $349,504 ($340,753)
====================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus
Pegasus Development
Subtotal Corporation Eliminations Totals
-------- ----------- ------------ ------
<S> <C> <C> <C> <C>
As of March 31, 1999
Assets:
Cash and cash equivalents $13,857 $131 $13,988
Accounts receivable, net 12,009 3,090 15,099
Other current assets 10,326 10,326
-------------------------------------------------------------------
Total current assets 36,192 3,221 39,413
Property and equipment, net 32,295 2 32,297
Intangible assets, net 423,654 235 423,889
Other assets 10,718 425 11,143
Investment in subsidiaries and affiliates
-------------------------------------------------------------------
Total assets $502,859 $3,883 $506,742
===================================================================
Liabilities and total equity:
Current portion of long-term debt $8,247 $8,247
Accounts payable 1,865 $30 1,895
Other current liabilities 31,110 2 31,112
-------------------------------------------------------------------
Total current liabilities 41,222 32 41,254
Long-term debt 98,895 98,895
Other liabilities 16,069 16,069
-------------------------------------------------------------------
Total liabilities 156,186 32 156,218
Minority interest 3,000 3,000
Total equity (deficit) 343,673 3,851 347,524
-------------------------------------------------------------------
Total liabilities and equity $502,859 $3,883 $506,742
===================================================================
As of December 31, 1998
Assets:
Cash and cash equivalents $22,553 $154 $22,707
Accounts receivable, net 13,631 3,106 16,737
Other current assets 12,174 12,174
-------------------------------------------------------------------
Total current assets 48,358 3,260 51,618
Property and equipment, net 28,783 2 28,785
Intangible assets, net 369,579 166 369,745
Other assets 11,044 425 11,469
Investment in subsidiaries and affiliates
-------------------------------------------------------------------
Total assets $457,764 $3,853 $461,617
===================================================================
Liabilities and total equity:
Current portion of long-term debt $10,332 $10,332
Accounts payable 3,246 3,246
Other current liabilities 32,388 $2 32,390
-------------------------------------------------------------------
Total current liabilities 45,966 2 45,968
Long-term debt 124,812 124,812
Other liabilities 25,668 25,668
-------------------------------------------------------------------
Total liabilities 196,446 2 196,448
Minority interest 3,000 3,000
Total equity (deficit) 258,318 3,851 262,169
-------------------------------------------------------------------
Total liabilities and equity $457,764 $3,853 $461,617
===================================================================
</TABLE>
10
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
10. Subsidiary Guarantees: - (Continued)
Condensed Combined Statements of Operations
For the Three Months ended March 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Total revenue $45,335 $346 ($371) $45,310
Total operating expenses 45,929 11,848 $174 (371) 57,580
--------------------------------------------------------------------------------
Income (loss) from operations (594) (11,502) (174) (12,270)
Interest expense 2,844 (13) 3,713 (2,576) 3,968
Other 3 (36) (33)
--------------------------------------------------------------------------------
Income (loss) before income
taxes (3,441) (11,489) (3,851) 2,576 (16,205)
Provision for income taxes 85 85
--------------------------------------------------------------------------------
Net income (loss) ($3,526) ($11,489) ($3,851) $2,576 ($16,290)
================================================================================
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
Total revenue $45,310
Total operating expenses 57,580
-------------------------------------------------
Income (loss) from operations (12,270)
Interest expense 3,968
Other (33)
-------------------------------------------------
Income (loss) before income
taxes (16,205)
Provision for income taxes 85
-------------------------------------------------
Net income (loss) ($16,290)
=================================================
</TABLE>
<PAGE>
Condensed Combined Statements of Operations
For the Three Months ended March 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Total revenue $27,936 $826 ($25) $28,737
Total operating expenses 30,065 740 $144 (25) 30,924
--------------------------------------------------------------------------------------
Income (loss) from operations (2,129) 86 (144) (2,187)
Interest expense 3,093 49 2,805 (2,563) 3,384
Other 13 (1) 12
--------------------------------------------------------------------------------------
Income (loss) before income
taxes (5,235) 37 (2,948) 2,563 (5,583)
Provision for income taxes 75 75
--------------------------------------------------------------------------------------
Net income (loss) ($5,310) $37 ($2,948) $2,563 ($5,658)
======================================================================================
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
Total revenue $328 ($328) $28,737
Total operating expenses 4,199 (328) 34,795
----------------------------------------------
Income (loss) from operations (3,871) (6,058)
Interest expense 3,384
Other 21 33
----------------------------------------------
Income (loss) before income
taxes (3,892) (9,475)
Provision for income taxes 75
----------------------------------------------
Net income (loss) ($3,892) ($9,550)
==============================================
</TABLE>
11
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
10. Subsidiary Guarantees: - (Continued)
Condensed Combined Statements of Cash Flows
For the Three Months ended March 31, 1999
(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) ($3,526) ($11,489) ($3,851) $2,576 ($16,290)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 12,139 51 174 12,364
Program rights amortization 783 783
Change in assets and liabilities:
Accounts receivable 1,298 1,298
Accounts payable and accrued expenses (722) (3) (2,576) (3,301)
Prepaids and other 52 52
Other (3,902) 5,427 1,525
----------------------------------------------------------------------------
Net cash provided (used) by operating activities 6,122 (11,441) 1,750 (3,569)
Cash flows from investing activities:
Acquisitions (65,776) (65,776)
Capital expenditures (1,464) (1,464)
Purchase of intangible assets (487) (21) (508)
Other 71,583 (72,318) (735)
----------------------------------------------------------------------------
Net cash provided (used) by investing activities 3,856 (72,339) (68,483)
Cash flows from financing activities:
Proceeds from debt 26,500 26,500
Repayment of debt (56,851) (56,851)
Other 19,166 8,828 65,713 93,707
----------------------------------------------------------------------------
Net cash provided (used) by financing activities (11,185) 8,828 65,713 63,356
Net increase (decrease) in cash and cash
equivalents (1,207) (2,613) (4,876) (8,696)
Cash and cash equivalents, beginning of year 14,143 3,092 5,318 22,553
----------------------------------------------------------------------------
Cash and cash equivalents, end of period $12,936 $479 $442 $13,857
============================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($16,290)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 12,364
Program rights amortization 783
Change in assets and liabilities:
Accounts receivable 16 1,314
Accounts payable and accrued expenses 30 (3,271)
Prepaids and other 52
Other 1,525
-------------------------------------------
Net cash provided (used) by operating activities 46 (3,523)
Cash flows from investing activities:
Acquisitions (65,776)
Capital expenditures (1,464)
Purchase of intangible assets (69) (577)
Other (735)
-------------------------------------------
Net cash provided (used) by investing activities (69) (68,552)
Cash flows from financing activities:
Proceeds from debt 26,500
Repayment of debt (56,851)
Other 93,707
-------------------------------------------
Net cash provided (used) by financing activities 63,356
Net increase (decrease) in cash and cash
equivalents (23) (8,719)
Cash and cash equivalents, beginning of year 154 22,707
-------------------------------------------
Cash and cash equivalents, end of period $131 $13,988
============================================
</TABLE>
12
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
10. Subsidiary Guarantees: - (Continued)
Condensed Combined Statements of Cash Flows
For the Three Months ended March 31, 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) ($5,310) $37 ($2,948) $2,563 ($5,658)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary gain on
extinguishment of debt
Depreciation and amortization 9,256 251 144 9,651
Program rights amortization 601 601
Change in assets and liabilities:
Accounts receivable 1,794 1,794
Accounts payable and accrued expenses 2,118 (468) (2,563) (913)
Prepaids and other (131) (8) (139)
Other 2,745 178 (2,734) 189
---------------------------------------------------------------------------
Net cash provided (used) by operating activities 11,073 (10) (5,538) 5,525
Cash flows from investing activities:
Acquisitions (7,778) (7,778)
Capital expenditures (1,205) (233) (1,438)
Purchase of intangible assets (716) (25) (741)
Other (811) 185 (626)
---------------------------------------------------------------------------
Net cash provided (used) by investing activities (10,510) (258) 185 (10,583)
Cash flows from financing activities:
Proceeds from debt
Repayment of debt (2,329) (3,054) (5,383)
Other 2,009 3,682 5,691
---------------------------------------------------------------------------
Net cash provided (used) by financing activities (320) 628 308
Net increase (decrease) in cash and cash
equivalents 243 360 (5,353) (4,750)
Cash and cash equivalents, beginning of year 9,170 2,511 5,329 17,010
---------------------------------------------------------------------------
Cash and cash equivalents, end of period $9,413 $2,871 ($24) $12,260
===========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($3,892) ($9,550)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary gain on
extinguishment of debt
Depreciation and amortization 9,651
Program rights amortization 601
Change in assets and liabilities:
Accounts receivable 1,794
Accounts payable and accrued expenses (913)
Prepaids and other (2,000) (2,139)
Other 23 212
--------------------------------------------
Net cash provided (used) by operating activities (5,869) (344)
Cash flows from investing activities:
Acquisitions (7,778)
Capital expenditures (30) (1,468)
Purchase of intangible assets (741)
Other (626)
--------------------------------------------
Net cash provided (used) by investing activities (30) (10,613)
Cash flows from financing activities:
Proceeds from debt
Repayment of debt (5,383)
Other 6,800 12,491
--------------------------------------------
Net cash provided (used) by financing activities 6,800 7,108
Net increase (decrease) in cash and cash
equivalents 901 (3,849)
Cash and cash equivalents, beginning of year 17,010
--------------------------------------------
Cash and cash equivalents, end of period $901 $13,161
============================================
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In reliance upon General Instruction (H)(2)(a) of Form 10-Q, Pegasus
is providing the limited disclosure set forth below. Such disclosure requires us
only to provide a narrative analysis of the results of operations which explains
the reasons for material changes in the amount of revenue and expense items
between the most recent fiscal year-to-date period presented and the
corresponding fiscal year-to-date period immediately preceding it. The following
discussion of the financial condition and results of operations of Pegasus
should be read in conjunction with the consolidated financial statements and
related notes which are included on pages 3-13 herein.
General
Pegasus Media & Communications, Inc. is:
o A wholly owned subsidiary of Pegasus Communications Corporation.
o An independent provider of DIRECTV with 299,000 subscribers at April
30, 1999. We have the exclusive right to distribute DIRECTV digital
broadcast satellite services to approximately 3.0 million rural
households in 30 states. We distribute DIRECTV through the Pegasus
Communications retail network, a network of approximately 2,000
independent retailers.
o The owner or programmer of nine TV stations affiliated with either
Fox, UPN or the WB and the owner of a large cable system in Puerto
Rico serving approximately 50,000 subscribers.
DBS revenues are principally derived from monthly customer
subscriptions and pay-per-view services. Broadcast revenues are derived from the
sale of broadcast airtime to local and national advertisers. Cable revenues are
derived from monthly customer subscriptions, pay-per-view services, subscriber
equipment rentals and installation charges.
In this section we use the terms pre-marketing cash flow and location
cash flow. Pre-marketing cash flow is calculated by taking our earnings and
adding back the following expenses:
o interest;
o income taxes;
o depreciation and amortization;
o non-cash charges, such as incentive compensation under Pegasus
Communication's restricted stock plan and 401(k) plans;
o corporate overhead; and
o DBS subscriber acquisition costs, which are sales and marketing
expenses incurred to acquire new DBS subscribers.
Location cash flow is pre-marketing cash flow less DBS subscriber
acquisition costs.
14
<PAGE>
Pre-marketing cash flow and location cash flow are not, and should not
be considered, alternatives to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing cash flow and location cash flow also do
not necessarily indicate whether our cash flow will be sufficient to fund
working capital, capital expenditures, or to react to changes in Pegasus'
industry or the economy generally. We believe that pre-marketing cash flow and
location cash flow are important, however, for the following reasons:
o those who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that our lenders, investors and we use to monitor
our financial performance and debt leverage.
Pegasus generally does not require new DBS customers to sign
programming contracts and, as a result, subscriber acquisition costs are
currently being charged to operations in the period incurred.
Results of Operations
Three months ended March 31, 1999 compared to three months ended March 31, 1998
Total net revenues for the three months ended March 31, 1999 were $45.3
million, an increase of $16.6 million, or 58%, compared to total net revenues of
$28.8 million for the same period in 1998. The increase in total net revenues
for the three months ended March 31, 1999 was primarily due to an increase in
DBS revenues of $16.9 million attributable to acquisitions and to internal
growth in Pegasus' DBS subscriber base. Total operating expenses for the three
months ended March 31, 1999 were $57.6 million, an increase of $22.8 million, or
65%, compared to total operating expenses of $34.8 million for the same period
in 1998. The increase was primarily due to an increase of $22.4 million in
operating expenses attributable to the growth in Pegasus' DBS business.
Total corporate expenses, including corporate depreciation and
amortization, were $1.1 million for the three months ended March 31, 1999, an
increase of $303,000, or 37%, compared to $812,000 for the same period in 1998.
The increase in corporate expenses is attributable to the growth in Pegasus'
business.
Interest expense was $4.0 million for the three months ended March 31,
1999, an increase of $584,000, or 17%, compared to interest expense of $3.4
million for the same period in 1998. The increase in interest expense is
primarily due to an increase in bank borrowings and sellers' notes associated
with Pegasus' DBS acquisitions. Interest income was $158,000 for the three
months ended March 31, 1999, an increase of $84,000, or 113%, compared to
interest income of $75,000 for the same period in 1998. The increase in interest
income is due to greater average cash balances for the three months ended March
31, 1999 compared to the same period in 1998.
Other expenses were $125,000 for the three months ended March 31, 1999,
an increase of $17,000, or 16%, compared to other expenses of $108,000 for the
same period in 1998.
The provision for income taxes was $85,000 for the three months ended
March 31, 1999, an increase of $10,000, or 13%, compared to $75,000 for the same
period in 1998.
15
<PAGE>
DBS
Pegasus' DBS business has experienced significant growth. During the
last twelve months, Pegasus acquired approximately 72,000 subscribers and the
exclusive DIRECTV distribution rights to approximately 699,000 households in
rural areas of the United States. At March 31, 1999, Pegasus had exclusive
DIRECTV distribution rights to 3.0 million households and 284,000 subscribers as
compared to 2.3 million households and 154,000 subscribers at March 31, 1998.
Pegasus had 3.1 million households and 307,000 subscribers at March 31, 1999,
including pending acquisitions. At March 31, 1998, subscribers would have been
241,000, including pending and completed acquisitions. Subscriber penetration
increased from 7.7% at March 31, 1998 to 9.8% at March 31, 1999, including
pending and completed acquisitions.
Total DBS net revenues were $34.3 million for the three months ended
March 31, 1999, an increase of $16.9 million, or 97%, compared to DBS net
revenues of $17.5 million for the same period in 1998. The increase is primarily
due to an increase in the average number of subscribers in the first quarter of
1999 compared to the first quarter of 1998. The average monthly revenue per
subscriber was $43.23 for the three months ended March 31, 1999 compared to
$41.91 for the same period in 1998. Pro forma DBS net revenues, including
pending acquisitions at March 31, 1999, were $38.6 million, an increase of $9.5
million, or 32%, compared to pro forma DBS net revenues of $29.1 million for the
same period in 1998.
Programming, technical, and general and administrative expenses were
$23.8 million for the three months ended March 31, 1999, an increase of $11.6
million, or 95%, compared to $12.2 million for the same period in 1998. The
increase is attributable to significant growth in subscribers and territory
during the last twelve months. As a percentage of revenue, programming,
technical, and general and administrative expenses were 69.3% for the three
months ended March 31, 1999 compared to 69.8% for the same period in 1998.
Subscriber acquisition costs were $11.8 million for the three months
ended March 31, 1999, an increase of $7.6 million compared to $4.2 million for
the same period in 1998. The total subscriber acquisition costs per gross
subscriber addition were $415 for the three months ended March 31, 1999 compared
to $283 for the same period in 1998. The increase is principally due to an
increase in promotional programming.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $325,000 for the three months ended March 31,
1999, a decrease of $35,000, or 10%, compared to $360,000 for the same period in
1998. The decrease resulted from a lower gain in pro forma location cash flow
during the first quarter of 1999 as compared to the first quarter of 1998.
Depreciation and amortization was $9.9 million for the three months
ended March 31, 1999, an increase of $3.3 million, or 49%, compared to $6.6
million for the same period in 1998. The increase in depreciation and
amortization is primarily due to an increase in the fixed and intangible asset
base as the result of DBS acquisitions that occurred during the last two years.
Broadcast
During the three months ended March 31, 1999, Pegasus owned or
programmed nine broadcast television stations in six markets. Two new stations
were launched during the second half of 1998. Total net broadcast revenues for
the three months ended March 31, 1999 were $7.9 million, an increase of $1.0
million, or 15%, compared to net broadcast revenues of $6.9 million for the same
period in 1998. The increase was primarily attributable to an increase of
$340,000 in net broadcast revenues from the four stations launched in 1997 and
1998, a $229,000 increase in barter revenue and an increase in local advertising
sales.
Programming, technical, and general and administrative expenses were
$4.9 million for the three months ended March 31, 1999, an increase of $1.1
million, or 27%, compared to $3.9 million for the same period in 1998. The
increase is primarily due to an increase in expenses from the two new stations
launched in 1998 and an increase in news related expenses associated with the
launch of self-produced news in our Portland, Maine and Chattanooga, Tennessee
markets.
16
<PAGE>
Marketing and selling expenses were $1.5 million for the three months
ended March 31, 1999, an increase of $82,000, or 6%, compared to $1.4 million
for the same period in 1998. The increase in marketing and selling expenses was
due to an increase in promotional costs associated with the launch of the new
stations and news programs.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $156,000 for the three months ended March 31, 1999
compared to no incentive compensation for the same period in 1998. The incentive
compensation resulted from a gain in pro forma location cash flow during the
first quarter of 1999 as compared to a loss in the first quarter of 1998.
Depreciation and amortization was $1.2 million for the three months
ended March 31, 1999, a decrease of $136,000, or 10%, compared to $1.3 million
for the same period in 1998.
Cable
Total net cable revenues were $3.1 million for the three months ended
March 31, 1999, a decrease of $1.3 million, or 30%, compared to net cable
revenues of $4.4 million for the same period in 1998. The decrease is primarily
due to the sale of Pegasus' New England cable systems effective July 1, 1998.
Net cable revenues from the New England Cable systems were $1.6 million for the
three months ended March 31, 1998. The net revenues derived from Pegasus' Puerto
Rico cable system were $3.1 million for the three months ended March 31, 1999,
an increase of $275,000, or 10%, compared to net cable revenues of $2.8 million
for the same period in 1998. The average monthly revenue per subscriber was
$35.15 for the three months ended March 31, 1999 compared to $33.71 for the same
period in 1998. On a pro forma basis, including the completed acquisition of the
Aguadilla, Puerto Rico cable system and the disposition of the New England cable
systems, there were 50,200 subscribers as of March 31, 1999 compared to 49,300
subscribers as of March 31, 1998.
Programming, technical, and general and administrative expenses were
$1.7 million for the three months ended March 31, 1999, a decrease of $631,000,
or 28%, compared to $2.3 million for the same period in 1998. The decrease is
primarily attributable to the sale of Pegasus' New England cable systems.
Marketing and selling expenses were $109,000 for the three months ended
March 31, 1999, an increase of $2,000, or 2%, compared to $107,000 for the same
period in 1998.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $23,000 for the three months ended March 31, 1999,
a decrease of $26,000, or 53%, compared to $49,000 for the same period in 1998.
The decrease resulted from a lower gain in pro forma location cash flow during
the first quarter of 1999 as compared to the first quarter of 1998.
Depreciation and amortization was $1.1 million for the three months
ended March 31, 1999, a decrease of $458,000, or 30%, compared to $1.5 million
for the same period in 1998. The decrease in depreciation and amortization is
primarily due to the sale of Pegasus' New England cable systems.
Liquidity and Capital Resources
Pegasus' primary sources of liquidity have been the net cash provided
by its DBS, broadcast and cable operations, credit available under its credit
facilities and proceeds from public and private offerings. Pegasus' principal
use of its cash has been to fund acquisitions, to meet debt service obligations,
to fund DBS subscriber acquisition costs and to fund investments in its
broadcast and cable technical facilities.
17
<PAGE>
Pre-marketing cash flow increased by approximately $4.5 million, or
50%, for the three months ended March 31, 1999 as compared to the same period in
1998. Pre-marketing cash flow increased as a result of:
o a $5.3 million, or 100%, increase in DBS pre-marketing cash flow of
which $2.2 million, or 41%, was due to an increase in same territory
pre-marketing cash flow and $3.1 million, or 59%, was attributable to
territories acquired in 1998 and 1999;
o a $109,000, or 7%, decrease in broadcast location cash flow as the
result of a $72,000, or 4%, increase in same station location cash
flow and a $181,000 decrease attributable to the two new stations
launched in July 1998 and November 1998; and
o a $694,000, or 35%, decrease in cable location cash flow. This
decrease was the net result of a $76,000, or 6%, increase in Puerto
Rico same system location cash flow and a $770,000 reduction due to
the sale of Pegasus' New England cable systems effective July 1,
1998.
During the three months ended March 31, 1999, $22.7 million of cash on
hand at the beginning of the year, together with $63.4 million of net cash
provided by Pegasus' financing activities, was used to fund operating activities
of approximately $3.5 million and investing activities of $68.6 million.
Investing activities consisted of:
o the purchase of a cable system serving Aguadilla, Puerto Rico and
neighboring communities for approximately $42.1 million;
o the acquisition of DBS assets from six independent DIRECTV providers
during the first quarter of 1999 for approximately $23.7 million;
o broadcast expenditures associated with the launch of self-produced
news in our Portland, Maine and Chattanooga, Tennessee markets
totaling $428,000;
o DBS facility upgrades of approximately $322,000;
o the expansion and enhancements of the Puerto Rico cable system
amounting to $600,000, including $213,000 related to hurricane
damage;
o payments of programming rights amounting to $735,000; and
o maintenance and other capital expenditures and intangibles totaling
approximately $691,000.
Financing activities consisted of:
o contributions by Pegasus Communications Corporation of approximately
$101.6 million;
o net repayments of bank credit facilities totaling $23.5 million;
o the repayment of approximately $15.8 million of long-term debt,
primarily sellers' notes, borrowings from affiliates and capital
leases; and
o restricted cash draws of approximately $1.0 million in connection
with the acquisition of the Aguadilla, Puerto Rico cable system.
As of March 31, 1999, cash on hand amounted to $14.0 million.
Pegasus maintains a $180.0 million senior, reducing revolving credit
facility. Borrowings under the credit facility are available for acquisitions,
subject to the approval of the lenders in certain circumstances, working
capital, capital expenditures and for general corporate purposes. As of March
31, 1999, $4.0 million was outstanding and stand-by letters of credit amounting
to $30.9 million were issued under its $180.0 million credit facility. The
credit facility expires in December 2003.
18
<PAGE>
As defined in the Indenture governing Pegasus' Series B Notes, Pegasus
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 for the most recent four-quarter
period, plus DBS Cash Flow for the most recent quarterly period multiplied by
four." Operating Cash Flow is income from operations before income taxes,
depreciation and amortization, interest expense, extraordinary items and
non-cash charges. Although Adjusted Operating Cash Flow is not a measure of
performance under generally accepted accounting principles, we believe that
Location Cash Flow, Operating Cash Flow and Adjusted Operating Cash Flow are
accepted within our business segments as generally recognized measures of
performance and are used by analysts who report publicly on the performance of
companies operating in such segments. Restricted Subsidiaries carries the same
meaning as in the Indenture. Pro forma for the acquisition of the Aquadilla,
Puerto Rico cable system, the six completed DBS acquisitions occurring in first
quarter of 1999 and the sale of our New England cable systems, as if such
acquisitions/disposition occurred on April 1, 1998, Adjusted Operating Cash Flow
would have been approximately $56.7 million as follows:
<TABLE>
<CAPTION>
Four
(in thousands) Quarters Ended
March 31,1999
--------------
<S> <C>
Revenues.......................................................................... $189,543
Direct operating expenses, excluding depreciation, amortization and other
non-cash charges................................................................ 128,929
--------
Income from operations before incentive compensation, corporate expenses,
depreciation and amortization and other non-cash charges........................ 60,614
Corporate expenses................................................................ 3,870
--------
Adjusted operating cash flow ..................................................... $ 56,744
========
</TABLE>
Pegasus believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations for at
least the next twelve months. However, our ability in the future to repay our
existing indebtedness will depend upon the success of our business strategy,
prevailing economic conditions, regulatory matters, levels of interest rates and
financial, business and other factors that are beyond our control. We cannot
assure you that we will be able to generate the substantial increases in cash
flow from operations that we will need to meet the obligations under our
indebtedness. Furthermore, our agreements with respect to our indebtedness
contain numerous covenants that, among other things:
o restrict our ability to pay dividends and make certain other payments
and investments;
o borrow additional funds;
o create liens; and
o to sell our assets.
Failure to make debt payments or comply with our covenants could result in an
event of default which if not cured or waived could have a material adverse
effect on us.
Pegasus closely monitors conditions in the capital markets to identify
opportunities for the effective use of financial leverage. In financing its
future expansion and acquisition requirements, Pegasus would expect to avail
itself of such opportunities and thereby increase its indebtedness. This could
result in increased debt service requirements. We cannot assure you that such
debt financing can be completed on terms satisfactory to Pegasus or at all.
Pegasus may also issue additional equity to fund its future expansion and
acquisition requirements.
19
<PAGE>
Year 2000
The year 2000 issue is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the year 2000
approaches and is reached. These problems generally arise from the fact that
most computer hardware and software have historically used only two digits to
identify the year in a date, often resulting in the computer failing to
distinguish dates in the 2000s from dates in the 1900s. These problems may also
arise from additional sources, such as the use of special codes and conventions
in software utilizing the date field.
Pegasus has reviewed all of its systems as to the year 2000 issue.
Pegasus' primary focus has been on its own internal systems. Pegasus has in the
past three years replaced or upgraded, or is in the process of replacing or
upgrading, all of its TV traffic systems, cable billing systems and corporate
accounting systems. All of these new systems are expected to be in place by May
31, 1999. However, if any necessary changes are not made or completed in a
timely fashion or unanticipated problems arise, the year 2000 issue may take
longer for Pegasus to address and may have a material adverse impact on Pegasus'
financial condition and its results of operations.
Pegasus relies on outside vendors for the operation of its DBS
satellite control and billing systems, including DIRECTV, the National Rural
Telecommunications Cooperative and their respective vendors. Pegasus has
established a policy to ensure that these vendors are currently in compliance
with the year 2000 issue or have a plan in place to be in compliance with the
year 2000 issue by the first quarter of 1999. In addition, Pegasus has had
initial communications with certain of its other significant suppliers,
distributors, financial institutions, lessors and parties with which it conducts
business to evaluate their year 2000 compliance plans and state of readiness and
to determine the extent to which Pegasus' systems may be affected by the failure
of others to remediate their own year 2000 issues. To date, however, Pegasus has
received only preliminary feedback from such parties and has not independently
confirmed any information received from other parties with respect to the year
2000 issue. As such, we cannot assure you that these other parties will complete
their year 2000 conversion in a timely fashion or will not suffer a year 2000
business disruption that may adversely affect Pegasus' financial condition and
its results of operations.
Because Pegasus' year 2000 conversion is expected to be completed prior
to any potential disruption to Pegasus' business, Pegasus has not yet completed
the development of a comprehensive year 2000-specific contingency plan. However,
as part of its year 2000 contingency planning effort, Pegasus examines
information received from external sources for date integrity before bringing it
into its internal systems. If Pegasus determines that its business or a segment
thereof is at material risk of disruption due to the year 2000 issue or
anticipates that its year 2000 conversion will not be completed in a timely
fashion, it will work to enhance its contingency plan. Costs to be incurred
beyond March 31, 1999 relating to the year 2000 issue are not expected to be
significant.
Seasonality
Pegasus' revenues vary throughout the year. As is typical in the
broadcast television industry, Pegasus' first quarter generally produces the
lowest revenues for the year and the fourth quarter generally produces the
highest revenues for the year. Pegasus' operating results in any period may be
affected by the incurrence of advertising and promotion expenses that do not
necessarily produce commensurate revenues in the short-term until the impact of
such advertising and promotion is realized in future periods.
Inflation
Pegasus believes that inflation has not been a material factor
affecting its business. In general, Pegasus' revenues and expenses are impacted
to the same extent by inflation. A majority of Pegasus' indebtedness bears
interest at a fixed rate.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter
ended March 31, 1999.
21
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Pegasus Media & Communications, Inc. has duly caused this Report to
be signed on its behalf by the undersigned thereunto duly authorized.
Pegasus Media & Communications, Inc.
Date May 12, 1998 By /s/ Robert N. Verdecchio
-------------- ----------------------------------------------
Robert N. Verdecchio
Senior Vice President, Chief Financial Officer,
Assistant Secretary and Director
(Principal Financial and Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the combined
balance sheet of Pegasus Media & Communications Inc., as of March 31, 1999
(unaudited) and the related combined statements of operations and cash flows for
the three months ended March 31, 1999 (unaudited). This information is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
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0
3,000,000
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</TABLE>
