<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 2000
-------------
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
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PEGASUS MEDIA & COMMUNICATIONS, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 23-2778525
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(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
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
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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 August 4, 2000:
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 June 30, 2000
Page
----
Part I. Financial Information
Item 1 Combined Financial Statements
Combined Balance Sheets
December 31, 1999 and June 30, 2000 3
Combined Statements of Operations
Three months ended June 30, 1999 and 2000 4
Combined Statements of Operations
Six months ended June 30, 1999 and 2000 5
Combined Statements of Cash Flows
Six months ended June 30, 1999 and 2000 6
Notes to Combined Financial Statements 7
Item 2 Management's Narrative Analysis of
the Results of Operations 17
Part II. Other Information
Item 1 Legal Proceedings 23
Item 6 Exhibits and Reports on Form 8-K 23
Signature 24
2
<PAGE>
Pegasus Media & Communications, Inc.
Combined Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $21,351 $10,758
Accounts receivable, less allowance for doubtful accounts of
$1,067 and $1,888, respectively 24,642 33,069
Inventory 9,506 20,292
Program rights 4,373 3,868
Deferred taxes 406 654
Net advances to affiliates 1,790 3,521
Prepaid expenses and other 3,463 6,098
--------- -----------
Total current assets 65,531 78,260
Property and equipment, net 37,841 51,591
Intangible assets, net 437,774 826,934
Deferred financing costs, net 6,500 9,998
Program rights 5,731 3,843
Deferred taxes 30,447 33,062
Investment in affiliates 4,598 116,444
Deposits and other 5,042 10,510
--------- -----------
Total assets $593,464 $1,130,642
========= ===========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $11,091 $10,560
Accounts payable 8,045 7,166
Accrued interest 6,253 10,946
Accrued satellite programming, fees and commissions 24,314 36,807
Accrued expenses 11,817 22,366
Amounts due seller 6,729 -
Current portion of program rights payable 4,447 4,360
--------- -----------
Total current liabilities 72,696 92,205
Long-term debt 235,633 362,170
Program rights payable 4,211 2,248
Deferred taxes 35,398 115,135
--------- -----------
Total liabilities 347,938 571,758
========= ===========
Commitments and contingent liabilities - -
Minority interest 3,000 -
Common stockholder's equity:
Class A Common Stock; $0.01 par value; 230,000 shares
authorized; 161,500 issued and outstanding 2 2
Class B Common Stock; $0.01 par value; 20,000 shares
authorized; 8,500 issued and outstanding - -
Additional paid-in capital 378,889 767,878
Deficit (136,365) (208,996)
--------- -----------
Total stockholder's equity 242,526 558,884
--------- -----------
Total liabilities and stockholder's equity $593,464 $1,130,642
========= ===========
</TABLE>
See accompanying notes to combined financial statements
3
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Operations
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------
1999 2000
-------- ---------
(unaudited)
<S> <C> <C>
Net revenues:
DBS $38,135 $105,286
Broadcast 9,578 9,233
--------- ---------
Total net revenues 47,713 114,519
Operating expenses:
DBS
Programming, technical, general and administrative 26,103 73,896
Marketing and selling 17,343 26,537
Incentive compensation 270 385
Depreciation and amortization 10,064 24,731
Broadcast
Programming, technical, general and administrative 5,209 6,076
Marketing and selling 1,612 2,042
Incentive compensation 46 31
Depreciation and amortization 1,288 1,215
Corporate expenses 1,049 2,707
Corporate depreciation and amortization 176 70
Development costs 2 742
Other expense, net 31 249
--------- ---------
Loss from operations (15,480) (24,162)
Interest expense (3,837) (11,885)
Interest income 1 274
--------- ---------
Loss from continuing operations before income
taxes and equity loss (19,316) (35,773)
Provision (benefit) for income taxes 100 (3,019)
Equity in net loss of unconsolidated affiliates - (99)
--------- ---------
Loss from continuing operations (19,416) (32,853)
Discontinued operations:
Income from discontinued operations of cable
segment, net of income taxes 616 163
--------- ---------
Net loss ($18,800) ($32,690)
========= =========
</TABLE>
See accompanying notes to combined financial statements
4
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Operations
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
1999 2000
-------- ---------
(unaudited)
<S> <C> <C>
Net revenues:
DBS $72,471 $201,143
Broadcast 17,481 17,332
--------- ---------
Total net revenues 89,952 218,475
Operating expenses:
DBS
Programming, technical, general and administrative 49,899 141,754
Marketing and selling 29,140 51,946
Incentive compensation 595 785
Depreciation and amortization 19,986 47,181
Broadcast
Programming, technical, general and administrative 10,145 12,021
Marketing and selling 3,079 3,911
Incentive compensation 202 46
Depreciation and amortization 2,472 2,531
Corporate expenses 1,931 4,622
Corporate depreciation and amortization 350 95
Development costs 2 1,169
Other expense, net 153 815
--------- ---------
Loss from operations (28,002) (48,401)
Interest expense (7,795) (22,646)
Interest income 143 432
--------- ---------
Loss from continuing operations before income
taxes, equity loss and extraordinary items (35,654) (70,615)
Provision (benefit) for income taxes 185 (6,825)
Equity in net loss of unconsolidated affiliates - (215)
--------- ---------
Loss from continuing operations before
extraordinary items (35,839) (64,005)
Discontinued operations:
Income from discontinued operations of cable
segment, net of income taxes 749 654
--------- ---------
Loss before extraordinary items (35,090) (63,351)
Extraordinary loss from extinguishment of debt, net - (9,280)
--------- ---------
Net loss ($35,090) ($72,631)
========= =========
</TABLE>
See accompanying notes to combined financial statements
5
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
1999 2000
-------- ---------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($35,090) ($72,631)
Adjustments to reconcile net loss
to net cash used for operating activities:
Extraordinary loss on extinquishment of debt, net - 9,280
Depreciation and amortization 25,831 54,002
Program rights amortization 1,539 2,410
Amortization of debt discount and deferred financing fees 199 2,013
Stock incentive compensation 858 1,211
Equity in net loss of unconsolidated affiliates - 215
Bad debt expense 1,594 6,409
Deferred income taxes 185 (6,626)
Change in assets and liabilities:
Accounts receivable (974) (3,195)
Inventory (1,003) (10,786)
Prepaid expenses and other (1,577) (1,808)
Accounts payable and accrued expenses 2,823 (5,232)
Accrued interest (44) 4,693
Deposits and other (195) (5,192)
-------- --------
Net cash used for operating activities (5,854) (25,237)
-------- --------
Cash flows from investing activities:
Acquisitions (91,930) (35,967)
Cash acquired from acquisitions 5 -
Cash acquired from merger with affiliate - 3,236
Capital expenditures (3,726) (14,245)
Purchase of intangible assets (1,216) (2,034)
Payments for programming rights (1,256) (2,065)
Investment in affiliate - (14,506)
-------- --------
Net cash used for investing activities (98,123) (65,581)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt (9,283) (13,503)
Borrowings on bank credit facilities 70,500 275,000
Repayments of bank credit facilities (50,000) (204,200)
Net advances to affiliates (10,068) (3,043)
Restricted cash 1,000 -
Increase in deferred financing costs (15) (8,558)
Capital lease repayments (61) (74)
Net contributions by Parent 91,209 34,603
-------- --------
Net cash provided by financing activities 93,282 80,225
-------- --------
Net decrease in cash and cash equivalents (10,695) (10,593)
Cash and cash equivalents, beginning of year 22,707 21,351
-------- --------
Cash and cash equivalents, end of period $12,012 $10,758
======== ========
</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, 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 operating subsidiaries are Pegasus Broadcast
Television, Inc. ("PBT"), Pegasus Cable Television, Inc. ("PCT") and Pegasus
Satellite Television, Inc. ("PST").
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 a cable television
("Cable") system that provides 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 1999 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, 1999 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.
In May, 2000, PCC completed a two-for-one split of its outstanding
Class A and Class B Common Stock in the form of a stock dividend. All references
to PCC's shares, including shares issued, option shares, warrant shares and
exercise prices included in the accompanying notes to combined financial
statements reflect the stock split and its retroactive effect.
3. Investment in Affiliates:
PDC has a 90% investment in Pegasus PCS Partners, LP ("PCS") which is
accounted for by the equity method. PCS, a jointly owned limited partnership,
acquires, owns, controls and manages wireless licenses. Pegasus PCS, Inc. is the
sole general partner of PCS and is controlled by Marshall W. Pagon, the
Company's President and Chief Executive Officer. PDC's share of undistributed
losses of PCS included in continuing operations was $211,000 for the first half
of 2000. PDC's total investment in PCS at June 30, 2000 was $4.4 million.
7
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
3. Investment in Affiliates: - (Continued)
In January 2000, PDC made an investment in Personalized Media
Communications, LLC ("PMC"), an advanced communications technology company, of
approximately $112.0 million which is accounted for by the equity method. The
investment consisted of $14.4 million in cash, 400,000 shares of PCC's Class A
Common Stock (amounting to $18.8 million) and warrants to purchase 2.0 million
shares of PCC's Class A Common Stock at an exercise price of $45.00 per share
and with a term of ten years. The fair value of the warrants to be issued was
estimated using the Black-Scholes pricing model and is approximately $78.8
million. A subsidiary of PMC granted to PDC an exclusive license for use of
PMC's patent portfolio in the distribution of satellite services from specified
orbital locations. Mary C. Metzger, Chairman of PMC and a member of Pegasus'
Board of Directors, and John C. Harvey, Managing Member of PMC and Ms. Metzger's
husband, own a majority of and control PMC. PDC's share of undistributed losses
of PMC included in continuing operations was $4,000 for the first half of 2000.
PDC's total investment in PMC at June 30, 2000 was $112.0 million.
4. 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.
5. Long-Term Debt:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---- ----
<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 $2.2 million and $2.0 million as of December 31, 1999
and June 30, 2000, respectively.............................................. $82,776 $82,976
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............ 142,500 -
Senior five-year $225.0 million revolving 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...................... - -
Senior five-year $275.0 million term loan 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...................... - 275,000
Mortgage payable, due 2000, interest at 8.75%.................................... 431 -
Sellers' notes, due 2000 to 2005, interest at 3% to 8%........................... 20,707 14,481
Capital leases and other......................................................... 310 273
-------- --------
246,724 372,730
Less current maturities.......................................................... 11,091 10,560
-------- --------
Long-term debt................................................................... $235,633 $362,170
======== ========
</TABLE>
Certain of the Company's sellers' notes are collateralized by stand-by
letters of credit issued pursuant to the New PM&C Credit Facility.
8
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
5. Long-Term Debt: - (Continued)
The Company maintained a $180.0 million senior revolving credit
facility (the "PM&C Credit Facility") which was collateralized by substantially
all of the assets of Pegasus and its subsidiaries. The PM&C Credit Facility was
subject to certain financial covenants as defined in the loan agreement,
including a debt to adjusted cash flow covenant. The PM&C Credit Facility was
amended and restated in January 2000.
In January 2000, the Company entered into a first amended and restated
credit facility, which consists of a $225.0 million senior revolving credit
facility which expires in 2004 and a $275.0 million senior term credit facility
which expires in 2005 (collectively, the "New PM&C Credit Facility"). The New
PM&C Credit Facility is collateralized by substantially all of the assets of
Pegasus and its subsidiaries and is subject to certain financial covenants as
defined in the loan agreement, including a debt to adjusted cash flow covenant.
As of June 30, 2000, $38.2 million of stand-by letters of credit were issued
pursuant to the New PM&C Credit Facility, including $10.4 million
collateralizing certain of the Company's outstanding sellers' notes.
Commensurate with the closing of the New PM&C Credit Facility, the
Company borrowed $275.0 million under the term loan and outstanding balances
under the PM&C Credit Facility were repaid. Additionally, in connection with the
closing of the New PM&C Credit Facility, Digital Television Services, Inc.
("DTS"), a wholly owned subsidiary of PCC, was merged with and into a subsidiary
of Pegasus.
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 contains certain financial and operating
covenants, including restrictions on the Company's ability to incur additional
indebtedness, to create liens and to pay dividends.
6. Acquisitions:
In the first half of 2000, the Company acquired, from seven independent
DIRECTV(R) ("DIRECTV") providers, the rights to provide DIRECTV programming in
certain rural areas of the United States and the related assets in exchange for
total consideration of approximately $133.9 million, which consisted of $36.0
million in cash, 22,500 shares of PCC's Series D Preferred Stock (amounting to
$22.5 million), 10,000 shares of PCC's Series E Preferred Stock (amounting to
$10.0 million), 873,184 shares of PCC's Class A Common Stock (amounting to $39.7
million), warrants to purchase a total of 3,000 shares of PCC's Class A Common
Stock (amounting to $166,000), $24.4 million of a deferred tax liability,
$200,000 in promissory notes and $961,000 in assumed net liabilities.
7. Discontinued Operations:
In January 2000, the Company entered into a letter of intent to sell
its remaining Cable operations for $170.0 million in cash, subject to certain
adjustments. The Company anticipates closing this sale during the second half of
2000. Accordingly, the results of operations from the entire Cable segment have
been classified as discontinued with prior periods restated.
9
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
7. Discontinued Operations: - (Continued)
Net revenues and income from discontinued operations were as follows
(in thousands):
Three Months Ended June 30,
---------------------------
1999 2000
---- ----
Net revenues..................................... $5,577 $6,511
Income from operations........................... 638 414
Provision for income taxes....................... - 249
Income from discontinued operations.............. 616 163
Six Months Ended June 30,
-------------------------
1999 2000
---- ----
Net revenues..................................... $8,648 $12,710
Income from operations........................... 765 811
Provision for income taxes....................... - 199
Income from discontinued operations.............. 749 654
8. Supplemental Cash Flow Information:
Significant non-cash investing and financing activities are as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 2000
---- ----
<S> <C> <C>
Barter revenue and related expense............................................ $3,648 $3,558
Acquisition of program rights and assumption of related program payables...... 6,655 16
Capital contribution and related acquisition of intangibles................... - 78,115
Capital contribution and related investment in affiliates..................... - 97,555
Notes payable and related acquisition of intangibles.......................... 4,490 515
Deferred taxes, net and related acquisition of intangibles.................... 29 27,985
</TABLE>
For the six months ended June 30, 1999 and 2000, the Company paid cash
for interest in the amount of $7.7 million and $16.0 million, respectively. The
Company paid no federal income taxes for the six months ended June 30, 1999 and
2000.
9. Commitments and Contingent Liabilities:
Legal Matters:
From time to time the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
consolidated operations, liquidity, cash flows or financial position of the
Company.
The Company is a rural affiliate of the National Rural
Telecommunications Cooperative ("NRTC"). The NRTC is a cooperative organization
whose members and affiliates are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the United
States. The Company's ability to distribute DIRECTV programming services is
dependent upon agreements between the NRTC and Hughes Electronics Corporation,
DIRECTV's parent, and between the Company and the NRTC.
10
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
9. Commitments and Contingent Liabilities: - (Continued)
On June 3, 1999, the NRTC filed a lawsuit in federal court against
DIRECTV seeking a court order to enforce the NRTC's contractual rights to obtain
from DIRECTV certain premium programming formerly distributed by United States
Satellite Broadcasting Company, Inc. for exclusive distribution by the NRTC's
members and affiliates in their rural markets. On July 22, 1999, DIRECTV
responded to the NRTC's continuing lawsuit by rejecting the NRTC's claims to
exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the NRTC. In
particular, DIRECTV contends in its counterclaim that the term of DIRECTV's
contract with the NRTC is measured solely by the orbital life of DBS-1, the
first DIRECTV satellite launched into orbit at the 101(Degree) W orbital
location, without regard to the orbital lives of the other DIRECTV satellites at
the 101(Degree) W orbital location. DIRECTV also alleges in its counterclaim
that the NRTC's right of first refusal, which is effective at the end of the
term of DIRECTV's contract with the NRTC, does not provide for certain
programming and other rights comparable to those now provided under the
contract.
On August 26, 1999, the NRTC filed a separate lawsuit in federal court
against DIRECTV claiming that DIRECTV had failed to provide to the NRTC its
share of launch fees and other benefits that DIRECTV and its affiliates have
received relating to programming and other services. On September 9, 1999, the
NRTC filed a response to DIRECTV's counterclaim contesting DIRECTV's
interpretations of the end of term and right of first refusal provisions.
On January 10, 2000, the Company and Golden Sky Systems, Inc. ("Golden
Sky", a subsidiary of Golden Sky Holdings, Inc., which PCC acquired on May 5,
2000) filed a lawsuit in federal court against DIRECTV which contains causes of
action for various torts, common counts and declaratory relief based on
DIRECTV's failure to provide the NRTC with premium programming, thereby
preventing the NRTC from providing this programming to the Company and Golden
Sky. The claims are also based on DIRECTV's position with respect to launch fees
and other benefits, term and rights of first refusal. The complaint seeks
monetary damages and a court order regarding the rights of the NRTC and its
members and affiliates.
On February 10, 2000, the Company and Golden Sky filed an amended
complaint which added new tort claims against DIRECTV for interference with
plaintiffs' relationships with manufacturers, distributors and dealers of direct
broadcast satellite equipment. The Company and Golden Sky also withdrew the
class action allegations to allow a new class action to be filed on behalf of
the members and affiliates of the NRTC. The class action was filed on February
27, 2000. All four actions are now pending before the same judge, who has set
various hearing dates, including the following. On October 2, 2000, the court
will hear argument on the motion for class certification and on DIRECTV's motion
to dismiss certain of our claims and claims by the class members. DIRECTV's
motion for partial summary judgment on the right of first refusal will be heard
on October 30, 2000. The court has set a trial date of November 27, 2001 for all
four actions.
Management is not currently able to predict the outcome of the DIRECTV
litigation matters or the effect such outcome will have on the combined
operations, liquidity, cash flows or financial position of the Company.
Commitments:
The Company has entered into a multi-year agreement with a provider of
integrated marketing, information and transaction services to provide customer
relationship management services which will significantly increase the Company's
existing call center capacity. The initial term of the agreement ends on
December 31, 2004. The Company must pay minimum fees to the provider as follows
(in thousands):
11
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
9. Commitments and Contingent Liabilities: - (Continued)
Annual
Year Minimum Fees
---- ------------
2000.................................................. $12,600
2001.................................................. 18,216
2002.................................................. 20,250
2003.................................................. 20,250
2004.................................................. 20,250
-------
Total minimum payments $91,566
=======
10. Industry Segments:
The Company operates in growing segments of the media industry: DBS and
Broadcast. DBS consists of providing direct broadcast satellite television
services to customers in certain rural areas of 38 states. Broadcast consists of
ten television stations affiliated with Fox, UPN and the WB, all located in the
eastern United States.
All of the Company's revenues are derived from external customers.
Capital expenditures for the Company's DBS segment were $834,000 and $6.9
million for the six months ended June 30, 1999 and 2000, respectively. Capital
expenditures for the Company's Broadcast segment were $494,000 and $4.1 million
for the six months ended June 30, 1999 and 2000, respectively. Capital
expenditures for the Company's discontinued Cable segment were $2.4 million and
$3.1 million for the six months ended June 30, 1999 and 2000, respectively. All
other capital expenditures for the six months ended June 30, 1999 and 2000 were
at the corporate level. Identifiable total assets for the Company's DBS segment
were $394.6 million and $815.4 million as of December 31, 1999 and June 30,
2000, respectively. Identifiable total assets for the Company's Broadcast
segment were $66.1 million and $66.4 million as of December 31, 1999 and June
30, 2000, respectively. Identifiable total assets for the Company's discontinued
Cable segment were $86.2 million and $84.3 million as of December 31, 1999 and
June 30, 2000, respectively. All other identifiable assets as of December 31,
1999 and June 30, 2000 were at the corporate level.
11. Other Events:
In July 2000, Pegasus Towers, Inc., a subsidiary of PCC, and PBT sold
substantially all of their broadcast tower assets to SpectraSite Broadcast Group
("SpectraSite"), a division of SpectraSite Holdings, Inc. ("SpectraSite
Holdings"), for approximately 1.4 million shares of SpectraSite Holdings' common
stock (amounting to approximately $36.6 million at a price of $26.63 per share).
The Company anticipates recognizing a gain on the transaction. Under the terms
of the agreement, SpectraSite will lease certain of its existing tower
facilities and build additional digital television towers for use by PBT.
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
12. 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.
12
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
12. Subsidiary Guarantees: - (Continued)
<TABLE>
<CAPTION>
Condensed Combined Balance Sheets
(in thousands)
Guarantor Non-guarantor
As of June 30, 2000 Subsidiaries Subsidiaries Pegasus Eliminations
------------ ------------ ------- ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $10,195 $179
Accounts receivable, net 34,558
Other current assets 32,602 $4
----------------------------------------------------------------------------
Total current assets 77,355 179 4 -
Property and equipment, net 51,014
Intangible assets, net 823,716 2,338 163
Other assets 13,432 43,556
Investment in subsidiaries and affiliates 71,042 847,698 ($918,740)
----------------------------------------------------------------------------
Total assets $965,517 $73,559 $891,421 ($918,740)
============================================================================
Liabilities and total equity:
Current portion of long-term debt $10,560
Accounts payable 7,015
Other current liabilities 74,329 $10,675 ($10,675)
----------------------------------------------------------------------------
Total current liabilities 91,904 - 10,675 (10,675)
Long-term debt 1,186,945 $314 82,976 (908,065)
Other liabilities 94,476 (8,875) 31,782
----------------------------------------------------------------------------
Total liabilities 1,373,325 (8,561) 125,433 (918,740)
Total equity (deficit) (407,808) 82,120 765,988
----------------------------------------------------------------------------
Total liabilities and equity $965,517 $73,559 $891,421 ($918,740)
============================================================================
As of December 31, 1999
Assets:
Cash and cash equivalents $15,085 $494 $5,756
Accounts receivable, net 21,993
Other current assets 19,469
----------------------------------------------------------------------------
Total current assets 56,547 494 5,756 -
Property and equipment, net 37,833
Intangible assets, net 438,212 2,440 3,083
Other assets 34,343 6,452
Investment in subsidiaries and affiliates 353,828 ($353,828)
----------------------------------------------------------------------------
Total assets $566,935 $2,934 $369,119 ($353,828)
============================================================================
Liabilities and total equity:
Current portion of long-term debt $11,091
Accounts payable 7,963
Other current liabilities 53,550 $5,690 ($5,690)
----------------------------------------------------------------------------
Total current liabilities 72,604 - 5,690 (5,690)
Long-term debt 500,681 $314 82,776 (348,138)
Other liabilities 36,627 (8,478) 11,460
----------------------------------------------------------------------------
Total liabilities 609,912 (8,164) 99,926 (353,828)
Minority interest 3,000
Total equity (deficit) (45,977) 11,098 269,193
----------------------------------------------------------------------------
Total liabilities and equity $566,935 $2,934 $369,119 ($353,828)
============================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Combined Balance Sheets
(in thousands) Pegasus
Pegasus Development
As of June 30, 2000 Subtotal Corporation Eliminations Totals
-------- ----------- ------------ ------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $10,374 $384 $10,758
Accounts receivable, net 34,558 (1,489) 33,069
Other current assets 32,606 1,827 34,433
------------------------------------------------------------------
Total current assets 77,538 722 - 78,260
Property and equipment, net 51,014 577 51,591
Intangible assets, net 826,217 717 826,934
Other assets 56,988 425 57,413
Investment in subsidiaries and affiliates - 116,444 116,444
------------------------------------------------------------------
Total assets $1,011,757 $118,885 - $1,130,642
==================================================================
Liabilities and total equity:
Current portion of long-term debt $10,560 $10,560
Accounts payable 7,015 $151 7,166
Other current liabilities 74,329 150 74,479
------------------------------------------------------------------
Total current liabilities 91,904 301 - 92,205
Long-term debt 362,170 362,170
Other liabilities 117,383 117,383
------------------------------------------------------------------
Total liabilities 571,457 301 - 571,758
Total equity (deficit) 440,300 118,584 558,884
------------------------------------------------------------------
Total liabilities and equity $1,011,757 $118,885 - $1,130,642
==================================================================
As of December 31, 1999
Assets:
Cash and cash equivalents $21,335 $16 $21,351
Accounts receivable, net 21,993 2,649 24,642
Other current assets 19,469 69 19,538
------------------------------------------------------------------
Total current assets 62,797 2,734 - 65,531
Property and equipment, net 37,833 8 37,841
Intangible assets, net 443,735 539 444,274
Other assets 40,795 425 41,220
Investment in subsidiaries and affiliates - 4,598 4,598
------------------------------------------------------------------
Total assets $585,160 $8,304 - $593,464
==================================================================
Liabilities and total equity:
Current portion of long-term debt $11,091 $11,091
Accounts payable 7,963 $82 8,045
Other current liabilities 53,550 10 53,560
------------------------------------------------------------------
Total current liabilities 72,604 92 - 72,696
Long-term debt 235,633 235,633
Other liabilities 39,609 39,609
------------------------------------------------------------------
Total liabilities 347,846 92 - 347,938
Minority interest 3,000 3,000
Total equity (deficit) 234,314 8,212 242,526
------------------------------------------------------------------
Total liabilities and equity $585,160 $8,304 - $593,464
==================================================================
</TABLE>
13
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
12. Subsidiary Guarantees: - (Continued)
<TABLE>
<CAPTION>
Condensed Combined Statements of Operations
For the Six Months ended June 30, 2000
(in thousands)
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations
------------ ------------ ------- ------------
<S> <C> <C> <C> <C>
Total revenue $218,475 $2,030 ($2,030)
Total operating expenses 215,577 52,048 $63 (2,030)
--------------------------------------------------------------------------
Income (loss) from operations 2,898 (50,018) (63) -
Interest expense 6,583 21,243 (5,180)
Other (431) (1)
--------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity loss (3,254) (50,018) (21,305) 5,180
Provision for income taxes (6,825)
Equity loss
Discontinued operations 656 (2)
--------------------------------------------------------------------------
Income (loss) before extraordinary item (2,598) (50,020) (14,480) 5,180
Extraordinary loss on extinguishment of debt (6,841) (2,439)
--------------------------------------------------------------------------
Net income (loss) ($9,439) ($50,020) ($16,919) $5,180
==========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus
Pegasus Development
Subtotal Corporation Eliminations Totals
-------- ----------- ------------ ------
<S> <C> <C> <C> <C>
Total revenue $218,475 $218,475
Total operating expenses 265,658 $1,218 266,876
------------------------------------------------------------
Income (loss) from operations (47,183) (1,218) - (48,401)
Interest expense 22,646 22,646
Other (432) (432)
------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity loss (69,397) (1,218) - (70,615)
Provision for income taxes (6,825) (6,825)
Equity loss - (215) (215)
Discontinued operations 654 654
------------------------------------------------------------
Income (loss) before extraordinary item (61,918) (1,433) - (63,351)
Extraordinary loss on extinguishment of debt (9,280) (9,280)
------------------------------------------------------------
Net income (loss) ($71,198) ($1,433) - ($72,631)
============================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Combined Statements of Operations
For the Six Months ended June 30, 1999
(in thousands)
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations
------------ ------------ ------- ------------
<S> <C> <C> <C> <C>
Total revenue $89,985 $956 ($989)
Total operating expenses 89,349 29,238 $356 (989)
--------------------------------------------------------------------------
Income (loss) from operations 636 (28,282) (356) -
Interest expense 5,621 7,329 (5,155)
Other (194) 47
--------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (4,791) (28,282) (7,732) 5,155
Provision for income taxes 185
Discontinued operations 736 13
--------------------------------------------------------------------------
Net income (loss) ($4,240) ($28,269) ($7,732) $5,155
==========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus
Pegasus Development
Subtotal Corporation Eliminations Totals
-------- ----------- ------------ ------
<S> <C> <C> <C> <C>
Total revenue $89,952 $89,952
Total operating expenses 117,954 117,954
------------------------------------------------------------
Income (loss) from operations (28,002) - - (28,002)
Interest expense 7,795 7,795
Other (147) $4 (143)
------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (35,650) (4) - (35,654)
Provision for income taxes 185 185
Discontinued operations 749 749
------------------------------------------------------------
Net income (loss) ($35,086) ($4) - ($35,090)
============================================================
</TABLE>
14
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
12. Subsidiary Guarantees: - (Continued)
<TABLE>
<CAPTION>
Condensed Combined Statements of Cash Flows
For the Six Months ended June 30, 2000
(in thousands)
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations
------------ ------------ ------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($9,439) ($50,020) ($16,919) $5,180
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 53,805 102 46
Program rights amortization 2,410
Change in assets and liabilities:
Accounts receivable (7,333)
Accounts payable and accrued expenses 4,432 (5,180)
Prepaids and other (1,808)
Other (27,225) 25,507
------------------------------------------------------------------
Net cash provided (used) by operating activities 14,842 (49,918) 8,634 -
Cash flows from investing activities:
Acquisitions (35,967)
Capital expenditures (13,676)
Purchase of intangible assets (4,681) 2,874
Other 629,489 (530,978)
------------------------------------------------------------------
Net cash provided (used) for investing activities 575,165 - (528,104) -
Cash flows from financing activities:
Proceeds from debt 275,000
Repayment of debt (217,777)
Other (652,120) 49,603 513,714
------------------------------------------------------------------
Net cash provided (used) by financing activities (594,897) 49,603 513,714 -
Net increase (decrease) in cash and cash equivalents (4,890) (315) (5,756)
Cash and cash equivalents, beginning of year 15,085 494 5,756
------------------------------------------------------------------
Cash and cash equivalents, end of period $10,195 $179 - -
==================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus
Pegasus Development
Subtotal Corporation Eliminations Totals
-------- ----------- ------------ ------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($71,198) ($1,433) ($72,631)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 53,953 49 54,002
Program rights amortization 2,410 2,410
Change in assets and liabilities:
Accounts receivable (7,333) 4,138 (3,195)
Accounts payable and accrued expenses (748) 209 (539)
Prepaids and other (1,808) (1,808)
Other (1,718) (1,758) (3,476)
--------------------------------------------------------
Net cash provided (used) by operating activities (26,442) 1,205 - (25,237)
Cash flows from investing activities:
Acquisitions (35,967) (35,967)
Capital expenditures (13,676) (569) (14,245)
Purchase of intangible assets (1,807) (227) (2,034)
Other 98,511 (111,846) (13,335)
--------------------------------------------------------
Net cash provided (used) for investing activities 47,061 (112,642) - (65,581)
Cash flows from financing activities:
Proceeds from debt 275,000 275,000
Repayment of debt (217,777) (217,777)
Other (88,803) 111,805 23,002
--------------------------------------------------------
Net cash provided (used) by financing activities (31,580) 111,805 - 80,225
Net increase (decrease) in cash and cash equivalents (10,961) 368 (10,593)
Cash and cash equivalents, beginning of year 21,335 16 21,351
--------------------------------------------------------
Cash and cash equivalents, end of period $10,374 $384 - $10,758
========================================================
</TABLE>
15
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
12. Subsidiary Guarantees: - (Continued)
<TABLE>
<CAPTION>
Condensed Combined Statements of Cash Flows
For the Six Months ended June 30, 1999
(in thousands)
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations
------------ ------------ ------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($4,240) ($28,269) ($7,732) $5,155
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 25,382 101 348
Program rights amortization 1,539
Change in assets and liabilities:
Accounts receivable (974)
Accounts payable and accrued expenses 8,110 (3) (5,155)
Prepaids and other (1,577)
Other (6,450) 7,904
------------------------------------------------------------------
Net cash provided (used) by operating activities 21,790 (28,171) 520 -
Cash flows from investing activities:
Acquisitions (91,930)
Capital expenditures (3,728)
Purchase of intangible assets (1,097) (26)
Other 69,835 (71,086)
------------------------------------------------------------------
Net cash provided (used) by investing activities (26,920) - (71,112) -
Cash flows from financing activities:
Proceeds from debt 70,500
Repayment of debt (59,344)
Other (9,146) 25,558 65,713
------------------------------------------------------------------
Net cash provided (used) by financing activities 2,010 25,558 65,713 -
Net increase (decrease) in cash and cash equivalents (3,120) (2,613) (4,879)
Cash and cash equivalents, beginning of year 14,143 3,092 5,318
------------------------------------------------------------------
Cash and cash equivalents, end of period $11,023 $479 $439 -
==================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus
Pegasus Development
Subtotal Corporation Eliminations Totals
-------- ----------- ------------ ------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($35,086) ($4) ($35,090)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 25,831 25,831
Program rights amortization 1,539 1,539
Change in assets and liabilities:
Accounts receivable (974) (974)
Accounts payable and accrued expenses 2,952 11 2,963
Prepaids and other (1,577) (1,577)
Other 1,454 1,454
-------------------------------------------------------
Net cash provided (used) by operating activities (5,861) 7 - (5,854)
Cash flows from investing activities:
Acquisitions (91,930) (91,930)
Capital expenditures (3,728) 2 (3,726)
Purchase of intangible assets (1,123) (93) (1,216)
Other (1,251) (1,251)
-------------------------------------------------------
Net cash provided (used) by investing activities (98,032) (91) - (98,123)
Cash flows from financing activities:
Proceeds from debt 70,500 70,500
Repayment of debt (59,344) (59,344)
Other 82,125 1 82,126
-------------------------------------------------------
Net cash provided (used) by financing activities 93,281 1 - 93,282
Net increase (decrease) in cash and cash equivalents (10,612) (83) (10,695)
Cash and cash equivalents, beginning of year 22,553 154 22,707
-------------------------------------------------------
Cash and cash equivalents, end of period $11,941 $71 - $12,012
=======================================================
</TABLE>
16
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to us that are based on the beliefs of our management, as
well as assumptions made by and information currently available to our
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 our current
views with respect to future events and are subject to unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those contemplated in such forward-looking statements. Such
factors include, among other things, the following: general economic and
business conditions, both nationally, internationally and in the regions in
which we operate; relationships with and events affecting third parties like
DIRECTV, Inc; litigation with DIRECTV; demographic changes; existing government
regulations and changes in, or the failure to comply with government
regulations; competition; the loss of any significant numbers of subscribers or
viewers; changes in business strategy or development plans; technological
developments and difficulties; the ability to attract and retain qualified
personnel; our significant indebtedness; the availability and terms of capital
to fund the expansion of our businesses; and other factors referenced in this
Report and in reports and registration statements filed by Pegasus and its
parent company, Pegasus Communications Corporation, from time to time with the
Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as the date
hereof. We do not undertake any obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
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 year-to-date period in the preceding fiscal year. The following
discussion of the results of operations of Pegasus should be read in conjunction
with the consolidated financial statements and related notes which are included
on pages 3-16 herein.
General
Pegasus Media & Communications, Inc. is:
o A wholly owned subsidiary of Pegasus Communications Corporation.
o An independent provider of DIRECTV with 848,000 subscribers at June
30, 2000, on an actual basis. We have the exclusive right to
distribute DIRECTV digital broadcast satellite services to
approximately 5.3 million rural households in 38 states. We
distribute DIRECTV through the Pegasus Communications retail
network, a network in excess of 3,000 independent retailers.
o The owner or programmer of ten TV stations affiliated with either
Fox, UPN or the WB and the owner of a large cable system in Puerto
Rico serving approximately 56,000 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.
In January 2000, we entered into a letter of intent to sell the assets
of our entire cable system business in Puerto Rico to a subsidiary of Centennial
Cellular Corporation for $170.0 million in cash, subject to certain adjustments.
The closing of this sale is anticipated to occur during the second half of 2000
and is subject to the negotiation of a definitive agreement, third-party
approvals, including regulatory approvals, and other customary conditions.
Accordingly, the results of our cable segment have been presented as
discontinued operations in our combined statements of operations.
17
<PAGE>
In this section we use the terms pre-marketing cash flow from
continuing operations and location cash flow from continuing operations.
Pre-marketing cash flow from continuing operations 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, stock option and 401(k) plans;
o corporate overhead;
o extraordinary and non-recurring items;
o results of discontinued operations; and
o DBS subscriber acquisition costs, which are sales and marketing
expenses incurred and promotional programming provided in connection
with the addition of new DBS subscribers.
Location cash flow from continuing operations is pre-marketing cash
flow from continuing operations less DBS subscriber acquisition costs.
Pre-marketing cash flow from continuing operations and location cash
flow from continuing operations 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 from continuing operations and location cash
flow from continuing operations 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 from continuing operations and location cash flow
from continuing operations are important, however, for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors 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.
Certain of our DBS customers, primarily those converted from
Primestar's medium-power DBS business, pay a monthly rental fee to us for use of
our DBS subscriber equipment. The equipment is owned by us and, accordingly, the
equipment costs are capitalized and depreciated over a period of three years.
These equipment costs are not included as a component of subscriber acquisition
costs in our results of operations.
18
<PAGE>
Results of Operations
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Total net revenues from continuing operations for the six months ended
June 30, 2000 were $218.5 million, an increase of $128.5 million, or 143%,
compared to total net revenues of $90.0 million for the same period in 1999. The
increase in total net revenues for the six months ended June 30, 2000 was
primarily due to an increase in DBS revenues of $128.7 million attributable to
acquisitions, internal growth in Pegasus' DBS subscriber base and the merger of
Digital Television Services with and into a subsidiary of Pegasus in January
2000. Total operating expenses from continuing operations for the six months
ended June 30, 2000 were $266.9 million, an increase of $148.9 million, or 126%,
compared to total operating expenses of $118.0 million for the same period in
1999. The increase was primarily due to an increase of $142.0 million in
operating expenses attributable to the growth in Pegasus' DBS business.
Total corporate expenses from continuing operations, including
corporate depreciation and amortization, were $4.7 million for the six months
ended June 30, 2000, an increase of $2.4 million, or 107%, compared to $2.3
million for the same period in 1999. The increase in corporate expenses is
primarily attributable to the growth in Pegasus' business.
New business development costs were $1.2 million for the six months
ended June 30, 2000 compared to $2,000 for the same period in 1999.
Other expenses from continuing operations were $815,000 for the six
months ended June 30, 2000, an increase of $662,000, or 433%, compared to other
expenses of $153,000 for the same period in 1999. The increase is primarily due
to legal fees associated with the DIRECTV litigation.
Interest expense from continuing operations was $22.6 million for the
six months ended June 30, 2000, an increase of $14.9 million, or 191%, compared
to interest expense of $7.8 million for the same period in 1999. The increase in
interest expense is primarily due to interest and fees in connection with the
new credit facility and the growth in Pegasus' DBS business. Interest income
from continuing operations was $432,000 for the six months ended June 30, 2000,
an increase of $289,000, or 202%, compared to interest income of $143,000 for
the same period in 1999. The increase in interest income is due to higher
average cash balances for the six months ended June 30, 2000 compared to the
same period in 1999.
The provision for income taxes from continuing operations declined by
approximately $7.0 million for the six months ended June 30, 2000 compared to
the same period in 1999 primarily as a result of the amortization of deferred
tax liabilities originating from DBS acquisitions and the merger of Digital
Television Services with and into a subsidiary of Pegasus.
Equity in the net losses of unconsolidated affiliates, resulting from
investments in Pegasus PCS Partners, LP in August 1999 and Personalized Media
Communications, LLC in January 2000, amounted to $215,000 for the six months
ended June 30, 2000.
Income from discontinued operations of the cable segment, net of income
taxes, was $654,000 for the six months ended June 30, 2000, a decrease of
$95,000, or 13%, compared to $749,000 for the same period in 1999. The decrease
is primarily attributable to an increase in incentive compensation and income
tax expense. Pegasus had approximately 56,000 cable subscribers at June 30, 2000
compared to 52,700 at June 30, 1999.
Extraordinary loss from the extinguishment of debt was $9.3 million for
the six months ended June 30, 2000. In January 2000, Pegasus entered into an
amended and restated $500.0 million credit facility. Commensurate with the
closing of the new credit facility, certain funds from the initial borrowing
were used to repay the outstanding balances under the existing Pegasus' $180.0
million credit facility, the Digital Television Services $90.0 million credit
facilities and the Pegasus Communications Corporation $35.5 million interim
letter of credit facility and commitments under these credit facilities were
terminated. Accordingly, the deferred financing costs related to the terminated
credit facilities were written off.
19
<PAGE>
DBS
During the last twelve months, Pegasus acquired, through acquisitions,
approximately 63,000 subscribers and the exclusive DIRECTV distribution rights
to approximately 520,000 households in rural areas of the United States. In
January 2000, as a result of the merger of Digital Television Services with and
into a subsidiary of Pegasus, Pegasus added approximately 263,000 subscribers
and 1.8 million households. At June 30, 2000, Pegasus had exclusive DIRECTV
distribution rights to 5.3 million households and 848,000 subscribers as
compared to 4.8 million households and 540,000 subscribers at June 30, 1999.
Pegasus had 5.7 million households and 910,000 subscribers at June 30, 2000,
including pending acquisitions. At June 30, 1999, subscribers would have been
647,000, including pending and completed acquisitions and the merger of Digital
Television Services with and into a subsidiary of Pegasus. Subscriber
penetration increased from 11.4% at June 30, 1999 to 16.0% at June 30, 2000,
including pending and completed acquisitions and the merger of Digital
Television Services with and into a subsidiary of Pegasus.
Total DBS net revenues were $201.1 million for the six months ended
June 30, 2000, an increase of $128.7 million, or 178%, compared to DBS net
revenues of $72.5 million for the same period in 1999. The increase is primarily
due to an increase in the average number of subscribers in the first half of
2000 compared to the first half of 1999. The average monthly revenue per
subscriber was $43.51 for the six months ended June 30, 2000 compared to $42.48
for the same period in 1999. Pro forma for the merger of Digital Television
Services with and into a subsidiary of Pegasus, DBS revenues for the six months
ended June 30, 1999 were $122.5 million.
Programming, technical, and general and administrative expenses were
$141.8 million for the six months ended June 30, 2000, an increase of $91.9
million, or 184%, compared to $49.9 million for the same period in 1999. 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 70.5% for the six months
ended June 30, 2000 compared to 68.9% for the same period in 1999.
Subscriber acquisition costs were $51.9 million for the six months
ended June 30, 2000, an increase of $22.8 million, or 78%, compared to $29.1
million for the same period in 1999. Gross subscriber additions were 154,500 for
the six months ended June 30, 2000 compared to 74,300 for the same period in
1999. The total subscriber acquisition costs per gross subscriber addition were
$336 for the six months ended June 30, 2000 compared to $392 for the same period
in 1999. The decrease in subscriber acquisition costs per gross subscriber
addition is primarily due to a decrease in promotional programming.
Approximately $4.1 million of DBS subscriber equipment was capitalized in the
first half of 2000 related to rental units which are being depreciated over a
three year period.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $785,000 for the six months ended June 30, 2000,
an increase of $190,000, or 32%, compared to $595,000 for the same period in
1999. The increase resulted from a larger gain in pro forma location cash flow
during the first half of 2000 as compared to the first half of 1999.
Depreciation and amortization was $47.2 million for the six months
ended June 30, 2000, an increase of $27.2 million, or 136%, compared to $20.0
million for the same period in 1999. 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
and the merger of Digital Television Services with an into a subsidiary of
Pegasus.
Broadcast
During the six months ended June 30, 2000, Pegasus owned or programmed
ten broadcast television stations in six markets. One new station was launched
during the fourth quarter of 1999. Total net broadcast revenues for the six
months ended June 30, 2000 were $17.3 million, a decrease of $149,000, or 1%,
compared to net broadcast revenues of $17.5 million for the same period in 1999.
The decrease is primarily attributable to a decrease in barter revenue.
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<PAGE>
Programming, technical, and general and administrative expenses were
$12.0 million for the six months ended June 30, 2000, an increase of $1.9
million, or 18%, compared to $10.1 million for the same period in 1999. The
increase is primarily due to higher programming costs for the six months ended
June 30, 2000 compared to the same period in 1999 and an increase in fees to the
Fox Television Network.
Marketing and selling expenses were $3.9 million for the six months
ended June 30, 2000, an increase of $832,000, or 27%, compared to $3.1 million
for the same period in 1999. The increase in marketing and selling expenses was
due to an increase in promotional costs associated with the launch of new
stations and news programs.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $46,000 for the six months ended June 30, 2000, a
decrease of $156,000, or 77%, compared to $202,000 for the same period in 1999.
The decrease resulted from a lower gain in pro forma location cash flow during
the first half of 2000 as compared to the first half of 1999.
Depreciation and amortization was $2.5 million for the six months ended
June 30, 2000, an increase of $59,000, or 2%, compared to $2.5 million for the
same period in 1999.
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 merger of Digital Television
Services with and into a subsidiary of Pegasus, as if such merger occurred on
July 1, 1999, adjusted operating cash flow would have been approximately $129.5
million as follows (in thousands):
<TABLE>
<CAPTION>
Four Quarters Ended
June 30, 2000
----------------------
<S> <C>
Revenues............................................................................... $442,657
Direct operating expenses, excluding depreciation, amortization and other
non-cash charges..................................................................... 305,034
--------
Income from operations before incentive compensation, corporate
expenses, depreciation and amortization and other non-cash charges................... 137,623
Corporate expenses..................................................................... 8,162
--------
Adjusted operating cash flow........................................................... $129,461
========
</TABLE>
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.
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New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). As a result of the
subsequent issuance of SFAS No. 137 in July 1999 and SFAS No. 138 in June 2000,
SFAS No. 133 is now effective for fiscal years beginning after June 15, 2000.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. Management believes that the adoption of
SFAS No. 133 will not have a material effect on our business, financial position
or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met in order to recognize revenue and
provides guidance for disclosure related to revenue recognition policies. The
subsequent issuance of SAB 101B has deferred the timing of the adoption of the
requirements until the fourth quarter of 2000. Management believes that the
adoption of SAB 101 will not have a material effect on our business, financial
position or results of operations.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DIRECTV/NRTC Litigation. We hereby incorporate by reference the
disclosure relating to "DIRECTV/NRTC Litigation" set forth under "Item 3: Legal
Proceedings" on pages 8 and 9 of Pegasus' Annual Report on Form 10-K filed with
the SEC on March 27, 2000 for the fiscal year ended December 31, 1999. The last
paragraph of this disclosure is deleted and replaced in its entirety by the
paragraphs set forth below. To the extent the disclosure set forth below
supersedes or updates other disclosure under "Item 3: Legal Proceedings," such
disclosure is hereby deemed to be modified, superseded and/or updated.
On February 10, 2000, we and Golden Sky filed an amended complaint
which added new tort claims against DIRECTV for interference with plaintiffs'
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. We and Golden Sky also withdrew the class action
allegations to allow a new class action to be filed on behalf of the members and
affiliates of the National Rural Telecommunications Cooperative. The class
action was filed on February 27, 2000. All four actions are now pending before
the same judge, who has set various hearing dates, including the following. On
October 2, 2000, the court will hear argument on the motion for class
certification and on DIRECTV's motion to dismiss certain of our claims and
claims by the class members. DIRECTV's motion for partial summary judgment on
the right of first refusal will be heard on October 30, 2000. The court has set
a trial date of November 27, 2001 for all four actions.
The outcome of this litigation and the litigation filed by the National
Rural Telecommunications Cooperative could have a material adverse effect on our
direct broadcast satellite business.
Other Matters. In addition to the matters discussed above, from time to
time we are involved with claims that arise in the normal course of our
business. In our opinion, the ultimate liability with respect to these claims
will not have a material adverse effect on our combined operations, cash flows
or financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter
ended June 30, 2000.
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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.
August 11, 2000 By: /s/ M. Kasin Smith
------------------------------ -----------------------
Date M. Kasin Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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