<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 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 November 14, 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 reduced
disclosure format.
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
Form 10-Q
Table of Contents
For the Quarterly Period Ended September 30, 2000
<TABLE>
<CAPTION>
Page
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Part I. Financial Information
Item 1 Financial Statements
Condensed Combined Balance Sheets
December 31, 1999 and September 30, 2000 4
Combined Statements of Operations and Comprehensive Loss
Three months ended September 30, 1999 and 2000 5
Combined Statements of Operations and Comprehensive Loss
Nine months ended September 30, 1999 and 2000 6
Condensed Combined Statements of Cash Flows
Nine months ended September 30, 1999 and 2000 7
Notes to Combined Financial Statements 8
Item 2 Management's Narrative Analysis of
the Results of Operations 18
Part II. Other Information
Item 1 Legal Proceedings 24
Item 6 Exhibits and Reports on Form 8-K 24
Signature 25
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
<PAGE>
Pegasus Media & Communications, Inc.
Condensed Combined Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
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ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $21,351 $161,627
Restricted cash - 3,000
Accounts receivable, net 24,642 32,065
Inventory 9,506 20,415
Program rights 4,373 4,505
Deferred taxes 406 715
Net advances to affiliates 1,790 4,056
Prepaid expenses and other 3,463 10,139
--------- ----------
Total current assets 65,531 236,522
Property and equipment, net 37,841 38,228
Intangible assets, net 437,774 823,382
Deferred financing costs, net 6,500 9,567
Program rights 5,731 5,416
Deferred taxes 30,447 23,673
Investment in affiliates 4,598 116,399
Marketable securities - 24,757
Deposits and other 5,042 12,821
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Total assets $593,464 $1,290,765
======== ==========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $11,091 $11,257
Current portion of program rights payable 4,447 4,727
Taxes payable - 28,000
Accounts payable 8,045 3,181
Accrued interest 6,253 3,936
Accrued satellite programming, fees and commissions 24,314 45,557
Accrued expenses 11,817 35,425
Amounts due seller 6,729 6,741
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Total current liabilities 72,696 138,824
Long-term debt 235,633 361,264
Finance obligation - 36,120
Program rights payable 4,211 4,022
Deferred taxes 35,398 103,205
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Total liabilities 347,938 643,435
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Commitments and contingent liabilities - -
Minority interest 3,000 -
Common stockholder's equity:
Common stock 2 2
Other stockholder's equity 242,524 647,328
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Total stockholder's equity 242,526 647,330
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Total liabilities and stockholder's equity $593,464 $1,290,765
======== ==========
</TABLE>
See accompanying notes to combined financial statements
4
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Operations and Comprehensive Loss
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 2000
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(unaudited)
<S> <C> <C>
Net revenues:
DBS $46,392 $113,632
Broadcast 8,920 8,706
-------- --------
Total net revenues 55,312 122,338
Operating expenses:
DBS
Programming, technical, general and administrative 32,549 79,391
Marketing and selling 25,506 42,644
Incentive compensation 200 648
Depreciation and amortization 10,632 26,451
Broadcast
Programming, technical, general and administrative 5,765 6,205
Marketing and selling 1,369 1,612
Incentive compensation - 158
Depreciation and amortization 1,299 1,317
Corporate expenses 1,137 3,368
Corporate depreciation and amortization 176 52
Development costs 74 1,141
Other expense, net 97 13
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Loss from operations (23,492) (40,662)
Interest expense (4,358) (10,924)
Interest income 28 435
Other non-operating expenses, net - (99)
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Loss from continuing operations before income taxes (27,822) (51,250)
Provision (benefit) for income taxes 221 (2,446)
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Loss from continuing operations (28,043) (48,804)
Discontinued operations:
Income from discontinued operations of cable segment 626 580
Gain on sale of discontinued operations, net of taxes - 59,366
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Net income (loss) (27,417) 11,142
Other comprehensive loss - (11,670)
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Comprehensive loss ($27,417) ($528)
======== ========
</TABLE>
See accompanying notes to combined financial statements
5
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Operations and Comprehensive Loss
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1999 2000
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(unaudited)
<S> <C> <C>
Net revenues:
DBS $118,863 $314,775
Broadcast 26,401 26,038
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Total net revenues 145,264 340,813
Operating expenses:
DBS
Programming, technical, general and administrative 82,448 221,145
Marketing and selling 54,646 94,590
Incentive compensation 795 1,433
Depreciation and amortization 30,618 73,632
Broadcast
Programming, technical, general and administrative 15,910 18,226
Marketing and selling 4,448 5,523
Incentive compensation 202 204
Depreciation and amortization 3,771 3,848
Corporate expenses 3,068 7,990
Corporate depreciation and amortization 526 147
Development costs 76 2,310
Other expense, net 250 828
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Loss from operations (51,494) (89,063)
Interest expense (12,153) (33,570)
Interest income 171 867
Other non-operating expenses, net - (314)
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Loss from continuing operations before income
taxes and extraordinary items (63,476) (122,080)
Provision (benefit) for income taxes 406 (9,271)
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Loss from continuing operations before
extraordinary items (63,882) (112,809)
Discontinued operations:
Income from discontinued operations of cable segment 1,375 1,234
Gain on sale of discontinued operations, net of taxes - 59,366
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Loss before extraordinary items (62,507) (52,209)
Extraordinary loss from extinguishment of debt - (9,280)
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Net loss (62,507) (61,489)
Other comprehensive loss - (11,670)
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Comprehensive loss ($62,507) ($73,159)
======== ========
</TABLE>
See accompanying notes to combined financial statements
6
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Pegasus Media & Communications, Inc.
Condensed Combined Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1999 2000
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(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net cash used for operating activities ($17,299) ($46,399)
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (104,059) (95,643)
Cash acquired from merger with affiliate - 3,236
Capital expenditures (8,950) (22,268)
Purchase of intangible assets (2,092) (11,989)
Payments for programming rights (2,156) (3,334)
Proceeds from sale of cable operations - 166,937
Investment in affiliates (4,829) (14,560)
Other - (519)
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Net cash provided by (used for) investing activities (122,086) 21,860
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Cash flows from financing activities:
Repayments of long-term debt (9,589) (13,841)
Net borrowings on bank credit facilities 58,400 70,800
Net advances to affiliates (13,223) (3,578)
Restricted cash 1,000 (3,000)
Debt financing costs (18) (8,574)
Net contributions by Parent 98,038 123,550
Other (91) (542)
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Net cash provided by financing activities 134,517 164,815
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Net increase (decrease) in cash and cash equivalents (4,868) 140,276
Cash and cash equivalents, beginning of year 22,707 21,351
-------- --------
Cash and cash equivalents, end of period $17,839 $161,627
======== ========
</TABLE>
See accompanying notes to combined financial statements
7
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS
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 wholly owned subsidiary of Pegasus Communications Corporation
("PCC" or the "Parent"). Pegasus' significant operating subsidiaries are Pegasus
Broadcast Television, Inc. ("PBT") and Pegasus Satellite Television, Inc.
("PST").
Pegasus' subsidiaries provide direct broadcast satellite television
("DBS") services to customers in various rural areas of the United States and
own and/or program broadcast television ("Broadcast" or "TV") stations.
Discontinued operations on the statements of operations and comprehensive loss
represent the Company's cable operations, which were sold on September 15, 2000
(see Note 8).
In January 2000, Digital Television Services, Inc. ("DTS"), formerly a
direct subsidiary of PCC, was merged with and into a subsidiary of Pegasus.
2. Basis of Presentation
The accompanying unaudited combined financial statements are prepared
in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The unaudited combined financial statements reflect all adjustments
consisting of normal recurring items which are, in the opinion of management,
necessary for a fair presentation, in all material respects, of the financial
position of the Company and the results of its operations and comprehensive loss
and its cash flows for the interim period. The amounts on the balance sheet as
of December 31, 1999 were derived from the audited balance sheet as of that
date. For further information, refer to the combined financial statements and
footnotes thereto included in Pegasus' Annual Report on Form 10-K for the year
ended December 31, 1999.
The financial statements include the accounts of Pegasus and all of its
subsidiaries on a consolidated basis combined with the accounts of Pegasus
Development Corporation ("PDC"). PDC, a subsidiary of PCC, provided capital for
various satellite initiatives, such as subscriber acquisition costs. The
accounts of PDC have been included in the accompanying combined financial
statements since the satellite initiatives 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
comprehensive loss and its cash flows. All intercompany transactions and
balances have been eliminated. The balance sheet and statement of cash flows are
presented on a condensed basis. Certain amounts for 1999 have been reclassified
for comparative purposes.
Development costs on the statements of operations and comprehensive
loss represent the combined expenses of other corporate initiatives that are in
their infancy of development. Most of these initiatives are presently being
sponsored by PDC. The operations of each initiative will be separately presented
on the statements of operations and comprehensive loss when they are determined
to be of a material continuing nature.
In May 2000, PCC completed a two-for-one stock split of its outstanding
Class A and Class B common stock in the form of a stock dividend. All references
to PCC's shares and options to purchase these shares reflect the effects of the
stock split.
3. Investment in Affiliates
In January 2000, PDC made an investment of approximately $112.0 million
in Personalized Media Communications, LLC ("PMC"), an advanced communications
technology company, that 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. These warrants at the time of their issuance were estimated
to have a fair value of $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. Through September 30, 2000,
PDC's equity in the losses of PMC was not material.
8
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
4. Relationship with Affiliate
On May 5, 2000, PCC acquired Golden Sky Holdings, Inc. ("GSH") along
with its indirect wholly owned principal operating subsidiary Golden Sky
Systems, Inc. ("GSS"). GSH is a direct wholly owned subsidiary of PCC. GSS
provides DBS services to subscribers in rural areas of 24 states. The Company,
through PST, provides management of and sales and administrative support
functions to GSS. Operational costs are allocated by the Company to GSS based on
a proportion of GSS' number of subscribers to the combined number of subscribers
of the Company and GSS. The Company owns and manages the inventory for both, and
supplies inventory to GSS to satisfy specific subscriber demands. The Company
performs most cash management functions for GSS, including accounts payable. The
cost of services provided and incurred by the Company for or on behalf of GSS is
charged to GSS. Balances due to or from the Company and GSS are settled in cash
periodically.
5. Long-Term Debt
In January 2000, Pegasus amended and restated its credit facility,
consisting of a $225.0 million senior revolving credit facility that expires in
2004, a $275.0 million senior term credit facility that expires in 2005 and an
uncommitted facility for an additional $200.0 million through June 30, 2001
(collectively, the "New Credit Facility"). The New 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. With the
closing of the New Credit Facility, the Company borrowed $275.0 million under
the term loan facility and used a portion of the proceeds to pay off balances
aggregating $221.5 million outstanding under its prior credit facility and a
credit facility of DTS. These other credit facilities along with their related
commitments and a letter of credit facility were then terminated. At September
30, 2000, $275.0 million was outstanding under the term loan facility, with
$38.2 million of stand-by letters of credit issued thereunder.
6. Other Stockholder's Equity
The increase in other stockholder's equity principally represents
capital contributions provided by PCC. This capital was in the form of PCC
equity issued in acquisitions made by the Company amounting to $187.1 million,
the contributions of DTS to the Company of $171.9 million and cash provided for
working capital needs of the Company of $138.1 million.
7. Acquisitions
During the nine months ended September 30, 2000, the Company completed
16 acquisitions of independent providers of DIRECTV(R) ("DIRECTV"). These
acquisitions principally consisted of the rights to provide DIRECTV programming
in various rural areas of the United States. The total consideration paid by the
Company for these acquisitions of $194.5 million consisted of cash of $95.6
million, 873,184 shares of PCC's Class A common stock (amounting to $39.7
million), 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), warrants to purchase 3,000 shares of the Class A common stock
(amounting to $166,000), a deferred tax liability incurred of $24.4 million,
$200,000 in promissory notes and $1.8 million in assumed net liabilities. These
acquisitions were accounted for by the purchase method, wherein substantially
all of the total consideration for these acquisitions was allocated to DBS
rights. The DBS rights are being amortized on a straight-line basis over 10
years. The Company's results of operations include the operations of these
acquisitions from their respective effective dates of acquisition.
The following unaudited pro forma financial information presents the
Company's consolidated results of operations as if the above noted acquisitions
had occurred at the beginning of the periods presented. This unaudited pro forma
financial information is presented for comparative purposes only and does not
necessarily reflect the results of operations of the Company had the
acquisitions occurred on the dates indicated nor results that may occur in the
future.
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended September 30,
-------------------------------
1999 2000
---- ----
(unaudited)
<S> <C> <C>
Net revenues ............................................................. $168,204 $347,275
======== ========
Loss before extraordinary items........................................... (54,157) (51,151)
======== ========
Net loss.................................................................. (54,157) (60,431)
======== ========
</TABLE>
9
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
8. Discontinued Operations
Discontinued operations on the statements of operations and
comprehensive loss represent the Company's cable operations located in Puerto
Rico. The measurement date for accounting for the cable operations as
discontinued was December 31, 1999. Since net income from and a gain on the sale
of the operations was expected, net income and gain after the measurement date
were recognized when earned. Revenues of the Puerto Rico cable operations for
the three and nine months ended September 30, 2000 and 1999 were $5.4 million
and $18.1 million, respectively, and $6.2 million and $14.9 million,
respectively. No income taxes were allocated to discontinued operations because
of the Company's net operating loss carryforward position.
On September 15, 2000, the Company sold to an unrelated third party its
interests in the assets of its entire cable operations in Puerto Rico. The sale
price was $170.0 million cash. Cash proceeds received at closing, after
adjustment for transaction costs paid at that time and $3.0 million placed in
escrow, were $164.5 million. The after tax gain on the sale was $59.4 million.
The net amount of assets and liabilities associated with the sale was $80.5
million and $1.2 million, respectively. The net assets primarily consisted of
net property, plant and equipment of $19.1 million and net intangibles
associated with prior acquisitions amounting to $60.9 million. Escrow remaining
after satisfaction of valid claims of indemnification, if any, made by the buyer
pursuant to the asset purchase agreement will be released to the Company. Taxes
recognized on the gain from the sale of $28.0 million are for Puerto Rico
capital gains and withholding taxes and are currently payable.
9. Extraordinary Loss from Extinguishment of Debt
In connection with the outstanding borrowings paid off in January 2000
with the proceeds of the New Credit Facility, unamortized balances of deferred
financing costs in the amount of $9.3 million associated with the borrowings
paid off were written off. No income taxes were allocated to this loss because
of the Company's net operating loss carryforward position.
10. Sale and Leaseback of Tower Assets and Related Accounting
On July 17, 2000, the Company jointly with a subsidiary of PCC sold 11
broadcast towers and related assets for approximately 1.4 million shares of
restricted common stock of the buyer. Of the 11 towers sold, eight belonged to
the Company. The sale closing date value of the buyer's common stock allocated
to the Company based on the relative fair value of the towers sold was $36.4
million, and the book value of the assets sold was $2.2 million. Coincident with
the sale of the towers, the Company leased back from the buyer its eight towers
sold. The lease has an initial term of 10 years with five successive 10-year
renewal periods at the option of the Company. Aggregate minimum lease payments
in each of the next five fiscal years and in total over the remaining initial
lease term are: $683,000 in 2001; $711,000 in 2002; $739,000 in 2003; $769,000
in 2004; $799,000 in 2005; and $4.1 million in total thereafter. The Company's
receipt of the buyer's common stock represents a continuing involvement by the
Company in the towers sold and leased back. Accordingly, the sale and leaseback
of these towers is accounted for as a financing. As a result, the Company
recorded a finance obligation in the amount of $36.1 million, which in essence
represents a deferral of the net gain and related costs of the sale that might
be otherwise recognized on the date of sale. Under the finance method, lease
payments made on the assets leased back are allocated between a reduction of the
finance obligation and interest as appropriate. Because of the amount of the
finance obligation relative to the amount of the payments, the Company expects
that all future payments will be applied to interest expense. The eight towers
and related assets remain on the Company's records and continue to be
depreciated by the Company as long as the financing method applies. The
accounting as a financing of the eight towers sold and leased back will continue
as long as the Company's continuing involvement in the towers, as represented by
the Company's ownership of the buyer's common stock, remains.
10
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PEGASUS MEDIA & COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
10. Sale and Leaseback of Tower Assets and Related Accounting (continued)
The stock received by the Company in the towers sale is accounted for
as an investment in marketable securities available for sale. Accordingly,
unrealized gain or loss on the investment is recorded as a component of the
Company's stockholders' equity. Other comprehensive loss on the statements of
operations and comprehensive loss reflects the unrealized loss on this
investment amounting to $11.7 million at September 30, 2000.
The Company has an agreement with the buyer of the tower assets in
which the buyer will build future towers for the Company when needed as
determined by the Company.
11. Income Taxes
The Company is in a net operating loss carryforward position for income
tax purposes. The tax benefit recognized represents the reversal of deferred tax
liabilities recognized in acquisitions.
12. Industry Segments
At September 30, 2000, the Company's two reportable segments were DBS
and Broadcast. Information on each of these segments' revenue and measure of
profit or loss is as presented on the statements of operations and comprehensive
loss. Each segment derived its revenues from external customers for each period
presented therein. Identifiable total assets for DBS increased from December 31,
1999 by $169.7 million to $871.6 million at September 30, 2000. This increase
was principally due to additional DBS rights obtained in acquisitions completed
during 2000 and the assets of DTS obtained in the merger with DTS. Broadcast's
identifiable total assets increased from December 31, 1999 by $28.5 million to
$98.8 million at September 30, 2000 principally due to the current fair market
value of the common stock received in the sale and leaseback of the tower
assets.
13. Supplemental Cash Flow Information
Significant non-cash investing and financing activities were as follows
(in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 2000
---- ----
<S> <C> <C>
Barter revenue and related expense............................................ $5,657 $ 5,377
Marketable securities received in sale of tower assets........................ - 36,427
Customer conversion costs and costs of related equipment...................... - 13,680
Acquisition of program rights and assumption of related program payables...... 6,072 3,427
Capital contribution and related acquisition of intangibles................... 1,364 78,141
Capital contribution and related investment in affiliates..................... - 97,555
Notes payable and related acquisition of intangibles.......................... 4,690 515
Deferred taxes, net and related acquisition of intangibles.................... 29 27,985
</TABLE>
14. 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
operations, liquidity, cash flows or financial position of the Company.
11
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
14. Commitments and Contingent Liabilities (continued)
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.
On September 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 GSS filed a lawsuit in federal
court against DIRECTV which contains causes of action for various torts, common
law 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 GSS. 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 GSS 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 GSS later withdrew the class action
allegations previously filed 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 pending before the same judge. On
November 20, 2000, the court will hear argument on the motion for class
certification and on DIRECTV's motion to dismiss certain of the Company's claims
and claims by the class members. DIRECTV's motion for partial summary judgment
on the right of first refusal will be heard on or about December 11, 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.
15. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS
No. 138, becomes effective for the Company starting January 1, 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. At September 30, 2000, the Company's use of derivative
instruments is confined to two interest rate swap and two interest rate cap
instruments. These instruments were entered into in connection with the
Company's credit facility. The Company does not use these instruments for
trading or speculative purposes. The notional amounts associated with these
instruments range from $33.9 million to $37.1 million. The Company believes that
it does not possess any derivative instruments that may be embedded in other
contracts or agreements. The Company continues to analyze SFAS 133 for any
material impacts of its adoption that it is not presently aware of. Because of
the limited number and use of derivative instruments that the Company has and
the relatively minor notional amounts associated with these instruments, the
Company believes at the present time that the accounting for its derivative
instruments under SFAS 133 will not have a material impact on the Company.
12
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
15. New Accounting Pronouncements (continued)
The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
addresses revenue recognition policies and practices of companies that report to
the SEC. The Company will adopt SAB 101 in the fourth quarter of 2000. The
Company believes that the adoption of SAB 101 will not have a material impact.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement revises standards for accounting
for securitizations and other transfers of financial assets and collateral. The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This standard
is effective for transfers occurring after March 31, 2001 and for fiscal years
ending after December 15, 2000 with respect to recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral. The Company is still analyzing the requirements of this statement
and does not fully know whether or not the impact of this statement will be
material. At the present time, the Company is not involved with any
securitization transactions.
16. Subsidiary Guarantees
Pegasus' 12.5% Series B Notes due 2005 are guaranteed on a full,
unconditional, senior subordinated basis, jointly and severally by each of the
100% 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 and Pegasus Cable Television of Connecticut, Inc., all
of which are direct or indirect subsidiaries of Pegasus, are not guarantors of
the 12.5% Series B Notes ("Non-guarantor Subsidiaries"). Due to 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.
13
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
16. Subsidiary Guarantees (continued)
Condensed Combined Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
As of September 30, 2000 Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $11,395 $180 $149,847 $161,422
Accounts receivable, net 36,807 36,807
Other current assets 39,632 3 39,635
--------------------------------------------------------------------------------
Total current assets 87,834 180 149,850 - 237,864
Property and equipment, net 37,232 37,232
Intangible assets, net 817,025 156 817,181
Other assets 41,500 33,834 75,334
Investment in subsidiaries and affiliates 71,042 781,696 ($852,738) -
--------------------------------------------------------------------------------
Total assets $983,591 $71,222 $965,536 ($852,738) $1,167,611
================================================================================
Liabilities and total equity:
Current portion of long-term debt $11,257 $11,257
Accounts payable 3,036 3,036
Other current liabilities 124,106 $3,507 ($3,507) 124,106
--------------------------------------------------------------------------------
Total current liabilities 138,399 - 3,507 (3,507) 138,399
Long-term debt 1,127,105 $314 83,076 (849,231) 361,264
Other liabilities 135,109 (11,975) 20,213 143,347
--------------------------------------------------------------------------------
Total liabilities 1,400,613 (11,661) 106,796 (852,738) 643,010
Total equity (deficit) (417,022) 82,883 858,740 524,601
--------------------------------------------------------------------------------
Total liabilities and equity $983,591 $71,222 $965,536 ($852,738) $1,167,611
================================================================================
As of December 31, 1999
Assets:
Cash and cash equivalents $15,085 $494 $5,756 $21,335
Accounts receivable, net 21,993 21,993
Other current assets 19,469 19,469
--------------------------------------------------------------------------------
Total current assets 56,547 494 5,756 - 62,797
Property and equipment, net 37,833 37,833
Intangible assets, net 438,212 2,440 3,083 443,735
Other assets 34,343 6,452 40,795
Investment in subsidiaries and affiliates 353,828 ($353,828) -
--------------------------------------------------------------------------------
Total assets $566,935 $2,934 $369,119 ($353,828) $585,160
================================================================================
Liabilities and total equity:
Current portion of long-term debt $11,091 $11,091
Accounts payable 7,963 7,963
Other current liabilities 53,550 $5,690 ($5,690) 53,550
--------------------------------------------------------------------------------
Total current liabilities 72,604 - 5,690 (5,690) 72,604
Long-term debt 500,681 $314 82,776 (348,138) 235,633
Other liabilities 36,627 (8,478) 11,460 39,609
--------------------------------------------------------------------------------
Total liabilities 609,912 (8,164) 99,926 (353,828) 347,846
Minority interest 3,000 3,000
Total equity (deficit) (45,977) 11,098 269,193 234,314
--------------------------------------------------------------------------------
Total liabilities and equity $566,935 $2,934 $369,119 ($353,828) $585,160
================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus
Development
As of September 30, 2000 Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C> <C>
Assets:
Cash and cash equivalents $205 $161,627
Accounts receivable, net (4,742) 32,065
Other current assets 3,195 42,830
--------------------------------------------
Total current assets (1,342) - 236,522
Property and equipment, net 996 38,228
Intangible assets, net 6,201 823,382
Other assets 900 76,234
Investment in subsidiaries and affiliates 116,399 116,399
--------------------------------------------
Total assets $123,154 - $1,290,765
============================================
Liabilities and total equity:
Current portion of long-term debt $11,257
Accounts payable $145 3,181
Other current liabilities 280 124,386
--------------------------------------------
Total current liabilities 425 - 138,824
Long-term debt 361,264
Other liabilities 143,347
--------------------------------------------
Total liabilities 425 - 643,435
Total equity (deficit) 122,729 647,330
--------------------------------------------
Total liabilities and equity $123,154 - $1,290,765
============================================
As of December 31, 1999
Assets:
Cash and cash equivalents $16 $21,351
Accounts receivable, net 2,649 24,642
Other current assets 69 19,538
--------------------------------------------
Total current assets 2,734 - 65,531
Property and equipment, net 8 37,841
Intangible assets, net 539 444,274
Other assets 425 41,220
Investment in subsidiaries and affiliates 4,598 4,598
--------------------------------------------
Total assets $8,304 - $593,464
============================================
Liabilities and total equity:
Current portion of long-term debt $11,091
Accounts payable $82 8,045
Other current liabilities 10 53,560
--------------------------------------------
Total current liabilities 92 - 72,696
Long-term debt 235,633
Other liabilities 39,609
--------------------------------------------
Total liabilities 92 - 347,938
Minority interest 3,000
Total equity (deficit) 8,212 242,526
--------------------------------------------
Total liabilities and equity $8,304 - $593,464
============================================
</TABLE>
14
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
16. Subsidiary Guarantees (continued)
Condensed Combined Statements of Operations and Comprehensive Loss
For the Nine Months ended September 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Total revenue $340,813 $3,217 ($3,217) $340,813
Total operating expenses 335,875 94,743 $72 (3,217) 427,473
-------------------------------------------------------------------------------
Income (loss) from operations 4,938 (91,526) (72) - (86,660)
Interest expense 9,593 31,751 (7,774) 33,570
Other (513) (354) (867)
-------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (4,142) (91,526) (31,469) 7,774 (119,363)
Provision for income taxes (9,271) (9,271)
Discontinued operations 60,631 (31) 60,600
-------------------------------------------------------------------------------
Income (loss) before extraordinary item 56,489 (91,557) (22,198) 7,774 (49,492)
Extraordinary loss on extinguishment of debt (6,841) (2,439) (9,280)
-------------------------------------------------------------------------------
Net income (loss) 49,648 (91,557) (24,637) 7,774 (58,772)
Other comprehensive loss (11,670) (11,670)
-------------------------------------------------------------------------------
Comprehensive income (loss) $37,978 ($91,557) ($24,637) $7,774 ($70,442)
===============================================================================
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
Total revenue $340,813
Total operating expenses $2,403 429,876
-----------------------------------------
Income (loss) from operations (2,403) - (89,063)
Interest expense 33,570
Other 314 (553)
-----------------------------------------
Income (loss) from continuing operations
before income taxes (2,717) - (122,080)
Provision for income taxes (9,271)
Discontinued operations 60,600
-----------------------------------------
Income (loss) before extraordinary item (2,717) - (52,209)
Extraordinary loss on extinguishment of debt (9,280)
-----------------------------------------
Net income (loss) (2,717) - (61,489)
Other comprehensive loss (11,670)
-----------------------------------------
Comprehensive income (loss) ($2,717) - ($73,159)
=========================================
</TABLE>
<PAGE>
Condensed Combined Statements of Operations
For the Nine Months ended September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Total revenue $145,297 $2,021 ($2,054) $145,264
Total operating expenses 143,488 54,799 $522 (2,054) 196,755
---------------------------------------------------------------------------------
Income (loss) from operations 1,809 (52,778) (522) (51,491)
Interest expense 8,424 11,466 (7,737) 12,153
Other (454) 207 (247)
---------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (6,161) (52,778) (12,195) 7,737 (63,397)
Provision for income taxes 406 406
Discontinued operations 1,397 (22) 1,375
---------------------------------------------------------------------------------
Net income (loss) ($5,170) ($52,800) ($12,195) $7,737 ($62,428)
=================================================================================
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
Total revenue $145,264
Total operating expenses $3 196,758
-------------------------------------------
Income (loss) from operations (3) - (51,494)
Interest expense 12,153
Other 76 (171)
-------------------------------------------
Income (loss) from continuing operations
before income taxes (79) - (63,476)
Provision for income taxes 406
Discontinued operations 1,375
-------------------------------------------
Net income (loss) ($79) - ($62,507)
===========================================
</TABLE>
15
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
16. Subsidiary Guarantees (continued)
Condensed Combined Statements of Cash Flows
For the Nine Months ended September 30, 2000
(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 cash provided by (used for) operating activities $58,457 ($89,117) ($17,713) ($48,373)
----------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions (95,643) (95,643)
Capital expenditures (21,280) (21,280)
Purchase of intangible assets (9,107) 2,873 (6,234)
Other 719,289 (455,253) 264,036
----------------------------------------------------------------------
Net cash provided by (used for) investing activities 593,259 - (452,380) - 140,879
Cash flows from financing activities:
Net proceeds from debt 70,800 70,800
Other (726,206) 88,803 614,184 (23,219)
----------------------------------------------------------------------
Net cash provided by (used for) financing activities (655,406) 88,803 614,184 - 47,581
Net increase (decrease) in cash and cash equivalents (3,690) (314) 144,091 140,087
Cash and cash equivalents, beginning of year 15,085 494 5,756 21,335
----------------------------------------------------------------------
Cash and cash equivalents, end of period $11,395 $180 $149,847 - $161,422
======================================================================
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
Cash flows from operating activities:
Net cash provided by (used for) operating activities $1,974 ($46,399)
------------------------------------------
Cash flows from investing activities:
Acquisitions (95,643)
Capital expenditures (988) (22,268)
Purchase of intangible assets (5,755) (11,989)
Other (112,276) 151,760
------------------------------------------
Net cash provided by (used for) investing activities (119,019) - 21,860
Cash flows from financing activities:
Net proceeds from debt 70,800
Other 117,234 94,015
------------------------------------------
Net cash provided by (used for) financing activities 117,234 - 164,815
Net increase (decrease) in cash and cash equivalents 189 140,276
Cash and cash equivalents, beginning of year 16 21,351
------------------------------------------
Cash and cash equivalents, end of period $205 - $161,627
==========================================
</TABLE>
16
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
16. Subsidiary Guarantees (continued)
Condensed Combined Statements of Cash Flows
For the Nine Months ended September 30, 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 cash provided by (used for) operating activities $42,445 ($52,652) ($7,268) ($17,475)
-------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions (104,064) (104,064)
Capital expenditures (8,952) (8,952)
Purchase of intangible assets (1,769) (33) (1,802)
Other 51,604 (53,755) (2,151)
-------------------------------------------------------------------------
Net cash provided by (used for) investing activities (63,181) - (53,788) - (116,969)
Cash flows from financing activities:
Net proceeds from debt 48,720 48,720
Other (25,250) 50,039 56,179 80,968
-------------------------------------------------------------------------
Net cash provided by (used for) financing activities 23,470 50,039 56,179 - 129,688
Net increase (decrease) in cash and cash equivalents 2,734 (2,613) (4,877) (4,756)
Cash and cash equivalents, beginning of year 14,143 3,092 5,318 22,553
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $16,877 $479 $441 - $17,797
=========================================================================
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
Cash flows from operating activities:
Net cash provided by (used for) operating activities $176 ($17,299)
------------------------------------------
Cash flows from investing activities:
Acquisitions (104,064)
Capital expenditures 2 (8,950)
Purchase of intangible assets (290) (2,092)
Other (4,829) (6,980)
------------------------------------------
Net cash provided by (used for) investing activities (5,117) - (122,086)
Cash flows from financing activities:
Net proceeds from debt 48,720
Other 4,829 85,797
------------------------------------------
Net cash provided by (used for) financing activities 4,829 - 134,517
Net increase (decrease) in cash and cash equivalents (112) (4,868)
Cash and cash equivalents, beginning of year 154 22,707
------------------------------------------
Cash and cash equivalents, end of period $42 - $17,839
==========================================
</TABLE>
17
<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 us and our 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, we are
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 our results of operations should be read in conjunction with the
consolidated financial statements and related notes which are included on pages
4-17 herein.
Significant Developments during 2000
In January 2000, we amended and restated our credit facility,
consisting of a $225.0 million senior revolving credit facility that expires in
2004, a $275.0 million senior term credit facility that expires in 2005 and an
uncommitted facility for an additional $200.0 million through June 30, 2001.
With the closing of the new credit facility, we borrowed $275.0 million under
the term loan facility and used a portion of the proceeds to pay off balances
aggregating $221.5 million outstanding under other credit facilities.
Also in January 2000, Digital Television Services, Inc., formerly a
direct subsidiary of our parent company, was merged with and into one of our
subsidiaries. At December 31, 1999, DTS had subscribers of 264,600, DIRECTV
distribution rights to 1.8 million households, and net assets of approximately
$172.0 million. Revenues for 1999 were $112.7 million.
During the nine months ended September 30, 2000, we completed 16
acquisitions of independent providers of DIRECTV. These acquisitions principally
consisted of the rights to provide DIRECTV programming in various rural areas of
the United States. The total consideration we paid for these acquisitions of
$194.5 million consisted of cash of $95.6 million, 873,184 shares of our
parent's Class A common stock (amounting to $39.7 million), 22,500 shares of our
parent's Series D preferred stock (amounting to $22.5 million), 10,000 shares of
our parent's Series E preferred stock (amounting to $10.0 million), warrants to
purchase 3,000 shares of the Class A common stock (amounting to $166,000), a
deferred tax liability incurred of $24.4 million, $200,000 in promissory notes
and $1.8 million in assumed net liabilities. Substantially all of the total
consideration for these acquisitions was allocated to DBS rights.
18
<PAGE>
On July 17, 2000, we jointly with a subsidiary of Pegasus
Communications Corporation sold 11 broadcast towers and related assets for
approximately 1.4 million shares of restricted common stock of the buyer. Of the
11 towers sold, eight belonged to us. The sale closing date value of the buyer's
common stock allocated to us based on the relative fair value of the towers sold
was $36.4 million, and the book value of the assets sold was $2.2 million.
Coincident with the sale of the towers, we leased back from the buyer the eight
towers we sold. The aggregate minimum lease payments in each of the next five
fiscal years and in total over the remaining initial lease term are: $683,000 in
2001; $711,000 in 2002; $739,000 in 2003; $769,000 in 2004; $799,000 in 2005;
and $4.1 million in total thereafter. Our receipt of the buyer's common stock
and resultant ownership interest in the buyer represents a continuing
involvement by us in the tower assets sold and leased back. As a result, the
gain that would otherwise be recognized on the sale at the date of sale is
deferred as a finance obligation amounting to $36.1 million. While we continue
to own the buyer's common stock, we expect that the lease payments we make on
the assets leased back will be allocated to interest expense due to the amount
of the finance obligation relative to the amount of the payments. We also will
continue to depreciate the tower assets sold as if we still owned them while the
financing method applies.
On September 15, 2000, we sold to an unrelated third party our
interests in the assets of our entire cable operations in Puerto Rico. The cash
proceeds we received at closing, after adjustment for transaction costs paid at
that time and $3.0 million placed in escrow, were $164.5 million and the after
tax gain on the sale was $59.4 million. Escrow remaining after satisfaction of
valid claims of indemnification, if any, made by the buyer pursuant to the asset
purchase agreement will be released to the Company.
On September 15, 2000, the board of directors of our parent approved a
reorganization of the current corporate structure. Under the new structure, a
new publicly-held parent holding company ("New PCC") will be formed and will
assume the identity and capital stock structure of the existing Pegasus
Communications Corporation ("Old PCC"). Debt securities held by Old PCC will
remain with Old PCC. New PCC will not issue or hold any debt securities as a
consequence of the reorganization. In the reorganization, Old PCC will become a
direct wholly-owned subsidiary of New PCC and will be renamed Pegasus Satellite
Communications, Inc. The Company is presently a subsidiary of Old PCC, and in
the reorganization will be a subsidiary of Pegasus Satellite. It is anticipated
that the reorganization will be accounted for as a recapitalization in which the
historical basis of assets and liabilities are not changed. The reorganization
is expected to become effective by the end of 2000.
Pre-marketing and Location Cash Flows
In this section we use the terms pre-marketing cash flow and location
cash flow. Pre-marketing cash flow of the DBS business is calculated by taking
the DBS revenues and deducting from them their related programming, technical,
general and administrative expenses. Location cash flow of the DBS business is
its pre-marketing cash flow less DBS marketing and selling expenses. The DBS
marketing and selling expenses are also known as subscriber acquisition costs.
Subscriber acquisition costs are sales and marketing expenses incurred and
promotional programming provided in connection with the addition of new DBS
subscribers. Location cash flow for the broadcast television business is
calculated by taking the broadcast revenues and deducting from them their
related programming, technical, general and administrative and marketing and
selling expenses.
19
<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 and location cash flows also do not
necessarily indicate whether our cash flow will be sufficient to fund working
capital, capital expenditures or to react to changes in our industry or the
economy generally. We believe that pre-marketing and location cash flows are
important 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.
General
We are a rapidly growing company that is highly leveraged. We have a
history of reported losses from our operations principally due to our
significant amounts of interest expense and amortization and depreciation. We
are likely to continue to report losses for the foreseeable future due to these
two items.
At the present, our principal operations are based on the distribution
of DBS services from DIRECTV. We are currently involved in litigation with
DIRECTV. An outcome in this litigation that is unfavorable to us could have a
material adverse effect on our DBS business. Refer herein to Note 14 of the
Notes to Consolidated Financial Statements and Item 1 - Legal Proceedings under
Part II for a more descriptive account of the litigation.
Results of Operations
In this section, amounts specified are for the nine months ended
September 30, 2000, and the changes to these amounts are with respect to the
corresponding nine months ended September 30, 1999, unless indicated otherwise.
Comparison of Nine Months Ended September 30, 2000 and 1999
DBS Business
Revenues increased $195.9 million to $314.8 million. This increase was
primarily due to the incremental impacts of acquisitions we made over the last
12 months and the merger of Digital Television Services into us. During the 12
months ended September 30, 2000, through acquisitions we obtained 88,500
subscribers and the exclusive DIRECTV distribution rights to approximately
680,500 households in rural areas of the United States. Additionally, we added
192,400 subscribers during the last 12 months through internal growth. The DTS
merger added 264,600 subscribers and 1.8 million households. At September 30,
2000, we had exclusive DIRECTV distribution rights to 5.5 million households and
937,600 subscribers compared to 3.1 million households and 392,100 subscribers
at September 30, 1999. Our subscriber penetration within territories in which we
have exclusive DIRECTV distribution rights increased to 17.0% at September 30,
2000 from 12.7% at September 30, 1999. Average monthly revenue per subscriber
was $43.63 for the nine months ended September 30, 2000 compared to $43.41 for
the same period in 1999. The variance in the average monthly revenue per
subscriber was due to a combination of the impacts of across the board price
increases instituted in 2000 offset in part by lower contributions from pay per
view and lower average revenues of subscribers obtained in acquisitions relative
to our other subscribers.
Programming, technical and general and administrative expenses
increased $138.7 million to $221.1 million. This increase was due to the growth
in the number of subscribers. The rate of increase of these expenses was
consistent with the increased average number of subscribers for the nine months
ended.
Subscriber acquisition costs increased $39.9 million to $94.6 million.
This increase was principally due to increased commissions and subsidies to our
dealer network resulting from the subscriber growth we experienced and due to
revisions to our commission and subsidy plans. During 2000, we revised our
commission and subsidy plans to be more competitive. In the third quarter of
2000, we also expanded our commission plans to include large, national dealers
affiliated with DIRECTV to whom commissions previously were paid directly by
DIRECTV. Subscriber acquisition costs per gross subscriber addition based on
subscribers added through internal growth was $387 for 244,300 subscribers added
for the nine months ended September 30, 2000 compared to $354 for 154,200
subscribers added for the same period in 1999.
20
<PAGE>
Depreciation and amortization increased $43.0 million to $73.6 million.
This increase was primarily due to increased amortization of DBS rights as a
result of additional DBS rights incurred in acquisitions over the 12 months
ended September 30, 2000 amounting to $206.0 million. Also adding to these
increased expenses is depreciation of DBS equipment that is rented to
subscribers. Renting units to subscribers commenced in the second quarter of
2000 with respect to our conversions of subscribers of a former DBS provider
into our subscribers. These converted subscribers had rented their equipment
from the former DBS provider, and we have added this service as a convenience to
these subscribers. Rented equipment capitalized during the nine months ended was
$8.4 million. Rental units are depreciated over a three-year period. We expect
that rental units and related depreciation will increase as more of our
subscribers choose a rental alternative.
Pre-marketing cash flow was $93.6 million compared to $36.4 million for
the same period in 1999. Location cash flow was $(960,000) compared to $(18.2)
million for the same period in 1999.
Broadcast Business
Revenues decreased $363,000 to $26.0 million. Reduced ratings this year
for our affiliated Fox network stations combined with lower television
advertising in general in 2000 contributed to this decrease. Also, contributing
to the decrease is that 1999 included revenues related to the National Football
League's Super Bowl held in January 1999 that was carried by the Fox network.
Despite strong revenues of our other affiliated stations, we expect overall that
revenues for the fourth quarter and year 2000 will be lower relative to the
prior year.
Programming, technical, and general and administrative expenses
increased $2.3 million to $18.2 million. This increase principally reflects
increased amortization of additional programming costs incurred and fees charged
by the Fox network that commenced in July 1999. The additional programming costs
were incurred in the purchase of new and additional programming, some of which
were for premier shows that have a higher programming premium associated with
them.
Marketing and selling expenses increased $1.1 million to $5.5 million.
This increase was primarily due to increased promotional costs associated with
the launch of new stations and news programs.
Location cash flow was $2.3 million compared to $6.0 million for the
same period in 1999.
Other Statements of Operations and Comprehensive Loss Items
Corporate expenses increased $4.9 million to $8.0 million. This
increase reflects growth in the corporate infrastructure in support of the
overall growth in business experienced by us.
Development costs of $2.3 million represent the combined expenses of
corporate initiatives that are in their infancy of development and not yet of a
material, continuing nature. Most of these initiatives are presently being
sponsored by Pegasus Development Corporation.
Other expenses, net from continuing operations increased $578,000 to
$828,000. This increase principally reflects expenses associated with our
ongoing litigation with DIRECTV.
Interest expense increased $21.4 million to $33.6 million. This
increase was due to additional borrowings outstanding and higher rates of
interest incurred during the period. Variable rate borrowings under credit
facilities we maintain increased from September 30, 1999 by $189.1 million to
$275.0 million at September 30, 2000 as a result of net additional amounts
borrowed when the credit facility was amended in January 2000. The weighted
average amount of principal and interest rates outstanding associated with
outstanding variable rate debt was $268.9 million at 9.86%, respectively,
compared to $38.3 million at 7.28%, respectively, for the prior year.
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We are in a net operating loss carryforward position for income tax
purposes. The tax benefit recognized represents the reversal of deferred tax
liabilities recognized in acquisitions.
Within discontinued operations, a gain of $59.4 million, net of taxes
of $28.0 million, was recognized on the sale of our Puerto Rico cable
operations. The taxes recognized on the gain relate to Puerto Rico capital gain
and withholding taxes and are currently payable.
An extraordinary loss from the extinguishment of debt in the amount of
$9.3 million was recognized which reflects the write-off of unamortized balances
of deferred financing costs connected with our debt that was refinanced when our
credit facility was amended in January 2000. No income taxes were allocated to
the loss because of our net operating loss carryforward position.
Other comprehensive loss represents the unrealized loss on the common
stock we obtained in the sale and leaseback of our tower assets.
In compliance with the indenture governing our 12.5% Series B Notes, we
provide below adjusted operating cash flow data for our restricted subsidiaries
on a combined basis. Under the governing indenture, 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
adjusted operating cash flow is a recognized measure of performance within the
industries we operate. This data is also used by analysts who report publicly on
the performance of companies operating in the industries within which we
operate. Including in the calculation the effects of DBS acquisitions completed
in the third quarter of 2000, as if these acquisitions had occrued on October 1,
1999, and the merger of Digital Television Services, pro forma adjusted
operating cash flow would have been as follows:
<TABLE>
<CAPTION>
Four Quarters Ended
September 30, 2000
----------------------
(in thousands)
<S> <C>
Revenues............................................................................... $462,190
Direct operating expenses, excluding depreciation, amortization and other
non-cash charges..................................................................... 326,385
--------
Income from operations before incentive compensation, corporate
expenses, depreciation and amortization and other non-cash charges................... 135,805
Corporate expenses..................................................................... 8,212
--------
Adjusted operating cash flow........................................................... $127,593
========
</TABLE>
Seasonality
Our revenues vary throughout the year. As is typical in the broadcast
television industry, our first quarter generally produces the lowest revenues
for the year and the fourth quarter generally produces the highest revenues for
the year. Our operating results in any period may be affected by the incurrence
of advertising and promotional 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.
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New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 138,
becomes effective for us starting January 1, 2001. SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. At September 30, 2000, our use of derivative instruments is confined
to two interest rate swap and two interest rate cap instruments. These
instruments were entered into in connection with our credit facility. We do not
use these instruments for trading or speculative purposes. The notional amounts
associated with these instruments range from $33.9 million to $37.1 million. At
the present time, we believe that we do not possess any derivative instruments
that may be embedded in other contracts or agreements. We continue to analyze
SFAS 133 for any material impacts of its adoption that we are not presently
aware of. Because of the limited number and use of derivative instruments that
we have and the relatively minor notional amounts associated with these
instruments, we believe at the present time that the accounting for our
derivative instruments under SFAS 133 will not have a material impact on us.
The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements". SAB 101 addresses revenue
recognition policies and practices of companies that report to the SEC. We will
adopt SAB 101 in the fourth quarter of 2000. We believe that our adoption of SAB
101 will not have a material impact.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement revises standards for accounting
for securitizations and other transfers of financial assets and collateral. The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This standard
is effective for transfers occurring after March 31, 2001 and for fiscal years
ending after December 15, 2000 with respect to recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral. We are still analyzing the requirements of this statement and we do
not fully know whether or not the impact of this statement will be material. At
the present time, we are not involved with any securitization transactions.
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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 our 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 our
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. We and Golden Sky later withdrew the class action
allegations we previously filed 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 pending before the same judge. On November 20, 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 or
about December 11, 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 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
On September 29, 2000, we filed a Current Report on Form 8-K dated
September 15, 2000 reporting under Item 2 the sale of our Puerto Rico cable
operations that included an unaudited pro forma condensed combined balance sheet
as of 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.
November 14, 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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