<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 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
---------
PEGASUS MEDIA & COMMUNICATIONS, INC.
------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 23-2778525
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
c/o Pegasus Communications Management Company;
225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004
------------------------------------------------ -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
--------------
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes_X_ No___
Number of shares of each class of the Registrant's common stock
outstanding as of May 9, 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 March 31, 2000
Page
----
Part I. Financial Information
Item 1 Combined Financial Statements
Combined Balance Sheets
December 31, 1999 and March 31, 2000 3
Combined Statements of Operations
Three months ended March 31, 1999 and 2000 4
Combined Statements of Cash Flows
Three months ended March 31, 1999 and 2000 5
Notes to Combined Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 23
Part II. Other Information
Item 1 Legal Proceedings 24
Item 6 Exhibits and Reports on Form 8-K 24
Signature 25
2
<PAGE>
Pegasus Media & Communications, Inc.
Combined Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,351 $24,046
Accounts receivable, less allowance for doubtful accounts of
$1,067 and $1,459, respectively 24,642 26,112
Inventory 9,506 15,599
Program rights 4,373 4,140
Deferred taxes 406 406
Net advances to affiliates 1,790 1,646
Prepaid expenses and other 3,463 5,040
--------- ----------
Total current assets 65,531 76,989
Property and equipment, net 37,841 43,141
Intangible assets, net 437,774 847,183
Deferred financing costs, net 6,500 10,244
Program rights 5,731 4,732
Deferred taxes 30,447 20,211
Investment in affiliates 4,598 116,499
Deposits and other 5,042 5,801
--------- ----------
Total assets $ 593,464 $1,124,800
========= ==========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $11,091 $8,966
Accounts payable 8,045 9,109
Accrued interest 6,253 8,527
Accrued satellite programming, fees and commissions 24,314 40,245
Accrued expenses 11,817 16,191
Amounts due seller 6,729 -
Current portion of program rights payable 4,447 4,281
--------- ----------
Total current liabilities 72,696 87,319
Long-term debt 235,633 367,248
Program rights payable 4,211 3,296
Deferred taxes 35,398 104,806
--------- ----------
Total liabilities 347,938 562,669
--------- ----------
Commitments and contingent liabilities - -
Minority interest 3,000 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 378,889 735,435
Deficit (136,365) (176,306)
--------- ----------
Total stockholder's equity 242,526 559,131
--------- ----------
Total liabilities and stockholder's equity $ 593,464 $1,124,800
========= ==========
</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 March 31,
-------------------------------
1999 2000
-------- --------
(unaudited)
<S> <C> <C>
Net revenues:
DBS $ 34,336 $ 95,857
Broadcast 7,903 8,099
-------- --------
Total net revenues 42,239 103,956
Operating expenses:
DBS
Programming, technical, general and administrative 23,796 67,858
Marketing and selling 11,797 25,409
Incentive compensation 325 400
Depreciation and amortization 9,922 22,450
Broadcast
Programming, technical, general and administrative 4,936 5,945
Marketing and selling 1,467 1,869
Incentive compensation 156 15
Depreciation and amortization 1,184 1,316
Corporate expenses 882 1,915
Corporate depreciation and amortization 174 25
Development costs - 427
Other expense, net 122 566
-------- --------
Loss from operations (12,522) (24,239)
Interest expense (3,958) (10,761)
Interest income 142 158
-------- --------
Loss from continuing operations before income
taxes, equity loss and extraordinary items (16,338) (34,842)
Provision (benefit) for income taxes 85 (3,806)
Equity in net loss of unconsolidated affiliates - (116)
-------- --------
Loss from continuing operations before
extraordinary items (16,423) (31,152)
Discontinued operations:
Income from discontinued operations of cable
segment, net of income taxes 133 491
-------- --------
Loss before extraordinary items (16,290) (30,661)
Extraordinary loss from extinguishment of debt, net - (9,280)
-------- --------
Net loss ($16,290) ($39,941)
======== ========
</TABLE>
See accompanying notes to combined financial statements
4
<PAGE>
Pegasus Media & Communications, Inc.
Combined Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 2000
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($16,290) ($39,941)
Adjustments to reconcile net loss
to net cash used for operating activities:
Extraordinary loss on
extinguishment of debt, net - 9,280
Depreciation and amortization 12,364 25,861
Program rights amortization 783 1,221
Amortization of debt discount and deferred financing fees 99 1,109
Stock incentive compensation 503 500
Equity in net loss of unconsolidated affiliates - 116
Bad debt expense 641 2,808
Deferred income taxes 85 (3,856)
Change in assets and liabilities:
Accounts receivable 1,314 7,363
Inventory 281 (6,093)
Prepaid expenses and other 52 (750)
Accounts payable and accrued expenses (716) (5,315)
Accrued interest (2,639) 2,274
Deposits and other - (483)
-------- --------
Net cash used for operating activities (3,523) (5,906)
-------- --------
Cash flows from investing activities:
Acquisitions (65,776) (35,967)
Cash acquired from merger with affiliate - 3,236
Capital expenditures (1,464) (3,619)
Purchase of intangible assets (562) (95)
Payments for programming rights (735) (1,068)
Investment in affiliate - (14,462)
-------- --------
Net cash used for investing activities (68,537) (51,975)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt (6,818) (9,761)
Borrowings on bank credit facilities 26,500 275,000
Repayments of bank credit facilities (50,000) (204,200)
Net contributions by Parent 101,646 8,937
Net advances to affiliates (8,939) (1,168)
Restricted cash 1,000 -
Increase in deferred financing costs (15) (8,194)
Capital lease repayments (33) (38)
-------- --------
Net cash provided by financing activities 63,341 60,576
-------- --------
Net increase (decrease) in cash and cash equivalents (8,719) 2,695
Cash and cash equivalents, beginning of year 22,707 21,351
-------- --------
Cash and cash equivalents, end of period $13,988 $ 24,046
======== ========
</TABLE>
See accompanying notes to combined financial statements
5
<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.
3. Investment in Affiliates:
PDC has an 89% 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 $116,000 for the first
quarter of 2000. PDC's total investment in PCS at March 31, 2000 was $4.5
million.
6
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS
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, 200,000 shares of PCC's Class A
Common Stock (amounting to $18.8 million) and PCC's agreement, subject to
certain conditions, to issue warrants to purchase 1.0 million shares of PCC's
Class A Common Stock at an exercise price of $90.00 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's 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 insignificant for the first quarter of 2000. PDC's
total investment in PMC at March 31, 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:
<TABLE>
<CAPTION>
Long-term debt consists of the following (in thousands): December 31, March 31,
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 $2.1 million as of December 31, 1999
and March 31, 2000, respectively...................................... $82,776 $82,876
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 18,029
Capital leases and other.................................................. 310 309
-------- --------
246,724 376,214
Less current maturities................................................... 11,091 8,966
-------- --------
Long-term debt............................................................ $235,633 $367,248
======== ========
</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.
7
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS
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 March 31, 2000, $40.6 million of stand-by letters of credit were issued
pursuant to the New PM&C Credit Facility, including $12.9 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 quarter 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), 436,592 shares of PCC's Class A Common Stock
(amounting to $39.7 million), warrants to purchase a total of 1,500 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 third quarter
of 2000. Accordingly, the results of operations from the entire Cable segment
have been classified as discontinued with prior periods restated.
8
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
7. Discontinued Operations: - (Continued)
Net revenues and income from discontinued operations were as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 2000
---- ----
<S> <C> <C>
Net revenues.................................................................. $3,071 $6,199
Income from operations........................................................ 127 397
Provision (benefit) for income taxes.......................................... - (50)
Income from discontinued operations........................................... 133 491
</TABLE>
8. Supplemental Cash Flow Information:
Significant non-cash investing and financing activities are as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 2000
---- ----
<S> <C> <C>
Barter revenue and related expense............................................ $1,683 $1,807
Acquisition of program rights and assumption of related program payables...... 170 -
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.......................... 2,250 515
Deferred taxes, net and related acquisition of intangibles.................... - 27,985
</TABLE>
For the three months ended March 31, 1999 and 2000, the Company paid
cash for interest in the amount of $6.5 million and $7.4 million, respectively.
The Company paid no federal income taxes for the three months ended March 31,
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
combined 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.
9
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS
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.) 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 and has been transferred to the judge assigned to the actions filed by
the Company and Golden Sky and by the NRTC.
Management is not currently able to predict the outcome of the DIRECTV
litigation matters or the effect such outcome will have on the consolidated
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):
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
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
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 $322,000 and $141,000
for the three months ended March 31, 1999 and 2000, respectively. Capital
expenditures for the Company's Broadcast segment were $251,000 and $1.9 million
for the three months ended March 31, 1999 and 2000, respectively. Capital
expenditures for the Company's discontinued Cable segment were $892,000 and $1.7
million for the three months ended March 31, 1999 and 2000, respectively. All
other capital expenditures for the three months ended March 31, 1999 and 2000
were at the corporate level. Identifiable total assets for the Company's DBS
segment were $394.6 million and $825.9 million as of December 31, 1999 and March
31, 2000, respectively. Identifiable total assets for the Company's Broadcast
segment were $66.1 million and $63.0 million as of December 31, 1999 and March
31, 2000, respectively. Identifiable total assets for the Company's discontinued
Cable segment were $86.2 million and $84.5 million as of December 31, 1999 and
March 31, 2000, respectively. All other identifiable assets as of December 31,
1999 and March 31, 2000 were at the corporate level.
11. 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.
11
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
11. Subsidiary Guarantees: - (Continued)
Condensed Combined Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
As of March 31, 2000 Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 23,455 $ 180 $ 23,635
Accounts receivable, net 26,230 26,230
Other current assets 25,361 25,361
-----------------------------------------------------------------------------------
Total current assets 75,046 180 - - 75,226
Property and equipment, net 42,774 42,774
Intangible assets, net 844,042 2,389 $ 200 846,631
Other assets 9,932 30,631 40,563
Investment in subsidiaries and affiliates 71,042 822,594 ($893,636) -
-----------------------------------------------------------------------------------
Total assets $ 971,794 $73,611 $853,425 ($893,636) $1,005,194
===================================================================================
Liabilities and total equity:
Current portion of long-term debt $ 8,966 $ 8,966
Accounts payable 9,039 9,039
Other current liabilities 69,171 $ 7,931 ($7,931) 69,171
-----------------------------------------------------------------------------------
Total current liabilities 87,176 - 7,931 (7,931) 87,176
Long-term debt 1,169,763 $314 82,876 (885,705) 367,248
Other liabilities 95,447 (8,799) 21,454 108,102
-----------------------------------------------------------------------------------
Total liabilities 1,352,386 (8,485) 112,261 (893,636) 562,526
Minority interest 3,000 3,000
Total equity (deficit) (383,592) 82,096 741,164 439,668
-----------------------------------------------------------------------------------
Total liabilities and equity $ 971,794 $73,611 $853,425 ($893,636) $1,005,194
===================================================================================
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>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Pegasus
Development
As of March 31, 2000 Corporation Eliminations Totals
---------- ------------ ------
<S> <C> <C> <C>
Assets:
Cash and cash equivalents $ 411 $ 24,046
Accounts receivable, net (118) 26,112
Other current assets 1,470 26,831
----------------------------------------------
Total current assets 1,763 - 76,989
Property and equipment, net 367 43,141
Intangible assets, net 552 847,183
Other assets 425 40,988
Investment in subsidiaries and affiliates 116,499 116,499
----------------------------------------------
Total assets $119,606 - $1,124,800
==============================================
Liabilities and total equity:
Current portion of long-term debt $ 8,966
Accounts payable $ 70 9,109
Other current liabilities 73 69,244
----------------------------------------------
Total current liabilities 143 - 87,319
Long-term debt 367,248
Other liabilities 108,102
----------------------------------------------
Total liabilities 143 - 562,669
Minority interest 3,000
Total equity (deficit) 119,463 559,131
----------------------------------------------
Total liabilities and equity $119,606 - $1,124,800
==============================================
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>
12
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
11. Subsidiary Guarantees: - (Continued)
Condensed Combined Statements of Operations
For the Three Months ended March 31, 2000
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Total revenue $103,956 $1,117 ($1,117) $103,956
Total operating expenses 103,388 25,460 $26 (1,117) 127,757
--------------------------------------------------------------------------------------
Income (loss) from operations 568 (24,343) (26) - (23,801)
Interest expense 3,608 9,741 (2,588) 10,761
Other (157) (1) (158)
--------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity loss (2,883) (24,343) (9,766) 2,588 (34,404)
Provision for income taxes (3,806) (3,806)
Equity loss -
Discontinued operations 492 (1) 491
--------------------------------------------------------------------------------------
Income (loss) before extraordinary item (2,391) (24,344) (5,960) 2,588 (30,107)
Extraordinary loss on extinguishment of debt (6,841) (2,439) (9,280)
--------------------------------------------------------------------------------------
Net income (loss) ($9,232) ($24,344) ($8,399) $2,588 ($39,387)
======================================================================================
</TABLE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C> <C>
Total revenue $103,956
Total operating expenses $438 128,195
-------------------------------------------------
Income (loss) from operations (438) - (24,239)
Interest expense 10,761
Other (158)
-------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity loss (438) - (34,842)
Provision for income taxes (3,806)
Equity loss (116) (116)
Discontinued operations 491
-------------------------------------------------
Income (loss) before extraordinary item (554) - (30,661)
Extraordinary loss on extinguishment of debt (9,280)
-------------------------------------------------
Net income (loss) ($554) - ($39,941)
=================================================
</TABLE>
<PAGE>
Condensed Combined Statements of Operations
For the Three Months ended March 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Total revenue $42,264 $346 ($371) $42,239
Total operating expenses 43,110 11,848 $174 (371) 54,761
--------------------------------------------------------------------------------------
Income (loss) from operations (846) (11,502) (174) - (12,522)
Interest expense 2,821 3,713 (2,576) 3,958
Other (106) (36) (142)
--------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (3,561) (11,502) (3,851) 2,576 (16,338)
Provision for income taxes 85 85
Discontinued operations 120 13 133
--------------------------------------------------------------------------------------
Net income (loss) ($3,526) ($11,489) ($3,851) $2,576 ($16,290)
======================================================================================
</TABLE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
<S> <C> <C> <C>
Total revenue $42,239
Total operating expenses 54,761
------------------------------------------------
Income (loss) from operations - - (12,522)
Interest expense 3,958
Other (142)
------------------------------------------------
Income (loss) from continuing operations
before income taxes - - (16,338)
Provision for income taxes 85
Discontinued operations 133
------------------------------------------------
Net income (loss) - - ($16,290)
================================================
</TABLE>
13
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
11. Subsidiary Guarantees: - (Continued)
Condensed Combined Statements of Cash Flows
For the Three Months ended March 31, 2000
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations
------------ ------------ ------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($9,232) ($24,344) ($8,399) $2,588
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 25,785 51 14
Program rights amortization 1,221
Change in assets and liabilities:
Accounts receivable 4,596
Accounts payable and accrued expenses (504) (2,588)
Prepaids and other (750)
Other (7,553) 12,335
------------------------------------------------------------------
Net cash provided (used) by operating activities 13,563 (24,293) 3,950 -
Cash flows from investing activities:
Acquisitions (35,967)
Capital expenditures (3,260)
Purchase of intangible assets (2,940) 2,869
Other 592,552 (492,945)
------------------------------------------------------------------
Net cash provided (used) for investing activities 550,385 - (490,076) -
Cash flows from financing activities:
Proceeds from debt 275,000
Repayment of debt (213,999)
Other (616,579) 23,979 480,370
------------------------------------------------------------------
Net cash provided (used) by financing activities (555,578) 23,979 480,370 -
Net increase (decrease) in cash and cash equivalents 8,370 (314) (5,756)
Cash and cash equivalents, beginning of year 15,085 494 5,756
------------------------------------------------------------------
Cash and cash equivalents, end of period $23,455 $180 - -
==================================================================
</TABLE>
<PAGE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Pegasus
Pegasus Development
Subtotal Corporation Eliminations Totals
-------- ----------- ------------ ------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($39,387) ($554) ($39,941)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 25,850 11 25,861
Program rights amortization 1,221 1,221
Change in assets and liabilities:
Accounts receivable 4,596 2,767 7,363
Accounts payable and accrued expenses (3,092) 51 (3,041)
Prepaids and other (750) (750)
Other 4,782 (1,401) 3,381
-----------------------------------------------------------
Net cash provided (used) by operating activities (6,780) 874 - (5,906)
Cash flows from investing activities:
Acquisitions (35,967) (35,967)
Capital expenditures (3,260) (359) (3,619)
Purchase of intangible assets (71) (24) (95)
Other 99,607 (111,901) (12,294)
-----------------------------------------------------------
Net cash provided (used) for investing activities 60,309 (112,284) - (51,975)
Cash flows from financing activities:
Proceeds from debt 275,000 275,000
Repayment of debt (213,999) (213,999)
Other (112,230) 111,805 (425)
-----------------------------------------------------------
Net cash provided (used) by financing activities (51,229) 111,805 - 60,576
Net increase (decrease) in cash and cash equivalents 2,300 395 2,695
Cash and cash equivalents, beginning of year 21,335 16 21,351
-----------------------------------------------------------
Cash and cash equivalents, end of period $23,635 $411 - $24,046
===========================================================
</TABLE>
14
<PAGE>
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
11. Subsidiary Guarantees: - (Continued)
Condensed Combined Statements of Cash Flows
For the Three Months ended March 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations
------------ ------------ ------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($3,526) ($11,489) ($3,851) $2,576
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 12,139 51 174
Program rights amortization 783
Change in assets and liabilities:
Accounts receivable 1,298
Accounts payable and accrued expenses (722) (3) (2,576)
Prepaids and other 52
Other (3,902) 5,427
------------------------------------------------------------------
Net cash provided (used) by operating activities 6,122 (11,441) 1,750 -
Cash flows from investing activities:
Acquisitions (65,776)
Capital expenditures (1,464)
Purchase of intangible assets (472) (21)
Other 71,583 (72,318)
------------------------------------------------------------------
Net cash provided (used) by investing activities 3,871 - (72,339) -
Cash flows from financing activities:
Proceeds from debt 26,500
Repayment of debt (56,851)
Other 19,151 8,828 65,713
------------------------------------------------------------------
Net cash provided (used) by financing activities (11,200) 8,828 65,713 -
Net increase (decrease) in cash and cash equivalents (1,207) (2,613) (4,876)
Cash and cash equivalents, beginning of year 14,143 3,092 5,318
------------------------------------------------------------------
Cash and cash equivalents, end of period $12,936 $479 $442 -
==================================================================
</TABLE>
<PAGE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Pegasus
Pegasus Development
Subtotal Corporation Eliminations Totals
-------- ----------- ------------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($16,290) ($16,290)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 12,364 12,364
Program rights amortization 783 783
Change in assets and liabilities:
Accounts receivable 1,298 $ 16 1,314
Accounts payable and accrued expenses (3,301) 30 (3,271)
Prepaids and other 52 52
Other 1,525 1,525
----------------------------------------------------------
Net cash provided (used) by operating activities (3,569) 46 - (3,523)
Cash flows from investing activities:
Acquisitions (65,776) (65,776)
Capital expenditures (1,464) (1,464)
Purchase of intangible assets (493) (69) (562)
Other (735) (735)
----------------------------------------------------------
Net cash provided (used) by investing activities (68,468) (69) - (68,537)
Cash flows from financing activities:
Proceeds from debt 26,500 26,500
Repayment of debt (56,851) (56,851)
Other 93,692 93,692
----------------------------------------------------------
Net cash provided (used) by financing activities 63,341 - - 63,341
Net increase (decrease) in cash and cash equivalents (8,696) (23) (8,719)
Cash and cash equivalents, beginning of year 22,553 154 22,707
----------------------------------------------------------
Cash and cash equivalents, end of period $13,857 $131 - $13,988
==========================================================
</TABLE>
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to 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 financial condition and results of operations of Pegasus
should be read in conjunction with the consolidated financial statements and
related notes which are included on pages 3-15 herein.
General
Pegasus Media & Communications, Inc. is:
o A wholly owned subsidiary of Pegasus Communications Corporation.
o An independent provider of DIRECTV with 802,000 subscribers at March
31, 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 2,500 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 55,000 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 third quarter 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.
16
<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 plan 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.
17
<PAGE>
Results of Operations
Three months ended March 31, 2000 compared to three months ended March 31, 1999
Total net revenues from continuing operations for the three months
ended March 31, 2000 were $104.0 million, an increase of $61.7 million, or 146%,
compared to total net revenues of $42.2 million for the same period in 1999. The
increase in total net revenues for the three months ended March 31, 2000 was
primarily due to an increase in DBS revenues of $61.5 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 three months
ended March 31, 2000 were $128.2 million, an increase of $73.4 million, or 134%,
compared to total operating expenses of $54.8 million for the same period in
1999. The increase was primarily due to an increase of $70.3 million in
operating expenses attributable to the growth in Pegasus' DBS business.
Total corporate expenses from continuing operations, including
corporate depreciation and amortization, were $1.9 million for the three months
ended March 31, 2000, an increase of $884,000, or 84%, compared to $1.1 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 $427,000 for the three months ended
March 31, 2000.
Other expenses from continuing operations were $566,000 for the three
months ended March 31, 2000, an increase of $444,000, or 364%, compared to other
expenses of $122,000 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 $10.8 million for the
three months ended March 31, 2000, an increase of $6.8 million, or 172%,
compared to interest expense of $4.0 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 $158,000 for the three months ended March
31, 2000, an increase of $16,000, or 11%, compared to interest income of
$142,000 for the same period in 1999. The increase in interest income is due to
higher average cash balances for the three months ended March 31, 2000 compared
to the same period in 1999.
The provision for income taxes from continuing operations declined by
approximately $3.9 million for the three months ended March 31, 2000 compared to
the same period in 1999 primarily as a result of the amortization of deferred
tax liabilities originating from DBS acquisitions and to 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 $116,000 for the three months
ended March 31, 2000.
Income from discontinued operations of the cable segment, net of income
taxes, was $491,000 for the three months ended March 31, 2000, an increase of
$358,000, or 269%, compared to $133,000 for the same period in 1999. The
increase is primarily attributable to the acquisition of the Aguadilla, Puerto
Rico cable system effective March 31, 1999. Pegasus had approximately 55,000
cable subscribers at March 31, 2000 compared to 50,200 at March 31, 1999.
Extraordinary loss from the extinguishment of debt was $9.3 million for
the three months ended March 31, 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.
18
<PAGE>
DBS
During the last twelve months, Pegasus acquired, through acquisitions,
approximately 77,000 subscribers and the exclusive DIRECTV distribution rights
to approximately 587,000 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 March 31, 2000, Pegasus had exclusive DIRECTV
distribution rights to 5.3 million households and 802,000 subscribers as
compared to 3.0 million households and 284,000 subscribers at March 31, 1999.
Pegasus had 5.4 million households and 814,000 subscribers at March 31, 2000,
including pending acquisitions. At March 31, 1999, subscribers would have been
557,000, including pending and completed acquisitions and the merger of Digital
Television Services with and into a subsidiary of Pegasus. Subscriber
penetration increased from 10.4% at March 31, 1999 to 15.1% at March 31, 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 $95.9 million for the three months ended
March 31, 2000, an increase of $61.5 million, or 179%, compared to DBS net
revenues of $34.3 million for the same period in 1999. The increase is primarily
due to an increase in the average number of subscribers in the first quarter of
2000 compared to the first quarter of 1999. The average monthly revenue per
subscriber was $43.52 for the three months ended March 31, 2000 compared to
$43.23 for the same period in 1999. Pro forma DBS net revenues, including
pending acquisitions and the merger of Digital Television Services with and into
a subsidiary of Pegasus at March 31, 2000, were $102.4 million, an increase of
$8.7 million, or 9%, compared to pro forma DBS net revenues of $93.7 million for
the same period in 1999.
Programming, technical, and general and administrative expenses were
$67.9 million for the three months ended March 31, 2000, an increase of $44.1
million, or 185%, compared to $23.8 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 70.8% for the three
months ended March 31, 2000 compared to 69.3% for the same period in 1999.
Subscriber acquisition costs were $25.4 million for the three months
ended March 31, 2000, an increase of $13.6 million compared to $11.8 million for
the same period in 1999. Gross subscriber additions were 79,300 for the three
months ended March 31, 2000 compared to 28,400 for the same period in 1999. The
total subscriber acquisition costs per gross subscriber addition were $321 for
the three months ended March 31, 2000 compared to $415 for the same period in
1999. The decrease in subscriber acquisition costs per gross subscriber addition
is due to a decrease in promotional programming.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $400,000 for the three months ended March 31,
2000, an increase of $75,000, or 23%, compared to $325,000 for the same period
in 1999. The increase resulted from a larger gain in pro forma location cash
flow during the first quarter of 2000 as compared to the first quarter of 1999.
Depreciation and amortization was $22.5 million for the three months
ended March 31, 2000, an increase of $12.5 million, or 126%, compared to $9.9
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 three months ended March 31, 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
three months ended March 31, 2000 were $8.1 million, an increase of $196,000, or
2%, compared to net broadcast revenues of $7.9 million for the same period in
1999. The increase is primarily attributable to an increase of $125,000 in
barter revenue.
19
<PAGE>
Programming, technical, and general and administrative expenses were
$5.9 million for the three months ended March 31, 2000, an increase of $1.0
million, or 20%, compared to $4.9 million for the same period in 1999. The
increase is primarily due to higher programming costs for the three months ended
March 31, 2000 compared to the same period in 1999 and an increase in fees to
the Fox Television Network.
Marketing and selling expenses were $1.9 million for the three months
ended March 31, 2000, an increase of $402,000, or 27%, compared to $1.5 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 $15,000 for the three months ended March 31, 2000,
a decrease of $141,000, or 90%, compared to $156,000 for the same period in
1999. The decrease resulted from a lower gain in pro forma location cash flow
during the first quarter of 2000 as compared to the first quarter of 1999.
Depreciation and amortization was $1.3 million for the three months
ended March 31, 2000, an increase of $132,000, or 11%, compared to $1.2 million
for the same period in 1999. The increase is due to capital expenditures
associated with the launch of new stations, our news initiative and the
construction of and facility upgrades to our stations.
Liquidity and Capital Resources
Pegasus' primary sources of liquidity have been the net cash provided
by its DBS, broadcast and cable operations, credit available under its credit
facilities and proceeds from public and private offerings. Pegasus' principal
uses of its cash has been to fund acquisitions, to meet debt service
obligations, to fund DBS subscriber acquisition costs, to fund DBS programming
costs and dealer commissions and to fund investments in its broadcast and cable
technical facilities.
Pre-marketing cash flow from continuing operations increased by
approximately $16.2 million, or 135%, for the three months ended March 31, 2000
as compared to the same period in 1999. Pre-marketing cash flow from continuing
operations increased as a result of:
o a $17.5 million, or 166%, increase in DBS pre-marketing cash flow 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; and
o a $1.2 million, or 81%, decrease in broadcast location cash flow as a result
of an increase in programming expenses and fees to the Fox Television Network.
During the three months ended March 31, 2000, $21.4 million of cash on
hand at the beginning of the year, together with $60.6 million of net cash
provided by Pegasus' financing activities, was used to fund operating activities
of approximately $5.9 million and investing activities of approximately $52.0
million. Investing activities consisted of:
o the acquisition of DBS assets from seven independent DIRECTV
providers during the first quarter of 2000 for approximately $36.0
million;
o cash acquired from the merger of Digital Television Services with and
into a subsidiary of Pegasus totaling approximately $3.2 million;
o approximately $1.3 million of broadcast expenditures for broadcast
television transmitter, tower and facility constructions and
upgrades;
o the expansion and enhancements of the Puerto Rico cable system
amounting to approximately $1.3 million;
20
<PAGE>
o investment in affiliates of $14.5 million;
o payments of programming rights amounting to $1.1 million; and
o maintenance and other capital expenditures and intangibles totaling
approximately $1.2 million.
Financing activities consisted of:
o net contributions by Pegasus Communications Corporation of
approximately $8.9 million;
o net borrowings on bank credit facilities totaling $70.8 million;
o an increase in deferred financing costs of approximately $8.2
million, primarily in connection with the amendment and restatement
of the Pegasus credit facility; and
o the repayment of approximately $11.0 million of long-term debt,
primarily sellers' notes, capital leases and affiliate advances.
As of March 31, 2000, cash on hand amounted to $24.0 million.
In January 2000, Pegasus 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. 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. Borrowings under the new credit facility
are available for acquisitions, subject to the approval of lenders in certain
circumstances, to retire certain indebtedness, to fund interest payments, for
working capital, capital expenditures and general corporate purposes. As of
March 31, 2000, $275.0 million was outstanding under the senior term credit
facility and stand-by letters of credit amounting to $40.6 million were issued
pursuant to the senior revolving credit facility.
A portion of the proceeds from the initial borrowing under the senior
term credit facility was used to repay the outstanding balances under the
existing $180.0 million senior revolving 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. Additionally, in connection with
the closing of the new credit facility, Digital Television Services was merged
with and into a subsidiary of Pegasus.
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 and the seven completed DBS
acquisitions occurring in the first quarter of 2000, as if such
acquisitions/merger occurred on April 1, 1999, adjusted operating cash flow
would have been approximately $122.9 million as follows (in thousands):
21
<PAGE>
<TABLE>
<CAPTION>
Four Quarters Ended
March 31, 2000
----------------------
<S> <C>
Revenues............................................................................... $503,308
Direct operating expenses, excluding depreciation, amortization and other
non-cash charges..................................................................... 373,497
-------
Income from operations before incentive compensation, corporate
expenses, depreciation and amortization and other non-cash charges................... 129,811
Corporate expenses..................................................................... 6,901
-------
Adjusted operating cash flow........................................................... $122,910
========
</TABLE>
Pegasus believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations for at
least the next twelve months. However, Pegasus is highly leveraged and our
ability in the future to repay our existing indebtedness will depend upon the
success of our business strategy, prevailing economic conditions, regulatory
matters, levels of interest rates and financial, business and other factors that
are beyond our control. We cannot assure you that we will be able to generate
the substantial increases in cash flow from operations that we will need to meet
the obligations under our indebtedness. Furthermore, our agreements with respect
to our indebtedness contain numerous covenants that, among other things,
restrict our ability to:
o pay dividends and make certain other payments and investments;
o borrow additional funds;
o create liens; and
o sell our assets.
Failure to make debt payments or comply with our covenants could result in an
event of default which if not cured or waived could have a material adverse
effect on us.
Pegasus closely monitors conditions in the capital markets to identify
opportunities for the effective use of financial leverage. In financing its
future expansion and acquisition requirements, Pegasus would expect to avail
itself of such opportunities and thereby increase its indebtedness. This could
result in increased debt service requirements. We cannot assure you that such
debt financing can be completed on terms satisfactory to Pegasus or at all.
Pegasus may also issue additional equity to fund its future expansion and
acquisition requirements.
Year 2000
The year 2000 issue is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the year 2000 is
approached and reached. An issue exists for all companies that rely on
computers. This issue involves computer programs and applications that were
written using two digits rather than four to identify the applicable year, and
could result in systems failures or miscalculations. We have completed an
assessment of and taken corrective measures to mitigate the potential adverse
effects the year 2000 issue may have on our operations. Costs in connection with
any modifications to make our systems compliant have not been and are not
expected to be material. We are not currently aware of any operational or
technical problems as a result of the change to the year 2000 and will continue
to monitor the potential adverse impact of the year 2000 issue on our business;
however, there can be no assurance that the year 2000 issue will not have a
material adverse impact on our financial condition or our results of operations
in the future.
22
<PAGE>
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.
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, 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" ("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 101A has deferred the timing of the adoption of the requirements until the
second 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In reliance upon General Instruction (H)(2)(c) of Form 10-Q, Pegasus
has omitted the disclosure required by this item.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DIRECTV/NRTC Litigation. Please refer to the disclosure relating to
this matter 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.
DBS Late Fee Litigation. In November 1998 we were sued in Indiana for
allegedly charging DBS subscribers excessive fees for late payments. The
plaintiffs, who claim to represent a class consisting of residential DIRECTV
customers in Indiana, seek unspecified damages for the purported class and
modification of our late-fee policy. On March 20, 2000, an order for stipulation
of dismissal without prejudice was signed by a judge of the Superior Court
Division II of Hamilton County, Indiana dismissing without prejudice all claims
asserted by the plaintiffs against Pegasus.
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 March 31, 2000.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Pegasus Media & Communications, Inc. has duly
caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
Pegasus Media & Communications, Inc.
May 12, 2000 By: /s/ M. Kasin Smith
- -------------------------- ----------------------
Date M. Kasin Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summay financial information extracted from the combined
balance sheet of Pegasus Media & Communications Inc., as of March 31, 2000
(unaudited) and the related combined statement of operations and cash flows for
the three months ended March 31, 2000 (unaudited). This information is qualified
in its entirety by reference to such financial statements.
(Dollars in thousands, except per share data)
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 24,046
<SECURITIES> 0
<RECEIVABLES> 27,571
<ALLOWANCES> 1,459
<INVENTORY> 15,599
<CURRENT-ASSETS> 76,989
<PP&E> 76,242
<DEPRECIATION> 33,101
<TOTAL-ASSETS> 1,124,800
<CURRENT-LIABILITIES> 87,319
<BONDS> 82,876
0
3,000
<COMMON> 2
<OTHER-SE> 559,129
<TOTAL-LIABILITY-AND-EQUITY> 1,124,800
<SALES> 103,956
<TOTAL-REVENUES> 103,956
<CGS> 0
<TOTAL-COSTS> 128,195
<OTHER-EXPENSES> (42)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,761
<INCOME-PRETAX> (34,958)
<INCOME-TAX> (3,806)
<INCOME-CONTINUING> (31,152)
<DISCONTINUED> 491
<EXTRAORDINARY> (9,280)
<CHANGES> 0
<NET-INCOME> (39,941)
<EPS-BASIC> (234.95)
<EPS-DILUTED> (234.95)
</TABLE>
