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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1999
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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.
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(Exact name of registrant as specified in its charter)
Delaware 23-2778525
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(State of other jurisdiction of (IRS Employer
incorporation of organization) Identification Number)
c/o Pegasus Communications Management Company;
225 City 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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Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
None
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___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X] Number of shares of each class of the
registrant's common stock outstanding as of March 15, 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 Instructions (I)(1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
Page
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PART I 3
Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 7
Item 3. Legal Proceedings.......................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders........................................ 9
PART II 9
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................. 9
Item 6. Selected Financial Data.................................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................. 16
Item 8. Financial Statements and Supplementary Data................................................ 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 16
PART III 16
PART IV 17
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 17
2
PEGASUS MEDIA & COMMUNICATIONS, INC.
PART I
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; 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; our relationships with DIRECTV and the National
Rural Telecommunications Cooperative; and other factors referenced in this
Report.
The information in this Report assumes the completion of certain
pending acquisitions described in "Item 1: Business - Recent Completed and
Pending Transactions," unless otherwise noted.
ITEM 1: BUSINESS
General
Pegasus Media & Communications, Inc. is:
o A wholly owned subsidiary of Pegasus Communications Corporation.
o The largest independent distributor of DIRECTV(R) with 779,000
subscribers at February 29, 2000. We have the exclusive right to
distribute DIRECTV digital broadcast satellite services to 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.
DIRECTV
DIRECTV is a service of Hughes Electronics, a subsidiary of General
Motors Corporation. DIRECTV offers in excess of 200 entertainment channels of
near laser disc quality video and compact disc quality audio programming.
DIRECTV currently transmits via four high-power Ku band satellites. We believe
that DIRECTV's extensive line-up of cable networks, pay-per-view movies and
events and sports packages, including the exclusive "NFL Sunday Ticket," have
enabled DIRECTV to capture a majority market share of existing direct broadcast
satellite subscribers and will continue to drive strong subscriber growth for
DIRECTV services in the future. DIRECTV added 1.6 million new subscribers in
1999.
3
DIRECTV Rural Affiliates
Prior to the launch of DIRECTV's programming service, Hughes
Electronics, which was succeeded by its subsidiary DIRECTV, entered into an
agreement with the National Rural Telecommunications Cooperative authorizing the
National Rural Telecommunications Cooperative to offer its members and
affiliates the opportunity to acquire exclusive rights to distribute DIRECTV
programming services in rural areas of the United States. The National Rural
Telecommunications Cooperative 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. Approximately 250
National Rural Telecommunications Cooperative members and affiliates acquired
such exclusive rights, thereby becoming DIRECTV rural affiliates. The DIRECTV
exclusive territories acquired by DIRECTV's rural affiliates include
approximately 9.0 million rural households. Pegasus was the largest of the
original DIRECTV rural affiliates, acquiring a DIRECTV exclusive territory of
approximately 500,000 homes in four New England states. Since 1996, we have
increased our DIRECTV exclusive territories to approximately 5.3 million homes
through the completed or pending acquisitions of 92 other DIRECTV rural
affiliates.
Upon completion of the pending acquisitions described below in
"--Recent Completed and Pending Transactions," we will distribute DIRECTV in the
following DIRECTV exclusive territories:
Exclusive
DIRECTV Total Homes in Total
Territories Territory Subscribers Penetration
----------- --------- ----------- -----------
Northeast.............................................. 751,745 87,176 11.6%
Central................................................ 1,138,651 169,197 14.9%
Southeast.............................................. 1,010,979 166,244 16.4%
Midwest................................................ 877,756 127,733 14.6%
Central Plains......................................... 411,666 47,749 11.6%
Texas.................................................. 465,835 87,229 18.7%
West................................................... 670,148 93,661 14.0%
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Total 5,326,780 778,989 14.6%
================= ================ =================
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Total homes in territory are based on estimates of primary residences
by Claritas, Inc.
Pegasus Rural Focus and Strategy
We believe that direct broadcast satellite and other digital satellite
services will achieve disproportionately greater consumer acceptance in rural
areas than in metropolitan areas. Direct broadcast satellite services have
already achieved a penetration of more than 22% in rural areas of the United
States, as compared to approximately 5% in metropolitan areas.
Our long-term goal is to become an integrated provider of direct
broadcast satellite and other digital satellite services for the 79.8 million
people, 32.3 million homes and 3.1 million businesses located in rural areas of
the United States. To accomplish our goal, we are pursuing the following
strategy:
o continuing to grow our rural subscriber base by aggressively marketing
DIRECTV;
o continuing to acquire other DIRECTV rural affiliates;
o continuing to develop the Pegasus Communications retail network; and
o generating future growth by bundling additional digital satellite
services with DIRECTV.
4
The Pegasus Communications Retail Network
As a subsidiary of Pegasus Communications Corporation, the Pegasus
Communications retail network of over 2,500 independent satellite, consumer
electronics and other retailers serving rural areas is available to us. The
Pegasus Communications retail network began in 1995 in order to distribute
DIRECTV in Pegasus' original DIRECTV exclusive territories in New England. This
network has been expanded into 41 states as a result of Pegasus Communications
Corporation's and our acquisitions of DIRECTV rural affiliates since 1996.
Today, the Pegasus Communications retail network is one of the few sales and
distribution channels available to digital satellite service providers seeking
broad and effective distribution in rural areas throughout the continental
United States.
We believe that the national reach of the Pegasus Communications retail
network has positioned us to:
o improve the penetration of DIRECTV in DIRECTV exclusive
territories that we now own or that we may acquire from other
DIRECTV rural affiliates;
o assist DIRECTV in improving DIRECTV's direct broadcast satellite
market share in rural areas outside of the DIRECTV exclusive
territories held by DIRECTV rural affiliates; and
o offer providers of new digital satellite services, such as the
soon to be launched digital audio and broadband multimedia
satellite services, an effective and convenient means for reaching
the approximately 30% of America's population that live and work
in rural areas.
Broadcast Television
Our operating strategy in broadcast television is focused on:
o developing strong local sales forces and sales management to
maximize the value of our stations' inventory of advertising spots;
o improving the stations' programming, promotion and technical
facilities in order to maximize their ratings in a cost-
effective manner; and
o maintaining strict control over operating costs while motivating
employees through the use of incentive plans, which reward our
employees in proportion to annual increases in location cash flow.
We have purchased or launched TV stations affiliated with the "emerging
networks" of Fox, the WB and UPN, because, while affiliates of these networks
generally have lower revenue shares than stations affiliated with ABC, CBS and
NBC, we believe that they will experience growing audience ratings and therefore
afford us greater opportunities for increasing their revenue share. We have
entered into local marketing agreements in markets where we already own a
station because they provide additional opportunities for increasing revenue
share with limited additional operating expenses. However, the FCC has recently
adopted rules which in most instances would prohibit us from expanding in our
existing markets through local marketing agreements and may require us to modify
or terminate our existing agreements. We have entered into local marketing
agreements to program one station as an affiliate of Fox, two stations as
affiliates of the WB network and one station as an affiliate of UPN. We plan to
program an additional station pursuant to a local marketing agreement in 2000,
if permitted by the FCC.
5
The following table sets forth general information for each of Pegasus'
stations.
Station
Station Acquisition Date Affiliation Market Area DMA(1) Households (2)
------- ---------------- ----------- ----------- ------ --------------
WDBD-40 May 1993 Fox Jackson, MS 89 306,000
WDSI-61 May 1993 Fox Chattanooga, TN 84 327,000
WGFL-53 (3) (3) WB Gainesville, FL 165 104,000
WOLF-56/WILF-53 (4) May 1993 Fox Northeastern PA 51 555,000
WSWB-38 (4) (4) WB Northeastern PA 51 555,000
WPXT-51 January 1996 Fox Portland, ME 80 355,000
WPME-35 (5) (5) UPN Portland, ME 80 355,000
WTLH-49/ WFXU (6) March 1996 Fox Tallahassee, FL 109 104,000
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(1) There are 211 designated market areas in the United States with each county in the continental United States assigned
uniquely to one designated market area. Ranking of designated market areas is based upon Nielsen estimates of the
number of television households.
(2) Represents total homes in a designated market area for each television station as estimated by Broadcast Investment Analysts.
(3) Pegasus began programming WGFL in October 1997 pursuant to a local marketing agreement as an affiliate of the WB network.
(4) WILF and WWLF until November 1998 had simulcast the programming of WOLF. In November 1998, the station then known as
WOLF (Channel 38) was sold to KB Prime Media LLC. That station has changed its call letters to WSWB and is now
programmed by Pegasus pursuant to a local marketing agreement as an affiliate of the WB network. The station formerly
known as WWLF changed its call letters to WOLF and simulcasts Fox programming on WILF.
(5) Pegasus began programming WPME in August 1997 pursuant to a local marketing agreement as an affiliate of UPN.
(6) Pegasus programs WFXU pursuant to a local marketing agreement. WFXU has simulcast the programming of WTLH since July 1998.
Cable Television
We own and operate a cable system serving areas of western,
southwestern and northwestern Puerto Rico. Our Puerto Rico cable system serves
franchised areas of approximately 170,000 households and serves approximately
55,000 subscribers.
We have entered into a letter of intent to sell the assets of our cable
system business in Puerto Rico to a subsidiary of Centennial Cellular
Corporation for $170.0 million in cash, subject to certain adjustments. The sale
of this cable system is subject to the negotiation of a definitive agreement,
third-party approvals, including regulatory approvals, and other customary
conditions. The sale is also subject to approval by the board of directors of
Pegasus Communications Corporation. We cannot assure you that these conditions
will be satisfied and that the sale will be consummated.
6
Recent Completed and Pending Transactions
Completed Transactions
Completed Direct Broadcast Satellite Acquisitions. From January 1, 2000
through March 1, 2000, we completed five acquisitions for DIRECTV distribution
rights in rural areas of California, Indiana, Illinois, Oregon and South Dakota.
In the aggregate, the consideration for the completed direct broadcast satellite
acquisitions was $23.5 million in cash, $22.5 million in Pegasus Communications
Corporation's Series D junior convertible participating preferred stock, $10.0
million in Pegasus Communications Corporation's Series E junior convertible
participating preferred stock, $39.7 million in Pegasus Communications
Corporation's Class A common stock, $200,000 in promissory notes and $381,000 in
assumed net liabilities. The territories covered by these transactions include
approximately 355,800 households, including approximately 17,800 seasonal
residences and 35,600 business locations and 42,800 subscribers. In January
2000, we completed an acquisition for DIRECTV distribution rights in rural areas
of Michigan that was effective December 14, 1999. In the aggregate, the total
consideration for this direct broadcast satellite acquisition was $707,000 in
cash, $5.7 million in Pegasus Communications Corporation's Series B junior
convertible participating preferred stock, $315,000 in promissory notes and
$61,000 in assumed net liabilities. The territories covered by this transaction
include approximately 27,700 households, including approximately 1,400 seasonal
residences and 2,800 business locations and 3,700 subscribers.
Credit Facility. On January 14, 2000, we entered into a first amended
and restated $500.0 million credit facility, which replaced our existing credit
facility. We can use borrowings under the credit facility for acquisitions and
general corporate purposes. In connection with the closing of this new credit
facility, Digital Television Services, Inc., a wholly-owned subsidiary of
Pegasus Communications Corporation, was merged with and into a subsidiary of
Pegasus.
Pending Transactions
Pending Direct Broadcast Satellite Acquisitions. As of March 1, 2000,
we have entered into letters of intent or definitive agreements to acquire
DIRECTV distribution rights in rural areas of three states. In the aggregate,
the consideration for these pending direct broadcast satellite acquisitions is
$15.7 million in cash. The territories covered by the letters of intent or
definitive agreements include approximately 81,500 television households,
including approximately 4,100 seasonal residences and 8,200 business locations
and 7,900 subscribers. The closings of these acquisitions are subject to
negotiation of definitive agreements, third-party approvals and other customary
conditions. We cannot assure you that these conditions will be satisfied.
Sale of Puerto Rico Cable System. We have entered into a letter of intent
to sell the assets of our cable system in Puerto Rico. See - Cable Television.
Employees
As of December 31, 1999, we had 638 full-time and 115 part-time
employees. We are not a party to any collective bargaining agreements, and we
consider our relations with our employees to be good.
ITEM 2: PROPERTIES
Our corporate headquarters are located in Bala Cynwyd, Pennsylvania. In
February 2000, our corporate headquarters was purchased by Pegasus
Communications Corporation for $12.5 million, with mortgage financing of
approximately $8.8 million.
7
Our direct broadcast satellite operations are headquartered in
Marlborough, Massachusetts and we operate call centers out of leased space in
San Luis Obispo, California, Marlborough, Massachusetts, and Louisville,
Kentucky. These leases expire on various dates through 2002. In connection with
our TV operations, we own or lease various transmitting equipment, television
stations, and office space. Our cable operations include office, head end, and
warehouse space in Puerto Rico. The property that we do not own in Puerto Rico
is operated under various leases expiring at various dates through 2004. Our
property in Puerto Rico will be sold in connection with the pending sale of our
Puerto Rico cable system.
ITEM 3: LEGAL PROCEEDINGS
DIRECTV/NRTC Litigation. On June 3, 1999, the National Rural
Telecommunications Cooperative filed a lawsuit in federal court against DIRECTV
seeking a court order to enforce the National Rural Telecommunications
Cooperative's contractual rights to obtain from DIRECTV certain premium
programming formerly distributed by United States Satellite Broadcasting
Company, Inc. for exclusive distribution by the National Rural
Telecommunications Cooperative's members and affiliates in their rural markets.
The National Rural Telecommunications Cooperative also sought a temporary
restraining order preventing DIRECTV from marketing the premium programming in
such markets and requiring DIRECTV to provide the National Rural
Telecommunications Cooperative with the premium programming for exclusive
distribution in those areas. The court, in an order dated June 17, 1999, denied
the National Rural Telecommunications Cooperative a preliminary injunction on
such matters, without deciding the underlying claims. On July 22, 1999, DIRECTV
responded to the National Rural Telecommunications Cooperative's continuing
lawsuit by rejecting the National Rural Telecommunications Cooperative's claims
to exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the National
Rural Telecommunications Cooperative. In particular, DIRECTV contends in its
counterclaim that the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative 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 National Rural Telecommunications Cooperative's right of first refusal,
which is effective at the end of the term of DIRECTV's contract with the
National Rural Telecommunications Cooperative, does not provide for certain
programming and other rights comparable to those now provided under the
contract. On September 8, 1999, the court denied a motion by DIRECTV to dismiss
certain of the National Rural Telecommunications Cooperative's claims, leaving
all of the causes of action asserted by the National Rural Telecommunications
Cooperative at issue.
On September 9, 1999, the National Rural Telecommunications Cooperative
filed a response to DIRECTV's counterclaim contesting DIRECTV's interpretations
of the end of term and right of first refusal provisions. On August 26, 1999,
the National Rural Telecommunications Cooperative filed a separate lawsuit in
federal court against DIRECTV claiming that DIRECTV had failed to provide to the
National Rural Telecommunications Cooperative its share of launch fees and other
benefits that DIRECTV and its affiliates have received relating to programming
and other services. On November 15, 1999, the court granted a motion by DIRECTV
and dismissed a portion of the National Rural Telecommunications Cooperative's
lawsuit regarding launch fees and other benefits. In particular, the court
dismissed the tort claim asserted by the National Rural Telecommunications
Cooperative, but left in place the remaining claims asserted by the National
Rural Telecommunications Cooperative. The court also consolidated that lawsuit
with the other pending National Rural Telecommunications Cooperative/DIRECTV
lawsuit. The court set various discovery and motion deadlines for the spring and
summer of 2000 but did not set a trial date.
On December 29, 1999, DIRECTV filed a motion for partial summary
judgment. The motion seeks a court order that the National Rural
Telecommunications Cooperative's right of first refusal, effective at the
termination of DIRECTV's contract with the National Rural Telecommunications
Cooperative, does not include programming services and is limited to 20 program
channels of transponder capacity. The hearing date on DIRECTV's motion was
vacated by the court pending resolution of certain procedural issues raised by a
new lawsuit we and Golden Sky Systems, Inc. filed against DIRECTV discussed
below. Golden Sky is the second largest independent provider of DIRECTV and is a
party to a definitive merger agreement with Pegasus Communications Corporation.
The court has not yet set a trial date on the merits of the motion for partial
summary judgment.
8
On January 10, 2000, we and Golden Sky filed a class action lawsuit in
federal court in Los Angeles against DIRECTV as representatives of a proposed
class that would include all members and affiliates of the National Rural
Telecommunications Cooperative that are distributors of DIRECTV. The complaint
contains causes of action for various torts, common counts and declaratory
relief based on DIRECTV's failure to provide the National Rural
Telecommunications Cooperative with premium programming, thereby preventing the
National Rural Telecommunications Cooperative from providing this programming to
the class members and affiliates. 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 National Rural Telecommunications Cooperative and its members
and affiliates.
On February 10, 2000, we and Golden Sky filed an amended complaint
which added new tort claims against DIRECTV for interference with plaintiffs'
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. We and Golden Sky also withdrew the class action
allegations to allow a new class action to be filed on behalf of the members and
affiliates of the National Rural Telecommunications Cooperative. The 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.
Direct Broadcast Satellite Late Fee Litigation. In November 1998, we
were sued in Indiana for allegedly charging direct broadcast satellite
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. We are unable to estimate the amount involved or to determine whether
this suit is material to us. Similar suits have been brought against DIRECTV and
various cable operators in other parts of the United States.
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 consolidated operations, cash
flows or financial position.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In reliance upon General Instruction (I)(2)(c) of Form 10-K, Pegasus
has omitted the disclosure required by this item.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
None of Pegasus' equity securities are publicly traded. All of Pegasus'
equity securities are held by Pegasus' parent, Pegasus Communications
Corporation. Pegasus did not sell any equity securities that would be required
to be reported in accordance with Item 701 of regulation S-K of the Securities
Act of 1933, as amended.
ITEM 6: SELECTED FINANCIAL DATA
In reliance upon General Instruction (I)(2)(a) of Form 10-K, Pegasus
has omitted the disclosure required by this item.
9
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In reliance upon General Instruction (I)(2)(a) of Form 10-K, 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 our most recent fiscal year and the fiscal year immediately preceding
it. The following discussion of the financial condition and results of
operations of Pegasus should be read in conjunction with the consolidated
financial statements and related notes which are included elsewhere herein. This
Report contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein.
General
Pegasus Media & Communications, Inc. is:
o A wholly-owned subsidiary of Pegasus Communications Corporation.
o The largest independent provider of DIRECTV with 771,000
subscribers at February 29, 2000, on an actual basis. We have the
exclusive right to distribute DIRECTV digital broadcast satellite
services to 5.2 million rural households in 36 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. The
sale is also subject to approval by Pegasus Communications Corporation's board
of directors. Accordingly, the results of our cable segment have been presented
as discontinued operations in our combined statements of operations.
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
Communications' 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 to acquire new DBS subscribers.
10
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 our 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.
Results of Operations
Year ended December 31, 1999 compared to the year ended December 31, 1998
Total net revenues from continuing operations in 1999 were $209.9
million, an increase of $81.6 million, or 64%, compared to total net revenues of
$128.2 million in 1998. The increase in total net revenues in 1999 was primarily
due to an increase in DBS revenues of $79.5 million attributable to acquisitions
and to internal growth in Pegasus' DBS subscriber base. Total operating expenses
from continuing operations in 1999 were $279.1 million, an increase of $121.9
million, or 78%, compared to total operating expenses of $157.2 million in 1998.
The increase was primarily due to an increase of $115.2 million in operating
expenses attributable to the growth in Pegasus' DBS business.
Total corporate expenses from continuing operations, including
corporate depreciation and amortization, were $5.1 million in 1999, an increase
of $883,000, or 21%, compared to $4.2 million in 1998. The increase in corporate
expenses is primarily attributable to the growth in Pegasus' business.
Other expenses from continuing operations were $665,000 in 1999, an
increase of $316,000, or 91%, compared to other expenses of $349,000 in 1998.
The increase is primarily due to increased investor relations activities and
development costs.
Interest expense from continuing operations was $17.5 million in 1999,
an increase of $1.6 million, or 10%, compared to interest expense of $15.9
million in 1998. The increase in interest expense is primarily due to an
increase in bank borrowings and seller notes associated with Pegasus' DBS
acquisitions. Interest income from continuing operations was $420,000 in 1999,
an increase of $210,000, or 100%, compared to interest income of $210,000 in
1998. The increase in interest income is due to higher average cash balances in
1999 compared to 1998.
The provision for income taxes from continuing operations amounted to
$100,000 in 1999, a decrease of $4.4 million, or 98%, compared to $4.5 million
in 1998. The decrease is primarily a result of differences in 1998 between the
financial statement carrying values and tax bases of assets and liabilities
associated with Pegasus' DBS acquisitions.
11
Equity in the net loss of an unconsolidated affiliate, resulting from
an investment in Pegasus PCS Partners, LP in August 1999, amounted to $201,000
for the year ended December 31, 1999.
Income from discontinued operations of the cable segment, net of income
taxes, was $2.1 million in 1999, an increase of $1.1 million, or 103%, compared
to $1.0 million in 1998. 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 December 31, 1999 compared
to 28,800 at December 31, 1998.
Pegasus sold its remaining New England cable systems in 1998 for $30.1
million resulting in a gain on the sale of discontinued operations, net of
income taxes, of $24.7 million.
DBS
During 1999, Pegasus acquired, through acquisitions, approximately
39,000 subscribers and the exclusive DIRECTV distribution rights to
approximately 336,000 households in rural areas of the United States. At
December 31, 1999, Pegasus had exclusive DIRECTV distribution rights to 3.1
million households and 438,000 subscribers as compared to 2.8 million households
and 254,000 subscribers at December 31, 1998. Pegasus had 5.3 million households
and 753,000 subscribers at December 31, 1999, including pending acquisitions
(which include the merger of Digital Television Services, Inc. into Pegasus). At
December 31, 1998, subscribers would have been 511,000, including pending and
completed acquisitions. Subscriber penetration increased from 9.6% at December
31, 1998 to 14.1% at December 31, 1999, including pending and completed
acquisitions.
Total DBS net revenues were $173.6 million in 1999, an increase of
$79.5 million, or 85%, compared to DBS net revenues of $94.1 million in 1998.
The increase is primarily due to an increase in the average number of
subscribers in 1999 compared to 1998. The average monthly revenue per subscriber
was $43.99 in 1999 compared to $41.91 in 1998. Pro forma DBS net revenues,
including pending acquisitions at December 31, 1999, were $295.7 million, an
increase of $71.1 million, or 32%, compared to pro forma DBS net revenues of
$224.6 million in 1998.
Programming, technical, and general and administrative expenses were
$121.9 million in 1999, an increase of $56.9 million, or 88%, compared to $65.0
million in 1998. The increase is attributable to significant growth in
subscribers and territory in 1999. As a percentage of revenue, programming,
technical, and general and administrative expenses were 70.2% in 1999 compared
to 69.1% in 1998.
Subscriber acquisition costs were $74.5 million, an increase of $47.4
million compared to $27.0 million in 1998. Gross subscriber additions were
208,700 in 1999 compared to 79,300 in 1998. The total subscriber acquisition
costs per gross subscriber addition were $357 in 1999 compared to $341 in 1998.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $1.1 million in 1999, an increase of $100,000, or
10%, compared to $985,000 in 1998. The increase resulted from a larger gain in
pro forma location cash flow during 1999 as compared to 1998.
Depreciation and amortization was $41.7 million in 1999, an increase of
$10.8 million, or 35%, compared to $30.9 million in 1998. The increase in
depreciation and amortization is primarily due to an increase in the fixed and
intangible asset base as the result of DBS acquisitions that occurred in 1998
and 1999.
Broadcast
In 1999, Pegasus owned or programmed ten broadcast television stations
in six markets. Two new stations were launched during the second half of 1998,
and one new station was launched in December 1999. Total net broadcast revenues
in 1999 were $36.3 million, an increase of $2.1 million, or 6%, compared to net
broadcast revenues of $34.1 million in 1998. The increase was primarily
attributable to an increase of $1.6 million in net broadcast revenues from the
four stations that began operations in 1997 and 1998.
12
Programming, technical, and general and administrative expenses were
$22.8 million in 1999, an increase of $4.7 million, or 26%, compared to $18.1
million in 1998. The increase is primarily due to higher programming costs in
1999 and an increase in news related expenses associated with the launch of
self-produced news in our Portland, Maine and Chattanooga, Tennessee markets.
Marketing and selling expenses were $6.3 million in 1999, an increase
of $311,000, or 5%, compared to $6.0 million in 1998. The increase in marketing
and selling expenses was due to an increase in promotional costs associated with
the launch of the new stations and news programs.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $57,000 in 1999, a decrease of $120,000, or 68%,
compared to $177,000 in 1998. The decrease resulted from a lower gain in pro
forma location cash flow during 1999 as compared to 1998.
Depreciation and amortization was $5.1 million in 1999, an increase of
$585,000, or 13%, compared to $4.5 million in 1998. The increase is due to
capital expenditures associated with the launch of the new stations and our news
initiative.
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 $19.7 million, or 50%, for the year ended December 31, 1999 as
compared to the same period in 1998. Pre-marketing cash flow from continuing
operations increased as a result of:
o a $22.6 million, or 78%, increase in DBS pre-marketing cash flow
of which $13.3 million, or 59%, was due to an increase in same
territory pre-marketing cash flow and $9.3 million or 41% was
attributable to territories acquired in 1998 and 1999; and
o a $2.9 million, or 29%, decrease in broadcast location cash flow
as the result of a $2.5 million, or 25%, decrease in same station
location cash flow and a $406,000 decrease attributable to the
three new stations launched in July 1998, November 1998 and
December 1999.
During the year ended December 31, 1999, $22.7 million of cash on hand
at the beginning of the year, together with $157.3 million of net cash provided
by Pegasus' financing activities, was used to fund operating activities of
approximately $27.2 million and other investing activities of $131.5 million.
Investing activities consisted of:
o the purchase of a cable system serving Aguadilla, Puerto Rico and
neighboring communities for approximately $42.1 million;
o the acquisition of DBS assets from fifteen independent DIRECTV
providers during 1999 for approximately $64.6 million;
o the purchase of a building for broadcast operations in our
Northeastern PA market for approximately $1.8 million;
o broadcast expenditures associated with the launch of
self-produced news in our Portland, Maine and Chattanooga,
Tennessee markets totaling approximately $1.0 million;
13
o broadcast expenditures in connection with our new station in
Jackson, Mississippi and other construction costs for $708,000;
o DBS facility upgrades of approximately $3.0 million;
o the expansion, enhancements and capitalized costs of the Puerto
Rico cable system amounting to approximately $6.1 million,
including $213,000 related to hurricane damage;
o payments of programming rights amounting to $3.5 million;
o new business development costs of $373,000;
o investment in affiliate of $4.8 million; and
o other capital expenditures and intangibles totaling $3.5 million.
Financing activities consisted of:
o contributions by Pegasus Communications Corporation of
approximately $62.4 million;
o net borrowings on bank credit facilities totaling $115.0 million;
o the repayment of approximately $21.1 million of long-term
debt, primarily sellers' notes, capital leases and affiliate
advances;
o restricted cash draws of approximately $1.0 million in
connection with the acquisition of the Aguadilla, Puerto Rico
cable system;
As of December 31, 1999, cash on hand amounted to $21.4 million
As defined in the Indenture governing Pegasus' Series B Notes, Pegasus
is required to provide adjusted operating cash flow data for Pegasus and its
restricted subsidiaries on a combined basis where adjusted operating cash flow
is defined as "for the four most recent fiscal quarters for which internal
financial statements are available, operating cash flow of such person and its
restricted subsidiaries less DBS cash flow for the most recent four-quarter
period plus DBS cash flow for the most recent quarterly period, multiplied by
four." Operating cash flow is income from operations before income taxes,
depreciation and amortization, interest expense, extraordinary items and
non-cash charges. Although adjusted operating cash flow is not a measure of
performance under generally accepted accounting principles, we believe that
location cash flow, operating cash flow and adjusted operating cash flow are
accepted within our business segments as generally recognized measures of
performance and are used by analysts who report publicly on the performance of
companies operating in such segments. Restricted subsidiaries carries the same
meaning as in the Indenture. Pro forma for the acquisition of the Aguadilla,
Puerto Rico cable system, the three completed DBS acquisitions occurring in the
fourth quarter of 1999 and the sale of our New England cable systems, as if such
acquisitions/disposition occurred on January 1, 1999, adjusted operating cash
flow would have been approximately $74.9 million as follows:
Four Quarters Ended
(in thousands) December 31,1999
----------------
Revenues................................................................................................. $244,467
Direct operating expenses, excluding depreciation, amortization and other non-cash
charges................................................................................................ 164,979
Income from operations before incentive compensation, corporate expenses, depreciation
and amortization and other non-cash charges............................................................ 79,488
Corporate expenses....................................................................................... 4,569
--------
Adjusted operating cash flow ............................................................................ $ 74,919
========
14
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.
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. The Company
does not expect that the adoption of SFAS No. 133 will have a material effect on
its business, financial position or results of operations.
15
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about Pegasus' market sensitive financial instruments is
provided below and constitutes a "forward-looking statement." Pegasus' major
market risk exposure is changing interest rates that relate to its credit
facilities and debt obligations. Pegasus' objective in managing its exposure to
interest rate changes is to limit the impact of interest rate changes on
earnings and cash flow and to lower its overall borrowing costs. Pegasus has
entered into interest rate protection agreements on its credit facilities to
limit its exposure to market interest rate fluctuations.
Pegasus maintained a $180.0 million senior, reducing revolving credit
facility. As of December 31, 1999, $142.5 million was outstanding. Interest on
the credit facility is calculated on either the bank's base rate or LIBOR, plus
an applicable margin. The credit facility was amended and restated in January
2000.
In January 2000, Pegasus entered into a first amended and restated
credit facility, which consists of a $225.0 million senior revolving credit
facility and a $275.0 million senior term credit facility. Availability of
borrowings under the revolving credit facility will reduce by specified amounts
quarterly commencing on March 31, 2001 through maturity. The term credit
facility is to be repaid in specified amounts quarterly commencing on March 31,
2001, with the balance due at maturity. Interest on the credit facility is
calculated on either the bank's base rate or LIBOR, plus an applicable margin.
The revolving credit facility expires in October 2004, and the term credit
facility expires in April 2005.
Commensurate with the closing of the first amended and restated credit
facility, Pegasus borrowed $275.0 million under the term loan and outstanding
balances under Pegasus' existing $180.0 million credit facility were repaid.
As of December 31, 1999, Pegasus estimated the fair value of its debt
to be approximately $255.7 million, using quoted market prices. The market risk
associated with Pegasus' debt is the potential increase in fair value resulting
from a decrease in interest rates. A 10% decrease in assumed interest rates
would not materially increase the fair value of Pegasus' debt.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages F-1 through
F-23.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The Registrant meets the conditions set forth in General Instructions
(I)(1)(a) and (b) of Form 10-K and in reliance thereof is filing this Form with
reduced disclosure. As such, the entire Part III is omitted.
16
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements
The financial statements filed as part of this Report
are listed on the Index to Financial Statements on
page F-1.
(2) Financial Statement Schedules
Page
----
Report of PricewaterhouseCoopers LLP..................................... S-1
Schedule II - Valuation and Qualifying Accounts.......................... S-2
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(3) Exhibits
Exhibit
Number Description of Document
2.1 Asset Purchase Agreement dated as of July 23, 1998 among Pegasus
Cable Television, Inc., Cable Systems USA, Partners, J&J Cable
Partners, Inc. and PS&G Cable Partners, Inc. (which is incorporated
by reference herein to Pegasus Communications Corporation's Form 10-Q
for the quarter ended June 30, 1998).
2.2 Asset Purchase Agreement dated as of January 16, 1998 between Avalon
Cable of New England, LLC and Pegasus Cable Television, Inc. and
Pegasus Cable Television of Connecticut, Inc. (which is incorporated
by reference herein to Pegasus Communications Corporation's Form 8-K
dated January 16, 1998).
3.1 Amended and Restated Certificate of Incorporation of Pegasus, as
amended (which is incorporated by reference to Exhibit 3.1 to
Pegasus' Registration Statement on Form S-1 (File No. 33-95042)).
3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2
to Pegasus' Registration Statement on Form S-1 (File No. 33-95042)).
4.1 Indenture, dated as of July 7, 1995, by and among Pegasus, the
Guarantors (as this term is defined in the Indenture), and First
Fidelity Bank, National Association, as Trustee, relating to the 12
1/2 % Series B Senior Subordinated Notes due 2005 (including the form
of Notes and Subsidiary Guarantee) (which is incorporated herein by
reference to Exhibit 4.1 to Pegasus' Registration Statement on Form
S-4 (File No. 33-95042)).
4.2 Form of 12 1/2% Series B Senior Subordinated Notes due 2005 (included
in Exhibit 4.1 above).
4.3 Form of Subsidiary Guarantee with respect to the 12 1/2% Series B
Senior Subordinated Notes due 2005 (included in Exhibit 4.1 above).
10.1 Station Affiliation Agreement, dated March 30, 1992, between Fox
Broadcasting Company and D. & K. Broadcast Properties L.P. relating
to television station WDBD (which is incorporated herein by reference
to Exhibit 10.5 to Pegasus' Registration Statement on Form S-4 (File
No. 33-95042)).
10.2 Agreement and Amendment to Station Affiliation Agreement, dated as of
June 11, 1993, between Fox Broadcasting Company and Donatelli & Klein
Broadcast relating to television station WDBD (which is incorporated
herein by reference to Exhibit 10.6 to Pegasus' Registration
Statement on Form S-4 (File No. 33-95042)).
17
10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox
Broadcast Company and Scranton TV Partners Ltd. relating to
television station WOLF (which is incorporated herein by reference to
Exhibit 10.8 to Pegasus' Registration Statement on Form S-4 (File No.
33-95042)).
10.4 Agreement and Amendment to Station Affiliation Agreement, dated June
11, 1993, between Fox Broadcasting Company and Scranton TV Partners,
Ltd. relating to television station WOLF (which is incorporated
herein by reference to Exhibit 10.9 to Pegasus' Registration
Statement on Form S-4 (File No. 33-95042)).
10.5 Amendment to Fox Broadcasting Company Station Affiliation Agreement
Regarding Network Nonduplication Protection, dated December 2, 1993,
between Fox Broadcasting Company and Pegasus Broadcast Television,
L.P. relating to television stations WOLF, WWLF, and WILF (which is
incorporated herein by reference to Exhibit 10.10 to Pegasus'
Registration Statement on Form S-4 (File No. 33-95042)).
10.6 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting
Company and Pegasus Broadcast Television, L.P. relating to television
station WOLF (which is incorporated herein by reference to Exhibit
10.11 to Pegasus' Registration Statement on Form S-4 (File No.
33-95042)).
10.7 Station Affiliation Agreement, dated March 30, 1992, between Fox
Broadcasting Company and WDSI Ltd. relating to television station
WDSI (which is incorporated herein by reference to Exhibit 10.12 to
Pegasus' Registration Statement on Form S-4 (File No. 33-95042)).
10.8 Agreement and Amendment to Station Affiliation Agreement, dated June
11, 1993, between Fox Broadcasting Company and Pegasus Broadcast
Television, L.P. relating to television station WDSI (which is
incorporated herein by reference to Exhibit 10.13 to Pegasus'
Registration Statement on Form S-4 (File No. 33-95042)).
10.9 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated
herein by reference to Exhibit 10.14 to Pegasus' Registration
Statement on Form S-4 (File No. 33-95042)).
10.10 NRTC/Member Agreement for Marketing and Distribution of DBS Services,
dated June 24, 1993, between the National Rural Telecommunications
Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated
herein by reference to Exhibit 10.28 to Pegasus' Registration
Statement on Form S-4 (File No. 33-95042) (other similar agreements
with the National Rural Telecommunications Cooperative are not being
filed but will be furnished upon request, subject to restrictions on
confidentiality)).
10.11 Amendment to NRTC/Member Agreement for Marketing and Distribution of
DBS Services, dated June 24, 1993, between the National Rural
Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
(which is incorporated herein by reference to Exhibit 10.29 to
Pegasus' Registration Statement on Form S-4 (File No. 33-95042)).
10.12 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc.
and Pegasus Satellite Television, Inc. (which is incorporated herein
by reference to Exhibit 10.30 to Pegasus' Registration Statement on
Form S-4 (File No. 33-95042)).
10.13 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and
operate cable television systems for the municipalities of Cabo Rojo,
San German, Lajas, Hormigueros, Guanica, Sabana Grande and Maricao
(which is incorporated herein by reference to Exhibit 2 to Pegasus'
Form 8-K dated March 21, 1996).
18
10.14 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and
operate cable television systems for the municipalities of Anasco,
Rincon and Las Marias (which is incorporated herein by reference to
Exhibit 3 to Pegasus' Form 8-K dated March 21, 1996).
10.15 Credit Agreement dated January 14, 2000 among Pegasus Media &
Communications, Inc., the lenders thereto, CIBC World Markets Corp.,
Deutsche Bank Securities Inc., Canadian Imperial Bank of Commerce,
Bankers Trust Company and Fleet National Bank (which is incorporated
by reference herein to Exhibit 10.7 to Pegasus Communications
Corporation's Registration Statement on Form S-4 (File No.
333-31080)).
10.16+ Pegasus Restricted Stock Plan (which is incorporated by reference to
Exhibit 10.28 to Pegasus Communications Corporation's Registration
Statement on Form S-1 (File No. 333-05057)).
10.17+ Option Agreement for Donald W. Weber (which is incorporated by
reference to Exhibit 10.29 to Pegasus Communications Corporation's
Registration Statement on Form S-1 (File No. 333-05057)).
10.18+ Pegasus Communications 1996 Stock Option Plan (as amended and
restated effective as of April 23, 1999) (which is incorporated by
reference to Exhibit 10.18 to Pegasus Communications Corporation's
Registration Statement on Form S-3 (File No. 333-70949)).
10.19+ Amendment to Option Agreement for Donald W. Weber, dated December 19,
1996 (which is incorporated by reference to Exhibit 10.31 to Pegasus
Communications Corporation's Registration Statement on Form S-1 (File
No. 333-18739)).
10.20 Agreement, effective as of September 13, 1999, by and among ADS
Alliance Data Systems, Inc., Pegasus Satellite Television, Inc., and
Digital Television Services, Inc. (which is incorporated by reference
to Exhibit 10.1 to Pegasus Communications Corporation's Form 10-Q
dated November 12, 1999).
10.21.1 Amendment dated December 31, 1999 to ADS Alliance Agreement among ADS
Alliance Data Systems, Inc., Pegasus Satellite Television, Inc., and
Digital Television Services, Inc., dated September 13, 1999 (which is
incorporated by reference to Exhibit 10.8 to Pegasus Communications
Corporation's Registration Statement on Form S-4 (File No.
333-31080)).
10.21.2 Renewal Franchise Agreement dated as of March 19, 1999, granted to
Pegasus Cable Television of San German, Inc. to build and operate
cable television systems for the municipalities of Aguadilla, Aguada,
Quebradillas, Moca and Isabela (which is incorporated by reference to
Exhibit 10.24 to Pegasus Communications Corporation's Form 10-K for
the fiscal year ended December 31, 1999 as filed with the SEC on
March 10, 2000).
24.1* Powers of Attorney (included in Signatures and Powers of Attorney).
27.1* Financial Data Schedule.
---------------
* Filed herewith.
+ Indicates a management contract or compensatory plan.
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed during the
quarter ended December 31, 1999.
19
SIGNATURES AND POWERS OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEGASUS MEDIA & COMMUNICATIONS, INC.
By: /s/ Marshall W. Pagon
-------------------------------------
Marshall W. Pagon
Chairman of the Board,
Chief Executive Officer and President
Date: March 27, 2000
Know all men by these presents, that each person whose signature
appears below hereby constitutes and appoints Marshall W. Pagon, Robert N.
Verdecchio and Ted S. Lodge and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each of such attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Marshall W. Pagon Chairman of the Board, Chief March 27, 2000
- ---------------------------------------------------- Executive Officer and President
Marshall W. Pagon
(Principal Executive Officer)
/s/ M. Kasin Smith Vice President and Chief March 27, 2000
- ---------------------------------------------------- Financial Officer
M. Kasin Smith
(Principal Financial and Accounting Officer)
/s/ Robert N. Verdecchio Director March 27, 2000
- ----------------------------------------------------
Robert N. Verdecchio
/s/ Michael C. Brooks Director March 27, 2000
- ----------------------------------------------------
Michael C. Brooks
/s/ Harry F. Hopper III Director March 27, 2000
- ----------------------------------------------------
Harry F. Hopper III
Director March 27, 2000
- ----------------------------------------------------
James J. McEntee, III
/s/ Mary C. Metzger Director March 27, 2000
- ----------------------------------------------------
Mary C. Metzger
/s/ William P. Phoenix Director March 27, 2000
- ----------------------------------------------------
William P. Phoenix
/s/ Donald W. Weber Director March 27, 2000
- ----------------------------------------------------
Donald W. Weber
/s/ Riordon B. Smith Director March 27, 2000
- ----------------------------------------------------
Riordon B. Smith
20
PEGASUS MEDIA & COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of PricewaterhouseCoopers LLP F-2
Combined Balance Sheets as of December 31, 1998 and 1999 F-3
Combined Statements of Operations for the years ended December 31, 1997,
1998 and 1999 F-4
Combined Statements of Changes in Total Equity (Deficit) for the years
ended December 31, 1997, 1998 and 1999 F-5
Combined Statements of Cash Flows for the years ended December 31, 1997,
1998 and 1999 F-6
Notes to Combined Financial Statements F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Pegasus Media & Communications, Inc.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and changes in total equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Pegasus Media & Communications, Inc. and its subsidiaries at December 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 11, 2000
F-2
Pegasus Media & Communications, Inc.
Combined Balance Sheets
(Dollars in thousands)
December 31, December 31,
1998 1999
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 22,707 $ 21,351
Restricted cash 1,000 --
Accounts receivable, less allowance for doubtful
accounts of $384 and $1,067, respectively 16,737 24,642
Inventory 4,693 9,506
Program rights 3,157 4,373
Deferred taxes 2,602 406
Net advances to affiliates -- 1,790
Prepaid expenses and other 722 3,463
--------- --------
Total current assets 51,618 65,531
Property and equipment, net 28,785 37,841
Intangible assets, net 369,745 444,274
Program rights 3,429 5,731
Deferred taxes 7,168 30,447
Investment in affiliate -- 4,598
Deposits and other 872 5,042
--------- --------
Total assets $461,617 $593,464
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 10,332 $ 11,091
Accounts payable 3,246 8,045
Accrued interest 6,189 6,253
Accrued satellite programming, fees and commissions 13,058 24,314
Accrued expenses 10,711 11,817
Amounts due seller -- 6,729
Current portion of program rights payable 2,432 4,447
--------- --------
Total current liabilities 45,968 72,696
Long-term debt 124,812 235,633
Net advances from affiliates 8,881 --
Program rights payable 2,472 4,211
Deferred taxes 14,315 35,398
--------- --------
Total liabilities 196,448 347,938
--------- --------
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 314,011 378,889
Deficit (51,844) (136,365)
--------- --------
Total stockholder's equity 262,169 242,526
--------- --------
Total liabilities and stockholder's equity $461,617 $593,464
========= ========
See accompanying notes to combined financial statements
F-3
Pegasus Media & Communications, Inc.
Combined Statements of Operations
(Dollars in thousands)
Years Ended December 31,
----------------------------------------------------------------
1997 1998 1999
------------------ ------------------ ------------------
Net revenues:
DBS $ 17,990 $ 94,088 $173,613
Broadcast 31,725 34,135 36,257
-------- -------- --------
Total net revenues 49,715 128,223 209,870
Operating expenses:
DBS
Programming, technical, general and administrative 11,991 65,005 121,882
Marketing and selling 4,804 27,044 74,460
Incentive compensation 440 985 1,085
Depreciation and amortization 7,855 30,886 41,681
Broadcast
Programming, technical, general and administrative 15,719 18,061 22,798
Marketing and selling 5,676 5,993 6,304
Incentive compensation 298 177 57
Depreciation and amortization 3,724 4,523 5,108
Corporate expenses 1,619 3,525 4,389
Corporate depreciation and amortization 632 680 699
Other expense, net 55 349 665
-------- -------- --------
Loss from operations (3,098) (29,005) (69,258)
Interest expense (10,777) (15,935) (17,510)
Interest income 72 210 420
-------- -------- --------
Loss from continuing operations before income
taxes, equity loss and extraordinary items (13,803) (44,730) (86,348)
Provision for income taxes 168 4,490 100
Equity in net loss of unconsolidated affiliate -- -- (201)
-------- -------- --------
Loss from continuing operations before
extraordinary items (13,971) (49,220) (86,649)
Discontinued operations:
Income from discontinued operations of cable
segment, net of income taxes 257 1,047 2,128
Gain on sale of discontinued operations, net of
income taxes 4,451 24,727 --
-------- -------- --------
Loss before extraordinary items (9,263) (23,446) (84,521)
Extraordinary loss from extinguishment of debt, net (1,656) -- --
-------- -------- --------
Net loss ($10,919) ($23,446) ($84,521)
======== ======== ========
See accompanying notes to combined financial statements
F-4
Pegasus Media & Communications, Inc.
Combined Statements of Changes in Total Equity (Deficit)
(In thousands)
Common Stock
--------------------------------------------
Class A Class B
-------------------------------------------- Additional Retained Total
Number Par Number Par Paid-In Earnings Equity
of Shares Value of Shares Value Capital (Deficit) (Deficit)
--------- ----- --------- ----- ------- --------- ---------
Balances at January 1, 1997 162 $2 9 - $ 7,881 ($17,479) ($9,596)
Net loss (10,919) (10,919)
Contribution by Parent 219,341 219,341
--------------------------------------------------------------------------------------
Balances at December 31, 1997 162 2 9 - 227,222 (28,398) 198,826
Net loss (23,446) (23,446)
Contribution by Parent 86,789 86,789
--------------------------------------------------------------------------------------
Balances at December 31, 1998 162 2 9 - 314,011 (51,844) 262,169
Net loss (84,521) (84,521)
Contribution by Parent 64,878 64,878
--------------------------------------------------------------------------------------
Balances at December 31, 1999 162 $2 9 - $378,889 ($136,365) $242,526
======================================================================================
See accompanying notes to combined financial statements
F-5
Pegasus Media & Communications, Inc.
Combined Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31,
1997 1998 1999
------------ ------------ -----------
Cash flows from operating activities:
Net loss ($10,919) ($23,446) ($84,521)
Adjustments to reconcile net loss
to net cash provided (used) for operating activities:
Extraordinary loss on
extinguishment of debt, net 1,656 -- --
Depreciation and amortization 17,854 41,082 54,471
Program rights amortization 1,716 2,366 3,686
Accretion on discount of bonds 394 397 398
Stock incentive compensation 919 1,278 1,495
Gain on sale of cable systems (4,451) (24,727) --
Equity in net loss of unconsolidated affiliate -- -- 201
Bad debt expense 579 1,976 5,122
Deferred income taxes 200 4,495 100
Change in assets and liabilities:
Accounts receivable (4,497) (5,240) (12,537)
Inventory (124) (3,717) (4,641)
Prepaid expenses and other 575 14 (2,666)
Accounts payable and accrued expenses 4,248 2,211 15,838
Accrued interest 167 164 64
Capitalized subscriber acquisition costs (701) -- --
Deposits and other (458) (248) (4,165)
-------- ------- -------
Net cash provided (used) by operating activities 7,158 (3,395) (27,155)
-------- ------- -------
Cash flows from investing activities:
Acquisitions (45,580) (109,340) (106,907)
Cash acquired from acquisitions 4,061 172 5
Capital expenditures (9,375) (9,777) (11,830)
Purchase of intangible assets (2,339) (3,131) (4,539)
Payments for programming rights (2,584) (2,561) (3,452)
Proceeds from sale of cable system 6,945 30,133 --
Investment in affiliate -- -- (4,800)
-------- ------- -------
Net cash used for investing activities (48,872) (94,504) (131,523)
-------- ------- -------
Cash flows from financing activities:
Repayments of long-term debt (214) (6,234) (10,260)
Borrowings on bank credit facilities 526 91,500 165,000
Repayments of bank credit facilities (124,326) (64,000) (50,000)
Net contributions by Parent 166,686 84,522 62,379
Net advances from (to) affiliates 9,846 (964) (10,671)
Restricted cash -- (1,000) 1,000
Debt issuance costs (1,886) -- --
Capital lease repayments (324) (228) (126)
-------- ------- -------
Net cash provided by financing activities 50,308 103,596 157,322
-------- ------- -------
Net increase (decrease) in cash and cash equivalents 8,594 5,697 (1,356)
Cash and cash equivalents, beginning of year 8,416 17,010 22,707
-------- ------- -------
Cash and cash equivalents, end of year $ 17,010 $ 22,707 $ 21,351
======== ======== ========
See accompanying notes to combined financial statements
F-6
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. The Company:
Pegasus Media & Communications, Inc. ("Pegasus" or together with its
subsidiaries stated below, the "Company") operates in growing segments of the
media industry and is a direct subsidiary of Pegasus Communications Corporation
("PCC" or the "Parent"). Pegasus' significant direct operating subsidiaries are
Pegasus Broadcast Television, Inc. ("PBT"), Pegasus Cable Television, Inc.
("PCT") and 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. Summary of Significant Accounting Policies:
Basis of Presentation:
The accompanying combined financial statements include the accounts of
Pegasus and all of its subsidiaries and the accounts of Pegasus Development
Corporation ("PDC"). All intercompany transactions and balances have been
eliminated. Certain amounts for 1997 and 1998 have been reclassified for
comparative purposes.
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.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and the disclosure of contingencies. Actual results could differ
from those estimates. Significant estimates relate to barter transactions and
the useful lives and recoverability of intangible assets.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid investments purchased
with an initial maturity of three months or less. The Company has cash balances
in excess of the federally insured limits at various banks.
Restricted Cash:
The Company had restricted cash held in escrow of $1.0 million at
December 31, 1998 in connection with the purchase of a cable system serving
Aguadilla, Puerto Rico.
Inventories:
Inventories consist of equipment held for resale to customers and
installation supplies. Inventories are stated at the lower of cost or market on
a first-in, first-out basis.
F-7
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies: - (Continued)
Long-Lived Assets:
The Company's assets are reviewed for impairment whenever events or
circumstances provide evidence which suggest the carrying amounts may not be
recoverable. The Company assesses the recoverability of its assets by
determining whether the depreciation or amortization of the respective asset
balance can be recovered through projected undiscounted future cash flows. To
date, no such impairments have occurred.
Property and Equipment:
Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets fully depreciated, sold, retired or otherwise
disposed of are removed from the respective accounts and any resulting gains or
losses are included in the statement of operations. For cable television
systems, initial subscriber installation costs including material, labor and
overhead costs of the hookup are capitalized as part of the distribution
facilities. The costs of disconnection and reconnection are charged to expense.
Satellite equipment that is leased to customers is stated at cost.
Depreciation is computed for financial reporting purposes using the
straight-line method based upon the following lives:
Reception and distribution facilities........... 7 to 11 years
Transmitter equipment........................... 5 to 10 years
Equipment, furniture and fixtures............... 5 to 10 years
Building and improvements....................... 12 to 39 years
Vehicles and other equipment.................... 3 to 5 years
Intangible Assets:
Intangible assets are stated at cost. The cost and related accumulated
amortization of assets fully amortized, sold, retired or otherwise disposed of
are removed from the respective accounts and any resulting gains or losses are
included in the statement of operations. Costs of successful franchise
applications are capitalized and amortized over the lives of the related
franchise agreements, while unsuccessful franchise applications and abandoned
franchises are charged to expense. Financing costs incurred in obtaining
long-term financing are amortized over the term of the applicable loan.
Amortization of intangible assets is computed for financial reporting
purposes using the straight-line method based upon the following lives:
Network affiliation agreements.................. 40 years
Goodwill........................................ 40 years
DBS rights...................................... 10 years
Broadcast licenses.............................. 7 years
Other intangibles............................... 2 to 14 years
Revenue:
The Company operates in growing segments of the media industry: DBS and
Broadcast. The Company recognizes revenue in its DBS operations when video and
audio services are provided. The Company recognizes revenue in its Broadcast
operations when advertising spots are broadcast.
F-8
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies: - (Continued)
The Company obtains a portion of its TV programming through its network
affiliations with Fox, UPN and WB and also through independent producers. The
Company does not make any direct payments for this programming. Instead, the
Company retains a portion of the available advertisement spots to sell on its
own account. Barter programming revenue and the related expense are recognized
when the advertisements sold by the networks or independent producers are
broadcast. Gross barter amounts of $7.5 million, $8.1 million and $7.6 million
for 1997, 1998 and 1999, respectively, are included in Broadcast revenue and
programming expense in the accompanying combined statements of operations.
Advertising Costs:
Advertising costs are charged to operations in the period incurred and
totaled approximately $2.5 million, $9.5 million and $14.2 million for the years
ended December 31, 1997, 1998 and 1999, respectively.
Program Rights:
The Company enters into agreements to show motion pictures and
syndicated programs on television. The Company records the right and associated
liabilities for those films and programs when they are currently available for
showing. These rights are recorded at the lower of unamortized cost or estimated
net realizable value and are amortized on the straight-line method over the
license period, which approximates amortization based on the estimated number of
showings during the contract period. Amortization of $1.7 million, $2.4 million
and $3.7 million is included in Broadcast programming expense for the years
ended December 31, 1997, 1998 and 1999, respectively. The obligations arising
from the acquisition of film rights are recorded at the gross amount. Payments
for the contracts are made pursuant to the contractual terms over periods which
are generally shorter than the license periods.
Income Taxes:
The Company accounts for income taxes utilizing the asset and liability
approach, whereby deferred tax assets and liabilities are recorded for the tax
effect of differences between the financial statement carrying values and tax
bases of assets and liabilities. A valuation allowance is recorded for deferred
taxes where it appears more likely than not that the Company will not be able to
recover the deferred tax asset. MCT Cablevision, LP, a subsidiary of the
Company, is treated as a partnership for federal and state income tax purposes
but taxed as a corporation for Puerto Rico income tax purposes.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables, cash and
cash equivalents.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base and their dispersion across different businesses and geographic regions. As
of December 31, 1998 and 1999, the Company had no other significant
concentrations of credit risk.
Reliance on DIRECTV:
A substantial portion of the Company's business is derived from
providing DBS services as an independent DIRECTV(R) ("DIRECTV") provider.
Because the Company is a distributor of DIRECTV services, the Company may be
adversely affected by any material adverse changes in the assets, financial
condition, programming, technological capabilities or services of DIRECTV or its
parent, Hughes Electronics Corporation ("Hughes").
F-9
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies: - (Continued)
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. The Company does not expect the adoption of SFAS No. 133 to have a
material effect on its business, financial position or results of operations.
3. Property and Equipment:
Property and equipment consist of the following (in thousands):
December 31, December 31,
1998 1999
---- ----
Reception and distribution facilities.......... $20,713 $32,179
Transmitter equipment.......................... 17,535 16,747
Equipment, furniture and fixtures.............. 3,637 6,876
Building and improvements...................... 2,914 5,664
Land........................................... 1,189 1,578
Vehicles....................................... 1,112 1,616
Other equipment................................ 4,156 1,827
--------- ----------
51,256 66,487
Accumulated depreciation....................... (22,471) (28,646)
--------- ----------
Net property and equipment..................... $28,785 $37,841
========= ==========
Depreciation expense amounted to $5.4 million, $5.4 million and $6.2
million for the years ended December 31, 1997, 1998 and 1999, respectively.
4. Intangibles:
Intangible assets consist of the following (in thousands):
December 31, December 31,
1998 1999
---- ----
DBS rights..................................... $336,285 $416,827
Franchise costs................................ 31,158 71,657
Goodwill....................................... 28,033 28,033
Broadcast licenses and affiliation agreements.. 15,062 16,436
Consultancy and non-compete agreements......... 7,023 7,964
Deferred financing costs....................... 6,697 10,701
Other deferred costs........................... 8,674 13,179
--------- ----------
432,932 564,797
Accumulated amortization....................... (63,187) (120,523)
--------- ----------
Net intangible assets.......................... $369,745 $444,274
========= ==========
Amortization expense amounted to $12.4 million, $35.7 million and $48.3
million for the years ended December 31, 1997, 1998 and 1999, respectively.
F-10
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
5. Equity Investment in Affiliate:
PDC has a 93% 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 a loss of $201,000 for 1999.
PDC's total investment in PCS at December 31, 1999 was $4.6 million.
6. 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.
7. Long-Term Debt:
Long-term debt consists of the following (in thousands): December 31, December 31,
1998 1999
---- ----
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 $2.6 million
and $2.2 million as of December 31, 1998 and 1999,
respectively................................................ $82,378 $82,776
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 (8.25% at December 31,
1999)....................................................... 27,500 142,500
Mortgage payable, due 2000, interest at 8.75%................... 455 431
Sellers' notes, due 2000 to 2005, interest at 3% to 8%.......... 24,376 20,707
Capital leases and other........................................ 435 310
-------- --------
135,144 246,724
Less current maturities......................................... 10,332 11,091
-------- --------
Long-term debt.................................................. $124,812 $235,633
======== ========
Certain of the Company's sellers' notes are collateralized by stand-by
letters of credit issued pursuant to the PM&C Credit Facility.
The Company maintains a $180.0 million senior revolving credit facility
(the "PM&C Credit Facility") which expires in 2003 and is collateralized by
substantially all of the assets of Pegasus and its subsidiaries. The PM&C Credit
Facility is subject to certain financial covenants as defined in the loan
agreement, including a debt to adjusted cash flow covenant.
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.
F-11
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
7. Long-Term Debt: - (Continued)
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company to incur additional
indebtedness, create liens and to pay dividends.
At December 31, 1999, maturities of long-term debt and capital leases
are as follows (in thousands):
2000........................................... $11,091
2001........................................... 6,362
2002........................................... 2,747
2003........................................... 748
2004........................................... 142,800
Thereafter..................................... 82,976
---------
$246,724
=========
8. Leases:
The Company leases certain studios, towers, utility pole attachments,
and occupancy of underground conduits and headend sites under operating leases.
The Company also leases office space, vehicles and various types of equipment
through separate operating lease agreements. The operating leases expire at
various dates through 2004. Rent expense for the years ended December 31, 1997,
1998 and 1999 was $896,000, $935,000 and $1.1 million, respectively. The Company
leases equipment under long-term leases and has the option to purchase the
equipment for a nominal cost at the termination of the leases. The related
obligations are included in long-term debt. Property and equipment at December
31 include the following amounts for leases that have been capitalized (in
thousands):
1998 1999
---- ----
Equipment, furniture and fixtures...... $638 $297
Vehicles............................... 371 286
------ -----
1,009 583
Accumulated depreciation............... (493) (240)
------ -----
Total.............................. $516 $343
====== =====
Future minimum lease payments on noncancellable operating and capital
leases at December 31, 1999 are as follows (in thousands):
Operating Capital
Leases Leases
---------- ----------
2000........................................... $914 $155
2001........................................... 670 139
2002........................................... 263 55
2003........................................... 104 2
2004........................................... 20 -
Thereafter..................................... - -
--------- -------
Total minimum payments......................... $1,971 351
=========
Less: amount representing interest............ 41
-------
Present value of net minimum lease payments
including current maturities of $127......... $310
=======
F-12
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
9. Income Taxes:
The following is a summary of the components of income taxes from
continuing operations (in thousands):
1997 1998 1999
---- ---- ----
Federal - deferred..................... $4,320
State and local - current.............. $168 170 $100
---- ------- -----
Provision (benefit) for income taxes $168 $4,490 $100
===== ======= =====
The deferred income tax assets and liabilities recorded in the combined
balance sheets at December 31, 1998 and 1999 are as follows (in thousands):
1998 1999
---- ----
Assets:
Receivables.................................................... $146 $406
Excess of tax basis over book basis from tax gain
recognized upon incorporation of subsidiaries.............. 2,112 -
Loss carryforwards............................................. 30,824 74,262
Other.......................................................... 973 -
------- -------
Total deferred tax assets................................. 34,055 74,668
------- -------
Liabilities:
Excess of book basis over tax basis of property, plant and
equipment.................................................. 2,355 4,237
Excess of book basis over tax basis of amortizable
intangible assets.......................................... 11,960 31,161
------- -------
Total deferred tax liabilities............................. 14,315 35,398
------- -------
Net deferred tax assets........................................ 19,740 39,270
Valuation allowance...................................... (24,285) (43,815)
------- -------
Net deferred tax liabilities.................................. ($4,545) ($4,545)
======= =======
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the expiration of
the Company's net operating loss carryforwards and portions of other deferred
tax assets related to prior acquisitions. The valuation allowance increased
primarily as the result of net operating loss carryforwards generated during
1999, which may not be utilized.
At December 31, 1999, the Company has net operating loss carryforwards
of approximately $195.4 million which are available to offset future taxable
income and expire through 2019.
A reconciliation of the Federal statutory rate to the effective tax
rate is as follows:
1997 1998 1999
---- ---- ----
U.S. statutory federal income tax rate.............. 34.00% 35.00% 35.00%
Foreign net operating loss.......................... - - -
Valuation allowance................................. (34.38) (0.13) (35.00)
Other............................................... 1.43 - -
------- ------- -------
Effective tax rate.................................. 1.05% 34.87% -
======= ======= =======
F-13
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
10. Supplemental Cash Flow Information:
Significant noncash investing and financing activities are as follows
(in thousands):
Years ended December 31,
-------------------------------------------
1997 1998 1999
---- ---- ----
Barter revenue and related expense................................ $7,520 $8,078 $7,598
Acquisition of program rights and assumption of related
program payables................................................ 3,453 4,630 7,205
Acquisition of plant under capital leases......................... 502 37 -
Capital contribution and related acquisition of intangibles....... 51,443 1,122 1,364
Notes payable and related acquisition of intangibles.............. 2,186 20,366 6,467
Deferred taxes, net and related acquisition of intangibles........ - - 29
For the years ended December 31, 1997, 1998 and 1999 the Company paid
cash for interest in the amount of $12.2 million, $15.8 million and $17.5
million, respectively. The Company paid no federal income taxes for the years
ended December 31, 1997, 1998 and 1999.
11. Acquisitions and Dispositions:
In 1998, the Company acquired, from 26 independent 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 $132.1 million, which consisted of $109.3 million in cash, 37,304
shares of PCC's Class A Common Stock (amounting to $900,000), warrants to
purchase a total of 25,000 shares of PCC's Class A Common Stock (amounting to
$222,000), $20.4 million in promissory notes and $1.3 million in assumed net
liabilities.
In 1999, the Company acquired, from 15 independent 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 $79.5 million, which consisted of $64.6 million in cash, 12,339
shares of PCC's Class A Common Stock (amounting to $550,000), warrants to
purchase a total of 25,000 shares of PCC's Class A Common Stock (amounting to
$814,000), $6.5 million in promissory notes, $6.7 million in accrued expenses
and $365,000 in assumed net liabilities.
The Company's 1999 acquisitions of rights to provide DIRECTV
programming were not significant, and accordingly, the pro forma impact of those
acquisitions has not been presented. Unaudited pro forma net revenues from
continuing operations and unaudited net loss for the year ended December 31,
1998 approximated $148.6 million and $49.5 million, respectively. This unaudited
pro forma information reflects the Company's 1998 acquisitions of rights to
provide DIRECTV programming and the disposition of the Cable segment as if each
such DBS territory and the Cable segment had been acquired or sold as of the
beginning of 1998 and includes the impact of certain adjustments, such as the
depreciation of fixed assets, amortization of intangibles, interest expense and
related income tax effects. This information does not purport to be indicative
of what would have occurred had the acquisitions/disposition been made on that
date or of results which may occur in the future.
12. Discontinued Operations:
Effective January 31, 1997, the Company sold substantially all the
assets of its New Hampshire cable system for approximately $6.9 million in cash,
net of certain selling costs and recognized a gain on the transaction of
approximately $4.5 million.
Effective July 1, 1998, the Company sold substantially all the assets
of its remaining New England cable systems for approximately $30.1 million in
cash and recognized a gain on the transaction of approximately $24.7 million.
F-14
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
12. Discontinued Operations: - (Continued)
Effective March 31, 1999, the Company purchased a cable system serving
Aguadilla, Puerto Rico and neighboring communities for a purchase price of
approximately $42.1 million in cash. The Aguadilla cable system is contiguous to
the Company's other Puerto Rico cable system and the Company has consolidated
the Aguadilla cable system with its existing cable system.
On January, 10, 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 to close 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 years restated.
Net revenues and income from discontinued operations were as follows
(in thousands):
Years Ended December 31,
-------------------------------------------
(unaudited)
1997 1998 1999
---- ---- ----
Net revenues $16,688 $13,767 $21,158
Income from operations 2,077 648 2,110
Provision for income taxes 32 5 -
Income from discontinued operations 257 1,047 2,128
Gain on sale of discontinued operations 4,451 24,727 -
13. Financial Instruments:
The carrying values and fair values of the Company's financial
instruments at December 31, 1999 consisted of (in thousands):
1998 1999
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
Long-term debt, including current portion $135,144 $146,691 $246,724 $255,747
Long-term debt: The fair value of long-term debt is estimated based on
the quoted market price for the same or similar instruments.
All other financial instruments are stated at cost which approximates
fair market value.
14. Commitments and Contingent Liabilities:
Legal Matters:
The Company has been sued in Indiana for allegedly charging DBS
subscribers excessive fees for late payments. The plaintiffs, who purport to
represent a class consisting of residential DIRECTV customers in Indiana, seek
unspecified damages for the purported class and modification of the Company's
late-fee policy. The Company is advised that similar suits have been brought
against DIRECTV and various cable operators in other parts of the United States.
From time to time the Company is involved with claims that arise in the
normal course of business.
In the opinion of management, the ultimate liability with respect to
the aforementioned claims and matters will not have a material adverse effect on
the combined operations, liquidity, cash flows or financial position of the
Company.
F-15
PEGASUS MEDIA & COMMUNICATIONS, INC.
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 and between the Company
and the NRTC.
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.
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 and Digital Television Services, Inc. ("DTS"), a wholly
owned subsidiary of PCC, have 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. Beginning January 1, 2000, the Company and
DTS must pay minimum fees to the provider as follows (in thousands):
Annual
Minimum
Year Fees
---- -------------
2000................................. $12,600
2001................................. 18,216
2002................................. 20,250
2003................................. 20,250
2004................................. 20,250
-------
Total minimum payments $91,566
=======
F-16
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
14. Commitments and Contingent Liabilities: - (Continued)
Program Rights:
The Company has entered into agreements totaling $7.4 million as of
December 31, 1999 for film rights and programs that are not yet available for
showing at December 31, 1999, and accordingly, are not recorded by the Company.
At December 31, 1999, the Company has commitments for future program rights of
approximately $3.3 million, $1.4 million, $214,000 and $87,000 in 2000, 2001,
2002 and 2003.
15. Related Party Transactions:
The Company reimburses various affiliates for corporate expenses
relating to certain administrative and accounting services, billing and
programming services and the reimbursement of expenses incurred therewith. For
the years ended December 31, 1997, 1998 and 1999, the fees and expenses were
approximately $1.6 million, $3.5 million and $4.6 million, respectively.
Other related party transaction balances at December 31, 1998 and 1999
are as follows (in thousands):
1998 1999
---- ----
Advances to (from) affiliates............. ($8,881) $1,790
PCC made contributions to the Company totaling $86.8 million and $64.9
million in 1998 and 1999, respectively, in connection with repayments of
outstanding balances on credit facilities, acquisitions and stock incentive
compensation.
PCC entered into an arrangement in 1998 with W.W. Keen Butcher (the
stepfather of Marshall W. Pagon, the Company's President and Chief Executive
Officer, and Nicholas A. Pagon, a Vice President of Pegasus), certain entities
controlled by him (the "KB Companies") and the owner of a minority interest in
one of the KB Companies, under which the Company agreed to provide and maintain
collateral for up to $4.0 million in principal amount of bank loans to Mr.
Butcher and the minority owner. The agreement was recently amended to increase
the amount of collateral that the Company will maintain for such loans to up to
$8.0 million. Mr. Butcher and the minority owner must lend or contribute the
proceeds of those bank loans to one or more of the KB Companies for the
acquisition of television broadcast stations to be operated by the Company
pursuant to local marketing agreements.
16. 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 36 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 $36,000, $1.2 million
and $2.1 million for 1997, 1998 and 1999, respectively. Capital expenditures for
the Company's Broadcast segment were $6.4 million, $6.8 million and $4.1 million
for 1997, 1998 and 1999, respectively. Capital expenditures for the Company's
discontinued Cable segment were $2.9 million, $1.9 million and $5.6 million for
1997, 1998 and 1999, respectively. All other capital expenditures for 1997, 1998
and 1999 were at the corporate level. Identifiable total assets for the
Company's DBS segment were $330.3 million and $394.6 million as of December 31,
1998 and 1999, respectively. Identifiable total assets for the Company's
Broadcast segment were $67.0 million and $66.1 million as of December 31, 1998
and 1999, respectively. Identifiable total assets for the Company's discontinued
Cable segment were $46.9 million and $86.2 million as of December 31, 1998 and
1999, respectively. All other identifiable assets as of December 31, 1998 and
1999 were at the corporate level.
F-17
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
17. Subsequent Events (unaudited):
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 amends the 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. Borrowings under the New PM&C Credit
Facility can be used for acquisitions and general corporate purposes.
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, DTS was merged with and into a
subsidiary of Pegasus.
In January 2000, PDC made an investment in Personalized Media
Communications, LLC ("PMC"), an advanced communications technology company, of
approximately $111.8 million, which consisted of $14.3 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.
As of February 11, 2000, the Company acquired, from two independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of California, Indiana and Oregon and the related assets in exchange for
total consideration of approximately $35.0 million, which consisted of $11.9
million in cash, 22,500 shares of PCC's Series D Preferred Stock (amounting to
$22.5 million), $200,000 in promissory notes, payable over two years, and
$381,000 in assumed net liabilities.
18. 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.
F-18
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
18. Subsidiary Guarantees: - (Continued)
Condensed Combined Balance Sheets
(in thousands)
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------- -------- ------------ --------
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
====================================================================================
As of December 31, 1998
Assets:
Cash and cash equivalents $14,143 $3,092 $5,318 $22,553
Accounts receivable, net 13,631 13,631
Other current assets 12,166 8 12,174
------------------------------------------------------------------------------------
Total current assets 39,940 3,100 5,318 48,358
Property and equipment, net 28,783 28,783
Intangible assets, net 363,345 2,643 3,591 369,579
Other assets 11,202 (158) 11,044
Investment in subsidiaries and affiliates 340,753 ($340,753)
------------------------------------------------------------------------------------
Total assets $443,270 $5,743 $349,504 ($340,753) $457,764
====================================================================================
Liabilities and total equity:
Current portion of long-term debt $10,332 $10,332
Accounts payable 3,246 3,246
Other current liabilities 32,417 ($29) $5,595 ($5,595) 32,388
------------------------------------------------------------------------------------
Total current liabilities 45,995 (29) 5,595 (5,595) 45,966
Long-term debt 373,163 4,429 82,378 (335,158) 124,812
Other liabilities 35,140 (9,814) 342 25,668
------------------------------------------------------------------------------------
Total liabilities 454,298 (5,414) 88,315 (340,753) 196,446
Minority interest 3,000 3,000
Total equity (deficit) (14,028) 11,157 261,189 258,318
------------------------------------------------------------------------------------
Total liabilities and equity $443,270 $5,743 $349,504 ($340,753) $457,764
====================================================================================
[RESTUBBED TABLE]
Condensed Combined Balance Sheets
(in thousands)
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
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
===============================================
As of December 31, 1998
Assets:
Cash and cash equivalents $154 $22,707
Accounts receivable, net 3,106 16,737
Other current assets 12,174
-----------------------------------------------
Total current assets 3,260 51,618
Property and equipment, net 2 28,785
Intangible assets, net 166 369,745
Other assets 425 11,469
Investment in subsidiaries and affiliates
-----------------------------------------------
Total assets $3,853 $461,617
===============================================
Liabilities and total equity:
Current portion of long-term debt $10,332
Accounts payable 3,246
Other current liabilities $2 32,390
------------------------------------------------
Total current liabilities 2 45,968
Long-term debt 124,812
Other liabilities 25,668
------------------------------------------------
Total liabilities 2 196,448
Minority interest 3,000
Total equity (deficit) 3,851 262,169
------------------------------------------------
Total liabilities and equity $3,853 $461,617
================================================
F-19
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
18. Subsidiary Guarantees: - (Continued)
Condensed Combined Statements of Operations
For the Year ended December 31, 1999
(in thousands)
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------- ------- ------------ --------
Total revenue $209,903 $2,826 ($2,859) $209,870
Total operating expenses 206,167 74,663 $769 (2,859) 278,740
-----------------------------------------------------------------------------------
Income (loss) from operations 3,736 (71,837) (769) (68,870)
Interest expense 11,251 16,581 (10,322) 17,510
Other (440) 141 (299)
-----------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity loss (7,075) (71,837) (17,491) 10,322 (86,081)
Provision for income taxes 100 100
Equity loss
Discontinued operations 1,900 228 2,128
-----------------------------------------------------------------------------------
Net income (loss) ($5,275) ($71,609) ($17,491) $10,322 ($84,053)
===================================================================================
[RESTUBBED TABLE]
Pegasus
Development
Corporation Eliminations Totals
----------- ------------ ------
Total revenue $209,870
Total operating expenses $388 279,128
----------------------------------------------
Income (loss) from operations (388) (69,258)
Interest expense 17,510
Other (121) (420)
----------------------------------------------
Income (loss) from continuing operations
before income taxes and equity loss (267) (86,348)
Provision for income taxes 100
Equity loss (201) (201)
Discontinued operations 2,128
----------------------------------------------
Net income (loss) ($468) ($84,521)
==============================================
Condensed Combined Statements of Operations
For the Year ended December 31, 1998
(in thousands)
Guarantor Non-guarantor Pegasus
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal
------------ ------------- ------- ------------- --------
Total revenue $128,409 $1,209 ($1,395) $128,223
Total operating expenses 130,982 22,962 $704 (1,395) 153,253
--------------------------------------------------------------------------------------
Loss from operations (2,573) (21,753) (704) (25,030)
Interest expense 11,333 48 14,827 (10,273) 15,935
Other (380) 170 (210)
--------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity loss (13,526) (21,801) (15,701) 10,273 (40,755)
Provision for income taxes 4,490 4,490
Discontinued operations 12,658 13,116 25,774
--------------------------------------------------------------------------------------
Net income (loss) ($5,358) ($8,685) ($15,701) $10,273 ($19,471)
======================================================================================
[RESTUBBED TABLE]
Pegasus
Development
Corporation Eliminations Totals
------------ ------------- ------
Total revenue $328 ($328) $128,223
Total operating expenses 4,303 (328) 157,228
----------------------------------------------
Loss from operations (3,975) (29,005)
Interest expense 15,935
Other (210)
----------------------------------------------
Income (loss) from continuing operations
before income taxes and equity loss (3,975) (44,730)
Provision for income taxes 4,490
Discontinued operations 25,774
----------------------------------------------
Net income (loss) ($3,975) ($23,446)
==============================================
F-20
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
18. Subsidiary Guarantees: - (Continued)
Condensed Combined Statements of Cash Flows
For the Year ended December 31, 1999
(in thousands)
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations
------------ -------------- --------- ------------
Cash flows from operating activities:
Net income (loss) ($5,275) ($71,609) ($17,491) $10,322
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 53,570 203 696
Program rights amortization 3,686
Change in assets and liabilities:
Accounts receivable (12,994)
Accounts payable and accrued expenses 26,105 29 (10,322)
Prepaids and other (2,666)
Other (8,719) 8 7,290
------------------------------------------------------------------
Net cash provided (used) by operating activities 53,707 (71,369) (9,505)
Cash flows from investing activities:
Acquisitions (106,907)
Capital expenditures (11,824)
Purchase of intangible assets (3,976) (188)
Other 16,036 (19,685)
------------------------------------------------------------------
Net cash provided (used) for investing activities (106,671) (19,873)
Cash flows from financing activities:
Proceeds from debt 165,000
Repayment of debt (56,271) (4,115)
Other (54,823) 72,886 29,816
------------------------------------------------------------------
Net cash provided (used) by financing activities 53,906 68,771 29,816
Net increase (decrease) in cash and cash equivalents 942 (2,598) 438
Cash and cash equivalents, beginning of year 14,143 3,092 5,318
------------------------------------------------------------------
Cash and cash equivalents, end of year $15,085 $494 $5,756
==================================================================
[RESTUBBED TABLE]
Pegasus
Pegasus Development
Subtotal Corporation Eliminations Totals
-------- ----------- ------------ ------
Cash flows from operating activities:
Net income (loss) ($84,053) ($468) ($84,521)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 54,469 2 54,471
Program rights amortization 3,686 3,686
Change in assets and liabilities:
Accounts receivable (12,994) 457 (12,537)
Accounts payable and accrued expenses 15,812 90 15,902
Prepaids and other (2,666) (2,666)
Other (1,421) (69) (1,490)
----------------------------------------------------------
Net cash provided (used) by operating activities (27,167) 12 (27,155)
Cash flows from investing activities:
Acquisitions (106,907) (106,907)
Capital expenditures (11,824) (6) (11,830)
Purchase of intangible assets (4,164) (375) (4,539)
Other (3,649) (4,598) (8,247)
----------------------------------------------------------
Net cash provided (used) for investing activities (126,544) (4,979) (131,523)
Cash flows from financing activities:
Proceeds from debt 165,000 165,000
Repayment of debt (60,386) (60,386)
Other 47,879 4,829 52,708
----------------------------------------------------------
Net cash provided (used) by financing activities 152,493 4,829 157,322
Net increase (decrease) in cash and cash equivalents (1,218) (138) (1,356)
Cash and cash equivalents, beginning of year 22,553 154 22,707
----------------------------------------------------------
Cash and cash equivalents, end of year $21,335 $16 $21,351
==========================================================
F-21
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
18. Subsidiary Guarantees: - (Continued)
Condensed Combined Statements of Cash Flows
For the Year ended December 31, 1998
(in thousands)
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations
------------ ------------- ------- ------------
Cash flows from operating activities:
Net income (loss) ($5,358) ($8,685) ($15,701) $10,273
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 39,800 602 680
Program rights amortization 2,366
Change in assets and liabilities:
Accounts receivable (2,135) 1
Accounts payable and accrued expenses 19,317 (2,174) (10,273)
Prepaids and other (290) 56
Other (31,619) (12,386) 19,209
------------------------------------------------------------------
Net cash provided (used) by operating activities 22,081 (22,586) 4,188
Cash flows from investing activities:
Acquisitions (109,340)
Capital expenditures (9,509) (266)
Purchase of intangible assets (2,871) (94)
Other 80,761 15,182 (68,199)
------------------------------------------------------------------
Net cash provided (used) by investing activities (40,959) 14,822 (68,199)
Cash flows from financing activities:
Proceeds from debt 91,500
Repayment of debt (67,378) (3,084)
Other (271) 11,429 64,000
------------------------------------------------------------------
Net cash provided (used) by financing activities 23,851 8,345 64,000
Net increase (decrease) in cash and cash equivalents 4,973 581 (11)
Cash and cash equivalents, beginning of year 9,170 2,511 5,329
------------------------------------------------------------------
Cash and cash equivalents, end of year $14,143 $3,092 $5,318
==================================================================
[RESTUBBED TABLE]
Pegasus
Pegasus Development
Subtotal Corporation Eliminations Totals
-------- ----------- ------------- ------
Cash flows from operating activities:
Net income (loss) ($19,471) ($3,975) ($23,446)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 41,082 41,082
Program rights amortization 2,366 2,366
Change in assets and liabilities:
Accounts receivable (2,134) (3,106) (5,240)
Accounts payable and accrued expenses 6,870 6,870
Prepaids and other (234) (234)
Other (24,796) 3 (24,793)
----------------------------------------------------------
Net cash provided (used) by operating activities 3,683 (7,078) (3,395)
Cash flows from investing activities:
Acquisitions (109,340) (109,340)
Capital expenditures (9,775) (2) (9,777)
Purchase of intangible assets (2,965) (166) (3,131)
Other 27,744 27,744
----------------------------------------------------------
Net cash provided (used) by investing activities (94,336) (168) (94,504)
Cash flows from financing activities:
Proceeds from debt 91,500 91,500
Repayment of debt (70,462) (70,462)
Other 75,158 7,400 82,558
----------------------------------------------------------
Net cash provided (used) by financing activities 96,196 7,400 103,596
Net increase (decrease) in cash and cash equivalents 5,543 154 5,697
Cash and cash equivalents, beginning of year 17,010 17,010
----------------------------------------------------------
Cash and cash equivalents, end of year $22,553 $154 $22,707
==========================================================
F-22
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
19. Quarterly Information (unaudited):
The net revenues and loss from operations data provided in the tables
below are from continuing operations and therefore will not necessarily agree to
quarterly information previously reported.
Quarter Ended
---------------------------------------------------------------
(in thousands) March 31, June 30, September 30, December 31,
1999 1999 1999 1999
------------- ----------- -------------- -------------
1999
- ----
Net revenues $42,238 $47,713 $55,312 $64,607
Loss from operations (12,584) (15,519) (23,391) (17,764)
Loss before extraordinary items (16,289) (18,801) (27,417) (22,014)
Net loss (16,289) (18,801) (27,417) (22,014)
The Company had no extraordinary gains or losses for the year ended
December 31, 1999.
Quarter Ended
---------------------------------------------------------------
(in thousands) March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------------- ----------- -------------- -------------
1998
- ----
Net revenues $24,342 $29,885 $33,151 $40,845
Loss from operations (6,564) (4,202) (7,683) (10,556)
Income (loss) before extraordinary items (9,550) (6,890) 13,033 (20,039)
Net income (loss) (9,550) (6,890) 13,033 (20,039)
The Company had no extraordinary gains or losses for the year ended
December 31, 1998.
F-23
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
Our audits of the combined financial statements referred to in our report dated
February 11, 2000 appearing in the 1999 Annual Report to the Board of Directors
and Stockholder of Pegasus Media & Communications, Inc. and its subsidiaries
(which report and combined financial statements are included in this Annual
Report on Form 10-K) also included an audit of the financial statement schedules
listed in Item 14 of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related combined financial statements.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 11, 2000
S-1
PEGASUS MEDIA & COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1998 and 1999
(Dollars in thousands)
Balance at Additions Additions Balance at
Beginning of Charged To Charged To End of
Description Period Expenses Other Accounts Deductions Period
Allowance for
Uncollectible
Accounts Receivable
Year 1997 $ 243 $ 579 $ -- $ 503(a) $ 319
Year 1998 $ 319 $ 1,976 $ -- $ 1,911(a) $ 384
Year 1999 $ 384 $ 5,122 $ -- $ 4,439(a) $ 1,067
Valuation Allowance for
Deferred Tax Assets
Year 1997 $ 10,684 $ 7,584 $ -- $ 4,971 $ 13,297
Year 1998 $ 13,297 $ 17,527 $ -- $ 6,539 $ 24,285
Year 1999 $ 24,285 $ 31,473 $ -- $ 11,943 $ 43,815
(a) Amounts written off, net of recoveries.
S-2