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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001
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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
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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 31, 2002:
Class A, Common Stock, $0.01 par value 161,500
Class B, Common Stock, $0.01 par value 8,500
As of the close of business on March 31, 2002, all of the Registrant's
outstanding voting stock was held by the parent of the Registrant and,
therefore, the aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant is $0.0.
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 authorized by General Instruction I.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS............................................................... 1
ITEM 2. PROPERTIES............................................................. 14
ITEM 3. LEGAL PROCEEDINGS...................................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................... 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.. 18
ITEM 6. SELECTED FINANCIAL DATA................................................ 18
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS........... 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............. 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................ 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................... 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................... 30
ITEM 11. EXECUTIVE COMPENSATION................................................. 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......... 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................... 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....... 31
-i-
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 Pegasus Media & Communications, Inc. 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," "hope," "intend," "expect" and
similar expressions are intended to identify forward looking statements,
although not all forward looking statements contain these identifying words.
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 the risks described elsewhere in this Report
and, among others, the following: general economic and business conditions, both
nationally, internationally and in the regions in which we operate; catastrophic
events, including acts of terrorism; relationships with and events affecting
third parties like DirecTV, Inc. and the National Rural Telecommunications
Cooperative; litigation with DirecTV, Inc.; the proposed merger of Hughes
Electronics Corporation with EchoStar Communications Corporation; 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; the cost of pursuing new business initiatives; an expansion of land based
communications systems; technological developments and difficulties; an
inability to obtain intellectual property licenses and to avoid committing
intellectual property infringement; the ability to attract and retain qualified
personnel; our significant indebtedness; the availability and terms of capital
to fund the expansion of our businesses; and other factors referenced in this
Report. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date hereof. We do not undertake
any obligation to publicly release any revisions to these forward looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Unless the context otherwise requires, all references to "Pegasus
Media," "we" or "us" or "our company" refer to Pegasus Media & Communications,
Inc., together with its direct and indirect subsidiaries. All references to
"Pegasus" or "Pegasus Communications" refer to our ultimate parent company,
Pegasus Communications Corporation, together with its direct and indirect
subsidiaries.
ITEM 1. BUSINESS
General
Pegasus Media & Communications, Inc. is:
o a wholly-owned subsidiary of Pegasus Satellite Communications,
Inc. and is an indirect subsidiary of Pegasus Communications
Corporation.
o a satellite TV company primarily focused on providing services to
rural and underserved areas of the United States;
o one of the fastest growing media companies in the United States
in terms of compound revenue growth rate;
o the tenth largest multichannel video provider in the United
States and the third largest direct broadcast satellite ("DBS")
provider;
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o the largest independent distributor of DIRECTV programming with
approximately 1.5 million subscribers at December 31, 2001, the
exclusive right to distribute DIRECTV digital broadcast satellite
services to approximately 7.5 million rural households in 41
states and a retail network of over 3,000 independent retailers;
and
o the owner or programmer of eleven TV stations affiliated with
either Fox, UPN or the WB.
We have changed the way in which we report the number of our
subscribers, effective with the first quarter of 2002. If we had done this in
2001, we would have reported approximately 1.4 million subscribers at December
31, 2001. See ITEM 7: Management's Narrative Analysis of the Results of
Operations - Results of Operations - Comparison of 2001 to 2000 - Direct
Broadcast Satellite Business - Revenues.
Corporate Mission
Our mission is to provide digital services to consumers in rural and
underserved areas of the United States. We are the only major digital services
provider focused exclusively on serving America's rural and underserved areas.
In the future, we hope to expand the scope of services that we can offer to
consumers and believe that the infrastructure of dealers and customer relations
that we have built and continue to refine will assist us in accomplishing our
mission.
Satellite Services in Rural Areas
Rural areas include approximately 85% of the total landmass of the
continental United States and have an average home density of approximately 11
homes per square mile. Because the cost of reaching a household by a cable or
other wireline distribution system is generally inversely proportional to home
density and the cost of providing satellite service is not, satellite services
have strong cost advantages over cable and other wireline distribution systems
in rural areas.
There are approximately 90 million people, 34 million households and
three million businesses located in rural areas of the United States. Rural
areas therefore represent a large and attractive market for DBS and other
digital satellite services. Approximately 55% of all U.S. DBS subscribers reside
in rural areas. It is our belief that future digital satellite services, such as
digital audio services and satellite broadband multimedia services, will also
achieve disproportionate success in rural areas as compared to metropolitan
areas.
It is difficult, however, for satellite and other service providers to
establish sales and distribution channels in rural areas. In contrast to
metropolitan areas, where there are many strong national retail chains, few
national retailers have a presence in rural areas. Most retailers in rural areas
are independently owned and have only one or two store locations. For these
reasons, satellite providers seeking to establish broad and effective rural
distribution have limited alternatives:
o They may seek to distribute their services through one of the few
national retailers, such as Radio Shack or Wal-Mart, that have a
strong retail presence in rural areas.
o They may seek to establish direct sales channels in rural areas.
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o They may seek to distribute through national networks of independent
retailers serving rural areas, such as have been established by
EchoStar and by Pegasus.
Pegasus Rural Focus and Strategy
DBS services have achieved a penetration of more than 32% in rural
areas of the United States, as compared to approximately 11% in metropolitan
areas. We believe that other digital satellite services will achieve
disproportionately greater consumer acceptance in rural and underserved areas
than in metropolitan areas.
Our long term goal is to become an integrated provider of DBS and other
digital satellite services for rural areas of the United States. To accomplish
our goal, we are pursuing the following strategy:
o Continue to Grow Our Rural Subscriber Base by Aggressively Marketing
DIRECTV and Obtaining Long Term, Higher Revenue Generating
Subscribers, and to Reduce Our Subscriber Acquisition Costs.
Although we still focus on expanding our subscriber base, our
marketing efforts and sales approaches are increasingly geared to
obtaining better quality subscribers: subscribers who are less
likely to churn in the future and who are likely to be interested in
more expansive and higher revenue generating programming packages.
We also focus on reducing the costs we incur in obtaining new
subscribers.
o Continue to Develop the Pegasus Retail Network and New Sales
Channels. We have established our network of independent retailers
in order to distribute DIRECTV in our DIRECTV exclusive territories.
Our consolidation of DIRECTV's rural affiliates has enabled us to
expand our retail network to over 3,000 independent retailers in 41
states. We believe that our retail network is one of the few sales
and distribution channels for digital satellite services with broad
and effective reach in rural areas of the U.S. We intend to further
expand our retail network in order to increase the penetration of
DIRECTV in rural areas while making our retail network more
effective and valuable to us by continuing to eliminate dealers
associated with high churn subscribers, developing incentives that
reward dealers for obtaining longer term, better revenue generating
subscribers, and selectively limiting dealer participation in
certain sales programs. We are also expanding our marketing of
DIRECTV beyond our traditional retail network channels. For
instance, we are increasing the size and utilization of our own
inside sales force and have or intend to enter into affinity
programs and arrangements like certificate programs where we can
generate sales through sales-only arrangements in which retailers
receive compensation for sales but will not be responsible for
equipment delivery and installation.
o Generate Future Growth By Bundling Additional Digital Satellite
Services with Our Distribution of DIRECTV Programming. New digital
satellite services, such as digital audio services, broadband
multimedia services and mobile satellite services, are or will be
increasingly introduced to consumers and businesses in the next five
years. We believe that these services, like DBS, should achieve
disproportionate success in rural areas. However, because there are
limited sales and distribution channels in rural areas, new digital
satellite service providers will confront the same difficulties that
DBS service providers have encountered in establishing broad
distribution in rural areas, as compared to metropolitan areas. We
believe that our retail network and our other sales channels will
enable us to establish relationships with digital satellite service
providers that will position us to capitalize on these new
opportunities. For more information on these new digital satellite
services see -Other Digital Broadband Satellite Services.
4
Direct Broadcast Satellite Television
There are currently two nationally branded DBS programming services:
DIRECTV, which is a service of DirecTV, Inc., a subsidiary of Hughes Electronic
Corporation, and The DISH Network, which is owned by EchoStar Communications
Corporation. Hughes and EchoStar have agreed to merge, which merger if
consummated would combine these services.
Both DBS programming services are digital satellite services and
therefore require that a subscriber install a satellite receiving antenna or
dish and a digital receiver. DIRECTV and DISH require a satellite dish of
approximately 18 inches in diameter that may be installed by the consumer
without professional assistance. As of December 31, 2001, the market shares of
DIRECTV and DISH among all DBS subscribers nationally were approximately 61% and
39%, respectively.
DIRECTV
DIRECTV offers in excess of 225 entertainment channels of near laser
disc quality video and compact disc quality audio programming. DIRECTV currently
transmits via six high power Ku band satellites. We believe that DIRECTV's
extensive line up of 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 DBS subscribers and will continue to drive
strong subscriber growth for DIRECTV programming in the future. DIRECTV reported
1.2 million net subscriber additions in 2001.
DIRECTV Rural Affiliates
Prior to the launch of DIRECTV's programming service, Hughes
Electronics, which was succeeded by its subsidiary DirecTV, Inc., 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 initially
acquired such exclusive rights, thereby becoming DIRECTV rural affiliates. The
DIRECTV exclusive territories acquired by DIRECTV's rural affiliates initially
included approximately 9.0 million rural households.
Consolidation of DIRECTV Rural Affiliates
When DIRECTV was launched in 1994, we were the largest of the original
DIRECTV rural affiliates, with a DIRECTV exclusive territory of approximately
500,000 homes in four New England states. In October 1996, we first acquired
exclusive distribution rights from another DIRECTV rural affiliate, thereby
beginning a process of consolidation that has significantly changed the
composition of DIRECTV's rural affiliates. Since October 1996, we have acquired
directly and indirectly through the April 1998 acquisition of Digital Television
Services, Inc. and the May 2000 acquisition of Golden Sky Holdings, Inc.,
exclusive distribution rights from approximately 166 DIRECTV rural affiliates.
Today, we represent approximately 83% of the DIRECTV exclusive territories held
by DIRECTV's rural affiliates, which includes approximately 7.5 million homes.
There are less than 100 remaining rural affiliates with exclusive DIRECTV
territories representing approximately 1.5 million homes. In 2001, we acquired
distribution rights from one other DIRECTV rural affiliate. In connection with
our ongoing litigation with DirecTV, our ability to consummate acquisitions has
been affected by DirecTV's refusal to approve assignments of National Rural
Telecommunications Cooperative member agreements for marketing and distribution
of DBS services without the imposition of conditions unacceptable to us.
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Proposed Merger of EchoStar Communications Corporation into Hughes Electronics
Corporation
On October 28, 2001, General Motors Corporation and its subsidiary
Hughes Electronics Corporation, together with EchoStar, announced that they had
signed definitive agreements that provide for the spin-off of Hughes Electronics
from General Motors and the merger of EchoStar into Hughes Electronics. The
companies have stated that the merged entity would use the EchoStar name and
adopt the DIRECTV brand name for its services and retail products. As reported,
at December 31, 2001 the merged entity would have had 15.8 million customers,
with another approximately 1.9 million customers being served by the National
Rural Telecommunications Cooperative and its affiliates, including us. The
spin-off and merger are subject to a number of conditions, including
shareholders approval, regulatory clearance under the Hart-Scott Rodino
Antitrust Act of 1976, and approval by the Federal Communications Commission.
The companies have stated that they expect the transaction to close in the
second half of 2002.
We are still in the process of evaluating the impacts of the pending
merger on our business.
Programming
DIRECTV programming includes (i) cable networks, broadcast networks
(including, where available, local into local channels) and audio services
available for purchase in tiers for a monthly subscription, (ii) premium
services available a la carte for a monthly subscription, (iii) sports
programming (including regional sports networks and seasonal college and major
professional league sports packages) available for a yearly, seasonal or monthly
subscription and (iv) movies and events available for purchase on a pay-per-view
basis.
Our core programming packages consist of Select Choice, Total Choice
and Total Choice Plus. The following is a summary of these programming packages:
o Select Choice. Package of over 45 popular channels of news, sports
and entertainment programming which retails for $24.99 per month.
o Total Choice. Over 105 channels of entertainment, including 31
commercial free Music Choice(SM) digital audio channels, which
retails for $34.99 per month.
o Total Choice Plus. All the programs included in Total Choice and 12
channels of family oriented programming and 5 additional Music
Choice(SM) channels, which retails for $38.99 per month.
In addition to our core programming packages, in designated market areas where
local channels are available, subscribers may obtain local network programming
for $6.00 per month.
Pay-per-view movies are generally $3.99 per movie. Movies recently
released for pay-per-view are available for viewing on multiple channels at
staggered starting times so that a viewer generally would not have to wait more
than 30 minutes to view a particular pay-per-view movie.
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Subscribers may also subscribe to various premium services: STARZ!,
HBO, Showtime, Cinemax and Sports Pack. Effective February 2002, premium
services became available to subscribers at prices based upon the number instead
of the type of premium service selected. Prior to this time, pricing was based
upon the particular premium selected. As a consequence, under the new pricing
methodology, the monthly fees for premium services are $12 for one premium, $22
for two premiums, $31 for three premiums, $39 for four premiums and $46 for five
premiums.
Sales and Marketing
In order to be competitive and generate long term, higher revenue
generating subscribers, we are increasingly developing flexibility and variety
in our sales programs.
We offer programs whereby subscribers can purchase equipment from our
retail network or national retailers. As an alternative to subscribers
purchasing a DIRECTV system, under our Pegasus Digital One Plan, subscribers are
provided with equipment, consisting of one or more receivers, obtain DIRECTV
programming for a monthly programming fee, enter into an initial 12 month
commitment secured by credit card, and enjoy the benefits of free service
repair. Under this plan, we have title to and own the receivers and remote
controls provided to subscribers. Subscribers who terminate service but do not
return equipment and access cards are assessed equipment and access card
non-return fees.
Beginning February 1, 2002, we require all of our new subscribers to
make an initial 12 month programming commitment. Failure to comply with the 12
month commitment, including, in some instances, suspension, discontinuance of or
downgrading service, can result in the imposition of cancellation fees intended
to reimburse us in part for our cost of special introductory promotional offers,
equipment and installation subsidies and dealer commissions.
In connection with the sale of DIRECTV programming, we from time to
time offer special free or reduced price programming offers. We provide these
offers in connection with acquisition of new subscribers or to encourage
existing subscribers to try additional programming.
We also give dealers incentives to sell program offers depending upon
the mix of sales offers that we hope to achieve. Dealer incentives include the
availability of installation and equipment subsidies, commissions and the
payment of flex payments, which can be changed from time to time in accordance
with certain business rules that we establish to reward particular dealer
behavior.
Beginning in the second quarter of 2002, we will be instituting a
certificate program whereby purchasers can purchase certificates and be entitled
to receive certain equipment, including, in some cases equipment at no cost, and
programming fee credits based upon the subscriber's credit score at the time of
activation. This initiative is intended to minimize our financial exposure to
subscribers who are more likely to churn for financial reasons while at the same
time providing incentives to attract new subscribers who meet certain credit
scoring criteria.
Many of the markets that we serve are not passed by cable or are passed
by older cable systems with limited numbers of channels. We actively market our
DIRECTV programming to potential subscribers in this market segment as their
primary source of television programming. It is our belief that this market
segment will continue to be a source for new Pegasus subscribers in the future.
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Our Retail Network
Our retail network is a network of over 3,000 independent satellite,
consumer electronics and other retailers serving rural areas. We began the
development of our retail network in 1995 in order to distribute DIRECTV in our
original DIRECTV exclusive territories in New England. We have expanded this
network into 41 states as a result of our acquisitions of DIRECTV rural
affiliates since 1996. Today, our 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 retail network has
positioned us to:
o improve the penetration of DIRECTV in the DIRECTV exclusive
territories that we now own;
o assist DIRECTV in improving DIRECTV's DBS market share in rural
areas outside of the DIRECTV exclusive territories held by the other
DIRECTV rural affiliates; and
We have developed and are continuing to develop programs to make our
retail network more effective and valuable to us by eliminating dealers
associated with high churn subscribers, establishing eligibility requirements
for the sale of certain sales programs, and providing dealer incentive
compensation programs that reward dealers for the sales of particular sales
programs and the acquisition of better Pegasus Satellite Television subscribers.
In order to facilitate the acquisition of subscribers by our retail
network, we have entered into certain distribution arrangements with national
distributors whereby our dealers can obtain DIRECTV equipment systems with, in
some cases, certain equipment subsidies provided by Pegasus.
Broadcast Television
We own or operate eleven TV stations affiliated with Fox, UPN, or the
WB located in the Jackson, Mississippi; Chattanooga, Tennessee; Gainesville,
Florida; Tallahassee, Florida; Wilkes-Barre/Scranton, Pennsylvania; Portland,
Maine; and Mobile, Alabama/Pensacola, Florida markets. We have purchased or
launched TV stations affiliated with the "emerging networks" of Fox, UPN and the
WB, 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 accordingly afford us greater
opportunities for increasing their revenue share. In addition, we have entered
into "local marketing agreements" in markets where we already own a station.
These agreements, which allow us to program the broadcast hours of a station we
do not own and to sell the advertising for that time, provide additional
opportunities for increasing revenue share with limited additional operating
expenses. However, the FCC has adopted changes to its ownership 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.
Competition
Our DBS business competes with a number of different sources which
provide news, information and entertainment programming to consumers, including:
o EchoStar;
o internet companies;
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o local television broadcast stations that provide off-air programming
which can be received using a roof top antenna and television set;
o satellite master antenna television systems, commonly known as
SMATV, which generally serve condominiums, apartment and office
complexes and residential developments;
o cable television systems;
o wireless program distribution services, commonly called wireless
cable systems, which use low power microwave frequencies to transmit
video programming over the air to subscribers;
o other operators who build and operate communications systems in the
same communities that we serve;
o movie theaters; and
o home video products.
Each of these may be able to offer more competitive packages or pricing than we
or DirecTV can provide. In addition, the DBS industry is still evolving and
recent or future competitive developments could adversely affect our direct
satellite business.
Our TV stations compete for audience share, programming and advertising
revenue with other television stations in their respective markets and with
cable operators and other advertising media. Cable operators in particular are
competing more aggressively than in the past for advertising revenues in our TV
stations' markets. This competition could adversely affect our stations'
revenues and performance in the future.
In addition, the markets in which we operate are in a constant state of
change due to technological, economic and regulatory developments. We are unable
to predict what forms of competition will develop in the future, the extent of
such competition or its possible effects on its businesses.
Employees
As of December 31, 2001, we had 931 full time and 426 part time
employees. We are not a party to any collective bargaining agreements and we
consider our relations with our employees to be good.
Direct Broadcast Satellite Agreements
Prior to the launch of the first DIRECTV satellite in 1993, Hughes
entered into various agreements intended to assist it in the introduction of
DIRECTV services, including agreements with RCA/Thomson for the development and
manufacture of DBS reception equipment and with United States Satellite
Broadcasting Company, Inc. for the sale of five transponders on the first
satellite. In an agreement concluded in 1994, Hughes offered members and
affiliates of the National Rural Telecommunications Cooperative the opportunity
to become the exclusive providers of certain DBS services using the DIRECTV
satellites at the 101(degree) W orbital location, generally including DIRECTV
programming, to specified residences and commercial subscribers in rural areas
of the U.S. 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 U.S.
National Rural Telecommunications Cooperative members and affiliates that
participated in its DBS program acquired the rights to provide the DBS services
described above in their service areas. The service areas purchased by
participating National Rural Telecommunications Cooperative members and
affiliates comprise approximately nine million television households and were
initially acquired for aggregate commitment payments exceeding $100 million.
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We are an affiliate of the National Rural Telecommunications
Cooperative, participating through agreements in its DBS program. The agreement
between Hughes (and DirecTV as its successor) and the National Rural
Telecommunications Cooperative, and related agreements between the National
Rural Telecommunications Cooperative and its participating members and
affiliates, provide those members and affiliates with substantial rights and
benefits from distribution in their service areas of the DBS services, including
the right to set pricing, to retain all subscription remittances and to appoint
sales agents. In exchange for such rights and benefits, the participating
members and affiliates made substantial commitment payments to DirectTV. In
addition, the participating members and affiliates are required to reimburse
DirecTV for their allocable shares of certain common expenses, such as
programming, satellite specific costs and expenses associated with the billing
and authorization systems, and to remit to DirecTV a 5% fee on subscription
revenues.
DirecTV has disputed the extent of the rights held by the participating
National Rural Telecommunications Cooperative members and affiliates. See -Legal
Proceedings--DirecTV Litigation. Those disputes include the rights asserted by
participating members and affiliates:
o to provide all services offered by DirecTV that are transmitted over
27 frequencies that the FCC has authorized for DirecTV's use for a
term running through the life of satellites at the 101(degree) W
orbital location;
o to provide certain other services over the satellites; and
o to have the National Rural Telecommunications Cooperative exercise a
right of first refusal to acquire comparable rights in the event
that DirecTV elects to launch successor satellites upon the removal
of the satellites from their orbital location at the end of their
lives.
Even if we and the National Rural Telecommunications Cooperative
prevail on our claims relating to right of first refusal, the financial terms of
the right of first refusal are likely to be the subject of negotiation and we
are unable to predict whether substantial additional expenditures by the
National Rural Telecommunications Cooperative will be required in connection
with the exercise of such right of first refusal.
The agreements between the National Rural Telecommunications
Cooperative and participating National Rural Telecommunications Cooperative
members and affiliates terminate when the DIRECTV satellites are removed from
their orbital location at the end of their lives. Our agreements with the
National Rural Telecommunications Cooperative may also be terminated as follows:
o If the agreement between DirecTV and the National Rural
Telecommunications Cooperative is terminated because of a breach by
DirecTV, the National Rural Telecommunications Cooperative may
terminate its agreements with us, but the National Rural
Telecommunications Cooperative will be responsible for paying to us
our pro rata portion of any refunds that the National Rural
Telecommunications Cooperative receives from DirecTV.
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o If we fail to make any payment due to the National Rural
Telecommunications Cooperative or otherwise breach a material
obligation of our agreements with the National Rural
Telecommunications Cooperative, the National Rural
Telecommunications Cooperative may terminate our agreement with the
National Rural Telecommunications Cooperative in addition to
exercising other rights and remedies against us.
o If the National Rural Telecommunications Cooperative's agreement
with DirecTV is terminated because of a breach by the National Rural
Telecommunications Cooperative, DirecTV is obligated to continue to
provide DIRECTV programming to us by assuming the National Rural
Telecommunications Cooperative's rights and obligations under the
National Rural Telecommunications Cooperative's agreement with
DirecTV or under a new agreement containing substantially the same
terms and conditions as the National Rural Telecommunications
Cooperative's agreement with DirecTV.
We are not permitted under our agreements with the National Rural
Telecommunications Cooperative to assign or transfer, directly or indirectly,
our rights under these agreements without the prior written consent of the
National Rural Telecommunications Cooperative and DirecTV, which consents cannot
be unreasonably withheld.
The National Rural Telecommunications Cooperative has adopted a policy
requiring any party acquiring DIRECTV distribution rights from a National Rural
Telecommunications Cooperative member or affiliate to post a letter of credit to
secure payment of National Rural Telecommunications Cooperative's billings when
acquisitions occur and when monthly payments to the National Rural
Telecommunications Cooperative exceeds a specified amount. Pursuant to this
policy, we or our subsidiaries have posted at December 31, 2001 letters of
credit of approximately $59.0 million. Although this requirement can be expected
to reduce borrowing capacity available to us under our revolving credit
facility, we expect this reduction to be manageable. There can be no assurance,
however, that the National Rural Telecommunications Cooperative will not in the
future seek to institute other policies, or to change this policy, in ways that
would be material to us.
On August 9, 2000, Pegasus Satellite Television, Inc. and Golden Sky
Systems, Inc. entered into agreements with DirecTV to provide seamless marketing
and sales for DIRECTV retailers and distributors and to provide seamless
customer service to all of our existing and prospective customers pursuant to a
seamless marketing program agreement and a seamless consumer program agreement,
respectively. Under the terms of the seamless marketing program agreement, the
parties agreed to reimburse each other the costs incurred in the activation of
new customers in their respective territories and dealers receive compensation
regardless of where a customer activates service. The seamless marketing
agreement has become the subject of litigation between us and DirecTV and we
exercised our rights to terminate the agreement on July 13, 2001. For more
information concerning the on going litigation pertaining to the seamless
marketing agreement, see ITEM 3: Legal Proceedings--DirecTV Litigation--Pegasus
Satellite Television and Golden Sky Systems.
The seamless consumer program agreement allows us to provide customers
more expansive service selection during activation and a simplified and
consolidated billing process. In particular, we have the right to provide our
customers with video services currently distributed by DirecTV from certain
frequencies, including the right to provide the premium services HBO, Showtime,
Cinemax and The Movie Channel, which are the subject of litigation between
DirecTV and Pegasus Satellite, as well as sports programming and local TV
stations. Under the seamless consumer program agreement, we retain 10% to 20% of
the revenues associated with these additional programming services. The
agreement is terminable by DirecTV on 90 days notice.
11
Legislation and Regulation
In February 1996, Congress passed the Telecommunications Act, which
substantially amended the Communications Act. This legislation has altered and
will continue to alter federal, state and local laws and regulations affecting
the communications industry, including us and certain of the services we
provide.
On November 29, 1999, Congress enacted the Satellite Home Viewer
Improvement Act of 1999 ("SHVIA"), which amended the Satellite Home Viewer Act.
This Act, for the first time, permits DBS operators to transmit local television
signals into local markets. In other important statutory amendments of
significance to satellite carriers and television broadcasters, the law
generally seeks to place satellite operators on an equal footing with cable
television operators in regards to the availability of television broadcast
programming.
Unlike a cable operator or a common carrier (such as a telephone
company), DBS operators such as DirecTV are free to set prices and serve
customers according to their business judgment, without rate of return or other
regulation or the obligation not to discriminate among customers. However, there
are laws and regulations that affect DirecTV and, therefore, affect us. As an
operator of a privately owned U.S. satellite system, DirecTV is subject to the
regulatory jurisdiction of the FCC, primarily with respect to:
o the licensing of individual satellites (i.e., the requirement that
DirecTV meet minimum financial, legal and technical standards);
o avoidance of interference with radio stations; and
o compliance with rules that the FCC has established specifically for
DBS licenses, including rules that the FCC is in the process of
adopting to govern the retransmission of television broadcast
stations by DBS operators.
As a distributor of television programming, DirecTV is also affected by
numerous other laws and regulations. The Telecommunications Act clarifies that
the FCC has exclusive jurisdiction over direct-to-home satellite services and
that criminal penalties may be imposed for piracy of direct-to-home satellite
services. The Telecommunications Act also offers direct-to-home operators relief
from private and local government imposed restrictions on the placement of
receiving antennae. In some instances, direct-to-home operators have been unable
to serve areas due to laws, zoning ordinances, homeowner association rules or
restrictive property covenants banning the installation of antennae on or near
homes. The FCC has promulgated rules designed to implement Congress' intent by
prohibiting any restriction, including zoning, land use or building regulation,
or any private covenant, homeowners' association rule, or similar restriction on
property within the exclusive use or control of the antenna user where the user
has a direct or indirect ownership interest in the property, to the extent it
impairs the installation, maintenance or use of a DBS receiving antenna that is
one meter or less in diameter or diagonal measurement, except where such
restriction is necessary to accomplish a clearly defined safety objective or to
preserve a recognized historic district. Local governments and associations may
apply to the FCC for a waiver of this rule based on local concerns of a highly
specialized or unusual nature. The FCC also issued a further order giving
renters the right to install antennas in areas of their rental property in which
they have exclusive use, e.g. balconies or patios. The Telecommunications Act
also preempted local (but not state) governments from imposing taxes or fees on
direct-to-home services, including DBS.
12
In addition to regulating pricing practices and competition within the
franchise cable television industry, the Communications Act is intended to
establish and support existing and new multi-channel video services, such as
wireless cable and direct-to-home, and to provide subscription television
services. We and DirecTV have benefited from the programming access provisions
of the Communications Act and implementing rules in that DirecTV has been able
to gain access to previously unavailable programming services and, in some
circumstances, has obtained certain programming services at reduced cost. Any
amendment to, or interpretation of, the Communications Act or the FCC's rules
that would permit cable companies or entities affiliated with cable companies to
discriminate against competitors such as DirecTV in making programming available
(or to discriminate in the terms and conditions of such programming) could
adversely affect DirecTV's ability to acquire programming on a cost effective
basis, which would have an adverse impact on us. The prohibition on exclusive
programming contracts between cable affiliated programmers and cable operators
will expire in October 2002 unless the FCC extends such restrictions.
The FCC has adopted rules imposing public interest requirements for
providing video programming on direct-to-home licensees, including, at a
minimum, reasonable and non-discriminatory access by qualified federal
candidates for office at the lowest unit rates and the obligation to set aside
four percent of the licensee's channel capacity for non-commercial programming
of an educational or informational nature. Within this set aside requirement,
direct-to-home providers must make capacity available to "national educational
programming suppliers" at rates not exceeding 50% of the direct-to-home
provider's direct costs of making the capacity available to the programmer.
SHVIA amends the Copyright Act and the Communications Act in order to
clarify the terms and conditions under which a DBS operator may retransmit local
and distant broadcast television stations to subscribers. The new law was
intended to promote the ability of satellite services to compete with cable
television systems and to resolve disputes that had arisen between broadcasters
and satellite carriers regarding the delivery of broadcast television station
programming to satellite service subscribers. As a result of SHVIA, our
television stations are generally entitled to seek carriage on any DBS
operator's system providing local-into-local service in their respective
markets.
SHVIA creates a new statutory copyright license applicable to the
retransmission of broadcast television stations to DBS subscribers located in
their markets. Although there is no royalty payment obligation associated with
this new license, eligibility for the license is conditioned on the satellite
carrier's compliance with the applicable Communications Act provisions and FCC
rules governing the retransmission of such "local" broadcast television stations
to satellite service subscribers. Noncompliance with the Communications Act
and/or FCC requirements could subject a satellite carrier to liability for
copyright infringement.
The amendments to the Communications Act contained in SHVIA provide
that, until May 29, 2000, a DBS operator was permitted to retransmit a broadcast
television station to satellite subscribers in the station's local market
without the station's consent. Beginning May 29, 2000 and continuing until
December 31, 2001, satellite carriers were able to carry local television
stations on a station by station basis if a retransmission consent agreement has
been reached. As of January 1, 2002, a satellite carrier that relies on the
statutory copyright license to retransmit a broadcast station to subscribers in
the station's local market is required to retransmit any other broadcast station
in that market that has elected to assert its right to mandatory carriage and
has so notified the satellite carrier. Broadcast stations in markets where a
satellite carrier is retransmitting a local signal were required to make their
election by July 1, 2001; carriers receiving such notice have 30 days to
respond. The initial election remains in effect until December 31, 2005;
thereafter, broadcasters will make new elections every three years. In December
2001, the U.S. Court of Appeals for the 4th Circuit rendered a decision
upholding the carry-one, carry-all provisions of SHVIA; however, that decision
has been appealed to the Supreme Court.
13
Other provisions contained in SHVIA address the retransmission by a
satellite service provider of a broadcast television station to subscribers who
reside outside the local market of the station being retransmitted. A DBS
provider may retransmit such "distant" broadcast stations affiliated with the
national broadcast television networks to those subscribers meeting certain
specified eligibility criteria which the FCC is directed to implement. The
primary determinant of a subscriber's eligibility to receive a distant affiliate
of a particular network is whether the subscriber is able to receive a "Grade B"
strength signal from an affiliate of that network using a conventional rooftop
broadcast television antenna. As required by SHVIA, the FCC also has adopted
rules subjecting the satellite retransmission of certain distant stations to
program "blackout" rules. These rules are similar to rules currently applicable
to the retransmission of distant broadcast television stations by cable systems.
The FCC has commenced a proceeding to consider the application of these rules to
the carriage of digital signals.
SHVIA also makes a number of revisions to the statutory copyright
license provisions applicable to the retransmission of distant broadcast
television stations to satellite service subscribers. These changes include
reducing the monthly per subscriber royalty rate payable under the distant
signal compulsory copyright license and creating a new compulsory copyright
license applicable to the retransmission of a national PBS programming feed. The
compulsory copyright license applicable to the retransmission of distant
broadcast signals to satellite service subscribers will expire on January 1,
2005, unless it is extended by Congress. If the license expires, DBS operators
will be required to negotiate in the marketplace to obtain the copyright
clearances necessary for the retransmission of distant broadcast signals to
satellite service subscribers.
The final outcome of ongoing and future FCC rulemakings, and of any
litigation pertaining thereto, cannot yet be determined. Any regulatory changes
could adversely affect our operations. Must carry requirements could cause the
displacement of possibly more attractive programming.
The foregoing does not purport to describe all present and proposed
federal regulations and legislation relating to the DBS industry.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Bala Cynwyd, Pennsylvania.
Our DBS operations are headquartered in leased space in Marlborough,
Massachusetts, and we operate call centers out of this space and other leased
space in Louisville, Kentucky and Lenexa, Kansas. These leases expire on various
dates through 2007. Our Marlborough, Massachusetts facility provides for an
option to purchase the building for approximately $10.7 million. Pegasus has
exercised this option to purchase and is currently completing certain due
diligence and negotiating an agreement of sale relating to the purchase of this
property. In connection with our broadcast TV operations, we own or lease
various transmitting equipment and towers, television stations and office space.
ITEM 3. LEGAL PROCEEDINGS
DirecTV Litigation
National Rural Telecommunications Cooperative
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.
14
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. As part of the counterclaim, DirecTV is seeking a declaratory
judgment that the term of the National Rural Telecommunications Cooperative's
agreement with DirecTV is measured only by the orbital life of DBS-1, the first
DIRECTV satellite launched, and not by the orbital lives of other DIRECTV
satellites at the 101(degree)W orbital location. According to DirecTV, DBS-1
suffered a failure of its primary control processor in July 1998 and since that
time has been operating normally using a spare control processor. While the
National Rural Telecommunications Cooperative has a right of first refusal to
receive certain services from any successor DIRECTV satellite, the scope and
terms of this right of first refusal are also being disputed in the litigation,
as discussed below. This right is not expressly provided for in our agreements
with the National Rural Telecommunications Cooperative.
If DirecTV were to prevail on its counterclaim, any failure of DBS-1
could have a material adverse effect on our DIRECTV rights.
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 December 29, 1999,
DirecTV filed a motion for partial summary judgment. The motion sought 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. On January 31, 2001,
the court issued an order denying DirecTV's motion in its entirety for partial
summary judgment relating to the right of first refusal.
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 the portion of this lawsuit
asserting tort claims, but left in place the remaining claims asserted by the
National Rural Telecommunications Cooperative.
Both of the National Rural Telecommunications Cooperative's lawsuits
against DirecTV have been consolidated for discovery and pre-trial purposes. A
trial date of December 2, 2002 has been set, although at this stage it is not
clear which of the lawsuits will be tried on that date.
The National Rural Telecommunications Cooperative and DirecTV have also
filed indemnity claims against one another which pertain to the alleged
obligation, if any, of the National Rural Telecommunications Cooperative to
indemnify DirecTV for costs incurred in various lawsuits described herein. These
claims have been severed from the other claims in the case and will be tried
separately. Each side has filed a summary judgement motion relating to the
claims.
15
Pegasus Satellite Television and Golden Sky Systems
On January 10, 2000, Pegasus Satellite Television, Inc. and Golden Sky
Systems, Inc. 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 contained causes of action for
various torts, common counts and declaratory relief based on DirecTV's failure
to provide the National Rural Telecommunications Cooperative with certain
premium programming, and on DirecTV's position with respect to launch fees and
other benefits, term and right of first refusal. The complaint sought monetary
damages and a court order regarding the rights of the National Rural
Telecommunications Cooperative and its members and affiliates.
On February 10, 2000, Pegasus Satellite Television and Golden Sky
Systems filed an amended complaint which added new tort claims against DirecTV
for interference with their relationships with manufacturers, distributors and
dealers of DBS equipment. The class action allegations they previously filed
were withdrawn to allow a new class action to be filed on behalf of the members
and affiliates of the National Rural Telecommunications Cooperative. The new
class action was filed on February 9, 2000.
On December 10, 2000, the court rejected in its entirety DirecTV's
motion to dismiss certain of the claims asserted by Pegasus Satellite
Television, Golden Sky Systems and the putative class. On January 31, 2001, the
court denied in its entirety a motion for summary judgment filed by DirecTV
relating to the right of first refusal. The court also certified the plaintiff's
class on December 28, 2000.
On March 9, 2001, DirecTV filed a counterclaim against Pegasus
Satellite Television, Golden Sky Systems and the class members. In the
counterclaim, DirecTV seeks two claims for relief: (1) a declaratory judgement
that Pegasus Satellite Television and Golden Sky Systems have no right of first
refusal in their agreements with the National Rural Telecommunications
Cooperative to have DirecTV provide any services after the expiration of the
term of these agreements, and (2) an order that DBS-1 is the satellite (and the
only satellite) that measures the term of their agreements with the National
Rural Telecommunications Cooperative. Pegasus Satellite Television and Golden
Sky Systems' motion to dismiss the counterclaims was denied on May 8, 2001, and
on June 4, 2001, Pegasus Satellite Television, Golden Sky Systems and the class
filed a response denying DirecTV's counterclaims. On July 2, 2001, DirecTV filed
under seal a summary judgment motion on its term claim, but the Court denied the
motion on October 31, 2001.
On May 21, 2001, Pegasus Satellite Television, Golden Sky Systems and
the class members moved to amend their complaints to add certain additional
claims against DirecTV relating to, among other things, DirecTV's provision of
advanced services. The court granted our motion on June 19, 2001. DirecTV filed
its answer to our second amended complaint on July 20, 2001.
On June 22, 2001, DirecTV brought suit against Pegasus Satellite
Television and Golden Sky Systems in Los Angeles County Superior Court for
breach of contract and common counts. The lawsuit pertains to the seamless
marketing agreement dated August 9, 2000, as amended, between DirecTV, on the
one hand, and Pegasus Satellite Television and Golden Sky Systems, on the other
hand. On July 13, 2001, Pegasus Satellite Television and Golden Sky Systems
terminated the seamless marketing agreement. On July 16, 2001, Pegasus Satellite
Television and Golden Sky Systems filed a cross-complaint against DirecTV
alleging, among other things, that (1) DirecTV has breached the seamless
marketing agreement, and (2) DirecTV has engaged in unlawful and/or unfair
business practices, as defined in Section 17200, et seq. of the California
Business and Professions Code. On July 19, 2001, Pegasus Satellite Television
and Golden Sky Systems removed the case from state to federal court. DirecTV
moved to remand the case back to state court but, on September 19, 2001, the
court denied DirecTV's motion. For more information regarding Pegasus'
agreements with DirecTV, see ITEM 1: Business--Direct Broadcast Satellite
Agreements.
16
All five lawsuits discussed above, including both lawsuits brought by
the National Rural Telecommunications Cooperative, the class action and Pegasus
Satellite Television and Golden Sky System's lawsuit, are pending before the
same judge. The court has set a trial date of December 2, 2002, although, as
noted above, it is not clear whether all the lawsuits will be tried together.
Patent Infringement Lawsuits
Recent Patent Infringement Litigation. In December 2001, one of our
affiliates was served with a complaint in a patent infringement lawsuit (along
with DirecTV, Hughes Electronics, EchoStar Communications and others) by
Broadcast Innovations, L.L.C. The nature of the plaintiff's claims is not clear
from the complaint. We are in the process of evaluating the matter in order to
determine whether it is material to our business.
Other Matters
In addition to the matters discussed above, from time to time we are
involved with claims that arise in the normal course of our business. In our
opinion, the ultimate liability with respect to these claims will not have a
material adverse effect on our 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, we have
omitted the information called for by this otherwise required item.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
None of our equity securities are publicly traded. We have not declared
or paid any cash dividends on our common stock within the two most recent fiscal
years. Our ability to declare dividends is affected by covenants in our
agreements related to indebtedness which, among other things, restrict our
ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
In reliance upon General Instruction I(2)(a) of Form 10-K, we have
omitted the information called for by this otherwise required item.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
In reliance upon General Instruction I(2)(a) of Form 10-K, we are
providing the limited disclosure set forth below. Such disclosure requires us
only to provide a narrative analysis of the results of operations that 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 our results of operations should be read in
conjunction with the consolidated financial statements and related notes which
are included on pages F-1 through F-31.
General
In June 2001, our parent company Pegasus Satellite Communications
contributed all of the capital stock of Golden Sky Holdings to one of our
subsidiaries. Pegasus Satellite had acquired Golden Sky Holdings in May 2000.
The financial information of Golden Sky Holdings has been combined with ours for
2000 on an "as if pooled" basis from the date that Golden Sky Holdings was
acquired by Pegasus Satellite.
In 2000, our financial information was on a combined basis with Pegasus
Development Corporation. Pegasus Development, a subsidiary of Pegasus
Communications Corporation, that is the parent company of Pegasus Satellite, had
provided capital for various of our satellite initiatives that were integral to
our direct broadcast satellite operations for periods prior to those presented
in this report. Pegasus Development's financial position, results of operations,
and cash flows no longer impact ours, and beginning in 2001 the financial
information of Pegasus Development was not combined with ours. For comparative
purposes, financial information contained in this report for 2000 has been
adjusted to exclude amounts associated with Pegasus Development.
We have a history of losses, with net losses of $201.2 million, $131.1
million, and $84.1 million in 2001, 2000, and 1999, respectively. Our losses
have been principally due to the substantial amounts we incurred for subscriber
acquisition costs, interest expense, and noncash depreciation and amortization.
We expect that these amounts will continue to be substantial. As a result, we do
not expect to have net income for the foreseeable future.
A substantial portion of our business is derived from providing
multichannel direct broadcast satellite services as an independent provider of
DIRECTV(R) audio and video programming in exclusive territories primarily within
rural areas of 41 states. DIRECTV is a service of DirecTV, Inc. For 2001, 2000,
and 1999, revenues from our direct broadcast satellite business were 96%, 94%,
and 83%, respectively, of total consolidated revenues in each respective year,
and operating expenses for this business were 93%, 93%, and 85%, respectively,
of total consolidated operating expenses in each respective year. Total assets
of the direct broadcast satellite business were 97% and 96% of total
consolidated assets for 2001 and 2000, respectively. Because we are a
distributor of DIRECTV, we may be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities, or services of DirecTV. See Item 1: Business-Risk Factors.
Separately, we are in litigation against DirecTV (see Note 14 of the notes to
consolidated financial statements). Additionally, Hughes Electronics
Corporation, which is the parent company of DirecTV, has agreed to merge with
EchoStar Communications Corporation, which owns the only other nationally
branded direct broadcast satellite programming service in the United States. At
this time, we are unable to predict the effect of our litigation with DirecTV or
the merger of EchoStar Communications and Hughes Electronics, should it occur,
on our financial position, results of operations, cash flows, and future
operations.
18
Overview of the Direct Broadcast Satellite Sales and Distribution Channel
This overview focuses on our direct broadcast satellite business, as
this is our only significant business segment. We believe this will assist with
understanding our results of operations.
Our primary means to obtain subscribers is through an independent
retail network channel. To a lesser extent, we also obtain subscribers through
our inside sales channel. In both channels, we create and launch the promotions
for our DIRECTV programming, equipment, and installations. In addition, we
specify the retail prices for our programming and establish the suggested retail
prices at which dealers sell or provide and install equipment. We also obtain
subscribers to our DIRECTV programming through national retail chains selling
DIRECTV under arrangements directly with DirecTV.
Our independent retail network consists of dealer and distributor
relationships. Distributors purchase directly from manufacturers and maintain in
their inventory the equipment needed by subscribers to access our DIRECTV
programming. Distributors sell this equipment to dealers who in turn provide the
equipment to subscribers. Distributors directly charge the dealers for the
equipment they sell to them. Dealers enroll subscribers to our DIRECTV
programming, provide them with equipment, and arrange for installation of the
equipment. Dealers directly charge new subscribers for equipment, installation,
and set up at the point of enrollment. We also directly enroll subscribers,
provide equipment to them, and arrange for installation of the equipment through
our inside sales channel. In this channel, we charge new subscribers at the
point of enrollment for equipment, installation, and set up. Once subscribers
have been enrolled under either channel, they contact us directly to activate
programming.
We offer a variety of incentives to our subscribers and to our
distributors and dealers. Incentives to subscribers consist of free or
discounted prices for our DIRECTV programming, equipment needed to access our
DIRECTV programming, and installation of equipment that accesses our DIRECTV
programming. We pay incentives directly to dealers and distributors in the form
of equipment subsidies, installation subsidies, and commissions.
We incur subscriber acquisition costs when we add new subscribers for
our DIRECTV programming. These costs consist of the portion of programming costs
associated with promotional programming provided to subscribers; equipment costs
and related subsidies paid to distributors; installation costs and related
subsidies paid to dealers; dealer commissions; advertising and marketing costs;
and selling costs. Promotional programming costs, which are included in
programming expense on the statements of operations and comprehensive loss, are
charged to expense when incurred. Equipment costs and related subsidies and
installation costs and related subsidies, which are included in promotions and
incentives on the statements of operations and comprehensive loss, are charged
to expense when the equipment is delivered and the installation occurs,
respectively. Dealer commissions, advertising and marketing costs, and selling
costs, which are included in advertising and selling on the statements of
operations and comprehensive loss, are charged to expense when incurred.
19
Certain subscriber acquisition costs are capitalized or deferred. Under
certain of our subscription plans for DIRECTV programming, we retain or take
title to equipment delivered to subscribers. The equipment costs and subsidies
related to this equipment are capitalized as fixed assets and depreciated. We
also have subscription plans for DIRECTV programming that contain commitment
periods and early termination fees for subscribers. Direct and incremental
subscriber acquisition costs associated with these plans are deferred in the
aggregate not to exceed the amounts of applicable termination fees, which are
less than the contractual revenue over the commitment period. These costs are
amortized over the period of the arrangement for which early termination fees
apply and are charged to amortization expense. Direct and incremental subscriber
acquisition costs consist of equipment costs and related subsidies not
capitalized as fixed assets, installation costs and related subsidies, and
dealer commissions. Direct and incremental subscriber acquisition costs in
excess of termination fee amounts are expensed immediately and charged to
promotion and incentives or advertising and selling, as applicable, in the
statements of operations and comprehensive loss.
Principal revenue of our direct broadcast satellite business is earned
by providing DIRECTV programming on a subscription or on demand basis. Standard
subscriptions are recognized as revenue monthly at the amount earned by us and
billed based on the level of programming content subscribed to during the month.
Promotional programming provided to subscribers at discounted prices is
recognized as revenue monthly at the promotional amount earned and billed.
Revenue for on demand viewing is recognized at the amount billed in the month
when the programming is viewed and earned. Fees that we charge new subscribers
for set up upon initiation of service are deferred as unearned revenue and are
recognized as revenue over our expected subscriber life of five years. Equipment
used by our subscribers is an integral component of our service. Accordingly,
amounts we charge for equipment sold and installations are deferred as unearned
revenue and are recognized as revenue over our expected subscriber life. We do
not recognize revenue for equipment, installations, and promotional programming
provided free of charge.
We believe that the accounting policies concerning subscriber
acquisition costs and revenues discussed above are critical to our DBS business
and our results of operations. Another accounting policy we consider to be
critical to our DBS business is the way we account for patronage from the
National Rural Telecommunications Cooperative ("NRTC") of which we are an
affiliate. The NRTC bills its members and affiliates the costs incurred by the
NRTC under its agreement with DirecTV, certain other costs incurred by the NRTC
relating to associated direct broadcast satellite projects, and margin on the
costs of providing direct broadcast satellite services pursuant to the NRTC
member agreement for marketing and distribution of direct broadcast satellite
services. The most notable service that the NRTC provides to us is programming
related to the DIRECTV programming we provide. We record as expenses the amounts
we pay to the NRTC. Members and affiliates that participate in the NRTC's
projects may be eligible to receive an allocation of the NRTC's net savings
(generally, amounts collected from NRTC members and affiliates in excess of the
NRTC's costs) in the form of a patronage distribution. Generally, each patron
who does business with the NRTC receives an annual distribution. The amount of
the distribution is based on the ratio of business a patron conducts with the
NRTC during a given fiscal year of the NRTC times the NRTC's net savings
available for patronage distribution for that year. Throughout each year, we
accrue a receivable from the NRTC based on our best estimate of our share of the
patronage distribution for that year, with an offsetting reduction to the
expenses that we recorded for the payments we made to the NRTC during the year.
The offsetting reduction can be significant. We adjust our accrual of the
estimated patronage distribution in the year that the distribution is received
and, accordingly, adjust the related expenses in and for the year the
distribution is received. Based on past experience, we expect that a majority of
the patronage distribution for 2001 to be made in 2002 will be tendered by the
NRTC in the form of patronage capital certificates that represent equity
interests in the NRTC. Also, we make significant estimates relating to the
useful lives and recoverability of our long lived assets. At December 31, 2001,
the net combined unamortized balance of our property and equipment and
intangibles was $1.8 billion, of which $1.6 billion was for our direct broadcast
satellite rights assets. In assessing the recoverability of our intangible
assets, we must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If these estimates
or their related assumptions change in the future, we may be required to record
impairment charges for these assets. Adjustments to the useful lives of or
impairment of the carrying amount of our direct broadcast satellite rights
assets could be significant to the results of our operations. Refer to "Summary
of Significant Accounting Policies" in the notes to consolidated financial
statements elsewhere herein for a description of other accounting policies
applicable to all of our businesses.
20
Results of Operations
Comparison of 2001 to 2000
In this section, amounts and changes specified are for the year ended
December 31, 2001 compared to the year ended December 31, 2000, unless indicated
otherwise
Direct Broadcast Satellite Business
Revenues
--------
Revenues increased $256.1 million to $838.2 million. This increase was
due to an increase in the number of subscribers and to a lesser extent higher
average revenue per subscriber. The current year includes 12 months of the
revenues of Golden Sky Holdings as well as 12 months of the revenues of the 19
entities that we acquired in 2000. The number of subscribers at December 31,
2001 was 1,519,000 compared to 1,403,000 at December 31, 2000, and the average
number of subscribers during 2001 and 2000 was 1.5 million and 1.1 million,
respectively. This increase was substantially due to internal growth. At
December 31, 2001, we had exclusive DIRECTV distribution rights to approximately
7.5 million households. Our sales and marketing efforts have increased our
penetration within our territories to approximately 20.2% at December 31, 2001
from 18.9% at December 31, 2000. Average monthly revenue per subscriber was
$47.86 and $44.80 for 2001 and 2000, respectively. The increase in 2001 was
primarily due to the impact from the seamless consumer agreement in effect for
12 months in 2001 versus only three months in 2000 and the rate increase for our
core packages effected in the fourth quarter 2001, partially offset by
unfavorable buy rate trends in our pay per view and a la carte revenue
categories and the unfavorable migration of subscribers to lower retail priced
core packages. The seamless consumer agreement with DirecTV became effective in
the fourth quarter 2000. This agreement gives us the right to provide our
subscribers with additional DIRECTV audio and video programming distributed by
DirecTV from certain frequencies and to retain a portion of the revenues
associated with this programming. We believe that the unfavorable buy rate and
migration trends were reflective of our subscribers' attempts to reduce demands
on their disposable incomes in response to the effects on them of the general
economic slow down within the United States. We have revenue enhancement
initiatives underway to reverse or mitigate the decrease in pay per view and a
la carte viewing and the shift to lower price programming packages. These
enhancements include: (1) enrolling more subscribers to plans with minimum
commitment periods, (2) subscriber evaluation techniques to better direct
subscribers to suitable promotions and plans, and (3) refinement and expansion
of our offers and promotions to consumers. We cannot make any assurances about
the success of these initiatives.
21
The number of subscribers we obtained through internal growth decreased
in 2001 from 2000 in part due to the success we had in 2000 in converting former
subscribers of the Primestar direct broadcast satellite system. Also, in 2001,
competition from digital cable providers and a competing direct broadcast
satellite provider in the territories we serve and the economic slow down
decelerated our growth. We anticipate that we will continue to face competition
from these other providers in 2002. Also in 2002, we anticipate that we will
experience a significant reduction in the number of new subscribers we obtain
from DirecTV's national retail chains. The reduction in the number of
subscribers from national retail chains under arrangements directly with DirecTV
will be the result of efforts by DirecTV, already implemented in 2002, to
minimize certain subscriber acquisition costs that they have paid to national
retail chains for their enrollment of subscribers who reside in our exclusive
territories. Our efforts to increase our new subscribers in 2002 and beyond
will include: (1) the diversification of our sales and distribution channels,
(2) the alignment of channel economics more closely to expected quality and
longevity of subscribers, (3) the establishment of direct relationships with
large national retail chains that we do not presently have in our distribution
channel, and (4) the refinement and expansion of our offers and promotions to
consumers. Because of the number of households available to us within our
territories that are not yet our subscribers, we believe that the prospects for
continued subscriber growth are present.
We have recently undertaken a review of the method by which we publicly
report the number of our subscribers. Our publicly reported subscriber counts in
the past have included a number of accounts whose service has been suspended for
prolonged periods of time. Because we believe it would improve our public
reporting and internal analyses, we are changing our method of reporting
subscribers, beginning with the first quarter of 2002 so as to exclude these
accounts. We estimate that if we had instituted this change at December 31,
2001, we would have reported approximately 1.4 million subscribers. This change
would have had no effect on our 2001 consolidated financial statements if we had
implemented it during 2001, and will have no effect on our future consolidated
financial statements.
In years prior to 2001, we had experienced large increases in our
number of subscribers as a result of the numerous acquisitions we made in those
years. In 2001, we acquired only one DIRECTV provider, which was not
significant. We cannot make any assurances that internal growth or growth
through acquisitions will occur and when or as to the rate of that growth.
Operating Expenses
------------------
Programming expenses increased $109.5 million to $362.2 million
primarily due to the incremental expenses incurred in providing service to an
increased subscriber base in place throughout 2001 compared to 2000. Our average
number of subscribers increased in 2001 by 34.8%. Additionally, 2001 had the
full effect of a 5-6% programming rate increase on our core programming packages
implemented by the National Rural Telecommunications Cooperative in mid 2000.
Other subscriber related expenses increased $69.6 million to $205.1
million. Other subscriber related expenses include infrastructure costs billed
to us by the NRTC, expenses associated with call centers, bad debt expense,
franchise fees, and other costs that vary with changes in the number of
subscribers. The increase is principally due to the incremental expenses
incurred in serving the increased subscriber base in place throughout 2001
compared to 2000. Increased costs to service subscriber equipment and increased
bad debt expense as a result of higher non-pay churn experience, also
contributed to the increase. We also opened a new call center facility in 2001
that added additional personnel related and customer care costs.
22
Promotions and incentives expensed increased $6.4 million to $38.1
million. Total promotions and incentives expensed and deferred or capitalized
were $74.4 million and $43.9 million in 2001 and 2000, respectively. Total
promotions and incentives incurred per new subscriber added in 2001 increased by
approximately 80.0% from that in 2000. The increases were due to a combination
of: (1) more subscribers enrolling in 2001 than in 2000 under subscription plans
that had greater subsidies for our independent retail network associated with
them than with our other subscription plans, (2) the longer amount of time in
2001 than in 2000 that our seamless marketing agreement with DirecTV was in
effect, and (3) a shift in 2001 towards compensation plans under which we
provided more subsidies and less commissions to our dealers. Under the seamless
marketing agreement, we reimbursed DirecTV for, among other items, subsidies
they incurred under their arrangements with national retail chains related to
our subscribers they enrolled in our exclusive territories. We entered into this
agreement in August 2000, and terminated it in July 2001. Promotions and
incentives deferred or capitalized were $36.3 million and $12.2 million in 2001
and 2000, respectively. The increase in the amount deferred or capitalized was
primarily due to a combination of: (1) an increase in 2001 in the number of
subscribers enrolling in plans under which we were able to capitalize equipment
provided to subscribers and (2) subscription plans in place in 2001 that were
not in place in 2000 under which we were able to defer direct and incremental
subscriber acquisition costs associated with the plans. The increase in the
number of subscribers enrolling in plans under which we could capitalize
equipment was due to the greater availability of such plans in 2001 than in 2000
and the amount of time that such plans were in place in 2001 than in 2000.
Advertising and selling expenses decreased $28.0 million to $104.7
million. Total advertising and selling costs expensed and deferred were $108.6
million and $132.7 million in 2001 and 2000, respectively. Total advertising and
selling costs incurred per new subscriber added in 2001 decreased by 14.8% from
that in 2000. The decreases were due to a combination of: (1) a lesser amount of
new subscribers added through our independent retail network in 2001 than in
2000 resulting in less commission costs and (2) a shift in 2001 towards
compensation plans under which we paid more subsidies and less commissions to
our dealers. Advertising and selling costs deferred in 2001 were $3.9 million.
No advertising and selling costs were deferred in 2000. Subscription plans under
which we were able to defer direct and incremental subscriber acquisition costs
associated with the plans were in place in 2001 and not in 2000.
General and administrative expenses increased $11.5 million to $36.1
million primarily due to the incremental internal support costs we incurred in
providing service to our increased subscriber base. We had a larger average
number of employees in 2001 than in 2000 with resultant higher employee related
expenses. Also, in 2001 we opened up a new operations office for our direct
broadcast satellite business that expanded our capabilities for that business
with a resultant increase in related internal support costs.
Subscriber acquisition costs expensed decreased $24.9 million to $145.1
million. Per new subscriber added, these expenses were $360 and $404 for 2001
and 2000, respectively. The decreases were principally due to the deferral and
capitalization of costs of $40.2 million in 2001 compared to $12.2 million in
2000. The increase in the amount deferred or capitalized was primarily due to a
combination of: (1) an increase in 2001 in the number of subscribers enrolling
in plans under which we were able to capitalize equipment provided to
subscribers and (2) subscription plans in place in 2001 that were not in place
in 2000 under which we were able to defer direct and incremental subscriber
acquisition costs associated with the plans. The increase in the number of
subscribers enrolling in plans under which we could capitalize equipment was due
to the greater availability of such plans in 2001 than in 2000 and the amount of
time that such plans were in place in 2001 than in 2000.
23
Total subscriber acquisition costs expensed and capitalized or deferred
were $185.3 million and $182.2 million for 2001 and 2000, respectively, or $459
and $433 per new subscriber added for 2001 and 2000, respectively. The increases
were due to a combination of: (1) more subscribers enrolling in 2001 than in
2000 under subscription plans that provided greater commissions and subsidies to
our independent retail network associated with them than with our other
subscription plans and (2) the longer amount of time in 2001 than in 2000 that
our seamless marketing agreement with DirecTV was in effect.
Depreciation and amortization increased $72.1 million to $257.5 million
principally due to the amortization of additional direct broadcast satellite
rights assets we recorded in acquisitions we made in 2000 and the amortization
of direct broadcast satellite rights assets of Golden Sky Holdings.
Approximately $33.0 million of the increase was associated with amortization of
the direct broadcast satellite rights assets of Golden Sky Holdings, which
amounted to $1.0 billion.
Revenues and Operating Expenses of the Broadcast Business
Net revenues and net operating expenses of our broadcast business in
2001 were $32.5 million and $38.8 million, respectively, and in 2000 were $35.3
million and $37.1 million, respectively. The lower revenues in 2001 were
principally the result of the general downturn in the United States' economy in
2001 that caused a reduction in television advertising dollars available to our
business and other broadcasters generally. Indications are that the softness in
advertising revenues will continue as long as the economy continues to slump. We
cannot predict the further course of the economy and its impact on advertising
revenues in general and specifically to us.
Other Statement of Operations and Comprehensive Loss Items
The increase in corporate expenses of $3.7 million to $13.9 million was
due to the growth of our overall operations. Other operating expenses of $27.6
million include $21.2 million in expenses associated with our ongoing DirecTV
litigation compared to $3.2 million expended on this litigation in 2000.
Interest expense decreased $14.4 million to $65.6 million principally
due to the amount of time that the 12-3/8% notes and 13-1/2% senior subordinated
discount notes of subsidiaries of Golden Sky Holdings were outstanding during
2001 versus 2000. These notes were exchanged in May 2001 into like notes of
Pegasus Satellite and then cancelled. Additionally, we incurred a lower
aggregate amount of interest on our combined term loan and revolving credit
facilities this year versus last year principally due to lower variable rates of
interest on this debt available to us in 2001 than in 2000. The combined
weighted average principal amount outstanding for term loans and revolving
credit facilities for 2001 was $399.6 million compared to $309.7 million in
2000. However, the combined weighted average variable interest rate on this debt
in 2001 was 7.84% compared to 10.49% in 2000, after factoring in the effect of
our interest rate hedging instruments in each year. Short term interest rates in
general declined throughout 2001 in response to the Federal Reserve's attempt to
stimulate the sluggish economy by reducing interest rates. Such interest rate
reductions in general meant continually declining market rates of interest were
available to us on our variable rate debt in 2001 relative to the market rates
of interest available to us for this debt in 2000.
In the third quarter 2001, we determined that our sole investment in
marketable securities had incurred an other than temporary decline in market
value. Accordingly, we wrote down the cost basis in this investment to its then
fair market value and charged earnings in the amount of $34.2 million for the
impairment loss realized. In connection with this write down, we made a
reclassification adjustment to other comprehensive income (loss) of $21.2
million, net of income taxes of $13.0 million, to remove all of the net
unrealized losses on this investment that had been accumulated at the date of
the write down.
24
Other nonoperating expenses of $5.9 million included $4.2 million for
losses on the decrease in the fair market values of our interest rate
instruments. The benefit for income taxes on the loss from continuing operations
increased $23.4 million to $115.5 million due to a greater amount of pretax loss
in 2001 than in 2000.
Premarketing cash flow of our direct broadcast satellite ("DBS")
business was $237.1 million in 2001 compared to $174.9 million in 2000. DBS
EBITDA was $92.0 million in 2001 compared to $4.9 million in 2000. DBS
premarketing cash flow is calculated by taking the revenues of the DBS business
and deducting programming expense (excluding promotional programming), other
subscriber related expenses, and general and administrative expenses. DBS EBITDA
is DBS premarketing cash flow less promotional programming, promotions and
incentives, and advertising and selling expenses. We present DBS premarketing
cash flow and DBS EBITDA because the DBS business is our only significant
segment and this business forms the principal portion of our results of
operations and cash flows. The increases in DBS premarketing cash flow and DBS
EBITDA in each year are due to the increase in revenues generated by an
increasing subscriber base in each year outpacing the increasing costs in
servicing the larger subscriber base in each. The increase in 2001 compared to
2000 is additionally due to an increase of $28.0 million in the amount of
subscriber acquisition costs deferred and capitalized in 2001 compared to 2000.
The increase in the amount of subscriber acquisition costs deferred and
capitalized is primarily due to a combination of: (1) an increase in 2001 in the
number of subscribers enrolling in plans under which we were able to capitalize
equipment provided to subscribers and (2) subscription plans in place in 2001
that were not in place in 2000 under which we were able to defer direct and
incremental subscriber acquisition costs associated with the plans. The increase
in the number of subscribers enrolling in plans under which we could capitalize
equipment was due to the greater availability of such plans in 2001 than in 2000
and the amount of time that such plans were in place in 2001 than in 2000.
Adjusted operating cash flow for the 12 months ended December 31, 2001
was $230.5 million. Adjusted operating cash flow is DBS operating cash flow for
the current quarter times four, plus operating cash flow from other operating
divisions for the last four quarters. Operating cash flow is income or loss from
operations adjusted for depreciation, amortization, and other noncash items
therein, and excludes subscriber acquisition costs and corporate expenses. We
present this measure for purpose of compliance with our debt indenture, and such
measure is not required to be presented on a comparative basis.
DBS premarketing cash flow, DBS EBITDA, and adjusted operating cash
flow are not, and should not be considered, alternatives to income from
operations, net income, net cash provided by operating activities, or any other
measure for determining our operating performance or liquidity, as determined
under generally accepted accounting principles. DBS premarketing cash flow, DBS
EBITDA, and adjusted operating cash flow also do not necessarily indicate
whether our cash flow will be sufficient to fund working capital, capital
expenditures, or to react to changes in our industry or the economy generally.
We believe that DBS premarketing cash flow, DBS EBITDA, and adjusted operating
cash flow are important because people who follow our industry frequently use
them as measures of financial performance and ability to pay debt service, and
they are measures that we, our lenders, and investors use to monitor our
financial performance and debt leverage. Although EBITDA is a common measure
used by other companies, our calculation of EBITDA may not be comparable with
that of others.
In 2001, net cash used by operating activities was $54.8 million, net
cash used by investing activities was $53.7 million, and net cash provided by
financing activities was $24.9 million.
25
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk is change in interest rates. Our primary
exposure is variable rates of interest associated with borrowings under our
revolving credit and term loan facilities. These rates of interest are based on
prime and LIBOR, as appropriate, which vary in accordance with prevailing
economic conditions. As required under the terms of our credit agreement, we
entered into interest rate hedging instruments aggregating $140.0 million in
notional amount. We did not enter into these instruments for trading or
speculative purposes.
The following tables summarize our market risks associated with debt
and interest rate hedging instruments outstanding at December 31, 2001 and 2000.
The tables display future cash flows for periodic payments and maturities of
principal for debt. These cash flows reflect scheduled principal repayments and
maturities for debt based on amounts outstanding at December 31, 2001 and 2000,
respectively. The interest rate for each year in the table is based on the
principal outstanding at the end of the year, after taking into effect any
principal payments and maturities during the year. Because of their variable and
unpredictable nature, the interest rates specified for variable rate debt for
each year are based on the actual aggregate weighted average rate in effect at
December 31, 2001 and 2000, respectively, adjusted for the weighted effect of
payments and maturities that occur in each year. With respect to our interest
rate swap instruments, we pay fixed interest and receive variable interest, and
the rates specified are based on the contracted fixed interest rates that we
pay. With respect to our cap instruments, we receive variable interest when the
applicable rates exceed the cap rates, and the rates specified are based on the
contracted cap rates. Notional amounts for our swaps and caps are presented in
the period that the related contracts expire. The notional amounts of the swaps
and caps are used to measure interest to be paid or received. We do not pay any
cash with respect to the notional amounts when they expire. The fair value of
our fixed rate debt that is publicly held was determined based on the quoted
market price. Fair values for variable rate debt were based on their principal
amounts outstanding at December 31, 2001 and 2000, respectively, for the
principal amounts are subject to short term variable rates of interest and the
rates in effect at December 31, 2001 and 2000 approximate the market rates
available at each date. Fair values of the swaps and caps were based on the
estimated amounts to settle the contracts assuming they were terminated at
December 31, 2001 and 2000, respectively.
26
Market Risks at December 31, 2001 (dollars in thousands)
- --------------------------------- ----------------------
Fair
2002 2003 2004 2005 2006 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Debt:
Fixed rate $5,865 $ 2,299 $ 325 $ 85,200 - - $ 93,689 $ 94,964
Average
interest rate 12.30% 12.45% 12.48% - - - - -
Variable rate $2,750 $29,417 $192,208 $127,875 - - $352,250 $352,250
Average
interest rate 5.62% 5.57% 5.44% - - - - -
Interest rate
swaps notional
amount - $72,114 - - - - $72,114 $ (4,161)
Average
interest rate 7.19% 7.19% - - - - - -
Interest rate
caps notional
amount - $67,886 - - - - $67,886 $ 1
Average
interest rate 9.00% 9.00% - - - - - -
27
Market Risks at December 31, 2000 (dollars in thousands)
- --------------------------------- ----------------------
Fair
2001 2002 2003 2004 2005 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Debt:
Fixed rate $8,041 $5,865 $ 1,849 $ 300 $ 85,200 $388,100 $489,355 $417,312
Average
interest rate 12.66% 12.74% 12.77% 12.77% 12.94% 12.93% - -
Variable rate $2,750 $3,100 $ 4,009 $208,725 $163,416 - $382,000 $382,000
Average
interest rate 10.16% 10.16% 10.16% 10.13% - - - -
Interest rate
swaps notional
amount - - $72,114 - - - $ 72,114 $ (1,554)
Average
interest rate 7.19% 7.19% 7.19% - - - - -
Interest rate
caps notional
amount - - $67,886 - - - $ 67,886 $ 14
Average
interest rate 9.00% 9.00% 9.00% - - - - -
28
There was a marked decrease in interest rates on our variable rate debt
in 2001 compared to 2000. Short term interest rates in general declined
throughout 2001 in response to the Federal Reserve's attempt to stimulate the
sluggish economy by reducing interest rates. Such interest rate reductions in
general meant continually declining market rates of interest were available to
us on our variable rate debt in 2001 relative to the market rates of interest
available to us for this debt in 2000.
The total amount of fixed rate debt outstanding at December 31, 2001
decreased from that at December 31, 2000 principally due to the notes of the
Golden Sky Holdings subsidiaries that were exchanged into Pegasus Satellite's
notes and then cancelled.
We have two swap contracts, one with a notional amount of $35.0 million
and the other with a notional amount of $37.1 million. The aggregate weighted
average fixed rate of interest for these contracts was 7.19% in each year. Each
contract is marked to the 6 month LIBOR rate in effect at the beginning of each
6 month resetting period. We have two interest rate caps, one with a notional
amount of $33.9 million and the other with a notional amount of $34.0 million.
The cap rate under each contract is 9.0% and payment is determined quarterly
based on the 3 month LIBOR rate in effect at the beginning of each 6 month
resetting period. As a result of market LIBOR rates available to us for the
swaps being lower than the fixed rates we pay on the swaps, we paid net
additional interest of approximately $1.0 million in each of 2001 and 2000 with
respect to our interest rate instruments. The net effect of the interest rate
instruments on our weighted average variable rates of interest was an increase
of 21 basis points in 2001 and 30 basis points in 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Pegasus Media &
Communications, Inc. required by this item are included in this report beginning
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In reliance on General Instruction I(2)(c) to Form 10-K, we have
omitted the information called for by this otherwise required item.
ITEM 11. EXECUTIVE COMPENSATION
In reliance on General Instruction I(2)(c) to Form 10-K, we have
omitted the information called for by this otherwise required item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In reliance on General Instruction I(2)(c) to Form 10-K, we have
omitted the information called for by this otherwise required item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In reliance on General Instruction I(2)(c) to Form 10-K, we have
omitted the information called for by this otherwise required item.
30
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
----
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
- -------------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of Pegasus
Media & Communications, Inc., as amended (which is incorporated
herein by reference to Exhibit 3.1 to Pegasus Media &
Communications, Inc.'s Registration Statement on Form S-1 (File
No. 33-95042)).
3.2 By-Laws of Pegasus Media & Communications, Inc. (which is
incorporated herein by reference to Exhibit 3.2 to Pegasus Media
& Communications, Inc.'s Registration Statement on Form S-1
(File No. 33-95042)).
4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media
& Communications, Inc., 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 Media & Communications,
Inc.'s 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 Media &
Communications, Inc.'s Registration Statement on Form S-4 (File
No. 33-95042)).
31
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 Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042)).
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 Media & Communications,
Inc.'s 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
Media & Communications, Inc.'s 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 Media & Communications, Inc.'s
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 Media &
Communications, Inc.'s 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 Media & Communications, Inc.'s
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 Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042)).
10.9 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 Media & Communications, Inc.'s 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)).
10.10 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 Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042)).
32
10.11 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
Media & Communications, Inc.'s Registration Statement on Form
S-4 (File No. 33-95042)).
10.12 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 herein by reference to Exhibit 10.7 to the
Registration Statement on Form S-4 of Pegasus Satellite
Communications, Inc. (formerly named Pegasus Communications
Corporation (File No. 333-31080)).
10.13 First Amendment to Credit Agreement dated as of July 23, 2001,
which amends the 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 herein by reference to
Exhibit 10.1 of Pegasus Communications Corporation's Form 10-Q
for the quarter ended June 30, 2001).
10.14 Second Amendment to Credit Agreement dated as of November 13,
2001, which amends the 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 herein by reference
to Exhibit 10.6 to the Annual Report on Form 10-K of Pegasus
Communications Corporation filed with the SEC on April 3, 2002).
10.15+ Pegasus Restricted Stock Plan (which is incorporated herein by
reference to Exhibit 10.28 to the Registration Statement on Form
S-1 of Pegasus Satellite Communications, Inc. (formerly named
Pegasus Communications Corporation) (File No. 333-05057)).
10.16+ Pegasus Communications 1996 Stock Option Plan (as amended and
restated effective as of April 23, 1999) (which is incorporated
herein by reference to Exhibit 10.18 to the Registration
Statement on Form S-3 of Pegasus Satellite Communications, Inc.
(formerly named Pegasus Communications Corporation) (File No.
333-70949)).
10.17 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
herein by reference to Exhibit 10.1 to Form 10-Q of Pegasus
Satellite Communications, Inc. (formerly named Pegasus
Communications Corporation) dated November 12, 1999).
10.18 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 herein by reference to
Exhibit 10.8 to the Registration Statement on Form S-4 of
Pegasus Satellite Communications, Inc. (formerly named Pegasus
Communications Corporation) (File No. 333-31080)).
24.1* Powers of Attorney (included in Signatures and Powers of
Attorney).
- -----------------
* Filed herewith.
+ Indicates a management contract or compensatory plan.
33
(b) Reports on Form 8-K.
On October 17, 2001, Pegasus Media & Communications, Inc. filed a
Current Report on Form 8-K dated October 12, 2001 reporting that Pegasus
Satellite Television, Inc. and Golden Sky Systems, Inc., and DirecTV entered
into a new agreement for a revised seamless consumer program. The new agreement
preserves Pegasus Media's right to provide its customers with video services
currently distributed by DirecTV from certain frequencies, including the right
to provide the premium services HBO, Showtime, Cinemax and The Movie Channel,
which are the subject of separate litigation among DirecTV, Pegasus Satellite
Television and Golden Sky, as well as sports programming and local TV stations.
On October 23, 2001, Pegasus Media & Communications, Inc. filed a
Current Report on Form 8-K dated October 22, 2001, reporting that oral argument
on a motion for summary judgment filed by DirecTV on July 2, 2001 in connection
with its term claim was held on October 22, 2001. This claim contends that the
length of the agreement between Pegasus Satellite, through its indirect
subsidiaries, and the National Rural Telecommunications Cooperative is tied to
the life of only one satellite, DBS-1. The court issued a written tentative
ruling denying DirecTV's motion and took the motion under submission
34
SIGNATURES
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/ Ted S. Lodge
-------------------------------------
Ted S. Lodge
President and Chief Operating Officer
Date: April 9, 2002
POWER OF ATTORNEY
The undersigned directors and officers of Pegasus Media &
Communications, Inc. hereby appoint Marshall W. Pagon, Ted S. Lodge and Scott A.
Blank or any of them individually, as attorney in fact and agent for the
undersigned, with full power of substitution for, and in the name, place and
stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, any and all
amendments to this report on Form 10-K, and exhibits to this report on Form
10-K, with full power and authority to do and perform any and all acts and
things whatsoever requisite and necessary or desirable in connection with such
matters, hereby ratifying and confirming all that each of said attorneys in fact
and agents, or his substitute or substitutes, may lawfully 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.
Signature Title Date
--------- ----- ----
By: /s/ Marshall W. Pagon Chairman of the Board and Chief April 9, 2002
----------------------------- Executive Officer (Principal
Marshall W. Pagon Executive Officer)
By: /s/ Jospeph W. Pooler, Jr. Vice President--Finance and April 9, 2002
----------------------------- Controller
Joseph W. Pooler, Jr. (Principal Financial and
Accounting Officer)
By: /s/ Ted S. Lodge Director, President, Chief April 9, 2002
------------------------------ Operating Officer and Counsel
Ted S. Lodge
By: /s/ Robert F. Benbow Director April 9, 2002
-----------------------------
Robert F. Benbow
By: /s/ Harry F. Hopper III Director April 9, 2002
-----------------------------
Harry F. Hopper III
By: /s/ James J. McEntee, III Director April 9, 2002
-----------------------------
James J. McEntee, III
By: /s/ Mary C. Metzger Director April 9, 2002
-----------------------------
Mary C. Metzger
By: /s/ William P. Phoenix Director April 9, 2002
-----------------------------
William P. Phoenix
By: /s/ Robert N. Verdecchio Director April 9, 2002
-----------------------------
Robert N. Verdecchio
Exhibit Index
Exhibit Number Description of Document
- -------------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of Pegasus
Media & Communications, Inc., as amended (which is incorporated
herein by reference to Exhibit 3.1 to Pegasus Media &
Communications, Inc.'s Registration Statement on Form S-1 (File
No. 33-95042)).
3.2 By-Laws of Pegasus Media & Communications, Inc. (which is
incorporated herein by reference to Exhibit 3.2 to Pegasus Media
& Communications, Inc.'s Registration Statement on Form S-1
(File No. 33-95042)).
4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media
& Communications, Inc., 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 Media & Communications,
Inc.'s 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 Media &
Communications, Inc.'s 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 Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042)).
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 Media & Communications,
Inc.'s 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
Media & Communications, Inc.'s 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 Media & Communications, Inc.'s
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 Media &
Communications, Inc.'s 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 Media & Communications, Inc.'s
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 Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042)).
10.9 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 Media & Communications, Inc.'s 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)).
10.10 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 Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042)).
10.11 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
Media & Communications, Inc.'s Registration Statement on Form
S-4 (File No. 33-95042)).
10.12 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 herein by reference to Exhibit 10.7 to the
Registration Statement on Form S-4 of Pegasus Satellite
Communications, Inc. (formerly named Pegasus Communications
Corporation (File No. 333-31080)).
10.13 First Amendment to Credit Agreement dated as of July 23, 2001,
which amends the 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 herein by reference to
Exhibit 10.1 of Pegasus Communications Corporation's Form 10-Q
for the quarter ended June 30, 2001).
10.14 Second Amendment to Credit Agreement dated as of November 13,
2001, which amends the 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 herein by reference
to Exhibit 10.6 to the Annual Report on Form 10-K of Pegasus
Communications Corporation filed with the SEC on April 3, 2002).
10.15+ Pegasus Restricted Stock Plan (which is incorporated herein by
reference to Exhibit 10.28 to the Registration Statement on Form
S-1 of Pegasus Satellite Communications, Inc. (formerly named
Pegasus Communications Corporation) (File No. 333-05057)).
10.16+ Pegasus Communications 1996 Stock Option Plan (as amended and
restated effective as of April 23, 1999) (which is incorporated
herein by reference to Exhibit 10.18 to the Registration
Statement on Form S-3 of Pegasus Satellite Communications, Inc.
(formerly named Pegasus Communications Corporation) (File No.
333-70949)).
10.17 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
herein by reference to Exhibit 10.1 to Form 10-Q of Pegasus
Satellite Communications, Inc. (formerly named Pegasus
Communications Corporation) dated November 12, 1999).
10.18 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 herein by reference to
Exhibit 10.8 to the Registration Statement on Form S-4 of
Pegasus Satellite Communications, Inc. (formerly named Pegasus
Communications Corporation) (File No. 333-31080)).
24.1* Powers of Attorney (included in Signatures and Powers of
Attorney).
- -----------------
* Filed herewith.
+ Indicates a management contract or compensatory plan.
PEGASUS MEDIA & COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
Financial Statements:
Report of Independent Accountants............................................................................F-2
Cosolidated Balance Sheets as of December 31, 2001 and 2000..................................................F-3
Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 2001, 2000, and 1999............................................................................F-4
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 2001, 2000, and 1999............................................................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999............................................................................F-6
Notes to Consolidated Financial Statements...................................................................F-7
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2001, 2000, and 1999............................................................................S-1
F-1
Report of Independent Accountants
To the Board of Directors and Investors of Pegasus Media & Communications, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page F-1, present fairly, in all material
respects, the financial position of Pegasus Media & Communications, Inc. and its
subsidiaries (the "Company") at December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
on page F-1 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, PA
February 13, 2002
F-2
Pegasus Media & Communications, Inc.
Consolidated Balance Sheet
(In thousands, except share amounts)
December 31, December 31,
2001 2000
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 99,710 $ 183,261
Accounts receivable:
Trade, less allowance for doubtful accounts of $5,961 and $3,303, respectively 32,139 40,285
Other 33,421 15,319
Inventory 5,415 14,823
Deferred subscriber acquisition costs, net 15,194 -
Net advances to affiliates 33,805 4,279
Prepaid expenses 11,070 20,784
Other current assets 9,895 9,347
----------- -----------
Total current assets 240,649 288,098
Property and equipment, net 72,335 46,947
Intangible assets, net 1,708,133 1,943,630
Other noncurrent assets 52,730 54,527
----------- -----------
Total assets $ 2,073,847 $ 2,333,202
=========== ===========
LIABILITIES AND COMMON STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long term debt $ 8,615 $ 10,785
Taxes payable - 29,620
Accounts payable 8,905 8,097
Accrued interest 5,956 18,006
Accrued programming, fees, and commissions 112,611 104,627
Accrued expenses 29,058 30,103
Other current liabilities 4,755 4,684
----------- -----------
Total current liabilities 169,900 205,922
Long term debt 435,902 793,385
Deferred income taxes, net 73,329 184,362
Other noncurrent liabilities 46,796 40,198
----------- -----------
Total liabilities 725,927 1,223,867
----------- -----------
Commitments and contingent liabilities (see Note 14)
Minority interest 1,315 911
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 1,805,974 1,379,602
Accumulated deficit (460,376) (259,204)
Accumulated other comprehensive income (loss), net of income tax
expense (benefit) of $616 and $(7,340) 1,005 (11,976)
----------- --------------
Total common stockholder's equity 1,346,605 1,108,424
----------- --------------
Total liabilities and common stockholder's equity $ 2,073,847 $ 2,333,202
=========== ==============
See accompanying notes to consolidated financial statements
F-3
Pegasus Media & Communications, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands)
Year Ended December 31,
2001 2000 1999
--------- --------- --------
Net revenues:
DBS $ 838,208 $ 582,075 $173,613
Broadcast 32,509 35,343 36,257
--------- --------- --------
Total net revenues 870,717 617,418 209,870
Operating expenses:
DBS
Programming 362,213 252,667 83,121
Other subscriber related expenses 205,120 135,513 38,678
--------- --------- --------
Direct operating expenses (excluding depreciation and
amortization shown below) 567,333 388,180 121,799
Promotions and incentives 38,059 31,684 14,498
Advertising and selling 104,677 132,718 51,518
General and administrative 36,132 24,593 8,527
Depreciation and amortization 257,543 185,422 41,681
Broadcast
Programming 13,088 14,198 12,846
Advertising and selling 7,950 7,612 6,304
General and administrative 12,585 10,168 9,952
Depreciation and amortization 5,130 5,121 5,108
Corporate expenses 13,892 10,194 4,380
Corporate depreciation and amortization 25 60 697
Development costs 249 200 -
Other operating expenses, net 27,624 9,270 1,430
--------- --------- --------
Loss from operations (213,570) (202,002) (68,870)
Interest expense (65,558) (79,969) (17,510)
Interest income 3,513 3,540 299
Loss on impairment of marketable securities (34,205) - -
Other nonoperating (expenses) income, net (5,901) 602 -
--------- --------- --------
Loss before income taxes, discontinued operations, and extraordinary item (315,721) (277,829) (86,081)
(Benefit) expense for income taxes (115,534) (92,136) 100
--------- --------- --------
Loss before discontinued operations and extraordinary item (200,187) (185,693) (86,181)
Discontinued operations:
Income from discontinued operations of cable segment, net of income
tax expense of $632 and $0, respectively - 1,031 2,128
Gain on sale of discontinued operations, net of taxes of $28,000 - 59,361 -
--------- --------- --------
Loss before extraordinary item (200,187) (125,301) (84,053)
Extraordinary loss from extinguishments of debt, net of income tax benefit
of $604 and $3,526, respectively (986) (5,754) -
--------- --------- --------
Net loss (201,173) (131,055) (84,053)
Other comprehensive income (loss):
Unrealized loss on marketable securities, net of income tax benefit
of $5,042 and $7,340, respectively (8,226) (11,976) -
Reclassification adjustment for accumulated unrealized loss on marketable
securities included in net loss, net of income tax benefit of $(12,998) 21,207 - -
--------- --------- --------
Net other comprehensive income (loss) 12,981 (11,976) -
--------- --------- --------
Comprehensive loss $(188,192) $(143,031) $(84,053)
========= ========= ========
See accompanying notes to consolidated financial statements
F-4
Pegasus Media & Communications, Inc.
Consolidated Statements of Common Stockholder's Equity
(In thousands)
Common Stock
-------------------------------------------
Class A Class B
------------------------------------------- Additional
Number Par Number Par Paid In
of Shares Value of Shares Value Capital
-------------------------------------------------------------
Balances at January 1, 1999, as previously reported 162 $ 2 9 $ - $ 314,011
Adjustment for prior year amounts associated with Pegasus
Development Corporation (11,600)
-------------------------------------------------------------
Balances at January 1, 1999 162 2 9 - 302,411
Net loss
Contributions from Pegasus Satellite Communications 116,286
Distributions to Pegasus Satellite Communications (51,408)
Adjustment for amounts previously included for Pegasus
Development Corporation (4,829)
-------------------------------------------------------------
Balances at December 31, 1999 162 2 9 - 362,460
Net loss
Contributions from Pegasus Satellite Communications 878,664
Distributions to Pegasus Satellite Communications (296,054)
Adjustment for amounts previously included for Pegasus
Development Corporation (203,530)
Adjustment to include amounts associated with Golden
Sky Holdings 638,061
Unrealized loss on marketable securities, net of tax benefit
of $7,340
-------------------------------------------------------------
Balances at December 31, 2000 162 2 9 - 1,379,601
Net loss
Contributions from Pegasus Satellite Communications 470,596
Distributions to Pegasus Satellite Communications (44,223)
Unrealized loss on marketable securities, net of tax benefit
of $5,042
Reclassification adjustment for accumulated unrealized loss
on marketable securities included in net loss, net of income
tax benefit of $12,998
-------------------------------------------------------------
Balances at December 31, 2001 162 $ 2 9 $ - $ 1,805,974
=============================================================
Accumulated
Other Total Common
Accumulated Comprehensive Stockholder's
Deficit Income (Loss) Equity (Deficit)
-------------------------------------------------
Balances at January 1, 1999, as previously reported $ (51,844) $ - $ 262,169
Adjustment for prior year amounts associated with Pegasus
Development Corporation 7,749
-------------------------------------------------
Balances at January 1, 1999 (44,095) - 258,318
Net loss (84,521) (84,521)
Contributions from Pegasus Satellite Communications 116,286
Distributions to Pegasus Satellite Communications (51,408)
Adjustment for amounts previously included for Pegasus
Development Corporation 468 (4,361)
-------------------------------------------------
Balances at December 31, 1999 (128,148) - 234,314
Net loss (58,704) (58,704)
Contributions from Pegasus Satellite Communications 878,664
Distributions to Pegasus Satellite Communications (296,054)
Adjustment for amounts previously included for Pegasus
Development Corporation 5,032 (198,498)
Adjustment to include amounts associated with Golden
Sky Holdings (77,383) 560,678
Unrealized loss on marketable securities, net of tax benefit
of $7,340 (11,976) (11,976)
-------------------------------------------------
Balances at December 31, 2000 (259,203) (11,976) 1,108,424
Net loss (201,173) (201,173)
Contributions from Pegasus Satellite Communications 470,596
Distributions to Pegasus Satellite Communications (44,223)
Unrealized loss on marketable securities, net of tax benefit
of $5,042 (8,226) (8,226)
Reclassification adjustment for accumulated unrealized loss
on marketable securities included in net loss, net of income -
tax benefit of $12,998 21,207 21,207
-------------------------------------------------
Balances at December 31, 2001 $(460,376) $ 1,005 $ 1,346,605
=================================================
See accompanying notes to consolidated financial statements
F-5
Pegasus Media & Communications, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2001 2000 1999
---------- ---------- ----------
Cash flows from operating activities:
Net loss $ (201,173) $ (131,055) $(84,053)
Adjustments to reconcile net loss to net cash used for operating activities:
Extraordinary loss on extinquishment of debt 1,590 9,280 -
Depreciation and amortization 267,744 200,986 58,155
Amortization of debt discount and deferred financing fees 10,886 15,651 398
Noncash incentive compensation 1,929 5,779 1,495
Loss on disposal of assets 2,784 902 424
Loss on derivative instruments 4,160 - -
Gain on sale of cable operations - (87,361) -
Bad debt expense 36,456 14,531 5,122
Deferred income taxes (115,385) (96,700) -
Loss on impairment of securities 34,205 - -
Other 1,525 (858) (3,777)
Change in current assets and liabilities:
Accounts receivable (63,949) (39,194) (12,856)
Inventory 9,408 (3,627) (4,641)
Deferred subscriber acquisition costs (19,421) - -
Prepaid expenses 9,714 (17,276) (2,666)
Other current assets (657) - -
Taxes payable (29,620) 29,620 100
Accounts payable and accrued expenses 7,045 45,421 15,748
Accrued interest (12,050) 5,210 64
---------- ---------- --------
Net cash used for operating activities (54,809) (48,691) (26,487)
---------- ---------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (889) (131,572) (106,902)
Cash acquired in merger with affiliate - 3,241 -
Merger costs allocated to DBS rights assets - (9,202) -
DBS equipment capitalized (20,830) (12,209) -
Other capital expenditures (19,682) (18,548) (12,248)
Purchases of intangible assets (7,638) (15,795) (4,098)
Payments for programming rights (4,629) (4,444) (3,452)
Proceeds from sale of cable operations - 166,937 -
Other - (500) -
---------- ---------- --------
Net cash used for investing activities (53,668) (22,092) (126,700)
---------- ---------- --------
Cash flows from financing activities:
Repayments of long term debt (7,485) (24,986) (10,260)
Net (repayments) borrowings on bank credit facilities (29,750) 125,800 115,000
Advances to affiliates, net of advances from same (41,414) (6,799) (11,128)
Changes in restricted cash, net of cash acquired 2,009 7,881 1,000
Debt financing costs (2,791) (8,380) (68)
Contributions from Pegasus Satellite Communications, net of distributions
to same 104,552 140,009 57,551
Other (195) (816) (126)
---------- ---------- --------
Net cash provided by financing activities 24,926 232,709 151,969
---------- ---------- --------
Net (decrease) increase in cash and cash equivalents (83,551) 161,926 (1,218)
Cash and cash equivalents, beginning of year 183,261 21,335 22,553
---------- ---------- --------
Cash and cash equivalents, end of period $ 99,710 $ 183,261 $ 21,335
========== ========== ========
See accompanying notes to consolidated financial statements
F-6
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
General
Pegasus Media & Communications, Inc. ("PM&C", and together with its
subsidiaries, the "Company") is a direct subsidiary of Pegasus Satellite
Communications, Inc. ("Pegasus Satellite"), which is a direct subsidiary of
Pegasus Communications Corporation ("Pegasus Communications"). PM&C's
significant operating subsidiaries are Pegasus Satellite Television, Inc.
("PST") and Pegasus Broadcast Television, Inc. ("PBT"). PST provides
multichannel direct broadcast satellite ("DBS") services as an independent
provider of DIRECTV(R) ("DIRECTV") audio and video programming in exclusive
territories primarily within rural areas of 41 states. DIRECTV is a service of
DirecTV, Inc. ("DirecTV"). Pegasus Broadcast Television owns and/or programs
broadcast television ("Broadcast") stations affiliated with the Fox Broadcasting
Company, United Paramount Network and The WB Television Network. In June 2001,
Pegasus Satellite contributed all of the capital stock of Golden Sky Holdings,
Inc. ("GSH") to a subsidiary of PM&C. Golden Sky Systems, Inc. ("GSS") and
Golden Sky DBS, Inc. ("GSDBS") are subsidiaries of GSH. GSH was acquired by
Pegasus Satellite in May 2000. GSH, through its subsidiaries, provides direct
broadcast satellite services. At the date of contribution, GSH had approximately
405,000 subscribers. Revenues for GSH for 2001 through the date of contribution
were $114.3 million, and $187.6 million for the year ended December 31, 2000.
The amount of Pegasus Satellite's investment in GSH contributed to PM&C at June
30, 2001 was $742.2 million.
Significant Risks and Uncertainties
The Company has a history of losses principally due to the substantial
amounts incurred for subscriber acquisition costs, interest expense, and noncash
depreciation and amortization. The Company expects that these amounts will
continue to be substantial. As a result, the Company does not expect to have net
income for the foreseeable future.
Both Pegasus Communications' and Pegasus Satellite's principal
operations are held by the Company and each primarily rely on the Company as a
source of cash in meeting debt and preferred stock obligations associated with
each. Using cash for these payments reduces the availability of funds for
working capital, capital expenditures, and other activities for the Company, and
limits the Company's flexibility in planning for, or reacting to, changes in its
business and the industries in which it operates. The Company's ability to fund
its operations, planned capital expenditures, debt service, and other activities
and to fund the debt service and preferred stock requirements of Pegasus
Communications and Pegasus Satellite will depend on its ability to generate cash
in the future. The Company's ability to generate cash will depend upon the
success of its business strategy, prevailing economic conditions, regulatory
risks, its ability to integrate acquired assets successfully into its
operations, competitive activities by other parties, equipment strategies,
technological developments, level of programming costs, levels of interest rates
and financial, business, and other factors that are beyond the Company's
control. The Company cannot assure that its business will generate sufficient
cash flow from operations or that alternative financing will be available to it
in amounts sufficient to fund the needs previously specified. PM&C's credit
agreement and note indenture contain numerous covenants that, among other
things, generally limit the ability to incur additional indebtedness and liens,
issue other securities, make certain payments and investments, pay dividends,
transfer cash, dispose of assets, and enter into other transactions. Failure to
make debt payments or comply with covenants could result in an event of default
that, if not cured or waived, could have a material adverse effect on the
Company.
Reliance on DirecTV, Inc.
The Company's principal business is its DBS business which is derived
from providing audio and video programming as an independent DIRECTV provider.
For 2001, 2000, and 1999, revenues for this business were 96%, 94%, and 83%,
respectively, of total consolidated revenues in each respective year, and
operating expenses for this business were 93%, 93%, and 85%, respectively, of
total consolidated operating expenses in each respective year. Total assets of
the DBS business were 97% and 96% of total consolidated assets at December 31,
2001 and 2000, respectively. Because the Company is a distributor of DIRECTV,
the Company may be adversely affected by any material adverse changes in the
assets, financial condition, programming, technological capabilities, or
services of DirecTV. Currently, the Company is in litigation against DirecTV
(see Note 14). Additionally, Hughes Electronics Corporation, which is the parent
company of DirecTV, and EchoStar Communications Corporation, which owns the only
other nationally branded direct broadcast satellite programming service in the
United States, have agreed to merge. At this time, the Company is unable to
predict the effect of its litigation with DirecTV
F-7
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and the merger of EchoStar Communications and Hughes Electronics, should it
occur, on the Company's financial position, results of operations, cash flows,
and future operations.
Overview of the DBS Sales and Distribution Channels
The primary means to obtain subscribers is through an independent
retail network channel. To a lesser extent, subscribers are obtained through the
Company's inside sales channel. In both channels, the Company creates and
launches the promotions for its DIRECTV programming, equipment, and
installations. In addition, the Company specifies the retail prices for its
DIRECTV programming and establishes the suggested retail prices at which dealers
sell or provide and install equipment. The Company also obtains subscribers to
its DIRECTV programming through national retail chains selling DIRECTV under
arrangements directly with DirecTV.
The Company's independent retail network consists of dealer and
distributor relationships. Distributors purchase directly from manufacturers and
maintain in their inventory the equipment needed by subscribers to access the
Company's DIRECTV programming. Distributors sell this equipment to dealers who
in turn provide the equipment to subscribers. Distributors directly charge the
dealers for the equipment they sell to them. Dealers enroll subscribers to the
Company's DIRECTV programming, provide them with equipment, and arrange for
installation of the equipment. Dealers directly charge new subscribers for
equipment, installation, and set up at the point of enrollment. The Company also
directly enrolls subscribers, provides equipment to them, and arranges for
installation of the equipment through its inside sales channel. In this channel,
the Company charges new subscribers at the point of enrollment for equipment,
installation, and set up. The amounts charged are deferred as unearned revenues
and are recognized as revenues over the Company's expected life of subscribers
of five years. Once subscribers have been enrolled under either channel, they
contact the Company directly to activate programming.
The Company offers a variety of incentives to its subscribers and to
its distributors and dealers. Incentives to subscribers consist of free or
discounted prices for its DIRECTV programming, equipment needed to access its
DIRECTV programming, and installation of equipment that accesses its DIRECTV
programming. The Company pays incentives directly to dealers and distributors in
the form of equipment subsidies, installation subsidies, and commissions.
Subscriber acquisition costs are incurred when the Company adds new
subscribers to its DIRECTV programming and Internet service. These costs consist
of the portion of programming costs associated with promotional programming
provided to subscribers; equipment costs and related subsidies paid to
distributors; installation costs and related subsidies paid to dealers; dealer
commissions; advertising and marketing costs; and selling costs. Promotional
programming costs, which are included in programming expense on the statement of
operations and comprehensive loss, are charged to expense when incurred.
Equipment costs and related subsidies and installation costs and related
subsidies, which are included in promotions and incentives on the statement of
operations and comprehensive loss, are charged to expense when the equipment is
delivered and the installation occurs, respectively. Dealer commissions,
advertising and marketing costs, and selling costs, which are included in
advertising and selling on the statement of operations and comprehensive loss,
are charged to expense when incurred.
Certain subscriber acquisition costs are capitalized or deferred. Under
certain of its subscription plans for DIRECTV programming, the Company retains
or takes title to equipment delivered to subscribers. The equipment costs and
subsidies related to this equipment are capitalized as fixed assets and
depreciated. The Company also has subscription plans for its DIRECTV programming
that contain commitment periods and early termination fees for subscribers.
Direct and incremental subscriber acquisition costs associated with these plans
are deferred in the aggregate not to exceed the amounts of applicable
termination fees, which are less than the contractual revenue over the
commitment period. These costs are amortized over the period of the arrangement
for which early termination fees apply and are charged to amortization expense.
Direct and incremental subscriber acquisition costs consist of equipment costs
and related subsidies not capitalized as fixed assets, installation costs and
related subsidies, and dealer commissions. Direct and incremental subscriber
acquisition costs in excess of termination fee amounts are expensed immediately
and charged to promotion and incentives or advertising and selling, as
applicable, in the statements of operations and comprehensive loss.
Refer to the following "Summary of Significant Accounting Policies" for
a description of the Company's accounting policies with respect to the
significant matters described above.
2. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements include the accounts of PM&C and all of its
subsidiaries on a consolidated basis. All intercompany transactions and balances
have been eliminated. The Company has an investment in another entity in which
it does not have a significant or controlling interest and, accordingly, this
investment is accounted for under the cost method. Since PM&C's common stock is
wholly owned by its parent company, computations of per common share amounts are
not required nor presented. Certain prior year amounts have been reclassified
for comparative purposes.
For financial reporting purposes, the financial statements of GSH have
been combined with those of the Company on an "as if pooled" basis for all
periods presented in this report from the date that GSH was acquired by PSC. As
a result, prior year amounts have been adjusted from that previously reported to
include amounts of GSH.
F-8
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Through December 31, 2000, the Company's financial statements were
presented on a combined basis with Pegasus Development Corporation ("PDC"). PDC,
a subsidiary of Pegasus Communications, had provided capital for various
satellite initiatives that were integral to the Company's DBS operations for
periods prior to those presented in this report. PDC's financial position,
results of operations, and cash flows no longer impact those of the Company and
beginning in 2001 the financial statements of PDC were not combined with those
of the Company. For comparative purposes, financial information contained in
this report for periods prior to 2001 has been adjusted from that previously
reported to exclude amounts associated with PDC.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires the
Company 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 useful lives and recoverability of the Company's long lived assets, including
investments the Company has in other entities, intangible assets, valuation
allowances associated with deferred income tax assets, average subscriber life
associated with recognition of unearned revenues, amounts associated with barter
transactions, NRTC patronage, allowance for doubtful accounts, and litigation
contingencies.
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.
NRTC Patronage Capital Distributions
The Company is an affiliate of the National Rural Telecommunications
Cooperative ("NRTC"), which is a tax exempt organization that operates on a
nonprofit basis. 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. Throughout each
year, the NRTC bills its members and affiliates the costs incurred by the NRTC
under its agreement with DirecTV, certain other costs incurred by the NRTC
relating to associated DBS projects, and margin on the costs of providing DBS
services pursuant to the NRTC member agreement for marketing and distribution of
DBS services. The most notable service that the NRTC provides to the Company is
programming related to the DIRECTV programming the Company provides. The Company
records as expenses the amounts it pays to the NRTC. Members and affiliates that
participate in the NRTC's projects may be eligible to receive an allocation of
the NRTC's net savings (generally, amounts collected from NRTC members and
affiliates in excess of the NRTC's costs) in the form of a patronage
distribution through the NRTC's patronage capital distribution program.
Generally, each patron who does business with the NRTC receives an annual
distribution composed of both patronage capital certificates and cash. The
patronage capital certificates represent equity interests in the NRTC. The
amount of the distribution is generally based on the ratio of business a patron
conducts with the NRTC during a given fiscal year of the NRTC times the NRTC's
net savings available for patronage distribution for that year. Throughout each
year, the Company accrues a receivable from the NRTC based on its best estimate
of its share of the patronage distribution for that year, with an offsetting
reduction to the expenses that were recorded by the Company for the payments
made to the NRTC during the year. The Company adjusts its accrual of the
estimated patronage distribution in the year that the distribution is received
and, accordingly, adjusts the related expenses in and for the year the
distribution is received. At December 31, 2001 and 2000, the Company had accrued
in accounts receivable - other $31.0 million and $13.3 million, respectively,
for its estimate of its share of patronage for the respective years. Based on
past experience, the Company expects that a majority of the patronage capital
distribution for 2001 to be made in 2002 will be tendered by the NRTC in the
form of patronage capital certificates. At December 31, 2001 and 2000, the
Company's investment in the NRTC, which is included in other noncurrent assets
on the balance sheet, was $28.6 million and $11.1 million, respectively. The
Company has no commitments to fund the NRTC's operations or acquire additional
equity interests in the NRTC.
Inventory
Inventory consists of equipment that enables access to the Company's
DIRECTV programming and supplies used in the installation of equipment.
Equipment is purchased from manufacturers in a completed state ready for its
intended use. Such equipment primarily consists of antennas that receive
satellite signals and receivers that decode signals to permit access to the
Company's DIRECTV programming and that also permit communications to authorize
on demand viewing of certain programming. Inventory is stated at the lower of
cost or market on a first in, first out basis.
Equipment that the Company delivers to subscribers is removed from
inventory at its carrying amount and charged to subscriber acquisition costs
when the equipment is delivered. Under certain of its subscription plans for
DIRECTV programming, the Company retains title to equipment delivered to
subscribers. In these cases, the inventory carrying amounts of this equipment
are capitalized as fixed assets and the equipment is depreciated over its useful
life of three years. Other inventory items are removed from inventory and
charged to the appropriate expense when used.
F-9
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Investment in Marketable Securities
The Company has an investment in the common stock of another company.
The Company acquired this common stock in one transaction. The Company considers
this investment to be available for sale and it is carried at its fair market
value based on the quoted market price of the common stock held. Accordingly,
unrealized gain or loss for changes in the fair market value of the investment
is recorded in common stockholder's equity as accumulated other comprehensive
income or loss as appropriate, and is presented as other comprehensive gain or
loss, as appropriate, on the statements of operations and comprehensive loss.
The fair market value of this investment at December 31, 2001 was $4.9 million,
which is included in other noncurrent assets on the balance sheet.
Property and Equipment
Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets sold, retired, or otherwise disposed of are
removed from the respective accounts and any resulting gains and losses are
included in results of operations. Expenditures for repairs and maintenance are
charged to expense when incurred. Expenditures for major renewals and
betterments that extend the useful lives of the related assets are capitalized
and depreciated. Depreciation is computed for financial reporting purposes using
the straight line method based upon the estimated useful lives of the assets.
DBS equipment delivered to subscribers that comes from the Company's inventory
and to which the Company retains title is capitalized at its inventory carrying
amount. DBS equipment delivered to subscribers by authorized dealers of the
Company to which the Company takes title is capitalized at the amount of the
subsidy paid by the Company for the equipment. The Company has a process in
place to recover the equipment or the cost thereof from subscribers should they
terminate their subscription.
Intangible Assets
Intangible assets are stated at cost. The cost and related accumulated
amortization of assets sold, retired, or otherwise disposed of are removed from
the respective accounts and any resulting gains and losses are included in
results of operations. Amortization of intangible assets is computed for
financial reporting purposes using the straight line method based upon the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lesser of the lease term or life of the related asset to which the
improvement was made. Deferred subscriber acquisition costs are amortized over
the length of time of the commitment period associated with the subscription
plans under which these costs are deferred.
Long Lived Assets
The Company's intangible and fixed assets are reviewed for impairment
whenever events or circumstances provide evidence that suggest the carrying
amounts may not be recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition is less than its carrying value. The
impairment, if any, would be measured as the excess of the carrying amount over
the asset's fair value. To date, no such impairments have occurred.
Deferred Financing Costs
Financing costs incurred in obtaining long term financing are deferred
and amortized over the term of the related financing. The Company uses the
straight line method to amortize these costs. Accumulated amortization was $7.8
million and $6.8 million at December 31, 2001 and 2000, respectively.
Broadcast Sale/Leaseback Transaction
The Company retains a continuing involvement in Broadcast assets that
had been sold and leased back. This sale/leaseback is accounted for under the
financing method in which the Company continues to record and depreciate the
related assets and recognizes a finance obligation representing a deferral of
the gain on the sale that would have otherwise been recognized at the date of
the sale. Under the finance method, lease payments made on the assets leased
back are allocated between a reduction of the finance obligation and interest as
appropriate. As a result of the amount of interest associated with the finance
obligation relative to the amount of the lease payments,
F-10
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the payments have been, and are expected to continue to be, applied to interest
expense. The accounting of the sale/leaseback transaction as a financing will
continue until the Company's continuing involvement in the related assets
ceases.
Derivative Financial Instruments
Derivative financial instruments are utilized by the Company to reduce
interest rate risk. The Company does not hold or issue financial instruments for
trading or speculative purposes. The Company uses interest rate swap and cap
agreements to reduce the impact of interest rate increases on its variable rate
debt. The interest rate swaps involve the exchange of variable for fixed rate
interest payments without the exchange or the payment of the underlying notional
amounts. The effects of the swaps are recorded as adjustments to the Company's
interest expense on an accrual basis. Under the interest rate caps, the Company
receives interest from the other parties to the agreements when market interest
rates specified in the cap agreements exceed the contracted interest cap rates.
Premiums paid by the Company to enter into interest rate cap agreements are
amortized to interest expense.
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS
No. 138, became effective for the Company on January 1, 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. The statement requires that all derivatives are to be
recognized as either assets or liabilities in the statement of financial
position and the instruments are to be measured at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The fair values of interest rate swaps
and caps held by the Company are determined by the financial institutions that
are party to the contracts. The fair values are measured by the amount that the
Company or the other parties to the contracts would pay if the contracts were
terminated at the measurement date. No cash is transferred in determining the
termination values. The Company did not designate these instruments as hedges
upon adopting SFAS 133. Accordingly, the changes in the fair values of these
instruments are recognized in earnings in other nonoperating income or expense
in the period of change. The net cumulative effect on January 1, 2001 of
adopting SFAS 133 was not significant.
Revenues
Principal revenue of the DBS business is earned by providing the
Company's DIRECTV programming on a subscription or on demand basis. Standard
subscriptions are recognized as revenue monthly at the amount earned and billed
based on the level of programming content subscribed to during the month.
Promotional programming provided to subscribers at discounted prices is
recognized as revenue monthly at the promotional amount earned and billed. No
revenue is recognized for promotional programming that is provided free of
charge. Revenue for on demand viewing is recognized at the amount billed in the
month when the programming is viewed and earned. Fees that the Company charges
new subscribers for set up upon initiation of service are deferred as unearned
revenue and are recognized as revenue over the Company's expected subscriber
life of five years. Amounts charged for DBS equipment rented is recognized as
revenue monthly at the amount earned and billed during the month. Equipment used
by subscribers for the Company's DIRECTV programming is an integral component of
this service. Accordingly, amounts that the Company charges for equipment sold
and installations are deferred as unearned revenue and are recognized as revenue
over the Company's expected life for subscribers of five years. No revenue is
recognized for equipment and installations provided free of charge.
Principal revenue of the Broadcast business is earned by selling
advertising airtime. This revenue is recognized when the advertising spots are
aired.
Subscriber Acquisition Costs
Subscriber acquisition costs are incurred when the Company adds new
subscribers to its DIRECTV programming and Internet service. These costs consist
of the portion of programming costs associated with promotional programming
provided to subscribers; equipment costs and related subsidies paid to
distributors; installation costs and related subsidies paid to dealers; dealer
commissions; advertising and marketing costs; and selling costs. Promotional
programming costs, which are included in programming expense on the statements
of operations and comprehensive loss, are charged to expense when incurred.
Promotional programming amounted to $2.3 million, $5.6 million and $8.4 million
in 2001, 2000, and 1999, respectively. Equipment costs and related subsidies and
installation costs and related subsidies, which are included in promotions and
incentives on the statements of operations and comprehensive loss, are charged
to expense when the equipment is delivered and the installation occurs,
respectively. Dealer commissions, advertising and marketing costs, and selling
costs, which are included in advertising and selling on the statements of
operations and comprehensive loss, are charged to expense when incurred.
Subscriber acquisition costs included in the accompanying consolidated
statements of operations and comprehensive loss were $145.1 million, $170.0
million, and $74.5 million in 2001, 2000, and 1999, respectively.
F-11
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Under certain of its subscription plans for DIRECTV programming, the
Company retains or takes title to equipment delivered to subscribers. The
equipment costs and subsidies related to this equipment are capitalized as fixed
assets and depreciated. Capitalized DBS equipment was $20.8 million and $12.2
million in 2001 and 2000, respectively. No DBS equipment was capitalized during
1999. The Company also has subscription plans for its DIRECTV programming that
contain commitment periods and early termination fees for subscribers. Direct
and incremental subscriber acquisition costs associated with these plans are
deferred in the aggregate not to exceed the amounts of applicable termination
fees, which are less than the contractual revenue over the commitment period.
These costs are amortized over the period of the arrangement for which early
termination fees apply and are charged to amortization expense. Direct and
incremental subscriber acquisition costs consist of equipment costs and related
subsidies not capitalized as fixed assets, installation costs and related
subsidies, and dealer commissions. Direct and incremental subscriber acquisition
costs in excess of termination fee amounts are expensed immediately and charged
to promotion and incentives or advertising and selling, as applicable, in the
statements of operations and comprehensive loss. Deferred subscriber acquisition
costs amounted to $19.4 million in 2001. Amortization of deferred subscriber
acquisition costs for the year ended December 31, 2001 was $4.2 million. No
subscriber acquisition costs were deferred during 2000 or 1999.
Total subscriber acquisition costs expensed, capitalized, and deferred
were $185.3 million, $182.2 million, and $74.5 million in 2001, 2000, and 1999,
respectively. Total advertising costs incurred were approximately $17.0 million,
$21.9 million, and $8.7 million for 2001, 2000, and 1999, respectively.
Other Subscriber Related Expenses
Other subscriber related expenses include infrastructure costs billed
to the Company by the NRTC, expenses associated with call centers, bad debt
expense, franchise fees, and other expenses that vary with changes in the number
of subscribers served. Franchise fees represent payments made to the NRTC in
accordance with the NRTC member agreement for marketing and distribution of DBS
services. The fees are calculated based on certain revenues earned by the
Company.
Broadcast Barter Transactions
The Company's Broadcast stations obtain programming for viewing from
the networks they are affiliated with, as well as from independent producers and
syndicators. Broadcast barter transactions represent the exchange of advertising
time for programming, except those involving the exchange of advertising time
for network programming. We do not report revenue or expenses for barter
transactions involving the exchange of advertising time for network programming.
Barter transactions are reported at the fair market value of the advertising
time relinquished. Barter programming revenue and the related programming
expense are recognized at the time that the advertisement airtime is broadcast.
For 2001, 2000, and 1999, $6.6 million, $7.1 million, and $7.6 million,
respectively, related to barter transactions were included in revenue and
programming expense of other businesses in the statements of operations and
comprehensive loss.
Deferred Income Taxes
The Company accounts for deferred income taxes utilizing the asset and
liability approach, whereby deferred income 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. Deferred income taxes
are measured using enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are expected to be received or settled. A
valuation allowance is recorded for deferred income taxes where it appears more
likely than not that the Company will not be able to recover the deferred income
tax asset.
Accretion on Notes Issued at a Discount
Notes issued at a discount from their full face value were initially
recorded at the amount of the discounted cash proceeds received. The difference
between the carrying amount and the full face value of the notes is accreted to
interest expense and to the carrying amount of the notes. The accretion is over
the discount period that ends with the date that cash interest begins to accrue,
at which time the carrying amount of the notes will equal their full face value.
F-12
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Concentration of Credit Risk
Financial instruments that 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 numbers comprising the Company's
subscriber and customer base and their dispersion across different businesses
and geographic regions. At December 31, 2001 and 2000, the Company had no other
significant concentrations of credit risk.
New Accounting Pronouncements
SFAS No. 141 "Business Combinations" addresses financial accounting and
reporting for business combinations. One of the principal requirements of this
statement is that all business combinations initiated or for which the date of
acquisition is after June 30, 2001 are to be accounted for using only the
purchase method. The Company has not completed a business combination since June
30, 2001. Another principal provision of this statement requires companies to
reassess the classification of carrying amounts for goodwill and intangible
assets apart from goodwill recognized in acquisitions in which the acquisition
date was before July 1, 2001 to determine their appropriate classification in
accordance with the statement. For the Company, this provision became effective
on January 1, 2002, and will be applied by the Company in the first quarter
2002. The Company has not yet finalized its assessment of the classification of
the carrying amounts of goodwill and intangible assets apart from goodwill, but
based on its preliminary assessment, the Company believes that there will be no
material impact on it.
SFAS No. 142 "Goodwill and Other Intangible Assets" addresses financial
accounting and reporting: 1) at the date of acquisition of goodwill and
intangible assets apart from goodwill acquired other than in a business
combination, and 2) all goodwill and intangible assets apart from goodwill
subsequent to their acquisition. A principal requirement of this statement is to
determine the useful lives of intangible assets and amortize or not amortize the
intangible assets accordingly. Intangible assets apart from goodwill with finite
lives are to be amortized over their useful lives to their residual value, if
any, whereas goodwill and intangible assets apart from goodwill with indefinite
lives are not to be amortized. Another principal requirement of this statement
relates to impairment of goodwill and intangible assets apart from goodwill.
Goodwill is to be separately stated from intangible assets apart from goodwill
on the statement of financial position. This statement in its entirety became
effective for the Company on January 1, 2002. Certain provisions of the
statement were effective July 1, 2001, but did not significantly impact the
Company because it has not acquired any goodwill or significant intangible
assets apart from goodwill since July 1, 2001. Certain provisions of the
statement are to be applied by the Company by the end of the first quarter 2002.
Other provisions of this statement have transition periods that for the Company
end June 30, 2002 and December 31, 2002, with retroactive application of the
effects of the transition periods to the Company's first quarter 2002. The
Company has not yet completed its analyses associated with the impacts of this
statement, and does not have sufficient information at this time to determine
whether or not the impacts will be material to its financial position or results
of operations.
SFAS No. 143 "Accounting for Asset Retirement Obligations" addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long lived assets and the associated asset retirement
costs. This statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company is studying the provisions of
this statement and has not yet determined the impacts, if any, that this
statement may have on it.
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" addresses financial accounting and reporting for the impairment or
disposal of long lived assets. The provisions of this statement became effective
for the Company on January 1, 2002. Many of the provisions of this statement are
the same as or similar to provisions of previously existing accounting standards
that this statement now supersedes. The Company has not yet finalized its
analysis of this statement. However, based on its preliminary assessment of the
statement and the belief that there are relatively no new requirements imposed
by the statement from requirements previously in effect for the Company under
prior accounting standards, the Company believes that there will be no material
impact on it.
F-13
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Property and Equipment
Property and equipment, along with the applicable estimated useful
life of each category, consisted of the following at December 31, 2001 and 2000
(in thousands):
2001 2000
-------- --------
Towers, antennas, and related equipment (7 to 20 years)................ $ 10,198 $ 5,952
Television broadcasting and production equipment (7 to 10 years)....... 24,219 20,117
Equipment, furniture, and fixtures (5 to 10 years)..................... 27,987 22,054
DBS equipment capitalized (3 years).................................... 33,039 12,209
Building and improvements (40 years)................................... 17,207 15,356
Land................................................................... 872 1,631
Other.................................................................. 2,184 812
-------- ---------
115,706 78,131
Accumulated depreciation............................................... (43,371) (31,184)
-------- ---------
Net property and equipment............................................. $ 72,335 $ 46,947
======== =========
Total depreciation expense was $13.8 million, $9.8 million, and $6.2
million for 2001, 2000, and 1999, respectively. Depreciation expense associated
with DBS equipment capitalized was $5.4 million for 2001 and $3.9 million for
2000. There was no DBS equipment capitalized in 1999.
4. Intangibles
Intangible assets, along with the applicable estimated useful
life of each category, consisted of the following at December 31, 2001 and 2000
(in thousands):
2001 2000
---------- ----------
DBS rights (10 years).............................................. $2,259,231 $2,245,036
Other (2 to 40 years) ............................................. 130,443 127,681
---------- ----------
2,389,674 2,372,717
Accumulated amortization........................................... (681,541) (429,087)
---------- ----------
Net intangible assets.............................................. $1,708,133 $1,943,630
========== ==========
Total amortization expense was $244.7 million, $186.5 million, and
$48.3 million for 2001, 2000, and 1999, respectively.
F-14
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Long Term Debt
Long term debts consisted of the following at December 31, 2001 and
2000 (in thousands):
2001 2000
-------- --------
12-1/2% senior subordinated notes of Pegasus Media &
Communications due July 2005, interest payable semiannually on
January 1 and July 1, net of unamortized discount of $1.4 million
and $1.8 million at December 31, 2001 and 2000, respectively...... $ 83,578 $ 83,176
Senior five year term loan facility of Pegasus Media &
Communications, interest at the company's option at either the
lender's base rate plus an applicable margin or LIBOR plus an
applicable margin................................................. 272,250 275,000
Senior five year revolving credit facility of Pegasus Media &
Communications, interest at the company's option at either the
lender's base rate plus an applicable margin or LIBOR plus an
applicable margin................................................. 80,000 35,000
Senior seven year revolving credit facility of Golden Sky Systems. - 37,000
Senior seven year term loan facility of Golden Sky Systems........ - 35,000
13-1/2% senior discount notes of Golden Sky DBS, net of
unamortized discount of $65.4 million............................. - 127,739
12-3/8% senior subordinated notes of Golden Sky Systems........... - 195,000
Other notes, due 2002 to 2005, stated interest up to 8%........... 8,676 16,161
Capital leases and other.......................................... 13 94
-------- --------
444,517 804,170
Less current maturities........................................... 8,615 10,785
-------- --------
Long term debt.................................................... $435,902 $793,385
======== ========
Long Term Debt of Pegasus Media & Communications
The 12-1/2% senior subordinated notes due July 2005 are unconditionally
guaranteed on an unsecured senior subordinated basis, jointly and severally by
specified subsidiaries of Pegasus Media & Communications. The notes are general
unsecured obligations that are subordinated to other senior indebtedness of the
company such as, among other things, its credit agreement. Pegasus Media &
Communications presently has the option to redeem the notes at prices specified
in the indenture for these notes.
Pegasus Media & Communications has a credit agreement that initially
provided for a $225.0 million senior revolving credit facility that expires in
October 2004 and a $275.0 million senior term loan facility that expires in
April 2005. The agreement also contains an uncommitted facility that gives the
company the option to seek $200.0 million in incremental term loans through June
30, 2002, as extended in 2001. Amounts borrowed under the agreement are
collateralized by substantially all of the assets of Pegasus Media &
Communications and its subsidiaries. The agreement contains certain financial
covenants. The borrowing commitment under the revolving facility automatically
and permanently reduces quarterly over the term of the facility that began on
March 31, 2001. At December 31, 2001, the commitment was $202.5 million.
Principal amounts outstanding in excess of the reduced commitment are to be
repaid on each commitment reduction date. Amounts repaid under the revolving
facility may be reborrowed, subject to the available borrowing commitment.
Availability under the revolving facility, net of outstanding stand by letters
of credit of $63.2 million, was $59.1 million at December 31, 2001. Generally,
letters of credit are not acted upon. Principal outstanding under the term loan
facility is payable quarterly in increasing increments over the term of the
facility that began on March 31, 2001. Amounts repaid under the term loan
facility may not be reborrowed. Margins on revolver base rates range from 1% to
2%, and margins on revolver LIBOR rates range from 2% to 3%, both of which are
determined by the level of a ratio computation specified in the agreement.
Margins on term loans are 2.5% for base rates and 3.5% for LIBOR rates. Interest
on outstanding principal borrowed under base rates is due and payable quarterly
and interest on outstanding principal borrowed under LIBOR rates is due and
payable the earlier of the end of the contracted interest rate period or three
months. Unused amounts under the revolving facility are subject to a commitment
fee at either .5% or .75% based on the aggregate of borrowings outstanding and
F-15
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
letters of credit issued under the facility. The weighted average variable rates
of interest, including applicable margins, on amounts outstanding at December
31, 2001 were approximately 6.25% for the revolving facility and 5.44% for the
term facility. The weighted average variable rates of interest, including
applicable margins, on amounts outstanding at December 31, 2000 were
approximately 10.11% for the revolving facility and 10.19% for the term
facility. The $80.0 million outstanding under the revolving credit facility at
December 31, 2001 was repaid in January 2002.
The indenture for the notes of Pegasus Media & Communications and
Pegasus Media & Communications' credit agreement generally limit the ability of
the company and its subsidiaries in varying degrees to, among other things, sell
assets, incur additional indebtedness and create liens, issue or sell other
securities, make certain payments, including dividends and investments, transfer
cash, engage in certain transactions with affiliates, and merge or consolidate.
Aggregate commitment fees incurred by the Company under all credit
facilities outstanding in the respective periods were $999,000 in 2001 and $1.6
million in 2000. Commitment fees were not significant in 1999.
Scheduled maturities of long term debt at their stated maturity values,
repayment of principal on capital lease obligations, and repayment of principal
outstanding under term loans and revolving credit facilities for amounts
outstanding at December 31, 2001 were $8.6 million in 2002, $31.7 million in
2003, $192.5 million in 2004, and $213.1 million in 2005.
Long Term Debt of GSS and GSDBS
At the time that GSH was acquired by Pegasus Satellite, GSS had in
place a credit agreement in which were outstanding amounts under term loan and
revolving credit facilities. Additionally at the date of the GSH acquisition,
GSS had outstanding $195.0 million principal amount of 12-3/8% senior
subordinated notes due August 2006 and GSDBS had outstanding $193.1 million
maturity value of 13-1/2% senior discount notes due March 2007. In the second
quarter 2001, all principal amounts outstanding under the term loan and
revolving credit facilities of the GSS credit agreement were repaid and the
credit agreement was terminated. Unamortized deferred financing costs associated
with the credit agreement were written off and were reported as an extraordinary
loss from extinguishment of debt on the statement of operations and
comprehensive loss in the amount of $986,000, net of an income tax benefit of
$604,000. All letters of credit associated with the GSS revolving credit
facility were cancelled and new letters of credit related to these cancelled
letters of credit were subsequently issued pursuant to PM&C's revolving credit
facility. Also in the second quarter 2001, all of the GSS and GSDBS notes were
exchanged for identical notes of Pegasus Satellite. The GSS and GSDBS notes,
with an aggregate carrying amount of $329.9 million at the date of the exchange,
were cancelled and the aggregate balance of unamortized deferred financing costs
associated with the notes of $9.5 million was transferred to Pegasus Satellite
and associated with the newly issued notes of Pegasus Satellite. As a result of
these exchanges, PM&C's additional paid in capital was increased by a net $320.4
million. Consent fees of $1.6 million incurred in the exchanges were recorded as
deferred financing costs that were included in the amounts transferred to
Pegasus Satellite.
6. Leases
The Company leases certain studios, towers, buildings, vehicles, and
various types of equipment through separate operating lease agreements. The
operating leases expire at various dates through 2010. Rent expense for 2001,
2000, and 1999 was $3.5 million, $2.5 million, and $1.1 million, respectively.
At December 31, 2001, minimum lease payments on noncancellable operating leases
were $3.0 million in 2002, $2.7 million in 2003, $2.6 million in 2004, $2.6
million in 2005, $2.1 million in 2006, and $1.4 million thereafter. At December
31, 2001, minimum lease payments associated with assets subject to
sale/leaseback transactions were $806,000 in 2002, $838,000 in 2003, $872,000 in
2004, $907,000 in 2005, $943,000 in 2006, and $3.7 million thereafter. At
December 31, 2001, property and equipment subject to capital leases and related
obligations were not significant.
7. Other Operating Expenses
Other operating expenses for 2001, 2000, and 1999 included expenses
associated with the Company's litigation with DirecTV of $21.2 million, $3.2
million, and $9,000, respectively. See Note 14 for information concerning this
litigation.
F-16
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Loss on Impairment of Marketable Securities
In the third quarter 2001, the Company determined that its sole
investment in marketable securities, which are included in other noncurrent
assets on the balance sheet, had incurred an other than temporary decline in
market value. Accordingly, the Company wrote down the cost basis in this
investment to its then fair market value and charged earnings in the amount of
$34.2 million for the impairment loss realized. In connection with this write
down, the Company made a reclassification adjustment to other comprehensive
income (loss) of $21.2 million, net of income tax benefit of $13.0 million, to
remove all of the net unrealized losses on this investment that had been
accumulated at the date of the write down. The amount of the reclassification
adjustment was based on specific identification of the cost of the common stock
held, as all of the common stock held had been acquired in one transaction.
9. Income Taxes
Following is a summary of income taxes for 2001, 2000, and 1999 (in
thousands):
2001 2000 1999
------------ --------- -----------
State and local - current (benefit) expense.................. $ (753) $ 1,670 $ 100
------------ --------- -----------
Federal - deferred:
Benefits of net operating loss carryforwards.............. (47,942) (41,779) -
Other..................................................... (66,839) (52,027) -
------------ --------- -----------
Total federal deferred.................................... (114,781) (93,806) -
------------ --------- -----------
(Benefit) expense attributable to continuing operations...... (115,534) (92,136) 100
Income taxes associated with other items:
Deferred expense for discontinued operations.............. - 632 -
Deferred benefit for extinguishment of debt............... (604) (3,526) -
Deferred benefit for comprehensive income/loss............ (5,042) (7,340) -
Deferred benefit for comprehensive loss reversed when
related unrealized loss was reclassed.................... 12,998 - -
------------ --------- -----------
Total income tax (benefit) expense recorded............... $ (108,182) $(102,370) $100
============ ========= ===========
Following were the deferred income tax assets and liabilities at
December 31, 2001 and 2000 (in thousands):
2001 2000
--------- -----------
Assets:
Receivables............................................................... $ 2,265 $ 1,079
Excess of tax basis over book basis in marketable securities.............. 25,745 20,073
Excess of tax basis over book basis - other............................... 1,581 218
Loss carryforwards........................................................ 286,629 257,273
--------- -----------
Total deferred tax assets............................................. 316,220 278,643
--------- -----------
Liabilities:
Excess of book basis over tax basis of property and equipment............. (4,899) (3,310)
Excess of book basis over tax basis of amortizable intangible assets...... (382,385) (458,616)
--------- -----------
Total deferred tax liabilities........................................ (387,284) (461,926)
--------- -----------
Net deferred tax liabilities................................................. $ (71,064) $ (183,283)
========= ===========
At December 31, 2001, the Company had net operating loss carryforwards
for income tax purposes of $754.3 million available to offset future taxable
income that expire beginning 2002 through 2021.
F-17
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Following is a reconciliation of the federal statutory income tax
rate to the Company's effective federal income tax rate attributable to
continuing operations for 2001, 2000, and 1999:
2001 2000 1999
-------- -------- --------
Statutory rate.................................... 35.00% 35.00% 35.00%
Valuation allowance............................... - - (29.70)
Other............................................. 1.44 (1.44) (5.30)
------- ------- -------
Effective tax rate................................ 36.44% 33.56% -%
======= ======= =======
10. Supplemental Cash Flow Information
Following are significant noncash investing and financing activities
for 2001, 2000, and 1999 (in thousands):
2001 2000 1999
-------- -------- --------
Contribution of the net assets of GSH by Pegasus Satellite.....................$742,166 $ - $ -
Adjustment to additional paid in capital resulting from exchange of GSS and
GSDBS notes with, net of related unamortized deferred financing costs
transferred to, Pegasus Satellite...............................................320,390 - -
Net unrealized gain (loss) on marketable securities, net of related
deferred taxes.................................................................. 12,981 (11,976) -
Patronage capital distribution received......................................... 17,544 10,322 319
Marketable securities received in sale of tower assets.......................... - 37,516 -
Contribution of the net assets of Digital Television Services by Pegasus
Satellite....................................................................... - 174,026 -
Contribution of capital stock issued by Pegasus Satellite in funding of
acquisitions.................................................................... - 78,115 1,364
Deferred taxes and related intangibles recognized in acquisitions............... - 27,985 29
Notes payable issued and related acquisition of intangibles..................... - 515 6,467
Transfer of broadcast licenses by Pegasus Satellite ............................ - 90,027 -
For 2001, 2000, and 1999, the Company paid cash interest of $66.7
million, $59.3 million, and $17.5 million, respectively. The Company paid no
federal income taxes in 2001, 2000, and 1999. The amount paid for state income
taxes was less than $1.0 million in each of 2001, 2000, and 1999.
11. Acquisitions
In 1999, the Company acquired 15 independent DIRECTV providers along
with the rights to provide DIRECTV programming in certain rural areas of the
United States and related assets that were accounted for under the purchase
method. Total consideration was $79.5 million, consisting of $64.6 million in
cash, 25,000 shares of Pegasus Communications' Class A common stock valued at
$550,000, warrants to purchase a total of 50,000 shares of Class A common stock
valued at $814,000, $6.5 million in promissory notes, $6.7 million in accrued
expenses, and $365,000 in assumed net liabilities.
Effective March 31, 1999, the Company purchased a cable system serving
Aguadilla, Puerto Rico and neighboring communities for $42.1 million in cash.
This system was sold in September 2000.
During 2000, the Company completed 19 other acquisitions of independent
providers of DIRECTV. These acquisitions principally consisted of the rights to
provide DIRECTV programming in various rural areas of the United States. The
total consideration for these acquisitions of $232.6 million consisted of cash
of $131.6 million, 905,000 shares of Pegasus Communications' Class A common
stock valued at $40.8 million, 22,500 shares of Pegasus Communications' Series D
preferred stock valued at $22.5 million, 10,000 shares of Pegasus
Communications' Series E preferred stock valued at $10.0 million, warrants to
purchase 4,000 shares of Class A common stock valued at $192,000, a deferred tax
liability incurred of $24.4 million, $200,000 in promissory notes and $2.9
million in assumed net liabilities. These acquisitions were accounted for by the
purchase method, wherein substantially all of the total consideration for these
acquisitions was allocated to DBS rights.
F-18
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On May 5, 2000, Pegasus Satellite acquired GSH in a transaction
accounted for as a purchase. The total consideration for the acquisition was
$1.2 billion. The merger consideration included $293.7 million of GSH
consolidated net liabilities, including a deferred income tax asset of $89.3
million principally for GSH's cumulative consolidated income tax net operating
loss carryforwards existing at the acquisition date. Also included in the
consideration was a deferred income tax liability of $421.3 million principally
for the excess of the book basis over the income tax basis of the amount of DBS
rights assets existing at the acquisition date. Of the total acquisition cost,
$1.0 billion was allocated to the DBS rights assets, net of $94.1 million for
the effect of Pegasus Satellite's consolidated deferred income tax valuation
allowances no longer required in association with the merger.
Minority interest at December 31, 2001 and 2000 represents a
partnership interest in Golden Sky Systems.
12. Discontinued Operations
Discontinued operations on the statements of operations and
comprehensive loss represent the Company's cable operations. The Company
completely exited the cable business with the sale of the Puerto Rico
operations, as discussed below.
In September 2000, the Company sold to a third party its interests in
the assets of its entire cable operations in Puerto Rico. The sale price was
$170.0 million in cash, and the net cash proceeds of the sale were $164.5
million. The gain on the sale was $59.4 million, net of currently payable Puerto
Rico capital gains and withholding taxes of $28.0 million. Net revenues from
discontinued operations were $18.1 million and $21.2 million in 2000 and 1999,
respectively.
13. Financial Instruments
The carrying and fair values of the Company's long term debt at
December 31, 2001 and 2000 were as follows (in thousands):
2001 2000
---------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------------------------- ------------- -------------
Long term debt (including current portion)............... $444,517 $445,792 $804,170 $732,127
The fair values of publicly held notes of $84.9 million and $333.9
million at December 31, 2001 and 2000, respectively, were determined based on
quoted market prices for each individual security. The carrying value of amounts
outstanding under the Company's revolving credit and term loan facilities
aggregating $352.3 million and $382.0 million at December 31, 2001 and 2000,
respectively, approximates fair value because the outstanding amounts are
subject to short term variable rates of interest and the rates in effect at
December 31, 2001 and 2000 approximate the market rates available at each date.
The carrying values of other financial instruments included in the table equal
or approximate their fair values and were not significant.
The Company is party to interest rate swap and interest rate cap
contracts to manage its interest rate exposure. These instruments were entered
into as a condition of the Company's credit agreement. The principal object of
these contracts is to minimize the risks and/or costs associated with the
Company's variable rate debt incurred under the credit agreement. The notional
amounts of the swaps and caps are used to measure interest to be paid or
received. However, no cash is transferred with respect to the notional amounts.
Net cash paid or received on the instruments is recognized as an adjustment to
interest expense over the related market interest rate setting period. The
parties to these swaps and caps are major financial institutions. The Company is
exposed to credit loss in the event of nonperformance by these institutions,
however, the Company does not anticipate their nonperformance.
The Company has two interest rate swaps, each with a different
financial institution. Both swaps terminate March 2003. One contract is for a
notional amount of $35.0 million and has a fixed rate of interest of 7.195%. The
other contract is for a notional amount of $37.1 million and has a fixed rate of
interest of 7.18%. The variable rate of interest under both contracts is marked
to the 6 month LIBOR rate in effect at the beginning of each 6 month resetting
period. Under the interest rate swaps, variable interest is exchanged for fixed
interest. The Company owes interest to the contracting institutions when the
F-19
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
specified market rate is below the contracted fixed rate and receives interest
from them when the specified market rate is above the contracted fixed rate. The
Company has two interest rate caps, each with a different financial institution.
Both caps terminate March 2003. One contract has a notional amount of
approximately $33.9 million and the other has a notional amount of $34.0
million. The cap rate under each contract is 9.0% and payment is determined
quarterly based on the 3 month LIBOR rate in effect at the beginning of each 6
month resetting period. Under the interest rate caps, the Company receives
interest from the contracting institutions when the specified market rate is
above the cap rate. The Company adjusts the swaps and caps to fair values at
each quarter. The aggregate fair value of the swaps and caps at December 31,
2001, estimated based on the amount that the Company would receive or pay to
terminate the contracts on that date, was a liability of $4.2 million. As a
result of market LIBOR rates available to the Company for the swaps being lower
than the fixed rates it pays on the swaps, the Company paid net additional
interest of approximately $1.0 million in each of 2001 and 2000 with respect to
the interest rate instruments.
14. Commitments and Contingent Liabilities
Legal Matters
DirecTV Litigation
------------------
National Rural Telecommunications Cooperative
PST and GSS are affiliates of the NRTC that participate through
agreements in the NRTC's direct broadcast satellite program.
On June 3, 1999, the NRTC filed a lawsuit in federal court against
DirecTV, Inc. 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. The NRTC also sought a
temporary restraining order preventing DirecTV from marketing the premium
programming in such markets and requiring DirecTV to provide the NRTC with the
premium programming for exclusive distribution in those areas. The court, in an
order dated June 17, 1999, denied the NRTC a preliminary injunction on such
matters, without deciding the underlying claims.
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. As part of the counterclaim, DirecTV is seeking a
declaratory judgment that the term of the NRTC's agreement with DirecTV is
measured only by the orbital life of DBS-1, the first DIRECTV satellite
launched, and not by the orbital lives of the other DIRECTV satellites at the
101(degree)W orbital location. According to DirecTV, DBS-1 suffered a failure of
its primary control processor in July 1998 and since that time has been
operating normally using a spare control processor. While the NRTC has a right
of first refusal to receive certain services from any successor DIRECTV
satellite, the scope and terms of this right of first refusal are also being
disputed in the litigation, as discussed below. This right is not expressly
provided for in the Company's agreements with the NRTC. If DirecTV were to
prevail on its counterclaim, any failure of DBS-1 could have a material adverse
effect on the Company's DIRECTV rights.
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 December 29, 1999, DirecTV filed a motion for
partial summary judgment. The motion sought a court order that the NRTC's right
of first refusal, effective at the termination of DirecTV's contract with the
NRTC, does not include programming services and is limited to 20 program
channels of transponder capacity. On January 31, 2001, the court issued an order
denying DirecTV's motion in its entirety for partial summary judgment relating
to the right of first refusal.
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 November 15, 1999, the
court granted a motion by DirecTV and dismissed the portion of this lawsuit
asserting tort claims, but left in place the remaining claims asserted by the
NRTC. NRTC and DirecTV have also filed indemnity claims against one another,
which pertain to NRTC's alleged obligation to indemnify DirecTV for costs
incurred in the various lawsuits described herein.
F-20
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Both of the NRTC's lawsuits against DirecTV have been consolidated for
discovery and pretrial purposes. A trial date of December 2, 2002 has been set,
although at this time it is not clear which of the lawsuits will be tried on
that date.
The NRTC and DirecTV have also filed indemnity claims against one
another that pertain to the alleged obligation, if any, of the NRTC to indemnify
DirecTV for costs incurred in various lawsuits described herein. These claims
have been severed from the other claims in the case and will be tried
separately. Each side has filed a summary judgment motion relating to the
claims.
PST and GSS
On January 10, 2000, PST and GSS 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 NRTC that are
distributors of DIRECTV. The complaint contained causes of action for various
torts, common counts and declaratory relief based on DirecTV's failure to
provide the NRTC with certain premium programming, and on DirecTV's position
with respect to launch fees and other benefits, term and right of first refusal.
The complaint sought monetary damages and a court order regarding the rights of
the NRTC and its members and affiliates.
On February 10, 2000, PST and GSS filed an amended complaint which
added new tort claims against DirecTV for interference with PST's and GSS'
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. The class action allegations PST and GSS previously filed
were withdrawn to allow a new class action to be filed on behalf of the members
and affiliates of the NRTC. The new class action was filed on February 29, 2000.
On December 10, 2000, the court rejected in its entirety DirecTV's
motion to dismiss certain of the claims asserted by PST, GSS, and the putative
class. On January 31, 2001, the court denied in its entirety a motion for
summary judgment filed by DirecTV relating to the right of first refusal. The
court also certified the plaintiff's class on December 28, 2000.
On March 9, 2001, DirecTV filed a counterclaim against PST and GSS, as
well as the class members. In the counterclaim, DirecTV seeks two claims for
relief: (i) a declaratory judgement that PST and GSS have no right of first
refusal in their agreements with the NRTC to have DirecTV provide any services
after the expiration of the term of these agreements, and (ii) an order that
DBS-1 is the satellite (and the only satellite) that measures the term of PST's
and GSS' agreements with the NRTC. PST's and GSS' motion to dismiss the
counterclaims were denied on May 8, 2001, and on June 4, 2001, PST, GSS, and the
class filed a response denying DirecTV's counterclaims. On July 2, 2001, DirecTV
filed under seal a summary judgment motion on its term claim, but the court
denied the motion on October 31, 2001.
On May 21, 2001, PST, GSS, and the class members moved to amend their
complaints to add certain additional claims against DirecTV relating to, among
other things, DirecTV's provision of advanced services. The court granted this
motion on June 19, 2001. DirecTV filed its answer to the second amended
complaint on July 20, 2001.
On June 22, 2001, DirecTV brought suit against PST and GSS in Los
Angeles County Superior Court for breach of contract and common counts. The
lawsuit pertains to the seamless marketing agreement dated August 9, 2000, as
amended, between DirecTV and PST and GSS. On July 13, 2001, PST and GSS
terminated the seamless marketing agreement. On July 16, 2001, PST and GSS filed
a cross complaint against DirecTV alleging, among other things, that (i) DirecTV
has breached the seamless marketing agreement, and (ii) DirecTV has engaged in
unlawful and/or unfair business practices, as defined in Section 17200, et seq.
of California Business and Professions Code. On July 19, 2001, PST and GSS
removed the case from state to federal court. DirecTV moved to remand the case
back to state court but, on September 19, 2001, the court denied DirecTV's
motion.
All five lawsuits discussed above, including both lawsuits brought by
the NRTC, the class action, and PST's and GSS' lawsuits, are pending before the
same judge. The court has set a trial date of December 2, 2002, although, as
noted above, it is not clear whether all the lawsuits will be tried together.
F-21
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Legal Matters
-------------------
In addition to the matters discussed above, from time to time the
Company is involved with claims that arise in the normal course of the Company's
business. In the Company's opinion, the ultimate liability with respect to these
claims will not have a material adverse effect on the Company's consolidated
operations, cash flows, or financial position.
Commitments
Call Center Services
--------------------
The Company has an agreement with a provider of integrated marketing,
information, and transaction services to provide customer relationship
management services. The initial term of the agreement ends in December 2004,
and is subject to automatic renewal for successive three year terms unless
either party provides notice of termination. The fees that the Company must pay
vary based on the types of service provided, performance criteria, and other
costs incurred by the provider. The minimum annual fees that the Company must
pay over the remaining initial term of this agreement are $20.3 million in each
year 2002 through 2004. Expense recognized under this agreement was $27.9
million, $22.3 million, and $1.7 million 2001, 2000, and 1999, respectively.
Communications Services
-----------------------
The Company has an agreement with a provider of telephone services that
commenced in May 2000 and expires May 2003. The fees that the Company must pay
vary based on usage type and volume. The Company must pay a minimum annual fee
of $7.0 million over the term of the agreement. Expense recognized under this
agreement was $9.2 million in 2001 and $6.3 million in 2000.
Purchase Option
---------------
In January 2002, the Company exercised its option to purchase for $10.7
million an office building it has been renting, and is in the process of
negotiating the purchase agreement.
15. Related Party Transactions
The Company reimburses a subsidiary of Pegasus Satellite for corporate
expenses services incurred by it on behalf of the Company relating to certain
administrative and accounting services, billing, and programming. The amount of
these expenses reimbursed and recorded by the Company as corporate expenses on
the statement of operations and comprehensive loss was $13.9 million, $10.2
million, and $4.4 million for 2001, 2000, and 1999, respectively. Net advances
to affiliates consist of the net amount due from, after reduction of amounts due
to, Pegasus Communications, Pegasus Satellite, and subsidiaries of each that are
not subsidiaries of the Company. Balances at December 31, 2001 and 2000 were
$33.8 million and $4.3 million, respectively. The principal reason for the
increase in the net advances to affiliates balance at December 31, 2001 is due
to the transfer of intercompany payable balances among the Company's
subsidiaries to a subsidiary of Pegasus Satellite.
16. Industry Segments
At December 31, 2001, the Company's only reportable segment was its DBS
business. DBS provides multichannel digital broadcast satellite audio and video
programming of DIRECTV service in rural areas of the United States on a
subscription basis. Audio and video programming provided 93% of the total DBS
revenues in each of 2001, 2000, and 1999. Performance of the DBS business is
evaluated based on premarketing cash flow and EBITDA. Premarketing cash flow of
the DBS business is DBS revenues less programming expense (excluding promotional
programming), other subscriber related expenses, and general and administrative
expenses. EBITDA of the DBS business is premarketing cash flow less promotional
programming, promotions and incentives, and advertising and selling expenses.
Premarketing cash flow and EBITDA 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 the Company's
operating performance or liquidity, as determined under generally accepted
accounting principles. Although EBITDA is a common measure used by other
companies, the Company's calculation of EBITDA may not be comparable with that
of others. Information on DBS' revenue and results of operations is as presented
on the statements of operations and comprehensive loss. DBS derived all of its
revenues from external customers for each period reported. Capital expenditures
for the DBS business were approximately $37.0 million, $19.1 million, and $3.6
million for 2001, 2000, and 1999, respectively. Capital expenditures for all
other operations were $3.5 million, $11.7 million, and $8.6 million for 2001,
2000, and 1999, respectively. Identifiable total assets for DBS were $2.0
billion and $2.2 billion at December 31, 2001 and 2000, respectively.
Identifiable total assets for all other operations were $56.7 million and $102.9
million at December 31, 2001 and 2000, respectively.
F-22
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Quarterly Information (Unaudited)
(in thousands)
Quarter Ended
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
---- ---- ---- ----
Net revenues................................ $213,484 $215,165 $214,578 $227,490
Loss from operations ....................... (69,340) (58,741) (48,165) (37,324)
Loss before extraordinary item.............. (61,112) (49,007) (56,911) (33,157)
Net loss.................................... (61,112) (49,993) (56,911) (33,157)
In the quarter ended September 30, 2001, the Company recognized a loss
on the impairment of marketable securities it held of $34.2 million.
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
---- ---- ---- ----
Net revenues................................ $103,956 $143,644 $168,289 $201,529
Loss from operations........................ (21,625) (38,849) (71,146) (70,382)
Loss before extraordinary item.............. (22,742) (35,735) (701) (66,123)
Net loss.................................... (28,496) (35,735) (701) (66,123)
The quarter ended March 31, 2001 has been adjusted from that previously
reported to include amounts for GSH on an "as if pooling" basis in connection
with the contribution of GSH by Pegasus Satellite to the Company in June 2001.
In the quarter ended September 30, 2000, the Company recognized a gain of $59.4
million, net of applicable taxes of $28.0 million, on the sale of its Puerto
Rico cable operations.
18. Subsidiary Guarantors
PM&C's 12-1/2% senior subordinated notes due 2005 are guaranteed on a
full, unconditional, senior subordinated basis, jointly and severally by each of
its 100% owned direct and indirect subsidiaries, including GSH and its
subsidiaries, with the exception of certain subsidiaries described in the
following sentence. Pegasus Satellite Finance Corporation 2000, Pegasus
Satellite Finance Corporation, Pegasus Satellite Development Corporation, and
South Plains DBS L.P., all of which are direct or indirect subsidiaries of PM&C,
are not guarantors of the notes ("Nonguarantor Subsidiaries"). PM&C believes
separate financial statements and other disclosures concerning the Guarantor
Subsidiaries are not deemed significant. In lieu of separate financial
statements, PM&C is providing the following condensed consolidating financial
statements to present the financial position, results of operations, and cash
flows of the guarantor and nonguarantor entities comprising the consolidated
reporting group.
F-23
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Subsidiary Guarantors (continued)
Condensed Consolidating Balance Sheets
(In thousands)
As of December 31, 2001
Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 99,710 $ 99,710
Accounts receivable, net 65,560 65,560
Other current assets 70,972 $ 4,407 75,379
------------------------------------------------------------------------------
Total current assets 236,242 - 4,407 - 240,649
Property and equipment, net 72,335 72,335
Intangible assets, net 1,708,008 125 1,708,133
Other noncurrent assets 45,056 7,674 52,730
Investment in subsidiaries and affiliates $ 287,435 2,423,599 $ (2,711,034)
------------------------------------------------------------------------------
Total assets $ 2,061,641 $ 287,435 $ 2,435,805 $ (2,711,034) $ 2,073,847
=============================================================================
Liabilities and common stockholder's equity:
Current portion of long term debt $ 5,865 $ 2,750 $ 8,615
Accounts payable 8,905 8,905
Other current liabilities 145,482 6,898 152,380
------------------------------------------------------------------------------
Total current liabilities 160,252 - 9,648 - 169,900
Long term debt 2,824 433,078 435,902
Other noncurrent liabilities 101,144 $ (58,508) 77,489 120,125
------------------------------------------------------------------------------
Total liabilities 264,220 (58,508) 520,215 - 725,927
Minority interest 1,315 1,315
Total common stockholder's equity 1,796,106 345,943 1,915,590 (2,711,034) 1,346,605
------------------------------------------------------------------------------
Total liabilities and common stockholder's equity $ 2,061,641 $ 287,435 $ 2,435,805 $ (2,711,034) $ 2,073,847
=============================================================================
F-24
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Subsidiary Guarantors (continued)
Condensed Consolidating Balance Sheets
(In thousands)
As of December 31, 2000
Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 76,982 $ 106,279 $ 183,261
Accounts receivable, net 55,604 55,604
Other current assets 43,802 5,431 49,233
------------------------------------------------------------------------------
Total current assets 176,388 - 111,710 - 288,098
Property and equipment, net 46,947 46,947
Intangible assets, net 1,943,717 (87) 1,943,630
Other noncurrent assets 45,616 8,911 54,527
Investment in subsidiaries and affiliates 266,042 2,544,011 $ (2,810,053)
------------------------------------------------------------------------------
Total assets $ 2,212,668 $ 266,042 $ 2,664,545 $ (2,810,053) $ 2,333,202
==============================================================================
Liabilities and common stockholder's equity:
Current portion of long term debt $ 8,035 $2,750 $ 10,785
Accounts payable 8,097 - 8,097
Other current liabilities 151,296 $ 35,744 187,040
------------------------------------------------------------------------------
Total current liabilities 167,428 - 38,494 - 205,922
Long term debt 400,209 393,176 793,385
Other noncurrent liabilities 74,977 $ (34,779) 184,362 224,560
------------------------------------------------------------------------------
Total liabilities 642,614 (34,779) 616,032 - 1,223,867
Minority interest 911 911
Total common stockholder's equity 1,569,143 300,821 2,048,513 (2,810,053) 1,108,424
------------------------------------------------------------------------------
Total liabilities and common stockholder's equity $ 2,212,668 $ 266,042 $ 2,664,545 $ (2,810,053) $ 2,333,202
==============================================================================
F-25
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Subsidiary Guarantors (continued)
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
(In thousands)
For the Year ended December 31, 2001
Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
--------------------------------------------------------------------------
Total net revenues $ 857,970 $ 54,785 $ (42,038) $ 870,717
Total operating expenses 1,005,568 120,660 $ 97 (42,038) 1,084,287
--------------------------------------------------------------------------
Loss from operations (147,598) (65,875) (97) - (213,570)
Interest expense (22,749) - (42,809) (65,558)
Other (34,615) - (1,978) (36,593)
--------------------------------------------------------------------------
Loss before income taxes and exraordinary item (204,962) (65,875) (44,884) - (315,721)
Income taxes (753) (114,781) (115,534)
--------------------------------------------------------------------------
Income (loss) before extraordinary item (204,209) (65,875) 69,897 - (200,187)
Extraordinary loss from extinguishment of debt, net of
income taxes (986) - (986)
--------------------------------------------------------------------------
Net income (loss) (205,195) (65,875) 69,897 - (201,173)
Other comprehensive income, net 25,979 (12,998) 12,981
--------------------------------------------------------------------------
Comprehensive income (loss) $ (179,216) $ (65,875) $ 56,899 $ - $ (188,192)
==========================================================================
F-26
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Subsidiary Guarantors (continued)
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
(In thousands)
For the Year ended December 31, 2000
Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
-------------------------------------------------------------------------
Total net revenues $ 610,305 $ 35,544 $ (28,431) $ 617,418
Total operating expenses 701,897 145,864 $ 90 (28,431) 819,420
-------------------------------------------------------------------------
Loss from operations (91,592) (110,320) (90) - (202,002)
Interest expense (36,302) (43,667) (79,969)
Other 1,564 2,578 4,142
-------------------------------------------------------------------------
Loss before income taxes, discontinued operations, and
extraordinary item (126,330) (110,320) (41,179) - (277,829)
Income taxes 1,670 (93,806) (92,136)
-------------------------------------------------------------------------
Income (loss) before discontinued operations and
extraordinary item (128,000) (110,320) 52,627 - (185,693)
Discontinued operations, net of income taxes 61,056 (32) (632) 60,392
-------------------------------------------------------------------------
Income (loss) before extraordinary item (66,944) (110,352) 51,995 - (125,301)
Extraordinary loss from extinguishments of debt, net of
income taxes (9,280) 3,526 (5,754)
-------------------------------------------------------------------------
Net income (loss) (76,224) (110,352) 55,521 - (131,055)
Other comprehensive loss, net (19,316) 7,340 (11,976)
-------------------------------------------------------------------------
Comprehensive income (loss) $ (95,540) $ (110,352) $ 62,861 $ - $(143,031)
=========================================================================
F-27
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Subsidiary Guarantors (continued)
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
(In thousands)
For the Year ended December 31, 1999
Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
---------------------------------------------------------------------------
Total net revenues $ 209,870 $ 11,054 $ (11,054) $ 209,870
Total operating expenses 214,565 74,460 $ 769 (11,054) 278,740
---------------------------------------------------------------------------
Loss from operations (4,695) (63,406) (769) - (68,870)
Interest expense (929) (16,581) (17,510)
Other 440 (141) 299
---------------------------------------------------------------------------
Loss before income taxes and discontinued operations (5,184) (63,406) (17,491) - (86,081)
Income taxes 100 100
---------------------------------------------------------------------------
Loss before discontinued operations (5,284) (63,406) (17,491) - (86,181)
Discontinued operations, net of income taxes 1,900 228 2,128
---------------------------------------------------------------------------
Net loss $ (3,384) $ (63,178) $ (17,491) $ - $ (84,053)
===========================================================================
F-28
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Subsidiary Guarantors: (continued)
Condensed Consolidated Statements of Cash Flows
(in thousands)
For the Year Ended December 31, 2001
Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
-----------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (205,195) $ (65,875) $ 69,897 $ - $ (201,173)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 267,579 140 25 267,744
Amortization of debt discount and deferred financing fees 8,105 2,781 10,886
Other 80,720 (113,456) (32,736)
Change in current assets and liabilities:
Accounts receivable (63,949) (63,949)
Accounts payable and accrued expenses 7,045 7,045
Prepaids 9,714 9,714
Taxes payable (1,670) (27,950) (29,620)
Other 5,102 (27,822) (22,720)
----------------------------------------------------------------------
Net cash provided (used) by operating activities 107,451 (65,735) (96,525) - (54,809)
----------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions (889) (889)
Capital expenditures (40,512) (40,512)
Purchases of intangible assets (7,638) (7,638)
Other (4,629) (4,629)
----------------------------------------------------------------------
Net cash used by investing activities (53,668) - - - (53,668)
----------------------------------------------------------------------
Cash flows from financing activities:
Net (repayments) borrowings of debt (79,485) 42,250 (37,235)
Net contributions from Pegasus Satellite Communications - 104,552 104,552
Other 48,430 65,735 (156,556) (42,391)
----------------------------------------------------------------------
Net cash provided (used) by financing activities (31,055) 65,735 (9,754) - 24,926
----------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 22,728 - (106,279) - (83,551)
Cash and cash equivalents, beginning of year 76,982 - 106,279 - 183,261
----------------------------------------------------------------------
Cash and cash equivalents, end of year $ 99,710 $ - $ - $ - $ 99,710
======================================================================
F-29
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Subsidiary Guarantors: (continued)
Condensed Consolidated Statements of Cash Flows
(in thousands)
For the Year Ended December 31, 2000
Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
----------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (76,224) $ (110,352) $ 55,521 $ - $ (131,055)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 200,832 94 60 200,986
Amortization of debt discount and deferred financing fees 13,210 2,441 15,651
Gain on sale of cable operations - (87,361) (87,361)
Other 23,855 (90,921) (67,066)
Change in current assets and liabilities:
Accounts receivable (39,194) (39,194)
Accounts payable and accrued expenses 45,421 45,421
Prepaids (17,276) (17,276)
Taxes payable 1,670 27,950 29,620
Other (14,850) 16,433 1,583
---------------------------------------------------------------------
Net cash provided (used) by operating activities 137,444 (110,258) (75,877) - (48,691)
---------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions (128,331) (128,331)
Capital expenditures (30,757) (30,757)
Increase in intangible assets (24,997) (24,997)
Proceeds from sale of cable operations - 166,937 166,937
Other (4,944) (4,944)
---------------------------------------------------------------------
Net cash provided (used) for investing activities (189,029) - 166,937 - (22,092)
---------------------------------------------------------------------
Cash flows from financing activities:
Net (repayments) borrowings of debt (66,686) 167,500 100,814
Net contributions from Pegasus Satellite Communications - 140,009 140,009
Other 179,854 110,078 (298,046) (8,114)
---------------------------------------------------------------------
Net cash provided by financing activities 113,168 110,078 9,463 - 232,709
---------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 61,583 (180) 100,523 - 161,926
Cash and cash equivalents, beginning of year 15,399 180 5,756 - 21,335
---------------------------------------------------------------------
Cash and cash equivalents, end of year $ 76,982 $ - $ 106,279 $ - $ 183,261
=====================================================================
F-30
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Subsidiary Guarantors: (continued)
Condensed Consolidated Statements of Cash Flows
(in thousands)
For the Year ended December 31, 1999
Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (3,384) $ (63,178) $ (17,491) $ (84,053)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 57,459 696 58,155
Amortization of debt discount and deferred financing fees - 398 398
Other 1,769 1,495 3,264
Change in current assets and liabilities:
Accounts receivable (12,856) (12,856)
Accounts payable and accrued expenses 15,748 15,748
Prepaids (2,666) (2,666)
Other (7,652) (4,115) 7,290 (4,477)
-----------------------------------------------------------------------
Net cash provided (used) by operating activities 48,418 (67,293) (7,612) - (26,487)
-----------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions (106,902) (106,902)
Capital expenditures (12,248) (12,248)
Purchases of intangible assets (4,098) (4,098)
Other (3,452) (3,452)
-----------------------------------------------------------------------
Net cash used by investing activities (126,700) - - - (126,700)
-----------------------------------------------------------------------
Cash flows from financing activities:
Net (repayments) borrowings of debt (10,260) 115,000 104,740
Net contributions from Pegasus Satellite Communications - 57,551 57,551
Other 89,484 64,695 (164,501) (10,322)
-----------------------------------------------------------------------
Net cash provided by financing activities 79,224 64,695 8,050 - 151,969
-----------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 942 (2,598) 438 - (1,218)
Cash and cash equivalents, beginning of year 14,457 2,778 5,318 - 22,553
-----------------------------------------------------------------------
Cash and cash equivalents, end of year $ 15,399 $ 180 $ 5,756 $ - $ 21,335
=======================================================================
F-31
PEGASUS MEDIA & COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2001, 2000, and 1999
(In thousands)
Balance at Additions Additions
Beginning of Charged To Charged To Balance at
Description Period Expenses Other Accounts Deductions End of Period
Allowance for Uncollectible
Accounts Receivable
-------------------
Year 2001 $ 3,303 $36,456 $ - $33,798(b) $ 5,961
Year 2000 1,067 14,531 1,343(a) 13,638(b) 3,303
Year 1999 384 5,122 - 4,439(b) 1,067
Valuation Allowance for
Deferred Tax Assets
-------------------
Year 2001 $ - $ - $ - $ - $ -
Year 2000 43,815 - - 43,815(c) -
Year 1999 24,285 31,473 - 11,943 43,815
(a) Represents allowance for doubtful accounts of $343 for Digital Television
Services, Inc. and $1,000 for Golden Sky Holdings, Inc. resulting from the
merger of each company into the Company.
(b) Amounts written off, net of recoveries.
(c) Valuation allowances no longer required due to the acquisition of Golden
Sky Holdings, Inc.
S-1