Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 1997
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 0-21389
-------
PEGASUS MEDIA & COMMUNICATIONS, INC.
------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2778525
-------- ----------
(State of other jurisdiction of (IRS Employer
incorporation of organization) Identification Number)
c/o Pegasus Communications Management Company;
5 Radnor Corporate Center; Suite 454, Radnor, PA 19087
------------------------------------------------ -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
--------------
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes_X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K.[X]
Number of shares of each class of the registrant's common stock
outstanding as of March 8, 1998:
Class A, Common Stock, $0.01 par value 161,500
Class B, Common Stock, $0.01 par value 8,500
The Registrant meets the conditions set forth in General Instructions (I)(1)(a)
and (b) of Form 10-K and therefore filing this Form with the reduced disclosure
format.
PEGASUS MEDIA & COMMUNICATIONS, INC.
PART I
For definitions of certain terms used in this Report, see "Glossary of
Defined Terms," which begins on page 5 of this Report.
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 the Company (as defined) that are based on the beliefs
of the management of the Company, as well as assumptions made by and information
currently available to the Company's management. When used in this Report, the
words "estimate," "project," "believe," "anticipate," "intend," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the current views of the Company 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. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. Such
factors include, among others, the following: general economic and business
conditions, both nationally, internationally and in the regions in which the
Company operates; demographic changes; existing government regulations and
changes in, or the failure to comply with government regulations; competition;
the loss of any significant numbers of subscribers or viewers; changes in
business strategy or development plans; technological developments and
difficulties (including any associated with the Year 2000); the ability to
attract and retain qualified personnel; the significant indebtedness of the
Company; the availability and terms of capital to fund the expansion of the
Company's businesses; and other factors referenced in this Report. The Company
does 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.
Item 1: Business
General
Pegasus Media & Communications, Inc. ("PM&C" and together with its
subsidiaries, the "Company") is a diversified company that operates in growing
segments of the media and communications industries. PM&C is a wholly owned
subsidiary of Pegasus Communications Corporation.
The Company owns and operates five TV stations affiliated with Fox and
has or plans to enter into LMAs to operate three television stations, two of
which are to be affiliated with WB and one affiliated with UPN. The Company is
the largest independent provider of DIRECTV(R) ("DIRECTV"). Giving effect to the
Pending DBS Acquisitions, the Company will have the exclusive right to provide
DIRECTV services to approximately 2.5 million U.S. television households in
rural areas of 30 states serving a current subscriber base, as of February 28,
1998 of approximately 178,300 subscribers. The Company also provides cable
service to approximately 43,000 subscribers in New England and Puerto Rico. On
January 16, 1998 the Company entered into an agreement to sell its New England
cable systems.
Acquisition Strategy
The Company's acquisition strategy is to identify media and
communications businesses exhibiting the following characteristics:
Significant Revenue Growth Potential. The Company targets media
segments whose revenues are growing (and in which it believes revenues will
continue to grow) consistently at rates of growth exceeding that of the U.S.
economy as a whole (as measured by gross domestic product).
2
Fragmented Ownership. The Company targets media segments where
ownership is fragmented and where it believes consolidation will result in
benefits to consumers as well as improved profitability.
Opportunity to Increase Market Share. The Company seeks to acquire or
start companies within media segments whose market share can be significantly
increased.
Operating Leverage. The Company seeks businesses in media segments
characterized by high levels of operating leverage and where Location Cash Flow
margins rise with increases in revenues.
Operating Strategy
The Company's operating strategy is designed to capitalize upon these
business characteristics in order to generate consistent and significant
increases in Location Cash Flow by:
Aggressive Sales and Marketing. The Company builds aggressive sales and
marketing organizations to enable it to significantly increase its market share.
Careful Cost Controls. The Company maintains careful cost controls to
capitalize upon the operating leverage intrinsic to its businesses.
Focus on Cash Flow Growth. The Company rewards all of its employees for
growth in Location Cash Flow through an innovative profit-sharing plan which it
believes ensures that all employees of the Company are focused on the goal of
consistent and significant increases in Location Cash Flow.
Recent and Pending Transactions
Completed Sale
Effective January 31, 1997, the Company sold substantially all the
assets of its New Hampshire cable system to State Cable TV Corporation for
approximately $6.9 million in cash, net of certain selling costs. The Company
recognized a gain on the transaction of approximately $4.5 million.
Completed Acquisitions
Effective October 31, 1997, the Company acquired, from an independent
DIRECTV provider, the rights to provide DIRECTV programming in certain rural
areas of Georgia and the related assets and liabilities in exchange for
approximately $6.4 million in cash and 397,035 shares of Class A Common Stock of
PM&C's parent, Pegasus Communications Corporation (the "Parent").
As of November 7, 1997, the Company acquired, from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Nebraska, Minnesota, Utah and Wyoming and the related assets in
exchange for approximately $3.1 million in cash, $147,000 in assumed
liabilities, a $1.7 million note, payable over two years, and a $446,000 note
due November 2000.
As of January 7, 1998, the Company acquired, from an independent
DIRECTV provider, the rights to provide DIRECTV programming in certain rural
areas of Minnesota and the related assets in exchange for approximately $1.9
million in cash and $32,000 in assumed liabilities.
3
Subsidiaries Combination
Effective October 21, 1997, the Company acquired (the "Subsidiaries
Combination") the assets of Pegasus Satellite Holdings, Inc. ("PSH"), a related
party, which assets consisted of the stock of its subsidiaries that hold the
rights to all of the Company's DBS territories (the "Shares"). The aggregate
purchase price for the Shares was approximately $218.2 million and consisted of
$85.6 million in cash, the redemption and cancellation of the $27.8 million of
preferred equity in PSH acquired in the PST/PSH Exchange (as defined in footnote
1 to the Company's Combined Financial Statements) and the assumption of
approximately $104.8 million in assumed liabilities. These transactions were
recorded at historical values. At October 21, 1997, PSH's subsidiaries provided
DBS services to customers in certain rural areas which encompassed portions of
26 states. As a result of the Subsidiaries Combination, the Company is the
direct or indirect parent of all subsidiaries that operate the parent's TV, DBS
and cable businesses.
LMAs
On August 1, 1997, Pegasus commenced operations of TV station WPME,
which is affiliated with UPN. WPME is in the Portland, Maine DMA and is being
operated under an LMA. WPME's offices, studio and transmission facilities are
co-located with WPXT, a TV station in the Portland market the Company has owned
and operated since January 1996.
On October 17, 1997, Pegasus commenced operations of TV station WGFL,
which is affiliated with WB. WGFL is in the Gainesville, Florida DMA and is
being operated under an LMA.
Pending Sale
On January 16, 1998, the Company entered into an agreement to sell its
remaining New England cable systems for a purchase price of at least $28 million
and not more than $31 million, based on the systems' cash flow for the trailing
12 months prior to closing, multiplied by nine.
Pending Acquisitions
Pending DBS Acquisitions. As of March 12, 1998, the Company had entered
into 14 letters of intent or definitive agreements to acquire, from various
independent DIRECTV providers, the rights to provide DIRECTV programming in
certain rural areas of Idaho, Nebraska, New Mexico, Oregon, South Dakota and
Texas and the related assets (the "Pending DBS Acquisitions") in exchange for
approximately $52.9 million of cash, $10.3 million of promissory notes and
$854,000 in shares of the Parent's Class A Common Stock. Each of the Pending DBS
Acquisitions for which there is only a letter of intent is subject to
negotiation of a definitive agreement, and all of the Pending DBS Acquisitions
are subject, if not already obtained, to the prior approval of Hughes
Electronics Corporation or one of its subsidiaries ("Hughes") and the NRTC. In
addition to these conditions, each of the Pending DBS Acquisitions will be
subject to conditions typical in acquisitions of this nature, certain of which
conditions, like the Hughes and NRTC consents, may be beyond the Company's
control. There can be no assurance that definitive agreements will be entered
into with respect to all of the Pending DBS Acquisitions or, if entered into,
that all or any of the Pending DBS Acquisitions will be completed.
New Credit Facility
In December 1997, PM&C entered into a $180.0 million six-year senior
revolving credit facility (the "New Credit Facility"), which is collateralized
by substantially all of the assets of PM&C and its subsidiaries. Interest on the
New Credit Facility is, at PM&C's option, at either the bank's base rate plus an
applicable margin or LIBOR plus an applicable margin. The New Credit Facility is
subject to certain financial covenants as defined in the loan agreement,
including a debt to adjusted cash flow covenant. The New Credit Facility will be
used to finance future acquisitions and for working capital, capital
expenditures and general corporate purposes. Payment of cash dividends on PM&C's
common stock are restricted by the terms of the New Credit Facility. There were
no borrowings outstanding on December 31, 1997.
4
Employees
As of February 28, 1998, the Company had 390 full-time and 69 part-time
employees. The Company is not a party to any collective bargaining agreement and
considers its relations with its employees to be good.
Glossary of Defined Terms
Company PM&C and its direct and indirect subsidiaries.
DBS Direct broadcast satellite television.
DIRECTV The video, audio and data services provided
via satellite by DIRECTV Enterprises, Inc.,
or the entity, as applicable.
Fox Fox Broadcasting Company.
Hughes Hughes Electronics Corporation or one of its
subsidiaries, including DIRECTV, Inc., as
applicable.
Indenture The indenture dated July 7, 1995 by and
among PM&C, Certain of its subsidiaries and
First Union National Bank, as trustee,
relating to the PM&C Notes.
LMAs Local marketing agreements, program service
agreements or time brokerage agreements
between broadcasters and television station
licensees pursuant to which broadcasters
provide programming to and retain the
advertising revenues of such stations in
exchange for fees paid to television station
licensees.
New Credit Facility PM&C's $180.0 million credit facitlity.
NRTC The National Rural Telecommunications
Cooperative, the only entity authorized to
provide DIRECTV services that is independent
of DIRECTV, Inc. Approximately 165 NRTC
members and affiliate members are authorized
to provide DIRECTV services in exclusive
territories granted to members and affiliate
members of the NRTC by DIRECTV, Inc.
Parent Pegasus Communications Corporation.
Pending DBS The acquisition of DBS territories and related
Acquisitions assets from 14 independent providers of DIRECTV
services.
PM&C Pegasus Media & Communications, Inc.
PST Pegasus Satellite Television, Inc.
UPN United Paramount Network.
WB The WB Television Network.
5
Item 2: Properties
Owned or
Leased Expiration of Lease
Location and Type of Property Approximate Size or Renewal Options
- ----------------------------- -------- ---------------- ------------------
TV Stations
Jackson, MS (transmitting equipment) Leased 1,125 foot tower 2/28/04
Jackson, MS (television station and (1) Lease/ 5,600 sq. ft. bldg.; 900 sq. N/A
transmitter building) Purchase ft. bldg.
West Mountain, PA (tower & transmitter) Leased 9.6 acres 1/31/00
Scranton, PA (television station) Leased 9,032 sq. ft. 4/30/00
Bald Eagle Mtn, PA (transmitting ) Leased 179' tower 9/30/07
Nescopec Mountain, PA (transmitting) Leased 400 foot tower 9/30/07
Williamsport, PA (tower) Owned 175 foot tower N/A
Williamsport, PA (land) Owned 40,000 sq. ft. N/A
Chattanooga, TN (transmitting) Leased 577 foot tower 9/30/07
Chattanooga, TN (television station) Owned 16,240 sq. ft. bldg. on 3.17 N/A
acres
Portland, ME (television station) Leased 8,000 sq. ft. 12/31/00
Gray, ME (tower site) Owned 18.6 acres N/A
Midway, FL (television station) Owned 16,000 sq. ft. bldg. on 3.55 N/A
acres
Jasper, FL Owned 118 acres N/A
Nickleville, GA (tower) Owned 22.5 acres N/A
Cairo, GA Owned 18 acres N/A
DBS Offices
Marlborough, MA (office) Leased 11,450 sq. ft. 6/30/02
Charlton, MA (warehouse) Leased 1,750 sq. ft. area Monthly
Cable Systems
Winchester, CT (headend) Owned 15.22 acres N/A
Winsted, CT (office) Owned 2,000 sq. ft. N/A
North Brookfield, MA (headend) Leased 60,000 sq. ft. / 100' tower 6/01/04
Charlton, MA (office, headend site) Leased 38,223 sq. ft. 5/9/99
Hinsdale, MA (headend site) Leased 30,590 sq. ft. 2/1/04
Lanesboro, MA (headend site) Leased 62,500 sq. ft. 4/13/03
West Stockbridge, MA (headend site) Leased 1.59 acres 4/4/05
Mayaguez, Puerto Rico (office) Leased 2,520 sq. ft. building 8/14/00
Mayaguez, Puerto Rico (headend) Leased 530 sq. ft. building 8/30/98
Mayaguez, Puerto Rico (warehouse) Leased 1,750 sq. ft. area monthly
San German, Puerto Rico (headend site) Owned 1,200 sq. ft. N/A
San German, Puerto Rico (land) Leased 192 sq. meters 30 yr. term
San German, Puerto Rico (tower & Owned 60' tower N/A
transmitter)
San German, Puerto Rico (office) Leased 2,928 sq. ft. 2/1/01
Anasco, Puerto Rico (office) Leased 500 sq. ft 2/28/99
Anasco, Puerto Rico (headend site) Leased 1,200 sq. meters monthly
Anasco, Puerto Rico (headend) Owned 59 foot tower N/A
Guanica, Puerto Rico (headend site) Leased 121 sq. meters 2/28/04
Cabo Rojo, Puerto Rico (headend site) Leased 121 sq. meters 11/10/04
Hormigueros, Puerto Rico (warehouse) Leased 2,000 sq. ft. monthly
(1) The Company entered into a Lease/Purchase agreement in July 1993 which calls
for 60 monthly payments of $4,500 at the end of which the property is
conveyed to the Company.
6
Item 3: Legal Proceedings
From time to time the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
consolidated operations, cash flows or financial position of the Company.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders of PM&C during the
fourth quarter of fiscal year 1997.
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
None of PM&C's equity securities are publicly traded. All of PM&C's
equity securities are held by the parent. PM&C did not sell any equity
securities that would be required to be reported in accordance with regulation
S-K Item 701 of the Securities Act of 1933, as amended.
7
Item 6: Selected Financial Data
The selected historical consolidated financial data for the years ended
December 31, 1993 have been derived from the Company's audited Consolidated
Financial Statements for such period. The selected historical consolidated
financial data for the years ended December 31, 1994, 1995, 1996 and 1997 have
been derived from the Company's Combined Financial Statements for such periods,
which have been audited by Coopers & Lybrand L.L.P., as indicated in their
report included elsewhere herein. The information should be read in conjunction
with the Combined Financial Statements and the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
are included elsewhere herein.
INCOME STATEMENT DATA :
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Net revenues
DBS $ - $ 174 $ 1,469 $ 4,213 $ 17,990
Cable 9,134 10,148 10,606 13,496 16,688
TV(a) 10,308 17,808 19,973 28,488 31,726
----------- ---------- ----------- ------------ -----------
Total net revenues 19,442 28,130 32,048 46,197 66,404
----------- ---------- ----------- ------------ -----------
Direct operating expenses(b)
DBS - 210 1,379 3,811 16,793
Cable 4,655 5,545 5,791 7,192 8,693
TV 7,564 12,380 13,980 18,775 21,398
Incentive compensation(c) 192 432 527 935 919
Corporate expenses 1,261 1,499 1,770 2,045 1,619
Depreciation and amortization 5,907 6,877 8,674 10,493 17,854
----------- ---------- ----------- ------------ -----------
Income (loss) from operations (137) 1,187 (73) 2,946 (872)
Interest expense (4,380) (5,951) (8,795) (12,438) (12,596)
Interest income - - 370 232 102
Other expense, net (220) (65) (44) (136) (148)
(Provision) benefit for income taxes - (140) (30) 120 (200)
Gain on sale of cable system - - - - 4,451
Extraordinary gain (loss), net - (633) 10,210 (251) (1,656)
========== ========= ========== =========== ==========
Net income (loss) $ (4,737) $ (5,602) $ 1,638 $ (9,527) $ (10,919)
=========== ========== =========== ============ ===========
Income (loss) per share:
Loss before extraordinary item $ (29.33) $ (30.77) $ (51.73) $ (54.57) $ (54.49)
Extraordinary item - (3.92) 61.62 (1.47) (9.74)
=========== ========== =========== ============ ===========
Net income (loss) per share $ (29.33) $ (34.69) $ 9.89 $ (56.04) $ (64.23)
=========== ========== =========== ============ ===========
Weighted average shares
Outstanding 161,500 161,500 165,692 170,000 170,000
OTHER DATA:
Pre-SAC Location Cash Flow(d) $ 7,223 $ 9,995 $ 11,310 $ 17,878 $ 24,324
Location Cash Flow(d) 7,223 9,995 10,898 16,419 19,520
Operating Cash Flow(d) 5,770 8,064 8,773 14,374 16,982
Capital expenditures 818 1,173 2,571 6,243 9,375
Net cash provided by (used for):
Operating activities 2,400 3,996 6,099 8,572 7,858
Investing activities (134) (3,480) (6,389) (51,033) (49,572)
Financing activities (1,694) (637) 10,881 38,911 50,308
8
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,498 $ 1,376 $ 11,967 $ 8,417 $ 17,010
Net working capital (deficiency) (3,853) (22,881) 17,378 479 285
Total assets 76,185 75,051 95,417 126,228 338,923
Total debt (including current) 72,127 61,349 82,638 115,511 93,308
Total liabilities 78,669 68,118 95,592 135,825 137,098
Total equity (deficiency)(e) (2,484) 6,933 (175) (9,596) 201,825
(a) Net revenues are shown net of agency commissions and national representation
fees.
(b) Direct operating expenses consist of programming, barter programming,
general and administrative, technical and operations, marketing and selling
and incentive compensation expense.
(c) Incentive compensation represents compensation expenses pursuant to the
Restricted Stock Plan and 401(k) Plans.
(d) Pre-SAC Location Cash Flow is defined as Location Cash Flow plus subscriber
acquisition costs. Location Cash Flow is defined as net revenues less
location operating expenses. Location operating expenses consist of
programming, barter programming, general and administrative, technical and
operations, marketing and selling expenses. Operating Cash Flow is defined
as income (loss) from operations plus (i) depreciation and amortization and
(ii) non-cash incentive compensation. The difference between Location Cash
Flow and Operating Cash Flow is that Operating Cash Flow includes cash
incentive compensation and corporate expenses. Although Location Cash Flow
and Operating Cash Flow are not measures of performance under generally
accepted accounting principles, the Company believes that Location Cash Flow
and Operating Cash Flow are accepted within the Company's business segments
as generally recognized measures of performance and are used by analysts who
report publicly on the performance of companies operating in such segments.
Nevertheless, these measures should not be considered in isolation or as a
substitute for income from operations, net income, net cash provided by
operating activities or any other measure for determining the Company's
operating performance or liquidity which is calculated in accordance with
generally accepted accounting principles.
(e) The Company has not paid any cash dividends. Payment of cash dividends on
PM&C's common stock are restricted by the terms of this Indenture and the
New Credit Facility.
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Combined
Financial Statements and related notes thereto which are included elsewhere
herein. This Report contains certain forward-looking statements that involve
risks and uncertainties. The Company`s actual results could differ materially
from those discussed herein.
General
The Company is a diversified company operating in growing segments of
the media and communications industries: multichannel television and broadcast
television. Pegasus Multichannel Television includes DBS and cable businesses.
As of December 31, 1997, the Company's DBS operations consisted of providing
DIRECTV services to approximately 132,000 subscribers in certain rural areas of
27 states in which the Company holds the exclusive right to provide such
services. Its cable operations consist of systems in New England (Connecticut
and Massachusetts) and Puerto Rico. The Company sold its New Hampshire cable
system effective January 31, 1997. On January 16, 1998, the Company entered into
an agreement to sell its remaining New England cable systems. Pegasus Broadcast
Television owns and operates five TV stations affiliated with Fox, operates one
station affiliated with UPN and another station affiliated with WB. The Company
has also entered into an agreement to operate an additional TV station, which
will be affiliated with WB and will commence operations in 1998.
Multichannel revenues are derived from monthly customer subscriptions,
pay-per-view services, subscriber equipment rentals, home shopping commissions,
advertising time sales and installation charges. Broadcast revenues are derived
from the sale of broadcast airtime to local and national advertisers.
The Company's location operating expenses consist of (i) programming
expenses, (ii) marketing and selling costs, including advertising and promotion
expenses, local sales commissions, and ratings and research expenditures, (iii)
technical and operations costs, (iv) general and administrative expenses, and
(v) expensed subscriber acquisition costs. Multichannel programming expenses
consist of amounts paid to program suppliers, DSS authorization charges and
satellite control fees, each of which is paid on a per subscriber basis, and
DIRECTV royalties which are equal to 5% of DBS program service revenues.
Broadcast programming expenses include the amortization of long-term program
rights purchases, music license costs and "barter" programming expenses which
represent the value of broadcast air time provided to television program
suppliers in lieu of cash.
9
The Company no longer requires new DBS customers to sign a one-year
programming contract and, as a result, subscriber acquisition costs ("SAC"),
which were being capitalized and amortized over a twelve-month period, are
currently being charged to operations in the period incurred. This change became
effective October 1, 1997. Subscriber acquisition costs charged to operations
are excluded from pre-SAC location operating expenses.
Results of Operations
Year ended December 31, 1997 compared to year ended December 31, 1996
The Company's net revenues increased by approximately $20.2 million or
44% for the year ended December 31, 1997 as compared to the same period in 1996.
Multichannel Television net revenues increased $17.0 million or 96% and
Broadcast Television net revenues increased $3.2 million or 11%. The net
revenues increased as a result of (i) a $13.8 million or 327% increase in DBS
revenues of which $2.6 million or 19% was due to the increased number of DBS
subscribers in territories owned at the beginning of 1996 and $11.2 million or
81% resulted from acquisitions made subsequent to September 1996, (ii) a $3.2
million or 24% increase in Cable revenues which was the net result of a $804,000
or 8% increase in same system revenues due primarily to rate increases, a $3.9
million increase due to the system acquired effective September 1, 1996 and a
$1.6 million reduction due to the sale of the Company's New Hampshire cable
system effective January 31, 1997 and (iii) a $3.2 million or 11% increase in TV
revenues of which $1.9 million or 57% was due to ratings-growth which the
Company was able to convert into higher revenues, $1.1 million or 34% was the
result of acquisitions made in the first quarter of 1996 and $289,000 or 9% was
due to the two new stations launched on August 1, 1997 and October 17, 1997.
The Company's total location operating expenses, as described above,
before DBS subscriber acquisition costs increased by approximately $13.8 million
or 49% for the year ended December 31, 1997 as compared to the same period in
1996. Multichannel Television pre-SAC location operating expenses increased
$11.1 million or 117% and Broadcast Television location operating expenses
increased $2.6 million or 14%. The pre-SAC location operating expenses increased
as a result of (i) a $9.6 million or 410% increase in operating expenses
generated by the Company's DBS operations due to a same territory increase in
programming and other operating costs totaling $1.5 million (resulting from the
increased number of DBS subscribers in territories owned at the beginning of
1996) and a $8.1 million increase attributable to territories acquired
subsequent to the third quarter of 1997, (ii) a $1.5 million or 21% increase in
Cable operating expenses as the net result of a $157,000 or 3% increase in same
system operating expenses due primarily to increases in programming costs, a
$2.2 million increase attributable to the system acquired effective September 1,
1996 and a $852,000 reduction due to the sale of the Company's New Hampshire
cable system effective January 31, 1997, and (iii) a $2.6 million or 14%
increase in TV operating expenses as the result of a $535,000 or 4% increase in
same station operating expenses, a $1.4 million increase attributable to
stations acquired in the first quarter of 1996 and a $650,000 increase
attributable to the two new stations launched on August 1, 1997 and October 17,
1997.
DBS subscriber acquisition costs, which consist of regional sales
costs, advertising and promotion, and commissions and subsidies, totaled $5.5
million or $236 per gross subscriber addition for the year ended December 31,
1997, of which $4.8 million was expensed.
Incentive compensation, which is calculated from increases in pro forma
Location Cash Flow, decreased by approximately $16,000 or 2% for the year ended
December 31, 1997 as compared to the same period in 1996.
Corporate expenses decreased by $426,000 or 21% for the year ended
December 31, 1997 as compared to the same period in 1996 primarily due to the
change in the method of calculating this cost. Prior to the Parent's initial
public offering in October 1996, this charge was calculated at 5% of net
revenues. After the Parent's intital public offering, this charge is a direct
reimbursement of costs.
10
Depreciation and amortization expense increased by approximately $7.4
million or 70% for the year ended December 31, 1997 as compared to the same
period in 1996 as the Company increased its fixed and intangible asset base as a
result of the Subsidiaries Combination and completed acquisitions during 1996
and 1997.
As a result of these factors, the Company reported a loss from
operations of $872,000 for the year ended December 31, 1997 as compared to
income from operations of $2.9 million for the same period in 1996.
Interest expense increased by approximately $158,000 or 1% for the year
ended December 31, 1997 as compared to the same period in 1996 as a result of an
increase in debt associated with the Company's acquisitions (see -- "Liquidity
and Capital Resources - Financings").
The Company's net loss increased by approximately $1.4 million for the
year ended December 31, 1997 as compared to the same period in 1996 as a net
result of an increase in the loss from operations of approximately $3.8 million,
an increase in interest expense of $158,000, an increase in the provision for
income taxes of $320,000, an increase in other expenses of approximately
$142,000, an increase in the extraordinary loss on extinguishment of debt of
$1.4 million and a gain on the sale of the New Hampshire cable system of
approximately $4.5 million.
Year ended December 31, 1996 compared to year ended December 31, 1995
The Company's net revenues increased by approximately $14.1 million or
44% for the year ended December 31, 1996 as compared to the same period in 1995
as a result of (i) a $2.7 million or 187% increase in DBS revenues due to the
increased number of DBS subscribers, (ii) a $2.0 million or 51% increase in
Puerto Rico cable revenues due primarily to an acquisition effective September
1, 1996, (iii) a $864,000 or 13% increase in New England cable revenues due
primarily to rate increases and new combined service packages and (iv) a $8.5
million or 43% increase in TV revenues of which $1.5 million or 17% was due to
ratings growth which the Company was able to convert into higher revenues and
$7.0 million or 83% was the result of acquisitions made in the first quarter of
1996.
The Company's total location operating expenses increased by
approximately $8.6 million or 41% for the year ended December 31, 1996 as
compared to the same period in 1995 as a result of (i) a $2.4 million or 176%
increase in operating expenses generated by the Company's DBS operations due to
an increase in programming costs of $1.4 million, royalty costs of $138,000,
marketing expenses of $455,000, customer support charges of $199,000 and other
DIRECTV costs such as security, authorization fees and telemetry and tracking
charges totaling $237,000, all generated from the increased number of DBS
subscribers, (ii) a $912,000 or 37% increase in Puerto Rico cable operating
expenses as the net result of a $64,000 or 3% decrease in same system direct
operating expenses and a $976,000 increase attributable to the system acquired
effective September 1, 1996, (iii) a $489,000 or 15% increase in New England
cable operating expenses due primarily to increases in programming costs
associated with the new combined service packages, (iv) a $4.8 million or 34%
increase in TV operating expenses as the net result of a $115,000 or 1% decrease
in same station direct operating expenses and a $4.9 million increase
attributable to stations acquired in the first quarter of 1996.
As a result of these factors, incentive compensation which is
calculated from increases in pro forma Location Cash Flow increased by
approximately $407,000 or 77% for the year ended December 31, 1996 as compared
to the same period in 1995.
Corporate expenses increased by $275,000 or 16% for the year ended
December 31, 1996 as compared to the same period in 1995 primarily due to the
initiation of public reporting requirements for PM&C.
11
Depreciation and amortization expense increased by approximately $1.8
million or 21% for the year ended December 31, 1996 as compared to the same
period in 1995 as the Company increased its fixed and intangible assets as a
result of three completed acquisitions during 1996.
As a result of these factors, income from operations increased by
approximately $3.0 million for the year ended December 31, 1996 as compared to
the same period in 1995.
Interest expense increased by approximately $3.8 million or 45% for the
year ended December 31, 1996 as compared to the same period in 1995 as a result
of a combination of the Company's issuance of the PM&C Notes on July 7, 1995 and
an increase in debt associated with the Company's 1996 acquisitions. A portion
of the proceeds from the issuance of the PM&C Notes was used to retire floating
debt on which the effective interest rate was lower than the 12.5% interest rate
under the PM&C Notes. The PM&C Notes, however, have more favorable terms such as
no requirement for principal repayment, subject to certain conditions, until the
end of the term.
The Company reported a net loss of approximately $9.5 million for the
year ended December 31, 1996 as compared to net income of approximately $1.6
million for the same period in 1995. The $11.1 million change was the net result
of an increase in income from operations of approximately $3.0 million, an
increase in interest expense of $3.8 million, a decrease in extraordinary items
of $10.5 million from extinguishment of debt, a decrease in the provision for
income taxes of $150,000 and an increase in other expenses of approximately
$92,000.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been the net cash
provided by its TV and cable operations, credit available under its credit
facilities and equity contributions from the Parent. The Company's principal use
of its cash has been to fund acquisitions, to meet debt service obligations, to
fund investment in its TV and cable technical facilities and to fund subscriber
acquisition costs.
Pre-SAC Location Cash Flow increased by $6.4 million or 36% for the
year ended December 31, 1997 as compared to the same period in 1996.
Multichannel Television Pre-SAC Location Cash Flow increased $5.8 million or 71%
and Broadcast Television Location Cash Flow increased $615,000 or 6%. Pre-SAC
Location Cash Flow increased as a result of (i) a $4.1 million or 222% increase
in DBS Pre-SAC Location Cash Flow of which $1.0 million or 24% was due to an
increase in same territory Pre-SAC Location Cash Flow and $3.1 million or 76%
was attributable to territories acquired subsequent to the third quarter of
1997, (ii) a $1.7 million or 27% increase in Cable Location Cash Flow which was
the net result of a $646,000 or 14% increase in same system Location Cash Flow,
a $1.7 million increase due to the system acquired effective September 1, 1996
and a $703,000 reduction due to the sale of the Company's New Hampshire cable
system effective January 31, 1997 and (iii) a $615,000 or 6% increase in TV
Location Cash Flow as the net result of a $1.3 million or 17% increase in same
station Location Cash Flow, a $343,000 decrease attributable to stations
acquired in the first quarter of 1996 and a $361,000 decrease attributable to
the two new stations launched on August 1, 1997 and October 17, 1997.
The Company is required to maintain a letter of credit in favor of the
NRTC to collateralize payment of NRTC billings. As of December 31, 1997, this
letter of credit amounted to approximately $8.5 million. The Company is required
to increase this amount with any DBS acquisition by an amount equal to the
acquired DBS entity's highest month of billings times three.
During the year ended December 31, 1997, net cash provided by operating
activities was approximately $7.9 million, which together with $8.6 million of
cash on hand, $6.9 million of net proceeds from the sale of the New Hampshire
cable system and $50.3 million of net cash provided by the Company's financing
activities was used to fund other investing activities totaling $56.5 million.
Financing activities consisted of $166.7 million of contributions by the Parent,
$9.8 million of borrowings from affiliates, $527,000 of borrowings under the
PM&C Credit Facility, repayment of approximately $124.9 million of long-term
debt and fees relating to the New Credit Facility amounting to $1.9 million.
Investing activities, net of the proceeds from the sale of the New Hampshire
cable system, consisted of (i) the acquisition of DBS assets from independent
DIRECTV providers during the fourth quarter of 1997 for approximately $41.5
million, net of cash acquired, (v) broadcast television transmitter, tower and
facility constructions and upgrades totaling approximately $5.8 million, (vi)
the interconnection and expansion of the Puerto Rico cable systems amounting to
approximately $1.8 million, (vii) DBS subscriber acquisition costs, which were
being capitalized through September 30, 1997 and amortized over a twelve-month
period, of approximately $902,000, (viii) payments of programming rights
amounting to $2.6 million, and (ix) maintenance and other capital expenditures
and intangibles totaling approximately $3.9 million. As of December 31, 1997,
the Company's cash on hand approximated $17.0 million.
12
Location Cash Flow increased by $5.5 million or 51% for the year ended
December 31, 1996 as compared to the same period in 1995 as a result of (i) a
$312,000 increase in DBS Location Cash Flow, (ii) a $1.1 million or 72% increase
in Puerto Rico cable Location Cash Flow of which $126,000 or 11% was due to an
increase in same system Location Cash Flow and $998,000 or 89% was due to a
cable system acquired effective September 1, 1996, (iii) a $375,000 or 11%
increase in New England cable Location Cash Flow and (iv) a $3.7 million or 62%
increase in TV Location Cash Flow of which $1.6 million or 42% was due to an
increase in same station Location Cash Flow and $2.1 million or 58% was due to
an increase attributable to stations acquired in the first quarter of 1996.
During the year ended December 31, 1996, net cash provided by operating
activities was approximately $8.6 million, which together with $12.0 million of
cash on hand and $38.9 million of net cash provided by the Company's financing
activities was used to fund investing activities totaling $51.0 million.
Investment activities consisted of (i) the Portland, Maine and Tallahassee,
Florida TV acquisitions for approximately $14.8 million, (ii) the San German,
Puerto Rico cable acquisition for approximately $26.0 million, (iii) the
purchase of the Pegasus Cable Television of Connecticut, Inc. ("PCT-CT") office
facility and headend facility for $201,000, (iv) the fiber upgrade in the PCT-CT
cable system amounting to $323,000, (v) the purchase of DSS units used as rental
and lease units amounting to $832,000, (vi) payments of programming rights
amounting to $1.8 million, and (vii) maintenance and other capital expenditures
and intangibles totaling approximately $7.1 million. As of December 31, 1996,
the Company's cash on hand approximated $8.4 million.
During the year ended December 31, 1995, net cash provided by
operations was approximately $6.2 million, which together with $1.4 million of
cash on hand and $10.9 million of net cash provided by the Company's financing
activities was used to fund a $12.5 million distribution to Pegasus
Communication Holdings, Inc. and to fund investing activities totaling $6.5
million. Investment activities consisted of (i) the final payment of the
deferred purchase price for the Company's New England DBS rights of
approximately $1.9 million, (ii) the purchase of a new WDSI studio and office
facility for $520,000, (iii) the purchase of a LIBOR cap for $300,000, (iv) the
purchase of DSS units used as rental and lease units for $157,000, (v) payments
of programming rights amounting to $1.2 million, and (vi) maintenance and other
capital expenditures and intangibles totaling approximately $2.3 million.
Financings
On December 10, 1997, PM&C entered into the New Credit Facility. The
New Credit Facility is a $180.0 million six-year, collateralized, reducing
revolving credit facility. Borrowings under the New Credit Facility are
available for acquisitions, subject to the approval of the lenders in certain
circumstances, working capital, capital expenditures and for general corporate
purposes. Concurrently with the closing of the New Credit Facility, the PM&C
Credit Facility was terminated. A portion of the deferred financing fees
relating to the PM&C Credit Facility were written off, resulting in an
extraordinary loss of $460,000 on the refinancing transaction.
As of December 31, 1997, the Company has indebtedness of $93.3 million,
total common stockholders' equity of $201.8 million, and, assuming certain
conditions are met, $161.5 million available under the New Credit Facility
The Indenture and New Credit Facility contain certain financial and
operating covenants, including restrictions on the Company's ability to incur
additional indebtedness, create liens and to pay dividends.
The ability of the Company to repay its existing indebtedness will
depend upon future operating performance, which is subject to the success of the
Company's business strategy, prevailing economic conditions, regulatory matters,
levels of interest rates and financial, business and other factors, many of
which are beyond the Company's control.
13
Pre-SAC Location Cash Flow is defined as net revenues less location
operating expenses before subscriber acquisition costs. Location Cash Flow is
defined as net revenues less location operating expenses. Although Pre-SAC
Location Cash Flow and Location Cash Flow are not measures of performance under
generally accepted accounting principles, the Company believes that Pre-SAC
Location Cash Flow and Location Cash Flow are accepted within the Company's
business segments as generally recognized measures of performance and are used
by analysts who report publicly on the performance of companies operating in
such segments. Nevertheless, these measures should not be considered in
isolation or as a substitute for income from operations, net income, net cash
provided by operating activities or any other measures for determining the
Company's operating performance or liquidity which is calculated in accordance
with generally accepted accounting principles.
The Company closely monitors conditions in the capital markets to
identify opportunities for the effective and prudent use of financial leverage.
In financing its future expansion and acquisition requirements, the Company
would expect to avail itself of such opportunities and thereby increase its
indebtedness, which could result in increased debt service requirements. There
can be no assurance that such debt financing can be completed on terms
satisfactory to the Company or at all. The Company may also issue additional
equity to fund its future expansion and acquisition requirements.
Capital Expenditures
The Company's capital expenditures aggregated $9.4 million in 1997 as
compared to $6.3 million in 1996. The Company expects recurring renewal and
refurbishment capital expenditures to total approximately $2.0 million per year.
In addition to these maintenance capital expenditures, the Company's 1998
capital projects include (i) DBS facility upgrades of approximately $500,000,
and (ii) approximately $2.6 million of TV expenditures for broadcast television
transmitter, tower and facility constructions and upgrades. Effective October 1,
1997, the Company no longer requires new DBS customers to sign a one-year
programming contract and, as a result, subscriber acquisition costs, which were
being capitalized through September 30, 1997 and amortized over a twelve-month
period, will be charged to operations in the period incurred. The Company
commenced the programming of two new TV stations, WPME on August 1, 1997 and
WGFL on October 17, 1997 and its plans are to commence programming of an
additional station in 1998. There can be no assurance that the Company's capital
expenditure plans will not change in the future.
Other
The Company has reviewed all of its systems as to the Year 2000 issue.
The Company has in the past three years replaced or upgraded, or is in the
process of replacing or upgrading, all of it's TV traffic systems, cable billing
systems and corporate accounting systems. All of these new systems will be in
place by the third quarter of 1998. The Company relies on outside vendors for
the operation of its DBS satellite control and billing systems, including
DIRECTV, the NRTC and their respective vendors. The Company has established a
policy to insure that its vendors are currently in compliance with the Year 2000
issue or have a plan in place to be in compliance with the Year 2000 issue by
the first quarter of 1999. Costs to be incurred beyond 1997 relating to the Year
2000 issue are not expected to be significant.
The Company believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations. The
Company believes that cash on hand, together with available borrowings under the
New Credit Facility and future indebtedness which may be incurred by the Company
and its subsidiaries will give the Company the ability to fund acquisitions and
other capital requirements in the future. The Company engages in discussions
with respect to acquisition opportunities in media and communications businesses
on a regular basis. However, there can be no assurance that the future cash
flows of the Company will be sufficient to meet all of the Company's obligations
and commitments.
14
On January 16, 1998, the Company entered into an agreement to sell its
remaining New England cable systems to Avalon Cable of New England, LLC for a
purchase price of at least $28 million and not more than $31 million.
PM&C's ability to incur additional indebtedness is limited under the
terms of the Indenture and New Credit Facility. These limitations take the form
of certain leverage ratios and are dependent upon certain measures of operating
profitability. Under the terms of the New Credit Facility, capital expenditures
and business acquisitions in excess of certain agreed upon levels require lender
consent.
The Company's revenues vary throughout the year. As is typical in the
broadcast television industry, the Company's first quarter generally produces
the lowest revenues for the year, and the fourth quarter generally produces the
highest revenues for the year. The Company's operating results in any period may
be affected by the incurrence of advertising and promotion expenses that do not
necessarily produce commensurate revenues in the short-term until the impact of
such advertising and promotion is realized in future periods.
The Company believes that inflation has not been a material factor
affecting the Company's business. In general, the Company's revenues and
expenses are impacted to the same extent by inflation. Substantially all of the
Company's indebtedness bears interest at a fixed rate.
The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The Company has
reviewed the provisions of SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", and the implementation of the above standards is not expected to
have any significant impact on its combined financial statements.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8: Financial Statements and Supplementary Data
The information required by this item is set forth on pages F-1 through
F-25.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
The Registrant meets the conditions set forth in General Instructions (I)(1)(a)
and (b) of Form 10-K and therefore filing this Form with the reduced disclosure
format. As such, the entire Part III is omitted.
15
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements
The financial statements filed as part of this Report are listed on the
Index to Financial Statements on page F-1.
(2) Financial Statement Schedules
Page
----
Report of Coopers & Lybrand L.L.P................................S-1
Schedule II - Valuation and Qualifying Accounts..................S-2
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(3) Exhibits
Exhibit
Number Description of Document
- ------ -----------------------
2.1 Contribution and Exchange Agreement by and between Pegasus
Communications Holdings, Inc. and Harron dated as of May 30, 1996
(including form of Joinder Agreement, Stockholder's Agreement and
Noncompetition Agreement) (which is incorporated by reference to
Exhibit 2.2 to the Parent's Registration Statement on Form S-1 (File
No. 333-05057)).
2.2 Amendment No. 1 to Exhibit 2.1 (which is incorporated by reference to
the Parent's Form 8-K, dated October 8, 1996).
2.3 Amendment No. 2 to Exhibit 2.1 (which is incorporated by reference to
Exhibit 2.5 to the Parent's Registration Statement on Form S-1 (File
No. 333-057057)).
2.4 Amendment No. 3 to Exhibit 2.1 (which is incorporated by reference to
Exhibit 4 to the Parent's Form 8-K dated October 8, 1996).
2.5 Joinder Agreement by and among Pegasus Communications Holdings, Inc.,
Pegasus Communications Corporation and Harron Communications Corp.
dated as of October 8, 1996 (which is incorporated by reference to
Exhibit 5 to the Parent's Form 8-K dated October 8, 1996).
2.6 Stockholders' Agreement by and among Pegasus Communications Holdings,
Inc., the Parent and Harron Communications Corporation dated as of
October 8, 1996 (which is incorporated by reference to Exhibit 6 to the
Parent's Form 8-K dated as of October 8, 1996).
2.7 Non-Competition Agreement by and among Pegasus Communications Holdings,
Inc., the Parent and Harron Communications Corp. dated October 8, 1996
(which is incorporated by reference to Exhibit 7 to the Parent's Form
8-K dated as of October 8, 1996).
2.8 Asset Purchase Agreement dated as of January 16, 1998 between Avalon
Cable of New England, LLC and Pegasus Cable Television, Inc. and
Pegasus Cable Television of Connecticut, Inc. (which is incorporated by
reference herein to the Parent's Form 8-K dated January 16, 1998).
3.1 Amended and Restated Certificate of Incorporation of PM&C, as amended
(which is incorporated by reference to Exhibit 3.1 to Pegasus' Form
10-K for the fiscal year ended December 31, 1996).
3.2 By-Laws of PM&C (which is incorporated by reference to Exhibit 3.2 to
PM&C's Registration Statement on Form S-1 (File No. 33-95042)).
16
4.1 Indenture, dated as of July 7, 1995, by and among PM&C, 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 PM&C'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 PM&C'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 PM&C'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 PM&C'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 PM&C'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 PM&C'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 PM&C'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 PM&C'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 PM&C's
Registration Statement on Form S-4 (File No. 33-95042)).
10.9 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated
herein by reference to Exhibit 10.14 to PM&C's Registration Statement
on Form S-4 (File No. 33-95042)).
10.10 NRTC/Member Agreement for Marketing and Distribution of DBS Services,
dated June 24, 1993, between the National Rural Telecommunications
Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated
herein by reference to Exhibit 10.28 to PM&C'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)).
10.11 Amendment to NRTC/Member Agreement for Marketing and Distribution of
DBS Services, dated June 24, 1993, between the National Rural
Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
(which is incorporated herein by reference to Exhibit 10.29 to PM&C's
Registration Statement on Form S-4 (File No.
33-95042)).
10.12 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and
Pegasus Satellite Television, Inc. (which is incorporated herein by
reference to Exhibit 10.30 to PM&C's Registration Statement on Form S-4
(File No. 33-95042)).
10.13 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and
operate cable television systems for the municipalities of Cabo Rojo,
San German, Lajas, Hormigueros, Guanica, Sabana Grande and Maricao
(which is incorporated herein by reference to Exhibit 2 to PM&C's Form
8-K dated March 21, 1996)).
17
10.14 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and
operate cable television systems for the municipalities of Anasco,
Rincon and Las Marias (which is incorporated herein by reference to
Exhibit 3 to PM&C's Form 8-K dated March 21, 1996)).
10.15 Credit Agreement dated as of December 9, 1997 by and among Pegasus
Media & Communications, Inc., the lenders thereto, and Bankers Trust
Company, as agent for the lenders (which is incorporated by reference
herein to Exhibit 10.1 to the Parent's Form 8-K dated December 10,
1997).
10.16+ Pegasus Restricted Stock Plan (which is incorporated by reference to
Exhibit 10.28 to the Parent's Registration Statement on Form S-1 (File
No. 333-05057)).
10.17+ Option Agreement for Donald W. Weber (which is incorporated by
reference to Exhibit 10.29 the Parent's Registration Statement on Form
S-1 (File No. 333-05057)).
10.18+ Pegasus 1996 Stock Option Plan (which is incorporated by reference to
Exhibit 10.30 to the Parent's Registration Statement on Form S-1 (File
No. 333-05057)).
10.19+ Amendment to Option Agreement for Donald W. Weber, dated December 19,
1996 (which is incorporated by reference to Exhibit 10.31 to the
Parent's Registration Statement on Form S-1 (File No. 333-18739)).
10.20 Amendment to Credit Agreement executed as of March 10, 1998 by and
among PM&S, the lenders thereto, and Bankers Trust Company, as agent
for the lenders (which is incorporated by reference to Exhibit 10.21 to
the Parent's Registration Statement on Form S-4 (File No. 333-44929)).
24.1* Powers of Attorney (included in Signatures and Powers of Attorney).
27.1* Financial Data Schedule.
- ---------------
* Filed herewith.
+ Indicates a management contract or compensatory plan.
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed during the quarter
ended December 31, 1997.
18
SIGNATURES AND POWERS OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PEGASUS MEDIA & COMMUNICATIONS, INC.
By: /s/ Marshall W. Pagon
-----------------------------------------
Marshall W. Pagon
Chief Executive Officer and President
Date: March 31, 1998
Know all men by these presents, that each person whose signature appears below
hereby constitutes and appoints Marshall W. Pagon, Robert N. Verdecchio and Ted
S. Lodge and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any or all amendments to this
Annual Report, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each of such attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary in connection with such matters and hereby ratifying and confirming
all that each of such attorneys-in-fact and agents or his substitutes may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- -----
/s/ Marshall W. Pagon President, Chief Executive Officer March 31, 1998
- --------------------------------------------- And Chairman of the Board
Marshall W. Pagon
(Principal Executive Officer)
/s/ Robert N. Verdecchio Senior Vice President, Chief March 31, 1998
- --------------------------------------------- Financial Officer, Assistant
Robert N. Verdecchio Secretary, and Director
(Principal Financial and Accounting Officer)
/s/ James J. McEntee, III Director March 31, 1998
- ---------------------------------------------
James J. McEntee, III
/s/ Mary C. Metzger Director March 31, 1998
- ---------------------------------------------
Mary C. Metzger
/s/ Donald W. Weber Director March 31, 1998
- ---------------------------------------------
Donald W. Weber
19
PEGASUS MEDIA & COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Coopers & Lybrand L.L.P. F-2
Combined Balance Sheets as of December 31, 1996 and 1997 F-3
Combined Statements of Operations for the years ended December 31, 1995,
1996 and 1997 F-4
Combined Statements of Changes in Total Equity (Deficiency) for the
years ended December 31, 1995, 1996 and 1997 F-5
Combined Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997 F-6
Notes to Combined Financial Statements F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Pegasus Media & Communications, Inc.
We have audited the accompanying combined balance sheets of Pegasus Media &
Communications, Inc. as of December 31, 1996 and 1997, and the related combined
statements of operations, changes in total equity, and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Pegasus Media &
Communications, Inc. as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 26, 1998
F-2
PEGASUS MEDIA & COMMUNICATIONS, INC.
COMBINED BALANCE SHEETS
December 31,
----------------------------
1996 1997
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 8,416,778 $ 17,010,315
Accounts receivable,less allowance for doubtful
accounts of $243,000 and $319,000, respectively ......... 6,030,697 13,074,636
Program rights ............................................ 1,289,437 2,059,346
Inventory ................................................. 697,957 974,920
Deferred taxes ............................................ 1,290,397 2,602,453
Prepaid expenses and other ................................ 717,664 767,482
------------ ------------
Total current assets ................................... 18,442,930 36,489,152
Property and equipment, net ................................. 23,823,489 27,382,713
Intangible assets, net ...................................... 82,500,306 272,164,370
Program rights .............................................. 1,294,985 2,262,299
Deposits and other .......................................... 166,498 624,629
------------ ------------
Total assets ........................................... $126,228,208 $338,923,163
============ ============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt ......................... $ 355,585 $ 6,328,463
Accounts payable .......................................... 6,111,411 11,297,108
Accrued interest .......................................... 5,592,083 6,025,004
Accrued expenses .......................................... 5,303,652 11,134,589
Current portion of program rights payable.................. 601,205 1,418,581
------------ ------------
Total current liabilities .............................. 17,963,936 36,203,745
Long-term debt, net ......................................... 115,155,610 86,979,613
Advances from affiliates .................................... -- 9,845,583
Program rights payable ...................................... 1,365,284 1,416,446
Deferred taxes .............................................. 1,339,859 2,652,454
------------ ------------
Total liabilities ...................................... 135,824,689 137,097,841
Commitments and contingent liabilities ...................... -- --
Minority interest ........................................... -- 3,000,000
Common stockholder's equity (deficiency):
Class A common stock ...................................... 1,615 1,615
Class B common stock ...................................... 85 85
Additional paid-in capital ................................ 7,880,848 227,221,423
Accumulated deficit ....................................... (17,479,029) (28,397,801)
------------ ------------
Total stockholder's equity (deficiency) ................ (9,596,481) 198,825,322
------------ ------------
Total liabilities and stockholder's equity (deficiency). $126,228,208 $338,923,163
============ ============
See accompanying notes to combined financial statements
F-3
Pegasus Media & Communications, Inc.
Combined Statements of Operations
Years Ended December 31,
------------------------------------------
1995 1996 1997
----------- ----------- -----------
Revenues:
Broadcasting revenue,
net of agency commissions $14,862,734 $21,813,409 $23,927,876
Barter Programming revenue 5,110,662 6,337,220 7,520,000
Basic and satellite service 10,002,579 15,231,257 30,810,087
Premium services 1,652,419 2,093,230 3,123,275
Other 420,320 721,584 1,022,632
----------- ----------- ------------
Total revenues 32,048,714 46,196,700 66,403,870
----------- ----------- ------------
Operating expenses:
Barter programming expense 5,110,662 6,337,220 7,520,000
Programming 5,475,623 9,061,532 15,439,074
General and administrative 3,885,473 5,690,637 8,608,140
Technical and operations 2,750,521 3,320,765 3,788,325
Marketing and selling 3,928,074 5,367,656 11,527,758
Incentive compensation 527,663 934,770 919,179
Corporate expenses 1,770,183 2,045,582 1,618,965
Depreciation and amortization 8,673,845 10,492,849 17,854,258
----------- ----------- ------------
Income (loss) from operations (73,330) 2,945,689 (871,829)
Interest expense (8,794,676) (12,438,366) (12,595,892)
Interest income 370,300 232,361 102,175
Other expenses, net (44,488) (136,035) (148,382)
Gain on sale of cable system --- --- 4,451,320
----------- ----------- ------------
Loss before income taxes and
extraordinary items (8,542,194) (9,396,351) (9,062,608)
Provision (benefit) for income taxes 30,000 (120,000) 200,000
----------- ----------- ------------
Loss before extraordinary items (8,572,194) (9,276,351) (9,262,608)
Extraordinary gain (loss) from
extinquishment of debt, net 10,210,580 (250,603) (1,656,164)
----------- ----------- ------------
Net income (loss) $ 1,638,386 ($9,526,954) ($10,918,772)
=========== =========== ============
Basic and diluted earnings per share:
Loss before extraordinary items ($51.73) ($54.57) ($54.49)
Extraordinary gain (loss) 61.62 (1.47) (9.74)
----------- ----------- ------------
Net income (loss) $9.89 ($56.04) ($64.23)
=========== =========== ============
Weighted average shares outstanding 165,692 170,000 170,000
=========== =========== ============
See accompanying notes to combined financial statements
F-4
PEGASUS MEDIA & COMMUNICATIONS, INC.
COMBINED STATEMENTS OF CHANGES IN TOTAL EQUITY (DEFICIENCY)
Common Stock
--------------------------------------
Class A Class B
-------------------------------------- Additional Retained Partners' Total
Number Par Number Par Paid-In Earnings Capital Equity
of Shares Value of Shares Value Capital (Deficit) (Deficit) (Deficiency)
--------- ----- --------- ----- ---------- --------- --------- ----------
Balances at January 1, 1995 494 $ 494 $16,382,054 ($4,025,360) ($5,423,999) $6,933,189
Net income (loss) 5,350,908 (3,712,522) 1,638,386
Distributions to Partners (246,515) (246,515)
Distributions to Parent (12,500,000) (12,500,000)
Exchange of common stock 161,006 1,121 (1,121) --
Issuance of Class B common stock 8,500 $85 3,999,915 4,000,000
------- ------ ----- --- ----------- ------------ ---------- -----------
Balances at December 31, 1995 161,500 1,615 8,500 85 7,880,848 1,325,548 (9,383,036) (174,940)
Net loss (4,351,099) (5,175,855) (9,526,954)
Contribution by Partners 105,413 105,413
Conversions of partnerships (14,453,478) 14,453,478
------- ------ ----- --- ----------- ------------ ---------- -----------
Balances at December 31, 1996 161,500 1,615 8,500 85 7,880,848 (17,479,029) (9,596,481)
Net income (10,918,772) (10,918,772)
Contribution by Parent 219,340,575 219,340,575
------- ------ ----- --- ------------ ------------ ---------- -----------
Balances at December 31, 1997 161,500 $1,615 8,500 $85 $227,221,423 ($28,397,801) $198,825,322
======= ====== ===== === ============ =========== ========== ============
See accompanying notes to combined financial statements
F-5
Pegasus Media & Communications, Inc.
Combined Statements of Cash Flows
Years Ended December 31,
------------------------------------------------
1995 1996 1997
------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 1,638,386 ($9,526,954) ($10,918,772)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Extraordinary (gain) loss on
extinguishment of debt, net (10,210,580) 250,603 1,656,164
Depreciation and amortization 8,673,845 10,492,849 17,854,258
Program rights amortization 1,263,190 1,514,122 1,715,556
Accretion on discount of bonds 195,454 392,324 394,219
Gain on sale of cable system -- -- (4,451,320)
Bad debt expense 146,147 335,856 578,969
Change in assets and liabilities:
Accounts receivable (814,862) (1,504,597) (4,496,937)
Inventory (389,318) 402,942 (123,952)
Prepaid expenses and other 504,755 (419,803) 575,233
Accounts payable and accrued expenses (88,013) 6,290,611 5,366,781
Accrued interest 5,173,745 418,338 166,353
Deposits and other 5,843 (74,173) (458,131)
------------ ----------- ------------
Net cash provided by operating activities 6,098,592 8,572,118 7,858,421
------------ ----------- ------------
Cash flows from investing activities:
Acquisitions -- (41,200,514) (45,580,199)
Capital expenditures (2,570,985) (6,242,598) (9,375,075)
Purchase of intangible assets (2,334,656) (1,758,727) (3,039,309)
Cash acquired from acquisitions -- -- 4,061,082
Payments of programming rights (1,233,777) (1,830,903) (2,584,241)
Proceeds from sale of cable system -- -- 6,945,270
Other (250,000) -- --
------------ ----------- ------------
Net cash used for investing activities (6,389,418) (51,032,742) (49,572,472)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from long-term debt 81,455,919 -- --
Repayments of long-term debt (48,063,692) (103,639) (213,612)
Borrowings on revolving credit facilities 2,591,335 41,400,000 526,250
Repayments of revolving credit facilities (2,591,335) (11,800,000) (124,326,250)
Contributions by parent -- -- 166,685,569
Net proceeds from borrowings from affiliates -- -- 9,845,583
Restricted cash (9,881,198) 9,881,198 --
Debt issuance costs (3,974,454) (304,237) (1,885,630)
Capital lease repayments (155,406) (267,900) (324,322)
Contributions by Partners -- 105,413 --
Distributions to Parent (12,500,000) -- --
Proceeds from issuance of common stock 4,000,000 -- --
------------ ----------- ------------
Net cash provided by financing activities 10,881,169 38,910,835 50,307,588
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents 10,590,343 (3,549,789) 8,593,537
Cash and cash equivalents, beginning of year 1,376,224 11,966,567 8,416,778
------------ ----------- ------------
Cash and cash equivalents, end of year $11,966,567 $ 8,416,778 $17,010,315
============ =========== ============
See accompanying notes to combined financial statements
F-6
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. The Company:
Pegasus Media & Communications, Inc. ("Pegasus", or together with its
subsidiaries stated below, the "Company"), is a diversified media and
communications company whose direct subsidiaries consist of Pegasus Broadcast
Television, Inc. ("PBT"), Pegasus Cable Television, Inc. ("PCT") and PST
Holdings, Inc. ("PSTH"). PBT, together with its subsidiaries, own and operate
broadcast television ("TV") stations affiliated with the Fox Broadcasting
Company ("Fox") and operate, pursuant to local marketing agreements, stations
affiliated with United Paramount Network ("UPN") and The WB Television Network
("WB"). PCT, together with its subsidiaries, own and operate cable television
("Cable") systems that provide service to individual and commercial subscribers
in New England and Puerto Rico. PSTH, together with its subsidiaries, provide
direct broadcast satellite television ("DBS") services to customers in certain
rural areas which encompass portions of twenty-seven states.
Prior to October 8, 1996, the Company was a direct subsidiary of
Pegasus Communications Holdings, Inc. ("PCH"). Effective October 8, 1996, the
Company became a direct subsidiary of Pegasus Communications Corporation ("PCC")
as a result of PCC's initial public offering (the "Initial Public Offering") of
its Class A Common Stock. On December 30, 1996, as a result of a registered
exchange offer made to holders of Pegasus' Class B Common Stock, Pegasus became
a wholly owned subsidiary of PCC.
In July 1997, the Company transferred the stock of Pegasus Satellite
Television, Inc. ("PST"), which provided DBS services to customers in the New
England area, to a newly formed subsidiary of the Company, PSTH. PSTH
transferred the PST stock to Pegasus Satellite Holdings, Inc. ("PSH"), a
subsidiary of PCC, in exchange for $27.8 million of preferred equity in PSH (the
"PST/PSH Exchange").
In October 1997, the Company acquired the assets of PSH (the
"Subsidiaries Combination"), which assets consisted of the stock of its
subsidiaries that hold the rights to all of the Company's DBS territories. As a
result of the Subsidiaries Combination, the Company is the direct or indirect
parent of all of PCC's subsidiaries that operate the TV, DBS and cable
businesses.
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The accompanying combined financial statements include the accounts of
Pegasus and all of its subsidiaries or affiliates and the accounts of Pegasus
Development Corporation ("PDC"). All intercompany transactions and balances have
been eliminated.
PDC, a subsidiary of PCC, provides capital for various satellite
initiatives such as subscriber acquisitions costs. The accounts of PDC have been
included in the accompanying combined financial statements since subscriber
acquisition costs are an integral part of the DBS operations and their inclusion
is necessary for a fair presentation of the financial position of the Company
and the results of its operations and its cash flows.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and the disclosure of contingencies. Actual results could differ
from those estimates. Significant estimates relate to barter transactions and
the useful lives and recoverability of intangible assets.
F-7
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies (continued):
Inventories:
Inventories consist of equipment held for resale to customers and
installation supplies. Inventories are stated at the lower of cost or market on
a first-in, first-out basis.
Long-Lived Assets:
The Company's assets are reviewed for impairment whenever events or
circumstances provide evidence that suggest that the carrying amounts may not be
recoverable. The Company assesses the recoverability of its assets by
determining whether the depreciation or amortization of the respective asset
balance can be recovered through projected undiscounted future cash flows.
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 or losses are
included in the statement of operations. For cable television systems, initial
subscriber installation costs, including material, labor and overhead costs of
the hookup are capitalized as part of the distribution facilities. The costs of
disconnection and reconnection are charged to expense. Satellite equipment that
is leased to customers is stated at cost.
Depreciation is computed for financial reporting purposes using the
straight-line method based upon the following lives:
Reception and distribution facilities...... 7 to 11 years
Transmitter equipment...................... 5 to 10 years
Equipment, furniture and fixtures.......... 5 to 10 years
Building and improvements.................. 12 to 39 years
Vehicles................................... 3 to 5 years
Intangible Assets:
Intangible assets are stated at cost and amortized by the straight-line
method. Costs of successful franchise applications are capitalized and amortized
over the lives of the related franchise agreements, while unsuccessful franchise
applications and abandoned franchises are charged to expense. Financing costs
incurred in obtaining long-term financing are amortized over the term of the
applicable loan.
Amortization of Intangible Assets is computed using the straight-line
method based upon the following lives:
Broadcast licenses......................... 40 years
Network affiliation agreements............. 40 years
Goodwill................................... 40 years
DBS rights................................. 10 years
Other intangibles.......................... 2 to 14 years
Subscriber acquisition costs............... 1 year
F-8
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies (continued):
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.
Financial Instruments:
The Company uses interest rate cap contracts for the purpose of hedging
interest rate exposures, which involve the exchange of fixed and floating rate
interest payments without the exchange of the underlying principal amounts. The
amounts to be paid or received are accrued as interest rates change and
recognized over the life of the contracts as an adjustment to interest expense.
Gains and losses realized from the termination of interest rate hedges are
recognized over the remaining life of the hedge contract. As a policy, the
Company does not engage in speculative or leveraged transactions, nor does the
Company hold or issue financial instruments for trading purposes. The Company
had no such instruments at December 31, 1997.
Revenue:
The Company operates in growing segments of the media and
communications industries: multichannel television (DBS and Cable) and broadcast
television (TV). The Company recognizes revenue in its multichannel operations
when video and audio services are provided. The Company recognizes revenue in
its broadcast operations when advertising spots are broadcast.
Barter Programming:
The Company obtains a portion of its TV programming, including pre-sold
advertisements, through its network affiliation agreements with Fox, UPN and WB,
and also through independent producers. The Company does not make any direct
payments for this programming. For running network programming, the Company
received payments from Fox, which totaled approximately $215,000 and $73,000 in
1995 and 1996, respectively. The Company received no such payments in 1997.
For running independent producers' programming, the Company received no
direct payments. Instead, the Company retains a portion of the available
advertisement spots to sell on its own account. Barter programming revenue and
the related expense are recognized when the pre-sold advertisements are
broadcast. These amounts are presented gross as barter programming revenue and
expense in the accompanying combined statements of operations.
Subscriber Acquisition Costs:
The Company's policy is to capitalize subscriber acquisition costs
directly related to new subscribers who sign a programming contract. These costs
are amortized over the life of the contract. The Company expenses its subscriber
acquisition costs when no contract is obtained.
Advertising Costs:
Advertising costs are charged to operations in the period incurred and
totaled approximately $613,000, $975,000 and $2.5 million for the years ended
December 31, 1995, 1996 and 1997, respectively.
F-9
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies (continued):
Program Rights:
The Company enters into agreements to show motion pictures and
syndicated programs on television. The Company records the right and associated
liabilities for those films and programs when they are currently available for
showing. These rights are recorded at the lower of unamortized cost or estimated
net realizable value and are amortized on the straight-line method over the
license period which approximates amortization based on the estimated number of
showings during the contract period. Amortization of $1.3 million, $1.5 million
and $1.7 million is included in programming expense for the years ended December
31, 1995, 1996 and 1997, respectively. The obligations arising from the
acquisition of film rights are recorded at the gross amount. Payments for the
contracts are made pursuant to the contractual terms over periods which are
generally shorter than the license periods.
The Company has entered into agreements totaling $6.6 million as of
December 31, 1997 for film rights and programs that are not yet available for
showing at December 31, 1997 and, accordingly, are not recorded by the Company.
At December 31, 1997, the Company has commitments for future program rights of
approximately $1.7 million, $1.0 million, $417,000, $123,000 and $15,000 in
1998, 1999, 2000, 2001 and 2002, respectively.
Income Taxes:
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach, whereby deferred tax assets and
liabilities are recorded to the extent of the tax effect of differences between
the financial statement carrying values and tax bases of assets and liabilities.
A valuation allowance is recorded for deferred taxes where it appears more
likely than not that the Company will not be able to recover the deferred tax
asset. MCT Cablevision, L.P., a subsidiary of PCT, is treated as a partnership
for federal and state income tax purposes, but taxed as a corporation for Puerto
Rico income tax purposes.
Earnings Per Share:
The Company has adopted SFAS No. 128 "Earnings Per Share" issued in
February 1997. This statement requires the disclosure of basic and diluted
earnings per share and revises the method required to calculate these amounts.
The adoption of this standard did not significantly impact previously reported
earnings per share amounts.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables, cash and
cash equivalents.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base, and their dispersion across different businesses and geographic regions.
As of December 31, 1995, 1996 and 1997 the Company had no significant
concentrations of credit risk.
F-10
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies (continued):
New Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS 130") and SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement table that is displayed with the same prominence as other financial
statements. SFAS 131 requires that all public business enterprises report
information about operating segments, as well as specific revised guidelines for
determining an entity's operating segments and the type and level of financial
information to be disclosed. These new standards, which are effective for the
fiscal year ending December 31, 1998, will not have a significant impact on the
Company.
3. Property and Equipment:
Property and equipment consist of the following:
December 31, December 31,
1996 1997
---------------- ---------------
Land........................................... $822,298 $907,712
Reception and distribution facilities.......... 29,140,040 27,012,297
Transmitter equipment.......................... 11,450,339 15,113,116
Building and improvements...................... 1,467,956 2,208,163
Equipment, furniture and fixtures.............. 1,199,563 2,661,743
Vehicles....................................... 765,689 983,256
Other equipment................................ 2,265,925 2,612,332
------------ -------------
47,111,810 51,498,619
Accumulated depreciation....................... (23,288,321) (24,115,906)
------------ -------------
Net property and equipment..................... $23,823,489 $27,382,713
============ =============
Depreciation expense amounted to $4.1 million, $5.1 million and $5.4
million for the years ended December 31, 1995, 1996 and 1997, respectively.
4. Intangibles:
Intangible assets consist of the following:
December 31, December 31,
1996 1997
---------------- ---------------
Goodwill....................................... $28,490,035 $28,490,035
Franchise costs................................ 35,972,374 35,332,755
Broadcast licenses & affiliation agreements.... 14,930,324 15,094,212
Deferred financing costs....................... 4,020,665 6,934,088
Subscriber acquistion 1,183,002 5,787,156
costs......................................
DBS rights..................................... 4,832,160 203,379,952
Consultancy & non-compete agreements........... 2,700,000 6,010,838
Organization & other deferred costs............ 6,269,953 8,529,281
------------ ------------
98,398,513 309,558,317
Accumulated amortization....................... (15,898,207) (37,393,947)
------------ ------------
Net intangible assets.......................... $82,500,306 $272,164,370
============ ============
F-11
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
4. Intangibles (continued):
Amortization expense amounted to $4.6 million, $5.4 million and $12.4
million for the years ended December 31, 1995, 1996 and 1997, respectively.
The Company's intangible assets increased primarily due to the net $178
million increase in DBS rights and other intangibles acquired in the
Subsidiaries Combination and the $21 million increase in DBS rights and other
intangibles related to the four acquisitions completed by the Company during the
fourth quarter of 1997 (see footnote 11 - Acquisitions and Disposition).
5. Common Stock:
At December 31, 1996 and 1997 common stock consists of the following:
Pegasus Class A common stock, $0.01 par value; 230,000 shares
authorized; 161,500 issued and outstanding.............. $1,615
Pegasus Class B common stock, $0.01 par value; 20,000 shares
authorized; 8,500 issued and outstanding,............... 85
======
Total common stock...................................... $1,700
======
The Company's ability to pay dividends on its Common Stock is subject to
certain restrictions (see footnote 6 -Long-Term Debt).
6. Long-Term Debt:
December 31, December 31,
Long-term debt consists of the following : 1996 1997
---------------- ----------------
Series B Notes payable by Pegasus, due 2005, interest at 12.5%,
payable semi-annually in arrears on January 1 and July 1,
net of unamortized discount of $3,412,222 and $3,018,003
as of December 31, 1996 and December 31, 1997, respectively.. $81,587,778 $81,981,997
Senior seven-year $50.0 million revolving credit facility,
payable by Pegasus, interest at the Company's option at
either the bank's prime rate plus an applicable margin
or LIBOR plus an applicable margin........................... 29,600,000 -
Senior six-year $180.0 million revolving credit facility,
payable by Pegasus, interest at the Company's option at
either the bank's base rate plus an applicable margin or
LIBOR plus an applicable margin.............................. - -
Mortgage payable, due 2000, interest at 8.75%.................... 498,468 477,664
Note payable, due 1998, interest at 10%.......................... 3,050,000 3,050,000
Sellers' notes, various maturities and interest rates............ 277,130 7,171,621
Capital leases and other......................................... 497,819 626,794
------------- -------------
115,511,195 93,308,076
Less current maturities.................................... 355,585 6,328,463
------------- -------------
Long-term debt............................................. $115,155,610 $86,979,613
============= =============
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company to incur additional
indebtedness, create liens and to pay dividends.
F-12
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
6. Long-Term Debt (continued):
In July 1995, Pegasus sold 85,000 units consisting of $85.0 million
in aggregate of 12.5% Series A Senior Subordinated Notes due 2005 (the "Series A
Notes" and, together with the Series B Notes, the "Notes") and 8,500 shares of
Pegasus' Class B Common Stock (the "Note Offering"). The Class B Common
Stock was subsequently exchanged for an aggregate of 191,775 shares of PCC's
Class A Common Stock. A portion of the proceeds from the Note Offering were used
to repurchase $26.0 million of notes for $13.0 million, resulting in an
extraordinary gain of approximately $10.2 million on the refinancing
transaction, net of expenses of $2.8 million.
In November 1995, Pegasus exchanged its Series B Notes for the
Series A Notes. The Series B Notes have substantially the same terms and
provisions as the Series A Notes. The Series B Notes are guaranteed on a full,
unconditional, senior subordinated basis, jointly and severally by a majority of
the wholly owned direct and indirect subsidiaries of Pegasus.
In August 1996, in conjunction with the acquisition of the WTLH
Tallahassee, Florida FCC license and Fox affiliation agreement, the Company
incurred indebtedness of $3.1 million.
In August 1996, the Company entered into a $50.0 million seven-year
senior revolving credit facility (the "Old Credit Facility"), which was
collateralized by substantially all of the assets of Pegasus and its
subsidiaries. Deferred financing fees relating to a retired $10.0 million
revolving credit facility were written off, resulting in an extraordinary loss
of approximately $251,000 on the refinancing transaction. Outstanding balances
under the Old Credit Facility were repaid by PCC. Concurrently with the closing
of the New Credit Facility (as defined), obligations of the Old Credit Facility
were satisfied in full and commitments thereunder were terminated. Deferred
financing fees relating to the Old Credit Facility were written off, resulting
in an extraordinary loss of approximately $460,000 on the refinancing
transaction.
In October 1997, PCC completed an offering of its Senior Notes ("the
Senior Notes Offering"). A portion of the proceeds from the Senior Notes
Offering were used to retire an existing $130.0 million credit facility (the
"PSH Credit Facility"). The PSH Credit Facility was financed with the New
Credit Facility. Deferred financing fees relating to the PSH Credit Facility
were written off, resulting in an extraordinary loss of approximately $1.2
million on the refinancing transaction.
In December 1997, the Company entered into a $180.0 million six-year
senior revolving credit facility (the "New Credit Facility"), which is
collateralized by substantially all of the assets of Pegasus and its
subsidiaries. Interest on the New Credit Facility is, at the Company's option,
at either the bank's base rate plus an applicable margin or LIBOR plus an
applicable margin. The New Credit Facility is subject to certain financial
covenants as defined in the loan agreement, including a debt to adjusted cash
flow covenant. The New Credit Facility will be used to finance future
acquisitions and for working capital, capital expenditures and general corporate
purposes. There were no borrowings outstanding under the New Credit Facility at
December 31, 1997.
At December 31, 1997, maturities of long-term debt and capital leases
are as follows:
1998 $6,328,463
1999 1,899,952
2000 1,925,484
2001 1,120,525
2002 51,655
Thereafter 81,981,997
===========
$93,308,076
===========
F-13
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
7. Net Income Per Share:
Calculation of basic and diluted net income per share:
The following table sets forth the computation of the number of shares used
in the computation of basic and diluted net income per share:
1995 1996 1997
---- ---- ----
Net income (loss) $1,638,386 ($9,526,954) ($10,918,772)
========== =========== ============
Weighted average shares outstanding 165,692 170,000 170,000
========== =========== ============
Total shares used for calculation of basic net
income per share 165,692 170,000 170,000
Stock options - - -
---------- ----------- ------------
Total shares used for calculation of diluted
net income per share 165,692 170,000 170,000
========== =========== ============
There are no securities that have not been issued and are antidilutive.
8. Leases:
The Company leases certain studios, towers, utility pole attachments,
and occupancy of underground conduits and headend sites under operating leases.
The Company also leases office space, vehicles and various types of equipment
through separate operating lease agreements. The operating leases expire at
various dates through 2005. Rent expense for the years ended December 31, 1995,
1996 and 1997 was $503,000, $686,000 and $896,000, respectively. The Company
leases equipment under long-term leases and has the option to purchase the
equipment for a nominal cost at the termination of the leases. The related
obligations are included in long-term debt. Property and equipment at December
31 include the following amounts for leases that have been capitalized:
1996 1997
---- ----
Equipment, furniture and fixtures...... $174,637 $676,679
Vehicles............................... 446,372 516,642
---------- ------------
621,009 1,193,321
Accumulated depreciation............... (216,575) (508,305)
========== ============
Total.................................. $404,434 $685,016
========== ============
F-14
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
8. Leases (continued):
Future minimum lease payments on noncancellable operating and capital
leases at December 31, 1997 are as follows:
Operating Capital
Leases Leases
--------- -------
1998.......................................... $469,846 $252,887
1999.......................................... 380,366 177,925
2000.......................................... 331,283 158,988
2001.......................................... 248,206 135,137
2002.......................................... 143,958 50,508
Thereafter.................................... 59,154 -
---------- ----------
Total minimum payments........................ $1,632,813 775,445
==========
Less: amount representing interest........... 148,651
==========
Present value of net minimum lease payments
including current maturities of $194,416 $626,794
==========
9. Income Taxes:
The following is a summary of the components of income taxes from
operations:
1995 1996 1997
---- ---- ----
Federal - deferred........................ $23,000 ($169,000)
State and local - current................. 7,000 49,000 $200,000
------- --------- --------
Provision (benefit) for income taxes... $30,000 ($120,000) $200,000
======= ========= ========
The deferred income tax assets and liabilities recorded in the
combined balance sheets at December 31, 1996 and 1997 are as follows:
1996 1997
---- ----
Assets:
Receivables................................................ $47,887 $73,547
Excess of tax basis over book basis from tax gain
recognized upon incorporation of subsidiaries.......... 1,890,025 1,890,025
Loss carryforwards......................................... 14,197,578 18,046,889
Other...................................................... 870,305 870,305
----------- -----------
Total deferred tax assets............................. 17,005,795 24,824,561
Liabilities:
Excess of book basis over tax basis of property, plant
and equipment.......................................... (1,754,621) (1,938,899)
Excess of book basis over tax basis of amortizable
intangible assets...................................... (4,616,997) (5,695,313)
----------- -----------
Total deferred tax liabilities......................... (6,371,618) (7,634,212)
----------- -----------
Net deferred tax assets.................................... 10,634,177 13,246,554
Valuation allowance................................... (10,683,639) (13,296,554)
----------- -----------
Net deferred tax liabilities............................... ($49,462) ($50,000)
=========== ===========
F-15
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
9. Income Taxes (continued):
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the expiration of
the Company's net operating loss carryforwards and portions of other deferred
tax assets related to prior acquisitions. The valuation allowance increased
primarily as the result of net operating loss carryforwards generated during
1997, which may not be utilized.
At December 31, 1997, the Company has net operating loss carryforwards
of approximately $53.1 million which are available to offset future taxable
income and expire through 2017.
A reconciliation of the Federal statutory rate to the effective tax
rate is as follows:
1995 1996 1997
---- ---- ----
U.S. statutory federal income tax rate............. 34.00% 34.00% 34.00%
Foreign net operating loss......................... 27.09 1.73 -
Valuation allowance................................ (61.46) (36.92) (34.38)
Other.............................................. - - 1.43
------- ------- -------
Effective tax rate................................. (0.37%) (1.19%) 1.05%
======= ======= =======
10. Supplemental Cash Flow Information:
Significant noncash investing and financing activities are as follows:
Years ended December 31,
1995 1996 1997
-------------- -------------- --------------
Barter revenue and related expense............. $5,110,662 $6,337,220 $7,520,000
Acquisition of program rights and assumption
of related program payables............... 1,335,275 1,140,072 3,452,779
Acquisition of plant under capital leases...... 121,373 312,578 501,907
Redemption of minority interests and related
receivable................................ 246,515 - -
Execution of license agreement option.......... - 3,050,000 -
Capital contribution and related incentive
compensation expense/ accrued
expense................................... - - 1,212,065
Capital contribution and related acquisition
of intangibles............................ - - 51,442,941
Notes payable and related acquisition of
intangibles............................... - - 2,185,622
For the years ended December 31, 1995, 1996 and 1997 the Company paid
cash for interest in the amount of $3.6 million, $12.0 million and $12.2
million, respectively. The Company paid no federal income taxes for the years
ended December 31, 1995, 1996 and 1997.
F-16
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
11. Acquisitions and Disposition:
In January 1996, PCH, then the parent of the Company, acquired all of
the outstanding stock of Portland Broadcasting, Inc. ("PBI"), which owns the
tangible assets of WPXT, Portland, Maine. PCH immediately transferred ownership
of PBI to the Company. The aggregate purchase price of PBI was approximately
$11.7 million of which $1.5 million was allocated to fixed and tangible assets
and $10.2 million to intangible assets. In June 1996, PCH acquired the FCC
license of WPXT for aggregate consideration of $3.0 million. PCH immediately
transferred the ownership of the license to the Company.
Effective March 1, 1996, the Company acquired the principal tangible
assets of WTLH, Inc., Tallahassee, Florida and certain of its affiliates for
approximately $5.0 million, except for the FCC license and Fox affiliation
agreement. Additionally, the Company entered into a put/call agreement regarding
the FCC license and Fox affiliation agreement with the licensee of WTLH. In
August 1996, the Company exercised its rights and recorded $3.1 million in
intangible assets and long term debt. The aggregate purchase price of WTLH, Inc.
and the related FCC licenses and Fox affiliation agreement was approximately
$8.1 million of which $2.2 million was allocated to fixed and tangible assets
and $5.9 million to various intangible assets. In addition, PCH granted the
sellers of WTLH a warrant to purchase $1.0 million of stock of one of its
subsidiaries at $14.00 per share.
The warrant expired in February 1997.
Effective August 29, 1996, the Company acquired all of the assets of
Dom's Tele-Cable, Inc. ("Dom's) for approximately $25.0 million in cash and $1.0
million in assumed liabilities. Dom's owned and operated cable systems serving
ten communities contiguous to the Company's Mayaguez, Puerto Rico cable system.
The aggregate purchase price of the principal assets of Dom's amounted to $26.0
million of which $4.7 million was allocated to fixed and tangible assets and
$21.3 million to various intangible assets.
Effective January 31, 1997, the Company sold substantially all the
assets of its New Hampshire cable system to State Cable TV Corporation for
approximately $6.9 million in cash, net of certain selling costs. The Company
recognized a gain on the transaction of approximately $4.5 million.
Effective October 21, 1997, upon consummation of PCC's Senior Notes
Offering, the Company acquired the assets of PSH, which assets consisted of the
stock of its subsidiaries that hold the rights to all of the Company's DBS
territories (the "Shares"), in the Subsidiaries Combination. The aggregate
purchase price for the Shares was approximately $218.2 million and consisted of
$85.6 million in cash, the redemption and cancellation of the $27.8 million of
preferred equity in PSH acquired in the PST/PSH Exchange and the assumption of
approximately $104.8 million in assumed liabilities. At October 21, 1997, PSH's
subsidiaries provided DBS services to customers in certain rural areas which
encompassed portions of twenty-six states.
Effective October 31, 1997 the Company acquired, from an independent
DIRECTV provider, the rights to provide DIRECTV programming in certain rural
areas of Georgia and the related assets and liabilities in exchange for
approximately $6.4 million in cash and 397,035 shares of PCC's Class A Common
Stock.
As of November 7, 1997 the Company acquired, from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Nebraska, Minnesota, Utah and Wyoming and the related assets in
exchange for approximately $3.1 million in cash, $147,000 in assumed
liabilities, a $1.7 million note, payable over two years, and a $446,000 note
due November 2000.
F-17
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
11. Acquisitions and Disposition:
The following unaudited summary, prepared on a pro forma basis,
combines the results of operations as if the above TV stations, DBS territories
and cable system had been acquired or sold as of the beginning of the periods
presented, after including the impact of certain adjustments, such as the
Company's payments to related parties, amortization of intangibles, interest
expense and related income tax effects. The pro forma information does not
purport to be indicative of what would have occurred had the
acquisitions/disposition been made on those dates or of results which may occur
in the future. This pro forma information does not include any acquisitions that
occurred subsequent to December 31, 1997.
Years Ended December 31,
------------------------
(in thousands, except earnings per share) (unaudited)
1996 1997
---- ----
Net revenues ..................................... $83,800 $104,207
-------- --------
Operating loss ................................... ($11,512) ($15,104)
-------- --------
Net loss before extraordinary item ................ ($33,474) ($34,903)
-------- --------
Net loss per share before extraordinary item ...... ($196.91) ($205.31)
======== ========
12. Financial Instruments:
The carrying values and fair values of the Company's financial
instruments at December 31 consisted of:
1996 1997
---- ----
(in thousands) Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Long-term debt, including current portion $ 115,511 $ 125,723 $ 93,308 $ 108,651
Long-term debt: The fair value of long-term debt is estimated based on the
quoted market price for the same or similar instruments.
All other financial instruments are stated at cost which approximates fair
market value.
13. Commitments and Contingent Liabilities:
Legal Matters:
From time to time the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
combined operations, liquidity, cash flows or financial position of the Company.
14. Other Events:
In August 1997, the Company commenced operations of TV station WPME,
which is affiliated with UPN. WPME is in the Portland, Maine Designated Market
Area ("DMA") and is being operated under a local marketing agreement ("LMA").
WPME's offices, studio and transmission facilities are co-located with WPXT, a
TV station in the Portland market the Company has owned and operated since
January 1996.
In October 1997, the Company commenced operations of TV station WGFL,
which is affiliated with WB. WGFL is in the Gainesville, Florida DMA and is
being operated under a LMA.
F-18
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
15. Related Party and Affiliate Transactions:
Effective October 31, 1997, the Company acquired DIRECTV distribution
rights for certain rural areas of Georgia and related assets (the "ViewStar DBS
Acquisition") from ViewStar Entertainment Services, Inc. ("ViewStar"). Prior to
the acquisition, Donald W. Weber, a director of Pegasus, was the President and
Chief Executive Officer of ViewStar and together with his son owned
approximately 73% of the outstanding stock of ViewStar. The ViewStar DBS
Acquisition was effected through a merger of ViewStar into a subsidiary of
Pegasus. The purchase price of the ViewStar DBS Acquisition consisted of
approximately $6.4 million in cash and 397,035 shares of PCC's Class A Common
Stock. The acquisition involved the execution of noncompetition agreements by
Mr. Weber and his son and the execution of a shareholders agreement (which
included the granting of certain registration rights on the shares of PCC's
Class A Common Stock issued in connection with the acquisition).
The Company reimburses various affiliates for corporate expenses relating
to certain administrative and accounting services, billing and programming
services and the reimbursement of expenses incurred therewith. For the years
ended December 31, 1995, 1996 and 1997, the fees and expenses were approximately
$1.8 million, $2.0 million and $1.6 million, respectively.
Other related party transaction balances at December 31, 1996 and 1997
are as follows:
1996 1997
------ ------
Accounts payable and accrued expenses..... $4,533,725 $5,759,979
Advances from affiliates.................. - $9,845,583
In 1996, PCC repaid $3.0 million on the Company's Old Credit Facility.
Additionally, PCC paid $1.5 million of accrued management fees on the Company's
behalf. Both payments were made from the proceeds of PCC's Initial Public
Offering.
In 1997, PCC advanced the Company $9.8 million to fund various DBS
acquisitions. The advances bear interest at a rate of 4% and are short-term in
nature. Additionally, PCC made contributions to the Company in 1997 totaling
$219.3 million in connection with repayment of outstanding balances on the
Company's Old Credit Facility (see footnote 6 - Long-Term Debt), the
Subsidiaries Combination and other acquisitions (see footnote 11 - Acquisitions
and Disposition) and stock incentive compensation.
F-19
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
16. Industry Segments:
The Company operates in growing segments of the media and
communications industries: multichannel television (DBS and Cable) and broadcast
television (TV). TV consists of five Fox-affiliated television stations, one of
which also simulcasts its signal in Hazelton and Williamsport, Pennsylvania, one
UPN-affiliated television station and two WB-affiliated television stations, one
of which is pending launch. Cable and DBS consist of providing cable
television services and direct broadcast satellite television services,
respectively, in twenty-seven states and Puerto Rico, as of December 31, 1997.
Information regarding the Company's business segments in 1995, 1996, and 1997 is
as follows (in thousands):
TV DBS Cable Combined
-- --- ----- --------
1995
Revenues $ 19,973 $ 1,469 $ 10,606 $ 32,049
Operating income (loss) 1,942 (772) (1,243) (73)
Identifiable assets 45,806 6,922 42,689 95,417
Incentive compensation 415 9 104 528
Corporate expenses 1,046 135 590 1,770
Depreciation & amortization 2,591 719 5,364 8,674
Capital expenditures 1,403 216 953 2,571
1996
Revenues $ 28,488 $ 4,213 $ 13,496 $ 46,197
Operating income (loss) 3,671 (798) 73 2,946
Identifiable assets 61,796 8,530 55,902 126,228
Incentive compensation 692 95 148 935
Corporate expenses 1,096 230 720 2,046
Depreciation & amortization 4,162 873 5,458 10,493
Capital expenditures 2,300 859 3,084 6,243
1997
Revenues $ 31,726 $ 17,990 $ 16,688 $ 66,404
Operating income (loss) 5,152 (7,538) 1,514 (872)
Identifiable assets 62,370 224,850 51,703 338,923
Incentive compensation 298 440 181 919
Corporate expenses 748 322 549 1,619
Depreciation & amortization 4,021 8,044 5,789 17,854
Capital expenditures 6,425 36 2,914 9,375
F-20
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
17. Subsequent Events:
As of January 7, 1998 the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Minnesota and the related assets in exchange for approximately $1.9 million in
cash and $32,000 in assumed liabilities.
In January 1998, the Company entered into an agreement to sell its
remaining New England cable systems for a purchase price of at least $28 million
and not more than $31 million, based on the systems' location cash flow for the
trailing 12 months prior to closing, multiplied by nine. The Company anticipates
this transaction to close in the third quarter of 1998. The Company expects to
report a one-time nonrecurring gain relating to this transaction.
The Company has entered into fourteen letters of intent or definitive
agreements to acquire, from various independent DIRECTV providers, the rights to
provide DIRECTV programming in certain rural areas of Idaho, Nebraska, New
Mexico, Oregon, South Dakota and Texas and the related assets in exchange for
approximately $52.9 million in cash, $10.3 million in promissory notes and
$854,000 of PCC's Class A Common Stock.
18. Subsidiary Guarantees:
The Series B Notes are guaranteed on a full, unconditional, senior
subordinated basis, jointly and severally by each of the wholly-owned direct and
indirect subsidiaries of Pegasus with the exception of certain subsidiaries as
described below (the "Guarantor Subsidiaries"). WTLH License Corp., WTLH, Inc.,
Pegasus Anasco Holdings, Inc. and PCT-CT, all of which are direct or indirect
subsidiaries of Pegasus, are not guarantors of the Series B Notes
("Non-guarantor Subsidiaries"). As the result of these subsidiaries not being
guarantors of the Series B Notes, the following condensed combining financial
statements have been provided. The Company believes separate financial
statements and other disclosures concerning the Guarantor Subsidiaries are not
deemed material to investors.
F-21
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
18. Subsidiary Guarantees (continued):
Condensed Combined Balance Sheets
(in thousands)
Guarantor Non-guarantor
As of December 31, 1997 Subsidiaries Subsidiaries Pegasus Eliminations
------------ ------------- ------- ------------
Assets:
Cash and cash equivalents $9,170 $2,511 $5,329
Accounts receivable, net 13,074 1
Other current assets 6,340 64
-------------------------------------------------------------------------
Total current assets 28,584 2,576 5,329
Property and equipment, net 25,159 2,224
Intangible assets, net 263,039 3,416 5,709
Other assets 2,396 66
Investment in subsidiaries and affiliates 270,212 ($270,212)
=========================================================================
Total assets $319,178 $8,216 $281,316 ($270,212)
=========================================================================
Liabilities and total equity:
Current portion of long-term debt $3,244 $3,084
Accounts payable 9,983 1,314
Other current liabilities 17,748 831 ($14,102) $14,102
-------------------------------------------------------------------------
Total current 30,975 5,229 (14,102) 14,102
liabilities
Long-term debt 284,883 4,429 81,982 (284,314)
Other liabilities 13,062 307 546
-------------------------------------------------------------------------
Total liabilities 328,920 9,965 68,426 (270,212)
Minority interest 3,000
Total equity (deficit) (12,742) (1,749) 212,890
=========================================================================
Total liabilities and equity $319,178 $8,216 $281,316 ($270,212)
=========================================================================
As of December 31, 1996
Assets:
Cash and cash equivalents $6,171 $807 $1,439
Accounts receivable, net 6,036 (5)
Other current assets 3,673 639 ($317)
-------------------------------------------------------------------------
Total current assets 15,880 1,441 1,439 (317)
Property and equipment, net 21,293 2,530
Intangible assets, net 75,463 3,176 3,861
Other assets 1,462
Investment in subsidiaries and affiliates 68,297 (68,297)
=========================================================================
Total assets $114,098 $7,147 $73,597 ($68,614)
=========================================================================
Liabilities and total equity:
Current portion of long-term debt $273 $83
Accounts payable 5,681 598 $149 ($317)
Other current liabilities 11,079 369 (8,769) 8,818
-------------------------------------------------------------------------
Total current 17,033 1,050 (8,620) 8,501
liabilities
Long-term debt 103,018 7,665 81,588 (77,115)
Other liabilities 2,237 307 161
-------------------------------------------------------------------------
Total liabilities 122,288 9,022 73,129 (68,614)
Total equity (deficit) (8,190) (1,875) 468
=========================================================================
Total liabilities and equity $114,098 $7,147 $73,597 ($68,614)
=========================================================================
Pegasus
Pegasus Development
As of December 31, 1997 Subtotal Corporation Eliminations Totals
-------- ----------- ------------ -------
Assets:
Cash and cash equivalents $17,010 $17,010
Accounts receivable, net 13,075 13,075
Other current assets 6,404 6,404
---------------------------------------------------------------------
Total current assets 36,489 36,489
Property and equipment, net 27,383 27,383
Intangible assets, net 272,164 272,164
Other assets 2,462 $425 2,887
Investment in subsidiaries and affiliates
=====================================================================
Total assets $338,498 $425 $338,923
=====================================================================
Liabilities and total equity:
Current portion of long-term debt $6,328 $6,328
Accounts payable 11,297 11,297
Other current liabilities 18,579 18,579
---------------------------------------------------------------------
Total current 36,204 36,204
liabilities
Long-term debt 86,980 86,980
Other liabilities 13,915 ($1) 13,914
---------------------------------------------------------------------
Total liabilities 137,099 (1) 137,098
Minority interest 3,000 3,000
Total equity (deficit) 198,399 426 198,825
=====================================================================
Total liabilities and equity $338,498 $425 $338,923
=====================================================================
As of December 31, 1996
Assets:
Cash and cash equivalents $8,417 $8,417
Accounts receivable, net 6,031 6,031
Other current assets 3,995 3,995
---------------------------------------------------------------------
Total current assets 18,443 18,443
Property and equipment, net 23,823 23,823
Intangible assets, net 82,500 82,500
Other assets 1,462 1,462
Investment in subsidiaries and affiliates
=====================================================================
Total assets $126,228 $126,228
=====================================================================
Liabilities and total equity:
Current portion of long-term debt $356 $356
Accounts payable 6,111 6,111
Other current liabilities 11,497 11,497
---------------------------------------------------------------------
Total current 17,964 17,964
liabilities
Long-term debt 115,156 115,156
Other liabilities 2,705 2,705
---------------------------------------------------------------------
Total liabilities 135,825 135,825
Total equity (deficit) (9,597) (9,597)
=====================================================================
Total liabilities and equity $126,228 $126,228
=====================================================================
F-22
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
18. Subsidiary Guarantees (continued):
Condensed Combined Statements of Operations
For the Year ended December 31, 1996
(in thousands)
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations
Total revenue $63,333 $3,171 ($100)
Total operating expenses 61,158 2,015 $429 (100)
----------------------------------------------------------------------
Income (loss) from operations 2,175 1,156 (429)
Interest expense 16,031 310 6,478 (10,223)
Other (4,417) 12
----------------------------------------------------------------------
Income (loss) before income
taxes (9,439) 846 (6,919) 10,223
Provisions for income taxes 200
----------------------------------------------------------------------
Income (loss) before
extraordinary item (9,639) 846 (6,919) 10,223
Extraordinary loss on
extinguishment of debt (1,656)
----------------------------------------------------------------------
Net income (loss) ($9,639) $846 ($8,575) $10,223
======================================================================
[RESTUBED TABLE FOR ABOVE]
Pegasus
Pegasus Development
Subtotal Corporation Eliminations Totals
Total revenue $66,404 $120 ($120) $66,404
Total operating expenses 63,502 3,894 (120) 67,276
-----------------------------------------------------------------------
Income (loss) from operatons 2,902 (3,774) (872)
Interest expense 12,596 12,596
Other (4,405) (4,405)
-----------------------------------------------------------------------
Income (loss) before income
taxes (5,289) (3,774) (9,063)
Provisions for income taxes 200 200
-----------------------------------------------------------------------
Income (loss) before
extraordinary item (5,489) (3,774) (9,263)
Extraordinary loss on
extinguishment of debt (1,656) (1,656)
-----------------------------------------------------------------------
Net income (loss) ($7,145) ($3,774) ($10,919)
=======================================================================
18. Subsidiary Guarantees (continued):
Condensed Combined Statements of Operations
For the Year ended December 31, 1996
(in thousands)
Guarantor Non-guarantor
Subsidiaries Subsidiaries Pegasus Eliminations
Total revenue $43,394 $2,903 ($100)
Total operating expenses 40,231 2,711 $409 (100)
----------------------------------------------------------------------
Income (loss) from operatons 3,163 192 (409)
Interest expense 11,468 330 7,435 (6,795)
Other 215 (311)
----------------------------------------------------------------------
Income (loss) before income
taxes (8,520) (138) (7,533) 6,795
Provisions for income taxes (120)
----------------------------------------------------------------------
Income (loss) before
extraordinary item (8,400) (138) (7,533) 6,795
Extraordinary loss on
extinguishment of debt (251)
----------------------------------------------------------------------
Net income (loss) ($8,400) ($138) ($7,784) $6,795
======================================================================
Pegasus
Pegasus Development
Subtotal Corporation Eliminations Totals
Total revenue $46,197 $46,197
Total operating expenses 43,251 43,251
-----------------------------------------------------------------------
Income (loss) from operatons 2,946 2,946
Interest expense 12,438 12,438
Other (96) (96)
-----------------------------------------------------------------------
Income (loss) before income
taxes (9,396) (9,396)
Provisions for income taxes (120) (120)
-----------------------------------------------------------------------
Income (loss) before
extraordinary item (9,276) (9,276)
Extraordinary loss on
extinguishment of debt (251) (251)
-----------------------------------------------------------------------
Net income (loss) ($9,527) ($9,527)
=======================================================================
F-23
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSIDIARY GUARANTEES (CONTINUED):
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
Pegasus
Guarantor Non-guarantor Pegasus Development
Subsidiaries Subsidiaries Pegasus Eliminations Subtotal Corporation Eliminations Totals
------------ ------------- ------- ------------ -------- ----------- ------------ ------
Cash flows from opening
activities:
Net income (loss) (59,639) $846 ($8,575) $10,223 ($7,145) ($3,774) ($10,919)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Extraordinary gain on
extinguishment of debt 1,656 1,656 1,656
Depreciation and amortization 16,438 987 429 17,854 17,854
Program rights amortization 1,716 1,716 1,716
Change in assets and liabilities:
Accounts receivable (4,497) (4,497) (4,497)
Accounts payable and accrued
expenses 14,410 1,178 (149) (9,906) 5,533 5,533
Prepaids and other 39 569 (66) 342 (425) 117
Other (10,236) (720) 7,672 (317) (3,601) (1) (3,602)
------- ------- ------ ------ ------- ------ ------- -------
Net cash provided (used) by
operating activities 8,231 2,860 967 12,058 (4,200) 7,858
Cash flows from investing
activities:
Acquisitions (45,580) (45,580) (45,580)
Capital expenditures (8,997) (378) (9,375) (9,375)
Purchase of intangible assets (219) (543) (2,277) (3,039) (3,039)
Other 93,422 (85,000) 8,422 8,422
------- ------- ------ ------ ------- ------ ------- -------
Net cash provided (used) by
investing activities 38,626 (921) (87,277) (49,572) (49,572)
Cash flows from financing
activities:
Proceeds from debt 526 526 526
Repayment of debt (94,503) (235) (30,126) (124,64) (124,864)
Other 50,645 119,800 170,445 4,200 174,645
------- ------- ------ ------ ------- ------ ------- -------
Net Cash provided (used) by
financing activities (43,858) (235) 90,200 46,107 4,200 50,307
Net increase (decrease) in
cash and cash equivalents 2,999 1,704 3,890 8,593 8,593
Cash and cash equivalents,
beginning of year 6,171 807 1,439 8,417 8,417
------- ------- ------ ------ ------- ------ ------- -------
Cash and cash equivalents,
end of year $9,170 $2,511 $5,329 $17,010 $17,010
======= ====== ====== ====== ======= ====== ======= =======
F-24
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
19. Quarterly Information (unaudited):
Quarter Ended
-------------
(in thousands) March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
1997
Net revenues $ 12,274 $ 13,593 $ 11,293 $ 29,244
Operating income before
depreciation and amortization 3,544 4,449 3,670 5,320
Income (loss) before
extraordinary items 1,811 (1,581) (1,916) (7,576)
Net income (loss) $ 1,811 $ (1,581) $ (1,916) $ (9,233)
Basic and diluted earnings per share:
Operating income before
depreciation and amortization $ 20.85 $ 26.17 $ 21.59 $ 31.29
Income (loss) before
extraordinary items 10.65 (9.30) (11.27) (44.57)
Net income (loss) $ 10.65 $ (9.30) $ (11.27) $ (54.31)
20. Other Information (unaudited):
As defined in the Indenture governing the Series B Notes, the Company is
required to provide Adjusted Operating Cash Flow data for Pegasus and its
Restricted Subsidiaries, on a combined basis, where Adjusted Operating Cash Flow
is defined as, "for the four most recent fiscal quarters for which internal
financial statements are available, Operating Cash Flow of such Person and its
Restricted Subsidiaries less DBS Cash Flow (Satellite Segment Operating Cash
Flow) for the most recent four-quarter period plus DBS Cash Flow for the most
recent quarterly period, multiplied by four." Operating Cash Flow is income from
operations before income taxes, depreciation and amortization, interest expense,
extraordinary items and non-cash corporate expenses and incentive compensation.
Restricted Subsidiaries carries the same meaning as in the Indenture. Although
Operating Cash Flow and Location Cash Flow are not measures of performance under
generally accepted accounting principles, the Company believes that Location
Cash Flow and Operating Cash Flow are accepted within the Company's business
segments as generally recognized measures of performance and are used by
analysts who report publicly on the performance of companies operating in such
segments. Restricted Subsidiaries carries the same meaning as in the Indenture.
Pro forma for the DBS territories acquired in the Subsidiaries Combination, the
four completed DBS acquisitions occurring in the fourth quarter of 1997 and the
disposition of the New Hampshire cable system, as if such
acquisitions/disposition occurred on January 1, 1997, Adjusted Operating Cash
Flow would have been approximately $35.5 million, as follows:
Four Quarters
Ended
(in thousands) December 31,1997
--------------------
Revenues $108,393
Direct operating expenses, excluding depreciation,
amortization and other non-cash charges 71,285
--------------------
Income from operations before corporate expenses,
depreciation, amortization and other non-cash charges 37,108
Corporate expenses 1,619
====================
Adjusted operating cash flow $35,489
====================
F-25
Coopers & Lybrand, L.L.P.
Coopers
&Lybrand a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Pegasus Media &
Communications, Inc. is included on page F-2 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedule included on page S-2 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements take as a whole,
presents fairly, in all material respects, the information required to be
represented therein.
/s/ Coopers & Lybrand LLP
- --------------------------
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 26, 1998
S-1
PEGASUS MEDIA & COMMUNICATIONS, INC. SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS For the Years Ended December 31, 1995, 1996 and 1997
(Dollars in thousands)
Description Balance at Additions Additions Balance at
Beginning of Charged To Charged To End of
Period Expenses Other Accounts Deductions Period
Allowance for Uncollectible
Accounts Receivable
Year 1995 $ 348 $ 151 $ - $ 261 (a) $ 238
Year 1996 $ 238 $ 336 $ - $ 331 (a) $ 243
Year 1997 $ 243 $ 371 $ - $ 295 (a) $ 319
Valuation Allowance for
Deferred Tax Assets
Year 1995 $ 1,756 $ 8,675 $ - $ 3,477 $ 6,954
Year 1996 $ 6,954 $ 7,032 $ - $ 3,302 $ 10,684
Year 1997 $ 10,684 $ 7,584 $ - $ 4,971 $ 13,297
(a) Amounts written off, net of recoveries.
S-2