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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from__________ to __________
Commission File Number 33-95042
PEGASUS MEDIA & COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 23-2778525
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
c/o Pegasus Communications Management Company;
225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes_X_ No___
Number of shares of each class of the Registrant's common stock
outstanding as of August 12, 2002:
Class A, Common Stock, $0.01 par value 161,500
Class B, Common Stock, $0.01 par value 8,500
The Registrant meets the conditions set forth in General Instruction H
(1)(a) and (b) of Form 10-Q and is therefore filing this Form with reduced
disclosure format
PEGASUS MEDIA & COMMUNICATIONS, INC.
Form 10-Q
Table of Contents
For the Quarterly Period Ended June 30, 2002
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 4
Consolidated Statements of Operations and Comprehensive Loss
Three months ended June 30, 2002 and 2001 5
Consolidated Statements of Operations and Comprehensive Loss
Six months ended June 30, 2002 and 2001 6
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Narrative Analysis of the
Results of Operations 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 28
Signature 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
Pegasus Media & Communications, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
June 30, December 31,
2002 2001
--------------- --------------
(unaudited)
Currents assets:
Cash and cash equivalents $ 83,106 $ 99,710
Accounts receivable, net
Trade 23,236 32,139
Other 7,996 11,721
Deferred subscriber acquisition costs, net 19,002 15,194
Net advances to affiliates 84 33,805
Other current assets 22,148 26,380
--------------- --------------
Total current assets 155,572 218,949
Property and equipment, net 77,422 72,335
Intangible assets, net 1,630,878 1,692,308
Other noncurrent assets 91,848 90,255
--------------- --------------
Total $1,955,720 $2,073,847
=============== ==============
Current liabilities:
Current portion of long term debt $ 5,694 $ 8,615
Accounts payable 10,263 8,905
Accrued programming fees 66,770 67,225
Accrued commissions and subsidies 41,155 45,386
Other accrued expenses 29,397 29,058
Other current liabilities 9,644 10,711
--------------- --------------
Total current liabilities 162,923 169,900
Long term debt 414,954 435,902
Deferred income taxes, net 65,365 73,329
Other noncurrent liabilities 43,045 46,796
--------------- --------------
Total liabilities 686,287 725,927
--------------- --------------
Commitments and contingent liabilities (see Note 10)
Minority interest 1,802 1,315
Common stockholder's equity:
Common stock 2 2
Other common stockholder's equity 1,267,629 1,346,603
--------------- --------------
Total common stockholder's equity 1,267,631 1,346,605
--------------- --------------
Total $1,955,720 $2,073,847
=============== ==============
See accompanying notes to consolidated financial statements
4
Pegasus Media & Communications, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands)
Three Months Ended June 30,
2002 2001
----------- -----------
(unaudited)
Net revenues:
DBS $216,447 $206,015
Broadcast 8,847 9,150
----------- -----------
Total net revenues 225,294 215,165
----------- -----------
Operating expenses:
DBS
Programming 96,016 87,772
Other subscriber related expenses 49,086 51,841
----------- -----------
Direct operating expenses (excluding depreciation and amortization
shown below) 145,102 139,613
Promotions and incentives 2,027 12,375
Advertising and selling 7,820 32,375
General and administrative 6,865 9,092
Depreciation and amortization 41,487 63,250
----------- -----------
Total DBS 203,301 256,705
----------- -----------
Broadcast
Programming 3,283 3,477
Other direct operating expenses 2,012 1,682
----------- -----------
Direct operating expenses (excluding depreciation and amortization
shown below) 5,295 5,159
Advertising and selling 2,059 2,145
General and administrative 1,084 1,212
Depreciation and amortization 1,081 1,202
----------- -----------
Total Broadcast 9,519 9,718
----------- -----------
Corporate and development expenses 3,588 3,322
Corporate depreciation and amortization - 6
Other operating expenses, net 5,449 4,155
----------- -----------
Income (loss) from operations 3,437 (58,741)
Interest expense (9,140) (20,664)
Interest income 73 934
Loss on impairment of marketable securities (3,063) -
Other nonoperating income, net 113 149
----------- -----------
Loss before income taxes and extraordinary item (8,580) (78,322)
Benefit for income taxes (3,231) (29,315)
----------- -----------
Loss before extraordinary item (5,349) (49,007)
Extraordinary loss from extinguishment of debt, net of income tax benefit
of $604 - (986)
----------- -----------
Net loss (5,349) (49,993)
----------- -----------
Other comprehensive loss:
Unrealized (loss) gain on marketable securities, net of income tax
benefit of $465 and $1,528, respectively (758) 2,493
Reclassification adjustment for accumulated unrealized loss on
marketable securities included in net loss, net of income tax benefit of
$1,164 1,899 -
----------- -----------
Net other comprehensive income 1,141 2,493
----------- -----------
Comprehensive loss $ (4,208) $ (47,500)
============ ============
See accompanying notes to consolidated financial statements
5
Pegasus Media & Communications, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands)
Six Months Ended June 30,
2002 2001
----------- -----------
(unaudited)
Net revenues:
DBS $431,171 $411,853
Broadcast 16,690 16,796
----------- -----------
Total net revenues 447,861 428,649
----------- -----------
Operating expenses:
DBS
Programming 192,334 175,934
Other subscriber related expenses 100,827 100,743
----------- -----------
Direct operating expenses (excluding depreciation and amortization
shown below) 293,161 276,677
Promotions and incentives 3,770 29,308
Advertising and selling 16,121 69,434
General and administrative 14,782 18,254
Depreciation and amortization 80,937 126,004
----------- -----------
Total DBS 408,771 519,677
----------- -----------
Broadcast
Programming 6,625 6,195
Other direct operating expenses 3,899 3,366
----------- -----------
Direct operating expenses (excluding depreciation and amortization
shown below) 10,524 9,561
Advertising and selling 3,891 4,027
General and administrative 2,204 2,246
Depreciation and amortization 2,206 2,483
----------- -----------
Total Broadcast 18,825 18,317
----------- -----------
Corporate and development expenses 7,613 6,506
Corporate depreciation and amortization 6 12
Other operating expenses, net 13,424 12,218
----------- -----------
Loss from operations (778) (128,081)
Interest expense (18,165) (44,423)
Interest income 153 3,165
Loss on impairment of marketable securities (3,063) -
Other nonoperating income (expense), net 1,239 (3,346)
----------- -----------
Loss before income taxes and extraordinary item (20,614) (172,685)
Benefit for income taxes (7,656) (62,566)
----------- -----------
Loss before extraordinary item (12,958) (110,119)
Extraordinary loss from extinguishment of debt, net of income tax benefit
of $604 - (986)
----------- -----------
Net loss (12,958) (111,105)
----------- -----------
Other comprehensive loss:
Unrealized loss on marketable securities, net of income tax benefit of
$1,780 and $3,137, respectively (2,904) (5,118)
Reclassification adjustment for accumulated unrealized loss on
marketable securities included in net loss, net of income tax benefit
of $1,164 1,899 -
----------- -----------
Net other comprehensive loss (1,005) (5,118)
----------- -----------
Comprehensive loss $ (13,963) $(116,223)
=========== ===========
See accompanying notes to consolidated financial statements
6
Pegasus Media & Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended June 30,
2002 2001
--------------- ---------------
(unaudited)
Net cash provided by (used for) operating activities $ 54,502 $ (57,095)
--------------- ---------------
Cash flows from investing activities:
DBS equipment capitalized (13,497) (8,056)
Other capital expenditures (2,020) (10,223)
Purchases of intangible assets (1) (2,358)
Other - (889)
--------------- ---------------
Net cash used for investing activities (15,518) (21,526)
--------------- ---------------
Cash flows from financing activities:
Proceeds from term loan facility 63,156 -
Net repayments of revolving credit facilities (80,000) -
Repayments of other long term debt (7,227) (8,178)
Net advances from (to) affiliates 32,319 (24,652)
Net distributions to parent (65,011) (20,096)
Other 1,175 1,170
--------------- ---------------
Net cash used for financing activities (55,588) (51,756)
--------------- ---------------
Net decrease in cash and cash equivalents (16,604) (130,377)
Cash and cash equivalents, beginning of year 99,710 183,261
--------------- ---------------
Cash and cash equivalents, end of period $ 83,106 $ 52,884
=============== ===============
See accompanying notes to consolidated financial statements
7
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
"We", "us", and "our" refer to Pegasus Media & Communications, Inc.
together with its subsidiaries. "PM&C" refers to Pegasus Media & Communications,
Inc. individually as a separate entity. "PSC" refers to Pegasus Satellite
Communications, Inc., the parent company of PM&C. "PCC" refers to Pegasus
Communications Corporation's, the parent company of PSC. "DBS" refers to direct
broadcast satellite.
Significant Risks and Uncertainties
Both PCC and PSC's principal operations are held by us, and each
primarily rely on us as a source of cash in meeting their respective debt and
preferred stock obligations. Using cash for these payments reduces the
availability of funds for working capital, capital expenditures, and other
activities for us, and limits our flexibility in planning for, or reacting to,
changes in our business and the industries in which we operate. Our ability to
fund operations, planned capital expenditures, debt service, and other
activities and to fund the debt service and preferred stock requirements of PCC
and PSC will depend on our ability to generate cash in the future. Our ability
to generate cash will depend upon the success of our business strategy,
prevailing economic conditions, regulatory risks, our ability to integrate
acquired assets successfully into our operations, competitive activities by
other parties, equipment strategies, technological developments, level of
programming costs, levels of interest rates, and financial, business, and other
factors that are beyond our control. We cannot assure that our business will
generate sufficient cash flow from operations or that alternative financing will
be available to us in amounts sufficient to fund the needs previously specified.
PM&C's credit agreement and note indenture contain numerous covenants that,
among other things, generally limit the ability to incur additional indebtedness
and liens, issue other securities, make certain payments and investments, pay
dividends, transfer cash, dispose of assets, and enter into other transactions.
Failure to make debt payments or comply with covenants could result in an event
of default that, if not cured or waived, could have a material adverse effect on
us.
2. Basis of Presentation
The unaudited financial statements herein include the accounts of PM&C
and all of its subsidiaries on a consolidated basis. All intercompany
transactions and balances have been eliminated. The balance sheets and
statements of cash flows are presented on a condensed basis. These financial
statements are prepared in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The financial statements reflect all
adjustments consisting of normal recurring items that, in our opinion, are
necessary for a fair presentation, in all material respects, of our financial
position and the results of our operations and comprehensive loss and our cash
flows for the interim period. The interim results of operations contained herein
may not necessarily be indicative of the results of operations for the full
fiscal year. Prior year amounts have been reclassified where appropriate to
conform to the current year classification for comparative purposes.
3. Adoption of FAS 141
On January 1, 2002, we adopted in its entirety Statement of Financial
Accounting Standards No. 141 "Business Combinations" ("FAS 141"). FAS 141, as
well as FAS 142 discussed below, makes a distinction between intangible assets
that are goodwill and intangible assets that are other than goodwill. When we
use the term "intangible asset or assets", we mean it to be an intangible asset
or assets other than goodwill, and when we use the term "goodwill", we mean it
to be separate from intangible assets. The principal impact to us of adopting
FAS 141 was the requirement to reassess at January 1, 2002 the classification on
our balance sheet of the carrying amounts of our goodwill and intangible assets
recorded in acquisitions we made before July 1, 2001. The adoption of FAS 141
did not have a significant impact on our financial position.
4. Adoption of FAS 142
In the first quarter 2002, effective on January 1, 2002, we adopted in
its entirety Statement of Financial Accounting Standards No. 142 "Goodwill and
Other Intangible Assets" ("FAS 142"). A principal provision of the standard is
that goodwill and intangible assets that have indefinite lives are not subject
to amortization, but are
8
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
subject to an impairment test at least annually. The principal impacts to us of
adopting FAS 142 were: 1) reassessing on January 1, 2002 the useful lives of
intangible assets existing on that date that we had recorded in acquisitions we
made before July 1, 2001 and adjusting remaining amortization periods as
appropriate; 2) ceasing amortization of goodwill and intangible assets with
indefinite lives effective January 1, 2002; 3) establishing reporting units as
needed for the purpose of testing goodwill for impairment; 4) testing on January
1, 2002 goodwill and intangible assets with indefinite lives existing on that
date for impairment; and 5) separating goodwill from intangible assets. The
provisions of this standard were not permitted to be retroactively applied to
periods before the date we adopted FAS 142.
We believe that the estimated remaining useful life of the DBS rights
assets should be based on the estimated useful lives of the satellites at the
1010 west longitude orbital location available to provide DirecTV services under
the NRTC-DirecTV contract. The contract sets forth the terms and conditions
under which the lives of those satellites are deemed to expire, based on fuel
levels and transponder functionality. We estimate that the useful life of the
DirecTV satellite resources provided under the contract (without regard to
renewal rights) expires in November 2016. Because the cash flows for all of our
DBS rights assets emanate from the same source, we believe that it is
appropriate for all of the estimated useful lives of our DBS rights assets to
end at the same time. Prior to the adoption of FAS 142, our DBS rights assets
had estimated useful lives of 10 years from the date we obtained the rights.
Linking the lives of our DBS rights assets in such fashion extended the
amortization period for the unamortized carrying amount of the assets and the
range of the useful lives of the rights from the date of their inception. The
life of our DBS rights is subject to litigation. See note 12 for information
regarding this litigation.
We determined that our broadcast licenses had indefinite lives because
under past and existing Federal Communications Commission's regulations the
licenses can be routinely renewed indefinitely with little cost. Ceasing
amortization on goodwill and broadcast licenses had no material effect. The
adoption of FAS 142 did not have a significant effect on our other intangible
assets other than those discussed above. Our industry segments already
established equate to the reporting units required under the standard. We
determined that there were no impairments to be recorded upon the adoption of
FAS 142.
At June 30, 2002 and December 31, 2001, intangible assets that were
amortized had the following balances (in thousands):
June 30, December 31,
2002 2001
------------- -------------
Cost:
DBS rights assets $2,291,422 $2,259,231
Other 50,360 109,880
------------- -------------
2,341,782 2,369,111
------------- -------------
Accumulated amortization:
DBS rights assets 697,154 624,115
Other 29,424 52,688
------------- -------------
726,578 676,803
------------- -------------
Net $1,615,204 $1,692,308
============= =============
At June 30, 2002, intangible assets that were not amortized consisted
of broadcast licenses with a carrying amount of $15.7 million. We had no
intangible assets that were not amortized at December 31, 2001. At June 30, 2002
and December 31, 2001, total goodwill had a carrying amount of $15.8 million and
was all associated with our broadcast segment. Because the carrying amount of
goodwill is not significant, it is included in other noncurrent assets on the
balance sheet.
9
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loss before extraordinary items and net loss, each as adjusted for the
effects of applying FAS 142, for the three and six months ended June 30, 2001
were as follows (in thousands):
For the three months ended:
Loss before extraordinary items, as adjusted $(32,791)
Net loss, as adjusted (33,777)
For the six months ended:
Loss before extraordinary items, as adjusted (77,066)
Net loss, as adjusted (78,052)
A reconciliation of net loss, as reported to net loss, as adjusted for
the three and six months ended June 30, 2001 is as follows (in thousands):
For the three months ended:
Net loss, as reported $(49,993)
Add back goodwill amortization 97
Add back amortization on broadcast licenses 97
Adjust amortization for a change in the useful life of DBS
rights assets 16,022
--------------
Net loss, adjusted $(33,777)
==============
For the six months ended:
Net loss, as reported $(111,105)
Add back goodwill amortization 198
Add back amortization on broadcast licenses 199
Adjust amortization for a change in the useful life of DBS
rights assets 32,656
---------------
Net loss, as adjusted $ (78,052)
===============
Aggregate amortization expense for the six months ended June 30, 2002
and 2001 was $59.2 million and $122.4 million, respectively. Aggregate
amortization expense for 2001 was $244.7 million. The estimated aggregate amount
of amortization expense for the remainder of 2002 and for each of the next five
years thereafter is $58.5 million, $116.8 million, $116.8 million, $114.5
million, and $111.4 million, and $110.7 million, respectively.
5. Changes in Other Stockholder's Equity
Changes in other stockholder's equity from December 31, 2001 to June
30, 2002 consisted of: net loss of $13.0 million; net cash distributions to PSC
of $65.0 million; and net change in accumulated other comprehensive loss of
$(1.0) million.
6. Long Term Debt
During the three months ended June 30, 2002, amounts borrowed and
repayments of amounts borrowed under PM&C's revolving credit facility were
equal. There was no principal amount outstanding under the revolving credit
facility at June 30, 2002, compared to $80.0 million outstanding at December 31,
2001. Letters of credit outstanding under the revolving credit facility, which
reduce the availability thereunder, were $60.9 million at June 30, 2002 and
$63.2 million at December 31, 2001. At June 30, 2002, the commitment for the
revolving credit facility was permanently reduced by approximately $8.4 million
as scheduled under the terms of the credit agreement to $185.6 million. The
commitment for the revolving credit facility will continue to be permanently
reduced by approximately $8.4 million in each of September and December 2002.
Availability under the revolving credit facility at June 30, 2002 was
approximately $124.5 million.
10
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We repaid $688 thousand of outstanding principal under PM&C's term loan
facility during the second quarter 2002, as scheduled in the credit agreement,
which reduced the total principal amount outstanding to $270.9 million. The
weighted average variable rate of interest including applicable margins on
principal amounts outstanding under the term facility was approximately 5.4% at
June 30, 2002 and December 31, 2001.
In June 2002, PM&C borrowed $63.2 million in incremental term loans
under its credit agreement out of $200.0 million capacity specified for such
purpose thereunder. Our option to request additional funding from the unused
portion of the incremental term loan capacity of $136.8 million expired June 30,
2002. Principal amounts outstanding under the incremental term loan facility are
payable quarterly in increasing increments over the remaining term of the
facility beginning September 30, 2002. All unpaid principal and interest
outstanding under the incremental term loans are due July 31, 2005. Quarterly
principal payments scheduled for the remainder of 2002 are $158 thousand in each
of September and December, with total payments of $632 thousand, $16.3 million,
and $45.9 million in 2003, 2004, and 2005, respectively. Amounts repaid under
the incremental term loan facility may not be reborrowed. Margins on incremental
term loans are 2.5% for base rates and 3.5% for LIBOR rates. Interest on
outstanding principal borrowed under base rates is due and payable quarterly and
interest on outstanding principal borrowed under LIBOR rates is due and payable
the earlier of the end of the contracted interest rate period or three months.
The weighted average rate of interest including applicable margins on principal
amounts outstanding under the incremental loan term facility at June 30, 2002
was 7.25%.
In July 2002, PSC purchased $17.1 million in maturity value of PM&C's
12-1/2% notes due July 2005 in a negotiated transaction with an unaffiliated
holder.
7. Supplemental Cash Flow Information
Significant noncash investing and financing activities were as follows
(in thousands):
Six Months
Ended June 30,
2002 2001
------------ ------------
NRTC patronage capital investment accrued $9,555 $ 10,850
Net change in other comprehensive loss 1,005 5,118
Increase in additional paid in capital due to cancellation of outstanding debt, net
of related unamortized deferred financing costs - 320,390
Contribution by PSC of the net assets of Golden Sky Holdings - 742,166
8. Loss on Impairment of Marketable Securities
Based on the significance and duration of the loss in fair value, at
June 30, 2002, we determined that our sole investment in marketable securities
held had incurred an other than temporary decline in fair market value.
Accordingly, we wrote down the cost basis in the marketable securities to their
fair market value at June 30, 2002 and charged earnings in the amount of $3.1
million for the impairment loss realized. The income tax benefit recorded in
income taxes for continuing operations associated with this charge was $1.2
million. Concurrently, we made a reclassification adjustment to other
comprehensive loss for the three and six months ended June 30, 2002 and other
stockholder's equity at June 30, 2002 of $1.9 million, net of income tax benefit
of $1.2 million, to remove all of the net unrealized losses on the marketable
securities accumulated at that date that were realized and recorded in earnings
as noted above.
9. Industry Segments
Our only reportable segment at June 30, 2002 was the DBS business.
Information on DBS' revenue and measure of profit/loss and how these contribute
to our consolidated loss from continuing operations before income taxes for each
period reported is as presented on the statements of operations and
comprehensive loss. DBS derived all of its revenues from external customers for
each period presented. Identifiable total assets for DBS were approximately $1.9
billion at June 30, 2002, which did not change significantly from the total DBS
assets at December 31, 2001.
11
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities
Legal Matters
DIRECTV Litigation:
National Rural Telecommunications Cooperative
Our subsidiaries, Pegasus Satellite Television ("PST") and Golden Sky
Systems ("GSS"), are affiliates of the National Rural Telecommunications
Cooperative ("NRTC") that participate through agreements in the NRTC's direct
broadcast satellite program. "DIRECTV" refers to the programming services
provided by DirecTV, Inc. ("DirecTV").
On June 3, 1999, the NRTC filed a lawsuit in United States District
Court, Central District of California against DirecTV seeking a court order to
enforce the NRTC's contractual rights to obtain from DirecTV certain premium
programming formerly distributed by United States Satellite Broadcasting
Company, Inc. for exclusive distribution by the NRTC's members and affiliates in
their rural markets. On July 22, 1999, DirecTV filed a counterclaim seeking
judicial clarification of certain provisions of DirecTV's contract with the
NRTC. As part of the counterclaim, DirecTV is seeking a declaratory judgment
that the term of the NRTC's agreement with DirecTV is measured only by the
orbital life of DBS-1, the first DIRECTV satellite launched, and not by the
orbital lives of the other DIRECTV satellites at the 101(degree)W orbital
location. While the NRTC has a right of first refusal to receive certain
services from any successor DIRECTV satellite, the scope and terms of this right
of first refusal are also being disputed in the litigation, as discussed below.
If DirecTV were to prevail on its counterclaim, any failure of DBS-1 could have
a material adverse effect on our DIRECTV rights. On August 26, 1999, the NRTC
filed a separate lawsuit in federal court against DirecTV claiming that DirecTV
had failed to provide to the NRTC its share of launch fees and other benefits
that DirecTV and its affiliates have received relating to programming and other
services. On November 15, 1999, the court granted a motion by DirecTV and
dismissed the portion of this lawsuit asserting tort claims, but left in place
the remaining claims asserted by the NRTC. The NRTC and DirecTV have also filed
indemnity claims against one another that pertain to the alleged obligation, if
any, of the NRTC to indemnify DirecTV for costs incurred in various lawsuits
described herein. These claims have been severed from the other claims in the
case and will be tried separately.
Pegasus Satellite Television and Golden Sky Systems
On January 10, 2000, PST and GSS filed a class action lawsuit in
federal court in Los Angeles against DirecTV as representatives of a proposed
class that would include all members and affiliates of the NRTC that are
distributors of DIRECTV. The complaint contained causes of action for various
torts, common counts and declaratory relief based on DirecTV's failure to
provide the NRTC with certain premium programming, and on DirecTV's position
with respect to launch fees and other benefits, term and right of first refusal.
The complaint sought monetary damages and a court order regarding the rights of
the NRTC and its members and affiliates. On February 10, 2000, PST and GSS filed
an amended complaint which added new tort claims against DirecTV for
interference with PST's and GSS' relationships with manufacturers, distributors
and dealers of direct broadcast satellite equipment. The class action
allegations PST and GSS previously filed were withdrawn to allow a new class
action to be filed on behalf of the members and affiliates of the NRTC. The new
class action was filed on February 29, 2000. The court certified the plaintiff's
class on December 28, 2000. On March 9, 2001, DirecTV filed a counterclaim
against PST and GSS, as well as the class members. In the counterclaim, DirecTV
seeks two claims for relief: (i) a declaratory judgment that PST and GSS have no
right of first refusal in their agreements with the NRTC to have DirecTV provide
any services after the expiration of the term of these agreements, and (ii) an
order that DBS-1 is the satellite (and the only satellite) that measures the
term of PST's and GSS' agreements with the NRTC.
On June 22, 2001, DirecTV brought suit against PST and GSS in Los
Angeles County Superior Court for breach of contract and common counts. The
lawsuit pertains to the seamless marketing agreement dated August 9, 2000, as
amended, between DirecTV and PST and GSS. On July 13, 2001, PST and GSS
terminated the seamless marketing agreement. On July 16, 2001, PST and GSS filed
a cross complaint against DirecTV alleging, among
12
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
other things, that (i) DirecTV has breached the seamless marketing agreement,
and (ii) DirecTV has engaged in unlawful and/or unfair business practices, as
defined in Section 17200, et seq. of California Business and Professions Code.
This suit has since been moved to the United States District Court, Central
District of California.
Both of the NRTC's lawsuits against DirecTV have been consolidated for
discovery and pretrial purposes. All five lawsuits discussed above, including
both lawsuits brought by the NRTC, the class action, and PST's and GSS' lawsuit,
are pending before the same judge. The court has set a trial date of April 1,
2003, although, as noted above, it is not clear whether all the lawsuits will be
tried together.
Patent Infringement Litigation:
In December 2001, we (along with DirectTV, Inc., Hughes Electronics
Corporation, Echostar Communications Corporation, and others) were served with a
complaint in a patent infringement lawsuit by Broadcast Innovations, L.L.C. The
precise nature of the plaintiff's claims is not clear from the complaint.
However, the plaintiff claims in response to interrogatories that the satellite
broadcast systems and equipment of defendants, including those used for DIRECTV
programming services, infringe its patent. The defendants named in the complaint
have denied the allegation and have raised defenses of patent invalidity and
noninfringement. We still are in the process of evaluating the matter in order
to determine whether it is material to our business. Other Legal Matters:
In addition to the matters discussed above, from time to time we are
involved with claims that arise in the normal course of our business. In our
opinion, the ultimate liability, if any, with respect to these claims will not
have a material adverse effect on our operations, cash flows, or financial
position.
Commitments
We negotiated a new agreement with our provider of communications
services commencing in the first quarter 2002. Under this new agreement, our
annual minimum commitment was reduced to $6.0 million over the three year term
of the agreement, from $7.0 million under the prior agreement.
In July 2002, we gave notice to the party that provides call center
services to us that we intend to terminate the agreement for the services at the
end of 12 months from the date of notice. We will pay a termination fee of $4.5
million at the agreement termination date.
11. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 143 "Accounting for
Asset Retirement Obligations" addresses financial accounting and reporting for
obligations associated with the retirement of tangible long lived assets and the
associated asset retirement costs. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. We are
studying the provisions of this statement and have not yet determined the
impacts, if any, that this statement may have on us.
Statement of Financial Accounting Standards No. 145 "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" was issued April 30, 2002. A principal provision of this statement
is the reporting of gains and losses associated with extinguishments of debt. In
the past, we have extinguished debt, and may do so in the future. We are
studying the provisions of this statement and have not yet determined the
impacts, if any, that this statement may have on us.
Statement of Financial Accounting Standards No. 146 "Accounting for
Costs Associated with Exit or Disposal Activities" was issued in June 2002. This
statement requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The statement is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. We are studying the
provisions of this statement and have not yet determined the impacts, if any,
that this statement may have on us.
13
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Subsidiary Guarantees
PM&C's 12-1/2% senior subordinated notes due 2005 are guaranteed on a
full, unconditional, senior subordinated basis, jointly and severally by each of
its 100% owned direct and indirect subsidiaries, with the exception of certain
subsidiaries described in the following sentence. Pegasus Satellite Finance
Corporation, Pegasus Satellite Finance Corporation 2002, Pegasus Satellite
Development Corporation, and South Plains DBS L.P., all of which are direct or
indirect subsidiaries of PM&C, are not guarantors of the notes ("Nonguarantor
Subsidiaries"). We believe separate financial statements and other disclosures
concerning the guarantor subsidiaries are not deemed significant. In lieu of
separate financial statements, we are providing the following condensed
consolidating financial statements to present the financial position, results of
operations, and cash flows of the guarantor and nonguarantor entities comprising
our consolidated reporting group.
14
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Subsidiary Guarantees (continued)
Condensed Consolidating Balance Sheets
(In thousands)
Guarantor Nonguarantor Adjustments/
As of June 30, 2002 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
-------------- --------------- ------------- --------------- --------------
Assets:
Cash and cash equivalents $ 83,106 $ 83,106
Accounts receivable, net 31,232 31,232
Other current assets 37,537 $ 3,697 41,234
-------------- --------------- ------------- --------------- --------------
Total current assets 151,875 3,697 155,572
Property and equipment, net 77,422 77,422
Intangible assets, net 1,630,878 1,630,878
Other noncurrent assets 85,514 6,334 91,848
Investments in subsidiaries and
affiliates $327,020 1,740,785 $(2,067,805)
-------------- --------------- ------------- --------------- --------------
Total assets $1,945,689 $327,020 $1,750,816 $(2,067,805) $1,955,720
============== =============== ============= =============== ==============
Liabilities and stockholder's equity
Current portion of long term debt $ 2,312 $ 3,382 $ 5,694
Accounts payable 10,263 10,263
Other current liabilities 139,782 7,184 146,966
-------------- --------------- ------------- --------------- --------------
Total current liabilities 152,357 10,566 162,923
Long term debt 525 414,429 414,954
Other noncurrent liabilities 118,310 $(78,150) 68,250 108,410
-------------- --------------- ------------- --------------- --------------
Total liabilities 271,192 (78,150) 493,245 686,287
Minority interest 1,802 1,802
Total common stockholder's equity 1,672,695 405,170 1,257,571 $(2,067,805) 1,267,631
-------------- --------------- ------------- --------------- --------------
Total liabilities and common
stockholder's equity $1,945,689 $327,020 $1,750,816 $(2,067,805) $1,955,720
============== =============== ============= =============== ==============
15
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Subsidiary Guarantees (continued)
Condensed Consolidating Balance Sheets
(In thousands)
Guarantor Nonguarantor Adjustments/
As of December 31, 2001 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
-------------- --------------- ------------- --------------- --------------
Assets:
Cash and cash equivalents $ 99,710 $ 99,710
Accounts receivable, net 43,860 43,860
Other current assets 70,972 $ 4,407 75,379
-------------- --------------- ------------- --------------- --------------
Total current assets 214,542 4,407 218,949
Property and equipment, net 72,335 72,335
Intangible assets, net 1,692,183 125 1,692,308
Other noncurrent assets 82,581 7,674 90,255
Investments in subsidiaries and
affiliates $ 287,435 2,232,888 $(2,520,323)
-------------- --------------- ------------- --------------- --------------
Total assets $2,061,641 $ 287,435 $2,245,094 $(2,520,323) $2,073,847
============== =============== ============= =============== ==============
Liabilities and stockholder's equity
Current portion of long term debt $ 5,865 $ 2,750 $ 8,615
Accounts payable 8,905 8,905
Other current liabilities 145,482 6,898 152,380
-------------- --------------- ------------- --------------- --------------
Total current liabilities 160,252 9,648 169,900
Long term debt 2,824 433,078 435,902
Other noncurrent liabilities 101,144 $(58,508) 77,489 120,125
-------------- --------------- ------------- --------------- --------------
Total liabilities 264,220 (58,508) 520,215 725,927
Minority interest 1,315 1,315
Total common stockholder's equity 1,796,106 345,943 1,724,879 $(2,520,323) 1,346,605
-------------- --------------- ------------- --------------- --------------
Total liabilities and common
stockholder's equity $2,061,641 $287,435 $2,245,094 $(2,520,323) $2,073,847
============== =============== ============= =============== ==============
16
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
(In thousands)
For the Three Months ended June 30, 2002
Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
-------------- --------------- ------------ --------------- --------------
Total net revenues $221,829 $12,904 $ (9,439) $225,294
Total operating expenses 208,183 12,522 $ 10,591 (9,439) 221,857
-------------- --------------- ------------ --------------- --------------
Income (loss) from operations 13,646 382 (10,591) - 3,437
Interest expense (230) (8,910) (9,140)
Other (2,999) 122 (2,877)
-------------- --------------- ------------ --------------- --------------
Income (loss) before income taxes 10,417 382 (19,379) - (8,580)
Equity in earnings(losses) of affiliates (1,264) 9,190 9,209 (17,135)
Benefit for income taxes (3,231) (3,231)
-------------- --------------- ------------ --------------- --------------
Net income (loss) 9,153 9,572 (6,939) (17,135) (5,349)
Other comprehensive income (loss) 1,840 - (699) 1,141
-------------- --------------- ------------ --------------- --------------
Comprehensive income (loss) $ 10,993 $ 9,572 $ (7,638) $(17,135) $ (4,208)
============== =============== ============ =============== ==============
17
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Operations and Comprehensive Loss
(In thousands)
For the Three Months ended June 30, 2001 Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
-------------- --------------- ------------- --------------- --------------
Total net revenues $212,041 $ 13,562 $ (10,438) $215,165
Total operating expenses 248,568 35,749 $ 27 (10,438) 273,906
-------------- --------------- ------------- --------------- --------------
Loss from operations (36,527) (22,187) (27) - (58,741)
Interest expense (9,257) (11,407) (20,664)
Other (78) 1,161 1,083
-------------- --------------- ------------- --------------- --------------
Loss before income taxes and
extraordinary item (45,862) (22,187) (10,273) - (78,322)
Equity in earnings (losses) of affiliates (39,318) 9,210 (44,188) 74,296
Benefit for income taxes (29,315) (29,315)
-------------- --------------- ------------- --------------- --------------
Loss before extraordinary item (85,180) (12,977) (25,146) 74,296 (49,007)
Extraordinary loss on extinguishment
of debt, net of taxes (986) (986)
-------------- --------------- ------------- --------------- --------------
Net loss (86,166) (12,977) (25,146) 74,296 (49,993)
Other comprehensive income 4,021 (1,528) 2,493
-------------- --------------- ------------- --------------- --------------
Comprehensive loss $(82,145) $(12,977) $(26,674) $ 74,296 $(47,500)
============== =============== ============= =============== ==============
18
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
(In thousands)
For the Six Months ended June 30, 2002 Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
-------------- --------------- ------------- --------------- --------------
Total net revenues $440,745 $26,438 $(19,322) $447,861
Total operating expenses 421,924 25,118 $ 20,919 (19,322) 448,639
-------------- --------------- ------------- --------------- --------------
Income (loss) from operations 18,821 1,320 (20,919) - (778)
Interest expense (512) (17,653) (18,165)
Other (2,956) 1,285 (1,671)
-------------- --------------- ------------- --------------- --------------
Income (loss) before income taxes 15,353 1,320 (37,287) - (20,614)
Equity in earnings (losses) of affiliates (4,251) 18,599 17,556 (31,904)
(Benefit) expense for income taxes 117 (7,773) (7,656)
-------------- --------------- ------------- --------------- --------------
Net income (loss) 10,985 19,919 (11,958) (31,904) (12,958)
Other comprehensive loss (1,621) 616 (1,005)
-------------- --------------- ------------- --------------- --------------
Comprehensive income (loss) $ 9,364 $19,919 $(11,342) $(31,904) $(13,963)
============== =============== ============= =============== ==============
19
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Operations and Comprehensive Loss
(In thousands)
For the Six Months ended June 30, 2001 Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
-------------- ---------------- ------------- --------------- --------------
Total net revenues $ 422,333 $ 26,207 $(19,891) $ 428,649
Total operating expenses 499,028 77,548 $ 45 (19,891) 556,730
-------------- ---------------- ------------- --------------- --------------
Loss from operations (76,695) (51,341) (45) - (128,081)
Interest expense (22,068) (22,355) (44,423)
Other 516 (697) (181)
-------------- ---------------- ------------- --------------- --------------
Loss before income taxes and
extraordinary item (98,247) (51,341) (23,097) - (172,685)
Equity in earnings (losses) of affiliates (94,505) 16,994 (106,602) 184,113
Benefit for income taxes (62,566) (62,566)
-------------- ---------------- ------------- --------------- --------------
Loss before extraordinary item (192,752) (34,347) (67,133) 184,113 (110,119)
Extraordinary loss on extinguishment
of debt, net of taxes (986) (986)
-------------- ---------------- ------------- --------------- --------------
Net loss (193,738) (34,347) (67,133) 184,113 (111,105)
Other comprehensive income(loss) (8,255) 3,137 (5,118)
-------------- ---------------- ------------- --------------- --------------
Comprehensive loss $(201,993) $(34,347) $(63,996) $184,113 $(116,223)
============== ================ ============= =============== ==============
20
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Cash Flows
(In thousands)
For the Six Months ended June 30, 2002 Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
-------------- --------------- ------------- --------------- --------------
Net cash provided by (used for)
operating activities $ 43,624 $ 19,989 $ (9,111) $ - $ 54,502
-------------- --------------- ------------- --------------- --------------
Cash flows from investing activities:
Capital expenditures (15,517) (15,517)
Purchases of intangible assets (1) (1)
-------------- --------------- ------------- --------------- --------------
Net cash used for investing activities (15,518) - - - (15,518)
-------------- --------------- ------------- --------------- --------------
Cash flows from financing activities:
Net repayments of debt (5,852) (18,219) (24,071)
Net contributions to parent - (65,011) (65,011)
Net advances (to)from affiliates (57,589) (19,989) 109,897 32,319
Other 1,175 1,175
-------------- --------------- ------------- --------------- --------------
Net cash provided by (used for)
financing activities (62,266) (19,989) 26,667 - (55,588)
-------------- --------------- ------------- --------------- --------------
Net decrease in cash and cash
equivalents (34,160) - 17,556 - (16,604)
Cash and cash equivalents, beginning
of year 99,710 - - - 99,710
-------------- --------------- ------------- --------------- --------------
Cash and cash equivalents, end of
period $ 65,550 $ - $ 17,556 $ - $ 83,106
============== =============== ============= =============== ==============
21
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Cash Flows
(In thousands)
For the Six Months ended June 30, 2001 Guarantor Nonguarantor Adjustments/
Subsidiaries Subsidiaries PM&C Eliminations Consolidated
-------------- --------------- ------------- --------------- --------------
Net cash provided by (used for)
operating activities $104,531 $(34,275) $(127,351) $ - $ (57,095)
-------------- --------------- ------------- --------------- --------------
Cash flows from investing activities:
Capital expenditures (18,279) (18,279)
Purchases of intangible assets (2,358) (2,358)
Other (889) (889)
-------------- --------------- ------------- --------------- --------------
Net cash used for investing activities (21,526) - - - (21,526)
-------------- --------------- ------------- --------------- --------------
Cash flows from financing activities:
Net (repayments) borrowings of debt (78,803) 70,625 (8,178)
Net contributions to parent - (20,096) (20,096)
Net advances (to)from affiliates 64,958 34,275 (123,885) (24,652)
Other 1,170 1,170
-------------- --------------- ------------- --------------- --------------
Net cash provided by (used for)
financing activities (12,675) 34,275 (73,356) - (51,756)
-------------- --------------- ------------- --------------- --------------
Net decrease in cash and cash
equivalents 70,330 - (200,707) - (130,377)
Cash and cash equivalents, beginning
of year 76,982 - 106,279 - 183,261
-------------- --------------- ------------- --------------- --------------
Cash and cash equivalents, end of
period $147,312 $ - $ (94,428) $ - $ 52,884
============== =============== ============= =============== ==============
22
PEGASUS MEDIA & COMMUNICATIONS, INC.
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
In reliance upon General Instruction (H)(2)(a) of Form 10-Q, we are
providing the limited disclosure set forth below. Such disclosure requires us
only to provide a narrative analysis of the results of operations which explains
the reasons for material changes in the amount of revenue and expense items
between the most recent fiscal year to date period presented and the
corresponding year to date period in the preceding fiscal year.
This report contains certain forward looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to us that are based on our beliefs, as well as assumptions
made by and information currently available to us. When used in this report, the
words "estimate," "project," "believe," "anticipate," "hope," "intend,"
"expect," and similar expressions are intended to identify forward looking
statements. Such statements reflect our current views with respect to future
events and are subject to unknown risks, uncertainties and other factors that
may cause actual results to differ materially from those contemplated in such
forward looking statements. Such factors include, among other things, the
following: general economic and business conditions, both nationally,
internationally and in the regions in which we operate; catastrophic events,
including acts of terrorism; relationships with and events affecting other
parties like DirecTV, Inc and the National Rural Telecommunications Cooperative;
litigation with DirecTV, Inc.; the proposed merger of Hughes Electronics
Corporation with EchoStar Communications Corporation; demographic changes;
existing government regulations and changes in, or the failure to comply with,
government regulations; competition, including the provision of local channels
by a competing direct broadcast satellite provider in markets where DirecTV does
not offer local channels; the loss of any significant numbers of subscribers or
viewers; changes in business strategy or development plans; the cost of pursuing
new business initiatives; expansion of land based communication systems;
technological developments and difficulties; the ability to obtain intellectual
property licenses and to avoid committing intellectual property infringement;
the ability to attract and retain qualified personnel; our significant
indebtedness; the availability and terms of capital to fund the expansion of our
businesses; and other factors referenced in this report and in reports and
registration statements filed from time to time with the Securities and Exchange
Commission, including our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001. Readers are cautioned not to place undue reliance on these
forward looking statements, which speak only as of the date of this report. We
do not undertake any obligation to publicly release any revisions to these
forward looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
The following discussion of our results of operations should be read in
conjunction with the consolidated financial statements and related notes herein.
General
"We", "us", and "our" refer to Pegasus Media & Communications, Inc.
togetherwith its subsidiaries. "PM&C" refers to Pegasus Media & Communications,
Inc. individually as a separate entity. "PSC" refers to Pegasus Satellite
Communications, Inc., the parent company of PM&C. "PCC" refers to Pegasus
Communications Corporation's, the parent company of PSC. "DBS" refers to direct
broadcast satellite.
Approximately 96% of our consolidated revenues and 91% of the expenses
within consolidated loss from operations for the six months ended June 30, 2002,
and 96% of our assets at June 30, 2002, were associated with our DBS business
that provides multichannel DIRECTV(R) audio and video services as an independent
DIRECTV provider. DIRECTV is a service of DirectTV, Inc. ("DirecTV"). We may be
adversely affected by any material adverse changes in the assets, financial
condition, programming, technological capabilities, or services of DirecTV.
Separately, we are involved in litigation with DirecTV. An outcome in this
litigation that is unfavorable to us could have a material adverse effect on our
DBS business. See Note 10 of the Notes to Consolidated Financial Statements for
information on the litigation. Additionally, Hughes Electronics Corporation,
which is the parent company of DirecTV, has agreed to merge with EchoStar
Communications Corporation, which owns the only other nationally branded DBS
programming service in the United States. At this time, we are unable to predict
the effect of our litigation with DirecTV or the merger of EchoStar and Hughes,
should it occur, on our financial position, results of operations, cash flows,
and future operations.
23
PEGASUS MEDIA & COMMUNICATIONS, INC.
We, PSC, or PCC may from time to time engage in transactions which
involve the purchase and/or exchange of PM&C's 12-1/2% senior subordinated notes
due July 2005, or we may from time to time engage in transactions which involve
the purchase and/or exchange of securities of PSC and/or PCC. Such transactions
may be made in the open market or in privately negotiated transactions. The
amount and timing of such transactions, if any, will depend on market conditions
and other considerations.
Results of Operations
In this section, amounts and changes specified are for the six months
ended June 30, 2002 compared to the six months ended June 30, 2001, unless
indicated otherwise. With respect to our loss from operations, we focus on our
DBS business, as this is our only significant business.
DBS Business
Revenues:
Revenues increased $19.3 million to $431.2 million. This increase was
primarily due to the rate increase for our core packages that we instituted in
the fourth quarter 2001. Effective July 1, 2002, we began passing on to
subscribers, in the form of a royalty fee, a portion of the royalty costs
charged to us in providing DIRECTV service. The fee is $1.25 or $1.50 to each
subscriber based on the subscriber's core programming package.
Direct Operating Expenses:
Programming increased $16.4 million to $192.3 million. This increase
was primarily due to an increase instituted in January 2002 in programming rates
charged to us by the National Rural Telecommunications Cooperative, through
which we receive our DIRECTV programming.
Operating Margins:
Our operating margin is the difference between net revenues and direct
operating expenses (excluding depreciation and amortization). Operating margins
for the six months ended June 30, 2002 and 2001 were $138.0 million and $135.2
million, respectively. There was no significant difference in our operating
margin ratio between the six months ended June 30, 2002 and 2001.
Other Operating Expenses:
Promotions and incentives decreased $25.5 million to $3.8 million. This
decrease was mainly due to the increased amounts of promotions and incentive
costs we deferred and/or capitalized of $16.4 million in the six months ended
June 30, 2002. We are able to defer the direct and incremental costs we incur
related to our subscription plans that have minimum service commitment periods,
not to exceed the amount of applicable termination fees associated with the
plans. These costs are amortized over the period of the commitment for which the
early termination fees apply, which is generally 12 months, and are charged to
amortization expense. We did not defer any costs in the six months ended June
30, 2001. All of our subscription plans starting February 2002 contain minimum
commitment periods and early termination fees. In 2001, we instituted such
provisions for only certain of our plans after June 30, and subsequently
increased the number of plans having such provisions in the fourth quarter 2001.
We are able to capitalize equipment costs and subsidies as fixed assets under
our subscription plans in which we retain or take title to the equipment
delivered to subscribers. The equipment costs and subsidies related to this
equipment are capitalized as fixed assets and depreciated over their estimated
useful lives of three years. Additionally, we incurred reduced subsidies of $8.7
million for the six months ended June 30, 2002 due to reduced gross subscriber
additions during 2002 compared to the corresponding 2001 period.
Advertising and selling decreased $53.3 million to $16.1 million. A
part of this decrease was due to the commissions incurred in the six months
ended June 30, 2001 of $20.6 million under the seamless marketing agreement with
DirecTV that was in effect during 2001. We terminated the seamless marketing
agreement in July 2001. Commissions we pay directly to our sales and
distribution channels decreased $17.5 million for the six
24
PEGASUS MEDIA & COMMUNICATIONS, INC.
months ended June 30, 2002 principally due to reduced gross subscriber additions
during 2002 compared to the corresponding 2001 period. Our advertising costs
decreased $6.9 million for the six months ended June 30, 2002 as a part of a
focused cost reduction initiative. Additionally, we deferred $6.4 million of
commissions in the six months ended June 30, 2002 in accordance with our
deferral practice described in the preceding paragraph that otherwise would have
been included in advertising and selling costs in the current year period. We
did not defer advertising and selling costs in the corresponding 2001 period.
All of our subscription plans starting February 2002 contain minimum commitment
periods and early termination fees. In 2001, we instituted such provisions for
only certain of our plans after June 30, and subsequently increased the number
of plans having such provisions in the fourth quarter 2001.
Our promotion and incentives and advertising and selling costs
constitute our subscriber acquisition costs ("SAC"). Gross SAC costs, that is,
before deferring and capitalizing costs, for the six months ended June 30, 2002
and 2001 were $50.7 million and $106.8 million, respectively.
General and administrative expenses decreased $3.5 million to $14.8
million due to a broad based cost reduction effort that we are undergoing in
2002.
Depreciation and amortization decreased $45.1 million to $80.9 million.
This principally resulted from our adoption in first quarter 2002 of Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("FAS 142") in its entirety on January 1, 2002. In accordance with FAS 142, we
reassessed the estimated lives of our intangible assets. We believe that the
estimated remaining useful life of the DBS rights assets should be based on the
estimated useful lives of the satellites at the 101(Degree) west longitude
orbital location available to provide DirecTV services under the NRTC-DirecTV
contract. The contract sets forth the terms and conditions under which the lives
of those satellites are deemed to expire, based on fuel levels and transponder
functionality. We estimate that the useful life of the DirecTV satellite
resources provided under the contract (without regard to renewal rights) expires
in November 2016. Because the cash flows for all of our DBS rights assets
emanate from the same source, we believe that it is appropriate for all of the
estimated useful lives of our DBS rights assets to end at the same time. Prior
to the adoption of FAS 142, our DBS rights assets had estimated useful lives of
10 years from the date we obtained the rights. Linking the lives of our DBS
rights assets in such fashion extended the amortization period for the
unamortized carrying amount of the assets and the range of the useful lives of
the rights from the date of their inception. The life of our DBS rights is
subject to litigation. See "Legal Matters" under Note 10 of the Notes to
Consolidated Financial Statements for information regarding this litigation.
Included in depreciation and amortization for the six months ended June
30, 2002 and 2001 was aggregate depreciation and amortization of promotions and
incentives costs capitalized or deferred and advertising and selling costs
deferred of $19.5 million and $2.0 million, respectively.
Subscribers:
Our number of subscribers at June 30, 2002 was 1,372,000. We
experienced a net reduction in the number of subscribers of approximately 10
thousand for the six months ended June 30, 2002 as the number of our subscribers
that churned was more than the number of the subscribers we added. These
decreases exclude the one time adjustment to decrease subscriber counts that we
made and reported in the first quarter 2002 of 138,000. We believe that the
reasons for the decrease were due to: 1) our focus on enrolling more
creditworthy subscribers; 2) competition from digital cable providers and a
competing direct broadcast satellite provider in the territories we serve; 3)
the economic slow down that has decelerated our growth; and 4) a reduction in
the number of new subscribers we obtain from DirecTV's national retail chains.
We will continue to focus on enrolling more creditworthy subscribers. We will
also continue to face intensive competition from other providers throughout
2002. This competition includes the provision of local channels by a competing
direct broadcast satellite provider in markets where DirecTV does not offer
local channels. We also anticipate a continued reduction in the number of new
subscribers obtained from DirecTV's national retail chains during the rest of
2002. The reduction in the number of subscribers from national retail chains
under arrangements directly with DirecTV is the result of efforts by DirecTV to
minimize certain subscriber acquisition costs that they have paid to national
retail chains for their enrollment of subscribers who reside in our exclusive
territories.
25
PEGASUS MEDIA & COMMUNICATIONS, INC.
We are most interested in adding high quality, creditworthy
subscribers. Our subscriber acquisition efforts in 2002 and beyond now include:
1) the diversification of our sales and distribution channels; 2) the alignment
of channel economics more closely to expected quality and longevity of
subscribers; and 3) the refinement and expansion of our offers and promotions to
consumers. This focus has lead to a more recent favorable churn rate. However,
improvements in churn could be offset or churn could increase due to: 1) our
service becoming less affordable as a result of our royalty cost pass through to
subscribers; 2) competition from a competing direct broadcast satellite provider
with respect to equipment, service pricing, and service content, including the
provision of local channels by a competing direct broadcast satellite provider
in market where DirecTV doe not offer local channels; and 3) the effect of
general economic conditions on our subscribers. We believe that net reductions
in our number of subscribers for all of 2002, if any, will not have a
significant effect on our operating margins for 2002.
Broadcast Business
The broadcast operations had revenues for the six months ended June 30,
2002 and 2001 of $16.7 million and $16.8 million, respectively, and net losses
from operations for the six months ended June 30, 2002 and 2001 of $2.1 million
and $1.5 million, respectively. We have provided these amounts for our broadcast
operations to give a perspective of the amounts contained within our other
businesses. The broadcast operations are not significant to an understanding of
our consolidated results of operations.
Other Statement of Operations and Comprehensive Loss Items
Interest expense decreased $26.3 million to $18.2 million. The decrease
was principally due to the: 1) exchange, with concurrent cancellation, of the
notes of our subsidiaries Golden Sky Systems and Golden Sky DBS in May 2001 for
like notes of PSC; 2) repayment of all principal amounts outstanding under
Golden Sky Systems' credit facility in May 2001 with the concurrent termination
of the facility; and 3) lower average amounts outstanding at lower average
variable rates of interest under PM&C's term and revolving credit facilities in
2002 versus 2001, offset in part by increased interest incurred with respect to
our swap instruments.
Interest income decreased by $3.0 million to $153 thousand due to
reduced cash amounts available for earning interest income and much lower
interest rates available during 2002 compared to 2001.
Based on the significance and duration of the loss in fair value, at
June 30, 2002, we determined that our sole investment in marketable securities
held had incurred an other than temporary decline in fair market value.
Accordingly, we wrote down the cost basis in the marketable securities to their
fair market value at June 30, 2002 and charged earnings in the amount of $3.1
million for the impairment loss realized.
We had other nonoperating income, net of $1.2 million for the six
months ended June 30, 2002, compared to other nonoperating expense, net of $3.3
million for the six months ended June 30, 2001. This difference was primarily
due to the increase in the fair value of our interest rate instruments. For the
six months 2002 we recorded income of $1.3 million for the increase in the fair
value of the instruments, whereas for the six months 2001 we recorded a charge
of $2.8 million for the decrease in the fair value of the instruments.
The income tax benefit on the loss from continuing operations decreased
$54.9 million to $7.7 million due to a reduced amount of pretax losses in the
current year compared to the corresponding prior year period.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 143 "Accounting for
Asset Retirement Obligations" addresses financial accounting and reporting for
obligations associated with the retirement of tangible long lived assets and the
associated asset retirement costs. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. We are
studying the provisions of this statement and have not yet determined the
impacts, if any, that this statement may have on us.
Statement of Financial Accounting Standards No. 145 "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" was issued April 30, 2002. A principal
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PEGASUS MEDIA & COMMUNICATIONS, INC.
provision of this statement is the reporting of gains and losses associated with
extinguishments of debt. In the past, we have extinguished debt, and may do so
in the future. We are studying the provisions of this statement and have not yet
determined the impacts, if any, that this statement may have on us.
Statement of Financial Accounting Standards No. 146 "Accounting for
Costs Associated with Exit or Disposal Activities" was issued in June 2002. This
statement requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The statement is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. We are studying the
provisions of this statement and have not yet determined the impacts, if any,
that this statement may have on us.
Other Information
Premarketing cash flow of our DBS business was $123.2 million and
$116.9 million for the six months ended June 30, 2002 and 2001, respectively.
EBITDA for our DBS business was $103.3 million and $18.2 million for the six
months ended June 30, 2002 and 2001, respectively. DBS premarketing cash flow is
calculated by subtracting DBS' direct operating expenses and general and
administrative expenses from their revenues. DBS EBITDA is DBS premarketing cash
flow less DBS' promotions and incentives and advertising and selling expenses.
We present DBS premarketing cash flow and DBS EBITDA because the DBS business is
our only significant segment and this business forms the principal portion of
our results of operations and cash flows.
DBS premarketing cash flow and DBS EBITDA are not, and should not be
considered, alternatives to income from operations, net income, net cash
provided by operating activities, or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. DBS premarketing cash flow and DBS EBITDA also do not
necessarily indicate whether our cash flow will be sufficient to fund working
capital, capital expenditures, or to react to changes in our industry or the
economy generally. We believe that DBS premarketing cash flow and DBS EBITDA are
important because people who follow our industry frequently use them as measures
of financial performance and ability to pay debt service, and they are measures
that we, our lenders, and investors use to monitor our financial performance and
debt leverage. Although EBITDA is a common measure used by other companies, our
calculation of EBITDA may not be comparable with that of others.
For the six months ended June 30, 2002, net cash provided by operating
activities was $54.5 million, net cash used for investing activities was $15.5
million, and net cash used for financing activities was $55.6 million.
Adjusted operating cash flow for the 12 months ended June 30, 2002 was
$232.8 million. Adjusted operating cash flow is operating cash flow of the DBS
business for the current quarter times four, plus operating cash flow from other
operating divisions for the last four quarters. Operating cash flow, for the
purpose of only calculating adjusted operating cash flow, is income or loss from
operations, adding back depreciation, amortization, and other noncash items
therein, and subscriber acquisition costs. We present this measure for purpose
of compliance with our debt indenture, and such measure is not required to be
presented on a comparative basis.
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PEGASUS MEDIA & COMMUNICATIONS, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information relating to litigation with DirecTV, Inc. and others,
we incorporate by reference herein the disclosure reported under Note 10 to the
Notes to Consolidated Financial Statements. The Notes to Consolidated Financial
Statements can be found under Part I, Item 1 of this Quarterly Report on Form
10-Q. We have previously filed reports during the fiscal year disclosing some or
all of the legal proceedings referenced above. In particular, we have reported
on such proceedings in our Annual Report on Form 10-K for the year ended
December 31, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Executive Employment Agreement effective June 1, 2002 for Ted
S. Lodge (which is incorporated herein by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2002 for Pegasus Communications
Corporation)
10.2 Pegasus Communications Corporation Short Term Incentive Plan
(Corporate, Satellite and Business Development) for calendar
year 2002 (which is incorporated herein by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002 for Pegasus
Communications Corporation)
10.3 Supplemental Description of Pegasus Communications Corporation
Short Term Incentive Plan (Corporate, Satellite and Business
Development) for calendar year 2002 (which is incorporated
herein by reference to Exhibit 10.3 to the Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2002 for
Pegasus Communications Corporation)
10.4 Description of Long Term Incentive Compensation Program
applicable to Executive Officers (which is incorporated herein
by reference to Exhibit 10.4 to the Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2002 for Pegasus
Communications Corporation)
10.5 Pegasus Communications 1996 Stock Option Plan, as amended and
restated effective as of February 13, 2002 (which is
incorporated herein by reference to Appendix B to the
definitive proxy statement of Pegasus Communications
Corporation as filed with the Securities and Exchange
Commission on May 9, 2002)
10.6 Pegasus Communications Restricted Stock Plan, as amended and
restated effective as of February 13, 2002 (which is
incorporated herein by reference to Appendix C to the
definitive proxy statement of Pegasus Communications
Corporation as filed with the Securities and Exchange
Commission on May 9, 2002)
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PEGASUS MEDIA & COMMUNICATIONS, INC.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Pegasus Media & Communications, Inc. has duly caused this Report to
be signed on its behalf by the undersigned thereunto duly authorized.
Pegasus Media & Communications, Inc.
August 14, 2002 By: /s/ Joseph W. Pooler, Jr.
Date Joseph W. Pooler, Jr.
Vice President - Finance and Controller
(Principal Financial and Accounting Officer)
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