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 September 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 November 14, 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 September 30, 2002
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 4
Consolidated Statements of Operations and Comprehensive Loss
Three months ended September 30, 2002 and 2001 5
Consolidated Statements of Operations and Comprehensive Loss
Nine months ended September 30, 2002 and 2001 6
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Narrative Analysis of the Results of Operations 24
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Signature 32
Certifications
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
Pegasus Media & Communications, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
2002 2001
---------------- ----------------
(unaudited)
Currents assets:
Cash and cash equivalents $ 20,453 $ 99,710
Accounts receivable, net:
Trade 18,076 32,139
Other 7,759 11,721
Deferred subscriber acquisition costs, net 17,152 15,194
Net advances to affiliates - 33,805
Other current assets 25,502 26,380
---------------- ----------------
Total current assets 88,942 218,949
Property and equipment, net 76,379 72,335
Intangible assets, net 1,596,702 1,692,308
Other noncurrent assets 100,491 90,255
---------------- ----------------
Total $ 1,862,514 $ 2,073,847
================ ================
Current liabilities:
Current portion of long term debt $ 5,781 $ 8,615
Accounts payable 11,922 8,905
Accrued programming fees 57,316 67,225
Accrued commissions and subsidies 42,741 45,386
Other accrued expenses 21,298 29,058
Other current liabilities 9,060 10,711
---------------- ----------------
Total current liabilities 148,118 169,900
Long term debt 414,110 435,902
Deferred income taxes, net 62,417 73,329
Other noncurrent liabilities 46,257 46,796
---------------- ----------------
Total liabilities 670,902 725,927
---------------- ----------------
Commitments and contingent liabilities (see Note 12)
Minority interest 2,007 1,315
Common stockholder's equity:
Common stock 2 2
Other common stockholder's equity 1,189,603 1,346,603
---------------- ----------------
Total common stockholder's equity 1,189,605 1,346,605
---------------- ----------------
Total $ 1,862,514 $ 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 September 30,
2002 2001
----------- -----------
(unaudited)
Net revenues:
DBS $ 216,363 $ 206,795
Broadcast 9,390 7,776
----------- -----------
Total net revenues 225,753 214,571
----------- -----------
Operating expenses:
DBS
Programming 94,584 89,660
Other subscriber related expenses 51,547 50,344
----------- -----------
Direct operating expenses (excluding depreciation and
amortization shown below) 146,131 140,004
Promotions and incentives 5,933 7,601
Advertising and selling 7,877 24,281
General and administrative 6,216 8,683
Depreciation and amortization 42,968 63,671
----------- -----------
Total DBS 209,125 244,240
----------- -----------
Broadcast
Programming 3,703 3,374
Other direct operating expenses 1,475 1,891
----------- -----------
Direct operating expenses (excluding depreciation and
amortization shown below) 5,178 5,265
Advertising and selling 1,801 1,694
General and administrative 1,054 1,183
Depreciation and amortization 948 1,232
----------- -----------
Total Broadcast 8,981 9,374
----------- -----------
Corporate and development expenses 3,219 3,563
Corporate depreciation and amortization - 7
Other operating expenses, net 7,043 5,235
----------- -----------
Loss from operations (2,615) (47,848)
Interest expense (10,050) (10,930)
Interest income 81 298
Loss on impairment of marketable securities - (34,205)
Other nonoperating income (expense), net 940 (2,165)
----------- -----------
Loss before income taxes and discontinued operations (11,644) (94,850)
Benefit for income taxes (4,477) (38,136)
----------- -----------
Loss before discontinued operations (7,167) (56,714)
Discontinued operations:
Loss on operations, net of income tax benefit of $165 and $120,
respectively (268) (197)
----------- -----------
Net loss (7,435) (56,911)
----------- -----------
Other comprehensive (loss) income:
Unrealized loss on marketable securities, net of income tax benefit of
$57 and $2,521, respectively (94) (4,113)
Reclassification adjustment for accumulated unrealized loss on
marketable securities included in net loss, net of income tax
benefit of $12,998 - 21,207
----------- -----------
Net other comprehensive (loss) income (94) 17,094
----------- -----------
Comprehensive loss $ (7,529) $ (39,817)
=========== ===========
See accompanying notes to consolidated financial statements
5
Pegasus Media & Communications, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands)
Nine Months Ended September 30,
2002 2001
----------- -----------
(unaudited)
Net revenues:
DBS $ 647,534 $ 618,648
Broadcast 25,743 24,572
----------- -----------
Total net revenues 673,277 643,220
----------- -----------
Operating expenses:
DBS
Programming 286,918 265,594
Other subscriber related expenses 152,374 151,087
----------- -----------
Direct operating expenses (excluding depreciation and
amortization shown below) 439,292 416,681
Promotions and incentives 9,703 36,909
Advertising and selling 23,998 93,715
General and administrative 20,998 26,937
Depreciation and amortization 123,905 189,675
----------- -----------
Total DBS 617,896 763,917
----------- -----------
Broadcast
Programming 9,996 9,569
Other direct operating expenses 4,947 5,257
----------- -----------
Direct operating expenses (excluding depreciation and
amortization shown below) 14,943 14,826
Advertising and selling 5,375 5,721
General and administrative 3,055 3,376
Depreciation and amortization 2,925 3,715
----------- -----------
Total Broadcast 26,298 27,638
----------- -----------
Corporate and development expenses 10,832 10,069
Corporate depreciation and amortization 6 19
Other operating expenses, net 20,467 17,453
----------- -----------
Loss from operations (2,222) (175,876)
Interest expense (28,215) (55,353)
Interest income 234 3,463
Loss on impairment of marketable securities (3,063) (34,205)
Other nonoperating income (expense), net 2,179 (5,511)
----------- -----------
Loss before income taxes, discontinued operations, and
extraordinary item (31,087) (267,482)
Benefit for income taxes (11,688) (100,681)
----------- -----------
Loss before discontinued operations and extraordinary item (19,399) (166,801)
Discontinued operations:
Loss on operations, net of income tax benefit of $610 and $141,
respectively (994) (229)
----------- -----------
Loss before extraordinary item (20,393) (167,030)
Extraordinary loss from extinguishment of debt, net of income tax
benefit of $604 - (986)
----------- -----------
Net loss (20,393) (168,016)
----------- -----------
Other comprehensive (loss) income:
Unrealized loss on marketable securities, net of income tax benefit of
$1,837 and $5,658, respectively (2,998) (9,231)
Reclassification adjustment for accumulated unrealized loss on
marketable securities included in net loss, net of income tax
benefit of $1,164 and $12,998, respectively 1,899 21,207
----------- -----------
Net other comprehensive (loss) income (1,099) 11,976
----------- -----------
Comprehensive loss $ (21,492) $ (156,040)
=========== ===========
See accompanying notes to consolidated financial statements
6
Pegasus Media &Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended September 30,
2002 2001
-------------- -------------
(unaudited)
Net cash provided by (used for) operating activities $ 70,788 $ (59,252)
-------------- -------------
Cash flows from investing activities:
DBS equipment capitalized (20,149) (9,620)
Other capital expenditures (2,566) (15,413)
Purchases of intangible assets - (7,171)
Other - (889)
-------------- -------------
Net cash used for investing activities (22,715) (33,093)
-------------- -------------
Cash flows from financing activities:
Borrowings on term loan facility 63,156 -
Repayments of term loan facility (2,220) (37,062)
Net repayments of revolving credit facilities (80,000)
Repayments of other long term debt (5,852) (7,003)
Net advances from (to) affiliates 31,683 (33,099)
Distributions to parent (247,599) (33,812)
Contributions from parent 112,091 59,323
Other 1,411 623
-------------- -------------
Net cash used for financing activities (127,330) (51,030)
-------------- -------------
Net decrease in cash and cash equivalents (79,257) (143,375)
Cash and cash equivalents, beginning of year 99,710 183,261
-------------- -------------
Cash and cash equivalents, end of period $ 20,453 $ 39,886
============== =============
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, the parent company of PSC. "DBS" refers to direct
broadcast satellite. Other terms used are defined as needed where they first
appear.
Significant Risks and Uncertainties
Both PCC's and PSC's principal operations are held by us, and each
primarily relies on us as a source of cash in meeting its 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 depends on our ability to generate cash in the future. Our ability to
generate cash depends on the success of our business strategy, prevailing
economic conditions, regulatory risks, 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. We are
involved in significant litigation. See note 12 for further information.
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, 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.
8
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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." A principal provision of the standard is that goodwill
and intangible assets that have indefinite lives are not subject to
amortization, but are 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 lives of our 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 to
remaining lives of approximately 15 years from January 1, 2002. The lives of our
DBS rights are 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 on our
results of operations. 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 ined that there were no
impairments to be recorded upon the adoption of FAS 142.units required under the
standard. We determined that there were no impairments to be recorded upon the
adoption of FAS 142.
At September 30, 2002 and December 31, 2001, intangible assets, net
consisted of the following (in thousands):
September 30, December 31,
2002 2001
-------------- -------------
Assets subject to amortization:
Cost:
DBS rights assets $ 2,289,068 $ 2,259,231
Other 48,179 109,880
-------------- -------------
2,337,247 2,369,111
-------------- -------------
Accumulated amortization:
DBS rights assets 724,787 624,115
Other 30,982 52,688
-------------- -------------
755,769 676,803
-------------- -------------
Net assets subject to amortization 1,581,478 1,692,308
Assets not subject to amortization:
Broadcast licenses 15,224 -
-------------- -------------
Intangible assets, net $ 1,596,702 $ 1,692,308
============== =============
9
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
At September 30, 2002 and December 31, 2001, total goodwill had a
carrying amount of $15.8 million and was entirely associated with our broadcast
operations. Because the carrying amount of goodwill is not significant, it is
included in other noncurrent assets on the balance sheet.
Loss before extraordinary items and net loss, each as adjusted for the
effects of applying FAS 142, for the three and nine months ended September 30,
2001 were as follows (in thousands):
For the three months ended:
Net loss, as adjusted $ (41,438)
For the nine months ended:
Loss before extraordinary items, as adjusted (118,570)
Net loss, as adjusted (119,556)
A reconciliation of net loss, as reported to net loss, as adjusted for
the three and nine months ended September 30, 2001 is as follows (in thousands):
For the three months ended:
Net loss, as reported $ (56,911)
Add back goodwill amortization 93
Add back amortization on broadcast licenses 69
Adjust amortization for a change in the useful life of DBS
rights assets 15,311
------------
Net loss, as adjusted $ (41,438)
============
For the nine months ended:
Net loss, as reported $ (168,016)
Add back goodwill amortization 291
Add back amortization on broadcast licenses 266
Adjust amortization for a change in the useful life of DBS
rights assets 47,903
------------
Net loss, as adjusted $ (119,556)
============
Aggregate amortization expense for the nine months ended September 30,
2002 and 2001 was $88.4 million and $183.6 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 $29.0 million, $115.9 million, $115.9 million, $113.9
million, $111.2 million, and $110.5 million, respectively.
5. Changes in Other Stockholder's Equity
Changes in other stockholder's equity from December 31, 2001 to
September 30, 2002 consisted of: net loss of $(17.6) million; net cash
distributions to PSC of $(135.5) million; and net change in accumulated other
comprehensive loss of $(1.1) million.
6. Long Term Debt
During the three months ended September 30, 2002, amounts borrowed by
PM&C under its revolving credit facility during the period were repaid during
the period. No principal amount was outstanding under the revolving credit
facility at September 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 $60.1 million at
September 30, 2002 and $63.2 million at December 31, 2001. At September 30,
2002, the commitment for the revolving credit facility was permanently reduced
by $8.4 million to $177.2 million as scheduled. The commitment for the revolving
credit facility is scheduled to be permanently reduced by another $8.4 million
in December 2002. Availability under the revolving credit facility at September
30, 2002 was $116.9 million.
10
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
We repaid $688 thousand of principal under PM&C's term loan facility
during the third quarter 2002, as scheduled, thereby reducing the total
principal amount outstanding thereunder to $270.2 million. The weighted average
variable rate of interest including applicable margins on principal amounts
outstanding under the term facility was 5.3% and 5.4% at September 30, 2002 and
December 31, 2001, respectively.
In June 2002, PM&C borrowed $63.2 million in incremental term loans
under its credit agreement. 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. 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. We repaid $158 thousand of principal during the
third quarter as scheduled, thereby reducing the total principal amount
outstanding thereunder to $63.0 million. We are scheduled to pay another $158
thousand of principal in December 2002. Total annual repayments of principal
scheduled over the remaining term of the facility are $632 thousand in 2003,
$16.3 million in 2004, and $45.9 million in 2005. The weighted average rate of
interest including applicable margins on principal amounts outstanding under the
incremental loan term facility at September 30, 2002 was 5.3%. There is no
availability under the incremental term loan facility.
In connection with the incremental term loan borrowed in June 2002,
PM&C entered into two additional interest rate cap agreements with the same
financial institution in August 2002. Each cap has a notional amount of $15.8
million. The cap rate under one agreement is 9.00% and the cap rate under the
other is 4.00%. Both caps terminate September 2005. Payment under each cap is
determined quarterly based on the three month LIBOR rate in effect at the
beginning of each three month resetting period. Under these caps, we receive
interest from the contracting institution when the applicable market LIBOR rate
exceeds the applicable cap rate at each resetting date. The premium we paid to
enter into these agreements was not significant.
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. These notes remain legally outstanding for PM&C. PSC's current plans are
to hold onto all of the notes purchased.
7. Supplemental Cash Flow Information
Significant noncash investing and financing activities were as follows (in
thousands):
Nine Months
Ended September 30,
2002 2001
------------- -------------
NRTC patronage capital investment accrued $ 13,780 $ 14,434
Net change in other comprehensive loss 1,099 11,976
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. 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 and other stockholder's
equity at June 30, 2002 amounting to $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 had been charged to earnings. The
remaining balance of this investment is not significant at September 30, 2002.
11
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
9. Discontinued Operations
We have entered into a definitive agreement to sell our Mobile, Alabama
broadcast television station to an unaffiliated party for $11.5 million in cash.
The sale is contingent upon conditions typical of sales of this nature,
including final approval by the Federal Communications Commission of the
transfer of the station's broadcast license to the buyer. It is anticipated that
the sale will occur in the first quarter of 2003. We have classified the
operations of this station as discontinued for all periods presented. Revenues
and pretax loss of the discontinued operation were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------- ----------- -------------- -----------
Revenues $ 209 $ 7 $ 546 $ 7
Pretax loss (433) (317) (1,604) (370)
Assets and liabilities associated with the station are not significant
to our financial position and are not shown separately on the balance sheet.
10. Impairment of Programming Rights
In the third quarter 2002, we recognized an impairment loss of $1.4
million associated with programming rights of our broadcast operations. This
loss is contained within other operating expenses on the statements of
operations. The fair value of the affected programming rights and the impairment
and amount of the loss were based upon the present value of the expected cash
flows associated with the related programming agreements that provide the
rights.
11. Industry Segments
Our only reportable segment at September 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 $1.8
billion at September 30, 2002, which did not change significantly from the total
DBS assets at December 31, 2001.
12. 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
12
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
On July 3, 2002, the court granted a motion for summary judgment filed
by DirecTV, holding that NRTC is liable to indemnify DirecTV for the costs of
defense and liabilities that DirecTV incurs in a patent case filed by Pegasus
Development Corporation ("Pegasus Development"), a subsidiary of PCC, and
Personalized Media Communications, L.L.C. ("Personalized Media") in December
2000 in the United States District Court, District of Delaware against DirecTV,
Hughes Electronics Corporation, Thomson Consumer Electronics and Philips
Electronics North America Corporation. Personalized Media is a company in which
Pegasus Development has an investment in and licensing arrangement with. Pegasus
Development and Personalized Media are seeking injunctive relief and monetary
damages for the defendants' alleged patent infringement and unauthorized
manufacture, use, sale, offer to sell and importation of products, services, and
systems that fall within the scope of Personalized Media's portfolio of patented
media and communications technologies, of which Pegasus Development is an
exclusive licensee within a field of use. The technologies covered by Pegasus
Development's exclusive license include services distributed to consumers using
certain Ku band BSS frequencies and Ka band frequencies, including frequencies
licensed to affiliates of Hughes Electronics and used by DirecTV to provide
services to its subscribers.
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 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. On September
16, 2002, PST and GSS filed first amended counterclaims against DirecTV. Among
other things, the first amended counterclaims added claims for (i) rescission of
the seamless marketing agreement on the ground of
13
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
fraudulent inducement, (ii) specific performance of audit rights, and (iii)
punitive damages on the breach of the implied covenant of good faith claim. In
addition, the first amended counterclaims deleted the business and professions
code claim and the claims for tortuous interference that were alleged in the
initial cross complaint. On November 5, 2002 the court granted DirecTV's motion
to dismiss (i) the specific performance claim, and (ii) the punitive damages
allegations on the breach of the implied covenant of good faith claim. The court
denied DirecTV's motion to dismiss the implied covenant of good faith claim in
its entirety.
DirecTV filed four summary judgment motions on September 11, 2002
against NRTC, the class members, and PST and GSS on a variety of issues in the
case. The motions cover a broad range of claims in the case, including (i) the
term of the agreement between NRTC and DirecTV, (ii) the right of first refusal
as it relates to PST and GSS, (iii) the right to distribute the premiums, and
(iv) damages relating to the premiums, launch fees and advanced services claims.
The court has set a hearing date of December 16, 2002 for the summary judgment
motions.
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.
("Broadcast Innovations"). 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. In October 2002,
we entered into a settlement agreement with Broadcast Innovations pursuant to
which all claims and counterclaims between us and Broadcast Innovations were
dismissed with prejudice.
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 communication
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 terminate a contract for call center
services provided to us that will terminate 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. We accrued a liability for this fee in the third quarter 2002
and charged DBS' other subscriber related expenses on the statement of
operations and comprehensive loss for this amount.
13. Net Advances to Affiliates
The balance of net advances to affiliates decreased from $33.8 million at
December 31, 2001 to none at September 30, 2002 because of efforts during 2002
to settle accumulated balances and to settle such balances routinely on a
quarterly basis.
14
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
14. 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. FAS 143 becomes effective for us on January
1, 2003. Entities are required to recognize the fair values of liabilities for
asset retirement obligations in the period in which the liabilities are
incurred. Liabilities recognized are to be added to the cost of the asset to
which they relate. Legal liabilities that exist on the date of adoption of FAS
143 are to be recognized on that date. We continue to study our long lived
assets to determine if any legal liabilities are connected with them that need
to be recognized upon the adoption of this statement.
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" becomes effective for us on January 1, 2003. A principal provision
of FAS 145 is the reporting in the statement of operations of gains and losses
associated with extinguishments of debt. FAS 145 rescinds the present required
classification of extinguishments of debt as extraordinary. Instead, FAS 145
states that extinguishments of debt be considered for extraordinary treatment in
light of already established criteria used to determine whether events are
extraordinary. For an event to be extraordinary, the established criteria are
that it must be both unusual and infrequent. Once FAS 145 becomes effective, all
debt extinguishments classified as extraordinary in the statement of operations
issued prior to the effective date of FAS 145 that do not satisfy the criteria
for extraordinary treatment may not be reported as extraordinary in statements
of operations issued after that date. We have extinguished debt a number of
times in the past, and may do so in the future. Regarding our debt
extinguishments occurring prior to January 1, 2003 that are properly reported as
extraordinary under accounting standards in effect until that time, we expect
that they will not be events that qualify for extraordinary treatment after that
date. As a result, we believe that our extinguishments of debt reported as
extraordinary prior to January 1, 2003 will not be reported as extraordinary
after that date. Rather, these extinguishments will be reported as a component
of nonoperating gains and losses within continuing operations in the statement
of operations. We believe that extinguishments of debt occurring after that date
will be classified similarly. We do not expect such a change in classification
to have any effect on our operations, cash flows, financial position, or
covenants related to our existing credit agreement and note indenture.
Statement of Financial Accounting Standards No. 146 "Accounting for
Costs Associated with Exit or Disposal Activities" becomes effective for us on
January 1, 2003. FAS 146 requires companies to recognize costs associated with
exit or disposal activities, costs to terminate contracts that are not capital
leases, and costs to consolidate facilities or relocate employees when they are
incurred rather than at the date of a commitment to engage in these activities
as permitted under existing accounting standards. FAS 146 is to be applied
prospectively to the activities covered by the statement that are initiated
after December 31, 2002. We will apply the requirements of FAS 146 after its
effective date when we engage in any of the covered activities.
15. 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 Development
Corporation and South Plains DBS L.P., 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.
15
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. Subsidiary Guarantees (continued)
Condensed Consolidating Balance Sheets
(In thousands)
Guarantor Nonguarantor Adjustments/
As of September 30, 2002 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
------------- ------------- ------------ ------------- ------------
Assets:
Cash and cash equivalents $ 20,453 $ 20,453
Accounts receivable, net 25,835 25,835
Other current assets 37,670 $ 14,978 $ 4,984 $ (14,978) 42,654
------------- ------------- ------------ ------------- ------------
Total current assets 83,958 14,978 4,984 (14,978) 88,942
Property and equipment, net 76,379 76,379
Intangible assets, net 1,596,702 1,596,702
Other noncurrent assets 29,408 6,970 36,378
Investments in others 1,059,723 1,642,618 (2,638,228) 64,113
------------- ------------- ------------ ------------- ------------
Total assets $ 2,846,170 $ 14,978 $ 1,654,572 $(2,653,206) $1,862,514
============= ============= ============ ============= ============
Liabilities and common stockholder's
equity
Current portion of long term debt $ 2,399 $ 3,382 $ 5,781
Accounts payable 11,922 11,922
Other current liabilities 141,581 3,812 $ (14,978) 130,415
------------- ------------- ------------ ------------- ------------
Total current liabilities 155,902 - 7,194 (14,978) 148,118
Long term debt 425 413,685 414,110
Other noncurrent liabilities 44,433 64,241 108,674
------------- ------------- ------------ ------------- ------------
Total liabilities 200,760 - 485,120 (14,978) 670,902
Minority interest 2,007 2,007
Total common stockholder's equity 2,643,403 $ 14,978 1,169,452 (2,638,228) 1,189,605
------------- ------------- ------------ ------------- ------------
Total liabilities and common
stockholder's equity $ 2,846,170 $ 14,978 $ 1,654,572 $(2,653,206) $1,862,514
============= ============= ============ ============= ============
16
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. 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 12,464 $ 58,508 $ 4,407 75,379
------------ ------------ ------------ -------------- -------------
Total current assets 156,034 58,508 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 32,249 7,674 39,923
Investments in others 1,219,941 287,435 2,232,888 $(3,689,932) 50,332
------------ ------------ ------------ -------------- -------------
Total assets $ 3,172,742 $ 345,943 $ 2,245,094 $(3,689,932) $ 2,073,847
============ ============ ============ ============== =============
Liabilities and common
stockholder's equity
Current portion of long term debt $ 5,865 $ 2,750 $ 8,615
Accounts payable 8,905 8,905
Other current liabilities 145,482 6,898 152,380
------------ ------------ ------------ -------------- -------------
Total current liabilities 160,252 - 9,648 - 169,900
Long term debt 2,824 433,078 435,902
Other noncurrent liabilities 42,636 77,489 120,125
------------ ------------ ------------ -------------- -------------
Total liabilities 205,712 - 520,215 - 725,927
Minority interest 1,315 1,315
Total common stockholder's
equity 2,965,715 $ 345,943 1,724,879 $(3,689,932) 1,346,605
------------ ------------ ------------ -------------- -------------
Total liabilities and common
stockholder's equity $ 3,172,742 $ 345,943 $ 2,245,094 $(3,689,932) $ 2,073,847
============ ============ ============ ============== =============
17
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
(In thousands)
Guarantor Nonguarantor Adjustments/
For the Three Months ended September 30, 2002 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
-------------- ------------ ---------- -------------- -------------
Net revenues:
DBS $ 212,896 $ (12,468) $15,935 $ 216,363
Other 9,390 9,390
-------------- ------------ ---------- -------------- -------------
Total net revenues 222,286 (12,468) - 15,935 225,753
-------------- ------------ ---------- -------------- -------------
Operating expenses:
DBS
Programming 92,644 1,940 94,584
Other subscriber related expenses 51,547 51,547
-------------- ------------ ---------- -------------- -------------
Direct operating expenses (excluding
depreciation and amortization shown
below) 144,191 1,940 146,131
Promotions and incentives 5,933 5,933
Advertising and selling (22,403) 14,345 15,935 7,877
General and administrative 6,122 94 6,216
Depreciation and amortization 42,933 35 42,968
-------------- ------------ ---------- -------------- -------------
Total DBS operating expenses 176,776 16,414 - 15,935 209,125
Other operating expenses 10,439 $ 8,804 19,243
-------------- ------------ ---------- -------------- -------------
Income (loss) from operations 35,071 (28,882) (8,804) - (2,615)
Interest expense (247) (9,803) (10,050)
Other (42) 1,063 1,021
-------------- ------------ ---------- -------------- -------------
Income (loss) before equity in
affiliates, income taxes, and
discontinued operations 34,782 (28,882) (17,544) (11,644)
Equity in earnings (losses) of affiliates (30,300) (16,202) 5,271 41,231
Benefit for income taxes (4,477) (4,477)
-------------- ------------ ---------- -------------- -------------
Income (loss) before discontinued
operations 4,482 (45,084) (7,796) 41,231 (7,167)
Discontinued operations, net of taxes (268) (268)
-------------- ------------ ---------- -------------- -------------
Net income (loss) 4,214 (45,084) (7,796) 41,231 (7,435)
Other comprehensive loss (151) 57 (94)
-------------- ------------ ---------- -------------- -------------
Comprehensive income (loss) $ 4,063 $ (45,084) $(7,739) $41,231 $ (7,529)
============== ============ ========== ============== =============
18
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
(In thousands)
Guarantor Nonguarantor Adjustments/
For the Three Months ended September 30, 2001 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
-------------- ----------- ---------- ------------- -----------
Net revenues:
DBS $ 203,718 $ 14,185 $(11,108) $206,795
Other 7,776 7,776
-------------- ----------- ---------- ------------- -----------
Total net revenues 211,494 14,185 - (11,108) 214,571
-------------- ----------- ---------- ------------- -----------
Operating expenses:
DBS
Programming 87,757 1,903 89,660
Other subscriber related expenses 50,344 50,344
-------------- ----------- ---------- ------------- -----------
Direct operating expenses (excluding
depreciation and amortization shown
below) 138,101 1,903 140,004
Promotions and incentives 7,601 7,601
Advertising and selling 11,161 24,228 (11,108) 24,281
General and administrative 8,549 134 8,683
Depreciation and amortization 63,637 34 63,671
-------------- ----------- ---------- ------------- -----------
Total DBS operating expenses 229,049 26,299 - (11,108) 244,240
Other operating expenses 18,134 $ 45 18,179
-------------- ----------- ---------- ------------- -----------
Loss from operations (35,689) (12,114) (45) - (47,848)
Interest expense (348) (10,582) (10,930)
Loss on marketable securities (34,205) (34,205)
Other (239) (1,628) (1,867)
-------------- ----------- ---------- ------------- -----------
Loss before equity in affiliates, income
taxes, and discontinued operations (70,481) (12,114) (12,255) (94,850)
Equity in earnings (losses) of affiliates (38,414) 9,813 (82,912) 111,513
Benefit for income taxes (38,136) (38,136)
-------------- ----------- ---------- ------------- -----------
Loss before discontinued operations (108,895) (2,301) (57,031) 111,513 (56,714)
Discontinued operations, net of taxes (197) (197)
-------------- ----------- ---------- ------------- -----------
Net loss (109,092) (2,301) (57,031) 111,513 (56,911)
Other comprehensive income 20,231 (3,137) 17,094
-------------- ----------- ---------- ------------- -----------
Comprehensive loss $ (88,861) $ (2,301) $(60,168) $111,513 $(39,817)
============== =========== ========== ============= ===========
19
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
(In thousands)
Guarantor Nonguarantor Adjustments/
For the Nine Months ended September 30, 2002 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
--------------- ------------ ---------- ------------ ------------
Net revenues:
DBS $ 636,951 $ 13,970 $(3,387) $647,534
Other 25,743 25,743
--------------- ------------ ---------- ------------ ------------
Total net revenues 662,694 13,970 - (3,387) 673,277
--------------- ------------ ---------- ------------ ------------
Operating expenses:
DBS
Programming 280,988 5,930 286,918
Other subscriber related expenses 152,374 152,374
--------------- ------------ ---------- ------------ ------------
Direct operating expenses (excluding
depreciation and amortization shown
below) 433,362 5,930 439,292
Promotions and incentives 9,703 9,703
Advertising and selling (7,783) 35,168 (3,387) 23,998
General and administrative 20,669 329 20,998
Depreciation and amortization 123,800 105 123,905
--------------- ------------ ---------- ------------ ------------
Total DBS operating expenses 579,751 41,532 - (3,387) 617,896
Other operating expenses 27,880 $ 29,723 57,603
--------------- ------------ ---------- ------------ ------------
Income (loss) from operations 55,063 (27,562) (29,723) - (2,222)
Interest expense (759) (27,456) (28,215)
Other (2,998) 2,348 (650)
--------------- ------------ ---------- ------------ ------------
Income (loss) before equity in
affiliates, income taxes, and
discontinued operations 51,306 (27,562) (54,831) (31,087)
Equity in earnings (losses) of affiliates (34,551) 2,397 21,710 10,444
Benefit for income taxes (11,688) (11,688)
--------------- ------------ ---------- ------------ ------------
Income (loss) before discontinued
operations 16,755 (25,165) (21,433) 10,444 (19,399)
Discontinued operations, net of taxes (994) (994)
--------------- ------------ ---------- ------------ ------------
Net income (loss) 15,761 (25,165) (21,433) 10,444 (20,393)
Other comprehensive loss (1,772) 673 (1,099)
--------------- ------------ ---------- ------------ ------------
Comprehensive income (loss) $ 13,989 $ (25,165) $(20,760) $10,444 $(21,492)
=============== ============ ========== ============ ============
20
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
(In thousands)
Guarantor Nonguarantor Adjustments/
For the Nine Months ended September 30, 2001 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
------------- ----------- ------------ ------------ -----------
Net revenues:
DBS $ 609,255 $ 40,392 $(30,999) $618,648
Other 24,572 24,572
------------- ----------- ------------ ------------ -----------
Total net revenues 633,827 40,392 - (30,999) 643,220
------------- ----------- ------------ ------------ -----------
Operating expenses:
DBS
Programming 259,861 5,733 265,594
Other subscriber related expenses 151,087 151,087
------------- ----------- ------------ ------------ -----------
Direct operating expenses (excluding
depreciation and amortization shown
below) 410,948 5,733 416,681
Promotions and incentives 36,909 36,909
Advertising and selling 27,119 97,595 (30,999) 93,715
General and administrative 26,524 413 26,937
Depreciation and amortization 189,569 106 189,675
------------- ----------- ------------ ------------ -----------
Total DBS operating expenses 691,069 103,847 - (30,999) 763,917
Other operating expenses 55,089 $ 90 55,179
------------- ----------- ------------ ------------ -----------
Loss from operations (112,331) (63,455) (90) - (175,876)
Interest expense (22,416) (32,937) (55,353)
Loss on marketable securities (34,205) (34,205)
Other 277 (2,325) (2,048)
------------- ----------- ------------ ------------ -----------
Loss before equity in affiliates, income
taxes, and discontinued operations (168,675) (63,455) (35,352) - (267,482)
Equity in earnings (losses) of affiliates (175,221) 26,807 (233,486) 381,900
Benefit for income taxes (100,681) (100,681)
------------- ----------- ------------ ------------ -----------
Loss before discontinued operations (343,896) (36,648) (168,157) 381,900 (166,801)
Discontinued operations, net of taxes (229) (229)
------------- ----------- ------------ ------------ -----------
Loss before extraordinary item (344,125) (36,648) (168,157) 381,900 (167,030)
Extraordinary loss on extinguishment of
debt, net of taxes (986) (986)
------------- ----------- ------------ ------------ -----------
Net loss (344,111) (36,648) (168,157) 381,900 (168,016)
Other comprehensive income 11,976 11,976
------------- ----------- ------------ ------------ -----------
Comprehensive loss $ (333,135) $ (36,648) $(168,157) $381,900 $(156,040)
============= =========== ============ ============ ===========
21
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Cash Flows
(In thousands)
Guarantor Nonguarantor Adjustments/
For the Nine Months ended September 30, 2002 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
--------------- ------------- ----------- ----------- ------------
Net cash provided by (used for)
operating activities $ 121,423 $ (25,060) $ (25,575) - $70,788
--------------- ------------- ----------- ----------- ------------
Cash flows from investing activities:
Capital expenditures (22,715) (22,715)
--------------- ------------- ----------- ----------- ------------
Net cash used for investing activities (22,715) - - - (22,715)
--------------- ------------- ----------- ----------- ------------
Cash flows from financing activities:
Borrowings on term loan facility 63,156 63,156
Repayments of term loan facility (2,220) (2,220)
Net repayments of revolving credit facility (80,000) (80,000)
Repayments of other long term debt (5,852) (5,852)
Net advances from (to) affiliates 32,886 (1,203) 31,683
Distributions to parent (293,715) (41,666) (247,599) $ (25,575) (247,599)
Distributions to subsidiaries (66,726) (112,091) 178,817
Contributions from parent 112,091 66,726 112,091 (41,666) 112,091
Contributions from subsidiaries 41,666 293,715 (335,381)
Other 1,685 (274) 1,411
--------------- ------------- ----------- ----------- ------------
Net cash provided by (used for)
financing activities (177,965) 25,060 25,575 - (127,330)
--------------- ------------- ----------- ----------- ------------
Net decrease in cash and cash
equivalents (79,257) (79,257)
Cash and cash equivalents, beginning of year 99,710 99,710
--------------- ------------- ----------- ----------- ------------
Cash and cash equivalents, end of period $ 20,453 $ - $ - $ - $20,453
=============== ============= =========== =========== ============
22
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Cash Flows
(In thousands)
Guarantor Nonguarantor Adjustments/
For the Nine Months ended September 30, 2001 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
------------- -------------- ------------ ------------- -------------
Net cash provided by (used for)
operating activities $ 243,669 $ (36,576) $ (266,345) - $(59,252)
------------- -------------- ------------ ------------- -------------
Cash flows from investing activities:
Capital expenditures (25,033) (25,033)
Purchases of intangibles (7,171) (7,171)
Other (889) (889)
------------- -------------- ------------ ------------- -------------
Net cash used for investing activities (33,093) - - - (33,093)
------------- -------------- ------------ ------------- -------------
Cash flows from financing activities:
Net repayments of term loan facility (37,062) (37,062)
Repayments of other long term debt (7,003) (7,003)
Net advances from (to) affiliates 76,127 (109,226) (33,099)
Distributions to parent (343,810) (170,508) (33,812) $ (266,345) (33,812)
Distributions to subsidiaries (207,084) (59,323) 266,407
Contributions from parent 59,323 207,084 59,323 (266,407) 59,323
Contributions from subsidiaries 170,508 343,810 (514,318)
Other 1,823 (1,200) 623
------------- -------------- ------------ ------------- -------------
Net cash provided by (used for)
financing activities (250,116) 36,576 162,510 - (51,030)
------------- -------------- ------------ ------------- -------------
Net decrease in cash and cash
equivalents (39,540) (103,835) (143,375)
Cash and cash equivalents, beginning of year 76,982 106,279 183,261
------------- -------------- ------------ ------------- -------------
Cash and cash equivalents, end of period $ 37,442 $ - $ 2,444 $ - $ 39,886
============= ============== ============ ============= =============
23
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 or the acquisition by a
third party of the DirecTV business and the related confusion in the
marketplace; 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 and
deceptive sales practices by agents of the competing direct broadcast satellite
provider; 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.
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, the parent company of PSC. "DBS" refers to direct
broadcast satellite. Other terms used are defined as needed where they first
appear.
Approximately 96% of our consolidated revenues and 91% of the expenses
within consolidated loss from operations for the nine months ended September 30,
2002, and 96% of our assets at September 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 12 of the Notes to Consolidated
Financial Statements for information on the litigation.
Hughes Electronics Corporation, which is the parent company of DirecTV,
and EchoStar Communications Corporation, which owns the only other nationally
branded DBS programming service in the United States, have
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PEGASUS MEDIA & COMMUNICATIONS, INC.
agreed to merge,subject to regulatory approval. However, recently the
Federal Communications Commission declined to approve the merger and the
Department of Justice along with 23 states filed a lawsuit to block the merger.
At this time, we are unable to predict the effect of our litigation with DirecTV
on our financial position, results of operations, cash flows, and future
operations. We also do not know at this time whether EchoStar and Hughes will
continue to seek regulatory approval for their proposed merger or not, and the
resulting impact thereof.
Through September 30, 2002, PSC purchased a portion of PM&C's 12-1/2%
senior subordinated notes due July 2005. We, PSC, and/or PCC may from time to
time engage in transactions that involve the purchase and/or exchange of our
notes or 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 nine months
ended September 30, 2002 compared to the nine months ended September 30, 2001,
unless indicated otherwise. With respect to our income or loss from operations,
we focus on our DBS business, as this is our only significant business.
DBS Business
Revenues:
Revenues increased $28.9 million to $647.5 million primarily due to the
rate increase for our core packages that we instituted in the fourth quarter
2001 and, effective July 1, 2002, a royalty fee that passes on to subscribers a
portion of the royalty costs charged to us in providing DIRECTV service. Revenue
increases were partially offset by revenue decreases from a reduction in the
number of subscribers, a reduction in on demand viewing, and subscribers
downgrading to a less expensive mix of programming offered by us primarily, we
believe, as the result of the effect of general economic conditions on our
subscribers.
Direct Operating Expenses:
Programming expense increased $21.3 million to $286.9 million primarily
due to a broad rate increase commencing January 2002 and a targeted increase to
certain programming rates commencing August 2002 charged to us by the National
Rural Telecommunications Cooperative ("NRTC"), through which we receive our
DIRECTV programming. Also contributing to the increase was our lowered
expectations of the amount of patronage that we are to receive from the NRTC for
2002 compared to that received in 2001. Patronage from the NRTC reduces the
programming expense we incur. Increased costs incurred by the NRTC in 2002
combined with our loss of subscribers in 2002 (discussed below) have factored
into our lowered patronage expectations. The increase in programming expense was
offset in part by the loss of subscribers in 2002.
Other subscriber related expenses increased $1.3 million to $152.4
million primarily due to a one time contract termination fee of $4.5 million,
offset in part by a decrease in bad debt expense. We accrued a liability in the
third quarter 2002 for the termination fee connected with a contract for call
center services for which we gave notice of termination during the quarter. The
decrease in bad debt expense was mainly due to our focus in 2002 on improving
the quality of the subscriber base that we obtain and retain over the quality of
the subscriber base that existed prior to 2002.
Operating Margins:
Our operating margin is the difference between net revenues and direct
operating expenses (excluding depreciation and amortization). Operating margins
for the nine months ended September 30, 2002 and 2001 were $208.2 million and
$202.0 million, respectively, and the operating margin ratio percent for these
respective periods was 32.2% and 32.6%. Excluding the one time contract
termination fee of $4.5 million referred to above, the operating margin and
ratio for the nine months ended September 30, 2002 was $212.7 million and 32.9%,
respectively. The increase in the current period ratio, as adjusted to exclude
the contract termination fee, reflects the
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PEGASUS MEDIA & COMMUNICATIONS, INC.
incremental effects of revenue rateincrease and royalty fee pass through
discussed under revenues above, and the decrease in bad debt expense discussed
under direct operating expenses above.
Other Operating Expenses:
Promotion and incentives and advertising and selling costs constitute
our expensed subscriber acquisition costs ("SAC"). Equipment and installation
subsidies and commissions form a substantial portion of promotions and
incentives and advertising and selling, respectively. Subsidies and commissions
are direct and incremental costs incurred with respect to our DIRECTV
subscription plans. We incur subsidies and commissions only when subscribers are
added. We are able to defer subsidies and commissions for plans that have
minimum service commitment periods and early termination fees, with amounts
deferred not to exceed the amount of the termination fees. Subsidies and
commissions deferred are amortized over the 12 month commitment period to which
the termination fees apply and charged to amortization expense. Also, we are
able to capitalize equipment subsidies as fixed assets under our subscription
plans in which we retain or take title to the equipment delivered to
subscribers. Equipment subsidies capitalized are depreciated over their
estimated useful lives of three years and charged to depreciation expense.
Subsidies and commissions that are not deferred or capitalized are expensed as
promotion and incentives expense and advertising and selling expense,
respectively.
Gross SAC costs decreased by $70.6 million to $78.1 million primarily
due to reduced gross subscriber additions this year compared to last year.
Additionally, commissions for the nine months ended September 30, 2001 were
higher due to amounts incurred under the seamless marketing agreement with
DirecTV that was in effect during 2001. That agreement was terminated in July
2001, and is the subject of litigation. See Note 12 of the Notes to Consolidated
Financial Statements for information on the litigation.
SAC costs deferred increased $15.8 million to $24.3 million primarily
due to substantially all of the subscription plans sold through our controlled
channels in 2002 containing provisions, as described above, that enabled us to
defer costs, whereas for 2001, plans with such provisions principally commenced
in the third quarter 2001. Our controlled channels consist of our independent
dealer and distributor network and direct sales channels, which are our
predominant sales channels. SAC costs capitalized increased $10.5 million to
$20.1 million primarily due to a greater number of plans in place in 2002 than
2001 under which equipment was eligible to be capitalized.
Primarily as a result of the reduced subscriber additions and increased
amounts deferred and capitalized noted above, aggregate promotions and
incentives and advertising and selling expenses decreased $96.9 million to $33.7
million. Also contributing to a decrease in advertising and selling expenses was
a reduction in advertising expenses of $8.2 million primarily due to a focused
cost reduction initiative. Amounts we expend for advertising are discretionary
on our part.
General and administrative expenses decreased $5.9 million to $21.0
million due to a broad based cost reduction effort that we have undertaken in
2002.
Depreciation and amortization decreased $65.8 million to $123.9 million
primarily due to our adoption in first quarter 2002 of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" 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 lives of our 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 to remaining lives of approximately 15
years from January 1, 2002. The lives of our DBS rights are subject to
litigation. See Note 12 of the Notes to Consolidated Financial Statements for
information on this litigation.
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PEGASUS MEDIA & COMMUNICATIONS, INC.
Included in depreciation and amortization for the nine months ended
September 30, 2002 and 2001 was aggregate depreciation and amortization of
promotions and incentives costs capitalized or deferred and advertising and
selling costs deferred of $32.2 million and $3.6 million, respectively. The
difference is due to the increased amount of costs deferred and capitalized in
the current year, as discussed above.
Subscribers:
Our number of subscribers at September 30, 2002 was 1,341,000. We have
experienced a net reduction in the number of subscribers in the nine months
ended September 30, 2002 as the number of subscribers that have churned exceeded
the number of subscribers that we have added by approximately 40,000. This net
decrease excludes the one time adjustment to decrease our subscriber count that
was made and reported in the first quarter 2002 of 138,000. We believe that the
reasons for the net 40,000 decrease are: 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,
including the provision of local channels by this competing direct broadcast
satellite provider in several markets where DirecTV does not offer local
channels; 3) our service becoming less affordable as a result of our royalty
cost pass through to subscribers; 4) the effect of general economic conditions
on our subscribers and potential subscribers; 5) deceptive sales practices by
agents of the competing direct broadcast satellite provider; 6) the departure of
subscribers due to the effect that the replacement of DIRECTV system access
cards had on subscribers that had been pirating a portion of their services; and
7) a reduction in the number of new subscribers we obtain from DirecTV's
national retail chains.
We will continue to face intensive competition from other providers for
the foreseeable future, most notably as a result of the local into local
programming provided by the competing direct broadcast satellite provider in
certain markets where DirecTV does not offer such programming. We believe that
the deceptive sales practices engaged in by agents of the competing direct
broadcast satellite provider may subside as a result of the aforementioned
regulatory rulings surrounding the proposed EchoStar and Hughes merger, although
the practices have continued into the fourth quarter. For the foreseeable
future, we expect to continue to see a decrease in subscribers obtained from
DirecTV's national retail chains. Reduction in the number of subscribers from
national retail chains under arrangements directly with DirecTV results from
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.
We will continue to focus on 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. Our subscriber screening policies may generate a lesser number of
subscriber additions, but we expect that the subscribers added will be of a
higher quality. We expect that this will have an immediate favorable impact on
our cash flows due to a reduction in SAC costs. We also believe that this will
have a longer term favorable impact on our cash flows due to an overall
extension of subscriber lives, thereby leading to a more favorable churn
experience. We manage our subscriber base to maximize cash flow generation. To
the extent that net subscriber reductions resulting from our recent churn
experience continue and unfavorably impact our cash flow generation, our
subscriber retention efforts and investments will be increased accordingly. We
believe that net reductions in our number of subscribers will not have a
significant effect on our operating margins for 2002.
Broadcast Business
The continuing broadcast operations had revenues for the nine months
ended September 30, 2002 and 2001 of $25.7 million and $24.6 million,
respectively, and net losses from continuing operations for the nine months
ended September 30, 2002 and 2001 of $555 thousand and $3.1 million,
respectively. We provide this information with respect to the broadcast
operations for context purposes only, for we believe that these operations are
not significant relative to the overall scope and understanding of our
operations.
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PEGASUS MEDIA & COMMUNICATIONS, INC.
Other Statement of Operations and Comprehensive Loss Items
Other operating expenses, net primarily consisted of amounts incurred
in our litigation with DirecTV of $10.1 million and $14.7 million for the nine
months ended September 20, 2002 and 2001, respectively.
Interest expense decreased $27.1 million to $28.2 million primarily due
to: 1) $17.0 million for the 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) $3.5 million for the repayment of all principal amounts
outstanding under Golden Sky Systems' credit facility in June 2001 with the
concurrent termination of the facility; and 3) $8.9 million for 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 of $2.2 million incurred with respect to our swap
instruments. Borrowings under our credit facilities are generally subject to
short term LIBOR rates that vary with market conditions. The interest we have
incurred in 2002 on these borrowings has benefited from relatively low market
LIBOR rates available throughout 2002. We have swap instruments that exchange
the market LIBOR rates incurred on our credit facilities based on an aggregate
notional amount of $72.1 million for fixed rates of interest specified in the
swap contracts. The purpose of the swaps is to protect us from an increase in
market LIBOR rates above the contracted fixed rates. Since our swaps are a hedge
against rising interest rates, we pay additional interest when the applicable
market LIBOR rates are less than the fixed rates. The applicable LIBOR rates
have been less than the related fixed swap rates for all of 2002. As a result,
we incurred additional cash interest expense of $2.6 million in the nine months
ended September 30, 2002 for the difference between the market rates and the
fixed rates.
Interest income decreased by $3.2 million to $234 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 incurred an other than
temporary decline in fair market value in this investment in the third quarter
2001 for which we realized an impairment loss of $34.2 million.
We had other nonoperating income, net of $2.2 million for the nine
months ended September 30, 2002, compared to other nonoperating expense, net of
$5.5 million for the corresponding period of 2001. This difference was primarily
due to the increase in the fair value of our interest rate instruments this year
of $2.3 million compared to a decrease in the fair value of these instruments
last year of $4.5 million. The fair values of our interest rate instruments are
based on the amounts that the related contracts could be settled at on any
designated day, as computed by the institutions that are party to the contracts.
No cash is exchanged on these assumed settlement dates, but we record gains for
increases and losses for decreases in fair values between assumed settlement
dates, which occur on each calendar quarter end month.
The income tax benefit on the loss from continuing operations decreased
$89.0 million to $11.7 million due to a reduced amount of pretax losses in the
current year compared to the corresponding prior year period.
We have entered into a definitive agreement to sell our Mobile, Alabama
broadcast television station to an unaffiliated party for $11.5 million in cash.
The sale is contingent upon conditions typical of sales of this nature,
including final approval by the Federal Communications Commission of the
transfer of the station's broadcast license to the buyer. It is anticipated that
the sale will occur in the first quarter of 2003.
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PEGASUS MEDIA & COMMUNICATIONS, INC.
We have classified the operations of this station as discontinued for all
periods presented. Revenues and pretax loss of the discontinued operation were
as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------- ----------- -------------- -----------
Revenues $ 209 $ 7 $ 546 $ 7
Pretax loss (433) (317) (1,604) (370)
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. FAS 143 becomes effective for us on January
1, 2003. Entities are required to recognize the fair values of liabilities for
asset retirement obligations in the period in which the liabilities are
incurred. Liabilities recognized are to be added to the cost of the asset to
which they relate. Legal liabilities that exist on the date of adoption of FAS
143 are to be recognized on that date. We continue to study our long lived
assets to determine if any legal liabilities are connected with them that need
to be recognized upon the adoption of this statement.
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" becomes effective for us on January 1, 2003. A principal provision
of FAS 145 is the reporting in the statement of operations of gains and losses
associated with extinguishments of debt. FAS 145 rescinds the present required
classification of extinguishments of debt as extraordinary. Instead, FAS 145
states that extinguishments of debt be considered for extraordinary treatment in
light of already established criteria used to determine whether events are
extraordinary. For an event to be extraordinary, the established criteria are
that it must be both unusual and infrequent. Once FAS 145 becomes effective, all
debt extinguishments classified as extraordinary in the statement of operations
issued prior to the effective date of FAS 145 that do not satisfy the criteria
for extraordinary treatment may not be reported as extraordinary in statements
of operations issued after that date. We have extinguished debt a number of
times in the past, and may do so in the future. Regarding our debt
extinguishments occurring prior to January 1, 2003 that are properly reported as
extraordinary under accounting standards in effect until that time, we expect
that they will not be events that qualify for extraordinary treatment after that
date. As a result, we believe that our extinguishments of debt reported as
extraordinary prior to January 1, 2003 will not be reported as extraordinary
after that date. Rather, these extinguishments will be reported as a component
of nonoperating gains and losses within continuing operations in the statement
of operations. We believe that extinguishments of debt occurring after that date
will be classified similarly. We do not expect such a change in classification
to have any effect on our operations, cash flows, financial position, or
covenants related to our existing credit agreement and note indenture.
Statement of Financial Accounting Standards No. 146 "Accounting for
Costs Associated with Exit or Disposal Activities" becomes effective for us on
January 1, 2003. FAS 146 requires companies to recognize costs associated with
exit or disposal activities, costs to terminate contracts that are not capital
leases, and costs to consolidate facilities or relocate employees when they are
incurred rather than at the date of a commitment to engage in these activities
as permitted under existing accounting standards. FAS 146 is to be applied
prospectively to the activities covered by the statement that are initiated
after December 31, 2002. We will apply the requirements of FAS 146 after its
effective date when we engage in any of the covered activities.
Other Information
Premarketing cash flow of our DBS business was $191.7 million and
$175.0 million for the nine months ended September 30, 2002 and 2001,
respectively. EBITDA for our DBS business was $158.0 million and $44.4 million
for the nine months ended September 30, 2002 and 2001, respectively. DBS
premarketing cash flow is calculated by subtracting DBS direct operating
expenses (excluding depreciation and amortization), as adjusted to exclude the
one time contract termination fee therein of $4.5 million, and general and
administrative expenses from DBS revenues. DBS EBITDA is DBS premarketing cash
flow less DBS promotions and incentives and advertising
29
PEGASUS MEDIA & COMMUNICATIONS, INC.
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 nine months ended September 30, 2002, net cash provided by
operating activities was $70.8 million, net cash used for investing activities
was $22.7 million, and net cash used for financing activities was $127.3
million, primarily consisting of net distributions to PSC.
Adjusted operating cash flow for the 12 months ended September 30, 2002
was $230.5 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.
We believe that our existing cash resources combined with cash
projected to be provided by operations in the next 12 months are sufficient to
meet our liquidity and capital resource needs for the next 12 months. However,
we cannot provide any assurance as to the amount or sufficiency of cash that
will be provided by our operations within the next 12 months.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report on Form
10-Q, we carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and Vice
President - Finance and Controller (the principal financial officer), to
determine the effectiveness of our disclosure controls and procedures. Based on
this evaluation, the Chief Executive Officer and the Vice President - Finance
and Controller concluded that these controls and procedures are effective in
their design to ensure that information required to be disclosed by the
registrant in reports that it files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and that
such information has been accumulated and communicated to the management of the
registrant, including the above indicated officers, as appropriate to allow
timely decisions regarding the required disclosures. There have not been any
significant changes in the registrant's internal controls or in other factors
that could significantly affect these controls subsequent to the date of this
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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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 12 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 and in our Quarterly Report on Form 10-Q for the quarterly
periods ended March 31, 2002 and June 30, 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.
November 14, 2002 By: /s/ Joseph W. Pooler, Jr.
Date Joseph W. Pooler, Jr.
Vice President - Finance and Controller
(Principal Financial and Accounting Officer)
32
CERTIFICATION
I, Marshall W. Pagon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pegasus Media
& Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 14, 2002
By: /s/ Marshall W. Pagon
Marshall W. Pagon
Chief Executive Officer
CERTIFICATION
I, Joseph W. Pooler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pegasus Media
& Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 14, 2002
By: /s/ Joseph W. Pooler
Joseph W. Pooler
Vice President - Finance and Controller