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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003
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 __
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes__ No /X/
Number of shares of each class of the registrant's common stock
outstanding as of May 9, 2003:
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 March 31, 2003
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 4
Consolidated Statements of Operations and Comprehensive Loss
Three months ended March 31, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Narrative Analysis of the Results of Operations 19
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
Pegasus Media & Communications, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2003 2002
---------------- ----------------
(unaudited)
Currents assets:
Cash and cash equivalents $ 15,121 $ 12,237
Accounts receivable, net:
Trade 21,547 27,163
Other 10,224 8,842
Deferred subscriber acquisition costs, net 14,242 15,706
Deferred income taxes 4,334 4,454
Prepaid expenses 5,086 6,377
Other current assets 6,930 7,581
---------------- ----------------
Total current assets 77,484 82,360
Property and equipment, net 66,957 66,977
Intangible assets, net 1,535,952 1,564,874
Other noncurrent assets 110,075 111,942
---------------- ----------------
Total $ 1,790,468 $ 1,826,153
================ ================
Current liabilities:
Current portion of long term debt $ 3,807 $ 5,631
Accounts payable 11,433 14,899
Accrued programming fees 56,915 57,196
Accrued commissions and subsidies 40,277 40,191
Other accrued expenses 19,835 19,866
Other current liabilities 10,657 14,894
---------------- ----------------
Total current liabilities 142,924 152,677
Long term debt 412,196 413,366
Other noncurrent liabilities 102,644 104,428
---------------- ----------------
Total liabilities 657,764 670,471
---------------- ----------------
Commitments and contingent liabilities (see Note 8)
Minority interest 2,343 2,157
Common stockholder's equity:
Common stock 2 2
Other common stockholder's equity 1,130,359 1,153,523
---------------- ----------------
Total common stockholder's equity 1,130,361 1,153,525
---------------- ----------------
Total $ 1,790,468 $ 1,826,153
================ ================
See accompanying notes to consolidated financial statements
4
Pegasus Media & Communications, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands)
Three Months Ended March 31,
2003 2002
------------- ------------
(unaudited)
Net revenues:
DBS $ 205,546 $ 214,724
Broadcast 7,284 6,495
------------- ------------
Total net revenues 212,830 221,219
Operating expenses:
DBS
Programming 93,256 96,318
Other subscriber related expenses 44,675 51,741
------------- ------------
Direct operating expenses (excluding depreciation and
amortization shown below) 137,931 148,059
Promotions and incentives 2,878 1,743
Advertising and selling 5,726 8,301
General and administrative 6,373 7,917
Depreciation and amortization 41,986 39,450
------------- ------------
Total DBS 194,894 205,470
Broadcast 7,605 7,260
Corporate expenses (including depreciation and amortization of $6
for 2002) 3,103 4,031
Other operating expenses, net 6,165 7,975
------------- ------------
Income (loss) from operations 1,063 (3,517)
Interest expense (9,875) (9,025)
Interest income 28 80
Other nonoperating income, net 1,316 1,126
------------- ------------
Loss before income taxes and discontinued operations (7,468) (11,336)
Benefit for income taxes (2,817) (4,160)
------------- ------------
Loss before discontinued operations (4,651) (7,176)
Discontinued operations:
Income (loss) from discontinued operations (including gain on disposal of
$7,639 in 2003), net of income tax (expense) benefit of $(2,729)
and $265, respectively 4,454 (433)
------------- ------------
Net loss (197) (7,609)
Other comprehensive loss:
Unrealized loss on marketable equity securities, net of income tax
benefit of $1,315 - (2,146)
------------- ------------
Comprehensive loss $ (197) $ (9,755)
============= ============
See accompanying notes to consolidated financial statements
5
Pegasus Media &Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended March 31,
2003 2002
------------- -------------
(unaudited)
Net cash provided by operating activities $ 24,484 $ 19,269
------------- -------------
Cash flows from investing activities:
DBS equipment capitalized (5,384) (6,039)
Other capital expenditures (375) (1,132)
Proceeds from sale of broadcast station 10,965 -
Other 98 -
------------- -------------
Net cash provided by (used for) investing activities 5,304 (7,171)
------------- -------------
Cash flows from financing activities:
Repayments of term loan facility (846) (687)
Repayment of revolving credit facility - (80,000)
Repayments of other long term debt (2,249) (5,852)
Net advances to affiliates (949) (224)
Distributions to parent (28,280) (48,352)
Contributions from parent 5,313 36,000
Other 107 29
------------- -------------
Net cash used for financing activities (26,904) (99,086)
------------- -------------
Net increase (decrease) in cash and cash equivalents 2,884 (86,988)
Cash and cash equivalents, beginning of year 12,237 99,710
------------- -------------
Cash and cash equivalents, end of period $ 15,121 $ 12,722
============= =============
See accompanying notes to consolidated financial statements
6
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
All references to "we," "us," and "our" refer to Pegasus Media &
Communications, Inc., together with its direct and indirect 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
We have a history of losses principally due to the substantial amounts
incurred for interest expense and noncash depreciation and amortization.
We hold the principal operations for PSC and PCC, and each relies on us
as a source of cash in primarily meeting their respective debt and preferred
stock obligations. 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 and subscriber acquisition costs ("SAC"), 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.
For the three months ended March 31, 2003 and 2002, the DBS business
had income from operations of $10.7 million and $9.3 million, respectively. We
attribute the improvement in the current year to our DBS business strategy.
Continued improvement in results from operations will in large part depend upon
our obtaining a sufficient number of quality subscribers, retention of these
subscribers for extended periods of time, and improving margins from them. While
our DBS business strategy has resulted in an increase in income from operations,
it has also resulted in decreases in the number of subscribers for the three
months ended March 31, 2003 and a decrease in DBS net revenues for the three
months ended March 31, 2003 compared to the three months ended March 31, 2002.
In the near term, our DBS business strategy may result in further decreases in
the number of our DBS subscribers and our DBS net revenues when compared to
prior periods, but we believe that our results from operations for the DBS
business will not be significantly impacted. We cannot make any assurances that
this will be the case, however. If a disproportionate number of subscribers
churn relative to the number of quality subscribers we enroll, we are not able
to enroll a sufficient number of quality subscribers, and/or we are not able to
maintain adequate margins from our subscribers, our results from operations may
not improve or improved results that do occur may not be sustained.
We are involved in significant litigation. See Note 8 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.
7
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 in the United States of America 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. Changes in Other Stockholder's Equity
Changes in other stockholder's equity from December 31, 2002 to March
31, 2003 consisted of net loss of $(197) thousand and cash distributions to PSC
of $(28.3) million.
4. Long Term Debt
All principal amounts borrowed by PM&C under its revolving credit
facility were repaid during the three months ended March 31, 2003. Letters of
credit outstanding under the revolving credit facility, which reduce the
availability thereunder, were $61.4 million at March 31, 2003. At March 31,
2003, the commitment for the revolving credit facility was permanently reduced
as scheduled by the terms of the facility by $14.1 million to $154.7 million.
The commitment is scheduled to be further reduced by $14.1 million on June 30,
2003. Availability under the revolving credit facility at March 31, 2003 was
$93.3 million.
PM&C repaid $688 thousand of principal outstanding under its term loan
facility during the three months ended March 31, 2003 as scheduled, thereby
reducing the total principal amount outstanding thereunder to $268.8 million.
The weighted average variable rate of interest including applicable margins on
principal amounts outstanding under the term loan facility was 4.8% and 5.3% at
March 31, 2003 and December 31, 2002, respectively.
PM&C repaid $158 thousand of principal outstanding under its
incremental term loan facility during the three months ended March 31, 2003 as
scheduled, thereby reducing the total principal amount outstanding thereunder to
$62.7 million. The weighted average variable rate of interest including
applicable margins on principal amounts outstanding under the incremental term
loan facility was 4.8% and 5.3% at March 31, 2003 and December 31, 2002,
respectively.
5. Supplemental Cash Flow Information
The only significant noncash investing and financing activity was a net
change in other comprehensive loss for the three months ended March 31, 2002 of
$2.1 million.
6. Dispositions
In March 2003, we completed the sale of our Mobile, Alabama broadcast
television station to an unaffiliated party for a purchase price of $11.5
million in cash. As of March 31, 2003, proceeds of the sale, net of costs
related to the sale, were $11.0 million, and a gain on the sale of $7.6 million
was recorded. Ultimate net proceeds from and gain on the sale are subject to
later adjustment for contract termination costs and fees and other services
related to the sale that are yet to be finalized. The operations for this
station are classified as discontinued in the statement of operations and
comprehensive loss for all periods presented.
8
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Prior to March 31, 2003, we had established our intent and ability to
dispose of two of our broadcast television stations that are located in
Mississippi. In April 2003, we transferred an entity holding the operating
licenses for the stations to PSC for aggregate consideration of $5.4 million. On
April 30, 2003, we sold the nonlicense assets and related liabilities of the
stations to an unaffiliated party for an aggregate of $8.1 million, and received
aggregate proceeds, net of costs of the sale, of $7.6 million. Gain or loss on
the sale of the nonlicense assets and related liabilities and transfer of the
operating licenses, if any, is pending subject to final determination of the
carrying amounts of assets and liabilities related to these transactions. The
operations of these stations are classified as discontinued in the statement of
operations and comprehensive loss for all periods presented.
Aggregate assets and liabilities associated with the broadcast
television stations above were not significant to our financial position to show
separately as held for sale on the balance sheet, but such have been included
therein in other current and noncurrent assets and liabilities as appropriate.
Aggregate revenues and pretax income (loss), including a net gain of
$7.6 million in 2003, for discontinued operations were as follows (in
thousands):
Three Months Ended
March 31,
2003 2002
---------- ----------
Revenues $1,153 $1,348
Pretax income (loss) 7,183 (698)
7. Industry Segments
Our only reportable segment at March 31, 2003 was our 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 $1.7
billion at March 31, 2003, which were not significantly different from those at
December 31, 2002.
8. 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.
On June 3, 1999, the NRTC filed a lawsuit in United States District
Court, Central District of California against DIRECTV, Inc. seeking a court
order to enforce the NRTC's contractual rights to obtain from DIRECTV, Inc.
certain premium programming formerly distributed by United States Satellite
Broadcasting Company, Inc. for exclusive distribution by the NRTC's members and
affiliates in their
9
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
rural markets. On July 22, 1999, DIRECTV, Inc. filed acounterclaim seeking
judicial clarification of certain provisions of DIRECTV, Inc.'s contract with
the NRTC. On August 26, 1999, the NRTC filed a separate lawsuit in United States
District Court, Central District of California against DIRECTV, Inc. claiming
that DIRECTV, Inc. had failed to provide to the NRTC its share of launch fees
and other benefits that DIRECTV, Inc. and its affiliates have received relating
to programming and other services. The NRTC and DIRECTV, Inc. have also filed
indemnity claims against one another that pertain to the alleged obligation, if
any, of the NRTC to indemnify DIRECTV, Inc. 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.
DIRECTV, Inc. is seeking as part of its counterclaim a declaratory
judgment that the term of the NRTC's agreement with DIRECTV, Inc. is measured
only by the life of DBS-1, the first DIRECTV satellite launched, and not the
orbital lives of the other DIRECTV satellites at the 101o W orbital location. If
DIRECTV, Inc. were to prevail on its counterclaim, any failure of DBS-1 could
have a material adverse effect on our DIRECTV rights. While the NRTC has a right
of first refusal to receive certain services after the term of NRTC's agreement
with DIRECTV, Inc., the scope and terms of this right of first refusal are also
being disputed as part of DIRECTV, Inc.'s counterclaim. On December 29, 1999,
DIRECTV, Inc. filed a motion for partial summary judgment seeking an order that
the right of first refusal does not include programming services and is limited
to 20 program channels of transponder capacity. On January 31, 2001, the court
issued an order denying DIRECTV Inc.'s motion for partial summary judgment
relating to the right of first refusal.
On July 3, 2002, the court granted a motion for summary judgment filed
by DIRECTV, Inc., holding that the NRTC is liable to indemnify DIRECTV, Inc. for
the costs of defense and liabilities that DIRECTV, Inc. 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, Inc., Hughes Electronics Corporation, Thomson Consumer Electronics, and
Philips Electronics North America Corporation. Personalized Media is a company
with which Pegasus Development has a licensing arrangement. In February 2003,
the United States District Court, District of Delaware granted Pegasus
Development's and Personalized Media's motion for leave to amend the complaint
to exclude relief for the delivery nationwide, using specified satellite
capacity, of services carried for the NRTC, plus any other services delivered
through the NRTC to subscribers in the NRTC's territories. The NRTC filed a
motion with the United States District Court, Central District of California to
reconsider its July 3, 2002 decision that the NRTC indemnify DIRECTV, Inc. for
DIRECTV, Inc.'s costs of defense and liabilities from the patent litigation.
That motion is scheduled for hearing June 2, 2003. 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, Inc. 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, Inc. 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
10
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
various torts, common counts, and declaratory relief based on DIRECTV, Inc.'s
failure to provide the NRTC with certain premium programming, and on DIRECTV,
Inc.'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, and withdrew the class action
allegations to allow a new class action to be filed on behalf of the members and
affiliates of the NRTC. The amended complaint also added claims regarding
DIRECTV Inc.'s failure to allow distribution through the NRTC of various
advanced services, including Tivo. 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, Inc. filed a counterclaim against PST and GSS, as well
as the class members, seeking two claims for relief: 1) a declaratory judgment
whether DIRECTV, Inc. is under a contractual obligation to provide PST and GSS
with services after the expiration of the term of their agreements with the NRTC
and 2) 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 October 29,
2001, the Court denied DIRECTV's motion for partial summary judgment on its term
counterclaim. On June 20, 2001, PST and GSS filed a second amended complaint,
updating the claims asserted in the earlier complaints.
On June 22, 2001, DIRECTV, Inc. 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, Inc. and PST and GSS. On July 13, 2001, PST and GSS
terminated the seamless marketing agreement. The seamless marketing agreement
provided seamless marketing and sales for DIRECTV retailers and distributors. On
July 16, 2001, PST and GSS filed a cross complaint against DIRECTV, Inc.
alleging, among other things, that 1) DIRECTV, Inc. breached the seamless
marketing agreement and 2) DIRECTV, Inc. engaged in unlawful and/or unfair
business practices, as defined in Section 17200, et seq. of the California
Business and Professions Code. This suit has since been removed to the United
States District Court, Central District of California. On September 16, 2002,
PST and GSS filed first amended counterclaims against DIRECTV, Inc. Among other
things, the first amended counterclaims added claims for 1) rescission of the
seamless marketing agreement on the ground of fraudulent inducement, 2) specific
performance of audit rights, and 3) 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
tortious interference that were alleged in the initial cross complaint. On
November 5, 2002 the court granted DIRECTV, Inc.'s motion to dismiss 1) the
specific performance claim and 2) the punitive damages allegations on the breach
of the implied covenant of good faith claim. The court denied DIRECTV, Inc.'s
motion to dismiss the implied covenant of good faith claim in its entirety.
DIRECTV, Inc. filed four summary judgment motions on September 11, 2002
against the 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 1)
the term of the agreement between the NRTC and DIRECTV, Inc., 2) the right of
first refusal as it relates to PST and GSS, 3) the right to distribute the
premiums, and 4) damages relating to the premiums, launch fees, and advanced
services claims. These motions were argued on May 5, 2003 and have been taken
under submission by the United States District Court, Central District of
California.
Pursuant to the court's order of December 17, 2002, the parties
stipulated on December 20, 2002 to participate in mediation proceedings presided
over by a mutually agreeable mediator. The mediation is ongoing.
Both of the NRTC's lawsuits against DIRECTV, Inc. have been
consolidated for discovery and pretrial purposes. All five lawsuits discussed
above, including both lawsuits brought by the NRTC, the
11
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
class action, and PST'sand GSS' lawsuit (but excluding the indemnity lawsuits),
are pending before the same judge. The court has set a trial date of June 3,
2003, although it is not clear which of the lawsuits will be tried together.
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. We believe
that the ultimate liability, if any, with respect to these claims will not have
a material effect on our consolidated operations, cash flows, or financial
position.
9. New Accounting Pronouncements
On April 30, 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("FAS") No. 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This FAS amends
and clarifies various items and issues related to derivative instruments. We are
still studying the content of this FAS for any potential impacts to us.
10. 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., both of which are direct or indirect
subsidiaries of PM&C, are not guarantors of the notes ("Nonguarantor
Subsidiaries"). We believe separate financial statements and other disclosures
concerning the Guarantor Subsidiaries are not significant to an understanding of
their financial position, results of operations, and cash flows. 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
the consolidated reporting group.
12
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Subsidiary Guarantees (continued)
Condensed Consolidating Balance Sheets
(In thousands)
Guarantor Nonguarantor Adjustments/
As of March 31, 2003 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
------------- ------------ ------------ ------------ -------------
Assets:
Cash and cash equivalents $ 11,560 $ 3,561 $ 15,121
Accounts receivable, net 31,771 31,771
Other current assets 18,556 $ 7,241 4,795 30,592
------------- ------------ ------------ ------------ -------------
Total current assets 61,887 7,241 8,356 77,484
Property and equipment, net 66,957 66,957
Intangible assets, net 1,535,952 1,535,952
Other noncurrent assets 1,024,316 1,599,258 $(2,513,499) 110,075
------------- ------------ ------------ ------------ -------------
Total assets $ 2,689,112 $ 7,241 $ 1,607,614 $(2,513,499) $ 1,790,468
============= ============ ============ ============ =============
Liabilities and common stockholder's
equity
Current portion of long term debt $ 425 $ 3,382 $ 3,807
Accounts payable 11,433 11,433
Other current liabilities 124,459 3,225 127,684
------------- ------------ ------------ ------------ -------------
Total current liabilities 136,317 6,607 142,924
Long term debt - 412,196 412,196
Other noncurrent liabilities 44,194 58,450 102,644
------------- ------------ ------------ ------------ -------------
Total liabilities 180,511 477,253 657,764
Minority interest 2,343 2,343
Total common stockholder's equity 2,506,258 $ 7,241 1,130,361 $(2,513,499) 1,130,361
------------- ------------ ------------ ------------ -------------
Total liabilities and common
stockholder's equity $ 2,689,112 $ 7,241 $ 1,607,614 $(2,513,499) $ 1,790,468
============= ============ ============ ============ =============
13
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Subsidiary Guarantees (continued)
Condensed Consolidating Balance Sheets
(In thousands)
Guarantor Nonguarantor Adjustments/
As of December 31, 2002 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
------------- ------------ ------------- ------------- -------------
Assets:
Cash and cash equivalents $ 12,237 $ 12,237
Accounts receivable, net 36,005 36,005
Other current assets 36,387 $ (7,275) $ 5,006 34,118
------------- ------------ ------------- ------------- -------------
Total current assets 84,629 (7,275) 5,006 82,360
Property and equipment, net 66,977 66,977
Intangible assets, net 1,564,874 1,564,874
Other noncurrent assets 1,027,186 1,631,178 $(2,546,422) 111,942
------------- ------------ ------------- ------------- -------------
Total assets $ 2,743,666 $ (7,275) $ 1,636,184 $(2,546,422) $ 1,826,153
============= ============ ============= ============= =============
Liabilities and common
stockholder's equity
Current portion of long term debt $ 2,249 $ 3,382 $ 5,631
Accounts payable 14,899 14,899
Other current liabilities 125,706 6,441 132,147
------------- ------------ ------------- ------------- -------------
Total current liabilities 142,854 9,823 152,677
Long term debt 425 412,941 413,366
Other noncurrent liabilities 44,533 59,895 104,428
------------- ------------ ------------- ------------- -------------
Total liabilities 187,812 482,659 670,471
Minority interest 2,157 2,157
Total common stockholder's
equity 2,553,697 $ (7,275) 1,153,525 $(2,546,422) 1,153,525
------------- ------------ ------------- ------------- -------------
Total liabilities and common
stockholder's equity $ 2,743,666 $ (7,275) $ 1,636,184 $(2,546,422) $ 1,826,153
============= ============ ============= ============= =============
14
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
(In thousands)
Guarantor Nonguarantor Adjustments/
For the Three Months ended March 31, 2003 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
------------- ------------ --------- ------------ ------------
Net revenues:
DBS $ 202,224 $ 3,748 $ (426) $ 205,546
Other 7,284 7,284
------------- ------------ --------- ------------ ------------
Total net revenues 209,508 3,748 (426) 212,830
------------- ------------ --------- ------------ ------------
Operating expenses:
DBS
Programming 91,346 1,910 93,256
Other subscriber related expenses 44,675 44,675
------------- ------------ --------- ------------ ------------
Direct operating expenses (excluding
depreciation and amortization shown
below) 136,021 1,910 137,931
Promotions and incentives 2,878 2,878
Advertising and selling (8) 6,160 (426) 5,726
General and administrative 6,274 99 6,373
Depreciation and amortization 41,951 35 41,986
------------- ------------ --------- ------------ ------------
Total DBS 187,116 8,204 (426) 194,894
Other operating expenses 7,674 $ 9,199 16,873
------------- ------------ --------- ------------ ------------
Income (loss) from operations 14,718 (4,456) (9,199) 1,063
Interest expense (209) (9,666) (9,875)
Other 103 1,241 1,344
------------- ------------ --------- ------------ ------------
Income (loss) before equity in
affiliates, income taxes, and
discontinued operations 14,612 (4,456) (17,624) (7,468)
Equity in earnings (losses) of affiliates (9,017) 10,156 (1,139)
Benefit for income taxes (2,817) (2,817)
------------- ------------ --------- ------------ ------------
Income (loss) before discontinued
operations 5,595 (4,456) (4,651) (1,139) (4,651)
Discontinued operations, net of taxes 4,454 4,454 (4,454) 4,454
------------- ------------ --------- ------------ ------------
Net income (loss) $ 10,049 $ (4,456) $ (197) $ (5,593) $ (197)
============= ============ ========= ============ ============
15
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
(In thousands)
Guaranto Nonguarantor Adjustments/
For the Three Months ended March 31, 2002 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
------------ ------------ ---------- ------------ ------------
Net revenues:
DBS $ 220,482 $ 4,125 $ (9,883) $ 214,724
Other 6,495 6,495
------------ ------------ ---------- ------------ ------------
Total net revenues 226,977 4,125 (9,883) 221,219
------------ ------------ ---------- ------------ ------------
Operating expenses:
DBS
Programming 94,287 2,031 96,318
Other subscriber related expenses 51,741 51,741
------------ ------------ ---------- ------------ ------------
Direct operating expenses (excluding
depreciation and amortization shown
below) 146,028 2,031 148,059
Promotions and incentives 1,743 1,743
Advertising and selling 7,781 10,403 (9,883) 8,301
General and administrative 7,790 127 7,917
Depreciation and amortization 39,415 35 39,450
------------ ------------ ---------- ------------ ------------
Total DBS 202,757 12,596 (9,883) 205,470
Other operating expenses 7,348 $ 11,918 19,266
------------ ------------ ---------- ------------ ------------
Income (loss) from operations 16,872 (8,471) (11,918) (3,517)
Interest expense (282) (8,743) (9,025)
Other 43 1,163 1,206
------------ ------------ ---------- ------------ ------------
Income (loss) before equity in
affiliates, income taxes, and
discontinued operations 16,633 (8,471) (19,498) (11,336)
Equity in earnings (losses) of affiliates (2,987) 9,409 8,162 (14,584) -
Benefit for income taxes (4,160) (4,160)
------------ ------------ ---------- ------------ ------------
Income (loss) before discontinued
operations 13,646 938 (7,176) (14,584) (7,176)
Discontinued operations, net of taxes (433) (433) 433 (433)
------------ ------------ ---------- ------------ ------------
Net income (loss) 13,213 938 (7,609) (14,151) (7,609)
Other comprehensive income (2,146) (2,146) 2,146 (2,146)
------------ ------------ ---------- ------------ ------------
Comprehensive income (loss) $ 11,067 $ 938 $ (9,755) $ (12,005) $ (9,755)
============ ============ ========== ============ ============
16
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Cash Flows
(In thousands)
Guarantor Nonguarantor Adjustments/
For the Three Months ended March 31, 2003 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
------------ ------------ --------- ------------ ------------
Net cash provided (used) by
operating activities $ 27,969 $ (4,421) $ 936 $ 24,484
------------ ------------ --------- ------------ ------------
Cash flows from investing activities:
DBS equipment capitalized (5,384) (5,384)
Other capital expenditures (375) (375)
Proceeds from sale of broadcast station 10,965 10,965
Other 98 98
------------ ------------ --------- ------------ ------------
Net cash provided by investing activities 5,304 5,304
------------ ------------ --------- ------------ ------------
Cash flows from financing activities:
Repayments of term loan facility - (846) (846)
Repayments of other long term debt (2,249) (2,249)
Net advances from (to) affiliates 3,825 (4,774) (949)
Distributions to parent (36,525) (14,551) (28,280) $ 51,076 (28,280)
Distributions to subsidiaries (18,972) (5,313) 24,285
Contributions from parent 5,313 18,972 5,313 (24,285) 5,313
Contributions from subsidiaries 14,551 36,525 (51,076)
Other 107 107
------------ ------------ --------- ------------ ------------
Net cash provided by (used for)
financing activities (33,950) 4,421 2,625 (26,904)
------------ ------------ --------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents (677) 3,561 2,884
Cash and cash equivalents, beginning of year 12,237 12,237
------------ ------------ --------- ------------ ------------
Cash and cash equivalents, end of period $ 11,560 $ - $ 3,561 $ - $ 15,121
============ ============ ========= ============ ============
17
PEGASUS MEDIA & COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Cash Flows
(In thousands)
Guarantor Nonguarantor Adjustments/
For the Three Months ended March 31, 2002 Subsidiaries Subsidiaries PM&C Eliminations Consolidated
------------ ------------ ----------- ------------ ------------
Net cash provided by (used for)
operating activities $ 28,406 $ 973 $ (10,110) $ 19,269
------------ ------------ ----------- ------------ ------------
Cash flows from investing activities:
DBS equipment capitalized (6,039) (6,039)
Capital expenditures (1,132) (1,132)
------------ ------------ ----------- ------------ ------------
Net cash used for investing activities (7,171) (7,171)
------------ ------------ ----------- ------------ ------------
Cash flows from financing activities:
Net repayments of term loan facility (687) (687)
Repayment of revolving credit facility (80,000) (80,000)
Repayments of other long term debt (5,852) (5,852)
Net advances from (to) affiliates 21,785 (22,009) (224)
Distributions to parent (161,180) (24,955) (48,352) $ 186,135 (48,352)
Distributions to subsidiaries (23,982) (36,000) 59,982
Contributions from parent 36,000 23,982 36,000 (59,982) 36,000
Contributions from subsidiaries 24,955 161,180 (186,135)
Other 51 (22) 29
------------ ------------ ----------- ------------ ------------
Net cash provided by (used for)
financing activities (108,223) (973) 10,110 (99,086)
------------ ------------ ----------- ------------ ------------
Net decrease in cash and cash
equivalents (86,988) (86,988)
Cash and cash equivalents, beginning of year 99,710 99,710
------------ ------------ ----------- ------------ ------------
Cash and cash equivalents, end of period $ 12,722 $ - $ - $ - $ 12,722
============ ============ =========== ============ ============
18
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, although not all forward looking statements contain these
identifying words. Such statements reflect our current views with respect to
future events and are subject to unknown risks, uncertainties, and other factors
that may cause actual results to differ materially from those contemplated in
such forward looking statements. Such factors include the risks described
elsewhere in this report and, among others, the following: general economic and
business conditions, both nationally, internationally, and in the regions in
which we operate; catastrophic events, including acts of terrorism;
relationships with and events affecting third parties like DIRECTV, Inc. and the
National Rural Telecommunications Cooperative; litigation with DIRECTV, Inc.;
the potential sale of DIRECTV, Inc.; demographic changes; existing government
regulations, and changes in, or the failure to comply with, government
regulations; competition, including our ability to offer local programming in
our direct broadcast satellite markets; the loss of any significant numbers of
subscribers or viewers; changes in business strategy or development plans; the
cost of pursuing new business initiatives; an expansion of land based
communications systems; technological developments and difficulties; 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 other reports 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, 2002. Readers are cautioned not
to place undue reliance on these forward looking statements, which speak only as
of the date hereof. We do not undertake any obligation to publicly release any
revisions to these forward looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
The following discussion of our results of operations should be read in
conjunction with the consolidated financial statements and related notes herein.
General
All references to "we," "us," and "our" refer to Pegasus Media &
Communications, Inc., together with its direct and indirect 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.
Our principal business is the DBS business. The following sections
focus on our DBS business, as this is our only significant business segment.
19
PEGASUS MEDIA & COMMUNICATIONS, INC.
Significant Risks and Uncertainties
We hold the principal operations for PSC and PCC, and each primarily
relies on us as a source of cash in primarily meeting their respective debt and
preferred stock obligations. 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 and subscriber acquisition costs
("SAC"), 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 in litigation against DIRECTV, Inc. An outcome in this
litigation that is unfavorable to us could have a material adverse effect on our
DBS business. Our litigation with DIRECTV, Inc. may have a bearing on our
estimation of the useful lives of our DBS rights assets. See Note 8 of the Notes
to Consolidated Financial Statements for information regarding this litigation.
Because we are a distributor of DIRECTV, we may be adversely affected
by any material adverse changes in the assets, financial condition, programming,
technological capabilities, or services of DIRECTV, Inc.
For the three months ended March 31, 2003 and 2002, the DBS business
had income from operations of $10.7 million and $9.3 million, respectively. We
attribute the improvement in the current year to our DBS business strategy.
Continued improvement in results from operations will in large part depend upon
our obtaining a sufficient number of quality subscribers, retention of these
subscribers for extended periods of time, and improving margins from them. While
our DBS business strategy has resulted in an increase in income from operations,
it has also resulted in decreases in the number of subscribers for the three
months ended March 31, 2003 and a decrease in DBS net revenues for the three
months ended March 31, 2003 compared to the three months ended March 31, 2002.
In the near term, our DBS business strategy may result in further decreases in
the number of our DBS subscribers and our DBS net revenues when compared to
prior periods, but we believe that our results from operations for the DBS
business will not be significantly impacted. We cannot make any assurances that
this will be the case, however. If a disproportionate number of subscribers
churn relative to the number of quality subscribers we enroll, we are not able
to enroll a sufficient number of quality subscribers, and/or we are not able to
maintain adequate margins from our subscribers, our results from operations may
not improve or improved results that do occur may not be sustained.
In the first quarter 2003, a major rating agency reduced the corporate
credit rating for us and our subsidiaries from "B" to "CCC+." We believe that
this downgrading will not have much of an impact on our liquidity and capital
resources because our rating before the downgrade was generally considered
speculative. Availability of external sources of liquidity and capital resources
to us is more impacted by the tightening of capital markets: 1) in general due
to general economic conditions, and 2) in particular to the cable and satellite
sector, in which we are included, as a result of uncertainties and developments
within the sector. Also, it is likely that the outcome of our ongoing litigation
with DIRECTV, Inc. will influence our credit ratings and access to capital.
20
PEGASUS MEDIA & COMMUNICATIONS, INC.
DBS Business Strategy
Our DBS business strategy focuses on: increasing the quality of new
subscribers and the composition of our existing subscriber base; enhancing the
returns on investment in our subscribers; generating free cash flow; and
preserving liquidity. The primary focus of our "Quality First" strategy is on
improving the quality and creditworthiness of our subscriber base. Our goal is
to acquire and retain high quality subscribers, to cause average subscribers to
become high quality subscribers, and to reduce acquisition and retention
investments in low quality subscribers. To achieve these goals, our subscriber
acquisition, development, and retention efforts focus on subscribers who are
less likely to churn and who are more likely to subscribe to more programming
services, including local and network programming, and to use multiple
receivers. Our strategy includes a significant emphasis on credit scoring of
potential subscribers, adding and upgrading subscribers in markets where DIRECTV
offers local channels, and who subscribe to multiple receivers. It is our
experience that these attributes are closely correlated with lower churn,
increased cash flow, and higher returns on investment. Our strategy also
includes the use of behavioral and predictive scores to group subscribers and to
design retention campaigns, upgrade offers, and consumer offers consistent with
our emphasis on acquiring and retaining high quality subscribers and reducing
our investment in lower quality subscribers.
Results of Operations
In this section, amounts and changes specified are for the three months
ended March 31, 2003 compared to the three months ended March 31, 2002, unless
indicated otherwise. With respect to our results from operations, we focus on
our DBS business, as this is our only significant business.
DBS
Subscribers:
We had 1,275,828 subscribers at March 31, 2003, a net decrease of
32,642 from the number of subscribers at December 31, 2002. The average number
of subscribers outstanding during the three months ended March 31, 2003 and 2002
was 1,293,416 and 1,378,877, respectively. Gross subscriber additions for the
three months ended March 31, 2003 and 2002 were 38,990 and 64,549, respectively.
We believe that the primary reasons for the net decrease in the number of
subscribers during the three months ended March 31, 2003 were: our continued
focus in 2003 on enrolling more creditworthy subscribers; our unwillingness to
aggressively invest retention amounts in low margin subscribers; 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,
Inc. does not offer local channels; the effect of general economic conditions on
our subscribers and potential subscribers; and a reduction in the number of new
subscribers we obtain from national retail chains with which we do not have
compensation arrangements.
Revenues:
Revenues decreased $9.2 million to $205.5 million primarily due to: a
decrease in our recurring subscription revenue from our core, a la carte, and
premium package offerings of $11.9 million; and a decrease in pay per view
revenues of $3.8 million. Revenue decreases were partially offset by $5.3
million in revenues from a royalty fee introduced in July 2002 that passes on to
subscribers a portion of the royalty costs charged to us in providing DIRECTV
service. The $11.9 million decrease from our core, a la carte, and premium
package offerings is primarily due to the net reduction in total subscribers
described above.
21
PEGASUS MEDIA & COMMUNICATIONS, INC.
Direct Operating Expenses:
Programming expense decreased $3.1 million to $93.3 million primarily
due to: a decrease in the cost of our core, a la carte, and premium package
offerings of $3.5 million; and a decrease in the cost of our pay per view
programming of $1.5 million. The decrease in the cost of our core, a la carte,
and premium package offerings was primarily due to the net reduction in total
subscribers, offset by a 7% increase, effective January 2003, in certain per
subscriber programming costs charged to us by the National Rural
Telecommunications Cooperative ("NRTC"). We also experienced a 10% increase,
effective January 2003, in certain pay per view programming costs charged to us
by the NRTC. These net decreases to programming expense were also partially
offset by our estimate of patronage to be received from the NRTC being $3.3
million less in the first quarter 2003, as compared to the first quarter 2002.
Other subscriber related expenses decreased $7.1 million to $44.7
million primarily due to a decrease in bad debt expense of $6.6 million. The
decrease in bad debt expense was mainly due to our continued focus on improving
the quality of our subscriber base that we obtain and retain and improved
account collection efforts.
Other Operating Expenses:
Promotion and incentives and advertising and selling expenses on our
statement of operations and comprehensive loss constitute our expensed SAC. Our
expensed SAC is the gross amount of SAC we incur less amounts of SAC deferred
and/or capitalized. Commissions, subsidies, and promotional programming are
costs included in SAC that are incurred only when new subscribers are enrolled.
Commissions and subsidies are the substantial cost elements within our SAC.
Amounts associated with SAC are contained in the following table:
SAC (in thousands): Three Months Ended
March 31,
2003 2002
----------- -----------
Expensed:
Promotions and incentives $ 2,878 $ 1,743
Advertising and selling 5,726 8,301
----------- -----------
Total expensed 8,604 10,044
Deferred 6,201 9,607
Capitalized 5,430 6,039
----------- -----------
Gross SAC incurred $ 20,235 $ 25,690
=========== ===========
Gross SAC decreased $5.5 million primarily due to a lesser amount of
gross subscriber additions in the 2003 period compared to the 2002 period.
Promotions and incentives expense increased in the 2003 period as compared to
2002, because in 2002 a greater percentage of the related costs were eligible
for either deferral or capitalization. In accordance with our policy whereby we
expense SAC in excess of amounts eligible to be deferred, we incurred more of
these excess promotions and incentive costs that were expensed than those
incurred in the 2002 period. Based on gross subscriber additions for the three
months ended March 31, 2003 and 2002 of 38,990 and 64,549, respectively, total
SAC per gross subscriber added was $519 and $398 for the three months ended
March 31, 2003 and 2002, respectively. The increase in the 2003 amount is
primarily due to: the disproportionate impact our sales administration costs and
other indirect SAC expenses have on the SAC per gross subscriber addition metric
when divided by a substantially lesser number of gross subscriber additions; a
greater percentage of our gross subscriber additions taking more than one
receiver that adds incrementally to the per subscriber cost;
22
PEGASUS MEDIA & COMMUNICATIONS, INC.
a lesser percentagein 2003 compared to 2002 of our gross subscriber additions
coming from national retailers with which we do not have compensation
arrangements; and the higher per subscriber costs associated with enrolling more
creditworthy subscribers and the proportionately greater number of such
subscribers enrolled in 2003 than in 2002.
General and administrative expenses decreased $1.5 million to $6.4
million primarily due to reduced expenditures for communication services
resulting from a renegotiation at the end of March 2002 of the related contract
for such services and the continuing effects of broad based cost reduction
efforts initiated in 2002 that were not fully in place in the first quarter
2002.
Depreciation and amortization increased $2.5 million to $42.0 million
primarily due to additional depreciation of capitalized SAC and amortization of
deferred SAC in 2003 compared to 2002. Depreciation and amortization included
depreciation of promotions and incentives capitalized of $4.4 million and $2.7
million for 2003 and 2002, respectively, and aggregate amortization of
promotions and incentives and advertising and selling costs deferred of $7.7
million and $5.8 million for 2003 and 2002, respectively.
Other Statement of Operations and Comprehensive Loss Items
Other operating expenses, net decreased $1.8 million to $6.2 million
primarily due to write off of asset costs in 2002 of $1.7 million due to
impairment.
The income tax benefit on the loss from continuing operations decreased
$1.3 million to $2.8 million due to a reduced amount of pretax losses in the
current year compared to the corresponding prior year period.
Discontinued operations consisted of a broadcast television station
located in Mobile, Alabama and two stations located in Mississippi. In March
2003, we completed the sale of our Mobile, Alabama broadcast television station
to an unaffiliated party for a purchase price of $11.5 million in cash and
recorded as of March 31, 2003 a gain on the sale of $7.6 million. The ultimate
gain on the sale is subject to later adjustment for contract termination costs
and fees and other services related to the sale that are yet to be finalized.
Prior to March 31, 2003, we had established our intent and ability to dispose of
two of our broadcast television stations that are located in Mississippi. In
April 2003, we transferred an entity holding the operating licenses for the
stations to PSC for aggregate consideration of $5.4 million. On April 30, 2003,
we sold the nonlicense assets and related liabilities of the stations to an
unaffiliated party for an aggregate of $8.1 million. Gain or loss on the sale of
the nonlicense assets and related liabilities and transfer of the operating
licenses, if any, is pending subject to final determination of the carrying
amounts of assets and liabilities related to these transactions. Aggregate
revenues and pretax income (loss), including a net gain of $7.6 million in 2003,
for discontinued operations were as follows (in thousands):
Three Months Ended
March 31,
2003 2002
-------- --------
Revenues $1,153 $1,348
Pretax income (loss) 7,183 (698)
EBITDA
DBS EBITDA was $52.6 and $48.7 million for three months ended
March 31, 2003 and 2002, respectively. We present DBS EBITDA because the DBS
business is our only significant business and
23
PEGASUS MEDIA & COMMUNICATIONS, INC.
this business forms the principalportion of our results of operations. The
calculation of DBS EBITDA and a reconciliation of DBS EBITDA to our most
comparable GAAP financial measure of loss from operations follows (in
thousands). All amounts are as contained on our consolidated statement of
operations and comprehensive loss.
For the Three Months
Ended Mach 31,
2003 2002
---------- ----------
DBS revenues $ 205,546 $ 214,724
DBS operating expenses, excluding
depreciation andamortization (152,908) (166,020)
---------- ----------
DBS EBITDA 52,638 48,704
DBS depreciation and amortization (41,986) (39,450)
Broadcast, net (321) (765)
Corporate expenses (3,103) (4,031)
Other operating expenses, net (6,165) (7,975)
---------- ----------
Income (loss) from operations $ 1,063 $ (3,517)
========== ==========
We use DBS EBITDA to evaluate the operating performance of our DBS segment.
We believe that DBS EBITDA is a measure of performance used by some investors,
equity analysts, lenders, and others who follow our industry to make informed
decisions. Multiples of current or projected DBS EBITDA are used by some to
estimate current or prospective enterprise value. We also believe that DBS
EBITDA is a common measure used to compare our operating performance and
enterprise value to other communications, entertainment, and media service
providers. DBS EBITDA is not, and should not be considered, an alternative to
income from operations, net income, or any other measure for determining our
operating performance, as determined under generally accepted accounting
principles. Although EBITDA is a common measure used by other companies, our
calculation of DBS EBITDA may not be comparable with that of others.
New Accounting Pronouncements
On April 30, 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("FAS") No. 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This FAS amends
and clarifies various items and issues related to derivative instruments. We are
still studying the content of this FAS for any potential impacts to us.
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
Senior Vice President of Finance (the principal financial officer), to determine
the effectiveness of our disclosure controls and procedures. Based on this
evaluation, the Chief Executive Officer and the Senior Vice President of Finance
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
24
PEGASUS MEDIA & COMMUNICATIONS, INC.
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.
25
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 8 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 our Annual Report on form 10-K during the fiscal
year disclosing some or all of the legal proceedings referenced above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit
Number
99.1* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act.
99.2* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act.
- -----------------
* Filed herewith.
b) Reports on Form 8-K
On January 27, 2003, we filed a Current Report on Form 8-K
dated January 16, 2003 reporting under Item 5 that in connection with
our litigation with DIRECTV, Inc. that our subsidiaries Pegasus
Satellite Television, Inc. and Golden Sky Systems, Inc. had entered
into a stipulation with DIRECTV, Inc. and other parties to the
litigation. The stipulation, which was filed as an exhibit to the Form
8-K, provided for the extension of certain pre-trial and trial
deadlines while the parties were participating in mediation with a
court approved mediator.
26
PEGASUS MEDIA & COMMUNICATIONS, INC.
SIGNATURES
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.
May 14, 2003 By: /s/ Joseph W. Pooler, Jr.
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Date Joseph W. Pooler, Jr.
Senior Vice President of Finance
(Chief financial and accounting officer)
27
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
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 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.
May 14, 2003
/s/ Marshall W. Pagon
Marshall W. Pagon
Chief Executive Officer
CERTIFICATION
I, Joseph W. Pooler, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-K 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 annual 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
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 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.
May 14, 2003
/s/ Joseph W. Pooler, Jr.
Joseph W. Pooler, Jr.
Senior Vice President of Finance
PEGASUS MEDIA & COMMUNICATIONS, INC.
Exhibit Index
Exhibit Number
99.1* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act.
99.2* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act.
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* Filed herewith.