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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 September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 0-32383
PEGASUS COMMUNICATIONS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-3070336
------------------------------- ----------------------
(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 [X] No [ ]
Number of shares of each class of the registrant's common stock outstanding
as of December 8, 2004:
Class A Common Stock, $0.01 par value 10,032,888
(excluding 1,315,208 shares held by
Pegasus Satellite Communications, Inc.
and 240,003 held by consolidated
subsidiaries)
Class B Common Stock, $0.01 par value 1,832,760
Non-Voting Common Stock, $0.01 par value -
PEGASUS COMMUNICATIONS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
September 30, 2004 and December 31, 2003 4
Consolidated Statements of Operations and Comprehensive Loss
Three months ended September 30, 2004 and 2003 5
Consolidated Statements of Operations and Comprehensive Loss
Nine months ended September 30, 2004 and 2003 6
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2004 and 2003 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 27
Item 4. Controls and Procedures 41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 43
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of
Equity Securities 43
Item 3. Defaults Upon Senior Securities 43
Item 6. Exhibits 44
Signatures 45
Certifications 46
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited financial statements herein include the accounts of
Pegasus Communications Corporation and certain of its subsidiaries on a
consolidated basis. As discussed in Note 1 to the Consolidated Financial
Statements, on June 2, 2004 ("Filing Date"), Pegasus Satellite
Communications, Inc. ("Pegasus Satellite"), Pegasus Media & Communications,
Inc., and certain of their direct and indirect subsidiaries filed a
voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code
in the U.S. Bankruptcy Court, District of Maine ("Bankruptcy Court"). The
Chapter 11 filing does not include Pegasus Communications or its direct
subsidiaries other than Pegasus Satellite. Under generally accepted
accounting principles, the financial results of Pegasus Satellite are
included in Pegasus Communications' consolidated results through the Filing
Date. Subsequent to the Filing Date, Pegasus Communications no longer
consolidates Pegasus Satellite's financial results in its consolidated
financial statements and Pegasus Satellite has been deconsolidated from its
balance sheet. Pegasus Communications' negative investment in Pegasus
Satellite of $412.7 million is presented using the cost method, and it no
longer records earnings or losses from Pegasus Satellite's operations
subsequent to the Filing Date.
3
PEGASUS COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
September 30, December 31,
2004 2003
------------- -------------
Cash and cash equivalents $ 55,883 $ 82,921
Restricted cash 2,101 62,517
Accounts receivable, net
Trade 71 4,737
Other 9,030 693
Prepaid expenses 1,712 1,765
Other current assets 51 3,348
Assets of discontinued operations - current - 45,356
------------- -------------
Total current assets 68,848 201,337
Property and equipment, net 18,177 32,079
Intangible assets, net 146,353 171,231
Other noncurrent assets 1,502 63,094
Assets of discontinued operations - noncurrent - 1,567,005
------------- -------------
Total $ 234,880 $ 2,034,746
============= =============
Current liabilities:
Current portion of long term debt $ 124 $ 3,132
Taxes payable 7,205 -
Accounts payable 414 3,893
Accrued interest 64 34,402
Other accrued expenses 9,185 9,319
Other current liabilities 12 3,933
Liabilities of discontinued operations - current - 117,694
------------- -------------
Total current liabilities 17,004 172,373
Investment in Pegasus Satellite Communications, Inc. 412,684 -
Long term debt 8,195 1,385,071
Mandatorily redeemable preferred stock - 85,512
Other noncurrent liabilities 37 68,983
Liabilities of discontinued operations - noncurrent - 1,524
------------- -------------
Total liabilities 437,920 1,713,463
------------- -------------
Commitments and contingent liabilities (see Note 12)
Redeemable preferred stocks 217,439 215,501
Minority interest 2,721 452
Common stockholders' equity (deficit):
Common stock 134 127
Other common stockholders' equity (deficit) (423,334) 105,203
------------- -------------
Total common stockholders' equity (deficit) (423,200) 105,330
------------- -------------
Total $ 234,880 $ 2,034,746
============= =============
See accompanying notes to consolidated financial statements
4
PEGASUS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(unaudited)
Three Months Ended September 30,
----------------------------------
2004 2003
--------------- ---------------
(Restated-see
Note 14)
Net revenues:
Broadcast television $ - $ 7,443
Other operations 241 201
--------------- ---------------
Total net revenues 241 7,644
Operating expenses:
Broadcast television expenses - 7,020
Corporate, development, and other operations 1,638 4,085
Corporate, development, and other operations
depreciation and amortization 3,908 4,067
Other operating expenses 4,156 1,919
--------------- ---------------
Loss from operations (9,461) (9,447)
Interest expense (197) (1,582)
Interest income 228 248
Other nonoperating income, net - 208
--------------- ---------------
Loss before discontinued operations and net
expense for income taxes (9,430) (10,573)
Net expense from income taxes (1) -
--------------- ---------------
Loss before discontinued operations (9,431) (10,573)
Discontinued operations:
Loss from discontinued operations (including
gain on disposal of $4,831 and net of income tax
expense of $865 in 2003) - (30,612)
--------------- ---------------
Net loss $ (9,431) $ (41,185)
=============== ===============
Comprehensive loss $ (9,431) $ (41,185)
=============== ===============
Basic and diluted per common share amounts:
Loss from continuing operations, including $3,182
and $3,185, respectively, representing preferred
stock dividends, deemed dividends, and accretion $ (0.97) $ (1.19)
Discontinued operations - (2.66)
--------------- ---------------
Net loss applicable to common shares $ (0.97) $ (3.85)
=============== ===============
Weighted average number of common shares outstanding 13,014 11,518
=============== ===============
See accompanying notes to consolidated financial statements
5
PEGASUS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(unaudited)
Nine Months Ended September 30,
---------------------------------
2004 2003
--------------- ---------------
(Restated-see
Note 14)
Net revenues:
Broadcast television $ 13,206 $ 22,868
Other operations 727 702
--------------- ---------------
Total net revenues 13,933 23,570
Operating expenses:
Broadcast television expenses 11,489 22,154
Corporate, development, and other operations 11,113 12,278
Corporate, development, and other operations
depreciation and amortization 11,927 12,247
Other operating expenses 21,181 11,687
--------------- ---------------
Loss from operations (41,777) (34,796)
Interest expense (3,549) (3,149)
Interest income 834 518
Other nonoperating (loss) income, net (5) 2,735
--------------- ---------------
Loss before equity in affiliates, discontinued
operations, cumulative effect of consolidating
variable interest entities, and net expense for
income taxes (44,497) (34,692)
Equity in earnings of affiliates - 161
Net expense for income taxes (1) -
--------------- ---------------
Loss before discontinued operations and cumulative
effect of consolidating variable interest entities (44,498) (34,531)
Discontinued operations:
Loss from discontinued operations (including gain on
disposal of $9,727 and net of income tax expense
of $878 in 2003) (490,621) (78,748)
--------------- ---------------
Loss before cumulative effect of consolidating
variable interest entities (535,119) (113,279)
Cumulative effect of consolidating variable interest entities (2,127) -
--------------- ---------------
Net loss $ (537,246) $ (113,279)
=============== ===============
Comprehensive loss $ (537,246) $ (113,279)
=============== ===============
Basic and diluted per common share amounts:
Loss from continuing operations, including $5,103 and
$16,671, respectively, representing preferred stock
dividends, deemed dividends, and accretion $ (4.08) $ (4.48)
Discontinued operations (40.40) (6.88)
Cumulative effect of consolidating variable interest entities (.18) -
--------------- ---------------
Net loss applicable to common shares $ (44.66) $ (11.36)
=============== ===============
Weighted average number of common shares outstanding 12,144 11,438
=============== ===============
See accompanying notes to consolidated financial statements
6
PEGASUS COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended September 30,
---------------------------------
2004 2003
--------------- ---------------
Net cash provided by (used for) operating activities $ (3,155) $ 4,065
--------------- ---------------
Cash flows from investing activities:
Direct broadcast satellite equipment capitalized (4,436) (16,528)
Other capital expenditures (2,192) (2,102)
Proceeds from sale of broadcast station - 21,593
Purchases of intangible assets (4,322) (341)
Other 311 492
--------------- ---------------
Net cash provided by (used for) investing activities (10,639) 3,114
--------------- ---------------
Cash flows from financing activities:
Borrowings on term loan facilities - 100,000
Repayments of term loan facilities (750) (4,074)
Repayment of notes - (67,895)
Repayments of other long term debt (108) (2,339)
Borrowings on revolving credit facility 18,000 43,500
Cash received from exchange of notes - 1,459
Purchases of common stock (1,210) (5,509)
Restricted cash (5,142) (60,269)
Debt financing costs (2,154) (11,163)
Other 571 10
--------------- ---------------
Net cash provided by (used for) financing activities 9,207 (6,280)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (4,587) 899
Net decrease in cash and cash equivalents - reclassification of
Pegasus Satellite Communications, Inc. to the cost method (22,451) -
Cash and cash equivalents, beginning of year 82,921 59,814
--------------- ---------------
Cash and cash equivalents, end of period $ 55,883 $ 60,713
=============== ===============
See accompanying notes to consolidated financial statements
7
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
All references to "we," "us," and "our" and "Pegasus Communications
Corporation" refer to Pegasus Communications Corporation, together with its
direct and indirect consolidated subsidiaries. "Pegasus Communications" refers
to Pegasus Communications Corporation individually as a separate entity.
"Pegasus Development" and "Pegasus Real Estate" refer to Pegasus Development
Corporation and Pegasus Real Estate Company, respectively, wholly owned
subsidiaries of Pegasus Communications. "Pegasus Satellite" refers to Pegasus
Satellite Communications, Inc., a wholly owned, deconsolidated subsidiary of
Pegasus Communications. "Pegasus Media" refers to Pegasus Media &
Communications, Inc., a wholly owned subsidiary of Pegasus Satellite
Communications, Inc. Other terms used are defined as necessary where they first
appear.
The unaudited financial statements herein include the accounts of
Pegasus Communications and certain of its subsidiaries on a consolidated basis.
As discussed below, on June 2, 2004 ("Filing Date"), Pegasus Satellite, Pegasus
Media, and certain of their direct and indirect subsidiaries (collectively
referred to herein as the "Debtors") filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code ("Bankruptcy Code") in the U.S.
Bankruptcy Court, District of Maine ("Bankruptcy Court"). The Chapter 11 filing
does not include Pegasus Communications or its direct subsidiaries other than
Pegasus Satellite. Under generally accepted accounting principles, the financial
results of Pegasus Satellite are included in our consolidated results through
the Filing Date. Subsequent to the Filing Date, we no longer consolidate Pegasus
Satellite's financial results in our consolidated financial statements and
Pegasus Satellite has been deconsolidated from our balance sheet. As of the
Filing Date, our negative investment in Pegasus Satellite of $412.7 million is
presented using the cost method, and we no longer record earnings or losses from
Pegasus Satellite's operations subsequent to the Filing Date. Furthermore, the
results of operations of Pegasus Satellite Television, Inc. (a wholly owned
subsidiary of Pegasus Media & Communications and one of the Debtor entities) are
included in discontinued operations in the accompanying financial statements of
Pegasus Communications Corporation and Pegasus Satellite due to the sale of the
direct broadcast satellite business to DIRECTV effective August 27, 2004. See
Note 2. When Pegasus Satellite, Pegasus Media, and certain of their direct and
indirect subsidiaries emerge from the jurisdiction of the Bankruptcy Court, the
subsequent accounting and ultimate disposition of our negative investment in
Pegasus Satellite will be determined based on the terms of the reorganization
plan. See discussion under "Proceedings Under Chapter 11 of the Bankruptcy Code"
below.
All intercompany transactions and balances with consolidated
subsidiaries 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 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, including reclassifications related to the discontinued operations.
See Note 2.
DECONSOLIDATION OF PEGASUS SATELLITE
On June 2, 2004, Pegasus Satellite, Pegasus Media, and certain of their
direct and indirect subsidiaries filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code. As a result
8
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the Chapter 11 filing, the operations of these entities are subject to the
jurisdiction of the Bankruptcy Court and our access to the cash flows of Pegasus
Satellite is restricted. Since Pegasus Satellite's results are no longer
consolidated and we believe that it is not probable that we will be obligated to
fund any post-petition losses of Pegasus Satellite, any adjustments reflected in
Pegasus Satellite's financial statements subsequent to the Filing Date relating
to the recoverability and classification of recorded asset amounts,
classification of liabilities, or adjustments made for loss contingencies and
other matters are not expected to affect our results of operations. When Pegasus
Satellite, Pegasus Media, and certain of their direct and indirect subsidiaries
emerge from the jurisdiction of the Bankruptcy Court, the subsequent accounting
and ultimate disposition of our negative investment in Pegasus Satellite will be
determined based on the terms of the reorganization plan.
Prior to the deconsolidation of Pegasus Satellite, Pegasus
Communications had investments in Pegasus Satellite's common stock and its
cumulative exchangeable 12-3/4% preferred stock, as well as a note receivable
from Pegasus Satellite. As of the deconsolidation, we aggregated these
investments in the $412.7 million negative investment in Pegasus Satellite.
The following information presents our results of operations excluding
Pegasus Satellite for the periods presented:
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
(in thousands) 2004 2003 2004 2003
- -------------------------------------------- ---------- ---------- ---------- ----------
Net revenues $ 241 $ 201 $ 727 $ 702
Costs of other operations 1,158 182 2,707 524
Corporate and development expenses 480 826 2,468 2,543
Corporate, development, and other operations
depreciation and amortization 3,908 3,952 11,732 11,845
Other operating expenses, net 4,156 1,428 14,634 9,267
---------- ---------- ---------- ----------
Loss from operations (9,461) (6,187) (30,814) (23,477)
Interest expense (197) (194) (643) (584)
Interest income 228 120 536 310
Gain on sale of assets - 768 - 768
Equity in earnings of affiliates - - - 161
Net expense for income taxes (1) - (1) -
---------- ---------- ---------- ----------
Net loss $ (9,431) $ (5,493) $ (30,922) $ (22,822)
========== ========== ========== ==========
Net loss applicable to common shares $ (.97) $ (0.75) $ (2.97) $ (2.84)
========== ========== ========== ==========
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On June 2, 2004, Pegasus Satellite Television, Inc. and certain of its
affiliates involved in the distribution of DIRECTV direct broadcast satellite
service received notices from the National Rural Telecommunications Cooperative
("NRTC") purporting to terminate their exclusive distribution agreements with
the NRTC, which provided them with the exclusive rights to distribute DIRECTV
services in specified rural territories in the United States, and from DIRECTV,
Inc., purporting to terminate the Revised Seamless Consumer Program effective as
of August 31, 2004. Pegasus Satellite Television, Inc. and its affiliates also
received a related cash offer from DIRECTV on June 2, 2004 to purchase the
assets of Pegasus Satellite Television.
9
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As a result of actions taken by NRTC and DIRECTV, on June 2, 2004
certain subsidiaries of Pegasus Communications involved in the direct broadcast
satellite business and broadcast television business filed voluntary petitions
for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court, District of
Maine. A creditors committee representing the unsecured creditors of the Debtors
has been appointed by the Bankruptcy Court, and in accordance with the
provisions of the Bankruptcy Code, has the right to be heard on all matters that
come before the Bankruptcy Court. The appointed committee has played an
important role in the bankruptcy proceedings to date and the Debtors expect that
the committee will play an important role in the negotiation of the terms of any
plan or plans of reorganization. The Debtors are required to bear certain of the
committee's costs and expenses, including those of their counsel and advisors.
As provided by the Bankruptcy Code and as ordered by the Bankruptcy Court, the
Debtors have the exclusive right to propose a plan of reorganization until
January 10, 2005, at which time a hearing will be held to determine whether
Debtors' exclusivity period will be further extended. If the Debtors fail to
file a plan of reorganization during such exclusive period or any extension
thereof, or if such plan is not accepted by the requisite number of creditors
and equity holders entitled to vote on the plan, other parties in interest may
be permitted to propose their own plan(s) of reorganization for the Debtors.
On July 30, 2004, Pegasus Satellite Television, Inc. and certain of its
affiliates entered into an agreement ("Asset Purchase Agreement") to sell to
DIRECTV its direct broadcast satellite business for a purchase price of $937.7
million, consisting of $875.0 million in cash and $62.7 million in debt
forgiveness, subject to certain closing adjustments. Pegasus Satellite
Television, Inc. and DIRECTV also entered into a cooperation agreement
("Cooperation Agreement") to ensure an efficient transfer of Pegasus Satellite's
direct broadcast satellite business to DIRECTV pursuant to the Asset Purchase
Agreement. Also on July 30, 2004, Pegasus Satellite, Pegasus Communications,
DIRECTV, the NRTC, and the creditors committee entered into a certain settlement
agreement ("Global Settlement Agreement").
In the Global Settlement Agreement, Pegasus Satellite, DIRECTV, and the
NRTC agreed to dismiss all litigation between and among them with prejudice,
stay all pending litigation, and agreed not to commence any new litigation in
order to facilitate the sale of Pegasus Satellite's direct broadcast satellite
business to DIRECTV. In addition, Pegasus Communications agreed to release all
claims against DIRECTV (with the exception of claims relating to the
Personalized Media patent infringement litigation) and the NRTC related to the
Debtors' direct broadcast satellite business. In consideration for Pegasus
Communications agreeing to provide the releases described above and agreeing to
release its claims against the Debtors for certain amounts owed by the Debtors
to Pegasus Communications, the Debtors agreed to release certain claims that the
Debtors may have against Pegasus Communications and various related parties,
including potential preference and fraudulent transfer avoidance claims.
The Bankruptcy Court approved the sale of the direct broadcast satellite
business to DIRECTV on August 26, 2004, and the sale of the direct broadcast
satellite business to DIRECTV took place on August 27, 2004. Pursuant to the
Cooperation Agreement, Pegasus Satellite Television continued to provide
services to DIRECTV until October 31, 2004.
10
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to a letter agreement ("Letter Agreement") dated July 30, 2004,
entered into by and among Pegasus Communications, the creditors committee and
members of the creditors committee, the parties agreed to take all actions
necessary to support the Global Settlement Agreement and the transactions
contemplated thereby. The Letter Agreement also provided that Pegasus
Communications could acquire all of the Debtors' broadcast television assets for
$75 million in cash, subject to higher and better offers received from third
parties pursuant to certain auction procedures described in the agreement and
subject to Bankruptcy Court approval. Pegasus Communications is currently
negotiating a subscription agreement with the creditors committee, which would
serve as a stalking bid for the broadcast television assets. Pegasus
Communications has entered into an agreement with a third party investor whereby
the investor has committed to provide financing consisting of $55.0 million of
term loans and $5.0 million of revolving credit to a subsidiary to be created to
acquire the broadcast television assets. Security interests in substantially all
the borrowing subsidiary's assets, including ownership interests in its
subsidiaries and all ownership interests in the borrower, would secure the
loans. The commitment is subject to definitive documentation and other customary
closing conditions, including completion of the acquisition of the Debtors'
broadcast television assets. Subject to definitive agreement on the Pegasus
Communications Subscription Agreement, it is anticipated that an auction of the
broadcast assets will occur in early 2005 with Pegasus Communications making a
stalking bid for the broadcast television assets.
The equitable doctrine of substantive consolidation permits a bankruptcy
court to disregard the separateness of related entities, and to consolidate and
pool the entities' assets and liabilities and treat them as though held and
incurred by one entity where the interrelationship between the entities warrants
such consolidation. We believe that any effort to substantively consolidate
Pegasus Communications with the Debtors would be without merit. However, it is
possible that the Debtors' creditors may attempt to advance such claims or other
claims under piercing the corporate veil, alter ego, control person, or related
theories in the Debtors' bankruptcy proceeding. If the Bankruptcy Court were to
allow substantive consolidation of Pegasus Communications and the Debtors, or if
another court were to allow other related claims against Pegasus Communications,
it could have a material adverse effect on Pegasus Communications. Since the
Bankruptcy Court approved the transactions contemplated by the various
agreements entered into on July 30, 2004 referenced above and the sale of
Pegasus Satellite Television, Inc. to DIRECTV was completed, we believe the
releases entered into by the creditors committee and members of the committee
eliminate the risk of substantive consolidation and any potential claims that
could be made against Pegasus Communications by the Debtors.
We believe the ultimate resolution of the Debtors' financial
difficulties will not affect Pegasus Communications' ability to continue as a
going concern. Pegasus Communications is not dependent on cash flows from the
Debtors, nor do we believe that Pegasus Communications is contingently liable to
creditors or preferred stockholders of the Debtors. We believe that our
available resources will be sufficient to fund our operating, investing, and
financing requirements.
FINANCIAL INFORMATION OF PEGASUS SATELLITE
The following condensed consolidated financial statements of Pegasus
Satellite have been prepared in conformity with Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,"
which requires that liabilities subject to compromise by the Bankruptcy Court be
segregated from liabilities not subject to compromise, and that all transactions
directly associated with the reorganization be identified. Liabilities subject
to compromise include pre-petition unsecured claims that may be settled at
amounts that differ from those recorded in the Debtors' condensed consolidated
financial statements.
11
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The financial information is also prepared on a going concern basis,
which contemplates the realization of assets and the liquidation of liabilities
in the ordinary course of business. However, as a result of the bankruptcy
filings, such realization of assets and liquidation of liabilities is subject to
significant uncertainty. Since Pegasus Satellite's results will no longer be
consolidated with our results, and we believe it is not probable that we will be
obligated to fund any post-petition losses of Pegasus Satellite under principles
of consolidation, the material uncertainties related to the Debtors are not
expected to impact our income or loss from operations.
On August 27, 2004, Pegasus Satellite Television completed the sale of
its satellite television assets to DIRECTV, Inc., for a purchase price of $937.7
million, consisting of $875.0 million in cash and $62.7 million in debt
forgiveness, subject to certain closing adjustments. As a result of this sale,
the results of operations of Pegasus Satellite Television are classified as
discontinued operations. See Note 2.
PEGASUS SATELLITE COMMUNICATIONS, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
September December
(unaudited, in thousands) 30, 2004 31, 2003
- ------------------------------------------------------------ ------------- -------------
Current assets $ 457,636 $ 99,750
Property and equipment, net 13,095 16,794
Intangible assets, net 20,601 12,442
Other noncurrent assets 39,594 72,535
Assets of discontinued operations (see Note 2) 89,947 1,612,361
------------- -------------
Total assets $ 620,873 $ 1,813,882
============= =============
Liabilities not subject to compromise:
Current liabilities $ 30,322 $ 53.580
Long-term debt - 1,376,854
Redeemable preferred stock - 177,668
Other noncurrent liabilities 48,834 140,799
Liabilities of discontinued operations (see Note 2) 22,048 119,218
Liabilities subject to compromise (1) 971,398 -
Liabilities subject to compromise of discontinued operations
(see Note 2) 3,654 -
Minority interest - 452
Redeemable preferred stock 235,375 -
Stockholder's deficit (690,758) (54,689)
------------- -------------
Total liabilities and stockholder's deficit $ 620,873 $ 1,813,882
============= =============
(1) Liabilities subject to compromise consist of the following (in thousands):
Unsecured debt and interest $ 962,537
Accrued expenses and other 8,861
----------
$ 971,398
==========
12
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) Liabilities subject to compromise of discontinued operations consist of the
following (in thousands):
Accounts payable and accrued expenses $ 1,354
Contract rejection damages 2,300
----------
$ 3,654
==========
Pegasus Satellite's balance sheet includes a $28.1 million note payable
to us which is included in unsecured debt and interest in liabilities subject to
compromise, $122.0 million of redeemable preferred stock owned by us, and $9.9
million of Pegasus Satellite's ownership of our Class A common stock included in
other noncurrent assets.
PEGASUS SATELLITE COMMUNICATIONS, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
(unaudited, in thousands) 2004 2003 2004 2003
- --------------------------------------------- ---------- ---------- ---------- ----------
Broadcast television net revenues $ 7,583 $ 7,443 $ 23,568 $ 22,868
Broadcast television operating expenses 6,632 7,020 20,631 22,154
Other operating expenses, excluding
reorganization items 7,118 4,956 24,058 18,189
Reorganization items 44,701 - 59,315 -
---------- ---------- ---------- ----------
Loss from operations (50,868) (4,533) (80,436) (17,475)
Interest and other income (expense), net (947) (1,172) (4,226) 227
Net income tax expense - - - -
Loss from discontinued operations (see Note 2) (53,677) (34,591) (555,951) (85,732)
Cumulative effect of consolidating variable
interest entities - - (2,127) -
---------- ---------- ---------- ----------
Net loss $ (105,492) $ (40,296) $ (642,740) $ (102,980)
========== ========== ========== ==========
Reorganization items are expense or income items that are incurred or
realized by the Debtors because they are in reorganization. These items include,
but are not limited to, professional and other fees directly related to the
bankruptcy proceedings, loss accruals or gains or losses resulting from
reorganization activities, and interest earned on cash accumulated by the
Debtors.
Reorganization items were as follows for the period from the Filing Date
through September 30, 2004:
Legal services $ 8,661
Advisory services 3,163
Accelerated amortization of certain
deferred financing costs (1) 8,732
Accelerated amortization of certain
deferred financing costs and
prepayment penalties (2) 38,295
Other 464
----------
$ 59,315
==========
13
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) As required by SOP 90-7, the Debtors' pre-petition debt that is
subject to compromise was adjusted to the allowed amount.
Accordingly, the Debtors accelerated the amortization of debt
related premiums, discounts, and issuance costs and recorded a
net expense of approximately $8.7 million in reorganization
items in June 2004.
(2) On September 17, 2004, the Debtors repaid $515.9 million of
secured debt using the proceeds from the sale of the direct
satellite television assets. As a result of this repayment,
Pegasus Satellite accelerated amortization of debt related
premiums, discounts and issuance costs of $26.7 million and
accrued $11.6 million of prepayment penalties.
We continue to provide certain services to the Debtors, including
management, accounting, treasury, human resources, legal, and payroll services,
among others. The Debtors compensate us for such services based on our actual
cost to provide the services, which cost is allocated based on a methodology
specified in a Support Services Agreement approved by the Bankruptcy Court. For
the period from June 3, 2004 through September 30, 2004 these services
aggregated $13.0 million.
As of September 30, 2004, we had an $8.2 million receivable due from the
Debtors of which $1.0 million related to the Support Services Agreement and $7.2
million related to income tax obligations (see note 10).
As a result of the bankruptcy filings and related events, there can be
no assurance that the carrying value of the Debtors' assets will be realized or
that the Debtors' liabilities will be liquidated or settled for the amounts
recorded, including the Debtors' liabilities to us.
INVESTMENT IN AFFILIATE
Pegasus Development has a limited partnership interest in Pegasus PCS
Partners, L.P. ("Pegasus PCS Partners"). Pegasus Development has no control or
voice in Pegasus PCS Partners' matters. The general partner of Pegasus PCS
Partners is an entity beneficially controlled by Marshall W. Pagon, our Chairman
of the Board and Chief Executive Officer. Pegasus PCS Partners' assets as of
September 30, 2004 and December 31, 2003 consisted principally of senior
preferred equity interests in Pegasus Capital Holdings, LLC ("PCH LLC"), 71,000
Class A shares of Pegasus Communications, and 14,472 Class B shares of Pegasus
Communications. PCH LLC is an entity that is also beneficially controlled by
Marshall W. Pagon. As of December 31, 2003, PCH LLC's assets consisted of only
direct and indirect investments in 1,805,822 Class B shares of Pegasus
Communications. Therefore, Pegasus Development's investment in Pegasus PCS
Partners as of December 31, 2003 and Pegasus PCS Partners' investment in PCH LLC
as of September 30, 2004 are classified as equity. The approximate carrying and
fair values of Pegasus Development's investment in Pegasus PCS Partners at
December 31, 2003 are $12.0 million and $15.8 million, respectively, based on
our Class A common share price at such date. The approximate carrying and fair
values of Pegasus PCS Partners' investment in PCH LLC at September 30, 2004 are
$14.0 million and $10.6 million, respectively, based on our Class A common share
price at such date.
2. DISCONTINUED OPERATIONS
On August 27, 2004, Pegasus Satellite Television completed the sale of
certain satellite television assets to DIRECTV, Inc., for a purchase price of
$937.7 million, consisting of $875.0 million in cash and $62.7 million in debt
forgiveness, subject to certain closing adjustments. Following the closing,
Pegasus Satellite Television continued to provide certain services to DIRECTV,
Inc. to assure uninterrupted delivery of
14
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DIRECTV programming to Pegasus Satellite Television's former subscribers while
these subscribers were being transitioned over to DIRECTV, Inc. The migration
was completed as of October 31, 2004.
As discussed in Note 1, on June 2, 2004, Pegasus Satellite, Pegasus
Media, and certain of their direct and indirect subsidiaries filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code Under generally
accepted accounting principles, the financial results of Pegasus Satellite are
included in our consolidated results through the Filing Date. Subsequent to the
Filing Date, we no longer consolidate Pegasus Satellite's financial results in
our consolidated financial statements and Pegasus Satellite has been
deconsolidated from our balance sheet.
Pegasus Satellite recorded a pre-tax loss of $5.0 million on the sale
of certain satellite television assets. In addition, Pegasus Satellite adjusted
the carrying value of satellite television property and equipment and other
assets not sold to DIRECTV, Inc. to their net realizable value, which resulted
in a loss of $16.7 million, and also recorded retention and severance expenses
of $6.2 million. Pegasus Satellite also recorded an income tax expense of $10.7
million resulting from the sale of certain satellite television assets. These
amounts are reported as part of the loss from discontinued operations in Pegasus
Satellite's condensed consolidated statements of operations included in Note 1.
Pegasus Satellite Television's operations are classified as discontinued
in our statements of operations and comprehensive loss and Pegasus Satellites'
condensed consolidated statements of operations included in Note 1. In
accordance with Emerging Issues Task Force Issue No. 87-24, "Allocation of
Interest to Discontinued Operations," we and Pegasus Satellite allocated
interest expense to discontinued operations based on a pro rata calculation of
net assets of the discontinued business to consolidated net assets. Note that
this allocation resulted in different interest expense amounts for the
discontinued operations of Pegasus Communications Corporation and Pegasus
Satellite due to the different amounts of interest expense incurred by each as a
result of the elimination of intercompany interest expense. For Pegasus
Communications Corporation, interest expense of $74.2 million was allocated to
discontinued operations for the nine months ended September 30, 2004, and
interest expense of $39.3 million and $109.9 million was allocated to
discontinued operations for the three and nine months ended September 30, 2003,
respectively. For Pegasus Satellite, interest expense of $16.1 million and
$102.4 million was allocated to discontinued operations for the three and nine
months ended September 30, 2004, respectively, and interest expense of $43.4
million and $116.9 million was allocated to discontinued operations for the
three and nine months ended September 30, 2003, respectively.
Aggregate assets and liabilities of Pegasus Satellite Television's
discontinued operations are shown separately in our condensed consolidated
balance sheet as of December 31, 2003, and in the condensed consolidated balance
sheets of Pegasus Satellite as of September 30, 2004 and December 31, 2003 in
Note 1.
In 2003, Pegasus Satellite completed the sale of three broadcast
television stations in two separate transactions. One station was located in
Mobile, Alabama and the other two stations were located in Mississippi. The
aggregate sale price was $24.9 million of cash, and Pegasus Satellite recognized
a net gain on the sales of $10.3 million, including a net gain of $10.0 million
in the first nine months of 2003. The operations of these stations, including
the net gain recognized on the sales, are classified as discontinued in the
statement of operations and comprehensive loss.
15
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Aggregate revenues and pretax loss from discontinued operations included
in our condensed consolidated statements of operations were as follows:
Nine Months Three Months Nine Months
Ended Ended Ended
September 30, September 30, September 30,
(in thousands) 2004 2003 2003
- -------------- ------------- ------------- -------------
Revenues $ 335,621 $ 207,010 $ 619,912
Pretax loss (490,621) (29,747) (77,870)
Aggregate revenues and pretax loss from discontinued operations included
in Pegasus Satellite's condensed consolidated statements of operations in Note 1
were as follows:
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
(in thousands) 2004 2004 2003 2003
- -------------- -------------- -------------- -------------- --------------
Revenues $ 118,495 $ 516,352 $ 207,010 $ 619,912
Pretax loss (42,978) (545,252) (33,793) (84,836)
Assets and liabilities of discontinued operations reported in our
condensed consolidated balance sheet as of December 31, 2003 were as follows:
December 31,
(in thousands) 2003
- ---------------------------------------- ------------
Current assets $ 45,356
Property and equipment, net 51,623
Intangible assets, net 1,436,574
Other noncurrent assets 78,808
------------
Assets of discontinued operations 1,612,361
Accrued programming fees and commissions 93,417
Other current liabilities 24,277
Other noncurrent liabilities 1,524
------------
Liabilities of discontinued operations 119,218
16
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Assets and liabilities of discontinued operations reported in Pegasus
Satellite's condensed consolidated balance sheets as of September 30, 2004 and
December 31, 2003 in Note 1 were as follows:
September 30, December 31,
(in thousands) 2004 2003
- ---------------------------------------- ------------- -------------
Current assets $ 15 $ 45,356
Property and equipment, net 1,097 51,623
Intangible assets, net - 1,436,574
Other noncurrent assets 88,835 78,808
------------- -------------
Assets of discontinued operations 89,947 1,612,361
Accrued programming fees and commissions 353 93,417
Other current liabilities 21,695 24,277
Other noncurrent liabilities - 1,524
------------- -------------
Liabilities of discontinued operations 22,048 119,218
Liabilities subject to compromise of
discontinued operations 3,654 -
3. SUMMARY OF CERTAIN ACCOUNTS
PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following at September 30,
2004 and December 31, 2003 (in thousands):
September 30, December 31,
2004 2003
------------- -------------
Towers, antennas, and related equipment $ 1,056 $ 7,630
Television broadcasting and production
equipment 90 17,291
Equipment, furniture, and fixtures 5,192 8,761
Building and improvements 9,691 16,665
Land 5,500 6,006
Other 1,798 3,332
------------- -------------
23,327 59,685
Accumulated depreciation (5,150) (27,606)
------------- -------------
Property and equipment, net $ 18,177 $ 32,079
============= =============
17
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTANGIBLE ASSETS
Intangible assets, net consisted of the following at September 30, 2004
and December 31, 2003 (in thousands):
September 30, December 31,
2004 2003
------------- -------------
Assets subject to amortization:
Cost:
Licenses $ 207,680 $ 207,680
Other 23 4,922
------------- -------------
207,703 212,602
------------- -------------
Accumulated amortization:
Licenses 61,600 50,911
Other 1 3,130
------------- -------------
61,601 54,041
------------- -------------
Net assets subject to amortization 146,102 158,561
Assets not subject to amortization:
Broadcast television licenses 251 12,670
------------- -------------
Intangible assets, net $ 146,353 $ 171,231
============= =============
ACCRUED EXPENSES
Accrued expenses of $9.2 million at September 30, 2004 consisted
primarily of $3.2 million of severance accruals, $2.9 million of compensation,
payroll taxes, and benefits expenses, and $2.4 million of professional fees.
ACCOUNTING FOR STOCK OPTIONS
We account for stock options and restricted stock issued using the
intrinsic value method. The following table illustrates the estimated pro forma
effect on our net loss and basic and diluted per common share amounts for the
net loss applicable to common shares if we had applied the fair value method in
recognizing stock based employee compensation (in thousands, except per share
amounts):
Three Months
Ended September 30,
-----------------------
2004 2003
---------- ----------
Net loss, as reported $ (9,431) $ (41,185)
Add: stock based employee compensation expense,
net of income tax, included in net loss, as
reported 477 465
Deduct: stock based employee compensation
expense, net of income tax, determined
under fair value method (3,839) (1,436)
---------- ----------
Net loss, pro forma $ (12,793) $ (42,156)
========== ==========
Basic and diluted per common share amounts
(see Note 8):
Net loss applicable to common shares, as reported $ (.97) $ (3.85)
Net loss applicable to common shares, pro forma $ (1.23) $ (3.94)
18
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine Months
Ended September 30,
-----------------------
2004 2003
---------- ----------
Net loss, as reported $ (537,246) $ (113,279)
Add: stock based employee compensation expense,
net of income tax, included in net loss, as reported 4,019 3,102
Deduct: stock based employee compensation expense,
net of income tax, determined under fair value method (9,374) (6,390)
---------- ----------
Net loss, pro forma $ (542,601) $ (116,567)
========== ==========
Basic and diluted per common share amounts
(see Note 8):
Net loss applicable to common shares, as reported $ (44.66) $ (11.36)
Net loss applicable to common shares, pro forma $ (45.10) $ (11.65)
On August 27, 2004, Pegasus Satellite Television completed the sale of
its satellite television assets to DIRECTV, Inc. Under the Amended and Restated
Pegasus Communications 1996 Stock Option Plan ("Stock Option Plan"), a
disposition of all or substantially all of the assets of Pegasus Communications
constitutes a change in control within the meaning of that plan. Upon this
change in control, all outstanding options under the Stock Option Plan
automatically became fully vested and exercisable. Generally, options issued
under the Stock Option Plan remain exercisable until the earlier of the
expiration date of the option grant or three months after termination of
employment.
4. REDEEMABLE PREFERRED STOCKS
The change in the carrying amount of preferred stock for the nine months
ended September 30, 2004 was as follows (in thousands):
Dividends accrued on preferred stock $ 9,575
Dividends in arrears on Series C issued in exchange 1,609
Elimination of Series D accumulated dividends in exchange (1,031)
Discount on Series C issued in exchange (4,938)
Conversion of Series E to common stock (2,972)
Elimination of Series E accumulated dividends in conversion (305)
---------
$ 1,938
=========
We recorded dividends on Series C of $9.5 million, on Series D of $32
thousand, and on Series E of $63 thousand during the first nine months of 2004.
This increase in the preferred stock carrying value was partially offset by the
issuance of 125,000 shares of 6-1/2% Series C convertible preferred stock
("Series C") with a par value of $12.5 million in January 2004 in exchange for
all of the remaining 12,500 shares of our Series D junior convertible
participating preferred stock ("Series D") with a par value of $12.5 million,
partially offset by dividends of $3.2 million accrued during the period. No cash
was transferred in the exchange. As of the date of the exchange, the Series D
shares had accumulated dividends in arrears of $1.0 million. Dividends on Series
C shares are in arrears, and the Series C shares exchanged were issued with
dividends in arrears as of the date of the exchange of $1.6 million. The
exchange was accounted for as a capital transaction involving equity securities
and accordingly, no gain or loss was recognized. A discount of $4.9 million was
recognized on the Series C shares issued in the exchange. Since redemption of
Series C is uncertain, the discount is not accreted to the shares' carrying
amount nor is it included for purposes of determining the preferred stock
dividend requirement in per
19
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
share computations. Accretion of the difference will commence when redemption of
the series is known or becomes probable.
Also, the Series E junior convertible participating preferred stock ("Series E")
decreased due to two June 2004 conversions of 472 shares with a liquidation
preference value of $472 thousand into 1,512 shares of Class A common stock and
payment of accumulated dividends associated with the converted shares of $47
thousand. In July 2004, all of the remaining outstanding Series E shares were
converted into shares of Class A common stock in three separate transactions. In
these conversions, 2,500 shares with a liquidation preference value of $2.5
million were converted into 8,014 shares of Class A common stock and payment of
accumulated dividends associated with the converted shares of $258 thousand. The
conversions were in accordance with the terms of the Series E's certificate of
designation.
The sale of the satellite television assets to DIRECTV on August 27,
2004 constituted a change of control of Pegasus Communications as defined in the
Certificate of Designation of the Series C preferred stock. On August 27, 2004,
holders of record of Series C shares were notified of the change in control and
the resulting one time option to convert any or all of their Series C shares
into shares of Class A common stock at a special conversion price of $170 per
share, which corresponds to a conversion ratio of 0.58824 shares of Class A
common stock per share of Series C preferred stock. This one time option was
available for notices of conversion received between September 27, 2004 and
October 26, 2004. For any notice of conversion received after this one time
option was available, the conversion will occur at the regular conversion price
of $318.75 per share, which corresponds to a conversion ratio of 0.31372 shares
of Class A common stock per share of Series C preferred stock. In October 2004,
one conversion of 15,000 Series C shares with a liquidation preference value of
$1.7 million into 8,823 Class A common shares occurred.
As permitted by the certificate of designation for the Series C, Pegasus
Communications' board of directors has the discretion to declare or not to
declare any scheduled quarterly dividends for Series C. Since January 31, 2002,
the board of directors has only declared a dividend of $100 thousand on the
series, which was paid with shares of Pegasus Communications' Class A common
stock. The total amount of dividends in arrears on Series C at September 30,
2004 was $30.2 million. The dividend of $3.2 million scheduled to be declared on
October 31, 2004 was not declared. Dividends not declared accumulate in arrears
until paid.
5. COMMON STOCK
The number of shares of Pegasus Communications' Class A common stock at
September 30, 2004 was 11,572,535 issued and 11,241,398 outstanding, and at
December 31, 2003 was 10,886,994 issued and 9,522,786 outstanding (as adjusted
for the two for one stock split). Shares outstanding as of September 30, 2004
exclude 206,600 shares held by Pegasus Development, our consolidated subsidiary,
and 71,000 shares held by Pegasus PCS Partners, a consolidated variable interest
entity. Shares outstanding at December 31, 2003 exclude 1,315,208 shares held by
Pegasus Satellite Communications, Inc. and 49,000 shares held by Pegasus
Development. The change in the number of shares outstanding during the nine
months ended September 30, 2004 was as follows:
Deconsolidation of Pegasus Satellite's ownership of Pegasus
Communications' Common stock 1,315,208
Shares issued for employee benefit and award plans 386,549
Shares repurchased and held in treasury (157,600)
Shares surrendered for employee benefit and award plans (98,072)
Shares owned by consolidated variable interest entity held in
treasury (71,000)
Shares issued upon conversion of preferred stock 9,526
Shares issued upon exercise of stock options 128,597
Shares issued upon exercise of warrants 205,404
------------
1,718,612
============
20
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate amount paid for shares repurchased during the nine months
ended September 30, 2004 was $1.2 million. We have not made any purchases of our
Class A common stock after September 30, 2004.
No dividends were declared or paid for common stocks during the nine
months ended September 30, 2004.
On August 5, 2004, we announced that our Board of Directors had declared
a two for one stock split of our common stock, which was effected in the form of
a stock dividend for holders of record on August 19, 2004 and was distributed on
August 26, 2004. The dividend was effected by a charge to paid in capital in the
amount of $67 thousand, the par value of the additional common stock that was
issued. As of August 19, 2004, we had 5,736,471 million shares of Class A common
stock and 916,380 shares of Class B common stock outstanding, including 657,604
Class A shares held by Pegasus Satellite Communications, Inc., our
unconsolidated subsidiary; 97,500 Class A shares held by Pegasus Development,
our consolidated subsidiary; and 35,500 Class A and 7,236 Class B shares held by
Pegasus PCS Partners, a consolidated variable interest entity. All share and per
share amounts included herein have been retroactively restated to reflect the
impact of the stock split for all periods presented.
6. CHANGES IN OTHER STOCKHOLDERS' EQUITY (DEFICIT)
The change in other stockholders' equity (deficit) from December 31,
2003 to September 30, 2004 consisted of (in thousands):
Net loss $ (537,246)
Increase (decrease) to additional paid in capital for:
Common stock issued 6,047
Preferred stock dividends accrued (9,575)
Deemed dividends associated with exchange of preferred stock 6,081
Exchange of preferred stock (1,720)
Class A common stock held by variable interest entity
classified as treasury stock (465)
Class B common stock held by variable interest entity
classified as treasury stock (208)
Conversion and retirement of preferred stock 2,972
Repurchases of common stock (1,210)
Other treasury stock transactions (1,036)
Investment in affiliate held by variable interest entity
classified as contra-equity (2,055)
Reclassification of Pegasus Satellite's holdings of
Pegasus Communications' common stock 9,885
-----------
$ (528,530)
===========
7. LONG TERM DEBT
Our debt outstanding at September 30, 2004 consists of a mortgage
payable at Pegasus Real Estate.
21
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As discussed in Note 1, on June 2, 2004, the Debtors filed a voluntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code. Under
generally accepted accounting principles, the financial results of Pegasus
Satellite are included in our consolidated results through the Filing Date.
However, subsequent to the Filing Date, we no longer consolidate Pegasus
Satellite's financial results in our consolidated financial statements and
Pegasus Satellite has been deconsolidated from our balance sheet. As a result,
Pegasus Satellite's long term debt is not included in our condensed consolidated
balance sheet as of September 30, 2004.
8. PER COMMON SHARE AMOUNTS
Basic and diluted per common share and related weighted average number
of common share amounts were the same within each period reported because
potential common shares were antidilutive and were excluded from the computation
due to our loss from continuing operations. The number of shares of potential
common stock derived from convertible preferred stocks, warrants, and stock
options at September 30, 2004 was 3.9 million.
In July 2004, 205,404 shares of Class A common stock were issued in
cashless warrant exercises with two separate parties.
Net loss available for common shares and results from continuing
operations are adjusted for dividends and accretion on preferred stocks to
arrive at the amount applicable to common shares. Such amounts for the periods
presented were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net loss, as reported $ (9,431) $ (41,185) $ (537,246) $ (113,279)
Accrued dividends 3,182 3,185 9,575 15,620
Accumulated dividends on
Series C issued in exchange for Series D - - 1,609 -
Deemed dividends - - (6,081) -
Accretion - - - 1,051
---------- ---------- ---------- ----------
Total accrued and deemed dividends on
preferred stock dividends 3,182 3,185 5,103 16,671
---------- ---------- ---------- ----------
Net loss available for common shares $ (12,613) $ (44,370) $ (542,349) $ (129,950)
========== ========== ========== ==========
On August 5, 2004, we announced that our Board of Directors had declared
a two for one stock split of our common stock, which was effected in the form of
a stock dividend for holders of record on August 19, 2004 and was distributed on
August 26, 2004. All share and per share amounts included herein have been
retroactively restated to reflect the impact of the stock split for all periods
presented.
22
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUPPLEMENTAL CASH FLOW INFORMATION
Significant noncash investing and financing activities were as follows
(in thousands):
Nine Months Ended
September 30,
-----------------------
2004 2003
---------- ----------
Preferred stock dividends accrued and accretion $ 9,575 $ 16,671
Common stock issued for employee benefits and awards 6,047 5,832
Net additional paid in capital from repurchase,
exchange, conversion, and/or redemption of
preferred stock 2,972 268
Payment of preferred stock dividends with shares of stock - 99
Value of common stock warrants applied to debt discount - 8,784
10. INCOME TAXES
Due to the deconsolidation of Pegasus Satellite and the fact that we now
account for our negative investment in Pegasus Satellite of $412.7 million using
the cost method, we recorded a deferred tax asset for the difference between the
tax basis and book basis of our investment in Pegasus Satellite.
In the three and nine months ended September 30, 2004, we recorded
increases of $9.5 million and $223.1 million, respectively, to the valuation
allowance recorded against the net deferred income tax asset balance at
September 30, 2004. The increases to the valuation allowance were charges to
income taxes that offset income tax benefits provided by net operating losses.
The net deferred income tax asset balance at September 30, 2004 was $309.3
million, offset by a valuation allowance in the same amount. A valuation
allowance sufficient to reduce the net deferred income tax asset balance to zero
at September 30, 2004 was necessary because it was more likely than not that the
benefits of the net deferred income tax asset will not be realized, based on our
history of losses. The effect of the valuation allowance reduced our overall
effective income tax rate on continuing operations for the three and nine months
ended September 30, 2004 to virtually zero. We recorded a $7.2 million tax
liability for income taxes payable resulting from Pegasus Satellite's sale of
certain satellite television assets along with an offsetting receivable due from
the Debtors.
11. INDUSTRY SEGMENTS
As a result of the sale of the direct broadcast satellite business, our
reportable operating segments have changed. As of September 30, 2004, our
reportable segments are Pegasus Rural Broadband LLC ("Pegasus Rural Broadband"),
a wholly owned subsidiary of Pegasus Communications which provides broadband
Internet access in rural areas; Pegasus Development, which holds two Ka band
satellite licenses granted by the Federal Communications Commission ("FCC") and
intellectual property rights licensed from Personalized Media Communications
L.L.C. ("Personalized Media"); Pegasus Guard Band LLC ("Pegasus Guard Band"), a
wholly owned subsidiary of Pegasus Communications which holds FCC licenses to
provide terrestrial communications services in the 700 MHZ spectrum; and Pegasus
Broadcast Television, which was deconsolidated as of June 2, 2004. Therefore,
our Condensed Statements of Operations and Comprehensive Loss for the nine
months ended September 30, 2004 includes only five months of revenues from
Pegasus Broadcast Television, and its assets were deconsolidated from our
balance sheet as of June 2, 2004. All revenues for the three and nine months
ended September 30, 2004 and 2003 were derived from external customers. The
Corporate and other category includes corporate activities, elimination entries,
and assets of discontinued operations.
23
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended Nine months ended
(in thousands) September 30, September 30,
- ------------------------------ --------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net revenues:
Pegasus Rural Broadband $ 61 $ - $ 131 $ -
Pegasus Development - - - -
Pegasus Guard Band - - - -
Pegasus Broadcast Television - 7,443 13,206 22,868
--------- --------- --------- ---------
Total revenues for
reportable segments 61 7,443 13,337 22,868
Corporate and other 180 201 596 702
--------- --------- --------- ---------
Total revenues $ 241 $ 7,644 $ 13,933 $ 23,570
========= ========= ========= =========
Income (loss) from operations:
Pegasus Rural Broadband $ (1,128) $ - $ (2,374) $ -
Pegasus Development (2,270) (2,544) (7,656) (7,786)
Pegasus Guard Band (1,693) (1,692) (5,081) (5,076)
Pegasus Broadcast Television - 423 1,717 714
--------- --------- --------- ---------
Total loss for
reportable segments (5,091) (3,813) (13,394) (12,148)
Corporate and other (4,370) (5,634) (28,383) (22,648)
--------- --------- --------- ---------
Total operating loss $ (9,461) $ (9,447) $ (41,777) $ (34,796)
========= ========= ========= =========
September 30, 2004 December 31, 2003
------------------ ------------------
Identifiable assets:
Pegasus Rural Broadband $ 5,784 $ 3,303
Pegasus Development 79,685 86,844
Pegasus Guard Band 69,382 74,454
Pegasus Broadcast Television - 56,984
------------------ ------------------
Total assets for
reportable segments 154,851 221,585
Corporate and other 80,029 1,813,161
------------------ ------------------
Total assets $ 234,880 $ 2,034,746
================== ==================
12. COMMITMENTS AND CONTINGENT LIABILITIES
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
See Note 1 for a detailed discussion of the proceedings under Chapter 11
of the Bankruptcy Code.
The equitable doctrine of substantive consolidation permits a bankruptcy
court to disregard the separateness of related entities, and to consolidate and
pool the entities' assets and liabilities and treat them as though held and
incurred by one entity where the interrelationship between the entities warrants
such consolidation. We believe that any effort to substantively consolidate
Pegasus Communications with the Debtors would be without merit. However, it is
possible that the Debtors' creditors may attempt to advance such claims or other
claims under piercing the corporate veil, alter ego, control person, or related
theories in the Debtors' bankruptcy proceeding. If the Bankruptcy Court were to
allow substantive consolidation of Pegasus Communications and the Debtors, or if
another court were to allow other related claims against Pegasus Communications,
it could have a material adverse effect on Pegasus Communications. Since the
Bankruptcy Court approved the transactions contemplated by the various
agreements entered into on July 30, 2004 referenced in Note 1 under "Proceedings
Under Chapter 11 of the Bankruptcy Code" and the sale of Pegasus Satellite
Television to DIRECTV was completed, we believe the releases entered into by the
creditors committee and members of the committee eliminate the risk of
substantive consolidation and any potential claims that could be made against
Pegasus Communications by the Debtors.
We believe the ultimate resolution of the Debtors' financial
difficulties will not affect Pegasus Communications' ability to continue as a
going concern. Pegasus Communications is not dependent on cash flows from the
Debtors, nor do we believe that Pegasus Communications is contingently liable to
24
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
creditors or preferred stockholders of the Debtors. We believe that our
available resources will be sufficient to fund our operating, investing, and
financing requirements.
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.
13. NASDAQ NOTICE
On August 30, 2004, we announced in a Form 8-K filed with the Securities
and Exchange Commission ("SEC") that our independent accountants had not
completed their review procedures related to our Form 10-Q for the period ended
June 30, 2004, with respect to our investment in limited partnership interests
in Pegasus PCS Partners.
On September 3, 2004, we announced that we had received a Nasdaq staff
determination on September 1, 2004. According to the Nasdaq staff determination,
the filing of our Form 10-Q under the circumstances described above is the
equivalent of a delinquent SEC filing, which, in the staff's view, violates
Nasdaq Marketplace rule 4310(c)(14) and may subject our Class A common stock to
delisting from the Nasdaq National Market. As a result, beginning at the opening
of trading on September 3, 2004, Nasdaq appended the character "E" after our
trading symbol. We requested a hearing before a Nasdaq Listing Qualifications
Panel ("the Panel") to review the staff determination. This hearing was held on
September 30, 2004 and any potential delisting of our Class A common stock was
stayed pending a determination of the Panel. On October 26, 2004, the Panel
granted our request for continued listing on the Nasdaq National Market, subject
to the condition that we file an amended Form 10-Q for the quarter ended June
30, 2004 and a Form 10-Q for the quarter ended September 30, 2004, as well as
file any necessary accounting restatements for prior periods, with the Nasdaq
and SEC on or before November 30, 2004.
On November 30, 2004, we filed a request with the Panel to grant a
further extension until December 17, 2004 to file our amended Form 10-Q for the
quarter ended June 30, 2004 and any necessary restatements for prior periods and
until December 24, 2004 to our file Form 10-Q for the quarter ended September
30, 2004. On December 7, 2004, the Panel granted our extension request. We filed
our amended Form 10-Q for the quarter ended June 30, 2004, our amended Form 10-Q
for the quarter ended March 31, 2004, and our amended Form 10-K for the year
ended December 31, 2003 on December 20, 2004. We filed our Form 10-Q for the
quarter ended September 30, 2004 on December 29, 2004. Although we believe that
our filings have brought us in compliance with the Panel's requirements, there
can be no assurance that the Panel would agree with our view in light of the
fact that our December 20, 2004 filings were made a day later than their due
date.
25
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTATEMENT OF FINANCIAL STATEMENTS
We have restated our previously issued interim financial statements
filed in our Form 10-Q for the three and nine months ended September 30, 2003 to
properly reflect income taxes associated with continuing and discontinued
operations. We have also restated in the statement of operations for the three
and nine months ended September 30, 2003 the equity in losses of affiliates
related to our investment in PCS Partners, to amend incorrect allocations of
profits and losses in accordance with the LP agreement. We summarized the
effects of these restatements in the table below.
Three months ended Nine months ended
September 30, 2003 September 30, 2003
------------------------ ------------------------
As As
Originally As Originally As
(in thousands) Reported Restated Reported Restated
- ----------------------------------------- ---------- ---------- ---------- ----------
Equity in (losses) earnings of affiliates $ (784) $ - $ (3,686) $ 161
Net (expense) benefit for income taxes (81) - (219) -
Loss before discontinued operations (11,438) (10,573) (38,597) (34,531)
Income (loss) from discontinued
operations, net of income tax (29,747) (30,612) (77,870) (78,748)
Net loss (41,185) (41,185) (116,467) (113,279)
While the restatements of the unaudited quarterly financial information
resulted in changes in the amount of net loss for the nine months ended
September 30, 2003, there was no change in the amount of net loss for the 2003
annual period. These restatements also had no impact on cash flows for the three
and nine months ended September 30, 2003. The originally reported numbers above
are adjusted for Pegasus Satellite Television's operations being classified as
discontinued in the statements of operations and comprehensive loss (See Note
2).
26
PEGASUS COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report contains certain forward looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to Pegasus Communications Corporation that are based on the beliefs of
our management, as well as assumptions made by and information currently
available to our management. These statements may differ materially from actual
future events or results. 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. Any statement
that is not a historical fact, including estimates, projections, future trends
and the outcome of events that have not yet occurred, are 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 from those contained in the forward looking
statements. Such factors include the risks described in this section below and
elsewhere in this Report and, although it is not possible to create a
comprehensive list of all factors that may cause actual results to differ from
our forward looking statements, such factors include, but are not limited to,
the following: general economic and business conditions, both nationally,
internationally, and in the regions in which we operate; catastrophic events,
including acts of terrorism; existing government regulations, and changes in, or
the failure to comply with, government regulations; competition, the resolution
of the Chapter 11 bankruptcy proceedings of Pegasus Satellite and certain of its
direct and indirect subsidiaries; changes in business strategy or development
plans; the cost of pursuing new business initiatives; an expansion of land based
communications systems; technological developments and difficulties; an
inability to obtain intellectual property licenses and to avoid committing
intellectual property infringement; the ability to attract and retain qualified
personnel; the availability and terms of capital to fund the expansion of our
businesses; and other factors mentioned 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, as amended by Form 10-K/A, for the year ended
December 31, 2003. 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," "our," and "Pegasus Communications
Corporation" refer to Pegasus Communications Corporation, together with its
direct and indirect consolidated subsidiaries. "Pegasus Communications" refers
to Pegasus Communications Corporation individually as a separate entity.
"Pegasus Development" and "Pegasus Real Estate" refer to Pegasus Development
Corporation and Pegasus Real Estate Company, respectively, wholly owned
subsidiaries of Pegasus Communications. "Pegasus Satellite" refers to Pegasus
Satellite Communications, Inc., a wholly owned, deconsolidated subsidiary of
Pegasus Communications. "Pegasus Media" refers to Pegasus Media &
Communications, Inc., a wholly owned subsidiary of Pegasus Satellite
Communications, Inc. Other terms used are defined as necessary where they first
appear.
Pegasus Development holds two Ka band satellite licenses granted by the
Federal Communications Commission ("FCC") and intellectual property rights
licensed from Personalized Media Communications L.L.C. ("Personalized Media").
Pegasus Guard Band LLC ("Pegasus Guard Band") is
27
PEGASUS COMMUNICATIONS CORPORATION
a wholly owned subsidiary of Pegasus Communications and holds FCC licenses to
provide terrestrial communications services in the 700 MHZ spectrum. Pegasus
Rural Broadband LLC ("Pegasus Rural Broadband") is a wholly owned subsidiary of
Pegasus Communications that provides broadband Internet access in rural areas.
Pegasus Communications Management Company ("Pegasus Management") is a wholly
owned subsidiary of Pegasus Communications and provides management services to
Pegasus Communications and its subsidiaries, including Pegasus Satellite
Communications, Inc. and its subsidiaries, Pegasus Development, Pegasus Guard
Band, and Pegasus Rural Broadband.
The unaudited financial statements herein include the accounts of
Pegasus Communications and certain of its subsidiaries on a consolidated basis.
As discussed below, on June 2, 2004 ("Filing Date"), Pegasus Satellite, Pegasus
Media, and certain of their direct and indirect subsidiaries (collectively
referred to herein as the "Debtors") filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code ("Bankruptcy Code") in the U.S.
Bankruptcy Court, District of Maine ("Bankruptcy Court"). The Chapter 11 filing
does not include Pegasus Communications or its direct subsidiaries other than
Pegasus Satellite. Under generally accepted accounting principles, the financial
results of Pegasus Satellite are included in our consolidated results through
the Filing Date. Subsequent to the Filing Date, we no longer consolidate Pegasus
Satellite's financial results in our consolidated financial statements and
Pegasus Satellite has been deconsolidated from our balance sheet. As of the
Filing Date, our negative investment in Pegasus Satellite of $412.7 million is
presented using the cost method, and we no longer record earnings or losses from
Pegasus Satellite's operations subsequent to the Filing Date. Furthermore, the
results of operations of Pegasus Satellite Television, Inc. (a wholly owned
subsidiary of Pegasus Media & Communications and one of the Debtor entities) are
included in discontinued operations in the accompanying financial statements of
Pegasus Communications Corporation and Pegasus Satellite due to the sale of the
direct broadcast satellite business to DIRECTV effective August 27, 2004. See
Note 2. When Pegasus Satellite, Pegasus Media, and certain of their direct and
indirect subsidiaries emerge from the jurisdiction of the Bankruptcy Court, the
subsequent accounting and ultimate disposition of our negative investment in
Pegasus Satellite will be determined based on the terms of the reorganization
plan. See discussion under "Proceedings Under Chapter 11 of the Bankruptcy Code"
below.
RESTATEMENT OF FINANCIAL STATEMENTS
We have restated our previously issued interim financial statements
filed in our Form 10-Q for the three and nine months ended September 30, 2003 to
properly reflect income taxes associated with continuing and discontinued
operations. We have also restated in the statement of operations for the three
and nine months ended September 30, 2003 the equity in losses of affiliates
related to our investment in PCS Partners, to amend incorrect allocations of
profits and losses in accordance with the LP agreement. We summarized the
effects of these restatements in the table below.
Three months ended Nine months ended
September 30, 2003 September 30, 2003
------------------------ ------------------------
As As
Originally As Originally As
(in thousands) Reported Restated Reported Restated
- ----------------------------------------- ---------- ---------- ---------- ----------
Equity in (losses) earnings of affiliates $ (784) $ - $ (3,686) $ 161
Net (expense) benefit for income taxes (81) - (219) -
Loss before discontinued operations (11,438) (10,573) (38,597) (34,531)
Income (loss) from discontinued
operations, net of income tax (29,747) (30,612) (77,870) (78,748)
Net loss (41,185) (41,185) (116,467) (113,279)
28
PEGASUS COMMUNICATIONS CORPORATION
While the restatements of the unaudited quarterly financial information
resulted in changes in the amount of net loss for the nine months ended
September 30, 2003, there was no change in the amount of net loss for the 2003
annual period. These restatements also had no impact on cash flows for the three
and nine months ended September 30, 2003. The originally reported numbers above
are adjusted for Pegasus Satellite Television's operations being classified as
discontinued in the statements of operations and comprehensive loss (See
Note 2).
On August 5, 2004, we announced that our Board of Directors had declared
a two for one stock split of our common stock, which was effected in the form of
a stock dividend for holders of record on August 19, 2004 and was distributed on
August 26, 2004. All share and per share amounts included herein have been
retroactively restated to reflect the impact of the stock split for all periods
presented.
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On June 2, 2004, Pegasus Satellite Television, Inc. (a wholly owned
subsidiary of Pegasus Media & Communications and one of the Debtor entities) and
certain of its affiliates involved in the distribution of DIRECTV direct
broadcast satellite service received notices from the National Rural
Telecommunications Cooperative ("NRTC") purporting to terminate their exclusive
distribution agreements with the NRTC, which provided them with the exclusive
rights to distribute DIRECTV services in specified rural territories in the
United States, and from DIRECTV, Inc., purporting to terminate the Revised
Seamless Consumer Program effective as of August 31, 2004. Pegasus Satellite
Television, Inc. and its affiliates also received a related cash offer from
DIRECTV on June 2, 2004 to purchase the assets of Pegasus Satellite Television.
As a result of actions taken by NRTC and DIRECTV, on June 2, 2004
certain subsidiaries of Pegasus Communications involved in the direct broadcast
satellite business and broadcast television business filed voluntary petitions
for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court, District of
Maine. A creditors committee representing the unsecured creditors of the Debtors
has been appointed by the Bankruptcy Court, and in accordance with the
provisions of the Bankruptcy Code, has the right to be heard on all matters that
come before the Bankruptcy Court. The appointed committee has played an
important role in the bankruptcy proceedings to date and the Debtors expect that
the committee will play an important role in the negotiation of the terms of any
plan or plans of reorganization. The Debtors are required to bear certain of the
committee's costs and expenses, including those of their counsel and advisors.
As provided by the Bankruptcy Code and as ordered by the Bankruptcy Court, the
Debtors have the exclusive right to propose a plan of reorganization until
January 10, 2005, at which time a hearing will be held to determine whether the
Debtors' exclusivity period will be further extended.. If the Debtors fail to
file a plan of reorganization during such exclusive period or any extension
thereof, or if such plan is not accepted by the requisite number of creditors
and equity holders entitled to vote on the plan, other parties in interest may
be permitted to propose their own plan(s) of reorganization for the Debtors.
On July 30, 2004, Pegasus Satellite Television, Inc. and certain of its
affiliates entered into an agreement ("Asset Purchase Agreement") to sell to
DIRECTV its direct broadcast satellite business for a purchase price of $937.7
million, consisting of $875.0 million in cash and $62.7 million in debt
forgiveness, subject to certain closing adjustments. Pegasus Satellite
Television, Inc. and DIRECTV also entered into a cooperation agreement
("Cooperation Agreement") to ensure an efficient transfer of Pegasus Satellite's
direct broadcast satellite business to DIRECTV pursuant to the Asset Purchase
Agreement. Also on July 30, 2004, Pegasus Satellite, Pegasus Communications,
DIRECTV, the NRTC,
29
PEGASUS COMMUNICATIONS CORPORATION
and the creditors committee entered into a certain settlement agreement ("Global
Settlement Agreement").
In the Global Settlement Agreement, Pegasus Satellite, DIRECTV, and the
NRTC agreed to dismiss all litigation between and among them with prejudice,
stay all pending litigation, and agreed not to commence any new litigation in
order to facilitate the sale of Pegasus Satellite's direct broadcast satellite
business to DIRECTV. In addition, Pegasus Communications agreed to release all
claims against DIRECTV (with the exception of claims relating to the
Personalized Media patent infringement litigation) and the NRTC related to the
Debtors' direct broadcast satellite business. In consideration for Pegasus
Communications agreeing to provide the releases described above and agreeing to
release its claims against the Debtors for certain amounts owed by the Debtors
to Pegasus Communications, the Debtors agreed to release certain claims that the
Debtors may have against Pegasus Communications and various related parties,
including potential preference and fraudulent transfer avoidance claims.
The Bankruptcy Court approved the sale of the direct broadcast satellite
business to DIRECTV on August 26, 2004, and the sale of the direct broadcast
satellite business to DIRECTV took place on August 27, 2004. Pursuant to the
Cooperation Agreement, Pegasus Satellite Television continued to provide
services to DIRECTV until October 31, 2004.
Pursuant to a letter agreement ("Letter Agreement") dated July 30, 2004,
entered into by and among Pegasus Communications, the creditors committee and
members of the creditors committee, the parties agreed to take all actions
necessary to support the Global Settlement Agreement and the transactions
contemplated thereby. The Letter Agreement also provided that Pegasus
Communications could acquire all of the Debtors' broadcast television assets for
$75 million in cash, subject to higher and better offers received from third
parties pursuant to certain auction procedures described in the agreement and
subject to Bankruptcy Court approval. Pegasus Communications is currently
negotiating a subscription agreement with the creditors committee, which would
serve as a stalking bid for the broadcast television assets. Pegasus
Communications has entered into an agreement with a third party investor whereby
the investor has committed to provide financing consisting of $55.0 million of
term loans and $5.0 million of revolving credit to a subsidiary to be created to
acquire the broadcast television assets. Security interests in substantially all
the borrowing subsidiary's assets, including ownership interests in its
subsidiaries and all ownership interests in the borrower, would secure the
loans. The commitment is subject to definitive documentation and other customary
closing conditions, including completion of the acquisition of the Debtors'
broadcast television assets. Subject to definitive agreement on the Pegasus
Communications Subscription Agreement, it is anticipated that an auction of the
broadcast assets will occur in early 2005 with Pegasus Communications making a
stalking bid for the broadcast television assets.
The equitable doctrine of substantive consolidation permits a bankruptcy
court to disregard the separateness of related entities, and to consolidate and
pool the entities' assets and liabilities and treat them as though held and
incurred by one entity where the interrelationship between the entities warrants
such consolidation. We believe that any effort to substantively consolidate
Pegasus Communications with the Debtors would be without merit. However, it is
possible that the Debtors' creditors may attempt to advance such claims or other
claims under piercing the corporate veil, alter ego, control person, or related
theories in the Debtors' bankruptcy proceeding. If the Bankruptcy Court were to
allow substantive consolidation of Pegasus Communications and the Debtors, or if
another court were to allow other related claims against Pegasus Communications,
it could have a material adverse effect on Pegasus Communications. Since the
Bankruptcy Court approved the transactions contemplated by the various
agreements entered into on July 30, 2004 referenced above and the sale of
Pegasus Satellite Television,
30
PEGASUS COMMUNICATIONS CORPORATION
Inc. to DIRECTV was completed, we believe the releases entered into by the
creditors committee and members of the committee eliminate the risk of
substantive consolidation and any potential claims that could be made against
Pegasus Communications by the Debtors.
We believe the ultimate resolution of the Debtors' financial
difficulties will not affect Pegasus Communications' ability to continue as a
going concern. Pegasus Communications is not dependent on cash flows from the
Debtors, nor do we believe that Pegasus Communications is contingently liable to
creditors or preferred stockholders of the Debtors. We believe that our
available resources will be sufficient to fund our operating, investing, and
financing requirements.
NASDAQ NOTICE
On August 30, 2004, we announced in a Form 8-K filed with the Securities
and Exchange Commission ("SEC") that our independent accountants had not
completed their review procedures related to our Form 10-Q for the period ended
June 30, 2004, with respect to our investment in limited partnership interests
in Pegasus PCS Partners.
On September 3, 2004, we announced that we had received a Nasdaq staff
determination on September 1, 2004. According to the Nasdaq staff determination,
the filing of our Form 10-Q under the circumstances described above is the
equivalent of a delinquent SEC filing, which, in the staff's view, violates
Nasdaq Marketplace rule 4310(c)(14) and may subject our Class A common stock to
delisting from the Nasdaq National Market. As a result, beginning at the opening
of trading on September 3, 2004, Nasdaq appended the character "E" after our
trading symbol. We requested a hearing before a Nasdaq Listing Qualifications
Panel to review the staff determination. This hearing was held on September 30,
2004 and any potential delisting of our Class A common stock was stayed pending
a determination of the Nasdaq Listing Qualification Panel. On October 26, 2004,
the Nasdaq Listing Qualifications Panel granted our request for continued
listing on the Nasdaq National Market, subject to the condition that we file an
amended Form 10-Q for the quarter ended June 30, 2004 and a Form 10-Q for the
quarter ended September 30, 2004, as well as file any necessary accounting
restatements for prior periods, with the Nasdaq and SEC on or before November
30, 2004.
On November 30, 2004, we filed a request with the Panel to grant a
further extension until December 17, 2004 to file our amended Form 10-Q for the
quarter ended June 30, 2004 and any necessary restatements for prior periods and
until December 24, 2004 to file our Form 10-Q for the quarter ended September
30, 2004. On December 7, 2004, the Panel granted our extension request. We filed
our amended Form 10-Q for the quarter ended June 30, 2004, our amended Form 10-Q
for the quarter ended March 31, 2004, and our amended Form 10-K for the year
ended December 31, 2003 on December 20, 2004. We filed our Form 10-Q for the
quarter ended September 30, 2004 on December 29, 2004. Although we believe that
our filings have brought us in compliance with the Panel's requirements, there
can be no assurance that the Panel would agree with our view in light of the
fact that our December 20, 2004 filings were made a day later than their due
date.
INVESTMENT IN AFFILIATE
Pegasus Development has a limited partnership interest in Pegasus PCS
Partners, L.P. ("Pegasus PCS Partners"). Pegasus Development has no control or
voice in Pegasus PCS Partners' matters. The general partner of Pegasus PCS
Partners is an entity beneficially controlled by Marshall W. Pagon, our Chairman
of the Board and Chief Executive Officer. Pegasus PCS Partners' assets as of
September 30, 2004 and December 31, 2003 consisted principally of senior
preferred equity interests in Pegasus Capital Holdings, LLC ("PCH LLC"), 71,000
Class A shares of Pegasus Communications, and 14,472 Class B shares of Pegasus
Communications. PCH LLC is an entity that is also beneficially controlled by
Marshall W. Pagon. As of December 31, 2003, PCH LLC's assets consisted of only
direct and indirect investments in 1,805,822 Class B shares of Pegasus
Communications. Therefore, Pegasus Development's investment in Pegasus PCS
Partners as of December 31, 2003 and Pegasus PCS Partners'
31
PEGASUS COMMUNICATIONS CORPORATION
investment in PCH LLC as of September 30, 2004 are classified as equity. The
approximate carrying and fair values of Pegasus Development's investment in
Pegasus PCS Partners at December 31, 2003 are $12.0 million and $15.8 million,
respectively, based on our Class A common share price at such date. The
approximate carrying and fair values of Pegasus PCS Partners' investment in PCH
LLC at September 30, 2004 are $14.0 million and $10.6 million, respectively,
based on our Class A common share price at such date.
RESULTS OF OPERATIONS
Prior to the bankruptcy filing of the Debtors, the direct broadcast
satellite business comprised a substantial portion of our revenues, operating
results, and financial position. As a result of the deconsolidation of Pegasus
Satellite and the subsequent sale of its satellite television business, our
results of operations have significantly changed. Under generally accepted
accounting principles, the financial results of Pegasus Satellite are included
in our consolidated results through the June 2, 2004 filing date. Subsequent to
June 2, 2004, we no longer consolidate Pegasus Satellite's financial results in
our consolidated financial statements and Pegasus Satellite has been
deconsolidated from our balance sheet. Our negative investment in Pegasus
Satellite of $412.7 million is presented using the cost method, and we no longer
record earnings or losses from Pegasus Satellite's operations subsequent to
June 2, 2004.
Furthermore, the results of operations of Pegasus Satellite Television
are included in discontinued operations in the accompanying financial statements
of Pegasus Communications Corporation and Pegasus Satellite.
In the following discussion and analysis of our accompanying
consolidated financial statements, we will discuss the results of operations for
Pegasus Communications Corporation shown in our Consolidated Statements of
Operations for the three and nine months ended September 30, 2004, including the
impact of the inclusion of Pegasus Satellite's financial results for only the
five months ended June 2, 2004 compared to the nine months ended September 30,
2003. We will then discuss the results of operations for Pegasus Communications
Corporation excluding Pegasus Satellite for the three and nine months ended
September 30, 2004 compared to the three and nine months ended September 30,
2003.
PEGASUS COMMUNICATIONS CORPORATION'S RESULTS OF OPERATIONS, INCLUDING PEGASUS
SATELLITE
The results of operations of Pegasus Satellite are included in the
accompanying Condensed Statements of Operations and Comprehensive Loss through
June 2, 2004, and the results of operations of Pegasus Satellite Television are
included in such statements as discontinued operations. See Note 1 of the Notes
to Consolidated Financial Statements for a discussion of the proceedings under
Chapter 11 of the Bankruptcy Code and the transactions contemplated by the Asset
Purchase Agreement, the Cooperation Agreement, the Global Settlement Agreement,
and the Letter Agreement.
See Note 2 of the Notes to Consolidated Financial Statements for a
discussion of discontinued operations. The following discussion focuses on the
results of operations of Pegasus Broadcast Television.
Broadcast Television Revenues:
For the nine months ended September 30, 2004, net revenues decreased
$9.7 million to $13.2 million compared to $22.9 million for the nine months
ended September 30, 2003. These decreases were primarily due to the impact of
comparing five months of net revenues in 2004 versus nine months in
32
PEGASUS COMMUNICATIONS CORPORATION
2003. Net revenues for the full nine months ended September 30, 2004 versus the
same period of 2003 increased $700 thousand. See Pegasus Satellite
Communications, Inc.'s Condensed Consolidated Statements of Operations in Note 1
of the Notes to Consolidated Financial Statements for broadcast television net
revenues for the nine months ended September 30, 2004 and 2003.
Broadcast Television Expenses:
Broadcast television expenses decreased $10.7 million to $11.5 million
compared to $22.2 million for the nine months ended September 30, 2003. These
decreases were primarily due to the impact of comparing five months of expenses
in 2004 versus nine months in 2003. See Pegasus Satellite Communications, Inc.'s
Condensed Consolidated Statements of Operations in Note 1 of the Notes to
Consolidated Financial Statements for broadcast television expenses for the nine
months ended September 30, 2004 and 2003. Broadcast television expenses
decreased for the full nine months ended September 30, 2004 compared to the same
period of 2003, primarily as a result of lower programming expense of $578
thousand and lower depreciation and amortization expenses of $593 thousand.
Pegasus Communications Corporation's Other Statement of Operations and
Comprehensive Loss Items
Corporate, development, and other operations expense decreased $2.4
million and $1.2 million for the three and nine months ended September 30, 2004
compared to the same periods of 2003 primarily due to the deconsolidation of
Pegasus Satellite. The prior year periods include consolidated corporate
expenses for the full three and nine month periods ended, whereas the current
year periods only include an allocation of corporate expenses attributable to
non-Debtors from the Filing Date to September 30, 2004. We continue to provide
certain services to the Debtors, including management, accounting, treasury,
human resources, legal, and payroll services, among others, and the Debtors
compensate us for such services based on a methodology specified in a Support
Services Agreement approved by the Bankruptcy Court. As a result of the
inclusion since the Filing Date of only an allocation of these expenses, our
corporate, development, and other operations expense line item has decreased.
Corporate expenses included in this line item for the three and nine months
ended September 30, 2004 were $151 thousand and $6.7 million, respectively,
compared to $3.3 million and $9.9 million, respectively for the same periods of
2003. See the discussion of Pegasus Communications Corporation's Results of
Operations, Excluding Pegasus Satellite, below. These decreases were partially
offset by the inclusion of expenses related to the Pegasus Rural Broadband
business of $1.1 million and $2.5 million in the three and nine months of 2004,
respectively. There were no expenses related to the Pegasus Rural Broadband
business in the three and nine months of September 30, 2003. Pegasus Rural
Broadband's terrestrial fixed wireless network currently passes approximately
60,000 households.
Other operating expenses increased $2.2 million to $4.1 million for the
three months ended September 30, 2004 compared to the same period of 2003,
primarily due to $1.5 million of non-Debtor allocated retention and severance
expenses and $1.3 million of professional fees, both related to Pegasus
Satellite's bankruptcy proceedings, partially offset by $530 thousand of legal
fees associated with patent litigation in the third quarter of 2003. Other
operating expenses increased $9.5 million to $21.2 million for the nine months
ended September 30, 2004 compared to the same period of 2003, primarily due to
(1) $3.4 million of expenses incurred in the second quarter of 2004 related
principally to certain previously capitalized direct and incremental costs of
acquiring our Ka band satellite licenses, and early stage satellite construction
costs related to these licenses; (2) the establishment in the second quarter of
2004 of a $3.0 million allowance against the performance bond posted for our
87 DEG. west longitude orbital location; (3) $3.2 million of professional fees,
related to Pegasus Satellite's bankruptcy proceedings, $1.9 million of which was
incurred in the second quarter of 2004 prior to the Filing Date and the
33
PEGASUS COMMUNICATIONS CORPORATION
deconsolidation of Pegasus Satellite; (4) $1.9 million of non-Debtor allocated
retention and severance expenses, primarily related to Pegasus Satellite's
bankruptcy proceedings ; (5) $864 thousand of expenses in the second quarter of
2004 related to certain previously capitalized direct and incremental costs
related to certain strategic initiatives; and (6) $535 thousand of direct and
incremental expenses in the second quarter of 2004 related to the cancellation
of a proposed tender offer for certain senior debt securities. These increases
were partially offset by legal fees associated with patent litigation that
decreased $3.9 million to $22 thousand in the nine months ended September 30,
2004 compared to the same period of 2003. Note that for the year to date period
of 2004, all amounts include only five months of expenses for Pegasus Satellite,
which was deconsolidated as of June 2, 2004.
Interest expense decreased $1.4 million and increased $400 thousand for
the three and nine months ended September 30, 2004 compared to the same periods
of 2003, respectively, primarily due to the deconsolidation of Pegasus
Satellite's debt and related interest expense as of June 2, 2004 and the
reclassification of a portion of such interest expense to discontinued
operations in accordance with Emerging Issues Task Force Issue No. 87-24,
"Allocation of Interest to Discontinued Operations." For Pegasus Communications
Corporation, interest expense of $74.2 million was allocated to discontinued
operations for the nine months ended September 30, 2004, and interest expense of
$39.3 million and $109.9 million was allocated to discontinued operations for
the three and nine months ended September 30, 2003, respectively. See discussion
of discontinued operations below and Note 2 of the Notes to Consolidated
Financial Statements. The following table details the total interest expense
incurred by Pegasus Communications Corporation and Pegasus Satellite, as
adjusted for the items listed above. The deconsolidated interest expense
represents interest recorded on secured debt for the Debtors after the Filing
Date. Pegasus Satellite ceased recording interest expense for its' unsecured
debt as a result of the bankruptcy filing in accordance with SOP 90-7.
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
(in thousands) 2004 2003 2004 2003
- -------------------------------------------- ---------- ---------- ---------- ----------
Pegasus Communications Corporation and
Pegasus Satellite total interest expense $ 14,017 $ 40,922 $ 96,372 $ 113,087
Less:
Deconsolidated interest expense (13,820) - (18,657) -
Interest expense allocated to discontinued
operations - (39,340) (74,166) (109,938)
---------- ---------- ---------- ----------
Pegasus Communications Corporation reported
interest expense $ 197 $ 1,582 $ 3,549 $ 3,149
========== ========== ========== ==========
In the three and nine months ended September 30, 2004, we recorded
increases of $9.5 million and $223.1 million, respectively, to the valuation
allowance recorded against the net deferred income tax asset balance at
September 30, 2004. The increases to the valuation allowance were charges to
income taxes that offset income tax benefits provided by net operating losses.
The net deferred income tax asset balance at September 30, 2004 was $309.3
million, offset by a valuation allowance in the same amount. A valuation
allowance sufficient to reduce the net deferred income tax asset balance to zero
at September 30, 2004 was necessary because it was more likely than not that the
benefits of the net deferred income tax asset will not be realized, based on our
history of losses. The effect of the valuation allowance reduced our overall
effective income tax rate on continuing operations for the three and nine months
ended September 30, 2004 to virtually zero. We recorded a $7.2 million tax
liability for income taxes
34
PEGASUS COMMUNICATIONS CORPORATION
payable resulting from Pegasus Satellite's sale of certain satellite television
assets along with an offsetting receivable due from the Debtors.
35
PEGASUS COMMUNICATIONS CORPORATION
Discontinued Operations
On August 27, 2004, Pegasus Satellite Television completed the sale of
certain satellite television assets to DIRECTV, Inc., for a purchase price of
$937.7 million, consisting of $875.0 million in cash and $62.7 million in debt
forgiveness, subject to certain closing adjustments. Following the closing,
Pegasus Satellite Television continued to provide certain services to DIRECTV,
Inc. to assure uninterrupted delivery of DIRECTV programming to Pegasus
Satellite Television's former subscribers while these subscribers were being
transitioned over to DIRECTV, Inc. The migration was completed as of October 31,
2004.
During the three months ended September 30, 2004, Pegasus Satellite
recorded a pre-tax loss of $5.0 million on the sale of certain satellite
television assets. In addition, Pegasus Satellite adjusted the carrying value of
satellite television property and equipment and other assets not sold to
DIRECTV, Inc. to their net realizable value, which resulted in a loss of $16.7
million, and also recorded retention and severance expenses of $6.2 million.
Pegasus Satellite also recorded an income tax expense of $10.7 million resulting
from the sale of certain satellite television assets. These amounts are reported
as part of the loss from discontinued operations in Pegasus Satellite's
condensed consolidated statements of operations included in Note 1.
Pegasus Satellite Television's operations are classified as discontinued
in our statements of operations and comprehensive loss and Pegasus Satellites'
condensed consolidated statements of operations included in Note 1. In
accordance with Emerging Issues Task Force Issue No. 87-24, "Allocation of
Interest to Discontinued Operations," we and Pegasus Satellite allocated
interest expense to discontinued operations based on a pro rata calculation of
net assets of the discontinued business to consolidated net assets. Note that
this allocation resulted in different interest expense amounts for the
discontinued operations of Pegasus Communications Corporation and Pegasus
Satellite due to the different amounts of interest expense incurred by each as a
result of the elimination of intercompany interest expense. For Pegasus
Communications Corporation, interest expense of $74.2 million was allocated to
discontinued operations for the nine months ended September 30, 2004, and
interest expense of $39.3 million and $109.9 million was allocated to
discontinued operations for the three and nine months ended September 30, 2003,
respectively. For Pegasus Satellite, interest expense of $16.1 million and
$102.4 million was allocated to discontinued operations for the three and nine
months ended September 30, 2004, respectively, and interest expense of $43.4
million and $116.9 million was allocated to discontinued operations for the
three and nine months ended September 30, 2003, respectively.
In 2003, Pegasus Satellite completed the sale of three broadcast
television stations in two separate transactions. One station was located in
Mobile, Alabama and the other two stations were located in Mississippi. The
aggregate sale price was $24.9 million of cash, and Pegasus Satellite recognized
a net gain on the sales of $10.3 million, including a net gain of $10.0 million
in the first nine months of 2003. The operations of these stations, including
the net gain recognized on the sales, are classified as discontinued in the
statement of operations and comprehensive loss.
36
PEGASUS COMMUNICATIONS CORPORATION
Aggregate revenues and pretax loss from discontinued operations included
in our condensed consolidated statements of operations were as follows:
Nine Months Three Months Nine Months
Ended Ended Ended
September 30, September 30, September 30,
(in thousands) 2004 2003 2003
- ----------------------------- ------------- ------------- -------------
Revenues $ 335,621 $ 207,010 $ 619,912
Pretax loss (490,621) (29,747) (77,870)
Aggregate revenues and pretax loss from discontinued operations included
in Pegasus Satellite's condensed consolidated statements of operations in Note 1
of the Notes to Consolidated Financial Statements were as follows:
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
(in thousands) 2004 2004 2003 2003
- ----------------------------- ------------- ------------- ------------- -------------
Revenues $ 118,495 $ 516,352 $ 207,010 $ 619,912
Pretax loss (42,978) (545,252) (33,793) (84,836)
PEGASUS COMMUNICATIONS CORPORATION'S RESULTS OF OPERATIONS, EXCLUDING PEGASUS
SATELLITE
The following information presents the results of operations of Pegasus
Communications Corporation on a basis that excludes the results of operations of
Pegasus Satellite for the periods presented. In this section, amounts and
changes discussed are for the three and nine months ended September 30, 2004
compared to the three and nine months ended September 30, 2003, unless indicated
otherwise. We continue to provide certain services to the Debtors, including
management, accounting, treasury, human resources, legal, and payroll services,
among others, and the Debtors compensate us for such services based on a
methodology specified in a Support Services Agreement approved by the Bankruptcy
Court. The corporate expenses included below for all periods presented include
only the non-Debtor allocation of such expenses.
37
PEGASUS COMMUNICATIONS CORPORATION
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
(in thousands) 2004 2003 2004 2003
- -------------------------------------------------- --------- --------- --------- ---------
Net revenues $ 241 $ 201 $ 727 $ 702
Costs of other operations 1,158 182 2,707 524
Corporate and development expenses 480 826 2,468 2,543
Corporate, development and other
operations depreciation and amortization 3,908 3,952 11,732 11,845
Other operating expenses, net 4,156 1,428 14,634 9,267
--------- --------- --------- ---------
Loss from operations (9,461) (6,187) (30,814) (23,477)
Interest expense (197) (194) (643) (584)
Interest income 228 120 536 310
Gain on sale of assets - 768 - 768
Equity in earnings of affiliates - - - 161
Net expense for income taxes (1) - (1) -
--------- --------- --------- ---------
Net loss $ (9,431) $ (5,493) $ (30,922) $ (22,822)
========= ========= ========= =========
Net loss applicable to common shares $ (0.97) $ (0.75) $ (2.97) $ (2.84)
========= ========= ========= =========
For the three and nine months ended September 30, 2004, costs of other
operations increased $1.0 million and $2.2 million, respectively, compared to
the same periods of 2003, primarily due to incremental costs incurred in
connection with the Pegasus Rural Broadband business, which began operations in
2004. Pegasus Rural Broadband's terrestrial fixed wireless network currently
passes approximately 60,000 households.
For the three months ended September 30, 2004, corporate and development
expenses decreased $346 thousand compared to the same period of 2003 primarily
as a result of a greater level of development activity in the prior year period,
including early stage exploration of rural broadband opportunities.
Other operating expenses increased $2.7 million to $4.2 million for the
three months ended September 30, 2004 compared to the same period of 2003,
primarily due to $1.6 million of non-Debtor allocated retention and severance
expenses and $1.3 million of professional fees, both related to Pegasus
Satellite's bankruptcy proceedings, partially offset by $530 thousand of legal
fees associated with patent litigation in the third quarter of 2003. Other
operating expenses increased $5.4 million to $14.6 million for the nine months
ended September 30, 2004 compared to the same period of 2003, primarily due to
(1) $3.4 million of expenses incurred in the second quarter of 2004 related
principally to certain previously capitalized direct and incremental costs of
acquiring our Ka band satellite licenses, and early stage satellite construction
costs related to these licenses; (2) the establishment in the second quarter of
2004 of a $3.0 million allowance against the performance bond posted for our
87 DEG. west longitude orbital location; (3) $1.3 million of professional fees,
related to Pegasus Satellite's bankruptcy proceedings; and (4) $1.6 million of
non-Debtor allocated retention and severance expenses, primarily related to
Pegasus Satellite's bankruptcy proceedings. These increases were partially
offset by legal fees associated with patent litigation that decreased $3.9
million to $22 thousand in the nine months ended September 30, 2004 compared to
the same period of 2003.
38
PEGASUS COMMUNICATIONS CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of liquidity and capital resources focuses on
our Condensed Consolidated Statements of Cash Flows. The amounts shown for the
nine months ended September 30, 2004 include the results of operations for
Pegasus Satellite through the June 2, 2004 filing date and the results of
operations for Pegasus Communications and its direct subsidiaries other than
Pegasus Satellite for the full nine months ended September 30, 2004. Prior year
amounts have not been restated. We are currently assessing the appropriate level
of corporate and administrative services required to support our operations
following the sale of Pegasus Satellite's direct broadcast satellite business
and the pending Plan of Reorganization that we expect will be filed and
consummated by the end of the first quarter of 2005. We believe the ultimate
resolution of the Debtors' financial difficulties will not affect Pegasus
Communications' ability to continue as a going concern. Pegasus Communications
is not dependent on cash flows from the Debtors, nor do we believe that Pegasus
Communications is contingently liable to creditors or preferred stockholders of
the Debtors. We believe that our available resources will be sufficient to fund
our operating, investing, and financing requirements.
We had cash and cash equivalents on hand at September 30, 2004 of $55.9
million compared to $82.9 million at December 31, 2003. The change in cash,
including the reduction as a result of the deconsolidation of Pegasus
Satellite's $22.5 million of cash as of June 2, 2004 is discussed below in terms
of the amounts shown in our Condensed Consolidated Statement of Cash Flows.
Net cash used for operating activities was $3.2 million for the nine
months ended September 30, 2004 compared to net cash provided by operating
activities of $4.1 million for the nine months ended September 30, 2003. Cash
provided by the discontinued direct broadcast satellite business that is
included in the Condensed Consolidated Statement of Cash Flows was approximately
$93.6 million for the five months ended June 2, 2004 compared to $147.4 million
for the nine months ended September 30, 2003, a decrease of $53.8 million. Also,
cash used by Pegasus Rural Broadband's operations was approximately $2.2 million
and $393 thousand for the nine months ended September 30, 2004 and 2003,
respectively, an increase in cash used of $1.8 million. These net decreases were
partially offset by approximately $47.3 million less cash interest paid in the
2004 period, primarily as a result of the Chapter 11 filing and deconsolidation
of Pegasus Satellite.
Net cash used for investing activities was $10.6 million and net cash
provided by investing activities was $3.1 million for the nine months ended
September 30, 2004 and 2003, respectively. The amount in the 2004 period
primarily consisted of $4.3 million for the January 2004 purchase of an FCC
license for a broadcast television station in Gainesville, Florida; $4.4 million
of purchases of direct broadcast satellite equipment; and other capital
expenditures of $2.2 million. The 2003 period primarily reflects cash received
of $21.6 million from sales of three broadcast television stations, and cash
utilized for direct broadcast satellite receiver equipment capitalized of $16.5
million and other capital expenditures of $2.1 million. We project that our
capital expenditures for the fourth quarter of 2004 will be approximately $500
thousand.
Net cash provided by financing activities was $9.2 million and net cash
used for financing activities was $6.3 million for the nine months ended
September 30, 2004 and 2003, respectively. The primary financing activities in
the 2004 period were $18.0 million of borrowings on Pegasus Media's revolving
credit facility, $5.1 million of restricted cash placed as collateral for a
bond, $2.2 million of debt financing costs incurred by Pegasus Satellite and its
subsidiaries, purchases of 157,600 shares of our Class A common stock for $1.2
million, and $750 thousand of repayments on term loan facilities. The primary
expenditures for financing activities for 2003 were: 1) redemption of all of the
outstanding principal of Pegasus Media's 12-1/2% notes due July 2005 of $67.9
million; 2) repayments of other long
39
PEGASUS COMMUNICATIONS CORPORATION
term debt of $6.4 million; 3) purchases by Pegasus Satellite of 594,920 shares
of our Class A common stock for $5.5 million; 4) costs of $11.2 million incurred
for new financing arrangements; and 5) the net change in restricted cash of
$60.3 million, of which $61.9 million represented collateral for a letter of
credit facility. The primary receipts for financing activities for 2003 were: 1)
$100.0 million in term loan financing; 2) net borrowings of $43.5 million under
Pegasus Media's revolving credit facility; and 3) $1.5 million in an exchange of
Pegasus Satellite's notes. In the fourth quarter of 2004, $2 million of the
previously mentioned $5.1 million of restricted cash became unrestricted, and is
currently available for use.
As permitted by the certificate of designation for the 6-1/2% Series C
convertible preferred stock ("Series C"), Pegasus Communications' board of
directors has the discretion to declare or not to declare any scheduled
quarterly dividends for Series C. Since January 31, 2002, the board of directors
has only declared a dividend of $100 thousand on the series, which was paid with
shares of Pegasus Communications' Class A common stock. The total amount of
dividends in arrears on Series C at September 30, 2004 was $30.2 million. The
dividend of $3.2 million scheduled to be declared on October 31, 2004 was not
declared. Dividends not declared accumulate in arrears until paid.
In January 2004, Pegasus Communications entered into an agreement with
an unrelated party to issue 125,000 shares of its Series C preferred stock in
exchange for all of the remaining 12,500 shares of its Series D junior
convertible participating ("Series D") preferred stock. No cash was transferred
in the exchange. The Series D shares had accumulated dividends in arrears to the
date of the exchange of $1.0 million. Dividends on Series C shares are in
arrears, and the Series C shares issued in the exchange were issued with an
amount equivalent to dividends in arrears to the date of the exchange of $1.6
million. Dividends on Series D were payable annually at 4% of liquidation
preference value. Dividends on Series C are payable quarterly at 6-1/2% of
liquidation preference value.
In June 2004, 472 shares of Series E junior convertible participating
preferred stock ("Series E") with a liquidation preference value of $472
thousand were converted into 1,512 shares of Class A common stock and payment of
accumulated dividends associated with the converted shares of $47 thousand. In
July and August 2004, all of the remaining outstanding Series E shares were
converted into shares of Class A common stock in three separate transactions. In
these conversions, 2,500 shares with a liquidation preference value of $2.5
million were converted into 8,014 shares of Class A common stock and payment of
accumulated dividends associated with the converted shares of $258 thousand. The
conversions were in accordance with the terms of Series E's certificate of
designation.
The sale of the satellite television assets to DIRECTV on August 27,
2004 constituted a change of control of Pegasus Communications as defined in the
Certificate of Designation of the Series C preferred stock. On August 27, 2004,
holders of record of Series C shares were notified of the change in control and
the resulting one time option to convert any or all of their Series C shares
into shares of Class A common stock at a special conversion price of $170 per
share, which corresponds to a conversion ratio of 0.58824 shares of Class A
common stock per share of Series C preferred stock. This one time option was
available for notices of conversion received between September 27, 2004 and
October 26, 2004. For any notice of conversion received after this one time
option was available, the conversion will occur at the regular conversion price
of $318.75 per share, which corresponds to a conversion ratio of 0.31372 shares
of Class A common stock per share of Series C preferred stock. In October 2004,
15,000 Series C shares with a liquidation preference value of $1.7 million were
converted into 8,823 shares of Class A common stock. Series C shares converted
in October 2004 forfeited the right to receive $244 thousand of dividends in
arrears and $22 thousand of dividends accrued and payable.
40
PEGASUS COMMUNICATIONS CORPORATION
As indicated above and previously disclosed, we have engaged in
transactions from time to time that involve the purchase, sale, and/or exchange
of our securities, and may further do so in the future. Such transactions may be
made in the open market or in privately negotiated transactions and may involve
cash or the issuance of new securities or securities that we received upon
purchase or exchange. The amount and timing of such transactions, if any, will
depend on market conditions and other considerations.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that information
required to be disclosed in reports that we file or submit 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 is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding the required disclosures. In
designing and evaluating the disclosure controls and procedures, we recognize
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
At the time the original Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2004 was prepared and filed, an evaluation within the 90
day period prior to June 30, 2004 had been carried out under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, to determine the effectiveness of our disclosure
controls and procedures. Based on this evaluation, the Chief Executive Officer
and Chief Financial Officer had originally concluded that information required
to be disclosed in reports that we file or submit 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 is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding the required disclosures.
The Company has identified material weaknesses in our identification and
application of accounting principles and policies related to our accounting for
income taxes and equity method investments. These material weaknesses
contributed to restatements of our financial statements. See Note 14 of the
Notes to Consolidated Financial Statements.
In conjunction with the decision to restate our financial statements, we
reevaluated our disclosure controls and procedures over the identification and
application of accounting principles related to our accounting for income taxes
and equity method investments, and concluded that these controls were not
effective. We have taken steps to identify, rectify, and prevent the recurrence
of the circumstances that resulted in the determination to restate prior period
financial statements. As part of this undertaking, we have incorporated
additional levels of review of the application of the related accounting
principles, and increased emphasis on reviewing applicable accounting literature
relating to the application of the related accounting principles. In addition,
we hired a corporate controller and we engaged a public accounting firm to
consult with regarding our accounting for income taxes. We believe these
enhancements to our system of internal controls and our disclosure controls and
procedures will be adequate to provide reasonable assurance that the control
objectives will be met.
Within the 90 day period prior to September 30, 2004, we carried out an
evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and
41
PEGASUS COMMUNICATIONS CORPORATION
Chief Financial Officer, to determine the effectiveness of our disclosure
controls and procedures. Based on this evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that these controls and procedures are
now 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 changes in the registrant's internal controls or in other
factors that could significantly affect these controls, other than those
described in the immediately preceding paragraph that enhanced our system of
internal controls and our disclosure controls and procedures.
42
PEGASUS COMMUNICATIONS CORPORATION
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 of the
Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q
and Note 13 of the Notes to Consolidated Financial Statements in our Quarterly
Report on Form 10-Q/A for the quarter ended March 31, 2004. The Notes to
Consolidated Financial Statements can be found under Part I, Item 1 of each of
these Quarterly Reports on Forms 10-Q and 10-Q/A. 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/A for the year ended December 31, 2003, our Quarterly
Reports on Form 10-Q/A for the quarters ended March 31, 2004 and June 30, 2004,
and our Current Reports on Form 8-K dated January 5, 2004, February 5, 2004, May
12, 2004, May 17, 2004, May 20, 2004, June 2, 2004, and July 30, 2004.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
ISSUER PURCHASES OF EQUITY SECURITIES
Approximate Dollar
Total Total Number of Value of Shares that
Number of Shares Purchased as May Yet Be
Shares Average Price Part of Publicly Purchased Under the
Period Purchased Paid per Share Announced Program Program
- ----------------- ------------- -------------- ------------------- --------------------
August 1-31, 2004 11,600 $ 10.16 11,600 $ 10,333,077
------------- -------------- ------------------- --------------------
Total 11,600 $ 10.16 11,600 $ 10,333,077
------------- -------------- ------------------- --------------------
Shares included in the above table were purchased under a publicly
announced $10 million repurchase program authorized by the Board of Directors on
February 13, 2002 to acquire Class A common stock issued by Pegasus
Communications. On November 6, 2003, the Board of Directors increased the
authorized repurchase amount to $20 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As previously reported, Pegasus Satellite, Pegasus Media, and other
significant direct and indirect subsidiaries of Pegasus Communications filed for
protection under Chapter 11 of the Bankruptcy Code on June 2, 2004. This filing
constituted an event of default under substantially all of the indebtedness of
those subsidiaries, consisting of approximately $995.3 million of debt of
Pegasus Satellite and $406.4 million of debt of Pegasus Media.
As permitted by the certificate of designation for the 6-1/2% Series C
convertible preferred stock, Pegasus Communications' board of directors has the
discretion to declare or not to declare any scheduled quarterly dividends for
Series C. Since January 31, 2002, the board of directors has only declared a
dividend of $100 thousand on the series, which was paid with shares of Pegasus
Communications' Class A common stock. The total amount of dividends in arrears
on Series C at September 30, 2004 was $30.2 million. The dividend of $3.2
million scheduled to be declared on October 31, 2004 was not declared. Dividends
not declared accumulate in arrears until paid.
43
PEGASUS COMMUNICATIONS CORPORATION
ITEM 6. EXHIBITS
Exhibit
Number
- -------
31.1* Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2* Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished herewith).
32.2* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished herewith).
- ----------
* Filed herewith.
44
PEGASUS COMMUNICATIONS CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Pegasus Communications Corporation has duly caused this Report to
be signed on its behalf by the undersigned thereunto duly authorized.
Pegasus Communications Corporation
December 29, 2004 By: /s/ Joseph W. Pooler, Jr.
- ------------------------- --------------------------------------------
Date Joseph W. Pooler, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
45