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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
--------------
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
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PEGASUS COMMUNICATIONS CORPORATION
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(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
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
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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 May 31, 2005:
Class A Common Stock, $0.01 par value
(excluding 206,600 shares held by a consolidated subsidiary and 25,758
shares held in treasury) 11,339,864
Class B Common Stock, $0.01 par value (including 86,081 shares held by
Pegasus PCS Partners, a variable interest entity which we determined that
we are the primary beneficiary of) 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 MARCH 31, 2005
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
March 31, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Operations
Three months ended March 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2005 and 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6. Exhibits 23
Signatures 24
Certifications 25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEGASUS COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2005 2004
----------- ------------
Current assets: (unaudited)
Cash and cash equivalents $ 51,975 $ 29,196
Short-term investments - 23,486
Accounts receivable, net (including due from affiliates of $43 and $1,603,
respectively) 160 2,916
Prepaid expenses and other current assets 265 720
--------- ------------
Total current assets 52,400 56,318
Property and equipment, net of accumulated depreciation of $5,967 and
$5,533, respectively 18,894 18,664
Intangible assets, net of accumulated amortization of $68,726 and $65,163,
respectively 139,228 142,791
Other noncurrent assets 1,622 1,628
--------- ------------
Total $ 212,144 $ 219,401
========= ============
Current liabilities:
Current portion of long term debt $ 167 $ 157
Accounts payable 695 971
Accrued expenses and other current liabilities (including due to affiliates
of $523 in 2005) 6,209 7,879
--------- ------------
Total current liabilities 7,071 9,007
Investment in Pegasus Satellite Communications, Inc. 413,125 413,125
Long term debt 8,086 8,131
Other noncurrent liabilities 62 1,425
--------- ------------
Total liabilities 428,344 431,688
--------- ------------
Commitments and contingent liabilities (see Note 9) - -
Minority interest 2,912 2,912
Stockholders' equity (deficiency):
Series C convertible preferred stock 20 19
Common stocks 134 133
Other stockholders' deficiency (219,266) (215,351)
--------- ------------
Total stockholders' deficiency (219,112) (215,199)
--------- ------------
Total $ 212,144 $ 219,401
========= ============
See accompanying notes to condensed consolidated financial statements
3
PEGASUS COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three Months Ended March 31,
2005 2004
------- --------
Broadband revenues $ 180 $ 26
------- --------
Operating expenses:
Broadband:
Direct operating expense 307 91
Advertising and selling 787 206
General and administrative 428 202
Depreciation and amortization 163 41
------- --------
Total Broadband 1,685 540
Corporate and development expenses (net of $2,341 in 2005 allocated to the
Debtors under the Support Services Agreement) 509 4,638
Corporate depreciation and amortization (net of $411 in 2005 allocated to
the Debtors under the Support Services Agreement) 3,419 3,867
Other operating expenses (net of $(646) income in 2005 allocated to the
Debtors under the Support Services Agreement) 808 4,480
------- --------
Total operating expenses 6,421 13,525
------- --------
Loss from operations (6,241) (13,499)
Interest expense (174) (251)
Interest income 318 144
Rental revenue 174 231
Other nonoperating expense, net (14) -
------- --------
Loss before discontinued operations (5,937) (13,375)
Discontinued operations:
Loss from discontinued operations (including cumulative effect of
consolidating variable interest entities of $2,127 in 2004) - (55,003)
------- --------
Net loss $(5,937) $(68,378)
======= ========
Basic and diluted per common share amounts:
Loss from continuing operations $ (0.70) $ (1.06)
Discontinued operations - (4.84)
------- --------
Net loss applicable to common shares $ (0.70) $ (5.90)
======= ========
Basic and diluted weighted average number of common shares outstanding 13,069 11,376
======= ========
See accompanying notes to condensed consolidated financial statements
4
PEGASUS COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended March 31,
2005 2004
------- --------
Net cash used for operating activities $ (550) $ (2,579)
------- --------
Cash flows from investing activities:
Direct broadcast satellite equipment capitalized - (2,621)
Other capital expenditures (470) (622)
Purchases of intangible assets - (4,316)
Short-term investments purchased - (13,400)
Short-term investments sold 23,486 19,100
Other 14 167
------- --------
Net cash provided by (used for) investing activities 23,030 (1,692)
------- --------
Cash flows from financing activities:
Repayments of term loan facilities - (750)
Repayments of other long term debt (35) (53)
Restricted cash - (5,282)
Debt financing costs - (2,477)
Exercise of stock options 350 2
Other (16) (147)
------- --------
Net cash provided by (used for) financing activities 299 (8,707)
------- --------
Net increase (decrease) in cash and cash equivalents 22,779 (12,978)
Cash and cash equivalents, beginning of period 29,196 43,221
------- --------
Cash and cash equivalents, end of period $51,975 $ 30,243
======= ========
See accompanying notes to condensed consolidated financial statements
5
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
BASIS OF PRESENTATION
The accompanying interim unaudited consolidated financial statements
include the accounts of Pegasus Communications Corporation (referred to herein
in its individual capacity as "Pegasus Communications"), together with its
direct and indirect consolidated subsidiaries (including, prior to its
deconsolidation, Pegasus Satellite Communications as hereinafter defined) and
variable interest entities in which we are deemed to hold the primary beneficial
interest (collectively, "we," "us," "our", "the Company" and "Pegasus
Communications Corporation"). The financial results of Pegasus Satellite
Communications, Inc. (a direct subsidiary of Pegasus Communications referred to
herein in its individual capacity as "Pegasus Satellite") and its consolidated
subsidiaries (collectively, "Pegasus Satellite Communications") are included in
our consolidated results only through June 2, 2004, the date on which Pegasus
Satellite and certain of its subsidiaries (collectively referred to herein as
the "Debtors") filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy
Court, District of Maine (the "Bankruptcy Court"). Subsequent to June 2, 2004,
Pegasus Satellite Communications has been deconsolidated from our balance sheet,
our negative investment in Pegasus Satellite of $413 million is presented using
the cost method, and we no longer consolidate or record earnings or losses from
Pegasus Satellite Communications' operations that occur after June 2, 2004.
All intercompany transactions and balances between consolidated
subsidiaries and variable interest entities have been eliminated. The financial
statements 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 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. These
financial statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in our Annual Report on Form 10-K
for the year ended December 31, 2004.
MANAGEMENT'S PLANS AND LIQUIDITY
Our relatively small operating business makes us more vulnerable to
adverse economic and industry conditions and limits our flexibility in planning
for, or reacting to, changes in our business and the industries in which we
operate. Our ability to fund operations, planned capital expenditures, preferred
stock requirements, and other activities depends on our ability to generate cash
in the future. Our ability to generate cash depends on the success of our
business strategy, prevailing economic conditions, regulatory risks, competitive
activities by other parties, equipment strategies, technological developments,
levels of bandwidth costs and subscriber acquisition costs, levels of interest
rates, and financial, business, and other factors that are beyond our control.
While we believe that our liquidity is sufficient for at least the next twelve
months, we cannot assure that our business will generate sufficient cash flow
from operations or that alternative financing will be available to us in amounts
sufficient to fund the needs previously specified.
6
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROCEEDINGS OF PEGASUS SATELLITE UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
In February 2005, the Debtors commenced solicitation of votes on their
First Amended Joint Chapter 11 Plan (as amended through the date of
confirmation, the "Plan of Reorganization"). The Plan of Reorganization
specifies the treatment of allowed claims against the Debtors and provides for
the creation of a liquidating trust (the "Liquidating Trust") to hold all of the
Debtors' assets, liquidate any remaining non-cash assets, resolve any disputed
claims and make distributions to holders of allowed claims in accordance with
the Plan of Reorganization. After several extensions of the confirmation hearing
date, the Plan of Reorganization was confirmed by order of the Bankruptcy Court
entered April 15, 2005 and became effective on May 5, 2005. Consequently, our
$413 million negative investment in Pegasus Satellite will be reversed and
recognized in our Consolidated Statement of Operations and Comprehensive Income
(Loss) in the second quarter of 2005. Upon plan effectiveness, the liquidating
trustee appointed pursuant to the Plan of Reorganization (the "Liquidating
Trustee") has full control over the Debtors' management and operations, as well
as the unilateral right to cancel our common share ownership in Pegasus
Satellite at any time without any right of recovery by us.
Our consolidated subsidiary, Pegasus Communications Management Company
("Pegasus Management") provides certain support services to the Debtors,
including management, accounting, treasury, human resources, legal, and payroll
services, among others. The Debtors pay us for such services based on our actual
cost to provide the services, which cost is determined based on a methodology
specified in a Support Services Agreement (the "Support Services Agreement")
approved by the Bankruptcy Court. For the first quarter of 2005, these services
aggregated $3.9 million, including $2.3 million of allocated corporate
expense-related support services, $0.4 million of allocated depreciation, $0.4
million of allocated other expense-related support services offset by a $1.0
million reduction in accrued severance, and $1.9 million of direct costs that we
incurred on behalf of the Debtors and that were reimbursable to us. At March 31,
2005 and December 31, 2004, we had a $0.5 million payable to and a $1.6 million
receivable from, respectively, the Debtors related to the Support Services
Agreement, including certain direct costs of the Debtors reimbursable to us in
accordance with the Support Services Agreement. Pursuant to the Plan of
Reorganization, the Debtors elected to assume (that is, continue to perform, and
require performance, under) the Support Services Agreement as of the effective
date of the Plan of Reorganization. On June 1, 2005, Pegasus Management
exercised its termination rights under the Support Services Agreement, which
consequently will terminate 90 days thereafter on August 30, 2005.
Pegasus Communications and the Debtors have entered into an agreement,
dated April 14, 2005 and approved by the Bankruptcy Court by order entered May
5, 2005, relating to certain tax matters. Pursuant to this agreement, Pegasus
Communications and the Debtors will cease filing tax returns on a consolidated
basis as of January 1, 2004 and will allocate between the Debtors and the
non-Debtors certain historic tax attributes (primarily related to net operating
loss carryforwards) arising in periods preceding the deconsolidation. This
agreement also provides that the non-Debtors will not take a deduction for the
worthlessness of stock in any Debtor until the date in which Pegasus
Communications no longer holds any stock in Pegasus Satellite, provided that
such deduction, if not taken earlier, may be in any event taken as of December
31, 2005 or any subsequent date.
7
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL INFORMATION OF PEGASUS SATELLITE COMMUNICATIONS - DECONSOLIDATED
AFTER JUNE 2, 2004
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" provides that consolidated financial
statements including one or more entities in reorganization proceedings and one
or more entities not in reorganization proceedings should include condensed
combined financial statements of the entities in reorganization proceedings.
Pegasus Satellite Communications was included in our condensed consolidated
statement of operations for the quarter ended March 31, 2004. The condensed
statement of operations of Pegasus Satellite Communications for this period is
as follows (in thousands):
PEGASUS SATELLITE COMMUNICATIONS, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Quarter ended
March 31, 2004
Corporate expenses $ 3,446
Other operating expenses 3,912
----------------------
Loss from operations (7,358)
----------------------
Discontinued operations:
Loss from discontinued operations (57,761)
Income tax expense
Cumulative effect of consolidating variable interest
entities (2,127)
----------------------
Loss from discontinued operations (59,888)
----------------------
Net loss $(67,246)
======================
As noted above, subsequent to June 2, 2004 our consolidated financial
statements no longer include the results of Pegasus Satellite Communications.
Consequently, no condensed financial statements for periods after June 2, 2004
are presented.
NEW ACCOUNTING PRONOUNCEMENTS
Pursuant to authorization from our Board of Directors, options to
purchase 225,000 shares of our Class A common stock ("Class A") were granted to
our officers on June 2, 2005, and options to purchase 75,000 shares of our Class
A common stock were granted to our outside directors on June 6, 2005. These
officer and director stock options had an aggregate grant date fair value of
approximately $1.2 million, respectively, and will be fully vested by June 2008.
The Company also made grants on June 2, 2005 to non-executive employees of
14,000 restricted shares of Class A (which will be fully vested by June 2007)
and options to purchase 132,000 shares of Class A (which will be fully vested by
September 2008). The grant date fair value of these restricted shares and
non-executive stock options were approximately $0.1 million and $0.6 million,
respectively. Upon our adoption of Statement of Financial Accounting Standards
No. 123R, "Share-Based Payments", which we anticipate will occur no later than
January 1, 2006, compensation expense for the unvested portion of these grants
will be recognized over their remaining vesting period.
8
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. DISCONTINUED OPERATIONS
As a result of the August 2004 sale of substantially all of the
Debtors' satellite television assets to DIRECTV, Inc., our Annual Report on Form
10-K for the year ended December 31, 2004 included the operations of Pegasus
Satellite Communications' satellite television business and interest expense
allocated to the satellite television business in discontinued operations.
Beginning with our Form 10-Q for the three month period ended March 31, 2005,
all of Pegasus Satellite Communications' operations and interest expense, except
for allocations of general corporate overhead of Pegasus Management, are
classified as discontinued in our condensed consolidated statements of
operations for the three month period ended March 31, 2004, as well as in the
condensed statements of operations included in Note 1. This reclassification
resulted from the combination of: a) a Plan of Reorganization submitted in
February 2005 which contemplated a liquidation of the Debtors' assets as well as
our disassociation with the Debtors after the effective date of the Plan of
Reorganization (except with respect to the Support Services Agreement); and b)
our decision in March 2005 not to pursue an acquisition of the broadcast assets
of the Debtors.
Aggregate revenues and pretax loss from discontinued operations
included in our condensed consolidated statements of operations were as follows
(in thousands):
Three Months
Ended
March 31,
2004
-----------------
Revenues $205,188
Pretax loss (55,003)
Aggregate revenues and pretax loss from discontinued operations
included in Pegasus Satellite Communications' condensed consolidated statement
of operations in Note 1 were as follows (in thousands):
Three Months
Ended
March 31, 2004
-----------------
Revenues $205,188
Pretax loss (59,888)
9
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF CERTAIN ACCOUNTS
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities were comprised of the
following (in thousands):
March 31, December 31,
2005 2004
--------------- ----------------
Accrued severance $ 2,322 $ 3,557
Accrued professional fees 1,133 1,630
Accrued health insurance costs 1,155 1,337
Other (including $523 due to Debtors in 2005 under the
Support Services Agreement) 1,599 1,355
--------------- ----------------
$ 6,209 $ 7,879
=============== ================
OTHER OPERATING EXPENSES
Other operating expenses from our continuing operations for the
quarters ended March 31, 2005 and 2004 were as follows (in thousands):
2005 2004
------------- -----------
Compensation-related charges, including
incentive compensation, stock awards and
severance (net of $(646) income allocated to
the Debtors in 2005 under the Support
Services Agreement) $ 400 $ 4,293
Bankruptcy-related legal fees 408 -
Other - 187
------------- -----------
$ 808 $ 4,480
============= ===========
10
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING FOR STOCK OPTIONS
We account for stock options and restricted stock issued to our
employees 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 March 31,
2005 2004
--------------- ---------
Net loss, as reported $ (5,937) $ (68,378)
Add: stock-based employee compensation expense included in net loss, as
reported 322 2,217
Deduct: stock-based employee compensation expense determined under the fair value
method (332) (3,199)
--------------- -------------
Net loss, pro forma $ (5,947) $ (69,360)
=============== =============
Basic and diluted per common share amounts (see Note 5):
Net loss applicable to common shares, as reported $ (0.70) $ (5.90)
Net loss applicable to common shares, pro forma $ (0.70) $ (5.98)
4. STOCKHOLDERS' EQUITY (DEFICIENCY)
The change in stockholders' equity (deficiency) from December 31, 2004
to March 31, 2005 consisted of the following (in thousands):
Number of
Shares
Issued - Number of
Series C Series C shares
convertible convertible issued - Other Total
preferred preferred Common Common stockholders' Stockholders'
(in thousands) stock stock stock stock deficiency Deficiency
-------------- ------------ ------------ ----------- -------------- ---------------
December 31, 2004 1,939 $19 13,362 $133 $(215,351) $(215,199)
Net loss (5,937) (5,937)
Common stock issued for:
Exercise of stock options 38 1 349 350
Stock plans and awards (including
amortization of deferred compensation
expense of $371) 2 - 286 286
Preferred stock issued in satisfaction of
liability 52 1 1,387 1,388
-------------- ------------ ------------ ----------- -------------- ---------------
March 31, 2005 1,991 $20 13,402 $134 $(219,266) $(219,112)
============== ============ ============ =========== ============== ===============
11
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Our Series C convertible preferred stock ("Series C"), with a par value
of $0.01 per share, had a liquidation preference, inclusive of accumulated
dividends in arrears, of $237.8 million and $228.4 million at March 31, 2005 and
December 31, 2004, respectively. Dividends not declared accumulate in arrears
until paid. At March 31, 2005, total dividends in arrears on Series C, which
have accumulated since January 31 2002, were $38.7 million, or $19.45 per share.
The dividend of $4.3 million subject to declaration on April 30, 2005 was not
declared.
The number of outstanding shares of our Class A and B common stocks at
March 31, 2005 and December 31, 2004 was 13,075,948 and 13,041,486,
respectively. Shares outstanding as of March 31, 2005 exclude 206,600 shares
held by a consolidated subsidiary, 86,081 shares held by Pegasus PCS Partners, a
consolidated variable interest entity, and 34,132 shares held in treasury.
Shares outstanding as of December 31, 2004 exclude 206,600 shares held by a
consolidated subsidiary, 85,472 shares held by Pegasus PCS Partners, and 29,583
shares held in treasury. The number of outstanding shares at both dates includes
1,315,208 shares held by the Debtors. We have no further involvement with the
Debtors, including their broadcast television business, after the effective date
of the Plan of Reorganization (except pursuant to the Support Services
Agreement).
On February 18, 2005 we entered into an agreement with The Blackstone
Group L.P. ("Blackstone"). Pursuant to the agreement, we issued 52,351 shares of
our 6 1/2% Series C convertible preferred stock in satisfaction of a liability
to Blackstone related to investment banking services in connection with the sale
of the DIRECTV distribution business of the Debtors.
No dividends were declared or paid on common stocks during the three
months ended March 31, 2005.
5. PER COMMON SHARE AMOUNTS
Net loss applicable to common shares equals net loss as reported
adjusted by certain preferred stock-related activity. The computations of net
loss applicable to common shares were as follows (in thousands):
Three Months Ended
March 31,
---------------------------------
2005 2004
-------------- ---------------
Loss before discontinued operations $(5,937) $(13,375)
-------------- ---------------
Preferred stock-related adjustments:
Accumulated and accrued dividends on preferred stock and redeemable
preferred stock (3,207) (3,189)
Accumulated dividends issued in exchange of Series C for Series D
preferred stock - (1,609)
Gains associated with redemptions of preferred stocks - 6,081
-------------- ---------------
Total preferred stock-related adjustments (3,207) 1,283
-------------- ---------------
Loss from continuing operations applicable to common shares (9,144) (12,092)
Loss from discontinued operations - (55,003)
-------------- ---------------
Net loss applicable to common shares $(9,144) $(67,095)
============== ===============
12
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 March 31, 2005 and 2004 were 3.4 million and 4.9 million,
respectively. The per share amounts are computed by dividing loss from
continuing operations applicable to common shares and loss from discontinued
operations, respectively, by the weighted average number of common shares
outstanding during the periods reported.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Significant noncash investing and financing activities were as follows
(in thousands):
Three Months Ended
March 31,
2005 2004
-------------- --------------
Preferred stock dividends accrued and accretion $ - $ (973)
Common stock issued for employee benefits and awards 286 2,547
Interest added to principal for Pegasus Satellite $100 million term loan - 1,661
Issuance of Series C in satisfaction of liability 1,387 -
7. INCOME TAXES
Due to the deconsolidation of Pegasus Satellite and the fact that we
now account for our negative investment in Pegasus Satellite of approximately
$413 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 months ended March 31, 2005, we recorded increases of
$1.9 million to the valuation allowance recorded against the net deferred income
tax asset balance. 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 March 31, 2005 was $321.9 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 March
31, 2005 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 months ended March 31,
2005 to virtually zero.
8. INDUSTRY SEGMENTS
As a consequence of our decision not to pursue an acquisition of the
broadcast television assets of the Debtors, and the resulting classification of
Pegasus Broadcast Television, Inc. as discontinued in periods prior to its
deconsolidation on June 2, 2004, our reportable operating segments have changed.
Currently, our sole reportable operating segment is our wireless broadband
business. We reported identifiable assets for our wireless broadband business of
$7.1 million and $8.7 million at March 31, 2005 and December 31, 2004,
respectively.
13
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENT LIABILITIES
Legal Matters
- -------------
Proceedings of Pegasus Satellite Under Chapter 11 of the Bankruptcy Code
See Note 1 for a detailed discussion of the proceedings under Chapter
11 of the Bankruptcy Code.
Pursuant to the Plan of Reorganization, the Liquidating Trustee will be
responsible for investigating and prosecuting or settling any claims or causes
of action of the Debtors existing on the date the Plan of Reorganization became
effective (the "Liquidating Trust Claims"). Liquidating Trust Claims include any
claims of the Debtors against Pegasus Communications Corporation and its
non-Debtor subsidiaries, as well as any claims against the officers and
directors of the non-Debtors and the Debtors, that may have arisen during the
bankruptcy proceedings and were not released by the Global Settlement Agreement
(the "Global Settlement Agreement") entered into on July 30, 2004 by Pegasus
Satellite Communications, Pegasus Communications, DIRECTV Inc., the National
Rural Telecommunications Cooperative, and the creditors committee representing
the unsecured creditors of the Debtors. Under the Global Settlement Agreement,
the Debtors released any and all claims against the non-Debtors and the officers
and directors of the Debtors and the non-Debtors arising on or prior to August
27, 2004, excluding claims, if any, arising under the Support Services
Agreement. The Global Settlement Agreement did not release any claims of third
parties held in their individual capacity and not derivatively. Although we do
not believe that any Liquidating Trust Claims have arisen that are likely to
result in any material liability to us, we may be required to incur costs in
connection with the Liquidating Trustee's investigation or assertion of any such
claims and, if the Liquidating Trustee were to successfully assert any such
claims, we could be subject to payment of damages in connection therewith.
Further, to the extent any such claims are asserted against our officers and
directors, we may incur indemnification obligations in connection therewith.
Patent Infringement Litigation
On December 4, 2000, our direct subsidiary Pegasus Development
Corporation ("Pegasus Development") and Personalized Media Communications, LLC
("Personalized Media") filed a patent infringement lawsuit in the United States
District Court, District of Delaware against DIRECTV, Inc., Hughes Electronics
Corporation ("Hughes"), Thomson Consumer Electronics ("Thomson"), and Philips
Electronics North America Corporation ("Philips"). Personalized Media is a
company with which Pegasus Development has a licensing arrangement. Pegasus
Development and Personalized Media are seeking injunctive relief and monetary
damages for the defendants' alleged patent infringement and unauthorized
manufacture, use, sale, offer to sell, and importation of products, services,
and systems that fall within the scope of Personalized Media's portfolio of
patented media and communications technologies, of which Pegasus Development is
an exclusive licensee within a field of use. The technologies covered by Pegasus
Development's exclusive license include services distributed to consumers using
certain Ku band BSS frequencies and Ka band frequencies, including frequencies
licensed to affiliates of DIRECTV, Inc.
In March 2003, a hearing was held before a special master appointed by
the Delaware district court to recommend constructions of disputed terms in the
patent claims in suit. On March 24, 2003, the special master issued his report,
recommending claim constructions largely favorable to the plaintiffs. The report
of the special master is subject to review by the district judge.
14
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In April 2003, the United States Patent and Trademark Office granted a
petition filed by defendant Thomson seeking reexamination of the patents in suit
in the Delaware litigation. Additional petitions seeking reexamination were
filed by Scientific-Atlanta, Inc. On April 14, 2003, the defendants filed a
motion in the Delaware district court seeking a stay of the patent litigation
pending completion of reexamination proceedings. On May 14, 2003, the Delaware
district court granted defendants' motion pending a disposition of the United
States Patent and Trademark Office's reexamination of several of the patents in
suit. Also on May 14, 2003, the Delaware district court denied all pending
motions without prejudice. The parties may refile those motions following the
stay and upon the entry of a new scheduling order. In April 2005, an examiner in
the United States Patent and Trademark Office issued office actions for two of
the patents under reexamination, finding that all of the claims of U.S. Patent
No. 4,704,725 and most of the claims of U.S. Patent No. 4,694,490 are not
patentable. In May 2005, an examiner in the United States Patent and Trademark
Office issued an office action for U.S. Patent No. 5,887,243, also under
reexamination, finding that most of the claims are not patentable. It is
expected that Personalized Media will respond to these office actions, and, if
necessary, pursue administrative and judicial review of the actions.
Personalized Media is entitled to appeal any adverse action by the patent
examiner to the Board of Patent Appeals and Interferences in the Patent and
Trademark Office, and may subsequently appeal an adverse decision of the Board
to the United States Court of Appeals for the Federal Circuit. Only after such
appeals have concluded does the United States Patent and Trademark Office issue
a certificate canceling any claims of the patents determined, after appeal, to
be unpatentable. This process can take several years. At this time, we do not
believe these office actions have an impact on the carrying amount of our
Personalized Media licenses.
Securities Litigation
On May 26, 2005, AIG Global Investments Corp., AIG SunAmerica Asset
Management Corp., and the Variable Annuity Life Insurance Company (collectively,
the "Plaintiffs"), all of which are members of American International Group,
Inc., sued the Company, Marshall W. Pagon (the Company's Chief Executive
Officer) and Joseph W. Pooler, Jr. (the Company's then Chief Financial Officer)
in the Eastern District of Pennsylvania alleging violations of federal and state
securities fraud laws, common law fraud and related claims. The Plaintiffs'
claims are based upon the allegation that certain public statements made by the
Company during the period from July 2002 to May 2004 concerning its subsidiary,
Pegasus Satellite, were materially false and misleading because such statements
failed to disclose that Pegasus Satellite's exclusive rights to distribute
DIRECTV satellite television programming services within certain defined
territories could be terminated prematurely without cause and without the
consent of Pegasus Satellite as early as 2004. Plaintiffs claim that they relied
on these statements and omissions to purchase more than $50 million of
securities of the Company and Pegasus Satellite from July 2002 until May 2004,
which have since decreased in value, allegedly causing damages to Plaintiffs of
greater than $20 million.
Due to the preliminary nature of this case, the Company is not able
to predict the outcome of this litigation; however, the Company believes that
the allegations are without merit and intends to vigorously defend against them.
In addition, the Company maintains directors and officers liability insurance
that it believes will cover any adverse judgment and all costs associated with
the Plaintiffs' claims beyond a $1 million deductible. At March 31, 2005, we
have not accrued any liability for legal and other costs associated with the AIG
suit as our accounting policy is to expense these costs as incurred.
15
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
SEC Investigation
On August 11, 2004, Pegasus Communications and its subsidiaries
received an investigative subpoena from the Securities and Exchange Commission
("SEC") to produce documents related to it and its subsidiaries' practices in
reporting the number of subscribers of its direct broadcast satellite business.
Subsequent to our receipt of the subpoena, we sold our direct broadcast
satellite business to DIRECTV, Inc. While we are cooperating fully with the SEC
in its investigation, we cannot predict the outcome of the SEC's investigation
or when the investigation will be resolved.
10. SUBSEQUENT EVENTS
Nasdaq Delisting Notice
- -----------------------
On May 20, 2005, our Class A common stock was delisted from the Nasdaq
Stock Market pursuant to a notice received on May 18, 2005, and is currently
trading on the Pink Sheets under the ticker symbol PGTV. We filed a request for
reconsideration by the Nasdaq Listing Qualifications Panel, and a separate
appeal with the Nasdaq Listing and Hearing Review Council seeking a review of
the Nasdaq Listing Qualifications Panel's decision to delist. Our request for
reconsideration was denied by the Nasdaq Listing Qualifications Panel on June 1,
2005. Consequently, we intend to proceed with our appeal. The notice of
delisting followed (i) an April 5, 2005 Nasdaq staff determination that the
Company had failed to comply with the Nasdaq filing requirement, as set forth in
Marketplace Rule 4310(c)(14), due to the fact that it had not filed its Annual
Report on Form 10-K for the year ended December 31, 2004 with the SEC by March
31, 2005, (ii) a May 5, 2005 hearing before a Nasdaq Listing Qualifications
Panel and (iii) the May 18, 2005 filing of the Company's Form 10-K and the
Company's request, submitted after the filing of the Form 10-K but before the
notice of delisting, that the Nasdaq Listing Qualifications Panel grant Pegasus'
request for an exception to allow Pegasus until June 15, 2005 to file its Form
10-Q for the quarter ended March 31, 2005.
Reversal of Negative Investment in Pegasus Satellite
- ----------------------------------------------------
As a result of the Plan of Reorganization becoming effective on May 5,
2005, our $413 million negative investment in Pegasus Satellite will be reversed
and recognized in our condensed Consolidated Statement of Operations in the
second quarter of 2005, with a correspondingly increase of $413 million to
stockholders' equity.
16
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, is a forward
looking statement. 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, 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 for the year ended
December 31, 2004. 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
in Item 1.
GENERAL
As a consequence of the Debtors filing for Chapter 11 bankruptcy
protection on June 2, 2004, the sale of the Debtors' direct broadcast satellite
business to DIRECTV, Inc. on August 27, 2004, and our decision in March 2005 not
to pursue an acquisition of the Debtors' broadcast television assets, our
results of operations have changed.
Under generally accepted accounting principles, the financial position
and results of Pegasus Satellite Communications are included in our consolidated
financial statements only through June 2, 2004, and all of Pegasus Satellite
Communications' operations and interest expense, except for allocations of
general corporate overhead of Pegasus Management, are classified as discontinued
in our condensed statements of operations for all periods prior to the
deconsolidation of Pegasus Satellite on June 2, 2004 (see Note 2 to the
Consolidated Financial Statements contained herein).
17
PEGASUS COMMUNICATIONS CORPORATION
Our principal operating business presently consists of the provision of
wireless Internet access and broadband communications to residential, small
business and enterprise subscribers, conducted through indirect subsidiaries of
Pegasus Communications referred to as Pegasus Broadband. Pegasus Broadband began
building its wireless communications network in April 2003, began commercial
operations in 2004, and continues to expand its wireless communications network.
At March 31, 2004, Pegasus Broadband provided service to approximately 300
subscribers in 10 communities in Texas through its network which passed
approximately 28,000 homes and small businesses. At March 31, 2005, Pegasus
Broadband provided service to approximately 1,700 subscribers in 47 communities
in Texas through its network which passed approximately 165,000 homes and small
businesses.
We also hold licenses and intellectual property, with a net carrying
amount of $139.2 million at March 31, 2005, through certain subsidiaries of
Pegasus Communications.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires that we
make certain estimates and assumptions that affect the reported amounts of
revenues, expenses, assets, and liabilities. Actual results could differ from
those estimates. Significant estimates relate to: useful lives and
recoverability of our long lived assets, including intangible assets consisting
of licenses and intellectual property rights; and valuation allowances
associated with deferred income tax assets. In addition to the above estimates
and accounting policies, we believe our accounting policy regarding the
deconsolidation of Pegasus Satellite Communications is important to
understanding our results of operations. A summary of significant accounting
policies and a description of accounting policies that are considered critical
may be found in our 2004 Annual Report on Form 10-K, filed on May 18, 2005, in
Note 2 of the Notes to the Consolidated Financial Statements and the Use of
Estimates and Critical Accounting Policies section of Management's Discussion
and Analysis of Financial Condition and Results of Operations.
COMPARISON OF CONTINUING OPERATIONS - 2005 VS. 2004
Broadband revenues for the quarter ending March 31, 2005 were $180
thousand, an increase of $154 thousand from the prior year reflecting growth in
this business which began commercial operations in 2004.
Consolidated broadband operating expenses in 2005 were $1.7 million, an
increase of $1.1 million, or 212%, from the prior year, primarily reflecting
increased costs related to expansion of the business segment.
Corporate and development expenses in 2005 were $0.5 million, a
decrease of $4.1 million, or 89%, from the prior year, primarily due to the
deconsolidation of Pegasus Satellite Communications. The 2004 period includes
general corporate expenses allocable to both non-Debtors and Pegasus Satellite
Communications, whereas the current year period only includes general corporate
expenses allocable to non-Debtors. We continue to provide certain services to
the Debtors, including management, accounting, treasury, human resources, legal,
and payroll services, among others, and the Debtors reimburse us, at cost, for
these services based on a methodology specified in a Support Services Agreement
approved by the Bankruptcy Court. The allocation of corporate expenses
attributable to the Debtors in the quarter ended March 31, 2005 totaled $2.3
million as a result of the services we provided. On June 1, 2005, Pegasus
Management exercised its termination rights under the Support Services
Agreement, which consequently will terminate 90 days thereafter on August 30,
2005. We have made certain reductions in the number of our personnel during the
second quarter of 2005 and continue to assess the appropriate level of corporate
and administrative services required to support our operations in the future,
including the cessation of our obligation to provide services under the Support
Services Agreement. We also intend to reassess our internal controls and
procedures and related documentation as appropriate for the smaller size of our
company.
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PEGASUS COMMUNICATIONS CORPORATION
Other operating expenses in 2005 were $0.8 million, a decrease of $3.7
million, or 82%, from the prior year. This decrease was primarily due to a $3.9
million reduction in compensation-related charges consisting of incentive
compensation, stock awards and severance.
Interest expense from continuing operations was $174 thousand in 2005,
$77 thousand lower than the prior year, primarily due to a $56 thousand
non-recurring adjustment in the 2004 quarter, as well as a stipulated drop in
the fixed interest rate on the mortgage for our corporate headquarters in
February 2005.
In the three months ended March 31, 2005, we recorded increases of $1.9
million to the valuation allowance recorded against the net deferred income tax
asset balance at March 31, 2005. 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 March 31, 2005
was $321.9 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 March 31, 2005 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
months ended March 31, 2005 to virtually zero.
DISCONTINUED OPERATIONS
Aggregate revenues and pretax loss from discontinued operations
included in our consolidated statements of operations were as follows (in
thousands):
Three Months
Ended
March 31,
------------
2004
------------
Revenues $205,188
Pretax loss (55,003)
As a result of the August 2004 sale of substantially all of the
Debtors' satellite television assets to DIRECTV, Inc., our Annual Report on Form
10-K for the year ended December 31, 2004 included the operations of Pegasus
Satellite Communications' satellite television business and interest expense
allocable to the satellite television business in discontinued operations.
Beginning with our Form 10-Q for the three months period ended March 31, 2005,
all of Pegasus Satellite Communications' operations and interest expense, except
for allocations of general corporate overhead of Pegasus Management, are
classified as discontinued in our condensed statements of operations for all
periods prior to the deconsolidation of Pegasus Satellite on June 2, 2004. This
reclassification resulted from the combination of: a) a Plan of Reorganization
submitted in February 2005 which contemplated a liquidation of the Debtors'
assets as well as our disassociation with the Debtors after the effective date
of the Plan of Reorganization (except with respect to the Support Services
Agreement); and b) our decision in March 2005 to not pursue an acquisition of
the broadcast assets of the Debtors.
19
PEGASUS COMMUNICATIONS CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of liquidity and capital resources focuses on
our Condensed Consolidated Statements of Cash Flows. Consequently, the amounts
shown for the three months ended March 31, 2004 include activity for Pegasus
Satellite Communications, which we did not deconsolidate until June 2, 2004.
Additionally, amounts related to discontinued operations have not been
separately classified in any of the periods presented. We are currently
assessing the appropriate level of corporate and administrative services
required to support our operations in light of the pending termination of the
Support Services Agreement. We believe our available resources will be
sufficient to fund our operating, investing, and financing requirements for at
least the next twelve months.
Net cash used for operating activities was $0.6 million and $2.6
million for 2005 and 2004, respectively. The principal reasons for the $2.0
million improvement between 2005 and 2004 were: a) a reduction of approximately
$46 million in cash interest paid in 2004; b) a reduction of approximately $4
million in incentive compensation related payments; c) a reduction of
approximately $2 million in payments for legal costs, and d) a reduction of
approximately $4 million in net corporate and development expenses paid due to
reimbursements by the Debtors under the Support Services Agreement; all
partially offset by e) a reduction of approximately $52 million in operating
cash flow provided by the direct broadcast satellite business; f) a reduction of
approximately $1 million in operating cash flow provided by the broadcast
television business; and g) an approximate $1 million increase in cash used by
our broadband business as it grows. The significant changes to operating cash
flow provided by the direct satellite business and cash interest payments are a
direct result of the Debtors' Chapter 11 Bankruptcy filing on June 2, 2004, the
subsequent deconsolidation of the operating results for Pegasus Satellite
Communications, and the sale of Pegasus Satellite Television in August 2004.
Net cash provided by investing activities was $23.0 million in 2005,
compared with net cash used of $1.7 million in 2004. The investing activities
for 2005 primarily reflected cash provided from the sale of all short-term
investments of $23.5 million. The investing activities for 2004 primarily
reflected cash provided from net sales of short-term investments of $5.7
million, partially offset by: a) $2.6 million used for direct broadcast
satellite receiver equipment recorded as capital assets; b) $4.3 million used
for the January 2004 purchase of an FCC license for a broadcast television
station in Gainesville, Florida; and c) other capital expenditures of $0.6
million.
Net cash provided by financing activities was $0.3 million in 2005,
compared with net cash used of $8.7 million in 2004. The primary financing
activities in 2005 were $350 thousand in cash received for exercised stock
options. The primary financing activities in 2004 were $5 million cash used to
post a performance bond relating to our Ka band satellite license, $2.5 million
of debt financing costs incurred by Pegasus Satellite Communications, and $750
thousand of repayments on term loan facilities.
We project that our capital expenditures for the balance of 2005 will
be $6.2 million, including capitalized subscriber acquisition costs for our
Pegasus Broadband business of $2.4 million and investments in property and
equipment of $3.8 million.
In connection with our wireless broadband business, our subsidiary
Pegasus Rural Broadband LLC ("Pegasus Rural Broadband") expects to execute
definitive loan documentation in the second quarter of 2005 related to its $13
million application for funding under the RUS Rural Broadband Access Loan and
Loan Guarantee Program, and anticipates initial funding for a portion of the
available balance to occur in the third quarter of 2005. We are awaiting a
response on Pegasus Rural Broadband's second loan application for approximately
$11 million. The RUS loan document has covenants restricting our ability to
access excess cash flows of Pegasus Rural Broadband.
20
PEGASUS COMMUNICATIONS CORPORATION
At March 31, 2005, approximately $41 million of our cash and cash
equivalents were concentrated in an investment portfolio consisting of money
market and high-grade financial instruments with initial maturities of less than
three months. A leading global investment banking, securities trading and
brokerage firm managed this investment portfolio. Due to the nature of the
financial instruments and the firm that is managing them, we believe that any
risk associated with this concentration is limited.
Dividends not declared on our 6-1/2% Series C convertible preferred
stock accumulate in arrears until paid. The total amount of dividends in arrears
on Series C at March 31, 2005, which have accumulated since January 2002, was
$38.7 million. The dividend of $4.3 million subject to declaration on April 30,
2005 was not declared. Our ability to pay dividends on common stock is limited
when there are preferred dividend arrearages.
Our relatively small operating business makes us more vulnerable to
adverse economic and industry conditions and limits our flexibility in planning
for, or reacting to, changes in our business and the industries in which we
operate. Our ability to fund operations, planned capital expenditures, preferred
stock requirements, and other activities depends on our ability to generate cash
in the future. Our ability to generate cash depends on the success of our
business strategy, prevailing economic conditions, regulatory risks, competitive
activities by other parties, equipment strategies, technological developments,
levels of bandwidth costs and subscriber acquisition costs, levels of interest
rates, and financial, business, and other factors that are beyond our control.
While we believe that our capital resources and liquidity are sufficient to meet
our contractual obligations for at least the next twelve months, we cannot
assure that our business will generate sufficient cash flow from operations or
that alternative financing will be available to us in amounts sufficient to fund
the needs previously specified.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
At March 31, 2005, there had not been a material change in any of the
market risk information disclosed by us in our Annual Report on Form 10-K for
the year ended December 31, 2004. More detailed information concerning market
risk can be found under Item 7A of our Annual Report on Form 10-K for the year
ended December 31, 2004.
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, principal financial officer
and principal accounting 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.
21
PEGASUS COMMUNICATIONS CORPORATION
The Company's management, with the participation of the Company's Chief
Executive Officer, principal financial officer and principal accounting officer,
evaluated the effectiveness of the Company's disclosure controls and procedures
as of the end of the period covered by this report, March 31, 2005. Based on
this evaluation, the Chief Executive Officer, principal financial officer and
principal accounting officer concluded that these controls and procedures, as of
such date, were effective in providing reasonable assurance of achieving their
desired control objectives.
Our failure to file this Form 10-Q by its May 10, 2005 due date was
occasioned by the circumstances leading to a delay in the filing of our Form
10-K for the year ended December 31, 2004, which included the resignation of the
company's former independent public accountants on December 29, 2004; the delay
in the engagement of the company's new public accountants until February 14,
2005; and the time and resources required to be devoted by management to the
Chapter 11 bankruptcy proceedings of the Debtors. The Company's management
believes that the Company will be able to timely file its future reports since
the circumstances that led to the late filings are nonrecurring.
As of December 31, 2004, we reported a material weakness relating to
the effectiveness of information technology systems in place to ensure
controlled backup of data is occurring and recovery capacity is appropriate, and
that the related backup and recovery systems are being monitored and tested (see
Item 9A(b) "Management's Annual Report on Internal Control Over Financial
Reporting" included in our 2004 Annual Report on Form 10K). We remedied the
weakness in the first quarter of 2005 by re-implementing appropriate backup and
recovery systems, similar to those that had been in place prior to the
transition of our information technology infrastructure to our corporate
headquarters in Bala Cynwyd, PA from our Marlborough, MA facility. Other than
this remediation, no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
occurred during the quarter ended March 31, 2005 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
In the second quarter of 2005, we have made certain reductions in the
number of our personnel and continue to assess the appropriate level of
corporate and administrative services required to support our operations in the
future, including following the cessation of the Support Services Agreement with
the Debtors. We also intend to reassess our internal controls and procedures and
related documentation as appropriate for the smaller size of our company.
22
PEGASUS COMMUNICATIONS CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information relating to the proceedings of Pegasus Satellite
Communications, Inc. under Chapter 11 of the U.S. Bankruptcy Code, patent
infringement litigation, a civil suit brought by certain members of the American
International Group, Inc., and an SEC investigation, we incorporate by reference
herein the disclosure reported under Note 9 of the Notes to Consolidated
Financial Statements contained in Item 1 of this Quarterly Report on Form 10-Q
and Note 19 of the Notes to Consolidated Financial Statements in our Annual
Report on Form 10-K for the year ended December 31, 2004.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 18, 2005, we issued 52,351 shares of our 6 1/2% Series C
convertible preferred stock to The Blackstone Group L.P. We have claimed
exemption for registration of these securities under Section 4(2) of the
Securities Act of 1933.
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.
23
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
June 13, 2005 By: /s/ Ronald B. Stark
- ------------------------------ -----------------------
Date Ronald B. Stark
Vice President of Finance
(principal accounting officer)
24