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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 August 5, 2004:
Class A Common Stock, $0.01 par value
(excluding 755,104 shares held by subsidiaries of the registrant) 5,081,590
Class B Common Stock, $0.01 par value 916,380
Non-Voting Common Stock, $0.01 par value -
PEGASUS COMMUNICATIONS CORPORATION
Form 10-Q
Table of Contents
For the Quarterly Period Ended June 30, 2004
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
June 30, 2004 and December 31, 2003 4
Consolidated Statements of Operations and Comprehensive Loss
Three months ended June 30, 2004 and 2003 5
Consolidated Statements of Operations and Comprehensive Loss
Six months ended June 30, 2004 and 2003 6
Condensed Consolidated Statements of Cash Flows
Six months ended June 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 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
Item 4. Controls and Procedures 41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 42
Item 2. Changes in Securities and Use of Proceeds and Issuer Purchases 42
of Equity Securities
Item 3. Defaults Upon Senior Securities 42
Item 5. Other Information 43
Item 6. Exhibits and Reports on Form 8-K 43
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 ("Pegasus Communications") 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)
June 30, December 31,
2004 2003
------------- ------------
(unaudited)
Currents assets:
Cash and cash equivalents $ 59,672 $ 82,921
Restricted cash 183 62,517
Accounts receivable, net
Trade 104 24,923
Other 1,041 7,529
Deferred subscriber acquisition costs, net - 9,945
Prepaid expenses 2,623 6,953
Other current assets 44 6,549
-------- ----------
Total current assets 63,667 201,337
Property and equipment, net 17,724 83,702
Intangible assets, net 149,917 1,607,805
Other noncurrent assets 22,683 158,256
-------- ----------
Total $253,991 $2,051,100
======== ==========
Current liabilities:
Current portion of long term debt $ 121 $ 3,157
Accounts payable 625 12,362
Accrued interest 64 34,696
Accrued programming fees and commissions - 58,250
Litigation verdict accrual - 35,167
Other accrued expenses 7,750 21,583
Other current liabilities 22 7,158
--------- ----------
Total current liabilities 8,582 172,373
Investment in Pegasus Satellite Communications, Inc. 412,684 -
Long term debt 8,225 1,385,071
Mandatorily redeemable preferred stock - 85,512
Other noncurrent liabilities - 70,507
--------- ----------
Total liabilities 429,491 1,713,463
--------- ----------
Commitments and contingent liabilities (see Note 12)
Redeemable preferred stocks 217,015 215,501
Minority interest 8,103 452
Common stockholders' equity:
Common stock 65 63
Other common stockholders' equity (400,683) 121,621
-------- ----------
Total common stockholders' equity (400,618) 121,684
-------- ----------
Total $253,991 $2,051,100
======== ==========
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 June 30,
2004 2003
----------- ----------
(restated-see Note 14)
Net revenues:
Direct broadcast satellite $ 137,711 $205,823
Broadcast television and other operations 6,224 8,354
--------- --------
Total net revenues 143,935 214,177
Operating expenses:
Direct broadcast satellite
Programming 48,772 92,483
Other subscriber related expenses 25,973 40,550
--------- --------
Direct operating expenses (excluding depreciation and amortization and 74,745 133,033
impairment of direct broadcast satellite assets shown below)
Promotions and incentives 2,476 3,595
Advertising and selling 2,604 6,572
Litigation verdict 4,718 -
General and administrative 4,039 5,913
Impairment of direct broadcast satellite assets 429,638 -
Depreciation and amortization 25,833 40,843
--------- --------
Total direct broadcast satellite expenses 544,053 189,956
Broadcast television and other operations (including depreciation and
amortization of $422 for 2004 and $562 for 2003) 5,840 7,755
Corporate and development expenses (including depreciation and amortization
of $3,882 for 2004 and $4,005 for 2003) 7,336 7,837
Other operating expenses 14,597 10,465
--------- --------
Loss from operations (427,891) (1,836)
Interest expense (31,854) (35,614)
Interest income 304 167
Other nonoperating income, net (2,631) 1,173
--------- --------
Loss before equity in affiliates, income taxes, and discontinued (462,072) (36,110)
operations
Equity in earnings of affiliates - 220
Net benefit for income taxes - 795
--------- --------
Loss before discontinued operations (462,072) (35,095)
Discontinued operations:
Income from discontinued operations (including loss on disposal of $2,548 and
net of income tax benefit of $975 in 2003) - (1,592)
--------- --------
Net loss $(462,072) $(36,687)
========= ========
Comprehensive loss $(462,072) $(36,687)
========= ========
Basic and diluted per common share amounts:
Loss from continuing operations, including $3,204 and $6,830, respectively, $ (77.34) $ (7.40)
representing preferred stock dividends, deemed dividends, and accretion
Discontinued operations - (0.28)
---------- --------
Net loss applicable to common shares $ (77.34) $ (7.68)
========== ========
Weighted average number of common shares outstanding 6,016 5,666
========== ========
5
Pegasus Communications Corporation
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share amounts)
(unaudited)
Six Months Ended June 30,
2004 2003
----------- ----------
(restated-see Note 14)
Net revenues:
Direct broadcast satellite $ 335,621 $411,369
Broadcast television and other operations 13,692 15,926
--------- --------
Total net revenues 349,313 427,295
Operating expenses:
Direct broadcast satellite
Programming 138,603 185,739
Other subscriber related expenses 62,745 85,225
--------- --------
Direct operating expenses (excluding depreciation and amortization and 201,348 270,964
impairment of direct broadcast satellite assets shown below)
Promotions and incentives 5,594 6,473
Advertising and selling 6,850 12,298
Litigation verdict 22,044 -
General and administrative 10,337 12,286
Impairment of direct broadcast satellite assets 429,638 -
Depreciation and amortization 70,297 82,829
--------- --------
Total direct broadcast satellite expenses 746,108 384,850
Broadcast television and other operations (including depreciation and
amortization of $976 for 2004 and $1,316 for 2003) 13,222 15,586
Corporate and development expenses (including depreciation and amortization
of $7,809 for 2004 and $8,070 for 2003) 15,735 15,921
Other operating expenses 23,064 18,475
--------- --------
Loss from operations (448,816) (7,537)
Interest expense (77,518) (72,165)
Interest income 651 317
Other nonoperating income (loss), net (2,640) 2,527
--------- --------
Loss before equity in affiliates, income taxes, discontinued operations,
and cumulative effect of consolidating variable interest entities (528,323) (76,858)
Equity in losses of affiliates - (2,902)
Net benefit for income taxes - 1,768
--------- --------
Loss before discontinued operations and cumulative effect of
consolidating variable interest entities (528,323) (77,992)
Discontinued operations:
Income from discontinued operations (including net gain on disposal of $5,209
and net of income tax expense of $1,754 in 2003) - 2,862
--------- --------
Loss before cumulative effect of consolidating variable interest entities (528,323) (75,130)
Cumulative effect of consolidating variable interest entities (2,127) -
--------- --------
Net loss $(530,450) $(75,130)
========= ========
Comprehensive loss $(530,450) $(75,130)
========= ========
Basic and diluted per common share amounts:
Loss from continuing operations, including $1,921 and $13,486, respectively,
representing preferred stock dividends, deemed dividends, and accretion $ (90.61) $ (16.09)
Discontinued operations - .50
Cumulative effect of consolidating variable interest entities (.37) -
--------- --------
Net loss applicable to common shares $ (90.98) $ (15.59)
========= ========
Weighted average number of common shares outstanding 5,852 5,686
========= ========
See accompanying notes to consolidated financial statements
6
Pegasus Communications Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Six Months Ended June 30,
2004 2003
---------- ---------
Net cash provided by operating activities $ 964 $ 9,366
------- -------
Cash flows from investing activities:
Direct broadcast satellite equipment capitalized (4,436) (9,511)
Other capital expenditures (1,395) (1,087)
Proceeds from sale of broadcast station - 21,593
Purchases of intangible assets (4,322) (121)
Other 319 224
------- -------
Net cash provided by (used for) investing activities (9,834) 11,098
------- -------
Cash flows from financing activities:
Repayments of term loan facilities (750) (1,691)
Repayments of other long term debt (81) (2,309)
Borrowings on revolving credit facility 18,000 -
Purchases of common stock (1,092) (3,688)
Restricted cash (5,215) 1,841
Debt financing costs (2,154) (2,840)
Other (636) (84)
------- -------
Net cash provided by (used for) financing activities 8,072 (8,771)
------- -------
Net increase (decrease) in cash and cash equivalents (798) 11,693
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 $59,672 $71,507
======= =======
See accompanying notes to consolidated financial statements
7
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
1. General
All references to "we," "us," and "our" 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 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. 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. We restated our consolidated financial statements for the three and
six months ended June 30, 2003. See Note 14.
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 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,
8
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
23
classification of liabilities, or adjustments made for loss contingencies and
other matters are not expected to affect Pegasus Communications' 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, we 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 (see Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations for discussion of
results of operations of Pegasus Communications on a basis that excludes the
results of operations of Pegasus Satellite for the periods presented):
(in thousands) Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
---------- --------- --------- ---------
Net revenues $ 229 $ 213 $ 486 $ 448
Costs of other operations 1,008 226 1,759 452
Corporate and development expenses 738 580 1,692 1,238
Corporate depreciation and amortization 3,802 3,881 7,614 7,783
Other operating expenses, net 7,033 2,202 7,596 3,895
-------- ------- -------- --------
Loss from operations (12,352) (6,676) (18,175) (12,920)
Interest expense (196) (195) (447) (390)
Interest income 164 103 308 190
Other nonoperating expenses, net (2,635) - (2,635) -
Equity in earnings (losses) of affiliates - 220 - (2,902)
-------- ------- -------- --------
Net loss $(15,019) $(6,548) $(20,949) $(16,022)
======== ======= ======== ========
Net loss applicable to common shares $ (3.03) $ (1.75) $ (3.91) $ (3.96)
Proceedings Under Chapter 11 of the Bankruptcy Code
On June 2, 2004, Pegasus Satellite Television, Inc. and certain of its
affiliates received notices from the National Rural Telecommunications
Cooperative ("NRTC") purporting to terminate their exclusive distribution
agreements with the NRTC, which provide their 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, Inc. on June 2, 2004
to purchase the assets of Pegasus Satellite. Information regarding the notices
and offer is more fully set forth in the Form 8-K filed June 3, 2004 by Pegasus
Communications.
Also on June 2, 2004, DIRECTV, Inc. filed a two-count complaint against
Pegasus Communications, Pegasus Satellite, Golden Sky Systems, Inc., Pegasus
Media, and Pegasus Satellite Television, Inc. in the United States District
Court, Central District of California. The first count is for federal trademark
infringement based on any use of the DIRECTV brand name after August 31, 2004,
the expiration of a 90-day license agreement that DIRECTV granted to the NRTC to
use the DIRECTV name
9
as part of the purported termination of the agreements described above. The
second claim is for breach of contract and is based upon an alleged failure of
the defendants to fulfill their "best efforts" obligations under Pegasus
Satellite Television, Inc.'s and its affiliates' agreements with the NRTC.
In addition, on June 2, 2004, Pegasus Communications announced that
certain of its direct and indirect subsidiaries had filed a voluntary petition
for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court, District of
Maine. These subsidiaries include Pegasus Satellite Television, Inc., Pegasus
Satellite, Pegasus Media, Argos Support Services Company, Bride Communications,
Inc., B.T. Satellite, Inc., Carr Rural TV, Inc., DBS Tele-Venture, Inc., Digital
Television Services of Indiana, LLC, DTS Management, LLC, Golden Sky DBS, Inc.,
Golden Sky Holdings, Inc., Golden Sky Systems, Inc., Henry County MRTV, Inc.,
HMW, Inc., Pegasus Broadcast Associates, L.P., Pegasus Broadcast Television,
Inc., Pegasus Broadcast Towers, Inc., Pegasus Satellite Television of Illinois,
Inc., Portland Broadcasting, Inc., Primewatch, Inc., PST Holdings, Inc., South
Plains DBS, L.P., Telecast of Florida, Inc., WDSI License Corp., WILF, Inc.,
WOLF License Corp., and WTLH License Corp (collectively referred to herein as
the "Debtors"). The Chapter 11 filing does not include Pegasus Communications or
its direct subsidiaries other than Pegasus Satellite.
As provided by the Bankruptcy Code, the Debtors have the exclusive
right to propose a plan of reorganization for 120 days following the June 2,
2004 filing date. 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.
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, will have 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.
After the Chapter 11 filing, the Debtors sought a determination from
the Bankruptcy Court that DIRECTV had violated the Bankruptcy Code's automatic
stay by (i) marketing to new subscribers and existing subscribers in the
Debtors' territories, and (ii) allegedly soliciting those subscribers using the
Debtors' subscriber information. In a bench decision rendered on June 10, 2004,
and by order of the same date, the Bankruptcy Court held that certain, limited,
action of DIRECTV violated the automatic stay with respect to DIRECTV's use of
certain information contained in the subscriber information, but that DIRECTV's
efforts to solicit customers in the Debtors' territories did not otherwise
violate the automatic stay (the "June 10th Decision"). Although DIRECTV and the
Debtors each disputed different portions of the June 10th Decision, neither of
them appealed or otherwise sought reconsideration of the June 10th Decision.
On June 14, 2004, the Debtors filed an adversary proceeding in the
Bankruptcy Court (the "Adversary Proceeding") in which DIRECTV and the NRTC,
among others, were named as defendants and in which the Debtors sought, inter
alia, preliminary and permanent injunctive relief and damages. In particular,
the Debtors requested, among other things, either specific performance of the
exclusive distribution agreements with the NRTC (and reinstatement of the
distribution agreement between DIRECTV and the NRTC, to the extent such
reinstatement is necessary to permit the NRTC to perform under the exclusive
distribution agreements), or damages from the NRTC and DIRECTV to compensate the
Debtors for the full value of the terminated distribution agreements.
Specifically, the Debtors
10
asserted claims sounding in, inter alia, breach of fiduciary duty, aiding and
abetting breach of fiduciary duty, civil conspiracy, unjust enrichment,
violations of the Sherman Act, breach of contract, breach of duty of good faith
and fair dealing, common law franchise, intentional interference with
contractual relations, intentional interference with performance of contractual
relations, intentional interference with performance of prospective contractual
relations, misappropriation of trade secrets, and fraudulent transfer.
Concurrent with their initiation of the Adversary Proceeding, the
Debtors also sought a temporary restraining order requesting the Bankruptcy
Court to, among other things, restore the status quo as of the date of the
termination of the distribution agreements between DIRECTV and the NRTC and the
Trademark License Consumer Program and to prevent the scheduled termination of
the Member Agreements and the Revised Seamless Agreement from taking effect. In
a bench decision rendered on June 21, 2004, and by order dated June 21, 2004,
the Bankruptcy Court denied the Debtors' request for a temporary restraining
order finding that the Debtors had not demonstrated a probability of success on
the merits of the underlying causes of action ("June 21 Order"). After the
Debtors accepted the Bankruptcy Court's offer to convert the temporary
restraining order ruling into a ruling on a preliminary injunction, the
Bankruptcy Court entered the Injunction Order denying the Debtors' request for a
preliminary injunction for the same reasons. On July 6, 2004, the Debtors filed
a notice of appeal from the Injunction Order (the "Appeal") with the United
States District Court for the District of Maine (the "District Court"). On July
9, 2004, expedited briefing was ordered in connection with the Appeal. DIRECTV
and the NRTC have filed a motion with the District Court to dismiss the Debtors'
Appeal on jurisdictional grounds. No trial has been scheduled in the Adversary
Proceeding and, in light of the Bankruptcy Court's scheduling order entered in
the Adversary Proceeding, one will not take place until after August 31, 2004.
Substantive settlement discussions with DIRECTV and the creditors
committee commenced in early July 2004, and 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, including $875 million in cash and
settlement of $62.7 million owed to DIRECTV as a result of the Seamless
Marketing litigation verdict. The purchase price will be subject to certain
working capital adjustments based on certain circumstances at the closing date,
as specified in the Asset Purchase Agreement. Under the Asset Purchase
Agreement, DIRECTV will acquire certain direct broadcast satellite business
assets and assume certain direct broadcast satellite business liabilities of
Pegasus Satellite. Pegasus Satellite Television, Inc. and DIRECTV also entered
into a cooperation agreement (the "Cooperation Agreement") to ensure an
efficient transfer of Pegasus Satellite's direct broadcast satellite business to
DIRECTV pursuant to the Asset Purchase Agreement. The Cooperation Agreement
prescribes (i) the manner in which the Debtors will cooperate and assist with
the transition of subscribers to DIRECTV, (ii) the undertaking of DIRECTV to
reimburse certain costs incurred by the Debtors in connection with the
transition, and (iii) the terms under which DIRECTV will provide DBS services to
the Debtors after August 31, 2004, if necessary, in the event that there is no
closing of the sale by that date.
Also on July 30, 2004, Pegasus Satellite, Pegasus Communications,
DIRECTV, the NRTC, and the creditors committee entered into an agreement (the
"Global Settlement Agreement"). In the Global Settlement Agreement, Pegasus
Satellite, DIRECTV, and the NRTC agree to dismiss all litigation between and
among them with prejudice, stay all pending litigation (including the Adversary
Proceeding discussed above), and agree 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 agrees to release all
claims against DIRECTV and the NRTC related to the Debtors' direct broadcast
satellite business. The Global Settlement Agreement does not affect the patent
infringement lawsuit that Pegasus
11
Development, a non-Debtor, and Personalized Media Communications, LLC have
brought against DIRECTV. See Note 13 of the Notes to Consolidated Financial
Statements in our Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 for a discussion of this lawsuit. 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.
Pursuant to a letter agreement (the "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 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. It is anticipated that a hearing to approve the sale
could be held in late October 2004.
The transactions contemplated by the Asset Purchase Agreement, the
Cooperation Agreement, the Global Settlement Agreement, and the Letter Agreement
are subject to the approval of the Bankruptcy Court and various governmental
approvals. A hearing with the Bankruptcy Court has been scheduled for August 25,
2004 to approve the previously referenced agreements. There can be no assurance
that such approvals will be obtained.
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. If the Bankruptcy Court approves the transactions
contemplated by the various agreements entered into on July 30, 2004 referenced
above, the releases entered into by the creditors committee and members of the
committee would 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.
Impairment of Direct Broadcast Satellite Rights and Other Direct Broadcast
Satellite Assets
As a result of the NRTC's June 2, 2004 purported termination of the
exclusive rights of Pegasus Satellite Television, Inc. and certain of its
affiliates to distribute DIRECTV services in specified rural territories in the
United States effective August 31, 2004, we performed an analysis of our direct
broadcast satellite rights and other direct broadcast satellite assets to
determine whether any impairment had occurred. In light of the June 21 Order, we
determined that the carrying amount of the asset group
12
exceeded the asset group's estimated, probability-weighted, undiscounted cash
flows as of June 2, 2004. Accordingly, Pegasus Satellite recorded an impairment
charge of $429.6 million prior to its deconsolidation from Pegasus
Communications.
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.
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.
Pegasus Satellite Communications, Inc.
(Debtor-in-Possession)
Condensed Consolidated Balance Sheets
(unaudited, in thousands) June 30, December 31,
2004 2003
------------ ------------
Current assets $ 190,908 $ 145,106
Property and equipment, net 49,320 68,417
Intangible assets, net 974,572 1,449,016
Other noncurrent assets 147,496 151,343
----------- ----------
Total assets $1,362,296 $1,813,882
=========== ==========
Liabilities not subject to compromise:
Current liabilities $ 69,099 $ 171,274
Long-term debt 502,602 1,376,854
Other noncurrent liabilities 48,181 319,991
Liabilities subject to compromise (1) 1,083,248 -
Minority interest 859 452
Redeemable preferred stock 243,486 -
Stockholder's deficit (585,179) (54,689)
---------- ----------
Total liabilities and stockholder's deficit $1,362,296 $1,813,882
========== ==========
(1) Liabilities subject to compromise consist of the following (in thousands):
13
Unsecured debt and interest $ 962,537
Litigation verdict accrual 62,719
Accrued programming fees & commissions 55,203
Accounts payable and accrued expenses 2,789
----------
$1,083,248
==========
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
(unaudited, in thousands) Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
--------- --------- --------- --------
Net revenues $ 208,721 $213,964 $ 413,842 $426,794
Operating expenses, excluding litigation
judgment, impairment of direct broadcast
satellite rights, and reorganization items 190,272 209,352 393,169 421,924
Litigation judgment 4,719 - 22,045 -
Impairment of direct broadcast satellite assets 429,638 - 429,638 -
Reorganization items 14,614 - 14,614 -
--------- -------- --------- --------
Income (loss) from operations (430,522) 4,612 (445,624) 4,870
Interest and other expense, net (39,480) (35,588) (89,497) (72,072)
Net benefit for income taxes - 763 - 1,656
Income (loss) from discontinued operations - (1,592) - 2,862
Cumulative effect of consolidating variable
interest entities - - (2,127) -
--------- -------- --------- --------
Net loss $(470,002) $(31,805) $(537,248) $(62,684)
========= ======== ========= ========
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 as a result of the non-payment of pre-petition liabilities.
Reorganization items were as follows for the period from the Filing
Date through June 30, 2004:
Legal services $ 4,236
Financial advisory services 1,330
Accelerated amortization of certain deferred financing costs (1) 8,692
Other 356
-------
$14,614
=======
14
(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.
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 June 30, 2004 these services aggregated
$4.8 million.
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.
Consolidation of Variable Interest Entities
Financial Accounting Standards Board ("FASB") Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") was originally issued
by the FASB in January 2003 and was revised in December 2003. FIN 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support.
As discussed in our Form 10-Q for the quarterly period ended March 31,
2004, Pegasus Media initially consolidated the KB Prime Media Companies as a
variable interest entity under FIN 46, resulting in a cumulative effect of a
$2.1 million loss or $0.37 cents per share for the three months ended March 31,
2004. As a result of the bankruptcy filing of Pegasus Media and its subsequent
deconsolidation from our financial statements, the results of operations of the
KB Prime Media Companies are no longer included in our financial statements
subsequent to the Filing Date.
Also at March 31, 2004, we initially consolidated Pegasus PCS Partners,
L.P. ("Pegasus PCS Partners") as a variable interest entity under FIN 46 and
continue to include its financial results in our consolidated financial
statements as of June 30, 2004.
Pegasus PCS Partners, as a result of a series of investments in 2001,
2002, and 2003, holds senior preferred equity interests in PCH LLC. PCH LLC is
controlled by affiliates of Marshall W. Pagon and Pegasus PCS Partners is not
the primary beneficiary. Its principal assets are investments that had an
approximate fair value of $19.2 million at June 30, 2004.
2. Basis of Presentation
Property and equipment
Property and equipment, net consisted of the following at June 30, 2004
and December 31, 2003 (in thousands):
15
June 30, December 31,
2004 2003
------------ ------------
Towers, antennas, and related equipment $ 701 $ 7,630
Television broadcasting and production equipment 90 17,291
Equipment, furniture, and fixtures 5,080 34,756
Direct broadcast satellite equipment capitalized - 65,778
Building and improvements 9,691 25,495
Land 5,500 6,036
Other 1,467 3,559
------------ -----------
22,529 160,545
Accumulated depreciation (4,805) (76,843)
------------ -----------
Property and equipment, net $ 17,724 $ 83,702
============ ===========
Intangible Assets
Intangible assets, net consisted of the following at June 30, 2004 and
December 31, 2003 (in thousands):
June 30, December 31,
2004 2003
---------- -----------
Assets subject to amortization:
Cost:
Direct broadcast satellite rights $ - $2,289,137
Other 207,703 257,921
--------- ----------
207,703 2,547,058
--------- ----------
Accumulated amortization:
Direct broadcast satellite rights - 862,903
Other 58,037 89,020
--------- ----------
58,037 951,923
--------- ----------
Net assets subject to amortization 149,666 1,595,135
Assets not subject to amortization:
Broadcast television licenses 251 12,670
--------- ----------
Intangible assets, net $ 149,917 $1,607,805
========= ==========
Other Noncurrent Assets
Pegasus PCS Partners, as a result of a series of investments in 2001,
2002, and 2003, holds senior preferred equity interests in PCH LLC. PCH LLC is
controlled by affiliates of Marshall W. Pagon and Pegasus PCS Partners is not
the primary beneficiary. Its principal assets are investments that had an
approximate fair value of $19.2 million at June 30, 2004. At March 31, 2004, we
initially consolidated Pegasus PCS Partners as a variable interest entity under
FIN 46 and continue to include its financial results in our consolidated
financial statements as of June 30, 2004. Noncurrent assets of $22.7 million at
June 30, 2004 consisted primarily of our investment in Pegasus PCS Partners of
$19.2 million, and $2.0 million of restricted cash.
16
Accrued Expenses
Accrued expenses of $7.7 million at June 30, 2004 consisted primarily
of $5.5 million of compensation, payroll taxes, and benefits expenses, as well
as $1.6 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 June 30,
2004 2003
--------- ----------
(restated -
see Note 14)
Net loss, as reported $(462,072) $(36,687)
Add: stock based employee compensation expense, net of income tax, included in net
loss, as reported 1,325 2,637
Deduct: stock based employee compensation expense, net of income tax, determined
under fair value method (2,336) (4,306)
--------- --------
Net loss, pro forma $(463,083) $(38,356)
========= ========
Basic and diluted per common share amounts (see Note 7):
Net loss applicable to common shares, as reported $ (77.34) $ (7.68)
Net loss applicable to common shares, pro forma $ (77.51) $ (7.97)
Six Months
Ended June 30,
2004 2003
--------- ----------
(restated -
see Note 14)
Net loss, as reported $(530,450) $(75,130)
Add: stock based employee compensation expense, net of income tax, included in net
loss, as reported 3,542 2,637
Deduct: stock based employee compensation expense, net of income tax, determined
under fair value method (5,535) (5,355)
--------- --------
Net loss, pro forma $(532,443) $(77,848)
========= ========
Basic and diluted per common share amounts (see Note 7):
Net loss applicable to common shares, as reported $ (90.98) $ (15.59)
Net loss applicable to common shares, pro forma $ (91.31) $ (16.06)
3. Redeemable Preferred Stocks
The net decrease in the aggregate carrying amount from December 31,
2003 to June 30, 2004 was due in part to 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
17
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 share computations. Accretion of the difference will
commence when redemption of the series is known or becomes probable.
The Series E junior convertible participating preferred stock ("Series
E") also decreased due to two June 2004 conversions of 472 shares with a
liquidation preference value of $472 thousand into 756 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 4,007 shares of Class A common stock
and payment of accumulated dividends associated with the converted shares of
$257 thousand. The conversions were in accordance with the terms of the Series
E's certificate of designation.
We also recorded dividends on Series C of $6.3 million, on Series D of
$32 thousand, and on Series E of $56 thousand during the first six months of
2004. The change in the carrying amount of preferred stock for the six months
ended June 30, 2004 was as follows (in thousands):
Dividends accrued on preferred stock $ 6,393
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 (472)
Elimination of Series E accumulated dividends in exchange (47)
--------
$ 1,514
========
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 June 30, 2004 was
$27.1 million. The dividend of $3.2 million scheduled to be declared on July 31,
2004 was not declared. Dividends not declared accumulate in arrears until paid.
4. Common Stock
The number of shares of Pegasus Communications' Class A common stock at
June 30, 2004 was 5,613,841 issued and 5,480,113 outstanding, and at December
31, 2003 was 5,443,497 issued and 4,761,393 outstanding. Shares outstanding as
of June 30, 2004 exclude 97,500 shares held by Pegasus Development, our
consolidated subsidiary, and 35,500 shares held by Pegasus PCS Partners, a
consolidated variable interest entity. Shares outstanding at December 31, 2003
exclude 657,604 shares held by Pegasus Satellite Communications, Inc. and 24,500
shares held by Pegasus Development. The change in the number of shares
outstanding during the six months ended June 30, 2004 was as follows:
18
Deconsolidation of Pegasus Satellite's ownership of Pegasus
Communications' common stock 657,604
Shares issued for employee benefit and award plans 169,458
Shares repurchased and held in treasury (73,000)
Shares surrendered for employee benefit and award plans (36,228)
Shares issued upon conversion of preferred stock 756
Shares issued upon exercise of stock options 130
--------
718,720
========
The aggregate amount paid for shares repurchased during the six months
ended June 30, 2004 was $1.1 million. We have not made any purchases of our
Class A common stock after June 30, 2004.
No dividends were declared or paid for common stocks during the six
months ended June 30, 2004. On August 5, 2004, we announced that our Board of
Directors had declared a two for one stock split which will be effected in the
form of a stock dividend. See Note 15.
5. Changes in Other Stockholders' Equity
The change in other stockholders' equity from December 31, 2003 to June
30, 2004 consisted of (in thousands):
Net loss $(530,450)
Increase (decrease) to additional paid in capital for:
Common stock issued 4,353
Preferred stock dividends accrued (6,393)
Deemed dividends associated with exchange of preferred stock 6,081
Exchange of preferred stock (1,720)
Class A common stock held by variable interest entities classified as treasury stock (2,259)
Class B common stock held by variable interest entity classified as treasury stock (208)
Conversion and retirement of preferred stock 472
Repurchases of common stock (1,092)
Other treasury stock transactions (973)
Reclassification of Pegasus Satellite's holdings of Pegasus Communications' common
stock 9,885
---------
$(522,304)
=========
6. Long Term Debt
Our debt outstanding at June 30, 2004 consists of a mortgage payable at
Pegasus Real Estate.
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 Pegasus Communications'
condensed consolidated balance sheet as of June 30, 2004.
19
7. 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 June 30, 2004 was 2.5 million.
In July 2004, 102,702 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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
--------- -------- --------- ---------
Net loss, as reported $(462,072) $(36,687) $(530,450) $(75,130)
Accrued dividends 3,204 6,304 6,393 12,435
Accumulated dividends on Series C
issued in exchange for Series D - - 1,609 -
Deemed dividends - - (6,081) -
Accretion - 526 - 1,051
--------- -------- --------- --------
Total accrued and deemed dividends 3,204 6,830 1,921 13,486
on preferred stock dividends
--------- -------- --------- --------
Net loss available for common shares $(465,276) $(43,517) $(532,371) $(88,616)
========= ======== ========= ========
On August 5, 2004, we announced that our Board of Directors had
declared a two for one stock split which will be effected in the form of a stock
dividend. See Note 15.
8. Supplemental Cash Flow Information
Significant noncash investing and financing activities were as follows
(in thousands):
Six Months Ended
June 30,
2004 2003
--------- -------
Preferred stock dividends accrued and accretion $6,393 $13,486
Common stock issued for employee benefits and awards 4,353 3,211
Net additional paid in capital from repurchase, exchange, and/or redemption of
preferred stock - 240
9. 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.
20
We recorded income tax expense of $20 thousand in the second quarter of
2004 for state income taxes payable. In the three and six months ended June 30,
2004, we recorded increases of $180.8 million and $202.8 million, respectively,
to the valuation allowance recorded against the net deferred income tax asset
balance at June 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 June 30, 2004 was $296.5
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 June 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 months ended
June 30, 2004 to virtually zero.
10. Discontinued Operations
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 $4.9 million
in the first six 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. Aggregate revenues and pretax
income from discontinued operations were as follows:
(in thousands) Three Months
Ended Six Months Ended
June 30, 2003 June 30, 2003
------------------ ------------------
Revenues $ 380 $ 1,533
Pretax income (loss) (2,567) 4,616
11. Industry Segments
For the three and six month period ended June 30, 2004, our only
reportable segment was our direct broadcast satellite business, which was
deconsolidated as of June 2, 2004. See Note 1. The financial results of Pegasus
Satellite are presented in Note 1. The direct broadcast satellite business
derived all of its revenues from external customers for each period presented.
Identifiable total assets for the direct broadcast satellite business were
approximately $1.2 billion at June 2, 2004 and $1.6 billion at December 31,
2003.
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
21
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. If the Bankruptcy Court approves 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," the
releases entered into by the creditors committee and members of the committee
would 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.
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. New Accounting Pronouncements
In March 2004, the Emerging Issues Task Force ("EITF") finalized Issue
03-06, "Participating Securities and the Two-Class Method under FASB Statement
No. 128, `Earnings Per Share'" ("EITF 03-06"). EITF 03-06 provides guidance for
evaluating whether a security meets the definition of a participating security
in FASB Statement 128. This guidance is applicable beginning in the second
quarter of 2004. Our adoption of EITF 03-06 had no impact on our financial
position and results of operations.
14. Restatement of Financial Statements
We have restated our previously issued interim financial statements
filed in our Form 10-Q for the three and six months ended June 30, 2003 to
properly reflect income taxes associated with continuing and discontinued
operations. The effect of this restatement is summarized in the table below.
(in thousands) Three months ended Six months ended
June 30, 2003 June 30, 2003
---------------------------- -----------------------------
As As
Originally As Originally As
Reported Restated Reported Restated
------------- ----------- ------------- ------------
Net (expense) benefit for income taxes $ (138) $ 795 $ (138) $ 1,768
Loss before discontinued operations (36,028) (35,095) (79,898) (77,992)
Income (loss) from discontinued
operations, net of income tax (2,567) (1,592) 4,616 2,862
Net loss (38,595) (36,687) (75,282) (75,130)
22
We will restate in the statements of operations in our 2003 Form 10-K
for the years ended December 31, 2003 and 2002 the allocation of income tax
expense (benefit) between continuing operations and discontinued operations. We
will also restate in the unaudited quarterly financial information note to our
financial statements in our 2003 Form 10-K for the years ended December 31, 2003
and 2002 the allocation of the full year income expense (benefit) among the
quarters of each year, as well as the allocation of the quarterly income tax
expense (benefit) for each year between continuing operations and discontinued
operations. While the restatements of the unaudited quarterly financial
information will result in changes in the amount of net loss by quarter, there
will not be any change in the amount of net loss for the 2003 and 2002 annual
periods. For the 2003 year, the total impact on the results of operations will
be to decrease the loss from continuing operations and to decrease the income
from discontinued operations by the same amount, resulting in no impact on net
loss for the year. For the 2002 year, there will be no impact on net loss for
the year. These restatements will not have any impact on total income tax
benefit, financial position, or cash flows for the annual periods in which the
changes take place.
We intend to file within a reasonable period of time an amendment to
our 2003 Form 10-K report with the Securities and Exchange Commission to reflect
these changes.
15. Subsequent Event
On August 5, 2004, we announced that our Board of Directors had
declared a two for one stock split of our common stock which will be effected in
the form of a stock dividend for holders of record on August 19, 2004. The
dividend will be distributed on August 26, 2004. As of August 5, 2004, we had
5,729,056 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.
We are accounting for the stock dividend as a stock split; therefore,
it will be recorded on the distribution date. Had the dividend been distributed
prior to the issuance of our Form 10-Q, our restated historical loss per share
would have been $38.67 and $45.49 for the three and six months ended June 30,
2004, respectively, and $3.84 and $7.79 for the three and six months ended June
30, 2003, respectively.
23
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 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 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.
We restated our consolidated financial statements for the three and six months
ended June 30, 2003. See Note 14 of the Notes to Consolidated Financial
Statements.
General
All references to "we," "us," and "our" 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"),
24
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 ("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. 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 six months ended June 30, 2003 to
properly reflect income taxes associated with continuing and discontinued
operations. The effect of this restatement is summarized in the table below.
(in thousands) Three months ended Six months ended
June 30, 2003 June 30, 2003
-------------------------- ---------------------------
As As
Originally As Originally As
Reported Restated Reported Restated
------------- ---------- ----------- ------------
Net (expense) benefit for income taxes $ (138) $ 795 $ (138) $ 1,768
Loss before discontinued operations (36,028) (35,095) (79,898) (77,992)
Income (loss) from discontinued
operations, net of income tax (2,567) (1,592) 4,616 2,862
Net loss (38,595) (36,687) (75,282) (75,130)
We will restate in the statements of operations in our 2003 Form 10-K
for the years ended December 31, 2003 and 2002 the allocation of income tax
expense (benefit) between continuing operations and discontinued operations. We
will also restate in the unaudited quarterly financial information note to our
financial statements in our 2003 Form 10-K for the years ended December 31, 2003
and 2002 the allocation of the full year income expense (benefit) among the
quarters of each year, as well as the allocation of the quarterly income tax
expense (benefit) for each year between continuing operations and discontinued
operations. While the restatements of the unaudited quarterly financial
information will result in changes in the amount of net loss by quarter, there
will not be any change in the amount of net loss for the 2003 and 2002 annual
periods. For the 2003 year, the total impact on the results of operations will
be to decrease the loss from continuing operations and to decrease the income
from discontinued operations by the same amount, resulting in no impact on net
loss for the year. For the 2002 year, there will be no impact on net loss for
the year. These restatements will not have any impact on total income tax
benefit, financial position, or cash flows for the annual periods in which the
changes take place.
We intend to file within a reasonable period of time an amendment to
our 2003 Form 10-K report with the Securities and Exchange Commission to reflect
these changes.
25
Proceedings Under Chapter 11 of the Bankruptcy Code
On June 2, 2004, Pegasus Satellite Television, Inc. and certain of its
affiliates received notices from the National Rural Telecommunications
Cooperative ("NRTC") purporting to terminate their exclusive distribution
agreements with the NRTC, which provide their 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, Inc. on June 2, 2004
to purchase the assets of Pegasus Satellite. Information regarding the notices
and offer is more fully set forth in the Form 8-K filed June 3, 2004 by Pegasus
Communications.
Also on June 2, 2004, DIRECTV, Inc. filed a two-count complaint against
Pegasus Communications, Pegasus Satellite, Golden Sky Systems, Inc., Pegasus
Media, and Pegasus Satellite Television, Inc. in the United States District
Court, Central District of California. The first count is for federal trademark
infringement based on any use of the DIRECTV brand name after August 31, 2004,
the expiration of a 90-day license agreement that DIRECTV granted to the NRTC to
use the DIRECTV name as part of the purported termination of the agreements
described above. The second claim is for breach of contract and is based upon an
alleged failure of the defendants to fulfill their "best efforts" obligations
under Pegasus Satellite Television, Inc.'s agreements with the NRTC.
In addition, on June 2, 2004, Pegasus Communications announced that
certain of its direct and indirect subsidiaries had filed a voluntary petition
for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court, District of
Maine. These subsidiaries include Pegasus Satellite Television, Inc., Pegasus
Satellite, Pegasus Media, Argos Support Services Company, Bride Communications,
Inc., B.T. Satellite, Inc., Carr Rural TV, Inc., DBS Tele-Venture, Inc., Digital
Television Services of Indiana, LLC, DTS Management, LLC, Golden Sky DBS, Inc.,
Golden Sky Holdings, Inc., Golden Sky Systems, Inc., Henry County MRTV, Inc.,
HMW, Inc., Pegasus Broadcast Associates, L.P., Pegasus Broadcast Television,
Inc., Pegasus Broadcast Towers, Inc., Pegasus Satellite Television of Illinois,
Inc., Portland Broadcasting, Inc., Primewatch, Inc., PST Holdings, Inc., South
Plains DBS, L.P., Telecast of Florida, Inc., WDSI License Corp., WILF, Inc.,
WOLF License Corp., and WTLH License Corp (collectively referred to herein as
the "Debtors"). The Chapter 11 filing does not include Pegasus Communications or
its direct subsidiaries other than Pegasus Satellite.
As provided by the Bankruptcy Code, the Debtors have the exclusive
right to propose a plan of reorganization for 120 days following the June 2,
2004 filing date. 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.
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, will have 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.
After the Chapter 11 filing, the Debtors sought a determination from
the Bankruptcy Court that DIRECTV had violated the Bankruptcy Code's automatic
stay by (i) marketing to new subscribers and existing subscribers in the
Debtors' territories, and (ii) allegedly soliciting those subscribers using the
26
Debtors' subscriber information. In a bench decision rendered on June 10, 2004,
and by order of the same date, the Bankruptcy Court held that certain, limited,
action of DIRECTV violated the automatic stay with respect to DIRECTV's use of
certain information contained in the subscriber information, but that DIRECTV's
efforts to solicit customers in the Debtors' territories did not otherwise
violate the automatic stay (the "June 10th Decision"). Although DIRECTV and the
Debtors each disputed different portions of the June 10th Decision, neither of
them appealed or otherwise sought reconsideration of the June 10th Decision.
On June 14, 2004, the Debtors filed an adversary proceeding in the
Bankruptcy Court (the "Adversary Proceeding") in which DIRECTV and the NRTC,
among others, were named as defendants and in which the Debtors sought, inter
alia, preliminary and permanent injunctive relief and damages. In particular,
the Debtors requested, among other things, either specific performance of the
exclusive distribution agreements with the NRTC (and reinstatement of the
distribution agreement between DIRECTV and the NRTC, to the extent such
reinstatement is necessary to permit the NRTC to perform under the exclusive
distribution agreements), or damages from the NRTC and DIRECTV to compensate the
Debtors for the full value of the terminated distribution agreements.
Specifically, the Debtors asserted claims sounding in, inter alia, breach of
fiduciary duty, aiding and abetting breach of fiduciary duty, civil conspiracy,
unjust enrichment, violations of the Sherman Act, breach of contract, breach of
duty of good faith and fair dealing, common law franchise, intentional
interference with contractual relations, intentional interference with
performance of contractual relations, intentional interference with performance
of prospective contractual relations, misappropriation of trade secrets, and
fraudulent transfer.
Concurrent with their initiation of the Adversary Proceeding, the
Debtors also sought a temporary restraining order requesting the Bankruptcy
Court to, among other things, restore the status quo as of the date of the
termination of the distribution agreements between DIRECTV and the NRTC and the
Trademark License Consumer Program and to prevent the scheduled termination of
the Member Agreements and the Revised Seamless Agreement from taking effect. In
a bench decision rendered on June 21, 2004, and by order dated June 21, 2004,
the Bankruptcy Court denied the Debtors' request for a temporary restraining
order finding that the Debtors had not demonstrated a probability of success on
the merits of the underlying causes of action ("June 21 Order"). After the
Debtors accepted the Bankruptcy Court's offer to convert the temporary
restraining order ruling into a ruling on a preliminary injunction, the
Bankruptcy Court entered the Injunction Order denying the Debtors' request for a
preliminary injunction for the same reasons. On July 6, 2004, the Debtors filed
a notice of appeal from the Injunction Order (the "Appeal") with the United
States District Court for the District of Maine (the "District Court"). On July
9, 2004, expedited briefing was ordered in connection with the Appeal. DIRECTV
and the NRTC have filed a motion with the District Court to dismiss the Debtors'
Appeal on jurisdictional grounds. No trial has been scheduled in the Adversary
Proceeding and, in light of the Bankruptcy Court's scheduling order entered in
the Adversary Proceeding, one will not take place until after August 31, 2004.
Substantive settlement discussions with DIRECTV and the creditors
committee commenced in early July 2004, and 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, including $875 million in cash and
settlement of $62.7 million owed to DIRECTV as a result of the Seamless
Marketing litigation verdict. The purchase price will be subject to certain
working capital adjustments based on certain circumstances at the closing date,
as specified in the Asset Purchase Agreement. Under the Asset Purchase
Agreement, DIRECTV will acquire certain direct broadcast satellite business
assets and assume certain direct broadcast satellite business liabilities of
Pegasus Satellite. Pegasus Satellite Television, Inc. and DIRECTV also entered
27
into a cooperation agreement (the "Cooperation Agreement") to ensure an
efficient transfer of Pegasus Satellite's direct broadcast satellite business to
DIRECTV, Inc. pursuant to the Asset Purchase Agreement. The Cooperation
Agreement prescribes (i) the manner in which the Debtors will cooperate and
assist with the transition of subscribers to DIRECTV, (ii) the undertaking of
DIRECTV to reimburse certain costs incurred by the Debtors in connection with
the transition, and (iii) the terms under which DIRECTV will provide DBS
services to the Debtors after August 31, 2004, if necessary, in the event that
there is no closing of the sale by that date.
Also on July 30, 2004, Pegasus Satellite, Pegasus Communications,
DIRECTV, the NRTC, and the creditors committee entered into an agreement (the
"Global Settlement Agreement"). In the Global Settlement Agreement, Pegasus
Satellite, DIRECTV, and the NRTC agree to dismiss all litigation between and
among them with prejudice, stay all pending litigation (including the Adversary
Proceeding discussed above), and agree 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 agrees to release all
claims against DIRECTV and the NRTC related to the Debtors' direct broadcast
satellite business. The Global Settlement Agreement does not affect the patent
infringement lawsuit that Pegasus Development, a non-Debtor, and Personalized
Media Communications, LLC have brought against DIRECTV, Inc. Note 13 of the
Notes to Consolidated Financial Statements in our Quarterly Report on Form 10-Q
for the quarter ended March 31, 2004 for a discussion of this lawsuit. 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.
Pursuant to a letter agreement (the "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 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. It is anticipated that a hearing to approve the sale
could be held in late October 2004.
The transactions contemplated by the Asset Purchase Agreement, the
Cooperation Agreement, the Global Settlement Agreement, and the Letter Agreement
are subject to the approval of the Bankruptcy Court and various governmental
approvals. A hearing with the Bankruptcy Court has been scheduled for August 25,
2004 to approve the previously referenced agreements. There can be no assurance
that such approvals will be obtained.
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. If the Bankruptcy Court approves the transactions
contemplated by the various agreements entered into on July 30, 2004 referenced
above, the releases entered into by the creditors
28
committee and members of the committee would 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.
Consolidation of Variable Interest Entities
Financial Accounting Standards Board ("FASB") Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") was originally issued
by the FASB in January 2003 and was revised in December 2003. FIN 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support.
As discussed in our Form 10-Q for the quarterly period ended March 31,
2004, Pegasus Media initially consolidated the KB Prime Media Companies as a
variable interest entity under FIN 46, resulting in a cumulative effect of a
$2.1 million loss or $0.37 cents per share for the three months ended March 31,
2004. As a result of the bankruptcy filing of Pegasus Media and its subsequent
deconsolidation from our financial statements, the results of operations of the
KB Prime Media Companies are no longer included in our financial statements
subsequent to the Filing Date.
Also at March 31, 2004, we initially consolidated Pegasus PCS Partners,
L.P. ("Pegasus PCS Partners") as a variable interest entity under FIN 46 and
continue to include its financial results in our consolidated financial
statements as of June 30, 2004.
Pegasus PCS Partners, as a result of a series of investments in 2001,
2002, and 2003, holds senior preferred equity interests in PCH LLC. PCH LLC is
controlled by affiliates of Marshall W. Pagon and Pegasus PCS Partners is not
the primary beneficiary. Its principal assets are investments that had an
approximate fair value of $19.2 million at June 30, 2004.
Operations
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 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 which 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.
29
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, 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.
In the following discussion and analysis of our accompanying
consolidated financial statements, we will discuss the results of operations for
Pegasus Satellite shown in our Consolidated Statements of Operations for the two
and five months ended June 2, 2004 compared to the three and six months ended
June 30, 2003. We will then discuss the results of operations for Pegasus
Communications excluding Pegasus Satellite for the three and six months ended
June 30, 2004 compared to the three and six months ended June 30, 2003.
Pegasus Satellite's Results of Operations
Direct Broadcast Satellite
The results of operations of Pegasus Satellite are included in the
accompanying condensed consolidated income statements through June 2, 2004. All
discussions of results of operations are for the two and five month periods
ended June 2, 2004 compared to the three and six month periods ended June 30,
2003. 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.
Subscribers:
Pegasus Satellite had 1,085,239 subscribers at June 2, 2004, a net
decrease of 69,862 from the number of subscribers at December 31, 2003. The
average number of subscribers outstanding during the two and five months ended
June 2, 2004 was 1,099,806 and 1,120,224, respectively, and 1,254,436 and
1,273,926 during the three and six months ended June 30, 2003, respectively.
Gross subscriber additions were 18,693 and 45,594 for the two and five months
ended June 2, 2004, respectively, and 31,577 and 70,567 for the three and six
months ended June 30, 2003, respectively. In addition to the effects of Pegasus
Satellite's "Quality First" strategy on the number of Pegasus Satellite's
subscribers, other reasons for the decrease in subscribers include a significant
competitive disadvantage that Pegasus Satellite experiences in a large number of
Pegasus Satellite's territories in which EchoStar provides local channels but
DIRECTV, Inc. does not; competition from EchoStar other than with respect to
local channels; and competition from digital cable providers.
Despite the decrease in subscribers of 69,862 from December 31, 2003 to
June 2, 2004, and the decrease in average subscribers for the five months ended
June 2, 2004 versus average subscribers in the first six months of 2003, Pegasus
Satellite's continued focus on Pegasus Satellite's "Quality First" strategy has
contributed to a $6.10 increase in average monthly revenue generated per
subscriber ("ARPU"), which grew to $59.92 at June 2, 2004 from $53.82 at June
30, 2003 (see below for detailed
30
discussion). This strategy has also resulted in direct broadcast satellite
operating profit (loss) before depreciation and amortization, as adjusted for
the litigation verdict and the impairment of direct broadcast satellite assets,
of $53.8 million and $111.5 million in the two and five months ended June 2,
2004, respectively, compared to $56.7 million and $109.3 million for the three
and six months ended June 30, 2003, respectively. Pegasus Satellite's direct
broadcast satellite operating profit (loss) before depreciation and
amortization, as adjusted for the litigation verdict, as a percent of revenue
has also improved to 39.1% from 27.6% for the two months ended June 2, 2004 and
the three months ended June 30, 2003, respectively, and to 33.2% from 26.6% for
the five months ended June 2, 2004 and the six months ended June 30, 2003,
respectively.
Revenues:
For the two months ended June 2, 2004, revenues decreased $68.1 million
to $137.7 million compared to $205.8 million for the three months ended June 30,
2003. For the five months ended June 2, 2004, revenues decreased $75.7 million
to $335.6 million compared to $411.4 million for the six months ended June 30,
2003. These decreases were primarily due to the impact of comparing two months
of revenues versus three months and five months of revenues versus six months,
respectively. For the second quarter, the decreases in recurring subscription
revenue from Pegasus Satellite's core, a la carte, and premium package offerings
were $55.9 million, from pay per view revenues were $4.9 million, and from other
revenues were $7.3 million. For the year to date periods, the decreases in
recurring subscription revenue from Pegasus Satellite's core, a la carte, and
premium package offerings were $62.4 million, from pay per view revenues were
$7.2 million, and from other revenues were $6.1 million. The decrease from
Pegasus Satellite's core, a la carte, and premium package offerings is primarily
due to the impact of comparing two months of revenues versus three months and
five months of revenues versus six months, respectively, as well as to the net
reduction in total subscribers described above, partially offset by increased
ARPU as discussed above.
Direct Operating Expenses:
For the two months ended June 2, 2004, programming expense decreased
$43.7 million to $48.8 million compared to $92.5 million for the three months
ended June 30, 2003. For the five months ended June 2, 2004, programming expense
decreased $47.1 million to $138.6 million compared to $185.7 million for the six
months ended June 30, 2003. These decreases were primarily due to the impact of
comparing two months of direct operating expenses versus three months and five
months of direct operating expenses versus six months, respectively. For the two
months ended June 2, 2004 compared to the three months ended June 30, 2003, the
decreases in the cost of programming from Pegasus Satellite's core, a la carte,
and premium package offerings were $30.8 million, and from pay per view
programming expense were $2.2 million. For the five months ended June 2, 2004
compared to the six months ended June 30, 2003, the decreases in the cost of
programming from Pegasus Satellite's core, a la carte, and premium package
offerings were $33.4 million, and from pay per view programming expense were
$3.2 million. The decreases from Pegasus Satellite's core, a la carte, and
premium package offerings is primarily due to the impact of comparing two months
of activity versus three months, and five months of activity versus six months,
respectively, as well as savings from the net reduction in total subscribers
described above. These decreases were partially offset by increases of $1.9
million and $4.3 million for the two and five months ended June 2, 2004 compared
to the three and six months ended June 30, 2003, respectively, in certain per
subscriber programming costs charged to Pegasus Satellite by the NRTC effective
January 2004. Pegasus Satellite's programming expenses also decreased as a
result of Pegasus Satellite's estimate of patronage to be received from the NRTC
being $11.3 million and $10.7 million more in the two and five months ended June
2, 2004 compared to the three and six months ended June 30, 2004, respectively.
The current year amounts include a $7.3 million adjustment to our estimates of
31
patronage to be received for the fiscal year 2003. The NRTC patronage is
recorded as a reduction to programming expense.
For the two months ended June 2, 2004, other subscriber related
expenses decreased $14.6 million to $26.0 million compared to $40.6 million for
the three months ended June 30, 2003. For the five months ended June 2, 2004,
other subscriber related expenses decreased $22.5 million to $62.7 million
compared to $85.2 million for the six months ended June 30, 2003. For the two
months ended June 2, 2004 compared to the three months ended June 30, 2003,
customer care costs decreased $5.2 million; infrastructure, billing, and royalty
fees expenses decreased $10.4 million; and bad debt expense decreased $1.2
million. For the five months ended June 2, 2004 compared to the six months ended
June 30, 2003, customer care costs decreased $8.1 million; infrastructure,
billing, and royalty fees expenses decreased $14.3 million; and bad debt expense
decreased $2.2 million. These decreases were primarily due to the impact of
comparing two months of other subscriber related expenses versus three months
and five months of other subscriber related expenses versus six months,
respectively. In addition, the decreases in customer care costs were primarily
the result of renegotiated rates for outsourced customer care services and
reduced call volume due to a smaller subscriber base; the decreases in
infrastructure, billing, and royalty fees expenses were primarily the result of
the net reduction in total subscribers previously discussed and decreases in
certain per subscriber and per receiver infrastructure costs charged to Pegasus
Satellite by the NRTC effective January 2004; and the reductions in bad debt
expense were primarily the result of Pegasus Satellite's continued focus on
improving the quality of its subscriber base.
Other Operating Expenses:
Subscriber acquisition costs are incurred when Pegasus Satellite
enrolls new subscribers to its DIRECTV programming. These costs consist of the
portion of programming costs associated with promotional programming provided to
subscribers, equipment related subsidies paid to distributors and applicable
costs incurred by Pegasus Satellite, installation costs and related subsidies
paid to dealers, dealer commissions, advertising and marketing costs, and
selling costs. Pegasus Satellite's subscriber acquisition costs may be expensed,
deferred, or capitalized, as explained below.
Promotional programming costs, which are included in promotions and
incentives expense on the statement of operations, are charged to expense when
incurred. Equipment and installation subsidies that are expensed, as described
below, are charged to expense when the equipment is delivered and the
installation occurs, respectively, and included in promotions and incentives on
the statement of operations. Dealer commissions, advertising and marketing
costs, and selling costs that are expensed, as described below, are charged to
expense when incurred and included in advertising and selling on the statement
of operations.
Certain subscriber acquisition costs are capitalized or deferred. Under
certain of its subscription plans for DIRECTV programming, Pegasus Satellite
takes title to equipment provided to subscribers. Applicable costs and subsidies
related to this equipment are capitalized as fixed assets and depreciated over
their estimated useful lives of three years and charged to depreciation expense.
Pegasus Satellite also has subscription plans for its DIRECTV programming that
contain minimum service commitment periods. These plans have early termination
fees for subscribers should service be terminated by subscribers before the end
of the commitment period. Direct and incremental subscriber acquisition costs
associated with these plans, consisting of equipment costs and related subsidies
not capitalized as fixed assets, installation costs and related subsidies, and
dealer commissions, are deferred in the aggregate not to exceed the amounts of
applicable termination fees. These costs are amortized over the minimum service
commitment period of 12 months and charged to amortization expense. Direct and
incremental subscriber acquisition costs deferred are less than the contractual
revenue from the plans
32
over the commitment period. Direct and incremental subscriber acquisition costs
in excess of termination fee amounts are expensed immediately and charged to
promotion and incentives or advertising and selling, as applicable, in the
statement of operations.
Amounts associated with subscriber acquisition costs are contained in
the following table (in thousands). For the 2004 periods, the two months ended
June 2, 2004 consist of the period from April 1, 2004 through June 2, 2004, and
the five months ended June 2, 2004 consist of the period from January 1, 2004
through June 2, 2004.
Two Months Three Months Five Months Six Months
Ended Ended Ended Ended
June 2, 2004 June 30, 2003 June 2, 2004 June 30, 2003
------------------ ------------------ ------------------ ------------------
Gross subscriber acquisition costs:
Incurred $ 8,900 $ 19,219 $ 22,313 $ 39,454
Capitalized 1,676 4,684 4,436 10,114
Deferred 2,144 4,368 5,433 10,569
------------------ ------------------ ------------------ ------------------
Expensed: $ 5,080 $ 10,167 $ 12,444 $ 18,771
================== ================== ================== ==================
Promotions and $ 2,476 $ 3,595 $ 5,594 $ 6,473
incentives
Advertising and selling 2,604 6,572 6,850 12,298
------------------ ------------------ ------------------ ------------------
Total expensed $ 5,080 $ 10,167 $ 12,444 $ 18,771
================== ================== ================== ==================
Amortization of amounts $ 2,785 $ 6,453 $ 7,528 $ 14,117
deferred
Depreciation of amounts
capitalized 3,190 4,388 7,936 8,758
Gross subscriber acquisition costs for the two and five months ended
June 2, 2004 compared to the three and six months ended June 30, 2003 decreased
$10.3 million and $17.1 million, respectively, primarily due to the impact of
comparing two months of gross subscriber acquisition costs versus three months
and five months of gross subscriber acquisition costs versus six months,
respectively, as well as to a lesser amount of gross subscriber additions in
2004 compared to 2003. Capitalized subscriber acquisition costs decreased as a
result of an approximate 18,000 decrease in the number of receivers that Pegasus
Satellite took title to that were delivered to new subscribers during the two
months ended June 2, 2004 compared to the three months ended June 30, 2003, and
an approximate 39,000 decrease in the number of receivers that Pegasus Satellite
took title to that were delivered to new subscribers during the five months
ended June 2, 2004 compared to the six months ended June 30, 2003. Deferred
subscriber acquisition costs decreased as a result of an approximate 9,000
decrease in the number of gross subscriber additions for which certain direct
and incremental subscriber acquisition costs were eligible for deferral during
the two months ended June 2, 2004 compared to the three months ended June 30,
2003, and an approximate 25,000 decrease in the number of gross subscriber
additions for which certain direct and incremental subscriber acquisition costs
were eligible for deferral during the five months ended June 2, 2004 compared to
the six months ended June 30, 2003.
Based on the gross subscriber additions during the two months ended
June 2, 2004 and the three months ended June 30, 2003, total subscriber
acquisition costs per gross subscriber added were $476 and $609, respectively.
Based on the gross subscriber additions during the first five months of 2004 and
the first six months of 2003, total subscriber acquisition costs per gross
subscriber added were $489 and $559, respectively. The decreases were primarily
due to: (1) a decrease in advertising expenses of $52
33
and $28 per gross subscriber added for the two and five months ended June 2,
2004, respectively, versus the three and six months ended June 30, 2003,
respectively; (2) lower aggregate dealer commission costs of $25 and $28 per
gross subscriber added for the two and five months ended June 2, 2004,
respectively, versus the three and six months ended June 30, 2003, respectively,
primarily as a result of increased direct channel sales as a relative percent of
total sales; (3) decreases of $30 and $18 per gross subscriber added for the two
and five months ended June 2, 2004, respectively, versus the three and six
months ended June 30, 2003, respectively, in equipment and installation
subsidies, primarily as a result of the increased use of refurbished receivers;
(4) a decrease of $12 and $3 per gross subscriber added for the two and five
months ended June 2, 2004, respectively, versus the three and six months ended
June 30, 2003, respectively, for costs of promotional introductory campaigns
that provide programming at discounted rates to new subscribers; and (5) a
decrease of $13 and an increase of $6 per gross subscriber added in sales
administration and other indirect subscriber acquisition costs for the two and
five months ended June 2, 2004, respectively, of 2004 versus the three and six
months ended June 30, 2003, respectively.
Litigation Verdict:
On April 14, 2004, the jury returned a verdict in favor of DIRECTV,
Inc. in the Seamless Marketing litigation. The jury's verdict awarded DIRECTV,
Inc. $51.5 million on DIRECTV, Inc.'s breach of contract and open book account
claims. Pegasus Satellite had previously accrued expenses of $35.2 million
related to amounts billed and unpaid under the Seamless Marketing agreement in
fiscal years 2000 and 2001. In the first quarter of 2004, as a result of the
jury's award of $51.5 million and Pegasus Satellite's estimate of interest of
$6.5 million, Pegasus Satellite increased this accrual by $22.8 million by
recording $17.3 million as litigation verdict in the consolidated statements of
operations and $5.5 million as property and equipment in the condensed
consolidated balance sheet. The $5.5 million of property and equipment
represents direct broadcast satellite receivers for which Pegasus Satellite
retained title. In addition, Pegasus Satellite recorded $5.1 million of
depreciation expense related to this property and equipment. On May 24, 2004,
the Court entered judgment in the amount of $62.6 million, which included
prejudgment interest through the date of the entry of the judgment. As a result,
we recorded $4.7 million of additional litigation verdict expense prior to the
deconsolidation of Pegasus Satellite on June 2, 2004, including $100 thousand of
interest subsequent to the entry of the judgment.
General and Administrative:
For the two months ended June 2, 2004, general and administrative
expenses decreased $1.9 million to $4.0 million compared to $5.9 million for the
three months ended June 30, 2003. For the five months ended June 2, 2004,
general and administrative expenses decreased $1.9 million to $10.3 million
compared to $12.3 million for the six months ended June 30, 2003. These
decreases were primarily due to the impact of comparing two months of general
and administrative expenses versus three months and five months of general and
administrative expenses versus six months, respectively.
Impairment of Direct Broadcast Satellite Assets:
As a result of the NRTC's June 2, 2004 purported termination of the
exclusive rights of Pegasus Satellite Television, Inc. and certain of its
affiliates to distribute DIRECTV services in specified rural territories in the
United States effective August 31, 2004, we performed an analysis of our direct
broadcast satellite rights and other direct broadcast satellite assets to
determine whether any impairment had occurred. In light of the June 21 Order, we
determined that the carrying amount of the asset group exceeded the asset
group's estimated, probability-weighted, undiscounted cash flows as of June 2,
2004.
34
Accordingly, Pegasus Satellite recorded an impairment charge of $429.6 million
prior to its deconsolidation from Pegasus Communications.
Depreciation and Amortization:
For the two months ended June 2, 2004, depreciation and amortization
decreased $15.0 million to $25.8 million compared to $40.8 million for the three
months ended June 30, 2003. For the five months ended June 2, 2004, depreciation
and amortization decreased $12.5 million to $70.3 million compared to $82.8
million for the six months ended June 30, 2003. These decreases were primarily
due to the impact of comparing two months of depreciation and amortization
versus three months and five months of depreciation and amortization versus six
months, respectively, as well as decreased amortization of deferred subscriber
acquisition costs in the current year as a result of a lesser number of
subscribers for which certain direct and incremental subscriber acquisition
costs were deferred and amortized during 2004, partially offset by incremental
depreciation expense of $5.5 million recorded in the first five months of 2004
in connection with the litigation verdict as described above.
Broadcast Television and Other Operations:
For the two months ended June 2, 2004, broadcast television and other
expenses decreased $2.0 million to $5.8 million compared to $7.8 million for the
three months ended June 30, 2003. For the five months ended June 2, 2004,
broadcast television and other expenses decreased $2.4 million to $13.2 million
compared to $15.6 million for the six months ended June 30, 2003. These
decreases were primarily due to the impact of comparing two months of broadcast
television and other expenses versus three months and five months of broadcast
television and other expenses versus six months, respectively.
Pegasus Communications' Other Statement of Operations and Comprehensive Loss
- -----------------------------------------------------------------------------
Items
- -----
Other operating expenses increased $4.1 million to $14.6 million and
$4.6 million to $23.1 million for the three and six months ended June 30, 2004
compared to the same periods of 2003, respectively, 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(degree) west
longitude orbital location; (3) $1.9 million of expenses in connection with
Pegasus Satellite's bankruptcy filing incurred in the second quarter of 2004
prior to the Filing Date; (4) increases in incentive compensation of $1.9
million to $2.8 million and of $2.2 million to $5.9 million in the three and six
months ended June 30, 2004 compared to the same periods of 2003, respectively,
and (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. These increases were partially offset by (1) legal fees
associated with Pegasus Satellite's DIRECTV, Inc. and patent litigation that
decreased $4.0 million to $1.2 million and $5.9 million to $3.7 million in the
three and six months ended June 30, 2004 compared to the same periods of 2003,
respectively; and (2) decreases in stock awards of $3.3 million to $942 thousand
and of $1.0 million to $3.2 million in the three and six months ended June 30,
2004, compared to the same periods of 2003, respectively. Note that for the
second quarter and year to date periods of 2004, all amounts include two and
five months of expenses for Pegasus Satellite, which was deconsolidated as of
June 2, 2004.
Interest expense decreased $3.8 million for the three months ended June
30, 2004 compared to 2003 primarily due to:
35
(1) reduced interest expense of $7.8 million on Pegasus Satellite's senior
notes and senior subordinated notes primarily as a result of the three
months ended June 30, 2004 including two months of interest on these
notes and the three months ended June 30, 2003 including three months
of interest on these notes; and
(2) interest in the second quarter of 2003 of $2.1 million with respect to
Pegasus Media's 12-1/2% notes due 2005 which were redeemed in September
2003 with outstanding principal of $67.9 million on the date of
redemption;
offset in part by:
(3) dividends on Pegasus Satellite's 12-3/4% preferred stock and interest
on dividends in arrears of $2.5 million that were classified as
interest expense in 2004 due to the stock being classified as a
liability upon Pegasus Satellite's adoption of Statement of Financial
Accounting Standards No. 150 beginning July 1, 2003;
(4) net incremental interest expense of $1.6 million associated with
Pegasus Media's credit agreement. Interest expense for the three months
ended June 30, 2004 includes two months of interest on the Tranche D
term loan of $300.0 million borrowed in October 2003 at a weighted
average rate of 9.0%. Interest expense for the three months ended June
30, 2003 includes three months of interest on the various debt that was
repaid with a portion of the proceeds from the Tranche D term loan; and
(5) interest of $2.4 million with respect to Pegasus Satellite's $100.0
million term loan due 2009 borrowed in August 2003 at a rate of 12.5%.
Interest expense for the three months ended June 30, 2004 includes two
months of interest on Pegasus Satellite's $100.0 million term loan.
Interest expense increased $5.4 million for the six months ended June 30,
2004 compared to 2003 primarily due to:
(1) dividends on Pegasus Satellite's 12-3/4% preferred stock and interest
on dividends in arrears of $6.4 million that were classified as
interest expense in 2004 due to the stock being classified as a
liability upon Pegasus Satellite's adoption of Statement of Financial
Accounting Standards No. 150 beginning July 1, 2003;
(2) net incremental interest expense of $5.8 million associated with
Pegasus Media's credit agreement. Interest expense for the six months
ended June 30, 2004 includes five months of interest on the Tranche D
term loan of $300.0 million borrowed in October 2003 at a weighted
average rate of 9.0%. Interest expense for the six months ended June
30, 2003 includes six months of interest on the various debt that was
repaid with a portion of the proceeds from the Tranche D term loan; and
(3) interest of $5.7 million with respect to Pegasus Satellite's $100.0
million term loan due 2009 borrowed in August 2003 at a rate of 12.5%.
Interest expense for the six months ended June 30, 2004 includes five
months of interest on Pegasus Satellite's $100.0 million term loan;
offset in part by:
(4) interest in the first two quarters of 2003 of $4.2 million with respect
to Pegasus Media's 12-1/2% notes due 2005 which were redeemed in
September 2003 with outstanding principal of $67.9 million on the date
of redemption;
(5) reduced interest expense of $7.4 million on Pegasus Satellite's senior
notes and senior subordinated notes primarily as a result of the six
months ended June 30, 2004 including five months of interest on these
notes and the six months ended June 30, 2003 including six months of
interest on these notes; and
36
(6) reduced interest expense of $935 thousand associated with interest rate
hedging financial instruments for Pegasus Media primarily due to the
expiration of interest rate swap contracts in 2003.
Other nonoperating expenses decreased $3.8 million and $5.2 million for
the three and six months ended June 30, 2004 primarily due to a $2.6 million
downward adjustment in the carrying value of Pegasus PCS Partners' investment in
PCH LCC in the second quarter of 2004 and a $1.2 million one time gain on the
sale of a construction permit in the second quarter of 2003.
Equity in earnings of affiliates was $220 thousand and equity in losses
of affiliates was $2.9 million for the three and six months ended June 30, 2003
due to an adjustment in the capital accounts of the respective partners of a
partnership in which Pegasus Development is a partner. As of March 31, 2004,
this previously reported equity investment is now consolidated as a variable
interest entity of which Pegasus Development is the primary beneficiary. See
Note 1 of the Notes to Consolidated Financial Statements.
We recorded income tax expense of $20 thousand in the second quarter of
2004 for state income taxes payable. In the three and six months ended June 30,
2004, we recorded increases of $180.8 million and $202.8 million, respectively,
to the valuation allowance recorded against the net deferred income tax asset
balance at June 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 June 30, 2004 was $296.5
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 June 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 months ended
June 30, 2004 to virtually zero.
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 $4.9 million
in the first six 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. Aggregate revenues and pretax
income from discontinued operations were as follows:
(in thousands) Three Months Six Months
Ended Ended
June 30, 2003 June 30, 2003
---------------- ---------------
Revenues $ 380 $1,533
Pretax income (loss) (2,567) 4,616
Pegasus Communications' Results of Operations
The following information presents the results of operations of Pegasus
Communications 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 six months ended June 30, 2004 compared to the
three and six months ended June 30, 2003, unless indicated otherwise.
37
(in thousands) Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
-------- ------- -------- --------
Net revenues $ 229 $ 213 $ 486 $ 448
Costs of other operations 1,008 226 1,759 452
Corporate and development expenses 738 580 1,692 1,238
Corporate depreciation and amortization 3,802 3,881 7,614 7,783
Other operating expenses, net 7,033 2,202 7,596 3,895
-------- ------- -------- --------
Loss from operations (12,352) (6,676) (18,175) (12,920)
Interest expense (196) (195) (447) (390)
Interest income 164 103 308 190
Other nonoperating expenses, net (2,635) - (2,635) -
Equity in earnings (losses) of affiliates - 220 - (2,902)
-------- ------- -------- --------
Net loss $(15,019) $(6,548) $(20,949) $(16,022)
======== ======= ======== ========
Net loss applicable to common shares $ (3.03) $ (1.75) $ (3.91) $ (3.96)
For the three and six months ended June 30, 2004, other operating
expenses, net increased $4.8 million and $3.7 million, respectively, compared to
the same periods 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(degree) west longitude
orbital location; and (3) increases in incentive compensation of $562 thousand
to $627 thousand and $667 thousand to $884 thousand in the three and six months
ended June 30, 2004 compared to the same periods of 2003, respectively;
partially offset by (4) legal fees related to patent litigation that were $22
thousand in the six months ended June 30, 2004 compared to $1.9 million and $3.4
million in the three and six months ended June 30, 2003.
Other nonoperating expenses were $2.6 million for the three and six
months ended June 30, 2004 primarily due to a $2.6 million downward adjustment
in the carrying value of Pegasus PCS Partners' investment in PCH LCC in the
second quarter of 2004.
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
six months ended June 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 six months ended June 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
completion of the planned sale of Pegasus Satellite's direct broadcast satellite
business.
The outstanding principal and related accrued interest of all long-term
debt of the Debtors became immediately due and payable as a result of the
bankruptcy filing. However, the majority of all claims in existence as of the
filing date (including claims for principal, accrued interest, and substantially
all legal proceedings) have been stayed while the Debtors continue to manage
their businesses. The
38
Bankruptcy Court has, upon motion of the Debtors, permitted it to pay or
otherwise honor certain unsecured pre-petition claims, including employee wages
and benefits and vendor claims in the ordinary course of business, subject to
certain limitations, and to fund, on an interim basis pending a final
determination on the issue by the Bankruptcy Court, its operations in the
ordinary course of business. See Note 1 of the Notes to Consolidated Financial
Statements for further information.
We had cash and cash equivalents on hand at June 30, 2004 of $59.7
million compared to $82.9 million at December 31, 2003. The change in cash is
discussed below in terms of the amounts shown in our Condensed Consolidated
Statement of Cash Flows.
Net cash provided by operating activities was $964 thousand and $9.4
million for the six months ended June 30, 2004 and 2003, respectively. Increases
resulting from direct broadcast satellite operating profit before depreciation
and amortization, as adjusted for special items, reduced interest payments, and
reduced deferred subscriber acquisition costs were more than offset by
unfavorable changes in our patronage accrual, incentive compensation paid, and
other working capital changes. Direct broadcast satellite operating profit
before depreciation and amortization, as adjusted for special items, increased
by $2.2 million to $111.5 million in the five months ended June 2, 2004 compared
to $109.3 million in the six months ended June 30, 2003. (The special items
excluded from the direct broadcast satellite operating profit before
depreciation and amortization were the litigation verdict in 2004, impairment of
direct broadcast satellite assets in 2004, and a $4.5 million contract
termination fee that was initially accrued in 2002 and was reversed in 2003
because the related contract was amended to eliminate the fee.) Also, cash
interest paid decreased $7.0 million in the 2004 period, primarily as a result
of the Chapter 11 filing of Pegasus Satellite, and deferred subscriber
acquisition costs decreased $5.2 million to $5.4 million in the five months
ended June 2, 2004 compared to $10.6 million in the six months ended June 30,
2003. Our patronage accrual increased $16.7 million more in the 2004 period than
in the 2003 period, cash paid for incentive compensation increased $1.9 million
in the 2004 period compared to 2003, and other working capital changes of $4.1
million were unfavorable in the 2004 period compared to 2003.
Net cash used for investing activities was $9.8 million and net cash
provided by investing activities was $11.1 million for the six months ended June
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 $1.4
million. The amount in the 2003 period primarily consisted of cash received of
$21.6 million associated with sales of three broadcast television stations,
partially offset by $9.5 million of purchases of direct broadcast satellite
equipment and $1.1 million of other capital expenditures. We project that our
capital expenditures for the third and fourth quarters of 2004 will be
approximately $1.1 million.
Net cash provided by financing activities was $8.1 million and net cash
used for financing activities was $8.8 million for the six months ended June 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,
$5.2 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 73,000 shares of our of our Class A common stock for $1.1 million,
and $750 thousand of repayments on term loan facilities. The primary financing
activities for 2003 were repayments of long term debt of $4.0 million, purchases
of 202,960 shares of our Class A common stock for $3.7 million, and costs of
$2.8 million incurred for new financing arrangements, partially offset by the
release of $1.8 million of restricted cash.
39
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 June 30, 2004 was $27.1 million. The
dividend of $3.2 million scheduled to be declared on July 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 756 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 4,007 shares of Class A common stock and payment of
accumulated dividends associated with the converted shares of $257 thousand. The
conversions were in accordance with the terms of Series E's certificate of
designation.
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.
New Accounting Pronouncements
In March 2004, the Emerging Issues Task Force ("EITF") finalized Issue
03-06, "Participating Securities and the Two-Class Method under FASB Statement
No. 128, `Earnings Per Share'" ("EITF 03-06"). EITF 03-06 provides guidance for
evaluating whether a security meets the definition of a participating security
in FASB Statement 128. This guidance is applicable beginning in the second
quarter of 2004. The adoption of EITF 03-06 had no impact on our financial
position and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On May 24, 2004, a major rating agency reduced the senior implied
rating for Pegasus Satellite from Caa1 to Ca, and the senior bank debt rating
for Pegasus Media from B3 to Caa1. All other existing ratings were unchanged. On
June 3, 2004, another major rating agency reduced its corporate credit rating
for Pegasus Communications, Pegasus Satellite, and Pegasus Media from CCC to D.
We believe that these downgrades will not have a significant impact on our
liquidity and capital resources because our ratings prior to the downgrades were
generally considered to be speculative.
40
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 day period prior to June 30, 2004, we carried out an
evaluation 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 the Chief Financial Officer
concluded that these controls and procedures are effective in their design to
ensure that information required to be disclosed by the registrant in reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
has been accumulated and communicated to the management of the registrant,
including the above indicated officers, as appropriate to allow timely decisions
regarding the required disclosures. There have not been any changes in the
registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of this evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
41
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 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 Form 10-Q. We have previously filed reports during
the fiscal year disclosing some or all of the legal proceedings referenced
above. In particular, we have reported on such proceedings in our Annual Report
on Form 10-K for the year ended December 31, 2003, our Quarterly Report on Form
10-Q for the quarter ended March 31, 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, and June 2, 2004.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total (d) Approximate
Number of Dollar Value
(a) Shares of Shares
Total (b) Purchased that May
Number Average as part of Yet be
of Price Publicly Purchased
Shares Paid per Announced Under
Period Purchased Share Program the Program
- ----------------- --------- ----------- ------------ --------------
May 21-26, 2004 26,000 $12.82 26,000 $11,209,682
- ----------------- --------- ----------- ------------ --------------
June 8-24, 2004 47,000 $16.14 47,000 $10,450,938
- ----------------- --------- ----------- ------------ --------------
Total 73,000 $14.96 73,000 $10,450,938
- ----------------- --------- ----------- ------------ --------------
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 $406.2 million of debt of
Pegasus Satellite and $1.0 billion 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 June 30, 2004 was $27.1 million. The dividend of $3.2 million
scheduled to be declared on July 31, 2004 was not declared. Dividends not
declared accumulate in arrears until paid.
42
ITEM 5. OTHER INFORMATION
On August 11, 2004, Pegasus Communications 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. Our direct broadcast
satellite subsidiaries are operating under bankruptcy protection and have
recently announced an agreement to sell the direct broadcast satellite business
to DIRECTV, Inc., subject to bankruptcy court approval. We do not believe that
the SEC investigation will affect the sale. We intend to cooperate fully with
the SEC in its investigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) 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.
b) Reports on Form 8-K
On May 17, 2004, we filed a Current Report on Form 8-K dated May 12,
2004 reporting under Item 5 that the United States District Court for the
Central District of California entered an order dismissing DIRECTV's claims
against Pegasus Satellite Television. The Court also dismissed Pegasus
Communications' claims against DIRECTV, thereby terminating further proceedings
before the District Court. We included as exhibits to the Form 8-K copies of two
press releases issued on May 13, 2004 as well as a copy of the final order
entered by the District Court.
On May 17, 2004, we filed a Current Report on Form 8-K/A dated May 17,
2004 solely for the purpose of filing as an exhibit a corrected copy of the
final order entered by the District Court to replace the copy of the final order
entered by the District Court originally filed as an exhibit to the Form 8-K
dated May 17, 2004.
On May 25, 2004, we filed a Current Report on Form 8-K dated May 20,
2004 reporting under Item 5 that: (1) on April 14, 2004, a jury returned a
verdict in favor of DIRECTV, Inc. in the Seamless Marketing litigation that
DIRECTV, Inc. brought against Pegasus Satellite Television, Inc. and Golden Sky
Systems, Inc., indirect subsidiaries of Pegasus Communications, which verdict
awarded DIRECTV,
43
Inc. $51.5 million on DIRECTV, Inc.'s breach of contract and open book account
claims; (2) on May 20, 2004, the United States District Court for the Central
District of California entered an order granting DIRECTV, Inc.'s April 16, 2004
request for prejudgment interest in the amount of $10.7 million; and (3) on May
24, 2004, the Court entered judgment in the amount of $62.6 million which
included prejudgment interest calculated through the date of entry of the
judgment.
On June 3, 2004, we filed a Current Report on Form 8-K dated June 2,
2004 reporting under Item 5 that Pegasus Satellite Television and certain of its
affiliates received notices from (i) the NRTC purporting to terminate the
exclusive distribution agreements with NRTC, which provide the exclusive rights
to distribute DIRECTV services in specified rural territories in the United
States, and (ii) 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, Inc.
Separately, on June 2, 2004, Pegasus Communications announced that its
subsidiaries Pegasus Satellite Television, Inc, Pegasus Satellite
Communications, Inc., Pegasus Media & Communications, Inc., and certain of their
subsidiaries filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code in the U.S. Bankruptcy Court, District of Maine in order to
prevent the purported termination by NRTC and DIRECTV of their agreements for
exclusive distribution of DIRECTV services in Pegasus Satellite Television's
rural territories. The Chapter 11 filing does not include Pegasus Communications
or its direct subsidiaries (other than Pegasus Satellite Communications, Inc.).
Also, on June 2, 2004, DIRECTV, Inc. filed a two-count complaint against Pegasus
Communications, Pegasus Satellite Communications, Inc., Golden Sky Systems,
Inc., Pegasus Media & Communications, Inc., and Pegasus Satellite Television,
Inc. in the United States District Court, Central District of California for
federal trademark infringement based on any use of the DIRECTV brand name after
August 31, 2004 (the expiration of a 90-day license agreement that DIRECTV
granted to NRTC to use the DIRECTV name as part of the purported termination of
the agreements described above) and for breach of contract based upon an alleged
failure of the defendants to fulfill their "best efforts" obligations under
Pegasus Satellite Television's agreements with the NRTC. We also reported under
Item 9 that we anticipated deconsolidating Pegasus Satellite as a result of the
Chapter 11 filing, and presented a pro forma condensed consolidated balance
sheet showing Pegasus Communications' financial position as of March 31, 2004
assuming deconsolidation of Pegasus Satellite. Copies of a June 2, 2004 press
release issued by Pegasus Communications, the June 2, 2004 notices from the NRTC
and DIRECTV, Inc., the agreement of termination between the NRTC and DIRECTV,
Inc., the offer agreement, and the June 2, 2004 press release announcing the
Chapter 11 filing were included as exhibits to the Form 8-K.
44
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
August 16, 2004 By: /s/ Joseph W. Pooler, Jr.
- -------------------- ------------------------------
Date Joseph W. Pooler, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
45
Exhibit 31.1
CERTIFICATION
I, Marshall W. Pagon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pegasus
Communications Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
quarterly report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
August 16, 2004
/s/ Marshall W. Pagon
Marshall W. Pagon
Chief Executive Officer
46
Exhibit 31.2
CERTIFICATION
I, Joseph W. Pooler, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pegasus
Communications Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
quarterly report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
August 16, 2004
/s/ Joseph W. Pooler, Jr.
Joseph W. Pooler, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
47
Exhibit 32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Marshall W. Pagon, the Chief Executive Officer of Pegasus Communications
Corporation, hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that the Form 10-Q of Pegasus Communications Corporation for the
quarterly period ended June 30, 2004 (the "June 30, 2004 Form 10-Q"), which this
certification accompanies, fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and
information contained in the June 30, 2004 Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations of Pegasus
Communications Corporation. A signed original of this written statement required
by Section 906 has been provided to Pegasus Communications Corporation and will
be retained by Pegasus Communications Corporation and furnished to the
Securities and Exchange Commission or its staff upon request.
Dated: August 16, 2004
/s/ Marshall W. Pagon
Marshall W. Pagon
48
Exhibit 32.2
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Joseph W. Pooler, Jr., the Chief Financial Officer of Pegasus Communications
Corporation, hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that the Form 10-Q of Pegasus Communications Corporation for the
quarterly period ended June 30, 2004 (the "June 30, 2004 Form 10-Q"), which this
certification accompanies, fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and
information contained in the June 30, 2004 Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations of Pegasus
Communications Corporation.
A signed original of this written statement required by Section 906 has been
provided to Pegasus Communications Corporation and will be retained by Pegasus
Communications Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
Dated: August 16, 2004
/s/ Joseph W. Pooler, Jr.
Joseph W. Pooler, Jr.
49