Pegasus Communications


is going to court to hold



to their broken distribution agreement.

Bankruptcy court.

The Bala Cynwyd, Pa., company said its Pegasus Satellite Television, Pegasus Satellite Communications and Pegasus Media subsidiaries filed for Chapter 11 protection after DirecTV ended an agreement with the National Rural Telecommunications Cooperative that gave Pegasus exclusive DirectTV distribution rights in rural areas.

The Pegasus units will try in the proceeding to block what it called the "unlawful termination" of the distribution pact.

"These filings will seek affirmation by the bankruptcy court of Pegasus Satellite Television's valuable rights as well as damages resulting from NRTC's and DirecTV's actions to impair those rights, including NRTC's breach of its duties to Pegasus Satellite Television, NRTC's majority owner."

Pegasus said the filing should allow it to continue providing uninterrupted service to its 1.1 million rural subscribers while the dispute its adjudicated.

Trading in Pegasus shares was halted for news Wednesday after closing at $15.43 Tuesday, down 79 cents. In premarket trading Thursday, the shares were down $5.13, or 33%, to $10.30.

Pegasus shares have lost well over half their value since the company's

last scrape with DirecTV. Pegasus stock zoomed to $51 earlier this year on investors' hopes that DirecTV's new management would buy out the company -- hopes that were

cruelly dashed this winter.

DirecTV -- which had a rocky relationship with the NRTC and Pegasus even before DirecTV's new management came in -- has blamed the old distribution agreement for stifling DirecTV's growth in rural areas.

"We have seen the number of subscribers to DirecTV services in territories covered by the NRTC agreement steadily decline -- primarily in Pegasus territories -- in the last few years," DirecTV Executive Vice President Steve Cox said in a statement Wednesday. "We believe the termination of the old distribution arrangement will allow DirecTV and NRTC to reverse this trend and compete more effectively in rural America."

The new arrangement, says a DirecTV spokesman, will enable the company to make the same offers to customers in current NRTC territories as it does elsewhere, covering such elements of service as pricing and hardware packages.

DirecTV has 1.5 million subscribers in the NRTC territories, which cover 9 million households across the U.S., according to Vintage Research analyst William Kidd.

Outside of the NRTC territories, DirecTV is showing sharp growth; the company added 460,000 of what it calls "owned-and-operated" subscribers in the first quarter, bringing that total to 11.14 million subs.

In February, DirecTV said it had terminated a yearlong mediation process with Pegasus over a contractual dispute with the distributor. At the time, DirecTV CEO Chase Carey accused both Pegasus' management and its investors of

having an inflated sense of their company's value.

"With every day that passes, both Pegasus' significance to DirecTV and its value as a standalone enterprise diminish," Carey said in a statement.

Pegasus's shares dropped 32% the following day, to $28.30.

In return for giving up its exclusive rights, the NRTC will receive a monthly payment of $4.4 million from DirecTV through June 2011, according to the DirecTV spokesman. The NRTC will also receive a payment based on the number of NRTC DirecTV subscribers that are transferred to DirecTV.

NRTC members who are retailers of the DirecTV service -- but not Pegasus -- will be able to preserve exclusivity in their territories through June 2011, says DirecTV. These affiliates will also have the option of transferring their subscribers to DirecTV, says the spokesman, in return for a payment of either $875 or $1,050 per customer, based on different formulas.

DirecTV says it will pay Pegasus $675 per subscriber, if the distributor -- which rejected a prior litigation settlement agreed to by other NRTC members -- agrees to transfer its subscribers back to DirecTV before the end of August.

In its latest quarter, DirecTV reported an average acquisition cost of $645 per subscriber, up from $545 one year earlier.