-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JaT9Mn3lYTT/lMMyJL+deGyRKIdsDtDqBN3YauAWeLMFeqmlzLhA/TozhXQcwou7 COEglB9W1Wa/zKuLm1k0Xg== 0000950116-99-000102.txt : 19990128 0000950116-99-000102.hdr.sgml : 19990128 ACCESSION NUMBER: 0000950116-99-000102 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19990127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEGASUS COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001015629 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 510374669 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-70949 FILM NUMBER: 99513543 BUSINESS ADDRESS: STREET 1: 5 RADNOR CORPORATE CTR STE 454 STREET 2: 100 MATSONFORD RD CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 6103411801 MAIL ADDRESS: STREET 1: 1345 CHESTNUT ST STREET 2: 1345 CHESTNUT ST CITY: PHILADELPHIA STATE: PA ZIP: 19107-3496 FORMER COMPANY: FORMER CONFORMED NAME: PEGASUS COMMUNICATIONS & MEDIA CORP DATE OF NAME CHANGE: 19960530 S-3/A 1 FORM S-3/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1999 REGISTRATION NO. 333-70949 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PEGASUS COMMUNICATIONS CORPORATION (Exact name of Registrant as specified in its charter) Delaware 51-0374669 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) c/o Pegasus Communications Management Company Suite 454, 5 Radnor Corporate Center 100 Matsonford Road Radnor, Pennsylvania 19087 (610) 341-1801 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------- Ted S. Lodge, Esq. Senior Vice President, Chief Adminstrative Officer, General Counsel and Secretary c/o Pegasus Communications Management Company Suite 454, 5 Radnor Corporate Center 100 Matsonford Road Radnor, Pennsylvania 19087 (610) 341-1801 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Please send copies of all communications to: Kirk A. Davenport, Esq. Michael B. Jordan, Esq. Latham & Watkins Drinker Biddle & Reath LLP 885 Third Avenue 1100 Philadelphia National Bank Building Suite 100 1345 Chestnut Street New York, NY 10022 Philadelphia, Pennsylvania 19107-3496 (212) 906-1284 (215) 988-2802 --------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. --------------------- If the only securities being registered on this Form are to be offered pursuant to dividend or interest reinvestment plans, please check the following box: [ ] If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
======================================================================================================================== Proposed Maximum Proposed Title of Shares Amount to be Aggregate Price Maximum Aggregate Amount of to be Registered Registered(1) Per Share(2) Offering Price Registration Fee(3) ---------------- ---------- --------- -------------- ---------------- Shares of Class A Common Stock par value $0.01 per share ========================================================================================================================
(1) Includes 450,000 shares which the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fees in accordance with Rule 457(c) of the Securities Act of 1933, as amended. The maximum price per share information is based on the average of the high and the low sale prices of Pegasus Communications Corporation's Class A Common Stock, $.01 par value per share, reported on the Nasdaq National Market System on January 13, 1999. (3) The Registrant previously filed a Registration Statement with respect to 4,664,200 shares for which a registration fee of $30,147 was paid. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. We will amend and complete the information in this Prospectus. Although we are permitted by U.S. federal securities laws to offer these securities using this Prospectus, we may not sell them or accept your offer to buy them until the registration statement filed with the SEC relating to these securities is effective. This Prospectus is not an offer to sell these securities or our solicitation of your offer to buy these securities in any jurisdiction where that would not be permitted or legal. SUBJECT TO COMPLETION -- JANUARY 27, 1999 ================================================================================ Prospectus , 1999 [GRAPHIC OMITTED] 4,664,200 Shares of Class A Common Stock - -------------------------------------------------------------------------------- The Offering o We are offering 3,000,000 of the shares and certain existing stockholders are offering 1,664,200 of the shares. o The underwriters have an option to purchase an additional 450,000 shares from us to cover over-allotments. o There is an existing trading market for these shares. The last reported sale price of Class A Common Stock was $25.25 per Class A Common Stock. o We plan to use the proceeds from the offering for acquisitions, capital expenditures and general corporate purposes. We will receive no proceeds from the sale of Class A Common Stock in the offering by the selling stockholders. o Closing: , 1999. o Nasdaq Symbol: PGTV
-------------------------------------------------------------------------------------------------- Per Share Total -------------------------------------------------------------------------------------------------- Public offering price: $ $ Underwriting fees: Proceeds to Company: Proceeds to selling stockholders: --------------------------------------------------------------------------------------------------
This investment involves risks. See "Risk Factors" beginning on Page 9. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this Prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- Donaldson, Lufkin & Jenrette Bear, Stearns & Co. Inc. Merrill Lynch & Co. C.E. Unterberg, Towbin ING Baring Furman Selz LLC [INSIDE FRONT COVER] [Color map of the United States showing Company operations in the various states.] TABLE OF CONTENTS Page --------- Prospectus Summary .......................... 3 Risk Factors ................................ 13 Use of Proceeds ............................. 22 Dividend Policy ............................. 23 Price Range of Class A Common Stock ......... 23 Dilution .................................... 24 Capitalization .............................. 25 Selected Historical and Pro Forma Consolidated Financial Data .............. 26 Management's Discussion and Analysis of Financial Condition and Results of Operation ................................ 29 The Company ................................. 39 Management .................................. 40 Principal and Selling Stockholders .......... 47 Certain Relationships and Related Transactions ............................. 50 Description of Certain Indebtedness ......... 53 Description of Capital Stock ................ 61 Future Sales of Common Stock ................ 64 Underwriters ................................ 67 Legal Matters ............................... 68 Experts ..................................... 68 Where You Can Find More Information ......... 69 Index to Financial Statements ............... F-1 2 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that you should consider before deciding to invest in our common stock. We urge you to read the entire prospectus carefully, including our SEC filings that we have incorporated by reference into this prospectus, the "Risk Factors" section and the consolidated financial statements and the notes to those statements. Information in this summary gives effect to the pending acquisitions described below in "The Company -Recent Pegasus Developments." Pegasus Pegasus Communications Corporation is: o The largest independent provider of DIRECTV(R) with 455,000 subscribers at December 31, 1998. We have the exclusive right to distribute DIRECTV digital broadcast satellite services to over 4.83 million rural households in 36 states. We distribute DIRECTV through the Pegasus retail network, a network of approximately 2,000 independent retailers. o The owner or programmer of nine TV stations affiliated with either Fox, UPN or the WB and the owner of a large cable system in Puerto Rico serving approximately 50,000 subscribers. o One of the fastest growing media companies in the United States. We have increased our revenues at a compound growth rate of 100% per annum since our inception in 1991. DBS and DIRECTV DBS programming services (DBS is the industry's abbreviation of "direct broadcast satellite") are digital satellite services that require a subscriber to install a satellite receiving antenna or dish and a digital receiver. The introduction of DBS receivers is widely regarded as the most successful introduction of a consumer electronics product in U.S. history, surpassing the rollout of color televisions, VCRs and compact disc players. According to a recent Paul Kagan study, DBS services captured almost 2 out of every 3 new subscribers to multi-channel television in the United States in 1998. At December 31, 1998, there were 8.7 million DBS subscribers in the United States. The Carmel Group has forecast that the number of DBS subscribers will grow to 21.1 million by 2003. There are currently three nationally branded DBS programming services: o DIRECTV -- There are 4.5 million DIRECTV subscribers (52% DBS market share), including approximately 3.55 million subscribers served by DIRECTV itself, 455,000 subscribers served by Pegasus and 500,000 subscribers served by the approximately 100 other DIRECTV rural affiliates. o Primestar -- There are 2.3 million Primestar subscribers (26% DBS market share). o EchoStar -- There are 1.9 million EchoStar subscribers (22% DBS market share). DIRECTV, a service of Hughes Electronics, is a "high power" DBS service that requires a satellite dish of approximately 18 inches in diameter that may be installed by the consumer without professional assistance. DIRECTV has said it will have the capacity to offer 370 3 channels of near laser disc quality video and CD quality audio programming after completing its announced acquisitions of United States Satellite Broadcasting, Inc. and Primestar described below. DIRECTV added 1.2 million new subscribers in 1998, which accounted for approximately 48% of all new DBS subscribers in that year. DIRECTV Rural Affiliates and Consolidation Prior to the launch of DIRECTV's DBS programming service, Hughes entered into an agreement with the National Rural Telecommunications Cooperative authorizing the NRTC to offer its members and associates the opportunity to acquire exclusive rights to distribute DIRECTV programming services in rural areas of the United States. (The NRTC is a cooperative organization whose members and associates are engaged in the distribution of telecommunications and other services in predominantly rural areas of the United States.) Approximately 250 NRTC members and associates acquired such exclusive rights, thereby becoming DIRECTV "rural affiliates." The DIRECTV exclusive territories acquired by DIRECTV's rural affiliates include approximately 9 million rural households. Pegasus was the largest of the original DIRECTV rural affiliates, acquiring a DIRECTV exclusive territory of approximately 500,000 homes in four New England states. When DIRECTV was launched in 1994, approximately 95% of the DIRECTV rural affiliate exclusive territories were held by small DIRECTV rural affiliates. In 1996, Pegasus made its first acquisition of another DIRECTV rural affiliate, thereby beginning a process of consolidation that has significantly changed the composition of DIRECTV's rural affiliates. Since 1996 we have increased our DIRECTV exclusive territories to more than 4.83 million homes through the completed or pending acquisitions of 81 other DIRECTV rural affiliates, including acquisitions by Digital Television Services, Inc., with which we merged in 1998. Today, Pegasus represents 55% of the DIRECTV exclusive territories held by DIRECTV's rural affiliates. Satellite Services in Rural Areas Rural areas include approximately 85% of the total landmass of the continental United States and have an average home density of less than 12 homes per square mile. Because the cost of building (or rebuilding) a cable or other wireline system is generally inversely proportional to home density and the cost of providing satellite service is not, satellite services have strong cost advantages over cable in rural areas. DBS services have already achieved a penetration of more than 17% in rural areas of the United States, as compared to approximately 5% in metropolitan areas. Approximately 65% of all U.S. DBS subscribers reside in rural areas. There are approximately 76 million people, 30 million households and 3 million businesses located in rural areas of the United States. Annual household income in rural areas totaled over $1.1 trillion in 1997, an average of approximately $38,000 per household. Rural areas therefore represent a large and attractive market for DBS and other digital satellite services. It is likely that future digital satellite services, such as soon to be launched digital audio services, satellite broadband multimedia services and mobile satellite services, will also (like DBS) achieve significantly greater penetration in rural areas than in metropolitan areas. Pegasus Rural Focus and Strategy Our long-term goal is to become an integrated provider of DBS and other digital satellite services in rural areas of the United States. To accomplish our goal, we are pursuing the following strategy: o Continue to Grow Our Rural Subscriber Base by Aggressively Marketing DIRECTV: Pegasus currently serves in excess of 455,000 DIRECTV subscribers, which represents a penetration of approximately 10%. Our rate of growth has accelerated as we have increased our scale and expanded the Pegasus retail network. o Continue to Acquire Other DIRECTV Rural Affiliates: We have had an excellent track record of acquiring DIRECTV rural affiliates and believe that we have a competitive advantage in acquiring additional DIRECTV rural affiliates due to our position as the largest DIRECTV rural affiliate, our access to the capital markets and our strong reputation in the DBS industry. 4 o Continue to Develop the Pegasus Retail Network: Our consolidation of DIRECTV's rural affiliates has enabled us to expand the Pegasus retail network to 2,000 independent retailers in 36 states. We believe that the Pegasus retail network is one of the few sales and distribution channels for digital satellite services with broad and effective reach in rural areas of the U.S. o Generate Future Growth By Bundling Additional Digital Satellite Services with DIRECTV: We believe that new digital satellite services, such as digital audio services, broadband multimedia services and mobile satellite services, will be introduced to consumers and businesses in the next five years. We believe that these services, like DBS, will achieve disproportionate success in rural areas and that the Pegasus retail network will position us to capitalize on these new opportunities. Recent DBS Developments Three important events have occurred recently in the DBS industry. DIRECTV/Hughes Acquisition of USSB. In December 1998, Hughes Electronics Corporation, the parent company of DIRECTV, announced that it had reached an agreement with United States Satellite Broadcasting Company, Inc. to acquire USSB's business and assets for approximately $1.3 billion in cash and stock. The transaction will enable DIRECTV to add such premium networks as multichannel HBO, Cinemax and Showtime. It is subject to review and approval by the Department of Justice and the Federal Communications Commission and other conditions. DIRECTV/Hughes Acquisition of Primestar. In January 1999, Hughes announced that it reached agreement with Primestar, Inc. to acquire Primestar's DBS business in two transactions valued at approximately $1.82 billion. DIRECTV has stated that it intends to operate Primestar's medium power business for approximately two years, during which time it will transition Primestar's approximately 2.3 million subscribers to the high power DIRECTV service. The Primestar transactions are subject to approval of the Federal Communications Commission and antitrust agencies and other conditions. We estimate that there are between 200,000 and 250,000 Primestar subscribers in our DIRECTV exclusive territories. (Our estimate is based on DIRECTV's estimate of the proportion of Primestar subscribers in the exclusive territories of DIRECTV rural affiliates and our proportionate ownership of those territories.) We are still evaluating the effects of the Primestar transactions on our business. EchoStar-News Corporation-MCI Settlement. In November 1998, EchoStar Communications Corporation, News Corporation, MCI and certain other parties reached an agreement for the transfer to EchoStar of a license to operate a high-power DBS business at the 110(degree) west longitude orbital location and certain other DBS assets in exchange for shares of EchoStar. The agreement with News Corporation and MCI has been approved by the Department of Justice and is pending approval of the Federal Communications Commission. This transaction could increase EchoStar's competitive position relative to DIRECTV. See "Risk Factors - Other Risks of Our Business - We Face Significant Competition: the Competition Landscape Changes Constantly." We believe that the EchoStar/News Corporation/MCI settlement will be positive for the DBS industry and will help increase DBS' competitive position vis-a-vis cable. 5 The Offering
Class A Common Stock offered by: The Company ............................. 3,000,000 shares (1) The selling stockholders ................ 1,664,200 shares ----------------- Total .................................. 4,664,200 shares ----------------- Class A Common Stock to be outstanding after the offering ......... 14,315,809 shares (2) Use of proceeds .......................... The net proceeds to the Company from this offering (after deducting underwriting discounts and commissions and estimated offering expenses) are estimated to be approximately $69.8 million (approximately $80.3 million if the underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds for acquisitions (only some of which have been identified), capital expenditures and general corporate. We will receive no proceeds from the sale of Class A Common Stock in the offering by the selling stockholders. See "Use of Proceeds." Nasdaq National Market symbol ............ PGTV
- ------------ (1) Excludes 450,000 shares to be sold by us if the underwriters' over-allotment option is exercised in full. See "Underwriters." (2) Based on the number of shares outstanding at January 20, 1999. Excludes issued and outstanding warrants for 659,565 shares of Class A Common Stock, and 642,227 options granted under the Company's stock option plan. -------------------------- Our principal executive offices are located at Suite 454, 5 Radnor Corporate Center, 100 Matsonford Road, Radnor, Pennsylvania 19087. Our telephone number is (888) 438-7488 and our Internet website is located at http://www.pgtv.com. Our website is not part of our prospectus. 6 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA The following table sets forth summary historical and pro forma consolidated financial data for the Company. You should read this information in conjunction with the consolidated financial statements and the notes to them, "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Historical and Pro Forma Consolidated Financial Data" and "Pro Forma Consolidated Financial Information" included elsewhere in this prospectus. You should also read the paragraphs following this table, which explain certain portions of the table. For expected fourth quarter results, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Fourth Quarter Results."
Years Ended December 31, -------------------------------------------------------------------------------- Pro Forma Statement of Operations Data: 1993 1994 1995 1996 1997 1997 (Dollars in thousands, except per share data) Net revenues: DBS .............................. $ -- $ 174 $ 1,469 $ 5,829 $ 38,254 $ 139,944 TV and cable ..................... 19,487 28,017 30,679 42,100 48,564 51,170 ------- -------- ------- -------- --------- --------- Total net revenues ............... 19,487 28,191 32,148 47,929 86,818 191,114 Pre-marketing location operating expenses: DBS ............................... -- 210 1,379 4,312 26,042 99,381 TV and cable ...................... 12,235 17,943 19,762 25,946 30,070 30,987 Subscriber acquisition costs ....... -- -- -- 646 5,973 29,319 Incentive compensation ............. 192 432 528 985 1,274 1,720 Corporate expenses ................. 1,265 1,506 1,364 1,429 2,256 2,256 Depreciation and amortization ...... 5,978 6,940 8,751 12,061 27,792 91,722 ------- -------- ------- -------- --------- --------- Income (loss) from operations ...... (183) 1,160 364 2,550 (6,589) (64,271) Interest expense ................... (4,402) (5,973) (8,817) (12,455) (16,094) (55,153) Interest income .................... -- -- 370 232 1,539 1,278 Other expenses, net ................ (220) (65) (44) (171) (723) (723) Gain on sale of cable system ....... -- -- -- -- 4,451 -- Provision (benefit) for income taxes ............................. -- 140 30 (120) 200 200 Extraordinary gain (loss) from extinguishment of debt ............ -- (633) 10,211 (250) (1,656) -- ------- -------- ------- -------- --------- --------- Net income (loss) .................. (4,805) (5,651) 2,054 (9,974) (19,272) (119,069) Dividends on Series A Preferred Stock ............................. -- -- -- -- 12,215 13,156 ------- -------- ------- -------- --------- --------- Net income (loss) applicable to common shares ..................... ($ 4,805) ($ 5,651) $ 2,054 ($ 9,974) ($ 31,487) ($ 132,225) ======= ======== ======= ======== ========= ========= Income (loss) per common share: Loss before extraordinary item ............................. ($ 1.59) ($ 1.56) ($ 3.02) ($ 7.05) Extraordinary item ................ 1.99 (0.04) (0.17) -- ------- -------- --------- --------- Net income (loss) per com- mon share ........................ ($ 0.40 ($ 1.60) ($ 3.19) ($ 7.05) ======= ======== ========= ========= Weighted average shares outstanding (000's) .............. 5,140 6,240 9,858 18,760 ======= ======== ========= ========= Other Data: Pre-marketing cash flow: DBS ............................... $ -- ($ 36) $ 90 $ 1,517 $ 12,212 $ 41,971 TV and cable ...................... 7,252 10,074 10,917 16,154 18,494 20,183 ------- -------- ------- -------- --------- --------- Total pre-marketing cash flow...... $ 7,252 $ 10,038 $11,007 $ 17,671 $ 30,706 $ 62,154 ======= ======== ======= ======== ========= ========= Location cash flow ................. $ 7,252 $ 10,038 $11,007 $ 17,025 $ 24,733 $ 32,835 Operating cash flow ................ 5,795 8,100 9,287 15,596 22,477 30,579 Capital expenditures ............... 885 1,264 2,640 6,294 9,929 19,069 Net cash provided by (used for): Operating activities .............. 1,694 4,103 5,783 3,059 8,478 Investing activities .............. (106) (3,571) (6,047) (81,179) (142,109) Financing activities .............. (1,020) (658) 10,859 74,727 169,098
Nine Months Ended September 30, Pro Forma ------------------------------------------ Twelve Months Pro Ended Forma September 30, Statement of Operations Data: 1997 1998 1998 1998 (Dollars in thousands, except per share data) Net revenues: DBS .............................. $ 23,362 $ 95,662 $143,151 $ 182,181 TV and cable ..................... 34,175 35,368 39,031 54,117 --------- -------- -------- --------- Total net revenues ............... 57,537 131,030 182,182 236,298 Pre-marketing location operating expenses: DBS ............................... 15,995 66,324 98,637 125,940 TV and cable ...................... 21,193 22,778 24,423 33,656 Subscriber acquisition costs ....... 1,822 25,018 36,590 49,546 Incentive compensation ............. 744 1,472 1,472 2,089 Corporate expenses ................. 1,409 2,418 2,418 3,265 Depreciation and amortization ...... 18,161 46,789 71,162 95,030 --------- -------- --------- --------- Income (loss) from operations ...... (1,787) (33,769) (52,520) (73,228) Interest expense ................... (10,288) (29,850) (41,104) (54,863) Interest income .................... 828 1,334 1,654 2,269 Other expenses, net ................ (454) (975) (975) (1,244) Gain on sale of cable system ....... 4,451 24,902 -- -- Provision (benefit) for income taxes ............................. 50 175 175 325 Extraordinary gain (loss) from extinguishment of debt ............ -- -- -- -- --------- -------- --------- --------- Net income (loss) .................. (7,300) (38,533) (93,120) (127,391) Dividends on Series A Preferred Stock ............................. 8,678 10,959 10,959 14,496 --------- -------- --------- --------- Net income (loss) applicable to common shares ..................... ($ 15,978) ($ 49,492) ($104,079) ($ 141,887) ========= ======== ========= ========= Income (loss) per common share: Loss before extraordinary item ............................. ($ 1.64) ($ 3.66) ($ 5.51) ($ 7.52) Extraordinary item ................ -- -- -- -- --------- -------- --------- --------- Net income (loss) per com- mon share ........................ ($ 1.64) ($ 3.66) ($ 5.51) ($ 7.52) ========= ======== ========= ========= Weighted average shares outstanding (000's) .............. 9,756 13,534 18,875 18,863 ========= ======== ========= ========= Other Data: Pre-marketing cash flow: DBS ............................... $ 7,367 $ 29,338 $44,514 $ 56,241 TV and cable ...................... 12,982 12,590 14,608 20,461 --------- -------- --------- --------- Total pre-marketing cash flow...... $ 20,349 $ 41,928 $59,122 $ 76,702 ========= ======== ========= ========= Location cash flow ................. $ 18,527 $ 16,910 $22,532 $ 27,156 Operating cash flow ................ 17,118 14,492 20,114 23,891 Capital expenditures ............... 7,681 6,179 6,657 15,552 Net cash provided by (used for): Operating activities .............. 268 (15,462) Investing activities .............. (104,433) (74,217) Financing activities .............. 129,793 84,704
As of December 31, As of September 30, 1998 --------------------------------------------------------- ---------------------------- 1993 1994 1995 1996 1997 Actual Pro Forma Balance Sheet Data: Cash and cash equivalents .......... $ 1,506 $ 1,380 $21,856 $ 8,582 $ 45,269 $ 58,811 $25,565 Working capital (deficiency) ....... (3,844) (23,074) 17,566 6,430 32,347 25,376 (12,004) Total assets ....................... 76,386 75,394 95,770 173,680 380,862 846,164 918,068 Total debt (including current) ..... 72,127 61,629 82,896 115,575 208,355 504,634 505,788 Total liabilities .................. 78,954 68,452 95,521 133,354 239,234 621,336 623,491 Redeemable preferred stock ......... -- -- -- -- 111,264 122,223 122,223 Minority interest .................. -- -- -- -- 3,000 3,000 3,000 Total common stockholders' equity (deficit) .................. (2,427) 6,942 249 40,326 27,364 99,605 169,355
7 Pro forma income statements and other data for the year ended December 31, 1997 and the nine months ended September 30, 1998 include our completed and pending acquisitions and sales, the issuance and sale of our 9 3/4% Senior Notes due 2006 and the use of proceeds from that offering and this offering and the use of proceeds from this offering as if they had all occurred in the beginning of such periods. The pro forma balance sheet data as of September 30, 1998 includes the acquisitions after September 30, 1998, the issuance and sale of our 9 3/4% Senior Notes due 2006 and the use of proceeds from that offering and this offering and the use of proceeds from this offering as if such events had occurred on such date. See "Pro Forma Consolidated Financial Information." The pro forma income statement data for the year ended December 31, 1997 and the nine and twelve months ended September 30, 1998 does not include the $4.5 million and the $24.9 million gain from the sale of our New England cable systems. The pro forma income statement data for the year ended December 31, 1997 does not include the $1.7 million writeoff of deferred financing costs in connection with the retirement of a retired credit facility. We present "revenues" and "pre-marketing location operating expenses" to show operations by segment. This presentation varies from that on the income statement included in our audited consolidated financial statements, which presents revenues and operating expenses by function. We believe our presentation by business segments is used by analysts who report publicly on the performance of companies operating in our segments. "Incentive compensation" represents compensation expenses under our Restricted Stock Plan and 401(k) Plans. "Pre-marketing cash flow" is defined as "location cash flow" plus subscriber acquisition costs. "Location cash flow" is defined as net revenues less location operating expenses. "Location operating expenses" consist of programming, barter programming, general and administrative, technical and operations, marketing and selling expenses. "Operating cash flow" is defined as income (loss) from operations plus depreciation, amortization and non-cash incentive compensation. The difference between location cash flow and operating cash flow is that operating cash flow includes cash incentive compensation and corporate expenses. Although operating cash flow, pre-marketing cash flow and location cash flow are not measures of performance under generally accepted accounting principles, the Company believes that location cash flow and operating cash flow are accepted within the Company's business segments as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such segments. Nevertheless, these measures should not be considered in isolation or as a substitute for income from operations, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. 8 RISK FACTORS You should carefully consider the risks described below before you decide to invest. They could materially and adversely affect our financial condition and results of operation. They could cause the trading price of our stock to decline, and you might lose all or part of your investment. These risks and uncertainties are not the only ones we face. Others that we do not know about now, or that we do not now think are important, may impair our business or the trading price of our stock. This prospectus contains or incorporates by reference certain statements and information that are "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We use words such as "anticipate," "believe," "estimate," "expect," "intend," "project" and similar expressions to identify forward-looking statements. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources, as well as statements concerning the integration of our acquisitions and related achievement of cost savings and other synergies. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions also could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed below. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances. Risks of Our DBS Business Satellite and DBS Technology Could Fail or Be Impaired DBS technology is highly complex and is still evolving. As with any "high-tech" product or system, it might not function as expected. One example of this risk occurred recently. In July 1998, the primary spacecraft control processor failed on one of the satellites that transmits DIRECTV programming from the 101o west longitudinal orbital slot. As it was designed to do, the satellite automatically switched to the on-board backup processor with no interruption of service to DIRECTV subscribers. Hughes Electronics, which made the satellite and owns DIRECTV, has announced that it plans to launch a new satellite in September 1999 to expand DIRECTV channel capacity and provide additional backup. If the backup processor on the current satellite fails before the new satellite is operational, other Hughes satellites presently operating at the 101o west longitudinal orbital slot would continue to transmit DIRECTV programming, but the service would experience an undetermined reduction in channel capacity. This could materially adversely affect our operations and financial performance. The DIRECTV satellites are supposed to last at least through the year 2007, but any of a number of things could shorten their lives, such as: o technical failure, o year 2000 computer problems, o anti-satellite devices, o electrostatic storms, o collision with space debris, and o acts of war. We Depend on DIRECTV and Third Party Programmers for Programming Because we are an intermediary for DIRECTV, events at DIRECTV that we do not control can adversely affect us. One of the most important of these is DIRECTV's ability to provide programming that appeals to 9 mass audiences. DIRECTV generally does not produce its own programming; it purchases it from third parties. DIRECTV's success -- and therefore ours -- depends in large part on DIRECTV's ability to make good judgments about programming sources and obtain programming on favorable terms. We have no control or influence over this. The law requires programming suppliers that are affiliated with cable companies to provide programming to all multichannel distributors -- including DIRECTV -- on nondiscriminatory terms. The rules implementing this law are scheduled to expire in 2002. If they are not extended, these programmers could increase DIRECTV's rates, and therefore ours. Future financial reverses at DIRECTV could also affect us. There Is Some Uncertainty About Our DIRECTV Rights After 2007 Our rights to provide DIRECTV programming do not come directly from DIRECTV but through an organization called the NRTC -- the National Rural Telecommunications Cooperative. The NRTC is a cooperative organization whose members are predominantly rural telephone and utility companies. We are an "associate" of the NRTC. The NRTC has an agreement with DIRECTV that allows it to grant exclusive DIRECTV distribution rights to NRTC members and associates in designated rural areas of the United States. The NRTC, in turn, has separate agreements with us and its other members and associates. The NRTC's agreements with DIRECTV and with us last for the life of the current DIRECTV satellites, which is expected to be at least through 2007. The NRTC has told us that its agreement with DIRECTV gives the NRTC a right of first refusal to get comparable rights if DIRECTV launches new satellites to replace the existing ones. The NRTC has not told us the details of this right of first refusal. We expect that its financial terms will have to be negotiated at the time any new satellites are to be launched. The cost of obtaining these rights will likely depend on DIRECTV's costs of launching replacement satellites and on other factors that are difficult to anticipate. For this reason, we are unable to predict whether, or at what cost, we will be able to continue in the DIRECTV business after the current satellites are removed from service. We Cannot Retransmit the Broadcast Networks' Programming to All Our Customers The DBS industry and the major television networks are in a serious dispute about whether DIRECTV and the other DBS services can carry network programming. If they cannot, DIRECTV could lose some of its consumer appeal; this could affect us adversely. The dispute arises under a federal law called the Satellite Home Viewer Act. This law allows DBS operators, for a statutory fee, to provide network programming to subscribers in "unserved areas" but not elsewhere. The concept of "unserved area" has to do with how well people in the area can receive over-the-air broadcasts of local network-affiliated stations. The problem is that there are technical issues and ambiguities in the way the law defines these areas. This is important to us because our subscribers are predominantly in rural areas where regular television reception is weak. In two recent lawsuits the networks have persuaded the courts to define "unserved areas" much more narrowly than has been our practice and that of others in the DBS industry. Other lawsuits have been filed but not decided. Under the court's order in one of the decided cases, DIRECTV will have to cut off CBS and Fox programming to ineligible subscribers between February 28, 1999 and April 30, 1999. We do not know how many of these subscribers will cancel their service entirely as a result. These disconnections will have an adverse effect on us. In addition, we are not providing programming from any of the four major networks to new customers unless they live in areas that meet the court's narrow definition of "unserved area." We do not know how many potential new customers we have lost and will lose because of this. More court proceedings and appeals are likely. Meanwhile, the FCC has started a proceeding to clarify the issue by regulation. The FCC may act as early as February 1, 1999. Whatever the FCC does could also be appealed to the courts. 10 We cannot predict how these issues will be resolved, how long it will take to resolve them, or how seriously they will affect us. In addition, the Satellite Home Viewer Act is scheduled to expire on December 31, 1999. If Congress does not renew it, DIRECTV will not be able to provide network programming even to unserved areas without the consent of the owners of the programming. DIRECTV Has Drawbacks to Consumers DBS has two main drawbacks to consumers. o Subscribers cannot receive their local TV stations on DBS, particularly local news and sports. (This will remain true for many subscribers even if the network programming issues discussed above are resolved in the DBS industry's favor.) In areas served by cable television, this puts us at a competitive disadvantage because cable systems usually carry local stations. o To receive DBS, the customer must buy and install reception equipment -- a dish and a receiver. Although the price of this equipment has decreased significantly since DIRECTV service began in 1994, it still costs about $149 to buy the equipment and another $129 to have it professionally installed. We reduce the front-end cost to consumers by subsidizing the equipment cost and providing free programming for a month or more, which reduces our income. Even so, cable has an advantage over DBS because cable customers do not have to buy equipment, and cable companies charge lower installation fees. There is a Risk of Signal Theft Signal theft has long been a problem in the cable and DBS industries. DIRECTV uses encryption technology to prevent people from receiving programming without paying for it. The technology is not foolproof, and there have been published reports that it has been compromised. If this becomes widespread, our revenues would suffer. We Could Lose Revenues if We Have Out-of-Territory Subscribers Just as we have exclusive DIRECTV distribution rights in our territories, we are not allowed to have customers outside our territories. The problem is that customers are not always truthful about where they live. If it turns out that large numbers of our subscribers are not in our territories, we would lose substantial revenues when we disconnect them. We could also face legal consequences for having subscribers in Canada, where DIRECTV reception is illegal. Risks of Our Broadcast Television Business We Depend on Our Network Affiliations For Programming The television stations that we now own or program are affiliated with the Fox, WB and UPN television networks. The networks provide substantial amounts of our stations' programming. Our broadcast operations could suffer materially if the network programming does not appeal to viewers, or if we lose our affiliations with these networks for any of a variety of reasons. In that connection: o We are in the process of negotiating renewals of the Fox affiliation agreements for four of our six television markets, which are currently scheduled to expire on January 30, 1999. o While the WB is permitting us to air its programming on two of the stations we program, we are still negotiating affiliation agreements for those stations. o If Fox acquires a significant ownership interest in another station in one of our markets, it can cancel our affiliation agreement for that market without penalty. Fox has done this in the past to other broadcasters. If we lose or do not obtain these network affiliations, we could not continue to carry the network programming. This could affect us materially and adversely. 11 Also, since the WB and UPN are relatively new networks, their long-term stability is uncertain. If these networks were to stop operating or cut back on their programming, we would have to acquire new programming for these stations which could be more expensive to us or less attractive to viewers. The FCC May Prevent Our Local Marketing Agreement Strategy One of our important strategies in broadcast television is to achieve economies of scale by programming two stations in each of our markets. The Federal Communications Commission is considering a measure that would prevent us from doing this. Because the FCC does not allow us to own more than one television station in the same market, we have implemented our strategy -- as have other broadcasters -- through arrangements known as local marketing agreements. We currently have local marketing agreements for second stations in four of our markets and expect to program a second station under such an agreement in one more market by 2000. Our typical local marketing agreement is an agreement with the owner of a station in which we get the right to sell all advertising time on the station and keep all advertising revenue in exchange for supplying all programming for the station and making agreed-upon payments to the station owner. We also have the option to purchase the station if it becomes legal under FCC rules for us to do so. The FCC currently has under consideration a change in its regulations that would prohibit this practice by treating local marketing agreements such as ours as if we owned the station. If the proposed change is adopted, it could prohibit us from obtaining additional in-market stations, and it could require us to terminate our existing agreements. (We might be able to keep one or more of them for a period of time or indefinitely under "grandfathering" rules, but the FCC has not made its position clear on this point.) This would affect us materially and adversely. Apart from the FCC, federal agencies that administer the antitrust laws have said they intend to review market concentrations in television, including through local marketing agreements that the FCC permits. We cannot predict how this will affect us. Even if we can keep and expand our local marketing agreements, their use carries the inherent risk that we do not control the other parties that actually own the stations and hold the stations' FCC licenses. It is conceivable that the licensee could pre-empt our programming. In an extreme case, the licensee could cease to meet FCC qualifications and put its license in jeopardy, in which case, we could lose the ability to program the station. The Planned Industry Conversion to Digital Television Creates a Number of Uncertainties All television stations in the United States must start broadcasting in digital format by May 2002 and must abandon the present analog format by 2006 (though the FCC may extend these dates). o It will be expensive to convert from the current analog format to digital format. We cannot now determine what that cost will be. o The digital technology will allow us to broadcast multiple channels, compared to only one today. While this should be positive, we cannot predict whether or at what cost we will be able to obtain programming for the additional channels. Increased revenues from the additional channels may not make up for the conversion cost and additional programming expenses. Also, multiple channels programmed by other stations could increase competition in our markets. o We could use the additional channel capacity for ancillary and supplemental services -- such as delivery of subscription programming, data services and paging services -- rather than our current free programming. But if we do this we would have to pay 5% of our gross revenues from these services to the federal government. 12 o The FCC has generally made available much higher power allocations to digital stations that will replace existing VHF stations (channels 2 through 13) than digital stations that will replace existing UHF stations (channels 14 through 69). All of our existing stations are UHF. This power disparity could put us at a disadvantage to our VHF competitors. o Stations using digital television will transmit a better quality signal compared to conventional stations. In some cases, however, when we convert a station to digital television, the signal may not be received in as large a coverage area, or it may suffer from additional interference. Also, the technical standards adopted by the FCC limit the power that stations may use to send the signal. As a result, viewers using antennas located inside their television sets may not receive a reliable signal. If viewers do not receive a high-quality, reliable signal from our stations, they may be encouraged to seek service from our competitors. o The FCC is considering whether to require cable companies to carry both the analog and the digital signals of their local broadcasters when television stations will be broadcasting both, during the transition period between 2002 (at the latest) and 2006. If the FCC does not require this, cable customers in our broadcast markets may not receive our digital signal, and this could affect us unfavorably. o A digital television set will cost the consumer several thousand dollars, at least initially. We have no way of knowing when these prices will decrease significantly or when consumers will buy the new sets. As a result, we do not know when there will be a significant audience for digital broadcasters. Television is a Heavily Regulated Business Our television business is regulated by the FCC. We need the FCC's approval to obtain, transfer and renew our broadcast television licenses. We need these licenses in order to operate our stations. For violations of the FCC's rules, a station can be fined and, in the case of severe or repeated violations, a station's license could be taken away by the FCC. These rules also restrict the ability to sell stock in our company or to sell our television stations, by limiting the purchase by those who are not U.S. citizens or who have had certain types of legal problems in the past. The FCC rules and federal legislation dealing with television broadcasting are continually under review and change often, as new rules are adopted, or as existing rules are modified. Some rules, including rules requiring the broadcast of certain amounts of educational programming directed to children, can impose costs on our operation of television stations. The FCC is considering other rules and rule changes which could impose other costs on the operation of our television stations, including limits on advertising time and requiring the broadcast of a certain amount of public interest programming. We cannot be certain of how the FCC will act on any of these matters. Further changes in the FCC's rules could have an adverse effect on our operation. Risks of Our Cable Business We Are Concentrated in Puerto Rico All of our cable operations are in Puerto Rico, and the cable system we have agreed to purchase is also in Puerto Rico. We decided to sell our New England cable systems and expand in Puerto Rico because we believe this strategy has better opportunity for growth. But this geographical concentration also carries risks: o Puerto Rico gets more hurricanes and other severe weather than many other places. Because of Hurricane Georges, which struck Puerto Rico in September 1998, we lost $1.4 million of revenue in the fourth quarter of 1998 alone, and we spent about $300,000 to repair the damage. Future hurricanes can be expected and could be even worse for us. o We could be more seriously affected by economic, regulatory and political events specific to Puerto Rico than if we were more geographically diversified. 13 Digital Television We mentioned above that the FCC is considering whether to require cable companies to carry both the analog and digital signals of local television stations during the transition to digital broadcasting. (See "Risks of Our Broadcast Television Business -- The Planned Industry Conversion to Digital Television Creates a Number of Incertainties.") Because we have only so much channel capacity in our cable system, this requirement could hurt our ability to expand our programming offerings. We Could Become Subject to Rate Regulation The government can regulate the rates cable companies charge for the lowest level of their service. The government does not now regulate our rates or those of the cable system we have agreed to purchase because the FCC has found that both systems are subject to "effective competition." This means that less than 30% of the people that could subscribe to the systems do subscribe. But if we are successful in significantly increasing the percentage of people that subscribe to our service, the lowest level of cable service we offer could become subject to rate regulation. Cable Is a Heavily Regulated Business The cable television industry and the provision of local telephone exchange services are subject to extensive regulation, and the cable and telecommunications industries are heavily regulated at the federal, state and local levels. Many aspects of this regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Other Risks of Our Business We Have a History of Substantial Losses; We Expect Them to Continue We have never made a profit (except in 1995, when we had a $10.2 million extraordinary gain). Because of interest expense on our substantial debt and because of high expense in amortizing goodwill from our acquisitions, we do not expect to have net income for the forseeable future. Substantial Indebtedness We have now and, after the offering, will continue to have a significant amount of indebtedness. The following chart shows certain important credit statistics and is presented assuming we had completed this offering (and applied the proceeds as intended), the pending and completed acquisitions described in this prospectus, and the 1998 offering of our senior notes, as of the date shown: Pro Forma At September 30, 1998 Total indebtedness ........... $ 505,788,000 Stockholders' equity ......... $ 169,355,000 Debt to equity ratio ......... 2.99x On the assumption that these things had occurred on January 1, 1997, our earnings would have been inadequate to cover our fixed charges and preferred stock dividends by $130.7 million for the year ended December 31, 1998, and by $104.6 million for the nine months ended September 30, 1998. Neither "total indebtedness" the "stockholders' equity," as set forth above, includes the approximately $122.0 million in outstanding Series A Preferred Stock or a $3 million minority interest in one of our subsidiaries. Our ability in the future to repay our existing indebtedness will depend upon the success of our business strategy, prevailing economic conditions, regulatory matters, levels of interest rates and financial, business and other factors that are beyond our control. We cannot assure you that we will be able to generate the substantial increases in cash flow from operations that we will need to meet the obligations under our indebtedness. Furthermore, our agreements with respect to our indebtedness, including the indentures governing our publicly held debt securities and our two credit facilities, as well as the terms of our publicly held preferred stock, contain numerous covenants that, among other things, restrict our ability to pay dividends and make certain other payments and investments, borrow additional funds, create liens and to sell our assets. Failing to make debt payments or comply with our covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on us. 4 Our substantial indebtedness could have other important consequences to you. For example, it could: o increase our vulnerability to general adverse economic and industry conditions; o require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other activities; o limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; and o place us at a competitive disadvantage compared to our competitors that have less debt. We Face Significant Competition; the Competitive Landscape Changes Constantly Each of the markets in which we operate is highly competitive. Many of our competitors have substantially greater resources than we do and may be able to compete more effectively than we can in our markets. In addition, the markets in which we operate are in a constant state of change due to technological, economic and regulatory developments. We are unable to predict what forms of competition will develop in the future, the extent of such competition or its possible effects on our businesses. The Company's DBS business faces competition from other current or potential multichannel programming distributors, including other DBS operators, direct to home providers, cable operators, wireless cable operators, internet and local exchange and long-distance companies, which may be able to offer more competitive packages or pricing than we or DIRECTV can provide. In addition, the DBS industry is still evolving and recent or future competitive developments could adversely affect us. For example, on November 30, 1998, EchoStar Communications Corporation, a competitor of the Company in the sale of DBS programming, announced that it had entered into an agreement with The News Corporation Limited and MCI Telecommunications Corporation/WorldCom providing for the transfer to EchoStar of the license to operate a high-powered DBS business at the 110 degrees west longitude orbital location consisting of 28 frequencies and the sale of two satellites that are currently under construction. This could adversely affect us in several ways. First, EchoStar could develop greater channel capacity than DIRECTV and offer more and a wider selection of programming than offered by DIRECTV. Second, DBS is limited by the copyright laws from retransmitting television signals to local markets, and EchoStar has been at the forefront of a legislative effort to change the laws in order to permit EchoStar and other DBS providers to deliver local network signals. The additional frequencies being acquired by EchoStar could provide it with enough capacity to retransmit local signals in larger television markets if the law is changed. The Company's TV stations compete for audience share, programming and advertising revenue with other television stations in their respective markets and with direct to home providers, including DBS operators, cable operators and wireless cable operators. They also compete for advertising revenue with other advertising media, such as newspapers, radio, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, internet and local cable systems. The Company's cable systems face competition from television stations, satellite master antennae television systems, wireless cable systems, direct-to- home providers, DBS systems and open video systems. Our Acquisition Strategy Creates a Variety of Risks We have grown primarily through acquisitions. We plan to continue with our acquisition program, particularly in the DBS business. Some of the risks in this strategy are: o We may not be able to keep making acquisitions on attractive terms. We compete with others for acquisitions. This has driven acquisition prices higher, and we expect it will continue to do so, particularly for the most attractive DBS territories. o Our acquisitions normally require third party consents that we do not control. These include the consents of DIRECTV and the NRTC for DBS acquisitions, the FCC and the television networks for 15 broadcast TV acquisitions, and cable franchising authorities and programmers for cable acquisitions. Some acquisitions also require the consent of our lenders. We have been able to get these consents in the past, but this could change, or become more difficult, or require us to incur additional costs, for reasons we cannot predict. o We could encounter difficulties integrating any given acquired business into our operations. These difficulties can cost money and divert management's attention from other important matters. o If we pay for an acquisition with our stock, the acquisition could dilute existing stockholders, depending on its terms. o If we finance an acquisition by borrowing, this would increase our already high leverage and interest expense. We May Be Adversely Affected By the Year 2000 Problem An issue exists for all companies that rely on computers as the year 2000 approaches. This issue involves computer programs and applications that were written using two digits rather than four to identify the applicable year, and could result in system failures or miscalculations. We have undertaken an assessment to determine the extent of any necessary remediation, and the anticipated costs thereof, to make our material equipment, systems and applications year 2000 compliant. Costs in connection with any modifications to make our systems compliant are not expected to be material. However, if such modifications are not completed successfully or are not completed in a timely manner, the year 2000 issue may have a material adverse impact on our operations. Exposure could arise also from the impact of non-compliance by certain software and/or equipment vendors and others with whom we conduct business. We cannot estimate the potential adverse impact that may result from non-compliance with the year 2000 issue by the software and/or equipment vendors and others with whom we conduct business. For a description of our Year 2000 compliance efforts, you should read "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." Risks of Investing in Our Common Stock Our Stock Price Has Been Volatile; This May Continue Our common stock was publicly offered for the first time in October 1996 at a price of $14.00 per share. Since then it has traded as low at $8.125 and as high as $27.875. Since October 1, 1998, it has traded as low as $10.625 and as high as $27.875. See "Price Range of Class A Common Stock." The market price for our stock may continue to be volatile, both because of our performance and for reasons that have nothing to do with it, such as conditions in the economy or the financial markets. We believe that one reason for the volatility of our stock price may be that there are relatively few shares in the hands of the public as compared with other companies, making our stock a relatively illiquid investment. We cannot assure you that the additional "public float" resulting from this offering will significantly ease this illiquidity. Voting Control of Our Stock is Held by One Person We have two classes of common stock that differ only in voting rights. You are being offered Class A Common Stock, which has one vote per share. The Class B Common Stock has ten votes per share. All of the Class B Common Stock is controlled by Marshall W. Pagon, our Chief Executive Officer. The two classes vote together as if they were a single class on nearly all matters, including the election of directors and fundamental events that require stockholder approval. See "Description of Capital Stock -- Description of Common Stock" for a more detailed description and the limited exceptions to this rule. Because of this voting difference, Mr. Pagon controls the outcome of nearly all matters on which the stockholders vote. After this offering, Mr. Pagon will have 24.3% of the total common stock but 72.2% of the votes. 16 Because of Mr. Pagon's voting control, no one can acquire the Company, or control of the Company, without his approval. Even if he no longer has voting control at some time in the future, the board of directors could adopt measures such as a so-called "poison pill" that delay or prevent a proposal to acquire the Company that you may think is attractive as a stockholder. We May Have to Repay Substantial Debt and Preferred Stock if a Change of Control Occurs We must offer to redeem our publicly held debt securities and preferred stock for approximately $585 million if we have a "change of control." See "Description of Certain Indebtedness" and "Description of Capital Stock -- Description of Series A Preferred Stock" for what this means. Our bank debt, approximately $77.9 million at January 15, 1999, would also come due on a change of control. If a change of control occurs and we are unable to refinance this debt, we would be in default. Future Sales of Common Stock Could Lower our Stock Price If existing stockholders decided to sell large amounts of our stock, this could cause our stock price to fall. Even the market's perception that this might occur could lower our stock price. To give you an idea of how much stock could be sold into the market, after this offering we will have 14,315,809 shares of Class A Common Stock outstanding (assuming the underwriters' over-allotment option is not exercised). Of these: o 7,733,226 shares will be held by the public. o 4,641,400 shares (including stock options) will be held or controlled by Marshall W. Pagon and may be currently sold without registration under SEC 144. o 336,464 other shares held by two current and one former officer may be sold at any time under an effective registration statement under the Securities Act. o 141,410 other shares (including vested stock options) held by directors and executive officers (other than Marshall W. Pagon) can currently be sold subject to the volume and other limitations under SEC Rule 144. o 3,662,497 other shares will have demand registration rights, which means the holders can require us to register them for sale into the public market. o 193,600 other shares can be acquired on exercise of outstanding warrants. Those shares have been registered under the Securities Act. o 1,337,000 other shares can be sold into the market without registration under SEC Rule 144. Persons holding 8,657,440 shares have agreed not to sell their shares (other than in this offering) for 120 days after the date of this prospectus without the written consent of Donaldson, Lufkin & Jenrette Securities Corporation. Persons holding an additional 1,697,528 shares have agreed not to sell their shares for 90 days after the date of this prospectus without such consent. There are certain limited exceptions to these agreements. Dilution in Investment to Purchasers of the Class A Common Stock Assuming a public offering price of $25.00 per share of Class A Common Stock, purchasers of the Class A Common Stock offered hereby will realize an immediate and substantial dilution of approximately $(52.60) in net tangible book value per share of Class A Common Stock of their investment from the offering price. See "Dilution." 17 USE OF PROCEEDS The net proceeds to the Company from its sale of 3,000,000 shares of Class A Common Stock in this offering at an assumed price of $25.00 per share, after deducting underwriting discounts and commissions and estimated fees and expenses of this offering, are estimated to be approximately $69.8 million (approximately $80.3 million if the underwriters' over-allotment option is exercised in full). The Company will not receive any proceeds from the sale of shares of Class A Common Stock by the selling stockholders. We plan to use the net proceeds we receive from the offering for acquisitions (only some of which we have identified), capital expenditures and general corporate purposes. Until we use the proceeds for these purposes, we will use them to pay down our bank debt, which we would be able to reborrow when needed. The Pegasus Media & Communications, Inc. ("PM&C") credit facility provides for a borrowing capacity of up to $180.0 million. Approximately $27.5 million was outstanding and $49.6 million was outstanding in standby letters of credit as of January 15, 1999. The PM&C credit facility bears interest at LIBOR or the prime rate (as selected by us) plus spreads that vary with our ratio of total debt to a measure of our cash flow. The applicable interest rate was 7 3/4% at January 15, 1999, and the credit facility expires in December 2003. The Digital Television Services, Inc. ("DTS") credit facility currently provides for revolving credit in the amount of $70.0 million (with a $50.0 million sublimit for letters of credit), and a $20.0 million term loan facility. As of January 15, 1999, approximately $30.8 million was outstanding under the credit facility, $19.6 million was outstanding under the term loan, and $18.5 million was outstanding as standby letters of credit. The DTS credit facility bears interest at LIBOR or the prime rate (as selected by DTS) plus spreads that vary with DTS' ratio of total debt to a measure of its cash flow. The applicable interest rate was 8 3/4% at January 15, 1999. The term loan must be repaid in 20 consecutive quarterly installments of $200,000 each commencing September 30, 1998, with the remaining balance due on July 30, 2003. Borrowings under the revolving credit facility will be available until July 31, 2003. 18 DIVIDEND POLICY Common Stock: Pegasus has not paid any cash dividends on Class A Common Stock and does not anticipate paying cash dividends on its common stock in the foreseeable future. Our policy is to retain cash for operations and expansion. Payment of cash dividends on the common stock is restricted by the Company's publicly held debt securities and preferred stock. Preferred Stock: Until July 1, 2002, we are allowed to pay dividends on our Series A Preferred Stock by issuing more shares of that stock instead of paying cash. We expect to do this, and in any event our publicly held debt securities require us to. Pegasus' ability to obtain cash from its subsidiaries with which to pay cash dividends is also restricted by the subsidiaries' publicly held debt securities and bank agreements. PRICE RANGE OF CLASS A COMMON STOCK The Class A Common Stock is traded on the Nasdaq National Market under the symbol PGTV. The sale prices reflect inter-dealer quotations, do not include retail markups, markdowns or commission, and do not necessarily represent actual transactions. We urge you to obtain current market quotations. The following table shows the high and low sale prices for the Class A Common Stock as reported on the Nasdaq National Market since January 1, 1997. Price Range of Common Stock ---------------------------- High Low Year Ended December 31, 1997: First Quarter .................................. $ 14 $ 10 3/4 Second Quarter ................................. 11 3/8 8 1/8 Third Quarter .................................. 21 1/2 10 1/2 Fourth Quarter ................................. 25 1/2 19 Year Ended December 31, 1998: First Quarter .................................. $ 26 3/8 $ 19 7/8 Second Quarter ................................. 26 5/8 20 7/8 Third Quarter .................................. 25 15 7/8 Fourth Quarter ................................. 25 1/2 10 5/8 Year Ended December 31, 1999: First Quarter (through January 20, 1999)........ $ 27 7/8 $ 22 5/8 For a recent reported sale price of the Class A Common Stock, see the cover page of this prospectus. As of December 31, 1998, the Company had 175 shareholders of record. 19 DILUTION The net tangible book deficit of the Company at September 30, 1998 was $491.7 million, or $30.93 per share of common stock. The net tangible book deficit per share of the common stock represents the amount of the Company's total tangible assets less its total liabilities, divided by the number of shares of common stock outstanding. Including the sale of the 3,000,000 shares of Common Stock offered by the Company in this offering at an assumed price of $25.00 per share, the pro forma net tangible book deficit of Company as of September 30, 1998 would have been $422.0 million, or $22.33 per share of the common stock. Including the completed and pending transactions described below under "The Company -- Recent Pegasus Developments," the pro forma net tangible book deficit of the Company as of September 30, 1998 would have been $521.7 million, or $27.60 per share of common stock. This represents an immediate increase in net tangible book value of $8.60 per share of the common stock to existing stockholders and an immediate dilution in net tangible book value of $(52.60) per share of the common stock to purchasers of the Class A Common Stock in this offering, as shown in the following table.
Public offering price per share ......................................................... $ 25.00 Net tangible book deficit per share as of September 30, 1998 ......................... $(30.93) Increase in net tangible book value per share attributable to new stockholders purchasing stock in this offering ................................................... $ 8.60 ------- Pro forma net tangible book deficit per share after giving effect to this offering.... $(22.33) Decrease in net tangible book value per share including the completed and pending transactions ................................................................ $ (5.27) ------- Pro forma net tangible book deficit including this offering and the completed and pending transactions ................................................................... $(27.60) ------- Dilution in net tangible book value per share to the purchasers in this offering after giving effect to the completed and pending transactions ................................ $(52.60) =======
20 CAPITALIZATION The following table sets forth the capitalization of the Company: o as of September 30, 1998, o as adjusted to reflect completed and pending acquisitions described under "The Company -- Recent Pegasus Developments" below, and to reflect the offer and sale of the 9 3/4% Senior Notes due 2006 and the use of proceeds from the notes; and o on a pro forma basis to reflect the offering and the use of proceeds of the offering, the completed and pending acquisitions described under "The Company -- Recent Pegasus Developments" below, and the offer and sale of the 9 3/4% Senior Notes due 2006 and the use of proceeds from the notes. See "Use of Proceeds," "Selected Historical and Pro Forma Consolidated Financial Data" and "Pro Forma Consolidated Financial Information."
As of September 30, 1998 --------------------------------------- Actual As Adjusted Pro Forma (Dollars in thousands) Cash - general funds ................................ $ 39,074 $ 5,828 $ 5,828 Restricted cash ..................................... 19,737 19,737 19,737 -------- -------- -------- Total cash and cash equivalents .................... $ 58,811 $ 25,565 $ 25,565 ======== ======== ======== Total debt: PM&C Credit Facility ............................... $ 81,500 $ 38,950 $ -- DTS Credit Facility ................................ 29,300 50,600 19,800 Senior Notes -- PCC - due 2006 ..................... -- 100,000 100,000 Senior Notes -- PCC - due 2005 ..................... 115,000 115,000 115,000 Senior Subordinated Notes -- DTS - due 2007 ........ 153,146 153,146 153,146 Senior Subordinated Notes -- PM&C - due 2005 ......................................... 82,279 82,279 82,279 Seller Notes ....................................... 42,327 34,481 34,481 Capital leases and other ........................... 1,082 1,082 1,082 -------- -------- -------- Total debt ...................................... 504,634 575,538 505,788 Series A Preferred Stock, $1,000 liquidation prefer- ence per share ..................................... 122,223 122,223 122,223 Minority interest ................................... 3,000 3,000 3,000 Total common stockholders' equity ................... 99,605 99,605 169,355 -------- -------- -------- Total capitalization ................................ $729,462 $800,366 $800,366 ======== ======== ========
- ------------ "Restricted cash" includes an amount held in escrow for interest payments on the DTS Senior Notes due 2007. "Minority interest" represents preferred stock of a subsidiary of Pegasus issued in connection with one of the completed DBS acquisitions. "Total common stockholders' equity" is as adjusted and pro forma shares issued and outstanding include an assumed issuance of approximately 3.0 million shares of Class A Common Stock in the offering (at an assumed price of $25.00 per share). For a description of the principal terms of the notes and preferred stock listed above, see "Description of Certain Indebtedness" in this prospectus. 21 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data have been derived from the Company's audited consolidated financial statements. The selected historical consolidated financial data for the nine months ended September 30, 1997 and 1998 have been derived from unaudited consolidated financial information, which in the opinion of the Company's management, contains all adjustments necessary for a fair presentation of this information. The selected historical consolidated financial data for the nine months ended September 30, 1998 should not be regarded as indicative of the results that may be expected for the entire year. The selected pro forma consolidated financial data for the year ended December 31, 1997 and as of and for the nine and twelve months ended September 30, 1998 should be read in conjunction with the consolidated financial statements and the notes to the statements, the "Pro Forma Consolidated Financial Information", and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this prospectus. The paragraphs following the table provide an explanation of certain portions of it. 22 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
Years Ended December 31, -------------------------------------------------------------------------------- Pro Forma Statement of Operations Data: 1993 1994 1995 1996 1997 1997 (Dollars in thousands, except per share data) Net revenues: DBS .................................... $ -- $ 174 $ 1,469 $ 5,829 $ 38,254 $ 139,944 TV and cable ........................... 19,487 28,017 30,679 42,100 48,564 51,170 ------- -------- ------- -------- --------- --------- Total net revenues ..................... 19,487 28,191 32,148 47,929 86,818 191,114 Pre-marketing location operating expenses: DBS ..................................... -- 210 1,379 4,312 26,042 99,381 TV and cable ............................ 12,235 17,943 19,762 25,946 30,070 30,987 Subscriber acquisition costs ............. -- -- -- 646 5,973 29,319 Incentive compensation ................... 192 432 528 985 1,274 1,720 Corporate expenses ....................... 1,265 1,506 1,364 1,429 2,256 2,256 Depreciation and amortization ............ 5,978 6,940 8,751 12,061 27,792 91,722 ------- -------- ------- -------- --------- --------- Income (loss) from operations ............ (183) 1,160 364 2,550 (6,589) (64,271) Interest expense ......................... (4,402) (5,973) (8,817) (12,455) (16,094) (55,153) Interest income .......................... -- -- 370 232 1,539 1,278 Other expenses, net ...................... (220) (65) (44) (171) (723) (723) Gain on sale of cable system ............. -- -- -- -- 4,451 -- Provision (benefit) for income taxes ..... -- 140 30 (120) 200 200 Extraordinary gain (loss) from extinguishment of debt .................. -- (633) 10,211 (250) (1,656) -- ------- -------- ------- -------- --------- --------- Net income (loss) ........................ (4,805) (5,651) 2,054 (9,974) (19,272) (119,069) Dividends on Series A Preferred Stock ................................... -- -- -- -- 12,215 13,156 ------- -------- ------- -------- --------- --------- Net income (loss) applicable to common shares ........................... ($ 4,805) ($ 5,651) $ 2,054 ($ 9,974) ($ 31,487) ($ 132,225) ======= ======== ======= ======== ========= ========= Income (loss) per common share: Loss before extraordinary item .......... ($ 1.59) ($ 1.56) ($ 3.02) ($ 7.05) Extraordinary item ...................... 1.99 (0.04) (0.17) -- ------- -------- --------- --------- Net income (loss) per common share .................................. $ 0.40 ($ 1.60) ($ 3.19) ($ 7.05) ======= ======== ========= ========= Weighted average shares outstanding (000's) .................... 5,140 6,240 9,858 18,760 ======= ======== ========= ========= Other Data: Pre-marketing cash flow: DBS ..................................... $ -- ($ 36) $ 90 $ 1,517 $ 12,212 $ 41,971 TV and cable ............................ 7,252 10,074 10,917 16,154 18,494 20,183 ------- -------- ------- -------- --------- --------- Total pre-marketing cash flow ........... $ 7,252 $ 10,038 $11,007 $ 17,671 $ 30,706 $ 62,154 ======= ======== ======= ======== ========= ========= Location cash flow ...................... $ 7,252 $ 10,038 $11,007 $ 17,025 $ 24,733 $ 32,835 Operating cash flow ..................... 5,795 8,100 9,287 15,596 22,477 30,579 Capital expenditures .................... 885 1,264 2,640 6,294 9,929 19,069 Net cash provided by (used for): Operating activities .................... 1,694 4,103 5,783 3,059 8,478 Investing activities .................... (106) (3,571) (6,047) (81,179) (142,109) Financing activities .................... (1,020) (658) 10,859 74,727 169,098
Nine Months Ended September 30, Pro Forma ------------------------------------------ Twelve Months Pro Ended Forma September Statement of Operations Data: 1997 1998 1998 30, 1998 (Dollars in thousands, except per share data) Net revenues: DBS .................................... $ 23,362 $ 95,662 $143,151 $ 182,181 TV and cable ........................... 34,175 35,368 39,031 54,117 --------- -------- -------- --------- Total net revenues ..................... 57,537 131,030 182,182 236,298 Pre-marketing location operating expenses: DBS ..................................... 15,995 66,324 98,637 125,940 TV and cable ............................ 21,193 22,778 24,423 33,656 Subscriber acquisition costs ............. 1,822 25,018 36,590 49,546 Incentive compensation ................... 744 1,472 1,472 2,089 Corporate expenses ....................... 1,409 2,418 2,418 3,265 Depreciation and amortization ............ 18,161 46,789 71,162 95,030 --------- -------- --------- --------- Income (loss) from operations ............ (1,787) (33,769) (52,520) (73,228) Interest expense ......................... (10,288) (29,850) (41,104) (54,863) Interest income .......................... 828 1,334 1,654 2,269 Other expenses, net ...................... (454) (975) (975) (1,244) Gain on sale of cable system ............. 4,451 24,902 -- -- Provision (benefit) for income taxes ..... 50 175 175 325 Extraordinary gain (loss) from extinguishment of debt .................. -- -- -- -- --------- -------- --------- --------- Net income (loss) ........................ (7,300) (38,533) (93,120) (127,391) Dividends on Series A Preferred Stock ................................... 8,678 10,959 10,959 14,496 --------- -------- --------- --------- Net income (loss) applicable to common shares ........................... ($ 15,978) ($ 49,492) ($104,079) ($ 141,887) ========= ======== ========= ========= Income (loss) per common share: Loss before extraordinary item .......... ($ 1.64) ($ 3.66) ($ 5.51) ($ 7.52) Extraordinary item ...................... -- -- -- -- --------- -------- --------- --------- Net income (loss) per common share .................................. ($ 1.64) ($ 3.66) ($ 5.51) ($ 7.52) ========= ======== ========= ========= Weighted average shares outstanding (000's) .................... 9,756 13,534 18,875 18,863 ========= ======== ========= ========= Other Data: Pre-marketing cash flow: DBS ..................................... $ 7,367 $ 29,338 $44,514 $ 56,241 TV and cable ............................ 12,982 12,590 14,608 20,461 --------- -------- --------- --------- Total pre-marketing cash flow ........... $ 20,349 $ 41,928 $59,122 $ 76,702 ========= ======== ========= ========= Location cash flow ...................... $ 18,527 $ 16,910 $22,532 $ 27,156 Operating cash flow ..................... 17,118 14,492 20,114 23,891 Capital expenditures .................... 7,681 6,179 6,657 15,552 Net cash provided by (used for): Operating activities .................... 268 (15,462) Investing activities .................... (104,433) (74,217) Financing activities .................... 129,793 84,704
As of December 31, As of September 30, 1998 ------------------------------------------------------------- ------------------------ 1993 1994 1995 1996 1997 Actual Pro Forma Balance Sheet Data: Cash and cash equivalents ............... $ 1,506 $ 1,380 $21,856 $ 8,582 $ 45,269 $ 58,811 $25,565 Working capital (deficiency) ............ (3,844) (23,074) 17,566 6,430 32,347 25,376 (12,004) Total assets ............................ 76,386 75,394 95,770 173,680 380,862 846,164 918,068 Total debt (including current) .......... 72,127 61,629 82,896 115,575 208,355 504,634 505,788 Total liabilities ....................... 78,954 68,452 95,521 133,354 239,234 621,336 623,491 Redeemable preferred stock .............. -- -- -- -- 111,264 122,223 122,223 Minority interest ....................... -- -- -- -- 3,000 3,000 3,000 Total common stockholders' equity (deficit) .............................. (2,427) 6,942 249 40,326 27,364 99,605 169,355
23 Pro forma income statements and other data for the year ended December 31, 1997 and the nine months ended September 30, 1998 include our completed and pending acquisitions and sales described below under "The Company -- Recent Pegasus Developments," the issuance and sale of our 9 3/4% Senior Notes due 2006 and the use of proceeds from that offering and this offering and the use of proceeds of this offering as if they had all occurred in the beginning of such periods. The pro forma balance sheet data as of September 30, 1998 includes the acquisitions after September 30, 1998, the issuance and sale of our 9 3/4% Senior Notes due 2006 and the use of proceeds from that offering and this offering and the use of proceeds of this offering as if such events had occurred on such date. See "Pro Forma Consolidated Financial Information." The pro forma income statement data for the year ended December 31, 1997 and the nine and twelve months ended September 30, 1998 does not include the $4.5 million and the $24.9 million gain from the sale of our New England cable systems. The pro forma income statement data for the year ended December 31, 1997 does not include the $1.7 million writeoff of deferred financing costs in connection with the retirement of a retired credit facility. We present "revenues" and "pre-marketing location operating expenses" to show operations by segment. This presentation varies from that on the income statement included in our audited consolidated financial statements, which presents revenues and operating expenses by function. We believe our presentation by business segments is used by analysts who report publicly on the performance of companies operating in our segments. "Incentive compensation" represents compensation expenses under our Restricted Stock Plan and 401(k) Plans. "Pre-marketing cash flow" is defined as "location cash flow plus subscriber acquisition costs known as "SAC." "Location cash flow" is defined as net revenues less location operating expenses. "Location operating expenses" consist of programming, barter programming, general and administrative, technical and operations, marketing and selling expenses. "Operating cash flow" is defined as income (loss) from operations plus depreciation, amortization and non-cash incentive compensation. The difference between location cash flow and operating cash flow is that operating cash flow includes cash incentive compensation and corporate expenses. Although operating cash flow, pre-marketing cash flow and location cash flow are not measures of performance under generally accepted accounting principles, the Company believes that location cash flow, pre-marketing cash flow and operating cash flow are accepted within the Company's business segments as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such segments. Nevertheless, these measures should not be considered in isolation or as a substitute for income from operations, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and related notes which are included elsewhere herein. General Pegasus Communications Corporation is a diversified company operating in growing segments of the media industry. In DBS, Pegasus Satellite Television is the largest independent provider of DIRECTV serving 454,620 DBS subscribers in 36 states, including pending acquisitions. In TV and cable, Pegasus Broadcast Television owns and/or programs nine TV stations affiliated with Fox, UPN and the WB and also owns and operates a cable system in Puerto Rico. DBS revenues are derived from monthly customer subscriptions, pay-per-view services and subscriber equipment rentals. TV and cable revenues are derived from the sale of broadcast air time to local and national advertisers, monthly customer subscriptions, pay-per-view services and subscriber equipment rentals, home shopping commissions, advertising time sales and installation charges. In this section we use the terms "pre-marketing cash flow" and "location cash flow." Both pre-marketing cash flow and location cash flow are measures of our operating performance within our Company's various business segments. Pre-marketing cash flow is calculated by taking our earnings and adding back the following expenses: o interest; o income taxes; o depreciation and amortization; o non-cash charges; o corporate overhead; and o subscriber acquisition costs, which are sales and marketing expenses incurred to acquire new subscribers. Location cash flow is pre-marketing cash flow less subscriber acquisition costs. Pre-marketing cash flow and location cash flow are not, and should not be considered, an alternative to net income from operations, net income, net cash provided by operating activities or any other measure for determining our operating performance or liquidity, as determined under generally accepted accounting principles. Pre-marketing cash flow and location cash flow also do not necessarily indicate whether our cash flow will be sufficient for items such as working capital, capital expenditures, or to react to changes in our Company's industry or the economy generally. We believe that pre-marketing cash flow and location cash flow are important, however, for the following reasons: o people who follow our industry frequently use it as a measure of performance and of determining a company's ability to pay its debts; and o it is one of the indicators that we and our lenders and investors use to assess our financial performance and our ability to meet contract requirements imposed on us by our lenders. We use location cash flow for several purposes, including evaluating markets and rewarding employees under incentive programs. We calculate location cash flow by taking our net revenues and subtracting location operating expenses. Location operating expenses include programming, barter programming, and general and administrative, technical and operations, marketing and selling expenses. 25 The Company expenses its subscriber acquisition costs when no new contract is obtained. The Company currently does not require new DBS customers to sign programming contracts and, as a result, subscriber acquisition costs are currently being charged to operations in the period incurred. Subscriber acquisition costs have generally risen as the Company has increased its equipment subsidies and commission structure. The Company believes this resulted in increased penetration in its exclusive DIRECTV territories. Fourth Quarter Results The results of our operations for the quarter ended December 31, 1998 have not been finalized and accordingly the following estimates are subject to change. We anticipate pro forma revenues for the twelve months ended December 31, 1998 to be approximately $14.6 million higher than pro forma revenues for the twelve months ended September 30, 1998. This increase is the net result of an increase in pro forma DBS revenues of approximately $15.4 million, an increase in TV revenues of approximately $0.7 million, and a temporary decrease in pro forma cable revenues of approximately $1.5 million. We anticipate pro forma pre-marketing cash flow for the twelve months ended December 31, 1998 to be approximately $2.7 million higher than pro forma pre-marketing cash flow for the twelve months ended September 30, 1998. This increase is the net result of an increase in pro forma DBS pre-marketing cash flow of approximately $4.7 million, a decrease in TV pre-marketing cash flow of approximately $0.3 million, and a temporary decrease in pro forma cable pre-marketing cash flow of approximately $1.7 million. The DBS increase results from a 34% greater number of pro forma DBS subscribers during the quarter ended December 31, 1998 as compared to the quarter ended December 31, 1997 together with a 5% increase in the amount of pro forma pre-marketing cash flow per subscriber. The cable decrease was mainly due to the temporary interruption of cable service that resulted from Hurricane Georges. In September 1998, Hurrican Georges struck the island of Puerto Rico and interrupted service to our cable subscribers. We suffered modest damage to our headend and approximately 3% of our 780 miles of cable plant. We substantially completed repairs by December 1, 1998. DBS subscriber acquisition costs are anticipated to be modestly higher, per new customer, during the quarter ended December 31, 1998 as compared to the quarter ended September 30, 1998. 26 Results of Operations Nine months ended September 30, 1998, compared to nine months ended September 30, 1997 The Company's net revenues increased by approximately $73.5 million or 128% for the nine months ended September 30, 1998, as compared to the same period in 1997. The net revenues increased as a result of: o a $72.3 million or 309% increase in DBS revenues of which $6.5 million or 9% was due to the increased number of DBS subscribers in territories owned at the beginning of 1997 and $65.8 million or 91% resulted from acquisitions made in 1997 and 1998; o a $1.8 million or 8% increase in TV revenues which was the result of a $649,000 or 3% increase in same station revenues due primarily to increases in local advertising sales and a $1.1 million increase due to the three new stations launched in August 1997, October 1997 and July 1998; and o a $580,000 or 5% decrease in cable revenues which was the net result of a $865,000 or 11% increase in Puerto Rico same system revenues, due primarily to rate increases and increased subscriber levels, a $133,000 reduction due to the sale of the Company's New Hampshire cable system effective January 31, 1997, and a $1.3 million reduction due to the sale of the Company's remaining New England cable systems effective July 1, 1998. The Company's total pre-marketing operating expenses, as described above (before DBS subscriber acquisition costs), increased by approximately $51.9 million or 140% for the nine months ended September 30, 1998, as compared to the same period in 1997. The pre-marketing operating expenses increased as a result of: o a $50.3 million or 315% increase in operating expenses of the Company's DBS operations due to a same territory increase in programming and other operating costs totaling $3.9 million (resulting from the increased number of DBS subscribers in territories owned at the beginning of 1997) and a $46.4 million increase attributable to territories acquired in 1997 and 1998; o a $1.9 million or 13% increase in TV operating expenses as the result of a $465,000 or 3% increase in same station operating expenses and a $1.4 million increase attributable to the three new stations launched in August 1997, October 1997 and July 1998; and o a $282,000 or 4% decrease in cable operating expenses as the net result of a $553,000 or 13% increase in Puerto Rico same system operating expenses due primarily to increases in programming costs, a $66,000 reduction due to the sale of the Company's New Hampshire cable system effective January 31, 1997 and a $769,000 reduction due to the sale of the Company's remaining New England cable systems effective July 1, 1998. Average monthly programming revenue per DBS subscriber was approximately $41.75, with a contribution margin of approximately 35.5%, for the nine months ended September 30, 1998, as compared to approximately $40.75, at a 36.3% margin, during the same period in 1997. The increase in average monthly programming revenue per DBS subscriber resulted primarily from an improved mix of premium package programming subscriptions. The contribution margin decline was primarily attributable to increases in customer service costs, in part due to increased call volume associated with the network issue described in 27 "Risk Factors -- Risks of Our DBS Business -- We Cannot Retransmit the Broadcast Networks' Programming to All Our Customers," and other costs associated with the integration of DBS operations in territories acquired in 1997 and 1998. DBS subscriber acquisition costs, which consist of regional sales costs, advertising and promotion, and commissions and subsidies, totaled approximately $25.0 million or $313 per gross subscriber addition for the nine months ended September 30, 1998, as compared to approximately $6.0 million or $304 per gross subscriber addition for the same period in 1997. Incentive compensation, which is calculated from increases in pro forma location cash flow, increased by $728,000 or 98% for the nine months ended September 30, 1998, as compared to the same period in 1997. Corporate expenses increased by approximately $1.0 million or 72% for the nine months ended September 30, 1998, as compared to the same period in 1997 primarily due to increased staffing as a result of internal and acquisition related growth, enhanced public relations activities and additional public reporting requirements for the Company. Depreciation and amortization expense increased by approximately $28.6 million or 158% for the nine months ended September 30, 1998, as compared to the same period in 1997 as the Company increased its fixed and intangible asset base as a result of twenty-five completed acquisitions during 1997 and twenty-one completed acquisitions in the first three quarters of 1998. As a result of these factors, the Company's loss from operations increased by approximately $32.0 million for the nine months ended September 30, 1998, as compared to the same period in 1997. Interest expense increased by approximately $19.6 million or 190% for the nine months ended September 30, 1998, as compared to the same period in 1997 as a result of an increase in debt associated with the Company's acquisitions. The Company reported a net loss of approximately $38.6 million for the nine months ended September 30, 1998, as compared to a net loss of approximately $7.3 million for the same period in 1997. The $31.2 million change was the net result of an increase in the loss from operations of approximately $32.0 million, an increase in interest expense of approximately $19.6 million, an increase in the provision for income taxes of $125,000, an increase in other expenses of $15,000, a nonrecurring gain on the sale of the New Hampshire cable system of approximately $4.5 million during the first quarter of 1997 and a nonrecurring gain on the sale of the Company's remaining New England cable systems of $24.9 million during the third quarter of 1998. The Company's preferred stock dividends, payable by issuing additional shares of Series A Preferred Stock, increased approximately $2.3 million for the nine months ended September 30, 1998, as compared to the same period in 1997. Year ended December 31, 1997, compared to year ended December 31, 1996 The Company's net revenues increased by approximately $38.9 million or 81% for the year ended December 31, 1997, as compared to the same period in 1996. The net revenues increased as a result of: o a $32.4 million or 556% increase in DBS revenues of which $2.6 million or 8% was due to the increased number of DBS subscribers in territories owned at the beginning of 1996 and $29.8 million or 92% resulted from acquisitions made subsequent to the third quarter of 1996; o a $3.2 million or 11% increase in TV revenues of which $1.9 million or 57% was due to ratings growth which the Company was able to convert into higher revenues, $1.1 million or 34% was the result of acquisitions made in the first quarter of 1996 and $289,000 or 9% was due to the two new stations launched in August 1997 and October 1997; and o a $3.2 million or 24% increase in cable revenues which was the net result of a $804,000 or 8% increase in same system revenues due primarily to rate increases, a $3.9 million increase due to the system acquired effective September 1, 1996 and a $1.6 million reduction due to the sale of the Company's New Hampshire cable system effective January 31, 1997. 28 The Company's total pre-marketing operating expenses, as described above, before DBS subscriber acquisition costs increased by approximately $25.9 million or 85% for the year ended December 31, 1997, as compared to the same period in 1996. The pre-SAC location operating expenses increased as a result of: o a $21.7 million or 504% increase in operating expenses generated by the Company's DBS operations due to a same territory increase in programming and other operating costs totaling $1.5 million (resulting from the increased number of DBS subscribers in territories owned at the beginning of 1996) and a $20.2 million increase attributable to territories acquired subsequent to the third quarter of 1996; o a $2.6 million or 14% increase in TV operating expenses as the result of a $535,000 or 4% increase in same station operating expenses, a $1.4 million increase attributable to stations acquired in the first quarter of 1996 and a $650,000 increase attributable to the two new stations launched in August 1997 and October 1997; and o a $1.5 million or 21% increase in cable operating expenses as the net result of a $157,000 or 3% increase in same system operating expenses due primarily to increases in programming costs, a $2.2 million increase attributable to the system acquired effective September 1, 1996 and a $852,000 reduction due to the sale of the Company's New Hampshire cable system effective January 31, 1997. DBS subscriber acquisition costs, which consist of regional sales costs, advertising and promotion, and commissions and subsidies, totaled $10.5 million or $281 per gross subscriber addition for the year ended December 31, 1997, of which $6.0 million was expensed. Incentive compensation, which is calculated from increases in pro forma location cash flow, increased by approximately $289,000 or 29% for the year ended December 31, 1997, as compared to the same period in 1996. Corporate expenses increased by $827,000 or 58% for the year ended December 31, 1997, as compared to the same period in 1996 primarily due to increased staffing as a result of internal and acquisition related growth, enhanced public relations activities and additional public reporting requirements for the Company. Depreciation and amortization expense increased by approximately $15.7 million or 130% for the year ended December 31, 1997, as compared to the same period in 1996 as the Company increased its fixed and intangible asset base as a result of five completed acquisitions during 1996 and twenty-five completed acquisitions during 1997. As a result of these factors, the Company reported a loss from operations of $6.6 million for the year ended December 31, 1997, as compared to income from operations of $2.6 million for the same period in 1996. Interest expense increased by approximately $3.6 million or 29% for the year ended December 31, 1997, as compared to the same period in 1996 as a result of an increase in debt associated with the Company's acquisitions. See "Liquidity and Capital Resources -- Financings." The Company's net loss increased by approximately $9.3 million for the year ended December 31, 1997, as compared to the same period in 1996 as a net result of an increase in the loss from operations of approximately $9.1 million, an increase in interest expense of $3.6 million, an increase in the provision for income taxes of $320,000, a decrease in other expenses of approximately $755,000, an increase in the extraordinary loss on extinguishment of debt of $1.4 million and a gain on the sale of the New Hampshire cable system of approximately $4.5 million. During 1997, the Company declared preferred stock dividends amounting to $12.2 million which were paid by issuing shares of Series A Preferred Stock. Year ended December 31, 1996, compared to year ended December 31, 1995 The Company's net revenues increased by approximately $15.8 million or 49% for the year ended December 31, 1996, as compared to the same period in 1995 as a result of: o a $4.4 million or 297% increase in DBS revenues of which $2.7 million or 63% was due to the increased number of DBS subscribers and $1.7 million or 37% resulting from acquisitions made in the fourth quarter of 1996; 29 o a $8.5 million or 43% increase in TV revenues of which $1.5 million or 17% was due to ratings growth which the Company was able to convert into higher revenues and $7.0 million or 83% was the result of acquisitions made in the first quarter of 1996; o a $2.0 million or 51% increase in Puerto Rico cable revenues due primarily to an acquisition effective September 1, 1996; and o a $864,000 or 13% increase in New England cable revenues due primarily to rate increases and new combined service packages. The Company's total location operating expenses increased by approximately $9.8 million or 46% for the year ended December 31, 1996, as compared to the same period in 1995 as a result of: o a $3.6 million or 260% increase in operating expenses generated by the Company's DBS operations due to an increase in programming costs of $1.4 million, royalty costs of $138,000, marketing expenses of $455,000, customer support charges of $199,000 and other DIRECTV costs such as security, authorization fees and telemetry and tracking charges totaling $237,000, all generated from the increased number of DBS subscribers, and a $1.1 million increase attributable to territories acquired in the fourth quarter of 1996; o a $4.8 million or 34% increase in TV operating expenses as the net result of a $115,000 or 1% decrease in same station direct operating expenses and a $4.9 million increase attributable to stations acquired in the first quarter of 1996; o a $912,000 or 37% increase in Puerto Rico cable operating expenses as the net result of a $64,000 or 3% decrease in same system direct operating expenses and a $976,000 increase attributable to the system acquired effective September 1, 1996; and o a $489,000 or 15% increase in New England cable operating expenses due primarily to increases in programming costs associated with the new combined service packages. As a result of these factors, incentive compensation which is calculated from increases in pro forma location cash flow increased by approximately $457,000 or 87% for the year ended December 31, 1996, as compared to the same period in 1995. Corporate expenses increased by $65,000 or 5% for the year ended December 31, 1996, as compared to the same period in 1995 primarily due to the initiation of public reporting requirements. Depreciation and amortization expense increased by approximately $3.3 million or 38% for the year ended December 31, 1996, as compared to the same period in 1995 as the Company increased its fixed and intangible assets as a result of five completed acquisitions during 1996. As a result of these factors, income from operations increased by approximately $2.2 million for the year ended December 31, 1996, as compared to the same period in 1995. Interest expense increased by approximately $3.6 million or 42% for the year ended December 31, 1996, as compared to the same period in 1995 as a result of a combination of the Company's issuance of $85 million of senior subordinated notes on July 7, 1995 and an increase in debt associated with the Company's 1996 acquisitions. A portion of the proceeds from the issuance of the senior subordinated notes was used to retire floating debt on which the effective interest rate was lower than the 12.5% interest rate under the notes. The notes, however, have more favorable terms such as no requirement for principal repayment, subject to certain conditions, until the end of the term. The Company reported a net loss of approximately $10.0 million for the year ended December 31, 1996, as compared to net income of approximately $2.0 million for the same period in 1995. The $12.0 million change was the net result of an increase in income from operations of approximately $2.2 million, an increase in interest expense of $3.6 million, a decrease in extraordinary items of $10.5 million from extinguishment of debt, a decrease in the provision for income taxes of $150,000 and an increase in other expenses of approximately $265,000. 30 Liquidity and Capital Resources The Company's primary sources of liquidity have been the net cash provided by its DBS, TV and cable operations, credit available under its credit facilities and proceeds from public and private offerings. The Company's principal use of its cash has been to fund acquisitions, to meet debt service obligations, to fund investment in its broadcast and cable technical facilities and to fund DBS subscriber acquisition costs. Pre-marketing cash flow increased by approximately $21.6 million or 106% for the nine months ended September 30, 1998, as compared to the same period in 1997. Pre-marketing cash flow increased as a result of: o a $22.0 million or 298% increase in DBS pre-marketing cash flow of which $2.6 million or 12% was due to an increase in same territory pre-marketing cash flow and $19.4 million or 88% was attributable to territories acquired in 1997 and 1998; o a $119,000 or 2% decrease in TV location cash flow as the net result of a $184,000 or 3% increase in same station location cash flow and a $303,000 decrease attributable to the three new stations launched in August 1997, October 1997 and July 1998; and o a $298,000 or 5% decrease in cable location cash flow which was the net result of a $312,000 or 9% increase in Puerto Rico same system location cash flow, a $67,000 reduction due to the sale of the Company's New Hampshire cable system effective January 31, 1997 and a $543,000 reduction due to the sale of the Company's remaining New England cable systems effective July 1, 1998. During the nine months ended September 30, 1998, $44.0 million of cash on hand, together with $30.1 million of proceeds from the sale of the Company's remaining New England cable systems, $3.3 million of cash acquired from acquisitions and $84.7 million of net cash provided by the Company's financing activities, was used to fund operating activities of approximately $15.5 million and other investing activities of $107.6 million. Investing activities, net of cash acquired from acquisitions and proceeds from the sale of the New England cable systems, consisted of: o the acquisition of DBS assets from 20 independent DIRECTV providers during the first three quarters of 1998 for approximately $89.9 million, o broadcast television transmitter, tower and facility upgrades totaling approximately $3.2 million, o payments of programming rights amounting to $1.6 million, o capitalized costs relating to the DTS Acquisition of $4.3 million, and o maintenance and other capital expenditures and intangibles totaling approximately $8.7 million. Financing activities consisted of o the repayment of approximately $5.9 million of long-term debt and capital leases, o net borrowings on bank credit facilities totaling $81.3 million, and o net restricted cash draws of approximately $9.3 million for interest payments. As of September 30, 1998, cash on hand amounted to $39.1 million plus restricted cash of $19.7 million. Additionally, we had $81.5 million drawn and standby letters of credit of $44.4 million on the $180.0 million PM&C credit facility. Additionally, there was $29.3 million drawn and stand by letters of credit of $27.6 million on the $90.0 million DTS credit facility. Pre-marketing cash flow increased by $13.0 million or 74% for the year ended December 31, 1997, as compared to the same period in 1996. Pre-marketing cash flow increased as a result of: o a $10.7 million or 705% increase in DBS pre-marketing cash flow of which $1.0 million or 10% was due to an increase in same territory pre-marketing cash flow and $9.7 million or 90% was attributable to territories acquired subsequent to the third quarter of 1996; 31 o a $649,000 or 6% increase in TV location cash flow as the net result of a $1.3 million or 17% increase in same station location cash flow, a $343,000 decrease attributable to stations acquired in the first quarter of 1996, and a $361,000 decrease attributable to the two new stations launched on August 1997 and October 1997; and o a $1.7 million or 27% increase in cable location cash flow which was the net result of a $646,000 or 14% increase in same system location cash flow, a $1.7 million increase due to the system acquired effective September 1, 1996, and a $703,000 reduction due to the sale of the Company's New Hampshire cable system effective January 31, 1997. During the year ended December 31, 1997, net cash provided by operating activities was approximately $8.5 million, which together with $8.6 million of cash on hand, $6.9 million of net proceeds from the sale of the New Hampshire cable system and $169.1 million of net cash provided by the Company's financing activities was used to fund other investing activities totaling $149.1 million. Financing activities consisted of raising $95.8 million in net proceeds from the Company's preferred stock offering in January 1997 and $111.0 million in net proceeds from the Company's offering of senior notes in October 1997, borrowing $94.2 million under a former bank credit facility, repayment of all $94.2 million of that indebtedness and $29.6 million of indebtedness under a still earlier credit facility, net repayment of approximately $657,000 of other long-term debt, placing $1.2 million in restricted cash to collateralize a letter of credit and the incurrence of approximately $6.2 million in debt issuance costs associated with various credit facilities. Investing activities, net of the proceeds from the sale of the New Hampshire cable system, consisted of: o the acquisition of DBS assets from 25 independent DIRECTV providers during the first quarter of 1997, for approximately $133.6 million; o broadcast television transmitter, tower and facility constructions and upgrades totaling approximately $5.8 million; o the interconnection and expansion of the Puerto Rico cable systems amounting to approximately $1.8 million; o payments of programming rights amounting to $2.6 million; and o maintenance and other capital expenditures and intangibles totaling approximately $5.4 million. Location cash flow increased by $6.0 million or 55% for the year ended December 31, 1996, as compared to the same period in 1995, as a result of: o a $781,000 or 868% increase in DBS location cash flow of which $312,000 or 40% was due to an increase in same territory location cash flow and $469,000 or 60% was due to an increase attributable to the territories acquired in the fourth quarter of 1996; o a $3.7 million or 62% increase in TV location cash flow of which $1.6 million or 42% was due to an increase in same station location cash flow and $2.1 million or 58% was due to an increase attributable to stations acquired in the first quarter of 1996; o a $1.1 million or 72% increase in Puerto Rico cable location cash flow of which $126,000 or 11% was due to an increase in same system location cash flow and $998,000 or 89% was due to the system acquired effective September 1, 1996; o a $375,000 or 11% increase in New England cable location cash flow; and During the year ended December 31, 1996, net cash provided by operating activities was approximately $3.1 million, which together with $12.0 million of cash on hand, $9.9 million of restricted cash and $74.7 million of net cash provided by the Company's financing activities was used to fund investing activities totaling $81.2 million. Investment activities consisted of: o the Portland, Maine and Tallahassee, Florida TV acquisitions for approximately $16.6 million; o the San German, Puerto Rico cable acquisition for approximately $26.0 million; 32 o the acquisition of DBS assets from two independent DIRECTV providers during the third quarter of 1996, for approximately $29.9 million; o the purchase of a New England cable office facility and headend facility for $201,000; o the fiber upgrade in the cable system amounting to $323,000; o the purchase of DIRECTV system units used as rental and lease units amounting to $832,000; o payments of programming rights amounting to $1.8 million; and o maintenance and other capital expenditures and intangibles totaling approximately $6.7 million. During the year ended December 31, 1995, net cash provided by operations was approximately $5.8 million, which together with $1.4 million of cash on hand and $10.9 million of net cash provided by the Company's financing activities was used to fund a $12.5 million distribution to Pegasus' parent and to fund investing activities totaling $6.1 million. Investment activities consisted of: o the final payment of the deferred purchase price for the Company's New England DBS rights of approximately $1.9 million; o the purchase of a new WDSI studio and office facility for $520,000; o the purchase of a LIBOR cap for $300,000; o the purchase of DIRECTV system units used as rental and lease units for $157,000; o payments of programming rights amounting to $1.2 million; and o maintenance and other capital expenditures and intangibles totaling approximately $1.9 million. Financings Pegasus Media & Communications, Inc. (PM&C) completed an $85.0 million Notes offering on July 7, 1995. The Notes were sold at a $4.0 million discount. The proceeds from the Notes offering, together with cash on hand, were used to (i) repay approximately $38.6 million in loans and other obligations, (ii) repurchase $25.6 million of notes for approximately $13.0 million, which resulted in a $10.2 million extraordinary gain net of expenses, (iii) make a $12.5 million distribution to its parent, (iv) escrow $9.7 million for the purpose of paying interest on the Notes, (v) pay $3.3 million in fees and expenses, and (vi) fund $8.8 million of the cash portion of the purchase price of an acquisition. During July 1995, PM&C entered into a credit facility in the amount of $10.0 million. This credit facility was retired in August 1996 from borrowings under the 1996 PM&C credit facility. In 1996, PM&C entered into a credit facility which provided for borrowings up to $50.0 million. This credit facility was retired in December 1997 from borrowings under the 1997 PM&C Credit facility. In 1996, DTS entered into a credit facility which provides for borrowings up to $90.0 million. Approximately $50.4 million was outstanding as of January 15, 1999. The credit facility expires in July 2003. On October 8, 1996, the Company completed its initial public offering in which it sold 3,000,000 shares of its Class A Common Stock to the public at a price of $14.00 per share resulting in net proceeds to the Company of approximately $38.1 million. The Company applied the net proceeds from the initial public offering as follows: (i) $29.9 million for the payment of the cash portion of the purchase price of DBS assets from two independent providers of DIRECTV services during the third quarter of 1996 and (ii) other payments in connection with certain other acquisitions and the repayment of indebtedness. On January 27, 1997, the Company completed an offering in which it sold 100,000 units, consisting of 100,000 shares of 12.75% Series A Cumulative Exchangeable Preferred Stock and 100,000 Warrants to purchase 193,600 shares of Class A Common Stock. This offering resulted in net proceeds to the Company of $95.8 million. The Company applied the net proceeds from the offering as follows: (i) $30.1 million to the repayment of all outstanding indebtedness under the 1996 PM&C Credit Facility and expenses related to it, and (ii) $56.5 million for the payment of the cash portion of the purchase price in the acquisition of DBS assets from nine independent DIRECTV providers. The remaining net proceeds were used for working capital, general corporate purposes and to finance other acquisitions. 33 On July 9, 1997, Pegasus Satellite Holdings, Inc. entered into a $130.0 million credit facility, which was collateralized by substantially all of the assets of PSH and its subsidiaries. The facility consisted of a $40.0 million seven-year senior term loan and a $90.0 million six-year senior revolving credit facility. On October 21, 1997, outstanding balances under the credit facility were repaid from the proceeds of the offering of Senior Notes discussed below and commitments under the PSH credit facility were terminated. Deferred financing fees relating to the $130.0 million revolving credit facility were written off, resulting in an extraordinary loss of $1.2 million on the refinancing transaction. On October 21, 1997, the Company completed an offering in which it sold $115.0 million of 9.625% Series A Senior Notes, resulting in net proceeds to the Company of approximately $111.0 million. The Company applied the net proceeds from the offering as follows: (i) $94.2 million to the repayment of all outstanding indebtedness under the PSH credit facility, and (ii) $16.8 million for the payment of the cash portion of the purchase price for the acquisition of DBS assets from various independent DIRECTV providers. On December 10, 1997, PM&C entered into a credit facility. The credit facility is a $180.0 million six-year, collateralized, reducing revolving credit facility. Borrowings under the credit facility are available for acquisitions, subject to the approval of the lenders in certain circumstances, working capital, capital expenditures and for general corporate purposes. Approximately $27.5 million was outstanding as of January 15, 1999. The credit facility expires in December 2003. On November 30, 1998, the Company completed the $100.0 million 9 3/4% Senior Notes offering due 2006, resulting in proceeds to the Company of approximately $96.6 million. The Company applied $64.7 million of the net proceeds to pay down indebtedness under the PM&C credit facility and $31.9 million to the cash portion of certain completed DBS acquisitions. The Company believes that it has adequate resources to meet its working capital, maintenance capital expenditure and debt service obligations. However, the Company is highly leveraged and our ability in the future to repay our existing indebtedness will depend upon the success of our business strategy, prevailing economic conditions, regulatory matters, levels of interest rates and financial, business and other factors that are beyond our control. We cannot assure you that we will be able to generate the substantial increases in cash flow from operations that we will need to meet the obligations under our indebtedness. Furthermore, our agreements with respect to our indebtedness, including the indentures governing our publicly held debt securities and our two credit facilities, as well as the terms of our publicly held preferred stock, contain numerous covenants that, among other things, restrict our ability to pay dividends and make certain other payments and investments, borrow additional funds, create liens and to sell our assets. Failing to make debt payments or comply with our covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on us. The Company closely monitors conditions in the capital markets to identify opportunities for the effective and prudent use of financial leverage. In financing its future expansion and acquisition requirements, the Company would expect to avail itself of such opportunities and thereby increase its indebtedness, which could result in increased debt service requirements. There can be no assurance that such debt financing can be completed on terms satisfactory to the Company or at all. The Company may also issue additional equity to fund its future expansion and acquisition requirements. Capital Expenditures For the nine months ended September 30, 1998, the Company's capital expenditures totalled $6.2 million. The Company expects recurring renewal and refurbishment capital expenditures to total approximately $2.0 million in 1998 and on a recurring basis. In addition to these maintenance capital expenditures, the Company's 1998 capital projects include: 34 o DBS facility upgrades of approximately $1.0 million, and o approximately $4.5 million of TV expenditures for broadcast television transmitter, tower and facility constructions and upgrades. The Company commenced the programming of four new TV stations, WPME in August 1997, WGFL in October 1997, WFXU in July 1998 and WSWB in November 1998 and its plans are to commence programming of an additional station in the first half of 1999. There can be no assurance that the Company's capital expenditure plans will not change in the future. Year 2000 The term "year 2000 issue" is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other equipment as the Year 2000 approaches and is reached. These problems generally arise from the fact that most computer hardware and software have historically used only two digits to identify the year in a date, often resulting in the computer failing to distinguish dates in the "2000's" from dates in the "1900's." These problems may also arise from additional sources, such as the use of special codes and conventions in software utilizing the date field. The Company has reviewed all of its systems as to the year 2000 issue. The Company's primary focus has been on its own internal systems. The Company has in the past three years replaced or upgraded, or is in the process of replacing or upgrading, all of its TV traffic systems, cable billing systems and corporate accounting systems. All of these new systems are expected to be in place by March 31, 1999. However, if any necessary changes are not made or completed in a timely fashion or unanticipated problems arise, the year 2000 issue may take longer for the Company to address and may have a material impact on the Company's financial condition and its results of operations. The Company relies on outside vendors for the operation of its DBS satellite control and billing systems, including DIRECTV, the NRTC and their respective vendors. The Company has established a policy to ensure that these vendors are currently in compliance with the year 2000 issue or have a plan in place to be in compliance with the year 2000 issue by the first quarter of 1999. In addition, the Company has had initial communications with certain of its other significant suppliers, distributors, financial institutions, lessors and parties with which it conducts business to evaluate their year 2000 compliance plans and state of readiness and to determine the extent to which the Company's systems may be affected by the failure of others to remediate their own year 2000 issues. To date, however, the Company has received only preliminary feedback from such parties and has not independently confirmed any information received from other parties with respect to the year 2000 issue. As such, there can be no assurance that such other parties will complete their year 2000 conversion in a timely fashion or will not suffer a year 2000 business disruption that may adversely affect the Company's financial condition and its results of operations. Because the Company's year 2000 conversion is expected to be completed prior to any potential disruption to the Company's business, the Company has not yet completed the development of a comprehensive year 2000-specific contingency plan. However, as part of its year 2000 contingency planning effort, information received from external sources is examined for date integrity before being brought into the Company's internal systems. If the Company determines that its business or a segment thereof is at material risk of disruption due to the year 2000 issue or anticipates that its year 2000 conversion will not be completed in a timely fashion, the Company will work to enhance its contingency plan. Costs to date relating to the year 2000 issue amounted to approximately $150,000. Costs to be incurred beyond September 30, 1998, relating to the year 2000 issue are expected to be approximately $200,000. 35 Dividend Policy As a holding company, Pegasus' ability to pay dividends is dependent upon the receipt of dividends from its direct and indirect subsidiaries. Credit facilities and publicly held debt securities of Pegasus' principal subsidiaries restrict them from paying dividends to Pegasus. In addition, Pegasus' ability to pay dividends and Pegasus' and its subsidiaries' ability to incur indebtedness are subject to certain restrictions contained in Pegasus' and its subsidiaries' credit facilities and publicly held debt securities and in Pegasus' Series A Preferred Stock. Seasonality The Company's revenues vary throughout the year. As is typical in the broadcast television industry, the Company's first quarter generally produces the lowest revenues for the year and the fourth quarter generally produces the highest revenues for the year. The Company's operating results in any period may be affected by the incurrence of advertising and promotion expenses that do not necessarily produce commensurate revenues in the short-term until the impact of such advertising and promotion is realized in future periods. Inflation The Company believes that inflation has not been a material factor affecting the Company's business. In general, the Company's revenues and expenses are impacted to the same extent by inflation. A majority of the Company's indebtedness bears interest at a fixed rate. Effects of Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement table that is displayed with the same prominence as other financial statements. SFAS 131 requires that all public business enterprises report information about operating segments, as well as specific revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. These new standards, which are effective for the fiscal year ending December 31, 1998, will not have a significant effect on the Company. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits." In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Management has reviewed the provisions of SFAS No. 132 and SFAS No.133 and the implementation of these standards is not expected to have any significant effect on its consolidated financial statements. THE COMPANY In this section we give a brief overview of our business, focusing particularly on our DBS business. To learn more detail about our business, you should read the description in our most recent Form 10-K report filed with the SEC, which we have incorporated by reference in this prospectus. To obtain a copy of our SEC filings, please refer to the section entitled "Where You Can Find More Information." Pegasus Pegasus Communications Corporation is: o The largest independent provider of DIRECTV(R) with 455,000 subscribers at December 31, 1998. We have the exclusive right to distribute DIRECTV digital broadcast satellite services to over 4.83 million rural households in 36 states. We distribute DIRECTV through the Pegasus retail network, a network of approximately 2,000 independent retailers. o The owner or programmer of nine TV stations affiliated with either Fox, UPN or the WB and the owner of a large cable system in Puerto Rico serving approximately 50,000 subscribers. o One of the fastest growing media companies in the United States. We have increased our revenues at a compound growth rate of 100% per annum since our inception in 1991. DBS The introduction of DBS receivers (DBS is the industry's abbreviation of "direct broadcast satellite" services) is widely regarded as the most successful introduction of a consumer electronics product in U.S. history, surpassing the rollout of color televisions, VCRs and compact disc players. According to a recent Paul Kagan study, in 1998 DBS was the fastest growing multi-channel television service in the country, capturing almost 2 out of every 3 new subscribers to those services. There are currently three nationally branded DBS programming services: DIRECTV, Primestar and EchoStar. At December 31, 1998, there were 8.7 million DBS subscribers in the United States: o 4.5 million DIRECTV subscribers, including approximately 3.55 million subscribers served by DIRECTV itself, 455,000 subscribers served by Pegasus and 500,000 subscribers served by the approximately 100 other DIRECTV rural affiliates. o 2.3 million Primestar subscribers. o 1.9 million EchoStar subscribers. All three DBS programming services are digital satellite services, and therefore require that a subscriber install a satellite receiving antenna or dish and a digital receiver. DIRECTV and EchoStar are "high power" DBS services and require a satellite dish of approximately 18 inches in diameter that may be installed by the consumer without professional assistance. Primestar is a "medium power" DBS service and requires a dish of approximately 36 inches in diameter that generally must be professionally installed. The market shares of DIRECTV, Primestar and Echostar among all DBS subscribers nationally are currently 52%, 26% and 22%, respectively. The Carmel Group has estimated that the number of DBS subscribers will grow to 21.1 million by 2003. As described below under "-- Recent DBS Developments," DIRECTV has announced an agreement to acquire Primestar's business. 36 DIRECTV DIRECTV is a service of Hughes Electronics, a subsidiary of General Motors Corporation. After completing its announced acquisition of United States Satellite Broadcasting, Inc. and Primestar described below, DIRECTV will offer in excess of 200 channels of near laser disc quality video and CD quality audio programming. DIRECTV currently transmits via three high-power Ku band satellites and has announced its intention to launch a fourth Ku band satellite in the third quarter of this year. We believe that DIRECTV's extensive line-up of cable networks, pay-per-view movies and events and sports packages, including the exclusive "NFL Sunday Ticket," have enabled DIRECTV to capture a majority market share of existing DBS subscribers and will continue to drive strong subscriber growth for DIRECTV DBS services in the future. DIRECTV added 1.2 million new subscribers in 1998, which was a greater increase than any other DBS provider and accounted for approximately 48% of all new DBS subscribers in that year. DIRECTV Rural Affiliates Prior to the launch of DIRECTV's DBS programming service, Hughes entered into an agreement with the National Rural Telecommunications Cooperative authorizing the NRTC to offer its members and associates the opportunity to acquire exclusive rights to distribute DIRECTV programming services in rural areas of the United States. (The NRTC is a cooperative organization whose members and associates are engaged in the distribution of telecommunications and other services in predominantly rural areas of the United States.) Approximately 250 NRTC members and associates acquired such exclusive rights, thereby becoming DIRECTV "rural affiliates." The DIRECTV exclusive territories acquired by DIRECTV's rural affiliates include approximately 9 million rural households. Pegasus was the largest of the original DIRECTV rural affiliates, acquiring a DIRECTV exclusive territory of approximately 500,000 homes in four New England states. Since 1996 we have increased our DIRECTV exclusive territories to more than 4.83 million homes through the completed or pending acquisitions of 81 other DIRECTV rural affiliates, including acquisitions on Digital Television Services, Inc., with which we merged in 1998. Pegasus Rural Focus and Strategy We believe that DBS and other digital satellite services will achieve disproportionately greater consumer acceptance in rural areas than in metropolitan areas. DBS services have already achieved a penetration of more than 17% in rural areas of the United States, as compared to approximately 5% in metropolitan areas. Our long-term goal is to become an integrated provider of DBS and other digital satellite services for the 76 million people, 30 million homes and 3 million businesses located in rural areas of the United States. To accomplish our goal, we are pursuing the following strategy: o Continue to Grow Our Rural Subscriber Base by Aggressively Marketing DIRECTV: Pegasus currently serves in excess of 455,000 DIRECTV subscribers, which represents a penetration of approximately 10%. We estimate that we have a 55% share of all DBS subscribers in our DIRECTV exclusive territories and that the remaining DBS subscribers are shared approximately equally between Primestar and EchoStar. Our rate of growth has accelerated as we have increased our scale and expanded the Pegasus retail network. o Continue to Acquire Other DIRECTV Rural Affiliates: We currently own approximately 55% of the DIRECTV exclusive territories held by DIRECTV's rural affiliates. We have had an excellent track record of acquiring DIRECTV rural affiliates and believe that we have a competitive advantage in acquiring additional DIRECTV rural affiliates due to our position as the largest DIRECTV rural affiliate, our access to the capital markets and our strong reputation in the DBS industry. We will continue to pursue our strategy of acquiring other DIRECTV rural affiliates. 37 o Continue to Develop the Pegasus Retail Network: We have established the Pegasus retail network in order to distribute DIRECTV in our DIRECTV exclusive territories. Our consolidation of DIRECTV's rural affiliates has enabled us to expand the Pegasus retail network to 2,000 independent retailers in 36 states. We believe that the Pegasus retail network is one of the few sales and distribution channels for digital satellite services with broad and effective reach in rural areas of the U.S. We intend to further expand the Pegasus retail network in order to increase the penetration of DIRECTV in rural areas and to enable us to distribute additional digital satellite services that will complement our distribution of DIRECTV. o Generate Future Growth By Bundling Additional Digital Satellite Services with DIRECTV: We believe that new digital satellite services, such as digital audio services, broadband multimedia services and mobile satellite services, will be introduced to consumers and businesses in the next five years. We believe that these services, like DBS, will achieve disproportionate success in rural areas. However, we believe that because there are limited sales and distribution channels in rural areas, new digital satellite service providers will confront the same difficulties that DBS service providers have encountered in establishing broad distribution in rural areas, as compared to metropolitan areas. We believe that the Pegasus retail network will enable us to establish relationships with digital satellite service providers that will position us to capitalize on these new opportunities. Satellite Services in Rural Areas Rural areas include approximately 85% of the total landmass of the continental United States and have an average home density of less than 12 homes per square mile. Because the cost of building (or rebuilding) a cable system is generally inversely proportional to home density and the cost of providing satellite service is not, satellite services have strong cost advantages over cable in rural areas. There are approximately 76 million people, 30 million households and 3 million businesses located in rural areas of the United States. Annual household income in rural areas totaled over $1.1 trillion in 1997, an average of approximately $38,000 per household. Rural areas therefore represent a large and attractive market for DBS and other digital satellite services. Approximately 65% of all U.S. DBS subscribers reside in rural areas. It is likely that future digital satellite services, such as soon to be launched digital audio services and satellite broadband multimedia services, will also achieve disproportionate success in rural areas as compared to metropolitan areas. It is difficult, however, for satellite and other service providers to establish sales and distribution channels in rural areas. In contrast to metropolitan areas, where there are many strong national retail chains, few national retailers have a presence in rural areas. Most retailers in rural areas are independently owned and have only one or two store locations. For these reasons, satellite providers seeking to establish broad and effective rural distribution have limited alternatives: o They may seek to distribute their services through one of the few national retailers, such as Radio Shack or Wal-Mart, that have a strong retail presence in rural areas. o They may seek to establish direct sales channels in rural areas, as Primestar initially sought to do through its cable partners. o They may seek to distribute through national networks of independent retailers serving rural areas, such as have been established by EchoStar and by Pegasus. 38 Consolidation of DIRECTV Rural Affiliates When DIRECTV was launched in 1994, approximately 95% of the DIRECTV rural affiliate exclusive territories were held by small DIRECTV rural affiliates. In 1996, Pegasus made its first acquisition of another DIRECTV rural affiliate, thereby beginning a process of consolidation that has significantly changed the composition of DIRECTV's rural affiliates. Since 1996, approximately 150 DIRECTV rural affiliates have been acquired by Pegasus, Digital Television Services (which merged with Pegasus in 1998) or Golden Sky Systems. Today, Pegasus represents 55% of the DIRECTV exclusive territories held by DIRECTV's rural affiliates, Golden Sky holds 19%, and the approximately 100 remaining rural affiliates total 26%. Pegasus believes that consolidation among DIRECTV's rural affiliates will continue. Upon completion of our pending acquisitions, we will distribute DIRECTV in the following DIRECTV exclusive territories: Exclusive Total Homes Not DIRECTV Homes in Passed by Total Territory Territory Cable Subscribers Penetration - ------------------------------------------------------------------------- Northeast 751,745 182,245 64,427 8.6% Central 1,163,510 287,306 103,214 8.9% Southeast 993,379 343,805 97,356 9.8% Midwest 612,579 183,098 64,729 10.6% Central Plains 375,410 73,516 28,665 7.6% Texas 465,835 150,987 49,043 10.5% Southwest 322,438 57,028 31,841 9.9% Northwest 143,754 56,726 15,345 10.7% Total 4,828,650 1,334,711 454,620 9.4% - ------------------------------------------------------------------------- Total homes in territory and homes not passed by cable are based on estimates of primary residences by Claritas, Inc. The Pegasus Retail Network The Pegasus retail network is a network of 2,000 independent satellite, consumer electronics and other retailers serving rural areas. We began the development of the Pegasus retail network in 1995 in order to distribute DIRECTV in our original DIRECTV exclusive territories in New England. Our acquisitions of DIRECTV rural affiliates since 1996 (including, most importantly, our merger with Digital Television Services, Inc. in 1998) have enabled us to expand the Pegasus retail network into 36 states. Today, the Pegasus retail network is one of the few sales and distribution channels available to digital satellite service providers seeking broad and effective distribution in rural areas throughout the continental United States. We believe that the national reach of the Pegasus retail network has positioned us to: o Improve the penetration of DIRECTV in DIRECTV exclusive territories that we now own or that we may acquire by from other DIRECTV rural affiliates. o Assist DIRECTV in improving DIRECTV's DBS market share in rural areas outside of the DIRECTV exclusive territories held by DIRECTV rural affiliates. o Offer providers of new digital satellite services (such as the soon to be launched digital audio and broadband multimedia satellite services) an effective and convenient means for reaching the approximately 30% of America's population that live and work in rural areas. 39 Recent DBS Developments Three important events have occurred recently in the DBS industry. DIRECTV/Hughes Acquisition of USSB. In December 1998, Hughes Electronics Corporation, the parent company of DIRECTV, announced that it had reached an agreement with United States Satellite Broadcasting Company, Inc. to acquire USSB's business and assets for approximately $1.3 billion in cash and stock. The transaction will enable DIRECTV to add such premium networks as multichannel HBO, Cinemax and Showtime. We expect these added offerings to increase DIRECTV's appeal to consumers and drive subscriber growth. DIRECTV and USSB have said that they expect the transaction to close in the first half of this year. It is subject to review and approval by the Department of Justice and the Federal Communications Commission and other conditions. DIRECTV/Hughes Acquisition of Primestar. In January 1999, Hughes announced that it reached agreement with Primestar, Inc. to acquire Primestar's medium-power DBS business and rights to acquire certain high power DBS satellite assets in two transactions valued at approximately $1.82 billion. DIRECTV has stated that it intends to operate Primestar's medium power business for approximately two years, during which time it will transition Primestar's approximately 2.3 million subscribers to the high power DIRECTV service. DIRECTV has also said it expects that its acquisition of the new high power DBS assets associated with the Primestar transaction along with its pending acquisition of the high power USSB assets will enable DIRECTV to offer more than 370 entertainment channels, almost twice its current channel capacity. If the Primestar and USSB transactions are consummated, we expect that DIRECTV and EchoStar will be the only providers of DBS services. The Primestar transactions are subject to approval of the Federal Communications Commission (with respect to the high power DBS assets only) and antitrust agencies and other conditions. We estimate that there are between 200,000 and 250,000 Primestar subscribers in our DIRECTV exclusive territories. (Our estimate is based on DIRECTV's estimate of the proportion of Primestar subscribers in the exclusive territories of DIRECTV rural affiliates and our proportionate ownership of those territories.) We are still evaluating the effects of the Primestar transactions on our business. EchoStar-News Corporation-MCI Settlement. In November 1998, EchoStar Communications Corporation, News Corporation, MCI and certain other parties reached an agreement for the transfer to EchoStar of a license to operate a high-power DBS business at the 110o west longitude orbital location and certain other DBS assets in exchange for shares of EchoStar. EchoStar already operates a DBS business at the 119o west longitude orbital location. The agreement with News Corporation and MCI has been approved by the Department of Justice and is pending approval of the Federal Communications Commission. EchoStar plans to launch satellites for operation at the 110o west longitude orbital slot in 1999. This transaction could increase EchoStar's competitive position relative to DIRECTV. See "Risk Factors -- Other Risks of Our Business -- We Face Significant Competition: the Competition Landscape Changes Constantly." We believe that the EchoStar/News Corporation/MCI settlement will be positive for the DBS industry and will help increase DBS' competitive position vis-a-vis cable. Pegasus' Cable and TV Businesses We own and operate a cable system serving areas of western and southwestern Puerto Rico, and are acquiring a contiguous system serving areas of northwestern Puerto Rico. The combined systems will hold franchises for communities representing almost 20% of Puerto Rico, will pass in excess of 170,000 homes and will serve approximately 50,000 subscribers. Our strategy in cable is to increase our penetration by adding Spanish language networks, locally originated programming and Internet access and other broadband and telecommunications services. Other cable operators serving Puerto Rico include Century Communications serving San Juan and surrounding areas, TCI International (recently merged with Liberty Communications, a subsidiary of TCI) serving eastern and northern Puerto Rico, and an independent system serving Ponce. Century has recently announced that it is considering "strategic alternatives," including a possible sale of its assets. We believe that it is possible that other strategic transactions may soon occur involving other cable operators in Puerto Rico or that consolidation may occur among some or all of Puerto Rico's cable operators. We currently own or program nine broadcast television stations in six Nielsen designated market areas. We own five of these stations and program four others pursuant to local marketing agreements which authorize us to program the stations and to sell advertising spots in the programming aired on them. Our TV stations are affiliated with Fox, UPN and the WB. Our operating strategy in TV focuses on developing strong local sales organizations, improving our programming, promotion and technical facilities, and maintaining careful control over operating costs. 40 We have affiliated with Fox, UPN and the WB because we believe that their audience ratings will continue to grow and that continued audience growth will enable our TV stations to significantly increase their market shares. Recent Pegasus Developments Completed DBS Acquisitions During the fourth quarter of 1998 and the first quarter of 1999, we made ten acquisitions from independent DIRECTV providers of rights to provide DIRECTV programming in rural areas of New Mexico, Oklahoma, South Dakota, West Virginia, Colorado, Illinois, Minnesota and Texas. These territories include, in the aggregate, approximately 149,000 television households (including approximately 6,800 seasonal residences and 13,000 business locations), and approximately 14,250 subscribers. The aggregate consideration paid for these acquisitions was approximately $26.8 million in cash and $1.25 million in promissory notes. Pending DBS Acquisitions As of the date of this prospectus, we have entered into letters of intent or definitive agreements to acquire DIRECTV distribution rights in rural areas of Colorado, Indiana, Minnesota, and Ohio. These territories include approximately 264,000 television households (including approximately 11,500 seasonal residences and 23,000 business locations) and approximately 15,350 subscribers. In the aggregate, the consideration for the pending DBS acquisitions is $28.9 million in cash, and $3.1 million in promissory notes and assumed liabilities. The closings of these acquisitions are subject to the negotiation of definitive agreements, third party approvals and other customary conditions. We believe, but cannot assure you, that these conditions will be satisfied. See "Risk Factors -- Other Risks of Our Business -- Our Acquisition Strategy Creates a Variety of Risks." Pending Cable Acquisition We have entered into an agreement to purchase a cable system serving Aguadilla, Puerto Rico and neighboring communities for a purchase price of approximately $42.0 million in cash. As of December 31, 1998, the Aguadilla cable system serves approximately 21,500 subscribers and passes approximately 81,300 of the 83,300 homes in the franchise area. The Aguadilla cable system is contiguous to our existing Puerto Rico cable system and, upon completion of the purchase, we intend to consolidate the Aguadilla cable system with our existing cable system. The closing of this acquisition is subject to third party approvals and other customary conditions. One of these conditions is that the Puerto Rico franchising authority will not impose greater burdens on us than it imposes on the present owner. We expect we will have to negotiate terms with the Puerto Rico authority. While we believe we will reach a satisfactory agreement, we cannot be sure. If we do, and the other conditions are met, we expect to close the acquisition in the first quarter of 1999. See "Risk Factors - -- Other Risks of Our Business -- Our Acquisition Strategy Creates a Variety of Risks." Fox Affiliation Agreements Our network affiliation agreements with Fox Broadcasting Company will expire on January 30, 1999 (other than the affiliation agreement for television station WTLH, which is scheduled to expire on December 31, 2000). We have been informed by Fox that it is revising its form affiliation agreement. Pending completion of its revised form agreement, Fox has proposed entering into new agreements based on its current form with a 90-day rolling term. We believe that we will enter into new affiliation agreements on satisfactory terms, either before the existing agreements expire or during an agreed-upon extension. If we are mistaken in this belief, the loss of the ability to carry Fox programming could have a material and adverse effect on us. See "Risk Factors -- Risks of Our Broadcast Television Business -- We Depend on our Network Affiliations For Programming." 41 Legal and Other Proceedings FCC Matters In connection with the pending license renewal application of television station WDBD, we have learned that there were a substantial number of violations at that station of the FCC's rule establishing limits on the amount of commercial material in programs directed to children. The FCC has options available to address violations of its rules ranging from a letter of admonishment to the revocation of a station license. We expect that the violations at television station WDBD will result in a monetary fine but not in revocation or nonrenewal of the station license. The FCC has not yet completed its review of the matter, however, so the outcome cannot be assured. DBS Late Fee Litigation In November 1998 we were sued in Indiana for allegedly charging DBS subscribers excessive fees for late payments. The plaintiffs, who claim to represent a class consisting of residential DIRECTV customers in Indiana, seek unspecified damages for the purported class and modification of our late-fee policy. We are in the process of evaluating our response and are unable to estimate the amount involved or to determine whether this suit is material to our Company. Similar suits have been brought against DIRECTV and various cable operators in other parts of the United States. 42 MANAGEMENT Executive Officers and Directors Set forth below is certain information concerning the executive officers and directors of Pegasus.
Name Age Position ---- --- -------- Marshall W. Pagon (1) .............. 43 Chairman of the Board, President and Chief Executive Officer Robert N. Verdecchio ............... 42 Senior Vice President, Chief Financial Officer, Treasurer, Assistant Secretary and Director Ted S. Lodge ....................... 42 Senior Vice President, Chief Administrative Officer, General Counsel and Secretary Howard E. Verlin ................... 37 Vice President and Assistant Secretary Nicholas A. Pagon .................. 42 Vice President Michael C. Brooks (1) .............. 54 Director Harry F. Hopper III (2) ............ 45 Director James J. McEntee, III (2) .......... 41 Director Mary C. Metzger (1)(3) ............. 53 Director William P. Phoenix ................. 41 Director Riordon B. Smith (3) ............... 37 Director Donald W. Weber (2)(3) ............. 62 Director
- ------------ (1) Member of Nominating Commitee. (2) Member of Compensation Commitee. (3) Member of Audit Commitee. Marshall W. Pagon has served as President, Chief Executive Officer and Chairman of the Board of Pegasus since its incorporation, and served as Treasurer of Pegasus from its incorporation to June 1997. From 1991 to October 1994, when the assets of various affiliates of Pegasus Media & Communications, Inc. ("PM&C," the predecessor of Pegasus and now its subsidiary) principally limited partnerships that owned and operated the Company's TV and cable operations, were transferred to PM&C's subsidiaries, entities controlled by Mr. Pagon served as the general partners of these partnerships and conducted the business of the Company. Mr. Pagon's background includes over 18 years of experience in the media and communications industry. Mr. Pagon is the brother of Nicholas A. Pagon. Robert N. Verdecchio has served as Pegasus' Senior Vice President, Chief Financial Officer and Assistant Secretary since its inception and as Pegasus' Treasurer since June 1997. He has also served similar functions for PM&C's affiliates and predecessors in interest since 1990. Mr. Verdecchio has been a director of Pegasus and PM&C since December 18, 1997. Mr. Verdecchio is a certified public accountant and has over 13 years of experience in the media and communications industry. Ted S. Lodge has served as Senior Vice President, Chief Administrative Officer, General Counsel and Assistant Secretary of Pegasus since July 1, 1996. In June 1997, Mr. Lodge became Pegasus' Secretary. From June 1992 through June 1996, Mr. Lodge practiced law with the law firm of Lodge & Company. During that period, Mr. Lodge was engaged by the Company as its outside legal counsel in connection with various matters. Howard E. Verlin is a Vice President and Assistant Secretary of Pegasus (and was until June 1997 its Secretary) and is responsible for operating activities of the Company's DBS and cable subsidiaries, including supervision of their general managers. Mr. Verlin has served similar functions with respect to the Company's predecessors in interest and affiliates since 1987 and has over 15 years of experience in the media and communications industry. 43 Nicholas A. Pagon has served as Vice President of Pegasus and Chief Executive Officer of its broadcast subsidiaries since November 1998 and is responsible for all broadcast television activities of the Company. From January to November 1998, Mr. Pagon served as President of Pegasus Development Corporation, a subsidiary of the Company. From 1990 through December 1998, Mr. Pagon was President of Wellspring Consulting, Inc., a telecommunications consulting business. Mr. Pagon is the brother of Marshall W. Pagon. Michael C. Brooks has been a director of the Company since April 27, 1998. From February 1997 until April 27, 1997, Mr. Brooks had been a director of Digital Television Services, Inc. He has been a general partner of J.H. Whitney & Co., a venture capital firm, since January 1985 and currently serves as Senior Partner. Mr. Brooks is also a director of SunGard Data Systems Inc., Nitinol Medical Technologies, Inc. and several private companies. Mr. Brooks is serving as a director of the Company as Whitney's designee to the Board of Directors. Harry F. Hopper III has been a director of the Company since April 27, 1998. From June 1996 until April 27, 1998, Mr. Hopper had been a director of Digital Television Services, Inc., or a manager of its predecessor, Digital Television Services, LLC. Mr. Hopper has been a Managing Director of Columbia Capital Corporation since January 1997. From January 1994 to January 1997, Mr. Hopper was a Senior Vice President of Columbia. From May 1990 to January 1994, he was an Executive Vice President of the corporate general partners of Bachtel Cellular Liquidity, LP and Paul S. Bachow Co-Investment Fund, LP. Mr. Hopper is serving as a Director of the Company as Columbia's designee to the Board of Directors. James J. McEntee, III has been a director of Pegasus since October 8, 1996. Mr. McEntee has been a member of the law firm of Lamb, Windle & McErlane, P.C. for the past six years and a principal of that law firm for the past five years. Mary C. Metzger has been a director of Pegasus since November 14, 1996. Ms. Metzger has been Chairman of Personalized Media Communications L.L.C. and its predecessor company, Personalized Media Communications Corp. since February 1989. Ms. Metzger has also been Managing Director of Video Technologies International, Inc. since June 1986. William P. Phoenix has been a director of the Company since June 17, 1998. He is a Managing Director of CIBC Oppenheimer Corp. and co-head of its Credit Capital Markets Group. Mr. Phoenix is also a member of CIBC Oppenheimer Corp.'s credit investment and risk committees. Prior to joining CIBC Oppenheimer Corp. in 1995, Mr. Phoenix had been a Managing Director of Canadian Imperial Bank of Commerce with management responsibilities for the bank's acquisition finance, mezzanine finance and loan workout and restructuring businesses. Mr. Phoenix joined Canadian Imperial Bank of Commerce in 1982. Mr. Phoenix is one of Marshall W. Pagon's designees to the Board of Directors pursuant to a voting agreement. Riordon B. Smith has been a director of the Company since April 27, 1998. From February 1997 until April 27, 1998, Mr. Smith had been a director of Digital Television Services, Inc., or a manager of its predecessor, Digital Television Services, LLC. Mr. Smith is a Senior Vice President of Fleet Private Equity Co., Inc., which he joined in 1990. Fleet Private Equity Co., Inc. is a private equity fund with an investment focus in media and information, telecommunications services, healthcare services, industrial manufacturing business services and consumer products and services. Mr. Smith is serving as a director of the Company as Chisholm Partners, III, L.P.'s designee to the Board of Directors. Donald W. Weber has been a director of Pegasus since its incorporation and a director of PM&C since November 1995. Until its acquisition by Pegasus in November 1997, Mr. Weber had been the President and Chief Executive Officer of ViewStar Entertainment Services, Inc., an NRTC associate that distributed DIRECTV services in North Georgia, since August 1993. From November 1991 through August 1993, Mr. Weber was a private investor and consultant to various communication companies. Prior to that time, Mr. Weber was President and Chief Executive Officer of Contel Corporation until its merger with GTE Corporation in 1991. Mr. Weber is currently a member of the boards of directors of Powertel, Inc. and Healthdyne Information Enterprises, Inc., which are publicly-traded companies. 44 In connection with the acquisition of DIRECTV rights and related assets from Harron Communications Corp., Pegasus Communications Holdings, Inc., Pegasus' parent corporation, agreed to nominate a designee of Harron as a member of Pegasus' Board of Directors. Effective October 8, 1996, James J. McEntee, III, was appointed to Pegasus' Board of Directors as Harron's designee. Harron's right to designate a Board member terminated on October 8, 1998. Executive Compensation The following table sets forth certain information for the Company's last three fiscal years concerning the compensation paid to the Chief Executive Officer and to each of the Company's most highly compensated officers, whose total annual salary and bonus for the fiscal year ended December 31, 1998 exceeded $100,000.
Annual Compensation(1) ------------------------ Name Principal Position Year Salary ---- ------------------ Marshall W. Pagon ........ President and Chief Executive Officer 1998 $ 200,000 1997 $ 200,000 1996 $ 150,000 Robert N. Verdecchio ..... Senior Vice President and Chief 1998 $ 150,000 Financial Officer 1997 $ 150,000 1996 $ 125,000 Ted S. Lodge ............. Senior Vice President, Chief 1998 $ 150,000 Administrative Officer and General 1997 $ 150,000 Counsel 1996 $ 75,000(5) Howard E. Verlin ......... Vice President, Satellite and Cable 1998 $ 135,000 Television 1997 $ 135,000 1996 $ 100,000 Long Term Compensation Awards -------------------------------------------- Restricted Securities Stock Underlying All Other Name Award(2) Options Compensation(3) ---- Marshall W. Pagon ........ $ 77,161 85,000 $ 67,274(4) $100,558 85,000 $ 63,228(4) -- -- $ 62,253(4) Robert N. Verdecchio ..... $ 38,580 40,000 $ 12,720 $ 50,279 40,000 $ 9,500 $555,940 -- $ 6,875 Ted S. Lodge ............. $ 30,864 60,000 $ 9,263 $ 40,223 40,000 $ 1,800 -- -- -- Howard E. Verlin ......... $110,125 40,000 $ 5,480 $100,558 40,000 $ 1,685 -- -- $ 1,100
- ------------ (1) Prior to the consummation of the Company's initial public offering of common stock in October of 1996, the Company's executive officers never received any salary or bonus compensation from the Company. The salary amounts presented above for January 1, 1996 through October 8, 1996 were paid by an affiliate of the Company. After October 8, 1996, the Company's executive officers' salaries were paid by the Company. There are no employment agreements between the Company and its executive officers. (2) Upon the Company's initial public offering in October of 1996 certain shares of Class B Common Stock were exchanged for shares of Class A Common Stock and distributed to certain members of management, including 38,807 shares of Class A Common Stock that were distributed to Mr. Verdecchio. (3) Unless otherwise indicated, the amounts listed represent the Company's contributions under its 401(k) Plans. (4) Of the amounts listed for Mr. Pagon for 1998, 1997 and 1996, $53,728, $53,728 and $53,728, respectively, represent the actuarial benefit to Mr. Pagon of premiums paid by the Company in connection with the split dollar agreement entered into by the Company with the trustees of insurance trust established by Mr. Pagon. See "Certain Relationships and Related Transactions -- Split Dollar Agreement." The remainder represents the Company's contributions under its 401(k) Plans. (5) Mr. Lodge became an employee of the Company on July 1, 1996. 45 Option Grants in 1998 Potential Realizable Value
% of Total Options Granted Exercise Options to Employees in Price Expiration Name Granted Fiscal Year(1) Per Share Date 5%(2) 10%(2) ---- ------- --------------- --------- ------ ------- -------- Marshall W. Pagon ......... 85,000 25.24% $ 21.375 2-16-08 $1,142,623 $2,895,631 Robert N. Verdecchio ...... 40,000 11.88% $ 21.375 2-16-08 $ 537,705 $1,362,650 Ted S. Lodge .............. 60,000 17.81% $ 21.375 2-16-08 $ 806,557 $2,043,975 Howard E. Verlin .......... 40,000 11.88% $ 21.375 2-16-08 $ 537,705 $1,362,650
- ------------ (1) The Company granted options to employees to purchase a total of 336,800 shares during 1998. (2) These amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date. Aggregated Option Exercises in 1998 and 1998 Year-End Option Values
Number of Unexercised Value of Unexercised Options at Fiscal In-the-Money Options Shares Year End at Fiscal Year End(1) Acquired on Value ------------------------------ ----------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- -------- -------- ----------- ------------- ----------- ------------- Marshall W. Pagon ........ -- -- 17,000 153,000 $239,020 $1,259,305 Robert N. Verdecchio ..... -- -- 9,090 70,910 $127,805 $ 581,995 Ted S. Lodge ............. -- -- 9,090 90,910 $127,805 $ 655,695 Howard E. Verlin ......... -- -- 9,090 70,910 $127,805 $ 581,995
- ------------ (1) In-the-money options are those where the fair market value of the underlying securities exceeds the exercise price of the option. The closing price of Pegasus' Class A Common Stock on December 31, 1998 was $25.06 per share. Compensation of Directors Under Pegasus' By-Laws, each director is entitled to receive such compensation, if any, as may from time to time be fixed by the Board of Directors. Pegasus currently pays its directors who are not employees or officers of Pegasus an annual retainer of $10,000 plus $750 for each Board meeting attended in person, $350 for each meeting of a committee of the Board and $375 for each Board meeting held by telephone. Pegasus also reimburses each director for all reasonable expenses incurred in traveling to and from the place of each meeting of the Board or committee of the Board. On February 17, 1998, James J. McEntee, III, Mary C. Metzger, and Donald W. Weber, who were then all of Pegasus' nonemployee directors, each received options under the Stock Option Plan to purchase 5,000 shares of Class A Common Stock under the Pegasus Communications 1996 Stock Option Plan. Each option vests in annual installments of 2,500 shares, was issued at an exercise price of $21.375 per share (the closing price of the Class A Common Stock at the time of the grant), and is exercisable until the tenth anniversary from the date of grant. Compensation Committee Interlocks and Insider Participation During 1998, decisions concerning executive compensation of executive officers were generally made by the Board of Directors, which included Marshall W. Pagon, the President and Chief Executive Officer of Pegasus, and Robert N. Verdecchio, Pegasus' Senior Vice President and Chief Financial Officer. A Special Stock Option Committee, however, made certain decisions regarding option grants under the Stock Option Plan. Both the Stock Option Plan and Restricted Stock Plan are discussed below. 46 Incentive Program General The Incentive Program, which includes the Restricted Stock Plan, the 401(k) Plans and the Stock Option Plan, is designed to promote growth in stockholder value by providing employees with restricted stock awards in the form of Class A Common Stock and grants of options to purchase Class A Common Stock. Awards under the Restricted Stock Plan (other than excess and discretionary awards) and the 401(k) Plans (other than matching contributions) are in proportion to annual increases in location cash flow. For this purpose location cash flow is automatically adjusted for acquisitions such that, for the purpose of calculating the annual increase in location cash flow, the location cash flow of the acquired properties is included as if it had been a part of the Company's financial results for the comparable period of the prior year. The Company believes that the Restricted Stock Plan and 401(k) Plans result in greater increases in stockholder value than result from a conventional stock option program, because these plans create a clear cause and effect relationship between initiatives taken to increase location cash flow and the amount of incentive compensation that results from these initiatives. Although the Restricted Stock Plan and 401(k) Plans like conventional stock option programs provide compensation to employees as a function of growth in stockholder value, the tax and accounting treatments of these programs are different. For tax purposes, incentive compensation awarded under the Restricted Stock Plan (generally, upon vesting) and the 401(k) Plans is fully tax deductible as compared to conventional stock option grants which generally are only partially tax deductible upon exercise. For accounting purposes, conventional stock option programs generally do not result in a charge to earnings while compensation under the Restricted Stock Plan (generally) and the 401(k) Plans do result in a charge to earnings. The Company believes that these differences result in a lack of comparability between the EBITDA of companies that utilize conventional stock option programs and the EBITDA of the Company. The table below lists the specific maximum components of the Restricted Stock Plan (other than excess and discretionary awards) and the 401(k) Plans (other than matching contributions) in terms of a $1 increase in annual location cash flow.
Component Amount --------- ------ Restricted Stock grants to general managers based on the increase in annual location cash flow of individual business units ....................................................... 6 Cents Restricted stock grants to department managers based on the increase in annual location cash flow of individual business units .................................................. 6 Cents Restricted stock grants to corporate managers (other than executive officers) based on the Company-wide increase in annual location cash flow ...................................... 3 Cents Restricted Stock grants to employees selected for special recognition .................... 5 Cents Restricted Stock grants under the 401(k) Plans for the benefit of all eligible employees and allocated pro-rata based on wages ................................................... 10 Cents --------- Total ................................................................................... 30 Cents =========
As of December 31, 1998, we had 723 full-time and 130 part-time employees. We also had 8 general managers, 37 department managers and 8 corporate managers as of this date. 47 Executive officers and non-employee directors are not eligible to receive profit sharing awards under the Restricted Stock Plan. Executive officers are eligible to receive awards under the Restricted Stock Plan consisting of o special recognition awards. o excess awards made to the extent that an employee does not receive a matching contribution under the 401(k) Plans because of restrictions of the Internal Revenue Code of 1986, as amended, or the Puerto Rico Internal Revenue Code. o discretionary restricted stock awards determined by a Board committee, or the full Board. Executive officers, non-employee directors and, effective December 18, 1998, all employees are eligible to receive options under the Stock Option Plan. Restricted Stock Plan The Pegasus Restricted Stock Plan became effective in September 1996 and will terminate in September 2006. Under the Restricted Stock Plan, 350,000 shares of Class A Common Stock are available for granting restricted stock awards to eligible employees of the Company. The Restricted Stock Plan provides for four types of restricted stock awards that are made in the form of Class A Common Stock as shown in the table above: o profit sharing awards to general managers, department managers and corporate managers (other than executive officers). o special recognition awards for consistency (team award), initiative (a team or individual award), problem solving (a team or individual award) and individual excellence. o excess awards that are made to the extent that an employee does not receive a matching contribution under the U.S. 401(k) Plan or Puerto Rico 401(k) Plan because of restrictions of the Internal Revenue Code or the Puerto Rico Internal Revenue Code. o discretionary restricted stock awards. Restricted Stock Awards other than special recognition awards vest 34% after two years of service with the Company (including years before the Restricted Stock Plan was established), 67% after three years of service and 100% after four years of service. Special recognition awards are fully vested on the date of the grant. Effective December 18, 1998, grantees may elect to receive certain types of awards under the Restricted Stock Plan in the form of an option rather than stock subject to a vesting schedule. Stock Option Plan The Pegasus Communications 1996 Stock Option Plan became effective in September 1996 and terminates in September 2006. Under the Stock Option Plan, up to 970,000 shares of Class A Common Stock are available for the granting of nonqualified stock options and options qualifying as incentive stock options under Section 422 of the Internal Revenue Code. Effective December 18, 1998, all Company employees are eligible to receive non-qualified stock options and incentive stock options (subject to shareholder approval for other than executive officers) under the Stock Option Plan, but no employee may be granted options covering more than 550,000 shares of Class A Common Stock under the Stock Option Plan. Directors of Pegasus who are not employees of the Company are eligible to receive non-qualified stock options under the Stock Option Plan. Currently, seven non-employee directors are eligible to receive options under the Stock Option Plan. The Stock Option Plan provides for discretionary option grants made by a Board committee or the full Board. In addition, effective December 18, 1998, the Stock Option Plan provides that an option to purchase 100 shares of Class A Common Stock is automatically granted to each full-time employee who is not an executive officer when he or she becomes a full-time employee (or December 18, 1998 if he or she is then a full-time employee). 48 401(k) Plans Effective January 1, 1996, Pegasus Media & Communications, Inc. adopted the Pegasus Communications Savings Plan for eligible employees of that company and its domestic subsidiaries. Effective October 1, 1996, the Pegasus' Puerto Rico subsidiary adopted the Pegasus Communications Puerto Rico Savings Plan for eligible employees of the Company's Puerto Rico subsidiaries. Substantially all Company employees who, as of the enrollment date under the 401(k) Plans, have completed at least one year of service with the Company are eligible to participate in one of the 401(k) Plans. Participants may make salary deferral contributions of 2% to 6% of salary to the 401(k) Plans. o The Company may make three types of contributions to the 401(k) Plans, each allocable to a participant's account if the participant completes at least 1,000 hours of service in the applicable plan year, and is employed on the last day of the applicable plan year. o the Company matches 100% of a participant's salary deferral contributions to the extent the participant invested his or her salary deferral contributions in Class A Common Stock at the time of his or her initial contribution to the 401(k) Plans. o the Company, in its discretion, may contribute an amount that equals up to 10% of the annual increase in Company-wide location cash flow (these Company discretionary contributions, if any, are allocated to eligible participants' accounts based on each participant's salary for the plan year). o the Company also matches a participant's rollover contribution, if any, to the 401(k) Plans, to the extent the participant invests his or her rollover contribution in Class A Common Stock at the time of his or her initial contribution to the 401(k) Plans. Discretionary Company contributions and Company matches of employee salary deferral contributions and rollover contributions are made in the form of Class A Common Stock, or in cash used to purchase Class A Common Stock. The Company has authorized and reserved for issuance up to 205,000 shares of Class A Common Stock in connection with the 401(k) Plans. Company contributions to the 401(k) Plans are subject to limitations under applicable laws and regulations. All employee contributions to the 401(k) Plans are fully vested at all times and all Company contributions, if any, vest 34% after two years of service with the Company (including years before the 401(k) Plans were established); 67% after three years of service and 100% after four years of service. A participant also becomes fully vested in Company contributions to the 401(k) Plans upon attaining age 65 or upon his or her death or disability. 49 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth as of the date of this prospectus certain information regarding the beneficial ownership of the Class A Common Stock and Class B Common Stock before and after this offering by: o each stockholder known to the Company to be the beneficial owner, as defined in Rule 13d-3 under the Exchange Act of more than 5% of the Class A Common Stock and Class B Common Stock, based upon Company records or the records of the SEC. o each director of the Company. o each of the most highly compensated officers whose total annual salary and bonus for the fiscal year ended December 31, 1998 exceeded $100,000. o all executive officers and directors of the Company as a group. The table also sets forth information regarding the beneficial ownership of Class A Common Stock and Class B Common Stock of each of the selling stockholders before and after this offering. The Class B Common Stock is currently convertible at the discretion of the holders into an equal amount of shares of Class A Common Stock. Each of the stockholders named below has sole voting power and sole investment power with respect to the shares shown as beneficially owned, unless otherwise stated.
Pegasus Class A Common Stock Shares Beneficially Owned Shares Prior to Offering Offered -------------------- --------- Number % Marshall W. Pagon(1)(2) ................. 6,752,840(3)(4)(5) 42.3 -- Robert N. Verdecchio .................... 282,206(5)(6)(7) 2.5 10,000 Howard E. Verlin ........................ 69,153(6)(7) * -- Ted S. Lodge ............................ 54,759(8) * -- James J. McEntee, III ................... 5,500(9) * -- Mary C. Metzger ......................... 5,500(9) * -- Donald W. Weber ......................... 293,420(10) 2.6 100,000 Harron Communications Corp. ............. 852,110 7.5 -- Columbia Capital Corporation(11) ........ 6,752,840(3)(4) 42.3 285,884 Columbia DBS, Inc.(11) .................. 6,752,840(3)(4) 42.3 18,316 Mark R. Warner(11) ...................... 511,892 4.5 200,000 David P. Mixer(11) ...................... 511,891 4.5 250,000 Robert B. Blow(11) ...................... 510,606 4.5 250,000 James B. Murray, Jr.(11) ................ 511,891 4.5 250,000 Mark J. Kington(11) ..................... 511,891 4.5 250,000 Whitney Equity Partners, L.P.(12) ....... 6,752,840(3)(4) 42.3 -- Fleet Entities(13) ...................... 6,752,840(3)(4) 42.3 -- Riordon B. Smith (14) ................... 6,752,840(3)(4) 42.3 -- Michael C. Brooks (15) .................. 6,752,840(3)(4) 42.3 -- Harry F. Hopper III (16) ................ 237,998 2.1 -- William P. Phoenix ...................... -- -- -- Richard D. Summe(17) .................... 177,181 1.6 50,000 Directors and Executive Officers as a Group (12 persons) (18) ................ 7,604,604 47.3 Pegasus Class B Pegasus Class A Common Stock Shares Common Stock Shares Beneficially Owned Beneficially Owned Prior to and After After Offering Offering ---------------------- ------------------------------ Shares % Shares % Marshall W. Pagon(1)(2) ................. 6,448,640 34.0 4,581,900(4) 100.0 Robert N. Verdecchio .................... 272,206 1.9 -- -- Howard E. Verlin ........................ 69,153 * -- -- Ted S. Lodge ............................ 54,759 * -- -- James J. McEntee, III ................... 5,500 * -- -- Mary C. Metzger ......................... 5,500 * -- -- Donald W. Weber ......................... 193,420 1.4 -- -- Harron Communications Corp. ............. 852,110 6.0 -- -- Columbia Capital Corporation(11) ........ 6,448,640 34.0 4,581,900(4) 100.0 Columbia DBS, Inc.(11) .................. 6,448,640 34.0 4,581,900(4) 100.0 Mark R. Warner(11) ...................... 311,892 2.2 -- -- David P. Mixer(11) ...................... 261,891 1.8 -- -- Robert B. Blow(11) ...................... 260,606 1.8 -- -- James B. Murray, Jr.(11) ................ 261,891 1.8 -- -- Mark J. Kington(11) ..................... 261,891 1.8 -- -- Whitney Equity Partners, L.P.(12) ....... 6,448,640 34.0 4,581,900(4) 100.0 Fleet Entities(13) ...................... 6,448,640 34.0 4,581,900(4) 100.0 Riordon B. Smith (14) ................... 6,448,640 34.0 4,581,900(4) 100.0 Michael C. Brooks (15) .................. 6,448,640 34.0 4,581,900(4) 100.0 Harry F. Hopper III (16) ................ 237,998 1.7 -- -- William P. Phoenix ...................... -- -- -- Richard D. Summe(17) .................... 127,181 * -- -- Directors and Executive Officers as a Group (12 persons) (18) ................ 7,190,404 37.7 4,581,900 100.0%
- ------------ * Represents less than 1% of the outstanding shares of Class A Common Stock. (1) The address of this person is c/o Pegasus Communications Management Company, 5 Radnor Corporate Center, Suite 454, 100 Matsonford Road, Radnor, Pennsylvania 19087. (2) Pegasus Capital, L.P. holds 1,217,348 shares of Class B Common Stock. Mr. Pagon is the sole shareholder of the general partner of Pegasus Capital, L.P. and is deemed to be the beneficial owner of these shares. All of the 3,364,552 remaining shares of Class B Common Stock are owned by Pegasus 50 Communications Holdings, Inc. and two of its subsidiaries. All the capital stock of Pegasus Communications Holdings, Inc. are held by Pegasus Communications Limited Partnership. Mr. Pagon controls Pegasus Communications Limited Partnership by reason of his ownership of all the outstanding voting stock of the sole general partner of a limited partnership that is, in turn, the sole general partner in Pegasus Communications Limited Partnership. Therefore, apart from the voting agreement described in note 4 below, Mr. Pagon is the beneficial owner of 100% of Class B Common Stock with sole voting and investment power over all such shares. (3) Includes 4,581,900 shares of Class B Common Stock, which are convertible into shares of Class A Common Stock on a one-for-one basis and 17,000 shares of Class A Common Stock which are issuable upon the exercise of the vested portion of outstanding stock options, and 42,500 shares of Class A Common Stock which are issuable upon the exercise of the portion of an outstanding stock option which vests on February 17, 1999. (4) Mr. Pagon, the Company, Pegasus Capital, L.P., the Parent, Pegasus Northwest Officer Corp, Pegasus Scranton Offer Corp, the Columbia Entities, which are discussed in note 12 below, Whitney and the Fleet Entities, which are discussed in note 14 below, have entered into the voting agreement, which provides that these parties vote all shares held by them in the manner specified in the voting agreement. As a consequence of being parties to the voting agreement, each of these parties is deemed to have shared voting power over certain shares beneficially owned by them in the aggregate for the purposes specified in the voting agreement. Therefore, the parties to the voting agreement are each deemed to be the beneficial owner with respect to 4,581,900 shares of Class B Common Stock and 6,752,840 shares of Class A Common Stock (including 4,581,900 shares of Class A Common Stock issuable upon conversion of the all outstanding shares of Class B Common Stock). The shares of Pegasus Class A Common Stock beneficially owned after the offering by this person have been adjusted to reflect the sale of 285,884 shares by Columbia Capital Corporation and the sale of 18,316 shares by Columbia DBS, Inc. See "Certain Relationships and Related Transactions -- Voting Agreement." (5) Includes 96,772 shares of Class A Common Stock held in the Company's 401(k) plan, over which Messrs. Pagon and Verdecchio share voting power in their capacities as co-trustees. (6) On March 26, 1997, the SEC declared effective a registration statement filed by Pegasus which would permit Messrs. Verdecchio and Verlin to sell shares of Class A Common Stock subject to certain vesting and other restrictions. As of the date of this prospectus, Mr. Verdecchio, a director of the Company, is permitted to sell 150,000 shares and Mr. Verlin 29,321 shares of Class A Common Stock pursuant to the registration statement. Messrs. Verdecchio and Verlin have sole voting and investment power over their shares, subject to certain vesting restrictions. (7) Includes 9,090 shares of Class A Common Stock which are issuable upon the exercises of the vested portion of outstanding stock options, and 20,000 shares of Class A Common Stock which are issuable upon the exercise of our outstanding stock option which vests on February 17, 1999. (8) Includes 1,500 shares of Class A Common Stock owned by Mr. Lodge's wife, of which Mr. Lodge disclaims beneficial ownership, 5,079 shares of Class A Common Stock issued to Mr. Lodge and his wife, subject to certain vesting restrictions, 9,090 shares of Class A Common Stock which are issuable upon the exercise of the vested portion of outstanding stock options and 30,000 shares of Class A Common Stock which are issuable upon the exercise of the portion of an outstanding stock option which vests on February 17, 1999. (9) Includes 2,500 shares of Class A Common Stock which are issuable upon the exercise of the vested portion of outstanding stock options, and 2,500 shares of Class A Common Stock which are issuable upon the exercise of the portion of our outstanding stock option which vests on February 17, 1999. (10) Includes 5,885 shares of Class A Common Stock issuable upon the exercise of the vested portion of outstanding stock options, and 2,500 shares of Class A Common Stock which are issuable upon the exercise of the portion of outstanding stock option which vests on February 17, 1999. Mr. Weber is a director of the Company. 51 (11) The Columbia Entities consist of Columbia Capital Corporation and Columbia DBS, Inc. Columbia Capital Corporation directly holds 285,884 shares of Class A Common Stock and Columbia DBS, Inc. directly holds 18,316 shares of Class A Common Stock. Columbia Capital Corporation has directors who also serve as directors of Columbia DBS, Inc. Columbia Capital Corporation and Columbia DBS, Inc. each disclaim beneficial ownership of all shares of Class A Common Stock held by the other entity. Messrs. Warner, Mixer, Blow, Murray and Kington are principals and/or substantial owners of Columbia Capital Corporation, a former stockholder of Digital Television Services, Inc., a subsidiary of Pegasus. Columbia Capital Corporation has certain rights under the Voting Agreement described in note 4. The address of each of the Columbia Entities is 201 N. Union Street, Suite 300, Alexandria, Virginia 22314-2642. (12) Includes 959,473 shares of Class A Common Stock held directly by Whitney over which it has, with the exception of matters covered by the voting agreement, sole voting and investment power. The shares of Class A Common Stock held directly by Whitney represent 8.5% of the shares of Class A Common Stock. The address of Whitney is 177 Broad Street, Stamford, Connecticut 06901. (13) The Fleet Entities consist of Fleet Venture Resources, Inc., Fleet Equity Partners VI, L.P., Chisholm Partners III, L.P. and Kennedy Plaza Partners. Each Fleet Entity holds the following number of shares of Class A Common Stock: Fleet Venture Resources (406,186); Fleet Equity Partners (174,079); Chisholm (147,611); and Kennedy Plaza Partners (10,179). The address of each of the Fleet Entities is 50 Kennedy Plaza, RI MO F12C, Providence, Rhode Island 02903. (14) The information for Mr. Smith includes the shares of Class A Common Stock held by the Fleet Entities. Mr. Smith is a Senior Vice President of each of the managing general partners of Fleet Equity, a Senior Vice President of Fleet Venture Resources, a Senior Vice President of the corporation that is the general partner of the partnership that is the general partner of Chisholm and a partner of Kennedy. He is a Senior Vice President of Fleet Growth Resources II, Inc. and Silverado IV Corp. (the two general partners of Fleet Equity Partners) and Senior Vice President of Fleet Venture Resources and Silverado III Corp. (the general partner of the partnership Silverado III, L.P., which is the general partner of Chisholm). Mr. Smith disclaims beneficial ownership for all shares held directly by Fleet Venture Resources and all shares held directly by Fleet Equity Partners, Chisholm and Kennedy, except for his pecuniary interest therein. The address of this person is 50 Kennedy Plaza, RI MO F12C, Providence, Rhode Island 02903. (15) The information for Mr. Brooks includes 959,473 shares of Class A Common Stock held by Whitney. Mr. Brooks has shared voting and investment power over such shares of Class A Common Stock with the managing members of the general partner of Whitney and disclaims beneficial ownership of such shares of Class A Common Stock. The address of this person is 177 Broad Street, Stamford, Connecticut 06901. (16) The information for Mr. Hopper excludes 18,316 shares of Class A Common Stock held by Columbia DBS, Inc. Mr. Hopper is a shareholder of Columbia Capital Corporation and Columbia DBS, Inc. Mr. Hopper disclaims beneficial ownership of the shares of Common Stock held by Columbia DBS, Inc. The Company will purchase 50,000 shares of Class A Common Stock from Mr. Hopper shortly after the completion of this offering. See "Certain Relationships and Related Transactions -- Other Transactions." (17) Mr. Summe received shares of Class A Common Stock of the Company in 1997, as consideration for the acquisition of a company by Pegasus in which Mr. Summe had an ownership interest. (18) See the notes above for information about the holdings of the directors and named executive officers. 52 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Split Dollar Agreement In December 1996, the Company entered into a split dollar agreement with the trustees of an insurance trust established by Marshall W. Pagon. Under the split dollar agreement, the Company agreed to pay a portion of the premiums for certain life insurance policies covering Mr. Pagon owned by the insurance trust. The agreement provides that the Company will be repaid for all amounts it expends for such premiums, either from the cash surrender value or the proceeds of the insurance policies. The actuarial benefit to Mr. Pagon of premiums paid by the Company amounted to $53,728 in 1996, $53,728 in 1997 and $53,728 in 1998. ViewStar DBS Acquisition Effective October 31, 1997, the Company acquired DIRECTV distribution rights for certain rural areas of Georgia and related assets from ViewStar Entertainment Services, Inc. Prior to the acquisition, Donald W. Weber, a director of the Company, was President and Chief Executive Officer of ViewStar and together with his son owned approximately 73% of the outstanding stock of ViewStar. The purchase price of the ViewStar acquisition consisted of approximately $6.4 million in cash and 397,035 shares of Class A Common Stock. The acquisition involved the execution of noncompetition agreements by Mr. Weber and his son and the execution of a shareholders agreement (which included the granting of certain registration rights on the shares of Class A Common Stock issued in connection with the acquisition). Relationship with W.W. Keen Butcher and Affiliated Entities The Company entered into an arrangement in 1998 with W.W. Keen Butcher (the stepfather of Marshall W. Pagon and Nicholas A. Pagon), certain entities controlled by him (the "KB Companies") and the owner of a minority interest in one of the KB Companies, under which the Company agreed to provide and maintain collateral for up to $4.0 million in principal amount of bank loans to Mr. Butcher and the minority owner. Mr. Butcher and the minority owner must lend or contribute the proceeds of those bank loans to one or more of the KB Companies for the acquisition of television broadcast stations to be operated by the Company pursuant to local marketing agreements. Under this arrangement, on November 10, 1998, the Company sold to one of the KB Companies the FCC license for the television station then known as WOLF (now known as WSWB), one of the Company's television stations serving the Northeastern Pennsylvania designated market area, and leased back certain related assets, including leases and subleases for studio, office, tower and transmitter space and equipment, for a cash payment of $500,000 and ongoing rental payments of approximately $25,000 per year. Mr. Butcher and the minority owner borrowed the $500,000 under the loan collateral arrangement described above. Concurrently with the closing under the agreement described above, KB Company assumed a local marketing agreement, under which the Company provides programming to WSWB and retains all revenues generated from advertising in exchange for payments to the KB Company of $4,000 per month plus reimbursement of certain expenses. The term of the local marketing agreement is three years, with two three-year automatic renewals. The KB Company also granted the Company an option to purchase the station license and assets if it becomes legal to do so for the costs incurred by the KB Company relating to the station, plus compound interest at 12% per year. On July 2, 1998, the Company assigned to one of the KB Companies its option to acquire the FCC authorization for television station WFXU, which rebroadcasts WTLH pursuant to a local marketing agreement. The KB Company will pay to the Company $50,000 for the option upon the FCC's approval of the authorization's transfer to KB, and will assume the obligations of the authorization's former owner under the local marketing agreement with the Company. The $50,000 will be borrowed under the loan collateral arrangement, and the KB Company will grant to the Company an option to purchase the station on essentially the same terms described above for WOLF. The local marketing agreement provides for a reimbursement of expenses by the Company and a term of five years, with one automatic five-year renewal. 53 The Company believes that the WOLF and WFXU transactions were done at fair value and that any future transactions that may be entered into with KB or similar entities will also be done at fair value. DTS Acquisition On April 27, 1998, the Company acquired Digital Television Services, Inc. through the merger of a subsidiary of the Company into DTS. Prior to the DTS merger, DTS was the second largest independent provider of DIRECTV services serving 140,000 subscribers in ten states and reaching approximately 140,000 subscribers. In connection with the DTS merger, Pegasus issued approximately 5,500,000 shares of its Class A Common Stock to the stockholders of DTS and assumed approximately $159 million of debt as of December 31, 1997 and granted registration rights to certain of DTS' stockholders, including Columbia, Whitney, the Fleet Entities and Harry F. Hopper, III. Mr. Hopper received shares of Class A Common Stock in the DTS merger and has an ownership interest in Columbia, which received 429,812 shares. As a result of the DTS merger and pursuant to the voting agreement described below, Michael C. Brooks, Harry F. Hopper, III and Riordon B. Smith were elected to the Company's Board of Directors. Voting Agreement On April 27, 1998, in connection with the DTS merger, the Company, Marshall W. Pagon and a number of partnerships and corporations controlled by him, and Fleet Venture Resources, Fleet Equity Partners, Chisholm Partners III, L.P., Kennedy Plaza Partners, Whitney Equity Partners, Columbia Capital Corporation and Columbia DBS, Inc. entered into a voting agreement. The voting agreement covers all shares of Class B Common Stock and other voting securities of Pegasus held at any time by Mr. Pagon and his controlled entities and shares of Class A Common Stock received in the DTS merger by Chisholm, Columbia, Whitney and the other former stockholders of DTS and provides that holders of such shares vote their respective shares in the manner specified in the voting agreement. In particular, the voting agreement establishes that the Board of Directors of the Company will consist initially of nine members: three independent directors (as this term is defined in the voting agreement), three directors designated by Mr. Pagon and one director to be designated by each of Chisholm, Columbia and Whitney. The voting agreement also provides that the committees of the Board of Directors will consist of an audit committee, a compensation committee and a nominating committee, with each committee consisting of one independent director, one director designated by Mr. Pagon and one director designated by a majority of the directors designated by Chisholm, Columbia and Whitney. As a result of the voting agreement, the parties to the agreement have sufficient voting power without the need for the vote of any other shareholder, to elect the entire Board of Directors. James J. McEntee, III, Mary C. Metzger and Donald W. Weber are serving as independent directors of the Company. Marshall W. Pagon, Robert N. Verdecchio and William P. Phoenix are serving as directors of the Company as designees of Mr. Pagon. Harry F. Hopper, III is serving as a director of the company as a designee of Columbia; Michael C. Brooks is serving as a director of the Company as a designee of Whitney; and Riordon B. Smith is serving as a director of the Company as a designee of Chisholm. The voting agreement terminates with respect to any covered share upon the sale or transfer of any such share to any person other than a permitted transferee. In addition, the right of Chisholm, Columbia and Whitney to designate a director terminates when the Fleet Entities, Columbia and Whitney cease owning one-half of the shares originally received by each of them in the DTS Merger or in certain other circumstances. CIBC Oppenheimer and Affiliates William P. Phoenix is a managing director of CIBC Oppenheimer Corp. CIBC Oppenheimer Corp. and its affiliates have provided various services to Pegasus and its subsidiaries (including DTS) since the beginning of 1997. Services to DTS described below include services provided prior to DTS becoming a subsidiary of Pegasus on April 27, 1998. 54 CIBC Oppenheimer Corp. served as one of the underwriters in Pegasus' January 1997 unit offering of preferred stock and warrants to purchase shares of Class A Common Stock, one of the initial purchasers in Pegasus' November 1998 Rule 144A offering of senior notes, the sole initial purchaser in Pegasus' October 1997 Rule 144A offering of senior notes, and one of the initial purchasers in DTS' July 1997 Rule 144A offering of senior subordinated notes. In these capacities, CIBC has received customary underwriting discounts and commissions. CIBC has also acted as agent and/or lender to Pegasus and its subsidiaries as follows: o agent and a lender in connection with a $130.0 million credit facility entered into by Pegasus Satellite Holdings, Inc. in July 1997, which was terminated in October 1997 and repaid with proceeds of Pegasus' October 1997 senior notes offering; o agent and a lender in connection with a $50.0 million credit facility entered into by Pegasus Media & Communications, Inc. in August 1996 and terminated in December 1997 upon PM&C entering into its current credit facility; and o arranger, administrative agent and a lender in connection with DTS' $90.0 million credit facility, which was entered into in November 1996 and currently remains in effect. For its services, CIBC received customary closing and agent fees. In addition to serving in these capacities, CIBC has provided a fair market value appraisal in connection with the contribution of certain assets between related parties and fairness opinions to Pegasus and/or its subsidiaries in connection with certain related party transaction (the acquisition of ViewStar from Donald W. Weber, a director of Pegasus, an intercompany loan from Pegasus to one of its subsidiaries and certain other intercompany transactions) and has served as solicitation agent with respect to certain amendments to Pegasus' 12 3/4% Series A Cumulative Exchangeable Preferred Stock due 2007 and as a standby purchaser in connection with DTS' offer to repurchase its senior subordinated notes as a result of the change of control arising from Pegasus' acquisition of DTS. Pegasus believes that all fees paid to CIBC in connection with these transactions were customary. During 1997, Pegasus (or its subsidiaries) paid an aggregate of $5,574,000 and DTS paid $2,130,000 to CIBC. These amounts represented CIBC's proportionate share of underwriting discounts and commissions and fees incurred in its capacity as a lender and/or agent under its credit facilities with Pegasus and its subsidiaries and with DTS. In 1998, for services rendered, Pegasus or its subsidiaries, including DTS, paid or will pay to CIBC an aggregate of $3.3 million in fees. Pegasus anticipates that it or its subsidiaries may engage the services of CIBC in the future, although no such engagement is currently contemplated. Other Transactions In December 1998, the Company agreed to lend $199,999 to Nicholas A. Pagon, the Company's Vice President of Broadcast Operations, bearing interest at the rate of 6% per annum, with the principal amount due on the fifth anniversary of the date of the promissory note. The loan has not yet been funded. Mr. Pagon is required to use half of the proceeds of the loan to purchase shares of Class A Common Stock, and the loan will be collateralized by those shares. The balance of the loan proceeds may be used at Mr. Pagon's discretion. On January 19, 1998, Pegasus agreed to purchase 50,000 shares of Class A Common Stock from Harry F. Hopper III, one of its directors, for a cash price equal to the public offering price in this offering less underwriting discount. The transaction is expected to be completed shortly after the closing of this offering. 55 DESCRIPTION OF CERTAIN INDEBTEDNESS Information with respect to our indebtedness is contained below and in the Section "Risk Factors -- Other Risks of Our Business -- Substantial Indebtedness" on page 12 of this prospectus. Our principal indebtedness is owned by corporations at different levels of our corporate structure: o PM&C: Pegasus Media & Communications, Inc., a subsidiary of Pegasus Communications Corporation, owes the indebtedness described below under "PM&C Credit Facility" and "PM&C Notes." Most of PM&C's subsidiaries have guaranteed that indebtedness. PM&C conducts (through subsidiaries) approximately 58% of our DBS business (measured by subscribers) and all of our broadcast and cable business. o DTS: Digital Television Services, Inc., a subsidiary of Pegasus Communications Corporation, owes the indebtedness described below under "DTS Credit Facility" and "DTS Notes." DTS' subsidiaries have guaranteed that indebtedness. DTS conducts (through a subsidiary) the DBS business that we acquired in the DTS merger in April 1998 which currently equals 42% of our DBS business (measured by subscribers) . o Pegasus: Pegasus Communications Corporation, whose stock is being offered in this offering, owes the indebtedness described below under "1998 Notes and 1997 Notes." None of Pegasus' subsidiaries have guaranteed that indebtedness. Pegasus is also the issuer of the Series A Preferred Stock described in the next section ("Description of Capital Stock"). If Pegasus elects to exchange the Series A Preferred Stock for the Exchange Notes described below in this section, Pegasus would owe the indebtedness under the Exchange Notes. PM&C Credit Facility In December 1997, Pegasus' wholly-owned subsidiary, Pegasus, Media & Communications, Inc., entered into a $180.0 million six-year, secured, reducing revolving credit facility. PM&C can use borrowings under the credit facility for acquisitions and general corporate purposes. The following summary of the material provisions of the credit facility is not complete, and is subject to all the provisions of the credit facility. All subsidiaries of PM&C, with certain exceptions, are guarantors of the credit facility, which is collateralized, with certain exceptions, by a security interest in all assets of, and all stock in PM&C's subsidiaries. The credit facility is also secured by a pledge by Pegasus of its stock in PM&C. Borrowings under the credit facility bear interest at LIBOR or the prime rate (as selected by the Company) plus spreads that vary with Pegasus' ratio of total debt to a measure of its cash flow. The credit facility requires an annual commitment fee of 0.5% of the unused portion of the revolving credit commitment. The credit facility requires PM&C to purchase an interest rate hedging contract covering an amount equal to at least 50% of the total amount of borrowings from the revolving credit facility for at least the first three years of the credit facility. The PM&C credit facility requires prepayments and concurrent reductions of the commitment from asset sales or other transactions outside the ordinary course of business (subject to provisions permitting the proceeds of certain sales to be used to make approved acquisitions within stated time periods without reducing the commitments of the lenders). The credit facility: o limits the amounts of indebtedness that PM&C and its subsidiaries may incur, o requires PM&C to maintain a maximum leverage ratio, a minimum interest coverage, and a minimum fixed charge coverage, and o limits dividends and other restricted payments. Unless there is a default under the credit facility, PM&C can distribute to Pegasus enough money to pay its interest and dividend obligations under its publicly held debt securities and, after July 1, 2002, its Series A Preferred Stock. The credit facility contains other customary covenants, representations, warranties, indemnities, conditions precedent to closing and borrowing, and events of default. 56 Beginning September 30, 1999, the revolving credit commitments under the credit facility will reduce in quarterly amounts ranging from $2.7 million per quarter in 1999 to approximately $16.7 million in 2003. DTS Credit Facility In July 1997, Digital Television Services, Inc., now a wholly-owned subsidiary of Pegasus, entered into an amended and restated revolving credit facility to provide for o revolving credit in the current amount of $70.0 million, with a $50.0 million sublimit for letters of credit, and o a $20.0 million term loan facility. DTS can use borrowings under the DTS credit facility for acquisitions, for capital expenditures, working capital and general corporate purposes. The following summary of the material provisions of the credit facility is not complete, and is subject to all of the provisions of the credit facility. All subsidiaries of DTS are guarantors of the credit facility, which is collateralized by a first priority security interest in all assets of, and a pledge of all the equity interests in, DTS's direct and indirect subsidiaries. Borrowings under the credit facility bear interest at LIBOR or the prime rate (as selected by DTS) plus spreads that vary with DTS' ratio of total debt to a measure of its cash flow. The term loan must be repaid in 20 consecutive quarterly installments of $200,000 each commencing September 30, 1998 with the remaining balance due on July 30, 2003. Borrowings under the revolving credit facility will be available to DTS until July 31, 2003. The commitments under the DTS credit facility will reduce quarterly commencing on September 30, 1999 at a rate of 3.5% per quarter through 1999, 5.75% per quarter in 2000, 7.0% per quarter in 2001, 9.0% per quarter in 2002 and 3.0% per quarter until June 30, 2003. All of the loans outstanding will be repayable on July 31, 2003. The making of each loan under the credit facility is subject to the satisfaction of certain conditions, including not exceeding a "borrowing base" based on the number of paying subscribers and households within the rural DIRECTV service territories served by DTS. The credit facility requires DTS to: o maintain minimum subscriber penetration levels; o maintain annualized contribution per paying subscriber levels based on net income plus certain sales, administrative and payroll expenses; o maintain a maximum ratio of total debt to equity beginning in the first quarter of 2000; o maintain a maximum ratio of total senior debt to annualized operating cash flow and a ratio of total debt to annualized operating cash flow beginning in the first quarter of 2000; o maintain a maximum ratio of total debt to adjusted annualized operating cash beginning in the first quarter of 1999 and continuing until the last quarter of 2000; and o maintain a maximum percentage of general and administrative expenses to revenues. In addition, the credit facility provides that DTS will be required to make mandatory prepayments from the net proceeds of certain sales or other dispositions by DTS or any of its subsidiaries of material assets and with 50% of any excess operating cash flow with respect to any fiscal year after the fiscal year ending December 31, 1998. 1998 Notes Pegasus has outstanding $100.0 million in aggregate principal of 9 3/4% Senior Notes due 2006 (the "1998 Notes"). The 1998 Notes are subject to an indenture between Pegasus and First Union National Bank, as trustee. The following summary of the material provisions of the 1998 Notes indenture is not complete, and is subject to all of the provisions of the indenture and those terms made a part of the indenture by the Trust Indenture Act of 1939, as amended. 57 General. The 1998 Notes will mature on December 1, 2006 and bear interest at 9 3/4% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 1999. The 1998 Notes are general unsecured obligations of Pegasus and rank senior in right of payment to all existing and future subordinated debt of Pegasus and rank equal in right of payment with all existing and future senior debt. Pegasus' obligations under the 1998 Notes may be guaranteed on a senior unsecured basis, jointly and severally, by each subsidiary of Pegasus that executes a supplemental indenture to the 1998 indenture. Optional Redemption. The 1998 Notes may be redeemed, in whole or in part, at the option of the Company on or after December 1, 2002, at the redemption prices (plus accrued interest) starting at 104.875% of principal during the 12-month period beginning December 1, 2002 and declining annually to 100% of principal on December 1, 2005 and thereafter. Pegasus also has the right, until December 1, 2001, to use the net proceeds of one or more offerings of its capital stock to redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 109.750% of the principal, plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption. If Pegasus does this, it must leave at least $65.0 million of the 1998 Notes outstanding, and the redemption must occur within 90 days of the date of closing of the offering of its capital stock. Change of Control. If a change of control occurs, each holder of 1998 Notes will have the right to require the Company to repurchase all or a portion of the holder's 1998 Notes at purchase price equal to 101% of the principal, plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of repurchase. Generally, a "change of control" includes any of the following: o the sale of all or substantially all of Pegasus' assets to any person other than Marshall W. Pagon or his related parties, as described in the indenture, o the adoption of a plan relating to the liquidation or dissolution of Pegasus, o the consummation of any transaction in which a person becomes the beneficial owner of more of the voting power of all our voting stock than is beneficially owned at such time by Mr. Pagon and his related parties, o the consummation of any transaction in which Mr. Pagon and his related parties cease to have at least 30% of the combined voting power of all of our voting stock, or Mr. Pagon and his affiliates acquire in the aggregate beneficial ownership of more than 66 2/3% of our Class A Common Stock, or o the first day on which a majority of the members of the Board of Directors of Pegasus are not "continuing directors" -- essentially, the current directors and replacements elected or recommended by the current directors or by such replacements. Certain Covenants. The 1998 Notes indenture contains a number of covenants restricting the operations of Pegasus, which, among other things, limit the ability of Pegasus to incur additional indebtedness, pay certain dividends or make distributions, make certain investments, sell assets, issue subsidiary stock, restrict distributions from subsidiaries, create certain liens, enter into certain consolidations or mergers and enter into certain transactions with affiliates. Exchange Offer; Registration Rights. Pursuant to a registration rights agreement among Pegasus and the initial purchasers of the 1998 Notes, Pegasus has agreed to file a registration statement with respect to an offer to exchange the 1998 Notes for a new issue of debt securities of Pegasus registered under the Securities Act, with terms substantially identical to those of the 1998 Notes. Under certain circumstances, Pegasus may be required to provide a shelf registration statement to cover resales of the 1998 Notes by holders. If Pegasus fails to satisfy these registration obligations, it will be required to pay liquidated damages to the holders of 1998 Notes under certain circumstances. Events of Default. Events of default under the 1998 Notes indenture include the following: o a default for 30 days in the payment when due of interest on, or liquidated damages with respect to, the 1998 Notes; o default in payment when due of the principal of or premium, if any, on the 1998 Notes; 58 o failure by Pegasus or any subsidiary to comply with certain provisions of the 1998 Notes indenture (subject, in some but not all cases, to notice and cure periods); o default under certain items of indebtedness for money borrowed by Pegasus or certain of its subsidiaries; o failure by Pegasus or certain of its subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; or o certain events of bankruptcy or insolvency with respect to Pegasus or certain of its subsidiaries. If an event of default occurs, with certain exceptions, the trustee under the 1998 Notes indenture or the holders of at least 25% in principal amount of the then outstanding 1998 Notes may accelerate the maturity of all the 1998 Notes. 1997 Notes Pegasus has outstanding $115.0 million in aggregate principal amount of its 9 5/8% Senior Notes due 2005 (the "1997 Notes"). The 1997 Notes are subject to an indenture between Pegasus and First Union National Bank, as trustee. The following summary of the material provisions of the indenture is not complete, and is subject to all of the provisions of the 1997 Indenture and those terms made a part of the indenture by the Trust Indenture Act. General. The 1997 Notes will mature on October 15, 2005 and bear interest at 9 5/8% per annum, payable semi-annually in arrears on April 15 and October 15 of each year. The 1997 Notes are general unsecured obligations of Pegasus and rank senior in right of payment to all existing and future subordinated debt of Pegasus and rank in equal in right of payment with all existing and future senior debt. Pegasus' obligations under the 1997 Notes may be guaranteed on a senior unsecured basis, jointly and severally, by each subsidiary of Pegasus that executes a supplemental indenture. Optional Redemption. The 1997 Notes may be redeemed, in whole or in part, at the option of the Company on or after October 15, 2001, at the redemption prices (plus accrued interest) starting at 104.813% of principal during the 12-month period beginning October 15, 2001 and declining annually to 100% of principal on October 15, 2003 and thereafter. Pegasus also has the right, until October 21, 2000, to use the net proceeds of one or more offerings of its capital stock to redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 109.625% of the principal, plus accrued and unpaid interest to the date of redemption. If Pegasus does this, it must leave at least $75.0 million of the notes outstanding after the redemption, and the redemption must occur within 90 days of the date of closing of the offering of capital stock of Pegasus. Change of Control. If a change of control of Pegasus occurs, each holder of the 1997 Notes may require the Company to repurchase all or a portion of the holder's 1997 Notes at a purchase price equal to 101% of the principal, together with accrued and unpaid interest and liquidated damages thereon, if any, to the date of repurchase. Generally, a "change of control," includes any of the following events: o the sale of all or substantially all of Pegasus' assets to any person other than Marshall W. Pagon or his related parties, as described in the indenture, o the adoption of a plan relating to the liquidation or dissolution of Pegasus. o the consummation of any transaction in which a person becomes the beneficial owner of more of the voting power of all our voting stock than is beneficially owned at such time by Mr. Pagon and his related parties, o the consummation of any transaction in which Mr. Pagon and his related parties cease to have at least 30% of the combined voting power of all of our voting stock, or Mr. Pagon and his affiliates acquire in the aggregate beneficial ownership of more than 66 2/3% of our Class A Common Stock, or 59 o the first day on which a majority of the members of the Board of Directors of Pegasus are not "continuing directors" -- essentially, the current directors and replacements elected or recommended by the current directors or by such replacements. Certain Covenants. The 1997 Notes indenture contains a number of covenants restricting the operations of Pegasus, which, among other things, limit the ability of Pegasus to incur additional indebtedness, pay certain dividends or make distributions, make certain investments, sell assets, issue subsidiary stock, restrict distributions from subsidiaries, create certain liens, enter into certain consolidations or mergers and enter into certain transactions with affiliates. Events of Default. Events of default under the indenture include the following: o a default for 30 days in the payment when due of interest on the 1997 Notes; o default in payment when due of the principal of or premium, if any, on the 1997 Notes; o failure by the Company to comply with certain provisions of the indenture (subject, in some but not all cases, to notice and cure periods); o default under certain items of indebtedness for money borrowed by Pegasus or certain of its subsidiaries; o failure by Pegasus or certain of its subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; or o certain events of bankruptcy or insolvency with respect to Pegasus or certain of its subsidiaries. If an event of default occurs, with certain exceptions, the trustee under the 1997 Notes indenture or the holders of at least 25% in principal amount of the then outstanding 1997 Notes may accelerate the maturity of all the 1997 Notes. PM&C Notes PM&C has outstanding $85.0 million in aggregate principal amount of its 12 1/2% Series B Senior Subordinated Notes due 2005. The PM&C Notes are subject to an indenture among PM&C, certain of its direct and indirect subsidiaries, as guarantors, and First Union National Bank, as trustee. The following summary of the material provisions of the indenture is not complete, and is subject to all of the provisions of the indenture and those terms made a part of the indenture by the Trust Indenture Act. General. The PM&C Notes will mature on July 1, 2005 and bear interest at 12 1/2% per annum, payable semi-annually on January 1 and July 1 of each year. The PM&C Notes are general unsecured obligations of PM&C and are subordinated in right of payment to all existing and future senior debt of PM&C. The PM&C Notes are unconditionally guaranteed, on an unsecured senior subordinated basis, jointly and severally, by the guarantor subsidiaries. Optional Redemption. The PM&C Notes are subject to redemption at any time, at the option of PM&C, in whole or in part, on or after July 1, 2000 at redemption prices (plus accrued interest) starting at 106.25% of principal during the 12-month period beginning July 1, 2000 and declining annually to 100% of principal on July 1, 2003 and thereafter. Change of Control. If a change of control of Pegasus occurs, each holder of the PM&C Notes may require PM&C to repurchase all or a portion of the holder's PM&C Notes at a purchase price equal to 101% of the principal, together with accrued and unpaid interest and liquidated damages thereon, if any, to the date of repurchase. Generally, a "change of control," includes any of the following events: o the sale of all or substantially all of PM&C's assets to any person other than Marshall W. Pagon or his related parties, as described in the indenture; o the adoption of a plan relating to the liquidation or dissolution of PM&C; 60 o the consummation of any transaction in which a person becomes the beneficial owner of more of the voting stock of Pegasus than is beneficially owned at that time by Mr. Pagon and his related parties; or o the first day on which a majority of the members of the Board of Directors of PM&C or Pegasus are not "continuing directors" -- essentially, the current directors and replacements elected or recommended by the current directors or by such replacements. Subordination. The PM&C Notes are general unsecured obligations of PM&C and are subordinate to all existing and future senior debt of PM&C. The PM&C Notes rank senior in right of payment to all junior subordinated indebtedness of PM&C. The subsidiary guarantees are general unsecured obligations of the guarantors of the PM&C Notes and are subordinated to the senior debt and to the guarantees of senior debt of the guarantors. The subsidiary guarantees rank senior in right of payment to all junior subordinated indebtedness of the guarantors. Certain Covenants. The PM&C Notes indenture contains a number of covenants restricting the operations of PM&C, which, among other things, limit the ability of PM&C to incur additional indebtedness, pay dividends or make distributions, make certain investments, sell assets, issue subsidiary stock, restrict distributions from subsidiaries, create certain liens, enter into certain consolidations or mergers and enter into certain transactions with affiliates. Events of Default. Events of default under the PM&C Notes indenture include the following: o a default for 30 days in the payment when due of interest on, or liquidated damages with respect to, the PM&C Notes; o default in payment when due of the principal of or premium, if any, on the PM&C Notes; o failure by PM&C to comply with certain provisions of the indenture (subject, in some but not all cases, to notice and cure periods); o default under certain items of indebtedness for money borrowed by PM&C or certain of its subsidiaries; o failure by PM&C or certain of its subsidiaries to pay final judgments aggregating in excess of $2.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; o except as permitted by the indenture, any subsidiary guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any subsidiary guarantor, or any person acting on behalf of any guarantor, shall deny or disaffirm its obligations under its subsidiary guarantee; or o certain events of bankruptcy or insolvency with respect to PM&C or certain of its subsidiaries. If an event of default occurs, with certain exceptions, the trustee under the indenture or the holders of at least 25% in principal amount of the then outstanding PM&C Notes may accelerate the maturity of all the PM&C Notes as provided in the indenture. DTS Notes Digital Television Services, Inc. has outstanding $155.0 million in aggregate principal amount of its 12 1/2% Series B Senior Subordinated Notes due 2007 (the "DTS Notes"). The DTS Notes are subject to an indenture among DTS, certain of its direct and indirect subsidiaries, as guarantors, and The Bank of New York, as trustee. The following summary of the material provisions of the DTS indenture is not complete, and is subject to all of the provisions of the DTS indenture and those terms made a part of the DTS indenture by the Trust Indenture Act. General. The DTS Notes will mature on August 1, 2007 and bear interest at 12 1/2% per annum, payable semi-annually on February 1 and August 1 of each year. The DTS Notes are general obligations of DTS. 61 Except for a first priority security interest granted in an interest escrow account to provide for payment of the installments of interest on the DTS Notes due through August 1, 1999, the DTS Notes are unsecured. The DTS Notes are unconditionally guaranteed, on an unsecured senior subordinated basis, jointly and severally, by the DTS guarantor subsidiaries. Optional Redemption. The DTS Notes are subject to redemption at any time, at the option of DTS, in whole or in part, on or after August 1, 2002 at redemption prices (plus accrued interest) starting at 106.25% of principal during the 12-month period beginning August 1, 2002 and declining annually to 100% of principal on August 1, 2005 and thereafter. In addition, prior to August 1, 2000, DTS may redeem up to 35% of the aggregate principal amount of the notes with the net proceeds of certain public or private offerings of its common equity to the extent such proceeds are contributed (within 120 days of any such offering) to DTS as common equity, at a price equal to 112.5% of the principal amount plus accrued interest. If DTS does this, it must leave at least 65% of the DTS Notes outstanding. Change of Control. If a change of control occurs, each holder of the DTS Notes may require DTS to repurchase all or a portion of the holder's DTS Notes at a purchase price equal to 101% of principal, together with accrued and unpaid interest and liquidated damages, if any, to the date of repurchase. Generally, a "change of control," means any of the following, with certain exceptions: o any person becomes the beneficial owner of more than 45% of the total voting power of DTS' outstanding equity interests; o a change in the composition of DTS' board of directors over any two-year period such that the individuals who constitute the board of directors at the beginning of the period (together with any new directors whose election was approved by a majority of the directors who were either directors at the beginning of the period or whose election was previously so approved) cease to constitute a majority of the board of directors; or o the liquidation or dissolution of DTS. Subordination. The DTS Notes are general unsecured obligations of DTS and are subordinate to all existing and future senior debt of DTS. The DTS Notes rank senior in right of payment to all junior subordinated debt of DTS. The guarantees of the guarantors of the DTS Notes are general unsecured obligations of the guarantors and are subordinated to the senior debt and to guarantees of senior debt of the guarantors. The guarantees of the DTS Notes by the guarantors rank senior in right of payment to all junior subordinated debt of the guarantors. Certain Covenants. The DTS indenture contains a number of covenants restricting the operations of DTS, which, among other things, limit the ability of DTS to incur additional indebtedness, pay dividends or make distributions, make certain investments, sell assets, issue subsidiary stock, restrict distributions from subsidiaries, create certain liens, enter into certain consolidations or mergers and enter into certain transactions with affiliates. Events of Default. Events of default under the DTS indenture include the following: o a default for 30 days in the payment when due of interest on, or liquidated damages with respect to, the DTS Notes; o default in payment when due of the principal of or premium, if any, on the DTS Notes; o failure by DTS to comply with certain provisions of the DTS Notes indenture (subject, in some but not all cases, to notice and cure periods); o default under certain items of indebtedness for money borrowed by DTS or any of its significant restricted subsidiaries in the amount of $5.0 million or more; o failure by DTS or any restricted subsidiary that would be a significant subsidiary to pay final judgments aggregating in excess of $2.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; 62 o except as permitted by the DTS Notes indenture, any subsidiary guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any subsidiary guarantor, or any person acting on behalf of any guarantor, shall deny or disaffirm its obligations under its subsidiary guarantee; or o certain events of bankruptcy or insolvency with respect to DTS or certain of its subsidiaries. If an event of default occurs, with certain exceptions, the trustee under the DTS Notes indenture or the holders of at least 25% in principal amount of the then outstanding DTS Notes may accelerate the maturity of all the DTS Notes. Exchange Notes Pegasus may, at its option, under certain circumstances exchange, in whole, but not in part, the then outstanding shares of Series A Preferred Stock for Exchange Notes. The Exchange Notes will, if and when issued, be issued pursuant to an indenture between Pegasus and First Union National Bank, as trustee. The terms of the Exchange Notes include those stated in the Exchange Note indenture and those made part of the Exchange Note indenture by reference to the Trust Indenture Act. The following summary of certain provisions of the Exchange Note Indenture is not complete, and is subject to all of the provisions of the Exchange Note indenture. Principal, Maturity and Interest. The Exchange Notes will mature on January 1, 2007. Interest on the Exchange Notes will accrue at the rate of 12 3/4% per annum and will be payable semi-annually in arrears on January 1 and July 1 of each year. Interest will be payable in cash, except that on each interest payment date occurring prior to January 1, 2002, interest may be paid, at Pegasus' option, by the issuance of additional Exchange Notes having an aggregate principal amount equal to the amount of such interest. Subordination. The payment of principal or, premium, if any, and interest on the Exchange Notes will be subordinated in right of payment, as described in the Exchange Note indenture, to the prior payment in full of all senior debt, whether outstanding on the date of the Exchange Note indenture or thereafter incurred. Optional Redemption. The Exchange Notes will not be redeemable at Pegasus' option prior to January 1, 2002. The Exchange Notes may be redeemed, in whole or in part, at the option of Pegasus on or after January 1, 2002, at the redemption prices, in each case, together with accrued and unpaid interest, if any, starting at 106.375% of principal during the 12-month period beginning January 1, 2002 and declining annually to 100% of principal on January 1, 2005 and thereafter. In addition, prior to January 1, 2000, Pegasus may, on any one or more occasions, use the net proceeds of one or more offerings of its Class A Common Stock to redeem up to 25% of the aggregate principal amount of the notes (whether issued in exchange for Series A Preferred Stock or in lieu of cash interest payments) at the redemption price of 112.750% of principal plus accrued and unpaid interest to the date of redemption. If Pegasus does this, it must leave at least $75.0 million of the notes outstanding, and the redemption must occur within 90 days of the date of closing of the offering. Change of Control. If a change of control of Pegasus occurs, each holder of Exchange Notes will have the right to require Pegasus to repurchase all or any part of the holder's Exchange Notes at an offer price in cash equal to 101% of the aggregate principal plus accrued and unpaid interest, if any, thereon to the date of purchase. See the description of our Series A Preferred Stock under "Description of Capital Stock" for what constitutes a change of control under the Exchange Notes. Certain Covenants. The Exchange Note indenture contains a number of covenants restricting the operations of Pegasus and its subsidiaries, which, among other things, limit the ability of Pegasus and/or its subsidiaries to incur additional indebtedness, pay dividends or make distributions, make certain investments, sell assets, issue subsidiary stock, create certain liens, enter into certain consolidations or mergers and enter into certain transactions with affiliates. 63 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of: o 30,000,000 shares of Class A Common Stock, par value $.01 per share o 15,000,000 shares of Class B Common Stock, par value $.01 per share o 5,000,000 shares of Preferred Stock, par value $.01 per share Of the 5,000,000 shares of Preferred Stock that we are authorized to issue, approximately 126,978 shares have been designated as Series A Preferred Stock. As of January 20, 1999, we had outstanding 11,315,809 shares of Class A Common Stock and 4,581,900 shares of Class B Common Stock. The following summary description relating to our capital stock sets forth the material terms of our capital stock. This summary is not intended to be complete. It is subject to, and qualified in its entirety by reference to, our Amended and Restated Certificate of Incorporation and the Certificate of Designation. Description of Common Stock Voting, Dividend and Other Rights. The voting powers, preferences and relative rights of the Class A Common Stock and the Class B Common Stock are identical in all respects, except for the following differences: o holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share o stock dividends on Class A Common Stock may be paid only in shares of Class A Common Stock and stock dividends on Class B Common Stock may be paid only in shares of Class B Common Stock o shares of Class B Common Stock can be converted into Class A Common Stock and are subject to certain restrictions on ownership and transfer. Holders of a majority of the outstanding shares of each class of common stock, voting as separate classes, must approve any amendment to the Amended and Restated Certificate of Incorporation that has any of the following effects: o any decrease in the voting rights per share of Class A Common Stock or any increase in the voting rights of Class B Common Stock; o any increase in the number of shares of Class A Common Stock into which shares of Class B Common Stock are convertible; o any relaxation on the restrictions on transfer of the Class B Common Stock; or o any change in the powers, preferences or special rights of either class of common stock adversely affecting the holders of the Class A Common Stock. Holders of a majority of the outstanding shares of each class of common stock, voting as separate classes, must approve the authorization or issuance of additional shares of Class B Common Stock, except when the Company takes parallel action with respect to Class A Common Stock in connection with stock dividends, stock splits, recapitalizations, and similar changes. Except as described above or as required by law, holders of Class A Common Stock and Class B Common Stock vote together on all matters presented to the stockholders for their vote or approval, including the election of directors. The outstanding shares of Class A Common Stock equal approximately 71.2% of the total common stock outstanding, and the holders of Class B Common Stock have control of approximately 80.2% of the combined voting power of the common stock. The holders of Class B Common Stock have the power to elect our entire Board of Directors. In 64 particular, Marshall W. Pagon, by virtue of his beneficial ownership of all of the Class B Common Stock, may determine the outcome of any matter submitted to the stockholders for approval (except matters on which the holders of Class A Common Stock are entitled to vote separately as a class), including the outcome of all corporate transactions. Each share of common stock is entitled to receive dividends as declared by the Board of Directors out of funds legally available. The Class A Common Stock and Class B Common Stock share equally on a share-for-share basis in cash dividends. In the event of a merger or consolidation to which we are a party, each share of Class A Common Stock and Class B Common Stock will be entitled to receive the same consideration, except that, if we are not the surviving corporation, holders of Class B Common Stock may receive stock with greater voting power in lieu of stock with lesser voting power received by holders of Class A Common Stock. Our stockholders have no preemptive or other rights to subscribe for additional shares. Subject to any rights of holders of any preferred stock, all holders of common stock, regardless of class, are entitled to share equally on a share-for-share basis in any assets available for distribution to stockholders if we liquidate, dissolve or wind up. No shares of common stock are subject to redemption or a sinking fund. All issued common stock is validly issued, fully paid and nonassessable. In the event of any change in the number of outstanding shares of either class of common stock from a stock split, combination, consolidation or reclassification, we are required to take parallel action with respect to the other class so that the number of shares of each class bears the same relationship to each other as they did before the event. Conversion Rights and Restrictions on Transfer of Class B Common Stock. The Class A Common Stock has no conversion rights. Each share of Class B Common Stock is convertible at the option of the holder at any time and from time to time into one share of Class A Common Stock. Any holder of shares of Class B Common Stock desiring to transfer shares of Class B Common Stock must present those shares to Pegasus for conversion into an equal number of shares of Class A Common Stock. After conversion, the converted shares may be freely transferred, subject to applicable securities laws. Notwithstanding the preceding, a holder of Class B Common Stock may transfer shares of Class B Common Stock without conversion if the transfer is to one of the following: o Marshall W. Pagon or any of his "immediate family members." For purposes of this paragraph, "immediate family member" is defined as Mr. Pagon's spouse and parents, the lineal descendents of either of his parents, and the spouses of their lineal descendents (adoptive and step relationships are included for purposes of defining parentage and descent); o the estate of Marshall W. Pagon or any of his immediate family members until the property of such estate is distributed in accordance with such deceased's will or applicable law; or o any trust (including a voting trust), corporation, partnership or other entity, more than 50% of the voting equity interests of which are owned directly or indirectly by (or, in the case of a trust not having voting equity interests, which is more than 50% for the benefit of), and which is controlled by, Marshall W. Pagon or any of his immediate family members. If ownership or voting rights of shares of Class B Common Stock are transferred other than in accordance with the preceding paragraph, or a transferee loses the status that allowed him or her to hold shares of Class B Common Stock without conversion, such shares of Class B Common Stock will automatically convert into an equal number of shares of Class A Common Stock. Because of these restrictions, no trading market is expected to develop in the Class B Common Stock and the Class B Common Stock will not be listed or traded on any exchange or in any market. Effects of Disproportionate Voting Rights. The disproportionate voting rights of the classes of common stock could have an adverse effect on the market price of the Class A Common Stock. For example, we could not be acquired in a hostile takeover without Marshall W. Pagon's approval as long as he has voting control. Merger proposals, tender offers, or proxy contests may be discouraged even if such actions were favored by holders of Class A Common Stock. Accordingly, holders of Class A Common Stock may be unable to sell their shares at a premium over prevailing market prices, since takeover bids frequently involve purchases of stock directly from shareholders at a premium price. 65 Description of Series A Preferred Stock General. Pursuant to the Certificate of Designation, we have issued approximately 126,978 shares of Series A Preferred Stock with a liquidation preference of $1,000 per share. This includes shares issued to pay in-kind dividends on the Series A Preferred Stock. On January 1, 2007, we must redeem, subject to the legal availability of funds, all outstanding shares of Series A Preferred Stock at a price in cash equal to the liquidation preference, plus accrued and unpaid dividends, if any, to the date of redemption. Dividends. The holders of shares of the Series A Preferred Stock are entitled to receive, as dividends are declared by the Board of Directors out of funds legally available, cumulative preferential dividends from the issue date of the Series A Preferred Stock accruing at the rate per share of 12 3/4% per annum, payable semi-annually in arrears on January 1 and July 1 of each year. Accumulated unpaid dividends bear interest at a per annum rate 200 basis points in excess of the annual dividend rate on the Series A Preferred Stock. Dividends are payable in cash, except that on or prior to January 1, 2002, dividends may be paid, at our option, by the issuance of additional shares of Series A Preferred Stock (including fractional shares) having an aggregate liquidation preference equal to the amount of such dividends. Optional Redemption. We do not have the option to redeem Series A Preferred Stock until after January 1, 2002. We may redeem the Series A Preferred Stock after that date, starting at 106.375% of the liquidation preference during the 12-month period beginning January 1, 2002 and declining annually to 100% of the liquidation preference on January 1, 2005 and thereafter. In addition, we may, on any one or more occasions, redeem up to 25% of the shares of Series A Preferred Stock then outstanding (whether initially issued or issued in lieu of cash dividends) at a redemption price of 112.750% of the liquidation preference plus, without duplication, accumulated and unpaid dividends to the date of redemption. Such a redemption is subject to the following conditions: o the redemption must occur prior to January 1, 2000; o we must pay for the redemption out of the net proceeds of an offering of Class A Common Stock, and must redeem within 90 days of the date of closing of such offering; and o after the redemption, at least $75.0 million in aggregate liquidation preference of Series A Preferred Stock must remain outstanding. Change of Control. Upon the occurrence of a Change of Control, each holder of shares of Series A Preferred Stock will have the right to require the us to repurchase all or any part of such holder's Series A Preferred Stock at an offer price in cash equal to 101% of the aggregate liquidation preference of the preferred stock the holder wishes to sell, plus accrued and unpaid dividends, if any, to the date of purchase. Generally, a "change of control" means the occurrence of any of the following: o the sale of all or substantially all of our assets to any person other than Marshall W. Pagon or his related parties as described in the Certificate of Designation, o the adoption of a plan relating to the liquidation or dissolution of Pegasus, o the consummation of any transaction in which a person becomes a beneficial owner of more of our Class A Common Stock than is beneficially owned at such time by Marshall W. Pagon and his related parties, o the consummation of any transaction in which Mr. Pagon and his related parties cease to have at least 30% of the combined voting power of all our voting stock or Mr. Pagon and his affiliates acquire beneficial ownership of more than 66 2/3% of our Class A Common Stock, or o the first day on which a majority of the members of the Board of Directors are not "continuing directors" -- essentially, directors elected or recommended by the current board of directors or their designated replacements. Certain Covenants. The Certificate of Designation contains a number of covenants restricting our operations and those of our subsidiaries. For example, the covenants limit Pegasus' ability to issue capital 66 stock ranking on parity with or senior to the Series A Preferred Stock, and the ability of Pegasus and its subsidiaries to incur additional indebtedness, pay dividends or make distributions, make certain investments, issue subsidiary stock, enter into certain consolidations or mergers and enter into certain transactions with affiliates. Transfer Agent and Registrar The Transfer Agent and Registrar for the common stock is First Union National Bank. Limitation on Directors' Liability The Delaware General Corporation Law authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breach of the fiduciary duty of care. The duty of care requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. In the absence of the limitations authorized by the Delaware statute, directors could be accountable to corporations and their stockholders for monetary damages for conduct that does not satisfy their duty of care. Although the statute does not change directors' duty of care, it enables corporations to limit available relief to equitable remedies such as injunction or rescission. Our Amended and Restated Certificate of Incorporation limits the liability of our directors to us or our stockholders to the fullest extent permitted by the Delaware statute. Specifically, our directors will not be personally liable for monetary damages for breach of fiduciary duty as directors, except in the following circumstances: o breach of the duty of loyalty to Pegasus or its stockholders. o acts or omissions not in good faith. o intentional misconduct or a knowing violation of law. o unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law. o any transaction from which a director derived an improper personal benefit. The inclusion of this provision in our Amended and Restated Certificate of Incorporation may reduce the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from bringing a lawsuit against a director for breach of the duty of care, even though such an action, if successful, might otherwise have benefited us and our stockholders. FUTURE SALES OF COMMON STOCK After this offering, the Company will have 14,315,809 shares of Class A Common Stock issued and outstanding (14,765,809 shares if the underwriters' over-allotment option is exercised in full). The Company will also have outstanding 4,581,900 shares of Class B Common Stock issued and outstanding. All of the Class B Common Stock is convertible into shares of Class A Common Stock on a share for share basis. Of the 14,315,809 shares of Class A Common Stock issued and outstanding after this offering (assuming the over-allotment option is not exercised): o 7,733,226 shares will be held by the public. o 4,641,400 shares (including vested stock options) will be held or controlled by Marshall W. Pagon. o 336,464 other shares held by two current and one former officer may be sold at any time under an effective registration statement under the Securities Act. o 141,410 other shares (including vested stock options) held by directors and executive officers can currently be sold subject to the volume and other limitations under SEC Rule 144. o 3,662,497 other shares have demand registration rights, which means the holders can require us to register them for sale into the public market. o 193,600 other shares can be acquired on exercise of outstanding warrants. Those shares have been registered under the Securities Act. o 1,337,000 other shares can be sold into the market without registration under SEC Rule 144. 67 Approximately 8,657,440 shares of Class A Common Stock and all of the 4,581,900 shares of Class B Common Stock are "restricted securities" under the Securities Act. Restricted securities and any shares purchased by affiliates of the Company in this offering may be sold only if they are registered under the Securities Act or under an applicable exemption from the registration requirements of the Securities Act, including SEC Rules 144. In general, under Rule 144 as currently in effect, if a period of at least one year has elapsed between the later of the date on which "restricted shares" (as that phrase is defined in Rule 144) were acquired from the Company and the date on which they were acquired from an "affiliate" (as defined in Rule 144) of the Company, then the holder of the restricted shares (including an affiliate) is entitled to sell a number of shares within any three-month period that does not exceed the greater of (i) one percent of the then outstanding shares of the Class A Common Stock, or (ii) the average weekly reported volume of trading of the Class A Common Stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain requirements pertaining to the manner of the sale, notices of the sale and the availability of current public information concerning the Company. Affiliates of the Company may sell shares not constituting restricted shares in accordance with these volume limitations and other requirements but without regard to the one-year period. Under Rule 144(k), if a period of at least two years has elapsed between the later of the date on which the restricted shares were acquired from the Company and the date on which they were acquired from an affiliate, a holder of the restricted shares who is not an affiliate at the time of the sale and has not been an affiliate for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume limitations and other conditions described above. This description of Rule 144 is not intended to be complete. Sales of significant amounts of Class A Common Stock, or the perception that these sales could occur, could have an adverse impact on the market price of the Company's Class A Common Stock. The Company, all of its directors and officers and certain stockholders have agreed that during the period beginning on the date of this prospectus and continuing to and including the date 120 days after the date of this prospectus, they will not offer, sell, contract to sell or otherwise dispose of any shares of Class A Common Stock beneficially owned by them without the consent of Donaldson, Lufkin & Jenrette Securities Corporation, on behalf of the underwriters of this offering. Persons holding an additional 1,697,528 shares have agreed not to sell their shares for 90 days after the date of this prospectus. The agreements entered into by these persons also covers any securities of the Company that are substantially similar to the shares of the Class A Common Stock or that are convertible or exchangeable into Class A Common Stock or substantially similar securities (with certain exceptions pertaining to employee benefit plans). Shares offered in connection with this offering are not covered by these agreements. Registration Rights DTS Registration Rights The former stockholders of Digital Television Services, Inc. received registration rights for 3,463,462 of the shares of our Class A Common Stock issued to them when we acquired DTS in April 1998. A brief description of these registration rights follows. o Underwritten Demand Registration: The DTS stockholders can require us to register their shares for an underwritten offering until April 27, 2003. They can do this no more than twice. Any demand must include at least 346,346 shares. We can delay a demand registration in case of material developments. o S-3 Shelf Registration: The DTS stockholders can require us to register their shares on a "shelf registration" any number of times until April 27, 2003. A shelf registration could cover shares to be sold into the market or in negotiated transactions. Any demand must include at least 100,000 shares. We do not have to keep any shelf registration effective for more than 90 days, and we can require that 90 days elapse between shelf registrations. We can delay a shelf registration in case of material developments. 68 o Piggyback Registration: The DTS stockholders have the right to include shares in any registration we make for ourselves or for other stockholders. (There are exceptions to this, such as registrations for acquisitions and employee benefit plans.) We can reduce the shares they want to include if we or our underwriters decide the offering would be too large. We would have to pay expenses of any registration, except that the selling DTS stockholders would have to pay underwriting discounts, brokerage commissions and the like. ViewStar Registration Rights The former stockholders of ViewStar Entertainment Services, Inc. received registration rights for the 397,035 shares of our Class A Common Stock issued to them when we acquired Viewstar in October 1997. One of the former ViewStar stockholders is Donald W. Weber, a director of Pegasus. (See "Certain Relationships and Related Transactions"). Because of a later sale by Mr. Weber and the sale by Mr. Weber of shares in this offering, these registration rights will cover 199,035 shares after this offering. A brief description of these registration rights follows. o Underwritten Demand Registration: The ViewStar stockholders can require us to register their shares for an underwritten offering until April 27, 2003. They can do this no more than once. We can delay a demand registration in case of material developments. o S-3 Shelf Registration: Mr. Weber can require us to register his shares on a "shelf registration" if he ceases to be an affiliate of Pegasus. He may do this no more than once. A shelf registration could cover shares to be sold into the market or in negotiated transactions. We do not have to keep the shelf registration effective for more than 180 days. We can delay a shelf registration in case of material developments. o Piggyback Registration: The ViewStar stockholders have the right to include shares in any registration we make for ourselves or for other stockholders. (There are exceptions to this, such as registrations for acquisitions and employee benefit plans.) We can reduce the shares they want to include if we or our underwriters decide the offering would be too large. We would have to pay expenses of any registration, except that the selling DTS stockholders would have to pay underwriting discounts, brokerage commissions and the like. The ViewStar stockholders' registration rights terminate when their shares can be sold under Rule 144 and we have authorized the removal of restrictive legends from their shares. Management Share Registration We have registered shares held by Robert N. Verdecchio and Howard E. Verlin, two of our officers, and one of our former officers for sales by them into the market. A total of 336,464 shares can now be sold under this registration. 69 UNDERWRITERS Subject to the terms and conditions contained in an underwriting agreement, dated ________, 1999 (the "Underwriting Agreement"), the underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co., Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, C.E. Unterberg, Towbin and ING Baring Furman Selz LLC (the "Representatives"), have severally agreed to purchase from the Company and the selling stockholders the number of shares set forth opposite their names below: Number of Shares --------- Underwriters: Donaldson, Lufkin & Jenrette Securities Corporation ...... Bear, Stearns & Co. Inc. ................................. Merrill Lynch, Pierce, Fenner & Smith Incorporated........ C.E. Unterberg, Towbin ................................... ING Baring Furman Selz LLC................................ ---------- Total ................................................... The Underwriting Agreement provides that the obligations of the several underwriters to purchase and accept delivery of the shares included in this offering are subject to approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to purchase and accept delivery of all the shares (other than those covered by the over-allotment option described below) if they purchase any of the shares. The Company's Class A Common Stock is listed on the Nasdaq National Market. The underwriters propose to initially offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to certain dealers at the public offering price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share on sales to certain other dealers. After the initial offering of the shares to the public, the Representatives may change the public offering price and such concessions. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The following table shows the underwriting fees to be paid to the underwriters by the Company and the selling stockholders in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of Class A Common Stock. No Exercise Full Exercise ------------- -------------- Company: Per share ........................ $ $ Total ............................ $ $ Selling Stockholders: Per share ........................ $ $ Total ............................ $ $ The selling stockholders have granted to the underwriters an option, exercisable for 30 days from the date of the Underwriting Agreement, to purchase up to 450,000 additional shares at the public offering price less the underwriting fees. The underwriters may exercise such option solely to cover over-allotments, if any, made in connection with this offering. To the extent that the underwriters exercise such option, each underwriter will become obligated, subject to certain conditions, to purchase a number of additional shares approximately proportionate to such underwriter's initial purchase commitment. The Company estimates its expenses relating to the offering to be $ . The Company, the selling stockholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933, as amended. Each of the Company, its executive officers and directors and certain stockholders of the Company (including the selling stockholders) has agreed that, for a period of either 90 days or 120 days from the date of this 70 prospectus, they will not, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation: o offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or, o enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any common stock (regardless of whether any of the transactions described in this paragraph is to be settled by the delivery of common stock, or such other securities, in cash or otherwise). In addition, during such period, the Company has agreed not to file any registration statement with respect to, and each of its executive officers and directors and certain stockholders of the Company (including the selling stockholders) has agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any securities convertible into or exercisable for common stock without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. Other than in the United States, no action has been taken by the Company, the selling stockholders or the underwriters that would permit a public offering of the shares of Class A Common Stock included in this offering in any jurisdiction where action for that purpose is required. The shares included in this offering may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisement in connection with the offer and sale of any such shares be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons who receive this prospectus should inform themselves about and observe any restrictions relating to the offering of the Class A Common Stock and the distribution of this prospectus. This prospectus is not an offer to sell or a solicitation of an offer to buy any shares of Class A Common Stock included in this offering in any jurisdiction where that would not be permitted or legal. Merrill Lynch & Co. provided the Company with a fairness opinion in connection with the acquisition by the Company of Digital Television Services, Inc. in April 1998 for which it was paid $1.35 million in fees. Stabilization In connection with this offering, certain underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Class A Common Stock. Specifically, the underwriters may overallot this offering, creating a syndicate short position. In addition, the underwriters may bid for and purchase shares of Class A Common Stock in the open market to cover syndicate short positions or to stabilize the price of the Class A Common Stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members if Donaldson, Lufkin & Jenrette Securities Corporation repurchases previously distributed Class A Common Stock in syndicate covering transactions, in stabilizing transactions or otherwise or if Donaldson, Lufkin & Jenrette Securities Corporation receives a report that indicates that the clients of such syndicate members have "flipped" the Class A Common Stock. These activities may stabilize or maintain the market price of the Class A Common Stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. LEGAL MATTERS The validity of the Class A Common Stock offered hereby will be passed upon by Drinker Biddle & Reath LLP, counsel for the Company. Michael B. Jordan, a partner of Drinker Biddle & Reath LLP, is an Assistant Secretary of the Company. Certain legal matters relating to this offering will be passed upon for the underwriters by Latham & Watkins, New York, New York. Latham & Watkins occasionally renders legal services to the Company. EXPERTS Pegasus' consolidated balance sheets as of December 31, 1996 and 1997 and the related consolidated statements of operations, statements of changes in total equity and statements of cash flows for each of the three years in the period ended December 31, 1997 included in this prospectus, have been included herein in reliance on the report of PricewaterhouseCoopers LLP, independent accountants given upon the authority of that firm as experts in accounting and auditing. 71 The consolidated financial statements of Digital Television Services, Inc. and subsidiaries for the period from inception (January 30, 1996) through December 31, 1996 and for the year ended December 31, 1997, which are included in this prospectus, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto and are included in this prospectus in reliance upon the authority of the firm as experts in accounting and auditing in giving these reports. WHERE YOU CAN FIND MORE INFORMATION Pegasus files annual, quarterly and special reports, as well as proxy statements and other information with the SEC. You may read and copy any of the documents Pegasus files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or at its Regional Offices located at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may obtain further information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0300. Pegasus' SEC filings are also available to the public over the Internet at the SEC's web site at http://www.sec.gov, which contains reports, proxy statements and other information regarding registrants like Pegasus that file electronically with the SEC. This prospectus is part of a registration statement on Form S-3 filed by Pegasus with the SEC under the Securities Act. As permitted by SEC rules, this prospectus does not contain all of the information included in the registration statement and the accompanying exhibits filed with the SEC. You may refer to the registration statement and its exhibits for more information. The SEC allows Pegasus to "incorporate by reference" into this prospectus the information it files with the SEC. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus. If Pegasus subsequently files updating or superseding information in a document that is incorporated by reference into this prospectus, the subsequent information will also become part of this prospectus and will supersede the earlier information. Pegasus is incorporating by reference the following documents that it has filed with the SEC: o Pegasus' Form 10-K/A filed with the SEC on April 20, 1998 for the fiscal year ended December 31, 1997; o Pegasus' Quarterly Report on Form 10-Q for the quarter ended September 30, 1998; o Pegasus' Quarterly Report on Form 10-Q for the quarter ended June 30, 1998; o Pegasus' Quarterly Report on Form 10-Q for the quarter ended March 31, 1998; o Pegasus' Forms 8-K dated December 10, 1997 and filed with the SEC on January 12, 1998; dated January 16, 1998 and filed with the SEC on March 3, 1998; and dated April 27, 1998 and filed with the SEC on May 11, 1998; o Digital Television Services, Inc.'s Form 10-K filed with the SEC on March 23, 1998 for the fiscal year ended December 31, 1997. Pegasus is also incorporating by reference into this prospectus all of its future filings with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until this offering is completed. You may obtain a copy of any of Pegasus' filings which are incorporated by reference, at no cost, by writing to our telephoning us at the following address: Pegasus Communications Corporation c/o Pegasus Communications Management Company Suite 454, 5 Radnor Corporate Center 100 Matsonford Road Radnor, Pennsylvania 19087 Attention: Director of Communications Telephone: (888) 438-7488 72 You should rely only on the information provided in this prospectus or incorporated by reference. We have not authorized anyone to provide you with different information. You should not assume that the information in this prospectus is accurate as of any date other than the date on the first page of the prospectus. Pegasus is not making this offer of securities in any state or country in which the offer or sale is not permitted. 73 PEGASUS COMMUNICATIONS CORPORATION INDEX TO FINANCIAL STATEMENTS
Page ---- Pegasus Communications Corporation Report of PricewaterhouseCoopers LLP ..................................................... F-2 Consolidated Balance Sheets as of December 31, 1996, 1997 and September 30, 1998 (unaudited) .......................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 (unaudited) and 1998 (unaudited) ...... F-4 Consolidated Statements of Changes in Total Equity for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1998 (unaudited) .................. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 (unaudited) and 1998 (unaudited) ........... F-6 Notes to Consolidated Financial Statements ............................................... F-7 Pro Forma Consolidated Financial Information ............................................. F-30 Pro Forma Consolidated Statement of Operations Data ...................................... F-31 Notes to Pro Forma Consolidated Statements of Operations Data ............................ F-34 Digital Television Services, Inc. and Subsidiaries (an acquired entity) Report of Arthur Andersen LLP ............................................................ F-41 Consolidated Balance Sheets as of December 31, 1996 and December 31, 1997 ................ F-42 Consolidated Statements of Operations for the period from inception (January 30) through December 31, 1996 and for the year ended December 31, 1997 .............................. F-43 Consolidated Statements of Members'/Stockholders' Equity for the period from inception (January 30) through December 31, 1996 and for the year ended December 31, 1997 ......... F-44 Consolidated Statements of Cash Flows for the period from inception (January 30) through December 31, 1996 and for the year ended December 31, 1997 .............................. F-45 Notes to Consolidated Financial Statements ............................................... F-46 Consolidated Balance Sheets as of September 30, 1998 (unaudited) ......................... F-64 Consolidated Statements of Operations for the nine months ended September 30, 1997 (unaudited) and September 30, 1998 (unaudited) .......................................... F-65 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 (unaudited) and September 30, 1998 (unaudited) .......................................... F-66 Notes to Consolidated Financial Statements ............................................... F-67
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Pegasus Communications Corporation We have audited the accompanying consolidated balance sheets of Pegasus Communications Corporation as of December 31, 1996 and 1997, and the related consolidated statements of operations, changes in total equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pegasus Communications Corporation as of December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. PricewaterhouseCoopers LLP 2400 Eleven Penn Center Philadelphia, Pennsylvania February 26, 1998 F-2 Pegasus Communications Corporation Consolidated Balance Sheets
December 31, ---------------------------------- September 30, 1996 1997 1998 (unaudited) ASSETS Current assets: Cash and cash equivalents ............................. $ 8,582,369 $ 44,049,097 $ 39,073,970 Restricted cash ....................................... -- 1,220,056 19,737,235 Accounts receivable, less allowance for doubtful accounts of $243,000, $319,000 and $551,000, respectively ........................................ 9,155,545 13,819,571 19,165,874 Program rights ........................................ 1,289,437 2,059,346 3,767,113 Inventory ............................................. 697,957 974,920 3,968,253 Deferred taxes ........................................ 1,290,397 2,602,453 2,602,453 Prepaid expenses and other ............................ 851,592 788,669 1,493,975 ------------- ------------- ------------- Total current assets ............................... 21,867,297 65,514,112 89,808,873 Property and equipment, net ............................ 24,115,138 27,686,646 29,551,695 Intangible assets, net ................................. 126,236,128 284,774,027 709,319,035 Program rights ......................................... 1,294,985 2,262,299 3,468,484 Deferred taxes ......................................... -- -- 13,296,554 Deposits and other ..................................... 166,498 624,629 719,565 ------------- ------------- ------------- Total assets ....................................... $ 173,680,046 $ 380,861,713 $ 846,164,206 ============= ============= ============= LIABILITIES AND TOTAL EQUITY Current liabilities: Current portion of long-term debt ..................... $ 363,833 $ 6,357,320 $ 22,218,859 Accounts payable ...................................... 4,414,504 4,151,226 4,684,795 Accrued interest ...................................... 5,592,083 8,177,261 11,990,442 Accrued satellite programming and fees ................ 1,191,007 6,089,389 15,824,268 Accrued expenses ...................................... 3,274,463 6,973,297 8,436,061 Current portion of program rights payable ............. 601,205 1,418,581 1,278,641 ------------- ------------- ------------- Total current liabilities .......................... 15,437,095 33,167,074 64,433,066 Long-term debt, net .................................... 115,211,610 201,997,811 482,414,676 Program rights payable ................................. 1,365,284 1,416,446 4,786,628 Deferred taxes ......................................... 1,339,859 2,652,454 69,701,954 ------------- ------------- ------------- Total liabilities .................................. 133,353,848 239,233,785 621,336,324 ------------- ------------- ------------- Commitments and contingent liabilities ................. -- -- -- Minority interest ...................................... -- 3,000,000 3,000,000 ------------- ------------- ------------- Series A preferred stock ............................... -- 111,264,424 122,223,017 ------------- ------------- ------------- Common stockholders' equity: Class A common stock .................................. 46,632 57,399 113,158 Class B common stock .................................. 45,819 45,819 45,819 Additional paid-in capital ............................ 57,736,011 64,034,687 174,753,387 Deficit ............................................... (17,502,264) (36,774,401) (75,307,499) ------------- ------------- ------------- Total common stockholders' equity .................. 40,326,198 27,363,504 99,604,865 ------------- ------------- ------------- Total liabilities and stockholders' equity ......... $ 173,680,046 $ 380,861,713 $ 846,164,206 ============= ============= =============
See accompanying notes to consolidated financial statements F-3 Pegasus Communications Corporation Consolidated Statements of Operaions
Years Ended December 31, --------------------------------------------------- 1995 1996 1997 Revenues: Basic and satellite service .............. $10,002,579 $ 16,645,428 $ 49,305,330 Premium services ......................... 1,652,419 2,197,188 4,665,823 Broadcasting revenue, net of agency commissions ............................. 14,862,734 21,813,409 23,927,876 Barter programming revenue ............... 5,110,662 6,337,220 7,520,000 Other .................................... 519,682 935,387 1,399,397 ----------- ------------ ------------ Total revenues .......................... 32,148,076 47,928,632 86,818,426 Operating expenses: Programming .............................. 5,475,623 9,889,895 24,340,556 Barter programming expense ............... 5,110,662 6,337,220 7,520,000 Technical and operations ................. 2,740,670 3,271,564 3,741,708 Marketing and selling .................... 3,928,073 5,481,315 14,352,775 General and administrative ............... 3,885,473 5,923,247 12,129,765 Incentive compensation ................... 527,663 985,365 1,273,872 Corporate expenses ....................... 1,364,323 1,429,252 2,256,233 Depreciation and amortization ............ 8,751,489 12,060,498 27,791,903 ----------- ------------ ------------ Income (loss) from operations ........... 364,100 2,550,276 (6,588,386) Interest expense .......................... (8,793,823) (12,454,891) (16,094,037) Interest expense -- related party ......... (22,759) -- -- Interest income ........................... 370,300 232,361 1,538,569 Other expenses, net ....................... (44,488) (171,289) (723,439) Gain on sale of cable system .............. -- -- 4,451,320 ----------- ------------ ------------ Loss before income taxes and extraordinary items ..................... (8,126,670) (9,843,543) (17,415,973) Provision (benefit) for income taxes ...... 30,000 (120,000) 200,000 ----------- ------------ ------------ Loss before extraordinary items .......... (8,156,670) (9,723,543) (17,615,973) Extraordinary gain (loss) from extinguishment of debt, net .............. 10,210,580 (250,603) (1,656,164) ----------- ------------ ------------ Net income (loss) ........................ 2,053,910 (9,974,146) (19,272,137) Preferred stock dividends ................ -- -- 12,215,000 ----------- ------------ ------------ Net income (loss) applicable to common shares .................................. $ 2,053,910 ($ 9,974,146) ($ 31,487,137) =========== ============ ============ Basic and diluted earnings per common share: Loss before extraordinary items ......... ($ 1.59) ($ 1.56) ($ 3.02) Extraordinary gain (loss) ............... 1.99 (0.04) (0.17) ----------- ------------ ------------ Net income (loss) ....................... $ 0.40 ($ 1.60) ($ 3.19) =========== ============ ============ Weighted average shares outstanding ..... 5,139,929 6,239,646 9,858,244 =========== ============ ============
Nine Months Ended September 30, ---------------------------------- 1997 1998 (unaudited) Revenues: Basic and satellite service .............. $ 32,008,696 $ 88,980,908 Premium services ......................... 3,116,253 13,053,641 Broadcasting revenue, net of agency commissions ............................. 16,950,204 18,290,873 Barter programming revenue ............... 4,507,600 4,861,900 Other .................................... 954,076 5,842,905 ------------ ------------ Total revenues .......................... 57,536,829 131,030,227 Operating expenses: Programming .............................. 15,916,313 49,179,278 Barter programming expense ............... 4,507,600 4,861,900 Technical and operations ................. 2,814,922 2,927,287 Marketing and selling .................... 7,429,814 33,688,708 General and administrative ............... 8,341,570 23,463,195 Incentive compensation ................... 744,242 1,471,876 Corporate expenses ....................... 1,408,954 2,418,067 Depreciation and amortization ............ 18,160,442 46,789,028 ------------ ------------ Income (loss) from operations ........... (1,787,028) (33,769,112) Interest expense .......................... (10,288,211) (29,849,768) Interest expense -- related party ......... -- -- Interest income ........................... 828,388 1,333,683 Other expenses, net ....................... (454,612) (975,185) Gain on sale of cable system .............. 4,451,320 24,902,284 ------------ ------------ Loss before income taxes and extraordinary items ..................... (7,250,143) (38,358,098) Provision (benefit) for income taxes ...... 50,000 175,000 ------------ ------------ Loss before extraordinary items .......... (7,300,143) (38,533,098) Extraordinary gain (loss) from extinguishment of debt, net .............. -- -- ------------ ------------ Net income (loss) ........................ (7,300,143) (38,533,098) Preferred stock dividends ................ 8,677,500 10,958,593 ------------ ------------ Net income (loss) applicable to common shares .................................. ($ 15,977,643) ($ 49,491,691) ============ ============ Basic and diluted earnings per common share: Loss before extraordinary items ......... ($ 1.64) ($ 3.66) Extraordinary gain (loss) ............... -- -- ------------ ------------ Net income (loss) ....................... ($ 1.64) ($ 3.66) ============ ============ Weighted average shares outstanding ..... 9,755,882 13,533,756 ============ ============
See accompanying notes to consolidated financial statements F-4 Pegasus Communications Corporation Consolidated Statements of Changes in Total Equity
Common Stock Series A -------------------------- Preferred Number Par Stock of Shares Value --------------- ------------- ----------- Balances at January 1, 1995 ................... 494 $ 494 Net income (loss) ............................. Distributions to Partners ..................... Distributions to Parent ....................... Exchange of common stock ...................... 161,006 1,121 Issuance of Class B common stock .............. 8,500 85 ---------- --------- -------- Balances at December 31, 1995 ................. 170,000 1,700 Net loss ...................................... Contributions by Parent ....................... Distributions to Parent ....................... Issuance of Class A common stock due to: Initial Public Offering ...................... 3,000,000 30,000 WPXT Acquisition ............................. 82,143 821 MI/TX DBS Acquisition ........................ 852,110 8,521 Awards ....................................... 3,614 36 Issuance of Class B common stock due to: WPXT Acquisition ............................. 71,429 714 Conversions of partnerships ................... Exchange of PM&C Class B ...................... 183,275 1,833 Exchange of PM&C Class A ...................... 4,882,541 48,826 ---------- --------- -------- Balances at December 31, 1996 ................. 9,245,112 92,451 Net loss ...................................... Issuance of Class A common stock due to: Acquisitions of DBS properties ............... 923,860 9,239 Liveoak Transaction .......................... 34,000 340 Incentive compensation and awards ............ 118,770 1,188 Issuance of Class A preferred stock due to: Unit Offering ................................ $100,000,000 Paid and accrued dividends ................... 12,215,000 Issuance of warrants due to: Acquisition of DBS properties ................ Unit Offering ................................ (950,576) ---------- --------- -------- Balances at December 31, 1997 ................. 111,264,424 10,321,742 103,218 Net loss ...................................... Issuance of Class A common stock due to: Acquisitions of DBS properties ............... 5,508,600 55,086 Incentive compensation and awards ............ 67,367 673 Issuance of Class A preferred stock due to: Paid and accrued dividends ................... 10,958,593 Issuance of warrants due to: Acquisition of DBS properties ................ ------------ ---------- -------- Balances at September 30, 1998 (unaudited) $122,223,017 15,897,709 $158,977 ============ ========== ========
Total Additional Retained Partners' Common Paid-In Earnings Capital Stockholders' Capital (Deficit) (Deficit) Equity ---------------- ---------------- ---------------- ---------------- Balances at January 1, 1995 ................... $ 16,382,054 ($ 3,905,909) ($ 5,535,017) $ 6,941,622 Net income (loss) ............................. 5,731,192 (3,677,282) 2,053,910 Distributions to Partners ..................... (246,515) (246,515) Distributions to Parent ....................... (12,500,000) (12,500,000) Exchange of common stock ...................... (1,121) Issuance of Class B common stock .............. 3,999,915 4,000,000 ------------- ------------- ------------ -------------- Balances at December 31, 1995 ................. 7,880,848 1,825,283 (9,458,814) 249,017 Net loss ...................................... (5,934,261) (4,039,885) (9,974,146) Contributions by Parent ....................... 579,152 105,413 684,565 Distributions to Parent ....................... (2,946,379) (2,946,379) Issuance of Class A common stock due to: Initial Public Offering ...................... 38,153,000 38,183,000 WPXT Acquisition ............................. 1,149,179 1,150,000 MI/TX DBS Acquisition ........................ 11,921,025 11,929,546 Awards ....................................... 50,559 50,595 Issuance of Class B common stock due to: WPXT Acquisition ............................. 999,286 1,000,000 Conversions of partnerships ................... (13,393,286) 13,393,286 Exchange of PM&C Class B ...................... (1,833) Exchange of PM&C Class A ...................... (48,826) ------------- ------------- ------------ -------------- Balances at December 31, 1996 ................. 57,736,011 (17,502,264) -- 40,326,198 Net loss ...................................... (19,272,137) (19,272,137) Issuance of Class A common stock due to: Acquisitions of DBS properties ............... 14,827,014 14,836,253 Liveoak Transaction .......................... 360,910 361,250 Incentive compensation and awards ............ 1,307,453 1,308,641 Issuance of Class A preferred stock due to: Unit Offering ................................ Paid and accrued dividends ................... (12,215,000) (12,215,000) Issuance of warrants due to: Acquisition of DBS properties ................ 1,067,723 1,067,723 Unit Offering ................................ 950,576 950,576 ------------- ------------- ------------ -------------- Balances at December 31, 1997 ................. 64,034,687 (36,774,401) -- 27,363,504 Net loss ...................................... (38,533,098) (38,533,098) Issuance of Class A common stock due to: Acquisitions of DBS properties ............... 119,640,387 119,695,473 Incentive compensation and awards ............ 1,413,670 1,414,343 Issuance of Class A preferred stock due to: Paid and accrued dividends ................... (10,958,593) (10,958,593) Issuance of warrants due to: Acquisition of DBS properties ................ 623,236 623,236 ------------- ------------- ------------ -------------- Balances at September 30, 1998 (unaudited) $ 174,753,387 ($ 75,307,499) -- $ 99,604,865 ============= ============ =========== ==============
See accompanying notes to consolidated financial statements F-5 Pegasus Communications Corporation Consolidated Statements of Cash Flows
Years Ended December 31, ----------------------------------------------------- 1995 1996 1997 Cash flows from operating activities: Net income (loss) ........................... $ 2,053,910 ($ 9,974,146) ($ 19,272,137) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary (gain) loss on extinguishment of debt, net ............................... (10,210,580) 250,603 1,656,164 Depreciation and amortization ............... 8,751,489 12,060,498 27,791,903 Program rights amortization ................. 1,263,190 1,514,122 1,715,556 Accretion on discount of bonds .............. 195,454 392,324 394,219 Stock incentive compensation ................ -- 50,595 -- Gain on sale of cable system ................ -- -- (4,451,320) Bad debt expense ............................ 146,147 335,856 1,141,913 Change in assets and liabilities: Accounts receivable ........................ (815,241) (4,607,356) (5,608,113) Inventory .................................. (389,318) 402,942 (115,800) Prepaid expenses and other ................. 490,636 (521,697) 305,066 Accounts payable and accrued expenses ...... (796,453) 4,552,633 7,308,021 Advances payable -- related party .......... 326,279 (468,327) -- Accrued interest ........................... 5,173,745 418,338 2,585,178 Capitalized subscriber acquisition costs ... (411,696) (1,272,283) (4,514,874) Deposits and other ......................... 5,843 (74,173) (458,131) -------------- ------------ ------------- Net cash provided (used) by operating activities .................................. 5,783,405 3,059,929 8,477,645 -------------- ------------ ------------- Cash flows from investing activities: Acquisitions, net of cash acquired .......... -- (72,567,216) (133,886,247) Cash acquired from acquisitions ............. -- -- 379,044 Capital expenditures ........................ (2,640,475) (6,294,352) (9,929,181) Purchase of intangible assets ............... (1,922,960) (486,444) (3,033,471) Payments of programming rights .............. (1,233,777) (1,830,903) (2,584,241) Proceeds from sale of cable system .......... -- -- 6,945,270 Other ....................................... (250,000) -- -- -------------- ------------ ------------- Net cash used for investing activities ....... (6,047,212) (81,178,915) (142,108,826) -------------- ------------ ------------- Cash flows from financing activities: Proceeds from long-term debt ................ 81,455,919 -- 115,000,000 Repayments of long-term debt ................ (48,095,692) (103,639) (320,612) Borrowings on bank credit facilities ........ 2,591,335 41,400,000 94,726,250 Repayments of bank credit facilities ........ (2,591,335) (11,800,000) (124,326,250) Proceeds from borrowings from related parties .................................... 20,000 -- -- Restricted cash ............................. (9,881,198) 9,881,198 (1,220,056) Debt issuance costs ......................... (3,974,454) (304,237) (10,236,823) Capital lease repayments .................... (166,050) (267,900) (336,680) Contributions by Parent ..................... -- 684,565 -- Distributions to Parent ..................... (12,500,000) (2,946,379) -- Proceeds from issuance of common stock ...... 4,000,000 42,000,000 -- Underwriting and IPO costs .................. -- (3,817,000) -- Proceeds from issuance of Series A preferred stock ............................ -- -- 100,000,000 Underwriting and preferred offering costs ... -- -- (4,187,920) -------------- ------------ ------------- Net cash provided by financing activities .... 10,858,525 74,726,608 169,097,909 -------------- ------------ ------------- Net increase (decrease) in cash and cash equivalents ................................. 10,594,718 (3,392,378) 35,466,728 Cash and cash equivalents, beginning of period ...................................... 1,380,029 11,974,747 8,582,369 -------------- ------------ ------------- Cash and cash equivalents, end of period ..... $ 11,974,747 $ 8,582,369 $ 44,049,097 ============== ============ =============
Nine Months Ended September 30, ------------------------------------ 1997 1998 (unaudited) Cash flows from operating activities: Net income (loss) ........................... ($ 7,300,143) ($ 38,533,098) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary (gain) loss on extinguishment of debt, net ............................... -- -- Depreciation and amortization ............... 18,160,442 46,789,028 Program rights amortization ................. 1,214,289 1,914,072 Accretion on discount of bonds .............. 295,486 931,808 Stock incentive compensation ................ -- -- Gain on sale of cable system ................ (4,451,320) (24,902,284) Bad debt expense ............................ 812,308 1,773,094 Change in assets and liabilities: Accounts receivable ........................ (2,139,807) (3,657,763) Inventory .................................. 57,455 (1,647,165) Prepaid expenses and other ................. (158,952) (530,481) Accounts payable and accrued expenses ...... 461,099 3,598,937 Advances payable -- related party .......... -- -- Accrued interest ........................... (2,135,269) (1,103,101) Capitalized subscriber acquisition costs ... (4,514,874) -- Deposits and other ......................... (32,906) (94,936) -------------- ------------ Net cash provided (used) by operating activities .................................. 267,808 (15,461,889) -------------- ------------ Cash flows from investing activities: Acquisitions, net of cash acquired .......... (99,305,168) (89,815,402) Cash acquired from acquisitions ............. 164,221 3,284,382 Capital expenditures ........................ (8,375,393) (6,178,866) Purchase of intangible assets ............... (2,068,864) (10,042,558) Payments of programming rights .............. (1,792,580) (1,597,782) Proceeds from sale of cable system .......... 6,945,270 30,132,826 Other ....................................... -- -- -------------- ------------ Net cash used for investing activities ....... (104,432,514) (74,217,400) -------------- ------------ Cash flows from financing activities: Proceeds from long-term debt ................ -- -- Repayments of long-term debt ................ (241,764) (5,558,004) Borrowings on bank credit facilities ........ 69,726,250 81,500,000 Repayments of bank credit facilities ........ (30,126,250) (200,000) Proceeds from borrowings from related parties .................................... -- -- Restricted cash ............................. (1,181,306) 9,283,210 Debt issuance costs ......................... (3,961,383) -- Capital lease repayments .................... (234,331) (321,044) Contributions by Parent ..................... -- -- Distributions to Parent ..................... -- -- Proceeds from issuance of common stock ...... -- -- Underwriting and IPO costs .................. -- -- Proceeds from issuance of Series A preferred stock ............................ 100,000,000 -- Underwriting and preferred offering costs ... (4,187,920) -- -------------- ------------ Net cash provided by financing activities .... 129,793,296 84,704,162 -------------- ------------ Net increase (decrease) in cash and cash equivalents ................................. 25,628,590 (4,975,127) Cash and cash equivalents, beginning of period ...................................... 8,582,369 44,049,097 -------------- ------------ Cash and cash equivalents, end of period ..... $ 34,210,959 $ 39,073,970 ============== ============
See accompanying notes to consolidated financial statements F-6 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company: Pegasus Communications Corporation ("Pegasus" or together with its subsidiaries stated below, the "Company"), is a diversified media and communications company, incorporated under the laws of the State of Delaware in May 1996, and is a direct subsidiary of Pegasus Communications Holdings, Inc. ("PCH" or the "Parent"). Pegasus' subsidiaries are Pegasus Media & Communications, Inc. ("PM&C"), Pegasus Development Corporation ("PDC"), Pegasus Towers, Inc. ("Towers") and Pegasus Communications Management Company ("PCMC"). PM&C is a diversified media and communications company whose subsidiaries provide direct broadcast satellite television ("DBS") services to customers in certain rural areas which encompass portions of twenty-seven states, own and operate cable television ("Cable") systems that provide service to individual and commercial subscribers in New England and Puerto Rico, own and operate broadcast television ("TV") stations affiliated with the Fox Broadcasting Company ("Fox") and operate, pursuant to local marketing agreements, stations affiliated with United Paramount Network ("UPN") and The WB Television Network ("WB"). PDC provides capital for various Satellite initiatives such as subscriber acquisitions costs. Towers owns and operates transmitting towers located in Pennsylvania and Tennessee. PCMC provides certain management and accounting services for the Company. In October 1996, Pegasus completed an initial public offering (the "Initial Public Offering") in which it sold 3,000,000 shares of its Class A Common Stock to the public at a price of $14 per share, resulting in net proceeds to the Company of $38.1 million. In January 1997, Pegasus completed a unit offering (the "Unit Offering") in which it sold 100,000 shares of 12.75% Series A Cumulative Exchangeable Preferred Stock (the "Series A Preferred Stock") and warrants to purchase 193,600 shares of Class A Common Stock at an exercise price of $15 per share, to the public at a price of $1,000 per unit, resulting in net proceeds to the Company of $95.8 million. The Company applied the net proceeds from the Unit Offering as follows: (i) $30.1 million to the repayment of all outstanding indebtedness under the PM&C Credit Facility (as defined) and expenses related thereto, and (ii) $56.5 million for the payment of the cash portion of the purchase price for the acquisition of DBS assets from nine independent DIRECTV providers. The remaining net proceeds were used for working capital, general corporate purposes and to finance other acquisitions. In October 1997, the Company completed a senior notes offering (the "Senior Notes Offering") in which it sold $115.0 million of 9.625% Series A Senior Notes (the "Senior Notes"), resulting in net proceeds to the Company of approximately $111.0 million. The Company applied the net proceeds from the Senior Notes Offering as follows: (i) $94.2 million to the repayment of all outstanding indebtedness under the PSH Credit Facility (as defined), and (ii) $16.8 million for the payment of the cash portion of the purchase price for the acquisition of DBS assets from various independent DIRECTV providers. 2. Summary of Significant Accounting Policies: Basis of Presentation: The accompanying consolidated financial statements include the accounts of Pegasus and all of its subsidiaries or affiliates. All intercompany transactions and balances have been eliminated. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingencies. Actual results could differ from those estimates. Significant estimates relate to barter transactions and the useful lives and recoverability of intangible assets. F-7 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. Summary of Significant Accounting Policies: -- (Continued) Cash and Cash Equivalents: Cash and cash equivalents include highly liquid investments purchased with an initial maturity of three months or less. The Company has cash balances in excess of the federally insured limits at various banks. Restricted Cash: The Company has restricted cash held in escrow of approximately $1.2 million at December 31, 1997 to collateralize loans made by banks to employees enabling them to pay income taxes as a result of grants of Class A Common Stock by the Company. Inventories: Inventories consist of equipment held for resale to customers and installation supplies. Inventories are stated at the lower of cost or market on a first-in, first-out basis. Long-Lived Assets: The Company's assets are reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amounts may not be recoverable. The Company assesses the recoverability of its assets by determining whether the depreciation or amortization of the respective asset balance can be recovered through projected undiscounted future cash flows. Property and Equipment: Property and equipment are stated at cost. The cost and related accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the respective accounts, and any resulting gains or losses are included in the statement of operations. For cable television systems, initial subscriber installation costs, including material, labor and overhead costs of the hookup are capitalized as part of the distribution facilities. The costs of disconnection and reconnection are charged to expense. Satellite equipment that is leased to customers is stated at cost. Depreciation is computed for financial reporting purposes using the straight-line method based upon the following lives: Reception and distribution facilities ......... 7 to 11 years Transmitter equipment ......................... 5 to 10 years Equipment, furniture and fixtures ............. 5 to 10 years Building and improvements ..................... 12 to 39 years Vehicles ...................................... 3 to 5 years Intangible Assets: Intangible assets are stated at cost and amortized by the straight-line method. Costs of successful franchise applications are capitalized and amortized over the lives of the related franchise agreements, while unsuccessful franchise applications and abandoned franchises are charged to expense. Financing costs incurred in obtaining long-term financing are amortized over the term of the applicable loan. The Company's policy is to capitalize subscriber acquisition costs directly related to new subscribers such as commissions and equipment subsidies, who sign a programming contract. These costs are amortized over the life of the contract. The Company expenses its subscriber acquisition costs when no contract is obtained. The Company currently does not require new DBS customers to sign programming contracts and as a result subscriber acquisition costs are currently being charged to operations in the period incurred. F-8 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. Summary of Significant Accounting Policies: -- (Continued) Amortization of intangible assets is computed using the straight-line method based upon the following lives: Broadcast licenses ..................... 40 years Network affiliation agreements ......... 40 years Goodwill ............................... 40 years DBS rights ............................. 10 years Other intangibles ...................... 2 to 14 years Subscriber acquisition costs ........... 1 year Financial Instruments: The Company uses interest rate cap contracts for the purpose of hedging interest rate exposures, which involve the exchange of fixed and floating rate interest payments without the exchange of the underlying principal amounts. The amounts to be paid or received are accrued as interest rates change and recognized over the life of the contracts as an adjustment to interest expense. Gains and losses are realized from the termination of interest rate hedges are recognized over the remaining life of the hedge contract. As a policy, the Company does not engage in speculative or leveraged transactions, nor does the Company hold or issue financial instruments for trading purposes. The Company had no such instruments at December 31, 1997. Revenue: The Company operates in growing segments of the media and communications industries: multichannel television (DBS and Cable) and broadcast television (TV). The Company recognizes revenue in its multichannel operations when video and audio services are provided. The Company recognizes revenue in its broadcast operations when advertising spots are broadcast. Barter Programming: The Company obtains a portion of its TV programming, including pre-sold advertisements, through its network affiliation agreements with Fox, UPN and WB, and also through independent producers. The Company does not make any direct payments for this programming. For running network programming, the Company received payments from Fox, which totaled approximately $215,000 and $73,000 in 1995 and 1996, respectively. The Company received no such payments in 1997. For running independent producers' programming, the Company received no direct payments. Instead, the Company retains a portion of the available advertisement spots to sell on its own account. Barter programming revenue and the related expense are recognized when the pre-sold advertisements are broadcast. These amounts are presented gross as barter programming revenue and expense in the accompanying consolidated statements of operations. Advertising Costs: Advertising costs are charged to operations in the period incurred and totaled approximately $613,000, $1.1 million and $3.6 million for the years ended December 31, 1995, 1996 and 1997, respectively. Program Rights: The Company enters into agreements to show motion pictures and syndicated programs on television. The Company records the right and associated liabilities for those films and programs when they are currently available for showing. These rights are recorded at the lower of unamortized cost or estimated net realizable value and are amortized on the straight-line method over the license period which approximates amortization based on the estimated number of showings during the contract period. Amortization of $1.3 million, $1.5 F-9 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. Summary of Significant Accounting Policies: -- (Continued) million and $1.7 million is included in programming expense for the years ended December 31, 1995, 1996 and 1997, respectively. The obligations arising from the acquisition of film rights are recorded at the gross amount. Payments for the contracts are made pursuant to the contractual terms over periods which are generally shorter than the license periods. The Company has entered into agreements totaling $6.6 million as of December 31, 1997 for film rights and programs that are not yet available for showing at December 31, 1997, and accordingly, are not recorded by the Company. At December 31, 1997, the Company has commitments for future program rights of approximately $1.7 million, $1.0 million, $417,000, $123,000 and $15,000 in 1998, 1999, 2000, 2001 and 2002, respectively. Income Taxes: The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 is an asset and liability approach, whereby deferred tax assets and liabilities are recorded to the extent of the tax effect of differences between the financial statement carrying values and tax bases of assets and liabilities. A valuation allowance is recorded for deferred taxes where it appears more likely than not that the Company will not be able to recover the deferred tax asset. MCT Cablevision, L.P. is treated as a partnership for federal and state income tax purposes, but taxed as a corporation for Puerto Rico income tax purposes. Stock Based Compensation: The Company applies Accounting Principles Board Opinion No. 25 -- "Accounting for Stock Issued to Employees" ("APB 25") in accounting for its stock plans. The Company has adopted the disclosure -- only provisions of Statement of Financial Accounting Standards No. 123 -- "Accounting for Stock-Based Compensation ("SFAS 123"). Earnings Per Share: The Company has adopted SFAS No. 128 "Earnings per share" issued in February 1997. This statement requires the disclosure of basic and diluted earnings per share and revises the method required to calculate these amounts. The adoption of this standard did not significantly impact previously reported earnings per share amounts. Concentration of Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables, cash and cash equivalents. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across different businesses and geographic regions. As of December 31, 1995, 1996 and 1997 the Company had no significant concentrations of credit risk. New Accounting Pronouncements: In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement table that is displayed with the same prominence as other financial statements. SFAS 131 requires that all public business F-10 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. Summary of Significant Accounting Policies: -- (Continued) enterprises report information about operating segments, as well as specific revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. These new standards, which are effective for the fiscal year ending December 31, 1998, will not have a significant impact on the Company. 3. Interim Financial Information: The financial statements as of September 30, 1998 and for the nine months ended September 30, 1998 and 1997 are unaudited. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair presentation of the results of operations have been included. Results for the nine months ended September 30, 1998 may not be indicative of the results expected for the year ending December 31, 1998. The Company has provided unaudited footnote information for the interim periods to the extent such information is substantially different from the audited periods. 4. Property and Equipment: Property and equipment consist of the following:
December 31, December 31, September 30, 1996 1997 1998 ---------------- ---------------- ---------------- (unaudited) Land .......................................... $ 862,298 $ 947,712 $ 949,712 Reception and distribution facilities ......... 29,140,040 27,012,297 19,445,435 Transmitter equipment ......................... 11,643,812 15,306,589 17,198,707 Building and improvements ..................... 1,553,548 2,293,755 3,163,111 Equipment, furniture and fixtures ............. 1,509,588 3,091,363 7,541,578 Vehicles ...................................... 766,192 983,256 900,953 Other equipment ............................... 2,295,446 2,612,332 3,193,704 ------------- ------------- ------------- 47,770,924 52,247,304 52,393,200 Accumulated depreciation ...................... (23,655,786) (24,560,658) (22,841,505) ------------- ------------- ------------- Net property and equipment .................... $ 24,115,138 $ 27,686,646 $ 29,551,695 ============= ============= =============
Depreciation expense amounted to $4.1 million, $5.2 million, $5.7 million, $4.2 million and $4.5 million for the years ended December 31, 1995, 1996, 1997 and for the nine months ended September 30, 1997 (unaudited) and 1998 (unaudited), respectively. F-11 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. Intangibles: Intangible assets consist of the following:
December 31, December 31, September 30, 1996 1997 1998 ---------------- ---------------- ---------------- (unaudited) Goodwill ............................................ $ 28,490,035 $ 28,490,035 $ 28,490,035 Franchise costs ..................................... 35,972,374 35,332,755 31,933,240 Broadcast licenses & affiliation agreements ......... 18,930,324 19,094,212 19,094,212 Deferred financing costs ............................ 4,020,665 16,654,186 30,671,322 Subscriber acquistion costs ......................... 1,272,282 5,787,156 5,787,156 DBS rights .......................................... 45,829,174 203,379,952 671,728,479 Consultancy & non-compete agreements ................ 2,700,000 6,010,838 7,022,688 Organization & other deferred costs ................. 6,368,426 8,571,281 13,129,722 ------------- ------------- ------------- 143,583,280 323,320,415 807,856,854 Accumulated amortization ............................ (17,347,152) (38,546,388) (98,537,819) ------------- ------------- ------------- Net intangible assets ............................... $ 126,236,128 $ 284,774,027 $ 709,319,035 ============= ============= =============
Amortization expense amounted to $4.6 million, $6.9 million, $22.1 million, $13.9 million and $42.3 million for the years ended December 31, 1995, 1996, 1997 and for the nine months ended September 30, 1997 (unaudited) and 1998 (unaudited), respectively. The Company's intangible assets increased primarily due to the $166 million increase in DBS rights and other intangibles relating to the 25 acquisitions completed by the Company during 1997 (see footnote 13 -- Acquisitions and Disposition), as well as the net $12.6 million increase in deferred financing costs related to the three completed financings (see footnote 7 -- Redeemable Preferred Stock and footnote 8 -- Long-Term Debt). The Company's intangible assets increased during the nine months ended September 30, 1998 (unaudited) primarily due to the $484 million increase in DBS rights and other intangibles relating to the 21 acquisitions completed by the Company during this period, net of a $6 million intangible asset reduction related to the sale of its remaining New England cable systems (see footnote 21 - -- Subsequent Events). 6. Common Stock: At December 31, 1996 common stock consists of the following: Pegasus Class A common stock, $0.01 par value; 30.0 million shares authorized; 4,663,229 issued and outstanding ................................................................ $ 46,632 Pegasus Class B common stock, $0.01 par value; 15.0 million shares authorized; 4,581,900 issued and outstanding ................................................................ 45,819 -------- Total common stock ................................................................. $ 92,451 ========
At December 31, 1997 common stock consists of the following: Pegasus Class A common stock, $0.01 par value; 30.0 million shares authorized; 5,739,842 issued and outstanding ................................................................ $ 57,399 Pegasus Class B common stock, $0.01 par value; 15.0 million shares authorized; 4,581,900 issued and outstanding ................................................................ 45,819 --------- Total common stock ................................................................. $ 103,218 =========
F-12 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 6. Common Stock: -- (Continued) At September 30, 1998 (unaudited ), common stock consists of the following: Pegasus Class A common stock, $0.01 par value; 30.0 million shares authorized; 11,315,809 issued and outstanding ................................................................. $ 113,158 Pegasus Class B common stock, $0.01 par value; 15.0 million shares authorized; 4,581,900 issued and outstanding ................................................................. 45,819 --------- Total common stock .................................................................. $ 158,977 =========
The Company's ability to pay dividends on its Common Stock is subject to certain restrictions (see footnote 7 -- Redeemable Preferred Stock and footnote 8 -- Long-Term Debt). 7. Redeemable Preferred Stock: As a result of the Unit Offering and dividends subsequently declared on the Series A Preferred Stock, the Company has outstanding approximately 112,215 shares of Series A Preferred Stock with a liquidation preference of $1,000 per share (the "Liquidation Preference"). Cumulative dividends, at a rate of 12.75% are payable semi-annually on January 1 and July 1. Dividends may be paid, occurring on or prior to January 1, 2002, at the option of the Company, either in cash or by the issuance of additional shares of Series A Preferred Stock. Subject to certain conditions, the Series A Preferred Stock is exchangeable in whole, but not in part, at the option of the Company, for Pegasus' 12.75% Senior Subordinated Exchange Notes due 2007 (the "Exchange Notes"). The Exchange Notes would contain substantially the same redemption provisions, restrictions and other terms as the Series A Preferred Stock. Pegasus is required to redeem all of the Series A Preferred Stock outstanding on January 1, 2007 at a redemption price equal to the Liquidation Preference thereof, plus accrued dividends. The carrying amount of the Series A Preferred Stock is periodically increased by amounts representing dividends not currently declared or paid but which will be payable under the mandatory redemption features. The increase in carrying amount is effected by charges against retained earnings, or in the absence of retained earnings, by charges against paid-in capital. Under the terms of the Series A Preferred Stock, Pegasus' ability to pay dividends on its Common Stock is subject to certain restrictions. At December 31, 1997 and September 30, 1998 (unaudited) 5.0 million shares of Series A Preferred Stock are authorized and 105,490 and 119,369 shares are issued and outstanding, respectively. Basic earnings per share amounts are based on net income after deducting preferred stock dividend requirements divided by the weighted average number of Class A and Class B Common shares outstanding during the year. For the year ended December 31, 1997 and the nine months ended September 30, 1997 (unaudited) and 1998 (unaudited), net loss per common share was determined by dividing net loss, as adjusted by the aggregate amount of dividends on the Company's Series A Preferred Stock, approximately $12.2 million, $8.7 million and $11.0 million, respectively, by applicable shares outstanding. F-13 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 8. Long-Term Debt: Long-term debt consists of the following :
December 31, December 31, September 30, 1996 1997 1998 -------------- -------------- -------------- (unaudited) Series B Notes payable by PM&C, due 2005, interest at 12.5%, payable semi-annually in arrears on January 1 and July 1, net of unamortized discount of $3,412,222, $3,018,003 and $2,721,088 as of December 31, 1996, 1997 and September 30, 1998, respectively ..................... $ 81,587,778 $ 81,981,997 $ 82,278,912 Series B Notes payable by DTS, due 2007, interest at 12.5%, payable semi-annually in arrears on February 1 and August 1, net of unamortized discount of $1,854,358 as of September 30, 1998 -- -- 153,145,642 Series B Senior Notes payable by Pegasus, due 2005, interest at 9.625%, payable semi-annually in arrears on April 15 and October 15, commencing on April 15, 1998 ............................. -- 115,000,000 115,000,000 Senior seven-year $50.0 million revolving credit facility, payable by PM&C, interest at PM&C's option at either the bank's base rate plus an applicable margin or LIBOR plus an applicable margin ................................................... 29,600,000 -- -- Senior six-year $180.0 million revolving credit facility, payable by PM&C, interest at PM&C's option at either the bank's base rate plus an applicable margin or LIBOR plus an applicable margin ................................................... -- -- 81,500,000 Senior six-year $70.0 million revolving credit facility, payable by DTS, interest at DTS' option at either the bank's base rate or the Eurodollar Rate ..................................................... -- -- 9,500,000 Senior six-year $20.0 million term loan facility, payable by DTS, interest at DTS' option at either the bank's base rate or the Eurodollar Rate .............. -- -- 19,800,000 Mortgage payable, due 2000, interest at 8.75% ............. 498,468 477,664 460,827 Note payable, due 1998, interest at 10% ................... 3,050,000 3,050,000 -- Sellers' notes, various maturities and interest rates ..... 277,130 7,171,621 42,327,380 Capital leases and other .................................. 562,067 673,849 620,774 ------------ ------------ ------------ 115,575,443 208,355,131 504,633,535 Less current maturities ................................... 363,833 6,357,320 22,218,859 ------------ ------------ ------------ Long-term debt ............................................ $115,211,610 $201,997,811 $482,414,676 ============ ============ ============
In July 1995, PM&C sold 85,000 units consisting of $85.0 million in aggregate of 12.5% Series A Senior Subordinated Notes due 2005 (the "PM&C Series A Notes" and, together with the PM&C Series B Notes, the "PM&C Notes") and 8,500 shares of Class B Common Stock of PM&C (the "PM&C Note Offering"). The PM&C Class B Shares were subsequently exchanged for an aggregate of 191,775 shares of Pegasus' Class A Common Stock. F-14 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 8. Long-Term Debt: -- (Continued) In November 1995, PM&C exchanged its PM&C Series B Notes for the PM&C Series A Notes. The PM&C Series B Notes have substantially the same terms and provisions as the PM&C Series A Notes. The PM&C Series B Notes are guaranteed on a full, unconditional, senior subordinated basis, jointly and severally by a majority of the wholly owned direct and indirect subsidiaries of PM&C. PM&C's indebtedness contain certain financial and operating covenants, including restrictions on PM&C to incur additional indebtedness, create liens and to pay dividends. In August 1996, in conjunction with the acquisition of the WTLH Tallahassee, Florida FCC license and Fox affiliation agreement, the Company incurred indebtedness of $3.1 million. In August 1996, PM&C entered into a $50.0 million seven-year senior revolving credit facility (the "PM&C Credit Facility"), which was collateralized by substantially all of the assets of PM&C and its subsidiaries. Deferred financing fees relating to the $10.0 million revolving credit facility were written off, resulting in an extraordinary loss of $251,000 on the refinancing transaction. Outstanding balances under the PM&C Credit Facility were repaid from the proceeds of the Unit Offering. Concurrently with the closing of the New Credit Facility, the PM&C Credit Facility was repaid in full and commitments thereunder were terminated. Deferred financing fees relating to the $50.0 million revolving credit facility were written off, resulting in an extraordinary loss of $460,000 on the refinancing transaction. In October 1997, Pegasus completed the Senior Notes Offering in which it sold $115.0 million of its 9.625% Series A Senior Notes due 2005 (the "9.625% Series A Senior Notes"), resulting in net proceeds to the Company of approximately $111.0 million. A portion of the proceeds from the Senior notes Offering were used to retire an existing $130.0 million credit facility (the "PSH Credit Facility"). The PSH Credit Facility was financed with the New Credit Facility. Deferred financing fees relating to the PSH Credit Facility were written off, resulting in an extraordinary loss of approximately $1.2 million on the refinancing transaction. In December 1997, PM&C entered into a $180.0 million six-year senior revolving credit facility (the "New Credit Facility"), which is collateralized by substantially all of the assets of PM&C and its subsidiaries. Interest on the New Credit Facility is, at the Company's option, at either the bank's base rate plus an applicable margin or LIBOR plus an applicable margin. The New Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. The New Credit Facility will be used to finance future acquisitions and for working capital, capital expenditures and general corporate purposes. There were no borrowings outstanding at December 31, 1997. The Company's indebtedness contain certain financial and operating covenants, including restrictions on the Company to incur additional indebtedness, create liens and to pay dividends. At December 31, 1997, maturities of long-term debt and capital leases are as follows: 1998 ........................................... $ 6,357,320 1999 ........................................... 1,905,265 2000 ........................................... 1,930,290 2001 ........................................... 1,125,561 2002 ........................................... 54,698 Thereafter ..................................... 196,981,997 ------------ $208,355,131 ============ F-15 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 9. Net Income Per Common Share: Calculation of Basic and Diluted net income per common share: The following table sets forth the computation of the number of shares used in the computation of basic and diluted net income per common share (in thousands):
Nine Months Ended September 30, 1995 1996 1997 1997 1998 ------------- ---------------- ----------------- ----------------- ----------------- (unaudited) Net income (loss) applicable to common shares ..................... $2,053,910 ($ 9,974,146) ($ 31,487,137) ($ 15,977,643) ($ 49,491,691) ========== =========== ============ ============ ============ Weighted average common shares outstanding ....................... 5,139,929 6,239,646 9,858,244 9,755,882 13,533,756 Total shares used for calculation of basic net income per common share ...................... 5,139,929 6,239,646 9,858,244 9,755,882 13,533,756 ---------- ----------- ------------ ------------ ------------ Stock options ...................... -- -- -- -- -- ---------- ----------- ------------ ------------ ------------ Total shares used for calculation of diluted net income per common share ...................... 5,139,929 6,239,646 9,858,244 9,755,882 13,533,756 ========== =========== ============ ============ ============
For the year ended December 31, 1997 and the nine months ended September 30, 1997 (unaudited) and 1998 (unaudited), net loss per common share was determined by dividing net loss, as adjusted by the aggregate amount of dividends on the Company's Series A Preferred Stock, approximately $12.2 million, $8.7 million and $11.0 million, respectively, by applicable shares outstanding. Securities that have not been issued and are antidilutive amounted to 2,539 shares in 1996 and 582,493 shares in 1997. 10. Leases: The Company leases certain studios, towers, utility pole attachments, and occupancy of underground conduits and headend sites under operating leases. The Company also leases office space, vehicles and various types of equipment through separate operating lease agreements. The operating leases expire at various dates through 2005. Rent expense for the years ended December 31, 1995, 1996 and 1997 was $503,000, $712,000 and $1.1 million, respectively. The Company leases equipment under long-term leases and has the option to purchase the equipment for a nominal cost at the termination of the leases. The related obligations are included in long-term debt. Property and equipment at December 31 include the following amounts for leases that have been capitalized: 1996 1997 ------------- ------------- Equipment, furniture and fixtures .......... $ 215,112 $ 700,807 Vehicles ................................... 446,372 516,642 ---------- ---------- 661,484 1,217,449 Accumulated depreciation ................... (250,288) (512,307) ---------- ---------- Total ................................... $ 411,196 $ 705,142 ========== ========== F-16 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 10. Leases: -- (Continued) Future minimum lease payments on noncancellable operating and capital leases at December 31, 1997 are as follows:
Operating Capital Leases Leases ------------- ----------- 1998 .............................................. $ 649,802 $259,574 1999 .............................................. 427,794 184,631 2000 .............................................. 331,283 164,726 2001 .............................................. 248,206 140,681 2002 .............................................. 143,958 53,612 Thereafter ........................................ 59,154 -- ---------- -------- Total minimum payments ............................ $1,860,197 803,224 ========== Less: amount representing interest ................ 153,375 -------- Present value of net minimum lease payments including current maturities of $199,273 ......... $649,849 ========
11. Income Taxes: The following is a summary of the components of income taxes from operations:
1995 1996 1997 ---------- -------------- ----------- Federal -- deferred ............................ $23,000 ($ 169,000) State and local -- current ..................... 7,000 49,000 $200,000 ------- --------- -------- Provision (benefit) for income taxes .......... $30,000 ($ 120,000) $200,000 ======= ========= ========
The deferred income tax assets and liabilities recorded in the consolidated balance sheets at December 31, 1996 and 1997 are as follows:
1996 1997 ---------------- --------------- Assets: Receivables ........................................................ $ 47,887 $ 73,547 Excess of tax basis over book basis from tax gain recognized upon incorporation of subsidiaries .................................... 1,890,025 1,890,025 Loss carryforwards ................................................. 14,197,578 18,046,889 Other .............................................................. 870,305 870,305 ------------ ------------ Total deferred tax assets ........................................ 17,005,795 20,880,766 Liabilities: Excess of book basis over tax basis of property, plant and equipment (1,754,621) (1,938,899) Excess of book basis over tax basis of amortizable intangible assets (4,616,997) (5,695,313) ------------ ------------ Total deferred tax liabilities ................................... (6,371,618) (7,634,212) ------------ ------------ Net deferred tax assets ............................................ 10,634,177 13,246,554 Valuation allowance .............................................. (10,683,639) (13,296,554) ------------ ------------ Net deferred tax liabilities ....................................... ($ 49,462) ($ 50,000) ============ ============
The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized due to the expiration of the Company's net operating loss carryforwards and portions of other deferred tax assets related to prior acquisitions. The valuation allowance increased primarily as the result of net operating loss carryforwards generated during 1997, which may not be utilized. F-17 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 11. Income Taxes: -- (Continued) At December 31, 1997, the Company has net operating loss carryforwards of approximately $53.1 million which are available to offset future taxable income and expire through 2017. A reconciliation of the Federal statutory rate to the effective tax rate is as follows:
1995 1996 1997 ------------- ------------- ----------- U.S. statutory federal income tax rate .......... 34.00% 34.00% 34.00% Foreign net operating loss ...................... 27.09 1.73 -- Valuation allowance ............................. (60.72) (36.92) (34.38) Other ........................................... -- -- 1.43 ------- ------- ------- Effective tax rate .............................. (0.37%) (1.19%) 1.05% ======= ======= =======
12. Supplemental Cash Flow Information: Significant noncash investing and financing activities are as follows:
Years ended December 31, Nine months ended September 30, ------------------------------------------- ------------------------------- 1995 1996 1997 1997 1998 ------------- ------------- ------------- ------------- -------------- (unaudited) (unaudited) Barter revenue and related expense $5,110,662 $ 6,337,220 $ 7,520,000 $4,507,600 $ 4,861,900 Acquisition of program rights and Assumption of related program payables ...................... 1,335,275 1,140,072 3,452,779 1,965,880 4,828,024 Acquisition of plant under capital Leases .......................... 121,373 312,578 529,072 385,642 36,500 Redemption of minority interests and related receivable .......... 246,515 -- -- -- -- Capital contribution and related acquisition of intangibles ...... -- 14,079,546 15,197,503 6,661,250 119,695,473 Execution of license agreement option .......................... -- 3,050,000 -- -- -- Stock incentive compensation and related expense/ accrued expense. -- -- 1,273,872 744,242 1,471,876 Minority interest and related acquisition of intangibles ...... -- -- 3,000,000 3,000,000 -- Notes payable and related acquisition of intangibles ...... -- -- 7,113,689 1,938,434 219,889,144 Series A Preferred Stock dividend and reduction of paid-in capital. -- -- 12,215,000 8,677,500 10,958,593 Deferred taxes, net and related acquisition of intangibles ...... -- -- -- -- 53,577,946
For the years ended December 31, 1995, 1996, 1997 and for the nine months ended September 30, 1997 (unaudited) and 1998 (unaudited), the Company paid cash for interest in the amount of $3.6 million, $12.0 million, $13.5 million, $12.4 million and $26.0 million, respectively. The Company paid no federal income taxes for the years ended December 31, 1995, 1996, 1997 and for the nine months ended September 30, 1997 (unaudited) and 1998 (unaudited). 13. Acquisitions and Disposition: In January 1996, PCH, the parent of the Company, acquired all of the outstanding stock of Portland Broadcasting, Inc. ("PBI"), which owns the tangible assets of WPXT, Portland, Maine. PCH immediately transferred ownership of PBI to the Company. The aggregate purchase price of PBI was approximately $11.7 F-18 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 13. Acquisitions and Disposition: -- (Continued) million of which $1.5 million was allocated to fixed and tangible assets and $10.2 million to intangible assets. In June 1996, PCH acquired the FCC license of WPXT for aggregate consideration of $3.0 million. PCH immediately transferred the ownership of the license to the Company. Effective March 1, 1996, the Company acquired the principal tangible assets of WTLH, Inc., Tallahassee, Florida and certain of its affiliates for approximately $5.0 million, except for the FCC license and Fox affiliation agreement. Additionally, the Company entered into a put/call agreement regarding the FCC license and Fox affiliation agreement with the licensee of WTLH. In August 1996, the Company exercised its rights and recorded $3.1 million in intangible assets and long term debt. The aggregate purchase price of WTLH, Inc. and the related FCC licenses and Fox affiliation agreement is approximately $8.1 million of which $2.2 million was allocated to fixed and tangible assets and $5.9 million to various intangible assets. In addition, PCH granted the sellers of WTLH a warrant to purchase $1.0 million of stock of one of its subsidiaries at $14.00 per share. The warrant expired in February 1997. Effective August 29, 1996, the Company acquired all of the assets of Dom's for approximately $25.0 million in cash and $1.0 million in assumed liabilities. Dom's operates cable systems serving ten communities contiguous to the Company's Mayaguez, Puerto Rico cable system. The aggregate purchase price of the principal assets of Dom's amounted to $26.0 million of which $4.7 million was allocated to fixed and tangible assets and $21.3 million to various intangible assets. On October 8, 1996, the Company acquired, from an independent DIRECTV provider, the rights to provide DIRECTV programming in certain rural areas of Texas and Michigan and the related assets in exchange for total consideration of approximately $29.8 million, which consisted of $17.9 million in cash and $11.9 million of the Company's Class A Common Stock. On November 8, 1996, the Company acquired, from an independent DIRECTV provider, the rights to provide DIRECTV programming in certain rural areas of Ohio and the related assets, including receivables, in exchange for approximately $12.0 million in cash. Effective January 31, 1997, the Company sold substantially all the assets of its New Hampshire cable system to State Cable TV Corporation for approximately $6.9 million in cash, net of certain selling costs. The Company recognized a gain on the transaction of approximately $4.5 million. On January 31, 1997, the Company acquired, from an independent DIRECTV provider, the rights to provide DIRECTV programming in certain rural areas of Indiana and the related assets and liabilities in exchange for total consideration of approximately $14.4 million, which consisted of $8.8 million in cash and 466,667 shares of the Company's Class A Common Stock (amounting to $5.6 million at the time of issuance.) On February 14, 1997, the Company acquired, from an independent DIRECTV provider, the rights to provide DIRECTV programming in certain rural areas of Mississippi and the related assets in exchange for approximately $14.8 million in cash. As of March 10, 1997, the Company acquired, from two independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Arkansas, Virginia and West Virginia and the related assets in exchange for total consideration of approximately $14.6 million, which consisted of $10.4 million in cash, $200,000 in assumed liabilities, $3.0 million in preferred stock of a subsidiary of Pegasus and warrants to purchase a total of 283,969 shares of the Company's Class A Common Stock (amounting to $951,000 at the time of issuance). The $3.0 million in preferred stock of a subsidiary of Pegasus has been accounted for as a minority interest. As of April 9, 1997, the Company acquired, from an independent DIRECTV provider, the rights to provide DIRECTV programming in certain rural areas of Georgia and the related assets in exchange for total F-19 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 13. Acquisitions and Disposition: -- (Continued) consideration of approximately $4.5 million, which consisted of $3.3 million in cash, $143,000 in assumed liabilities, 42,187 shares of the Company's Class A Common Stock (amounting to $500,000 at the time of issuance), and a $600,000 obligation, payable over four years, for consultancy and non-compete agreements. As of May 9, 1997, the Company acquired, from four independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Colorado, Florida, Maryland, Minnesota, Nevada, New Hampshire, Oklahoma, Texas, Virginia, Washington, Wisconsin and Wyoming and the related assets in exchange for total consideration of approximately $20.3 million, which consisted of $18.6 million in cash, $502,000 in assumed liabilities, a $350,000 note due January 1998, 17,971 shares of the Company's Class A Common Stock (amounting to $200,000 at the time of issuance), and $600,000 in cash for consultancy and non-compete agreements. As of July 9, 1997, the Company acquired, from two independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Ohio and Texas and the related assets in exchange for total consideration of approximately $17.9 million, which consisted of $17.4 million in cash and $503,000 in assumed liabilities. As of August 8, 1997, the Company acquired, from four independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Indiana, Minnesota and South Dakota and the related assets in exchange for total consideration of approximately $17.7 million, which consisted of $15.5 million in cash, $464,000 in assumed liabilities and a $988,000 note due January 1998; and $750,000 in cash for endorsement and non-compete agreements. As of September 8, 1997, the Company acquired, from four independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Illinois, Minnesota and Utah and the related assets in exchange for total consideration of approximately $9.3 million, which consisted of $9.1 million in cash and $165,000 in assumed liabilities. As of October 8, 1997, the Company acquired, from two independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Alabama and Texas and the related assets in exchange for total consideration of approximately $28.0 million, which consisted of $24.2 million in cash, $219,000 in assumed liabilities, a $2.2 million note, payable over four years, and $589,000 in cash and a $772,000 obligation, payable over four years, for consultancy and non-compete agreements. Effective October 31, 1997 the Company acquired, from an independent DIRECTV provider, the rights to provide DIRECTV programming in certain rural areas of Georgia and the related assets and liabilities in exchange for total consideration of approximately $14.9 million, which consisted of $6.4 million in cash and 397,035 shares of the Company's Class A Common Stock (amounting to $8.5 million at the time of issuance). As of November 7, 1997 the Company acquired, from three independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Nebraska, Minnesota, Utah and Wyoming and the related assets in exchange for total consideration of approximately $5.4 million, which consisted of $3.1 million in cash, $147,000 in assumed liabilities, a $1.7 million note, payable over two years, and a $446,000 note due November 2000. The value assigned to the Class A Common Stock was computed by multiplying the number of shares issued by the closing price per share on the day prior to the date of consumption of the acquisition. The following unaudited summary, prepared on a pro forma basis, combines the results of operations as if the above DBS territories and cable system and TV stations had been acquired or sold as of the beginning of the periods presented, after including the impact of certain adjustments, such as the Company's payments to related parties, amortization of intangibles, interest expense, preferred stock dividends and related income tax F-20 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 13. Acquisitions and Disposition: -- (Continued) effects. The pro forma information does not purport to be indicative of what would have occurred had the acquisitions/disposition been made on those dates or of results which may occur in the future. This pro forma information does not include any acquisitions that occurred subsequent to December 31, 1997.
Years Ended December 31, ----------------------------- (in thousands, except earnings per share) (unaudited) 1996 1997 ------------- ------------- Net revenues ...................................... $ 83,916 $104,357 -------- -------- Operating loss .................................... ($ 11,564) ($ 16,250) -------- -------- Net loss .......................................... ($ 34,820) ($ 39,002) Less: Preferred stock dividends ................... (13,156) (13,156) -------- -------- Net loss available to common stockholders ......... ($ 47,976) ($ 52,158) ======== ======== Net loss per common share ......................... ($ 6.70) ($ 5.09) ======== ========
14. Financial Instruments: The carrying values and fair values of the Company's financial instruments consisted of:
December 31, December 31, September 30, 1996 1997 1998 ------------------------ ------------------------ ------------------------ (unaudited) (in thousands) Carrying Fair Carrying Fair Carrying Fair Value Value Value Value Value Value ---------- ----------- ---------- ----------- ---------- ----------- Long-term debt, including current portion ......................... $115,575 $125,788 $208,355 $240,086 $504,634 $536,546 Series A Preferred Stock ......... -- -- 111,264 114,750 122,223 137,956
Long-term debt: The fair value of long-term debt is estimated based on the quoted market price for the same or similar instruments. Series A Preferred Stock: The fair value of Series A Preferred Stock is estimated based on the quoted market price for the same or similar instruments. All other financial instruments are stated at cost which approximates fair market value. 15. Warrants: In January 1997, in connection with the Unit Offering, the Company issued warrants to purchase 193,600 shares of Class A Common Stock at an exercise price of $15 per share. These warrants are exercisable through January 1, 2007. At December 31, 1997, none of these warrants have been exercised. The fair value of these warrants was estimated using the Black-Scholes pricing model and was approximately $1.1 million. The value assigned to these warrants reduced the carrying amount of the Series A Preferred Stock and was effected by an increase in additional paid-in-capital. In March 1997, in connection with the acquisition of DBS properties, the Company issued warrants to purchase 283,969 shares of Class A Common Stock at an exercise price of $11.81 per share. These warrants are exercisable through March 10, 2006. At December 31, 1997, none of these warrants have been exercised. The fair value of these warrants was estimated using the Black-Scholes pricing model and was approximately $951,000. The value assigned to these warrants increased the carrying amount of the DBS rights acquired and was effected by an increase in additional paid-in-capital. 16. Employee Benefit Plans: The Company has two active stock plans available to grant stock options (the "Stock Option Plan") and restricted stock awards (the "Restricted Stock Plan") to eligible employees, executive officers and non-employee directors of the Company. F-21 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 16. Employee Benefit Plans: -- (Continued) Stock Option Plan The Stock Option Plan provides for the granting of nonqualified and qualified options to purchase a maximum of 450,000 shares (subject to adjustment to reflect stock dividends, stock splits, recapitalizations and similar changes in the capitalization of Pegasus) of Class A Common Stock of the Company. Executive officers, who are not eligible to receive profit sharing awards under the Restricted Stock Plan, are eligible to receive stock options under the Stock Option Plan, but no executive officer may be granted options to purchase more than 275,000 shares of Class A Common Stock under the Stock Option Plan. Directors of Pegasus who are not employees of the Company are eligible to receive nonqualified options. The Stock Option Plan terminates in September 2006. As of December 31, 1997, options to purchase an aggregate of 223,385 shares of Class A Common Stock were outstanding, including 220,000 options outstanding under the Stock Option Plan. All options granted under the Stock Option Plan have been granted at fair market value at the time of grant. The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), in October 1995. Under SFAS 123, companies can either continue to account for stock compensation plans pursuant to existing accounting standards or elect to expense the value derived from using an option pricing model. The Company is continuing to apply existing accounting standards. However, SFAS 123 requires disclosures of pro forma net income and earnings per share as if the Company had adopted the expensing provisions of SFAS 123. The fair value of options was estimated using the Black-Scholes option pricing model with the following weighted average assumptions for 1996 and 1997: 1996 1997 ---------- ---------- Risk-free interest rate ................. 5.56% 6.35% Dividend Yield .......................... 0.00% 0.00% Volatility Factor ....................... 0.00 0.403 Weighted average expected life .......... 5 years 5 years Pro forma net losses for 1996 and 1997 would have been $9,976,114 and $19,480,852, respectively; pro forma net losses per common share for 1996 and 1997 would have been $1.60 and $3.22, respectively. The weighted average fair value of options granted were $3.40 and $4.99 for 1996 and 1997, respectively. The following table summarizes stock option activity over the past two years under the Company's plan:
Weighted Number of Average Shares Exercise Price ----------- --------------- Outstanding at January 1, 1996 ................... -- -- Granted .......................................... 3,385 $ 14.00 Exercised ........................................ -- -- Canceled or expired .............................. -- -- ------- -------- Outstanding at December 31, 1996 ................. 3,385 14.00 Granted .......................................... 220,000 11.00 Exercised ........................................ -- -- Canceled or expired .............................. -- -- ------- -------- Outstanding at December 31, 1997 ................. 223,385 $ 11.05 ======= ======== Options exercisable at December 31, 1996 ......... 3,385 14.00 Options exercisable at December 31, 1997 ......... 3,385 14.00
F-22 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 16. Employee Benefit Plans: -- (Continued) Restricted Stock Plan The Restricted Stock Plan provides for the granting of restricted stock awards representing a maximum of 270,000 shares (subject to adjustment to reflect stock dividends, stock splits, recapitalizations and similar changes in the capitalization of Pegasus) of Class A Common Stock of the Company to eligible employees who have completed at least one year of service. Restricted stock received under the Restricted Stock Plan vests over four years. The Plan terminates in September 2006. As of December 31, 1997, 94,159 shares of Class A Common Stock had been granted under the Restricted Stock Plan. The expense for this plan amounted to $501,139 and $800,768 in 1996 and 1997, respectively. 401(k) Plans Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings Plan (the "US 401(k) Plan") for eligible employees of PM&C and its domestic subsidiaries. In 1996, the Company's Puerto Rico subsidiary adopted the Pegasus Communications Puerto Rico Savings Plan (the "Puerto Rico 401(k) Plan" and, together with the US 401(k) Plan, the "401(k) Plans") for eligible employees of the Company's Puerto Rico subsidiaries. Substantially all Company employees who, as of the enrollment date under the 401(k) Plans, have completed at least one year of service with the Company are eligible to participate in one of the 401(k) Plans. Participants may make salary deferral contributions of 2% to 6% of their salary to the 401(k) Plans. The expense for this plan amounted to $484,226 and $473,104 in 1996 and 1997, respectively. The Company may make three types of contributions to the 401(k) Plans, each allocable to a participant's account if the participant completes at least 1,000 hours of service in the applicable plan year, and is employed on the last day of the applicable plan year: (i) the Company matches 100% of a participant's salary deferral contributions to the extent the participant invested his or her salary deferral contributions in Class A Common Stock at the time of his or her initial contribution to the 401(k) Plans, (ii) the Company, in its discretion, may contribute an amount that equals up to 10% of the annual increase in Company-wide Location Cash Flow (these Company discretionary contributions, if any, are allocated to eligible participants' accounts based on each participant's salary for the plan year), and (iii) the Company also matches a participant's rollover contribution, if any, to the 401(k) Plans, to the extent the participant invested his or her rollover contribution in Class A Common Stock at the time of his or her initial contribution to the 401(k) Plans. Discretionary Company contributions and Company matches of employee salary deferral contributions and rollover contributions are made in the form of Class A Common Stock, or in cash used to purchase Class A Common Stock. The Company has authorized and reserved for issuance up to 205,000 shares of Class A Common Stock in connection with the 401(k) Plans. Company contributions to the 401(k) Plans are subject to limitations under applicable laws and regulations. All employee contributions to the 401(k) Plans are fully vested at all times and all Company contributions, if any, vest 34% after two years of service with the Company (including years before the 401(k) Plans were established), 67% after three years of service and 100% after four years of service. A participant also becomes fully vested in Company contributions to the 401(k) Plans upon attaining age 65 or upon his or her death or disability. 17. Commitments and Contingent Liabilities: Legal Matters: From time to time the Company is involved with claims that arise in the normal course of business. In the opinion of management, the ultimate liability with respect to these claims will not have a material adverse effect on the consolidated operations, liquidity, cash flows or financial position of the Company. F-23 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 18. Other Events: In August 1997, Pegasus commenced programming of TV station WPME, which is affiliated with UPN. WPME is in the Portland, Maine Designated Market Area ("DMA") and is being programmed under a local marketing agreement ("LMA"). WPME's offices, studio and transmission facilities are co-located with WPXT, a TV station in the Portland market the Company has owned and operated since January 1996. In October 1997, Pegasus commenced programming of TV station WGFL, which is affiliated with WB. WGFL is in the Gainesville, Florida DMA and is being programmed under a LMA. 19. Related Party Transaction: Effective October 31, 1997, the Company acquired DIRECTV distribution rights for certain rural areas of Georgia and related assets (the "ViewStar DBS Acquisition") from ViewStar Entertainment Services, Inc. ("ViewStar"). Prior to the acquisition, Donald W. Weber, a director of Pegasus, was the President and Chief Executive Officer of ViewStar and together with his son owned approximately 73% of the outstanding stock of ViewStar. The ViewStar DBS Acquisition was effected through a merger of ViewStar into a subsidiary of Pegasus. The purchase price of the ViewStar DBS Acquisition consisted of approximately $6.4 million in cash and 397,035 shares of Class A Common Stock. The acquisition involved the execution of noncompetition agreements by Mr. Weber and his son and the execution of a shareholders agreement (which included the granting of certain registration rights on the shares of Class A Common Stock issued in connection with the acquisition). The Company advanced approximately $212,000 to KB Communications, Inc., which was subsequently repaid. KB Communications is a corporation in which W.W. Keen Butcher, the stepfather of Marshall W. Pagon, the Company's President and Chief Executive Officer, holds a majority interest. F-24 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 20. Industry Segments: The Company operates in growing segments of the media and communications industries: multichannel television (DBS and Cable) and broadcast television (TV). TV consists of five Fox-affiliated television stations, one of which also simulcasts its signal in Hazelton and Williamsport, Pennsylvania, one UPN-affiliated television station and two WB-affiliated television stations, one of which one is pending launch. Cable and DBS consist of providing cable television services and direct broadcast satellite services, respectively, in twenty-seven states and Puerto Rico, as of December 31, 1997. Information regarding the Company's business segments in 1995, 1996, and 1997 is as follows (in thousands):
Mgmt. Co. & DBS TV Cable Other Consolidated ----------- ---------- ---------- --------- ------------- 1995 Revenues ............................ $ 1,469 $20,073 $ 10,606 $ -- $ 32,148 Operating income (loss) ............. (752) 2,219 (1,103) -- 364 Identifiable assets ................. 5,577 36,906 34,395 18,892 95,770 Incentive compensation .............. 9 415 104 -- 528 Corporate expenses .................. 114 800 450 -- 1,364 Depreciation & amortization ......... 719 2,668 5,364 -- 8,751 Capital expenditures ................ 216 1,403 953 69 2,641 1996 Revenues ............................ $ 5,829 $28,604 $ 13,496 $ -- $ 47,929 Operating income (loss) ............. (1,239) 3,599 190 -- 2,550 Identifiable assets ................. 53,090 61,817 54,346 4,427 173,680 Incentive compensation .............. 95 742 148 -- 985 Corporate expenses .................. 158 774 497 -- 1,429 Depreciation & amortization ......... 1,786 5,029 5,245 -- 12,060 Capital expenditures ................ 855 2,289 3,070 80 6,294 1997 Revenues ............................ $ 38,254 $31,876 $ 16,688 $ -- $ 86,818 Operating income (loss) ............. (11,990) 3,780 1,622 -- (6,588) Identifiable assets ................. 209,507 63,016 51,714 56,625 380,862 Incentive compensation .............. 525 568 181 -- 1,274 Corporate expenses .................. 744 895 617 -- 2,256 Depreciation & amortization ......... 17,042 5,107 5,643 -- 27,792 Capital expenditures ................ 506 6,425 2,914 84 9,929
21. Subsequent Events: A. Acquisitions and Disposition As of January 7, 1998, the Company acquired, from an independent DIRECTV(R) ("DIRECTV") provider, the rights to provide DIRECTV programming in certain rural areas of Minnesota and the related assets in exchange for total consideration of approximately $1.9 million, which consisted of $1.8 million in cash and $32,000 in assumed liabilities. As of March 9, 1998, the Company acquired, from two independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Nebraska and Texas and the related assets in exchange for total consideration of approximately $15.6 million, which consisted of $5.9 million in cash, $105,000 in assumed liabilities, a $9.4 million note, payable over four years, and an aggregate of $225,000 for consultancy and non-compete agreements (consisting of $75,000 in cash and a $150,000 obligation, payable over two years). F-25 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 21. Subsequent Events: -- (Continued) As of April 9, 1998, the Company acquired, from two independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of New Mexico and Texas and the related assets in exchange for total consideration of approximately $14.3 million, which consisted of $13.1 million in cash, $298,000 in assumed liabilities and 37,304 shares of the Company's Class A Common Stock (amounting to $900,000 at the time of issuance). On April 27, 1998, the Company acquired, from Digital Television Services, Inc. ("DTS") which holds the rights to provide DIRECTV programming in certain rural areas of California, Colorado, Georgia, Indiana, Kansas, Kentucky, New Hampshire, New Mexico, New York, South Carolina and Vermont, the related assets and liabilities in exchange for total consideration of approximately $345.2 million, which consisted of approximately 5.5 million shares of the Company's Class A Common Stock (amounting to $119.4 million at a price of $21.71 per share), approximately $158.9 million of assumed net liabilities and approximately $66.9 million of a deferred tax liability. As of May 11, 1998, the Company acquired, from three independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Idaho and Oregon and the related assets in exchange for total consideration of approximately $9.3 million, which consisted of $9.2 million in cash and $140,000 in assumed liabilities. As of June 10, 1998, the Company acquired, from four independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Idaho, South Dakota and Texas and the related assets in exchange for total consideration of approximately $12.5 million, which consisted of $12.2 million in cash, $154,000 in assumed liabilities, and a $120,000 obligation, payable over three years, for a non-compete agreement. Effective July 1, 1998, the Company sold substantially all the assets of its remaining New England cable systems to Avalon Cable of New England, LLC for approximately $30.1 million in cash. The Company recognized a nonrecurring gain of approximately $24.9 million in the third quarter of 1998 relating to this transaction. As of July 10, 1998, the Company acquired, from three independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Alabama, Nebraska and South Dakota and the related assets in exchange for total consideration of approximately $18.6 million, which consisted of $18.1 million in cash, $81,000 in assumed liabilities, and an aggregate of $425,000 for consultancy and non-compete agreements (consisting of $62,000 in cash, a $63,000 obligation, payable over one year, and a $300,000 obligation, payable over three years). As of August 10, 1998, the Company acquired, from an independent DIRECTV provider the rights to provide DIRECTV programming in certain rural areas of Oregon and the related assets in exchange for total consideration of approximately $3.0 million, which consisted of $2.8 million in cash, $34,000 in assumed liabilities, and a $200,000 obligation, payable over two years, for consultancy and non-compete agreements. As of September 10, 1998, the Company acquired, from four independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Alabama, Illinois, Minnesota and Texas and the related assets in exchange for total consideration of approximately $37.1 million, which consisted of $26.5 million in cash, $464,000 in assumed liabilities, and $10.2 million notes, payable over seven years. As of October 9, 1998, the Company acquired from an independent DIRECTV provider, the rights to provide DIRECTV programming in certain rural areas of South Dakota and the related assets in exchange for total consideration of approximately $1.1 million, which consisted of $1.1 million in cash and $14,000 in assumed liabilities. F-26 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 21. Subsequent Events: -- (Continued) As of November 9, 1998, the Company acquired from three independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Oklahoma, South Dakota and Texas and the related assets in exchange for total consideration of approximately $12.5 million, which consisted of $12.5 million in cash and $94,000 in assumed liabilities. As of December 9, 1998, the Company acquired from two independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of New Mexico and West Virginia and the related assets in exchange for total consideration of approximately $5.9 million, which consisted of $5.9 million in cash and $84,000 in assumed liabilities. As of January 9, 1999, the Company acquired from four independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Colorado, Illinois, Minnesota and Texas and the related assets in exchange for total consideration of approximately $8.2 million, which consisted of $7.0 million in cash and a $1.2 million note, payable over one year. B. Long-Term Debt In July 1997, DTS entered into an amended and restated $70.0 million six-year senior revolving credit facility and a $20.0 million six-year senior term facility (collectively, the "DTS Credit Facility"), which is collateralized by substantially all of the assets of DTS and its subsidiaries. Interest on the DTS Credit Facility is, at DTS' option, at either the bank's base rate or the Eurodollar Rate. The DTS Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. The DTS Credit Facility may be used to refinance certain existing indebtedness, finance future acquisitions and for working capital, capital expenditures and general corporate purposes. In July 1997, DTS completed a senior subordinated notes offering (the "DTS Notes Offering") in which it sold $155.0 million of its 12.5% Series A Senior Subordinated Notes due 2007 (the "DTS Series A Notes"), resulting in net proceeds to DTS of approximately $146.0 million. DTS used the net proceeds to fund an interest escrow account, which is included in restricted cash on the Company's consolidated balance sheets, for the first four semi-annual interest payments on the notes and to repay outstanding indebtedness under the DTS Credit Facility. In January 1998, DTS exchanged its DTS Series A Notes for its 12.5% Series B Senior Subordinated Notes due 2007 (the "DTS Series B Notes", and together with the DTS Series A Notes, the "DTS Notes"). The DTS Series B Notes have substantially the same terms and provisions as the DTS Series A Notes. The DTS Series B Notes are guaranteed on a full, unconditional, senior subordinated basis, jointly and severally by all direct and indirect subsidiaries of DTS, except DTS Capital, which is a co-issuer of the DTS Notes and currently has nominal assets and does not conduct any operations. In February 1998, pursuant to a registered exchange offer, Pegasus exchanged all $115.0 million of its 9.625% Series A Notes for $115.0 million of its 9.625% Series B Senior Notes due 2005 (the "9.625% Series B Senior Notes", and together with the 9.625% Series A Senior Notes, the "Senior Notes"). The 9.625% Series B Senior Notes have substantially the same terms and provisions as the 9.625% Series A Senior Notes. No gain or loss was recorded in connection with the exchange of the notes. In November 1998 (unaudited), Pegasus completed an offering of senior notes (the "9.75% Senior Notes Offering") in which it sold $100.0 million of its 9.75% Series A Senior Notes due 2006 (the "9.75% Series A Senior Notes"), resulting in net proceeds to the Company of approximately $97.0 million. A portion of the proceeds from the 9.75% Senior Notes Offering were used to repay indebtedness under the PM&C Credit Facility. C. Other Events On June 17, 1998 the Board of Directors declared a dividend on the Series A Preferred Stock in the aggregate of approximately 7,154 shares of Series A Preferred Stock, payable on July 1, 1998 to shareholders of record on June 15, 1998. F-27 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 21. Subsequent Events: -- (Continued) On July 23, 1998, the Company entered into an agreement to purchase a cable system serving Aguadilla, Puerto Rico and neighboring communities for a purchase price of approximately $42.0 million in cash. The Aguadilla cable system serves approximately 21,500 subscribers and passes approximately 81,000 of the 90,000 homes in the franchise area. The Aquadilla cable system is contiguous to the Company's existing Puerto Rico cable system and, upon completion of the purchase, the Company intends to consolidate the Aquadilla cable system with its existing cable system. The closing of this acquisition is subject to regulatory and other approvals, as well as customary conditions, and the Company expects this transaction to close in the first quarter of 1999. In July 1998, Pegasus commenced programming TV station WFXU, which simulcasts the signal of WTLH, a TV station owned by the Company which is affiliated with Fox. WFXU is in the Tallahassee, Florida DMA and is being programmed under a LMA. In November 1998 Pegasus commenced programming TV station WSWB, which is affiliated with WB. WSWB is in the Northwestern Pennsylvania DMA and is programmed under a LMA. On December 11, 1998 the Board of Directors declared a dividend on the Series A Preferred Stock in the aggregate of approximately 7,610 shares of Series A Preferred Stock, payable on January 1, 1999 to shareholders of record on December 15, 1998. 22. Quarterly Information (Unaudited):
Quarter Ended --------------------------------------------- March 31, June 30, September 30, 1998 1998 1998 (in thousands) ------------- ------------ -------------- 1998 Net revenues .......................................... $ 28,784 $ 46,739 $ 55,507 Operating income (loss) ............................... (6,302) (8,877) (18,590) Income (loss) before extraordinary items .............. (15,936) (22,804) (10,751) Net income (loss) applicable to common shares ......... $ (15,936) $ (22,804) $ (10,751) Basic and diluted earnings per share: Operating income (loss) ............................... $ (0.61) $ (0.62) $ (1.17) Income (loss) before extraordinary items .............. (1.54) (1.59) (0.68) Net income (loss) ..................................... $ (1.54) $ (1.59) $ (0.68)
Quarter Ended ------------------------------------------------------------ March 31, June 30, September 30, December 31, 1997 1997 1997 1997 (in thousands) ----------- ------------ --------------- ------------- 1997 Net revenues ..................................... $15,897 $ 19,778 $ 21,927 $ 29,216 Operating income (loss) .......................... (366) (113) (1,308) (4,801) Income (loss) before extraordinary items ......... (692) (6,270) (9,015) (13,854) Net income (loss) applicable to common shares ......................................... $ (692) $ (6,270) $ (9,015) $ (15,510) Basic and diluted earnings per share: Operating income (loss) .......................... $ (0.04) $ (0.01) $ (0.13) $ (0.47) Income (loss) before extraordinary items ......... (0.07) (0.64) (0.91) (1.36) Net income (loss) ................................ $ (0.07) $ (0.64) $ (0.91) $ (1.53)
F-28 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 22. Quarterly Information (Unaudited): -- (Continued) For the fourth quarter of 1997, the Company had an extraordinary loss of approximately loss $1.7 million or $0.16 per share in connection with the refinancing of certain facilities (see footnote 8 -- Long-Term Debt).
Quarter Ended ------------------------------------------------------------ March 31, June 30, September 30, December 31, 1996 1996 1996 1996 (in thousands) ----------- ------------ --------------- ------------- 1996 Net revenues ..................................... $ 8,427 $ 10,756 $ 10,938 $17,809 Operating income (loss) .......................... (451) 960 (604) 2,644 Income (loss) before extraordinary items ......... (3,106) (1,732) (3,980) (905) Net income (loss) applicable to common shares ......................................... $ (3,106) $ (1,732) $ (4,231) $ (905) Basic and diluted earnings per share: Operating income (loss) .......................... $ (0.09) $ 0.18 $ (0.12) $ 0.30 Income (loss) before extraordinary items ......... (0.59) (0.33) (0.76) (0.10) Net income (loss) ................................ $ (0.59) $ (0.33) $ (0.81) $ (0.10)
For the third quarter of 1996, the Company had an extraordinary loss of approximately $251,000 or $0.05 per share in connection with the refinancing of a credit facility (see footnote 8 -- Long-Term Debt.) F-29 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Pro forma consolidated statement of operations data and other data for the year ended December 31, 1997 and the nine and twelve months ended September 30, 1998 include (i) our pending acquisition of a cable system serving Aguadilla, Puerto Rico, (ii) the completed and pending DBS acquisitions described in this prospectus under "The Company -- Recent Pegasus Developments" above, (iii) the sale of our New England cable systems, (iv) the offering of the Company's 1998 Senior Notes, and (v) this offering, all as if these events had occurred at the beginning of each period. The pro forma consolidated balance sheet as of September 30, 1998 includes payments in connection with (i) our pending acquisition of a cable system serving Aguadilla, Puerto Rico, (ii) the completed and pending DBS acquisitions described in this prospectus under "The Company -- Recent Pegasus Developments" above, (iii) the Sale of our New England cable systems, (iv) the offering of the Company's 1998 Senior Notes, and (v) this offering, as if these events had occurred on September 30, 1998. The acquisitions are accounted for using the purchase method of accounting. The total costs of such acquisitions are allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values. The allocation of the purchase price included in the pro forma financial statements is preliminary. We do not expect that the final allocation of the purchase price will materially differ from the preliminary allocation. The pro forma adjustments are based upon available information and upon certain assumptions that we believe are reasonable. The pro forma consolidated financial information should be read in conjunction with our consolidated financial statements and notes thereto. The pro forma consolidated financial information is not necessarily indicative of our future results of operations. There can be no assurance whether or when the pending DBS acquisitions or the acquisition of the Puerto Rico cable system will be consummated. F-30 Pegasus Communications Corporation Pro Forma Consolidated Statement of Operations Data Year Ended December 31, 1997 (Dollars in thousands)
DBS Acquisitions ---------------------------- New England Statement of Actual Completed(a) Pending(b) Cable Sale(c) Operations Data: ------------ -------------- ------------ --------------- Net Revenues: DBS ............................. $ 38,254 $ 96,591 $5,099 TV and Cable .................... 48,564 ($ 6,324) --------- -------- ------ ------- Total net revenues ............. 86,818 96,591 5,099 (6,324) --------- -------- ------ ------- Pre-marketing location operating expenses: DBS ............................. 26,042 70,387 2,952 TV and Cable .................... 30,070 (3,161) Subscriber acquisition costs ..... 5,973 22,817 529 Incentive compensation ........... 1,274 (95) Corporate expenses ............... 2,256 1,064 (242) Depreciation and amortization..... 27,792 18,435 41 (1,748) --------- -------- ------ ------- Income (loss) from operations .................... (6,589) (16,112) 1,577 (1,078) Interest expense ................. (16,094) (15,522) (16) 1,884 Other income (expense), net ...... 816 119 (65) Gain on sale of cable system ..... 4,451 --------- -------- ------ ------- Income (loss) before income taxes and extraordinary items ........................... (17,416) (31,515) 1,561 741 Provision (benefit) for income taxes ........................... 200 17 (16) --------- -------- ------ ------- Income (loss) before extraordinary items ............. (17,616) (31,532) 1,561 757 Extraordinary loss from extinguishment of debt .......... (1,656) Dividends on Series A Preferred Stock ................. (12,215) --------- -------- ------ ------- Income (loss) applicable to common shares ................... ($ 31,487) ($ 31,532) $1,561 $ 757 ========= ======== ====== ======= Income (loss) per common share: Net loss ......................... ($ 3.19) ========= Weighted average shares outstanding ..................... 9,858,244 =========
Pending Cable The Statement of Acquisition(d) Adjustments Subtotal Offering Pro Forma Operations Data: ---------------- ----------------- -------------- --------------- -------------- Net Revenues: DBS ............................. $ 139,944 $ 139,944 TV and Cable .................... $ 8,930 51,170 51,170 --------- ---------- ---------- -------- ---------- Total net revenues ............. 8,930 191,114 191,114 --------- ---------- ---------- -------- ---------- Pre-marketing location operating expenses: DBS ............................. 99,381 99,381 TV and Cable .................... 4,078 30,987 30,987 Subscriber acquisition costs ..... 29,319 29,319 Incentive compensation ........... $ 541(e) 1,720 1,720 Corporate expenses ............... 628 (1,450)(f) 2,256 2,256 Depreciation and amortization..... 1,146 46,056(g) 91,722 91,722 --------- ---------- ---------- -------- ---------- Income (loss) from operations .................... 3,078 (45,147) (64,271) (64,271) Interest expense ................. (1,747) (29,546)(h) (61,041) $ 5,888(n) (55,153) Other income (expense), net ...... (315)(i) 555 555 Gain on sale of cable system ..... (4,451)(j) --------- ---------- ---------- -------- ---------- Income (loss) before income taxes and extraordinary items ........................... 1,331 (79,459) (124,757) 5,888 (118,869) Provision (benefit) for income taxes ........................... 1,044 (1,045)(k) 200 200 --------- ---------- ---------- -------- ---------- Income (loss) before extraordinary items ............. 287 (78,414) (124,957) 5,888 (119,069) Extraordinary loss from extinguishment of debt .......... 1,656(l) Dividends on Series A Preferred Stock ................. (941)(m) (13,156) (13,156) --------- ---------- ---------- -------- ---------- Income (loss) applicable to common shares ................... $ 287 ($ 77,699) ($ 138,113) $ 5,888 ($ 132,225) ========= ========== ========== ======== ========== Income (loss) per common share: Net loss ......................... ($ 8.76) ($ 7.05) ========== ========== Weighted average shares outstanding ..................... 15,760,037 18,760,037 ========== ==========
F-31 Pegasus Communications Corporation Pro Forma Consolidated Statement of Operations Data Nine Months Ended September 30, 1998 (Dollars in thousands)
DBS Acquisitions ---------------------------- New England Actual Completed(a) Pending(b) Cable Sale(c) -------------- -------------- ------------ --------------- Statement of Operations Data: Net Revenues: DBS ............................ $ 95,662 $ 42,257 $5,232 TV and Cable ................... 35,368 ($ 3,277) ----------- -------- ------ ------- Total net revenues ............ 131,030 42,257 5,232 (3,277) ----------- -------- ------ ------- Pre-marketing location operating expenses: DBS ............................ 66,324 29,238 3,075 TV and Cable ................... 22,778 (1,614) Subscriber acquisition costs..... 25,018 10,979 593 Incentive compensation .......... 1,472 (75) Corporate expenses .............. 2,418 176 (98) Depreciation and amortization ................... 46,789 7,988 31 (835) ----------- -------- ------ ------- Income (loss) from operations ................... (33,769) (6,124) 1,533 (655) Interest expense ................ (29,850) (8,435) (13) 938 Other income (expense), net ............................ 359 386 27 Gain on sale of cable system ......................... 24,902 ----------- -------- ------ ------- Income (loss) before income taxes .......................... (38,358) (14,173) 1,520 310 Provision (benefit) for income taxes ................... 175 88 (5) ----------- -------- ------ ------- Net income (loss) ............... (38,533) (14,261) 1,520 315 Dividends on Series A Preferred Stock ................ (10,959) ----------- -------- ------ ------- Income (loss) applicable to common shares .................. ($ 49,492) ($ 14,261) $1,520 $ 315 =========== ======== ====== ======= Income (loss) per common share: Net loss ........................ ($ 3.66) =========== Weighted average shares outstanding .................... 13,533,756 ===========
Pending Cable The Acquisition(d) Adjustments Subtotal Offering Pro Forma ---------------- ----------------- -------------- --------------- -------------- Statement of Operations Data: Net Revenues: DBS ............................ $ 143,151 $ 143,151 TV and Cable ................... $ 6,940 39,031 39,031 --------- ---------- ---------- -------- ---------- Total net revenues ............ 6,940 182,182 182,182 --------- ---------- ---------- -------- ---------- Pre-marketing location operating expenses: DBS ............................ 98,637 98,637 TV and Cable ................... 3,259 24,423 24,423 Subscriber acquisition costs..... 36,590 36,590 Incentive compensation .......... $ 75(e) 1,472 1,472 Corporate expenses .............. 609 (687)(f) 2,418 2,418 Depreciation and amortization ................... 733 16,456(g) 71,162 71,162 --------- ---------- ---------- -------- ---------- Income (loss) from operations ................... 2,339 (15,844) (52,520) (52,520) Interest expense ................ (1,245) (6,915)(h) (45,520) $ 4,416(n) (41,104) Other income (expense), net ............................ (305) 212(i) 679 679 Gain on sale of cable system ......................... (24,902)(j) --------- ---------- ---------- -------- ---------- Income (loss) before income taxes .......................... 789 (47,449) (97,361) 4,416 (92,945) Provision (benefit) for income taxes ................... 619 (702)(k) 175 175 --------- ---------- ---------- -------- ---------- Net income (loss) ............... 170 (46,747) (97,536) 4,416 (93,120) Dividends on Series A Preferred Stock ................ (10,959) (10,959) --------- ---------- ---------- -------- ---------- Income (loss) applicable to common shares .................. $ 170 ($ 46,747) ($ 108,495) $ 4,416 ($ 104,079) ========= ========== ========== ======== ========== Income (loss) per common share: Net loss ........................ ($ 6.83) ($ 5.51) ---------- ---------- Weighted average shares outstanding .................... 15,874,544 18,874,544 ========== ==========
F-32 Pegasus Communications Corporation Pro Forma Consolidated Statement of Operations Data Twelve Months Ended September 30, 1998 (Dollars in Thousands)
DBS Acquisition ---------------------------- New England Actual Completed(a) Pending(b) Cable Sale(c) -------------- -------------- ------------ --------------- Statement of Operations Data: Net Revenues: DBS ............................. $ 110,554 $ 65,102 $6,525 TV and Cable .................... 49,757 ($4,880) ----------- -------- ------ ------ Total net revenues ............. 160,311 65,102 6,525 (4,880) ----------- -------- ------ ------ Pre-marketing location operating expenses: DBS ............................. 76,371 45,504 4,065 TV and Cable .................... 31,655 (2,326) Subscriber acquisition costs ..... 29,169 19,384 993 Incentive compensation ........... 2,002 (123) Corporate expenses ............... 3,265 285 (156) Depreciation and amortization..... 56,420 12,907 41 (1,246) ----------- -------- ------ ------ Income (loss) from operations .................... (38,571) (12,978) 1,426 (1,029) Interest expense ................. (35,656) (14,217) (17) 1,501 Other income (expense), net ...... 801 407 (76) Gain on sale of cable system ..... 24,902 ----------- -------- ------ ------ Income (loss) before income taxes and extraordinary items ........................... (48,524) (26,788) 1,409 396 Provision (benefit) for income taxes ........................... 325 27 (9) ----------- -------- ------ ------ Income (loss) before extraordinary items ............. (48,849) (26,815) 1,409 405 Extraordinary loss from extinguishment of debt .......... (1,656) Dividends on Series A Preferred Stock ................. (14,496) ----------- -------- ------ ------ Income (loss) applicable to common shares ................... ($ 65,001) ($ 26,815) $1,409 $ 405 =========== ======== ====== ====== Income (loss) per common share: Net loss ......................... $ 5.12) =========== Weighted average shares outstanding ..................... 12,683,487 ===========
Pending Cable The Acquisition(d) Adjustments Subtotal Offering Pro Forma ---------------- ----------------- -------------- --------------- -------------- Statement of Operations Data: Net Revenues: DBS ............................. $ 182,181 $ 182,181 TV and Cable .................... $ 9,240 54,117 54,117 --------- ---------- ---------- -------- ---------- Total net revenues ............. 9,240 236,298 236,298 --------- ---------- ---------- -------- ---------- Pre-marketing location operating expenses: DBS ............................. 125,940 125,940 TV and Cable .................... 4,327 33,656 33,656 Subscriber acquisition costs ..... 49,546 49,546 Incentive compensation ........... $ 210(e) 2,089 2,089 Corporate expenses ............... 750 (879)(f) 3,265 3,265 Depreciation and amortization..... 1,021 25,887(g) 95,030 95,030 --------- ---------- ---------- -------- ---------- Income (loss) from operations .................... 3,142 (25,218) (73,228) (73,228) Interest expense ................. (1,680) (9,210)(h) (59,279) $ 4,416(n) (54,863) Other income (expense), net ...... (305) 198(i) 1,025 1,025 Gain on sale of cable system ..... (24,902)(j) --------- ---------- ---------- -------- ---------- Income (loss) before income taxes and extraordinary items ........................... 1,157 (59,132) (131,482) 4,416 (127,066) Provision (benefit) for income taxes ........................... 908 (926)(k) 325 325 --------- ---------- ---------- -------- ---------- Income (loss) before extraordinary items ............. 249 (58,206) (131,807) 4,416 (127,391) Extraordinary loss from extinguishment of debt .......... 1,656(l) Dividends on Series A Preferred Stock ................. (14,496) (14,496) --------- ---------- ---------- -------- ---------- Income (loss) applicable to common shares ................... $ 249 ($ 56,550) ($ 146,303) $ 4,416 ($ 141,887) ========= ========== ========== ======== ========== Income (loss) per common share: Net loss ......................... ($ 9.22) ($ 7.52) ========== ========== Weighted average shares outstanding ..................... 15,862,984 18,862,984 ========== ==========
F-33 Notes to Pro forma Consolidated Statements of Operations Data (a) Represents the combined financial results of the Completed DBS Acquisitions from the beginning of the period presented to the date of acquisition by the Company or the end of the period, as follows (dollars in thousands):
For the year ended For the nine months ended December 31, 1997 September 30, 1998 -------------------------------------- -------------------------------------- Income Income (loss) (loss) Income applicable Income applicable (loss) to (loss) to Effective Net from common Net from common Date Revenues operations shares Revenues operations Shares NRTC # 1065 1/31/97 322 (64) (80) NRTC # 1061 2/14/97 499 (91) (93) NRTC # 1032 3/10/97 144 29 29 NRTC # 1039 3/10/97 586 (38) (39) NRTC # 1073 4/10/97 209 32 33 NRTC # 35 5/9/97 98 (8) (8) NRTC # 333 5/9/97 539 (34) (67) NRTC # 1003 5/9/97 51 (31) (19) NRTC # 1028 5/9/97 911 (50) (52) NRTC # 172 7/9/97 1,881 (114) (61) NRTC # 1004 7/9/97 486 64 59 NRTC # 43 8/8/97 764 (75) (79) NRTC # 408 8/8/97 261 (44) (66) NRTC # 481 8/8/97 899 (134) (145) NRTC # 1040 8/8/97 378 (106) (118) NRTC # 86 9/8/97 335 (5) (8) NRTC # 396 9/8/97 190 (20) (20) NRTC # 470 9/8/97 346 30 31 NRTC # 471 9/8/97 498 (162) (170) NRTC # 152 10/8/97 3,453 (761) (1,049) NRTC # 331 10/8/97 1,496 (220) (273) NRTC # 36 11/7/97 103 7 7 NRTC # 391 11/7/97 440 (89) (97) NRTC # 1024 11/7/97 251 24 20 NRTC # 1045 11/7/97 2,498 (58) (110) NRTC # 434 1/7/98 416 (19) (24) NRTC # 211 3/9/98 3,453 676 623 638 121 112 NRTC # 334 3/9/98 623 0 (10) 161 11 8 NRTC # 20 4/27/98 5,218 387 285 NRTC # 73 4/27/98 693 96 96 NRTC # 109 4/27/98 315 (105) (127) NRTC # 120 4/27/98 144 (26) (26) NRTC # 156 4/27/98 60 (27) (28) NRTC # 174 4/9/98 2,464 (70) (80) 759 91 91 NRTC # 422 4/27/98 1,250 29 29 NRTC # 1005 4/27/98 1,170 (262) (273) NRTC # 1011 4/9/98 308 18 15 108 18 16 NRTC # 1017 4/27/98 2,015 234 150 177 24 24 NRTC # 1071 4/27/98 102 6 6 DTS 4/27/98 41,753 (15,580) (30,148) 24,276 (7,962) (15,940) NRTC # 267 5/11/98 738 20 21 355 79 49 NRTC # 368 5/11/98 290 64 64 150 67 67 NRTC # 379 5/11/98 468 (2) 15 221 42 54 NRTC # 121 6/10/98 346 64 55 207 55 51 NRTC # 128 6/10/98 1,442 130 125 833 110 98 NRTC # 364 6/10/98 220 (13) (9) 115 (6) (4) NRTC # 365 6/10/98 378 (15) (16) 202 65 65 NRTC # 37 7/10/98 859 28 28 520 94 94 NRTC # 250 7/10/98 1,435 193 100 1,092 167 111 NRTC # 460 7/10/98 1,757 (204) (204) 1,008 (200) (200) NRTC # 289 8/10/98 431 2 5 371 46 31 NRTC # 83 9/10/98 844 388 388 808 326 326 NRTC # 378 9/10/98 774 60 49 863 5 1 NRTC # 433 9/10/98 888 (162) (162) 696 66 66 NRTC # 475 9/10/98 3,829 516 631 4,037 490 597 NRTC # 363 10/9/98 152 (2) (1) 241 97 97 NRTC # 13 11/9/98 766 (197) (197) 764 (79) (79) NRTC # 131 11/9/98 195 72 72 203 82 82 NRTC # 454 11/9/98 886 (250) (341) 1,078 (47) (142) NRTC # 1027 12/9/98 401 3 (18) 471 24 24 NRTC # 1075 12/9/98 607 197 197 644 108 94 NRTC # 87 1/9/99 317 16 16 357 19 19 NRTC # 348 1/9/99 196 73 73 201 82 82 NRTC # 377 1/9/99 462 (638) (642) 398 (232) (268) NRTC # 1015 1/9/99 288 106 106 303 113 113 ------ ------- ------- ------ ------ ------- Total 96,591 (16,112) (31,532) 42,257 (6,124) (14,261) ====== ======= ======= ====== ====== =======
For the twelve months ended September 30, 1998 ------------------------------------- Income (loss) Income applicable (loss) to Net from common Revenues operations shares NRTC # 1065 NRTC # 1061 NRTC # 1032 NRTC # 1039 NRTC # 1073 NRTC # 35 NRTC # 333 NRTC # 1003 NRTC # 1028 NRTC # 172 NRTC # 1004 NRTC # 43 NRTC # 408 NRTC # 481 NRTC # 1040 NRTC # 86 NRTC # 396 NRTC # 470 NRTC # 471 NRTC # 152 NRTC # 331 NRTC # 36 13 3 3 NRTC # 391 60 (12) (12) NRTC # 1024 27 4 3 NRTC # 1045 309 (3) (22) NRTC # 434 107 (19) (18) NRTC # 211 1,664 364 341 NRTC # 334 420 (177) (183) NRTC # 20 1,605 403 317 NRTC # 73 NRTC # 109 NRTC # 120 NRTC # 156 NRTC # 174 1,530 34 32 NRTC # 422 NRTC # 1005 NRTC # 1011 187 (26) (30) NRTC # 1017 617 10 (3) NRTC # 1071 DTS 35,466 (14,831) (28,335) NRTC # 267 588 76 55 NRTC # 368 251 98 98 NRTC # 379 388 54 73 NRTC # 121 320 81 71 NRTC # 128 1,522 84 69 NRTC # 364 182 (26) (19) NRTC # 365 328 45 45 NRTC # 37 869 160 160 NRTC # 250 1,454 128 54 NRTC # 460 1,727 (240) (240) NRTC # 289 527 52 37 NRTC # 83 1,088 567 567 NRTC # 378 1,143 3 (6) NRTC # 433 1,019 (129) (129) NRTC # 475 5,480 778 888 NRTC # 363 273 96 97 NRTC # 13 1,071 (185) (185) NRTC # 131 265 114 114 NRTC # 454 1,454 (52) (146) NRTC # 1027 614 (19) (40) NRTC # 1075 853 191 177 NRTC # 87 456 26 26 NRTC # 348 266 138 138 NRTC # 377 560 (932) (976) NRTC # 1015 399 164 164 ------ ------- ------- Total 65,102 (12,978) (26,815) ====== ======= =======
Entities with an effective date of 4/27/98 represent DTS acquisitions that occurred prior to the DTS acquisition by Pegasus. F-34 (b) Represents the combined financial results of the Pending DBS Acquisitions from the beginning of the period presented to the end of the period, as follows (dollars in thousands):
For the year ended For the nine months ended December 31, 1997 September 30, 1998 -------------------------------------- -------------------------------------- Income Income (loss) (loss) Income applicable Income applicable (loss) to (loss) to Effective Net from common Net from common Date Revenues operations shares Revenues operations Shares NRTC # 110 Pending 367 4 4 395 67 67 NRTC # 177 Pending 2,159 814 814 2,310 716 716 NRTC # 223 Pending 413 153 153 403 143 143 NRTC # 248 Pending 460 (24) (40) 466 19 6 NRTC # 273 Pending 1,700 630 630 1,658 588 588 ----- --- --- ----- --- --- Total 5,099 1,577 1,561 5,232 1,533 1,520 ===== ===== ===== ===== ===== ===== For the twelve months ended September 30, 1998 ------------------------------------- Income (loss) Income applicable (loss) to Net from common Revenues operations shares NRTC # 110 508 63 63 NRTC # 177 2,795 393 393 NRTC # 223 517 188 188 NRTC # 248 583 11 (6) NRTC # 273 2,122 771 771 ----- --- ----- Total 6,525 1,426 1,409 ===== ===== =====
(c) Financial results of the New England operations of Pegasus Cable Television. The pro forma income statement data for the year ended December 31, 1997 does not include a $4.5 million and a $24.7 million gain resulting from the sale of the New Hampshire systems and the balance of our New England cable systems, respectively. (d) Financial results of the pending cable acquisition. (e) To record the incentive compensation for the completed and pending DBS acquisitions as per the Company's current incentive compensation plan. (f) To eliminate corporate expenses charged by prior owners. These costs represent management fees charged by the prior owners in addition to their regular salaries, benefits and other related costs. These costs will not be incurred in future periods as the Company's corporate expenses do not include fees in excess of actual allocated costs. (g) To record additional amortization and depreciation expense resulting from the purchase accounting treatment of the completed DBS acquisitions, the pending DBS acquisitions, the Puerto Rico cable acquisition and the sale of our New England cable systems. Substantially all of the purchase price has been allocated to DBS rights which are being amortized over a ten year period. Such amounts are based on a preliminary allocation of the total consideration. The actual amortization may change immaterially based upon the final allocation of the total consideration to be paid to the tangible, if any, and intangible assets acquired. F-35 (h) To record interest expense, as follows (dollars in thousands):
Nine Months Twelve Months Year Ended Ended Ended Interest Rate 12/31/97 9/30/98 9/30/98 Interest expense PM&C Credit Facility 7.7% -- -- -- DTS Credit Facility 8.0 1,584 1,188 1,584 PCC 1998 Notes 9.75 9,750 7,313 9,750 PCC 1997 Notes 9.625 11,069 8,302 11,069 DTS Notes 12.5 19,375 14,531 19,375 PM&C Notes 12.5 10,625 7,969 10,625 Sellers' Notes various 2,314 1,662 2,314 Capital leases and other various 436 139 146 ------ ------ ------ Total 55,153 41,104 54,863 ====== ====== ======
(i) To eliminate certain nonrecurring income and expenses, net. These expenses are primarily composed of legal and professional fees incurred by prior owners. (j) To eliminate the nonrecurring gain on sale of New England cable systems. (k) To eliminate the net tax provision in connection with the acquisitions. (l) To eliminate the extraordinary gain (loss) on extinguishment of debt. (m) Dividends on the Series A Preferred Stock as if the offering had occurred on January 1, 1997. (n) To remove interest expense as a result of the pay down of debt from this offering. See footnote h. F-36 Pegasus Communications Corporation Pro Forma Consolidated Balance Sheet September 30, 1998 (Dollars in thousands)
DBS Acquisitions ---------------------------- Actual Completed(a) Pending(b) ------------ -------------- ------------ ASSETS Cash and cash equivalents .......... $ 39,074 ($ 26,600) ($ 26,800) Restricted cash .................... 19,737 Accounts receivable, net ........... 19,166 Inventory .......................... 3,968 Prepaid expenses and other current assets .................... 7,863 Property and equipment, net ........ 29,552 Intangibles, net ................... 709,319 27,850 31,970 Other assets ....................... 17,485 --------- -------- -------- Total assets ..................... $ 846,164 $ 1,250 $ 5,170 ========= ======== ======== LIABILITIES AND TOTAL EQUITY Accounts payable and accrued expenses .......................... $ 28,944 $ 1,000 Accrued interest ................... 11,990 Current portion of long-term debt .............................. 22,219 $ 1,250 1,883 Current portion of program rights payable .................... 1,279 Long-term debt, net ................ 21,190 167 Senior Notes ....................... 115,000 PM&C Notes ......................... 82,279 DTS Notes .......................... 153,146 Credit Facilities .................. 110,800 2,120 Program rights payable, net ........ 4,787 Other long-term liabilities ........ 69,702 Minority Interest .................. 3,000 Series A Preferred Stock ........... 122,223 Class A Common Stock ............... 113 Class B Common Stock ............... 46 Additional paid in capital ......... 174,753 Deficit ............................ (75,307) --------- -------- -------- Total liabilities and equity ..... $ 846,164 $ 1,250 $ 5,170 ========= ======== ========
Pending Cable The Acquisition(c) Other(d) Subtotal Offering(e) Pro Forma ---------------- ------------- ------------ ------------- ------------ ASSETS Cash and cash equivalents .......... $ 20,154 $ 5,828 $ 5,828 Restricted cash .................... 19,737 19,737 Accounts receivable, net ........... 19,166 19,166 Inventory .......................... 3,968 3,968 Prepaid expenses and other current assets .................... 7,863 7,863 Property and equipment, net ........ $ 5,460 35,012 35,012 Intangibles, net ................... 36,540 3,330 809,009 809,009 Other assets ....................... 17,485 17,485 ------- -------- --------- ------ --------- Total assets ..................... $42,000 $ 23,484 $ 918,068 -- $ 918,068 ======= ======== ========= ====== ========= LIABILITIES AND TOTAL EQUITY Accounts payable and accrued expenses .......................... $ 29,944 $ 29,944 Accrued interest ................... 11,990 11,990 Current portion of long-term debt .............................. 25,352 25,352 Current portion of program rights payable .................... 1,279 1,279 Long-term debt, net ................ ($ 11,146) 10,211 10,211 Senior Notes ....................... 100,000 215,000 215,000 PM&C Notes ......................... 82,279 82,279 DTS Notes .......................... 153,146 153,146 Credit Facilities .................. $42,000 (65,370) 89,550 ($ 69,750) 19,800 Program rights payable, net ........ 4,787 4,787 Other long-term liabilities ........ 69,702 69,702 Minority Interest .................. 3,000 3,000 Series A Preferred Stock ........... 122,223 122,223 Class A Common Stock ............... 113 30 143 Class B Common Stock ............... 46 46 Additional paid in capital ......... 174,753 69,720 244,473 Deficit ............................ (75,307) (75,307) ------- -------- --------- -------- --------- Total liabilities and equity ..... $42,000 $ 23,484 $ 918,068 -- $ 918,068 ======= ======== ========= ======== =========
F-37 Notes to Pro Forma Consolidated Balance Sheet (dollars in thousands) (a) To record the ten completed DBS acquisitions which occurred subsequent to September 30, 1998. Intangible assets purchased consist entirely of DBS rights, which are being amortized over a 10-year period, as follows: Completed Total DBS Acquisitions Consideration Cash Notes ---------------- ------------- ---- ----- NRTC System No. 0363 ......... $ 1,100 $ 1,100 NRTC System No. 0013 ......... 4,100 4,100 NRTC System No. 0087 ......... 2,500 1,250 $1,250 NRTC System No. 0377 ......... 3,025 3,025 NRTC System No. 0348 ......... 1,100 1,100 NRTC System No. 0454 ......... 7,250 7,250 NRTC System No. 1075 ......... 3,125 3,125 NRTC System No. 1027 ......... 2,800 2,800 NRTC System No. 1015 ......... 1,600 1,600 NRTC System No. 0131 ......... 1,250 1,250 ------- ------- ------ Total ..................... $27,850 $26,600 $1,250 ======= ======= ====== (b) To rcord the five pending DBS acquisitions. Intangible assets to be purchased consist of $31.5 million of DBS rights and $500,000 of non-complete covenants, which are being amortized over a 10-year period and the term of the related non-complete covenants (3-5 years), respectively, as follows:
Pending Total Assumed DBS Acquisitions Consideration Cash Notes Liabilities ---------------- ------------- ---- ----- ----------- NRTC System No. 0177 ......... $14,500 $14,500 NRTC System No. 0110 ......... 2,400 2,400 NRTC System No. 0248 ......... 3,100 1,550 $1,550 NRTC System No. 0223 ......... 2,120 2,120 NRTC System No. 0273 ......... 9,850 8,350 500 $1,000 ------- ------- ------ ------ Total ..................... $31,970 $28,920 $2,050 $1,000 ======= ======= ====== ======
(c) To record the pending Puerto Rico cable acquisition. Assets to be purchased consist of $5.5 million of property, plant and equipment and $36.5 million of franchise rights, which are being amortized over a 20-year period and a 15-year period, respectively. The total consideration is $42.0 million in cash. (d) To record the proceeds from the 1998 Senior Notes Offering and the uses of such proceeds, net of additional borrowings under the credit facilities and the uses of such borrowings. (e) To record the proceeds from the offering and the uses of such proceeds. F-38 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Digital Television Services, Inc.: We have audited the accompanying consolidated balance sheets of DIGITAL TELEVISION SERVICES, INC. (a Delaware corporation and formerly Digital Television Services, LLC) AND SUBSIDIARIES as of December 31, 1996 and 1997 and the related consolidated statements of operations, members'/stockholders' equity, and cash flows for the period from inception (January 30, 1996) through December 31, 1996 and for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Digital Television Services, Inc. and subsidiaries as of December 31, 1996 and 1997 and the results of their operations and their cash flows for the period from inception (January 30, 1996) through December 31, 1996 and for the year ended December 31, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Atlanta, Georgia February 18, 1998 F-39 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1996 1997 --------------- --------------- ASSETS CURRENT ASSETS: Cash and cash equivalents .............................................. $ 1,595,955 $ 39,113,152 Restricted cash ........................................................ -- 19,006,386 Accounts receivable: Trade, net of allowance for doubtful accounts of $6,750 and $190,647 at December 31, 1996 and 1997, respectively ........................ 893,950 4,629,539 Other ................................................................ 154,840 544,480 Inventory .............................................................. 244,544 2,229,918 Other (Note 2) ......................................................... 234,153 92,605 ------------ ------------ Total current assets .............................................. 3,123,442 65,616,080 ------------ ------------ RESTRICTED CASH ......................................................... -- 18,020,702 ------------ ------------ PROPERTY AND EQUIPMENT, at cost (Note 2) ................................ 478,445 3,474,754 Less accumulated depreciation .......................................... (44,339) (554,537) ------------ ------------ 434,106 2,920,217 ------------ ------------ CONTRACT RIGHTS AND OTHER ASSETS, NET (Note 2) .......................... 38,604,625 171,105,067 ------------ ------------ $ 42,162,173 $257,662,066 ============ ============ LIABILITIES AND MEMBERS'/STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ....................................................... $ 1,041,019 $ 4,495,937 Accrued liabilities .................................................... 1,380,321 40,275,901 Unearned revenue ....................................................... 1,082,601 3,314,397 Current maturities of long-term debt ................................... 6,033,732 14,950,430 Other .................................................................. 92,279 299,766 ------------ ------------ Total current liabilities ......................................... 9,629,952 63,336,431 ------------ ------------ LONG-TERM DEBT, less current maturities ................................. 17,542,883 177,641,876 ------------ ------------ OTHER LIABILITIES ....................................................... 83,615 46,646 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 5, 6, 8, and 10) MEMBERS'/STOCKHOLDERS' EQUITY Class A units .......................................................... -- -- Class B units .......................................................... 18,440,982 -- Class C units .......................................................... -- -- Class D units .......................................................... -- -- Preferred stock, $.01 par value; 10,000,000 shares authorized; 1,404,056 issued and outstanding at December 31, 1997 .......................... -- 14,041 Common stock, $.01 par value; 10,000,000 shares authorized; 2,137,049 issued and outstanding at December 31, 1997 .......................... -- 21,370 Additional paid-in capital ............................................. -- 25,826,080 Retained deficit ....................................................... (3,535,259) (9,224,378) ------------ ------------ Total members'/stockholders' equity ............................... 14,905,723 16,637,113 ------------ ------------ $ 42,162,173 $257,662,066 ============ ============
The accompanying notes are an integral part of these consolidated balance sheets. F-40 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Inception (January 30) to Year Ended December 31, December 31, 1996 1997 ----------------- ---------------- REVENUE: Programming revenue ................................... $ 3,085,146 $ 41,752,873 Equipment and installation revenue .................... 323,663 5,690,253 ------------ ------------- Total revenue .................................... 3,408,809 47,443,126 ------------ ------------- COST OF REVENUE: Programming expense ................................... 1,595,963 20,694,127 Cost of equipment and installation .................... 398,144 6,443,374 Service fees .......................................... 275,704 4,009,353 ------------ ------------- Total cost of revenue ............................ 2,269,811 31,146,854 ------------ ------------- GROSS PROFIT ........................................... 1,138,998 16,296,272 ------------ ------------- OPERATING EXPENSES: Sales and marketing ................................... 778,036 8,659,446 General and administrative ............................ 1,953,635 8,706,851 Depreciation and amortization ......................... 1,147,963 14,509,152 ------------ ------------- Total operating expenses ......................... 3,879,634 31,875,449 ------------ ------------- OPERATING LOSS ......................................... (2,740,636) (15,579,177) ------------ ------------- OTHER INCOME (EXPENSE): Interest expense, net ................................. (817,603) (14,457,088) Other income (expense) ................................ 22,980 (111,350) ------------ ------------- (794,623) (14,568,438) ------------ ------------- NET LOSS ............................................... $ (3,535,259) $ (30,147,615) ============ ============= BASIC AND DILUTED PRO FORMA NET LOSS PER COMMON SHARE: Net loss .............................................. $ (6.19) $ (14.11) ============ ============= Pro forma weighted average shares outstanding ......... $ 571,317 2,135,921 ============ =============
The accompanying notes are an integral part of these consolidated statements. F-41 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF MEMBERS'/STOCKHOLDERS' EQUITY for the Period From Inception (January 30, 1996) Through December 31, 1996 and for the Year Ended December 31, 1997
Class A Class B --------------------------------- --------------------------------- Units Amount Units Amount --------------- ---------------- --------------- ---------------- BALANCE, January 30, 1996 ......... -- $ -- -- $ -- Sale of Class B Units..... -- -- 1,844,098 18,440,982 Issuance of Class C Units ................... -- -- -- -- Net loss ................. -- -- -- (3,535,259) --------- -------------- --------- -------------- BALANCE, December 31, 1996 ........ -- -- 1,844,098 14,905,723 Sale of Class A Units..... 1,333,333 29,820,008 -- -- Sale of Class B Units..... -- -- 205,902 2,058,997 Issuance of Class D Units ................... -- -- -- -- Net Loss (January 1, 1997 through Octo- ber 10, 1997) ........... -- (3,958,517) -- (16,964,720) --------- -------------- --------- -------------- BALANCE, October 10, 1997 ......... 1,333,333 25,861,491 2,050,000 -- Conversion of Capital (Note 7) ................. (1,333,333) (25,861,491) (2,050,000) -- Net Loss (October 11, 1997 through December 31, 1997)...... -- -- -- -- ---------- -------------- ---------- -------------- BALANCE, December 31, 1997 ........ -- $ -- -- $ -- ========== ============== ========== ============== Class C Class D Preferred Stock Common Stock ---------------------- ----------------------- ------------------------- ------------ Units Amount Units Amount Shares Par Value Shares ------------ -------- ------------- -------- ------------ ----------- ------------ BALANCE, January 30, 1996 ......... -- $ -- -- $ -- -- $ -- -- Sale of Class B Units..... -- -- -- -- -- -- -- Issuance of Class C Units ................... 87,049 -- -- -- -- -- -- Net loss ................. -- -- -- -- -- -- -- ------ ---- -- ---- -- ------- -- BALANCE, December 31, 1996 ........ 87,049 -- -- -- -- -- -- Sale of Class A Units..... -- -- -- -- -- -- -- Sale of Class B Units..... -- -- -- -- -- -- -- Issuance of Class D Units ................... -- -- 124,000 -- -- -- -- Net Loss (January 1, 1997 through Octo- ber 10, 1997) .......... -- -- -- -- -- -- -- ------ ---- ------- ---- -- ------- -- BALANCE, October 10, 1997 ......... 87,049 -- 124,000 -- -- -- -- Conversion of Capital (Note 7) ................. (87,049) -- (124,000) -- 1,404,056 14,041 2,137,049 Net Loss (October 11, 1997 through December 31, 1997)...... -- -- -- -- -- -- -- ------- ---- -------- ---- --------- ------- --------- BALANCE, December 31, 1997 ........ -- $ -- -- $ -- 1,404,056 $14,041 2,137,049 ======= ==== ======== ==== ========= ======= =========
Total Common Stock Additional Members'/ ------------ Paid-In Retained Stockholders' Par Value Capital Deficit Equity ----------- -------------- --------------- ---------------- BALANCE, January 30, 1996 ......... $ -- $ -- $ -- $ -- Sale of Class B Units..... -- -- -- 18,440,982 Issuance of Class C Units ................... -- -- -- -- Net loss ................. -- -- -- (3,535,259) ------- ----------- ------------ -------------- BALANCE, December 31, 1996 ........ -- -- -- 14,905,723 Sale of Class A Units..... -- -- -- 29,820,008 Sale of Class B Units..... -- -- -- 2,058,997 Issuance of Class D Units ................... -- -- -- -- Net Loss (January 1, 1997 through Octo- ber 10, 1997) ........... -- -- -- (20,923,237) ------- ----------- ------------ -------------- BALANCE, October 10, 1997 ......... -- -- -- 25,861,491 Conversion of Capital (Note 7) ................. 21,370 25,826,080 -- -- Net Loss (October 11, 1997 through December 31, 1997) ..... -- -- (9,224,378) (9,224,378) ------- ----------- ------------ -------------- BALANCE, December 31, 1997 ........ $21,370 $25,826,080 $ (9,224,378) $ 16,637,113 ======= =========== ============ ==============
The accompanying notes are an integral part of these consolidated statements. F-42 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Inception (January 30) to Year Ended December 31, December 31, 1996 1997 ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ........................................................................ $ (3,535,259) $ (30,147,615) ------------- -------------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ................................................. 1,106,264 13,412,025 Amortization of capitalized debt costs and debt discount ...................... 313,329 2,423,535 Amortization of deferred promotional costs .................................... 41,699 1,097,127 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable, net ..................................................... (428,281) (1,678,650) Inventory .................................................................... (218,140) (1,566,129) Other current assets ......................................................... (269,721) (771,194) Accounts payable ............................................................. 877,630 19,297 Accrued liabilities and other liabilities .................................... 1,099,003 11,721,655 Unearned revenue ............................................................. 379,533 (1,817,178) ------------- -------------- Total adjustments .......................................................... 2,901,316 22,840,488 ------------- -------------- Net cash used in operating activities ...................................... (633,943) (7,307,127) ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net of acquisitions ........................ (382,175) (2,611,405) Disposals of property and equipment ............................................. (3,930) -- Increase in restricted cash for payment of subordinated notes ................... -- (37,027,088) Purchase of contract rights and related net assets, net of amounts financed ..... (12,695,488) (89,590,710) Increase in other assets ........................................................ (693,690) (1,222,307) ------------- -------------- Net cash used in investing activities ...................................... (13,775,283) (130,451,510) ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank credit facility .............................................. 9,400,000 88,269,409 Repayment of bank credit facility ............................................... -- (82,169,409) Proceeds from subordinated notes offering, net of discounts ..................... -- 152,840,850 Issuance of notes payable ....................................................... 32,399 344,417 Repayment of seller notes and other notes payable ............................... (9,047,023) (6,201,532) Capitalized financing fees ...................................................... (2,821,177) (9,649,936) Sale of Member Units ............................................................ 18,440,982 31,879,005 Other, net ...................................................................... -- (36,970) ------------- -------------- Net cash provided by financing activities .................................. 16,005,181 175,275,834 ------------- -------------- NET INCREASE IN CASH AND CASH EQUIVALENTS ........................................ 1,595,955 37,517,197 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................. -- 1,595,955 ------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................................... $ 1,595,955 $ 39,113,152 ============= ============== SUPPLEMENTAL NONCASH FINANCING ACTIVITY: NRTC patronage capital declared ................................................. $ 83,615 $ -- ============= ============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest .......................................................... $ 301,035 $ 5,425,156 ============= ============== Issuance of seller notes in connection with acquisitions ........................ $ 24,156,000 $ 17,552,000 ============= ==============
The accompanying notes are an integral part of these consolidated statements. F-43 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 1. ORGANIZATION AND NATURE OF BUSINESS Digital Television Services, Inc. ("DTS"), a Delaware corporation, is successor to Digital Television Services, LLC, a limited liability company organized under the Delaware Limited Liability Act, and DBS Holdings, L.P., a Delaware limited partnership originally formed on January 30, 1996 by Columbia Capital Corporation ("Columbia") and senior management of DTS. DTS and its wholly owned subsidiaries (collectively, "the Company") were formed to acquire and operate the exclusive rights to distribute direct broadcast satellite ("DBS") services ("DIRECTV Services") offered by DirecTv, Inc. ("DirecTv") in certain rural markets. The Company completed its first acquisition of rights to provide DIRECTV Services in March 1996 and has made a total of 17 acquisitions through December 31, 1997. On November 19, 1996, the limited partnership was converted into a limited liability company. On October 10, 1997, DTS effected a conversion from a limited liability company to a corporation through a merger with and into WEP Intermediate Corp. In connection with the Company's expansion, Columbia and certain of its affiliates increased their investment in the Company in February 1997. Also, in February 1997, the Company raised additional equity from J.H. Whitney & Co. and Fleet Equity Partners (together with Columbia, the "Equity Investors") and from senior executives of the Company. The Equity Investors and senior executives, in aggregate, have contributed $50,500,000 of equity capital to the Company. DTS is a holding company which operates primarily through its wholly-owned subsidiaries. The principal wholly-owned subsidiaries of DTS as of December 31, 1997 consist of 11 entities (the "Operating Subsidiaries") which, except for one subsidiary which is a Delaware limited liability company and one subsidiary which is a New Mexico corporation, are limited liability companies organized under the laws of the state of Georgia. The Operating Subsidiaries have the right to provide DIRECTV Services. The sole member and manager of the Operating Subsidiaries is DTS Management, LLC ("DTS Management"), a Georgia limited liability company, which is a wholly-owned subsidiary of DTS. The Company's other wholly-owned subsidiary, DTS Capital, Inc. ("DTS Capital"), was formed in 1997 and currently has nominal assets and does not conduct any operations. DTS Capital was formed to facilitate the issuance of $155.0 million in senior subordinated notes (the "Notes") in July 1997 (Note 5). In connection with the reorganization (the "Reorganization") of the Company in February 1997, the Company contributed to the capital of DTS Management the Company's ownership interest in each of its direct subsidiaries, other than DTS Management and DTS Capital. As a result thereof, each direct subsidiary became a wholly-owned direct subsidiary of DTS Management and a wholly-owned indirect subsidiary of the Company. Since each subsidiary was a wholly-owned direct or indirect subsidiary of the Company prior to the Reorganization, the Reorganization had no impact on the consolidated financial statements of the Company. The Company obtained the rights to distribute DIRECTV Services in its territories pursuant to agreements (the "NRTC Member Agreements") with the National Rural Telecommunications Cooperative (the "NRTC"). Under the provisions of the NRTC Member Agreements, the Company has the exclusive right to provide DIRECTV Services within certain rural territories in the United States (Note 3). The Company has had a limited operating history during which time it has generated negative cash flows and net losses. The negative cash flows can be attributed to the costs incurred to purchase NRTC contract rights and related assets (Notes 3 and 10) and general corporate overhead expenses. The Company expects negative cash flows and net losses to continue through at least 1998, as the Company plans to purchase additional contract rights and to incur substantial selling and marketing expenses in order to build its subscriber base. The ability to generate positive cash flow in the future is dependent upon many factors, including general economic conditions, the level of market acceptance for the Company's services, and the degree of competition encountered by the Company. As discussed in Note 5, financing totaling $90 million F-44 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 1. ORGANIZATION AND NATURE OF BUSINESS -- (Continued) has been committed by a syndicate of lenders, of which approximately $41.0 million was available at December 31, 1997. The Company also issued the Notes in July 1997 (Note 5) to refinance certain indebtedness and to provide additional funds for possible future acquisitions and general operating needs. The success of the Company is dependent on the future ability of DTS and its subsidiaries to generate projected revenues through successful operations. In the opinion of management, capital on hand, as well as funds provided from financings (Note 5), will be sufficient to meet the capital and operating needs of the Company through at least 1998. Additional funding may be required for any future acquisitions. However, there can be no assurance when or if future operations of the Company will be successful or that further financing, if needed, will be available with terms acceptable to the Company, or at all. On November 6, 1997, the Company entered into an agreement in principle with Pegasus Communications Corporation ("Pegasus") providing for the acquisition of the Company by Pegasus (Note 10). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of DTS and its subsidiaries. All significant intercompany transactions and balances have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition The Company earns programming revenue by providing DIRECTV Services to its subscribers. Programming revenue includes DIRECTV Services purchased by subscribers in monthly, quarterly, or annual subscriptions; additional premium programming available on an a la carte basis; sports programming available under monthly, annual, or seasonal subscriptions; and movies and events programming available on a pay-per-view basis. Programming purchased on a monthly, quarterly, annual, or seasonal basis, including premium programming, is billed in advance and is recorded as unearned revenue. All programming revenue is recognized when earned. As programming revenue is earned uniformly over the period of the purchase agreement with the customer, approximately $447,000 and $2,315,000 of net accounts receivable in the accompanying consolidated balance sheets represent unearned revenue at December 31, 1996 and 1997, respectively. Equipment and installation revenue primarily consists of the sale of DSS(R) equipment and accessories and related installation charges. Equipment sales revenue represents the amounts paid by customers to the Company and is recognized upon delivery of the equipment. Installation revenue is recognized when the equipment is installed and represents the amounts paid by customers to the Company for such services. Cost of Revenues Cost of revenues includes the cost associated with providing DIRECTV Services to the Company's subscribers. These costs include the direct wholesale cost of purchasing related programming from DirecTv F-45 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) (through the NRTC (Note 9)); monthly subscriber maintenance fees charged by DirecTV, such as security fees, ground service fees, system authorization fees, and fees for subscriber billings; costs of equipment and installation; and certain subscriber operating costs. Cost of equipment and installation represents the actual cost of the equipment to the Company plus the costs to install the equipment. Inventories The Company maintains inventories consisting of DSS(R) equipment and related accessories. Inventory is valued at the lower of cost or market, generally on a specific identification basis. Other Current Assets Other current assets consist of the following: December 31, December 31, 1996 1997 -------------- ------------- Deferred promotional costs ......... $214,939 $16,006 Other .............................. 19,214 76,599 -------- ------- $234,153 $92,605 ======== ======= Deferred promotional costs consist of costs related to a subscriber rebate program sponsored by DirecTv. Under the program, new subscribers who sign a non-cancellable and non-refundable contract pursuant to which they agree to prepay for one year of programming service receive a credit which is applied toward the one year's programming subscription. Subscribers under this program may choose to net the credit on their first bill or pay the full amount and receive a refund from the Company for the credit. The Company defers both the programming revenue and the cost of this credit and amortizes them over the one-year contract period. In addition, as a part of this program, the Company receives $1 per month for up to five years from the NRTC for each subscriber activated under this program. This program was discontinued in July 1997. Property and Equipment Property and equipment are stated at cost. Major property additions, replacements, and betterments are capitalized, while maintenance and repairs which do not extend the useful lives of these assets are expensed currently. Depreciation for property and equipment is provided using the straight-line method over the estimated useful lives of five years for leasehold improvements and three to seven years for furniture and equipment. Depreciation expense was $48,269 and $509,842 for the period from inception (January 30, 1996) through December 31, 1996 and for the year ended December 31, 1997, respectively. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in earnings. Property and equipment, at cost, consist of the following: December 31, December 31, 1996 1997 -------------- ------------- Leasehold improvements .......... $ 81,244 $ 327,804 Furniture and equipment ......... 397,201 3,146,950 -------- ---------- $478,445 $3,474,754 ======== ========== F-46 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Contract Rights and Other Assets Contract rights and other assets consist of the following:
December 31, December 31, 1996 1997 -------------- --------------- Contract rights ........................... $ 32,727,697 $ 170,715,335 Organization costs ........................ 599,528 1,166,475 ------------ ------------- 33,327,225 171,881,810 Accumulated amortization .................. (1,057,995) (13,943,682) ------------ ------------- 32,269,230 157,938,128 Deposits on Pending Acquisitions .......... 3,380,961 250,000 Debt issuance costs, net .................. 2,776,658 4,002,209 Bond issuance costs, net .................. -- 7,276,609 NRTC patronage capital .................... 83,615 46,646 Subscriber acquisition receivable ......... -- 717,632 Capitalized merger costs .................. -- 555,239 Other ..................................... 94,161 318,604 ------------ ------------- $ 38,604,625 $ 171,105,067 ============ =============
Contract Rights: Contract rights represent the cost of acquiring rights to distribute DIRECTV Services (Note 3), less net tangible assets acquired. Contract rights are being amortized over ten years, the estimated remaining useful life of the satellites operated by DirecTv which provide service under the related contracts. Amortization expense, included in depreciation and amortization in the accompanying consolidated statements of operations, was $1,021,606 and $12,646,558 for the period from inception (January 30, 1996) through December 31, 1996 and for the year ended December 31, 1997, respectively. Accumulated amortization, included in the accompanying consolidated balance sheets, was $1,021,606 and $13,668,165 for the period from inception (January 30, 1996) through December 31, 1996 and for the year ended December 31, 1997, respectively. Organization Costs: Organization costs are costs associated with the formation of the Company and its subsidiaries and are being amortized over five years. Amortization expense included in depreciation and amortization in the accompanying consolidated statements of operations was $33,891 and $241,626, for the period from inception (January 30, 1996) through December 31, 1996 and for the year ended December 31, 1997, respectively. Accumulated amortization, included in the accompanying consolidated balance sheets, was $33,891 and $275,517 for the period from inception (January 30) through December 31, 1996 and for the year ended December 31, 1997, respectively. Deposits on Acquisitions: In accordance with the provisions of asset purchase agreements entered into by the Company, deposits were made into escrow accounts for acquisitions of contract rights in Kentucky, Vermont and Kansas, which were pending at December 31, 1996 and for a pending acquisition of contract rights in Georgia at December 31, 1997. Debt Issuance Costs: Debt issuance costs are amortized over the term of the related long-term debt facility. Amortization expense, included in interest expense in the accompanying consolidated statements of operations, was $44,520 and $843,410 for the period from inception (January 30, 1996) through December 31, 1996 and for the year ended December 31, 1997, respectively. Accumulated amortization, included in the accompanying consolidated balance sheets, was $44,520 and $887,930 for the period from inception (January 30) through December 31, 1996 and for the year ended December 31, 1997, respectively. F-47 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Bond Issuance Costs: Bond issuance costs represent deferred costs incurred in connection with the issuance of the Notes (Note 5) and are capitalized over the life of the Notes. Amortization expense, included in interest expense in the accompanying consolidated statements of operations, was $304,364 for the year ended December 31, 1997. Accumulated amortization, included in the accompanying consolidated balance sheets, was $304,364 for the same period. NRTC Patronage Capital: The Company, through its subsidiaries, is an affiliate of the NRTC. While affiliates have no vote, they do have an interest in the NRTC in proportion to their prior patronage. NRTC patronage capital represents the noncash portion of NRTC patronage income. Under its bylaws, the NRTC declares a patronage dividend of its excess of revenues over expenses each year. Of the total patronage dividend, 20% is paid in cash and recognized as income when received and is netted against programming expense in the accompanying statement of operations. The remaining 80% is distributed in the form of noncash patronage capital, which will be redeemed in cash only at the discretion of the NRTC. The Company includes noncash patronage capital as other assets, with an offsetting deferred patronage income amount included in other liabilities in the accompanying consolidated balance sheets. The patronage capital will be recognized as income when cash distributions are declared by the NRTC. The NRTC does not permit the transfer of patronage capital. Accordingly, noncash patronage capital due to the Operating Subsidiaries relating to the period of time prior to the date of acquisition by the Company has not been recorded in the accompanying consolidated balance sheets. Subscriber Acquisition Receivable: During the second half of 1996, the Company entered into an agreement with the NRTC pursuant to which the NRTC provided a rebate to offset costs relating to the acquisition of new subscribers under the Company's subscriber rebate program. The Company receives the rebate over the period of 60 months commencing with the acquisition date of each subscriber covered under this agreement. The receivable represents amounts due to the Company under this agreement at December 31, 1997. Capitalized Merger Costs: Capitalized merger costs are costs incurred during 1997 associated with the agreement with Pegasus that provides that the Company will become a wholly owned subsidiary of Pegasus (Note 10). As the transaction is not expected to be completed until the first half of 1998, no amortization expense has been recorded in the accompanying consolidated statement of operations. Income Taxes The Company was considered a partnership for federal and state income tax purposes for the period from inception (January 30, 1996) to October 10, 1997. All taxable income or loss was allocated to the members in accordance with the terms of the limited liability company agreement of the Company (the "LLC Agreement"). Additionally, the Company incurred an operating loss for the period from October 11, 1997 to December 31, 1997. Accordingly, no provision for income taxes is included in the accompanying consolidated financial statements. The Company became a taxable entity for federal and state income tax purposes, effective with its conversion to a corporation (Note 7) on October 10, 1997. The Company accounts for income taxes using Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires the use of the asset and liability approach for financial accounting and reporting for income taxes. Deferred tax assets and liabilities arise from differences between the tax basis of an asset or liability and its reported amount in the financial statements. Deferred tax balances are calculated by applying the provisions of enacted tax law to determine the amount of taxes payable or refundable currently or in future years. F-48 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) The sources of the differences between the financial accounting and tax bases of the Company's assets and liabilities which give rise to the deferred tax assets and liabilities and the tax effects of each are as follows as of December 31, 1997 (in thousands): Deferred tax assets: Net operating loss carryforwards ("NOLs") ......... $ 3,072 Amortization ...................................... 1,989 Professional fees ................................. 172 Other ............................................. 97 Less: valuation allowance ......................... (5,330) -------- $ -- ======== As of December 31, 1997, the Company had NOLs of approximately $7,877,000, which will expire in year 2017. The Company has established a valuation allowance equal to the net operating loss carryforwards not utilized because of the uncertainty of the realizability of the net operating loss carryforwards. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of the following disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation. The methods and assumptions used to estimate fair value are as follows: Cash and cash equivalents: The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying amount approximates fair value due to the relatively short period to maturity of these instruments. Long-term debt: Fair value is estimated based on borrowing rates currently available to the Company for bank loans with similar terms and average maturities. The asset and liability amounts recorded in the accompanying balance sheets at December 31, 1996 and 1997 for cash and cash equivalents and long-term debt approximate fair value based on the above assumptions. Concentration of Credit Risk Concentration of credit risk with respect to accounts receivable is limited due to the large number of geographically dispersed subscribers. As a result, at December 31, 1996 and 1997, management does not believe any significant concentration of credit risk exists. Long-Lived Assets Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When events or changes in circumstances occur related to long-lived assets, management estimates the future cash flows expected to F-49 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) result from the use of the asset and its eventual disposition. Having found no instances whereby the sum of expected future cash flows (undiscounted and without interest charges) was less than the carrying amount of the asset and thus requiring the recognition of an impairment loss, management believes that the long-lived assets in the accompanying consolidated balance sheets are appropriately valued. Pro Forma Net Loss Per Common Share Basic and diluted net loss per common share is computed by dividing net loss by the pro forma weighted average number of common shares outstanding during 1996 and 1997 of 571,317 and 2,135,921, respectively, assuming the corporate conversion had occurred on January 30, 1996. Due to the Company's net losses, the warrants and options are excluded from the pro forma net loss per common share calculation because the effect would be antidilutive. 3. CONTRACT RIGHTS During 1996, the Company acquired the rights to distribute DIRECTV Services in eight rural DirecTv markets in certain rural areas in the United States (the "1996 Acquisitions"). The aggregate consideration was approximately $32.3 million, including closing date working capital and other adjustments as defined in the purchase agreements and fair value adjustments related to the seller notes (Note 5), subject to increase based on the number of subscribers in one of the markets on October 1, 1998 (Note 5). Of the total purchase price, approximately $9.3 million was paid in cash and approximately $24.2 million (before fair value adjustments related to the seller notes of $1.2 million (Note 5)) was financed through the issuance of promissory notes to the sellers of the contract rights (Note 5). Under the 1996 Acquisitions, rights were acquired in the following markets: o In March 1996, the Company acquired the outstanding common stock of Spacenet, Inc. and the rights to provide DIRECTV Services in certain counties in New Mexico. o In April 1996, the Company acquired the rights to provide DIRECTV Services in certain counties in California from Pacific Coast DBS, Inc. o In August 1996, the Company acquired the rights to provide DIRECTV Services in certain counties in New Mexico from Teg DBS Services, Inc., in certain counties in New York from Northeast Cable Services, Inc. and Falls Earth Station, Inc., and in certain counties in Colorado from Omega Cable. o In November 1996, the Company acquired the rights to provide DIRECTV Services in certain counties in South Carolina from Pee Dee Electric Cooperative, Inc. and Santee Electric Cooperative, Inc. When the Company purchases the exclusive rights to provide DIRECTV Services in a rural DirecTv market, it acquires the NRTC Member Agreement and related agreements providing for the exclusive rights to provide DIRECTV Services within that market, all net assets related to the provision of DIRECTV Services in such market, and any residual rights to provide DBS services which the NRTC may grant the owner of such market after the termination or expiration of the NRTC Member Agreement. The purchase price of the above acquisitions was allocated to the fair values of the net assets acquired as follows (in thousands): Current assets ........................................................ $ 751 Property and equipment ................................................ 96 Contract rights, net of fair value adjustments of $1.2 million......... 32,728 Current liabilities ................................................... (1,240) -------- Total consideration ............................................. $ 32,335 ========
Any additional contingent consideration will be recorded as an increase in contract rights. F-50 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 3. CONTRACT RIGHTS -- (Continued) During 1997, the Company acquired the rights to distribute DIRECTV Services in nine additional rural DirecTv markets in certain rural areas in the United States (the "1997 Acquisitions"). The aggregate consideration was approximately $134.3 million including closing date working capital and other adjustments as defined in the purchase agreements and fair value adjustments related to the seller notes (Note 5). Of the total price, approximately $44.4 million was paid in cash, approximately $75.3 million was financed through borrowings under the Credit Facility and approximately $17.6 million (before fair value adjustments related to the seller notes of $3.0 million (Note 5)) was financed through the issuance of promissory notes to the sellers of the contract rights (Note 5). Under the 1997 Acquisitions, rights were acquired in the following markets: o In January 1997, the Company acquired the rights to provide DIRECTV Services in certain counties in Kentucky from Direct Programming Services Limited Partnership. o In January 1997, the Company also acquired the rights to provide DIRECTV Services in certain counties in Kansas from Kansas DBS, L.L.C. and Skywave Communications, Inc. o In February 1997, the Company acquired the rights to provide DIRECTV Services in certain counties in Vermont from Northeast DBS Enterprises, L.P. o In May 1997, the Company acquired the rights to provide DIRECTV Services in certain counties in Georgia from Mitchell Electric Membership Corporation, Washington Electric Membership Corporation, Planters Electric Membership Corporation and DigiCom Services, Inc. o In December 1997, the Company acquired the rights to provide DIRECTV Services in certain counties in Indiana from Satellite Television Services, Inc. ("STS"). The purchase price has been allocated to the assets acquired and liabilities assumed based on the estimated fair values as of the acquisition date. The purchase price allocation of STS is preliminary and subject to adjustment. The purchase price of the above acquisitions was allocated to the fair values of the net assets acquired as follows (in thousands): Current assets ........................................................ $ 3,908 Property and equipment ................................................ 385 Contract rights, net of fair value adjustments of $3.0 million......... 137,987 Current liabilities ................................................... (7,965) -------- Total consideration ............................................. $134,315 ========
The following pro forma information has been prepared assuming that the 1996 Acquisitions and the 1997 Acquisitions (collectively the "Acquisitions") occurred at the beginning of the respective periods. This information includes pro forma adjustments related to the amortization of contract rights resulting from the excess of the purchase price over the fair value of the net assets acquired and interest expense related to the Notes, the seller notes and a portion of the credit facility which were used to acquire the Acquisitions. The pro forma information is presented for informational purposes only and may not be indicative of the results of operations as they would have been had the Acquisitions occurred at the beginning of the respective periods, nor is the information necessarily indicative of the results of the operations which may occur in the future. December 31 ----------------------------- 1996 1997 ------------- ------------- (in thousands) (Unaudited) Consolidated operating revenues ......... $ 40,024 $ 57,498 Consolidated net loss ................... $ (43,718) $ (44,904) 4. RELATED-PARTY TRANSACTIONS Columbia, which is owned by certain members of the Company holding Class A and Class B units prior to October 10, 1997 and preferred stock and common stock subsequent to October 10, 1997 (Note 7), F-51 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) provides financial, managerial, and other services to the Company. Total fees and expenses paid to Columbia were approximately $322,000 and $47,000 for the period from inception (January 30, 1996) through December 31, 1996 and for the year ended December 31, 1997, respectively. Such fees are included in general and administrative expenses and other expenses in the accompanying consolidated statements of operations. 5. LONG-TERM DEBT Long-term debt consisted of the following:
December 31, 1996 December 31, 1997 ----------------------------- ------------------------------ Unamortized Unamortized Principal Discount Principal Discount ------------- ------------- --------------- ------------ Senior subordinated notes ............ $ -- $ -- $155,000,000 $2,069,185 Credit facility ...................... 9,400,000 -- 15,500,000 -- Seller notes and commitments ......... 15,113,250 965,011 26,544,998 2,675,149 Installment notes .................... 28,376 -- 291,642 -- ----------- -------- ------------ ---------- 24,541,626 965,011 197,336,640 4,744,334 Less current maturities .............. 6,130,183 96,451 16,315,333 1,364,903 ----------- -------- ------------ ---------- $18,411,443 $868,560 $181,021,307 $3,379,431 =========== ======== ============ ==========
Senior Subordinated Notes On July 30, 1997, the Company sold the Notes in a transaction exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). The Notes are the joint and several obligations of the Company and DTS Capital. DTS Capital has nominal assets, does not conduct any operations and will not provide any additional security for the Notes. DTS Capital was formed solely to provide a corporate co-issuer in addition to a limited liability company issuer (the Company). Accordingly, financial information for DTS Capital is not provided. The Notes mature in 2007 and bear interest at 12 1/2%, payable semi-annually on February 1 and August 1. The Company raised approximately $146.0 million, net of underwriting discount and estimated expenses, through the issuance of the Notes. The Company used the net proceeds to fund an interest escrow account for the first four semi-annual interest payments and to repay outstanding indebtedness under the Credit Facility (as defined below). The Company filed to exchange the Notes with new senior subordinated notes (the "Exchange Notes") registered under the Securities Act. The terms of the Exchange Notes are identical in all material respects (including principal amount, interest rate, maturity, security and ranking) to the terms of the Private Notes (which they replace), except that the Exchange Notes: (i) bear a Series B designation, (ii) have been registered under the Securities Act and, therefore, do not bear legends restricting their transfer, and (iii) are not entitled to certain registration rights and certain liquidated damages which were applicable to the Notes in certain circumstances under a registration rights agreement entered into by the Company in connection with the sale of the Notes. The Exchange Notes are unconditionally guaranteed, on a senior subordinated basis, as to payment of principal, premium, if any, and interest, jointly and severally, by all direct and indirect subsidiaries of DTS (the "Guarantors"). The Guarantors consist of all of the subsidiaries of DTS, except DTS Capital, which is a co-issuer of the Exchange Notes and has no separate assets or operations. DTS does not have assets or operations apart from the assets and operations of the subsidiaries. Accordingly, separate financial information for the Guarantors is not provided because management of the Company has determined that such information would not be material to investors. On January 26 1998, the Company completed the exchange of the Notes with the Exchange Notes. F-52 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. LONG-TERM DEBT -- (Continued) Credit Facility The Company is a party to a credit agreement dated November 27, 1996, as amended and restated on July 30, 1997 (the "Credit Facility") by and among the Company, the banks and other lenders party from time to time thereto (the "Lenders"), CIBC, as Administrative Agent, CIBC Wood Gundy Securities Corp. ("CIBCWG"), as Arranger, J.P. Morgan, as Syndication Agent, and Fleet Bank, as Documentation Agent, which provides for a revolving credit facility in the amount of $70.0 million, with a $50.0 million sublimit for letters of credit, and a $20.0 million term loan facility. The proceeds of the Credit Facility may be used (i) to refinance certain existing indebtedness, (ii) prior to December 31, 1998, to finance the acquisition of certain Rural DirecTv Markets and related costs and expenses, (iii) to finance capital expenditures of the Company and its subsidiaries and (iv) for the general corporate purposes and working capital needs of the Company and its subsidiaries. The $20.0 million term loan facility must be drawn no later than July 30, 1998 and any amounts not so drawn by that date will be cancelled. The term loan shall be repaid in 20 consecutive quarterly installments of $200,000 each commencing September 30, 1998 with the remaining balance due July 31, 2003. Borrowings under the revolving credit facility established pursuant to the Credit Facility are available to the Company until July 31, 2003; however, if the then unused portion of the commitments exceeds $10.0 million on December 31, 1998, the commitments will be reduced on such date by an amount equal to the unused portion of such commitments minus $10.0 million. Thereafter, the commitments thereunder will reduce quarterly commencing on September 30, 1999 at a rate of 3.50% through 1999, 5.75% in 2000, 7.0% in 2001, 9.0% in 2002 and 3.0% until June 30, 2003. All of the loans outstanding will be repayable on July 31, 2003. The making of each loan under the Credit Facility is subject to the satisfaction of certain conditions, including not exceeding a certain "borrowing base" based on the number of paying subscribers and households within the Rural DirecTv Markets served by the Company; maintaining minimum subscriber penetration throughout the term of the Credit Facility; maintaining annualized contribution per paying subscriber throughout the term of the Credit Facility based on net income plus certain sales, administrative and payroll expenses; maintaining a maximum ratio of total debt to equity beginning in the first quarter of 2000 and continuing throughout the term of the Credit Facility; maintaining a maximum ratio of total senior debt to annualized operating cash flow and a ratio of total debt to annualized operating cash flow beginning in the first quarter of 2000 and continuing throughout the term of the Credit Facility; maintaining a maximum ratio of total debt to adjusted annualized operating cash beginning in the first quarter of 1999 and continuing until the last quarter of 2000; and maintaining a maximum percentage of general and administrative expenses to revenues beginning in the first quarter of 1998 and continuing for the duration of the Credit Facility. The Credit Facility also contains a number of significant covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional indebtedness and guaranty obligations, create liens and other encumbrances, make certain payments, investments, loans and advances, pay dividends or make other distributions in respect of its equity interests, sell or otherwise dispose of assets, make capital expenditures, merge or consolidate with another entity, make amendments to its organizational documents or transact with affiliates. The Company is in compliance with those covenants with which it is required to comply as of the date hereof. In addition, the Credit Facility provides that the Company will be required to make mandatory prepayments of the Credit Facility from, subject to certain exceptions, the net proceeds of certain sales or other dispositions by the Company or any of its subsidiaries of material assets and with 50% of any excess operating cash flow with respect to any fiscal year after the fiscal year ending December 31, 1998. Borrowings by the Company under the Credit Facility are unconditionally guaranteed by each of the Company's direct and indirect subsidiaries, and such borrowings are secured by (i) an equal and ratable pledge of all of the equity interests in the Company's subsidiaries, (ii) a first priority security interest in all of their assets, and (iii) a collateral pledge of the Company's NRTC Member Agreements. F-53 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. LONG-TERM DEBT -- (Continued) The Credit Facility provides that the Company may elect that all or a portion of the borrowings under the Credit Facility bear interest at a rate per annum equal to either (i) the CIBC Alternate Base Rate plus the Applicable Margin or (ii) the Eurodollar Rate plus the Applicable Margin. When applying the CIBC Alternate Base Rate with respect to borrowings pursuant to the revolving credit facility, the Applicable Margin will be (w) 2.25% per annum (when the ratio of total indebtedness of the Company to annualized operating cash flow (the "Leverage Ratio")) is greater than or equal to 6.75 to 1.00), (x) 2.00% (when the Leverage Ratio is less than 6.75 to 1.00 but greater than or equal to 6.25 to 1.00), (y) 1.50% (when the Leverage Ratio is less than 6.25 to 1.00 but greater than or equal to 5.75 to 1.00) or (z) 1.25% (when the Leverage Ratio is less than 5.75 to 1.00). When applying the Eurodollar Rate with respect to borrowings pursuant to the revolving credit facility, Applicable Margin will be (w) 3.50% per annum (when the Leverage Ratio is greater than or equal to 6.75 to 1.00), (x) 3.25% (when the Leverage Ratio is less than 6.75 to 1.00 but greater than or equal to 6.25 to 1.00), (y) 2.75% (when the Leverage Ratio is less than 6.25 to 1.00 but greater than or equal to 5.75 to 1.00) or (z) 2.50% (when the Leverage Ratio is less than 5.75 to 1.00). The Applicable Margin for borrowings pursuant to the term loan facility will be the Applicable Margin for borrowings pursuant to the revolving credit facility, plus 0.25%. As used herein, "CIBC Alternate Base Rate" means the higher of (i) CIBC's prime rate and (ii) the federal funds effective rate from time to time plus 1/2% per annum. As used herein, "Eurodollar Rate" means the rate at which eurodollar deposits for one, two, three and six months (as selected by the Company) are offered to CIBC in the interbank eurodollar market. The Credit Facility will also provide that at any time when the Company is in default in the payment of any amount due thereunder, the principal of all loans made under the Credit Facility will bear interest at 2% per annum above the rate otherwise applicable thereto and overdue interest and fees will bear interest at a rate of 2% per annum over the CIBC Alternative Base Rate. At December 31, 1996 and 1997, borrowings under the Credit Facility accrued interest at the rate of 9% and 9.66%, respectively. The Company has and will pay a commitment fee on the unused amounts under the Credit Facility calculated at 0.5% per annum, payable quarterly in arrears. The Company also paid the arrangers of the Credit Facility a customary structuring and syndication fee and paid certain agency fees to the agents. Pursuant to a recent amendment to the NRTC Member Agreements, the Company and all other NRTC Members whose monthly obligations to the NRTC have exceeded $500,000 in the past six months are required to keep and maintain in full force and effect a standby letter of credit in favor of the NRTC to secure their respective payment obligations to the NRTC under the NRTC Member Agreements. The amount of the letter of credit issued at the request of the Company pursuant to the Credit Facility, is equal to three times the Company's single largest monthly invoice from the NRTC, exclusive of amounts payable for DSS(R) equipment purchased by the Company from the NRTC, or $6.3 million, and must be increased as the Company makes additional acquisitions of Rural DirecTv Markets and when the Company's obligations to the NRTC exceed the amount of the original letter of credit by 167%. Seller Notes and Commitments In connection with the acquisition of the Company's California rural DirecTv market, one of the Operating Subsidiaries, Digital Television Services of California, LLC ("DTS California"), entered into a promissory note dated April 1, 1996, as modified as of December 31, 1996 (as so modified, the "DTS California Note"), in favor of Pacific Coast DBS, Inc. ("Pacific"). Pursuant to the DTS California Note, DTS California is obligated to pay to Pacific the sum of (i) $480,000, payable in 24 equal monthly installments commencing May 1, 1996, and (ii) an amount payable on October 1, 1998 equal to the greater of $4.0 million or the Contingent Payment Amount. The Contingent Payment Amount is determined by multiplying the number of subscribers to DIRECTV Services in DTS California's rural DirecTv market as of October 1, 1998 F-54 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. LONG-TERM DEBT -- (Continued) by certain dollar amounts. As of December 31, 1996 and December 31, 1997, the Contingent Payment Amount is recorded as $4,223,250 and $6,250,800, which is based on subscriber levels at December 31, 1996 and December 31, 1997, respectively. The DTS California Note is classified as current maturities in the accompanying consolidated balance sheet at December 31, 1997. The obligations of DTS California pursuant to the DTS California Note are secured by a $7,000,000 irrevocable letter of credit (the "DTS California Letter of Credit") issued in favor of Pacific pursuant to the Credit Facility, as subsequently defined. The stated amount of the DTS California Letter of Credit will increase so that it will at all times be at least equal to 110% of the Contingent Payment Amount. The DTS California Note contains certain covenants which, among other things, prohibit the payment of dividends or other distributions by DTS California and payments by DTS California to Columbia. A failure to make any payment due under the DTS California Note will allow Pacific to draw under the DTS California Letter of Credit. In connection with the acquisition of one of the Company's rural DirecTv markets in South Carolina (the "South Carolina Rural DirecTv Markets"), one of the Operating Subsidiaries, Digital Television Services of South Carolina I, LLC ("DTS South Carolina I"), entered into a promissory note dated November 26, 1996 (the "South Carolina I Note") payable to Pee Dee Electricom, Inc. ("Pee Dee") in the amount of $7,955,000, of which $3,265,000 was paid in January 1997. The balance was paid on January 2, 1998 and is classified as current maturities in the accompanying consolidated balance sheet at December 31, 1997. The note bears interest at a rate of 4% per annum, payable quarterly. The obligations of DTS South Carolina I with respect to the South Carolina I Note are secured by an irrevocable letter of credit (the "South Carolina I Letter of Credit") issued in favor of Pee Dee pursuant to the Credit Facility. The South Carolina I Note does not contain any covenants; however, a failure to make any payment due under the South Carolina I Note will allow Pee Dee to draw under the South Carolina I Letter of Credit. In connection with the acquisition of the Company's other South Carolina rural DirecTv market, one of the Operating Subsidiaries, Digital Television Services of South Carolina II, LLC, entered into a promissory note dated November 26, 1996 (the "South Carolina II Note") payable to Santee Satellite Systems, Inc. ("Santee") in the amount of $2,200,000, of which $1,100,000 was due on November 26, 1997, with the balance due on November 26, 1998. The entire balance was paid in January 1997 and thus is classified as current maturities in the accompanying consolidated balance sheet at December 31, 1996. The note bears interest at 6% per annum, payable quarterly. The note is secured by an irrevocable letter of credit issued pursuant to the Credit Facility (the "South Carolina II Letter of Credit") issued in favor of Santee. The South Carolina II Note does not contain any covenants; however, a failure to make any payment due under the South Carolina II Note will allow Santee to draw under the South Carolina II Letter of Credit. In connection with the acquisition of one of the Company's New Mexico rural DirecTv markets, the Company entered into a promissory note dated March 1, 1996, as modified as of November 27, 1996 (as so modified, the "New Mexico Note"), in favor of Edward Botefuhr and Janet Blakeley Botefuhr in the amount of $415,000, payable in equal installments on April 1, 1998 and April 1, 1999. The note bears interest at 15% per annum, payable monthly. The note is secured by an irrevocable letter of credit issued pursuant to the Credit Facility (the "New Mexico Letter of Credit") issued in favor of the Botefuhrs. The New Mexico Note does not contain any covenants; however, a failure to make any payment due under the New Mexico Note will allow the Botefuhrs to draw under the New Mexico Letter of Credit. The entire balance was paid in January 1997 and thus is classified as current maturities in the accompanying consolidated balance sheet at December 31, 1996. In connection with the acquisition of the Company's Rural DirecTv Markets in Georgia (the "Georgia Rural DirecTv Markets"), one of the Subsidiaries, Digital Television Services of Georgia, LLC ("DTS F-55 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. LONG-TERM DEBT -- (Continued) Georgia"), issued three promissory notes, each of which represents a portion of the purchase price for one of the Georgia Rural DirecTv Markets. DTS Georgia issued (i) a promissory note dated May 9, 1997 (the "Planters Notes") payable to Planters Electric Membership Corporation ("Planters") in the amount of approximately $850,000, (ii) a promissory note dated May 9, 1997 (the "Mitchell Note") payable to Mitchell Electric Membership Corporation ("Mitchell") in the amount of approximately $9.4 million and (iii) a promissory note dated May 9, 1997 (the "Washington Note") payable to Washington Electric Membership Corporation ("Washington") in the amount of approximately $5.2 million. The principal amount of the Planters Note was paid on January 2, 1998 and bears interest at a rate of 3% per annum; provided that if DTS Georgia acquires a certain Rural DirecTv Market, the interest rate will increase as of the date of such acquisition to 3 1/2% per annum. The principal amount of each of the Mitchell Note and the Washington Note is payable in annual installments beginning January 2, 1998 through January 2, 2001. The Mitchell Note and the Washington Note bear interest at a rate of 3% per annum until May 9, 2000 and at a rate of 3 1/2% per annum thereafter; provided that if DTS Georgia acquires a certain Rural DirectTv Market, the interest rate will increase as of the date of such acquisition to 3 1/2% per annum, until May 9, 2000, and to 4% thereafter. The obligations of DTS Georgia with respect to the Georgia Notes are secured by three irrevocable letters of credit issued pursuant to the Credit Facility (the "Georgia Letters of Credit"), each of which has been issued for the benefit of one of Planters, Mitchell and Washington. The Georgia Notes do not contain any affirmative or negative covenants regarding the Company, DTS Georgia or the operation of the Georgia Rural DirecTv Markets; however, a failure to make any payment due under a Georgia Note will allow the payee of such Georgia Note to draw under the applicable Georgia Letter of Credit. Installment Notes The installment notes represent notes payable to certain financial institutions for certain property and equipment. The notes are payable in equal monthly installments through May 2000 and bear interest at rates ranging from 8.5% to 10.3% at December 31, 1996 and 1997. Unamortized Discount The Company has discounted the Notes, the DTS California Note, the South Carolina I Note, the South Carolina II Note and the seller notes issued in conjunction with the acquisitions of certain Rural DirecTv markets in Georgia to reflect the fair market value based on average interest rates available to the Company. The estimated fair value interest rate used to record the discount was 12.75% for the Notes and 9% for the seller notes. The unamortized discount is being amortized over the life of the notes using the effective interest method. Amortization expense, included in interest expense in the accompanying consolidated statements of operations, is $268,544 and $1,275,761 for the period from inception (January 30, 1996) through December 31, 1996 and for the year ended December 31, 1997, respectively. Future maturities of long-term debt are as follows at December 31, 1997: 1998 ............................................. $16,315,333 1999 ............................................. 4,945,001 2000 ............................................. 4,990,854 2001 ............................................. 3,385,452 2002 ............................................. 12,700,000 ----------- $42,336,640 =========== 6. COMMITMENTS AND CONTINGENCIES Leases The Company leases office and retail space and certain equipment under noncancelable operating leases which expire in various years through 2002. Future minimum lease payments for noncancelable operating leases in effect at December 31, 1997 are as follows: F-56 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 6. COMMITMENTS AND CONTINGENCIES -- (Continued) 1998 ..................................... $ 641,000 1999 ..................................... 529,000 2000 ..................................... 369,000 2001 ..................................... 318,000 2002 ..................................... 186,000 ---------- Total future minimum lease payments ........... $2,043,000 ========== Rental expense charged to operations totaled approximately $83,000 and $672,632 during the period from inception (January 30, 1996) through December 31, 1996 and during the year ended December 31, 1997, respectively, and is included in general and administrative expense in the accompanying consolidated statements of operations. Minimum Subscribers As part of the NRTC Member Agreements, the Company is required to pay certain programming fees based on a minimum number of subscribers in each of its rural DirecTv markets (such minimum number of subscribers being equal to up to 5% of the households in each such rural DirecTv market) and the requirements of certain programming agreements between DirecTv and providers of programming, beginning in the fourth year of operation of the NRTC Member Agreement, with respect to such rural DirecTv market. Each of the Operating Subsidiaries had achieved the minimum subscriber requirement at December 31, 1997. 7. MEMBERS'/STOCKHOLDERS' EQUITY Prior to October 10, 1997, DTS was a limited liability company (the "LLC") organized under the laws of the State of Delaware. The LLC had four classes of equity interests, denominated as "Class A Units," "Class B Units," "Class C Units," and "Class D Units," with the classes having different voting and distribution rights per the LLC Agreement. During 1996, the Company sold 1,844,098 Class B Units to Columbia DBS, Inc. and Columbia DBS Investors, L.P., which are affiliates of Columbia, and certain senior executives of the Company, raising $18.4 million of initial equity capital. On January 2, 1997, the Company sold an additional 205,902 Class B Units to this same group for approximately $2.1 million. On February 10, 1997, the Company sold 1,333,333 Class A Units to the Equity Investors, raising an additional $30 million of equity capital. Class C Units were issued to certain senior executives of the Company, subject to certain vesting requirements related to employment. Each Class C Unit represented a restricted interest in the Company received in exchange for the performance of services. The Company issued a total of 87,049 Class C Units, of which 34,876 and 68,302 were vested at December 31, 1996 and October 10, 1997, respectively. In March 1997, DTS Management adopted an Employee Unit Plan (the "Employee Unit Plan") pursuant to which up to 180,000 Class D Units could be issued to employees or independent contractors of DTS Management or the Subsidiaries at prices equal to the market value thereof as of the date of issuance and pursuant to such terms and conditions (including vesting) as determined by the Company. As of October 10, 1997, 124,000 Class D Units were issued pursuant to the Employee Unit Plan. F-57 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 7. MEMBERS'/STOCKHOLDERS' EQUITY -- (Continued) On October 10, 1997, the Company converted to corporate form in a transaction (the "Corporate Conversion") contemplated on the LLC Agreement pursuant to which the LLC merged with and into WEP Intermediate Corp., a Delaware corporation ("WEP"). As a result of the Corporate Conversion, (i) the member interests in the LLC held by WEP were canceled, (ii) all of the outstanding capital stock of WEP was converted into Series A Preferred Stock of the Company, (iii) the member interests in the LLC evidenced by the Class A Units (other than those held by WEP) were converted into Series A Preferred Stock of the Company, (iv) the member interests in the LLC evidenced by the Class B Units were converted into Common Stock of the Company, (v) the member interests in the LLC evidenced by the Class C Units together with such Class C Unit holders' promissory notes in the principal amount of $10.00 per share were exchanged for shares of Common Stock of the Company, (vi) the member interests in the LLC evidenced by the Class D Units were converted into warrants to purchase Common Stock of the Company, (vii) the surviving entity changed its name to "Digital Television Services, Inc." and (viii) Digital Television Services, Inc. assumed by operation of law and supplemental indenture all of the obligations of the LLC under the terms of the Notes. Subsequent to the Corporate Conversion, substantially all of the outstanding shares of the Company are owned by the holders of the equity interests in the LLC. Therefore, the Corporate Conversion has been treated for accounting purposes as the acquisition of WEP by the LLC. The LLC's assets and liabilities have been recorded at historical cost and WEP's assets and liabilities have been recorded at fair value. However, given that WEP's only asset consisted of its investment in the LLC, no goodwill has been recognized. Effective with the Corporate Conversion, the historical financial statements of the LLC have become the historical financial statements of WEP and include the businesses of both companies. As a result of the Corporate Conversion, the stockholders' equity of the Company is as follows: Common Stock. The Company is authorized to issue up to 10,000,000 shares of Common Stock, par value $.01 per share. As of December 31, 1997, there were issued and outstanding 2,137,049 shares of Common Stock, held of record by five stockholders. Preferred Stock. The authorized capital stock of the Company includes 10,000,000 shares of preferred stock, par value $.01 per share. A total of 5,000,000 of such shares have been designated "Series A Payment-in-Kind Convertible Preferred Stock" (the "Series A Preferred Stock"). As of December 31, 1997, there were issued and outstanding 1,404,056 shares of Series A Preferred Stock, held of record by six stockholders. The Board is authorized by the Amended and Restated Certificate of Incorporation to issue one or more additional series of preferred stock from time to time, without further stockholder action, in one or more series and, with respect to such series, to fix the designation and number of shares to be issued, the voting rights of the shares, the dividend rights, if any, the redemption rights, if any, sinking fund requirements, if any, rights upon the liquidation, dissolution or winding up of the Company or upon the distribution of the assets of the Company, the terms of the conversion or exchange into any other class or series of shares, if provided for, and other powers, preferences, rights, qualifications, limitations or restrictions thereof. Under the Stockholders Agreement dated as of October 10, 1997 among the Company, the holders of the Common Stock and the holders of the Series A Preferred Stock (the "Stockholders Agreement"), stockholder approval may be required in order to take certain of these actions. Each holder of shares of the Series A Preferred Stock will have the right, exercisable at any time and from time to time, to convert all or any such shares of Series A Preferred Stock into shares of Common Stock, initially on a share-for-share basis. The conversion ratio of the Series A Preferred Stock is subject to adjustment in the event of (i) any subdivision or combination of the Common Stock, (ii) any payment by the Company of a stock dividend to the holders of the Common Stock, (iii) the issuance of rights to acquire F-58 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 7. MEMBERS'/STOCKHOLDERS' EQUITY -- (Continued) equity to holders of the Common Stock without issuing similar rights to the holders of the Series A Preferred Stock, or (iv) the issuance of equity or rights to acquire equity at a price per share less than $22.50 (as adjusted). In addition, if the Company consolidates or merges with, or transfers all or substantially all of its assets to, another corporation, and such transaction requires the approval of the stockholders of the Company, then a holder of the Series A Preferred Stock may convert some or all of such shares into shares of Common Stock simultaneously with the record date for, or the effective date of, such transaction so as to receive the rights, warrants, securities or assets that a holder of shares of the Common Stock on that date may receive. If the Company consummates an underwritten public offering of equity securities resulting in gross proceeds to the Company of at least $25 million and at a price per share equal to (i) at least $33.75, if such public offering is consummated on or before July 31, 1998, (ii) at least $39.37, if such public offering is consummated after July 31, 1998 but on or before July 31, 1999, and (iii) at least $45.00, if such public offering is consummated at any time after July 31, 1999 (a public offering meeting such requirements is referred to herein as a "Qualified IPO"), then the Series A Preferred Stock shall be converted automatically upon such consummation into shares of Common Stock at an initial conversion rate of one-for-one, subject to adjustment as described above. In the event of any voluntary or involuntary dissolution, winding up or liquidation of the Company, after payment or provision for payment of all of the Company's debts and other liabilities, the holders of the Series A Preferred Stock will be entitled to receive, out of the remaining net assets of the Company and in preference to the holders of the Common Stock and any other capital stock ranking junior to the Series A Preferred Stock, the amount of $22.50 (the "Liquidation Preference") for each share of the Series A Preferred Stock, plus any accrued and unpaid dividends up to the date for such distribution, whether or not declared. If, upon any liquidation of the Company, the assets distributable among the holders of the Series A Preferred Stock are insufficient to permit the payment in full to the holders of the Series A Preferred Stock and all other classes of preferred stock ranking (as to any such distribution) senior to or on a parity with the Series A Preferred Stock, of all preferential amounts payable to all such holders, then the entire assets of the Company thus distributable will be distributed ratably among the holders of the Series A Preferred Stock and all classes and series of capital stock ranking (as to any such distribution) senior to or on a parity with the Series A Preferred Stock in order of relative priority and, as to classes and series ranking on a parity with one another, in proportion to the full preferential amount that would be payable per share if such assets were sufficient to permit payment in full. If, after payment of the Liquidation Preference to the holders of the Series A Preferred Stock and the payment of the liquidation preference with respect to any capital stock ranking (as to any such distribution) senior to or on a parity with the Series A Preferred Stock, assets remain in the Company, all such remaining funds shall be distributed first to the holders of the Common Stock, until such holders have received an amount per share equal to the Liquidation Preference, subject to certain adjustments, and then on an equal per share basis to holders of all capital stock of the Company on a pro rata, as-if-converted to Common Stock basis. The holders of the Series A Preferred Stock shall be entitled to receive when, as and if declared by the Board cumulative dividends payable on the shares of the Series A Preferred Stock for each quarterly dividend period, commencing March 15, June 15, September 15 and December 15 of each year and ending on the day next preceding the first day of the next quarterly dividend period, at a rate of 8% per annum, compounded annually, in respect of the Liquidation Preference. All such dividends shall be payable on March 15, June 15, September 15 and December 15 of each year. The Company may, at its option, pay a certain portion of such dividends through the issuance of that number of additional shares of Series A Preferred Stock having an aggregate Liquidation Preference equal to the aggregate dollar amount of dividends to be paid on such dividend payment date. Except as provided by law, the holders of the Series A Preferred Stock are entitled to only those voting rights set forth in the Stockholders Agreement. F-59 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 8. EMPLOYEE BENEFITS Employment Agreements DTS Management has entered into employment agreements, as amended, with certain executive officers of DTS Management (the "Employment Agreements"). The initial term of the Employment Agreements are one year, with automatic extensions of one year unless terminated by DTS Management or the executive. The Employment Agreements provide for base salaries and bonuses at the discretion of the Board of Directors of DTS. Pursuant to the Employment Agreements, the Company issued the executives an aggregate of 87,049 Class C Units, which vest based on the Company's reaching defined numbers of subscribers and/or on defined vesting dates. Any units not vested at the earlier of (i) the date on which the Company completes an initial public offering; (ii) the date upon which Columbia and its officers, directors, stockholders and employees cease to own, directly or indirectly, in the aggregate at least 50% of the equity interests of the Company held by them on November 19, 1996; or (iii) March 31, 1998 shall become fully vested and cease to be restricted so long as the executive has remained employed by DTS Management through such date. The Employment Agreements also permitted the executives to purchase a certain number of Class B Units at a price of $10 per unit. Pursuant to rights under the Employment Agreements and the Company's LLC Agreement, the executives have purchased an aggregate of 100,500 Class B Units. The Employment Agreements provide that the Company has the option to repurchase all of the Class C Units held by an executive which have vested and all of the Class B Units held by an executive if the executive's employment is terminated voluntarily or with cause (as defined) prior to April 1, 1998. At such time, all unvested Class C Units of the executive shall be forfeited. If the executive is terminated for any reason other than cause, the executive's Class C Units will become fully vested and unrestricted. Simultaneous with the execution of the Employment Agreements, the subject executive officers also entered into loan agreements with Columbia for an aggregate of $430,000 to fund a portion of the equity purchases by the executives. The loans bear interest at 10% per annum and mature on the earlier of April 1, 2001 or receipt by the executive of proceeds from the sale of the purchased units. The loans are secured by a portion of the executive's purchased Class B Units. The Employment Agreements were amended as of October 10, 1997 to provide for certain changes with respect to the severance provisions and the vesting of applicable executive officers' shares of Common Stock received in exchange for their Class C Units and warrants received in exchange for their Class D Units. Digital Television Services 401(k) Plan In January 1997, the Company established the Digital Television Services 401(k) Plan (the "Plan") covering all of its employees. As part of the Plan, the Company provides matching contributions of 20% of the participant's contributions up to a maximum of 5% of the participant's pay. The Plan also provides for additional contributions at the discretion of the Company. The Company incurs the cost of administering this plan. Employee Stock Plan In October 1997, the Company adopted the Digital Television Services, Inc. 1997 Stock Option Plan (the "Employee Stock Plan") pursuant to which up to 100,000 shares of Common Stock (or such larger number of shares as may be approved by the Compensation Committee of the Board of Directors of the Company (the F-60 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 8. EMPLOYEE BENEFITS -- (Continued) "Board")) may be issued to employees or independent contractors of the Company or the Subsidiaries at prices equal to the market value thereof as of the date of issuance and pursuant to such terms and conditions (including vesting) as the Board shall determine. As of December 31, 1997, stock options have been granted with respect to 43,633 shares of Common Stock. The exercise price at the date of grant of $22.50 per share approximates the market value of the options and, therefore, the plan is generally non-compensatory. The stock options expire from two to ten years after each respective grant date. A portion of the options are exercisable as of the grant date. The remaining options become exercisable beginning one year from the grant date with vesting periods of four years. Upon consummation of the Pegasus transaction (Note 10), generally all options that remain unvested will become fully vested. The Company accounts for stock options under Accounting Principles Board ("APB") Opinion No. 25, which requires compensation costs to be recognized only when the option price differs from the market price at the grant date. Statement of Financial Accounting Standards No. 123: Accounting for Stock Based Compensation ("SFAS No. 123") allows a company to follow APB Opinion No. 25 with an additional disclosure that shows what the Company's pro forma net loss would have been using the compensation model under SFAS No. 123. Under SFAS No. 123, the fair values for these options were estimated at the date of grant using an option pricing model with the following assumptions: weighted average risk-free interest rate of 5.65%, no dividend yield, and a life of the options approximating one year to reflect accelerated vesting provisions of the Pegasus transaction (Note 10). The estimated fair value of these options was calculated using a minimum value method and may not be indicative of the future impact, since the model for this method does not take volatility into consideration. The pro forma net loss under SFAS No. 123 approach was $3,535,259 for the period from January 30, 1996 (inception) to December 31, 1996 and $30,286,667 for the year ended December 31, 1997. 9. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS The NRTC has contracted with third parties to provide the NRTC members with certain services, including billing services and centralized remittance processing services. The NRTC bills the Company for these services on a monthly basis. These fees are recorded as service fees in the accompanying statement of operations. The NRTC also sells DSS(R) equipment to its members. Because the Company is, through the NRTC, a distributor of DIRECTV Services, the Company would be adversely affected by any material adverse changes in the assets, financial condition, programming, technological capabilities or services of DirecTv or its parent corporation, Hughes Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or renew its Federal Communication Commission ("FCC") licenses to transmit radio frequency signals from the orbital slots occupied by its satellites. The NRTC is a cooperative organization whose members are engaged in the distribution of telecommunications and other services in predominantly rural areas of the United States. Pursuant to an agreement between the NRTC and Hughes (the "Hughes Agreement") and the NRTC Member Agreements, participating NRTC members acquired the exclusive rights to provide DIRECTV Services to residential and commercial subscribers in certain rural DirecTv markets. In general, upon default by the NRTC under the Hughes Agreement, the Company would have the right to acquire DIRECTV Services directly from DirecTv. The NRTC has contracted with third parties to provide the NRTC members with certain services, including billing services and centralized remittance processing services. If the NRTC is unable to provide these services for whatever reason, the Company would be required to acquire the services from other sources. There can be no assurance that the cost to the Company to obtain these services elsewhere would not exceed the amounts currently payable to the NRTC. F-61 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 9. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS -- (Continued) The Company would also be adversely affected by the termination of the NRTC Member Agreements by the NRTC prior to the expiration of their respective terms. If the NRTC Member Agreements are terminated by the NRTC, the Company would no longer have the right to provide DIRECTV Services. There can be no assurance that the Company would be able to obtain similar DBS services from other sources. Both the Hughes Agreement and the NRTC Member Agreements expire when Hughes removes its current satellites from their assigned orbital locations. Although, according to Hughes, the three DirecTv satellites have estimated orbital lives of approximately 15 years from their respective launches in December 1993 and 1994, there can be no assurance as to the longevity of the satellites and thus no assurance as to how long the Company will be able to continue to acquire DBS services pursuant to the NRTC Member Agreements. While the Company believes it will have access to DIRECTV Services following the expiration of the current Hughes Agreement by virtue of the NRTC's right of first refusal in the Hughes Agreement and the Company's existing contractual and membership relationship with the NRTC, there can be no assurance that such services will be available to the Company from Hughes or the NRTC, and, if available, there can be no assurance with regard to the financial and other terms under which the Company could acquire the services. The Company's DBS business is a new business with a limited operating history. There are numerous risks associated with satellite transmission technology. There can be no assurance as to the longevity of the satellites or that loss, damage, or changes in the satellites will not occur and have a material adverse effect on DirecTv and the Company's DBS business. DirecTv, and therefore the Company, is dependent on third parties to provide high-quality programming that appeals to mass audiences. DirecTv's programming agreements have terms which expire on various dates and have different renewal and cancellation provisions. There can be no assurance that any such agreements will be renewed or will not be canceled prior to expiration of their original terms. DBS operators, such as DirecTv, are free to set prices and serve subscribers according to their business judgment, without rate of return and other regulation. However, DirecTv is subject to the regulatory jurisdiction of the FCC. 10. SUBSEQUENT EVENTS Acquisition of Contract Rights On January 30, 1998, the Company acquired the rights to provide DIRECTV Services in certain counties in Georgia for $9.5 million from Ocmulgee Communications, Inc. The purchase price was financed through borrowings under the Credit Facility. The Acquisition of the Company On January 8, 1998, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") among Pegasus Communications Corporation ("Pegasus"), the Company, Pegasus DTS Merger Sub, Inc., a wholly-owned subsidiary of Pegasus (the "Merger Sub"), certain stockholders of Pegasus and certain stockholders of the Company. Pursuant to the Merger Agreement, the Merger Sub will be merged (the "Pegasus Transaction") with and into the Company, and the Company will become a wholly-owned subsidiary of Pegasus. The Merger Agreement provides for the acquisition of all of the outstanding capital stock of the Company in exchange for approximately 5.5 million shares of Pegasus' Class A Common Stock. Pegasus will not assume, guarantee or otherwise have any liability for the Notes or any other liability of the Company or F-62 DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 10. SUBSEQUENT EVENTS -- (Continued) its subsidiaries. At the closing of the Pegasus Transaction, and thereafter except to the extent permitted under the terms of the Notes, the Company will not assume, guarantee or otherwise have any liability for any indebtedness or other liability of Pegasus or any of its subsidiaries. The Pegasus Transaction is expected to be completed in the first half of 1998 and is subject, among other things, to approval of the stockholders of Pegasus and the Company, consents from the NRTC, DirecTv and the Company's lenders, and other conditions customary in transactions of this nature. Upon the consummation of the Pegasus Transaction, a change of control will occur and the Company will be required to make an offer to purchase the Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of the purchase. The Company has entered into a commitment letter with CIBC Oppenheimer Corp. ("CIBC") under which CIBC has agreed to purchase the Notes tendered in response to the offer to purchase the Notes. CIBC's commitment is subject to the execution of definitive documentation and customary closing conditions. There can be no assurance that such alternative arrangements will be available or, if available, will be on terms satisfactory to the Company. In addition, the consummation of the Pegasus Transaction may also constitute an event of default under the Credit Facility due to a change in control of the Company, permitting the lenders thereunder to accelerate the repayment of indebtedness thereunder, in which case the subordination provisions of the Notes would require the payment in full of the outstanding amounts under the Credit Facility and any other senior indebtedness before the Company could distribute cash to purchase the Notes. A condition to the closing of the Pegasus Transaction is that the Credit Facility be amended to permit such closing. The Company has been informed by the management of Pegasus that, upon consummation of the Pegasus Transaction, Pegasus would use the purchase method of accounting to record the acquisition of the Company and would "push down" the effects of the purchase price which would increase the Company's intangible assets by approximately $163.3 million. Accordingly, the Company's amortization expense would be increased with respect to periods subsequent to the consummation of the Pegasus Transaction. F-63 Digital Television Services, Inc. Consolidated Balance Sheets
September 30, 1998 ---------------- (unaudited) ASSETS Current assets: Cash and cash equivalents ............................................... $ 4,762,877 Restricted cash ......................................................... 18,637,235 Accounts receivable, less allowance for doubtful accounts of $191,000 and $183,000, respectively ................................................. 3,271,923 Inventory ............................................................... 413,164 Prepaid expenses and other .............................................. 540,752 ------------- Total current assets ................................................. 27,625,951 Restricted cash ............................................................ -- Property and equipment, net ................................................ 3,540,161 Intangible assets, net ..................................................... 336,810,192 Deferred taxes ............................................................. 13,296,554 Deposits and other ......................................................... -- ------------- Total assets ......................................................... $ 381,272,858 ============= LIABILITIES AND EQUITY Current liabilities: Current portion of long-term debt ....................................... $ 11,998,097 Accounts payable ........................................................ 1,279,086 Accrued interest ........................................................ 3,310,369 Accrued satellite programming and fees .................................. 6,830,572 Accrued expenses ........................................................ 7,556,967 Amounts due seller ...................................................... -- ------------- Total current liabilities ............................................ 30,975,091 Long-term debt ............................................................. 187,804,744 Deferred taxes ............................................................. 66,874,500 ------------- Total liabilities .................................................... 285,654,335 ------------- Commitments and contingent liabilities ..................................... -- Stockholders' equity: Common stock ............................................................ 1 Preferred stock ......................................................... -- Additional paid-in capital .............................................. 145,401,605 Accumulated deficit ..................................................... (49,783,083) ------------- Total stockholders' equity ........................................... 95,618,523 ------------- Total liabilities and stockholders' equity .............................. $ 381,272,858 =============
See accompanying notes to consolidated financial statements F-64 Digital Television Services, Inc. Consolidated Statements of Operations
Nine Months Ended September 30, ------------------------------------- 1997 1998 ----------------- ----------------- (unaudited) Revenues: Basic satellite service ............... $ 22,477,116 $ 44,556,030 Premium services ...................... 4,585,042 7,328,230 Other ................................. 1,749,077 2,799,301 ------------ ------------ Total revenues ..................... 28,811,235 54,683,561 Operating expenses: Programming ........................... 12,742,294 24,483,144 General and administrative ............ 8,599,970 12,262,822 Marketing and selling ................. 8,641,644 17,649,592 Incentive compensation ................ -- 173,919 Depreciation and amortization ......... 10,288,621 22,837,276 ------------ ------------ Loss from operations ............... (11,461,294) (22,723,192) Interest expense ......................... (8,846,229) (18,693,648) Interest income .......................... 630,916 1,136,990 Other expenses, net ...................... (91,503) (278,855) ------------ ------------ Net loss .............................. ($ 19,768,110) ($ 40,558,705) ============ ============
See accompanying notes to consolidated financial statements F-65 Digital Television Services, Inc. Consolidated Statements of Cash Flows
Nine Months Ended September 30, ------------------------------------- 1997 1998 ----------------- ----------------- (unaudited) Cash flows from operating activities: Net loss .................................................... ($ 19,768,110) ($ 40,558,705) Adjustments to reconcile net loss to net cash used by operating activities: ..................................... Depreciation and amortization ............................. 10,288,621 22,837,276 Accretion on discount of bonds and seller notes ........... 815,910 1,094,092 Bad debt expense .......................................... 479,595 985,319 Change in assets and liabilities: Accounts receivable ...................................... (1,731,526) (2,182,896) Inventory ................................................ (420,808) 1,816,754 Prepaid expenses and other ............................... (33,037) (464,153) Accounts payable and accrued expenses .................... 3,098,016 6,444,013 Accrued interest ......................................... 2,753,059 (4,936,704) ------------ ------------ Net cash used by operating activities ....................... (4,518,280) (14,965,004) ------------ ------------ Cash flows from investing activities: Acquisitions .............................................. (88,745,395) (37,172,504) Capital expenditures ...................................... (1,339,466) (1,232,829) Purchase of intangible assets ............................. (683,529) (5,588,721) ------------ ------------ Net cash used by investing activities ....................... (90,768,390) (43,994,054) ------------ ------------ Cash flows from financing activities: Proceeds from subordinated notes offering ................. 152,840,850 -- Proceeds from long-term debt .............................. 344,417 -- Repayments of long-term debt .............................. (6,080,000) (9,555,622) Borrowings on bank credit facilities ...................... 72,769,409 14,000,000 Repayments of revolving credit facilities ................. (82,169,409) (200,000) Contributions by Parent ................................... -- 2,146,087 Restricted cash ........................................... (36,544,197) 18,389,853 Capital lease repayments .................................. (52,908) (171,535) Sale of Member Units ...................................... 31,879,005 -- Capitalized financing costs ............................... (9,325,449) -- ------------ ------------ Net cash provided by financing activities ................... 123,661,718 24,608,783 ------------ ------------ Net increase (decrease) in cash and cash equivalents ......... 28,375,048 (34,350,275) Cash and cash equivalents, beginning of year ................. 1,595,955 39,113,152 ------------ ------------ Cash and cash equivalents, end of period ..................... $ 29,971,003 $ 4,762,877 ============ ============
See accompanying notes to consolidated financial statements F-66 DIGITAL TELEVISION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company: Digital Television Services, Inc. ("DTS" or together with its wholly owned subsidiaries, the "Company"), a Delaware corporation, is a successor to Digital Television Services, LLC and DBS Holdings, L.P., originally formed on January 30, 1996. The Company provides direct broadcast satellite television ("DBS") services to customers in certain rural areas which encompass portions of eleven states. The Company completed its first acquisition of rights to provide DBS services in March 1996 and has made a total of eighteen acquisitions as of September 30, 1998. DTS is a holding company which operates primarily through its wholly owned subsidiaries. The principal wholly owned subsidiaries of DTS as of September 30, 1998 consist of eleven entities (the "Operating Subsidiaries"). Until April 27, 1998 the sole member and manager of the Operating Subsidiaries was DTS Management, LLC ("DTS Management"), which is a wholly owned subsidiary of DTS. The Company's other wholly owned subsidiary, DTS Capital, Inc. ("DTS Capital"), was formed in 1997 and currently has nominal assets and does not conduct any operations. DTS Capital was formed to facilitate the issuance of $155.0 million of 12.5% Series A Senior Subordinated Notes due 2007 (the "Series A Notes") in July 1997 (see footnote 5 -- Long-Term Debt). On April 27, 1998, the Company merged (the "Merger") with Pegasus DTS Merger Sub, Inc., a wholly owned subsidiary of Pegasus Communications Corporation ("Pegasus"). In connection with the Merger, the stockholders of the Company exchanged all of their outstanding capital stock for approximately 5.5 million shares of Pegasus' Class A Common Stock and, as a consequence, the Company became a wholly owned subsidiary of Pegasus. Pegasus did not assume, guarantee or otherwise have any liability for DTS' outstanding indebtedness or any other liability of the Company or its subsidiaries. After the Merger, except to the extent permitted under the terms of the Notes, the Company did not assume, guarantee or otherwise have any liability for any indebtedness or other liability of Pegasus or any of Pegasus' subsidiaries. Effective with the Merger, a change of control occurred and, as a result, the Company was required to make an offer to purchase the Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of the purchase. The Company entered into an agreement with CIBC Oppenheimer Corp. ("CIBCC") under which CIBCC agreed to purchase the Notes tendered in response to the offer to purchase the Notes. Total consideration for the Merger was approximately $345.2 million, which consisted of approximately 5.5 million shares of Pegasus' Class A Common Stock (amounting to $119.4 million at a price of $21.71 per share), approximately $158.9 million of net liabilities and approximately $66.9 million of a deferred tax liability, primarily as a result of non-deductible amortization, of which $53.6 million was allocated to DBS rights and $13.3 million was recorded as a deferred tax asset. As a result of the Merger and Pegasus' use of the purchase method of accounting to record the acquisition of the Company, the "push down" effect of the purchase price increased the Company's intangible assets by approximately $173.0 million. As a consequence, results prior to the Merger are not comparable with those subsequent to the Merger. 2. Basis of Presentation The accompanying unaudited consolidated financial statements have been 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 for complete financial statements. The unaudited consolidated financial statements reflect all adjustments consisting of normal recurring items which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position of the Company and the results of its operations and its cash flows for the interim period. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1997 included in the Company's Form 10-K for the year then ended. All intercompany transactions and balances have been eliminated. F-67 DIGITAL TELEVISION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 3. Common Stock: At September 30, 1998 common stock consists of the following:
DTS common stock, $0.01 par value; 10.0 million shares authorized; 100 shares issued and outstanding ..................................................... $ 1 ====
The Company's ability to pay dividends on its Common Stock is subject to certain restrictions (see footnote 5 -- Long-Term Debt). 4. Preferred Stock: At September 30, 1998 preferred stock consists of the following: DTS preferred stock, $0.01 par value; 10.0 million shares authorized; no shares issued and outstanding ....................................................... $ -- =====
The Company's ability to pay dividends on its Preferred Stock is subject to certain restrictions (see footnote 5 -- Long-Term Debt). 5. Long-Term Debt: Long-term debt consists of the following: September 30, 1998 -------------------------------- Unamortized Principal Discount --------------- -------------- Senior subordinated notes ............ $155,000,000 $ 1,854,358 Credit facility ...................... 29,300,000 -- Seller notes and commitments ......... 19,032,976 1,795,883 Capital leases and other ............. 120,106 -- ------------ ----------- 203,453,082 3,650,241 Less current maturities .............. 13,069,206 1,071,109 ------------ ----------- $190,383,876 $ 2,579,132 ============ =========== Senior Subordinated Notes: In July 1997, the Company completed a senior subordinated notes offering (the "Notes Offering") in which it sold $155.0 million of its Series A Notes, resulting in net proceeds to the Company of approximately $146.0 million. The Company used the net proceeds to fund an interest escrow account for the first four semi-annual interest payments on the Notes and to repay outstanding indebtedness under the Credit Facility (as defined herein). This escrow account is included as restricted cash on the Company's balance sheets. In January 1998, the Company exchanged its Series A Notes for its 12.5% Series B Senior Subordinated Notes due 2007 (the "Series B Notes" and, together with the Series A Notes, the "Notes"). The Series B Notes have substantially the same terms and provisions as the Series A Notes. The Series B Notes are guaranteed on a full, unconditional, senior subordinated basis, jointly and severally, by all direct and indirect subsidiaries of DTS, except DTS Capital, which is a co-issuer of the Notes and currently has nominal assets and does not conduct any operations. DTS does not have assets or operations apart from the assets and operations of its Operating Subsidiaries. Accordingly, separate financial information for the Guarantors is not provided because management of the Company has determined that such information would not be material to investors. F-68 DIGITAL TELEVISION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. Long-Term Debt: -- (Continued) Credit Facility: In July 1997, DTS entered into an amended and restated $70.0 million six-year senior revolving credit facility and a $20.0 million six-year senior term facility (collectively, the "Credit Facility"), which are collateralized by substantially all of the assets of the Company. Interest on the Credit Facility is, at the Company's option, at either the bank's base rate or the Eurodollar Rate. The Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. The Credit Facility may be used to refinance certain existing indebtedness, finance future acquisitions and for working capital, capital expenditures and general corporate purposes. Seller Notes and Commitments: In connection with the acquisition of the Company's California DBS rights, one of the Operating Subsidiaries entered into a promissory note in favor of the seller. Pursuant to the note, the Operating Subsidiary is obligated to pay to the seller the sum of (i) $480,000, payable in 24 equal monthly installments commencing May 1, 1996, and (ii) an amount payable on October 1, 1998 equal to the greater of $4.0 million or the Contingent Payment Amount. The Contingent Payment Amount is determined by multiplying the number of DBS subscribers in the Company's California territory as of October 1, 1998 by certain dollar amounts. As of September 30, 1998, the Contingent Payment Amount is recorded as approximately $8.3 million, which is based on projected subscriber levels at October 1, 1998. The obligation of the Operating Subsidiary with respect to the outstanding promissory note is collateralized by an irrevocable letter of credit issued pursuant to the Credit Facility, which has been issued for the benefit of the sellers. The note was paid in October 1998 with proceeds from Credit Facility borrowings. In connection with the acquisition of one of the Company's South Carolina DBS rights, one of the Operating Subsidiaries entered into a promissory note in favor of the seller in the amount of approximately $8.0 million, of which approximately $3.3 million was paid in January 1997. The balance was paid in January 1998. In connection with the acquisition of the Company's Georgia DBS rights (the "Georgia DBS Rights"), one of the Operating Subsidiaries issued three promissory notes (the "Georgia Notes"), each of which represents a portion of the purchase price for one of the Georgia DBS Rights. The Operating Subsidiary issued (i) a promissory note in favor of the seller in the amount of approximately $850,000 ("Georgia Note 1"), (ii) a promissory note in favor of the seller in the amount of approximately $9.4 million ("Georgia Note 2"), and (iii) a promissory note in favor of the seller in the amount of approximately $5.2 million ("Georgia Note 3"). The principal amount of the Georgia Note 1 was paid in January 1998. The principal amount of each of the Georgia Note 2 and the Georgia Note 3 is payable in annual installments beginning in January 1998 through January 2001. The obligations of the Operating Subsidiary with respect to the outstanding Georgia Notes are collateralized by two irrevocable letters of credit issued pursuant to the Credit Facility, each of which has been issued for the benefit of the sellers. Capital Leases and Other: The capital leases and other represent notes payable to certain financial institutions for certain property and equipment. The notes are payable in equal monthly installments through May 2000. The Company's indebtedness contain certain financial and operating covenants, including restrictions on the Company's ability to incur additional indebtedness, create liens and pay dividends. F-69 DIGITAL TELEVISION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 6. Net Loss Per Share: Calculation of Basic and Diluted Earnings Per Share: The following table sets forth the computation of the number of shares used in the computation of basic and diluted earnings per share:
Nine Months Ended September 30, ------------------------------------- 1997 1998 ----------------- ----------------- Net loss .................................... ($ 19,768,110) ($ 40,558,705) ============ ============ Weighted average shares outstanding ......... 100 100 ============ ============
For the nine months ended September 30, 1997 and 1998, net loss per share was determined by dividing net loss by applicable shares outstanding. The total shares used for the calculation of basic and diluted net loss per share are pro forma for the Merger and were the same as there were no securities that have not been issued. 7. Acquisition: On January 30, 1998, the Company acquired the rights to provide DIRECTV(R) ("DIRECTV") programming in certain rural areas of Georgia and the related assets for total consideration of approximately $9.5 million, which consisted of $9.5 million in cash and $37,000 in assumed net liabilities. 8. Commitments and Contingent Liabilities: Legal Matters: From time to time the Company is involved with claims that arise in the normal course of business. In the opinion of management, the ultimate liability with respect to these claims will not have a material adverse effect on the consolidated operations, liquidity, cash flows or financial position of the Company. F-70 ================================================================================ You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. ----------------------------------- TABLE OF CONTENTS Page --------- Prospectus Summary .......................... 3 Risk Factors ................................ 13 Use of Proceeds ............................. 22 Dividend Policy ............................. 23 Price Range of Class A Common Stock ......... 23 Dilution .................................... 24 Capitalization .............................. 25 Selected Historical and Pro Forma Consolidated Financial Data .............. 26 Management's Discussion and Analysis of Financial Condition and Results of Operation ................................ 29 The Company ................................. 39 Management .................................. 40 Principal and Selling Stockholders .......... 47 Certain Relationships and Related Transactions ............................. 50 Description of Certain Indebtedness ......... 53 Description of Capital Stock ................ 61 Future Sales of Common Stock ................ 64 Underwriters ................................ 67 Legal Matters ............................... 68 Experts ..................................... 68 Where You Can Find More Information ......... 69 Index to Financial Statements ............... F-1 ----------------------------------- ================================================================================ ================================================================================ _________Shares [GRAPHIC OMITTED] Class A Common Stock ---------- PROSPECTUS ---------- , 1999 -------- Donaldson, Lufkin & Jenrette Bear, Stearns & Co. Inc. Merrill Lynch & Co. C. E. Unterberg, Towbin ING Baring Furman Selz LLC ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. The following table sets forth the expenses payable by the Registrant in connection with this Registration Statement. All of such expenses are estimates, other than the filing and listing fees payable to the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Filing Fee -- Securities and Exchange Commission ............... $30,147.00 Filing Fee -- Nasdaq Stock Market, Inc. ........................ 17,500.00 Filing Fee -- National Association Securities Dealers, Inc. ..... $ 8,000.00 Fees and Expenses of Accountants ............................... * Fees and Expenses of Counsel ................................... * Printing Expenses .............................................. * Blue Sky Fees and Expenses ..................................... * Miscellaneous Expenses ......................................... * ------- Total ........................................................ * - ----------- *To be supplied by amendment Item 15. Indemnification of Directors and Officers The Registrant's Amended and Restated Certificate of Incorporation provides that a director of the Registrant shall have no personal liability to the Registrant or to its stockholders for monetary damages for breach of fiduciary duty as a director except to the extent that Section 102(b)(7) (or any successor provision) of the Delaware General Corporation Law, as amended from time to time, expressly provides that the liability of a director may not be eliminated or limited. Article 6 of the Registrant's By-Laws provides that any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Registrant, or is or was serving while a director or officer of the Registrant at the request of the Registrant as a director, officer, employee, agent, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall be indemnified by the Registrant against expenses (including attorneys' fees), judgments, fines, excise taxes and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the full extent permissible under Delaware law. Article 6 also provides that any person who is claiming indemnification under the Registrant's By-Laws is entitled to advances from the Registrant for the payment of expenses incurred by such person in the manner and to the full extent permitted under Delaware law. The Underwriting Agreement provides that the Underwriters are obligated, under certain circumstances, to indemnify directors, officers and controlling persons of the Registrant against certain liabilities under the Securities Act of 1933, as amended. Reference is made to Section _ of the form of Underwriting Agreement which is filed as Exhibit 1.1 hereto. The Registrant maintains directors' and officers' liability insurance. Item 16. Exhibits.
Number Description of Document - ------ ----------------------- 1.1** Underwriting Agreement by and between Pegasus Communications Corporation and Donaldson Lufkin and Jenrette, dated as of January __, 1999. 2.1 Agreement and Plan of Merger dated January 8, 1998 among Pegasus Communications Corporation and certain of its shareholders, Pegasus DTS Merger Sub, Inc., and Digital Television Services, Inc. and certain of its shareholders, including forms of Registration Rights Agreement and Voting Agreement as exhibits (which is incorporated by reference herein to Exhibit 2.1 to Pegasus's Form 8-K dated December 10, 1997). 2.2 Asset Purchase Agreement dated as of January 16, 1998 between Avalon Cable of New England, LLC and Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc. (which is incorporated by reference herein to Pegasus' Form 8-K dated January 16, 1998). 2.3 Asset Purchase Agreement dated as of July 23, 1998 among Pegasus Cable Television, Inc., Cable Systems USA, Partners, J&J Cable Partners, Inc. and PS&G Cable Partners, Inc. (which is incorporated by reference herein to Pegasus' Form 10-Q dated August 13, 1998).
-2- 3.1 Certificate of Incorporation of Pegasus, as amended (which is incorporated by reference to Exhibit 3.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057)). 3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2 to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)). 3.3 Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof which is incorporated by reference to Exhibit 3.3 to Pegasus' Registration Statement on Form S-1 (File No. 333-23595). 4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media & Communications, Inc., the Guarantors (as this term is defined in the Indenture), and First Fidelity Bank, National Association, as Trustee, relating to the 12 1/2 % Series B Senior Subordinated Notes due 2005 (including the form of Notes and Subsidiary Guarantee) (which is incorporated herein by reference to Exhibit 4.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 4.2 Form of 12 1/2% Series B Senior Subordinated Notes due 2005 (included in Exhibit 4.1 above). 4.3 Form of Subsidiary Guarantee with respect to the 12 1/2% Series B Senior Subordinated Notes due 2005 (included in Exhibit 4.1 above). 4.4 Indenture by and between Pegasus and First Union National Bank, as trustee, relating to the Exchange Notes (included in Exhibit 3.3 above). 4.5 Indenture, dated as of October 21, 1997, by and between Pegasus Communications Corporation and First Union National Bank, as trustee, relating to the Senior Notes (which is incorporated by reference herein to Exhibit 4.1 to Amendment No. 1 to Pegasus' Form 8-K dated September 8, 1997). 4.6 Indenture, dated as of November 30, 1998, by and between Pegasus Communications Corporation and First Union National Bank, as trustee, relating to the 1998 Senior Notes (which is incorporated by reference to Exhibit 4.6 to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)). 4.7 Indenture, dated as of July 30, 1997 among Digital Television Services, Inc., certain of its subsidiaries, and The Bank of New York, as trustee (the "DTS Indenture") (which is incorporated by reference to Exhibit 4.1 of Digital Television Services' Registration Statement of Form S-4 (File No. 333-36217)). 4.8 Supplemental Indenture to the DTS Indenture, dated October 10, 1997 (which is incorporated by reference to Exhibit 4.6 of Digital Television Services' Registration Statement on Form S-4 (File No. 333-36217)). 5 Opinion of Drinker Biddle & Reath LLP (which is incorporated by reference to Exhibit 5 to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)). 10.1 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and D. & K. Broadcast Properties L.P. relating to television station WDBD (which is incorporated herein by reference to Exhibit 10.5 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.2 Agreement and Amendment to Station Affiliation Agreement, dated as of June 11, 1993, between Fox Broadcasting Company and Donatelli & Klein Broadcast relating to television station WDBD (which is incorporated herein by reference to Exhibit 10.6 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcast Company and Scranton TV Partners Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.8 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.4 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting Company and Scranton TV Partners, Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.9 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
-3- 10.5 Amendment to Fox Broadcasting Company Station Affiliation Agreement Regarding Network Nonduplication Protection, dated December 2, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television stations WOLF, WWLF, and WILF (which is incorporated herein by reference to Exhibit 10.10 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.6 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.11 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.7 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and WDSI Ltd. relating to television station WDSI (which is incorporated herein by reference to Exhibit 10.12 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.8 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WDSI (which is incorporated herein by reference to Exhibit 10.13 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.9 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated herein by reference to Exhibit 10.14 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.10 NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.28 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042) (other similar agreements with the National Rural Telecommunications Cooperative are not being filed but will be furnished upon request, subject to restrictions on confidentiality)). 10.11 Amendment to NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.29 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.12 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and Pegasus Satellite Television, Inc. (which is incorporated herein by reference to Exhibit 10.30 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.13 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and operate cable television systems for the municipalities of Cabo Rojo, San German, Lajas, Hormigueros, Guanica, Sabana Grande and Maricao (which is incorporated herein by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996). 10.14 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and operate cable television systems for the municipalities of Anasco, Rincon and Las Marias (which is incorporated herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996). 10.15 Credit Agreement dated as of December 9, 1997 by and among Pegasus Media & Communications, Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders (which is incorporated by reference herein to Exhibit 10.1 to Pegasus' Form 8-K dated December 10, 1997).
-4- 10.16+ Pegasus Restricted Stock Plan (which is incorporated by reference to Exhibit 10.28 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057)). 10.17+ Option Agreement for Donald W. Weber (which is incorporated by reference to Exhibit 10.29 Pegasus' Registration Statement on Form S-1 (File No. 333-05057)). 10.18+ Pegasus 1996 Stock Option Plan (which is incorporated by reference to Exhibit 10.30 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057)). 10.19+ Amendment to Option Agreement for Donald W. Weber, dated December 19, 1996 (which is incorporated by reference to Exhibit 10.31 to Pegasus' Registration Statement on Form S-1 (File No. 333-18739)). 10.20 Warrant Agreement between Pegasus and First Union National Bank, as Warrant Agent relating to the Warrants (which is incorporated by reference to Exhibit 10.32 to Pegasus' Registration Statementon Form S-1 (File No. 333-23595)). 10.21 Amendment to Credit Agreement executed as of March 10, 1998, by and among Pegasus Media & Communications, Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders (which is incorporated by reference to Exhibit 10.21 to Pegasus's Registration Statement on Form S-4 (File No. 333044929)). 10.22 Second Amendment to Credit Agreement executed as of August 3, 1998, by and among Pegasus Media & Communications, Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders (which is incorporated by reference to Exhibit No. 10.22 to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)). 10.23 Third Amendment to Credit Agreement executed as of December 31, 1998, by and among Pegasus Media & Communications, Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders (which is incorporated by reference to Exhibit No. 10.23 to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)). 10.24 Second Amended and Restated Credit Agreement dated as of July 30, 1997 among Digital Television Services, LLC, and several lenders, CIBC Wood Gundy Securites Corp., as arranger, Morgan Guaranty Trust Company of New York, Fleet National Bank, and Canadian Imperial Bank of Commerce (which is incorporated by reference to Exhibit 10.1 of Digital Television Services' Registration Statement on Form S-4 (File No. 333-36217)). 21.1** Subsidiaries of Pegasus (which is incorporated by reference to 21.1 to Pegasus's Registration Statement on Form S-4 (File No. 333-44929)). 23.1* Consent of PricewaterhouseCoopers LLP. 23.2* Consent of Arthur Andersen LLP. 23.3 Consent of Drinker Biddle & Reath LLP (included in Exhibit 5) (which is incorporated by reference to Exhibits 5 and 23.3 to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)). 24.1 Powers of Attorney (included in Signatures and Powers of Attorney) (which is incorporated by reference to the Powers of Attorney included in Pegasus' Registration Statement on Form S-3 (File No. 333-70949)).
- ------------------ *Filed herewith. **To be filed by amendment. +Indicates a management contract or compensatory plan. Item 17. Undertakings. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. -5- Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: 1. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. 2. For the purposes of determining any liability under the Securities Act of 1933, each post- effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. -6- SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Radnor, Commonwealth of Pennsylvania, on January 26, 1999. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Marshall W. Pagon -------------------------------------- Marshall W. Pagon Chairman of the Board Chief Executive Officer and President Date: January 26, 1999 POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Marshall W. Pagon - ------------------------------ January 26, 1999 Marshall W. Pagon President, Chief Executive Officer, (Principal Executive Officer) Chairman of the Board and Director /s/ Robert N. Verdecchio - ------------------------------ January 26, 1999 Robert N. Verdecchio Senior Vice President, (Principal Financial and Chief Financial Officer, Assistant Accounting Officer) Secretary and Director */s/ James J. McEntee - ------------------------------ January 26, 1999 James J. McEntee, III Director */s/ Mary C. Metzger - ------------------------------ January 26, 1999 Mary C. Metzger Director
Signature Title Date --------- ----- ---- */s/ Donald W. Weber - ----------------------- January 26, 1999 Donald W. Weber Director */s/ Michael C. Brooks - ----------------------- January 26, 1999 Michael C. Brooks Director */s/ Harry F. Hopper - ----------------------- January 26, 1999 Harry F. Hopper, III Director - ----------------------- January 26, 1999 William P. Phoenix Director */s/ Riordon B. Smith - ----------------------- January 26, 1999 Riordon B. Smith Director *By: /s/ Ted S. Lodge ----------------------- Ted S. Lodge Attorney-in-Fact
-2- EXHIBIT INDEX
Number Description of Document - ------ ----------------------- 1.1** Underwriting Agreement by and between Pegasus Communications Corporation and Donaldson Lufkin and Jenrette, dated as of January __, 1999. 2.1 Agreement and Plan of Merger dated January 8, 1998 among Pegasus Communications Corporation and certain of its shareholders, Pegasus DTS Merger Sub, Inc., and Digital Television Services, Inc. and certain of its shareholders, including forms of Registration Rights Agreement and Voting Agreement as exhibits (which is incorporated by reference herein to Exhibit 2.1 to Pegasus's Form 8-K dated December 10, 1997). 2.2 Asset Purchase Agreement dated as of January 16, 1998 between Avalon Cable of New England, LLC and Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc. (which is incorporated by reference herein to Pegasus' Form 8-K dated January 16, 1998). 2.3 Asset Purchase Agreement dated as of July 23, 1998 among Pegasus Cable Television, Inc., Cable Systems USA, Partners, J&J Cable Partners, Inc. and PS&G Cable Partners, Inc. (which is incorporated by reference herein to Pegasus' Form 10-Q dated August 13, 1998). 3.1 Certificate of Incorporation of Pegasus, as amended (which is incorporated by reference to Exhibit 3.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057)). 3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2 to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)). 3.3 Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof which is incorporated by reference to Exhibit 3.3 to Pegasus' Registration Statement on Form S-1 (File No. 333-23595). 4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media & Communications, Inc., the Guarantors (as this term is defined in the Indenture), and First Fidelity Bank, National Association, as Trustee, relating to the 12 1/2 % Series B Senior Subordinated Notes due 2005 (including the form of Notes and Subsidiary Guarantee) (which is incorporated herein by reference to Exhibit 4.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 4.2 Form of 12 1/2% Series B Senior Subordinated Notes due 2005 (included in Exhibit 4.1 above). 4.3 Form of Subsidiary Guarantee with respect to the 12 1/2% Series B Senior Subordinated Notes due 2005 (included in Exhibit 4.1 above). 4.4 Indenture by and between Pegasus and First Union National Bank, as trustee, relating to the Exchange Notes (included in Exhibit 3.3 above). 4.5 Indenture, dated as of October 21, 1997, by and between Pegasus Communications Corporation and First Union National Bank, as trustee, relating to the Senior Notes (which is incorporated by reference herein to Exhibit 4.1 to Amendment No. 1 to Pegasus' Form 8-K dated September 8, 1997). 4.6 Indenture, dated as of November 30, 1998, by and between Pegasus Communications Corporation and First Union National Bank, as trustee, relating to the 1998 Senior Notes (which is incorporated by reference to Exhibit 4.6 to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)). 4.7 Indenture, dated as of July 30, 1997 among Digital Television Services, Inc., certain of its subsidiaries, and The Bank of New York, as trustee (the "DTS Indenture") (which is incorporated by reference to Exhibit 4.1 of Digital Television Services' Registration Statement of Form S-4 (File No. 333-36217)). 4.8 Supplemental Indenture to the DTS Indenture, dated October 10, 1997 (which is incorporated by reference to Exhibit 4.6 of Digital Television Services' Registration Statement on Form S-4 (File No. 333-36217)). 5 Opinion of Drinker Biddle & Reath LLP (which is incorporated by reference to Exhibit No. 5 to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)). 10.1 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and D. & K. Broadcast Properties L.P. relating to television station WDBD (which is incorporated herein by reference to Exhibit 10.5 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.2 Agreement and Amendment to Station Affiliation Agreement, dated as of June 11, 1993, between Fox Broadcasting Company and Donatelli & Klein Broadcast relating to television station WDBD (which is incorporated herein by reference to Exhibit 10.6 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcast Company and Scranton TV Partners Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.8 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.4 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting Company and Scranton TV Partners, Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.9 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
10.5 Amendment to Fox Broadcasting Company Station Affiliation Agreement Regarding Network Nonduplication Protection, dated December 2, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television stations WOLF, WWLF, and WILF (which is incorporated herein by reference to Exhibit 10.10 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.6 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.11 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.7 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and WDSI Ltd. relating to television station WDSI (which is incorporated herein by reference to Exhibit 10.12 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.8 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WDSI (which is incorporated herein by reference to Exhibit 10.13 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.9 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated herein by reference to Exhibit 10.14 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.10 NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.28 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042) (other similar agreements with the National Rural Telecommunications Cooperative are not being filed but will be furnished upon request, subject to restrictions on confidentiality)). 10.11 Amendment to NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.29 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.12 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and Pegasus Satellite Television, Inc. (which is incorporated herein by reference to Exhibit 10.30 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.13 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and operate cable television systems for the municipalities of Cabo Rojo, San German, Lajas, Hormigueros, Guanica, Sabana Grande and Maricao (which is incorporated herein by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996). 10.14 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and operate cable television systems for the municipalities of Anasco, Rincon and Las Marias (which is incorporated herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996). 10.15 Credit Agreement dated as of December 9, 1997 by and among Pegasus Media & Communications, Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders (which is incorporated by reference herein to Exhibit 10.1 to Pegasus' Form 8-K dated December 10, 1997).
10.16+ Pegasus Restricted Stock Plan (which is incorporated by reference to Exhibit 10.28 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057)). 10.17+ Option Agreement for Donald W. Weber (which is incorporated by reference to Exhibit 10.29 Pegasus' Registration Statement on Form S-1 (File No. 333-05057)). 10.18+ Pegasus 1996 Stock Option Plan (which is incorporated by reference to Exhibit 10.30 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057)). 10.19+ Amendment to Option Agreement for Donald W. Weber, dated December 19, 1996 (which is incorporated by reference to Exhibit 10.31 to Pegasus' Registration Statement on Form S-1 (File No. 333-18739)). 10.20 Warrant Agreement between Pegasus and First Union National Bank, as Warrant Agent relating to the Warrants (which is incorporated by reference to Exhibit 10.32 to Pegasus' Registration Statementon Form S-1 (File No. 333-23595)). 10.21 Amendment to Credit Agreement executed as of March 10, 1998, by and among Pegasus Media & Communications, Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders (which is incorporated by reference to Exhibit 10.21 to Pegasus's Registration Statement on Form S-4 (File No. 333044929)). 10.22 Second Amendment to Credit Agreement executed as of August 3, 1998, by and among Pegasus Media & Communications, Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders (which is incorporated by reference to Exhibit 10.22 to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)). 10.23 Third Amendment to Credit Agreement executed as of December 31, 1998, by and among Pegasus Media & Communications, Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders (which is incorporated by reference to Exhibit 10.23 to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)). 10.24 Second Amended and Restated Credit Agreement dated as of July 30, 1997 among Digital Television Services, LLC, and several lenders, CIBC Wood Gundy Securites Corp., as arranger, Morgan Guaranty Trust Company of New York, Fleet National Bank, and Canadian Imperial Bank of Commerce (which is incorporated by reference to Exhibit 10.1 of Digital Television Services' Registration Statement on Form S-4 (File No. 333-36217)). 21.1** Subsidiaries of Pegasus (which is incorporated by reference to 21.1 to Pegasus's Registration Statement on Form S-4 (File No. 333-44929)). 23.1* Consent of PricewaterhouseCoopers LLP. 23.2* Consent of Arthur Andersen LLP. 23.3 Consent of Drinker Biddle & Reath LLP (included in Exhibit 5) (which is incorporated by reference to Exhibits 5 and 23.3 to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)). 24.1 Powers of Attorney (included in Signatures and Powers of Attorney) (which is incorporated by reference to the Powers of Attorney filed with Pegasus' Registration Statement on Form S-3 (File No. 333-70949)).
EX-3.2 2 BYLAWS BYLAWS of PEGASUS COMMUNICATIONS CORPORATION (a Delaware corporation) (As amended and restated effective January 1, 1998) ARTICLE 1 OFFICES Section 1.01. Offices. The Corporation may have offices at such places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE 2 MEETINGS OF STOCKHOLDERS Section 2.01. Place of Meeting. Meetings of the stockholders shall be held at such place, within the State of Delaware or elsewhere, as may be fixed from time to time by the Board of Directors. If no place is so fixed for a meeting, it shall be held at the Corporation's then principal executive office. Section 2.02. Annual Meeting. The annual meeting of stockholders shall be held, unless the Board of Directors shall fix some other hour or date therefor, at 10:00 A.M. on the third Tuesday of April in each year, if not a legal holiday under the laws of Delaware, and, if a legal holiday, then on the next succeeding secular day not a legal holiday under the laws of Delaware, at which the stockholders shall elect by plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting. Section 2.03. Notice of Annual Meetings. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than 10 days nor more than 60 days before the date of the meeting. Section 2.04. List of Stockholders. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be so specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.05. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board or the President and shall be called by the President or Secretary at the request in writing of a majority of the Board of Directors or of stockholders holding voting stock of the Company with twenty percent or more of the votes eligible to be cast in the election of directors. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 2.06. Notice of Special Meetings. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than 10 days nor more than 60 days before the date of the meeting. Section 2.07. Quorum; Voting. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. When a quorum is present at any meeting, except for elections of directors, which shall be decided by plurality vote, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of statute or of the Certificate of Incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no shares shall be voted pursuant to a proxy more than three years after the date of the proxy unless the proxy provides for a longer period. 2 Section 2.08. Action Without a Meeting. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in the State, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days after the earliest dated consent delivered in the manner required by this Section to the Corporation, written consents signed by a sufficient number of stockholders to take action are delivered in the manner required by this Section to the Corporation. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE 3 DIRECTORS Section 3.01. Number and Term of Office. The number of directors of the Corporation shall be such number as shall be designated from time to time by resolution of the Board of Directors and initially shall be two. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 3.02 hereof. Each director elected shall hold office for a term of one year and shall serve until his successor is elected and qualified or until his earlier death, resignation or removal. Directors need not be stockholders. Section 3.02. Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10 percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3.03. Resignations. Any director may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board, if there is one, the President, or the Secretary. Such resignation shall take effect at the time of receipt thereof or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3.04. Direction of Management. The business of the Corporation shall be managed under the direction of its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. 3 Section 3.05. Place of Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 3.06. Annual Meeting. Immediately after each annual election of directors, the Board of Directors shall meet for the purpose of organization, election of officers, and the transaction of other business, at the place where such election of directors was held or, if notice of such meeting is given, at the place specified in such notice. Notice of such meeting need not be given. In the absence of a quorum at said meeting, the same may be held at any other time and place which shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by the directors, if any, not attending and participating in the meeting. Section 3.07. Regular Meetings. Regular meetings of the Board of Directors shall be held at least four times in each fiscal year of the Company and may be held without notice at such time and place as shall from time to time be determined by the Board. Section 3.08. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, if there is one, or the President on 2 days' notice to each director, either personally (including telephone), or in the manner specified in Section 4.01; special meetings shall be called by the Chairman of the Board, if there is one, or the President or the Secretary on 10 days' notice given in like manner to each director on the written request of one-third or more of all the directors. Section 3.09. Quorum; Voting. At all meetings of the Board, a majority of the directors shall constitute a quorum for the transaction of business; and at all meetings of any committee of the Board, a majority of the members of such committee shall constitute a quorum for the transaction of business. The act of a majority of the directors present at any meeting of the Board of Directors or any committee thereof at which there is a quorum present shall be the act of the Board of Directors or such committee, as the case may be, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors or committee thereof, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3.10. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 3.11. Participation in Meetings. One or more directors may participate in any meeting of the Board or committee thereof by means of conference telephone or similar communications equipment by which all persons participating can hear each other. 4 Section 3.12. Committees of Directors. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise all of the powers and authority of the Board of Directors and may authorize the seal of the Corporation to be affixed to all papers which may require it, but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution providing for the issuance of shares of stock adopted by the Board of Directors, fix any preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the Bylaws of the Corporation; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when requested. Section 3.13. Compensation of Directors. Each director shall be entitled to receive such compensation, if any, as may from time to time be fixed by the Board of Directors. Members of special or standing committees may be allowed like compensation for attending committee meetings. Directors may also be reimbursed by the Corporation for all reasonable expenses incurred in traveling to and from the place of each meeting of the Board or of any such committee or otherwise incurred in the performance of their duties as directors. No payment referred to herein shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. 5 ARTICLE 4 NOTICES Section 4.01. Notices. Whenever, under the provisions of law or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or stockholder, such requirement shall not be construed to necessitate personal notice. Such notice may in every instance be effectively given by depositing a writing in a post office or letter box, in a postpaid, sealed wrapper, or by dispatching a prepaid telegram, cable, telecopy or telex or by delivering a writing in a sealed wrapper prepaid to a courier service guaranteeing delivery within 2 business days, in each case addressed to such director or stockholder, at his address as it appears on the records of the Corporation in the case of a stockholder and at his business address (unless he shall have filed a written request with the Secretary that notices be directed to a different address) in the case of a director. Such notice shall be deemed to be given at the time it is so dispatched. Section 4.02. Waiver of Notice. Whenever, under the provisions of law or of the Certificate of Incorporation or of these Bylaws, notice is required to be given, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent thereto. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE 5 OFFICERS Section 5.01. Number. The officers of the Corporation shall be a President, a Secretary and a Treasurer, and may also include a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers, and such other officers as may be elected by the Board of Directors. Any number of offices may be held by the same person. Section 5.02. Election and Term of Office. The officers of the Corporation shall be elected by the Board of Directors. Officers shall hold office at the pleasure of the Board. Section 5.03. Removal. Any officer may be removed at any time by the Board of Directors. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors. Section 5.04. Chairman of the Board. The Chairman of the Board, if there is one, shall preside at all meetings of the Board of Directors and shall perform such other duties, if any, as may be specified by the Board from time to time. Section 5.05. President. The President shall be the chief executive officer of the Corporation and shall have overall responsibility for the management of the business and operations of the Corporation and shall see that all orders and resolutions of the Board are carried into effect. In the absence of the Chairman of the Board he shall preside over meetings of the Board of Directors. In general, he shall perform all duties incident to the office of President, and such other duties as from time to time may be assigned to him by the Board. 6 Section 5.06. Vice Presidents. The Vice Presidents shall perform such duties and have such authority as may be specified in these Bylaws or by the Board of Directors or the President. In the absence or disability of the President, the Vice Presidents, in order of seniority established by the Board of Directors or the President, shall perform the duties and exercise the powers of the President. Section 5.07. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the stockholders and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or the President. He shall have custody of the corporate seal of the Corporation and he, or an Assistant Secretary, shall have authority to affix the same to any instrument, and when so affixed it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. Section 5.08. Assistant Secretaries. The Assistant Secretary or Secretaries shall, in the absence or disability of the Secretary, perform the duties and exercise the authority of the Secretary and shall perform such other duties and have such other authority as the Board of Directors or the President may from time to time prescribe. Section 5.09. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors or the President or the Chief Financial Officer, taking proper vouchers for such disbursements, and shall render to the Board of Directors when the Board so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. Section 5.10. Assistant Treasurers. The Assistant Treasurer or Treasurers shall, in the absence or disability of the Treasurer, perform the duties and exercise the authority of the Treasurer and shall perform such other duties and have such other authority as the Board of Directors may from time to time prescribe. 7 ARTICLE 6 INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 6.01. Indemnification. Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving while a director or officer of the Corporation at the request of the Corporation as a director, officer, employee, agent, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall be indemnified by the Corporation against expenses (including attorneys' fees), judgments, fines, excise taxes and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the full extent permissible under Delaware law. Section 6.02. Advances. Any person claiming indemnification within the scope of Section 6.01 shall be entitled to advances from the Corporation for payment of the expenses of defending actions against such person in the manner and to the full extent permissible under Delaware law. Section 6.03. Procedure. On the request of any person requesting indemnification under Section 6.01, the Board of Directors or a committee thereof shall determine whether such indemnification is permissible or such determination shall be made by independent legal counsel if the Board or committee so directs or if the Board or committee is not empowered by statute to make such determination. Section 6.04. Other Rights. The indemnification and advancement of expenses provided by this Article 6 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any insurance or other agreement, vote of shareholders or disinterested directors or otherwise, both as to actions in their official capacity and as to actions in another capacity while holding an office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such person. Section 6.05. Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, agent, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of these Bylaws. 8 Section 6.06. Modification. The duties of the Corporation to indemnify and to advance expenses to a director or officer provided in this Article 6 shall be in the nature of a contract between the Corporation and each such director or officer, and no amendment or repeal of any provision of this Article 6 shall alter, to the detriment of such director or officer, the right of such person to the advancement of expenses or indemnification related to a claim based on an act or failure to act which took place prior to such amendment, repeal or termination. ARTICLE 7 CERTIFICATES OF STOCK Section 7.01. Stock Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate in the form prescribed by the Board of Directors signed on behalf of the Corporation by the Chairman of the Board or the President or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, representing the number of shares owned by him in the Corporation. Any or all signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent, or registrar at the date of issue. Section 7.02. Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 7.03. Transfers of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 7.04. Fixing Record Date. The Board of Directors of the Corporation may fix a record date for the purpose of determining the stockholders entitled to notice of, or to vote at, any meeting of stockholders or any adjournment thereof, or to consent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action. Such record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and such record date shall not be (i) in the case of such a meeting of stockholders, more than 60 nor less than 10 days before the date of the meeting of stockholders, or (ii) in the case of consents in writing without a meeting, more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors, or (iii) in other cases, more than 60 days prior to the payment or allotment or change, conversion or exchange or other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting. 9 Section 7.05. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of stock to receive dividends and to vote as such owner, and shall be entitled to hold liable for calls and assessments a person registered on its books as the owner of stock, and shall not be bound to recognize any equitable or other claim to, or interest in, such stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE 8 AMENDMENTS Section 8.01. Amendments. These Bylaws may be altered, amended or repealed, and new Bylaws may be adopted, by the stockholders or by the Board of Directors at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new Bylaws be contained in the notice of such special meeting. 10 EX-4.6 3 INDENTURE ------------------------------------------------------------------------------- PEGASUS COMMUNICATION CORPORATION 9 3/4% SENIOR NOTES DUE 2006 --------------------- INDENTURE Dated as of November 30, 1998 --------------------- --------------------- FIRST UNION NATIONAL BANK as Trustee --------------------- - -------------------------------------------------------------------------------- INDENTURE dated as of November 30, 1998 between Pegasus Communications Corporation, a Delaware corporation (the "Company"), and First Union National Bank, a national banking association, as Trustee (the "Trustee"). The Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the 9 3/4% Series A Senior Notes due 2006 (the "Series A Notes") and the 9 3/4% Series B Senior Notes due 2006 (the "Series B Notes" and, together with the Series A Notes, the "Notes"): ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "144A Global Note" means a Global Note in the form of Exhibit A hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of, and registered in the name of, the Depositary or its nominee that will be issued in a denomination equal to the outstanding principal amount of the Notes sold in reliance on Rule 144A. "1997 Indenture" means the indenture, dated as of October 21, 1997, between the Company and First Union National Bank, as trustee, governing the terms of the 1997 Notes. "1997 Notes" means the Company's 9 5/8% Senior Notes due 2005. "1997 Notes Subsidiary Guarantees" means the guarantees of the Company's payment obligations under the 1997 Indenture and the 1997 Notes, if and when executed by the Subsidiaries of the Company pursuant to the provisions of the 1997 Indenture. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person and (ii) Indebtedness secured by a Lien encumbering any assets acquired by such specified Person. "Adjusted Operating Cash Flow" means, for the four most recent fiscal quarters for which internal financial statements are available, Operating Cash Flow of such Person and its Restricted Subsidiaries less DBS Cash Flow for the most recent four-quarter period plus DBS Cash Flow for the most recent quarterly period, multiplied by four. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided, however, that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. -1- "Agent" means any Registrar, Paying Agent or co-Registrar. "Applicable Procedures" means, with respect to any transfer or exchange of or for beneficial interests in any Global Note, the rules and procedures of the Depositary, Euroclear and Cedel that apply to such transfer or exchange. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets (including, without limitation, by way of a sale and leaseback) other than in the ordinary course of business consistent with past practices (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole will be governed by the provisions described in Section 4.15 hereof and/or the provisions described in Section 5.01 hereof and not by the provisions of Section 4.10 hereof and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding the foregoing, the following transactions will not be deemed to be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned Restricted Subsidiary of the Company or by a Wholly Owned Restricted Subsidiary of the Company to the Company or to another Wholly Owned Restricted Subsidiary of the Company, (ii) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary of the Company to the Company or to another Wholly Owned Restricted Subsidiary of the Company and (iii) a Restricted Payment that is permitted by the provisions of Section 4.07 hereof. "Asset Swap" means an exchange of assets by the Company or a Restricted Subsidiary of the Company for (i) one or more Permitted Businesses, (ii) a controlling equity interest in any Person whose assets consist primarily of one or more Permitted Businesses and/or (iii) long-term assets that are used in a Permitted Business in a like-kind exchange pursuant to Section 1031 of the Code or any similar or successor provision of the Code. "Bank Facilities" means, with respect to the Company or any of its Restricted Subsidiaries, one or more debt facilities or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. -2- "Board" or "Board of Directors" means the Board of Directors of the Company or any authorized committee of the Board of Directors. "Business Day" means any day other than a Legal Holiday. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the full faith and credit of the United States government or any agency or instrumentality thereof having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any domestic commercial bank having capital and surplus in excess of $500.0 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper having the highest rating obtainable from either Moody's Investors Service, Inc. or Standard & Poor's Corporation and, in each case, maturing within six months after the date of acquisition and (vi) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (i) through (v) of this definition. "Cedel" means Cedel Bank, SA. "Certificate of Designation" means the Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of 12 3/4% Series A Cumulative Exchangeable Preferred Stock of Pegasus Communications Corporation. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Principal or his Related Parties, (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that (A) any "person" (as defined above) becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time, upon the happening of an event or otherwise), directly or indirectly, of more of the Voting Stock of the Company (measured by voting power rather than number of shares) than is at the time beneficially owned (as defined above) by the Principal and his Related Parties in the aggregate, (B) the Principal and his Related Parties collectively cease to beneficially own (as defined above) Voting Stock of the Company having at least 30% of the combined voting power of all classes of Voting Stock of the Company then outstanding or (C) the Principal and his Affiliates acquire, in the aggregate, beneficial ownership (as defined above) of more than 66 2/3% of the shares of Class A Common Stock at the time outstanding or (iv) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. -3- "Class A Common Stock" means the Company's Class A Common Stock, par value $.01 per share. "Closing Date" means the original date of issuance of the Notes. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means Pegasus Communications Corporation, a Delaware corporation and any and all successors thereto. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iii) the cumulative effect of a change in accounting principles shall be excluded and (iv) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Subsidiaries. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the Closing Date or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 10.02 hereof or such other address as to which the Trustee may give notice to the Company. "Cumulative Operating Cash Flow" means, as of any date of determination, Operating Cash Flow for the Company and its Restricted Subsidiaries for the period (taken as one accounting period) from the beginning of the first full month commencing after the Closing Date to the end of the most recently ended fiscal quarter for which internal financial statements are available at such date of determination, plus all cash dividends received by the Company or a Wholly Owned Restricted Subsidiary of the Company from any Unrestricted Subsidiary of the Company or Wholly Owned Restricted Subsidiary of the Company to the extent that such dividends are not included in the calculation of permitted Restricted Payments under paragraph (C) of Section 4.07 (a) by virtue of clause (iii) of such paragraph. -4- "Cumulative Total Interest Expense" means, with respect to the Company and its Restricted Subsidiaries, as of any date of determination, Total Interest Expense for the period (taken as one accounting period) from the beginning of the first full fiscal month commencing after the Closing Date to the end of the most recently ended fiscal quarter for which internal financial statements are available at such date of determination. "Custodian" means the Trustee, as custodian with respect to the Notes in global form, or any successor entity thereto. "DBS Cash Flow" means income from operations (before depreciation, amortization and Non-Cash Incentive Compensation to the extent deducted in arriving at income from operations) for the Satellite Segment determined on a basis consistent with the segment data contained in the Company's consolidated audited financial statements. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Definitive Note" means a certificated Note registered in the name of the Holder thereof and issued in accordance with Section 2.06 hereof, in the form of Exhibit A hereto except that such Note shall not bear the Global Note Legend and shall not have the "Schedule of Exchanges of Interests in the Global Note" attached thereto. "Depositary" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Notes, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provision of this Indenture. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Notes mature unless, in any such case, the issuer's obligation to pay, purchase or redeem such Capital Stock is expressly conditioned on its ability to do so in compliance with the provisions in Section 4.07 hereof. "DTS Credit Facility" means the Second Amended and Restated Credit Agreement, dated as of July 30, 1997, by and among Digital Television Services, LLC, CIBC Wood Gundy Securities Corp., as arranger, Morgan Guaranty Trust Company of New York, as syndication agent, Fleet National Bank, as documentation agent, and Canadian Imperial Bank of Commerce, as administrative agent, as amended through the Closing Date. "Eligible Indebtedness" means any Indebtedness other than (i) Indebtedness in the form of, or represented by, bonds or other securities or any guarantee thereof and (ii) Indebtedness which is, or may be, quoted, listed or ordinarily purchased and sold on any stock exchange, automated trading system or over-the-counter or other securities market (including, without prejudice to the generality of the foregoing, the market for securities eligible for resale pursuant to Rule 144A under the Securities Act). -5- "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear system. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Offer" has the meaning set forth in the Registration Rights Agreement. "Exchange Offer Registration Statement" has the meaning set forth in the Registration Rights Agreement. "Existing Credit Facilities" means the DTS Credit Facility and the PM&C Credit Facility. "Existing Indebtedness" means all Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the Existing Credit Facilities) in existence on the Closing Date, until such amounts are repaid. "fair market value" means, with respect to assets or aggregate net proceeds having a fair market value (a) of less than $5.0 million, the fair market value of such assets or proceeds determined in good faith by the Board of Directors of the Company (including a majority of the Independent Directors thereof) and evidenced by a board resolution and (b) equal to or in excess of $5.0 million, the fair market value of such assets or proceeds as determined by an investment banking firm of national standing; provided that the fair market value of the assets purchased in an arm's-length transaction by an Affiliate of the Company (other than a Subsidiary) from a third party that is not also an Affiliate of the Company or such purchaser and contributed to the Company within five Business Days of the consummation of the acquisition of such assets by such Affiliate shall be deemed to be the aggregate consideration paid by such Affiliate (which may include the fair market value of any non-cash consideration to the extent that the valuation requirements of this definition are complied with as to any such non-cash consideration). "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Closing Date. -6- "Global Notes" means, individually and collectively, each of the Restricted Global Notes and the Unrestricted Global Notes, in the form of Exhibit A hereto issued in accordance with Sections 2.01, 2.06(b)(iv), 2.06(d)(ii) or 2.06(f) hereof. "Global Note Legend" means the legend which is required to be placed on all Global Notes issued under this Indenture. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America, and the payment for which the United States pledges its full faith and credit. "guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, co-borrowing arrangements, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "Holder" means a Person in whose name a Note is registered. "IAI Global Note" means the Global Note in the form of Exhibit A hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of and registered in the name of the Depositary or its nominee that will be issued in a denomination equal to the outstanding principal amount of the Notes sold to Institutional Accredited Investors. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing any Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the guarantee by such Person of any indebtedness of any other Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Indebtedness issued with original issue discount is the full amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness issued with original issue discount and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. -7- "Indebtedness to Adjusted Operating Cash Flow Ratio" means, as of any date of determination, the ratio of (a) the aggregate principal amount of all outstanding Indebtedness of a Person and its Restricted Subsidiaries as of such date on a consolidated basis, plus the aggregate liquidation preference of all outstanding preferred stock of the Restricted Subsidiaries of such Person as of such date (excluding Qualified Subsidiary Stock and any such preferred stock held by such Person or a Wholly Owned Restricted Subsidiary of such Person), plus the aggregate liquidation preference or redemption amount of all Disqualified Stock of such Person (excluding any Disqualified Stock held by such Person or a Wholly Owned Restricted Subsidiary of such Person) as of such date to (b) Adjusted Operating Cash Flow of such Person and its Restricted Subsidiaries for the most recent four-quarter period for which internal financial statements are available determined on a pro forma basis after giving effect to all acquisitions and dispositions of assets (notwithstanding clause (iii) of the definition of "Consolidated Net Income") (including, without limitation, Asset Swaps) made by such Person and its Restricted Subsidiaries since the beginning of such four-quarter period through such date as if such acquisitions and dispositions had occurred at the beginning of such four-quarter period. "Indenture" means this Indenture, as amended or supplemented from time to time. "Indirect Participant" means a Person who holds a beneficial interest in a Global Note through a Participant. "Independent Director" means a member of the Board of Directors who is neither an officer nor an employee of the Company or any of its Affiliates. "Initial Purchasers" means CIBC Oppenheimer Corp. and BT Alex. Brown Incorporated. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP; provided that an acquisition of assets, Equity Interests or other securities by the Company for consideration consisting of common equity securities, or preferred stock which is not Disqualified Stock, of the Company shall not be deemed to be an Investment. -8- "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue on such payment for the intervening period. "Letter of Transmittal" means the letter of transmittal to be prepared by the Company and sent to all Holders of Notes for use by such Holders in connection with the Exchange Offer. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Liquidated Damages" means all liquidated damages then owing pursuant to Section 5 of the Registration Rights Agreement. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries, and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting, investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness in connection with such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Cash Incentive Compensation" means incentive compensation paid to any officer of the Company or any of its Subsidiaries in the form of Class A Common Stock of the Company or options to purchase Class A Common Stock of the Company pursuant to the Pegasus Restricted Stock Plan and the Pegasus 1996 Stock Option Plan. -9- "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise) or (c) constitutes the lender; and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Non-U.S. Person" means a Person who is not a U.S. Person. "Notes" has the meaning assigned to it in the preamble to this Indenture. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Offering" means the offering of the Notes by the Company. "Offering Memorandum" means the Offering Memorandum, dated November 24, 1998, relating to the Offering. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary , any Assistant Secretary, any Vice-President or any Assistant Vice President of such Person. "Officers' Certificate" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Section 10.05 hereof. -10- "Operating Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period, (A) plus (i) extraordinary net losses and net losses on sales of assets outside the ordinary course of business during such period, to the extent such losses were deducted in computing such Consolidated Net Income, plus (ii) provision for taxes based on income or profits, to the extent such provision for taxes was included in computing such Consolidated Net Income, and any provision for taxes utilized in computing the net losses under clause (i) hereof, plus (iii) consolidated interest expense of such Person and its Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash charges were deducted in computing such Consolidated Net Income, plus (v) Non-Cash Incentive Compensation to the extent such compensation expense was deducted in computing such Consolidated Net Income and to the extent not included in clause (iv) of this definition and (B) less all non-cash income for such period (excluding any such non-cash income to the extent it represents an accrual of cash income in any future period or amortization of cash income received in a prior period). "Opinion of Counsel" means an opinion from legal counsel who is not unsatisfactory to the Trustee, that meets the requirements of Section 10.05 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "Pari Passu Debt" means senior Indebtedness of the Company or any Subsidiary Guarantor permitted by Section 4.09 hereof, which is pari passu in right of payment with the Notes or any Subsidiary Guarantee. "Participant" means, with respect to the Depositary, Euroclear or Cedel, a Person who has an account with the Depositary, Euroclear or Cedel, respectively (and, with respect to The Depository Trust Company, shall include Euroclear and Cedel). "Participating Broker-Dealer" has the meaning set forth in the Registration Rights Agreement. "Pegasus 1996 Stock Option Plan" means the Pegasus Communications 1996 Stock Option Plan, approved by the Company's stockholders and adopted by the Company in September 1996. "Pegasus Restricted Stock Plan" means the Pegasus Restricted Stock Plan, approved by the Company's stockholders and adopted by the Company in September 1996. "Permitted Businesses" means (i) any media or communications business, including but not limited to, any broadcast television station, cable franchise or other business in the television broadcasting, cable or direct-to-home satellite television industries and (ii) any business reasonably related or ancillary to any of the foregoing businesses. -11- "Permitted Investments" means (a) any Investments in the Company or in a Wholly Owned Restricted Subsidiary of the Company; (b) any Investments in Cash Equivalents; (c) Investments by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the Company or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Wholly Owned Restricted Subsidiary of the Company; (d) Investments made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with Section 4.10 hereof; and (e) other Investments made since the date of this Indenture (measured as of the time made and without giving effect to subsequent changes in value) that do not exceed an amount equal to $15.0 million plus, to the extent any such Investments are sold for cash or are otherwise liquidated or repaid for cash, any gains less any losses realized on the disposition of such Investments. "Permitted Liens" means (i) Liens securing term loans, revolving borrowings, letters of credit or other Obligations under any Bank Facility; (ii) Liens securing Eligible Indebtedness of a Subsidiary that was permitted to be incurred under this Indenture, (iii) Liens on property of a Person existing at the time such Person is merged into or consolidated with the Company or any Restricted Subsidiary of the Company; provided that such Liens were not created in contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Company or any Restricted Subsidiary of the Company; (iv) Liens on property existing at the time of acquisition thereof by the Company or any Restricted Subsidiary of the Company; provided that such Liens were not created in contemplation of such acquisition; (v) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (vi) Liens existing on the Closing Date; (vii) Liens to secure Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations permitted by clause (vii) of Section 4.09(b) hereof, covering only the assets acquired with such Indebtedness; (viii) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (ix) Liens incurred in the ordinary course of business of the Company or any Restricted Subsidiary of the Company with respect to obligations that do not exceed $1.5 million at any one time outstanding; (x) Liens on deposits or Cash Equivalents made pursuant to legally binding agreements or non-binding letters of intent to acquire assets (or the Capital Stock of Persons owning such assets), in an amount not to exceed 10% of the purchase price of such assets or Capital Stock; provided that the assets to be acquired (or the Capital Stock of Persons owning such assets) will be owned by the Company or a Restricted Subsidiary of the Company upon consummation of the contemplated acquisition; (xi) Liens encumbering deposits or Cash Equivalents made to secure obligations of the Company to repurchase Capital Stock of the Company pledged to secure obligations of employees of the Company in an aggregate amount not to exceed $5.0 million at any time outstanding and (xii) Liens on assets of or Equity Interests in Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries. -12- "Permitted Refinancing Debt" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that (i) the principal amount of (or accreted value, if applicable) such Permitted Refinancing Debt does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus (a) the amount of reasonable expenses incurred in connection therewith and (b) the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of such refinancing or deemed by the Company or such Restricted Subsidiary necessary to be paid in order to effectuate such refinancing); (ii) such Permitted Refinancing Debt has a final maturity date not earlier than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Debt has a final maturity date later than the final maturity date of the Notes, and is subordinated in right of payment to the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (v) if such Permitted Refinancing Debt is incurred by a Restricted Subsidiary that is not a Subsidiary Guarantor, such Permitted Refinancing Debt constitutes Eligible Indebtedness. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "PM&C" means Pegasus Media & Communications, Inc., a Delaware corporation and a direct Subsidiary of the Company. "PM&C Credit Facility" means the Credit Agreement, dated as of December 10, 1997, by and among PM&C, the several lenders from time to time party thereto and Bankers Trust Company, as agent for such lenders, as amended through the Closing Date. "Principal" means Marshall W. Pagon. "Private Placement Legend" means the legend set forth in Section 2.06(g)(i) to be placed on all Notes issued under this Indenture except where otherwise permitted by the provisions of this Indenture. -13- "PSTV Preferred Stock" means the Series A Preferred Stock, par value $1.00 per share, of Pegasus Satellite Television of Virginia, Inc. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Qualified Subsidiary Stock" means Capital Stock of a Subsidiary of the Company which by its terms (a) does not mature, or is not mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, and is not redeemable at the option of the Holder thereof, in whole or in part, prior to December 1, 2007 (in each case, whether automatically or upon the happening of any event) (unless, in any such case, the issuer's obligation to pay, purchase or redeem such Capital Stock is expressly conditioned on its ability to do so in compliance with Section 4.07 hereof), (b) is automatically exchangeable into shares of Capital Stock of the Company that is not Disqualified Stock upon the earlier to occur of (i) the occurrence of an Event of Default and (ii) December 1, 2005, (c) has no voting or remedial rights and (d) does not permit the payment of cash dividends prior to December 1, 2006 (unless, in the case of this clause (d), the issuer's ability to pay cash dividends is expressly conditioned on its ability to do so in compliance with Section 4.07 hereof). Notwithstanding the foregoing, for all purposes under this Indenture, "Qualified Subsidiary Stock" shall be deemed to include the PSTV Preferred Stock. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of November 30, 1998, between the Company and the Initial Purchasers, as such agreement may be amended, modified or supplemented from time to time. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Global Note" means a Global Note bearing the Private Placement Legend and deposited with or on behalf of the Depositary and registered in the name of the Depositary or its nominee, issued in a denomination equal to the outstanding principal amount of the Notes initially sold in reliance on Rule 903 of Regulation S. "Related Party" with respect to the Principal means (A) any immediate family member of the Principal or (B) any trust, corporation, partnership or other entity, more than 50% of the voting equity interests of which are owned directly or indirectly by, and which is controlled by, the Principal and/or such other Persons referred to in the immediately preceding clause (A). For purposes of this definition, (i) "immediate family member" means spouse, parent, step-parent, child, sibling or step-sibling and (ii) "control" has the meaning specified in the definition of "Affiliate" contained herein. In addition, the Principal's estate shall be deemed to be a Related Party until such time as such estate is distributed in accordance with the Principal's will or applicable state law. "Responsible Officer" when used with respect to the Trustee, means any officer within the Corporate Trust Administration department of the Trustee (or any successor group of the Trustee) or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Definitive Note" means a Definitive Note bearing the Private Placement Legend. "Restricted Global Note" means a Global Note bearing the Private Placement Legend. -14- "Restricted Investment" means any Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Rule 144" means Rule 144 promulgated under the Securities Act. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Rule 903" means Rule 903 promulgated under the Securities Act. "Rule 904" means Rule 904 promulgated under the Securities Act. "SEC" means the Securities and Exchange Commission. "Satellite Segment" means the business involved in the marketing of video and audio programming and data information services through transmission media consisting of space-based satellite broadcasting services, the assets related to the conduct of such business held by the Company and its Restricted Subsidiaries on the Closing Date, plus all other assets acquired by the Company or any of its Restricted Subsidiaries that are directly related to such business (excluding, without limitation, the terrestrial television broadcasting business and the assets related thereto and the cable television business and the assets related thereto); provided that any assets acquired by the Company or any of its Restricted Subsidiaries after the Closing Date that are not directly related to such business shall not be included for purposes of this definition. "Securities Act" means the Securities Act of 1933, as amended. "Series A Preferred Stock" means the Company's 12 3/4% Series A Cumulative Exchangeable Preferred Stock. "Series A Notes" has the meaning assigned to it in the preamble to this Indenture. "Series B Notes" has the meaning assigned to it in the preamble to this Indenture. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date of this Indenture. -15- "Split Dollar Agreement" means the Split Dollar Agreement between the Company and Nicholas A. Pagon, Holly T. Pagon and Michael B. Jordan, as trustees of an insurance trust established by Marshall W. Pagon, as in effect on the Closing Date. "Stated Maturity" means, with respect to any interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subordinated Exchange Note Indenture" means the Indenture filed as an exhibit to the Certificate of Designation which would govern the Subordinated Exchange Notes, if issued, as the same may be amended, but without giving effect to any amendment that materially alters the economic terms thereof. "Subordinated Exchange Notes" means the Company's 12 3/4% Senior Subordinated Exchange Notes due 2007 issuable pursuant to the Subordinated Exchange Note Indenture in exchange for the Company's Series A Preferred Stock. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries (of such Person or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such a Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof.) "Subsidiary Guarantee" means the Subsidiary Guarantee by each Subsidiary Guarantor of the Company's payment obligations under this Indenture and the Notes, executed pursuant to the provisions of this Indenture. "Subsidiary Guarantor" means any Restricted Subsidiary that shall have guaranteed, pursuant to a supplemental indenture and the requirements therefor set forth in this Indenture, the payment of all principal of, and interest and premium, if any, on, the Notes and all other amounts payable under the Notes or this Indenture, which guarantee shall be pari passu with or senior to all Indebtedness of such Restricted Subsidiary. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb as amended) as in effect on the date on which this Indenture is qualified under the TIA. -16- "Total Interest Expense" means, with respect to any Person for any period, the sum of (i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, to the extent such amounts are not included in clause (i) of this definition, and (iii) any interest expense for such period on Indebtedness of another Person that is guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets (other than Equity Interests in Unrestricted Subsidiaries securing Indebtedness of Unrestricted Subsidiaries) of such Person or one of its Restricted Subsidiaries (whether or not such guarantee or Lien is called upon) and (iv) all cash dividend payments during such period on any series of preferred stock of a Restricted Subsidiary of such Person. "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "Unrestricted Global Note" means a permanent Global Note in the form of Exhibit A attached hereto that bears the Global Note Legend and that has the "Schedule of Exchanges of Interests in the Global Note" attached thereto, and that is deposited with or on behalf of and registered in the name of the Depositary, representing a series of Notes that do not bear the Private Placement Legend. "Unrestricted Definitive Note" means one or more Definitive Notes that do not bear and are not required to bear the Private Placement Legend. -17- "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent that such Subsidiary (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation made by the Board of Directors at a time when any Notes are outstanding shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by Section 4.07 hereof. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under Section 4.09 hereof (treating such Subsidiary as a Restricted Subsidiary for such purpose for the period relevant to such covenant), the Company shall be in default of such covenant); provided, however, that in the event an Unrestricted Subsidiary ceases to meet the requirement set forth in clause (e) of this definition, such Unrestricted Subsidiary shall have 60 days to meet such requirement before such Unrestricted Subsidiary shall cease to be an Unrestricted Subsidiary. The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall be permitted only if (i) such Indebtedness is permitted under Section 4.09 hereof (treating such Subsidiary as a Restricted Subsidiary for such purpose for the period relevant to such covenant) and (ii) no Default or Event of Default would be in existence following such designation. "U.S. Person" means a U.S. person as defined in Rule 902(o) under the Securities Act. "Voting Stock" means with respect to any specified Person, Capital Stock with voting power, under ordinary circumstances and without regard to the occurrence of any contingency, to elect the directors or other managers or trustees of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock (other than Qualified Subsidiary Stock) or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person and/or by one or more Wholly Owned Restricted Subsidiaries of such Person. -18- SECTION 1.02. OTHER DEFINITIONS. Defined in Term Section "Affiliate Transaction"................................................4.11 "Asset Sale Offer".....................................................4.10 "Basket Period"........................................................4.07 "Change of Control Offer"..............................................4.15 "Change of Control Payment"............................................4.15 "Change of Control Payment Date".......................................4.15 "Covenant Defeasance"..................................................8.03 "custodian"............................................................6.01 "DTC"..................................................................2.03 "Event of Default".....................................................6.01 "Excess Proceeds"......................................................4.10 "incur"................................................................4.09 "Legal Defeasance".....................................................8.02 "Notice of Default"....................................................6.01 "Offer Amount".........................................................3.09 "Offer Period..........................................................3.09 "outstanding"..........................................................8.02 "Paying Agent".........................................................2.03 "Payment Default"......................................................6.01 "Purchase Date"........................................................3.09 "Registrar"............................................................2.03 "Restricted Payments"..................................................4.07 SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes and the Subsidiary Guarantees; "indenture security Holder" means a Holder of a Note; "indenture to be qualified" means this Indenture; "indenture Trustee" or "institutional Trustee" means the Trustee; "obligor" on the Notes means the Company and any successor obligor upon the Notes. -19- All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04. RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement of successor sections or rules adopted by the SEC from time to time. ARTICLE 2. THE NOTES SECTION 2.01. FORM AND DATING. (a) General. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes shall be in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. (b) Global Notes. Notes issued in global form shall be substantially in the form of Exhibit A attached hereto (including the Global Note Legend thereon and the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Notes issued in definitive form shall be substantially in the form of Exhibit A attached hereto (but without the Global Note Legend thereon and without the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate principal amount of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Notes represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. -20- (c) Euroclear and Cedel Procedures Applicable. The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "General Terms and Conditions of Cedel Bank" and "Customer Handbook" of Cedel Bank shall be applicable to transfers of beneficial interests in Global Notes that are held by Participants through Euroclear or Cedel Bank. SECTION 2.02. EXECUTION AND AUTHENTICATION. An Officer shall sign the Notes for the Company by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time a Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee shall, upon a written order of the Company signed by an Officer (an "Authentication Order"), authenticate Notes for original issue up to the aggregate principal amount stated in paragraph 4 of the Notes. The aggregate principal amount of Notes outstanding at any time may not exceed such amount except as provided in Section 2.07 hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holders or an Affiliate of the Company. SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange ("Registrar") and an office or agency where Notes may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. -21- The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Custodian with respect to the Global Notes. SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium or Liquidated Damages, if any, or interest on the Notes, and will notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for the money. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the Company, the Trustee shall serve as Paying Agent for the Notes. SECTION 2.05. HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA ss.312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Notes and the Company shall otherwise comply with TIA Section 312(a). -22- SECTION 2.06. TRANSFER AND EXCHANGE. (a) Transfer and Exchange of Global Notes. A Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary or to another nominee of the Depositary, by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. All Global Notes will be exchanged by the Company for Definitive Notes if (i) the Company delivers to the Trustee notice from the Depositary that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, a successor Depositary is not appointed by the Company within 120 days after the date of such notice from the Depositary, (ii) the Company in its sole discretion determines that the Global Notes (in whole but not in part) should be exchanged for Definitive Notes and delivers a written notice to such effect to the Trustee or (iii) there shall have occurred and be continuing a Default or Event of Default with respect to the Notes. Upon the occurrence of any of the preceding events in (i), (ii) or (iii) above, Definitive Notes shall be issued in such names and denominations as the Depositary shall instruct the Trustee. Global Notes also may be exchanged or replaced, in whole or in part, as provided in Sections 2.07 and 2.10 hereof. Every Note authenticated and delivered in exchange for, or in lieu of, a Global Note or any portion thereof, pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof, shall be authenticated and delivered in the form of, and shall be, a Global Note. A Global Note may not be exchanged for another Note other than as provided in this Section 2.06(a), however, beneficial interests in a Global Note may be transferred and exchanged as provided in Section 2.06(b),(c) or (f) hereof. (b) Transfer and Exchange of Beneficial Interests in the Global Notes. The transfer and exchange of beneficial interests in the Global Notes shall be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Restricted Global Notes shall be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Transfers of beneficial interests in the Global Notes also shall require compliance with either subparagraph (i) or (ii) below, as applicable, as well as one or more of the other following subparagraphs, as applicable: (i) Transfer of Beneficial Interests in the Same Global Note. Beneficial interests in any Restricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Restricted Global Note in accordance with the transfer restrictions set forth in the Private Placement Legend; provided, however, that prior to the expiration of the Restricted Period, transfers of beneficial interests in the Regulation S Global Note may not be made to a U.S. Person or for the account or benefit of a U.S. Person (other than the Initial Purchasers). Beneficial interests in any Unrestricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.06(b)(i). -23- (ii) All Other Transfers and Exchanges of Beneficial Interests in Global Notes. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.06(b)(i) above, the transferor of such beneficial interest must deliver to the Registrar either (A) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase or (B) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Definitive Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given by the Depositary to the Registrar containing information regarding the Person in whose name such Definitive Note shall be registered to effect the transfer or exchange referred to in (1) above. Upon consummation of an Exchange Offer by the Company in accordance with Section 2.06(f) hereof, the requirements of this Section 2.06(b)(ii) shall be deemed to have been satisfied upon receipt by the Registrar of the instructions contained in the Letter of Transmittal delivered by the Holder of such beneficial interests in the Restricted Global Notes. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Notes contained in this Indenture and the Notes or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Note(s) pursuant to Section 2.06(h) hereof. (iii) Transfer of Beneficial Interests to Another Restricted Global Note. A beneficial interest in any Restricted Global Note may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in another Restricted Global Note if the transfer complies with the requirements of Section 2.06(b)(ii) above and the Registrar receives the following: (A) if the transferee will take delivery in the form of a beneficial interest in the 144A Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transferee will take delivery in the form of a beneficial interest in the Regulation S Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transferee will take delivery in the form of a beneficial interest in the IAI Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications and certificates and Opinion of Counsel required by item (3) thereof, if applicable. -24- (iv) Transfer and Exchange of Beneficial Interests in a Restricted Global Note for Beneficial Interests in the Unrestricted Global Note. A beneficial interest in any Restricted Global Note may be exchanged by any holder thereof for a beneficial interest in an Unrestricted Global Note or transferred to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note if the exchange or transfer complies with the requirements of Section 2.06(b)(ii) above and: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of the beneficial interest to be transferred, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Series B Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(a) thereof; or (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. If any such transfer is effected pursuant to subparagraph (B) or (D) above at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the aggregate principal amount of beneficial interests transferred pursuant to subparagraph (B) or (D) above. -25- Beneficial interests in an Unrestricted Global Note cannot be exchanged for, or transferred to Persons who take delivery thereof in the form of, a beneficial interest in a Restricted Global Note. (c) Transfer or Exchange of Beneficial Interests for Definitive Notes. (i) Beneficial Interests in Restricted Global Notes to Restricted Definitive Notes. If any holder of a beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Definitive Note, then, upon receipt by the Registrar of the following documentation: (A) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (2)(a) thereof; (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such beneficial interest is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such beneficial interest is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) through (D) above, a certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable; (F) if such beneficial interest is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or -26- (G) if such beneficial interest is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c)(i) shall bear the Private Placement Legend and shall be subject to all restrictions on transfer contained therein. (ii) Beneficial Interests in Restricted Global Notes to Unrestricted Definitive Notes. A holder of a beneficial interest in a Restricted Global Note may exchange such beneficial interest for an Unrestricted Definitive Note or may transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of such beneficial interest, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Series B Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(b) thereof; or -27- (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (iii) Beneficial Interests in Unrestricted Global Notes to Unrestricted Definitive Notes. If any holder of a beneficial interest in an Unrestricted Global Note proposes to exchange such beneficial interest for a Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Note, then, upon satisfaction of the conditions set forth in Section 2.06(b)(ii) hereof, the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(iii) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(iii) shall not bear the Private Placement Legend. (d) Transfer and Exchange of Definitive Notes for Beneficial Interests. (i) Restricted Definitive Notes to Beneficial Interests in Restricted Global Notes. If any Holder of a Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note or to transfer such Restricted Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in a Restricted Global Note, then, upon receipt by the Registrar of the following documentation: (A) if the Holder of such Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (2)(b) thereof; -28- (B) if such Restricted Definitive Note is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such Restricted Definitive Note is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such Restricted Definitive Note is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such Restricted Definitive Note is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) through (D) above, a certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable; (F) if such Restricted Definitive Note is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (G) if such Restricted Definitive Note is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Trustee shall cancel the Restricted Definitive Note, increase or cause to be increased the aggregate principal amount of, in the case of clause (A) above, the appropriate Restricted Global Note, in the case of clause (B) above, the 144A Global Note, in the case of clause (c) above, the Regulation S Global Note, and in all other cases, the IAI Global Note. (ii) Restricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of a Restricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Restricted Definitive Note to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note only if: -29- (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Series B Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Definitive Notes proposes to exchange such Notes for a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(c) thereof; or (2) if the Holder of such Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. Upon satisfaction of the conditions of any of the subparagraphs in this Section 2.06(d)(ii), the Trustee shall cancel the Definitive Notes and increase or cause to be increased the aggregate principal amount of the Unrestricted Global Note. (iii) Unrestricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of an Unrestricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note at any time. Upon receipt of a request for such an exchange or transfer, the Trustee shall cancel the applicable Unrestricted Definitive Note and increase or cause to be increased the aggregate principal amount of one of the Unrestricted Global Notes. -30- If any such exchange or transfer from a Definitive Note to a beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or (iii) above at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of Definitive Notes so transferred. (e) Transfer and Exchange of Definitive Notes for Definitive Notes. Upon request by a Holder of Definitive Notes and such Holder's compliance with the provisions of this Section 2.06(e), the Registrar shall register the transfer or exchange of Definitive Notes. Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Registrar the Definitive Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing. In addition, the requesting Holder shall provide any additional certifications, documents and information, as applicable, required pursuant to the following provisions of this Section 2.06(e). (i) Restricted Definitive Notes to Restricted Definitive Notes. Any Restricted Definitive Note may be transferred to and registered in the name of Persons who take delivery thereof in the form of a Restricted Definitive Note if the Registrar receives the following: (A) if the transfer will be made pursuant to Rule 144A under the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transfer will be made pursuant to Rule 903 or Rule 904, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transfer will be made pursuant to any other exemption from the registration requirements of the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable. (ii) Restricted Definitive Notes to Unrestricted Definitive Notes. Any Restricted Definitive Note may be exchanged by the Holder thereof for an Unrestricted Definitive Note or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Definitive Note if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Series B Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; -31- (B) any such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) any such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Restricted Definitive Notes proposes to exchange such Notes for an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(d) thereof; or (2) if the Holder of such Restricted Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests, an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (iii) Unrestricted Definitive Notes to Unrestricted Definitive Notes. A Holder of Unrestricted Definitive Notes may transfer such Notes to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note. Upon receipt of a request to register such a transfer, the Registrar shall register the Unrestricted Definitive Notes pursuant to the instructions from the Holder thereof. (f) Exchange Offer. Upon the occurrence of the Exchange Offer in accordance with the Registration Rights Agreement, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02, the Trustee shall authenticate (i) one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of the beneficial interests in the Restricted Global Notes tendered for acceptance by Persons that certify in the applicable Letters of Transmittal that (x) they are not broker-dealers, (y) they are not participating in a distribution of the Series B Notes and (z) they are not affiliates (as defined in Rule 144) of the Company, and accepted for exchange in the Exchange Offer and (ii) Definitive Notes in an aggregate principal amount equal to the principal amount of the Restricted Definitive Notes accepted for exchange in the Exchange Offer. Concurrently with the issuance of such Notes, the Trustee shall cause the aggregate principal amount of the applicable Restricted Global Notes to be reduced accordingly, and the Company shall execute and the Trustee shall authenticate and deliver to the Persons designated by the Holders of Definitive Notes so accepted Definitive Notes in the appropriate principal amount. -32- (g) Legends. The following legends shall appear on the face of all Global Notes and Definitive Notes issued under this Indenture unless specifically stated otherwise in the applicable provisions of this Indenture. (i) Private Placement Legend. (A) Except as permitted by subparagraph (B) below, each Global Note and each Definitive Note (and all Notes issued in exchange therefor or substitution thereof) shall bear the legend in substantially the following form: THIS SENIOR NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE ACT) OR (B) IT IS AN "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE ACT) (AN "ACCREDITED INVESTOR"), OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SENIOR NOTE IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS SENIOR NOTE EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (C) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE ACT, (D) INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHED (OR HAS FURNISHED ON ITS BEHALF BY A U.S. BROKER-DEALER) TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS SENIOR NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE), (E) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE ACT, (F) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE ACT (IF AVAILABLE) OR (G) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SENIOR NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS SENIOR NOTE PURSUANT TO CLAUSES (D), (F) AND (G) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE COMPANY SUCH CERTIFICATES, LEGAL OPINIONS OR OTHER INFORMATION AS ANY OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM OR IN A TRANSACTION NOT SUBJECT TO THE REGISTRATION REQUIREMENTS OF THE ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANING GIVEN TO THEM BY REGULATION S UNDER THE ACT. -33- (B) Notwithstanding the foregoing, any Global Note or Definitive Note issued pursuant to subparagraphs (b)(iv), (c)(ii), (c)(iii), (d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to this Section 2.06 (and all Notes issued in exchange therefor or substitution thereof) shall not bear the Private Placement Legend. (ii) Global Note Legend. Each Global Note shall bear a legend in substantially the following form: "THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY." (h) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in a particular Global Note have been exchanged for Definitive Notes or a particular Global Note has been redeemed, repurchased or canceled in whole and not in part, each such Global Note shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Definitive Notes, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note shall be increased accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase. -34- (i) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Global Notes and Definitive Notes upon the Company's order or at the Registrar's request. (ii) No service charge shall be made to a holder of a beneficial interest in a Global Note or to a Holder of a Definitive Note for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.06, 3.09, 4.10, 4.15 and 9.05 hereof). (iii) The Registrar shall not be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (iv) All Global Notes and Definitive Notes issued upon any registration of transfer or exchange of Global Notes or Definitive Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Notes or Definitive Notes surrendered upon such registration of transfer or exchange. (v) The Company shall not be required (A) to issue, to register the transfer of or to exchange any Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part or (c) to register the transfer of or to exchange a Note between a record date and the next succeeding Interest Payment Date. (vi) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Notes and for all other purposes, and none of the Trustee, any Agent or the Company shall be affected by notice to the contrary. (vii) The Trustee shall authenticate Global Notes and Definitive Notes in accordance with the provisions of Section 2.02 hereof. (viii) All certifications, certificates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.06 to effect a registration of transfer or exchange may be submitted by facsimile. -35- SECTION 2.07. REPLACEMENT NOTES. If any mutilated Note is surrendered to the Trustee or the Company and the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Note, the Company shall issue and the Trustee, upon receipt of an Authentication Order, shall authenticate a replacement Note if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Note is replaced. The Company may charge for its expenses in replacing a Note. Every replacement Note is an additional obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder. SECTION 2.08. OUTSTANDING NOTES. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section as not outstanding. Except as set forth in Section 2.09 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note; however, Notes held by the Company or a Subsidiary of the Company shall not be deemed to be outstanding for purposes of Section 3.07(b) hereof. If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, on a redemption date or maturity date, money sufficient to pay Notes payable on that date, then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest. SECTION 2.09. TREASURY NOTES. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company, or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company, shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that the Trustee knows are so owned shall be so disregarded. -36- SECTION 2.10. TEMPORARY NOTES. Until certificates representing Notes are ready for delivery, the Company may prepare and the Trustee, upon receipt of an Authentication Order, shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of certificated Notes but may have variations that the Company considers appropriate for temporary Notes and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of this Indenture. SECTION 2.11. CANCELLATION. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy canceled Notes (subject to the record retention requirement of the Exchange Act). Certification of the destruction of all canceled Notes shall be delivered to the Company. The Company may not issue new Notes to replace Notes that it has paid or that have been delivered to the Trustee for cancellation. SECTION 2.12. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, in each case at the rate provided in the Notes and in Section 4.01 hereof. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Note and the date of the proposed payment. The Company shall fix or cause to be fixed each such special record date and payment date, provided that no such special record date shall be less than 10 days prior to the related payment date for such defaulted interest. At least 15 days before the special record date, the Company (or, upon the written request of the Company, the Trustee in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. -37- ARTICLE 3. REDEMPTION AND PREPAYMENT SECTION 3.01. NOTICES TO TRUSTEE. If the Company is required to make an offer to purchase Notes pursuant to the provisions of Section 3.09 hereof, it shall furnish to the Trustee an Officers' Certificate setting forth (i) the Section of this Indenture pursuant to which the purchase shall occur, (ii) the purchase date, (iii) the principal amount of Notes to be purchased, (iv) the purchase price and (v) a statement to the effect that a Change of Control has occurred and the conditions set forth in Section 3.09 hereof have been satisfied, as applicable. SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED. If less than all of the Notes are to be redeemed at any time, the Trustee shall select the Notes to be redeemed among the Holders of the Notes in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not so listed, to be redeemed among the Holders of Notes on a pro rata basis, by lot or by such method as the Trustee deems fair and appropriate; provided that no Notes of $1,000 or less shall be redeemed in part. In the event of partial redemption by lot, the particular Notes to be redeemed shall be selected, unless otherwise provided herein, not less than 30 nor more than 60 days prior to the redemption date by the Trustee from the outstanding Notes not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Note selected for partial redemption, the principal amount thereof to be redeemed. Notes and portions of Notes selected shall be in amounts of $1,000 or whole multiples of $1,000; except that if all of the Notes of a Holder are to be redeemed, the entire outstanding amount of Notes held by such Holder, even if not a multiple of $1,000, shall be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. Notes called for redemption shall become due on the redemption date. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. Except as provided in this Section 3.02, provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. SECTION 3.03. NOTICE OF REDEMPTION. Subject to the provisions of Section 3.09 hereof, at least 30 days but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed, by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed at its registered address. -38- The notice shall identify the Notes to be redeemed and shall state: (a) the redemption date; (b) the redemption price; (c) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the redemption date upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion shall be issued upon cancellation of the original; (d) the name and address of the Paying Agent; (e) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (f) that, unless the Company defaults in making such redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date; (g) the paragraph of the Notes and/or Section of this Indenture pursuant to which the Notes called for redemption are being redeemed; and (h) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Notes. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense; provided, however, that the Company shall have delivered to the Trustee, at least 30 days prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 3.03 hereof, Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price. A notice of redemption may not be conditional. SECTION 3.05. DEPOSIT OF REDEMPTION OR PURCHASE PRICE. One Business Day prior to 10:00 a.m. Eastern Time on the redemption date, the Company shall deposit with the Trustee or with the Paying Agent money in immediately available funds sufficient to pay the redemption or purchase price of and accrued interest, if any, on all Notes to be redeemed or purchased on that date. The Trustee or the Paying Agent shall promptly return to the Company any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption or purchase price of, and accrued interest on, all Notes to be redeemed or purchased. -39- If Notes called for redemption or tendered in a Change of Control Offer are paid or if the Company has deposited with the Trustee or Paying Agent money sufficient to pay the redemption or purchase price of, and unpaid and accrued interest, if any, on all Notes to be redeemed or purchased, on and after the applicable redemption or purchase date, interest, if any, ceases to accrue on the Notes or the portions of Notes called for redemption or tendered and not withdrawn in a Change of Control Offer (regardless of whether certificates for such Notes are actually surrendered). If a Note is redeemed or purchased on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest, if any, shall be paid to the Person in whose name such Note was registered at the close of business on such record date. If any Note called for redemption or subject to a Change of Control Offer shall not be so paid upon surrender for redemption or purchase because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption or purchase date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case, at the rate provided in the Notes and in Section 4.01 hereof. SECTION 3.06. NOTES REDEEMED OR PURCHASED IN PART. Upon surrender of a Note that is redeemed or purchased in part, the Company shall issue and, upon the Company's written request, the Trustee shall authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unredeemed or unpurchased portion of the Note surrendered. SECTION 3.07. OPTIONAL REDEMPTION. (a) The Notes shall not be redeemable at the Company's option prior to December 1, 2002. The Notes may be redeemed, in whole or in part, at the option of the Company on or after December 1, 2002, at the redemption prices specified below (expressed as percentages of the principal amount thereof), in each case, together with accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of redemption, upon not less than 30 nor more than 60 days notice, if redeemed during the twelve-month period beginning on December 1 of the years indicated below: -40- Redemption Year Price - ---- ----------- 2002 104.875% 2003 103.250% 2004 101.625% 2005 and thereafter 100.000% (b) Notwithstanding the foregoing, during the first 36 months after the Closing Date, the Company may, on any one or more occasions, use the net proceeds of one or more offerings of its Capital Stock to redeem up to 35% of the aggregate principal amount of the Notes at a redemption price of 109.75% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption; provided that, after any such redemption, the aggregate principal amount of the Notes outstanding (excluding Notes held by the Company and its subsidiaries) must equal at least $65.0 million; and provided further, that any such redemption shall occur within 90 days of the date of closing of such offering of Capital Stock of the Company. (c) Any redemption pursuant to this Section 3.07 shall be made pursuant to the provisions of Section 3.01 through 3.06 hereof. SECTION 3.08. MANDATORY REDEMPTION. The Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS. (a) In the event that, pursuant to Section 4.10 hereof, the Company shall be required to commence an Asset Sale Offer, it shall follow the procedures specified below with respect to the Holders of Notes. (b) The Asset Sale Offer shall remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than five Business Days after the termination of the Offer Period (the "Purchase Date"), the Company shall purchase the principal amount of Notes required to be purchased pursuant to Section 4.10 hereof (the "Offer Amount") or, if less than the Offer Amount has been tendered, all Notes tendered in response to the Asset Sale Offer. Payment for any Notes so purchased shall be made in the same manner as interest payments are made. -41- (c) The Company shall comply with any tender offer rules under the Exchange Act which may then be applicable, including Rule 14e-1, in connection with any offer required to be made by the Company to repurchase the Notes as a result of an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section 3.09, the Company shall comply with the applicable securities laws or regulations and shall not be deemed to have breached its obligations hereunder by virtue thereof. (d) If the Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest shall be paid to the Person in whose name a Note is registered at the close of business on such record date, and no additional interest shall be payable to Holders who tender Notes pursuant to the Asset Sale Offer. (e) Upon the commencement of an Asset Sale Offer, the Company shall send, by first class mail, a notice to the Trustee and each of the Holders, with a copy to the Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to the Asset Sale Offer. The Asset Sale Offer shall be made to all Holders. The notice, which shall govern the terms of the Asset Sale Offer, shall state: (i) that the Asset Sale Offer is being made pursuant to this Section 3.09 and Section 4.10 hereof and the length of time the Asset Sale Offer shall remain open; (ii) the Offer Amount, the purchase price and the Purchase Date and, if any Restricted Subsidiary is required to and does make an offer to holders of its Indebtedness pursuant to a requirement similar to that contained in Section 4.10 and this Section, the notice shall state that fact, that the Offer Amount will be reduced by the amount of Indebtedness required to be purchased pursuant to such other offer, and that the amount of such reduction will not be known until the expiration of such other offer, which shall not be later than the expiration of the Offer Period; (iii) that any Note not tendered or accepted for payment shall continue to accrue interest; (iv) that, unless the Company defaults in making such payment, any Note accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest after the Purchase Date; (v) that Holders electing to have a Note purchased pursuant to an Asset Sale Offer may only elect to have all of such Note purchased and may not elect to have only a portion of such Note purchased; (vi) that Holders electing to have a Note purchased pursuant to any Asset Sale Offer shall be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, or transfer by book-entry transfer, to the Company, a depositary, if appointed by the Company, or a Paying Agent at the address specified in the notice at least three days before the Purchase Date; -42- (vii) that Holders shall be entitled to withdraw their election if the Company, the Depositary or the Paying Agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Note purchased; (viii) that, if the aggregate principal amount of Notes surrendered by Holders exceeds the Offer Amount, the Company shall select the Notes to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000, or integral multiples thereof, shall be purchased, other than in the case of Holders whose Notes were purchased in whole); and (ix) that Holders whose Notes were purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (or transferred by book-entry transfer). (f) On or before the Purchase Date, the Company shall, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Notes or portions thereof tendered pursuant to the Asset Sale Offer, or if less than the Offer Amount has been tendered, all Notes tendered, and shall deliver to the Trustee an Officers' Certificate stating that such Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this Section 3.09. The Company, the Depositary or the Paying Agent, as the case may be, shall promptly (but in any case not later than five days after the Purchase Date) mail or deliver to each tendering Holder of Notes an amount equal to the purchase price of the Notes tendered by such Holder of Notes and accepted by the Company for purchase, and the Company shall promptly issue a new Note and the Trustee, upon written request from the Company shall authenticate and mail or deliver such new Note to such Holder of Notes in a principal amount equal to any unpurchased portion of the Note surrendered. Any Note not so accepted shall be promptly mailed or delivered by the Company to the Holder of Notes thereof. The Company shall publicly announce the results of the Asset Sale Offer on the Purchase Date. (g) Other than as specifically provided in this Section 3.09, any purchase pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. No repurchase of Notes under this Section 3.09 shall be deemed to be a redemption of Notes. -43- ARTICLE 4. COVENANTS SECTION 4.01. PAYMENT OF NOTES. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent, if other than the Company or a Subsidiary thereof, holds as of 10:00 a.m. Eastern Time on the due date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest then due. The Company shall pay all Liquidated Damages, if any, in the same manner on the dates and in the amounts set forth in the Registration Rights Agreement. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee, Registrar or co-Registrar) where Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.03. -44- SECTION 4.03. REPORTS. (a) Whether or not required by the rules and regulations of the SEC, so long as any Notes are outstanding, the Company shall furnish to the Holders of Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were required to file such Forms, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the SEC on Form 8-K if the Company were required to file such reports, in each case within the time periods specified in the SEC's rules and regulations. In addition, following consummation of the Exchange Offer contemplated by the Registration Rights Agreement, whether or not required by the rules and regulations of the SEC, the Company shall file a copy of all such information and reports with the SEC for public availability within the time periods set forth in the SEC's rules and regulations (unless the SEC will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition to the financial information required by the Exchange Act, each such quarterly and annual report shall be required to contain "summarized financial information" (as defined in Rule 1-02(aa)(1) of Regulation S-X under the Exchange Act) showing Adjusted Operating Cash Flow for the Company and its Restricted Subsidiaries, on a consolidated basis, where Adjusted Operating Cash Flow for the Company is calculated in a manner consistent with the manner described under the definition of "Adjusted Operating Cash Flow" contained herein. The summarized financial information required pursuant to the preceding sentence may, at the election of the Company, be included in the footnotes to audited consolidated financial statements or unaudited quarterly financial statements of the Company and shall be as of the same dates and for the same periods as the consolidated financial statements of the Company and its Subsidiaries required pursuant to the Exchange Act. (b) In addition, the Company has agreed that, for so long as any Notes remain outstanding, it will furnish to the holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to rule 144A(d)(4) under the Securities Act. -45- SECTION 4.04. COMPLIANCE CERTIFICATE. (a) The Company shall deliver to the Trustee, within 90 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest on the Notes is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements delivered pursuant to Section 4.03 above shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Article Four or Article Five hereof or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) The Company shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer of the Company becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SECTION 4.05. TAXES. The Company shall pay, and shall cause each of its Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and governmental levies except such as are contested in good faith and by appropriate proceedings or where the failure to effect such payment is not adverse in any material respect to the Holders of the Notes. SECTION 4.06. STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. -46- SECTION 4.07. RESTRICTED PAYMENTS. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, (i) declare or pay any dividend or make any other payment or distribution on account of the Company's Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company) or on account of any Qualified Subsidiary Stock or make any payment or distribution (other than compensation paid to, or reimbursement of expenses of, employees in the ordinary course of business) to or for the benefit of the direct or indirect holders of the Company's Equity Interests or the direct or indirect holders of any Qualified Subsidiary Stock in their capacities as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or additional shares of such Qualified Subsidiary Stock); (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Company or any direct or indirect parent of the Company (other than any such Equity Interests owned by the Company or any of its Restricted Subsidiaries); (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Notes, except a payment of interest or principal at Stated Maturity; (iv) forgive any loan or advance to or other obligation of any Affiliate of the Company (other than a loan or advance to or other obligations of a Wholly Owned Restricted Subsidiary of the Company) which at the time it was made was not a Restricted Payment; or (v) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (v) above being collectively referred to as "Restricted Payments"), unless, at the time of and immediately after giving effect to such Restricted Payment: (A) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (B) the Company would be permitted to incur $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio described in Section 4.09(a) hereof; and -47- (C) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the Closing Date (excluding Restricted Payments permitted by clauses (2) and (3) of Section 4.07(b)), is less than the sum of, without duplication, (i) an amount equal to the Cumulative Operating Cash Flow for the period (taken as one accounting period) from the beginning of the first full month commencing after the Closing Date to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (the "Basket Period") less 1.4 times the Company's Cumulative Total Interest Expense for the Basket Period, plus (ii) 100% of the aggregate net cash proceeds and, in the case of proceeds consisting of assets constituting or used in a Permitted Business 100% of the fair market value of the aggregate net proceeds other than cash, received since the Closing Date (1) by the Company as capital contributions to the Company (other than from a Subsidiary) or (2) from the sale by the Company (other than to a Subsidiary) of its Equity Interests (other than Disqualified Stock), plus (iii) to the extent that any Restricted Investment that was made after the Closing Date is sold for cash or otherwise liquidated or repaid for cash, the Net Proceeds received by the Company or a Wholly Owned Restricted Subsidiary of the Company upon the sale, liquidation or repayment of such Restricted Investment, plus (iv) to the extent that any Unrestricted Subsidiary is designated by the Company as a Restricted Subsidiary, an amount equal to the fair market value of such Investment at the time of such designation, plus (v) 100% of any cash dividends and other cash distributions received by the Company from an Unrestricted Subsidiary, plus (vi) $2.5 million. (b) The foregoing provisions shall not prohibit (1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of this Indenture; (2) the redemption, repurchase, retirement or other acquisition of any Equity Interests or subordinated Indebtedness of the Company in exchange for, or out of the net proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than any Disqualified Stock); provided that the amount of any such net proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (C)(ii) of the preceding paragraph; (3) the defeasance, redemption or repurchase of Indebtedness with the proceeds of a substantially concurrent issuance of Permitted Refinancing Debt in accordance with the provisions of Section 4.09 hereof; (4) the payment by the Company of advances under the Split Dollar Agreement in an amount not to exceed $250,000 in any four-quarter period; (5) the repurchase or redemption from employees of the Company and its Subsidiaries (other than the Principal) of Capital Stock of the Company in an amount not to exceed an aggregate of $5.0 million since the date of this Indenture; (6) the payment of dividends on the Series A Preferred Stock in accordance with the terms thereof as in effect on the Closing Date; provided, however, that cash dividends may not be paid on the Series A Preferred Stock pursuant to this clause (6) prior to July 1, 2002; (7) the issuance of Subordinated Notes in exchange for shares of the Series A Preferred Stock; provided that such issuance is permitted by Section 4.09 hereof; (8) in the event that the Company elects to issue Subordinated Notes in exchange for Series A Preferred Stock, cash payments made in lieu of the issuance of Subordinated Notes having a face amount less than $1,000 and any cash payments representing accrued and unpaid dividends in respect thereof, not to exceed $100,000 in the aggregate in any fiscal year; and (9) cash payments made in lieu of the issuance of additional Subordinated Notes having a face amount less than $1,000 and any cash payments representing accrued and unpaid interest in respect thereof, not to exceed $100,000 in the aggregate in any fiscal year. -48- (c) The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or the applicable Restricted Subsidiary, as the case may be, net of any liabilities proposed to be assumed by the transferee and novated pursuant to a written agreement releasing the Company and its Subsidiaries. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this covenant were computed, which calculations may be based upon the Company's latest available financial statements. (d) The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default or an Event of Default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries in the Subsidiary so designated shall be deemed to be Restricted Payments at the time of such designation (valued as set forth below) and shall reduce the amount available for Restricted Payments under Section 4.07(a) hereof. All such outstanding Investments shall be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation. Such designation shall only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary would otherwise meet the definition of an Unrestricted Subsidiary. SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any Indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) the terms of any Indebtedness permitted by this Indenture to be incurred by any Subsidiary of the Company; provided, that, any such Indebtedness permits the payment of cash dividends to the Company in an amount sufficient to enable the Company to make payments of (A) interest required to be paid in respect of the Notes, (B) interest required to be paid in respect of the 1997 Notes and (C) after July 1, 2002, dividends required to be paid in respect of the Series A Preferred Stock and interest required to be paid in respect of the Notes, if issued, in each case, in accordance with the terms thereof (except during the continuance of a default or event of default under such other Indebtedness), (b) Existing Indebtedness or the PM&C Credit Facility, each as in effect on the Closing Date, (c) this Indenture, the Notes, the Subsidiary Guarantees, the 1997 Indenture, the 1997 Notes and the 1997 Notes Subsidiary Guarantees, (d) applicable law, (e) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person and its Subsidiaries, or the property or assets of the Person and its Subsidiaries, so acquired, (f) by reason of customary non-assignment provisions in leases and other contracts entered into in the ordinary course of business and consistent with past practices or (g) any agreement for the sale of any Subsidiary or its assets that restricts distributions by that Subsidiary pending its sale. -49- SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK. (a) The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and shall not, and shall not permit any Subsidiary Guarantor to, issue any Disqualified Stock and shall not permit any of its Restricted Subsidiaries that are not Subsidiary Guarantors to issue any shares of preferred stock (other than Qualified Subsidiary Stock); provided, however, that the Company or any Restricted Subsidiary may incur Indebtedness (including Acquired Debt) or issue shares of preferred stock (including Disqualified Stock) if, in each case, (1) the Company's Indebtedness to Adjusted Operating Cash Flow Ratio as of the date on which such Indebtedness is incurred or such preferred stock or Disqualified Stock is issued would have been 7.0 to 1 or less, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock or preferred stock had been issued, as the case may be, as of the date of such calculation and (2) no Default or Event of Default would occur as a consequence thereof. The Company shall not, and shall not permit any Subsidiary Guarantor to, incur any Indebtedness that is contractually subordinated to any other Indebtedness of the Company or of such Subsidiary Guarantor, as the case may be, unless such Indebtedness is also contractually subordinated to the Notes or the Subsidiary Guarantee of such Subsidiary Guarantor, as the case may be, on substantially identical terms; provided, however, that no Indebtedness shall be deemed to be contractually subordinated to any other Indebtedness solely by virtue of being unsecured. (b) The foregoing provisions shall not apply to (collectively, "Permitted Debt"): (i) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt or the issuance by such Unrestricted Subsidiaries of preferred stock; provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary or any such preferred stock becomes preferred stock (other than Qualified Subsidiary Stock) of a Restricted Subsidiary, as the case may be, such event shall be deemed to constitute an incurrence of Indebtedness by, or an issuance of preferred stock (other than Qualified Subsidiary Stock) of, as the case may be, a Restricted Subsidiary of the Company; (ii) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness pursuant to one or more Bank Facilities if the aggregate principal amount at any time outstanding incurred pursuant to this clause (ii) does not exceed $50.0 million; -50- (iii) the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness; (iv) the incurrence by the Company of Indebtedness under the Subordinated Exchange Notes to pay interest on outstanding Subordinated Notes; (v) Indebtedness under the Notes and the Subsidiary Guarantees; (vi) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Wholly Owned Restricted Subsidiaries; provided, however, that (1) if the Company or a Subsidiary Guarantor is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations with respect to the Notes or the Subsidiary Guarantee of such Subsidiary Guarantor, as the case may be, and (2)(A) any subsequent issuance or transfer of Equity Interests that result in any such Indebtedness being held by a Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company and (B) any sale or other transfer of such Indebtedness to a Person that is not either the Company or a Wholly Owned Restricted Subsidiary of the Company shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be; (vii) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property used in the business of the Company or such Restricted Subsidiary, in an aggregate principal amount not to exceed $7.5 million at any time outstanding, including all Permitted Refinancing Debt incurred pursuant to clause (viii) below to refund, replace or refinance any Indebtedness incurred pursuant to this clause (vii); (viii) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Debt in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness (other than intercompany Indebtedness) that was permitted by this Indenture to be incurred; (ix) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness (in addition to Indebtedness permitted by any other clause of this paragraph) in an aggregate principal amount at any time outstanding, including all Permitted Refinancing Debt incurred pursuant to clause (viii) above to refund, replace or refinance any Indebtedness incurred pursuant to this clause (ix), not to exceed $7.5 million; and (x) the guarantee by the Company or any Restricted Subsidiary of the Company of Indebtedness of the Company or a Subsidiary of the Company that was permitted to be incurred by another provision of this Section 4.09. -51- For purposes of determining compliance with this Section 4.09, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (x) above or is permitted to be incurred pursuant to Section 4.09(a) hereof and also meets the criteria of one or more of the categories of Permitted Debt described in clauses (i) through (x) above, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this Section 4.09 and may from time to time reclassify such item of Indebtedness in any manner in which such item could be incurred at the time of such reclassification. For purposes of this paragraph, "Indebtedness" includes Disqualified Stock and preferred stock of Subsidiaries. Accrual of interest and the accretion of accreted value will not be deemed to be an incurrence of Indebtedness for purposes of this Section 4.09. SECTION 4.10. ASSET SALES. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 85% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash; provided that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet or in notes thereto), of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Notes or any guarantee thereof) that are assumed by the transferee of any such assets and (y) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are contemporaneously (subject to ordinary settlement periods) converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received), shall be deemed to be cash for purposes of this provision. (b) Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may engage in Asset Swaps (which shall not be deemed to be Asset Sales for purposes of this Section 4.10); provided that, immediately after giving effect to such Asset Swap, the Company would be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio set forth in Section 4.09(a) hereof. -52- (c) Within 180 days after the receipt of any Net Proceeds from an Asset Sale, the Company or the applicable Restricted Subsidiary may, at its option, apply such Net Proceeds (i) to permanently reduce Indebtedness outstanding pursuant to any Bank Facility (and to permanently reduce the commitments thereunder by a corresponding amount), (ii) to permanently reduce Indebtedness of any of the Company's Restricted Subsidiaries or (iii) to the acquisition by the Company or any of its Restricted Subsidiaries of another business, the making of a capital expenditure or the acquisition of other long-term assets, in each case, in a Permitted Business; provided, however, that if the Company or any Restricted Subsidiary enters into a legally binding agreement with an entity that is not an Affiliate of the Company to reinvest such Net Proceeds in accordance with this clause (iii) within 180 days after the receipt thereof, the provisions of this Section 4.10 will be satisfied so long as such binding agreement is consummated within one year after the receipt of such Net Proceeds. If any such legally binding agreement to reinvest such Net Proceeds is terminated, then the Company may, within 360 days of such Asset Sale, apply such Net Proceeds as provided in clauses (i), (ii) or (iii) above (without regard to the proviso contained in clause (iii) above). Pending the final application of any such Net Proceeds, the Company or the applicable Restricted Subsidiary may temporarily reduce Indebtedness pursuant to any Bank Facility or otherwise invest such Net Proceeds in any manner that is not prohibited by this Indenture. A reduction of Indebtedness pursuant to any Bank Facility is not "permanent" for purposes of clause (i) of this Section 4.10(c) if an amount equal to the amount of such reduction is reborrowed and used to make an acquisition described in clause (iii) of this Section 4.10(c) within the time period specified in this Section 4.10. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this Section 4.10(c) will be deemed to constitute "Excess Proceeds." (d) Within five days of each date on which the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company will be required to make an offer to all Holders of Notes and the Holders of Pari Passu Debt, to the extent required by the terms thereof (an "Asset Sale Offer") to purchase the maximum principal amount of Notes and Pari Passu Debt that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus, in each case, accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase, in accordance with the procedures set forth in Section 3.09 or the agreements governing Pari Passu Debt, as applicable; provided, however, that the Company may only purchase Pari Passu Debt in an Asset Sale Offer that was issued pursuant to an indenture having a provision substantially similar to this Section 4.10. (e) To the extent that the aggregate amount of Notes and Pari Passu Debt tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. (f) If the aggregate principal amount of Notes and Pari Passu Debt surrendered exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and Pari Passu Debt to be purchased on a pro rata basis, based upon the principal amount thereof surrendered in such Asset Sale Offer. (g) Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. -53- SECTION 4.11. TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Holders (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and a majority of the Independent Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5.0 million, an opinion as to the fairness to the Company or such Restricted Subsidiary of such Affiliate Transaction from a financial point of view issued by an investment banking firm of national standing; provided that the Company shall not, and shall not permit any of its Restricted Subsidiaries to, engage in any Affiliate Transaction involving aggregate consideration in excess of $1.0 million at any time that there is not at least one Independent Director on the Company's Board of Directors; and provided further that (w) any employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (x) transactions between or among the Company and/or its Restricted Subsidiaries, (y) the payment of any dividend on, or the issuance of additional Subordinated Notes in exchange for, the Series A Preferred Stock, provided that such dividends are paid on a pro rata basis and the additional Subordinated Notes are issued in accordance with the Certificate of Designation, and (z) transactions permitted by Section 4.07 hereof, in each case, shall not be deemed Affiliate Transactions. SECTION 4.12. LIENS. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly create, incur, assume or suffer to exist any Lien on any asset now owned or hereafter acquired, or any income or profits therefrom or assign or convey any right to receive income therefrom, except Permitted Liens. -54- SECTION 4.13. LIMITATION OF CERTAIN SUBSIDIARY INDEBTEDNESS AND PREFERRED STOCK Notwithstanding any other provision of this Indenture to the contrary, the Company will not permit any of its Restricted Subsidiaries to incur any Indebtedness (other than Eligible Indebtedness) or to issue any Disqualified Stock; provided that any Restricted Subsidiary that is a Subsidiary Guarantor may incur Indebtedness (whether or not such Indebtedness is Eligible Indebtedness) or issue Disqualified Stock if such incurrence or issuance is permitted under Section 4.09 hereof, provide further that notwithstanding the immediately preceding proviso, in no event shall the Company permit any of its Restricted Subsidiaries to incur any Indebtedness represented by senior secured bonds or other senior secured securities, unless such Subsidiary is a Subsidiary Guarantor and its Subsidiary Guarantee is secured on an equal and ratable basis with other such other senior secured bonds or other senior secured securities. SECTION 4.14. CONTINUED EXISTENCE. Subject to Article 5 hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence, and the corporate, partnership or other existence of each of its Restricted Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company or any such Restricted Subsidiary and (ii) the rights (charter and statutory), licenses and franchises of the Company and any of its Restrictive Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Restricted Subsidiaries, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Restricted Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Notes. SECTION 4.15. OFFER TO REPURCHASE UPON CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control, each Holder of Notes shall have the right to require the Company to repurchase all or any part (but not, in the case of any Holder requiring the Company to purchase less than all of the Notes held by such Holder, any Note in principal amount less than $1,000) of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of purchase (the "Change of Control payment"). -55- (b) Within ten days following any Change of Control, the Company shall mail a notice to each Holder, with a copy to the Trustee, stating: (1) a description of the transaction or transactions that constitute the Change of Control; (2) that the Change of Control Offer is being made pursuant to this Section 4.15 and that all Notes tendered shall be accepted for payment; (3) the purchase price and the purchase date, which shall be no later than 30 Business Days from the date such notice is mailed (the "Change of Control Payment Date"); (4) that any Note not tendered shall continue to accrue interest; (5) that, unless the Company defaults in the payment of the Change of Control Payment, all Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (6) that Holders electing to have any Notes purchased pursuant to a Change of Control Offer shall be required to surrender the Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (7) that Holders shall be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile, transmission or letter setting forth the name of the Holder, the principal amount of Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have the Notes purchased; and (8) that Holders whose Notes are being purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. (c) On or prior to 10:00 a.m. Eastern Time on the Change of Control Payment Date, the Company shall, to the extent lawful, (1) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. (d) The Company shall not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Section 4.15 and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. SECTION 4.16. LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED RESTRICTED SUBSIDIARIES. The Company (i) shall not, and shall not permit any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey, sell or otherwise dispose of any Capital Stock of any Wholly Owned Restricted Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company), unless (a) such transfer, conveyance, sale, lease or other disposition is of all the Capital Stock of such Wholly Owned Restricted Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with Section 4.10 hereof and (ii) shall not permit any Wholly Owned Restricted Subsidiary of the Company to issue any of its Equity Interests (other than, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Restricted Subsidiary of the Company. -56- SECTION 4.17. LIMITATION ON ISSUANCE OF SUBSIDIARY GUARANTEES (a) The Company shall not permit any Restricted Subsidiary to guarantee the payment of any Indebtedness of the Company or any Indebtedness of any Subsidiary Guarantor (in each case, the "Guaranteed Debt;" the Company or the Subsidiary Guarantor that is primarily liable on the Guaranteed Debt being the "Obligor") unless (i) if such Restricted Subsidiary is not a Subsidiary Guarantor, such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture in form attached hereto as Exhibit E providing for a guarantee (a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary, (ii) if the Guaranteed Debt is by its express terms subordinated in right of payment to the Notes or the Subsidiary Guarantee of such Obligor, any such guarantee of such Subsidiary Guarantor with respect to the Guaranteed Debt shall be subordinated in right of payment to such Subsidiary Guarantor's Subsidiary Guarantee with respect to the Notes substantially to the same extent as the Guaranteed Debt is subordinated to the Notes or the Subsidiary Guarantee of such Obligor, (iii) such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee and (iv) such Restricted Subsidiary shall deliver to the Trustee an opinion of counsel to the effect that (A) such Subsidiary Guarantee of the Notes has been duly executed and authorized and (B) such Subsidiary Guarantee of the Notes constitutes a valid, binding and enforceable obligation of such Restricted Subsidiary, except insofar as enforcement thereof may be limited by bankruptcy, insolvency or similar laws (including, without limitation, all laws relating to fraudulent transfers) and except insofar as enforcement thereof is subject to general principles of equity. (b) No Subsidiary Guarantor may consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Subsidiary Guarantor unless (i) subject to the provisions of Section 4.17(c) hereof, the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) assumes all the obligations of such Subsidiary Guarantor pursuant to a supplemental indenture in the form attached hereto as Exhibit E, under the Notes, the Indenture and the Registration Rights Agreement; (ii) immediately after giving effect to such transaction no Default or Event of Default exists; and (iii) the Company would be permitted to incur $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio described in Section 4.09(a) hereof. (c) In the event of a sale or other disposition of all of the assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all the capital stock of such Subsidiary Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all of the assets of such Subsidiary Guarantor) will be released and relieved of any obligation under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or other disposition shall be applied in accordance with Section 4.10 hereof. (d) Any Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in accordance with the terms of this Indenture will be released and relieved of its obligations under its Subsidiary Guarantee for so long as such Subsidiary is so designated. -57- SECTION 4.18. NO AMENDMENT OF SUBORDINATION PROVISIONS. Without the consent of each Holder of Notes outstanding, the Company shall not amend, modify or alter the Subordinated Exchange Note Indenture in any way that will (i) increase the rate of or change the time for payment of interest on any Subordinated Exchange Notes, (ii) increase the principal of, advance the final maturity date of or shorten the Weighted Average Life to Maturity of any Subordinated Exchange Notes, (iii) alter the redemption provisions or the price or terms at which the Company is required to offer to purchase such Subordinated Exchange Notes in a manner that would be adverse to any Holder of Notes or (iv) amend the provisions of Article 10 of the Subordinated Exchange Note Indenture (which relate to subordination). ARTICLE 5. SUCCESSORS SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS. The Company shall not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the Obligations of the Company under the Notes, this Indenture and the Registration Rights Agreement pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; (iv) the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio set forth in Section 4.09(a) hereof and (v) each Subsidiary Guarantor, if any, unless it is the other party to the transactions described above, shall have by supplemental indenture confirmed that its Subsidiary Guarantee shall apply to such Person's obligations under the Indenture and the Notes. -58- SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.01 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation and not to the Company), and may exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; provided, however, that the predecessor Company shall not be relieved from the obligation to pay the principal of and interest on the Notes except in the case of a sale of all of the Company's assets that meets the requirements of Section 5.01 hereof. -59- ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT An "Event of Default" occurs if: (a) the Company Defaults in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the Notes and such Default continues for a period of 30 days; (b) the Company defaults in the payment when due of principal of or premium, if any, on the Notes when the same becomes due and payable at maturity, upon redemption or otherwise; (c) the Company fails to comply with any of the provisions of section 4.07, 4.09, 4.10, 4.15 or 5.01 hereof; (d) the Company or any Subsidiary fails to observe or perform any other covenant, representation, warranty or other agreement in this Indenture, the Notes for 60 days after notice to comply; (e) a default occurs under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (on the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries), whether such Indebtedness or guarantee now exists, or is created after the date of this Indenture, which default (i) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (f) a final judgment or final judgments for the payment of money are entered by a court or courts of competent jurisdiction against the Company or any Restricted Subsidiary that would be a Significant Subsidiary and such judgment or judgments remain unpaid, undischarged, or unstayed for a period of 60 days, provided that the aggregate of all such undischarged judgments exceeds $5.0 million; (g) the Company or any of its Restricted Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary pursuant to or within the meaning of Bankruptcy Law: (i) commences a voluntary case, -60- (ii) consents to the entry of an order for relief against it in an involuntary case, (iii) consents to the appointment of a custodian of it or for all or substantially all of its property, (iv) makes a general assignment for the benefit of its creditors, or (v) generally is not paying its debts as they become due; or (h) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any of its Restricted Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary in an involuntary case; (ii) appoints a custodian of the Company or any of its Restricted Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary or for all or substantially all of the property of the Company or any of its Restricted Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; or (iii) orders the liquidation of the Company or any of its Restricted Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 consecutive days; or (i) the termination of any Subsidiary Guarantee for any reason not permitted by this Indenture, or the denial by any Subsidiary Guarantor or any Person acting on behalf of any Subsidiary Guarantor of such Subsidiary Guarantor's obligations under its respective Subsidiary Guarantee. The term "custodian" as used in this Article VI means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. An Event of Default shall not be deemed to have occurred under clause (c), (e) or (f) until the Trustee shall have received at the Corporate Trust Office of the Trustee written notice from the Company or any of the Holders or unless a Responsible Officer shall have actual knowledge of such Event of Default. A Default under clause (e) is not an Event of Default until the Trustee notifies the Company, or the Holders of at least 25% in principal amount of the then outstanding Notes notify the Company and the Trustee, of the Default and the Company does not cure the Default within 60 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." -61- In the case of any Event of Default pursuant to the provisions of this Section 6.01 occurring by reason of any action (or inaction) willfully taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Notes pursuant to Section 3.07 hereof, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Notes, anything in this Indenture or in the Notes to the contrary notwithstanding; provided that the Trustee shall not be under any duty to collect such premium on behalf of the Holders until such time as Holders of at least 10% in principal amount of the then outstanding Notes so notify the Trustee. If an Event of Default occurs prior to December 1, 2002 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Notes prior to December 1, 2002, then the premium payable for purposes of this paragraph for each of the twelve month period beginning on December 1 of the years set forth below shall be as set forth in the following table expressed as a percentage of the amount that would otherwise be due but for the provisions of this sentence, plus accrued interest, if any, to the date of payment: Year Percentage - ---- ---------- 1998......................................... 111.375% 1999......................................... 109.750% 2000......................................... 108.125% 2001......................................... 106.500% SECTION 6.02. ACCELERATION. If any Event of Default (other than an Event of Default specified in clause (g) or (h) of Section 6.01 hereof) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Upon any such declaration, the principal of, premium, if any, and accrued and unpaid interest and Liquidated Damages, if any, on the Notes shall become due and payable immediately. Notwithstanding the foregoing, if an Event of Default specified in clause (g) or (h) of Section 6.01 hereof occurs with respect to the Company, any of its Restricted Subsidiaries that would constitute a Significant Subsidiary, or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, all outstanding Notes shall be due and payable immediately without further action or notice. Holders of the Notes may not enforce this Indenture or the Notes except as provided in this Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest or Liquidated Damages, if any) if it determines that withholding notice is in their interest. -62- SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 6.04. WAIVER OF PAST DEFAULTS. Holders of not less than a majority in aggregate principal amount of the then outstanding Notes by notice to the Trustee may on behalf of the Holders of all of the Notes waive an existing Default or Event of Default and its consequences hereunder, except a continuing Default or Event of Default in the payment of the principal of, premium, if any, or interest on, the Notes (including in connection with an offer to purchase) (provided, however, that the Holders of a majority in aggregate principal amount of the then outstanding Notes may rescind an acceleration and its consequences, including any related payment default that resulted from such acceleration). Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 6.05. CONTROL BY MAJORITY. Holders of a majority in principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture that the Trustee determines may be unduly prejudicial to the rights of other Holders of Notes or that may involve the Trustee in personal liability. SECTION 6.06. LIMITATION ON SUITS. A Holder of a Note may pursue a remedy with respect to this Indenture or the Notes only if: (a) the Holder of a Note gives to the Trustee written notice of a continuing Event of Default; -63- (b) the Holders of at least 25% in principal amount of the then outstanding Notes make a written request to the Trustee to pursue the remedy; (c) such Holder of a Note or Holders of Notes offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder of a Note may not use this Indenture to prejudice the rights of another Holder of a Note or to obtain a preference or priority over another Holder of a Note. SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium, if any, and interest on the Note, on or after the respective due dates expressed in the Note (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.01(a) or (b) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as Trustee of an express trust against the Company for the whole amount of principal of, premium, if any, and interest remaining unpaid on the Notes and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. -64- SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Notes allowed in any judicial proceedings relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.07 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders of Notes for amounts due and unpaid on the Notes for principal, premium, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium, if any, and interest, respectively; and Third: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Notes pursuant to this Section 6.10. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. -65- ARTICLE 7. TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of its own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proven that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), and (c) of this Section. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holders shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. -66- (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02. RIGHTS OF TRUSTEE. (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. -67- SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. SECTION 7.05. NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if a Responsible Officer of the Trustee has actual knowledge of such Default or Event of Default, the Trustee shall mail to Holders of Notes a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment of principal of, or interest on, any Note, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Notes. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, and for so long as Notes remain outstanding, the Trustee shall mail to the Holders of the Notes a brief report dated as of such reporting date that complies with TIA ss. 313(a) (but if no event described in TIA ss. 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA ss. 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA ss. 313(c). A copy of each report at the time of its mailing to the Holders of Notes shall be mailed to the Company and filed with the SEC and each stock exchange on which the Notes are listed in accordance with TIA ss. 313(d). The Company shall promptly notify the Trustee when the Notes are listed on any stock exchange. SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee from time to time such compensation for its acceptance of this Indenture and services hereunder as the Company and Trustee have separately agreed. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. -68- The Company shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company (including this Section 7.07) and defending itself against any claim (whether asserted by the Company or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent any such loss, liability or expense may be attributable to its negligence or bad faith. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. To secure the Company's payment obligations in this Section, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(g) or (h) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA ss. 313(b)(2) to the extent applicable. SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; -69 (c) a custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee, after written request by any Holder of a Note who has been a Holder of a Note for at least six months, fails to comply with Section 7.10, such Holder of a Note may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders of the Notes. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities and that has a combined capital and surplus of at least $100 million as set forth in its most recent published annual report of condition. -70- This Indenture shall always have a Trustee who satisfies the requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is subject to TIA Section 310(b). SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee is subject to TIA ss. 311(a), excluding any creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be subject to TIA ss. 311(a) Section 7.01. to the extent indicated therein. ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE. The Company may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding Notes upon compliance with the conditions set forth below in this Article 8. SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Company shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from its obligations with respect to all outstanding Notes on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.05 hereof and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all of its other Obligations under such Notes and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Notes to receive solely from the trust fund described in Section 8.04 hereof, and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest and Liquidated Damages, if any, on such Notes when such payments are due, (b) the Company's obligations with respect to such Notes under Article 2 and Section 4.02 hereof, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder, and the Company's obligations in connection therewith and (d) this Article 8. Subject to compliance with this Article 8, the Company may exercise its option under this Section 8.02 notwithstanding the prior exercise of its option under Section 8.03 hereof. -71- SECTION 8.03. COVENANT DEFEASANCE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, the Company shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be released from its obligations under the covenants contained in Sections 3.09, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16, 4.17, 4.18 and 5.01 hereof with respect to the outstanding Notes on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the "outstanding" Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, Sections 6.01(d) through 6.01(f) hereof shall not constitute Events of Default. SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE. The following shall be the conditions to the application of either Section 8.02 or 8.03 hereof to the outstanding Notes: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in United States dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, interest and premium and Liquidated Damages, if any, on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date; (b) in the case of an election under Section 8.02 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) since the date of this Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; -72- (c) in the case of an election under Section 8.03 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (d) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Sections 6.01(g) or (h) hereof are concerned, at any time in the period ending on the 91st day after the date of deposit (or greater period of time in which any such deposit of trust funds may remain subject to bankruptcy or insolvency laws insofar as those apply to the deposit by the Company); (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than this Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (f) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that, as of the date of such opinion, (i) the trust funds will not be subject to the rights of holders of Indebtedness other than the Notes and (ii) assuming no intervening bankruptcy of the Company between the date of deposit and the 91st day (or greater period of time in which any such deposit of trust funds may remain subject to bankruptcy or insolvency laws insofar as those apply to the deposit by the Company) following the deposit and assuming no Holder of Notes is an insider of the Company, after the 91st day (or later date until which any such deposit of trust funds may remain subject to bankruptcy or insolvency laws insofar as those apply to the deposit by the Company) following the deposit, the trust funds will not be subject to the effects of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally under any applicable United States or state law; (g) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (h) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with. -73- SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to Section 8.06 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes. Anything in this Article 8 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the request of the Company any money or non-callable Government Securities held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(a) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.06. REPAYMENT TO COMPANY. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium or interest or Liquidated Damages, if any, on any Note and remaining unclaimed for two years after such principal, and premium, if any, or interest has become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as a secured creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. -74- SECTION 8.07. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any United States dollars or non-callable Government Securities in accordance with Section 8.02 or 8.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 or 8.03 hereof, as the case may be; provided, however, that, if the Company makes any payment of principal of, premium or interest or Liquidated Damages, if any, on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES. Notwithstanding Section 9.02 of this Indenture, the Company, a Subsidiary Guarantor (with respect to a Subsidiary Guarantee or the Indenture to which it is a party) and the Trustee may amend or supplement this Indenture, the Notes or the Subsidiary Guarantees without the consent of any Holder of a Note: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes; (c) to provide for the assumption of the Company's or any Subsidiary Guarantor's obligations to Holders of Notes in the case of a merger or consolidation pursuant to Article 5 hereof, as applicable; (d) to make any change that would provide any additional rights or benefits to the Holders of Notes or that does not adversely affect the legal rights hereunder of any such Holder; or (e) to comply with the requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA or to allow any Subsidiary Guarantor to guarantee the Notes. Upon the request of the Company accompanied by a resolution of the Board of Directors of the Company or a Subsidiary Guarantor, as applicable, authorizing the execution of any such amended or supplemental Indenture, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee shall join with the Company or such Subsidiary Guarantor in the execution of any amended or supplemental Indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental Indenture or Subsidiary Guarantee that affects its own rights, duties or immunities under this Indenture or otherwise. -75- SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES. Except as provided below in this Section 9.02, the Company, a Subsidiary Guarantor (with respect to a Subsidiary Guarantee or the Indenture to which it is a party) and the Trustee may amend or supplement this Indenture, the Notes or the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes), and, subject to Sections 6.04 and 6.07 hereof, any existing Default or Event of Default (other than a Default or Event of Default in the payment of the principal of, premium or interest or Liquidated Damages, if any, on the Notes) or compliance with any provision of this Indenture or the Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for the Notes). Any amendment to the provisions of Article 10 hereof including the related definitions will require the consent of the Holders of at least 75% in aggregate principal amount of the Notes then outstanding if such amendment would adversely affect the rights of Holders of Notes. Upon the request of the Company accompanied by a resolution of the Board of Directors of the Company or a Subsidiary Guarantor, as applicable, authorizing the execution of any such amended or supplemental Indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee shall join with the Company or such Subsidiary Guarantor in the execution of such amended or supplemental Indenture unless such amended or supplemental Indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such amended or supplemental Indenture. It shall not be necessary for the consent of the Holders of Notes under this Section 9.02 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders of Notes affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate principal amount of the Notes then outstanding may waive compliance in a particular instance by the Company with any provision of this Indenture or the Notes. However, without the consent of each Holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting Holder): -76- (a) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes (other than provisions relating to Sections 3.09, 4.10 and 4.15 hereof); (c) reduce the rate of or change the time for payment of interest, including default interest, on any Note; (d) waive a Default or Event of Default in the payment of principal of or interest or premium or Liquidated Damages, if any, on the Notes (except a rescission of acceleration of the Notes by the Holders of a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); (e) make any Note payable in money other than that stated in the Notes; (f) make any change in the provisions of this Indenture relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or interest or premium or Liquidated Damages, if any, on the Notes; (g) waive a redemption payment with respect to any Note (other than a payment required by the provisions of Section 3.09, 4.10 or 4.15 hereof); (h) make any change in Section 6.04 or 6.07 hereof or in the foregoing amendment and waiver provisions; or (i) except as provided in Article 8 hereof or otherwise in accordance with the terms of this Indenture or any Subsidiary Guarantee, release a Subsidiary Guarantor from its obligations under its Subsidiary Guarantee or make any change in a Subsidiary Guarantee that would adversely affect the Holders of the Notes. SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment or supplement to this Indenture or the Notes shall be set forth in an amended or supplemental Indenture that complies with the TIA as then in effect. -77- SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder of a Note and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Notes, even if notation of the consent is not made on any Notes. However, any such Holder of a Note or subsequent Holder of a Note may revoke the consent as to its Notes if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder. SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Notes thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or to issue new Notes shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amendment or supplemental Indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company may not sign an amendment or supplemental Indenture until its Board of Directors approves it. If it does, the Trustee may, but need not, sign it. In signing or refusing to sign such amendment or supplemental Indenture, the Trustee shall be entitled to receive and, subject to Section 7.01 hereof, shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel as conclusive evidence that such amendment or supplemental Indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company in accordance with its terms. -78- ARTICLE 10. MISCELLANEOUS SECTION 10.01. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA ss.318(c), the imposed duties shall control. SECTION 10.02. NOTICES. Any notice or communication by the Company or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the others' address: If to the Company: Pegasus Communications Corporation c/o Pegasus Communications Management Company 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, PA 19087 Telecopier No.: (610) 341-1835 Attention: Marshall W. Pagon With a copy to: Drinker Biddle & Reath LLP PNB Building, 11th Floor 1345 Chestnut Street Philadelphia, PA 19107 Telecopier No.: (215) 988-2757 Attention: Michael B. Jordan, Esq. If to the Trustee: First Union National Bank 230 S. Tryon Street Charlotte, NC 28288-1153 Telecopier No.: (704) 374-6114 Attention: Client Service Group -79- With a copy to: First Union National Bank 123 South Broad Street PA 1249 Philadelphia, PA 19109 Telecopier No.: (215) 985-7290 Attention: Corporate Trust Administration The Company or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA ss. 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 10.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES. Holders may communicate pursuant to TIA ss. 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 10.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 10.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and -80- (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 10.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 10.05 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA ss. 314(a)(4)) shall comply with the provisions of TIA ss. 314(e) and shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied. SECTION 10.06 RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 10.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS. No past, present or future director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Notes, this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. -81- SECTION 10.08. GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE AND THE NOTES. SECTION 10.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 10.10. SUCCESSORS. All agreements of the Company in this Indenture and the Notes shall bind its respective successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 10.11. SEVERABILITY. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 10.12 COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 10.13. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. -82- SIGNATURES IN WITNESS WHEREOF, the parties have executed this Indenture as of the date first written above. Very truly yours, PEGASUS COMMUNICATIONS CORPORATION By: ______________________________ Name: Title: FIRST UNION NATIONAL BANK By:____________________________ Name: Title: TABLE OF CONTENTS
ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE..............................................................1 Section 1.01 Definitions.................................................................................1 Section 1.02 Other Definitions..........................................................................19 Section 1.03 Incorporation by Reference of Trust Indenture Act..........................................19 Section 1.04 Rules of Construction......................................................................20 ARTICLE 2 THE NOTES .............................................................................................20 Section 2.01 Form and Dating............................................................................20 Section 2.02 Execution and Authentication...............................................................21 Section 2.03 Registrar and Paying Agent.................................................................21 Section 2.04 Paying Agent to Hold Money in Trust........................................................22 Section 2.05 Holder Lists...............................................................................22 Section 2.06 Transfer and Exchange......................................................................23 Section 2.07 Replacement Notes..........................................................................36 Section 2.08 Outstanding Notes..........................................................................36 Section 2.09 Treasury Notes.............................................................................36 Section 2.10 Temporary Notes............................................................................37 Section 2.11 Cancellation...............................................................................37 Section 2.12 Defaulted Interest.........................................................................37 ARTICLE 3 REDEMPTION AND PREPAYMENT..............................................................................38 Section 3.01 Notices to Trustee.........................................................................38 Section 3.02 Selection of Notes to Be Redeemed..........................................................38 Section 3.03 Notice of Redemption.......................................................................38 Section 3.04 Effect of Notice of Redemption.............................................................39 Section 3.05 Deposit of Redemption or Purchase Price....................................................39 Section 3.06 Notes Redeemed or Purchased in Part........................................................40 Section 3.07 Optional Redemption........................................................................40 Section 3.08 Mandatory Redemption.......................................................................41 Section 3.09 Offer to Purchase by Application of Excess Proceeds........................................41 ARTICLE 4 COVENANTS .............................................................................................44 Section 4.01 Payment of Notes...........................................................................44 Section 4.02 Maintenance of Office or Agency............................................................44 Section 4.03 Reports....................................................................................45 Section 4.04 Compliance Certificate.....................................................................45 Section 4.05 Taxes......................................................................................46 Section 4.06 Stay, Extension and Usury Laws.............................................................46 Section 4.07 Restricted Payments........................................................................46 Section 4.08 Dividend and Other Payment Restrictions Affecting Subsidiaries...............................................................................49 Section 4.09 Incurrence of Indebtedness and Issuance of Preferred Stock...............................................................................50 Section 4.10 Asset Sales................................................................................52
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Section 4.11 Transactions with Affiliates...............................................................53 Section 4.12 Liens......................................................................................54 Section 4.13 Limitation of Certain Subsidiary Indebtedness and Preferred Stock.........................54 Section 4.14 Continued Existence........................................................................55 Section 4.15 Offer to Repurchase Upon Change of Control.................................................55 Section 4.16 Limitation on Issuances and Sales of Capital Stock of Wholly Owned Restricted Subsidiaries....................................................................56 Section 4.17 Limitation on Issuance of Subsidiary Guarantee.............................................56 Section 4.18 No amendment of subordination provisions...................................................58 ARTICLE 5 SUCCESSORS.............................................................................................58 Section 5.01 Merger, Consolidation, or Sale of Assets...................................................58 Section 5.02 Successor Corporation Substituted..........................................................59 ARTICLE 6 DEFAULTS AND REMEDIES..................................................................................60 Section 6.01 events of default..........................................................................60 Section 6.02 Acceleration...............................................................................62 Section 6.03 Other Remedies.............................................................................63 Section 6.04 Waiver of Past Defaults....................................................................63 Section 6.05 Control by Majority........................................................................63 Section 6.06 Limitation on Suits........................................................................63 Section 6.07 Rights of Holders of Notes to Receive Payment..............................................64 Section 6.08 Collection Suit by Trustee.................................................................64 Section 6.09 Trustee May File Proofs of Claim...........................................................64 Section 6.10 Priorities.................................................................................65 Section 6.11 Undertaking for Costs......................................................................65 ARTICLE 7 TRUSTEE ...............................................................................................66 Section 7.01 Duties of Trustee..........................................................................66 Section 7.02 Rights of Trustee..........................................................................67 Section 7.03 Individual Rights of Trustee...............................................................67 Section 7.04 Trustee's Disclaimer.......................................................................68 Section 7.05 Notice of Defaults.........................................................................68 Section 7.06 Reports by Trustee to Holders of the Notes.................................................68 Section 7.07 Compensation and Indemnity.................................................................68 Section 7.08 Replacement of Trustee.....................................................................69 Section 7.09 Successor Trustee by Merger, etc...........................................................70 Section 7.10 Eligibility; Disqualification..............................................................70 Section 7.11 Preferential Collection of Claims Against Company..........................................71 ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE...............................................................71 Section 8.01 Option to Effect Legal Defeasance or Covenant Defeasance...................................71 Section 8.02 Legal Defeasance and Discharge.............................................................71 Section 8.03 Covenant Defeasance........................................................................72 Section 8.04 Conditions to Legal or Covenant Defeasance.................................................72
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Section 8.05 Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions...................................................................74 Section 8.06 Repayment to Company.......................................................................74 Section 8.07 Reinstatement..............................................................................75 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER.......................................................................75 Section 9.01 Without Consent of Holders of Notes........................................................75 Section 9.02 With Consent of Holders of Notes...........................................................76 Section 9.03 Compliance with Trust Indenture Act........................................................77 Section 9.04 Revocation and Effect of Consents..........................................................77 Section 9.05 Notation on or Exchange of Notes...........................................................78 Section 9.06 Trustee to Sign Amendments, etc............................................................78 ARTICLE 10 MISCELLANEOUS.........................................................................................79 Section 10.01 Trust Indenture Act Controls...............................................................79 Section 10.02 Notices....................................................................................79 Section 10.03 Communication by Holders of Notes with Other Holders of Notes..............................80 Section 10.04 Certificate and Opinion as to Conditions Precedent.........................................80 Section 10.05 Statements Required in Certificate or Opinion..............................................81 Section 10.06 Rules by Trustee and Agents................................................................81 Section 10.07 No Personal Liability of Directors, Officers, Employees and Stockholders...................81 Section 10.08 Governing Law..............................................................................82 Section 10.09 No Adverse Interpretation of Other Agreements..............................................82 Section 10.10 Successors.................................................................................82 Section 10.11 Severability...............................................................................82 Section 10.12 Counterpart Originals......................................................................82 Section 10.13 Table of Contents, Headings, etc...........................................................82
iii EX-5 4 EXHIBIT 5 Law Offices DRINKER BIDDLE & REATH LLP Philadelphia National Bank Building 1345 Chestnut Street Philadelphia, PA 19107-3496 Telephone: (215) 988-2700 Fax: (215) 988-2757 January 21, 1999 Pegasus Communications Corporation 5 Radnor Corporate Center Suite 454 100 Matsonford Road Radnor, PA 19087 Ladies and Gentlemen: We have acted as counsel to Pegasus Communications Corporation, a Delaware corporation (the "Company"), in connection with the preparation and filing with the Securities and Exchange Commission of a Registration Statement on Form S-3 (the "Registration Statement"), under the Securities Act of 1933, as amended (the "Securities Act"), registering an aggregate of 4,664,200 shares of the Company's Class A Common Stock, par value $.01 per share (the "Shares"). In this connection, we have examined the originals or copies, certified or otherwise identified to our satisfaction, of the Certificate of Incorporation and the By-laws of the Company, resolutions of the Company's Board of Directors, and such other documents and corporate records relating to the Company and the issuance and sale of the Shares as we have deemed appropriate. This opinion is based exclusively on the General Corporation Law of the State of Delaware. In all cases, we have assumed the legal capacity of each natural person signing any of the documents and corporate records examined by us, the genuineness of signatures, the authenticity of documents submitted to us as originals, the conformity to authentic original documents of documents submitted to us as copies and the accuracy and completeness of all corporate records and other information made available to us by the Company. On the basis of the foregoing, we are of the opinion that the Shares, when issued and paid for as contemplated by the Registration Statement, have been validly issued and are fully paid and non-assessable by the Company. We hereby consent to the reference to our firm under the caption "Legal Matters" in the prospectus included in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not admit that we come within the categories of persons whose consent is required under Section 7 of the Securities Act. Very truly yours, /s/ Drinker Biddle & Reath LLP DRINKER BIDDLE & REATH LLP EX-10 5 EXHIBIT 10.22 Exhibit 10.22 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT ("this Amendment"), executed as of August 3, 1998 is by and between PEGASUS MEDIA & COMMUNICATIONS, INC., a Delaware corporation (the "Borrower"); the undersigned financial institutions, in their capacities as "Lenders" under the Credit Agreement referred to below, and being the "Required Lenders", as defined in the Credit Agreement, for purposes of this Amendment (the "Required Lenders"); and BANKERS TRUST COMPANY, as agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, the "Agent"). RECITALS A. The Borrower, the Lenders and the Agent are parties to a Credit Agreement dated as of December 10, 1997, as amended by a First Amendment to Credit Agreement executed as of March 10, 1998 and effective as of January 1, 1998 (as amended, the "Credit Agreement"). Capitalized terms used herein without definition have the meanings assigned to them in the Credit Agreement. B. The Borrower has requested the amendment of the Credit Agreement to (1) increase the Letter of Credit Exposure; and (2) increase the amount of Permitted Seller Debt. C. Subject to certain terms and conditions, the Agent and the Required Lenders are willing to agree to such requests, concurrently with the execution of this Agreement. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: I. Amendments to Credit Agreement. Subject to the satisfaction of each of the conditions set forth in Section III, the Agent and the Required Lenders hereby agree with the Borrower as follows: A. Letters of Credit. Section 1.02(a)(i) of the Credit Agreement is amended by deleting said subsection (i) and substituting therefor the following: "(i) The Issuing Bank shall not issue any Letter of Credit, if after giving effect to the issuance thereof, (A) the Aggregate Exposure would exceed the aggregate Commitments then in effect, (B) the aggregate NRTC Letter of Credit Exposure would exceed $20,000,000, (C) the aggregate General Purpose Letter of Credit Exposure would exceed $5,000,000, (D) the aggregate Seller Letter of Credit Exposure would exceed $40,000,000 or (E) the sum of the aggregate General Purpose Letter of Credit Exposure plus the aggregate Seller Letter of Credit Exposure would exceed $40,000,000." B. Permitted Seller Debt. Section 7.01(g) of the Credit Agreement is amended by deleting said subsection (g) and substituting therefor the following: "(g) Permitted Seller Debt not exceeding $40,000,000 in the aggregate outstanding at any time, including without limitation all such Indebtedness specified in Part C of Schedule 7.01;" C. No Further Amendments. Except for such amendments, the text of the Credit Agreement and all other Loan Documents shall remain unchanged and in full force and effect and is hereby ratified and confirmed by the Borrower. II. Representations, Warranties and Covenants of the Borrower. The Borrower hereby represents and warrants to, and covenants and agrees with, the Lenders that: A. The execution and delivery of this Amendment have been duly authorized by all requisite corporate action on the part of the Borrower. B. After giving effect to this Amendment, all warranties and representations set forth in the Credit Agreement and the other Loan Documents are true and correct in all material respects (except to the extent they expressly relate to an earlier specified date or are affected by transactions or events occurring after the Closing Date and permitted or not prohibited under the Credit Agreement). C. As of the date hereof and since the Closing Date, no event or circumstance has occurred which has had or could have a Material Adverse Effect. D. After giving effect to this Amendment, no Default has occurred and is continuing. E. Neither the Borrower nor any of its Affiliates is required to obtain any consent, approval or authorization from, or to file any declaration or statement with, any governmental instrumentality or other agency or any other person or entity (including without limitation the Parent and the Subsidiaries) in connection with or as a condition to the execution, delivery or performance of this Amendment. F. This Amendment constitutes the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally or the application of principles of equity, whether in any action at law or proceeding in equity, and subject to the availability of the remedy of specific performance or of any other equitable remedy or relief to enforce any right thereunder. III. General Conditions. The willingness of the Agent and the Required Lenders to agree to the foregoing is subject to the condition that the Borrower shall have executed and delivered to the Agent (or shall have caused to be duly executed and delivered to the Agent by the appropriate persons) the following: A. This Amendment. B. True and complete copies of any required stockholders' and/or directors' consents and/or resolutions, authorizing the execution and delivery of this Amendment, certified by the Secretary of the appropriate company. C. Any and all such documents (including additional Security Documents), certificates and opinions as the Agent shall reasonably request with respect to this Amendment and as otherwise required to ensure or evidence compliance by the Borrower with the requirements of Sections 2.01(b)(i) and 2.01(b)(ii) of the Credit Agreement in connection therewith. IV. Miscellaneous. A. As provided in the Credit Agreement, the Borrower agrees to reimburse the Agent upon demand for all reasonable fees and disbursements of counsel to the Agent incurred in connection with the preparation of this Amendment. B. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. C. This Amendment may be executed by the parties hereto in several counterparts hereof and by the different parties hereto on separate counterparts hereof, all of which counterparts shall together constitute one and the same agreement. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as an in hand delivery of an original executed counterpart hereof. *The Next Page is the Signature Page* IN WITNESS WHEREOF, the Agent, the Borrower and the undersigned Required Lenders have caused this Amendment to be duly executed as a sealed instrument by their duly authorized representatives, all as of the day and year first above written. BORROWER: PEGASUS MEDIA & COMMUNICATIONS, INC. By: Robert N. Verdecchio, Senior Vice President AGENT: BANKERS TRUST COMPANY By:____________________________________ Name:_________________________________ Title:__________________________________ LENDERS: BANKERS TRUST COMPANY By:___________________________________ Name:________________________________ Title:_________________________________ [Signature Page to Second Amendment to Credit Agreement of Pegasus Media & Communications, Inc. and Bankers Trust Company as Agent for the Lenders, dated as of December 10, 1997] BANKBOSTON, N.A. By:____________________________ Name:__________________________ Title:___________________________ [Signature Page to Second Amendment to Credit Agreement of Pegasus Media & Communications, Inc. and Bankers Trust Company as Agent for the Lenders, dated as of December 10, 1997] BANQUE PARIBAS By:____________________________ Name:__________________________ Title:___________________________ [Signature Page to Second Amendment to Credit Agreement of Pegasus Media & Communications, Inc. and Bankers Trust Company as Agent for the Lenders, dated as of December 10, 1997] BANK OF MONTREAL, CHICAGO BRANCH By:__________________________________________________ Name:______________________________ Title:_______________________________ [Signature Page to Second Amendment to Credit Agreement of Pegasus Media & Communications, Inc. and Bankers Trust Company as Agent for the Lenders, dated as of December 10, 1997] FLEET NATIONAL BANK By:_____________________________ Name:__________________________ Title:___________________________ [Signature Page to Second Amendment to Credit Agreement of Pegasus Media & Communications, Inc. and Bankers Trust Company as Agent for the Lenders, dated as of December 10, 1997] IBJ SCHRODER BANK & TRUST COMPANY By:_________________________________ Name:______________________________ Title:_______________________________ [Signature Page to Second Amendment to Credit Agreement of Pegasus Media & Communications, Inc. and Bankers Trust Company as Agent for the Lenders, dated as of December 10, 1997] MEESPIERSON CAPITAL CORP. By:______________________________ Name:____________________________ Title:_____________________________ [Signature Page to Second Amendment to Credit Agreement of Pegasus Media & Communications, Inc. and Bankers Trust Company as Agent for the Lenders, dated as of December 10, 1997] STATE STREET BANK AND TRUST COMPANY By:_________________________________ Name:_______________________________ Title:________________________________ [Signature Page to Second Amendment to Credit Agreement of Pegasus Media & Communications, Inc. and Bankers Trust Company as Agent for the Lenders, dated as of December 10, 1997] COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE By:______________________________ Name:____________________________ Title:_____________________________ [Signature Page to Second Amendment to Credit Agreement of Pegasus Media & Communications, Inc. and Bankers Trust Company as Agent for the Lenders, dated as of December 10, 1997] UNION BANK OF CALIFORNIA By:______________________________ Name:____________________________ Title:_____________________________ EX-10 6 EXHIBIT 10.23 Exhibit 10.23 THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT ("this Amendment"), executed as of December 31, 1998, is by and among PEGASUS MEDIA & COMMUNICATIONS, INC., a Delaware corporation (the "Borrower"); the undersigned financial institutions, in their capacities as "Lenders" under the Credit Agreement referred to below, and being the "Required Lenders", as defined in the Credit Agreement, for purposes of this Amendment (the "Required Lenders"); and BANKERS TRUST COMPANY, as agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, the "Agent"). RECITALS A. The Borrower, the Lenders and the Agent are parties to a Credit Agreement dated as of December 10, 1997, as amended pursuant to a First Amendment to Credit Agreement dated as of March 10, 1998 and a Second Amendment to Credit Agreement dated as of August 3, 1998 (as so amended, the "Credit Agreement"). Capitalized terms used herein without definition have the meanings assigned to them in the Credit Agreement. B. On November 30, 1998, the Parent issued and sold its 93/4% Senior Notes due 2006 in the aggregate principal amount of $100,000,000, issued pursuant to an Indenture dated as of such date between the Parent and First Union National Bank, as trustee. In connection with the sale of the New PCC Senior Notes, the Parent prepared and circulated an Offering Memorandum dated November 24, 1998, setting forth information regarding the Parent, the Borrower and its Subsidiaries and the New PCC Senior Notes. C. Approximately $95,000,000 of the gross proceeds of the Offering has been or, simultaneously with the execution of this Amendment, will be contributed to the equity capital of the Borrower to retire existing indebtedness of the Borrower to the Lenders and to finance the acquisition of a cable system serving Aguadilla, Puerto Rico and neighboring communities (the "Aguadilla Acquisition"), certain pending DBS Acquisitions and working capital. D. The Borrower has requested the amendment of the Credit Agreement to (1) permit dividends by the Borrower to the Parent to finance interest payable under such Senior Notes, (2) revise the calculation of Adjusted Fixed Charges under Section 5.03 of the Credit Agreement, (3) revise the Fixed Charges and Subscriber Acquisition Cost covenants in Sections 5.03 and 5.04 of the Credit Agreement and (4) permit the Aguadilla Acquisition. E. Subject to certain terms and conditions, the Agent and the Required Lenders are willing to agree to such requests, concurrently with the execution of this Amendment. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: I. Amendments to Credit Agreement. Subject to the satisfaction of each of the conditions set forth in Section IV below, the Agent and the Required Lenders hereby agree with the Borrower as follows: A. Definitions. 1. Article XI of the Credit Agreement is amended by adding thereto, in appropriate alphabetical location, the following new definitions: New PCC Senior Notes. The Parent's 93/4% Senior Notes due 2006 in the aggregate principal amount of $100,000,000, issued pursuant to the New PCC Indenture. New PCC Indenture. The Indenture dated as of November 30, 1998 between the Parent and First Union National Bank, as trustee. New Offering Memorandum. The Offering Memorandum dated November 24, 1998, and setting forth information regarding the Parent, the Borrower and its Subsidiaries and the New PCC Senior Notes. 2. Article XI of the Credit Agreement is further amended by deleting the second reference to "SAC Payments" from clause (m) of the definition of "Permitted Investments" and substituting therefor the term "SAC Commissions" B. Fixed Charges, Subscriber Acquisition Costs; Etc. 1. Article XI of the Credit Agreement is further amended by deleting the definitions of Adjusted Fixed Charges and Subordinated Debt and substituting therefor the following: Adjusted Fixed Charges. For any period of four (4) fiscal quarters, the sum of (a) Subscriber Acquisition Costs for any such four quarter period ending on or after March 31, 2001; (b) Total Debt Service for such period (excluding (i) payments of principal in respect of Permitted Seller Debt and Permitted Seller Subordinated Debt and (ii) voluntary prepayments of the Notes); (c) Capital Expenditures made by the Companies during such period; and (d) all other distributions and other payments made to the Parent under Section 5.05 or otherwise (excluding dividends and distributions made by the Borrower to the Parent as permitted under Section 5.05(b)(vii)). Subordinated Debt. (a) Indebtedness of the Borrower and any of its Subsidiaries to the Subordinated Noteholders under the Subordinated Indenture and the Subordinated Notes, (b) Permitted Seller Subordinated Debt and (c) any Indebtedness which is subject to an Affiliate Subordination Agreement. 2. Section 5.03 of the Credit Agreement is amended by deleting the Table contained therein and substituting therefor the following: Quarter End Minimum Ratio ----------- ------------- December 31, 1998 and March 31, 1999 1.00:1.00 June 30, 1999 through September 30, 1999 1.05:1.00 December 31, 1999 through March 31, 2000 1.15:1.00 June 30, 2000 through September 30, 2000 1.20:1.00 December 31, 2000 1.25:1.00 March 31 through December 31, 2001 1.05:1.00 March 31, 2002 and each quarter end 1.10:1.00 thereafter 3. Section 5.04 of the Credit Agreement is amended by adding the following at the end thereof: Not permit the Average Subscriber Acquisition Cost for any period of four (4) consecutive fiscal quarters ended on or after December 31, 1998 through and including December 31, 2000 to exceed the following: -2- Maximum Subscriber Four Quarter Period Ended Acquisition Cost ------------------------- ------------------ December 31, 1998 $550 March 31, 1999 $600 June 30, 1999 $650 September 30, 1999 $700 December 31, 1999 $750 March 31, 2000 $770 June 30, 2000 $790 September 30, 2000 $810 December 31, 2000 $825 D. Restricted Payments. Section 5.05 of the Credit Agreement is amended by adding a new paragraph (b)(ix) at the end thereof reading in its entirety as follows: (ix) The Borrower may pay annual or semi-annual dividends or distributions to the Parent solely for the purpose of financing interest due and payable under the New PCC Senior Notes, provided that no Default shall exist as of the date of the proposed payment or after giving effect thereto. E. No Further Amendments. Except for such amendments, the text of the Credit Agreement and all other Loan Documents shall remain unchanged and in full force and effect and is hereby ratified and confirmed by the Borrower. F. Consent to Aguadilla Acquisition. As provided in clause (a) of the definition of "Permitted Acquisitions" set forth in the Credit Agreement, the Required Lenders hereby approve the Aguadilla Acquisition, subject to compliance with all of the conditions thereto set forth in such definition and in other provisions of the Loan Documents and provided that the aggregate purchase price paid in connection therewith shall not exceed $42,000,000, plus customary prorations and adjustments. II. Waiver. The Borrower has applied $65,000,000 of the Equity Proceeds to repay principal under the Notes and has requested that it be permitted to retain the balance of the Equity Proceeds for use as contemplated in Recital C above. The Lenders hereby agree to such request and waive the application of Section 1.06(d) to such portion of the Equity Proceeds. The foregoing waiver is limited to its express terms III. Representations, Warranties and Covenants of the Borrower. The Borrower hereby represents and warrants to, and covenants and agrees with, the Lenders that: A. The execution and delivery of this Amendment have been duly authorized by all requisite corporate action on the part of the Borrower. B. After giving effect to this Amendment, all warranties and representations set forth in the Credit Agreement and the other Loan Documents are true and correct in all material respects (except to the extent they expressly relate to an earlier specified date or are affected by transactions or events occurring after the Closing Date and permitted or not prohibited under the Credit Agreement). C. As of the date hereof and since the Closing Date, no event or circumstance has occurred which has had or could have a Material Adverse Effect. D. After giving effect to this Amendment, no Default has occurred and is continuing. -3- E. None of the Borrower or any of its Affiliates is required to obtain any consent, approval or authorization from, or to file any declaration or statement with, any governmental instrumentality or other agency or any other person or entity (including without limitation the Parent and the Subsidiaries) in connection with or as a condition to the execution, delivery or performance of this Amendment. F. This Amendment constitutes the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally or the application of principles of equity, whether in any action at law or proceeding in equity, and subject to the availability of the remedy of specific performance or of any other equitable remedy or relief to enforce any right thereunder. G. Without limiting the generality of the foregoing, (a) all of the Obligations are permitted under, do not and will not violate, and constitute "Eligible Indebtedness" under, the New PCC Indenture, the New PCC Senior Notes and any and all other instruments and agreements entered into or issued in connection therewith; and (b) the New PCC Senior Notes and the New PCC Indenture are permitted under, and do not and will not violate, the PCC Preferred Stock Designation, the PCC Indenture, the PCC Senior Notes and the Subordinated Debt Documents. IV. General Conditions. The willingness of the Agent and the Required Lenders to agree to the foregoing is subject to the condition that the Borrower shall have executed and delivered to the Agent (or shall have caused to be duly executed and delivered to the Agent by the appropriate persons) the following: A. This Amendment. B. True and complete copies of any required stockholders' and/or directors' consents and/or resolutions, authorizing the execution and delivery of this Amendment, certified by the Secretary of the appropriate company. C. True and complete copies of the New PCC Indenture and of the form of the New PCC Senior Notes. D. True and complete copies of the Acquisition Agreement relating to the Aguadilla Acquisition, reflecting terms and conditions consistent with the requirements of the Credit Agreement with respect to Permitted Acquisitions. E. Evidence satisfactory to the Agent that at least $95,000,000 of the gross proceeds of the Offering has been contributed to the equity capital of the Borrower. F. Any and all such documents, certificates and opinions (including an opinion with respect to the Special Purpose Subsidiary and an opinion with respect to the New PCC Senior Notes and the New PCC Senior Indenture) as the Agent shall reasonably request with respect to this Amendment. V. Miscellaneous. A. As provided in the Loan Agreement, the Borrower agrees to reimburse the Agent upon demand for all reasonable fees and disbursements of counsel to the Agent incurred in connection with the preparation of this Amendment. B. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. C. This Amendment may be executed by the parties hereto in several counterparts hereof and by the different parties hereto on separate counterparts hereof, all of which counterparts shall together constitute one and the same agreement. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as an in hand delivery of an original executed counterpart hereof. *The Next Page is the Signature Page* -4- IN WITNESS WHEREOF, the Agent, the Borrower and the undersigned Required Lenders have caused this Amendment to be duly executed as a sealed instrument by their duly authorized representatives, all as of the day and year first above written. BORROWER: --------- PEGASUS MEDIA & COMMUNICATIONS, INC. By:_____________________________________________ Robert N. Verdecchio, Senior Vice President AGENT: ------ BANKERS TRUST COMPANY By:____________________________________ Gregory P. Shefrin, Vice President LENDERS: -------- BANKERS TRUST COMPANY By:___________________________________ Gregory P. Shefrin, Vice President BANKBOSTON, N.A. By:____________________________ Name:__________________________ Title:___________________________ -5- BANQUE PARIBAS By:____________________________ Name:__________________________ Title:_________________________ BANK OF MONTREAL, CHICAGO BRANCH By:____________________________ Name:__________________________ Title:_________________________ FLEET NATIONAL BANK By:_____________________________ Name:__________________________ Title:___________________________ -6- IBJ SCHRODER BANK & TRUST COMPANY By:_________________________________ Name:_______________________________ Title:_______________________________ MEESPIERSON CAPITAL CORP. By:______________________________ Name:____________________________ Title:_____________________________ STATE STREET BANK AND TRUST COMPANY By:_________________________________ Name:_______________________________ Title:________________________________ COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE By:______________________________ Name:____________________________ Title:_____________________________ UNION BANK OF CALIFORNIA By:______________________________ Name:____________________________ Title:_____________________________ -7- EX-23.1 7 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the inclusion in this registration statement of Pegasus Communications Corporation on Form S-3 of our report dated February 26, 1998 on our audits of the consolidated financial statements of Pegasus Communications Corporation as of December 31, 1996 and 1997 and for the three years in the period ended December 31, 1997. We also consent to the reference to our firm under the captions "Experts." /s/ PricewaterhouseCoopers -------------------------------- PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 26, 1999 EX-23.2 8 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in this Pre-Effective Amendment No. 1 to Pegasus' Registration Statement of our report dated February 18, 1998 on the consolidated balance sheets of Digital Television Services, Inc. and Subsidiaries as of December 31, 1996 and 1997 and the related consolidated statements of operations, members'/stockholders' equity, and cash flows for the period from inception (January 30, 1996) through December 31, 1996 and for the year ended December 31, 1997 and to all references to our Firm included in or made a part of this Registration Statement. /s/ Arthur Andersen - ----------------------- Arthur Andersen Atlanta, Georgia January 25, 1999 -----END PRIVACY-ENHANCED MESSAGE-----