-----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, P/gS5U1leSpBcRibQxB5KWB6Y6dmrOlUAxaF590VvDuuRrht2v7K5jzYX+moPtet 2hYuDp64qciXkcd8p1qs1A== 0000950116-99-000376.txt : 19990308 0000950116-99-000376.hdr.sgml : 19990308 ACCESSION NUMBER: 0000950116-99-000376 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19990305 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: 99557860 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 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 1999 REGISTRATION NO. 333-70949 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 3 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 (888) 438-7488 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------- Ted S. Lodge, Esq. Senior Vice President, Chief Administrative Officer, General Counsel and Secretary c/o Pegasus Communications Management Company Suite 454, 5 Radnor Corporate Center 100 Matsonford Road Radnor, Pennsylvania 19087 (888) 438-7488 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Please send copies of all communications to: Michael B. Jordan, Esq. Kirk A. Davenport, Esq. Drinker Biddle & Reath LLP Latham & Watkins 1100 Philadelphia National Bank Building 885 Third Avenue 1345 Chestnut Street Suite 100 Philadelphia, Pennsylvania 19107-3496 New York, NY 10022 (215) 988-2802 (212) 906-1284 --------------------- 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. [ ] 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. ================================================================================
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 Offering Price Registration Fee(1) - ----------------------------------------------------------------------------------------------------------- Shares of Class A common stock par value $0.01 per share ......... $ $ $ ===========================================================================================================
(1) The Registrant previously filed a Registration Statement with respect to 5,114,200 shares (including 707,130 shares which the underwriters have the option to purchase to cover over-allotments, if any) for which a registration fee of $30,147 was paid and a pre-effective amendment with respect to 307,130 shares (including 257,130 shares which the underwriters have the option to purchase to cover over-allotments, if any) for which a registration fee of $2,011.82 was paid. These shares have not been included for purposes of calculation of the amount of registration fee due. 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 -- MARCH 5, 1999 ================================================================================ Prospectus , 1999 [GRAPHIC OMITTED] 4,714,200 shares of Class A common stock - -------------------------------------------------------------------------------- o We are offering 3,000,000 of the shares and certain existing stockholders are offering 1,714,200 of the shares. o The underwriters have an option to purchase an additional 707,130 shares from us to cover over-allotments. o Closing: , 1999. o Nasdaq National Market Symbol: PGTV ------------------------------------------------------------------- Per Share Total ------------------------------------------------------------------- Public offering price: $ $ Underwriting fees: Proceeds to Pegasus: 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.] 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. When we describe the size of our business in this summary -- for example, the number of homes in our territories and how many subscribers we have -- we are assuming that we will complete the pending acquisitions described below in "The Company -- Recent Pegasus Developments." Pegasus Pegasus Communications Corporation is: o The largest independent distributor of DIRECTV(R) with 464,000 subscribers as of January 31, 1999. We have the exclusive right to distribute DIRECTV digital broadcast satellite services to over 4.8 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. Direct Broadcast Satellite and DIRECTV Direct broadcast satellite programming services deliver television programming to subscribers from a satellite in digital format. To receive this programming, a subscriber must install a satellite antenna or dish and a digital receiver and pay a monthly fee. There are currently three national direct broadcast satellite programming services: o DIRECTV -- DIRECTV currently has 4.6 million subscribers, a 51% direct broadcast satellite market share, including approximately 3.6 million subscribers served by DIRECTV itself, 464,000 subscribers served by Pegasus and 500,000 subscribers served by the approximately 100 other DIRECTV rural affiliates. o Primestar -- Primestar currently has 2.3 million subscribers, a 26% direct broadcast satellite market share. o EchoStar -- EchoStar currently has 2.0 million subscribers, a 23% direct broadcast satellite market share. DIRECTV, a service of Hughes Electronics, 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 entertainment channels of near laser disc quality video and digital quality audio programming after completing its announced acquisitions of United States Satellite Broadcasting and Primestar described below. DIRECTV Rural Affiliates and Consolidation Hughes has an agreement with the National Rural Telecommunications Cooperative authorizing the cooperative to offer its members and associates the opportunity to acquire exclusive rights to distribute 3 DIRECTV programming services in rural areas of the United States. Approximately 250 National Rural Telecommunications members and associates, including Pegasus, have acquired the exclusive right to become DIRECTV rural affiliates. The exclusive territories include approximately 9.0 million rural households. When DIRECTV was launched in 1994, approximately 95% of the DIRECTV rural affiliate exclusive territories were held by small DIRECTV rural affiliates. Since 1996, we have acquired or agreed to acquire 81 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. Pegasus Rural Focus and Strategy Rural areas are an attractive market for direct broadcast satellite television and other satellite services because they are generally underserved by cable operators. Our long-term goal is to become an integrated provider of direct broadcast satellite 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. o Continue to acquire other DIRECTV rural affiliates. o Continue to develop the Pegasus retail network. o Generate future growth by bundling additional digital satellite services with DIRECTV. Recent Direct Broadcast Satellite Developments Three important events have occurred recently in the direct broadcast satellite industry. DIRECTV/Hughes Acquisition of United States Satellite Broadcasting. In December 1998, Hughes, the parent company of DIRECTV, announced an agreement with United States Satellite Broadcasting Company, Inc. to acquire United States Satellite's business and assets. The transaction, if completed, will enable DIRECTV to add premium networks, including multichannel HBO, Cinemax and Showtime. We are evaluating the impact of the United States Satellite transaction on our business. DIRECTV/Hughes Acquisition of Primestar. In January 1999, Hughes announced an agreement with Primestar, Inc. to acquire Primestar's direct broadcast satellite business. We estimate that there are between 200,000 and 250,000 Primestar subscribers in our DIRECTV exclusive territories. We are analyzing the effects of the Primestar transaction on our business. EchoStar-News Corporation-MCI Settlement. In November 1998, EchoStar Communications Corporation, News Corporation, MCI WorldCom Inc. and others reached an agreement for the transfer to EchoStar of a license to operate another direct broadcast satellite business. If this transaction is completed, we believe it will help increase the overall competitive position of direct broadcast satellite relative to cable. However, the transaction could also increase EchoStar's competitive position relative to DIRECTV. See Risk Factors - -- Other Risks of Our Business -- We Face Significant Competition: the Competitive Landscape Changes Constantly. 4 The Offering Class A common stock offered by: Pegasus ................................. 3,000,000 shares (1) The selling stockholders ................ 1,714,200 shares ----------------- Total .................................. 4,714,200 shares ----------------- Class A common stock to be outstanding after the offering ......... 14,317,751 shares (1)(2) Use of proceeds .......................... The net proceeds to Pegasus from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, are estimated to be approximately $69.8 million, approximately $86.4 million if the underwriters' over-allotment option is exercised in full. Pegasus intends to use the net proceeds 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. See Use of Proceeds. Nasdaq National Market symbol ............ PGTV
- -------------- (1) Excludes 707,130 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 February 26, 1999. Excludes issued and outstanding warrants for 652,749 shares of Class A common stock, and 646,427 options granted under Pegasus' 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. 5 Summary Historical and Pro Forma Consolidated Financial Data The following table sets forth summary historical and pro forma consolidated financial data for Pegasus. 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.
Years Ended December 31, -------------------------------------- Statement of Operating Data: 1994 1995 1996 (Dollars in thousands, except per share data) Net revenues: DBS ........................................................... $ 174 $ 1,469 $ 5,829 Broadcast and cable ........................................... 28,017 30,679 42,100 ------- -------- -------- Total revenues ............................................... 28,191 32,148 47,929 Operating expenses: DBS Programming, technical, and general and administrative ....... 161 1,379 4,312 Marketing and selling ........................................ 50 -- 646 Incentive compensation ....................................... -- 9 146 Depreciation and amortization ................................ -- 640 1,786 Broadcast and cable Programming, technical, and general and administrative ....... 14,856 15,823 21,006 Marketing and selling ........................................ 3,086 3,939 4,940 Incentive compensation ....................................... 432 519 839 Depreciation and amortization ................................ 6,536 7,619 9,287 Corporate expenses ............................................ 1,506 1,364 1,429 Corporate depreciation and amortization ....................... 404 492 988 ------- -------- -------- Income (loss) from operations ................................ 1,160 364 2,550 Interest expense ............................................... (5,973) (8,817) (12,455) Interest income ................................................ -- 370 232 Other expenses, net ............................................ (65) (44) (171) Gain on sales of cable systems ................................. -- -- -- ------- -------- -------- Loss before income taxes ..................................... (4,878) (8,127) (9,844) Provision (benefit) for income taxes ........................... 140 30 (120) ------- -------- -------- Loss before extraordinary items ............................... (5,018) (8,157) (9,724) Extraordinary gain (loss) from extinguishment of debt, net ..... (633) 10,211 (250) ------- -------- -------- Net income (loss) ............................................ (5,651) 2,054 (9,974) Preferred stock dividends .................................... -- -- -- ------- -------- -------- Net income (loss) applicable to common shares ................ ($ 5,651) $ 2,054 ($ 9,974) ======= ======== ======== Loss per common share: Loss before extraordinary items .............................. ($1.56) Extraordinary item ........................................... (0.04) -------- Loss per common share ........................................ ($1.60) ======== Weighted average shares outstanding (000's) .................. 6,240 ======== Other Data: Pre-marketing cash flow: DBS ........................................................... $ 13 $ 90 $ 1,517 Broadcast and cable ........................................... 10,075 10,917 16,154 ------- -------- -------- Total pre-marketing cash flow ................................. $10,088 $ 11,007 $ 17,671 ======= ======== ======== Location cash flow ............................................. $10,038 $ 11,007 $ 17,025 Operating cash flow ............................................ 8,100 9,287 15,596 Capital expenditures ........................................... 1,264 2,640 6,294 Net cash provided by (used for): Operating activities .......................................... 4,103 5,783 3,059 Investing activities .......................................... (3,571) (6,047) (81,179) Financing activities .......................................... (658) 10,859 74,727
Years Ended December 31, ------------------------------------------- Pro Forma Statement of Operating Data: 1997 1998 1998 (Dollars in thousands, except per share data) Net revenues: DBS ........................................................... $ 38,254 $ 147,142 $ 197,413 Broadcast and cable ........................................... 48,564 48,079 54,161 --------- --------- --------- Total revenues ............................................... 86,818 195,221 251,574 Operating expenses: DBS Programming, technical, and general and administrative ....... 26,042 102,420 136,625 Marketing and selling ........................................ 5,973 45,706 57,278 Incentive compensation ....................................... 795 1,159 1,159 Depreciation and amortization ................................ 17,042 59,077 83,683 Broadcast and cable Programming, technical, and general and administrative ....... 24,099 25,613 28,420 Marketing and selling ........................................ 5,971 6,334 6,322 Incentive compensation ....................................... 479 292 292 Depreciation and amortization ................................ 9,397 9,550 11,429 Corporate expenses ............................................ 2,256 3,614 3,614 Corporate depreciation and amortization ....................... 1,352 2,105 2,105 --------- --------- --------- Income (loss) from operations ................................ (6,588) (60,649) (79,353) Interest expense ............................................... (16,094) (44,604) (55,760) Interest income ................................................ 1,539 2,036 2,036 Other expenses, net ............................................ (724) (1,523) (1,203) Gain on sales of cable systems ................................. 4,451 24,726 -- --------- --------- --------- Loss before income taxes ..................................... (17,416) (80,014) (134,280) Provision (benefit) for income taxes ........................... 200 (896) (896) --------- --------- --------- Loss before extraordinary items ............................... (17,616) (79,118) (133,384) Extraordinary gain (loss) from extinguishment of debt, net ..... (1,656) -- -- --------- --------- --------- Net income (loss) ............................................ (19,272) (79,118) (133,384) Preferred stock dividends .................................... 12,215 14,763 14,763 --------- --------- --------- Net income (loss) applicable to common shares ................ ($ 31,487) ($ 93,881) ($ 148,147) ========= ========= ========= Loss per common share: Loss before extraordinary items .............................. ($3.02) ($6.64) ($8.65) Extraordinary item ........................................... (0.17) -- -- --------- --------- --------- Loss per common share ........................................ ($3.19) ($6.64) ($8.65) ========= ========= ========= Weighted average shares outstanding (000's) .................. 9,858 14,130 17,130 ========= ========= ========= Other Data: Pre-marketing cash flow: DBS ........................................................... $ 12,212 $ 44,722 $ 60,788 Broadcast and cable ........................................... 18,494 16,132 19,419 --------- --------- --------- Total pre-marketing cash flow ................................. $ 30,706 $ 60,854 $ 80,207 ========= ========= ========= Location cash flow ............................................. $ 24,733 $ 15,148 $ 22,929 Operating cash flow ............................................ 22,477 11,534 19,315 Capital expenditures ........................................... 9,929 12,400 16,540 Net cash provided by (used for): Operating activities .......................................... 8,478 (21,962) Investing activities .......................................... (142,109) (101,373) Financing activities .......................................... 169,098 133,791
6
As of December 31, ------------------------------------------------------------------------------- Pro Forma 1994 1995 1996 1997 1998 1998 Balance Sheet Data: Cash and cash equivalents ................. $ 1,380 $21,856 $ 8,582 $ 45,269 $ 75,985 $ 27,681 Working capital (deficiency) .............. (23,074) 17,566 6,430 32,347 37,889 (14,547) Total assets .............................. 75,394 95,770 173,680 380,862 886,310 920,202 Total debt (including current) ............ 61,629 82,896 115,575 208,355 559,029 522,171 Total liabilities ......................... 68,452 95,521 133,354 239,234 699,144 663,286 Redeemable preferred stock ................ -- -- -- 111,264 126,028 126,028 Minority interest ......................... -- -- -- 3,000 3,000 3,000 Total common stockholders' equity ......... 6,942 249 40,326 27,364 58,138 127,888
Pro forma income statements and other data for the year ended December 31, 1998 include our completed and pending acquisitions and sales and the use of proceeds from this offering as if they had all occurred in the beginning of such period. The pro forma balance sheet data as of December 31, 1998 includes the acquisitions completed after December 31, 1998, the acquisitions pending as of the same date 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, 1998 does not include the $24.7 million gain from the sale of our New England cable systems. In this section we use the terms pre-marketing cash flow and location cash flow. 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, such as incentive compensation under our restricted stock plan and 401(k) plan; o corporate overhead; and o Direct broadcast satellite subscriber acquisition costs, which are sales and marketing expenses incurred to acquire new direct broadcast satellite subscribers. Location cash flow is pre-marketing cash flow less direct broadcast satellite subscriber acquisition costs. Pre-marketing cash flow and location cash flow are not, and should not be considered, alternatives to 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 to fund working capital, capital expenditures, or to react to changes in Pegasus' 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 them as measures of financial performance and ability to pay debt service; and o they are measures that we, our lenders and investors use to monitor our financial performance and debt leverage. 7 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; o Digital Television Services, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998; o Digital Television Services, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998; o Digital Television Services, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 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 or 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 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. 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. Risks of Our Direct Broadcast Satellite Business Satellite and Direct Broadcast Satellite Technology Could Fail or Be Impaired Direct broadcast satellite technology is highly complex and is still evolving. As with any high-tech product or system, it might not function as expected or last through the year 2007 as currently expected. If any of the DIRECTV satellites is damaged or stops working partially or completely for any of a number of reasons, DIRECTV customers would lose programming. We would in turn likely lose customers, which could materially and adversely affect our operations, financial performance and stock price. 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. As it was designed to do, the satellite automatically switched to the on-board backup processor with no interruption of service to DIRECTV subscribers. If the backup processor on the current satellite fails, other satellites presently in orbit would continue to transmit DIRECTV programming, but the service would experience an undetermined reduction in channel capacity. While Hughes Electronics, which owns DIRECTV, has announced plans to launch a new satellite in September 1999, this will not eliminate the risk. Events at DIRECTV Could Adversely Affect Us 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 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. Programming Costs May Increase 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. If we increase our rates, we may lose customers. If we do not increase our rates, our revenues and financial performance could be adversely affected. We May Lose Our DIRECTV Rights After 2007 We may or may not be able to continue in the DIRECTV business after the current DIRECTV satellites are replaced. If we can continue, we cannot predict what it will cost us to do so. The National Rural Telecommunications Cooperative'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 cooperative has told us that its agreement with DIRECTV gives the cooperative a right of first refusal to get comparable rights if DIRECTV launches new satellites to replace the existing ones. 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. 9 We Cannot Retransmit the Broadcast Networks' Programming to All Our Customers; This Could Cause Us to Lose Customers and Revenues The direct broadcast satellite industry and the television networks are in a dispute about whether direct broadcast satellite services can carry network programming. If they cannot, DIRECTV could lose some of its consumer appeal. As a result of this dispute, we will be required to shut off network programming to some existing customers and not to offer it to some new customers. This could result in our loss of customers and revenues. The dispute arises under a federal law called the Satellite Home Viewer Act. Under this law, direct broadcast satellite operators, for a fee, can provide network programming to subscribers only in unserved areas. The concept of an unserved area has to do with how well people in an area can receive over-the-air broadcasts of local network-affiliated stations. In 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 direct broadcast satellite industry. Under the court's order in two of these lawsuits, we are required to cut off CBS and Fox programming to ineligible subscribers in two stages between February 28, 1999 and April 30, 1999. The first stage cut-offs affect approximately 64,000 subscribers. We do not know how many of our other subscribers will be affected by the second stage cut-offs. These cut-offs will result in a reduction of revenues and the possible loss of subscribers. Since we are using the court's narrower definition of unserved area to determine whether new subscribers are eligible to receive any of the four networks, we do not know how many potential customers we have lost or will lose because of this. DIRECTV Cannot Carry Local Station Programming Subscribers cannot receive their local TV stations on direct broadcast satellite, particularly local news and sports. This will remain true for many subscribers even if the network programming issues discussed above are resolved in the direct broadcast satellite industry's favor. In areas served by cable television, this puts us at a competitive disadvantage and may lose us customers and revenues because cable systems usually carry local stations. We May Lose Customers To Cable Because DIRECTV Equipment is Expensive To receive DIRECTV, 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 direct broadcast satellite because cable customers do not have to buy equipment, and cable companies charge lower installation fees. We may lose customers and revenues to cable because of this. We Could Lose Money Because of Signal Theft Signal theft has long been a problem in the cable and direct broadcast satellite 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 Our Broadcast Operations Could Be Adversely Affected if We Fail to Successfully Negotiate Our Network Affiliation Agreements 10 The Fox, WB and UPN television networks provide substantial amounts of our stations' programming. We are in the process of negotiating affiliation agreements with Fox and WB. If we are not successful in these negotiations, our broadcast operations could suffer materially. In addition, 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. Our Broadcast Operations Could Be Adversely Affected if the FCC Prevents 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 FCC is considering a measure that would prevent us from doing this and could force us to stop programming some of our existing stations. This could cost us significant revenues. 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 three of our markets and our only station in another market is programmed through a local marketing agreement. We expect to program a second station under such an agreement in one more market by 2000. If the FCC adopts the proposed change, 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 our broadcast operations materially and adversely. There Are Other Risks of Our Local Marketing Agreement Strategy 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 commercial 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. 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 The FCC has generally made available much higher power allocations to digital stations that will replace stations on existing channels 2 through 13 than digital stations that will replace stations on existing channels 14 through 69. All of our existing stations are on channels 14 through 69. This power disparity could put us at a disadvantage to our competitors that now operate on channels 2 through 13. 11 o In some cases, 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. Risks of Our Cable Business We Could Lose Revenues Because of Our Geographic Concentration 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. 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 A local downturn in the Puerto Rico economy could cause us to lose revenues from subscribers and advertisers. This would affect our cable business more seriously than if we were more geographically diversified. The FCC's Digital Television Requirements May Prevent Us From Expanding Our Cable Programming 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 Uncertainties. 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. Other Risks of Our Business We Have a History of Substantial Losses; We Expect Them to Continue; Losses Could Adversely Affect our Stock Price and Access to Capital Markets 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 foreseeable future. To the extent investors measure our performance by net income or loss, rather than alternative measures based on cash flow, continuing losses could adversely affect our stock prices and our access to capital markets. 12 Our Substantial Indebtedness Could Adversely Affect Your Investment 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, and the pending and completed acquisitions described in this prospectus are consummated, as of the date shown: Pro Forma At December 31, 1998 Total indebtedness ........... $ 522,171,000 Stockholders' equity ......... $ 127,888,000 Debt to equity ratio ......... 4.08x On the assumption that these events and the 1998 offering of our senior notes had occurred on January 1, 1998, our earnings would have been inadequate to cover our fixed charges and preferred stock dividends by $149.0 million for the year ended December 31, 1998. Neither total indebtedness nor stockholders' equity, as set forth above, includes the approximately $126.0 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: o pay dividends and make certain other payments and investments; o borrow additional funds; o create liens; and o 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. 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 Our direct broadcast satellite business faces competition from other current or potential multichannel programming distributors, including other direct broadcast satellite operators, direct-to-home providers, cable operators, wireless cable operators, internet and local and long-distance telephone companies, which may be able to offer more competitive packages or pricing than we or DIRECTV can provide. In addition, the direct broadcast satellite industry is still evolving and recent or future competitive developments could adversely affect us. For example, on November 30, 1998, EchoStar, which competes with us in the sale of direct broadcast satellite programming, announced that it had entered into an agreement with News Corporation and MCI providing for the transfer to EchoStar of the license to operate a high-powered direct broadcast satellite business at the 110o west longitude orbital location consisting of 28 frequencies and the sale of two satellites 13 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, direct broadcast satellite 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 direct broadcast satellite 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. DIRECTV does not have this capacity. Our TV stations compete for audience share, programming and advertising revenue with other television stations in their respective markets and with direct broadcast satellite operators, cable operators and other advertising media. Direct broadcast satellite and cable operators in particular are competing more aggressively than in the past for advertising revenues in our TV stations' markets. This competition could adversely affect our stations' revenues and performance in the future. Our cable systems face competition from television stations, satellite master antennae television systems, wireless cable systems, direct-to-home providers, direct broadcast satellite systems and open video systems. 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. 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 direct broadcast satellite 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 direct broadcast satellite territories. o Our acquisitions normally require third party consents that we do not control. These include the consents of DIRECTV and National Rural Telecommunications for direct broadcast satellite acquisitions, the FCC and the television networks for 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. The Year 2000 Problem Could Adversely Affect Us 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. 14 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 as $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 number of outstanding shares resulting from this offering will significantly ease this illiquidity. You May Not Be Able to Control Votes 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 24.2% of the total common stock but 76.2% of the votes. Because of Mr. Pagon's voting control, no one can acquire Pegasus, or control of Pegasus, 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 Pegasus that you may think is attractive as a stockholder. If a Change of Control Occurs, We May Be Unable to Refinance Our Publicly Held Debt, Bank Debt and Preferred Stock 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 $85.4 million at February 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 decide to sell large amounts of our stock, our stock price could 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 14,317,751 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 4,658,400 shares, including stock options, will be held or controlled by Marshall W. Pagon and may be currently sold without registration under SEC Rule 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 176,180 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. 15 o 3,612,497 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 8,609,382 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. Purchasers of the Class A Common Stock Will Suffer Dilution of Their Investment 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 $(54.41) in net tangible book value per share of Class A common stock of their investment from the offering price. See Dilution. We May Not Be Aware of All Risks 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. Forward-Looking Statements May Prove Inaccurate 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 of 1933 and Section 21E of the Securities Exchange Act of 1934. We use words such as "anticipate," "believe," "estimate," "expect," "intend," "project," "should" 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 above. 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. 16 Use of Proceeds The net proceeds to Pegasus 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 $86.4 million if the underwriters' over-allotment option is exercised in full. Pegasus 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. credit facility provides for a borrowing capacity of up to $180.0 million. Approximately $35.0 million was outstanding and $49.6 million was outstanding in standby letters of credit as of February 15, 1999. The Pegasus Media & Communications 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 1/4% at February 15, 1999, and the credit facility expires in December 2003. The Digital Television Services, Inc. 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 February 15, 1999, approximately $30.8 million was outstanding under the credit facility, $19.6 million was outstanding under the term loan, and $14.5 million was outstanding as standby letters of credit. The Digital Television Services credit facility bears interest at LIBOR or the prime rate, as selected by Digital Television Services, plus spreads that vary with Digital Television Services' ratio of total debt to a measure of its cash flow. The applicable interest rate was 8 1/2% at February 15, 1999. The term loan must be repaid in 20 consecutive quarterly installments of $200,000 each, commencing on 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. 17 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 Pegasus' 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 February 22, 1999) ......... $27 7/8 $22 5/8 The sale price of the Class A common stock was $25.00 on February 22, 1999. As of February 23, 1999, Pegasus had 165 shareholders of record. 18 Dilution The net tangible book deficit of Pegasus at December 31, 1998 was $548.8 million, or $34.52 per share of common stock. The net tangible book deficit per share of the common stock represents the amount of Pegasus' 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 Pegasus in this offering at an assumed price of $25.00 per share, the pro forma net tangible book deficit of Pegasus as of December 31, 1998 would have been $479.1 million, or $25.35 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 Pegasus as of December 31, 1998 would have been $555.8 million, or $29.41 per share of common stock. This represents an immediate increase in net tangible book value of $9.17 per share of the common stock to existing stockholders and an immediate dilution in net tangible book value of $(54.41) 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 December 31, 1998 ................... $(34.52) Increase in net tangible book value per share attributable to new stockholders purchasing stock in this offering ............................... $ 9.17 ------- Pro forma net tangible book deficit per share after giving effect to this offering ..................................................................... $(25.35) Decrease in net tangible book value per share including the completed and pending transactions ..................................................... $ (4.06) ------- Pro forma net tangible book deficit including this offering and the completed and pending transactions ........................................................ $(29.41) ------- Dilution in net tangible book value per share to the purchasers in this offering after giving effect to the completed and pending transactions .......... $(54.41) =======
19 Capitalization The following table sets forth the capitalization of Pegasus: o as of December 31, 1998, o as adjusted to reflect completed and pending acquisitions described under The Company -- Recent Pegasus Developments below, and o on a pro forma basis to reflect the offering, the use of proceeds of the offering, and the completed and pending acquisitions described under The Company -- Recent Pegasus Developments below. See Use of Proceeds, Selected Historical and Pro Forma Consolidated Financial Data and Pro Forma Consolidated Financial Information.
As of December 31, 1998 --------------------------------------- Actual As Adjusted Pro Forma (Dollars in thousands) Cash - general funds .................................. $ 54,505 $ 6,202 $ 6,202 Restricted cash ....................................... 21,479 21,479 21,479 -------- -------- -------- Total cash and cash equivalents ...................... $ 75,984 $ 27,681 $ 27,681 ======== ======== ======== Total debt: PM&C credit facility ................................. $ 27,500 $ 67,000 $ -- DTS credit facility .................................. 46,400 46,400 43,650 Senior notes -- PCC - due 2006 ....................... 100,000 100,000 100,000 Senior notes -- PCC - due 2005 ....................... 115,000 115,000 115,000 Senior subordinated notes -- DTS - due 2007 .......... 153,215 153,215 153,215 Senior subordinated notes -- PM&C - due 2005 ......... 82,378 82,378 82,378 Seller notes ......................................... 33,538 26,930 26,930 Capital leases and other ............................. 998 998 998 -------- -------- -------- Total debt ........................................ 559,029 591,921 522,171 Series A preferred stock, $1,000 liquidation preference per share ............................................ 126,028 126,028 126,028 Minority interest ..................................... 3,000 3,000 3,000 Total common stockholders' equity ..................... 58,138 58,138 127,888 -------- -------- -------- Total capitalization .................................. $746,195 $779,087 $779,087 ======== ======== ========
- ------------ Restricted cash includes an amount held in escrow for interest payments on the Digital Television Services senior subordinated notes due 2007. Minority interest represents preferred stock of a subsidiary of Pegasus issued in connection with one of the completed direct broadcast satellite acquisitions. The pro forma total common stockholders' equity reflects the issuance of approximately 3.0 million shares of Class A common stock in this 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. 20 Selected Historical and Pro Forma Consolidated Financial Data The selected historical consolidated financial data have been derived from Pegasus' audited consolidated financial statements. The selected pro forma consolidated financial data for the year ended December 31, 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.
Years Ended December 31, -------------------------------------- Statement of Operating Data: 1994 1995 1996 (Dollars in thousands, except per share data) Net revenues: DBS ........................................................... $ 174 $ 1,469 $ 5,829 Broadcast and cable ........................................... 28,017 30,679 42,100 ------- -------- -------- Total revenues ............................................... 28,191 32,148 47,929 Operating expenses: DBS Programming, technical and general and administrative ........ 161 1,379 4,312 Marketing and selling ........................................ 50 -- 646 Incentive compensation ....................................... -- 9 146 Depreciation and amortization ................................ -- 640 1,786 Broadcast and cable Programming, technical and general and administrative ........ 14,856 15,823 21,006 Marketing and selling ........................................ 3,086 3,939 4,940 Incentive compensation ....................................... 432 519 839 Depreciation and amortization ................................ 6,536 7,619 9,287 Corporate expenses ............................................ 1,506 1,364 1,429 Corporate depreciation and amortization ....................... 404 492 988 ------- -------- -------- Income (loss) from operations ................................ 1,160 364 2,550 Interest expense ............................................... (5,973) (8,817) (12,455) Interest income ................................................ -- 370 232 Other expenses, net ............................................ (65) (44) (171) Gain on sale of cable systems .................................. -- -- -- ------- -------- -------- Loss before income taxes ..................................... (4,878) (8,127) (9,844) Provision (benefit) for income taxes ........................... 140 30 (120) ------- -------- -------- Loss before extraordinary items ............................... (5,018) (8,157) (9,724) Extraordinary gain (loss) from extinguishment of debt, net ..... (633) 10,211 (250) ------- -------- -------- Net income (loss) ............................................ (5,651) 2,054 (9,974) Preferred stock dividends .................................... -- -- -- ------- -------- -------- Net income (loss) applicable to common shares ................ ($ 5,651) $ 2,054 ($ 9,974) ======= ======== ======== Loss per common share: Loss before extraordinary items .............................. ($1.56) Extraordinary item ........................................... (0.04) -------- Loss per common share ........................................ ($1.60) ======== Weighted average shares outstanding (000's) .................. 6,240 ======== Other Data: Pre-marketing cash flow: DBS ........................................................... $ 13 $ 90 $ 1,517 Broadcast and cable ........................................... 10,075 10,917 16,154 ------- -------- -------- Total pre-marketing cash flow ................................. $10,088 $ 11,007 $ 17,671 ======= ======== ======== Location cash flow ............................................. $10,038 $ 11,007 $ 17,025 Operating cash flow ............................................ 8,100 9,287 15,596 Capital expenditures ........................................... 1,264 2,640 6,294 Net cash provided by (used for): Operating activities .......................................... 4,103 5,783 3,059 Investing activities .......................................... (3,571) (6,047) (81,179) Financing activities .......................................... (658) 10,859 74,727
Years Ended December 31, ------------------------------------------- Pro Forma Statement of Operating Data: 1997 1998 1998 (Dollars in thousands, except per share data) Net revenues: DBS ........................................................... $ 38,254 $ 147,142 $ 197,413 Broadcast and cable ........................................... 48,564 48,079 54,161 --------- --------- --------- Total revenues ............................................... 86,818 195,221 251,574 Operating expenses: DBS Programming, technical and general and administrative ........ 26,042 102,420 136,625 Marketing and selling ........................................ 5,973 45,706 57,278 Incentive compensation ....................................... 795 1,159 1,159 Depreciation and amortization ................................ 17,042 59,077 83,683 Broadcast and cable Programming, technical and general and administrative ........ 24,099 25,613 28,420 Marketing and selling ........................................ 5,971 6,334 6,322 Incentive compensation ....................................... 479 292 292 Depreciation and amortization ................................ 9,397 9,550 11,429 Corporate expenses ............................................ 2,256 3,614 3,614 Corporate depreciation and amortization ....................... 1,352 2,105 2,105 --------- --------- --------- Income (loss) from operations ................................ (6,588) (60,649) (79,353) Interest expense ............................................... (16,094) (44,604) (55,760) Interest income ................................................ 1,539 2,036 2,036 Other expenses, net ............................................ (724) (1,523) (1,203) Gain on sale of cable systems .................................. 4,451 24,726 -- --------- --------- --------- Loss before income taxes ..................................... (17,416) (80,014) (134,280) Provision (benefit) for income taxes ........................... 200 (896) (896) --------- --------- --------- Loss before extraordinary items ............................... (17,616) (79,118) (133,384) Extraordinary gain (loss) from extinguishment of debt, net ..... (1,656) -- -- --------- --------- --------- Net income (loss) ............................................ (19,272) (79,118) (133,384) Preferred stock dividends .................................... 12,215 14,763 14,763 --------- --------- --------- Net income (loss) applicable to common shares ................ ($ 31,487) ($ 93,881) ($ 148,147) ========= ========= ========= Loss per common share: Loss before extraordinary items .............................. ($3.02) ($6.64) ($8.65) Extraordinary item ........................................... (0.17) -- -- --------- --------- --------- Loss per common share ........................................ ($3.19) ($6.64) ($8.65) ========= ========= ========= Weighted average shares outstanding (000's) .................. 9,858 14,130 17,130 ========= ========= ========= Other Data: Pre-marketing cash flow: DBS ........................................................... $ 12,212 $ 44,722 $ 60,788 Broadcast and cable ........................................... 18,494 16,132 19,419 --------- --------- --------- Total pre-marketing cash flow ................................. $ 30,706 $ 60,854 $ 80,207 ========= ========= ========= Location cash flow ............................................. $ 24,733 $ 15,148 $ 22,929 Operating cash flow ............................................ 22,477 11,534 19,315 Capital expenditures ........................................... 9,929 12,400 16,540 Net cash provided by (used for): Operating activities .......................................... 8,478 (21,962) Investing activities .......................................... (142,109) (101,373) Financing activities .......................................... 169,098 133,791
21
As of December 31, ------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 Pro Forma 1998 Balance Sheet Data: Cash and cash equivalents ................. $ 1,380 $21,856 $ 8,582 $ 45,269 $ 75,985 $ 27,681 Working capital (deficiency) .............. (23,074) 17,566 6,430 32,347 37,889 (14,547) Total assets .............................. 75,394 95,770 173,680 380,862 886,310 920,202 Total debt (including current) ............ 61,629 82,896 115,575 208,355 559,029 522,171 Total liabilities ......................... 68,452 95,521 133,354 239,234 699,144 663,286 Redeemable preferred stock ................ -- -- -- 111,264 126,028 126,028 Minority interest ......................... -- -- -- 3,000 3,000 3,000 Total common stockholders' equity ......... 6,942 249 40,326 27,364 58,138 127,888
Pro forma income statements and other data for the year ended December 31, 1998 include our completed and pending acquisitions and sales described below under The Company -- Recent Pegasus Developments, 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 December 31, 1998 includes the acquisitions completed after December 31, 1998 and the acquisitions pending as of the same date, 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, 1998 does not include the $24.7 million gain from the sale of our New England cable systems. In this section we use the terms pre-marketing cash flow and location cash flow. Pre-marketing cash flow calculated by taking our earnings and adding back the following expenses. o interest; o income taxes; o depreciation and amortization; o non-cash charges, such as incentive compensation under our restricted stock plan and 401(k) plans; o corporate overhead; and o Direct broadcast satellite subscriber acquisition costs, which are sales and marketing expenses incurred to acquire new direct broadcast satellite subscribers. Location cash flow is pre-marketing cash flow less direct broadcast satellite subscriber acquisition costs. Pre-marketing cash flow and location cash flow are not, and should not be considered, alternatives to income from operations, new 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 necessary indicate whether our cash flow will be sufficient to fund working capital, capital expenditures, or to react to changes in Pegasus' 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 them as measures of financial performance and ability to pay debt service; and o they are measures that we, our lenders and investors use to monitor our financial performance and debt leverage. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of the financial condition and results of operations of Pegasus should be read in conjunction with the consolidated financial statements and related notes which are included beginning on page F-1. General Direct broadcast satellite revenues are principally derived from monthly customer subscriptions and pay-per-view services. Broadcast revenues are derived from the sale of broadcast airtime to local and national advertisers. Cable revenues are derived from monthly customer subscriptions, pay-per-view services, subscriber equipment rentals and installation charges. In this section we use the terms pre-marketing cash flow and location cash flow. 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 Direct broadcast satellite subscriber acquisition costs, which are sales and marketing expenses incurred to acquire new direct broadcast satellite subscribers. Location cash flow is pre-marketing cash flow less direct broadcast satellite subscriber acquisition costs. Pro forma location cash flow includes completed and pending acquisitions and sales and the use of proceeds from this offering as if they had all occurred prior to December 31, 1998. Pre-marketing cash flow and location cash flow are not, and should not be considered, alternatives to 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 to fund working capital, capital expenditures, or to react to changes in Pegasus' 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 them as measures of financial performance and ability to pay debt service; and o they are measures that we, our lenders and investors use to monitor our financial performance and debt leverage. Pegasus generally does not require new direct broadcast satellite customers to sign programming contracts and, as a result, subscriber acquisition costs are currently being charged to operations in the period incurred. Results of Operations Year ended December 31, 1998 compared to the year ended December 31, 1997 Total net revenues in 1998 were $195.2 million, an increase of $108.4 million, or 125%, compared to total net revenues of $86.8 million in 1997. The increase in total net revenues in 1998 was primarily due to an increase in direct broadcast satellite revenues of $109.0 million attributable to acquisitions and to internal growth in Pegasus' direct broadcast satellite subscriber base. Total operating expenses in 1998 were $255.9 23 million, an increase of $162.5 million, or 174%, compared to total operating expenses of $93.4 million in 1997. The increase was primarily due to an increase of $158.5 million in operating expenses attributable to the growth in Pegasus' direct broadcast satellite business. Total corporate expenses, including corporate depreciation and amortization, were $5.7 million in 1998, an increase of $2.1 million, or 58%, compared to $3.6 million in 1997. The increase in corporate expenses is primarily attributable to the growth in Pegasus' business. The increase in corporate depreciation and amortization is due to amortization of deferred financing costs associated with the issuance of $100.0 million of preferred stock in January 1997, $115.0 million of senior notes in October 1997 and $100.0 million of senior notes in November 1998. Interest expense was $44.6 million in 1998, an increase of $28.5 million, or 177%, compared to interest expense of $16.1 million in 1997. The increase in interest expense is primarily due to a full year's interest on Pegasus' $115.0 million senior notes and an increase in bank borrowings and seller notes associated with Pegasus' direct broadcast satellite acquisitions. Interest income was $2.0 million in 1998, an increase of $497,000, or 32%, compared to interest income of $1.5 million in 1997. The increase in interest income is due to greater average cash balances in 1998 compared to 1997. Other expenses were $1.5 million in 1998, an increase of $800,000, or 110%, compared to other expenses of $723,000 in 1997. The increase is primarily due to increased investor relations activities and other board related costs. The gain on sale of the cable systems was $24.7 million in 1998 compared to $4.5 million in 1997. In 1997, Pegasus sold its New Hampshire cable system for $6.9 million resulting in a gain of $4.5 million. In 1998, Pegasus sold its remaining New England cable systems for $30.1 million resulting in a gain of $24.7 million. The provision for income taxes declined by approximately $1.1 million primarily as a result of the amortization of the deferred tax liability that originated from the acquisition of Digital Television Services, Inc. Extraordinary loss from the extinguishment of debt decreased $1.7 million in 1998. In 1997, Pegasus refinanced its existing $130.0 million credit facility with a new $180.0 million credit facility and accordingly, the deferred financing costs associated with the $130.0 million credit facility were written off. No such refinancing occurred in 1998. Preferred stock dividends were $14.8 million in 1998, an increase of $2.6 million, or 21%, compared to $12.2 million in preferred stock dividends in 1997. The increase is attributable to a greater number of shares of Pegasus' preferred stock outstanding in 1998 compared to 1997 as the result of payment of dividends in preferred stock and to the preferred stock being outstanding for a full year. Direct Broadcast Satellite Pegasus' direct broadcast satellite business experienced significant growth in 1998. During 1998, Pegasus acquired approximately 217,000 subscribers and the exclusive DIRECTV distribution rights to approximately 2.4 million households in rural areas of the United States. At December 31, 1998, Pegasus had exclusive DIRECTV distribution rights to 4.6 million households and 435,000 subscribers as compared to 2.2 million households and 132,000 subscribers at December 31, 1997. Pegasus had 4.8 million households and 455,000 subscribers at December 31, 1998, including pending acquisitions. At December 31, 1997, subscribers would have been 344,000, including pending acquisitions. Subscriber penetration increased from 7.1% at December 31, 1997 to 9.4% at December 31, 1998, including pending acquisitions. Total direct broadcast satellite net revenues were $147.1 million in 1998, an increase of $109.0 million, or 286%, compared to direct broadcast satellite net revenues of $38.2 million in 1997. The increase is primarily due to an increase in the average number of subscribers in 1998 compared to 1997. Pegasus' 1998 direct broadcast satellite acquisitions represented $70.4 million, or 65%, of the $109.0 million increase in direct broadcast satellite net revenues. The average monthly revenue per subscriber was $41.63 in 1998 24 compared to $40.72 in 1997. Pro forma direct broadcast satellite net revenues, including pending acquisitions at December 31, 1998, were $197.8 million, an increase of $57.9 million, or 41%, compared to pro forma direct broadcast satellite net revenues of $139.9 million in 1997. Programming, technical, and general and administrative expenses were $102.4 million in 1998, an increase of $76.4 million, or 294%, compared to $26.0 million in 1997. The increase is attributable to significant growth in subscribers and territory in 1998. Pegasus' 1998 direct broadcast satellite acquisitions represented $45.7 million, or 60%, of the $76.4 million increase in programming, technical, and general and administrative expenses. As a percentage of revenue, programming, technical, and general and administrative expenses were 69.3% in 1998 compared to 68.1% in 1997. Subscriber acquisition costs were $45.7 million, an increase of $35.2 million compared to $10.5 million in 1997. In 1997, $4.5 million in subscriber acquisition costs were capitalized as a significant number of subscribers entered into extended programming contracts. Pegasus did not require new subscribers to sign programming contracts in 1998. The total subscriber acquisition costs per gross subscriber addition were $344 in 1998 compared to $281 in 1997. The increase is attributable to increases in sales commissions paid to Pegasus' dealers, promotional programming and advertising. Pegasus expects subscriber acquisition costs per gross subscriber addition to increase in 1999. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $1.2 million in 1998, an increase of $364,000, or 46% compared to $795,000 in 1997. The increase resulted from a larger gain in pro forma location cash flow during 1998 as compared to 1997. Depreciation and amortization was $59.1 million in 1998, an increase of $42.0 million, or 247%, compared to $17.0 million in 1997. The increase in depreciation and amortization is primarily due to an increase in the fixed and intangible asset base as the result of direct broadcast satellite acquisitions that occurred in 1997 and 1998. Broadcast In 1998, Pegasus owned or programmed nine broadcast television stations in six markets. Two new stations were launched during the second half of 1998. Total net broadcast revenues in 1998 were $34.3 million, an increase of $2.4 million, or 7%, compared to net broadcast revenues of $31.9 million in 1997. The increase was primarily attributable to an increase of $1.3 million in net broadcast revenues from stations that began operations in 1997 and a $558,000 increase in barter revenue. Net broadcast revenues from the two stations launched in 1998 were minimal. Programming, technical, and general and administrative expenses were $18.1 million in 1998, an increase of $2.4 million, or 15%, compared to $15.7 million in 1997. The increase is primarily due to a full year's expenses from the two stations launched in 1997 and higher programming costs in 1998. Marketing and selling expenses were $6.0 million in 1998, an increase of $289,000, or 5%, compared to $5.7 million in 1997. The increase in marketing and selling expenses was due to an increase in promotional costs associated with the launch of the new stations and news programs. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $177,000 in 1998, a decrease of $121,000, or 40%, compared to $298,000 in 1997. The decrease resulted from a lower gain in pro forma location cash flow during 1998 as compared to 1997. Depreciation and amortization was $4.6 million in 1998, an increase of $802,000, or 21%, compared to $3.8 million in 1997. The increase in depreciation and amortization is due to an increase in fixed assets associated with the construction of the new stations in 1997 and 1998. Cable Total net cable revenues were $13.8 million in 1998, a decrease of $2.9 million, or 18%, compared to net cable revenues of $16.7 million in 1997. The decrease is primarily due to the sale of Pegasus' remaining New England cable systems effective July 1, 1998. Net cable revenues from the New England Cable systems were 25 $3.3 million in 1998 compared to $6.1 million in 1997. The net revenues derived from Pegasus' Puerto Rico cable system were $10.5 million in 1998 compared to $10.4 million in 1997. The average monthly revenue per subscriber was $33.48 in 1998 compared to $32.46 in 1997. On September 22, 1998, Hurricane Georges swept through Puerto Rico damaging Pegasus' cable system. Prior to the hurricane, Pegasus had approximately 29,000 subscribers. As of December 31, 1998, there were 28,800 subscribers compared to 27,300 at December 31, 1997. Pegasus estimates that it lost approximately $1.4 million in net cable revenues as a result of the hurricane. Programming, technical, and general and administrative expenses were $7.6 million in 1998, a decrease of $870,000, or 10%, compared to $8.4 million in 1997. The decrease is primarily attributable to the sale of Pegasus' New England cable systems. Marketing and selling expenses were $341,000 in 1998, an increase of $74,000, or 27%, compared to $267,000 in 1997. The increase is primarily due to an increase in Puerto Rico's promotional expenses in connection with post-hurricane activities partially offset by the sale of Pegasus' New England cable systems. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $115,000 in 1998, a decrease of $66,000, or 36%, compared to $181,000 in 1997. The decrease resulted from a lower gain in pro forma location cash flow during 1998 as compared to 1997. Depreciation and amortization was $5.0 million in 1998, a decrease of $650,000, or 11%, compared to $5.6 million in 1997. The decrease in depreciation and amortization is primarily due to the sale of Pegasus' New England cable systems. Year ended December 31, 1997 compared to the year ended December 31, 1996 Total net revenues in 1997 were $86.8 million, an increase of $38.9 million, or 81%, compared to total net revenues of $47.9 million in 1996. The increase in total net revenue in 1997 was primarily due to an increase in direct broadcast satellite revenues of $32.3 million attributable to internal growth in Pegasus' direct broadcast satellite subscriber base and through acquisitions. Total operating expenses in 1997 were $93.4 million, an increase of $48.0 million, or 106%, compared to total operating expenses of $45.4 million in 1996. The increase was primarily due to an increase of $43.0 million in operating expenses attributable to the growth in Pegasus' direct broadcast satellite business. Total corporate expenses, including corporate depreciation and amortization, were $3.6 million in 1997, an increase of $1.2 million, or 49%, compared to $2.4 million in 1996. The increase in corporate expenses is due to internal and acquisition related growth. Interest expense was $16.1 million in 1997, an increase of $3.6 million, or 29%, compared to interest expense of $12.5 million in 1996. The increase in interest expense is primarily due to an increase in debt associated with Pegasus' acquisitions. Interest income was $1.5 million in 1997, an increase of $1.3 million, or 562%, compared to interest income of $232,000 in 1996. The increase in interest income is due to greater average cash balances in 1997 compared to 1996. Other expenses were $723,000 in 1997, an increase of $552,000, or 322%, compared to other expenses of $171,000 in 1996. The increase is due to increased board fees, investor relations and other costs associated with operating a public company. In 1997, Pegasus sold its New Hampshire cable system for $6.9 million resulting in a gain of $4.5 million. Extraordinary loss from the extinguishment of debt was $1.7 million in 1997. In 1997, Pegasus refinanced its existing $130.0 million credit facility with a new $180.0 million credit facility and accordingly, the deferred financing costs associated with the $130.0 million credit facility were written off. No such refinancings occurred in 1996. Preferred stock dividends were $12.2 million in 1997 and represent preferred stock dividends payable under Pegasus' preferred stock issued in January 1997. 26 Direct Broadcast Satellite During 1997, Pegasus acquired approximately 79,000 subscribers and the exclusive DIRECTV distribution rights to approximately 1,159,000 households in rural areas of the United States. At December 31, 1997, Pegasus had exclusive DIRECTV distribution rights to 2,168,000 households and 132,000 subscribers as compared to 1,009,000 households and 30,000 subscribers at December 31, 1996. Subscriber penetration increased from 5.3% at December 31, 1996 to 7.1% at December 31, 1997, including pending and completed acquisitions. Total direct broadcast satellite net revenues were $38.3 million in 1997, an increase of $32.4 million, or 559%, compared to direct broadcast satellite net revenues of $5.8 million in 1996. The increase is primarily due to an increase in the actual number of subscribers in 1997 compared to 1996. Pegasus' 1997 direct broadcast satellite acquisitions represented $20.7 million, or 64%, of the $32.4 million increase in direct broadcast satellite net revenues. The average monthly revenue per subscriber was $40.72 in 1997 compared to $37.26 in 1996. Programming, technical, and general and administrative expenses were $26.0 million in 1997, an increase of $21.7 million, or 504%, compared to $4.3 million in 1996. The increase is attributable to significant growth in subscribers and territory in 1997. Pegasus' 1997 direct broadcast satellite acquisitions represented $15.0 million, or 69%, of the $21.7 million increase in programming, technical and general and administrative expenses. As a percentage of revenue, programming, technical, and general and administrative expenses were 68.1% in 1997 compared to 74.0% in 1996. Subscriber acquisition costs were $10.5 million in 1997, an increase of $8.6 million compared to $1.9 million in 1996. In 1997 and 1996, $4.5 million and $1.3 million, respectively, in subscriber acquisition costs were capitalized, as the related subscribers entered into extended programming contracts. Total subscriber acquisition costs per gross subscriber addition were $281 in 1997 compared to $211 in 1996. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $795,000 in 1997, an increase of $649,000, or 445%, compared to $146,000 in 1996. The increase resulted from a larger gain in pro forma location cash flow during 1997 as compared to 1996. Depreciation and amortization was $17.0 million in 1997, an increase of $15.2 million, or 844%, compared to $1.8 million in 1996. The increase in depreciation and amortization is primarily due to an increase in the fixed and intangible asset base as the result of direct broadcast satellite acquisitions that occurred in 1996 and 1997. Broadcast In 1997, Pegasus owned or programmed seven broadcast television stations in six markets. Two stations were launched during the second half of 1997. Total net broadcast revenues in 1997 were $32.0 million, an increase of $3.4 million, or 12%, compared to net broadcast revenues of $28.6 million in 1996. The increase was primarily attributable to an increase of $1.9 million in net broadcast revenues from ratings increases that Pegasus was able to convert into higher revenues and a $1.2 million increase in barter revenue. Net broadcast revenues from the two stations launched in 1997 were $289,000. Programming, technical, and general and administrative expenses were $15.7 million in 1997, an increase of $1.8 million, or 13%, compared to $13.9 million in 1996. The increase is primarily due to an increase in barter programming expense of $1.2 million and start-up costs associated with the launch of two new stations in 1997. Marketing and selling expenses were $5.7 million in 1997, an increase of $853,000, or 18%, compared to $4.8 million in 1996. The increase in marketing and selling expenses was due an increase in promotional costs associated with the launch of the new stations. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $298,000 in 1997, a decrease of $393,000, or 57%, compared to $691,000 in 1996. The decrease resulted from a lower gain in pro forma location cash flow during 1997 as compared to 1996. 27 Depreciation and amortization was $3.8 million in 1997, a decrease of $287,000, or 7%, compared to $4.1 million in 1996. Cable Total net cable revenues were $16.7 million in 1997, an increase of $3.2 million, or 24%, compared to net cable revenues of $13.5 million in 1996. The increase is primarily due to a full year of operations of a Puerto Rico cable system acquired in August 1996. This increase was partially offset by the sale of Pegasus' New Hampshire cable system in 1997. The average monthly revenue per subscriber was $32.46 in 1997 compared to $32.45 in 1996. Programming, technical, and general and administrative expenses were $8.4 million in 1997, an increase of $1.3 million, or 19%, compared to $7.1 million in 1996. The increase is primarily attributable to a full year of operations of a Puerto Rico cable system acquired in August 1996. Marketing and selling expenses were $267,000 in 1997, an increase of $177,000, or 197%, compared to $90,000 in 1996. The increase is primarily due to an increase in Puerto Rico's promotional expenses. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $181,000 in 1997, an increase of $33,000, or 22%, compared to $148,000 in 1996. The increase resulted from a larger gain in pro forma location cash flow during 1997 as compared to 1996. Depreciation and amortization was $5.6 million in 1997, an increase of $398,000, or 8%, compared to $5.2 million in 1996. The increase in depreciation and amortization is primarily due an increase in the fixed asset base as the result of a Puerto Rico cable system acquired in August 1996. Liquidity and Capital Resources Pegasus' primary sources of liquidity have been the net cash provided by its direct broadcast satellite, broadcast and cable operations, credit available under its credit facilities and proceeds from public and private offerings. Pegasus' principal use of its cash has been to fund acquisitions, to meet debt service obligations, to fund direct broadcast satellite subscriber acquisition costs and to fund investment in its broadcast and cable technical facilities. Pre-marketing cash flow increased by approximately $30.1 million, or 98%, for the year ended December 31, 1998, as compared to the same period in 1997. Pre-marketing cash flow increased as a result of: o a $32.5 million, or 266%, increase in direct broadcast satellite pre-marketing cash flow of which $3.8 million, or 12%, was due to an increase in same territory pre-marketing cash flow and $28.7 million or 88% was attributable to territories acquired in 1997 and 1998; o a $249,000, or 2%, decrease in broadcast location cash flow as the net result of a $121,000, or 1%, decrease in same station location cash flow and a $128,000 decrease attributable to the four new stations launched in August 1997, October 1997, July 1998 and November 1998; and o a $2.1 million, or 27%, decrease in cable location cash flow. This decrease was the net result of a $610,000, or 13%, decrease in Puerto Rico same system location cash flow, a $67,000 reduction due to the sale of Pegasus' New Hampshire cable system effective January 31, 1997 and a $1.4 million reduction due to the sale of Pegasus' remaining New England cable systems effective July 1, 1998. During the year ended December 31, 1998, proceeds from the sale of Pegasus' remaining New England cable systems amounted to $30.1 million, which together with $10.5 million of cash on hand at the beginning of the year, $3.3 million of cash acquired from acquisitions and $133.8 million of net cash provided by Pegasus' financing activities, was used to fund operating activities of approximately $22.0 million and other investing activities of $134.8 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 direct broadcast satellite assets, excluding Digital Television Services, Inc., from 26 independent DIRECTV providers during for approximately $109.3 million; 28 o approximately $6.8 million of broadcast expenditures for broadcast television transmitter, tower and facility constructions and upgrades. Pegasus commenced the programming of four new broadcast stations over the last two years, WPME in August 1997, WGFL in October 1997, WFXU in July 1998 and WSWB in November 1998 and plans to commence programming of an additional station by the year 2000; o direct broadcast satellite facility upgrades of approximately $1.2 million; o the expansion and enhancements of the Puerto Rico cable system amounting to approximately $2.0 million; o payments of programming rights amounting to $2.6 million; o capitalized costs relating to Pegasus' financings of $4.4 million; o capitalized costs relating to the acquisition of Digital Television Services, Inc. of $4.3 million; and o maintenance and other capital expenditures and intangibles totaling approximately $4.2 million. Financing activities consisted of: o the $100.0 million 9 3/4% senior notes offering resulting in proceeds to Pegasus of approximately $96.8 million; o net borrowings on bank credit facilities totaling $44.4 million; o the repayment of approximately $15.0 million of long-term debt, primarily seller's notes and capital leases; and o net restricted cash draws of approximately $7.5 million for interest payments. As of December 31, 1998, cash on hand amounted to $54.5 million plus restricted cash of $21.5 million. Pegasus had $27.5 million drawn and standby letters of credit amounting to $49.6 million under the $180.0 million Pegasus Media & Communications credit facility. Additionally, there was $46.4 million drawn and standby letters of credit of $18.5 million outstanding under the $90.0 million Digital Television Services 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 direct broadcast satellite pre-marketing cash flow. Of this amount, $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; o a $649,000, or 6%, increase in broadcast location cash flow. The increase was the net result of a $1.4 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 in August 1997 and October 1997; and o a $1.7 million, or 27%, increase in cable location cash flow. This increase 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 in August, 1996, and a $703,000 reduction due to the sale of Pegasus' 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. This amount, 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 Pegasus' financing activities was used to fund other investing activities totaling $149.1 million. Financing activities consisted of: o raising $95.8 million in net proceeds from Pegasus' preferred stock offering in January 1997 and $111.0 million in net proceeds from Pegasus' offering of senior notes in October 1997, o borrowing $94.2 million under a former bank credit facility, 29 o repayment of all $94.2 million of that indebtedness and $29.6 million of indebtedness under a still earlier credit facility, o net repayment of approximately $657,000 of other long-term debt, o designating $1.2 million as restricted cash to collateralize a letter of credit, and o 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 direct broadcast satellite assets from 25 independent DIRECTV providers during 1997, for approximately $133.9 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. During the year ended December 31, 1996, net cash provided by operating activities was approximately $3.1 million. This amount, together with $12.0 million of cash on hand, $9.9 million of restricted cash and $74.7 million of net cash from Pegasus' financing activities was used to fund investing activities totaling $81.2 million. Investment activities consisted of: o the Portland, Maine and Tallahassee, Florida broadcast acquisitions for approximately $16.6 million; o the San German, Puerto Rico cable acquisition for approximately $26.0 million; o the acquisition of direct broadcast satellite assets from two independent DIRECTV providers during the fourth 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 a 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. Financings Pegasus Media & Communications, Inc. 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: o repay approximately $38.6 million in loans and other obligations, o repurchase $25.6 million of notes for approximately $13.0 million, which resulted in a $10.2 million extraordinary gain net of expenses, o make a $12.5 million distribution to Pegasus Communications Holdings, Inc., o escrow $9.7 million for the purpose of paying interest on the notes, o pay $3.3 million in fees and expenses, and o fund $8.8 million of the cash portion of the purchase price of the WPXT acquisition. 30 During July 1995, Pegasus Media & Communications 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 Pegasus Media & Communications credit facility. In 1996, Pegasus Media & Communications 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 Pegasus Media & Communications credit facility. In 1996, Digital Television Services, Inc. entered into a credit facility which provides for borrowings up to $90.0 million. Approximately $50.4 million was outstanding as of March 1, 1999. The credit facility expires in July 2003. On October 8, 1996, Pegasus completed its initial public offering in which it sold 3.0 million shares of its Class A common stock to the public at a price of $14.00 per share resulting in net proceeds to Pegasus of approximately $38.1 million. Pegasus applied the net proceeds from the initial public offering as follows: o $29.9 million for the payment of the cash portion of the purchase price of direct broadcast satellite assets from two independent providers of DIRECTV services during the fourth quarter of 1996, and o other payments in connection with certain other acquisitions and the repayment of indebtedness. On January 27, 1997, Pegasus completed an offering in which it sold 100,000 units, consisting of 100,000 shares of preferred stock and 100,000 warrants to purchase 193,600 shares of Class A common stock. This offering resulted in net proceeds to Pegasus of $95.8 million. Pegasus applied the net proceeds from the offering as follows: o $30.1 million to the repayment of all outstanding indebtedness under the 1996 Pegasus Media & Communications credit facility and expenses related to it, and o $56.5 million for the payment of the cash portion of the purchase price in the acquisition of direct broadcast satellite assets from various independent DIRECTV providers. The remaining net proceeds were used for working capital, general corporate purposes and to finance other acquisitions. 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 Pegasus Satellite Holdings 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 Pegasus Satellite Holdings 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 $1.7 million on the refinancing transaction. On October 21, 1997, Pegasus completed an offering in which it sold $115.0 million of its 9.625% senior notes, resulting in net proceeds to Pegasus of approximately $111.0 million. Pegasus applied the net proceeds from the offering as follows: o $94.2 million to the repayment of all outstanding indebtedness under the Pegasus Satellite Holdings credit facility, and o $16.8 million for the payment of the cash portion of the purchase price for the acquisition of direct broadcast satellite assets from various independent DIRECTV providers. On December 10, 1997, Pegasus Media & Communications 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 $35.0 million was outstanding as of March 1, 1999. The credit facility expires in December 2003. On November 30, 1998, Pegasus completed an offering of $100.0 million 9 3/4% senior notes due 2006, resulting in net proceeds to Pegasus of approximately $96.8 million. Pegasus applied $64.0 million of the net proceeds to pay down indebtedness under the Pegasus Media & Communications credit facility and $32.8 million to the cash portion of certain completed direct broadcast satellite acquisitions. 31 Pegasus believes that it has adequate resources to meet its working capital, maintenance capital expenditure and debt service obligations for at least the next twelve months. However, Pegasus 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 contain numerous covenants that, among other things: o restrict our ability to pay dividends and make certain other payments and investments; o borrow additional funds; o create liens; and o 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. See Risk Factors. Pegasus closely monitors conditions in the capital markets to identify opportunities for the effective use of financial leverage. In financing its future expansion and acquisition requirements, Pegasus would expect to avail itself of such opportunities and thereby increase its indebtedness. This could result in increased debt service requirements. We cannot assure you that such debt financing can be completed on terms satisfactory to Pegasus or at all. Pegasus may also issue additional equity to fund its future expansion and acquisition requirements. Year 2000 The 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. Pegasus has reviewed all of its systems as to the year 2000 issue. Pegasus' primary focus has been on its own internal systems. Pegasus 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 Pegasus to address and may have a material adverse impact on Pegasus' financial condition and its results of operations. Pegasus relies on outside vendors for the operation of its direct broadcast satellite control and billing systems, including DIRECTV, National Rural Telecommunications and their respective vendors. Pegasus 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, Pegasus 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 Pegasus' systems may be affected by the failure of others to remediate their own year 2000 issues. To date, however, Pegasus 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, we cannot assure you that these 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 Pegasus' financial condition and its results of operations. 32 Because Pegasus' year 2000 conversion is expected to be completed prior to any potential disruption to Pegasus' business, Pegasus has not yet completed the development of a comprehensive year 2000-specific contingency plan. However, as part of its year 2000 contingency planning effort, Pegasus examines information received from external sources for date integrity before bringing it into its internal systems. If Pegasus 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, it 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 December 31, 1998, relating to the year 2000 issue are expected to be approximately $200,000. 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 the terms of Pegasus' Series A preferred stock. Seasonality Pegasus' revenues vary throughout the year. As is typical in the broadcast television industry, Pegasus' first quarter generally produces the lowest revenues for the year and the fourth quarter generally produces the highest revenues for the year. Pegasus' 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 Pegasus believes that inflation has not been a material factor affecting its business. In general, Pegasus' revenues and expenses are impacted to the same extent by inflation. A majority of Pegasus' indebtedness bears interest at a fixed rate. 33 The Company In this section we give a brief overview of our business, focusing particularly on our direct broadcast satellite 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." Information in this section includes the pending acquisitions described below. Pegasus Pegasus Communications Corporation is: o The largest independent distributor of DIRECTV(R) with 464,000 subscribers at January 31, 1999. We have the exclusive right to distribute DIRECTV digital broadcast satellite services to over 4.8 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 network 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. Direct Broadcast Satellite Television The introduction of direct broadcast satellite, or direct broadcast satellite, receivers is widely regarded as the most successful introduction of a consumer electronics product in U.S. history, surpassing the introduction of color televisions, videocasette recorders and compact disc players. According to a recent Paul Kagan study, in 1998 direct broadcast satellite was the fastest growing multiple-channel television service in the country, capturing almost 2 out of every 3 new subscribers to those services. There are currently three national direct broadcast satellite programming services: DIRECTV, Primestar and EchoStar. At January 31, 1999, there were 8.9 million direct broadcast satellite subscribers in the United States: o 4.6 million DIRECTV subscribers, including approximately 3.6 million subscribers served by DIRECTV itself, 464,000 subscribers served by Pegasus and 500,000 subscribers served by the approximately 100 other DIRECTV rural affiliates; o 2.3 million Primestar subscribers; o 2.0 million EchoStar subscribers; All three direct broadcast satellite 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 require a satellite dish of approximately 18 inches in diameter that may be installed by the consumer without professional assistance. Primestar 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 direct broadcast satellite subscribers nationally are currently 51%, 26% and 23%, respectively. The Carmel Group has estimated that the number of direct broadcast satellite subscribers will grow to 21.1 million by 2003. As described below under Recent Direct Broadcast Satellite Developments, DIRECTV has announced an agreement to acquire Primestar's business. DIRECTV DIRECTV is a service of Hughes Electronics. After completing its announced acquisition of United States Satellite Broadcasting and Primestar described below, DIRECTV will offer in excess of 370 entertainment channels of near laser disc quality video and compact disc 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, 34 including the exclusive "NFL Sunday Ticket," have enabled DIRECTV to capture a majority market share of existing direct broadcast satellite subscribers and will continue to drive strong subscriber growth for DIRECTV services in the future. DIRECTV added 1.2 million new subscribers in 1998, which was a greater increase than any other direct broadcast satellite service and accounted for approximately 48% of all new direct broadcast satellite subscribers in that year. DIRECTV Rural Affiliates Prior to the launch of DIRECTV's programming service, Hughes entered into an agreement with the National Rural Telecommunications Cooperative authorizing the cooperative to offer its members and associates the opportunity to acquire exclusive rights to distribute DIRECTV programming services in rural areas of the United States. National Rural Telecommunications 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 cooperative members and associates acquired such exclusive rights, thereby becoming DIRECTV rural affiliates. The DIRECTV exclusive territories acquired by DIRECTV's rural affiliates include approximately 9.0 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 4.8 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. Pegasus Rural Focus and Strategy We believe that direct broadcast satellite and other digital satellite services will achieve disproportionately greater consumer acceptance in rural areas than in metropolitan areas. Direct broadcast satellite 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 distributor of direct broadcast satellite and other digital satellite services for the approximately 76.0 million people, 30.0 million homes and 3.0 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 464,000 DIRECTV subscribers, which represents a penetration of approximately 10%. We estimate that we have a 55% share of all direct broadcast satellite subscribers in our DIRECTV exclusive territories and that the remaining direct broadcast satellite 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 network of independent retailers. 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. We base this belief on our position as the largest DIRECTV rural affiliate, our access to the capital markets and our strong reputation in the direct broadcast satellite industry. We will continue to pursue our strategy of acquiring other DIRECTV rural affiliates. o Continue to Develop the Pegasus Retail Network: We have established the Pegasus network of independent retailers 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. 35 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. These services, like direct broadcast satellite, should achieve disproportionate success in rural areas. However, because there are limited sales and distribution channels in rural areas, new digital satellite service providers will confront the same difficulties that direct broadcast satellite 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 reaching a household by a cable or other wireline distribution 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 76.0 million people, 30.0 million households and 3.0 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 direct broadcast satellite and other digital satellite services. Approximately 65% of all U.S. direct broadcast satellite 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 networks of independent retailers serving rural areas, such as have been established by EchoStar and by Pegasus. Consolidation of DIRECTV Rural Affiliates When DIRECTV was launched in 1994, small DIRECTV rural affiliates held approximately 95% of the DIRECTV rural affiliate exclusive territories. In 1996, Pegasus first acquired another DIRECTV rural affiliate, thereby beginning a process of consolidation that has significantly changed the composition of DIRECTV's rural affiliates. Since 1996, Pegasus, its subsidiary, Digital Television Services, Inc., or Golden Sky Systems has acquired approximately 150 DIRECTV rural affiliates. 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. 36 Upon completion of our pending acquisitions, we will have the exclusive right to distribute DIRECTV in the following DIRECTV exclusive territories:
Homes Total Not Homes Exclusive Homes Passed Passed Penetration DIRECTV in by by Total -------------------------------- Territory Territory Cable Cable Subscribers Total Uncabled Cabled - ---------------------------------------------------------------------------------------------------------- Northeast 751,745 182,245 569,500 65,189 8.7% 30.0% 1.9% Central 1,163,510 287,306 876,204 105,523 9.1% 26.8% 3.2% Southeast 993,379 343,805 649,574 99,476 10.0% 24.1% 2.5% Midwest 612,579 183,098 429,481 65,930 10.8% 30.3% 2.4% Central Plains 375,410 73,516 301,894 29,174 7.8% 29.0% 2.6% Texas 465,835 150,987 314,848 50,448 10.8% 25.6% 3.8% Southwest 322,438 57,028 265,410 32,442 10.1% 36.0% 4.5% Northwest 143,754 56,726 87,028 15,487 10.8% 21.9% 3.5% Total 4,828,650 1,334,711 3,493,939 463,669 9.6% 27.2% 2.9% - ----------------------------------------------------------------------------------------------------------
Total homes in territory, homes not passed by cable, and homes 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 this network in 1995 in order to distribute DIRECTV in our original DIRECTV exclusive territories in New England. We have expanded this network into 36 states as a result of our acquisitions of DIRECTV rural affiliates since 1996. 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 from other DIRECTV rural affiliates. o Assist DIRECTV in improving DIRECTV's direct broadcast satellite market share in rural areas outside of the DIRECTV exclusive territories held by DIRECTV rural affiliates. o Offer distributors 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. Recent Direct Broadcast Satellite Developments Three important events have occurred recently in the direct broadcast satellite industry. DIRECTV/Hughes Acquisition of United States Satellite Broadcasting Company, Inc. In December 1998, Hughes Electronics, the parent company of DIRECTV, announced that it had reached an agreement with United States Satellite Broadcasting to acquire its 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 United States Satellite Broadcasting 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 FCC and other conditions. We are still evaluating the impact of this transaction on our business. 37 DIRECTV/ Hughes Acquisition of Primestar. In January 1999, Hughes announced that it reached agreement with Primestar to acquire Primestar's direct broadcast satellite business and rights to acquire certain other direct broadcast satellite satellite assets in two transactions valued at approximately $1.8 billion. DIRECTV has stated that it intends to operate Primestar's business for approximately two years, during which time it will attempt to transition Primestar's approximately 2.3 million subscribers to the DIRECTV service. DIRECTV has also said it expects that its acquisition of the other Primestar direct broadcast satellite assets along with its pending acquisition of assets of United States Satellite will enable DIRECTV to offer more than 370 entertainment channels, almost twice its current channel capacity. If the Primestar and United States Satellite transactions are consummated, we expect that DIRECTV and EchoStar will be the only distributors of direct broadcast satellite services. The Primestar transactions are subject to approval of the FCC 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 targeting Primestar customers in our territories with promotions that we hope will encourage them to convert to DIRECTV. EchoStar is doing the same thing. It is not possible to predict with certainty how well these efforts will succeed. We are continuing to evaluate the effects of the Primestar transactions on our business. EchoStar-News Corporation-MCI Settlement. In November 1998, EchoStar, News Corporation, MCI WorldCom Inc. and certain other parties reached an agreement for the transfer to EchoStar of a license to operate a direct broadcast satellite business at the 110o west longitude orbital location and certain other direct broadcast satellite assets in exchange for shares of EchoStar. EchoStar already operates a direct broadcast satellite 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 FCC. EchoStar plans to launch satellites for operation at the 110o west longitude orbital slot in 1999. While we believe that this transacation, if completed, will help increase the overall competitive position of direct broadcast satellite relative to cable, it could also increase EchoStar's competitive position relative to DIRECTV. See Risk Factors -- Other Risks of Our Business -- We Face Significant Competition: the Competitive Landscape Changes Constantly. Pegasus' Cable and Broadcast 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 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 broadcast focuses on developing strong local sales organizations, improving our programming, promotion and technical facilities, and maintaining careful control over operating costs. 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. 38 Recent Pegasus Developments Completed Direct Broadcast Satellite Acquisitions During the first quarter of 1999, we made five acquisitions from independent DIRECTV providers of rights to provide DIRECTV programming in rural areas of Indiana, Colorado, Illinois, Minnesota and Texas. These territories include, in the aggregate, approximately 155,000 television households, including approximately 7,700 seasonal residences and 15,500 business locations, and approximately 10,000 subscribers. The aggregate consideration paid for these acquisitions was approximately $21.5 million in cash and $1.3 million in promissory notes. Pending Direct Broadcast Satellite 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 115,000, television households, including approximately 5,800 seasonal residences and 11,600 business locations, and approximately 9,400 subscribers. In the aggregate, the consideration for the pending direct broadcast satellite acquisitions is $14.4 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 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 half 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 the Fox Broadcasting Company formally expired on January 30, 1999, except the affiliation agreement for television station WTLH, which is scheduled to expire on December 31, 2000. Except in the case of WTLH, we currently broadcast Fox programming under arrangements between Pegasus and Fox which have generally conformed in practice to the pre-existing affiliation agreements. 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 subject to termination by Fox or Pegasus upon 90 days prior written notice to the other party. Negotiations with Fox are continuing, and we believe that we will enter into new affiliation agreements on satisfactory terms with no disruption in programming. If we are mistaken in this belief, our broadcast operations could be materially and adversely affected by the loss of the ability to carry Fox programming. Legal and Other Proceedings Federal Communications Commission 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 39 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. Direct Broadcast Satellite Late Fee Litigation In November 1998, we were sued in Indiana for allegedly charging direct broadcast satellite 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 Pegasus. Similar suits have been brought against DIRECTV and various cable operators in other parts of the United States. 40 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. principally limited partnerships that owned and operated Pegasus' broadcast and cable operations, were transferred to Pegasus Media & Communication's subsidiaries, entities controlled by Mr. Pagon served as the general partners of these partnerships and conducted the business of Pegasus. 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 Pegasus Media & Communication's affiliates and predecessors in interest since 1990. Mr. Verdecchio has been a director of Pegasus and Pegasus Media & Communications since December 18, 1997. Mr. Verdecchio is a certified public accountant and has over 13 years of experience in the media and communications industry. Mr. Verdecchio is serving as a director of Pegasus as Marshall W. Pagon's designee to the board of directors. 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 Pegasus as its outside legal counsel in connection with various matters. Howard E. Verlin is a Vice President and Assistant Secretary of Pegasus and is responsible for operating activities of Pegasus' direct broadcast satellite and cable subsidiaries, including supervision of their general managers. Mr. Verlin has served similar functions with respect to Pegasus' predecessors in interest and affiliates since 1987 and has over 15 years of experience in the media and communications industry. 41 Nicholas A. Pagon has served as a Vice President of Pegasus and Chief Executive Officer of its broadcast subsidiaries since November 1998 and is responsible for all broadcast television activities of Pegasus. From January to November 1998, Mr. Pagon served as President of Pegasus Development Corporation, a subsidiary of Pegasus. 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 Pegasus 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 Pegasus as Whitney's designee to the board of directors. Harry F. Hopper III has been a director of Pegasus 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 is a Managing Director of Columbia Capital Corporation which he joined in January 1994. Columbia Capital is a venture capital firm with an investment focus on communications services, and information and communication technologies. Mr. Hopper is serving as a Director of Pegasus 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 Pegasus 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 Pegasus 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 Pegasus 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 Pegasus Media & Communications 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., a National Rural Telecommunications 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. 42 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 Pegasus' last three fiscal years concerning the compensation paid to the Chief Executive Officer and to each of Pegasus' most highly compensated officers. The most highly compensated officers are those whose total annual salary and bonus for the fiscal year ended December 31, 1998 exceeded $100,000. Prior to the consummation of Pegasus' initial public offering of common stock in October of 1996, Pegasus' executive officers never received any salary or bonus compensation from Pegasus. The salary amounts presented below under "Annual Compensation" for January 1, 1996 through October 8, 1996 were paid by an affiliate of Pegasus. After October 8, 1996, Pegasus' executive officers' salaries were paid by Pegasus. There are no employment agreements between Pegasus and its executive officers. Upon Pegasus' 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. This information is set forth under the column "Restricted Stock" below. Unless otherwise indicated, the amounts listed under the column "All Other Compensation" represent Pegasus' contributions under its 401(k) plans.
Long Term Compensation Awards Annual -------------------------------------------- Compensation Restricted Securities ------------------------ Stock Underlying All Other Name Principal Position Year Salary Award Options Compensation ---- ------------------ Marshall W. Pagon ............ President and 1998 $ 200,000 $ 77,161 85,000 $ 67,274(1) Chief Executive 1997 $ 200,000 $100,558 85,000 $ 63,228(1) Officer 1996 $ 150,000 -- -- $ 62,253(1) Robert N. Verdecchio ......... Senior Vice 1998 $ 150,000 $ 38,580 40,000 $ 12,720 President and 1997 $ 150,000 $ 50,279 40,000 $ 9,500 Chief Financial 1996 $ 125,000 $555,940 -- $ 6,875 Officer Ted S. Lodge ................. Senior Vice 1998 $ 150,000 $ 30,864 60,000 $ 9,263 President, Chief 1997 $ 150,000 $ 40,223 40,000 $ 1,800 Administrative 1996 $ 75,000(2) -- -- -- Officer and General Counsel Howard E. Verlin ............. Vice President, 1998 $ 135,000 $110,125 40,000 $ 5,480 Satellite and 1997 $ 135,000 $100,558 40,000 $ 1,685 Cable Television 1996 $ 100,000 -- -- $ 1,100
- ------------ (1) 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 Pegasus in connection with the split dollar agreement entered into by Pegasus with the trustees of insurance trust established by Mr. Pagon. See Certain Relationships and Related Transactions -- Split Dollar Agreement. The remainder represents Pegasus' contributions under its 401(k) plans. (2) Mr. Lodge became an employee of Pegasus on July 1, 1996. 43 Pegasus granted options to employees to purchase a total of 336,800 shares during 1998. The amounts set forth below in the columns entitled "5%" and "10%" 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. Option Grants in 1998 Potential Realizable Value
% of Total Options Granted to Exercise Expira- Options Employees in Price tion Name Granted Fiscal Year Per Share Date 5% 10% ---- --------- -------------- ----------- --------- ------------- ------------- 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
The table below shows aggregated stock option exercises by the named executive officers in 1998, and 1998 year-end values. In-the-money options, which are listed in the last two columns, are those in which 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. Aggregated Option Exercises in 1998 and 1998 Year-End Option Values
Number of Value of Unexercised Unexercised Options at Fiscal In-the-Money Options Shares Year End at Fiscal Year End Acquired ----------------------------- ---------------------------- on Value Un- Un- Name Exercise Realized Exercisable exercisable Exercisable exercisable ---- ---------- ---------- ------------- ------------- ------------- ------------ 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
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 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, the board of directors generally made decisions concerning executive compensation of executive officers. The board 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. 44 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 we automaticaly adjust location cash flow for acquisitions. As a result, 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 Pegasus' financial results for the comparable period of the prior year. Pegasus 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. The basis of this belief is that 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 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. Pegasus believes that these differences result in a lack of comparability between the EBITDA of companies that utilize conventional stock option programs and Pegasus' EBITDA. The table below lists the specific maximum components of the restricted stock plan and the 401(k) plans in terms of a $1 increase in annual location cash flow. The table does not list excess and discretionary awards under the restricted stock plan or matching contributions under the 401(k) plans.
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 749 full-time and 130 part-time employees. We also had 8 general managers, 37 department managers and 9 corporate managers as of this date. 45 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 Pegasus. 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, initiative, problem solving 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 Pegasus, 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 Pegasus employees are eligible to receive non-qualified stock options and incentive stock options under the stock option plan. No employee, however, 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 Pegasus 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, as of December 18, 1998 each full time employee of Pegasus who is not an executive officer is eligible to receive a grant of an option to purchase 100 shares of Class A common stock under the stock option plan. 46 401(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 Pegasus' Puerto Rico subsidiaries. Substantially all Pegasus employees who, as of the enrollment date under the 401(k) plans, have completed at least one year of service with Pegasus 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 Pegasus 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 Pegasus 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 Pegasus, in its discretion, may contribute an amount that equals up to 10% of the annual increase in company-wide location cash flow. These discretionary contributions, if any, are allocated to eligible participants' accounts based on each participant's salary for the plan year. o Pegasus 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. Pegasus makes discretionary contributions and matches of employee salary deferral contributions and rollover contributions in the form of Class A common stock, or in cash used to purchase Class A common stock. Pegasus has authorized and reserved for issuance up to 205,000 shares of Class A common stock in connection with the 401(k) plans. Pegasus' 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 Pegasus contributions, if any, vest 34% after two years of service with Pegasus, 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. 47 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 Pegasus 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 Pegasus. 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 Pegasus 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) .............. 6,769,840(3)(4)(5) 42.4 -- Robert N. Verdecchio ...... 291,296(5)(6)(7) 2.6 10,000 Howard E. Verlin .......... 73,243(6)(7) * -- Ted S. Lodge .............. 63,849(8) * -- James J. McEntee, III ..... 8,000(9) * -- Mary C. Metzger ........... 8,000(9) * -- Donald W. Weber ........... 295,920(10) 2.6 100,000 Harron Communica- tions Corp. .............. 852,110 7.5 -- Columbia Capital Cor- poration(11) ............. 6,769,840(3)(4) 42.4 285,884 Columbia DBS, Inc.(11) ................. 6,769,840(3)(4) 42.4 18,316 Mark R. Warner(11) ........ 501,892 4.4 200,000 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 Part- ners, L.P.(12) ........... 6,769,840(3)(4) 42.4 -- Fleet Entities(13) ........ 6,769,840(3)(4) 42.4 -- Riordon B. Smith (14)...... 6,769,840(3)(4) 42.4 -- Michael C. Brooks (15)..... 6,769,840(3)(4) 42.4 -- Harry F. Hopper III (11) ..................... 237,998 2.1 50,000 William P. Phoenix ........ -- -- -- Richard D. Summe(16) 212,770 1.9 50,000 T. Rowe Price Associ- ates, Inc.(17) ........... 750,200 6.6 -- PAR Capital Manage- ment, Inc. and related entities(18) ..... 650,200 5.7 -- Directors and Execu- tive Officers as a Group (12 persons) (19) ..................... 7,651,374 47.4 160,000
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) .............. 6,465,640 34.1 4,581,900(4) 100.0 Robert N. Verdecchio ...... 281,296 2.0 -- -- Howard E. Verlin .......... 73,243 * -- -- Ted S. Lodge .............. 63,849 * -- -- James J. McEntee, III ..... 8,000 * -- -- Mary C. Metzger ........... 8,000 * -- -- Donald W. Weber ........... 195,920 1.4 -- -- Harron Communica- tions Corp. .............. 852,110 6.0 -- -- Columbia Capital Cor- poration(11) ............. 6,465,640 34.1 4,581,900(4) 100.0 Columbia DBS, Inc.(11) ................. 6,465,640 34.1 4,581,900(4) 100.0 Mark R. Warner(11) ........ 301,892 2.1 -- -- 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 Part- ners, L.P.(12) ........... 6,465,640 34.1 4,581,900(4) 100.0 Fleet Entities(13) ........ 6,465,640 34.1 4,581,900(4) 100.0 Riordon B. Smith (14)...... 6,465,640 34.1 4,581,900(4) 100.0 Michael C. Brooks (15)..... 6,465,640 34.1 4,581,900(4) 100.0 Harry F. Hopper III (11) ..................... 187,998 1.3 -- -- William P. Phoenix ........ -- -- -- Richard D. Summe(16) 162,770 1.1 -- -- T. Rowe Price Associ- ates, Inc.(17) ........... 750,200 5.2 -- -- PAR Capital Manage- ment, Inc. and related entities(18) ..... 650,200 4.5 -- -- Directors and Execu- tive Officers as a Group (12 persons) (19) ..................... 7,187,174 37.6 4,581,900 100.0%
48 - ------------ * 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 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 59,500 shares of Class A common stock which are issuable upon the exercise of the vested portion of outstanding stock options, and 17,000 shares of Class A common stock which are issuable upon the exercise of the portion of an outstanding stock option which vests on March 21, 1999. (4) Mr. Pagon, Pegasus, Pegasus Capital, L.P., the parent, Pegasus Northwest Officer Corp, Pegasus Scranton Offer Corp, Columbia Capital Corporation and Columbia DBS, Inc., which are discussed in note 11 below, and Whitney Equity Partners, L.P. 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 6,769,840 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 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 Pegasus' 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 Pegasus, 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 29,090 shares of Class A common stock which are issuable upon the exercises of the vested portion of outstanding stock options, and 9,090 shares of Class A common stock which are issuable upon the exercise of an outstanding stock option which vests on March 21, 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, 39,090 shares of Class A common stock which are issuable upon the exercise of the vested portion of outstanding stock options and 9,090 shares of Class A common stock which are issuable upon the exercise of the portion of an outstanding stock option which vests on March 21, 1999. 49 (9) Includes 5,000 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 an outstanding stock option which vests on March 21, 1999. (10) Includes 8,385 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 an outstanding stock option which vests on March 21, 1999. Mr. Weber is a director of the Pegasus. (11) 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, Kington and Hopper are principals and/or substantial owners of Columbia Capital Corporation, a former stockholder of Digital Television Services, Inc., a subsidiary of Pegasus, and/or of Columbia DBS, Inc. 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 Partners VI, 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 Partners III, L.P. and a partner of Kennedy Plaza Partners. 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 Partners III, L.P. Mr. Smith disclaims beneficial ownership for all shares held directly by Fleet Venture Resources and all shares held directly by Fleet Equity Partners, Chisholm Partners III, L.P. and Kennedy Plaza Partners, 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 Equity Partners, L.P. 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 Equity Partners, L.P. 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) Mr. Summe received shares of Class A common stock of Pegasus in 1997, as consideration for the acquisition of a company by Pegasus in which Mr. Summe had an ownership interest. (17) These shares are owned by various individual and institutional investors which T. Rowe Price Associates, Inc. serves as investment adviser. Price Associates has sole investment power with respect to all of these shares and sole voting power with respect to 57,400 shares. Price Associates disclaims beneficial of these shares. The address of Price Associates is 100 East Pratt Street, Baltimore, Maryland 21202. (18) PAR Investment Partners, L.P. has sole voting and investment power with respect to all of these shares. The sole general partner of PAR Investment Partners, L.P. is PAR Group, L.P., whole sole general partner is PAR Capital Management, Inc. As a consequence, each of PAR Group, L.P. and PAR Capital Management, Inc. may be deemed to be the beneficial owner of the shares held by PAR Investment Partners, L.P. with sole voting and investment power with respect to such shares. The address of PAR Investment Partners, L.P. is One Financial Center, Suite 1600, Boston, Massachusetts 02111. (19) See the notes above for information about the holdings of the directors and named executive officers. 50 Certain Relationships and Related Transactions Split Dollar Agreement In December 1996, Pegasus entered into a split dollar agreement with the trustees of an insurance trust established by Marshall W. Pagon. Under the split dollar agreement, Pegasus 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 Pegasus 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 Pegasus amounted to $53,728 in 1996, $53,728 in 1997 and $53,728 in 1998. ViewStar Direct Broadcast Satellite Acquisition Effective October 31, 1997, Pegasus 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 Pegasus, 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 Pegasus 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 and the owner of a minority interest in one of the entities. Under this agreement, Pegasus 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 entities owned by Mr. Butcher for the acquisition of television broadcast stations to be operated by Pegasus pursuant to local marketing agreements. Under this arrangement, on November 10, 1998, Pegasus sold to one of the Butcher companies the FCC license for the television station then known as WOLF 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. WOLF is now known as WSWB and is one of Pegasus' television stations serving the northeastern Pennsylvania designated television market area. 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, one of the Butcher companies assumed a local marketing agreement, under which Pegasus provides programming to WSWB and retains all revenues generated from advertising in exchange for payments to the Butcher 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 Butcher company also granted Pegasus an option to purchase the station license and assets if it becomes legal to do so for the costs incurred by the Butcher company relating to the station, plus compound interest at 12% per year. On July 2, 1998, Pegasus assigned to one of the Butcher companies its option to acquire the FCC authorization for television station WFXU, which rebroadcasts WTLH pursuant to a local marketing agreement. The Butcher company will pay to Pegasus $50,000 for the option upon the FCC's approval of the authorization's transfer to the Butcher company, and will assume the obligations of the authorization's former owner under the local marketing agreement with Pegasus. The Butcher company will borrow the $50,000 under the loan collateral arrangement, and the company will grant to Pegasus 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 Pegasus and a term of five years, with one automatic five-year renewal. 51 Pegasus believes that the WOLF and WFXU transactions were done at fair value and that any future transactions that may be entered into with the Butcher companies or similar entities will also be done at fair value. Acquisition of Digital Television Services, Inc. On April 27, 1998, Pegasus acquired Digital Television Services, Inc. through the merger of a subsidiary of Pegasus into Digital Television Services. Prior to the merger, Digital Television Services was the second largest independent distributor of DIRECTV services serving 140,000 subscribers in ten states and reaching approximately 140,000 subscribers. In connection with the merger, Pegasus issued approximately 5.5 million shares of its Class A common stock to the stockholders of Digital Television Services and assumed approximately $159 million of debt as of December 31, 1997. Pegasus also granted registration rights to certain of Digital Television Service's stockholders, including Columbia Capital Corporation, Columbia DBS, Inc., Whitney Equity Partners, L.P. and Fleet Venture Resources, Inc. and its affiliates and Harry F. Hopper, III. Mr. Hopper received shares of Class A common stock in the Digital Television Services merger and has an ownership interest in Columbia Capital Corporation, which received 429,812 shares. As a result of the Digital Television Services merger and the voting agreement described below, Michael C. Brooks, Harry F. Hopper, III and Riordon B. Smith were elected to Pegasus' board of directors. Voting Agreement On April 27, 1998, in connection with the Digital Television Services merger, Pegasus, 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 Digital Television Services merger by Chisholm, Columbia, Whitney and the other former stockholders of Digital Television Services. It 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 Pegasus will consist initially of nine members: three independent directors, three directors designated by Mr. Pagon and one director to be designated by each of Chisholm Partners III, L.P., Columbia Capital Corporation and Whitney Equity Partners. 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. Each committee shall consist of one independent director, one director designated by Mr. Pagon and one director designated by a majority of the directors designated by Chisholm Parters III, L.P., Columbia Capital Corporation and Whitney Equity Partners. 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 Pegasus. Marshall W. Pagon, Robert N. Verdecchio and William P. Phoenix are serving as directors of Pegasus as designees of Mr. Pagon. Harry F. Hopper, III is serving as a director of Pegasus as a designee of Columbia Capital Corporation; Michael C. Brooks is serving as a director of Pegasus as a designee of Whitney Equity Partners; and Riordon B. Smith is serving as a director of Pegasus as a designee of Chisholm Partners III, L.P. 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 Partners III, L.P., Columbia Capital Corporation and Whitney Equity Partners to designate a director terminates when the Fleet entities, Columbia Capital Corporation and Whitney Equity Partners cease owning one-half of the shares originally received by each of them in the Digital Television Services merger or in certain other circumstances. Communications License Re-Auction PCS Partners, a company owned and controlled by Marshall W. Pagon, currently holds a personal communications system license in Puerto Rico and is qualified to participate in the FCC's upcoming 52 re-auction of certain other PCS licenses. Pegasus itself does not meet the qualification criteria for this re-auction. We have advanced approximately $3.4 million, with interest at 10% per year, to PCS Partners for the purpose of funding its participation in this re-auction. We are separately evaluating an investment in or contractual relationship with PCS Partners. CIBC Oppenheimer and Affiliates William P. Phoenix is a managing director of CIBC Oppenheimer Corp. CIBC Oppenheimer and its affiliates have provided various services to Pegasus and its subsidiaries, including Digital Television Services, since the beginning of 1997. Services to Digital Television Services described below include services provided prior to that company becoming a subsidiary of Pegasus on April 27, 1998. CIBC Oppenheimer Corp. has historically performed a number of services for Pegasus, including serving as one of the initial purchasers in Pegasus' November 1998 Rule 144A senior notes offering. In this capacity, CIBC Oppenheimer received customary underwriting discounts and commissions. CIBC Oppenheimer has also performed the following services for Pegasus: o provided a fair market value appraisal in connection with the contribution to Pegasus of certain assets between related parties. o provided fairness opinions to Pegasus and/or its affiliates in connection with certain intercompany loans and other intercompany transactions. o provided fairness opinions to Pegasus in connection with the acquisition of ViewStar Entertainment Services, Inc. from Donald W. Weber, a director of Pegasus. o acted as a standby purchaser in connection with Digital Television Service's offer to repurchase its senior subordinated notes as a result of the change in control arising by Pegasus' acquisition of the company. In 1998, for services rendered, Pegasus or its subsidiaries, including Digital Television Services, paid or will pay to CIBC Oppenheimer an aggregate of $3.3 million in fees. Pegasus believes that all fees paid to CIBC Oppenheimer in connection with the transactions described above were customary. Pegasus anticipates that it or its subsidiaries may engage the services of CIBC Oppenheimer in the future, although no such engagement is currently contemplated. Other Transactions In December 1998, Pegasus agreed to lend $199,999 to Nicholas A. Pagon, Pegasus' 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. 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. 53 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. Our principal indebtedness is owned by corporations at different levels of our corporate structure: o Pegasus Media & Communications: Pegasus Media & Communications, Inc., a wholly-owned subsidiary of Pegasus Communications Corporation, owes the indebtedness described below under Pegasus Media & Communications Credit Facility and Pegasus Media & Communications Notes. Most of Pegasus Media & Communications subsidiaries have guaranteed that indebtedness. Pegasus Media & Communications conducts through subsidiaries approximately 58% of our direct broadcast satellite business and all of our broadcast and cable business. o Digital Television Services: Digital Television Services, Inc., a subsidiary of Pegasus Communications Corporation, owes the indebtedness described below under Digital Television Services Credit Facility and Digital Television Services Notes. Digital Television Services' subsidiaries have guaranteed that indebtedness. Digital Television Services conducts the direct broadcast satellite business that we acquired in the Digital Television Services merger in April 1998, which currently equals 42% of our direct broadcast satellite business. 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. 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. Pegasus Media & Communications Credit Facility In December 1997, Pegasus Media & Communications, Inc., entered into a $180.0 million six-year, secured, reducing revolving credit facility. Pegasus Media & Communications 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 Pegasus Media & Communications, 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 Pegasus Media & Communications's subsidiaries. The credit facility is also secured by a pledge by Pegasus of its stock in Pegasus Media & Communications. Borrowings under the credit facility bear interest at LIBOR or the prime rate, as selected by Pegasus Media & Communications, plus spreads that vary with its 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 Pegasus Media & Communications 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 Pegasus Media & Communications credit facility requires prepayments and concurrent reductions of the commitment from asset sales or other transactions outside the ordinary course of business. These requirements are subject, however, 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 Pegasus Media & Communications and its subsidiaries may incur, o requires Pegasus Media & Communications to maintain a maximum leverage ratio, a minimum interest coverage, and a minimum fixed charge coverage, and o limits dividends and other restricted payments. 54 Unless there is a default under the credit facility, Pegasus Media & Communications 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. 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. Digital Television Services 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. Digital Television Services can use borrowings under the Digital Television Services credit facility for acquisitions, 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 Digital Television Services 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, Digital Television Services' direct and indirect subsidiaries. Borrowings under the credit facility bear interest at LIBOR or the prime rate, as selected by Digital Television Services, plus spreads that vary with its 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 Digital Television Services until July 31, 2003. The commitments under the Digital Television Services 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 Digital Television Services. The credit facility requires Digital Television Services to maintain: o minimum subscriber penetration levels; o annualized contribution per paying subscriber levels based on net income plus certain sales, administrative and payroll expenses; o a maximum ratio of total debt to equity beginning in the first quarter of 2000; o 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 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 a maximum percentage of general and administrative expenses to revenues. In addition, the credit facility requires Digital Television Services to make mandatory prepayments from the net proceeds of certain sales or other dispositions by it 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. 55 1998 Notes Pegasus has outstanding $100.0 million in aggregate principal of 9 3/4% senior notes due 2006. 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. 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 Pegasus 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 of Pegasus occurs, each holder of 1998 notes will have the right to require Pegasus 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, 56 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; 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 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 Pegasus 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 Pegasus 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, 57 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 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 Pegasus 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. Pegasus Media & Communications Notes Pegasus Media & Communications has outstanding $85.0 million in aggregate principal amount of its 12 1/2% senior subordinated notes due 2005. The Pegasus Media & Communications notes are subject to an indenture among Pegasus Media & Communications, 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 Pegasus Media & Communications 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 notes are general unsecured obligations of Pegasus Media & Communications and are subordinated in right of payment to all existing and future senior debt of that company. The notes are unconditionally guaranteed, on an unsecured senior subordinated basis, jointly and severally, by the guarantor subsidiaries. Optional Redemption. The Pegasus Media & Communications notes are subject to redemption at any time, at the option of Pegasus Media & Communications, 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. 58 Change of Control. If a change of control of Pegasus occurs, each holder of the Pegasus Media & Communications notes may require Pegasus Media & Communications to repurchase all or a portion of the holder's Pegasus Media & Communications notes at a purchase price equal to 101% of the principal, together with accrued and unpaid interest, 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 Media & Communications'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 Pegasus Media & Communications; 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 Pegasus Media & Communications 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 Pegasus Media & Communications notes are general unsecured obligations of Pegasus Media & Communications and are subordinate to all existing and future senior debt of it. The notes rank senior in right of payment to all junior subordinated indebtedness of Pegasus Media & Communications. The subsidiary guarantees are general unsecured obligations of the guarantors of the 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 Pegasus Media & Communications notes indenture contains a number of covenants restricting the operations of it, which, among other things, o limit the ability of it to incur additional indebtedness, pay dividends or make distributions, o make certain investments, sell assets, issue subsidiary stock, restrict distributions from subsidiaries, o create certain liens, enter into certain consolidations or mergers and enter into certain transactions with affiliates. Events of Default. Events of default under the Pegasus Media & Communications notes indenture include the following: o a default for 30 days in the payment when due of interest on the notes; o default in payment when due of the principal of or premium, if any, on the notes; o failure by Pegasus Media & Communications 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 Media & Communications or certain of its subsidiaries; o failure by Pegasus Media & Communications 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 Pegasus Media & Communications or certain of its subsidiaries. 59 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 Pegasus Media & Communications notes may accelerate the maturity of all the notes as provided in the indenture. Digital Television Services 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 Digital Television Services notes are subject to an indenture among Digital Television Services, 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 Digital Television Services indenture is not complete, and is subject to all of the provisions of the Digital Television Services indenture and those terms made a part of the indenture by the Trust Indenture Act. General. The Digital Television Services 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 Digital Television Services notes are general obligations of Digital Television Services. Except for a first priority security interest granted in an interest escrow account to provide for payment of the installments of interest on the Digital Television Services notes due through August 1, 1999, the Digital Television Services notes are unsecured. The Digital Television Services notes are unconditionally guaranteed, on an unsecured senior subordinated basis, jointly and severally, by the Digital Television Services guarantor subsidiaries. Optional Redemption. The Digital Television Services notes are subject to redemption at any time, at the option of Digital Television Services, 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, Digital Television Services 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 at a price equal to 112.5% of the principal amount plus accrued interest. If Digital Television Services does this, it must leave at least 65% of the Digital Television Services notes outstanding. Change of Control. If a change of control of Digital Television Services occurs, each holder of the Digital Television Services notes may require Digital Television Services to repurchase all or a portion of the holder's Digital Television Services notes at a purchase price equal to 101% of principal, together with accrued and unpaid interest, 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 Digital Television Services outstanding equity interests; o a change in the composition of Digital Television Services' board of directors over any two-year period such that the individuals who constitute the board of directors at the beginning of the period cease to constitute a majority of the board of directors; or o the liquidation or dissolution of Digital Television Services. Subordination. The Digital Television Services notes are general unsecured obligations of Digital Television Services and are subordinate to all existing and future senior debt of it. The Digital Television Services notes rank senior in right of payment to all junior subordinated debt of Digital Television Services. The guarantees of the guarantors of the Digital Television Services 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 notes by the guarantors rank senior in right of payment to all junior subordinated debt of the guarantors. Certain Covenants. The Digital Television Services indenture contains a number of covenants restricting the operations of Digital Television Services, which, among other things, limit the ability of Digital Television Services to: 60 o incur additional indebtedness, o pay dividends or make distributions, o make certain investments, o sell assets, o issue subsidiary stock, o restrict distributions from subsidiaries, o create certain liens, o enter into certain consolidations or mergers, and o enter into certain transactions with affiliates. Events of Default. Events of default under the Digital Television Services notes indenture include the following: o a default for 30 days in the payment when due of interest on the Digital Television Services notes; o default in payment when due of the principal of or premium, if any, on the notes; o failure by Digital Television Services to comply with certain provisions of the 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 Digital Television Services or any of its significant restricted subsidiaries in the amount of $5.0 million or more; o failure by Digital Television Services 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; o except as permitted by the Digital Television Services notes indenture, any subsidiary guarantee shall be held in any judicial proceeding to be unenforceable or invalid or cease to be in full force and effect o any subsidiary guarantor, or person acting on its behalf, denies or disaffirms its obligations as a guarantor; or o certain events of bankruptcy or insolvency with respect to Digital Television Services or certain of its subsidiaries. If an event of default occurs, with certain exceptions, the trustee under the Digital Television Services notes indenture or the holders of at least 25% in principal amount of the then outstanding notes may accelerate the maturity of all the 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. 61 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 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: o incur additional indebtedness, o pay dividends or make distributions, o make certain investments, o sell assets, o issue subsidiary stock, o create certain liens, o enter into certain consolidations or mergers, and o enter into certain transactions with affiliates. 62 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 February 26, 1999, we had outstanding 11,317,751 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; and 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 Pegasus 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 general, 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 including the outcome of all corporate transactions. Mr. Pagon and the Class B common stock are currently subject to the terms of a voting agreement. See Certain Relationships and Relation Transactions -- Voting Agreement. 63 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. 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 includes 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 voting or other 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, 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. 64 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 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 of Pegasus, 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 65 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. 66 Future Sales of Common Stock After this offering, Pegasus will have 14,317,751 shares of Class A common stock issued and outstanding, 15,024,881 shares if the underwriters' over-allotment option is exercised in full. Pegasus 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 14,317,751 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 4,658,400 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 176,180 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 3,612,497 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. Approximately 8,609,382 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 Pegasus 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 Rule 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, were acquired from Pegasus and the date on which they were acquired from an affiliate of Pegasus then the holder of the restricted shares is entitled to sell a number of shares within any three-month period that does not exceed the greater of: (1) one percent of the then outstanding shares of the Class A common stock, or (2) 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 Pegasus. Affiliates of Pegasus 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 Pegasus 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 Pegasus' Class A common stock. Pegasus, 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 67 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 cover any securities of Pegasus 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 Digital Television Services, Inc. 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 that company in April 1998. A brief description of these registration rights follows. o Underwritten Demand Registration: The Digital Television Service 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 Digital Television Service 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. o Piggyback Registration: The Digital Television Services 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 Digital Television Services stockholders would have to pay underwriting discounts, brokerage commissions and the like. ViewStar Entertainment Services, Inc. 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 it 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 Entertainment Services 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 Entertainment Services 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. 68 We would have to pay expenses of any registration, except that the selling ViewStar Entertainment Services stockholders would have to pay underwriting discounts, brokerage commissions and the like. The ViewStar Entertainment Services 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 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 have severally agreed to purchase from Pegasus 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. Pegasus' 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 of the Underwriters 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 Pegasus 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 ----------- ------------- Pegasus: Per share ........................... $ $ Total ............................... $ $ Selling Stockholders: Per share ........................... $ $ Total ............................... $ $ Pegasus has granted to the underwriters an option, exercisable for 30 days from the date of the Underwriting Agreement, to purchase up to 707,130 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. Pegasus estimates its expenses relating to the offering to be $550,000. The underwriters have reserved for sale, at the public offering price, up to ____% of the shares of Class A common stock offered hereby by Pegasus to Pegasus' employees and certain other individuals who have expressed an interest in purchasing shares in this offering. The number of shares available for sale to the general public will be reduced if these persons purchase these reserved shares. The underwriters will offer any unpurchased reserved shares to the general public on the same basis as the other shares offered in this prospectus. 70 Pegasus, certain of its subsidiaries, 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 Pegasus, its executive officers and directors and certain stockholders of Pegasus, including the selling stockholders, has agreed that, for a period of either 90 days or 120 days from the date of this 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, Pegasus has agreed not to file any registration statement with respect to 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. Each of Pegasus' executive officers and directors and certain of its stockholders, including the selling stockholders, has also agreed not to make any demand for, or exercise any right with respect to, such a registration statement. Other than in the United States, no action has been taken by Pegasus, 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 Pegasus with a fairness opinion in connection with the acquisition by Pegasus 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 Drinker Biddle & Reath LLP, counsel for Pegasus, will pass upon the validity of the Class A common stock offered in this prospectus. Michael B. Jordan, a partner of Drinker Biddle & Reath LLP, is an Assistant Secretary of Pegasus. Latham & Watkins, New York, New York will pass upon certain legal matters relating to this offering for the underwriters. Latham & Watkins occasionally renders legal services to Pegasus. 71 Experts Pegasus' consolidated balance sheets as of December 31, 1997 and 1998 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, 1998 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. The consolidated financial statements of Digital Television Services Inc. as of December 31, 1996 and 1997 and for the period from inception (January 30, 1996) through December 31, 1996 and for the year ended December 31, 1997 incorporated by reference in this registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are incorporated herein in reliance upon the authority of said firm as experts in giving said reports. 72 Pegasus Communications Corporation Index to Financial Statements
Page ---- Pegasus Communications Corporation Report of PricewaterhouseCoopers LLP ..................................................... F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 ............................. F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 ................................................................................... F-4 Consolidated Statements of Changes in Total Equity for the years ended December 31, 1996, 1997 and 1998 .......................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 ................................................................................... F-6 Notes to Consolidated Financial Statements ............................................... F-7 Pro Forma Consolidated Financial Information -- Pegasus Communications Corporation ....... F-23 Pro Forma Consolidated Statement of Operations Data for the year ended December 31, 1998.. F-24 Notes to Pro Forma Consolidated Statements of Operations Data ............................ F-25 Pro Forma Consolidated Balance Sheet as of December 31, 1998 ............................. F-27 Notes to Pro Forma Consolidated Balance Sheet ............................................ F-28
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Pegasus Communications Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and retained earnings and of cash flows present fairly, in all material respects, the financial position of Pegasus Communications Corporation and its subsidiaries at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP February 12, 1999 Philadelphia, Pennsylvania F-2 Pegasus Communications Corporation Consolidated Balance Sheets
December 31, ------------------------------------ 1997 1998 ---------------- ----------------- ASSETS Current assets: Cash and cash equivalents .................................................. $ 44,049,097 $ 54,505,473 Restricted cash ............................................................ 1,220,056 21,479,305 Accounts receivable, less allowance for doubtful accounts of $319,000 and $567,000, respectively ................................................ 13,819,571 20,882,260 Inventory .................................................................. 974,920 5,426,348 Program rights ............................................................. 2,059,346 3,156,715 Deferred taxes ............................................................. 2,602,453 2,602,453 Prepaid expenses and other ................................................. 788,669 1,207,312 ------------- -------------- Total current assets .................................................... 65,514,112 109,259,866 Property and equipment, net ................................................... 27,686,646 34,066,502 Intangible assets, net ........................................................ 284,774,027 729,405,657 Program rights ................................................................ 2,262,299 3,428,382 Deferred taxes ................................................................ -- 9,277,280 Deposits and other ............................................................ 624,629 872,386 ------------- -------------- Total assets ............................................................ $ 380,861,713 $ 886,310,073 ============= ============== LIABILITIES AND TOTAL EQUITY Current liabilities: Current portion of long-term debt .......................................... $ 6,357,320 $ 14,399,046 Accounts payable ........................................................... 4,151,226 4,794,809 Accrued interest ........................................................... 8,177,261 17,465,493 Accrued satellite programming and fees ..................................... 6,089,389 19,352,780 Accrued expenses ........................................................... 6,973,297 12,926,864 Current portion of program rights payable .................................. 1,418,581 2,431,515 ------------- -------------- Total current liabilities ............................................... 33,167,074 71,370,507 Long-term debt ................................................................ 201,997,811 544,629,706 Program rights payable ........................................................ 1,416,446 2,472,367 Deferred taxes ................................................................ 2,652,454 80,671,714 ------------- -------------- Total liabilities ....................................................... 239,233,785 699,144,294 ------------- -------------- Commitments and contingent liabilities ........................................ -- -- Minority interest ............................................................. 3,000,000 3,000,000 Preferred Stock; $0.01 par value; 5.0 million shares authorized ............... -- -- Series A Preferred Stock; $0.01 par value; 112,215 and 126,978 shares authorized; 105,490 and 119,369 issued and outstanding ....................... 111,264,424 126,027,871 Common stockholders' equity: Class A Common Stock; $0.01 par value; 30.0 million shares authorized; 5,739,842 and 11,315,809 issued and outstanding ............... 57,399 113,158 Class B Common Stock; $0.01 par value; 15.0 million shares authorized; 4,581,900 issued and outstanding .............................. 45,819 45,819 Additional paid-in capital ................................................. 64,034,687 173,870,633 Deficit .................................................................... (36,774,401) (115,891,702) ------------- -------------- Total common stockholders' equity ....................................... 27,363,504 58,137,908 ------------- -------------- Total liabilities and stockholders' equity ................................. $ 380,861,713 $ 886,310,073 ============= ==============
See accompanying notes to consolidated financial statements F-3 Pegasus Communications Corporation Consolidated Statements of Operations
Years Ended December 31, ------------------------------------------------------- 1996 1997 1998 ---------------- ---------------- ----------------- Net revenues: DBS ........................................................ $ 5,829,097 $ 38,254,186 $147,142,347 Broadcast .................................................. 28,603,516 31,875,744 34,310,898 Cable ...................................................... 13,496,019 16,688,496 13,767,400 ------------ ------------ ------------ Total net revenues ....................................... 47,928,632 86,818,426 195,220,645 Operating expenses: DBS Programming, technical, general and administrative........ 4,311,604 26,042,185 102,419,612 Marketing and selling .................................... 646,073 5,973,013 45,706,233 Incentive compensation ................................... 145,757 794,838 1,158,919 Depreciation and amortization ............................ 1,786,181 17,042,149 59,076,759 Broadcast Programming, technical, general and administrative ....... 13,902,769 15,672,405 18,056,173 Marketing and selling .................................... 4,850,597 5,703,858 5,992,751 Incentive compensation ................................... 691,436 297,734 177,345 Depreciation and amortization ............................ 4,040,905 3,754,400 4,556,654 Cable Programming, technical, general and administrative ....... 7,102,573 8,426,755 7,556,548 Marketing and selling .................................... 89,625 266,588 340,591 Incentive compensation ................................... 148,172 181,300 115,430 Depreciation and amortization ............................ 5,245,255 5,642,901 4,992,833 Corporate expenses ......................................... 1,429,252 2,256,233 3,613,858 Corporate depreciation and amortization .................... 988,157 1,352,453 2,105,249 ------------ ------------ ------------ Income (loss) from operations .............................. 2,550,276 (6,588,386) (60,648,310) Interest expense ............................................ (12,454,891) (16,094,037) (44,604,055) Interest income ............................................. 232,361 1,538,569 2,036,061 Other expenses, net ......................................... (171,289) (723,439) (1,523,074) Gain on sale of cable systems ............................... -- 4,451,320 24,726,432 ------------ ------------ ------------ Loss before income taxes ................................... (9,843,543) (17,415,973) (80,012,946) Provision (benefit) for income taxes ........................ (120,000) 200,000 (895,645) ------------ ------------ ------------ Loss before extraordinary items ............................ (9,723,543) (17,615,973) (79,117,301) Extraordinary loss from extinguishment of debt, net ......... (250,603) (1,656,164) -- ------------ ------------ ------------ Net loss ................................................... (9,974,146) (19,272,137) (79,117,301) Preferred stock dividends .................................. -- 12,215,000 14,763,447 ------------ ------------ ------------ Net loss applicable to common shares ....................... ($ 9,974,146) ($ 31,487,137) ($ 93,880,748) ============ ============ ============ Basic and diluted earnings per common share: Loss before extraordinary items ............................ ($1.56) ($3.02) ($6.64) Extraordinary loss ......................................... (0.04) (0.17) -- ------------ ------------ ------------ Net loss ................................................... ($1.60) ($3.19) ($6.64) ============ ============ ============ Weighted average shares outstanding ........................ 6,239,646 9,858,244 14,129,602 ============ ============ ============
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, 1996 ...... 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 Acquisitions ................... 934,253 9,342 Awards ......................... 3,614 36 Issuance of Class B common stock due to: 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 ................... 957,860 9,579 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 ..................... 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 ................... 5,508,600 55,086 Incentive compensation and awards .................... 67,367 673 Issuance of Class A preferred stock due to: Paid and accrued dividends ..................... 14,763,447 Issuance of warrants and options due to: Acquisitions ................... ------------ --------- -------- Balances at December 31, 1998 ............................ $126,027,871 15,897,709 $158,977 ============ ========== ========
Total Additional Retained Partners' Common Paid-In Earnings Capital Stockholders' Capital (Deficit) (Deficit) Equity --------------- ------------------ ---------------- ---------------- Balances at January 1, 1996 ...... $ 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 Acquisitions ................... 13,070,204 13,079,546 Awards ......................... 50,559 50,595 Issuance of Class B common stock due to: 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 ................... 15,187,924 15,197,503 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 ..................... 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 ......................... (79,117,301) (79,117,301) Issuance of Class A common stock due to: Acquisitions ................... 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 ..................... (14,763,447) (14,763,447) Issuance of warrants and options due to: Acquisitions ................... 3,545,336 3,545,336 ------------- ------------- ----------- -------------- Balances at December 31, 1998 ............................ $ 173,870,633 ($ 115,891,702) -- $ 58,137,908 ============= ============= =========== ==============
See accompanying notes to consolidated financial statements F-5 Pegasus Communications Corporation Consolidated Statements of Cash Flows
Years Ended December 31, -------------------------------------------------------- 1996 1997 1998 ---------------- ----------------- ----------------- Cash flows from operating activities: Net loss ................................................. ($ 9,974,146) ($ 19,272,137) ($ 79,117,301) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Extraordinary loss on extinguishment of debt, net ...... 250,603 1,656,164 -- Depreciation and amortization .......................... 12,060,498 27,791,903 70,731,495 Program rights amortization ............................ 1,514,122 1,715,556 2,366,429 Accretion on discount of bonds and seller notes ........ 392,324 394,219 1,319,520 Stock incentive compensation ........................... 985,365 1,273,872 1,451,694 Gain on sale of cable systems .......................... -- (4,451,320) (24,726,432) Bad debt expense ....................................... 335,956 1,141,913 2,850,666 Change in assets and liabilities: Accounts receivable ................................... (4,607,356) (5,608,113) (6,463,976) Inventory ............................................. 402,942 (115,800) (3,105,260) Prepaid expenses and other ............................ (521,697) 305,066 (243,818) Accounts payable and accrued expenses ................. 3,617,863 6,034,149 8,850,741 Advances payable -- related party ..................... (468,327) -- -- Accrued interest ...................................... 418,338 2,585,178 4,371,950 Capitalized subscriber acquisition costs .............. (1,272,383) (4,514,874) -- Deposits and other .................................... (74,173) (458,131) (247,757) ------------ ------------- ------------- Net cash provided (used) by operating activities ......... 3,059,929 8,477,645 (21,962,049) ------------ ------------- ------------- Cash flows from investing activities: Acquisitions ........................................... (72,567,216) (133,886,247) (109,339,673) Cash acquired from acquisitions ........................ -- 379,044 3,284,382 Capital expenditures ................................... (6,294,352) (9,929,181) (12,399,650) Purchase of intangible assets .......................... (486,444) (3,033,471) (10,489,397) Payments for programming rights ........................ (1,830,903) (2,584,241) (2,561,026) Proceeds from sale of cable systems .................... -- 6,945,270 30,132,826 ------------ ------------- ------------- Net cash used for investing activities ................... (81,178,915) (142,108,826) (101,372,538) ------------ ------------- ------------- Cash flows from financing activities: Proceeds from long-term debt ........................... -- 115,000,000 100,000,000 Repayments of long-term debt ........................... (103,639) (320,612) (14,572,446) Borrowings on bank credit facilities ................... 41,400,000 94,726,250 108,800,000 Repayments of bank credit facilities ................... (11,800,000) (124,326,250) (64,400,000) Restricted cash ........................................ 9,881,198 (1,220,056) 7,541,140 Debt issuance costs .................................... (304,237) (10,236,823) (3,178,634) Capital lease repayments ............................... (267,900) (336,680) (399,097) Contributions by Parent ................................ 684,565 -- -- Distributions to Parent ................................ (2,946,379) -- -- Proceeds from issuance of common stock ................. 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 ................ 74,726,608 169,097,909 133,790,963 ------------ ------------- ------------- Net increase (decrease) in cash and cash equivalents ...... (3,392,378) 35,466,728 10,456,376 Cash and cash equivalents, beginning of year .............. 11,974,747 8,582,369 44,049,097 ------------ ------------- ------------- Cash and cash equivalents, end of year .................... $ 8,582,369 $ 44,049,097 $ 54,505,473 ============ ============= =============
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") operates in growing segments of the media industry and is a direct subsidiary of Pegasus Communications Holdings, Inc. ("PCH" or the "Parent"). Pegasus' significant direct operating subsidiaries are Pegasus Media & Communications, Inc. ("PM&C") and Digital Television Services, Inc. ("DTS"). PM&C's subsidiaries provide direct broadcast satellite television ("DBS") services to customers in certain rural areas of the United States; own and/or program broadcast television ("Broadcast" or "TV") stations affiliated with the Fox Broadcasting Company ("Fox"), United Paramount Network ("UPN") and The WB Television Network ("WB"); and own and operate a cable television ("Cable") system that provides service to individual and commercial subscribers in Puerto Rico. DTS and its subsidiaries, which were acquired by the Company on April 27, 1998, provide DBS services to customers in certain rural areas of the United States. 2. Summary of Significant Accounting Policies: Basis of Presentation: The accompanying consolidated financial statements include the accounts of Pegasus and all of its subsidiaries. All intercompany transactions and balances have been eliminated. Certain amounts for 1996 and 1997 have been reclassified for comparative purposes. 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. 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 $21.5 million at December 31, 1998 of which $18.9 million is to fund interest payments on the DTS Notes, $1.6 million is to collateralize certain outstanding letters of credit and $1.0 million is held in escrow in connection with the pending purchase of a cable system serving Aguadilla, Puerto Rico. 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 which suggest 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. To date, no such impairments have occurred. F-7 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. Summary of Significant Accounting Policies: -- (Continued) Property and Equipment: Property and equipment are stated at cost. The cost and related accumulated depreciation of assets fully depreciated, 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. The cost and related accumulated amortization of assets fully amortized, 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. 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, such as commissions and equipment subsidies, directly related to new subscribers 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. Subsequent to September 30, 1997, the Company does not require new DBS customers to sign programming contracts and as a result subscriber acquisition costs are charged to operations in the period incurred. Amortization of intangible assets is computed for financial reporting purposes 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 Subscriber acquisition costs ........... 1 year Other intangibles ...................... 2 to 14 years Revenue: The Company operates in growing segments of the media industry: DBS, Broadcast and Cable. The Company recognizes revenue in its DBS and Cable operations when video and audio services are provided. The Company recognizes revenue in its Broadcast operations when advertising spots are broadcast. The Company obtains a portion of its TV programming through its network affiliations with Fox, UPN and WB and also through independent producers. The Company does not make any direct payments for this F-8 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. Summary of Significant Accounting Policies: -- (Continued) programming. 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 advertisements sold by the networks or independent producers are broadcast. Gross barter amounts of $6.3 million, $7.5 million and $8.1 million for 1996, 1997 and 1998, respectively, are included in Broadcast revenue and programming expense in the accompanying consolidated statements of operations. Advertising Costs: Advertising costs are charged to operations in the period incurred and totaled approximately $1.1 million, $3.6 million and $14.0 million for the years ended December 31, 1996, 1997 and 1998, 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 $1.5 million, $1.7 million and $2.4 million is included in Broadcast programming expense for the years ended December 31, 1996, 1997 and 1998, 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. Income Taxes: The Company accounts for income taxes utilizing the asset and liability approach, whereby deferred tax assets and liabilities are recorded for 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., a subsidiary of the Company, is treated as a partnership for federal and state income tax purposes but taxed as a corporation for Puerto Rico income tax purposes. 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, 1997 and 1998, the Company had no significant concentrations of credit risk. Reliance on DIRECTV; A substantial portion of the Company's business is derived from providing DBS services as an independent DIRECTV(R) ("DIRECTV") provider. Because the Company is 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, Hughes Electronics Corporation. New Accounting Pronouncements: In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), which is effective for fiscal years beginning after December 15, 1998. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement F-9 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. Summary of Significant Accounting Policies: -- (Continued) of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective for fiscal quarters of fiscal years beginning after June 15, 1999. Management has reviewed the provisions of SOP 98-5 and SFAS No. 133 and the implementation of these standards is not expected to have any significant impact on its consolidated financial statements. 3. Property and Equipment: Property and equipment consist of the following:
December 31, December 31, 1997 1998 ---------------- ---------------- Reception and distribution facilities ......... $ 27,012,297 $ 20,712,511 Transmitter equipment ......................... 15,306,589 17,728,338 Equipment, furniture and fixtures ............. 3,091,363 8,530,100 Building and improvements ..................... 2,293,755 3,410,466 Land .......................................... 947,712 1,229,163 Vehicles ...................................... 983,256 1,111,665 Other equipment ............................... 2,612,332 5,893,561 ------------- ------------- 52,247,304 58,615,804 Accumulated depreciation ...................... (24,560,658) (24,549,302) ------------- ------------- Net property and equipment .................... $ 27,686,646 $ 34,066,502 ============= =============
Depreciation expense amounted to $5.2 million, $5.7 million and $6.2 million for the years ended December 31, 1996, 1997 and 1998, respectively. 4. Intangibles: Intangible assets consist of the following:
December 31, December 31, 1997 1998 ---------------- ----------------- DBS rights ...................................... $ 203,379,952 $ 712,231,669 Deferred financing costs ........................ 16,654,186 33,762,651 Franchise costs ................................. 35,332,755 31,157,958 Goodwill ........................................ 28,490,035 28,033,368 Broadcast licenses and affiliation agreements . . 19,094,212 19,062,241 Consultancy and non-compete agreements .......... 6,010,838 7,022,688 Subscriber acquistion costs ..................... 5,787,156 -- Other deferred costs ............................ 8,571,281 13,121,413 ------------- -------------- 323,320,415 844,391,988 Accumulated amortization ........................ (38,546,388) (114,986,331) ------------- -------------- Net intangible assets ........................... $ 284,774,027 $ 729,405,657 ============= ==============
Amortization expense amounted to $6.9 million, $22.1 million and $64.5 million for the years ended December 31, 1996, 1997 and 1998, respectively. 5. Common Stock: In October 1996, Pegasus completed an initial public offering in which it sold 3.0 million 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. F-10 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. Common Stock: -- (Continued) As of December 31, 1997 and 1998, the Company had two classes of Common Stock: Class A Common Stock and Class B Common Stock. Holders of Class A Common Stock and Class B Common Stock are entitled to one vote per share and ten votes per share, respectively. The Company's ability to pay dividends on its Common Stock is subject to certain restrictions. 6. Preferred Stock: As of December 31, 1997 and 1998, the Company had 5.0 million shares of Preferred Stock authorized of which 112,215 and 126,978 shares have been designated as Series A Preferred Stock, respectively. 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. As a result of the Unit Offering and dividends subsequently paid on the Series A Preferred Stock, the Company had approximately 105,490 and 119,369 shares of Series A Preferred Stock issued and outstanding at December 31, 1997 and 1998, respectively. On December 18, 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. Each whole share of Series A Preferred Stock has 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. F-11 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 7. Long-Term Debt: Long-term debt consists of the following:
December 31, December 31, 1997 1998 -------------- --------------- Series B Senior Notes payable by Pegasus, due 2005, interest at 9.625%, payable semi-annually in arrears on April 15 and October 15 ....................................................... $115,000,000 $115,000,000 Series A Senior Notes payable by Pegasus, due 2006, interest at 9.75%, payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 1999 ........................... -- 100,000,000 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 (7.8125% at December 31, 1998) ............................ -- 27,500,000 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 (8.94% at December 31, 1998) ................. -- 26,800,000 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 (9.03% at December 31, 1998) ..................... -- 19,600,000 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 $3,018,003 and $2,621,878 as of December 31, 1997 and 1998, respectively ......................... 81,981,997 82,378,122 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 $1,784,844 as of December 31, 1998 ............................................................. -- 153,215,156 Mortgage payable, due 2000, interest at 8.75% ..................... 477,664 454,965 Note payable, due 1998, interest at 10% ........................... 3,050,000 -- Sellers' notes, due 1999 to 2005, interest at 3% to 8% ............ 7,171,621 33,537,788 Capital leases and other .......................................... 673,849 542,721 ------------ ------------ 208,355,131 559,028,752 Less current maturities ........................................... 6,357,320 14,399,046 ------------ ------------ Long-term debt .................................................... $201,997,811 $544,629,706 ============ ============
Certain of the Company's sellers' notes are secured by stand-by letters of credit issued pursuant to the PM&C Credit Facility and the DTS Credit Facility. DTS maintains a $70.0 million senior revolving credit facility and a $20.0 million senior term credit facility (collectively, the "DTS Credit Facility") which expires in 2003 and is collateralized by substantially all of the assets of DTS and its subsidiaries. The DTS Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. As of December 31, 1998, $18.5 million of stand-by letters of credit were issued pursuant to the DTS Credit Facility. Prior to being acquired by Pegasus, 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"). A portion of the net proceeds from the DTS Notes Offering was used 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 DTS Series A Notes. DTS exchanged its DTS Series A F-12 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 7. Long-Term Debt: -- (Continued) 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 has nominal assets and does not conduct any operations. In October 1997, Pegasus completed an offering of senior notes (the "9.625% 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 Notes"), resulting in net proceeds to the Company of approximately $111.0 million. A portion of the net proceeds from the 9.625% Senior Notes Offering was used to retire an existing $130.0 million credit facility (the "PSH Credit Facility"). The PSH Credit Facility was refinanced with the PM&C Credit Facility. Deferred financing fees relating to the PSH Credit Facility were written off, resulting in an extraordinary loss of approximately $1.7 million on the refinancing transaction. Pegasus exchanged its 9.625% Series A Notes for its 9.625% Series B Senior Notes due 2005 (the "9.625% Series B Notes" and, together with the 9.625% Series A Notes, the "9.625% Senior Notes"). The 9.625% Series B Notes have substantially the same terms and provisions as the 9.625% Series A Notes. In December 1997, PM&C entered into a $180.0 million senior revolving credit facility (the "PM&C Credit Facility") which expires in 2003 and is collateralized by substantially all of the assets of PM&C and its subsidiaries. The PM&C Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. As of December 31, 1998, $49.6 million of stand-by letters of credit were issued pursuant to the PM&C Credit Facility. In November 1998, 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 Notes"), resulting in net proceeds to the Company of approximately $96.8 million. $64.0 million of the net proceeds from the 9.75% Senior Notes Offering were used to repay a portion of the outstanding indebtedness under the PM&C Credit Facility. Certain of the Company's notes may be redeemed, at the option of the Company, in whole or in part, at various points in time after July 1, 2000 at the redemption prices specified in the indentures governing the respective notes, plus accrued and unpaid interest thereon. 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, 1998, maturities of long-term debt and capital leases are as follows: 1999 ......................... $ 14,399,046 2000 ......................... 11,318,785 2001 ......................... 8,108,254 2002 ......................... 3,105,629 2003 ......................... 71,003,760 Thereafter ................... 451,093,278 ------------ $559,028,752 ============ F-13 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 8. Earnings Per Common Share: Calculation of basic and diluted earnings per common share: The following table sets forth the computation of the number of shares used in the computation of basic and diluted earnings per common share (in thousands):
1996 1997 1998 ---------------- ----------------- ----------------- Net loss applicable to common shares .................. ($ 9,974,146) ($ 31,487,137) ($ 93,880,748) =========== ============ ============ Weighted average common shares outstanding ............ 6,239,646 9,858,244 14,129,602 =========== ============ ============ Total shares used for calculation of basic earnings per common share ......................................... 6,239,646 9,858,244 14,129,602 Stock options ......................................... -- -- -- ----------- ------------ ------------ Total shares used for calculation of diluted earnings per common share ..................................... 6,239,646 9,858,244 14,129,602 =========== ============ ============
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 years ended December 31, 1997 and 1998, 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 and $14.8 million, respectively, by applicable shares outstanding. Securities that have not been issued and are antidilutive amounted to 2,539 shares in 1996, 582,493 shares in 1997 and 1,299,863 shares in 1998. 9. 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 2004. Rent expense for the years ended December 31, 1996, 1997 and 1998 was $712,000, $1.1 million and $1.6 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: 1997 1998 ------------- ------------ Equipment, furniture and fixtures .......... $ 700,807 $ 662,276 Vehicles ................................... 516,642 541,068 ---------- ---------- 1,217,449 1,203,344 Accumulated depreciation ................... (512,307) (562,403) ---------- ---------- Total ...................................... $ 705,142 $ 640,941 ========== ========== F-14 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 9. Leases: -- (Continued) Future minimum lease payments on noncancellable operating and capital leases at December 31, 1998 are as follows:
Operating Capital Leases Leases ------------- ----------- 1999 .............................................. $1,887,217 $216,795 2000 .............................................. 1,651,919 207,635 2001 .............................................. 1,521,132 157,286 2002 .............................................. 1,075,957 57,902 2003 .............................................. 630,623 1,560 Thereafter ........................................ 393,013 -- ---------- -------- Total minimum payments ............................ $7,159,861 641,178 ========== Less: amount representing interest ................ 98,457 -------- Present value of net minimum lease payments including current maturities of $168,117 ......... $542,721 ========
10. Income Taxes: The following is a summary of the components of income taxes from operations:
1996 1997 1998 -------------- ----------- ---------------- Federal -- deferred ............................ ($ 169,000) ($ 1,070,645) State and local -- current ..................... 49,000 $200,000 175,000 --------- -------- ----------- Provision (benefit) for income taxes .......... ($ 120,000) $200,000 ($ 895,645) ========= ======== ===========
The deferred income tax assets and liabilities recorded in the consolidated balance sheets at December 31, 1997 and 1998 are as follows:
1997 1998 ---------------- ---------------- Assets: Receivables ......................................................... $ 73,547 $ 215,451 Excess of tax basis over book basis from tax gain recognized upon incorporation of subsidiaries ..................................... 1,890,025 2,112,381 Loss carryforwards .................................................. 18,046,889 56,700,200 Other ............................................................... 870,305 972,694 ------------ ------------ Total deferred tax assets ......................................... 20,880,766 60,000,726 ------------ ------------ Liabilities: Excess of book basis over tax basis of property, plant and equipment 1,938,899 1,906,903 Excess of book basis over tax basis of amortizable intangible assets. 5,695,313 78,764,811 ------------ ------------ Total deferred tax liabilities .................................... 7,634,212 80,671,714 ------------ ------------ Net deferred tax assets (liabilities) ............................... 13,246,554 (20,670,988) Valuation allowance ............................................... (13,296,554) (48,120,993) ------------ ------------ Net deferred tax liabilities ........................................ ($ 50,000) ($ 68,791,981) ============ ============
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 1998, which may not be utilized. F-15 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 10. Income Taxes: -- (Continued) At December 31, 1998, the Company has net operating loss carryforwards of approximately $149.2 million which are available to offset future taxable income and expire through 2018. A reconciliation of the Federal statutory rate to the effective tax rate is as follows:
1996 1997 1998 ------------- ----------- ----------- U.S. statutory federal income tax rate .......... 34.00% 34.00% 35.00% Foreign net operating loss ...................... 1.73 -- -- Valuation allowance ............................. (36.92) (34.38) (34.40) Other ........................................... -- 1.43 0.70 ------ ------ ------ Effective tax rate .............................. (1.19%) 1.05% 1.30% ====== ====== ======
11. Supplemental Cash Flow Information: Significant noncash investing and financing activities are as follows:
Years ended December 31, ---------------------------------------------- 1996 1997 1998 ------------- ------------- -------------- Barter revenue and related expense ...................... $6,337,220 $7,520,000 $ 8,078,000 Acquisition of program rights and assumption of related program payables ............................... 1,140,072 3,452,779 4,629,881 Acquisition of plant under capital leases ............... 312,578 529,072 36,500 Capital contribution and related acquisition of intan- gibles ................................................. 14,079,546 15,197,503 119,695,473 Execution of license agreement option ................... 3,050,000 -- -- Minority interest and related acquisition of intan- gibles ................................................. -- 3,000,000 -- Notes payable and related acquisition of intangibles..... -- 7,113,689 219,889,144 Series A Preferred Stock dividend and reduction of paid-in capital ........................................ -- 12,215,000 14,763,447 Deferred taxes, net and related acquisition of intan- gibles ................................................. -- -- 82,934,179
For the years ended December 31, 1996, 1997 and 1998, the Company paid cash for interest in the amount of $12.0 million, $13.5 million and $35.3 million, respectively. The Company paid no federal income taxes for the years ended December 31, 1996, 1997 and 1998. 12. Acquisitions and Dispositions: In 1997, the Company acquired, from 25 independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of the United States and the related assets in exchange for total consideration of approximately $161.2 million, which consisted of $133.9 million in cash, 923,860 shares of the Company's Class A Common Stock (amounting to $14.9 million at the time of issuance), $3.0 million in preferred stock of a subsidiary of Pegasus, warrants to purchase a total of 283,969 shares of the Company's Class A Common Stock (amounting to $1.1 million at the time of issuance), $7.1 million in promissory notes and $1.2 million in assumed net liabilities. 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. F-16 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 12. Acquisitions and Dispositions: -- (Continued) In 1998, the Company acquired (exclusive of the acquisition of DTS), from 26 independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of the United States and the related assets in exchange for total consideration of approximately $132.1 million, which consisted of $109.3 million in cash, 37,304 shares of the Company's Class A Common Stock (amounting to $900,000 at the time of issuance), warrants to purchase a total of 25,000 shares of the Company's Class A Common Stock (amounting to $222,000 at the time of issuance), $20.4 million in promissory notes and $1.3 million in assumed net liabilities. On April 27, 1998, the Company acquired 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, in exchange for total consideration of approximately $363.9 million, which consisted of approximately 5.5 million shares of the Company's Class A Common Stock (amounting to $118.8 million at a price of $21.71 per share, the average closing price per share five days prior and subsequent to the acquisition announcement), options and warrants to purchase a total of 224,038 shares of the Company's Class A Common Stock (amounting to $3.3 million at the time of issuance), approximately $158.9 million in assumed net liabilities and approximately $82.9 million of a deferred tax liability. 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 gain on the transaction of approximately $24.7 million. Unless otherwise noted, 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 consummation 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 systems had been acquired or sold as of the beginning of the periods presented, after including the impact of certain adjustments, such as the amortization of intangibles, interest expense, preferred stock dividends and related income tax effects. The pro forma information does not purport to be indicative of what would have occurred had the acquisitions/dispositions 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, 1998.
Years Ended December 31, ----------------------------- (in thousands, except earnings per share) (unaudited) 1997 1998 ------------- ------------- Net revenues ...................................... $ 178,769 $ 236,293 ========= ========= Operating loss .................................... ($ 64,304) ($ 78,798) ========= ========= Net loss .......................................... ($ 120,873) ($ 133,988) Less: Preferred stock dividends ................... (13,156) (14,763) --------- --------- Net loss available to common stockholders ......... ($ 134,029) ($ 148,751) ========= ========= Net loss per common share ......................... ($ 8.50) ($ 9.37) ========= =========
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 Aguadilla cable system is contiguous to the Company's existing F-17 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 12. Acquisitions and Dispositions: -- (Continued) Puerto Rico cable system and, upon completion of the purchase, the Company intends to consolidate the Aguadilla 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 half of 1999. 13. Financial Instruments: The carrying values and fair values of the Company's financial instruments at December 31 consisted of:
1997 1998 ------------------------ ------------------------ Carrying Fair Carrying Fair Value Value Value Value ---------- ----------- ---------- ----------- (in thousands) Long-term debt, including current portion ......... $208,355 $240,086 $559,029 $583,460 Series A Preferred Stock .......................... 111,264 114,750 126,028 126,978
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. 14. 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, 1998, 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 reduced the carrying amount of the Series A Preferred Stock and was effected by an increase in 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, 1998, none of these warrants had 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 increased the carrying amount of the DBS rights acquired and was effected by an increase in paid-in-capital. In 1998, in connection with the acquisition of DBS properties, the Company issued warrants to purchase 181,996 shares of Class A Common Stock at exercise prices between $14.64 and $24.26 per share. These warrants are exercisable through October 10, 2007. At December 31, 1998, warrants to purchase 1,929 shares of Class A Common Stock have been exercised. The fair value of the warrants issued was estimated using the Black-Scholes pricing model and was approximately $2.7 million. The value assigned to these warrants increased the carrying amount of the DBS rights acquired and was effected by an increase in paid-in-capital. 15. 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. 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 SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). F-18 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 15. 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 970,000 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. The Stock Option Plan terminates in September 2006. As of December 31, 1998, options to purchase an aggregate of 642,227 shares of Class A Common Stock at exercise prices between $11.00 and $25.13 were outstanding, including 638,842 options outstanding under the Stock Option Plan, of which 67,042 were issued in connection with the acquisition of DTS. All options granted under the Stock Option Plan have been granted at fair market value at the time of grant. 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, 1997 and 1998:
1996 1997 1998 ---------- ---------- ---------- Risk-free interest rate ................. 5.56% 6.35% 5.11% Dividend Yield .......................... 0.00% 0.00% 0.00% Volatility Factor ....................... 0.00 0.403 0.479 Weighted average expected life .......... 5 years 5 years 4.5 years
Pro forma net losses for 1996, 1997 and 1998 would have been $10.0 million, $31.7 million and $94.7 million, respectively; pro forma net losses per common share for 1996, 1997 and 1998 would have been $1.60, $3.22 and $6.70, respectively. The weighted average fair value of options granted were $3.40, $4.99 and $11.19 for 1996, 1997 and 1998, respectively. The following table summarizes stock option activity over the past three years:
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 Granted .......................................... 418,842 21.23 Exercised ........................................ -- -- Canceled or expired .............................. -- -- ======= ======= Outstanding at December 31, 1998 ................. 642,227 $ 17.69 ======= ======= Options exercisable at December 31, 1996 ......... 3,385 $ 14.00 Options exercisable at December 31, 1997 ......... 3,385 14.00 Options exercisable at December 31, 1998 ......... 143,728 15.09
F-19 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 15. Employee Benefit Plans: -- (Continued) Restricted Stock Plan The Restricted Stock Plan provides for the granting of four types of restricted stock awards representing a maximum of 350,000 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 based on years of service with the Company and are fully vested for employees who have four years of service with the Company with the exception of special recognition awards which are fully vested on the date of grant. The Restricted Stock Plan terminates in September 2006. As of December 31, 1998, 138,379 shares of Class A Common Stock had been granted under the Restricted Stock Plan. The expense for this plan amounted to $501,139, $800,768 and $1.0 million in 1996, 1997 and 1998, 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. Effective October 1, 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, $473,104 and $450,883 in 1996, 1997 and 1998, 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. 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 based on years of service with the Company and are fully vested for employees who have four years of service with the Company. 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. 16. Commitments and Contingent Liabilities: Legal Matters: In connection with the pending license renewal application of one of the Company's television stations, it has come to the attention of the Company that, at that station, there were violations of the FCC's rules establishing limits on the amount of commercial material in programs directed to children. The Company was notified that is has been sued in Indiana for allegedly charging DBS subscribers excessive fees for late payments. The plaintiffs, who purport to represent a class consisting of residential DIRECTV customers in Indiana, seek unspecified damages for the purported class and modification of the Company's late-fee policy. The Company is advised that similar suits have been brought against DIRECTV and various cable operators in other parts of the United States. From time to time the Company is involved with claims that arise in the normal course of business. F-20 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 16. Commitments and Contingent Liabilities: -- (Continued) In the opinion of management, the ultimate liability with respect to the aforementioned claims and matters will not have a material adverse effect on the consolidated operations, liquidity, cash flows or financial position of the Company. Program Rights: The Company has entered into agreements totaling $6.9 million as of December 31, 1998 for film rights and programs that are not yet available for showing at December 31, 1998, and accordingly, are not recorded by the Company. At December 31, 1998, the Company has commitments for future program rights of approximately $3.1 million, $3.6 million, $3.1 million, $1.3 million, $214,000 and $428,000 in 1999, 2000, 2001, 2002, 2003 and thereafter, respectively. 17. Related Party Transactions: Effective October 31, 1997, the Company acquired DIRECTV distribution rights for certain rural areas of Georgia and the 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 entered into an arrangement in 1998 with W.W. Keen Butcher (the stepfather of Marshall W. Pagon, the Company's President and Chief Executive Officer, and Nicholas A. Pagon, a Vice President of Pegasus), 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. As of December 31, 1998, the Company had provided collateral of $1.6 million pursuant to this arrangement, which is included as restricted cash on the Company's consolidated balance sheets. William P. Phoenix, a director of Pegasus since June 1998, is a managing director of CIBC Oppenheimer Corporation. CIBC and its affiliates have provided financial services to Pegasus since 1997, including serving as one of the initial purchasers in the 9.75% senior notes offering, providing a fair market value appraisal in connection with the contribution to Pegasus of certain assets between related parties, providing fairness opinions in connection with the ViewStar direct broadcast satellite acquisition and certain intercompany transactions and acting as a standby purchaser in connection with Digital Television Services' offer to repurchase the Digital Television Services notes as a result of the change of control arising by Pegasus' acquisition of Digital Television Services. Total fees and expenses were approximately $3.3 million for the year ended December 31, 1998. 18. Industry Segments: The Company operates in growing segments of the media industry: DBS, Broadcast and Cable. DBS consists of providing direct broadcast satellite television services to customers in certain rural areas of 36 states. Broadcast consists of television stations affiliated with Fox, United Paramount Network and the WB and two transmitting towers, all located in the eastern United States. Cable consists of providing cable television services to individual and commercial subscribers in Puerto Rico. F-21 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 18. Industry Segments: -- (Continued) All of the Company's revenues are derived from external customers. Capital expenditures for the Company's DBS segment were $855,000, $506,000 and $2.0 for 1996, 1997 and 1998, respectively. Capital expenditures for the Company's Broadcast segment were $2.3 million, $6.4 million and $6.8 million for 1996, 1997 and 1998, respectively. Capital expenditures for the Company's Cable segment were $3.1 million, $2.9 million and $2.0 million for 1996, 1997 and 1998, respectively. Identifiable total assets for the Company's DBS segment were $209.5 million and $715.6 million as of December 31, 1997 and 1998, respectively. Identifiable total assets for the Company's Broadcast segment were $63.0 million and $67.1 million as of December 31, 1997 and 1998, respectively. Identifiable total assets for the Company's Cable segment were $51.7 million and $47.0 million as of December 31, 1997 and 1998, respectively. 19. Subsequent Events: As of February 12, 1999, the Company acquired, from five independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Colorado, Illinois, Indiana, Minnesota and Texas and the related assets in exchange for total consideration of approximately $22.6 million, which consisted of $21.5 million in cash and a $1.3 million promissory note, payable over one year. 20. Quarterly Information (unaudited):
Quarter Ended -------------------------------------------------------------- (in thousands, except per share data) March 31, June 30, September 30, December 31, 1998 1998 1998 1998 ------------- ------------ --------------- ------------- 1998 Net revenues ................................. $ 28,784 $ 46,739 $ 55,507 $ 64,190 Operating loss ............................... (6,302) (8,877) (18,590) (26,879) Loss before extraordinary items .............. (15,936) (22,804) (10,751) (44,389) Net loss applicable to common Shares ......... ($ 15,936) ($ 22,804) ($ 10,751) ($ 44,389) Basic and diluted earnings per share: Operating loss ............................... ($ 0.61) ($ 0.62) ($ 1.17) ($ 1.69) Loss before extraordinary items .............. (1.54) (1.59) (0.68) (2.79) Net loss ..................................... ($ 1.54) ($ 1.59) ($ 0.68) ($ 2.79)
The Company had no extraordinary gains or losses for the year ended December 31, 1998.
Quarter Ended ------------------------------------------------------------ (in thousands, except per share data) March 31, June 30, September 30, December 31, 1997 1997 1997 1997 ----------- ------------ --------------- ------------- 1997 Net revenues ................................. $15,897 $19,778 $21,927 $ 29,216 Operating loss ............................... (366) (113) (1,308) (4,801) Loss before extraordinary items .............. (692) (6,270) (9,015) (13,854) Net loss applicable to common Shares ......... ($ 692) ($ 6,270) ($ 9,015) ($ 15,510) Basic and diluted earnings per share: Operating loss ............................... ($ 0.04) ($ 0.01) ($ 0.13) ($ 0.47) Loss before extraordinary items .............. (0.07) (0.64) (0.91) (1.36) Net loss ..................................... ($ 0.07) ($ 0.64) ($ 0.91) ($ 1.53)
For the fourth quarter of 1997, the Company had an extraordinary loss of approximately $1.7 million or $0.16 per share in connection with the refinancing of certain facilities. F-22 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Pro forma consolidated statement of operations data and other data for the year ended December 31, 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", (iii) the sale of our New England cable systems, and (iv) this offering, all as if these events had occurred at the beginning of the period. The pro forma consolidated balance sheet as of December 31, 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", (iii) the repayment of seller notes, and (iv) this offering, as if these events had occurred on December 31, 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-23 Pegasus Communications Corporation Pro Forma Consolidated Statement of Operations Data Year Ended December 31, 1998 (Dollars in thousands)
DBS Acquisitions ---------------------------- New England Actual Completed(a) Pending(b) Cable Sale(c) ------------- -------------- ------------ --------------- Net revenues: DBS ........................... $147,142 $ 46,082 $4,189 Broadcast ..................... 34,311 Cable ......................... 13,768 ($3,277) -------- -------- ------ ------- Total revenues ............... 195,221 46,082 4,189 (3,277) Operating expenses: DBS Programming, technical, and general and administrative .............. 102,420 31,743 2,462 Marketing and selling ........ 45,706 10,979 593 Incentive compensation ....... 1,159 Depreciation and amortization ................ 59,077 8,180 42 Broadcast Programming, technical, and general and administrative .............. 18,056 Marketing and selling ........ 5,993 Incentive compensation ....... 177 Depreciation and amortization ................ 4,557 Cable Programming, technical, and general and administrative .............. 7,557 (1,602) Marketing and selling ........ 341 (12) Incentive compensation ....... 115 (75) Depreciation and amortization ................ 4,993 (835) Corporate expenses ............ 3,614 196 (98) Corporate depreciation and amortization ................. 2,105 -------- -------- ------ ------- Income (loss) from operations .................. (60,649) (5,016) 1,092 (655) Interest expense ............... (44,604) (8,435) (17) 938 Interest income ................ 2,036 Other income (expenses), net ... (1,523) 387 27 Gain on sale of cable systems .. 24,726 -------- -------- ------ ------- Income (loss) before income taxes ........................ (80,014) (13,064) 1,075 310 Provision (benefit) for income taxes ......................... (896) 88 (5) -------- -------- ------ ------- Net income (loss) ............. (79,118) (13,152) 1,075 315 Preferred stock dividends ..... 14,763 -------- -------- ------ ------- Net income (loss) applicable to common shares ............. ($ 93,881) ($ 13,152) $1,075 $ 315 ======== ======== ====== ======
Pending Cable The Acquisition(d) Adjustments Subtotal Offering Pro Forma ---------------- ----------- -------- -------- --------- Net revenues: DBS ........................... $ 197,413 $ 197,413 Broadcast ..................... 34,311 34,311 Cable ......................... $ 9,359 19,850 19,850 --------- ----------- --------- -------- --------- Total revenues ............... 9,359 251,574 251,574 Operating expenses: DBS Programming, technical, and general and administrative .............. 136,625 136,625 Marketing and selling ........ 57,278 57,278 Incentive compensation ....... 1,159 1,159 Depreciation and amortization ................ 16,384 (e) 83,683 83,683 Broadcast Programming, technical, and general and administrative .............. 18,056 18,056 Marketing and selling ........ 5,993 5,993 Incentive compensation ....... 177 177 Depreciation and amortization ................ 4,557 4,557 Cable Programming, technical, and general and administrative .............. 4,409 10,364 10,364 Marketing and selling ........ 329 329 Incentive compensation ....... 75 (f) 115 115 Depreciation and amortization ................ 982 1,732 (e) 6,872 6,872 Corporate expenses ............ 997 (1,095)(g) 3,614 3,614 Corporate depreciation and amortization ................. 2,105 2,105 --------- ----------- --------- -------- --------- Income (loss) from operations .................. 2,971 (17,096) (79,353) (79,353) Interest expense ............... (1,617) (7,379)(h) (61,114) 5,354(l) (55,760) Interest income ................ 2,036 2,036 Other income (expenses), net ... (325) 231 (i) (1,203) (1,203) Gain on sale of cable systems .. (24,726)(j) --------- ----------- --------- -------- --------- Income (loss) before income taxes ........................ 1,029 (48,970) (139,634) 5,354 (134,280) Provision (benefit) for income taxes ......................... 922 (1,005)(k) (896) (896) --------- ----------- --------- -------- --------- Net income (loss) ............. 107 (47,965) (138,738) 5,354 (133,384) Preferred stock dividends ..... 14,763 14,763 --------- ----------- --------- -------- --------- Net income (loss) applicable to common shares ............. $ 107 ($ 47,965) ($ 153,501) $ 5,354 ($ 148,147) ========= =========== ========= ======== =========
F-24 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 December 31, 1998 -------------------------------------------- Income (loss) Income applicable (loss) to Effective Net from common Date Revenues operations Shares NRTC # 211 3/9/98 $ 638 $ 121 $ 112 NRTC # 334 3/9/98 161 11 8 NRTC # 174 4/9/98 759 91 91 NRTC # 1011 4/9/98 108 18 16 NRTC # 1017 4/27/98 177 24 24 DTS 4/27/98 24,276 (7,962) (15,940) NRTC# 267 5/11/98 355 79 49 NRTC# 368 5/11/98 150 67 67 NRTC# 379 5/11/98 221 42 54 NRTC# 121 6/10/98 207 55 51 NRTC# 128 6/10/98 833 110 98 NRTC# 364 6/10/98 115 (6) (4) NRTC# 365 6/10/98 202 65 65 NRTC# 37 7/10/98 520 94 94 NRTC# 250 7/10/98 1,092 167 111 NRTC# 460 7/10/98 1,008 (200) (200) NRTC# 289 8/10/98 371 46 31 NRTC# 83 9/10/98 808 326 326 NRTC# 378 9/10/98 863 5 1 NRTC# 433 9/10/98 696 66 66 NRTC# 475 9/10/98 4,037 490 597 NRTC# 363 10/9/98 241 97 97 NRTC# 13 11/9/98 834 (162) (162) NRTC# 131 11/9/98 235 96 96 NRTC# 454 11/9/98 1,187 12 (83) NRTC# 1027 12/9/98 589 68 68 NRTC# 1075 12/9/98 771 233 219 NRTC# 87 1/9/99 504 59 59 NRTC# 348 1/9/99 279 90 90 NRTC# 377 1/9/99 677 (103) (138) NRTC# 1015 1/9/99 428 157 157 NRTC# 177 2/9/99 2,740 728 728 ------- ------- -------- Total $46,082 $(5,016) $(13,152) ======= ======= ======== Entities with an effective date of 4/27/98 represent DTS acquisitions that occurred prior to the DTS acquisition by Pegasus. F-25 (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 December 31, 1998 --------------------------------------- Income (loss) Income applicable (loss) to Effective Net from common Date Revenues operations Shares NRTC # 110 Pending $ 540 $ 96 $ 96 NRTC # 223 Pending 538 191 191 NRTC # 248 Pending 621 25 8 NRTC # 273 Pending 2,490 780 780 ------ ------ ------ Total $4,189 $1,092 $1,075 ====== ====== ====== (c) Financial results of the New England operations of Pegasus Cable Television. The pro forma income statement data for the year ended December 31, 1998 does not include a $24.7 million gain resulting from the sale of our New England cable systems. (d) Financial results of the pending Puerto Rico cable acquisition. (e) To record additional amortization and depreciation expense resulting from the purchase accounting treatment of the completed DBS acquisitions, the pending DBS acquisitions, the pending Puerto Rico cable acquisition and the sale of our New England cable systems. Substantially all of the purchase price for the completed and pending DBS acquisitions has been allocated to DBS rights of the $42.0 million purchase price for the pending Puerto Rico cable acquisition, $5.5 million and $36.5 million has been allocated to property, plant and equipment and franchise rights, respectively. Such amounts are based on a preliminary allocation of the total consideration. The actual depreciation and amortization may change immaterially based upon the final allocation of the total consideration to be paid to the tangible, and intangible assets acquired. (f) To record the incentive compensation for the completed and pending DBS acquisitions as per the Company's current incentive compensation plan. (g) 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. (h) To record interest expense, as follows (dollars in thousands): Year Ended Interest Rate 12/31/98 Interest expense PM&C Credit Facility 7.7% $ -- DTS Credit Facility 8.0 3,492 PCC 1998 Notes 9.75 9,750 PCC 1997 Notes 9.625 11,069 DTS Notes 12.5 19,375 PM&C Notes 12.5 10,625 Sellers' Notes various 1,346 Capital leases and other various 103 ------- Total $55,760 ======= (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 remove interest expense as a result of the pay down of debt from this offering. See footnote h. F-26 Pegasus Communications Corporation Pro Forma Consolidated Balance Sheet December 31, 1998 (Dollars in thousands)
DBS Acquisitions ---------------------------- Actual Completed(a) Pending(b) ------------- -------------- ------------ ASSETS Cash and cash equivalents .......... $ 54,505 ($ 13,975) ($ 14,420) Restricted cash .................... 21,479 Accounts receivable, net ........... 20,882 Inventory .......................... 3,157 Prepaid expenses and other current assets .................... 9,236 Property and equipment, net ........ 34,067 Intangibles, net ................... 729,406 22,725 17,470 Other assets ....................... 13,578 ----------- -------- -------- Total assets ..................... $ 886,310 $ 8,750 $ 3,050 =========== ======== ======== LIABILITIES AND TOTAL EQUITY Accounts payable and accrued expenses .......................... $ 37,074 $ 1,000 Accrued interest ................... 17,465 Current portion of long-term debt .............................. 14,399 $ 1,250 1,883 Current portion of program rights payable .................... 2,432 Long-term debt, net ................ 20,137 167 Senior Notes ....................... 215,000 PM&C Notes ......................... 82,378 DTS Notes .......................... 153,215 Credit Facilities .................. 73,900 7,500 Program rights payable, net ........ 2,472 Other long-term liabilities ........ 80,672 Minority Interest .................. 3,000 Series A Preferred Stock ........... 126,028 Class A Common Stock ............... 113 Class B Common Stock ............... 46 Additional paid in capital ......... 173,871 Deficit ............................ (115,892) ----------- -------- -------- Total liabilities and equity ..... $ 886,310 $ 8,750 $ 3,050 =========== ======== ========
Pending Cable The Acquisition(c) Other(d) Subtotal Offering(e) Pro Forma ---------------- ------------- ------------- ------------- ------------- ASSETS Cash and cash equivalents .......... ($ 19,908) $ 6,202 $ 6,202 Restricted cash .................... 21,479 21,479 Accounts receivable, net ........... 20,882 20,882 Inventory .......................... 3,157 3,157 Prepaid expenses and other current assets .................... 9,236 9,236 Property and equipment, net ........ $ 5,460 39,527 39,527 Intangibles, net ................... 36,540 806,141 806,141 Other assets ....................... 13,578 13,578 ------- -------- ----------- -------- ----------- Total assets ..................... $42,000 ($ 19,908) $ 920,202 $ 0 $ 920,202 ======= ======== =========== ======== =========== LIABILITIES AND TOTAL EQUITY Accounts payable and accrued expenses .......................... $ 38,074 $ 38,074 Accrued interest ................... 17,465 17,465 Current portion of long-term debt .............................. 17,532 17,532 Current portion of program rights payable .................... 2,432 2,432 Long-term debt, net ................ ($ 9,908) 10,396 10,396 Senior Notes ....................... 215,000 215,000 PM&C Notes ......................... 82,378 82,378 DTS Notes .......................... 153,215 153,215 Credit Facilities .................. $42,000 (10,000) 113,400 ($ 69,750) 43,650 Program rights payable, net ........ 2,472 2,472 Other long-term liabilities ........ 80,672 80,672 Minority Interest .................. 3,000 3,000 Series A Preferred Stock ........... 126,028 126,028 Class A Common Stock ............... 113 30 143 Class B Common Stock ............... 46 46 Additional paid in capital ......... 173,871 69,720 243,591 Deficit ............................ (115,892) (115,892) ------- -------- ----------- -------- ----------- Total liabilities and equity ..... $42,000 ($ 19,908) $ 920,202 $ 0 $ 920,202 ======= ======== =========== ======== ===========
F-27 Notes to Pro Forma Consolidated Balance Sheet (dollars in thousands) (a) To record the five completed DBS acquisitions which occurred subsequent to December 31, 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. 0348 ......... $ 1,100 $ 1,100 NRTC System No. 0177 ......... 14,500 14,500 NRTC System No. 0087 ......... 2,500 1,250 $1,250 NRTC System No. 0377 ......... 3,025 3,025 NRTC System No. 1015 ......... 1,600 1,600 ------- ------- ------ Total ..................... $22,725 $21,475 $1,250 ======= ======= ====== (b) To record the four pending DBS acquisitions. Intangible assets to be purchased consist of $17.0 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. 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 ..................... $17,470 $14,420 $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 additional borrowings under the credit facilities and payments of sellers' notes. (e) To record the proceeds from the offering and the uses of such proceeds. F-28 [INSIDE BACK COVER] [COLOR PICTURES OF TELEVISION SHOWS] [PEGASUS LOGO] ================================================================================ 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 Where You Can Find More Information .......... 8 Risk Factors ................................. 9 Use of Proceeds .............................. 17 Dividend Policy .............................. 18 Price Range of Class A Common Stock .......... 18 Dilution ..................................... 19 Capitalization ............................... 20 Selected Historical and Pro Forma Consolidated Financial Data ............... 21 Management's Discussion and Analysis of Financial Condition and Results of Operation ................................. 23 The Company .................................. 34 Management ................................... 41 Principal and Selling Stockholders ........... 48 Certain Relationships and Related Transactions .............................. 51 Description of Certain Indebtedness .......... 54 Description of Capital Stock ................. 63 Future Sales of Common Stock ................. 67 Underwriters ................................. 70 Legal Matters ................................ 71 Experts ...................................... 71 Index to Financial Statements ................ F-1 Pro Forma Consolidated Financial Information. F-23 ================================================================================ ================================================================================ 4,714,200 Shares [GRAPHIC OMITTED] Corporation 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 .................... $ 32,158.00 Filing Fee -- Nasdaq Stock Market, Inc. ............................. 17,500.00 Filing Fee -- National Association Securities Dealers, Inc. ......... 8,000.00 Fees and Expenses of Accountants .................................... 90,000.00 Fees and Expenses of Counsel ........................................ 190,000.00 Printing Expenses ................................................... 200,000.00 Blue Sky Fees and Expenses .......................................... 7,500.00 ------------ Total ............................................................. $ 545,158.00
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 7 of the form of Underwriting Agreement which is filed as Exhibit 1.1 hereto. The Registrant maintains directors' and officers' liability insurance. II-1 Item 16. Exhibits.
Number Description of Document - ------ ----------------------- 1.1** Form of Underwriting Agreement by and between Pegasus Communications Corporation and Donaldson Lufkin & Jenrette Securities Corporation. 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 5, to Pegasus' Pre-Effective Amendment No. 2 to Pegasus' Registration Statement on Form S-3, filed on February 24, 1999 (File No. 333-70949)).
II-2
Number Description of Document - ------ ----------------------- 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).
II-3
Number Description of Document - ----- ----------------------- 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 Communications 1996 Stock Option Plan (as amended and restated effective as of December 18, 1998). 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 Statement on 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' Registration Statement on Form S-4 (File No. 333-44929)). 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 Exhibit 21.1 to Pegasus' Pre-Effective Amendment No. 2 to Pegasus Registration Statement on Form S-3, filed on February 24, 1999 (File No. 333-70949)). 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). 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)). 27.1 Financial Data Schedules (which is incorporated by reference to Exhibit 27.1 to Pegasus' Pre-Effective Amendment No. 2 to Pegasus Registration Statement on Form S-3, filed on February 24, 1999 (File No. 333-70949)).
- ------------ * Filed herewith. ** To be filed by amendment. II-4 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. 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. II-5 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 March 4, 1999. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Marshall W. Pagon -------------------------------------- Marshall W. Pagon Chairman of the Board Chief Executive Officer and President Date: March 4, 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 President, Chief Executive Officer, March 4, 1999 - ---------------------------- Chairman of the Board and Director Marshall W. Pagon (Principal Executive Officer) /s/ Robert N. Verdecchio Senior Vice President, Chief Financial March 4, 1999 - ---------------------------- Officer, Assistant Secretary and Director Robert N. Verdecchio (Principal Financial and Accounting Officer) * Director March 4, 1999 - ---------------------------- James J. McEntee, III * Director March 4, 1999 - ---------------------------- Mary C. Metzger * Director March 4, 1999 - ---------------------------- Donald W. Weber * Director March 4, 1999 - ---------------------------- Michael C. Brooks * Director March 4, 1999 - ---------------------------- Harry F. Hopper, III Director March 4, 1999 - ---------------------------- William P. Phoenix * Director March 4, 1999 - ---------------------------- Riordon B. Smith *By: /s/ Ted S. Lodge ----------------------- Ted S. Lodge Attorney-in-Fact
II-6 EXHIBIT INDEX
Number Description of Document - ------ ----------------------- 1.1** Form of Underwriting Agreement by and between Pegasus Communications Corporation and Donaldson Lufkin & Jenrette Securities Corporation. 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 5, to Pegasus' Pre-Effective Amendment No. 2 to Pegasus' Registration Statement on Form S-3, filed on February 24, 1999 (File No. 333-70949)).
Number Description of Document - ------ ----------------------- 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).
Number Description of Document - ----- ----------------------- 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 Communications 1996 Stock Option Plan (as amended and restated effective as of December 18, 1998). 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 Statement on 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' Registration Statement on Form S-4 (File No. 333-44929)). 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 Exhibit 21.1 to Pegasus' Pre-Effective Amendment No. 2 to Pegasus Registration Statement on Form S-3, filed on February 24, 1999 (File No. 333-70949)). 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). 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)). 27.1 Financial Data Schedules (which is incorporated by reference to Exhibit 27.1 to Pegasus' Pre-Effective Amendment No. 2 to Pegasus Registration Statement on Form S-3, filed on February 24, 1999 (File No. 333-70949)).
- ------------ * Filed herewith. ** To be filed by amendment. EX-10 2 EXHIBIT 10.18 PEGASUS COMMUNICATIONS 1996 STOCK OPTION PLAN (As Amended and Restated Effective As of December 18, 1998) Table of Contents
1. Purpose.................................................................................................1 2. Administration..........................................................................................1 3. Eligibility.............................................................................................2 4. Stock...................................................................................................2 5. Annual Limit............................................................................................3 6. Granting of Discretionary Options.......................................................................3 7. Terms and Conditions of Discretionary Options...........................................................3 8. Formula Grants to Full-Time Employees Who Are Not Executive Officers....................................7 9. Capital Adjustments....................................................................................11 10. Certain Corporate Transactions.........................................................................11 11. Change in Control......................................................................................12 12. Amendment or Termination of the Plan...................................................................13 13. Absence of Rights......................................................................................13 14. Indemnification of Board and Committee.................................................................14 15. Application of Funds...................................................................................14 16. Shareholder Approval...................................................................................14 17. No Obligation to Exercise Option.......................................................................14 18. Termination of Plan....................................................................................14 19. Governing Law..........................................................................................15 20. Option Agreements -- Other Provisions..................................................................15 21. Listing and Registration of Shares.....................................................................15 22. Special Provisions Regarding Digital Television Services, Inc..........................................15
-i- PEGASUS COMMUNICATIONS 1996 STOCK OPTION PLAN (As Amended and Restated Effective As of December 18, 1998) -------------------------------- WHEREAS, Pegasus Communications Corporation established the Pegasus Communications Corporation 1996 Stock Option Plan effective September 30, 1996, and amended the 1996 Stock Option Plan on one occasion thereafter; WHEREAS, Pegasus Communications Corporation desires to amend and restate the 1996 Stock Option Plan (i) to provide that all employees (and not just executive officers) are eligible to receive options under the 1996 Stock Option Plan, and (ii) to provide for a grant to each full-time employee who is not an executive officer, such grant to be made on the later of December 18, 1998, or the date the employee becomes a full-time employee; NOW THEREFORE, effective as of December 18, 1998, the Pegasus Communications 1996 Stock Option Plan is hereby amended and restated to read as follows: 1. Purpose. This Pegasus Communications 1996 Stock Option Plan (the "Plan") is intended to provide a means whereby Pegasus Communications Corporation (the "Company") may, through the grant of incentive stock options and nonqualified stock options (collectively, the "Options") to Employees and Non-employee Directors (as defined in Section 3), attract and retain such individuals and motivate them to exercise their best efforts on behalf of the Company and of any Related Company. A "Related Company" shall mean either a "subsidiary corporation" of the Company, as defined in section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"), or the "parent corporation" of the Company, as defined in section 424(e) of the Code. Further, as used in the Plan, (i) the term "ISO" shall mean an option which, at the time such option is granted, qualifies as an incentive stock option within the meaning of section 422 of the Code and is designated as an ISO in the "Option Agreement" (as defined in Section 20); and (ii) the term "NQSO" shall mean an option which, at the time such option is granted, does not meet the definition of ISO, whether or not it is designated as a nonqualified stock option in the Option Agreement. 2. Administration. The Plan shall be administered: (a) By a committee, which shall consist solely of not fewer than two directors of the Company who shall be appointed by, and shall serve at the pleasure of, the Board of Directors of the Company (the "Board"), taking into consideration the rules under Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and the requirements of section 162(m) of the Code; or -1- (b) In the event a committee has not been established in accordance with subsection (a), or cannot be constituted to vote on the grant of an Option, by the entire Board; provided, however, that a member of the Board shall not participate in a vote approving the grant of an Option to himself or herself to the extent provided under the laws of the State of Delaware governing corporate self-dealing. The administrator of the Plan shall hereinafter be referred to as the "Committee." Each member of the Committee, while serving as such, shall be deemed to be acting in his capacity as a director of the Company. Except as provided in Section 8 (regarding formula grants to employees other than executive officers), the Committee shall have full authority, subject to the terms of the Plan, to select the Employees and Non-employee Directors to be granted Options under the Plan, to grant Options on behalf of the Company, and to set the date of grant and the other terms of such Options; provided, however, that a Non-employee Director shall not be eligible to receive an ISO under the Plan. The Committee may correct any defect, supply any omission and reconcile any inconsistency in this Plan and in any Option granted hereunder in the manner and to the extent it deems desirable. The Committee also shall have the authority to establish such rules and regulations, not inconsistent with the provisions of the Plan, for the proper administration of the Plan, to amend, modify, or rescind any such rules and regulations, and to make such determinations, and interpretations under, or in connection with, the Plan, as it deems necessary or advisable. All such rules, regulations, determinations, and interpretations shall be binding and conclusive upon the Company, its shareholders and all Employees and Non-employee Directors, upon their respective legal representatives, beneficiaries, successors, and assigns, and upon all other persons claiming under or through any of them. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. 3. Eligibility. All employees of the Company or a Related Company (including any directors who also are officers) ("Employees") shall be eligible to receive Options under the Plan. Directors of the Company or a Related Company who are not employees ("Non-employee Directors") shall be eligible to receive NQSOs (and not ISOs) under the Plan. More than one Option may be granted to an Employee or a Non-employee Director under the Plan. An Employee or Non-employee Director who has been granted an Option under the Plan shall hereinafter be referred to as an "Optionee." 4. Stock. Options may be granted under the Plan to purchase up to a maximum of 970,000 shares of Class A common stock of the Company ("Common Stock"); provided, however, that no Employee shall receive Options for more than 550,000 shares of the Company's Common Stock over the life of the Plan. However, both limits in the preceding sentence shall be subject to adjustment as provided in Section 9. Shares issuable under the Plan may be authorized but unissued shares or reacquired shares, and the Company may purchase shares required for this purpose, from time to time, if it deems such purchase to be advisable. -2- If any Option granted under the Plan expires or otherwise terminates for any reason whatsoever (including, without limitation, the Optionee's surrender thereof) without having been exercised, the shares subject to the unexercised portion of the Option shall continue to be available for the granting of Options under the Plan as fully as if the shares had never been subject to an Option; provided, however, that (i) if an Option is cancelled, the shares of Common Stock covered by the cancelled Option shall be counted against the maximum number of shares specified above for which Options may be granted to single Employee, and (ii) if the exercise price of an Option is reduced after the date of grant, the transaction shall be treated as a cancellation of the original Option and the grant of a new Option for purposes of such maximum. 5. Annual Limit. The aggregate fair market value (determined under Section 7(b)) of the Common Stock with respect to which ISOs are exercisable for the first time by an Employee during any calendar year (counting ISOs under this Plan and incentive stock options under any other stock option plan of the Company or a Related Company) shall not exceed $100,000. If an Option intended as an ISO is granted to an Employee and the Option may not be treated in whole or in part as an ISO pursuant to the $100,000 limitation, the Option shall be treated as an ISO to the extent it may be so treated under the limitation and as an NQSO as to the remainder. For purposes of determining whether an ISO would cause the limitation to be exceeded, ISOs shall be taken into account in the order granted. The annual limits set forth above for ISOs shall not apply to NQSOs. 6. Granting of Discretionary Options. From time to time until the expiration or earlier suspension or discontinuance of the Plan, the Committee may, on behalf of the Company, grant to Employees and Non-employee Directors under the Plan such Options as it determines are warranted; provided, however, that grants of ISOs and NQSOs shall be separate and not in tandem, and further provided that Non-employee Directors shall not be eligible to receive ISOs under the Plan. In making any determination as to whether an Employee or a Non-employee Director shall be granted an Option, the type of Option to be granted to an Employee, the number of shares to be covered by the Option, and other terms of the Option, the Committee shall take into account the duties of the Employee or the Non-employee Director, his present and potential contributions to the success of the Company or a Related Company, the tax implications to the Company and the Employee of any Option granted, and such other factors as the Committee shall deem relevant in accomplishing the purposes of the Plan. Moreover, the Committee may provide in the Option that said Option may be exercised only if certain conditions, as determined by the Committee, are fulfilled. 7. Terms and Conditions of Discretionary Options. Options granted pursuant to Section 6 shall include expressly or by reference the following terms and conditions, as well as such other provisions not inconsistent with the provisions of this Plan and, for ISOs granted under this Plan, the provisions of section 422(b) of the Code, as the Committee shall deem desirable -- (a) Number of Shares. The Option shall state the number of shares of Common Stock to which the Option pertains. -3- (b) Price. Each Option granted under Section 6 shall state the Option price which shall be determined and fixed by the Committee in its discretion but shall not be less than the higher of 100 percent (110 percent in the case of an ISO granted to a more-than-10-percent shareholder, as provided in Section 7(i)) of the fair market value of the optioned shares of Common Stock, or the par value thereof. The fair market value of a share of Common Stock shall be the closing price of the Common Stock on a registered securities exchange or on an over-the-counter market on the last business day prior to the date of grant on which Common Stock traded. (c) Term. (1) ISOs. Subject to earlier termination as provided in Section 7(e), (f), and (g) and in Section 10, the term of each ISO granted under Section 6 shall be not more than ten years (five years in the case of a more-than-10-percent shareholder, as discussed in Section 7(i)) from the date of grant. (2) NQSOs. Subject to earlier termination as provided in Section 7(e), (f), and (g) and in Section 10, the term of each NQSO granted under Section 6 shall be not more than ten years from the date of grant. (d) Exercise. Options granted under Section 6 shall be exercisable in such installments and on such dates, as the Committee may specify. The Committee may accelerate the exercise date of any outstanding Option, in its discretion, if it deems such acceleration to be desirable. Any exercisable Options may be exercised at any time up to the expiration or termination of the Option. Exercisable Options may be exercised, in whole or in part and from time to time, by giving written notice of exercise to the Company at its principal office, specifying the number of shares to be purchased and accompanied by payment in full of the aggregate Option exercise price for such shares (or payment as soon as practicable after the exercise, in the case of an exercise arrangement approved by the Committee and described in paragraph (2)(C) below). Only full shares shall be issued under the Plan, and any fractional share which might otherwise be issuable upon exercise of an Option granted hereunder shall be forfeited. The Option price shall be payable -- (1) in cash or its equivalent; (2) in the case of an ISO, if the Committee in its discretion causes the Option Agreement so to provide, and in the case of an NQSO, if the Committee in its discretion so determines at or prior to the time of exercise, then -- (A) in shares of Common Stock previously acquired by the Optionee; provided that (i) if such shares of Common Stock were acquired through the exercise -4- of an ISO and are used to pay the Option price for ISOs, such shares have been held by the Employee for a period of not less than the holding period described in section 422(a)(1) of the Code on the date of exercise, (ii) if such shares of Common Stock were acquired through the exercise of an NQSO (and are used to pay the Option price of an ISO or NQSO) or acquired through the exercise of an ISO (and are used to pay the Option price of an NQSO), such shares have been held by the Optionee for a period of not less than six months on the date of exercise, and (iii) if such shares of Common Stock were acquired through the vesting of a restricted stock award, such shares shall have vested in the Optionee at least six months prior to the date of exercise; (B) in Company Common Stock newly acquired by the Optionee upon exercise of such Option (which shall constitute a disqualifying disposition in the case of an Option which is an ISO); (C) by delivering a properly executed notice of exercise of the Option to the Company and a broker, with irrevocable instructions to the broker promptly to deliver to the Company the amount of sale or loan proceeds necessary to pay the exercise price of the Option; (D) if the Optionee is designated as an "eligible participant," and if the Optionee thereafter so requests, (i) the Company will loan the Optionee the money required to pay the exercise price of the Option; (ii) any such loan to an Optionee shall be made only at the time the Option is exercised; and (iii) the loan will be made on the Optionee's personal negotiable demand promissory note, bearing interest at the lowest rate which will avoid imputation of interest under section 7872 of the Code, and including such other terms as the Committee prescribes; or (E) in any combination of (1), (2)(A), (2)(B), (2)(C) and (2)(D) above. In the event the Option price is paid, in whole or in part, with shares of Common Stock, the portion of the Option price so paid shall be equal to the aggregate fair market value (determined under Section 7(b), with reference to the date of exercise of the Option, rather than the date of grant) of the Common Stock so surrendered in payment of the Option price. (e) Termination of Employment or Board Membership. If an Employee's employment by the Company (and Related Companies) or a Non-employee Director's membership on the Board is terminated by either party prior to the expiration date fixed for his Option for any reason other than death or disability, such Option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of such termination, or to any greater extent permitted by the Committee, by the Optionee at any time prior to the earlier of (i) the expiration date specified in such Option, or (ii) an accelerated expiration date determined by the Committee, in its discretion, and set forth in the Option Agreement; except that, subject to Section 10 hereof, such accelerated expiration date shall not be earlier than the date of the termination of the Employee's employment or the Non-employee -5- Director's Board membership, and in the case of ISOs, such accelerated expiration date shall not be later than three months after such termination of employment. (f) Exercise upon Disability of Optionee. If an Optionee becomes disabled (within the meaning of section 22(e)(3) of the Code) during his employment or membership on the Board and, prior to the expiration date fixed for his Option, his employment or membership on the Board is terminated as a consequence of such disability, such Option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of such termination, or to any greater extent permitted by the Committee, by the Optionee at any time prior to the earlier of (i) the expiration date specified in such Option, or (ii) an accelerated termination date determined by the Committee, in its discretion, and set forth in the Option Agreement; except that, subject to Section 10 hereof, such accelerated termination date shall not be earlier than the date of the Optionee's termination of employment or Board membership by reason of disability, and in the case of ISOs, such accelerated termination date shall not be later than one year after such termination of employment. In the event of the Optionee's legal disability, such Option may be exercised by the Optionee's legal representative. (g) Exercise upon Death of Optionee. If an Optionee dies during his employment or Board membership, and prior to the expiration date fixed for his Option, or if an Optionee whose employment or Board membership is terminated for any reason, dies following his termination of employment or Board membership but prior to the earliest of (i) the expiration date fixed for his Option, (ii) the expiration of the period determined under paragraphs (e) and (f) above, or (iii) in the case of an ISO, three months following termination of employment, such Option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of his death, or to any greater extent permitted by the Committee, by the Optionee's estate, personal representative or beneficiary who acquired the right to exercise such Option by bequest or inheritance or by reason of the death of the Optionee. Such post-death exercise may occur at any time prior to the earlier of (i) the expiration date specified in such Option or (ii) an accelerated termination date determined by the Committee, in its discretion, and set forth in the Option Agreement; except that, subject to Section 10 hereof, such accelerated termination date shall not be later than three years after the date of death. (h) Non-Transferability. No ISO granted under Section 6 shall be assignable or transferable by the Optionee other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, an ISO shall be exercisable only by the Optionee, or in the event of the Optionee's legal disability, by the Optionee's guardian or legal representative. Except as provided in an Optionee's Option Agreement, such limits on assignment, transfer and exercise shall also apply to NQSOs. If the Optionee is married at the time of exercise and if the Optionee so requests at the time of exercise, the certificate or certificates shall be registered in the name of the Optionee and the Optionee's spouse, jointly, with right of survivorship. (i) Ten Percent Shareholder. If the Employee owns more than 10 percent of the total combined voting power of all shares of stock of the Company or of a Related Company at the time an ISO is granted to him (taking into account the attribution rules of section 424(d) of the Code), the Option price for the ISO shall be not less than 110 percent of the fair market value (as determined under Section 7(b)) of the optioned shares of Common Stock on the date the ISO -6- is granted, and such ISO, by its terms, shall not be exercisable after the expiration of five years from the date the ISO is granted. The conditions set forth in this paragraph shall not apply to NQSOs. (j) Withholding and Use of Shares to Satisfy Tax Obligations. The obligation of the Company to deliver shares of Common Stock upon the exercise of any Option shall be subject to applicable federal, state and local tax withholding requirements. If the exercise of any Option granted under Section 6 is subject to the withholding requirements of applicable federal tax law, the Committee, in its discretion, may permit or require the Employee to satisfy the federal, state and local withholding tax, in whole or in part, by electing to have the Company withhold shares of Common Stock subject to the exercise (or by returning previously acquired shares of Common Stock to the Company). The Company may not withhold shares in excess of the number necessary to satisfy the minimum federal, state and local tax withholding requirements. Shares of Common Stock shall be valued, for purposes of this paragraph, at their fair market value determined under Section 7(b), with reference to the date the amount attributable to the exercise of the Option is includable in income by the Employee under section 83 of the Code (the "Determination Date"), rather than the date of grant. If shares of Common Stock acquired by the exercise of an ISO are used to satisfy the withholding requirement described above, such shares of Common Stock must have been held by the Employee for a period of not less than the holding period described in section 422(a)(1) of the Code as of the Determination Date. The Committee shall adopt such withholding rules as it deems necessary to carry out the provisions of this paragraph. (k) Loans. If an Optionee who is granted an Option under Section 6 is designated as an "eligible participant" by the Committee at the date of grant in the case of an ISO, or at or after the date of grant in the case of an NQSO, and if the Optionee thereafter so requests, the Company will loan the Optionee the money required to satisfy any regular income tax obligations (as opposed to alternative minimum tax obligations) resulting from the exercise of any Options. Any loan or loans to an Optionee shall be made only at the time any such tax resulting from such exercise is due. The Committee, in its discretion, may require an affidavit from the Optionee specifying the amount of the tax required to be paid and the date when such tax must be paid. The loan will be made on the Optionee's personal, negotiable, demand promissory note, bearing interest at the lowest rate which will avoid imputation of interest under section 7872 of the Code, and including such other terms as the Committee prescribes. 8. Formula Grants to Full-Time Employees Who Are Not Executive Officers. (a) Grant. Each full-time Employee who is not an executive officer of the Company or a Related Company shall be granted an Option to purchase 100 shares of Common Stock as provided in this Section 8. Such Option shall be granted on the later of (i) December 18, 1998, or (ii) the date the Employee becomes a full-time Employee (as a result of hire or a change in status from part-time to full-time Employee). No Employee shall receive more than one Option grant under this Section 8. -7- (b) Type of Option. Each Option granted under this Section 8 prior to the date shareholder approval of this amended and restated Plan is obtained shall be an NQSO. Each Option granted under this Section 8 on and after the date shareholder approval of this amended and restated Plan is obtained shall, unless the Committee determines otherwise, be an ISO. (c) Terms and Conditions of Formula Options. Options granted under this Section 8 shall include expressly or by reference the following terms and conditions -- (1) Number of Shares. The Option shall state the number of shares of Common Stock to which the Option pertains. (2) Price. The Option price of each Option granted under this Section 8 shall be the higher of 100 percent (110 percent in the case of an ISO granted to a more-than-10-percent shareholder, as provided in Section 7(i)) of the fair market value (as defined in Section 7(b)) of the optioned shares of Common Stock, or the par value thereof. (3) Term. Subject to earlier termination as provided in Section 8(c)(5), (6) and (7) and in Section 10 hereof, the term of each Option granted under this Section 8 shall be ten years (five years in the case of an ISO granted to a more-than-ten-percent shareholder, as discussed in Section 7(i) above) from the date of grant. (4) Exercise. Each Option granted under this Section 8 shall become exercisable in accordance with the following schedule: Percentage of Shares Subject Years of Vesting Service to Option That Are Exercisable ------------------------ ------------------------------ fewer than 2 0 2 but fewer than 3 34% 3 but fewer than 4 an additional 33% 4 or more an additional 33% If the Optionee has completed four or more Years of Vesting Service on the date of grant, the Option shall be fully exercisable on the date of grant. For purposes of this Section 8(c)(4), Years of Vesting Service shall have the meaning set forth in Article I of (I) the Pegasus Communications Savings Plan, as it may be amended from time to time, if the Employee is an eligible employee thereunder or (II) the Pegasus Communications Puerto Rico Savings Plan, as it may be amended from time to time, if the Employee is an eligible employee thereunder; provided, however, that an Employee shall not complete a Year of Vesting Service for purposes of this Plan until the last day of the 12-month computation period in which such Year is being measured. Notwithstanding the foregoing, an Option granted under this Section 8 shall become fully exercisable upon the Optionee's death or disability (as defined in section 22(e)(3) of the Code) while in the employ of the Company or a Related Company. In addition, -8- the Committee may accelerate the exercise date of any outstanding Option, in its discretion, if it deems such acceleration to be desirable. Any exercisable Options may be exercised at any time up to the expiration or termination of the Option. Exercisable Options may be exercised, in whole or in part and from time to time, by giving written notice of exercise to the Company at its principal office, specifying the number of shares to be purchased and accompanied by payment in full of the aggregate Option exercise price for such shares (or payment as soon as practicable after the exercise, in the case of an exercise arrangement described in paragraph (C) below). Only full shares shall be issued under the Plan, and any fractional share which might otherwise be issuable upon exercise of an Option granted hereunder shall be forfeited. The Option price shall be payable -- (A) in cash or its equivalent; (B) in shares of Common Stock previously acquired by the Optionee; provided that (i) if such shares of Common Stock were acquired through the exercise of an ISO and are used to pay the Option price for ISOs, such shares have been held by the Employee for a period of not less than the holding period described in section 422(a)(1) of the Code on the date of exercise, (ii) if such shares of Common Stock were acquired through the exercise of an NQSO (and used to pay the Option price for ISOs or NQSOs) or acquired through the exercise of an ISO (and used to pay the Option price for NQSOs), such shares have been held by the Optionee for a period of not less than six months on the date of exercise, and (iii) if such shares of Common Stock were acquired through the vesting of a restricted stock award, such shares shall have vested in the Optionee at least six months prior to the date of exercise; (C) by delivering a properly executed notice of exercise of the Option to the Company and a broker, with irrevocable instructions to the broker promptly to deliver to the Company the amount of sale or loan proceeds necessary to pay the exercise price of the Option; or (D) in any combination of (A), (B) and (C) above. In the event the Option price is paid, in whole or in part, with shares of Common Stock, the portion of the Option price so paid shall be equal to the aggregate fair market value (determined under Section 7(b), with reference to the date of exercise of the Option, rather than the date of grant) of the Common Stock so surrendered in payment of the Option price. (5) Termination of Employment. If an Employee's employment by the Company (and Related Companies) is terminated by either party prior to the expiration date fixed for his Option for any reason other than death or disability, such Option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of such termination, by the Optionee at any time prior to the earliest of (i) the expiration -9- date specified in such Option, (ii) three months after such termination of employment, or (iii) termination of such Option under Section 10. (6) Exercise upon Disability of Optionee. If an Optionee becomes disabled (within the meaning of section 22(e)(3) of the Code) during his employment and prior to the expiration date fixed for his Option, such Option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of such termination by the Optionee at any time prior to the earliest of (i) the expiration date specified in such Option, (ii) one year after such termination of employment, or (iii) termination of such Option under Section 10. In the event of the Optionee's legal disability, such Option may be exercised by the Optionee's legal representative. (7) Exercise upon Death of Optionee. If an Optionee dies during his employment, and prior to the expiration date fixed for his Option, or if an Optionee whose employment is terminated for any reason, dies following his termination of employment but prior to the earliest of (A) the expiration date fixed for his Option, (B) the expiration of the period determined under paragraphs (5) and (6) above, or (C) in the case of an ISO, three months following termination of employment, such Option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of his death, by the Optionee's estate, personal representative or beneficiary who acquired the right to exercise such Option by bequest or inheritance or by reason of the death of the Optionee. Such post-death exercise may occur at any time prior to the earliest of (i) the expiration date specified in such Option, (ii) one year after the date of death, or (iii) termination of such Option under Section 10. (8) Non-Transferability. No Option granted under this Section 8 shall be assignable or transferable by the Optionee other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, all Options granted under this Section 8 shall be exercisable only by the Optionee, or, in the event of the Optionee's legal disability, by the Optionee's guardian or legal representative. If the Optionee is married at the time of exercise and if the Optionee so requests at the time of exercise, the certificate or certificates shall be registered in the name of the Optionee and the Optionee's spouse, jointly, with right of survivorship. (9) Withholding and Use of Shares to Satisfy Tax Obligations. The obligation of the Company to deliver shares of Common Stock upon the exercise of any Option shall be subject to applicable federal, state and local tax withholding requirements. If the exercise of any Option granted under this Section 8 is subject to the withholding requirements of applicable federal tax law, the Employee may satisfy the federal, state and local withholding tax, in whole or in part, by electing to have the Company withhold shares of Common Stock subject to the exercise (or by returning previously acquired shares of Common Stock to the Company). The Company may not withhold shares in excess of the number necessary to satisfy the minimum federal, state and local tax withholding requirements. Shares of Common Stock shall be valued, for purposes of this paragraph, at their fair market value determined under Section 7(b), with reference to the date the amount attributable to the exercise of the Option is includable in income by the Employee under section 83 of the Code (the "Determination Date"), rather than the date of grant. -10- If shares of Common Stock acquired by the exercise of an ISO are used to satisfy the withholding requirement described above, such shares of Common Stock must have been held by the Employee for a period of not less than the holding period described in section 422(a)(1) of the Code as of the Determination Date. The Committee shall adopt such withholding rules as it deems necessary to carry out the provisions of this paragraph. 9. Capital Adjustments. The number of shares which may be issued under the Plan, the maximum number of shares with respect to which Options may be granted to any Employee under the Plan (as stated in Section 4 hereof), the number of shares subject to an Option to be granted under Section 8, and the number of shares issuable upon exercise of outstanding Options under the Plan (as well as the Option price per share under such outstanding Options) shall be adjusted, as may be deemed appropriate by the Committee, to reflect any stock dividend, stock split, spin-off, share combination, or similar change in the capitalization of the Company; provided, however, that no such adjustment shall be made to an outstanding ISO if such adjustment would constitute a modification under section 424(h) of the Code, unless the Optionee consents to such adjustment. In the event any such change in capitalization cannot be reflected in a straight mathematical adjustment of the number of shares issuable upon the exercise of outstanding Options (and a straight mathematical adjustment of the exercise price thereof), the Committee shall make such adjustments as are appropriate to reflect most nearly such straight mathematical adjustment. Such adjustments shall be made only as necessary to maintain the proportionate interest of Optionees, and preserve, without exceeding, the value of Options. 10. Certain Corporate Transactions. In the event of a corporate transaction (as that term is described in section 424(a) of the Code and the Treasury Regulations issued thereunder as, for example, a merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation), the surviving or successor corporation shall assume each outstanding Option or substitute a new option for each outstanding Option; provided, however, that, in the event of a proposed corporate transaction, the Committee may terminate all or a portion of the outstanding Options if it determines that such termination is in the best interests of the Company. If the Committee decides to terminate outstanding Options, the Committee shall give each Optionee holding an Option to be terminated not less than seven days' notice prior to any such termination, and any Option which is to be so terminated may be exercised (if and only to the extent that it is then exercisable) up to, and including the date immediately preceding such termination. Further, as provided in Section 7(d) and Section 8(c)(4), the Committee, in its discretion, may accelerate, in whole or in part, the date on which any or all Options become exercisable. The Committee also may, in its discretion, change the terms of any outstanding Option to reflect any such corporate transaction, provided that, in the case of ISOs, such change does not constitute a "modification" under section 424(h) of the Code, unless the Option holder consents to the change. -11- 11. Change in Control. (a) Full Vesting. Notwithstanding any other provision of this Plan, all outstanding Options shall become fully vested and exercisable upon a Change in Control. (b) Definitions. The following definitions shall apply for purposes of this Section -- (1) "Change in 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 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 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), of more of the voting stock of the Company than is "beneficially owned" (as defined above) at such time by the Principal and his Related Parties, or (iv) the first day on which a majority of the members of the Board are not Continuing Directors. (2) "Continuing Directors" means, as of any date of determination, any member of the Board who (i) was a member of the Board on September 30, 1996, or (ii) was nominated for election or elected to the Board with approval of a majority of the Continuing Directors who were members of the Board at the time of such nomination or election. (3) "Person" shall have the meaning set forth in the indenture dated July 7, 1995, by and among Pegasus Media & Communications, Inc., certain of its subsidiaries, and First Union National Bank and Trustee. (4) "Principal" means Marshall W. Pagon. (5) "Related Party" 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," as used with respect to any Person, means 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 that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. 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. -12- 12. Amendment or Termination of the Plan. (a) In General. The Board, pursuant to a written resolution, from time to time may suspend or terminate the Plan or amend it, and the Committee may amend any outstanding Options in any respect whatsoever; except that, without the approval of the shareholders (given in the manner set forth in paragraph (b) below) -- (1) the class of employees eligible to receive ISOs shall not be changed; (2) the maximum number of shares of Common Stock with respect to which Options may be granted under the Plan shall not be increased, except as permitted under Section 9 hereof; (3) the duration of the Plan under Section 18 hereof with respect to any ISOs granted hereunder shall not be extended; and (4) no amendment requiring shareholder approval pursuant to Treas. Reg. ss. 1.162-27(e)(4)(vi) or any successor thereto may be made (to the extent compliance with section 162(m) of the Code is desired). Notwithstanding the foregoing, no such suspension, discontinuance or amendment shall materially impair the rights of any holder of an outstanding Option without the consent of such holder. (b) Manner of Shareholder Approval. The approval of shareholders must be effected -- (1) By a method and in a degree that would be treated as adequate under applicable state law in the case of an action requiring shareholder approval (i.e., an action on which shareholders would be entitled to vote if the action were taken at a duly held shareholders' meeting); or (2) By a majority of the votes cast at a duly held shareholders' meeting at which a quorum representing a majority of all outstanding voting stock is, either in person or by proxy, present and voting on the Plan. 13. Absence of Rights. Neither the adoption of the Plan nor any action of the Board or the Committee shall be deemed to give any individual any right to be granted an Option, or any other right hereunder, unless and until the Committee shall have granted such individual an Option (or unless and until such Option shall have been granted under Section 8), and then his rights shall be only such as are provided by the Option Agreement. Any Option under the Plan shall not entitle the holder thereof to any rights as a stockholder of the Company prior to the exercise of such Option and the issuance of the shares -13- pursuant thereto. Further, notwithstanding any provisions of the Plan or the Option Agreement with an Employee, the Company and any Related Company shall have the right, in its discretion but subject to any employment contract entered into with the Employee, to retire the Employee at any time pursuant to its retirement rules or otherwise to terminate his employment at any time for any reason whatsoever. 14. Indemnification of Board and Committee. Without limiting any other rights of indemnification which they may have from the Company and any Related Company, the members of the Board and the members of the Committee shall be indemnified by the Company against all costs and expenses reasonably incurred by them in connection with any claim, action, suit, or proceeding to which they or any of them may be a party by reason of any action taken or failure to act under, or in connection with, the Plan, or any Option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit, or proceeding, except a judgment based upon a finding of willful misconduct or recklessness on their part. Upon the making or institution of any such claim, action, suit, or proceeding, the Board or Committee member shall notify the Company in writing, giving the Company an opportunity, at its own expense, to handle and defend the same before such Board or Committee member undertakes to handle it on his own behalf. The provisions of this Section shall not give members of the Board or the Committee greater rights than they would have under the Company's by-laws or Delaware law. 15. Application of Funds. The proceeds received by the Company from the sale of Common Stock pursuant to Options granted under the Plan shall be used for general corporate purposes. Any cash received in payment for shares upon exercise of an Option shall be added to the general funds of the Company and shall be used for its corporate purposes. Any Common Stock received in payment for shares upon exercise of an Option shall become treasury stock. 16. Shareholder Approval. This amended and restated Plan shall become effective on December 18, 1998; provided, however, that if shareholders do not approve (in the manner described in Section 12(b) hereof) the expansion of the class of employees who are eligible to receive ISOs hereunder, on or before December 17, 1999, any ISOs granted hereunder to Employees who are not executive officers of the Company or a Related Company shall be null and void and no additional ISO shall be granted hereunder to an Employee who is not an executive officer of the Company or Related Company. 17. No Obligation to Exercise Option. The granting of an Option shall impose no obligation upon an Optionee to exercise such Option. 18. Termination of Plan. Unless earlier terminated as provided in the Plan, the Plan and all authority granted hereunder shall terminate absolutely at 12:00 midnight on September 29, 2006, which date is within 10 years after the date the Plan was adopted by the Board, or the date the Plan was approved by the shareholders of the Company, whichever is earlier, and no Options hereunder shall be granted thereafter. Nothing contained in this Section, however, shall terminate or affect the continued existence of rights created under Options issued -14- hereunder, and outstanding on the date set forth in the preceding sentence, which by their terms extend beyond such date. 19. Governing Law. The Plan shall be governed by the applicable Code provisions to the maximum extent possible. Otherwise, the laws of the State of Delaware shall govern the operation of, and the rights of Employees and Non-employee Directors under, the Plan and Options granted thereunder. 20. Option Agreements -- Other Provisions. Options granted under the Plan shall be evidenced by written documents ("Option Agreements") in such form as the Committee shall from time to time approve, and containing such provisions not inconsistent with the provisions of the Plan (and, for ISOs granted pursuant to the Plan, not inconsistent with section 422(b) of the Code), as the Committee shall deem advisable. The Option Agreements shall specify whether the Option is an ISO or NQSO. Each Optionee shall enter into, and be bound by, an Option Agreement as soon as practicable after the grant of an Option. 21. Listing and Registration of Shares. Each Option shall be subject to the requirement that, if at any time the Committee shall determine, in its discretion, that the listing, registration, or qualification of the shares of Common Stock covered thereby upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the purchase of shares of Common Stock thereunder, or that action by the Company or by the Optionee should be taken in order to obtain an exemption from any such requirement, no such Option may be exercised, in whole or in part, unless and until such listing, registration, qualification, consent, approval, or action shall have been effected, obtained, or taken under conditions acceptable to the Committee. Without limiting the generality of the foregoing, each Optionee or his legal representative or beneficiary may also be required to give satisfactory assurance that shares purchased upon exercise of an Option are being purchased for investment and not with a view to distribution, and certificates representing such shares may be legended accordingly. 22. Special Provisions Regarding Digital Television Services, Inc. Digital Television Services, Inc. ("DTS") became a wholly-owned subsidiary of the Company by means of the merger (the "Merger") of a wholly-owned subsidiary of the Company into DTS pursuant to the Agreement and Plan of Merger dated January 8, 1998 (the "Merger Agreement") among the Company, DTS, Pegasus DTS Merger Sub, Inc. and certain stockholders of the Company and DTS. Section 2.12 of the Merger Agreement provides that the Company will assume certain outstanding DTS options specified therein. Section 2.12 of the Merger Agreement also provides that such DTS options will be replaced with options (the "Replacement Options") to purchase the number of shares of Common Stock equal to the "conversion ratio" (as defined in the Merger Agreement) times the number of shares of DTS common stock issuable upon the exercise of such options, for an exercise price equal to the exercise price applicable to such options divided by the "conversion ratio." Each Replacement Option shall be exercisable under the Plan in accordance with the terms of the agreement entered into between the Company and the holder of the Replacement -15- Option (the "Replacement Agreement"), the terms of which shall govern in the event of any conflict with the provisions of the Plan. The following provisions of the Plan shall not apply to the Replacement Options: (i) Section 11 ("Change in Control"); (ii) Section 7(d)(2)(D) (regarding payment of exercise price with the proceeds of a loan from the Company); and (iii) Section 7(k) (regarding payment of income tax obligations with the proceeds of a loan from the Company). In addition, any provision of the Plan that would provide an additional benefit (within the meaning of section 424(a)(2) of the Code and Treasury Regulations thereunder) shall not apply to the Replacement Options. EX-23.1 3 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the inclusion in this Registration Statement of Pegasus Communications Corporation on Form S-3 (File no. 333-70949) of our report dated February 12, 1999, on our audits of the consolidated financial statements of Pegasus Communications Corporation as of December 31, 1998. We also consent to the reference to our firm under the captions "Experts." /s/ PricewaterhouseCoopers -------------------------- PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 5, 1999 EX-23.2 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this registration statement of our report dated February 18, 1998 included in Digital Television Services, Inc.'s Form 10-K for the year ended December 31, 1997 and to all references to our Firm included in this registration statement. /s/ Arthur Andersen LLP Atlanta, Georgia March 4, 1999 -----END PRIVACY-ENHANCED MESSAGE-----