-----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, ExfC9H3LxcK0SvC+LQyga/HUpzgU68xNiObzrdy5erlRZ/oW49pdTBz3McbLh+hu Xu+C0sz/rJcsn2MvIqZV0w== 0000950116-99-001547.txt : 19990816 0000950116-99-001547.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950116-99-001547 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 10-Q SEC ACT: SEC FILE NUMBER: 333-71447 FILM NUMBER: 99687784 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 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 1999 ------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from__________ to __________ Commission File Number 0-21389 PEGASUS COMMUNICATIONS CORPORATION ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 51-0374669 ------------------------------ ---------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) c/o Pegasus Communications Management Company; 225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004 ------------------------------------------------ ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (888) 438-7488 -------------- Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No___ Number of shares of each class of the Registrant's common stock outstanding as of August 6, 1999: Class A, Common Stock, $0.01 par value 15,138,806 Class B, Common Stock, $0.01 par value 4,581,900 Non-Voting, Common Stock, $0.01 par value _ PEGASUS COMMUNICATIONS CORPORATION Form 10-Q Table of Contents For the Quarterly Period Ended June 30, 1999 Page ---- Part I. Financial Information Item 1 Consolidated Financial Statements Consolidated Balance Sheets December 31, 1998 and June 30, 1999 3 Consolidated Statements of Operations Three months ended June 30, 1998 and 1999 4 Consolidated Statements of Operations Six months ended June 30, 1998 and 1999 5 Consolidated Statements of Cash Flows Six months ended June 30, 1998 and 1999 6 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3 Quantitative and Qualitative Disclosures About Market Risk 22 Part II. Other Information Item 2 Changes in Securities and Use of Proceeds 23 Item 4 Submission of Matters to a Vote of Security Holders 23 Item 5 Other Information 24 Item 6 Exhibits and Reports on Form 8-K 24 Signature 25 2 Pegasus Communications Corporation Consolidated Balance Sheets
December 31, June 30, 1998 1999 ------------ ------------ ASSETS (unaudited) Current assets: Cash and cash equivalents $ 54,505,473 $ 16,679,995 Restricted cash 21,479,305 11,162,225 Accounts receivable, less allowance for doubtful accounts of $567,000 and $776,000, respectively 20,882,260 20,991,123 Inventory 5,426,348 6,345,912 Program rights 3,156,715 5,853,382 Deferred taxes 2,602,453 2,759,933 Prepaid expenses and other 1,207,312 4,084,438 ------------ ------------ Total current assets 109,259,866 67,877,008 Property and equipment, net 34,066,502 37,962,255 Intangible assets, net 729,405,657 780,240,030 Program rights 3,428,382 5,847,465 Deferred taxes 9,277,280 5,215,582 Deposits and other 872,386 6,117,796 ------------ ------------ Total assets $886,310,073 $903,260,136 ============ ============ LIABILITIES AND TOTAL EQUITY Current liabilities: Current portion of long-term debt $ 14,399,046 $ 13,700,367 Accounts payable 4,794,809 6,027,207 Accrued interest 17,465,493 17,190,917 Accrued satellite programming, fees and commissions 22,680,595 26,831,766 Accrued expenses 9,599,049 10,392,780 Current portion of program rights payable 2,431,515 6,050,097 ------------ ------------ Total current liabilities 71,370,507 80,193,134 Long-term debt 544,629,706 564,252,844 Program rights payable 2,472,367 4,252,781 Deferred taxes 80,671,714 75,723,467 ------------ ------------ Total liabilities 699,144,294 724,422,226 ------------ ------------ 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; 135,073 shares authorized; 119,369 and 126,978 issued and outstanding 126,027,871 134,122,747 Common stockholders' equity: Class A Common Stock; $0.01 par value; 50.0 million shares authorized; 11,315,809 and 15,121,415 issued and outstanding 113,158 151,214 Class B Common Stock; $0.01 par value; 15.0 million shares authorized; 4,581,900 issued and outstanding 45,819 45,819 Non-Voting Common Stock; $0.01 par value; 20.0 million shares authorized - - Additional paid-in capital 173,870,633 243,911,590 Deficit (115,891,702) (202,393,460) ------------ ------------ Total common stockholders' equity 58,137,908 41,715,163 ------------ ------------ Total liabilities and stockholders' equity $886,310,073 $903,260,136 ============ ============
See accompanying notes to consolidated financial statements 3 Pegasus Communications Corporation Consolidated Statements of Operations
Three Months Ended June 30, --------------------------------- 1998 1999 ----------- ----------- (unaudited) Net revenues: DBS $33,463,072 $64,118,278 Broadcast 8,699,298 9,621,626 Cable 4,576,987 5,577,427 ----------- ----------- Total net revenues 46,739,357 79,317,331 Operating expenses: DBS Programming, technical, general and administrative 22,757,040 43,845,952 Marketing and selling 6,687,419 28,743,398 Incentive compensation 473,919 400,000 Depreciation and amortization 13,620,571 20,481,579 Broadcast Programming, technical, general and administrative 4,189,013 5,211,453 Marketing and selling 1,576,725 1,612,197 Incentive compensation 32,053 46,867 Depreciation and amortization 1,197,999 1,292,802 Cable Programming, technical, general and administrative 2,242,756 2,748,010 Marketing and selling 79,655 176,460 Incentive compensation 114,400 37,853 Depreciation and amortization 1,385,713 1,938,350 Corporate expenses 796,176 1,483,003 Corporate depreciation and amortization 463,362 739,629 ----------- ----------- Loss from operations (8,877,444) (29,440,222) Interest expense (10,339,353) (15,603,721) Interest income 374,543 314,921 Other expense, net (334,665) (468,147) ----------- ----------- Loss before income taxes (19,176,919) (45,197,169) Provision (benefit) for income taxes 50,000 (572,500) ----------- ----------- Net loss (19,226,919) (44,624,669) Preferred stock dividends 3,576,853 4,047,438 ----------- ----------- Net loss applicable to common shares ($22,803,772) ($48,672,107) =========== =========== Basic and diluted earnings per common share: Net loss ($1.59) ($2.48) =========== =========== Weighted average shares outstanding 14,310,075 19,626,873 =========== ===========
See accompanying notes to consolidated financial statements 4 Pegasus Communications Corporation Consolidated Statements of Operations
Six Months Ended June 30, --------------------------------- 1998 1999 ----------- ------------ (unaudited) Net revenues: DBS $50,927,234 $122,454,051 Broadcast 15,624,317 17,571,156 Cable 8,971,498 8,648,411 ----------- ------------ Total net revenues 75,523,049 148,673,618 Operating expenses: DBS Programming, technical, general and administrative 34,951,427 84,365,509 Marketing and selling 10,886,825 49,889,670 Incentive compensation 833,919 790,000 Depreciation and amortization 20,264,698 41,933,132 Broadcast Programming, technical, general and administrative 8,066,811 10,154,002 Marketing and selling 2,961,526 3,078,806 Incentive compensation 32,053 202,409 Depreciation and amortization 2,527,418 2,481,946 Cable Programming, technical, general and administrative 4,540,097 4,413,978 Marketing and selling 186,721 285,338 Incentive compensation 163,605 60,788 Depreciation and amortization 2,928,091 3,022,930 Corporate expenses 1,481,442 2,723,246 Corporate depreciation and amortization 878,022 1,450,219 ----------- ------------ Loss from operations (15,179,606) (56,178,355) Interest expense (16,315,091) (31,294,861) Interest income 720,290 775,486 Other expense, net (687,119) (819,028) ----------- ------------ Loss before income taxes (31,461,526) (87,516,758) Provision (benefit) for income taxes 125,000 (1,015,000) ----------- ------------ Net loss (31,586,526) (86,501,758) Preferred stock dividends 7,153,706 8,094,876 ----------- ------------ Net loss applicable to common shares ($38,740,232) ($94,596,634) =========== ============ Basic and diluted earnings per common share: Net loss ($3.14) ($5.26) =========== ============ Weighted average shares outstanding 12,332,244 17,998,636 =========== ============
See accompanying notes to consolidated financial statements 5 Pegasus Communications Corporation Consolidated Statements of Cash Flows
Six Months Ended June 30, ---------------------------------- 1998 1999 ----------- ----------- (unaudited) Cash flows from operating activities: Net loss ($31,586,526) ($86,501,758) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 26,598,229 48,888,227 Program rights amortization 1,251,490 1,539,347 Accretion on discount of bonds and seller notes 535,955 745,586 Stock incentive compensation 1,029,577 1,053,197 Gain on disposal of assets - (35,343) Bad debt expense 794,882 2,555,136 Change in assets and liabilities: Accounts receivable (1,005,976) (2,214,960) Inventory (161,357) (748,564) Prepaid expenses and other (424,267) (2,802,718) Accounts payable and accrued expenses 3,753,613 4,664,836 Accrued interest 3,777,383 (274,576) Deposits and other - (5,240,970) ----------- ----------- Net cash provided (used) by operating activities 4,563,003 (38,372,560) ----------- ----------- Cash flows from investing activities: Acquisitions (42,252,899) (91,930,212) Cash acquired from acquisitions 3,112,482 5,486 Capital expenditures (3,647,790) (4,120,756) Purchase of intangible assets (7,608,821) (2,851,948) Payments for programming rights (1,224,220) (1,256,101) Proceeds from sale of assets - 508,988 ----------- ----------- Net cash used for investing activities (51,621,248) (99,644,543) ----------- ----------- Cash flows from financing activities: Repayments of long-term debt (5,404,660) (13,314,602) Borrowings on bank credit facilities 46,000,000 77,500,000 Repayments of bank credit facilities - (50,400,000) Restricted cash (121,176) 10,317,080 Capital lease repayments (246,583) (96,525) Proceeds from issuance of common stock - 80,843,070 Underwriting and common stock offering costs - (4,657,398) ----------- ----------- Net cash provided by financing activities 40,227,581 100,191,625 ----------- ----------- Net decrease in cash and cash equivalents (6,830,664) (37,825,478) Cash and cash equivalents, beginning of year 44,049,097 54,505,473 ----------- ----------- Cash and cash equivalents, end of period $37,218,433 $16,679,995 =========== ===========
See accompanying notes to consolidated financial statements 6 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company: Pegasus Communications Corporation ("Pegasus" or together with its subsidiaries, 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 cable television ("Cable") systems that provide service to individual and commercial subscribers in Puerto Rico. DTS and its subsidiaries provide DBS services to customers in certain rural areas of the United States. 2. Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements include the accounts of Pegasus and all of its subsidiaries. All intercompany transactions and balances have been eliminated. Certain amounts for 1998 have been reclassified for comparative purposes. The unaudited consolidated financial statements reflect all adjustments consisting of normal recurring items which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position of the Company and the results of its operations and its cash flows for the interim period. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K for the year then ended. 3. Common Stock: In March 1999, Pegasus completed a secondary public offering in which it sold approximately 3.6 million shares of its Class A Common Stock to the public at a price of $22 per share, resulting in net proceeds to the Company of $74.9 million. On June 21, 1999, the Company amended Pegasus' Certificate of Incorporation, increasing the number of authorized shares of Class A Common Stock from 30.0 million to 50.0 million and authorizing 20.0 million shares of Non-Voting Common Stock, par value $0.01 per share. As of June 30, 1999, the Company had three classes of Common Stock: Class A Common Stock, Class B Common Stock and Non-Voting 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. 4. Preferred Stock: As of December 31, 1998 and June 30, 1999, the Company had 5.0 million shares of Preferred Stock authorized of which 135,073 shares have been designated as 12.75% Series A Cumulative Exchangeable Preferred Stock (the "Series A Preferred Stock"). The Company had approximately 119,369 and 126,978 shares of Series A Preferred Stock issued and outstanding at December 31, 1998 and June 30, 1999, respectively. On June 11, 1999, the Board of Directors declared a dividend on the Series A Preferred Stock of approximately 8,095 shares in the aggregate of Series A Preferred Stock, payable on July 1, 1999 to stockholders of record on June 15, 1999. 7 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. Preferred Stock: - (Continued) 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. 5. Long-Term Debt:
Long-term debt consists of the following : December 31, June 30, 1998 1999 ------------ ------------ 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 B Senior Notes payable by Pegasus, due 2006, interest at 9.75%, payable semi-annually in arrears on June 1 and December 1......................................... 100,000,000 100,000,000 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.......................................... 27,500,000 48,000,000 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....................... 26,800,000 33,800,000 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........................................ 19,600,000 19,200,000 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 $2,621,878 and $2,423,099 as of December 31, 1998 and June 30, 1999, respectively.......... 82,378,122 82,576,901 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 and $1,648,957 as of December 31, 1998 and June 30, 1999, respectively.......... 153,215,156 153,351,043 Mortgage payable, due 2000, interest at 8.75%..................... 454,965 442,866 Sellers' notes, due 1999 to 2005, interest at 3% to 8%............ 33,537,788 25,136,205 Capital leases and other.......................................... 542,721 446,196 ------------ ------------ 559,028,752 577,953,211 Less current maturities........................................... 14,399,046 13,700,367 ------------ ------------ Long-term debt.................................................... $544,629,706 $564,252,844 ============ ============
8 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Long-Term Debt: - (Continued) 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 June 30, 1999, $18.5 million of stand-by letters of credit were issued pursuant to the DTS Credit Facility, including $10.7 million collateralizing certain of the Company's outstanding sellers' notes. PM&C maintains 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 June 30, 1999, $28.6 million of stand-by letters of credit were issued pursuant to the PM&C Credit Facility, including $14.5 million collateralizing certain of the Company's outstanding sellers' notes. 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's ability to incur additional indebtedness, create liens and pay dividends. 6. 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:
Three Months Ended June 30, -------------------------------- 1998 1999 ----------- ----------- Net loss applicable to common shares ($22,803,772) ($48,672,107) ----------- ----------- Weighted average common shares outstanding 14,310,075 19,626,873 ----------- ----------- Total shares used for calculation of basic earnings per common share 14,310,075 19,626,873 Stock options and warrants - - ----------- ----------- Total shares used for calculation of diluted earnings per common share 14,310,075 19,626,873 =========== ===========
9 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 6. Earnings Per Common Share: - (Continued)
Six Months Ended June 30, --------------------------------- 1998 1999 ------------ ------------ Net loss applicable to common shares ($38,740,232) ($94,596,634) ------------ ------------ Weighted average common shares outstanding 12,332,244 17,998,636 ------------ ------------ Total shares used for calculation of basic earnings per common share 12,332,244 17,998,636 Stock options and warrants - - ------------ ------------ Total shares used for calculation of diluted earnings per common share 12,332,244 17,998,636 ============ ============
Basic earnings per common share amounts are based on net income, after deducting preferred stock dividend requirements, divided by the weighted average number of shares of Class A, Class B and Non-Voting Common Stock outstanding during the year. The total shares used for the calculation of diluted earnings per common share were not adjusted for securities that have not been issued as they are antidilutive. For the three and six months ended June 30, 1998 and 1999, 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 $3.6 million, $7.2 million, $4.0 million and $8.1 million, respectively, by applicable shares outstanding. 7. Acquisitions: In the first half of 1999, the Company acquired, from ten independent DIRECTV(R) ("DIRECTV") providers, the rights to provide DIRECTV programming in certain rural areas of Colorado, Illinois, Indiana, Minnesota, Nebraska, North Dakota, Ohio and Texas and the related assets in exchange for total consideration of approximately $55.1 million, which consisted of $49.6 million in cash, warrants to purchase a total of 25,000 shares of the Company's Class A Common Stock (amounting to $814,000 at the time of issuance), $4.5 million in promissory notes and $129,000 in assumed net liabilities. Effective March 31, 1999, the Company purchased a cable system serving Aguadilla, Puerto Rico and neighboring communities for a purchase price of approximately $42.1 million in cash. At March 31, 1999, the Aguadilla cable system served approximately 21,000 subscribers and passed approximately 81,000 of the 90,000 homes in the franchise area. The Aguadilla cable system is contiguous to the Company's other Puerto Rico cable system and the Company intends to consolidate the Aguadilla cable system with its existing cable system. 8. Supplemental Cash Flow Information: Significant noncash investing and financing activities are as follows:
Six Months Ended June 30, -------------------------- 1998 1999 ---------- ---------- Barter revenue and related expense.............................................. $3,246,700 $3,648,102 Acquisition of program rights and assumption of related program payables........ - 6,655,097 Acquisition of plant under capital leases....................................... 36,500 - Capital contribution and related acquisition of intangibles..................... 123,162,284 813,735 Notes payable and related acquisition of intangibles............................ 209,143,311 4,490,000 Series A Preferred Stock dividend and reduction of paid-in capital.............. 7,153,706 8,094,876 Deferred taxes, net and related acquisition of intangibles...................... 82,934,179 29,029
10 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 8. Supplemental Cash Flow Information: - (Continued) For the six months ended June 30, 1998 and 1999, the Company paid cash for interest in the amount of $7.6 million and $31.6 million, respectively. The Company paid no federal income taxes for the six months ended June 30, 1998 and 1999. 9. 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 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. In the opinion of management, the ultimate liability with respect to these claims and matters will not have a material adverse effect on the consolidated operations, liquidity, cash flows or financial position of the Company. 10. 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 nine television stations affiliated with Fox, UPN 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. All of the Company's revenues are derived from external customers. Capital expenditures for the Company's DBS segment were $255,000 and $966,000 for the six months ended June 30, 1998 and 1999, respectively. Capital expenditures for the Company's Broadcast segment were $2.2 million and $494,000 for the six months ended June 30, 1998 and 1999, respectively. Capital expenditures for the Company's Cable segment were $1.0 million and $2.4 million for the six months ended June 30, 1998 and 1999, respectively. Identifiable total assets for the Company's DBS segment were $715.6 million and $702.4 million as of December 31, 1998 and June 30, 1999, respectively. Identifiable total assets for the Company's Broadcast segment were $67.1 million and $72.0 million as of December 31, 1998 and June 30, 1999, respectively. Identifiable total assets for the Company's Cable segment were $47.0 million and $87.5 million as of December 31, 1998 and June 30, 1999, respectively. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to us that are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. When used in this Report, the words "estimate," "project," "believe," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to unknown risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated in such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions, both nationally, internationally and in the regions in which we operate; relationships with and events affecting third parties like DIRECTV, Inc.; demographic changes; existing government regulations and changes in, or the failure to comply with government regulations; competition; the loss of any significant numbers of subscribers or viewers; changes in business strategy or development plans; technological developments and difficulties (including any associated with the year 2000); the ability to attract and retain qualified personnel; our significant indebtedness; the availability and terms of capital to fund the expansion of our businesses; and other factors referenced in this Report and in reports and registration statements filed from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as the date hereof. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following discussion of 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 on pages 3-11 herein. General Pegasus Communications Corporation is: o The largest independent provider of DIRECTV with 566,000 subscribers at July 31, 1999. We have the exclusive right to distribute DIRECTV digital broadcast satellite services to 4.8 million rural households in 36 states. We distribute DIRECTV through the Pegasus retail network, a network in excess of 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 53,000 subscribers. DBS 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 12 o DBS subscriber acquisition costs, which are sales and marketing expenses incurred to acquire new DBS subscribers. Location cash flow is pre-marketing cash flow less DBS 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 those who follow our industry frequently use them as measures of financial performance and ability to pay debt service; and o they are measures that our lenders, investors and we use to monitor our financial performance and debt leverage. Pegasus generally does not require new DBS customers to sign programming contracts and, as a result, subscriber acquisition costs are currently being charged to operations in the period incurred. Results of Operations Three months ended June 30, 1999 compared to three months ended June 30, 1998 Total net revenues for the three months ended June 30, 1999 were $79.3 million, an increase of $32.6 million, or 70%, compared to total net revenues of $46.7 million for the same period in 1998. The increase in total net revenues for the three months ended June 30, 1999 is primarily due to an increase in DBS revenues of $30.7 million attributable to acquisitions and internal growth in Pegasus' DBS subscriber base. Total operating expenses for the three months ended June 30, 1999 were $108.8 million, an increase of $53.1 million, or 96%, compared to total operating expenses of $55.6 million for the same period in 1998. The increase is primarily due to an increase of $49.9 million in operating expenses attributable to the growth in Pegasus' DBS business. Total corporate expenses, including corporate depreciation and amortization, were $2.2 million for the three months ended June 30, 1999, an increase of $963,000, or 76%, compared to $1.3 million for the same period in 1998. The increase in corporate expenses is attributable to the growth in Pegasus' business. The increase in corporate depreciation and amortization is primarily due to amortization of deferred financing costs associated with the issuance of $100.0 million of senior notes in November 1998. Interest expense was $15.6 million for the three months ended June 30, 1999, an increase of $5.3 million, or 51%, compared to interest expense of $10.3 million for the same period in 1998. The increase in interest expense is primarily due to interest on Pegasus' $100.0 million senior notes issued in November 1998, Digital Television Service, Inc.'s $155.0 million senior notes, which were assumed by Pegasus in April 1998, and an increase in bank borrowings and sellers' notes associated with Pegasus' DBS acquisitions. Interest income was $315,000 for the three months ended June 30, 1999, a decrease of $60,000, or 16%, compared to interest income of $375,000 for the same period in 1998. The decrease in interest income is due to lower average cash balances for the three months ended June 30, 1999 compared to the same period in 1998. Other expenses were $468,000 for the three months ended June 30, 1999, an increase of $133,000, or 40%, compared to other expenses of $335,000 for the same period in 1998. The increase is primarily due to increased investor relation activities and other non-operating expenses. The provision for income taxes declined by approximately $623,000 primarily as a result of the amortization of the deferred tax liability that originated from the acquisition of Digital Television Services, Inc. 13 Preferred stock dividends were $4.0 million for the three months ended June 30, 1999, an increase of $471,000, or 13%, compared to $3.6 million in preferred stock dividends for the same period in 1998. The increase is attributable to a greater number of shares of Pegasus' preferred stock outstanding during the second quarter of 1999 compared to the second quarter of 1998 as the result of payment of dividends in kind. DBS Pegasus' DBS business has experienced significant growth. During the last twelve months, Pegasus acquired approximately 69,000 subscribers and the exclusive DIRECTV distribution rights to approximately 557,000 households in rural areas of the United States. On April 27, 1998, Pegasus acquired approximately 145,000 subscribers and 1.8 million households as a result of the merger with Digital Television Services, Inc. At June 30, 1999, Pegasus had exclusive DIRECTV distribution rights to 4.8 million households and 540,000 subscribers as compared to 4.2 million households and 329,000 subscribers at June 30, 1998. Pegasus had 4.9 million households and 553,000 subscribers at June 30, 1999, including pending acquisitions. At June 30, 1998, subscribers would have been 402,000, including pending and completed acquisitions. Subscriber penetration increased from 8.1% at June 30, 1998 to 11.2% at June 30, 1999, including pending and completed acquisitions. Total DBS net revenues were $64.1 million for the three months ended June 30, 1999, an increase of $30.7 million, or 92%, compared to DBS net revenues of $33.5 million for the same period in 1998. The increase is primarily due to an increase in the average number of subscribers in the second quarter of 1999 compared to the second quarter of 1998. The average monthly revenue per subscriber was $41.89 for the three months ended June 30, 1999 compared to $42.02 for the same period in 1998. Pro forma DBS net revenues, including pending acquisitions at June 30, 1999, were $67.5 million, an increase of $18.0 million, or 36%, compared to pro forma DBS net revenues of $49.6 million for the same period in 1998. Programming, technical, and general and administrative expenses were $43.8 million for the three months ended June 30, 1999, an increase of $21.1 million, or 93%, compared to $22.8 million for the same period in 1998. The increase is attributable to significant growth in subscribers and territory during the last twelve months. As a percentage of revenue, programming, technical, and general and administrative expenses were 68.4% for the three months ended June 30, 1999 compared to 68.0% for the same period in 1998. Subscriber acquisition costs were $28.7 million for the three months ended June 30, 1999, an increase of $22.1 million compared to $6.7 million for the same period in 1998. Gross subscriber additions were 76,000 for the three months ended June 30, 1999 compared to 24,200 for the same period in 1998. The total subscriber acquisition costs per gross subscriber addition were $378 for the three months ended June 30, 1999 compared to $276 for the same period in 1998. The increase is due to an increase in promotional programming and commissions. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $400,000 for the three months ended June 30, 1999, a decrease of $74,000, or 16%, compared to $474,000 for the same period in 1998. The decrease resulted from a lower gain in pro forma location cash flow during the second quarter of 1999 as compared to the second quarter of 1998. Depreciation and amortization was $20.5 million for the three months ended June 30, 1999, an increase of $6.9 million, or 50%, compared to $13.6 million for the same period in 1998. The increase in depreciation and amortization is primarily due to an increase in the fixed and intangible asset base as the result of DBS acquisitions that occurred during the last two years. Broadcast During the three months ended June 30, 1999, 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 for the three months ended June 30, 1999 were $9.6 million, an increase of $922,000, or 11%, compared to net broadcast revenues of $8.7 million for the same period in 1998. The increase is primarily attributable to an increase of $400,000 in net broadcast revenues from the four stations launched in 1997 and 1998, a $179,000 increase in barter revenue and an increase in local and national advertising sales. 14 Programming, technical, and general and administrative expenses were $5.2 million for the three months ended June 30, 1999, an increase of $1.0 million, or 24%, compared to $4.2 million for the same period in 1998. The increase is primarily due to an increase in expenses from the two new stations launched in 1998 and an increase in news related expenses associated with the launch of self-produced news in our Portland, Maine and Chattanooga, Tennessee markets. Marketing and selling expenses were $1.6 million for the three months ended June 30, 1999, an increase of $35,000, or 2%, compared to $1.6 million for the same period in 1998. The increase in marketing and selling expenses is 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 $47,000 for the three months ended June 30, 1999, an increase of $15,000, or 46% compared to $32,000 for the same period in 1998. The increase resulted from a larger gain in pro forma location cash flow during the second quarter of 1999 as compared to the second quarter of 1998. Depreciation and amortization was $1.3 million for the three months ended June 30, 1999, an increase of $95,000, or 8%, compared to $1.2 million for the same period in 1998. The increase is due to capital expenditures associated with the launch of the new stations and our news initiative. Cable Total net cable revenues were $5.6 million for the three months ended June 30, 1999, an increase of $1.0 million, or 22%, compared to net cable revenues of $4.6 million for the same period in 1998. The increase is primarily attributable to the acquisition of the Aguadilla, Puerto Rico cable system effective March 31, 1999, partially offset by the sale of Pegasus' New England cable systems effective July 1, 1998. Net cable revenues from the New England Cable systems were $1.7 million for the three months ended June 30, 1998. The net revenues derived from Pegasus' existing Puerto Rico cable system were $3.3 million for the three months ended June 30, 1999, an increase of $397,000, or 14%, compared to net cable revenues of $2.9 million for the same period in 1998. The Aguadilla, Puerto Rico cable system generated net revenues of $2.3 million for the three months ended June 30, 1999. The average monthly revenue per subscriber was $36.15 for the three months ended June 30, 1999 compared to $34.11 for the same period in 1998. On a pro forma basis, including the completed acquisition of the Aguadilla, Puerto Rico cable system and the disposition of the New England cable systems, there were 52,700 subscribers as of June 30, 1999 compared to 50,200 subscribers as of June 30, 1998. Programming, technical, and general and administrative expenses were $2.7 million for the three months ended June 30, 1999, an increase of $505,000, or 23%, compared to $2.2 million for the same period in 1998. The increase is primarily attributable to the acquisition of the Aguadilla, Puerto Rico cable system effective March 31, 1999, partially offset by the sale of Pegasus' New England cable systems effective July 1, 1998. Marketing and selling expenses were $176,000 for the three months ended June 30, 1999, an increase of $97,000, or 122%, compared to $80,000 for the same period in 1998. The increase is a result of the acquisition of the Aguadilla, Puerto Rico cable system. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $38,000 for the three months ended June 30, 1999, a decrease of $77,000, or 67%, compared to $114,000 for the same period in 1998. The decrease resulted from a lower gain in pro forma location cash flow during the second quarter of 1999 as compared to the second quarter of 1998. Depreciation and amortization was $1.9 million for the three months ended June 30, 1999, an increase of $553,000, or 40%, compared to $1.4 million for the same period in 1998. The increase in depreciation and amortization is primarily due to the acquisition of the Aguadilla, Puerto Rico cable system. 15 Six months ended June 30, 1999 compared to six months ended June 30, 1998 Total net revenues for the six months ended June 30, 1999 were $148.7 million, an increase of $73.2 million, or 97%, compared to total net revenues of $75.5 million for the same period in 1998. The increase in total net revenues for the six months ended June 30, 1999 is primarily due to an increase in DBS revenues of $71.5 million attributable to acquisitions and internal growth in Pegasus' DBS subscriber base. Total operating expenses for the six months ended June 30, 1999 were $204.9 million, an increase of $114.1 million, or 126%, compared to total operating expenses of $90.7 million for the same period in 1998. The increase is primarily due to an increase of $110.0 million in operating expenses attributable to the growth in Pegasus' DBS business. Total corporate expenses, including corporate depreciation and amortization, were $4.2 million for the six months ended June 30, 1999, an increase of $1.8 million, or 77%, compared to $2.4 million for the same period in 1998. The increase in corporate expenses is attributable to the growth in Pegasus' business. The increase in corporate depreciation and amortization is primarily due to amortization of deferred financing costs associated with the issuance of $100.0 million of senior notes in November 1998. Interest expense was $31.3 million for the six months ended June 30, 1999, an increase of $15.0 million, or 92%, compared to interest expense of $16.3 million for the same period in 1998. The increase in interest expense is primarily due to interest on Pegasus' $100.0 million senior notes issued in November 1998, Digital Television Service, Inc.'s $155.0 million senior notes, which were assumed by Pegasus in April 1998, and an increase in bank borrowings and sellers' notes associated with Pegasus' DBS acquisitions. Interest income was $775,000 for the six months ended June 30, 1999, an increase of $55,000, or 8%, compared to interest income of $720,000 for the same period in 1998. The increase in interest income is due to greater average cash balances for the six months ended June 30, 1999 compared to the same period in 1998. Other expenses were $819,000 for the six months ended June 30, 1999, an increase of $132,000, or 19%, compared to other expenses of $687,000 for the same period in 1998. The increase is primarily due to increased investor relation activities and other non-operating expenses. 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. Preferred stock dividends were $8.1 million for the six months ended June 30, 1999, an increase of $941,000, or 13%, compared to $7.2 million in preferred stock dividends for the same period in 1998. The increase is attributable to a greater number of shares of Pegasus' preferred stock outstanding during the first half of 1999 compared to the first half of 1998 as the result of payment of dividends in kind. DBS Total DBS net revenues were $122.5 million for the six months ended June 30, 1999, an increase of $71.5 million, or 140%, compared to DBS net revenues of $50.9 million for the same period in 1998. The increase is primarily due to an increase in the average number of subscribers in the first half of 1999 compared to the first half of 1998. The average monthly revenue per subscriber was $42.47 for the six months ended June 30, 1999 compared to $41.98 for the same period in 1998. Pro forma DBS net revenues, including pending acquisitions at June 30, 1999, were $130.5 million, an increase of $34.4 million, or 36%, compared to pro forma DBS net revenues of $96.1 million for the same period in 1998. Programming, technical, and general and administrative expenses were $84.4 million for the six months ended June 30, 1999, an increase of $49.4 million, or 141%, compared to $35.0 million for the same period in 1998. The increase is attributable to significant growth in subscribers and territory during the last twelve months. As a percentage of revenue, programming, technical, and general and administrative expenses were 68.9% for the six months ended June 30, 1999 compared to 68.6% for the same period in 1998. 16 Subscriber acquisition costs were $49.9 million for the six months ended June 30, 1999, an increase of $39.0 million compared to $10.9 million for the same period in 1998. Gross subscriber additions were 127,700 for the six months ended June 30, 1999 compared to 39,000 for the same period in 1998. The total subscriber acquisition costs per gross subscriber addition were $391 for the six months ended June 30, 1999 compared to $279 for the same period in 1998. The increase is due to an increase in promotional programming and commissions. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $790,000 for the six months ended June 30, 1999, a decrease of $44,000, or 5%, compared to $834,000 for the same period in 1998. The decrease resulted from a lower gain in pro forma location cash flow during the first half of 1999 as compared to the first half of 1998. Depreciation and amortization was $41.9 million for the six months ended June 30, 1999, an increase of $21.7 million, or 107%, compared to $20.3 million for the same period in 1998. The increase in depreciation and amortization is primarily due to an increase in the fixed and intangible asset base as the result of DBS acquisitions that occurred during the last two years. Broadcast During the six months ended June 30, 1999, 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 for the six months ended June 30, 1999 were $17.6 million, an increase of $1.9 million, or 12%, compared to net broadcast revenues of $15.6 million for the same period in 1998. The increase is primarily attributable to an increase of $740,000 in net broadcast revenues from the four stations launched in 1997 and 1998, a $401,000 increase in barter revenue and an increase in local and national advertising sales. Programming, technical, and general and administrative expenses were $10.2 million for the six months ended June 30, 1999, an increase of $2.1 million, or 26%, compared to $8.1 million for the same period in 1998. The increase is primarily due to an increase in expenses from the two new stations launched in 1998 and an increase in news related expenses associated with the launch of self-produced news in our Portland, Maine and Chattanooga, Tennessee markets. Marketing and selling expenses were $3.1 million for the six months ended June 30, 1999, an increase of $117,000, or 4%, compared to $3.0 million for the same period in 1998. The increase in marketing and selling expenses is 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 $202,000 for the six months ended June 30, 1999, an increase of $170,000, or 532% compared to $32,000 for the same period in 1998. The increase resulted from a larger gain in pro forma location cash flow during the first half of 1999 as compared to the first half of 1998. Depreciation and amortization was $2.5 million for the six months ended June 30, 1999, a decrease of $45,000, or 2%, compared to $2.5 million for the same period in 1998. 17 Cable Total net cable revenues were $8.6 million for the six months ended June 30, 1999, a decrease of $323,000, or 4%, compared to net cable revenues of $9.0 million for the same period in 1998. The decrease is primarily due to the sale of Pegasus' New England cable systems effective July 1, 1998, partially offset by the acquisition of the Aguadilla, Puerto Rico cable system effective March 31, 1999. Net cable revenues from the New England Cable systems were $3.3 million for the six months ended June 30, 1998. The net revenues derived from Pegasus' existing Puerto Rico cable system were $6.4 million for the six months ended June 30, 1999, an increase of $673,000, or 12%, compared to net cable revenues of $5.7 million for the same period in 1998. The Aguadilla, Puerto Rico cable system generated net revenues of $2.3 million for the six months ended June 30, 1999. The average monthly revenue per subscriber was $35.79 for the six months ended June 30, 1999 compared to $33.91 for the same period in 1998. On a pro forma basis, including the completed acquisition of the Aguadilla, Puerto Rico cable system and the disposition of the New England cable systems, there were 52,700 subscribers as of June 30, 1999 compared to 50,200 subscribers as of June 30, 1998. Programming, technical, and general and administrative expenses were $4.4 million for the six months ended June 30, 1999, a decrease of $126,000, or 3%, compared to $4.5 million for the same period in 1998. The decrease is primarily attributable to the sale of Pegasus' New England cable systems, partially offset by the acquisition of the Aguadilla, Puerto Rico cable system. Marketing and selling expenses were $285,000 for the six months ended June 30, 1999, an increase of $99,000, or 53%, compared to $187,000 for the same period in 1998. The increase is a result of the acquisition of the Aguadilla, Puerto Rico cable system. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $61,000 for the six months ended June 30, 1999, a decrease of $103,000, or 63%, compared to $164,000 for the same period in 1998. The decrease resulted from a lower gain in pro forma location cash flow during the first half of 1999 as compared to the first half of 1998. Depreciation and amortization was $3.0 million for the six months ended June 30, 1999, an increase of $95,000, or 3%, compared to $2.9 million for the same period in 1998. The increase in depreciation and amortization is primarily due to the acquisition of the Aguadilla, Puerto Rico cable system. Liquidity and Capital Resources Pegasus' primary sources of liquidity have been the net cash provided by its DBS, broadcast and cable operations, credit available under its credit facilities and proceeds from public and private offerings. Pegasus' principal uses of its cash has been to fund acquisitions, meet debt service obligations, fund DBS subscriber acquisition costs and fund investments in its broadcast and cable technical facilities. Pre-marketing cash flow increased by approximately $9.8 million, or 62%, for the three months ended June 30, 1999 as compared to the same period in 1998. The increase in pre-marketing cash flow for the three months ended June 30, 1999 is primarily due to an increase in DBS pre-marketing cash flow of $9.6 million, or 89%, attributable to acquisitions and internal growth in Pegasus' DBS subscriber base. Pre-marketing cash flow increased by approximately $21.6 million, or 87%, for the six months ended June 30, 1999 as compared to the same period in 1998. The increase in pre-marketing cash flow for the six months ended June 30, 1999 is primarily due to an increase in DBS pre-marketing cash flow of $22.1 million, or 138%, attributable to acquisitions and internal growth in Pegasus' DBS subscriber base. During the six months ended June 30, 1999, $54.5 million of cash on hand at the beginning of the year, together with $100.2 million of net cash provided by Pegasus' financing activities, was used to fund operating activities of approximately $38.4 million and investing activities of $99.6 million. Investing activities consisted of: 18 o the purchase of a cable system serving Aguadilla, Puerto Rico and neighboring communities for approximately $42.1 million; o the acquisition of DBS assets from ten independent DIRECTV providers during the first half of 1999 for approximately $49.6 million; o broadcast expenditures associated with the launch of self-produced news in our Portland, Maine and Chattanooga, Tennessee markets totaling $630,000; o DBS facility upgrades of $951,000; o the expansion and enhancements of the Puerto Rico cable system amounting to $1.7 million, including $213,000 related to hurricane damage; o payments of programming rights amounting to $1.3 million; o capitalized costs relating to Pegasus' financing of approximately $1.5 million; o proceeds from the sale of DBS assets to an independent DIRECTV provider for $509,000; and o maintenance and other capital expenditures and intangibles totaling $2.4 million. Financing activities consisted of: o the issuance of approximately 3.8 million shares of Class A common stock resulting in net proceeds to Pegasus of approximately $76.2 million; o net borrowings on bank credit facilities totaling $27.1 million; o the repayment of approximately $13.4 million of long-term debt, primarily sellers' notes and capital leases; and o net restricted cash draws of approximately $9.3 million for interest payments and $1.0 million in connection with the acquisition of the Aguadilla, Puerto Rico cable system. As of June 30, 1999, cash on hand amounted to $16.7 million plus restricted cash of $11.2 million. Pegasus Media & Communications maintains a $180.0 million senior, 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. As of June 30, 1999, $48.0 million was outstanding and stand-by letters of credit amounting to $28.6 million were issued under its $180.0 million credit facility. The credit facility expires in December 2003. Digital Television Services maintains a $70.0 million senior, reducing revolving credit facility and a $20.0 million senior term credit facility. Borrowings under the credit facilities are available to refinance certain indebtedness and for acquisitions, subject to the approval of the lenders in certain circumstances, working capital, capital expenditures and for general corporate purposes. As of June 30, 1999, $53.0 million was outstanding and stand-by letters of credit amounting to $18.5 million were issued under its $90.0 million credit facilities. The credit facilities expire in July 2003. 19 In March 1999, Pegasus completed its secondary public offering in which it sold approximately 3.6 million shares of its Class A Common Stock to the public at a price of $22.00 per share, resulting in net proceeds to Pegasus of approximately $74.9 million. Pegasus applied $49.9 million of the net proceeds to pay down indebtedness under the Pegasus Media & Communications credit facility and $25.0 million towards the acquisition of the cable system serving Aguadilla, Puerto Rico and neighboring communities. As defined in the Certificate of Designation governing Pegasus' Series A Preferred Stock and the indentures governing Pegasus' senior notes, Pegasus is required to provide Adjusted Operating Cash Flow data for Pegasus and its Restricted Subsidiaries on a consolidated basis where Adjusted Operating Cash Flow is defined as "for the four most recent fiscal quarters for which internal financial statements are available, Operating Cash Flow of such Person and its Restricted Subsidiaries less DBS Cash Flow for the most recent four-quarter period plus DBS Cash Flow for the most recent quarterly period, multiplied by four." Operating Cash Flow is income from operations before income taxes, depreciation and amortization, interest expense, extraordinary items and non-cash charges. Although Adjusted Operating Cash Flow is not a measure of performance under generally accepted accounting principles, we believe that Location Cash Flow, Operating Cash Flow and Adjusted Operating Cash Flow are accepted within our business segments as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such segments. Restricted Subsidiaries carries the same meaning as in the Certificate of Designation. Digital Television Services, Inc., among certain other Pegasus' subsidiaries, are not included in the definition of Restricted Subsidiaries and, accordingly, their operating results are not included in the Adjusted Operating Cash Flow data provided below. Pro forma for the acquisition of the Aguadilla, Puerto Rico cable system, the four completed DBS acquisitions occurring in the second quarter of 1999 and the sale of our New England cable systems, as if such acquisitions/disposition occurred on July 1, 1998, Adjusted Operating Cash Flow would have been approximately $62.1 million as follows:
Four Quarters Ended (in thousands) June 30,1999 ------------------- Revenues ................................................................ $199,147 Direct operating expenses, excluding depreciation, amortization and other non-cash charges ...................................................... 132,866 -------- Income from operations before incentive compensation, corporate expenses, depreciation and amortization and other non-cash charges .... 66,281 Corporate expenses ...................................................... 4,162 -------- Adjusted operating cash flow ............................................ $ 62,119 ========
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. Failure 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. 20 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 2000s from dates in the 1900s. 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 its critical 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 its TV traffic systems, cable billing systems and corporate accounting systems. However, if any additional 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 DBS satellite control and billing systems, including DIRECTV, the National Rural Telecommunications Cooperative 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. In addition, Pegasus has had initial communications with certain of its other significant suppliers, distributors, financial institutions 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. 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 year 2000-specific contingency plan. 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 $250,000. Costs to be incurred beyond June 30, 1999, relating to the year 2000 issue are expected to be approximately $100,000. 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. 21 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. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). As a result of the subsequent issuance of SFAS No. 137, SFAS No. 133 is now effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. The Company does not expect that the adoption of SFAS No. 133 will have a material effect on our business, financial position or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. 22 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the second quarter of 1999, Pegasus issued an aggregate of 62,689 shares of its Class A Common Stock upon the exercise of various warrants previously issued in connection with acquisitions. These shares were issued to holders who elected to surrender warrants to purchase 96,896 shares of Class A Common Stock in the aggregate in lieu of paying the exercise price. In issuing these shares, Pegasus relied upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 10, 1999, Pegasus held its annual meeting of stockholders. At this meeting, Marshall W. Pagon, Michael C. Brooks, Harry F. Hopper, III, James J. McEntee, III, Mary C. Metzger, William P. Phoenix, Riordan B. Smith, Robert N. Verdecchio and Donald W. Weber were reelected to Pegasus' Board of Directors. In such election, 59,166,796 votes were cast for each director, 575 votes were withheld with respect to each director and no votes were cast against any director nor were any votes held in abstention with respect to any director. At the meeting, the following proposals were considered: Amendment to Pegasus' Stock Option Plan. Pegasus Communications 1996 Stock Option Plan was amended to expand the group of employees who are eligible to receive options and to increase the number of shares of Class A Common Stock available under the plan from 970,000 to 1,300,000. At the meeting, 57,701,043 votes were cast for ratification of the plan, 1,466,163 votes were cast against ratification and 165 were held in abstention. Amendment to Pegasus Communications Restricted Stock Plan. Pegasus Communications Restricted Stock Plan was amended to permit a grantee to elect to receive all or any part of a discretionary restricted stock award or a profit sharing award in the form of an option in lieu of restricted stock. In connection with this proposal, 57,237,622 shares were voted in favor of the amendment, 1,531,740 votes were cast against and 365 votes were held in abstention. Increase in Authorized Shares of Class A Common Stock. At the meeting, approval was given to amend Pegasus' Certification of Incorporation to increase the number of authorized shares of Class A Common Stock from 30,000,000 to 50,000,000. Approval of this amendment required the vote of holders of the Class A Common Stock, as a separate class, and the vote of holders of the Class A and Class B Common Stock voting together. With respect to the holders of the Class A Common Stock voting as a separate class, 13,216,794 votes were cast in favor of the proposal, 135,481 votes were cast against and 165 votes were abstained. With respect to the vote of holders of the Class A and Class B Common Stock voting together, 59,031,725 votes were cast for the amendment, 135,481 votes were cast against and 165 votes were held in abstention. Amendment to Certificate of Incorporation to Eliminate Class Voting on Changes in the Number of Authorized Shares of Class A Common Stock. At the meeting, approval was given to amend Pegasus' Certificate of Incorporation to clarify that future increases or decreases in the authorized number of shares of Class A Common Stock can be approved by a majority of the votes of the Class A Common Stock and the Class B Common Stock voting together as a single class. Approval of this amendment required the vote of holders of the Class A Common Stock, as a separate class, and the vote of holders of the Class A and Class B Common Stock voting together. With respect to the vote of holders of the Class A Common Stock, 11,458,462 votes were cast in favor of the amendment, 1,492,000 votes were cast against and 165 were abstained. With respect to the vote of holders of the Class A and Class B Common Stock voting together, 57,277,462 votes were cast for the amendment, 1,492,000 votes were cast against and 165 votes were held in abstention. 23 Amendment to Certificate of Incorporation to Authorize 20,000,000 Shares of Non-Voting Common Stock. Approval was given at the meeting to amend Pegasus' Certificate of Incorporation to authorize the issuance of up to 20,000,000 shares of Non-Voting Common Stock. With respect to this amendment, 56,216,704 votes were cast for this amendment, 2,549,738 votes were cast against and 3,285 votes were held in abstention. Ratification of Appointment of Auditors. Stockholders voted to ratify the appointment of PricewaterhouseCoopers LLP as independent accountants for Pegasus for the current fiscal year. With respect to this proposal, 59,078,259 votes were cast in favor, 85,947 votes were cast against ratification and 3,165 votes were held in abstention. ITEM 5. OTHER INFORMATION On June 3, 1999, National Rural Telecommunications Cooperative ("NRTC") filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc. (together, "DIRECTV") seeking a court order enforcing NRTC's contractual rights to obtain from DIRECTV certain premium programming formerly distributed by United States Satellite Broadcasting Company, Inc. ("Premiums") for exclusive distribution by NRTC's members and affiliates in their rural markets. On July 22, 1999, DIRECTV responded to NRTC's lawsuit by rejecting NRTC's claims to such exclusive distribution rights and by filing a counterclaim seeking judicial clarification of certain provisions of DIRECTV's contract with NRTC. In particular, DIRECTV contends in its counterclaim that the term of DIRECTV's contract with NRTC is measured by the life of DBS-1 only and not the lives of the other satellites at the 101 W orbital location; and that NRTC's right of first refusal does not provide for certain programming and other rights comparable to those now provided for in the contract. We understand that NRTC intends to pursue vigorously its claim relating to the Premiums. NRTC has not yet filed a response to DIRECTV's counterclaim, but we also understand that NRTC intends to contest vigorously DIRECTV's interpretations of the end of term and right of first refusal provisions. While the Company is not a party to the pending litigation between NRTC and DIRECTV, the Company has an interest in the outcome of the litigation because it is an associate of the NRTC with contract rights that are affected by the contractual relationship between DIRECTV and NRTC. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 3.1 Amended and Restated Certificate of Incorporation of Pegasus Communications Corporation. Exhibit 10.1 Pegasus Communications 1996 Stock Option Plan (as amended and restated effective as of April 23, 1999). Exhibit 10.2 Pegasus Communications Restricted Stock Plan (as amended and restated, generally effective as of December 18, 1998). Exhibit 27.1 Financial Data Schedule. (b) Reports on Form 8-K There were no Current Reports on Form 8-K filed during the quarter ended June 30, 1999. 24 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Pegasus Communications Corporation has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Pegasus Communications Corporation Date August 12, 1999 By /s/ Robert N. Verdecchio - --------------------- ------------------------------------------- Robert N. Verdecchio Senior Vice President, Chief Financial Officer, Assistant Secretary and Director (Principal Financial and Accounting Officer) 25 EXHIBIT INDEX Exhibit 3.1 Amended and Restated Certificate of Incorporation of Pegasus Communications Corporation. Exhibit 10.1 Pegasus Communications 1996 Stock Option Plan (as amended and restated effective as of April 23, 1999). Exhibit 10.2 Pegasus Communications Restricted Stock Plan (as amended and restated, generally effective as of December 18, 1998). Exhibit 27.1 Financial Data Schedule. EX-3.1 2 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PEGASUS COMMUNICATIONS CORPORATION Ted S. Lodge, being a duly elected Senior Vice President of Pegasus Communications Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify as follows: 1. The Corporation filed its original Certificate of Incorporation with the Delaware Secretary of State on May 30, 1996 (the "Certificate"). 2. The original name of the Corporation was Pegasus Communications and Media Corporation. 3. The Board of Directors and the Stockholders of the Corporation, pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, adopted resolutions authorizing the Corporation to amend, integrate and restate the Corporation's Certificate in its entirety to read as follows. FIRST: The name of the Corporation is PEGASUS COMMUNICATIONS CORPORATION (the "Corporation"). SECOND: The address of the Corporation's registered office in the State of Delaware is 103 Springer Building, 3411 Silverside Road, Wilmington, Delaware, 19810. The name of the Corporation's registered agent at such address is Organization Services, Inc., in the County of New Castle. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is 90,000,000 shares, divided into 50,000,000 shares of Class A Common Stock, par value $0.01 per share, 15,000,000 shares of Class B Common Stock, par value $0.01 per share, 20,000,000 shares of Non-Voting Common Stock, par value $0.01 per share, and 5,000,000 shares of Preferred Stock, par value $0.01 per share. No stockholder shall have any preemptive right to subscribe to or purchase any issue of stock or other securities of the Corporation, or any treasury stock or other treasury securities. The powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights are as follows: I. PREFERRED STOCK 1. General. The Board of Directors shall have authority, by resolution, to divide any or all of the shares of Preferred Stock into, and to authorize the issue of, one or more series, and with respect to each such series to establish and, prior to the issue thereof, to fix and determine: (a) a distinguishing designation for such series and the number of shares comprised by such series, which number may (except as otherwise provided by the Board of Directors in creating such series) be increased or decreased from time to time (but not below the number of shares then outstanding) by action of the Board of Directors; (b) the rate and times at which and the other conditions on which dividends, if any, on the shares may be declared and paid or set aside for payment; whether the shares shall be entitled to any participating or other dividends in addition to dividends at the rate so determined and, if so, on what terms; and whether dividends shall be cumulative and, if so, from what date or dates and on what terms; (c) whether or not the shares shall have voting rights, in addition to the voting rights provided by law and, if so, the terms and conditions thereof; (d) whether the shares shall be convertible or exchangeable, at the option of either the holder or the Corporation or upon the happening of a specified event, and, if so, the terms and conditions of such conversion or exchange, including provisions for any adjustment of the conversion or exchange rate; (e) whether or not the shares shall be redeemable and, if so, the terms and conditions, if any, upon which they may be redeemed, including the date or dates or event or events upon or after which they shall be redeemable, the cash, property or rights (including securities of the Corporation and of a corporation or corporations other than the Corporation) for which they may be redeemed, whether they shall be redeemable at the option of the holder or the Corporation, or both, or upon the happening of a specified event or events and the amount or rate of cash, property or rights (including securities of the Corporation and of a corporation or corporations other than the Corporation) per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates, including provisions for any adjustment of the redemption prices or rates; 2 (f) whether any shares shall be redeemed through sinking fund payments and, if so, on what terms; (g) the amounts payable upon shares in the event of voluntary or involuntary liquidation, dissolution, winding up or distribution of the assets of the Corporation; and (h) the subject to the provisions of the next succeeding paragraph of this Section 1 of Part I, any other relative powers, preferences and rights and qualifications, limitations and restrictions of such series. In the resolution establishing a new series of Preferred Stock, the Board of Directors may provide for such additional rights, and with respect to rights as to dividends, redemption and liquidation, such relative preferences between shares of different series, as are not inconsistent with the rights of any outstanding shares of previously established series, and not inconsistent with any other provision of this Article FOURTH, but in the resolution creating a new series of Preferred Stock the Board of Directors may provide that such series shall have a preference over outstanding shares of any previously created series of Preferred Stock with respect to rights as to dividends, redemption and liquidation only to the extent that the resolutions of the Board of Directors authorizing such previously created series expressly so permit. All shares of Preferred Stock of all series shall be identical except as to the above mentioned rights and preferences which the Board of Directors is authorized as aforesaid to fix and determine. Except to the extent that the resolution of the Board of Directors establishing a particular series shall otherwise provide: (i) in case the stated dividends are not paid in full, all shares of Preferred Stock of all series shall participate ratably in the payment of dividends, including accumulated but unpaid dividends, in accordance with the sums which would be payable thereon if all dividends thereon were declared and paid in full, and (ii) in case amounts payable upon liquidation of all series are not paid in full, all shares of Preferred Stock of all series having a liquidation preference on a parity with one another shall participate ratably in any distribution of assets other than by way of dividends, in accordance with the sums which would be payable on such distribution if all sums payable thereon to holders of all shares of Preferred Stock were discharged in full. 2. Dividends. When and as declared by the Board of Directors, in its discretion or upon the occurrence of conditions specified in the resolution of the Board of Directors authorizing a particular series of Preferred Stock (including, without limitation, the sole specified condition that funds for the payment of any dividend be legally available for the payment of dividends under the laws of the State of Delaware as in effect at the time any periodic dividend is declared or payable, in which event the Board of Directors, in considering the payment of a dividend on such a series of Preferred Stock, shall not exercise any element of discretion which it might otherwise exercise in determining whether a dividend should be declared and paid), the holders of the shares of Preferred Stock shall be entitled to receive out of any funds of the Corporation lawfully available for dividends under the laws of the State of Delaware, dividends at such fixed rate, if any (or, if participating, such participating rate and such fixed rate, if any), per share for each particular series, and no more, payable with such frequency and on such dates, and payable in cash, in property or in rights (including securities of the Corporation or of one or more corporations or other legal entities other than the Corporation), or a combination thereof, in each case as the Board of Directors may determine in fixing and determining the rights and preferences of such series as above provided. Except to the extent that the resolution of the Board of Directors establishing a particular series shall provide that dividends on shares of such series shall not be cumulative or shall otherwise provide, such dividends on the Preferred Stock shall be cumulative from the dates as follows: 3 (a) in the case of shares issued prior to the record date for the initial dividend on shares of the series of which such shares shall constitute a part, then from the date of issuance of such shares; (b) in the case of shares issued during the period commencing immediately after the record date for a dividend on shares of such series and terminating at the close of the payment date for such dividend, then from such dividend payment date; and (c) otherwise, from the dividend payment date next preceding the date of issuance of such shares. Accrued but undeclared or unpaid dividends on any shares of Preferred Stock shall not bear interest. Further restrictions with respect to dividends and distributions on, and acquisitions for value of, shares of Preferred Stock and shares of Class A Common Stock, Class B Common Stock and Non-Voting Common Stock are set forth in Section 6 of this Part I. 3. Redemption of Preferred Stock. Except as otherwise provided in Section 6 of this Part I, and except to the extent that the resolution of the Board of Directors establishing a particular series shall provide that shares of such series (a) shall not be redeemable by the Corporation or (b) shall be redeemable by the Corporation only after a specified date or period or subject to any other condition or conditions or (c) shall be redeemable in another manner, the Corporation may redeem all or any of the outstanding shares of Preferred Stock, or all or any shares of any series thereof, at any time or from time to time, upon payment in respect of the shares so redeemed of the amount payable upon redemption thereof fixed as aforesaid by the Board of Directors in respect of the series of which such shares shall constitute a part, together in each case, to the extent that such shares have cumulative dividend rights, with an amount equal to all accumulated and unpaid dividends accrued thereon to the date of redemption, whether or not such dividends shall have been earned or declared (such price, including such amount equal to such accumulated and unpaid dividends, and whether payable in cash, property or rights or a combination thereof, as hereinafter provided, being hereinafter called the "redemption price"). In fixing the redemption price for shares of Preferred Stock of a particular series as aforesaid, the Board of Directors shall specify whether such redemption price shall be paid in cash, in property or in rights (including securities of the Corporation or of one or more legal entities other than the Corporation), or a combination thereof. If the redemption price of shares of a particular series may be paid in whole or in part in property or rights, the resolution fixing the redemption price shall specify the method to be followed in valuing the property or rights which may be used to make such payment. 4 Any redemption by the Corporation shall be in such amount, at such place and in such manner as the Board of Directors shall determine. Except to the extent that the resolution of the Board of Directors authorizing a particular series of Preferred Stock shall otherwise provide, in the case of a redemption by the Corporation of less than all the outstanding shares of Preferred Stock of any series, the particular shares to be redeemed shall be selected by lot in such manner as the Board of Directors shall determine. Unless otherwise waived in writing by the holder thereof, notice of every redemption shall be mailed at least 30 days (or such shorter period as shall be specified in the resolutions of the Board of Directors establishing the particular series) prior to the date fixed for such redemption to the holders of record of the shares so to be redeemed at their respective addresses as the same shall appear on the books of the Corporation. From and after the date fixed in any such notice as the date of redemption by the Corporation, unless default shall be made by the Corporation in providing the redemption price at the time and place specified for the payment thereof pursuant to said notice, all dividends on the shares of Preferred Stock thereby called for redemption shall cease to accrue and all rights of the holders thereof as stockholders in the Corporation, except the right to receive the redemption price upon surrender of their share certificates, shall cease and terminate, and such shares shall not be deemed outstanding for any purpose. The Corporation may, however, give or irrevocably authorize the Depositary hereinafter mentioned forthwith to give written notice (in the manner as the notice of redemption is required to be given as aforesaid) to the holders of all the shares of Preferred Stock selected for redemption by the Corporation that the redemption price has been or will on a date specified be deposited with a designated bank, bank and trust company, or private bank, which shall have an office in Wilmington, Delaware, Philadelphia, Pennsylvania, or New York, New York, and shall have a capital and surplus of not less than $25,000,000 (hereinafter called the "Depositary"), in trust for the account of the holders of such shares of Preferred Stock, and that such holders may receive the redemption price of such shares of Preferred Stock from such Depositary on or after the date of such deposit upon the surrender of their share certificates without awaiting the date fixed for redemption. In such event, if the redemption price shall have been so deposited by the Corporation with such Depositary, all rights as stockholders in the Corporation of the holders of the shares so called, except the right to receive the redemption price from such Depositary upon such surrender, shall cease and terminate upon the date of such deposit or the date of the giving of such notice or authority, whichever be later, and such shares of Preferred Stock shall thereafter not be deemed to be outstanding for any purpose; but if any shares so called for redemption shall at that time be convertible, the conversion privilege may be exercised in accordance with its terms, but not later than the close of business on the day prior to the date fixed for redemption. Any portion of the redemption price so deposited which represents the redemption price of convertible shares which are actually converted shall promptly be repaid by the Depository to the Corporation. Any remaining portion of the redemption price so deposited which shall remain unclaimed by the holders of such shares of Preferred Stock at the end of two years after the date so fixed for redemption shall be paid by such Depositary to the Corporation, after which the holders of such shares of Preferred Stock shall look only to the Corporation for payment of the redemption price thereof. 5 Shares of Preferred Stock of any series redeemed, purchased or otherwise acquired may be cancelled by the Board of Directors and thereupon restored to the status of authorized but unissued shares of Preferred Stock undesignated as to series. 4. Liquidation or Dissolution. Except to the extent that the resolution of the Board of Directors establishing a particular series, shall otherwise provide with respect to shares of such series, on any voluntary or involuntary liquidation or dissolution of the Corporation, before any payment or distribution shall be made to the holders of any Common Stock, the holders of the shares of Preferred Stock shall be entitled to be paid the amounts, if any, respectively fixed therefor as aforesaid by the Board of Directors in respect of each outstanding series of Preferred Stock, together in each case, to the extent such shares have cumulative dividend rights, with an amount equal to all accumulated and unpaid dividends thereon to the date of such payment, whether or not such dividends shall have been earned or declared. After such payment shall have been made in full to the holders of shares of Preferred Stock, they shall be entitled to no further payment or distribution, and the holders of Class A Common Stock, Class B Common Stock and Non-Voting Common Stock shall be entitled to share ratably in all remaining assets of the Corporation. A consolidation with or merger with or into any other corporation or corporations shall not be deemed a liquidation or dissolution of the Corporation within the meaning of this Section 4 of Part I. 5. Voting Rights. Except to the extent that the resolution of the Board of Directors establishing a particular series shall otherwise provide, and except as otherwise provided herein or by law, at each meeting of stockholders of the Corporation, each holder of shares of Preferred Stock shall be entitled to one vote for each such share standing in his or her name on the books of the Corporation on each matter to come before the meeting. The resolution of the Board of Directors establishing a particular series may confer on holders of the shares of such series, voting separately or with holders of shares of Preferred Stock of other series, the right to elect a member or members of the Board of Directors at any time or from time to time. 6 6. Restrictions on Dividends and Purchase of Shares of Preferred, Class A Common Stock, Class B Common Stock and Non-Voting Common Stock. (a) So long as any shares of Preferred Stock shall be outstanding, no dividend (other than dividends payable in shares of Class A Common Stock, Class B Common Stock or Non-Voting Common Stock) shall be paid or distribution shall be made on the shares of Class A Common Stock, Class B Common Stock or Non-Voting Common Stock, nor shall any shares of Class A Common Stock, Class B Common Stock or Non-Voting Common Stock be purchased, retired or otherwise acquired by the Corporation, unless in each such case: (1) all accumulated and unpaid dividends, if any, on all outstanding shares of Preferred Stock for all past dividend periods shall have been paid and full dividends, if any, on all shares of Preferred Stock for the then current dividend period declared and a sum sufficient for the payment thereof set apart; and (2) the Corporation shall not be in arrears in respect of any sinking fund obligation or obligations of a similar nature in respect of any series of Preferred Stock. (b) The resolutions of the Board of Directors establishing a particular series of Preferred Stock may provide that the payment of any dividend or the making of any distribution on, or the redemption, purchase or other acquisition (for sinking fund purposes or otherwise) by the Corporation of, shares of that series or any other series of Preferred Stock (but, in the case of any other series established before the series in question, only if the resolution of the Board of Directors establishing such other series so permits) shall be conditioned on: (1) the payment of all accumulated and unpaid dividends, if any, on all outstanding shares of Preferred Stock of one or more specified series and the declaration of full dividends, if any, on all shares of Preferred Stock of one or more specified series for the then current dividend period and the setting apart of a sum sufficient for the payments thereof; (2) the absence of any arrearage in respect of any sinking fund obligation or obligations of a similar mature in respect of one or more specified series of Preferred Stock; or (3) any other condition specified in such resolution. 7. Certain Matters Requiring Consent of Holders of Two-Thirds of Preferred Stock. So long as any shares of Preferred Stock shall be outstanding, and subject to the provisions of the last sentence of this Section 7 of Part I, the Corporation shall not, without the consent of the holders of at least two-thirds of the shares of Preferred Stock at the time outstanding, voting as a single class and not separately by series, given in person or by proxy, either in writing or at a meeting called for the purpose: 7 (a) adopt or effect any amendment to the Corporation's Certificate of Incorporation, including any amendment to the terms of any previously created series of Preferred Stock, other than an amendment of the nature described under Section 8 of this Part I, which would adversely affect the powers, preferences or special rights of the Preferred Stock; but if any such amendment shall adversely affect the powers, preferences or special rights of one or more, but not all, of the several series of Preferred Stock at the time outstanding, the consent of the holders of at least two-thirds of the shares then outstanding of those series adversely affected, voting together and not by series, shall be required in lieu of the consent of the holders of two-thirds of the Preferred Stock; or (b) authorize any new class of stock which is senior to the Preferred Stock with respect to the payment of dividends or distributions on liquidation or dissolution. Notwithstanding the foregoing provisions, the resolution of the Board of Directors creating a particular series may provide that the consent of the holders of the outstanding shares of such series shall not be required with respect to some or all of the foregoing matters and, to the extent so provided, such shares shall not be deemed outstanding for the purpose of applying the provisions of this Section 7 of Part I. 8. Certain Matters Requiring Consent of Holders of Majority of All Outstanding Shares. The Corporation may increase the authorized number of shares of Preferred Stock, or authorize any new class of stock which is on a parity with the Preferred Stock with respect to the payment of dividends or distributions on liquidation or dissolution, by obtaining the affirmative vote, given in person or by proxy, of the holders of at least a majority of the then outstanding Class A Common Stock, Class B Common Stock and Preferred Stock, voting together and not by class. II. CLASS A COMMON STOCK, CLASS B COMMON STOCK AND NON-VOTING COMMON STOCK 1. Dividends. (a) Subject to the rights of the holders of Preferred Stock, and subject to any other provisions of this Certificate of Incorporation, as amended from time to time, the holders of Class A Common Stock, the holders of Class B Common Stock and the holders of Non-Voting Common Stock shall be entitled to receive such dividends and other distributions in cash or property of the Corporation, or, subject to subsection (b), securities or obligations of the Corporation, as may be declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor; but except as provided in subsection (b), a dividend may be declared and paid on shares of either the Class A Common Stock, the Class B Common Stock or the Non-Voting Common Stock only if an identical dividend shall be simultaneously declared and paid on each share of each other class. 8 (b) In the case of dividends or other distributions payable on the Class A Common Stock, the Class B Common Stock or the Non-Voting Common Stock, including distributions pursuant to stock splits or divisions of the Class A Common Stock, the Class B Common Stock or the Non-Voting Common Stock, (1) only Class A Common Stock shall be paid or distributed on the Class A Common Stock, only Class B Common Stock shall be paid or distributed on the Class B Common Stock, and only Non-Voting Common Stock shall be paid or distributed on the Non-Voting Common Stock, and (2) any such payment or distribution on any class may be made only if parallel action is simultaneously taken in respect of each other class, so that the number of shares of each class outstanding immediately following such stock dividend, stock split or stock division shall bear the same relationship to each other as the number of shares of each class outstanding immediately before such stock dividend, stock split or stock division. (c) In the case of any decrease in the number of outstanding shares of the Class A Common Stock, the Class B Common Stock or the Non-Voting Common Stock resulting from a combination or consolidation of shares or other capital reclassification, parallel action shall be simultaneously taken in respect of each other class so that the number of shares of each class outstanding immediately following such combination, consolidation or capital reclassification shall bear the same relationship to each other as the number of shares of each class outstanding immediately before such combination, consolidation or capital reclassification. 2. Voting. (a) At every meeting of stockholders and in respect of each action by consent in writing of the holders, every holder of Class A Common Stock shall be entitled to one (1) vote in person or by proxy for each share of Class A Common Stock standing in his or her name on the transfer books of the Corporation, and every holder of Class B Common Stock shall be entitled to ten (10) votes in person or by proxy for each share of Class B Common Stock standing in his or her name on the transfer books of the Corporation. (b) Except as may be otherwise required by law or by Section 2(c) of this Part II, the holders of Class A Common Stock and Class B Common Stock shall vote together as a single class, and not separately by designated classes, on all matters with respect to which a vote of the stockholders of the Corporation is required or permitted under applicable law, including, without limitation, any amendment of this Certificate of Incorporation (whether any such amendment increases or decreases the number of authorized shares of Class A Common Stock, or otherwise), subject to any voting rights that may be granted to holders of Preferred Stock. 9 (c) Notwithstanding Section 2(b) of this Part II, but subject to any voting rights that may be granted to holders of Preferred Stock, the following matters may be authorized only by the vote of the holders of a majority of the outstanding shares of the Class A Common Stock and a majority of the outstanding shares of the Class B Common Stock, voting as separate classes: (i) the authorization or issuance (other than issuances that comply with Section 1(b)(2) of this Part II) of additional shares of Class B Common Stock after the closing date of the Corporation's initial public offering of shares of Class A Common Stock registered under the Securities Act of 1933; and (ii) any amendment to this certificate of incorporation that has any of the following effects: (1) any decrease in the voting rights per share of the Class A Common Stock or any increase in the voting rights per share of the Class B Common Stock; (2) any increase in the number of shares of Class A Common Stock into which shares of Class B Common Stock are convertible, as provided herein; (3) any relaxation on the restrictions on transfer of the Class B Common Stock, as provided herein; or (4) any change in the powers, preferences or special rights of the Class A Common Stock or the Class B Common Stock adversely affecting the holders of the Class A Common Stock. (d) Except as may otherwise be required by law, the holders of the Non-Voting Common Stock shall have no voting rights, including, without limitation, on any amendment to this Certificate of Incorporation (whether any such amendment increases or decreases the number of authorized shares of Non-Voting Common Stock, or otherwise). In any case in which the holders of the Non-Voting Common Stock have voting rights required by law, including, without limitation, on any amendment of this Certificate of Incorporation, (1) every holder of Non-Voting Common Stock shall be entitled to one (1) vote in person or by proxy for each share of Non-Voting Common Stock standing in his or her name on the transfer books of the Corporation, and (2) the holders of the Non-Voting Common Stock shall vote together with the holders of the Class A Common Stock and the Class B Common Stock and not as a separate class unless otherwise required by law. 10 3. Transfer. (a) No person holding shares of Class B Common Stock of record (hereinafter called "Class B Holder") may transfer, and the Corporation shall not register the transfer of, such shares of Class B Common Stock, whether by sale, assignment, gift, bequest, appointment, operation of law or otherwise, except to a Permitted Transferee. "Permitted Transferee" means: (1) Marshall W. Pagon or any immediate family member of his; or (2) any trust (including a voting trust), corporation, partnership or other entity, more than 50% of the voting equity interests of which are owned directly or indirectly by (or, in the case of a trust not having voting equity interests, which is more than 50% for the benefit of) and which is controlled by, one or more persons referred to in Section 3(a)(1) of this Part II; or (3) the estate of any person referred to in Section 3(a)(1) of this Part II until such time as the property of such estate is distributed in accordance with his will or applicable law. For purposes of the definition of "Permitted Transferee": (A) "immediate family member" means (i) the spouse or any parent of Marshall W. Pagon, (ii) any lineal descendant of a parent of Marshall W. Pagon, and (iii) the spouse of any such lineal descendant (parentage and descent in each case to include adoptive and step relationships); and (B) "control" of a trust, corporation or other entity means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the trust, corporation or other entity, whether through the ownership of voting securities, by agreement or otherwise. (b) Notwithstanding anything to the contrary set forth herein, any Class B Holder may pledge such Holder's shares of Class B Common Stock to a pledgee pursuant to a bona fide pledge of such shares as collateral security for indebtedness due to the pledgee, provided that such shares shall not be transferred to or registered in the name of the pledgee and shall remain subject to the provisions of this Section 3. In the event of foreclosure or other similar action by the pledgee, such pledged shares of Class B Common Stock may be transferred only to a Permitted Transferee or may be converted into shares of Class A Common Stock, as the pledgee may elect. (c) The following events shall result in the conversion of the applicable shares of Class B Common Stock into shares of Class A Common Stock: (1) a Class B Holder shall transfer Class B Common Stock to a person or entity not a Permitted Transferee; 11 (2) a Class B Holder shall transfer to any person or entity not a Permitted Transferee, including, without limitation, a pledgee, the right to vote any Class B Common Stock, whether by agreement, voting trust or otherwise; or (3) a trust, corporation, partnership or other entity holding Class B Common Stock ceases to meet the description contained in Section 3(a)(2) of this Part II. If any of the foregoing events shall occur, all shares of Class B Common Stock subject to such transfer or then held by such trust, corporation, partnership or other entity, whichever is applicable, shall, without further act on anyone's part, be converted into shares of Class A Common Stock effective upon the date such event occurs, and stock certificates formerly representing such shares of Class B Common Stock shall thereupon and thereafter be deemed to represent the like number of shares of Class A Common Stock. The Corporation may, in connection with preparing a list of stockholders entitled to vote at any meeting of stockholders, or as a condition to the transfer or the registration of shares of Class B Common Stock on the Corporation's books, require the furnishing of such affidavits, documents or other proof as it deems necessary to establish that any person is a Permitted Transferee or to ascertain that none of the events described in this subsection (c) has occurred. (d) Shares of Class B Common Stock shall be registered in the names of a beneficial owner thereof and not in "street" or "nominee" name. For this purpose, a "beneficial owner" of any shares of Class B Common Stock means a person or entity that possesses the power, either singly or jointly, to direct the voting or disposition of such shares. The Corporation shall note on the certificates for shares of Class B Common Stock the existence of the restrictions on transfer imposed by this Section 3. 4. Conversion Rights. (a) Subject to the terms and conditions of this Section 4, each share of Class B Common Stock shall be convertible at any time or from time to time, at the option of the respective holder thereof, at the office of any transfer agent for Class B Common Stock, and at such other place or places, if any, as the Board of Directors may designate, or, if the Board of Directors shall fail so to designate, at the principal office of the Corporation, into one (1) fully paid and nonassessable share of Class A Common Stock. Upon conversion, the Corporation shall make no payment or adjustment on account of dividends accrued or in arrears on Class B Common Stock surrendered for conversion or on account of any dividends on the Class A Common Stock issuable on such conversion. Before any holder of Class B Common Stock shall be entitled to convert the same into Class A Common Stock, he shall surrender the certificate or certificates for such Class B Common Stock at the office of said transfer agent (or other place as provided above), which certificate or certificates, if the Corporation shall so request, shall be duly endorsed to the Corporation in blank or be accompanied by proper instruments of transfer to the Corporation in blank (such endorsements or instruments of transfer to be in form satisfactory to the Corporation), and shall give written notice to the Corporation at said office that he elects so to convert said Class B Common Stock in accordance with the terms of this Section 4 and shall state in writing therein the name or names in which he wishes the certificate or certificates for Class A Common Stock to be issued. The Corporation will as soon as practicable after such deposit of a certificate or certificates for Class B Common Stock, accompanied by the written notice and the statement above prescribed, issue and deliver at the office of said transfer agent (or other place as provided above) to the person for whose account such Class B Common Stock was so surrendered, or to his nominee or nominees, a certificate or certificates for the number of full shares of Class A Common Stock to which he or she shall be entitled as aforesaid. Subject to the provisions of subsection (c) of this Section 4, such conversion shall be deemed to have been made as of the date of such surrender of the Class B Common Stock to be converted; and the person or persons entitled to receive the Class A Common Stock issuable upon conversion of such Class B Common Stock shall be treated for all purposes as the record holder of holder of such Class A Common Stock on such date. 12 (b) The issuance of certificates for shares of Class A Common Stock upon conversion of shares of Class B Common Stock shall be made without charge for any stamp or other similar tax in respect of such issuance. However, if any such certificate is to be issued in a name other than that of the holder of the share or shares of Class B Common Stock converted, the person or persons requesting the issuance thereof shall pay to the Corporation the amount of any tax which may be payable in respect of any transfer involved in such issuance or shall establish to the satisfaction of the Corporation that such tax has been paid. (c) The Corporation shall not be required to convert Class B Common Stock, and no surrender of Class B Common Stock shall be effective for that purpose, while the stock transfer books of Class A Common Stock or Class B Common Stock are closed for any purpose; but the surrender of Class B Common Stock for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books, as if the conversion had been made on the date such Class B Common Stock was surrendered. (d) The Corporation covenants that it will at all times reserve and keep available, solely for the purpose of issuance upon conversion of the outstanding shares of Class B Common Stock, such number of shares of Class A Common Stock as shall be issuable upon the conversion of all such outstanding shares, but nothing contained herein shall be construed to preclude the Corporation from satisfying its obligations in respect of the conversion of the outstanding shares of Class B Common Stock by delivery of shares of Class A Common Stock held in the treasury of the Corporation. The Corporation covenants that if any shares of Class A Common Stock, required to be reserved for purposes of conversion hereunder, require registration with or approval of any governmental authority under any federal or state law before such shares of Class A Common Stock may be issued upon conversion, the Corporation will use its best efforts to cause such shares to be duly registered or approved, as the case may be. The Corporation will endeavor to list the shares of Class A Common Stock required to be delivered upon conversion prior to such delivery upon each national securities exchange, if any, upon which the outstanding Class A Common Stock is listed at the time of such delivery. The Corporation covenants that all shares of Class A Common Stock which shall be issued upon conversion of the shares of Class B Common Stock, will, upon issuance, be fully paid and nonassessable and not entitled to an preemptive rights. 13 (e) Shares of Class A Common Stock, including shares originally issued upon conversion of Class B Common Stock, shall not be convertible into Class B Common Stock or any other class of stock. 5. Subscription and Related Rights; Mergers and Other Transactions. In the event that rights to subscribe to Class A Common Stock, options or warrants to purchase Class A Common Stock, or any securities convertible into Class A Common Stock are offered or granted to all holders of Class A Common Stock, Class B Common Stock or Non-Voting Common Stock, parallel action shall be simultaneously taken in respect of each other class, so that the number of shares of each class that would be outstanding immediately after the exercise in full of such rights, options or warrants or the conversion of such convertible securities shall bear the same relationship to each other as the number of shares of each class outstanding immediately before the offer or grant of such rights, options, warrants or convertible securities. Except as provided in the following sentence, if there should be any merger, consolidation, purchase or acquisition of property or stock, separation, reorganization or liquidation of the Corporation, the holders of Class A Common Stock, the holders of Class B Common Stock and the holders of Non-Voting Common Stock shall receive the shares of stock, securities or other assets as would be issuable or payable upon such merger, consolidation, purchase or acquisition of such property or stock, separation, reorganization or liquidation as if the Class A Common Stock, the Class B Common Stock and the Non-Voting Common Stock were one and the same class of stock. Notwithstanding the foregoing, in the event of a merger or consolidation which, by its terms, contemplates that the holders of Class A Common Stock, Class B Common Stock and Non-Voting Common Stock will receive, in exchange for their Class A Common Stock, Class B Common Stock and Non-Voting Common Stock, capital stock of the surviving corporation, the holders of Class A Common Stock, Class B Common Stock and Non-Voting Common Stock shall be entitled (to the extent provided for in the terms of such merger or consolidation) to receive, in exchange for their Class A Common Stock, Class B Common Stock and Non-Voting Common Stock, respectively, shares of stock of the surviving corporation having substantially similar relative designations, preferences, qualification, privileges, limitations, restrictions (including, without limitation, restrictions on transferability) in the case of Class B Common Stock) and rights as the relative designations, preferences, qualifications, privileges, limitations, restrictions and rights of the Class A Common Stock, Class B Common Stock and Non-Voting Common Stock. 6. Liquidation Rights. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation, and after payment in full of amounts, if any, required to be paid to the holders of shares of stock having preferential liquidation rights, including without limitation the holders of Preferred Stock, the remaining assets of the Corporation shall be divided among and distributed ratably to the holders of Class A Common Stock, Class B Common Stock (including those persons who shall become holders of Class A Common Stock by reason of converting their shares of Class B Common Stock) and Non-Voting Common Stock, with no distinction between the Class A Common Stock, the Class B Common Stock and the Non-Voting Common Stock. A merger or consolidation of the Corporation with or into any corporation or other entity or a sale of all or any part of the assets of the Corporation (which shall not in fact result in the liquidation of the Corporation and the distribution of its assets to stockholders) shall not be deemed to be a dissolution, liquidation or winding up of the affairs of the Corporation within the meaning of this Section 6. 14 7. Other Rights. Except as expressly set forth in this Article FOURTH, each share of Class A Common Stock and Non-Voting Common Stock shall entitle the holder thereof to rights that are in all respects identical to the rights of a holder of Class B Common Stock. FIFTH: In furtherance and not in limitation of the general powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to make, alter or repeal the bylaws of the Corporation, except as specifically otherwise provided therein. SIXTH: A director of the Corporation shall have no personal liability to the Corporation or 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. No amendment or repeal of this Article SIXTH shall apply to or affect the liability or alleged liability of any director of the Corporation for or in respect of any act or omission of such director occurring before such amendment or repeal. 15 IN WITNESS WHEREOF, the undersigned, for the purpose of amending and restating the Certificate, affirms that this is the act and deed of the Corporation and the facts stated herein are true, and accordingly has hereunto signed this Amended and Restated Certificate of Incorporation this 18th day of June, 1999. By: /s/ Ted S. Lodge ---------------------------------- Ted S. Lodge, Senior Vice President 16 EX-10.1 3 EXHIBIT 10.1 PEGASUS COMMUNICATIONS 1996 STOCK OPTION PLAN (As Amended and Restated Effective As of April 23, 1999) - - Table of Contents 1. Purpose................................................................ 1 2. Administration......................................................... 1 3. Eligibility............................................................ 2 4. Stock.................................................................. 3 5. Annual Limit........................................................... 3 6. Granting of Discretionary Options...................................... 3 7. Terms and Conditions of Discretionary Options.......................... 4 8. Formula Grants to Full-Time Employees Who Are Not Executive Officers... 8 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. Stockholder 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 PEGASUS COMMUNICATIONS 1996 STOCK OPTION PLAN (As Amended and Restated Effective As of April 23, 1999) -------------------------------- WHEREAS, Pegasus Communications Corporation amended and restated the Pegasus Communications 1996 Stock Option Plan effective December 18, 1998; WHEREAS, Pegasus Communications Corporation, in accordance with resolutions adopted by the Board of Directors on April 23, 1999, desires to amend and restate the Plan (i) to increase the number of shares of Class A Common Stock available thereunder to 1,300,000, (ii) to provide that options may be granted to employees who are not executive officers by a management committee, and (iii) to change certain provisions regarding 100-share options granted (or to be granted) to full-time employees; NOW THEREFORE, effective as of April 23, 1999, 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 as follows: 1 (a) Executive Officers and Non-employee Directors. With respect to options granted to executive officers and Non-employee Directors of the Company, the Plan shall be administered: (1) 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, as amended (the "Exchange Act"), and the requirements of Section 162(m) of the Code; or (2) In the event a committee has not been established in accordance with Section 2(a)(1), 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. (b) Employees Who Are Not Executive Officers. With respect to options granted to Employees (as defined in Section 3) who are not executive officers, the Plan shall be administered by a management committee, the members of which shall be appointed by, and shall serve at the pleasure of, the Board. (c) In General. The administrator of the Plan, whether it be the committee under Section 2(a) or the committee under Section 2(b), shall hereinafter be referred to as the "Committee," with respect to the eligible individuals for which the particular committee serves as administrator. Each member of the Committee, while serving as such, shall be deemed to be acting in his capacity as a director or employee 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 stockholders 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. 2 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 1,300,000 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. 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 a 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. 3 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. (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 stockholder, 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 the 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 stockholder, 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. 4 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 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. 5 (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 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. 6 (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 Stockholder. 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 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. 7 (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. (b) Type of Option. Each Option granted under this Section 8 on December 18, 1998 shall be an NQSO. Each Option granted under this Section 8 after December 18, 1998 shall, unless the Code otherwise requires or the Committee otherwise determines, 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 stockholder, 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 stockholder, as discussed in Section 7(i) above) from the date of grant. (4) Exercise. Effective April 23, 1999, each Option granted under this Section 8 shall become fully exercisable on the earliest of (i) the date the Optionee completes one Year of Vesting Service, (ii) the first anniversary of the date the Option is granted if the Optionee is then in the employ of the Company or a Related Company, or (iii) on 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, the Committee may accelerate the exercise date of any outstanding Option, in its discretion, if it deems such acceleration to be desirable. For purposes of this Section 8(c)(4), Year 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. 8 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 date specified in such Option, (ii) three months after such termination of employment, or (iii) termination of such Option under Section 10. 9 (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 Determination Date (as defined in Section 7(j)), 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 stockholders (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 stockholder 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 Stockholder Approval. The approval of stockholders 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 stockholder approval (i.e., an action on which stockholders would be entitled to vote if the action were taken at a duly held stockholders' meeting); or (2) By a majority of the votes cast at a duly held stockholders' 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. 13 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 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. Stockholder Approval. This amended and restated Plan shall become effective on April 23, 1999; provided, however, that if stockholders 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 stockholders 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 hereunder, and outstanding on the date set forth in the preceding sentence, which by their terms extend beyond such date. 14 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." 15 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 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. 16 EX-10.2 4 EXHIBIT 10.2 PEGASUS COMMUNICATIONS RESTRICTED STOCK PLAN (As Amended and Restated, Generally Effective As of December 18, 1998) TABLE OF CONTENTS
Page SECTION 1 Purpose........................................................................................1 SECTION 2 Definitions....................................................................................1 (a) "Awards".......................................................................................1 (b) "Award Agreement"..............................................................................1 (c) "Board"........................................................................................1 (d) "Business Unit Location Cash Flow".............................................................1 (e) "Code".........................................................................................1 (f) "Committee"....................................................................................1 (g) "Common Stock".................................................................................1 (h) "Company Matching Contributions"...............................................................2 (i) "Company-Wide Location Cash Flow"..............................................................2 (j) "Disability"...................................................................................2 (k) "Discretionary Awards".........................................................................2 (l) "Excess Awards"................................................................................2 (m) "Fair Market Value"............................................................................2 (n) "Grantee"......................................................................................2 (o) "ISO"..........................................................................................2 (p) "Management Committee".........................................................................2 (q) "NQSO".........................................................................................2 (r) "Officers".....................................................................................2 (s) "Option".......................................................................................2 (t) "PCC"..........................................................................................2 (u) "Pegasus"......................................................................................2 (v) "Plan".........................................................................................3 (w) "Plan Administrator"...........................................................................3 (x) "Profit-Sharing Awards"........................................................................3 (y) "Rollover Matching Contributions"..............................................................3 (z) "Salary".......................................................................................3 (aa) "Savings Plan".................................................................................3 (bb) "Special Recognition Awards"...................................................................3 (cc) "Year Over Year Increase in Business Unit Location Cash Flow"..................................3 (dd) "Year Over Year Increase in Company-Wide Location Cash Flow"...................................3 (ee) "Years of Vesting Service".....................................................................4 SECTION 3 Administration.................................................................................4 (a) Special Recognition Awards and Discretionary Awards to Officers................................4 (b) All Other Awards...............................................................................4 (c) In General.....................................................................................5 SECTION 4 Eligibility....................................................................................5 (a) Special Recognition Awards.....................................................................5 (b) Profit-Sharing Awards..........................................................................5 (c) Excess Awards..................................................................................6 (d) Discretionary Awards...........................................................................6 SECTION 5 Stock..........................................................................................6
i TABLE OF CONTENTS (continued)
Page SECTION 6 Amount of Award................................................................................6 (a) Special Recognition Awards.....................................................................6 (b) Profit-Sharing Awards..........................................................................6 (c) Excess Awards..................................................................................7 (d) Discretionary Awards...........................................................................8 SECTION 7 Vesting........................................................................................8 (a) Special Recognition Awards.....................................................................8 (b) Awards Other than Special Recognition Awards...................................................8 (c) Forfeiture.....................................................................................9 SECTION 8 Election To Receive Option in Lieu of Common Stock Subject to Vesting Requirements...................................................................................9 (a) Election.......................................................................................9 (b) Date of Grant..................................................................................9 (c) Number of Shares Subject to Option.............................................................9 (d) Type of Option.................................................................................9 (e) Terms and Conditions of Options...............................................................10 (f) Application of Funds..........................................................................13 SECTION 9 Capital Adjustments...........................................................................13 SECTION 10 Amendment or Discontinuance of the Plan.......................................................14 SECTION 11 Termination of Plan...........................................................................15 SECTION 12 Effective Date................................................................................15 SECTION 13 Miscellaneous.................................................................................15 (a) Issuance and Delivery of Certificates.........................................................15 (b) Rights as a Stockholder.......................................................................16 (c) Award Agreement...............................................................................16 (d) Governing Law.................................................................................16 (e) Rights........................................................................................16 (f) Non-Transferability...........................................................................16 (g) Listing and Registration of Shares............................................................17 (h) Withholding and Use of Shares to Satisfy Tax Obligations......................................17 (i) Indemnification of Board and Plan Administrator...............................................17
ii PEGASUS COMMUNICATIONS RESTRICTED STOCK PLAN (As Amended and Restated, Generally Effective As of December 18, 1998) SECTION 1 Purpose This Pegasus Communications Restricted Stock Plan is intended to provide a means whereby PCC may, through the grant of Common Stock subject to vesting requirements to employees of Pegasus, attract and retain such individuals and motivate them to exercise their best efforts on behalf of Pegasus. With respect to Discretionary Awards and Profit Sharing Awards made after December 31, 1998, a Grantee may elect to receive an Option in lieu of all or any part of a grant of Common Stock subject to vesting requirements. With respect to Discretionary Awards made on or after April 23, 1999, an Officer may elect to receive cash or an Option to purchase Common Stock in lieu of all or any part of a grant of Common Stock subject to vesting requirements. SECTION 2 Definitions Whenever the following terms are used in this Plan, they shall have the meanings specified below, unless the context clearly indicates to the contrary: (a) "Awards" shall mean Special Recognition Awards, Profit-Sharing Awards, Excess Awards and Discretionary Awards. (b) "Award Agreement" shall mean the written document described in Section 13(c) evidencing Awards made pursuant to the Plan. (c) "Board" shall mean the Board of Directors of PCC. (d) "Business Unit Location Cash Flow" shall mean income from the business unit's operations before management fees, depreciation, amortization (other than amortization of film contracts), and incentive compensation (including contributions under the Plan and the Savings Plan). (e) "Code" shall mean, as applicable, the Internal Revenue Code of 1986, as amended, or the Puerto Rico Internal Revenue Code of 1994, as amended. (f) "Committee" shall mean the administrator of the Plan with respect to Special Recognition Awards and Discretionary Awards to Officers, which shall be a committee of the Board or the Board, in accordance with Section 3(a). (g) "Common Stock" shall mean the Class A common stock of PCC. (h) "Company Matching Contributions" shall have the meaning set forth in Article I of the Savings Plan. 1 (i) "Company-Wide Location Cash Flow" shall mean income from Pegasus operations before management fees, depreciation, amortization (other than amortization of film contracts), and incentive compensation (including contributions under the Plan and the Savings Plan). (j) "Disability" shall have the meaning set forth in Article I of the Savings Plan. (k) "Discretionary Awards" shall mean the discretionary awards described in Section 6(d). (l) "Excess Awards" shall mean the formula awards described in Section 6(c). (m) "Fair Market Value" shall mean 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. (n) "Grantee" shall mean an individual who has received an Award under the Plan. (o) "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 Internal Revenue Code of 1986, as amended, and which is designated as an ISO in the Award Agreement. (p) "Management Committee" shall mean the committee authorized by the Board to administer the Plan with respect to all Awards other than Special Recognition Awards and Discretionary Awards to Officers. (q) "NQSO" shall mean an option which, at the time such option is granted, does not meet the definition of an ISO, whether or not it is designated as an NQSO in the Award Agreement. (r) "Officers" shall mean employees who are officers, within the meaning of Rule 16a-1(f) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor thereto. (s) "Option" shall mean an ISO or an NQSO granted to an employee in lieu of Common Stock subject to a vesting schedule, pursuant to the employee's election under Section 8(a). (t) "PCC" shall mean Pegasus Communications Corporation. (u) "Pegasus" shall mean Pegasus Communications Holdings, Inc. and its direct and indirect subsidiaries, whether in corporate, partnership or any other form. (v) "Plan" shall mean the Pegasus Communications Restricted Stock Plan, as set forth in this document and as it may be amended from time to time. (w) "Plan Administrator" shall mean - 2 (1) With respect to Special Recognition Awards and Discretionary Awards to Officers, the Committee; and (2) With respect to all other Awards, the Management Committee. (x) "Profit-Sharing Awards" shall mean the formula awards described in Section 6(b). (y) "Rollover Matching Contributions" shall have the meaning set forth in Article I of the Savings Plan. (z) "Salary" shall have the meaning set forth in Article I of the Savings Plan. (aa) "Savings Plan" shall mean, as applicable, the Pegasus Communications Savings Plan, effective January 1, 1996, and as it may be amended from time to time, or the Pegasus Communications Puerto Rico Savings Plan, effective October 1, 1996, and as it may be amended from time to time. (bb) "Special Recognition Awards" shall mean the awards described in Section 6(a). (cc) "Year Over Year Increase in Business Unit Location Cash Flow" shall mean, with respect to any year, the excess of the Business Unit Location Cash Flow for such year over the Business Unit Location Cash Flow for the preceding year, determined on a pro forma basis by the Board or a committee thereof. For purposes of determining the excess of the Business Unit Location Cash Flow in the first calendar year in which a business unit becomes a business unit of Pegasus ("Year 1") over the Business Unit Location Cash Flow for the preceding year ("Year 0"), the Business Unit Location Cash Flow attributable to the period in Year 1 during which the business unit was a business unit of Pegasus shall be compared to the business unit's income -- before management fees, depreciation, amortization (other than amortization of film contracts), and incentive compensation (including contributions under any qualified or nonqualified plan) -- from non-Pegasus operations during the same period in Year 0. For purposes of determining the excess of the Business Unit Location Cash Flow for the succeeding year ("Year 2") over the Business Unit Location Cash Flow for Year 1, the Business Unit Location Cash Flow attributable to the period in Year 1 during which the business unit was a business unit of Pegasus shall be compared to the Business Unit Location Cash Flow during the same period in Year 2. (dd) "Year Over Year Increase in Company-Wide Location Cash Flow" shall have the meaning set forth in Article I of the Savings Plan. (ee) "Years of Vesting Service" shall have the meaning set forth in Article I of the Savings Plan; provided, however, that a Grantee 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. 3 SECTION 3 Administration The Plan shall be administered as follows: (a) Special Recognition Awards and Discretionary Awards to Officers. With respect to Special Recognition Awards and Discretionary Awards to Officers, the Plan shall be administered: (1) By a committee, which shall consist solely of not fewer than two directors of PCC who shall be appointed by, and shall serve at the pleasure of, the Board, taking into consideration the rules under Section 16(b) of the Exchange Act and the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended; or (2) In the event a committee has not been established in accordance with paragraph 1, by the entire Board; provided, however, that a member of the Board shall not participate in a vote approving an Award to himself or herself to the extent provided under the laws of the State of Delaware governing corporate self-dealing. The Plan Administrator with respect to Special Recognition Awards and Discretionary Awards to Officers 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 PCC. The Committee shall have full authority, upon consideration of recommendations by the Management Committee and subject to the terms of the Plan, to select the Officers to be granted Special Recognition Awards and Discretionary Awards under the Plan, to grant Special Recognition Awards and Discretionary Awards to Officers on behalf of PCC, and to set the date of grant and the other terms of such Awards. The Committee shall also have full authority to make certain determinations with respect to an Option granted pursuant to an Officer's election, as described in Section 8. (b) All Other Awards. With respect to all Awards other than Special Recognition Awards and Discretionary Awards to Officers, the Plan shall be administered by the Management Committee. With respect to Special Recognition Awards and Discretionary Awards to employees who are not Officers, the Management Committee shall have full authority, subject to the terms of the Plan, to select the employees to be granted such Awards under the Plan, to grant such Awards on behalf of PCC, and to set the date of grant and the other terms of such Awards. The Management Committee shall also have full authority to make certain determinations with respect to an Option granted pursuant to the election of an employee who is not an Officer, as described in Section 8. The terms and conditions of Profit-Sharing Awards and Excess Awards are intended to be fixed in advance. Consequently, Profit-Sharing Awards and Excess Awards shall be as set forth in Sections 6(b) and 6(c), respectively, of the Plan, and the Management Committee shall not have any discretionary authority with respect thereto, except as provided in Section 8 (regarding Options). 4 (c) In General. The Plan Administrator may correct any defect, supply any omission and reconcile any inconsistency in the Plan and in any Award granted hereunder to the extent it shall deem desirable. The Plan Administrator 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, and 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 PCC, its stockholders and all employees, and 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, the Committee or the Management Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award granted under it. SECTION 4 Eligibility More than one Award may be granted to an employee who is eligible to receive an Award under the Plan. Employees shall be eligible to receive Awards as follows: (a) Special Recognition Awards. All employees of Pegasus shall be eligible to receive Special Recognition Awards. (b) Profit-Sharing Awards. A General Manager, Department Manager or Corporate Manager shall be eligible to receive a Profit-Sharing Award with respect to a year if: (1) He is not an Officer on the date the Award is made; and (2) He is employed by Pegasus as a Manager on: (A) June 30 of the year for which the Profit-Sharing Award is made; and (B) The date the Profit-Sharing Award is made. (c) Excess Awards. A Participant in the Savings Plan shall be eligible to receive an Excess Award if contributions on his behalf under the Savings Plan are limited by certain limitations imposed by the Code, as described in Section 6(c), and he is employed by Pegasus on the date the Excess Award is made. (d) Discretionary Awards. All employees of Pegasus shall be eligible to receive Discretionary Awards. Special Recognition Awards and Profit-Sharing Awards shall be made as soon as practicable after the financial information necessary for determining the amount of the Award is available (absent extraordinary circumstances, on or before the March 31 following the year for which the Award is made). Excess Awards shall be made as soon as practicable after the availability of the information required to determine whether contributions under the Savings Plan on behalf of a Participant with respect to a year are limited (absent extraordinary circumstances, on or before the March 15 following the Savings Plan year for which such contribution is limited). 5 SECTION 5 Stock The number of shares of Common Stock that may be subject to Awards under the Plan shall be 350,000 shares, subject to adjustment as hereinafter provided. Common Stock issuable under the Plan may be authorized but unissued shares or reacquired shares, and PCC may purchase shares required for \ this purpose, from time to time, if it deems such purchase to be advisable. Any Common Stock subject to an Award which is forfeited shall continue to be available for the granting of Awards under the Plan. SECTION 6 Amount of Award (a) Special Recognition Awards. The Plan Administrator, in its sole discretion, shall determine the amount of the annual Special Recognition Award, if any, to be made on behalf of an eligible employee described in Section 4(a); provided, however, that the Fair Market Value of the Common Stock covered by the annual Special Recognition Awards for any year to all employees in the aggregate, determined as of the date the Awards are granted, shall not exceed the sum of (1) five percent of the Year Over Year Increase in Company-Wide Location Cash Flow, plus (2) the Year Over Year Increase in Company-Wide Location Cash Flow which could have been awarded as a Special Recognition Award in the preceding year, and was not. Special Recognition Awards may be granted for consistency (awarded to a team of employees), initiative (a team or individual award), problem solving (a team or individual award), and individual excellence. (b) Profit-Sharing Awards. An annual Profit-Sharing Award of Common Stock shall be made to each eligible employee described in Section 4(b). Except as provided in Section 8(c), the number of shares of Common Stock covered by an annual Profit-Sharing Award shall be determined as follows -- (1) General Managers. The number of shares of Common Stock covered by the annual Profit-Sharing Award to each eligible employee who is a General Manager shall equal the quotient of (A) six percent of the Year Over Year Increase in Business Unit Location Cash Flow of the General Manager's business unit, divided by (B) the Fair Market Value of a share of Common Stock. 6 (2) Department Managers. The number of shares of Common Stock covered by an annual Profit-Sharing Award to Department Managers in a business unit in the aggregate shall equal the quotient of (A) six percent of the Year Over Year Increase in Business Unit Location Cash Flow of the Department Manager's business unit, divided by (B) the Fair Market Value of a share of Common Stock. Such shares shall be allocated, per capita, to each eligible employee who is a Department Manager in the business unit; provided, however, that the shares allocated to any Department Manager pursuant to an annual Profit-Sharing Award shall not exceed the shares that would have been allocated to the Department Manager if all Department Manager positions in the business unit were filled on June 30 of the year for which the Profit-Sharing Award is being made and the date the Profit-Sharing Award is made. Any shares that may not be allocated on account of the limitation set forth in the previous sentence shall not be subject to the annual Profit-Sharing Award for the year in which such limitation applies. (3) Corporate Managers. The number of shares of Common Stock covered by an annual Profit-Sharing Award to eligible employees who are Corporate Managers in the aggregate shall equal the quotient of (A) three percent of the Year Over Year Increase in Company-Wide Location Cash Flow, divided by (B) the Fair Market Value of a share of Common Stock. Such shares shall be allocated to each eligible employee who is a Corporate Manager in the same proportion that such Corporate Manager's Salary for such year bears to the total Salary of all Corporate Managers entitled to a Profit-Sharing Award for such year. (c) Excess Awards. The number of shares of Common Stock covered by an Excess Award made on behalf of an eligible employee described in Section 4(c) with respect to any year shall equal the quotient of -- (1) The sum of -- (A) Company Matching Contributions which were not contributed to the Savings Plan on the eligible employee's behalf for such year because of any Code provision that limits such contributions, plus (B) Rollover Matching Contributions which were not contributed to the Savings Plan on the eligible employee's behalf for such year because of any Code provision that limits such contributions; divided by (2) The Fair Market Value of a share of Common Stock. (d) Discretionary Awards. The Plan Administrator, in its sole discretion, shall determine the amount of the Discretionary Award, if any, to be made on behalf of an eligible employee described in Section 4(d). Discretionary Awards granted after December 31, 1998 shall be payable in Common Stock subject to vesting requirements or, to the extent elected by the Grantee under Section 8(a), in the form of an Option. Effective with respect to Discretionary Awards granted to an Officer on or after April 23, 1999, the Officer may elect, before the date of grant and in accordance with procedures established by the Plan Administrator or its delegate, to receive such an Award in the form of (i) Common Stock subject to vesting requirements, (ii) an Option described in Section 8, (iii) cash, or (iv) in any combination of the foregoing; provided, however, that the amount of cash payable under a Discretionary Award shall not exceed 33-1/3% of the Officer's base salary for the year in which the Discretionary Award is made. The Officer's vesting percentage under Section 7 shall be applied to the portions of the Discretionary Award payable in the form of an Option and Common Stock, but not to the portion of the Discretionary Award payable in cash. Any cash payable pursuant to such an election shall be payable as soon as practicable after the Discretionary Award is made. 7 SECTION 7 Vesting (a) Special Recognition Awards. A Grantee shall be 100% vested in a Special Recognition Award made on or after April 30, 1998 on the date such Award is made. A Grantee shall be 100% vested in a Special Recognition Award made before April 30, 1998 on April 30, 1998 to the extent such Award has not been forfeited or become fully vested prior to April 30, 1998. (b) Awards Other than Special Recognition Awards. (1) Death, Disability. A Grantee shall be 100% vested in his Profit-Sharing Awards, Excess Awards and Discretionary Awards under the Plan when he -- (A) Incurs a Disability; or (B) Dies. (2) Vesting Schedule. Except as otherwise provided in paragraph (1), a Grantee shall be 100% vested in his Profit-Sharing Awards, Excess Awards and Discretionary Awards under the Plan in accordance with the following schedule -- Percentage of Shares Subject to Awards Years of Vesting Service That Are 100% Vested ------------------------ -------------------- Fewer than 2 0 2 but fewer than 3 34 3 but fewer than 4 67 4 or more 100 Notwithstanding the foregoing, (A) an Officer shall be 100% vested in any portion of his Discretionary Award that is payable in cash, and (B) the Plan Administrator may accelerate the vesting of an Award when granted or at any time thereafter, in its discretion, if it deems such acceleration to be desirable. (c) Forfeiture. Any shares of Common Stock covered by a Grantee's Awards that are not vested pursuant to subsection (a) or subsection (b) shall be immediately forfeited upon the Grantee's voluntary or involuntary termination of employment by Pegasus. SECTION 8 Election To Receive Option in Lieu of Common Stock Subject to Vesting Requirements (a) Election. An employee may elect to receive all or any portion of a Discretionary Award and/or Profit-Sharing Award granted after December 31, 1998 in the form of an Option described in this Section 8 in lieu of Common Stock subject to vesting requirements. Such an election shall be made before the date of grant in accordance with procedures established by the Plan Administrator or its delegate. In no event, however, may an employee elect to receive Options for more than 50,000 shares of Common Stock (as adjusted pursuant to Section 9) under this Section 8 in any calendar year. If an Option is cancelled, the shares of Common Stock covered by the cancelled Option shall be counted against the maximum number of shares for which Options may be granted to a single employee. 8 (b) Date of Grant. The date of grant for an Option granted pursuant to a Grantee's election under Section 8(a) shall be the date such Award would have been made under Section 4 absent such an election. (c) Number of Shares Subject to Option. The number of shares of Common Stock subject to an Option granted pursuant to a Grantee's election under Section 8(a) shall be equal to the total number of shares of Common Stock which would have been covered by the Grantee's Award (determined pursuant to Section 6(b) or (d), as applicable) without giving effect to any election to receive the Award in a form other than Common Stock subject to vesting requirements, multiplied by (i) the percentage of the Award the Grantee has elected to have paid in the form of an Option, and (ii) a conversion factor. The conversion factor shall be determined pursuant to a valuation formula established by the Plan Administrator or its delegate. (d) Type of Option. Each Option granted under this Section 8 shall, unless the Code otherwise requires or the Plan Administrator otherwise determines, be an ISO, provided stockholder approval of the Plan (as amended and restated) is obtained within 12 months after December 18, 1998. The aggregate Fair Market Value 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 stock option plan of Pegasus) 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. (e) Terms and Conditions of Options. Options granted under this Section 8 in lieu of Common Stock subject to vesting requirements 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 stockholder, as provided in Section 8(e)(10)) of the Fair Market Value of the optioned shares of Common Stock, or the par value thereof. 9 (3) Term. Subject to earlier termination as provided in Section 8(e)(5), (6) and (7) and in Section 9 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 stockholder, as discussed in Section 8(e)(10)) from the date of grant, or such lesser term as the Plan Administrator, in its sole discretion, shall permit the Grantee to elect on or before 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 Grantee 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. Notwithstanding the foregoing, an Option granted under this Section 8 shall become fully exercisable upon the Grantee's death or Disability while in the employ of Pegasus. In addition, the Plan Administrator may accelerate the exercise date of any Option when granted or at any time thereafter, 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 Pegasus 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 Grantee; 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 an ISO, such shares have been held by the Grantee for a period of not less than the holding period described in Section 422(a)(1) of the Internal Revenue Code of 1986, as amended 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 for an ISO or an NQSO) or acquired through the exercise of an ISO (and are used to pay the Option price for an NQSO), such shares have been held by the Grantee 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 Grantee at least six months prior to the date of exercise; 10 (C) by delivering a properly executed notice of exercise of the Option to Pegasus and a broker, with irrevocable instructions to the broker promptly to deliver to Pegasus 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 2(m), 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 a Grantee's employment by Pegasus 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 Grantee could have exercised it on the date of such termination, by the Grantee any time prior to the earliest of (i) the expiration date specified in such Option, (ii) three months after such termination of employment, or (iii) termination of such Option under Section 9. (6) Exercise upon Disability of Grantee. If a Grantee becomes Disabled 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 Grantee could have exercised it on the date of such termination by the Grantee 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 9. In the event of the Grantee's legal disability, such Option may be exercised by the Grantee's legal representative. (7) Exercise upon Death of Grantee. If a Grantee dies during his employment, and prior to the expiration date fixed for his Option, or if a Grantee 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 Grantee could have exercised it on the date of his death, by the Grantee'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 Grantee. 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 9. (8) Non-Transferability. No Option granted under this Section 8 shall be assignable or transferable by the Grantee other than by will or by the laws of descent and distribution. During the lifetime of the Grantee, all Options granted under this Section 8 shall be exercisable only by the Grantee, or, in the event of the Grantee's legal disability, by the Grantee's guardian or legal representative. If the Grantee is married at the time of exercise and if the Grantee so requests at the time of exercise, the certificate or certificates shall be registered in the name of the Grantee and the Grantee's spouse, jointly, with right of survivorship. 11 (9) Withholding and Use of Shares to Satisfy Tax Obligations. The obligation of PCC 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 Grantee may satisfy the federal, state and local withholding tax, in whole or in part, by electing to have PCC withhold shares of Common Stock subject to the exercise (or by returning previously acquired shares of Common Stock to PCC). PCC 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 2(m), with reference to the date the amount attributable to the exercise of the Option is includable in income by the Grantee under 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 Grantee for a period of not less than the holding period described in Section 422(a)(1) of the Internal Revenue Code of 1986, as amended, as of the Determination Date. The Plan Administrator shall adopt such withholding rules as it deems necessary to carry out the provisions of this paragraph. (10) Ten Percent Stockholder. If an employee owns more than ten percent of the total combined voting power of all classes of stock of PCC or of its parent or subsidiary corporation at the time an ISO is granted to him (taking into account the attribution rules of Section 424(d) of the Internal Revenue Code of 1986, as amended), the Option price for the ISO shall be 110 percent of the Fair Market Value of the optioned shares of Common Stock on the date the ISO 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. (f) Application of Funds. The proceeds received 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 PCC 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. 12 SECTION 9 Capital Adjustments The number of shares which may be issued under the Plan and the number of shares of Common Stock issuable upon the vesting of outstanding Awards shall be adjusted to reflect any stock dividend, stock split, share combination, or similar change in the capitalization of PCC. The maximum number of shares with respect to which Options may be granted to any employee in any calendar year (as stated in Section 8(a)) 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 Plan Administrator, to reflect any stock dividend, stock split, spin-off, share combination, or similar change in the capitalization of PCC; 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 Internal Revenue Code of 1986, as amended, unless the Grantee 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 vesting of outstanding Awards or the exercise of outstanding Options (as well as the Option price), the Plan Administrator 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 interests of Grantees and preserve, without exceeding, the value of Awards. In the event of a corporate transaction (as that term is described in Section 424(a) of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations issued thereunder as, for example, a merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation), each outstanding Award shall be assumed by the surviving or successor corporation; provided, however, that, in the event of a proposed corporate transaction, the Plan Administrator may terminate all or a portion of the outstanding Options if it determines that such termination is in the best interests of PCC. If the Plan Administrator desires to terminate outstanding Options, the Plan Administrator 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 8(e), the Plan Administrator, in its discretion, may accelerate, in whole or in part, the date on which any or all Options become exercisable. The Plan Administrator 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 Internal Revenue Code of 1986, as amended, unless the Option holder consents to the change. 13 SECTION 10 Amendment or Discontinuance of the Plan At any time and from time to time, the Board may suspend or terminate the Plan or amend it, and the Plan Administrator may amend any outstanding Awards in any respect whatsoever, except that the following amendments shall require the approval of stockholders: (a) Any amendment which would increase the number of shares of Common Stock authorized under the Plan; (b) Any amendment for which stockholder approval is required under the rules of an exchange or market on which Common Stock is listed; (c) Any amendment which would change the class of employees eligible to receive ISOs; and (d) Any amendment requiring stockholder approval pursuant to Treas. Reg. ss.1.162-27(e)(4)(iv) or any successor thereto (to the extent compliance with Section 162(m) of the Internal Revenue Code of 1986, as amended, is desired). Notwithstanding the foregoing, no such suspension, discontinuance or amendment shall materially impair the rights of any holder of an outstanding Award without the consent of such holder. The approval of stockholders must be (i) by a method and in a degree that would be treated as adequate under applicable state law in the case of an action requiring stockholder approval (i.e., an action on which stockholders would be entitled to vote if the action were taken at a duly held stockholders' meeting), or (ii) by a majority of the votes cast at a duly held stockholders' 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. SECTION 11 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, and no Awards hereunder shall be granted thereafter. Nothing contained in this Section 11, however, shall terminate or affect the continued existence of rights created under Awards issued hereunder and outstanding on September 29, 2006 which by their terms extend beyond such date. SECTION 12 Effective Date This Plan became effective on September 30, 1996 (the date the Plan was adopted by the Board). As amended and restated, this Plan shall become effective as of December 18, 1998. 14 SECTION 13 Miscellaneous (a) Issuance and Delivery of Certificates. This Section 13(a) shall not apply to the portion of any Award with respect to which the Grantee has made an election to receive an Option pursuant to Section 8(a). Upon the granting of an Award, (i) PCC shall issue certificates in the name of the Grantee (or the Grantee and the Grantee's spouse -- see subsection (f)) representing the Common Stock subject to the Award. Any shares of Common Stock in which the Grantee is not vested on the date the Award is granted shall bear a legend indicating that they are subject to the terms of the Plan and the Award Agreement and that they may not be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of except in accordance with the terms of the Plan and the Award Agreement. Upon issuance of such certificates, the Grantee shall immediately execute a stock power or other instrument of transfer, appropriately endorsed in blank, to be held with the certificates by PCC pursuant to the terms of the Plan and the Award Agreement with respect to shares of Common Stock in which the Grantee is not vested on the date the Award is granted. Only full shares shall be issued, and any fractional shares which might otherwise be issuable pursuant to an Award shall be forfeited. (b) Rights as a Stockholder. With respect to any shares of Common Stock in which the Grantee is not vested on the date an Award is granted (other than shares for which the Grantee has made an election pursuant to Section 8(a) to receive an Option), the Grantee shall be entitled to receive dividends paid on such shares, shall have the right to vote such shares, and shall have all other stockholder's rights with respect to such shares, except that (i) the Grantee will not be entitled to delivery of the stock certificate, (ii) PCC will retain custody of the Common Stock, and (iii) the shares subject to Awards will revert to PCC in accordance with Section 7(c) to the extent not vested on the Grantee's voluntary or involuntary termination of employment by Pegasus. With respect to the portion of any Award for which the Grantee has made an election under Section 8(a), the Option issued pursuant thereto shall not entitle the holder thereof to any rights as a stockholder of PCC prior to the exercise of such Option and the issuance of the shares pursuant thereto. (c) Award Agreement. Awards under the Plan shall be evidenced by written documents in such form as the Plan Administrator shall, from time to time, approve, which Award Agreements shall contain such provisions, not inconsistent with the provisions of the Plan, as the Plan Administrator shall deem advisable. Each Grantee shall enter into, and be bound by the terms of, the Award Agreement. (d) Governing Law. The Plan, and the Award Agreements entered into and Awards granted thereunder, shall be governed by the Code provisions to the extent applicable. Otherwise, the operation of, and the rights of eligible individuals under, the Plan, the Award Agreements, and the Awards shall be governed by applicable federal law and otherwise by the laws of the State of Delaware. (e) Rights. Neither the adoption of the Plan nor any action of the Board or the Plan Administrator shall be deemed to give any individual any right to be granted an Award, or any other right hereunder, unless and until the Plan Administrator shall have granted such individual an Award, and then his rights shall be only such as are provided by the Plan and the Award Agreement. 15 Further, notwithstanding any provisions of the Plan or any Award Agreement with a Grantee, but subject to any employment agreement, Pegasus shall have the right, in its discretion, to retire an employee at any time pursuant to its retirement rules or otherwise to terminate his employment at any time for any reason whatsoever. (f) Non-Transferability. This Section 13(f) shall not apply to the portion of an Award with respect to which the Grantee has made an election to receive an Option pursuant to Section 8(a). Except as otherwise provided in any Award Agreement, Awards which have not vested shall not be assignable or transferable by the Grantee otherwise than by will or by the laws of descent and distribution. If a Grantee is married on the date an Award is granted, and if the Grantee so requests, the certificate or certificates issued shall be registered in the name of the Grantee and the Grantee's spouse, jointly, with right of survivorship. (g) Listing and Registration of Shares. Each Award shall be subject to the requirement that, if at any time the Plan Administrator shall determine, in its discretion, that the listing, registration, or qualification of the 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 Award or the vesting of Common Stock thereunder, or that action by PCC or by the Grantee should be taken in order to obtain an exemption from any such requirement, no shares of Common Stock shall be received pursuant to an Award, unless and until such listing, registration, qualification, consent, approval, or action shall have been effected, obtained, or taken under conditions acceptable to the Plan Administrator. Without limiting the generality of the foregoing, each Grantee or his legal representative or beneficiary may also be required to give satisfactory assurance that shares received pursuant to an Award will be held as an investment and not with a view to distribution, and certificates representing such shares may be legended accordingly. (h) Withholding and Use of Shares to Satisfy Tax Obligations. This Section 13(h) shall not apply to the portion of an Award with respect to which the Grantee made an election to receive an Option pursuant to Section 8(a). The obligation of PCC to deliver Common Stock pursuant to any Award shall be subject to applicable federal, state and local tax withholding requirements. If the vesting of any Award is subject to the withholding requirements of applicable federal tax law, the Plan Administrator, in its discretion, may permit or require the Grantee to satisfy the federal, state and local withholding tax, in whole or in part, by electing to have PCC withhold shares of Common Stock subject to the Award (or by returning previously acquired shares of Common Stock to PCC). PCC may not withhold shares in excess of the number necessary to satisfy the minimum federal, state and local income tax withholding requirements. Shares of Common Stock shall be valued, for purposes of this paragraph, at their fair market value, determined under Section 2(m), with reference to the date the amount attributable to the vesting of the Award is includable in income by the Grantee under the Code (the "Vesting Date"). 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 Grantee for a period of not less than the holding period described in Section 422(a)(1) of the Internal Revenue Code of 1986, as amended, as of the Vesting Date. The Plan Administrator shall adopt such withholding rules as it deems necessary to carry out the provisions of this paragraph. 16 (i) Indemnification of Board and Plan Administrator. Without limiting any other rights of indemnification which they may have from Pegasus, the members of the Board, the Committee and the Management Committee shall be indemnified by PCC 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 Award granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by legal counsel selected by PCC) 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, Committee or Management Committee member shall notify PCC in writing, giving PCC an opportunity, at its own expense, to handle and defend the same before such Board, Committee or Management Committee member undertakes to handle it on his own behalf. 17 EX-27.1 5 EXHIBIT 27.1
5 This schedule contains summary financial information extracted from the consolidated balance sheet of Pegasus Communication Corporation as of June 30, 1999 (uaudited) and the related consolidated statements of operations and cash flows for the three and six months ended June 30, 1999 (unaudited). This information is qualified in its entirety by reference to such financial statements. 1 U.S. DOLLARS 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 JUN-30-1999 JUN-30-1999 JUN-30-1999 JUN-30-1999 1 1 16,679,995 16,679,995 0 0 21,767,123 21,767,123 776,000 776,000 6,345,912 6,345,912 67,877,008 67,877,008 66,154,560 66,154,560 28,192,305 28,192,305 903,260,136 903,260,136 80,193,134 80,193,134 450,927,944 450,927,944 134,122,747 134,122,747 3,000,000 3,000,000 197,033 197,033 41,518,130 41,518,130 903,260,136 903,260,136 79,317,331 148,673,618 79,317,331 148,673,618 0 0 108,757,553 204,851,973 153,226 43,542 0 0 15,603,721 31,294,861 (45,197,169) (87,516,758) (572,500) (1,015,000) (44,624,669) (86,501,758) 0 0 0 0 0 0 (44,624,669) (86,501,758) (2.48) (5.26) (2.48) (5.26)
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