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Prospectus
March 16, 1999
[GRAPHIC OMITTED]
4,106,200 shares of Class A common stock
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o We are offering 3,000,000 of the shares and certain existing stockholders are
offering 1,106,200 of the shares.
o The underwriters have an option to purchase an additional 615,930 shares from
us to cover over-allotments.
o Closing: March 19, 1999.
o Nasdaq National Market Symbol: PGTV
o The last reported sales price on March 15, 1999 was $22.50 per share.
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Per Share Total
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Public offering price: $ 22.00 $90,336,400
Underwriting fees: $ 1.10 $ 4,516,820
Proceeds to Pegasus: $ 20.90 $62,700,000
Proceeds to selling stockholders: $ 20.90 $23,119,580
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This investment involves risks. See Risk Factors beginning on Page 9.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
Merrill Lynch & Co.
C.E. Unterberg, Towbin
ING Baring Furman Selz LLC
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[INSIDE FRONT COVER]
[Color map of the United States
showing Company operations in the various states.]
2
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Prospectus Summary
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that you
should consider before deciding to invest in our common stock. We urge you to
read the entire prospectus carefully, including our SEC filings that we have
incorporated by reference into this prospectus, the "Risk Factors" section and
the consolidated financial statements and the notes to those statements.
When we describe the size of our business in this summary -- for example,
the number of homes in our territories and how many subscribers we have -- we
are assuming that we will complete the pending acquisitions described below in
"The Company -- Recent Pegasus Developments."
Pegasus
Pegasus Communications Corporation is:
o The largest independent distributor of DIRECTV\R with 464,000 subscribers
as of January 31, 1999. We have the exclusive right to distribute DIRECTV
digital broadcast satellite services to over 4.8 million rural households
in 36 states. We distribute DIRECTV through the Pegasus retail network, a
network of approximately 2,000 independent retailers.
o The owner or programmer of nine TV stations affiliated with either Fox,
UPN or the WB and the owner of a large cable system in Puerto Rico serving
approximately 50,000 subscribers.
o One of the fastest growing media companies in the United States. We have
increased our revenues at a compound growth rate of 100% per annum since
our inception in 1991.
Direct Broadcast Satellite and DIRECTV
Direct broadcast satellite programming services deliver television
programming to subscribers from a satellite in digital format. To receive this
programming, a subscriber must install a satellite antenna or dish and a digital
receiver and pay a monthly fee. There are currently three national direct
broadcast satellite programming services:
o DIRECTV -- DIRECTV currently has 4.6 million subscribers, a 51% direct
broadcast satellite market share, including approximately 3.6 million
subscribers served by DIRECTV itself, 464,000 subscribers served by
Pegasus and 500,000 subscribers served by the approximately 100 other
DIRECTV rural affiliates.
o Primestar -- Primestar currently has 2.3 million subscribers, a 26% direct
broadcast satellite market share.
o EchoStar -- EchoStar currently has 2.0 million subscribers, a 23% direct
broadcast satellite market share.
DIRECTV, a service of Hughes Electronics, requires a satellite dish of
approximately 18 inches in diameter that may be installed by the consumer
without professional assistance. DIRECTV has said it will have the capacity to
offer 370 entertainment channels of near laser disc quality video and digital
quality audio programming after completing its announced acquisitions of United
States Satellite Broadcasting and Primestar described below.
DIRECTV Rural Affiliates and Consolidation
Hughes has an agreement with the National Rural Telecommunications
Cooperative authorizing the cooperative to offer its members and associates the
opportunity to acquire exclusive rights to distribute
3
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DIRECTV programming services in rural areas of the United States. Approximately
250 National Rural Telecommunications members and associates, including Pegasus,
have acquired the exclusive right to become DIRECTV rural affiliates. The
exclusive territories include approximately 9.0 million rural households.
When DIRECTV was launched in 1994, approximately 95% of the DIRECTV rural
affiliate exclusive territories were held by small DIRECTV rural affiliates.
Since 1996, we have acquired or agreed to acquire 81 DIRECTV rural affiliates,
including acquisitions by Digital Television Services, Inc., with which we
merged in 1998. Today, Pegasus represents 55% of the DIRECTV exclusive
territories held by DIRECTV's rural affiliates.
Pegasus Rural Focus and Strategy
Rural areas are an attractive market for direct broadcast satellite
television and other satellite services because they are generally underserved
by cable operators. Our long-term goal is to become an integrated provider of
direct broadcast satellite and other digital satellite services in rural areas
of the United States. To accomplish our goal, we are pursuing the following
strategy:
o Continue to grow our rural subscriber base by aggressively marketing
DIRECTV.
o Continue to acquire other DIRECTV rural affiliates.
o Continue to develop the Pegasus retail network.
o Generate future growth by bundling additional digital satellite services
with DIRECTV.
Recent Direct Broadcast Satellite Developments
Three important events have occurred recently in the direct broadcast
satellite industry.
DIRECTV/Hughes Acquisition of United States Satellite Broadcasting. In
December 1998, Hughes, the parent company of DIRECTV, announced an agreement
with United States Satellite Broadcasting Company, Inc. to acquire United States
Satellite's business and assets. The transaction, if completed, will enable
DIRECTV to add premium networks, including multichannel HBO, Cinemax and
Showtime. We are evaluating the impact of the United States Satellite
transaction on our business.
DIRECTV/Hughes Acquisition of Primestar. In January 1999, Hughes announced
an agreement with Primestar, Inc. to acquire Primestar's direct broadcast
satellite business. We estimate that there are between 200,000 and 250,000
Primestar subscribers in our DIRECTV exclusive territories. We are analyzing the
effects of the Primestar transaction on our business.
EchoStar-News Corporation-MCI Settlement. In November 1998, EchoStar
Communications Corporation, News Corporation, MCI WorldCom Inc. and others
reached an agreement for the transfer to EchoStar of a license to operate
another direct broadcast satellite business. If this transaction is completed,
we believe it will help increase the overall competitive position of direct
broadcast satellite relative to cable. However, the transaction could also
increase EchoStar's competitive position relative to DIRECTV. See Risk Factors
- -- Other Risks of Our Business -- We Face Significant Competition; the
Competitive Landscape Changes Constantly.
4
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The Offering
<TABLE>
<S> <C>
Class A common stock offered by:
Pegasus ................................. 3,000,000 shares (1)
The selling stockholders ................ 1,106,200 shares
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Total .................................. 4,106,200 shares
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Class A common stock to be
outstanding after the offering ......... 14,317,751 shares (1)(2)
Use of proceeds .......................... The net proceeds to Pegasus from this offering, after deducting
underwriting discounts and commissions and estimated offering
expenses, are estimated to be approximately $62.0 million,
approximately $74.9 million if the underwriters' over-allotment
option is exercised in full. Pegasus intends to use the net
proceeds for acquisitions, capital expenditures and general
corporate purposes. We will receive no proceeds from the sale
of Class A common stock in the offering by the selling
stockholders. See Use of Proceeds.
Nasdaq National Market symbol ............ PGTV
</TABLE>
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(1) Excludes 615,930 shares to be sold by us if the underwriters'
over-allotment option is exercised in full. See Underwriters.
(2) Based on the number of shares outstanding at March 16, 1999. Excludes issued
and outstanding warrants for 652,749 shares of Class A common stock, and 646,427
options granted under Pegasus' stock option plan.
--------------------------
Our principal executive offices are located at Suite 454, 5 Radnor
Corporate Center, 100 Matsonford Road, Radnor, Pennsylvania 19087. Our telephone
number is (888) 438-7488 and our Internet website is located at
http://www.pgtv.com. Our website is not part of our prospectus.
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Summary Historical and Pro Forma Consolidated Financial Data The
following table sets forth summary historical and pro forma
consolidated financial data for Pegasus. You should read this information in
conjunction with the consolidated financial statements and the notes to them,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Selected Historical and Pro Forma Consolidated Financial Data and
Pro Forma Consolidated Financial Information included elsewhere in this
prospectus. You should also read the paragraphs following this table, which
explain certain portions of the table.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
Statement of Operating Data: 1994 1995 1996
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Net revenues:
DBS ........................................................... $ 174 $ 1,469 $ 5,829
Broadcast and cable ........................................... 28,017 30,679 42,100
------- -------- --------
Total net revenues ........................................... 28,191 32,148 47,929
Operating expenses:
DBS
Programming, technical, and general and administrative ....... 161 1,379 4,312
Marketing and selling ........................................ 50 -- 646
Incentive compensation ....................................... -- 9 146
Depreciation and amortization ................................ -- 640 1,786
Broadcast and cable
Programming, technical, and general and administrative ....... 14,856 15,823 21,006
Marketing and selling ........................................ 3,086 3,939 4,940
Incentive compensation ....................................... 432 519 839
Depreciation and amortization ................................ 6,536 7,619 9,287
Corporate expenses ............................................ 1,506 1,364 1,429
Corporate depreciation and amortization ....................... 404 492 988
------- -------- --------
Income (loss) from operations ................................ 1,160 364 2,550
Interest expense ............................................... (5,973) (8,817) (12,455)
Interest income ................................................ -- 370 232
Other expenses, net ............................................ (65) (44) (171)
Gain on sales of cable systems ................................. -- -- --
------- -------- --------
Loss before income taxes ..................................... (4,878) (8,127) (9,844)
Provision (benefit) for income taxes ........................... 140 30 (120)
------- -------- --------
Loss before extraordinary items ............................... (5,018) (8,157) (9,724)
Extraordinary gain (loss) from extinguishment of debt, net ..... (633) 10,211 (250)
------- -------- --------
Net income (loss) ............................................ (5,651) 2,054 (9,974)
Preferred stock dividends .................................... -- -- --
------- -------- --------
Net income (loss) applicable to common shares ................ ($ 5,651) $ 2,054 ($ 9,974)
======= ======== ========
Loss per common share:
Loss before extraordinary items .............................. ($ 1.56)
Extraordinary item ........................................... (0.04)
--------
Loss per common share ........................................ ($ 1.60)
========
Weighted average shares outstanding (000's) .................. 6,240
========
Other Data:
Pre-marketing cash flow:
DBS ........................................................... $ 13 $ 90 $ 1,517
Broadcast and cable ........................................... 10,075 10,917 16,154
------- -------- --------
Total pre-marketing cash flow ................................. $10,088 $ 11,007 $ 17,671
======= ======== ========
Location cash flow ............................................. $10,038 $ 11,007 $ 17,025
Operating cash flow ............................................ 8,100 9,287 15,596
Capital expenditures ........................................... 1,264 2,640 6,294
Net cash provided by (used for):
Operating activities .......................................... 4,103 5,783 3,059
Investing activities .......................................... (3,571) (6,047) (81,179)
Financing activities .......................................... (658) 10,859 74,727
</TABLE>
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<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
Pro Forma
Statement of Operating Data: 1997 1998 1998
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Net revenues:
DBS ........................................................... $ 38,254 $ 147,142 $ 197,413
Broadcast and cable ........................................... 48,564 48,079 53,881
--------- --------- ---------
Total net revenues ........................................... 86,818 195,221 251,294
Operating expenses:
DBS
Programming, technical, and general and administrative ....... 26,042 102,420 136,625
Marketing and selling ........................................ 5,973 45,706 57,278
Incentive compensation ....................................... 795 1,159 1,159
Depreciation and amortization ................................ 17,042 59,077 83,683
Broadcast and cable
Programming, technical, and general and administrative ....... 24,099 25,613 28,420
Marketing and selling ........................................ 5,971 6,334 6,322
Incentive compensation ....................................... 479 292 292
Depreciation and amortization ................................ 9,397 9,550 11,429
Corporate expenses ............................................ 2,256 3,614 3,614
Corporate depreciation and amortization ....................... 1,352 2,105 2,105
--------- --------- ---------
Income (loss) from operations ................................ (6,588) (60,649) (79,633)
Interest expense ............................................... (16,094) (44,604) (56,362)
Interest income ................................................ 1,539 2,036 2,036
Other expenses, net ............................................ (724) (1,523) (922)
Gain on sales of cable systems ................................. 4,451 24,726 --
--------- --------- ---------
Loss before income taxes ..................................... (17,416) (80,014) (134,881)
Provision (benefit) for income taxes ........................... 200 (896) (896)
--------- --------- ---------
Loss before extraordinary items ............................... (17,616) (79,118) (133,985)
Extraordinary gain (loss) from extinguishment of debt, net ..... (1,656) -- --
--------- --------- ---------
Net income (loss) ............................................ (19,272) (79,118) (133,985)
Preferred stock dividends .................................... 12,215 14,763 14,763
--------- --------- ---------
Net income (loss) applicable to common shares ................ ($ 31,487) ($ 93,881) ($ 148,748)
========= ========= =========
Loss per common share:
Loss before extraordinary items .............................. ($ 3.02) ($ 6.64) ($ 7.88)
Extraordinary item ........................................... ( 0.17) -- --
--------- --------- ---------
Loss per common share ........................................ ($ 3.19) ($ 6.64) ($ 7.88)
========= ========= =========
Weighted average shares outstanding (000's) .................. 9,858 14,130 18,875
========= ========= =========
Other Data:
Pre-marketing cash flow:
DBS ........................................................... $ 12,212 $ 44,722 $ 60,788
Broadcast and cable ........................................... 18,494 16,132 19,139
--------- --------- ---------
Total pre-marketing cash flow ................................. $ 30,706 $ 60,854 $ 79,927
========= ========= =========
Location cash flow ............................................. $ 24,733 $ 15,148 $ 22,649
Operating cash flow ............................................ 22,477 11,534 19,035
Capital expenditures ........................................... 9,929 12,400 16,540
Net cash provided by (used for):
Operating activities .......................................... 8,478 (21,962)
Investing activities .......................................... (142,109) (101,373)
Financing activities .......................................... 169,098 133,791
</TABLE>
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<TABLE>
<CAPTION>
As of December 31,
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Pro Forma
1994 1995 1996 1997 1998 1998
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ................. $ 1,380 $21,856 $ 8,582 $ 45,269 $ 75,985 $ 27,681
Working capital (deficiency) .............. (23,074) 17,566 6,430 32,347 37,889 (14,547)
Total assets .............................. 75,394 95,770 173,680 380,862 886,310 920,202
Total debt (including current) ............ 61,629 82,896 115,575 208,355 559,029 529,881
Total liabilities ......................... 68,452 95,521 133,354 239,234 699,144 670,996
Redeemable preferred stock ................ -- -- -- 111,264 126,028 126,028
Minority interest ......................... -- -- -- 3,000 3,000 3,000
Total common stockholders' equity ......... 6,942 249 40,326 27,364 58,138 120,178
</TABLE>
Pro forma income statements and other data for the year ended December 31,
1998 include our completed and pending acquisitions and sales and the use of
proceeds from this offering as if they had all occurred in the beginning of such
period. The pro forma balance sheet data as of December 31, 1998 includes the
acquisitions completed after December 31, 1998, the acquisitions pending as of
the same date and the use of proceeds from this offering as if such events had
occurred on such date. See Pro Forma Consolidated Financial Information.
The pro forma income statement data for the year ended December 31, 1998
does not include the $24.7 million gain from the sale of our New England cable
systems.
In this section we use the terms pre-marketing cash flow and location cash
flow. Pre-marketing cash flow is calculated by taking our earnings and adding
back the following expenses:
o interest;
o income taxes;
o depreciation and amortization;
o non-cash charges, such as incentive compensation under our restricted
stock plan and 401(k) plans;
o corporate overhead; and
o direct broadcast satellite subscriber acquisition costs, which are sales
and marketing expenses incurred to acquire new direct broadcast satellite
subscribers.
Location cash flow is pre-marketing cash flow less direct broadcast
satellite subscriber acquisition costs.
Pre-marketing cash flow and location cash flow are not, and should not be
considered, alternatives to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing cash flow and location cash flow also do
not necessarily indicate whether our cash flow will be sufficient to fund
working capital, capital expenditures, or to react to changes in Pegasus'
industry or the economy generally. We believe that pre-marketing cash flow and
location cash flow are important, however, for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to monitor our
financial performance and debt leverage.
7
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Where You Can Find More Information
Pegasus files annual, quarterly and special reports, as well as proxy
statements and other information with the SEC. You may read and copy any of the
documents Pegasus files with the SEC at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549 or at its Regional Offices located at
7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may
obtain further information about the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0300. Pegasus' SEC filings are also available to
the public over the Internet at the SEC's web site at http://www.sec.gov, which
contains reports, proxy statements and other information regarding registrants
like Pegasus that file electronically with the SEC.
This prospectus is part of a registration statement on Form S-3 filed by
Pegasus with the SEC under the Securities Act. As permitted by SEC rules, this
prospectus does not contain all of the information included in the registration
statement and the accompanying exhibits filed with the SEC. You may refer to the
registration statement and its exhibits for more information.
The SEC allows Pegasus to incorporate by reference into this prospectus the
information it files with the SEC. This means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus. If
Pegasus subsequently files updating or superseding information in a document
that is incorporated by reference into this prospectus, the subsequent
information will also become part of this prospectus and will supersede the
earlier information.
Pegasus is incorporating by reference the following documents that it has
filed with the SEC:
o Pegasus' Form 10-K filed with the SEC on March 10, 1999 for the fiscal
year ended December 31, 1998;
o Digital Television Services, Inc.'s Form 10-K filed with the SEC on March
23, 1998 for the fiscal year ended December 31, 1997;
o Digital Television Services, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998;
o Digital Television Services, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998;
o Digital Television Services, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
Pegasus is also incorporating by reference into this prospectus all of its
future filings with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act until this offering is completed.
You may obtain a copy of any of Pegasus' filings which are incorporated by
reference, at no cost, by writing to or telephoning us at the following address:
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
Suite 454, 5 Radnor Corporate Center
100 Matsonford Road
Radnor, Pennsylvania 19087
Attention: Director of Communications
Telephone: (888) 438-7488
You should rely only on the information provided in this prospectus or
incorporated by reference. We have not authorized anyone to provide you with
different information. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the first page of
the prospectus. Pegasus is not making this offer of securities in any state or
country in which the offer or sale is not permitted.
8
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Risk Factors
You should carefully consider the risks described below before you decide
to invest. They could materially and adversely affect our financial condition
and results of operation. They could cause the trading price of our stock to
decline, and you might lose all or part of your investment.
Risks of Our Direct Broadcast Satellite Business
Satellite and Direct Broadcast Satellite Technology Could Fail or Be
Impaired
Direct broadcast satellite technology is highly complex and is still
evolving. As with any high-tech product or system, it might not function as
expected or last through the year 2007 as currently expected. If any of the
DIRECTV satellites is damaged or stops working partially or completely for any
of a number of reasons, DIRECTV customers would lose programming. We would in
turn likely lose customers, which could materially and adversely affect our
operations, financial performance and stock price.
One example of this risk occurred recently. In July 1998, the primary
spacecraft control processor failed on one of the satellites that transmits
DIRECTV programming. As it was designed to do, the satellite automatically
switched to the on-board backup processor with no interruption of service to
DIRECTV subscribers. If the backup processor on the current satellite fails,
other satellites presently in orbit would continue to transmit DIRECTV
programming, but the service would experience an undetermined reduction in
channel capacity. While Hughes Electronics, which owns DIRECTV, has announced
plans to launch a new satellite in September 1999, this will not eliminate the
risk.
Events at DIRECTV Could Adversely Affect Us
Because we are an intermediary for DIRECTV, events at DIRECTV that we do
not control can adversely affect us. One of the most important of these is
DIRECTV's ability to provide programming that appeals to mass audiences. DIRECTV
generally does not produce its own programming; it purchases it from third
parties. DIRECTV's success -- and therefore ours -- depends in large part on
DIRECTV's ability to make good judgments about programming sources and obtain
programming on favorable terms. We have no control or influence over this.
Programming Costs May Increase
The law requires programming suppliers that are affiliated with cable
companies to provide programming to all multichannel distributors -- including
DIRECTV -- on nondiscriminatory terms. The rules implementing this law are
scheduled to expire in 2002. If they are not extended, these programmers could
increase DIRECTV's rates, and therefore ours. If we increase our rates, we may
lose customers. If we do not increase our rates, our revenues and financial
performance could be adversely affected.
We May Lose Our DIRECTV Rights After 2007
We may or may not be able to continue in the DIRECTV business after the
current DIRECTV satellites are replaced. If we can continue, we cannot predict
what it will cost us to do so.
The National Rural Telecommunications Cooperative's agreements with DIRECTV
and with us last for the life of the current DIRECTV satellites, which is
expected to be at least through 2007. The cooperative has told us that its
agreement with DIRECTV gives it a right of first refusal to get comparable
rights if DIRECTV launches new satellites to replace the existing ones. We
expect that its financial terms will have to be negotiated at the time any new
satellites are to be launched. The cost of obtaining these rights will likely
depend on DIRECTV's costs of launching replacement satellites and on other
factors that are difficult to anticipate. For this reason, we are unable to
predict whether, or at what cost, we will be able to continue in the DIRECTV
business after the current satellites are removed from service.
9
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We Cannot Retransmit the Broadcast Networks' Programming to All Our
Customers; This Could Cause Us to Lose Customers and Revenues
The direct broadcast satellite industry and the television networks are in
a dispute about whether direct broadcast satellite services can carry network
programming. If they cannot, DIRECTV could lose some of its consumer appeal. As
a result of this dispute, we will be required to shut off network programming to
some existing customers and not to offer it to some new customers. This could
result in our loss of customers and revenues.
The dispute arises under a federal law called the Satellite Home Viewer
Act. Under this law, direct broadcast satellite operators, for a fee, can
provide network programming to subscribers only in unserved areas. The concept
of an unserved area has to do with how well people in an area can receive
over-the-air broadcasts of local network-affiliated stations.
In recent lawsuits, the networks have persuaded the courts to define
"unserved areas" much more narrowly than has been our practice and that of
others in the direct broadcast satellite industry. Under the court's order in
two of these lawsuits, we are required to cut off CBS and Fox programming to
ineligible subscribers in two stages between February 28, 1999 and April 30,
1999. The first stage cut-offs affect approximately 64,000 subscribers. We do
not know how many of our other subscribers will be affected by the second stage
cut-offs. These cut-offs will result in a reduction of revenues and the possible
loss of subscribers. Since we are using the court's narrower definition of
unserved area to determine whether new subscribers are eligible to receive any
of the four networks, we do not know how many potential customers we have lost
or will lose because of this.
DIRECTV Cannot Carry Local Station Programming
Subscribers cannot receive their local TV stations on direct broadcast
satellite, particularly local news and sports. This will remain true for many
subscribers even if the network programming issues discussed above are resolved
in the direct broadcast satellite industry's favor. In areas served by cable
television, this puts us at a competitive disadvantage and may lose us customers
and revenues because cable systems usually carry local stations.
We May Lose Customers To Cable Because DIRECTV Equipment is Expensive
To receive DIRECTV, the customer must buy and install reception equipment
- -- a dish and a receiver. Although the price of this equipment has decreased
significantly since DIRECTV service began in 1994, it still costs about $149 to
buy the equipment and another $129 to have it professionally installed. We
reduce the front-end cost to consumers by subsidizing the equipment cost and
providing free programming for a month or more, which reduces our income. Even
so, cable has an advantage over direct broadcast satellite because cable
customers do not have to buy equipment, and cable companies charge lower
installation fees. We may lose customers and revenues to cable because of this.
We Could Lose Money Because of Signal Theft
Signal theft has long been a problem in the cable and direct broadcast
satellite industries. DIRECTV uses encryption technology to prevent people from
receiving programming without paying for it. The technology is not foolproof,
and there have been published reports that it has been compromised. If this
becomes widespread, our revenues would suffer.
We Could Lose Revenues if We Have Out-of-Territory Subscribers
Just as we have exclusive DIRECTV distribution rights in our territories,
we are not allowed to have customers outside our territories. The problem is
that customers are not always truthful about where they live. If it turns out
that large numbers of our subscribers are not in our territories, we would lose
substantial revenues when we disconnect them. We could also face legal
consequences for having subscribers in Canada, where DIRECTV reception is
illegal.
10
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Risks of Our Broadcast Television Business
Our Broadcast Operations Could Be Adversely Affected if We Fail to
Negotiate Successfully Our Network Affiliation Agreements
The Fox, WB and UPN television networks provide substantial amounts of our
stations' programming. We are in the process of negotiating affiliation
agreements with Fox and WB. If we are not successful in these negotiations, our
broadcast operations could suffer materially.
In addition, if Fox acquires a significant ownership interest in another
station in one of our markets, it can cancel our affiliation agreement for that
market without penalty. Fox has done this in the past to other broadcasters.
Our Broadcast Operations Could Be Adversely Affected if the FCC Prevents
Our Local Marketing Agreement Strategy
One of our important strategies in broadcast television is to achieve
economies of scale by programming two stations in each of our markets. The FCC
is considering a measure that would prevent us from doing this and could force
us to stop programming some of our existing stations. This could cost us
significant revenues.
Because the FCC does not allow us to own more than one television station
in the same market, we have implemented our strategy -- as have other
broadcasters -- through arrangements known as local marketing agreements. We
currently have local marketing agreements for second stations in three of our
markets and our only station in another market is programmed through a local
marketing agreement. We expect to program a second station under such an
agreement in one more market by 2000.
If the FCC adopts the proposed change, it could prohibit us from obtaining
additional in-market stations, and it could require us to terminate our existing
agreements. We might be able to keep one or more of them for a period of time or
indefinitely under grandfathering rules, but the FCC has not made its position
clear on this point. This would affect our broadcast operations materially and
adversely.
Antitrust Laws Could Limit Our Local Marketing Agreement Strategy
Apart from the FCC, federal agencies that administer the antitrust laws
have said they intend to review market concentrations in television, including
through local marketing agreements that the FCC permits. We cannot predict how
this will affect us.
Our Inability to Control Our Licensees Under Our Local Marketing
Agreements Could Adversely Affect Our Broadcast Operations
Even if we can keep and expand our local marketing agreements, their use
carries the inherent risk that we do not control the other parties that actually
own the stations and hold the stations' FCC licenses. It is conceivable that the
licensee could pre-empt our programming. In an extreme case, the licensee could
cease to meet FCC qualifications and put its license in jeopardy, in which case
we could lose the ability to program the station.
The Planned Industry Conversion to Digital Television Creates a Number of
Uncertainties
All commercial television stations in the United States must start
broadcasting in digital format by May 2002 and must abandon the present analog
format by 2006, though the FCC may extend these dates.
o It will be expensive to convert from the current analog format to digital
format. We cannot now determine what that cost will be.
o The digital technology will allow us to broadcast multiple channels,
compared to only one today. We cannot predict whether or at what cost we
will be able to obtain programming for the additional channels. Increased
revenues from the additional channels may not make up for the conversion
cost and additional programming expenses. Also, multiple channels
programmed by other stations could increase competition in our markets.
11
<PAGE>
o The FCC has generally made available much higher power allocations to
digital stations that will replace stations on existing channels 2
through 13 than digital stations that will replace stations on existing
channels 14 through 69. All of our existing stations are on channels 14
through 69. This power disparity could put us at a disadvantage to our
competitors that now operate on channels 2 through 13.
o In some cases, when we convert a station to digital television, the
signal may not be received in as large a coverage area, or it may suffer
from additional interference. Also, the technical standards adopted by
the FCC limit the power that stations may use to send the signal. As a
result, viewers using antennas located inside their television sets may
not receive a reliable signal. If viewers do not receive a high-quality,
reliable signal from our stations, they may be encouraged to seek service
from our competitors.
o The FCC is considering whether to require cable companies to carry both
the analog and the digital signals of their local broadcasters when
television stations will be broadcasting both, during the transition
period between 2002, at the latest, and 2006. If the FCC does not require
this, cable customers in our broadcast markets may not receive our
digital signal, which could affect us unfavorably.
Risks of Our Cable Business
We Could Lose Revenues Because of Our Geographic Concentration in Puerto
Rico
All of our cable operations are in Puerto Rico, and the cable system we
have agreed to purchase is also in Puerto Rico. This geographical concentration
carries risks:
o Puerto Rico gets more hurricanes and other severe weather than many other
places. Because of Hurricane Georges, which struck Puerto Rico in
September 1998, we lost $1.4 million of revenue in the fourth quarter of
1998 alone, and we spent about $300,000 to repair the damage. Future
hurricanes can be expected and could be even worse for us.
o A local downturn in the Puerto Rico economy could cause us to lose
revenues from subscribers and advertisers. This would affect our cable
business more seriously than if we were more geographically diversified.
The FCC's Digital Television Requirements May Prevent Us From Expanding
Our Cable Programming
We mentioned above that the FCC is considering whether to require cable
companies to carry both the analog and digital signals of local television
stations during the transition to digital broadcasting. See Risks of Our
Broadcast Television Business -- The Planned Industry Conversion to Digital
Television Creates a Number of Uncertainties. Because we have only so much
channel capacity in our cable system, this requirement could hurt our ability to
expand our programming offerings.
We Could Become Subject to Rate Regulation
The government can regulate the rates cable companies charge for the lowest
level of their service. The government does not now regulate our rates or those
of the cable system we have agreed to purchase because the FCC has found that
both systems are subject to effective competition. This means that less than 30%
of the people that could subscribe to the systems do subscribe. But if we are
successful in significantly increasing the percentage of people that subscribe
to our service, the lowest level of cable service we offer could become subject
to rate regulation.
12
<PAGE>
Other Risks of Our Business
We Have a History of Substantial Losses; We Expect Them to Continue;
Losses Could Adversely Affect our Stock Price and Access to Capital Markets
We have never made a profit, except in 1995, when we had a $10.2 million
extraordinary gain. Because of interest expense on our substantial debt and
because of high expense in amortizing goodwill from our acquisitions, we do not
expect to have net income for the foreseeable future. To the extent investors
measure our performance by net income or loss, rather than alternative measures
based on cash flow, continuing losses could adversely affect our stock prices
and our access to capital markets.
Our Substantial Indebtedness Could Adversely Affect Your Investment
We have now and, after the offering, will continue to have a significant
amount of indebtedness. The following chart shows certain important credit
statistics and is presented with the assumptions that we had completed this
offering and applied the proceeds as intended, and consummated the pending and
completed acquisitions described in this prospectus, as of the date shown:
Pro Forma
At December 31, 1998
Total indebtedness ........... $ 529,881,000
Stockholders' equity ......... $ 120,178,000
Debt to equity ratio ......... 4.41x
On the assumption that these events and the 1998 offering of our senior
notes had occurred on January 1, 1998, our earnings would have been inadequate
to cover our fixed charges and preferred stock dividends by $149.6 million for
the year ended December 31, 1998. Neither total indebtedness nor stockholders'
equity, as set forth above, includes the approximately $126.0 million in
outstanding Series A preferred stock or a $3 million minority interest in one of
our subsidiaries.
Our ability in the future to repay our existing indebtedness will depend
upon the success of our business strategy, prevailing economic conditions,
regulatory matters, levels of interest rates and financial, business and other
factors that are beyond our control. We cannot assure you that we will be able
to generate the substantial increases in cash flow from operations that we will
need to meet the obligations under our indebtedness. Furthermore, our agreements
with respect to our indebtedness, including the indentures governing our
publicly held debt securities and our two credit facilities, as well as the
terms of our publicly held preferred stock, contain numerous covenants that,
among other things, restrict our ability to:
o pay dividends and make certain other payments and investments;
o borrow additional funds;
o create liens; and
o sell our assets.
Failing to make debt payments or comply with our covenants could result in an
event of default which, if not cured or waived, could have a material adverse
effect on us.
Our substantial indebtedness could have other important consequences to
you. For example, it could:
o increase our vulnerability to general adverse economic and industry
conditions;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, acquisitions and other activities;
o limit our flexibility in planning for, or reacting to, changes in our
business and the industries in which we operate; and
o place us at a competitive disadvantage compared to our competitors that
have less debt.
13
<PAGE>
We Face Significant Competition; the Competitive Landscape Changes
Constantly
Our direct broadcast satellite business faces competition from other
current or potential multichannel programming distributors, including other
direct broadcast satellite operators, direct-to-home providers, cable operators,
wireless cable operators, internet and local and long-distance telephone
companies, which may be able to offer more competitive packages or pricing than
we or DIRECTV can provide. In addition, the direct broadcast satellite industry
is still evolving and recent or future competitive developments could adversely
affect us. For example, on November 30, 1998, EchoStar, which competes with us
in the sale of direct broadcast satellite programming, announced that it had
entered into an agreement with News Corporation and MCI providing for the
transfer to EchoStar of the license to operate a high-powered direct broadcast
satellite business at the 110o west longitude orbital location consisting of 28
frequencies and the sale of two satellites that are currently under
construction. This could adversely affect us in several ways. First, EchoStar
could develop greater channel capacity than DIRECTV and offer more and a wider
selection of programming than offered by DIRECTV. Second, direct broadcast
satellite is limited by the copyright laws from retransmitting television
signals to local markets, and EchoStar has been at the forefront of a
legislative effort to change the laws in order to permit EchoStar and other
direct broadcast satellite providers to deliver local network signals. The
additional frequencies being acquired by EchoStar could provide it with enough
capacity to retransmit local signals in larger television markets if the law is
changed. DIRECTV does not have this capacity.
Our TV stations compete for audience share, programming and advertising
revenue with other television stations in their respective markets and with
direct broadcast satellite operators, cable operators and other advertising
media. Direct broadcast satellite and cable operators in particular are
competing more aggressively than in the past for advertising revenues in our TV
stations' markets. This competition could adversely affect our stations'
revenues and performance in the future.
Our cable systems face competition from television stations, satellite
master antennae television systems, wireless cable systems, direct-to-home
providers, direct broadcast satellite systems and open video systems.
In addition, the markets in which we operate are in a constant state of
change due to technological, economic and regulatory developments. We are unable
to predict what forms of competition will develop in the future, the extent of
such competition or its possible effects on our businesses.
Our Acquisition Strategy May Not Be Successful Which Could Adversely
Affect Our Financial Performance
We have grown primarily through acquisitions. We plan to continue with our
acquisition program, particularly in the direct broadcast satellite business.
Some of the risks of this strategy are:
o We may not be able to keep making acquisitions on attractive terms. We
compete with others for acquisitions. This has driven acquisition prices
higher, and we expect it will continue to do so, particularly for the
most attractive direct broadcast satellite territories.
o Our acquisitions normally require third party consents that we do not
control. These include the consents of DIRECTV and National Rural
Telecommunications for direct broadcast satellite acquisitions, the FCC
and the television networks for broadcast TV acquisitions, and cable
franchising authorities and programmers for cable acquisitions. Some
acquisitions also require the consent of our lenders. We have been able
to get these consents in the past, but this could change, or become more
difficult, or require us to incur additional costs, for reasons we cannot
predict.
o We could encounter difficulties integrating any given acquired business
into our operations. These difficulties can cost money and divert
management's attention from other important matters.
o If we pay for an acquisition with our stock, the acquisition could dilute
existing stockholders, depending on its terms.
o If we finance an acquisition by borrowing, this would increase our
already high leverage and interest expense.
The Year 2000 Problem Could Adversely Affect Us
An issue exists for all companies that rely on computers as the year 2000
approaches. This issue involves computer programs and applications that were
written using two digits rather than four to identify the
14
<PAGE>
applicable year, and could result in system failures or miscalculations. We have
undertaken an assessment to determine the extent of any necessary remediation,
and the anticipated costs thereof, to make our material equipment, systems and
applications year 2000 compliant. Costs in connection with any modifications to
make our systems compliant are not expected to be material. However, if such
modifications are not completed successfully or are not completed in a timely
manner, the year 2000 issue may have a material adverse impact on our
operations. Exposure could arise also from the impact of non-compliance by
certain software and/or equipment vendors and others with whom we conduct
business. We cannot estimate the potential adverse impact that may result from
non-compliance with the year 2000 issue by the software and/or equipment vendors
and others with whom we conduct business.
For a description of our Year 2000 compliance efforts, you should read
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000.
Risks of Investing in Our Common Stock
Our Stock Price Has Been Volatile; This May Continue
Our common stock was publicly offered for the first time in October 1996 at
a price of $14.00 per share. Since then it has traded as low as $8.125 and as
high as $27.875. Since October 1, 1998, it has traded as low as $10.625 and as
high as $27.875. See Price Range of Class A Common Stock.
The market price for our stock may continue to be volatile, both because of
our performance and for reasons that have nothing to do with it, such as
conditions in the economy or the financial markets. We believe that one reason
for the volatility of our stock price may be that there are relatively few
shares in the hands of the public as compared with other companies, making our
stock a relatively illiquid investment. We cannot assure you that the additional
number of outstanding shares resulting from this offering will significantly
ease this illiquidity.
You May Not Be Able to Control Votes
We have two classes of common stock that differ only in voting rights. You
are being offered Class A common stock, which has one vote per share. The Class
B common stock has ten votes per share. All of the Class B common stock is
controlled by Marshall W. Pagon, our Chief Executive Officer. The two classes
vote together as if they were a single class on nearly all matters, including
the election of directors and fundamental events that require stockholder
approval. See Description of Capital Stock -- Description of Common Stock for a
more detailed description and the limited exceptions to this rule.
Because of this voting difference, Mr. Pagon controls the outcome of nearly
all matters on which the stockholders vote. After this offering, Mr. Pagon will
have 24.2% of the total common stock but 76.2% of the votes.
Because of Mr. Pagon's voting control, no one can acquire Pegasus, or
control of Pegasus, without his approval. Even if he no longer has voting
control at some time in the future, the board of directors could adopt measures
such as a so-called poison pill that delay or prevent a proposal to acquire
Pegasus that you may think is attractive as a stockholder.
If a Change of Control Occurs, We May Be Unable to Refinance Our Publicly
Held Debt, Bank Debt and Preferred Stock
We must offer to redeem our publicly held debt securities and preferred
stock for approximately $585 million if we have a change of control. See
Description of Certain Indebtedness and Description of Capital Stock --
Description of Series A Preferred Stock for what this means. Our bank debt,
approximately $85.4 million at February 28, 1999, would also come due on a
change of control. If a change of control occurs and we are unable to refinance
this debt, we would be in default.
Future Sales of Common Stock Could Lower our Stock Price
If existing stockholders decide to sell large amounts of our stock, our
stock price could fall. Even the market's perception that this might occur could
lower our stock price.
15
<PAGE>
To give you an idea of how much stock could be sold into the market, after
this offering we will have 14,317,751 shares of Class A common stock
outstanding, assuming the underwriters' over-allotment option is not exercised.
Our Class B common stock, of which there are currently 4,581,900 shares
outstanding, is convertible into Class A common stock on a one-for-one basis.
Of these shares:
o 7,175,226 shares will be held by the public.
o 4,658,400 shares, after conversion of all Class B common stock, including
stock options, will be held or controlled by Marshall W. Pagon and may be
currently sold without registration under SEC Rule 144.
o 336,464 other shares held by two current and one former officer may be
sold at any time under an effective registration statement under the
Securities Act.
o 271,180 other shares, including vested stock options, held by directors
and executive officers, other than Marshall W. Pagon, can currently be
sold subject to the volume and other limitations under SEC Rule 144.
o 4,220,497 other shares will have demand registration rights, which means
the holders can require us to register them for sale into the public
market.
o 193,600 other shares can be acquired on exercise of outstanding warrants.
Those shares have been registered under the Securities Act.
o 1,337,000 other shares can be sold into the market without registration
under SEC Rule 144.
Persons holding 9,920,492 shares have agreed not to sell their shares,
other than in this offering for 120 days after the date of this prospectus
without the written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. Persons holding an additional 1,697,528 shares have agreed not to
sell their shares for 90 days after the date of this prospectus without such
consent. There are certain limited exceptions to these agreements.
Purchasers of the Class A Common Stock Will Suffer Dilution of Their
Investment
Purchasers of the Class A common stock offered hereby will realize an
immediate and substantial dilution of approximately $(51.82) in net tangible
book value per share of Class A common stock of their investment from the
offering price. See Dilution.
We May Not Be Aware of All Risks
These risks and uncertainties are not the only ones we face. Others that we
do not know about now, or that we do not now think are important, may impair our
business or the trading price of our stock.
Forward-Looking Statements May Prove Inaccurate
This prospectus contains or incorporates by reference certain statements
and information that are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We use words such as "anticipate," "believe," "estimate,"
"expect," "intend," "project," "should" and similar expressions to identify
forward-looking statements. Those statements include, among other things, the
discussions of our business strategy and expectations concerning our market
position, future operations, margins, profitability, liquidity and capital
resources, as well as statements concerning the integration of our acquisitions
and related achievement of cost savings and other synergies. We caution you that
reliance on any forward-looking statement involves risks and uncertainties, and
that although we believe that the assumptions on which our forward-looking
statements are based are reasonable, any of those assumptions could prove to be
inaccurate, and, as a result, the forward-looking statements based on those
assumptions also could be incorrect. The uncertainties in this regard include,
but are not limited to, those identified in the risk factors discussed above. In
light of these and other uncertainties, you should not conclude that we will
necessarily achieve any plans and objectives or projected financial results
referred to in any of the forward-looking statements. We do not undertake to
release the results of any revisions of these forward-looking statements to
reflect future events or circumstances.
16
<PAGE>
Use of Proceeds
The net proceeds to Pegasus from its sale of 3,000,000 shares of Class A
common stock in this offering, at a price of $22.00 per share, after deducting
underwriting discounts and commissions and estimated fees and expenses of this
offering, are estimated to be approximately $62.0 million, approximately $74.9
million if the underwriters' over-allotment option is exercised in full. Pegasus
will not receive any proceeds from the sale of shares of Class A common stock by
the selling stockholders.
We plan to use the net proceeds we receive from the offering for
acquisitions, only some of which we have identified, capital expenditures and
general corporate purposes. Until we use the proceeds for these purposes, we
will use them to pay down our bank debt, which we would be able to reborrow when
needed.
The Pegasus Media & Communications, Inc. credit facility provides for a
borrowing capacity of up to $180.0 million. Approximately $35.0 million was
outstanding and $49.6 million was outstanding in standby letters of credit as of
February 28, 1999. The Pegasus Media & Communications credit facility bears
interest at LIBOR or the prime rate, as selected by us, plus spreads that vary
with our ratio of total debt to a measure of our cash flow. The applicable
interest rate was 7 1/4% at February 15, 1999, and the credit facility expires
in December 2003.
The Digital Television Services, Inc. credit facility currently provides
for revolving credit in the amount of $70.0 million, with a $50.0 million
sublimit for letters of credit, and a $20.0 million term loan facility. As of
February 28, 1999, approximately $30.8 million was outstanding under the credit
facility, $19.6 million was outstanding under the term loan, and $14.5 million
was outstanding as standby letters of credit. The Digital Television Services
credit facility bears interest at LIBOR or the prime rate, as selected by
Digital Television Services, plus spreads that vary with Digital Television
Services' ratio of total debt to a measure of its cash flow. The applicable
interest rate was 8 1/2% at February 28, 1999. The term loan must be repaid in
20 consecutive quarterly installments of $200,000 each, commencing on September
30, 1998, with the remaining balance due on July 30, 2003. Borrowings under the
revolving credit facility will be available until July 31, 2003.
17
<PAGE>
Dividend Policy
Common Stock: Pegasus has not paid any cash dividends on its Class A common
stock and does not anticipate paying cash dividends on its common stock in the
foreseeable future. Our policy is to retain cash for operations and expansion.
Payment of cash dividends on the common stock is restricted by Pegasus' publicly
held debt securities and preferred stock.
Preferred Stock: Until July 1, 2002, we are allowed to pay dividends on our
Series A preferred stock by issuing more shares of that stock instead of paying
cash. We expect to do this, and in any event our publicly held debt securities
require us to.
Pegasus' ability to obtain cash from its subsidiaries with which to pay
cash dividends is also restricted by the subsidiaries' publicly held debt
securities and bank agreements.
Price Range of Class A Common Stock
The Class A common stock is traded on the Nasdaq National Market under the
symbol PGTV. The sale prices reflect inter-dealer quotations, do not include
retail markups, markdowns or commission, and do not necessarily represent actual
transactions. We urge you to obtain current market quotations. The following
table shows the high and low sale prices for the Class A common stock as
reported on the Nasdaq National Market since January 1, 1997.
Price Range of Common Stock
---------------------------
High Low
Year Ended December 31, 1997:
First Quarter .................................. $14 $10 3/4
Second Quarter ................................. 11 3/8 8 1/8
Third Quarter .................................. 21 1/2 10 1/2
Fourth Quarter ................................. 25 1/2 19
Year Ended December 31, 1998:
First Quarter .................................. $26 3/8 $19 7/8
Second Quarter ................................. 26 5/8 20 7/8
Third Quarter .................................. 25 15 7/8
Fourth Quarter ................................. 25 1/2 10 5/8
Year Ended December 31, 1999:
First Quarter (through March 15, 1999) ......... $27 7/8 $22 1/2
The sale price of the Class A common stock was $22.50 on March 15, 1999.
As of March 15, 1999, Pegasus had 171 shareholders of record.
18
<PAGE>
Dilution
The net tangible book deficit of Pegasus at December 31, 1998 was $548.8
million, or $34.52 per share of common stock. The net tangible book deficit per
share of the common stock represents the amount of Pegasus' total tangible
assets less its total liabilities, divided by the number of shares of common
stock outstanding. Including the sale of the 3,000,000 shares of common stock
offered by Pegasus in this offering at a price of $22.00 per share, the pro
forma net tangible book deficit of Pegasus as of December 31, 1998 would have
been $486.8 million, or $25.76 per share of the common stock. Including the
completed and pending transactions described below under The Company -- Recent
Pegasus Developments, the pro forma net tangible book deficit of Pegasus as of
December 31, 1998 would have been $563.5 million, or $29.82 per share of common
stock. This represents an immediate increase in net tangible book value of $8.76
per share of the common stock to existing stockholders and an immediate dilution
in net tangible book value of $(51.82) per share of the common stock to
purchasers of the Class A common stock in this offering, as shown in the
following table.
<TABLE>
<S> <C> <C>
Public offering price per share .................................................. $ 22.00
Net tangible book deficit per share as of December 31, 1998 ................... $(34.52)
Increase in net tangible book value per share attributable to new stock-
holders purchasing stock in this offering .................................... $ 8.76
-------
Pro forma net tangible book deficit per share after giving effect to this
offering ..................................................................... $(25.76)
Decrease in net tangible book value per share including the completed
and pending transactions ..................................................... $ (4.06)
-------
Pro forma net tangible book deficit including this offering and the completed
and pending transactions ........................................................ $(29.82)
-------
Dilution in net tangible book value per share to the purchasers in this offer-
ing after giving effect to the completed and pending transactions ............... $(51.82)
=======
</TABLE>
19
<PAGE>
Capitalization
The following table sets forth the capitalization of Pegasus:
o as of December 31, 1998,
o as adjusted to reflect completed and pending acquisitions described under
The Company -- Recent Pegasus Developments below, and
o on a pro forma basis to reflect the offering, the use of proceeds of the
offering, and the completed and pending acquisitions described under The
Company -- Recent Pegasus Developments below.
See Use of Proceeds, Selected Historical and Pro Forma Consolidated
Financial Data and Pro Forma Consolidated Financial Information.
<TABLE>
<CAPTION>
As of December 31, 1998
---------------------------------------
Actual As Adjusted Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
Cash - general funds .................................. $ 54,505 $ 6,202 $ 6,202
Restricted cash ....................................... 21,479 21,479 21,479
-------- -------- --------
Total cash and cash equivalents ...................... $ 75,984 $ 27,681 $ 27,681
======== ======== ========
Total debt:
PM&C credit facility ................................. $ 27,500 $ 67,000 $ 4,960
DTS credit facility .................................. 46,400 46,400 46,400
Senior notes -- PCC - due 2006 ....................... 100,000 100,000 100,000
Senior notes -- PCC - due 2005 ....................... 115,000 115,000 115,000
Senior subordinated notes -- DTS - due 2007 .......... 153,215 153,215 153,215
Senior subordinated notes -- PM&C - due 2005 ......... 82,378 82,378 82,378
Seller notes ......................................... 33,538 26,930 26,930
Capital leases and other ............................. 998 998 998
-------- -------- --------
Total debt ........................................ 559,029 591,921 529,881
Series A preferred stock, $1,000 liquidation preference
per share ............................................ 126,028 126,028 126,028
Minority interest ..................................... 3,000 3,000 3,000
Total common stockholders' equity ..................... 58,138 58,138 120,178
-------- -------- --------
Total capitalization .................................. $746,195 $779,087 $779,087
======== ======== ========
</TABLE>
- ------------
Restricted cash includes an amount held in escrow for interest payments on
the Digital Television Services senior subordinated notes due 2007.
Minority interest represents preferred stock of a subsidiary of Pegasus
issued in connection with one of the completed direct broadcast satellite
acquisitions.
The pro forma total common stockholders' equity reflects the issuance of
approximately 3.0 million shares of Class A common stock in this offering at a
price of $22.00 per share.
For a description of the principal terms of the notes and preferred stock
listed above, see Description of Certain Indebtedness in this prospectus.
20
<PAGE>
Selected Historical and Pro Forma Consolidated Financial Data
The selected historical consolidated financial data have been derived from
Pegasus' audited consolidated financial statements. The selected pro forma
consolidated financial data for the year ended December 31, 1998 should be read
in conjunction with the consolidated financial statements and the notes to the
statements, the Pro Forma Consolidated Financial Information, and Management's
Discussion and Analysis of Financial Condition and Results of Operations in this
prospectus. The paragraphs following the table provide an explanation of certain
portions of it.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
Statement of Operating Data: 1994 1995 1996
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Net revenues:
DBS ........................................................... $ 174 $ 1,469 $ 5,829
Broadcast and cable ........................................... 28,017 30,679 42,100
------- -------- --------
Total net revenues ........................................... 28,191 32,148 47,929
Operating expenses:
DBS
Programming, technical and general and administrative ........ 161 1,379 4,312
Marketing and selling ........................................ 50 -- 646
Incentive compensation ....................................... -- 9 146
Depreciation and amortization ................................ -- 640 1,786
Broadcast and cable
Programming, technical and general and administrative ........ 14,856 15,823 21,006
Marketing and selling ........................................ 3,086 3,939 4,940
Incentive compensation ....................................... 432 519 839
Depreciation and amortization ................................ 6,536 7,619 9,287
Corporate expenses ............................................ 1,506 1,364 1,429
Corporate depreciation and amortization ....................... 404 492 988
------- -------- --------
Income (loss) from operations ................................ 1,160 364 2,550
Interest expense ............................................... (5,973) (8,817) (12,455)
Interest income ................................................ -- 370 232
Other expenses, net ............................................ (65) (44) (171)
Gain on sale of cable systems .................................. -- -- --
------- -------- --------
Loss before income taxes ..................................... (4,878) (8,127) (9,844)
Provision (benefit) for income taxes ........................... 140 30 (120)
------- -------- --------
Loss before extraordinary items ............................... (5,018) (8,157) (9,724)
Extraordinary gain (loss) from extinguishment of debt, net ..... (633) 10,211 (250)
------- -------- --------
Net income (loss) ............................................ (5,651) 2,054 (9,974)
Preferred stock dividends .................................... -- -- --
------- -------- --------
Net income (loss) applicable to common shares ................ ($ 5,651) $ 2,054 ($ 9,974)
======= ======== ========
Loss per common share:
Loss before extraordinary items .............................. ($ 1.56)
Extraordinary item ........................................... (0.04)
--------
Loss per common share ........................................ ($ 1.60)
========
Weighted average shares outstanding (000's) .................. 6,240
========
Other Data:
Pre-marketing cash flow:
DBS ........................................................... $ 13 $ 90 $ 1,517
Broadcast and cable ........................................... 10,075 10,917 16,154
------- -------- --------
Total pre-marketing cash flow ................................. $10,088 $ 11,007 $ 17,671
======= ======== ========
Location cash flow ............................................. $10,038 $ 11,007 $ 17,025
Operating cash flow ............................................ 8,100 9,287 15,596
Capital expenditures ........................................... 1,264 2,640 6,294
Net cash provided by (used for):
Operating activities .......................................... 4,103 5,783 3,059
Investing activities .......................................... (3,571) (6,047) (81,179)
Financing activities .......................................... (658) 10,859 74,727
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
Pro Forma
Statement of Operating Data: 1997 1998 1998
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Net revenues:
DBS ........................................................... $ 38,254 $ 147,142 $ 197,413
Broadcast and cable ........................................... 48,564 48,079 53,881
--------- --------- ---------
Total net revenues ........................................... 86,818 195,221 251,294
Operating expenses:
DBS
Programming, technical and general and administrative ........ 26,042 102,420 136,625
Marketing and selling ........................................ 5,973 45,706 57,278
Incentive compensation ....................................... 795 1,159 1,159
Depreciation and amortization ................................ 17,042 59,077 83,683
Broadcast and cable
Programming, technical and general and administrative ........ 24,099 25,613 28,420
Marketing and selling ........................................ 5,971 6,334 6,322
Incentive compensation ....................................... 479 292 292
Depreciation and amortization ................................ 9,397 9,550 11,429
Corporate expenses ............................................ 2,256 3,614 3,614
Corporate depreciation and amortization ....................... 1,352 2,105 2,105
--------- --------- ---------
Income (loss) from operations ................................ (6,588) (60,649) (79,633)
Interest expense ............................................... (16,094) (44,604) (56,362)
Interest income ................................................ 1,539 2,036 2,036
Other expenses, net ............................................ (724) (1,523) (922)
Gain on sale of cable systems .................................. 4,451 24,726 --
--------- --------- ---------
Loss before income taxes ..................................... (17,416) (80,014) (134,881)
Provision (benefit) for income taxes ........................... 200 (896) (896)
--------- --------- ---------
Loss before extraordinary items ............................... (17,616) (79,118) (133,985)
Extraordinary gain (loss) from extinguishment of debt, net ..... (1,656) -- --
--------- --------- ---------
Net income (loss) ............................................ (19,272) (79,118) (133,985)
Preferred stock dividends .................................... 12,215 14,763 14,763
--------- --------- ---------
Net income (loss) applicable to common shares ................ ($ 31,487) ($ 93,881) ($ 148,748)
========= ========= =========
Loss per common share:
Loss before extraordinary items .............................. ($ 3.02) ($ 6.64) ($ 7.88)
Extraordinary item ........................................... (0.17) -- --
--------- --------- ---------
Loss per common share ........................................ ($ 3.19) ($ 6.64) ($ 7.88)
========= ========= =========
Weighted average shares outstanding (000's) .................. 9,858 14,130 18,875
========= ========= =========
Other Data:
Pre-marketing cash flow:
DBS ........................................................... $ 12,212 $ 44,722 $ 60,788
Broadcast and cable ........................................... 18,494 16,132 19,139
--------- --------- ---------
Total pre-marketing cash flow ................................. $ 30,706 $ 60,854 $ 79,927
========= ========= =========
Location cash flow ............................................. $ 24,733 $ 15,148 $ 22,649
Operating cash flow ............................................ 22,477 11,534 19,035
Capital expenditures ........................................... 9,929 12,400 16,540
Net cash provided by (used for):
Operating activities .......................................... 8,478 (21,962)
Investing activities .......................................... (142,109) (101,373)
Financing activities .......................................... 169,098 133,791
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------------------------
1994 1995 1996 1997 1998 Pro Forma
1998
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ................. $ 1,380 $21,856 $ 8,582 $ 45,269 $ 75,985 $ 27,681
Working capital (deficiency) .............. (23,074) 17,566 6,430 32,347 37,889 (14,547)
Total assets .............................. 75,394 95,770 173,680 380,862 886,310 920,202
Total debt (including current) ............ 61,629 82,896 115,575 208,355 559,029 529,881
Total liabilities ......................... 68,452 95,521 133,354 239,234 699,144 670,996
Redeemable preferred stock ................ -- -- -- 111,264 126,028 126,028
Minority interest ......................... -- -- -- 3,000 3,000 3,000
Total common stockholders' equity ......... 6,942 249 40,326 27,364 58,138 120,178
</TABLE>
Pro forma income statements and other data for the year ended December 31,
1998 include our completed and pending acquisitions and sales described below
under The Company -- Recent Pegasus Developments, and the use of proceeds of
this offering as if they had all occurred in the beginning of such periods. The
pro forma balance sheet data as of December 31, 1998 includes the acquisitions
completed after December 31, 1998 and the acquisitions pending as of the same
date, and the use of proceeds of this offering as if such events had occurred on
such date. See Pro Forma Consolidated Financial Information.
The pro forma income statement data for the year ended December 31, 1998
does not include the $24.7 million gain from the sale of our New England cable
systems.
In this section we use the terms pre-marketing cash flow and location cash
flow. Pre-marketing cash flow calculated by taking our earnings and adding back
the following expenses.
o interest;
o income taxes;
o depreciation and amortization;
o non-cash charges, such as incentive compensation under our restricted
stock plan and 401(k) plans;
o corporate overhead; and
o direct broadcast satellite subscriber acquisition costs, which are sales
and marketing expenses incurred to acquire new direct broadcast satellite
subscribers.
Location cash flow is pre-marketing cash flow less direct broadcast
satellite subscriber acquisition costs.
Pre-marketing cash flow and location cash flow are not, and should not be
considered, alternatives to income from operations, new income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing cash flow and location cash flow also do
not necessary indicate whether our cash flow will be sufficient to fund working
capital, capital expenditures, or to react to changes in Pegasus' industry or
the economy generally. We believe that pre-marketing cash flow and location cash
flow are important, however, for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to monitor our
financial performance and debt leverage.
22
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion of the financial condition and results of
operations of Pegasus should be read in conjunction with the consolidated
financial statements and related notes which are included beginning on page F-1.
General
Direct broadcast satellite revenues are principally derived from monthly
customer subscriptions and pay-per-view services. Broadcast revenues are derived
from the sale of broadcast airtime to local and national advertisers. Cable
revenues are derived from monthly customer subscriptions, pay-per-view services,
subscriber equipment rentals and installation charges.
In this section we use the terms pre-marketing cash flow and location cash
flow. Pre-marketing cash flow is calculated by taking our earnings and adding
back the following expenses:
o interest;
o income taxes;
o depreciation and amortization;
o non-cash charges;
o corporate overhead; and
o direct broadcast satellite subscriber acquisition costs, which are sales
and marketing expenses incurred to acquire new direct broadcast satellite
subscribers.
Location cash flow is pre-marketing cash flow less direct broadcast
satellite subscriber acquisition costs. Pro forma location cash flow includes
completed and pending acquisitions and sales and the use of proceeds from this
offering as if they had all occurred prior to December 31, 1998.
Pre-marketing cash flow and location cash flow are not, and should not be
considered, alternatives to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing cash flow and location cash flow also do
not necessarily indicate whether our cash flow will be sufficient to fund
working capital, capital expenditures, or to react to changes in Pegasus'
industry or the economy generally. We believe that pre-marketing cash flow and
location cash flow are important, however, for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to monitor our
financial performance and debt leverage.
Pegasus generally does not require new direct broadcast satellite customers
to sign programming contracts and, as a result, subscriber acquisition costs are
currently being charged to operations in the period incurred.
Results of Operations
Year ended December 31, 1998 compared to the year ended December 31, 1997
Total net revenues in 1998 were $195.2 million, an increase of $108.4
million, or 125%, compared to total net revenues of $86.8 million in 1997. The
increase in total net revenues in 1998 was primarily due to an increase in
direct broadcast satellite revenues of $109.0 million attributable to
acquisitions and to internal growth in Pegasus' direct broadcast satellite
subscriber base. Total operating expenses in 1998 were $255.9
23
<PAGE>
million, an increase of $162.5 million, or 174%, compared to total operating
expenses of $93.4 million in 1997. The increase was primarily due to an increase
of $158.5 million in operating expenses attributable to the growth in Pegasus'
direct broadcast satellite business.
Total corporate expenses, including corporate depreciation and
amortization, were $5.7 million in 1998, an increase of $2.1 million, or 58%,
compared to $3.6 million in 1997. The increase in corporate expenses is
primarily attributable to the growth in Pegasus' business. The increase in
corporate depreciation and amortization is due to amortization of deferred
financing costs associated with the issuance of $100.0 million of preferred
stock in January 1997, $115.0 million of senior notes in October 1997 and $100.0
million of senior notes in November 1998.
Interest expense was $44.6 million in 1998, an increase of $28.5 million,
or 177%, compared to interest expense of $16.1 million in 1997. The increase in
interest expense is primarily due to a full year's interest on Pegasus' $115.0
million senior notes and an increase in bank borrowings and seller notes
associated with Pegasus' direct broadcast satellite acquisitions. Interest
income was $2.0 million in 1998, an increase of $497,000, or 32%, compared to
interest income of $1.5 million in 1997. The increase in interest income is due
to greater average cash balances in 1998 compared to 1997.
Other expenses were $1.5 million in 1998, an increase of $800,000, or 110%,
compared to other expenses of $723,000 in 1997. The increase is primarily due to
increased investor relations activities and other board related costs.
The gain on sale of the cable systems was $24.7 million in 1998 compared to
$4.5 million in 1997. In 1997, Pegasus sold its New Hampshire cable system for
$6.9 million resulting in a gain of $4.5 million. In 1998, Pegasus sold its
remaining New England cable systems for $30.1 million resulting in a gain of
$24.7 million.
The provision for income taxes declined by approximately $1.1 million
primarily as a result of the amortization of the deferred tax liability that
originated from the acquisition of Digital Television Services, Inc.
Extraordinary loss from the extinguishment of debt decreased $1.7 million
in 1998. In 1997, Pegasus refinanced its existing $130.0 million credit facility
with a new $180.0 million credit facility and accordingly, the deferred
financing costs associated with the $130.0 million credit facility were written
off. No such refinancing occurred in 1998.
Preferred stock dividends were $14.8 million in 1998, an increase of $2.6
million, or 21%, compared to $12.2 million in preferred stock dividends in 1997.
The increase is attributable to a greater number of shares of Pegasus' preferred
stock outstanding in 1998 compared to 1997, as the result of payment of
dividends in preferred stock and to the preferred stock being outstanding for a
full year.
Direct Broadcast Satellite
Pegasus' direct broadcast satellite business experienced significant growth
in 1998. During 1998, Pegasus acquired approximately 217,000 subscribers and the
exclusive DIRECTV distribution rights to approximately 2.4 million households in
rural areas of the United States. At December 31, 1998, Pegasus had exclusive
DIRECTV distribution rights to 4.6 million households and 435,000 subscribers as
compared to 2.2 million households and 132,000 subscribers at December 31, 1997.
Pegasus had 4.8 million households and 455,000 subscribers at December 31, 1998,
including pending acquisitions. At December 31, 1997, subscribers would have
been 344,000, including pending and completed acquisitions. Subscriber
penetration increased from 7.1% at December 31, 1997 to 9.4% at December 31,
1998, including pending and completed acquisitions.
Total direct broadcast satellite net revenues were $147.1 million in 1998,
an increase of $109.0 million, or 286%, compared to direct broadcast satellite
net revenues of $38.2 million in 1997. The increase is primarily due to an
increase in the average number of subscribers in 1998 compared to 1997. Pegasus'
1998 direct broadcast satellite acquisitions represented $70.4 million, or 65%,
of the $109.0 million increase in direct broadcast satellite net revenues. The
average monthly revenue per subscriber was $41.63 in 1998
24
<PAGE>
compared to $40.72 in 1997. Pro forma direct broadcast satellite net revenues,
including pending acquisitions at December 31, 1998, were $197.8 million, an
increase of $57.9 million, or 41%, compared to pro forma direct broadcast
satellite net revenues of $139.9 million in 1997.
Programming, technical, and general and administrative expenses were $102.4
million in 1998, an increase of $76.4 million, or 294%, compared to $26.0
million in 1997. The increase is attributable to significant growth in
subscribers and territory in 1998. Pegasus' 1998 direct broadcast satellite
acquisitions represented $45.7 million, or 60%, of the $76.4 million increase in
programming, technical, and general and administrative expenses. As a percentage
of revenue, programming, technical, and general and administrative expenses were
69.6% in 1998 compared to 68.1% in 1997.
Subscriber acquisition costs were $45.7 million, an increase of $35.2
million compared to $10.5 million in 1997. In 1997, $4.5 million in subscriber
acquisition costs were capitalized as a significant number of subscribers
entered into extended programming contracts. Pegasus generally did not require
new subscribers to sign programming contracts in 1998. The total subscriber
acquisition costs per gross subscriber addition were $344 in 1998 compared to
$281 in 1997. The increase is attributable to increases in sales commissions
paid to Pegasus' dealers, promotional programming and advertising. Pegasus
expects subscriber acquisition costs per gross subscriber addition to increase
in 1999.
Incentive compensation, which is calculated based on increases in pro forma
location cash flow, was $1.2 million in 1998, an increase of $364,000, or 46%,
compared to $795,000 in 1997. The increase resulted from a larger gain in pro
forma location cash flow during 1998 as compared to 1997.
Depreciation and amortization was $59.1 million in 1998, an increase of
$42.0 million, or 247%, compared to $17.0 million in 1997. The increase in
depreciation and amortization is primarily due to an increase in the fixed and
intangible asset base as the result of direct broadcast satellite acquisitions
that occurred in 1997 and 1998.
Broadcast
In 1998, Pegasus owned or programmed nine broadcast television stations in
six markets. Two new stations were launched during the second half of 1998.
Total net broadcast revenues in 1998 were $34.3 million, an increase of $2.4
million, or 7%, compared to net broadcast revenues of $31.9 million in 1997. The
increase was primarily attributable to an increase of $1.3 million in net
broadcast revenues from stations that began operations in 1997 and a $558,000
increase in barter revenue. Net broadcast revenues from the two stations
launched in 1998 were minimal.
Programming, technical, and general and administrative expenses were $18.1
million in 1998, an increase of $2.4 million, or 15%, compared to $15.7 million
in 1997. The increase is primarily due to a full year's expenses from the two
stations launched in 1997 and higher programming costs in 1998.
Marketing and selling expenses were $6.0 million in 1998, an increase of
$289,000, or 5%, compared to $5.7 million in 1997. The increase in marketing and
selling expenses was due to an increase in promotional costs associated with the
launch of the new stations and news programs.
Incentive compensation, which is calculated based on increases in pro forma
location cash flow, was $177,000 in 1998, a decrease of $121,000, or 40%,
compared to $298,000 in 1997. The decrease resulted from a lower gain in pro
forma location cash flow during 1998 as compared to 1997.
Depreciation and amortization was $4.6 million in 1998, an increase of
$802,000, or 21%, compared to $3.8 million in 1997. The increase in depreciation
and amortization is due to an increase in fixed assets associated with the
construction of the new stations in 1997 and 1998.
Cable
Total net cable revenues were $13.8 million in 1998, a decrease of $2.9
million, or 18%, compared to net cable revenues of $16.7 million in 1997. The
decrease is primarily due to the sale of Pegasus' remaining New England cable
systems effective July 1, 1998. Net cable revenues from the New England Cable
systems were
25
<PAGE>
$3.3 million in 1998 compared to $6.1 million in 1997. The net revenues derived
from Pegasus' Puerto Rico cable system were $10.5 million in 1998 compared to
$10.4 million in 1997. The average monthly revenue per subscriber was $33.48 in
1998 compared to $32.46 in 1997. On September 22, 1998, Hurricane Georges swept
through Puerto Rico damaging Pegasus' cable system. Prior to the hurricane,
Pegasus had approximately 29,000 subscribers. As of December 31, 1998, there
were 28,800 subscribers compared to 27,300 at December 31, 1997. Pegasus
estimates that it lost approximately $1.4 million in net cable revenues as a
result of the hurricane.
Programming, technical, and general and administrative expenses were $7.6
million in 1998, a decrease of $870,000, or 10%, compared to $8.4 million in
1997. The decrease is primarily attributable to the sale of Pegasus' New England
cable systems.
Marketing and selling expenses were $341,000 in 1998, an increase of
$74,000, or 27%, compared to $267,000 in 1997. The increase is primarily due to
an increase in Puerto Rico's promotional expenses in connection with
post-hurricane activities partially offset by the sale of Pegasus' New England
cable systems.
Incentive compensation, which is calculated based on increases in pro forma
location cash flow, was $115,000 in 1998, a decrease of $66,000, or 36%,
compared to $181,000 in 1997. The decrease resulted from a lower gain in pro
forma location cash flow during 1998 as compared to 1997.
Depreciation and amortization was $5.0 million in 1998, a decrease of
$650,000, or 11%, compared to $5.6 million in 1997. The decrease in depreciation
and amortization is primarily due to the sale of Pegasus' New England cable
systems.
Year ended December 31, 1997 compared to the year ended December 31, 1996
Total net revenues in 1997 were $86.8 million, an increase of $38.9
million, or 81%, compared to total net revenues of $47.9 million in 1996. The
increase in total net revenue in 1997 was primarily due to an increase in direct
broadcast satellite revenues of $32.3 million attributable to internal growth in
Pegasus' direct broadcast satellite subscriber base and through acquisitions.
Total operating expenses in 1997 were $93.4 million, an increase of $48.0
million, or 106%, compared to total operating expenses of $45.4 million in 1996.
The increase was primarily due to an increase of $43.0 million in operating
expenses attributable to the growth in Pegasus' direct broadcast satellite
business.
Total corporate expenses, including corporate depreciation and
amortization, were $3.6 million in 1997, an increase of $1.2 million, or 49%,
compared to $2.4 million in 1996. The increase in corporate expenses is due to
internal and acquisition related growth.
Interest expense was $16.1 million in 1997, an increase of $3.6 million, or
29%, compared to interest expense of $12.5 million in 1996. The increase in
interest expense is primarily due to an increase in debt associated with
Pegasus' acquisitions. Interest income was $1.5 million in 1997, an increase of
$1.3 million, or 562%, compared to interest income of $232,000 in 1996. The
increase in interest income is due to greater average cash balances in 1997
compared to 1996.
Other expenses were $723,000 in 1997, an increase of $552,000, or 322%,
compared to other expenses of $171,000 in 1996. The increase is due to increased
board fees, investor relations and other costs associated with operating a
public company.
In 1997, Pegasus sold its New Hampshire cable system for $6.9 million
resulting in a gain of $4.5 million.
Extraordinary loss from the extinguishment of debt was $1.7 million in 1997
compared to $251,000 in 1996. In 1997, Pegasus refinanced its existing $130.0
million credit facility with a new $180.0 million credit facility and
accordingly, the deferred financing costs associated with the $130.0 million
credit facility were written off. In 1996, Pegasus refinanced its existing $10.0
million credit facility with a new $50.0 million credit facility and
accordingly, the deferred financing costs associated with the $10.0 million
credit facility were written off.
Preferred stock dividends were $12.2 million in 1997 and represent
preferred stock dividends payable under Pegasus' preferred stock issued in
January 1997.
26
<PAGE>
Direct Broadcast Satellite
During 1997, Pegasus acquired approximately 79,000 subscribers and the
exclusive DIRECTV distribution rights to approximately 1,159,000 households in
rural areas of the United States. At December 31, 1997, Pegasus had exclusive
DIRECTV distribution rights to 2,168,000 households and 132,000 subscribers as
compared to 1,009,000 households and 30,000 subscribers at December 31, 1996.
Subscriber penetration increased from 5.3% at December 31, 1996 to 7.1% at
December 31, 1997, including pending and completed acquisitions.
Total direct broadcast satellite net revenues were $38.3 million in 1997,
an increase of $32.4 million, or 559%, compared to direct broadcast satellite
net revenues of $5.8 million in 1996. The increase is primarily due to an
increase in the actual number of subscribers in 1997 compared to 1996. Pegasus'
1997 direct broadcast satellite acquisitions represented $20.7 million, or 64%,
of the $32.4 million increase in direct broadcast satellite net revenues. The
average monthly revenue per subscriber was $40.72 in 1997 compared to $37.26 in
1996.
Programming, technical, and general and administrative expenses were $26.0
million in 1997, an increase of $21.7 million, or 504%, compared to $4.3 million
in 1996. The increase is attributable to significant growth in subscribers and
territory in 1997. Pegasus' 1997 direct broadcast satellite acquisitions
represented $13.0 million, or 60%, of the $21.7 million increase in programming,
technical and general and administrative expenses. As a percentage of revenue,
programming, technical, and general and administrative expenses were 68.1% in
1997 compared to 74.0% in 1996.
Subscriber acquisition costs were $10.5 million in 1997, an increase of
$8.6 million compared to $1.9 million in 1996. In 1997 and 1996, $4.5 million
and $1.3 million, respectively, in subscriber acquisition costs were
capitalized, as the related subscribers entered into extended programming
contracts. Total subscriber acquisition costs per gross subscriber addition were
$281 in 1997 compared to $211 in 1996.
Incentive compensation, which is calculated based on increases in pro forma
location cash flow, was $795,000 in 1997, an increase of $649,000, or 445%,
compared to $146,000 in 1996. The increase resulted from a larger gain in pro
forma location cash flow during 1997 as compared to 1996.
Depreciation and amortization was $17.0 million in 1997, an increase of
$15.2 million, or 844%, compared to $1.8 million in 1996. The increase in
depreciation and amortization is primarily due to an increase in the fixed and
intangible asset base as the result of direct broadcast satellite acquisitions
that occurred in 1996 and 1997.
Broadcast
In 1997, Pegasus owned or programmed seven broadcast television stations in
six markets. Two stations were launched during the second half of 1997. Total
net broadcast revenues in 1997 were $32.0 million, an increase of $3.4 million,
or 12%, compared to net broadcast revenues of $28.6 million in 1996. The
increase was primarily attributable to an increase of $1.9 million in net
broadcast revenues from ratings increases that Pegasus was able to convert into
higher revenues and a $1.2 million increase in barter revenue. Net broadcast
revenues from the two stations launched in 1997 were $289,000.
Programming, technical, and general and administrative expenses were $15.7
million in 1997, an increase of $1.8 million, or 13%, compared to $13.9 million
in 1996. The increase is primarily due to an increase in barter programming
expense of $1.2 million and start-up costs associated with the launch of two new
stations in 1997.
Marketing and selling expenses were $5.7 million in 1997, an increase of
$853,000, or 18%, compared to $4.8 million in 1996. The increase in marketing
and selling expenses was due an increase in promotional costs associated with
the launch of the new stations.
Incentive compensation, which is calculated based on increases in pro forma
location cash flow, was $298,000 in 1997, a decrease of $393,000, or 57%,
compared to $691,000 in 1996. The decrease resulted from a lower gain in pro
forma location cash flow during 1997 as compared to 1996.
27
<PAGE>
Depreciation and amortization was $3.8 million in 1997, a decrease of
$287,000, or 7%, compared to $4.1 million in 1996.
Cable
Total net cable revenues were $16.7 million in 1997, an increase of $3.2
million, or 24%, compared to net cable revenues of $13.5 million in 1996. The
increase is primarily due to a full year of operations of a Puerto Rico cable
system acquired in August 1996. This increase was partially offset by the sale
of Pegasus' New Hampshire cable system in 1997. The average monthly revenue per
subscriber was $32.46 in 1997 compared to $32.45 in 1996.
Programming, technical, and general and administrative expenses were $8.4
million in 1997, an increase of $1.3 million, or 19%, compared to $7.1 million
in 1996. The increase is primarily attributable to a full year of operations of
a Puerto Rico cable system acquired in August 1996.
Marketing and selling expenses were $267,000 in 1997, an increase of
$177,000, or 197%, compared to $90,000 in 1996. The increase is primarily due to
an increase in Puerto Rico's promotional expenses.
Incentive compensation, which is calculated based on increases in pro forma
location cash flow, was $181,000 in 1997, an increase of $33,000, or 22%,
compared to $148,000 in 1996. The increase resulted from a larger gain in pro
forma location cash flow during 1997 as compared to 1996.
Depreciation and amortization was $5.6 million in 1997, an increase of
$398,000, or 8%, compared to $5.2 million in 1996. The increase in depreciation
and amortization is primarily due an increase in the fixed and intangible asset
base as the result of a Puerto Rico cable system acquired in August 1996.
Liquidity and Capital Resources
Pegasus' primary sources of liquidity have been the net cash provided by
its direct broadcast satellite, broadcast and cable operations, credit available
under its credit facilities and proceeds from public and private offerings.
Pegasus' principal use of its cash has been to fund acquisitions, to meet debt
service obligations, to fund direct broadcast satellite subscriber acquisition
costs and to fund investments in its broadcast and cable technical facilities.
Pre-marketing cash flow increased by approximately $30.1 million, or 98%,
for the year ended December 31, 1998, as compared to the same period in 1997.
Pre-marketing cash flow increased as a result of:
o a $32.5 million, or 266%, increase in direct broadcast satellite
pre-marketing cash flow of which $3.8 million, or 12%, was due to an
increase in same territory pre-marketing cash flow and $28.7 million or
88% was attributable to territories acquired in 1997 and 1998;
o a $249,000, or 2%, decrease in broadcast location cash flow as the result
of a $121,000, or 1%, decrease in same station location cash flow and a
$128,000 decrease attributable to the four new stations launched in
August 1997, October 1997, July 1998 and November 1998; and
o a $2.1 million, or 27%, decrease in cable location cash flow. This
decrease was the result of a $610,000, or 13%, decrease in Puerto Rico
same system location cash flow, a $67,000 reduction due to the sale of
Pegasus' New Hampshire cable system effective January 31, 1997 and a $1.4
million reduction due to the sale of Pegasus' remaining New England cable
systems effective July 1, 1998.
During the year ended December 31, 1998, proceeds from the sale of Pegasus'
remaining New England cable systems amounted to $30.1 million, which together
with $44.0 million of cash on hand at the beginning of the year, $3.3 million of
cash acquired from acquisitions and $133.8 million of net cash provided by
Pegasus' financing activities, was used to fund operating activities of
approximately $22.0 million and other investing activities of $134.8 million.
Investing activities, net of cash acquired from acquisitions and proceeds from
the sale of the New England cable systems, consisted of:
o the acquisition of direct broadcast satellite assets, excluding Digital
Television Services, Inc., from 26 independent DIRECTV providers during
for approximately $109.3 million;
28
<PAGE>
o approximately $6.8 million of broadcast expenditures for broadcast
television transmitter, tower and facility constructions and upgrades.
Pegasus commenced the programming of four new broadcast stations over the
last two years, WPME in August 1997, WGFL in October 1997, WFXU in July
1998 and WSWB in November 1998 and plans to commence programming of an
additional station by the year 2000;
o direct broadcast satellite facility upgrades of approximately $1.2
million;
o the expansion and enhancements of the Puerto Rico cable system amounting
to approximately $2.0 million;
o payments of programming rights amounting to $2.6 million;
o capitalized costs relating to Pegasus' financings of $4.4 million;
o capitalized costs relating to the acquisition of Digital Television
Services, Inc. of $4.3 million; and
o maintenance and other capital expenditures and intangibles totaling
approximately $4.2 million.
Financing activities consisted of:
o the $100.0 million 9 3/4% senior notes offering resulting in proceeds to
Pegasus of approximately $96.8 million;
o net borrowings on bank credit facilities totaling $44.4 million;
o the repayment of approximately $15.0 million of long-term debt, primarily
sellers' notes and capital leases; and
o net restricted cash draws of approximately $7.5 million for interest
payments.
As of December 31, 1998, cash on hand amounted to $54.5 million plus
restricted cash of $21.5 million. Pegasus had $27.5 million drawn and standby
letters of credit amounting to $49.6 million under the $180.0 million Pegasus
Media & Communications credit facility. Additionally, there was $46.4 million
drawn and standby letters of credit of $18.5 million outstanding under the $90.0
million Digital Television Services credit facility.
Pre-marketing cash flow increased by $13.0 million, or 74%, for the year
ended December 31, 1997, as compared to the same period in 1996. Pre-marketing
cash flow increased as a result of:
o a $10.7 million, or 705%, increase in direct broadcast satellite
pre-marketing cash flow. Of this amount, $1.0 million, or 10%, was due to
an increase in same territory pre-marketing cash flow and $9.7 million,
or 90%, was attributable to territories acquired subsequent to the third
quarter of 1996;
o a $649,000, or 6%, increase in broadcast location cash flow. The increase
was the net result of a $1.4 million, or 17%, increase in same station
location cash flow, a $343,000 decrease attributable to stations acquired
in the first quarter of 1996, and a $361,000 decrease attributable to the
two new stations launched in August 1997 and October 1997; and
o a $1.7 million, or 27%, increase in cable location cash flow. This
increase was the net result of a $646,000, or 14%, increase in same
system location cash flow, a $1.7 million increase due to the system
acquired in August 1996, and a $703,000 reduction due to the sale of
Pegasus' New Hampshire cable system effective January 31, 1997.
During the year ended December 31, 1997, net cash provided by operating
activities was approximately $8.5 million. This amount, together with $8.6
million of cash on hand, $6.9 million of net proceeds from the sale of the New
Hampshire cable system and $169.1 million of net cash provided by Pegasus'
financing activities was used to fund other investing activities totaling $149.1
million. Financing activities consisted of:
o raising $95.8 million in net proceeds from Pegasus' preferred stock
offering in January 1997 and $111.0 million in net proceeds from Pegasus'
offering of senior notes in October 1997,
o borrowing $94.2 million under a former bank credit facility,
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o repayment of all $94.2 million of that indebtedness and $29.6 million of
indebtedness under a still earlier credit facility,
o net repayment of approximately $657,000 of other long-term debt,
o designating $1.2 million as restricted cash to collateralize a letter of
credit, and
o the incurrence of approximately $6.2 million in debt issuance costs
associated with various credit facilities.
Investing activities, net of the proceeds from the sale of the New
Hampshire cable system, consisted of:
o the acquisition of direct broadcast satellite assets from 25 independent
DIRECTV providers during 1997, for approximately $133.9 million;
o broadcast television transmitter, tower and facility constructions and
upgrades totaling approximately $5.8 million;
o the interconnection and expansion of the Puerto Rico cable systems
amounting to approximately $1.8 million;
o payments of programming rights amounting to $2.6 million; and
o maintenance and other capital expenditures and intangibles totaling
approximately $5.4 million.
During the year ended December 31, 1996, net cash provided by operating
activities was approximately $3.1 million. This amount, together with $12.0
million of cash on hand, $9.9 million of restricted cash and $74.7 million of
net cash from Pegasus' financing activities was used to fund investing
activities totaling $81.2 million. Investing activities consisted of:
o the Portland, Maine and Tallahassee, Florida broadcast acquisitions for
approximately $16.6 million;
o the San German, Puerto Rico cable acquisition for approximately $26.0
million;
o the acquisition of direct broadcast satellite assets from two independent
DIRECTV providers during the fourth quarter of 1996 for approximately
$29.9 million;
o the purchase of a New England cable office facility and headend facility
for $201,000;
o the fiber upgrade in a cable system amounting to $323,000;
o the purchase of DIRECTV system units used as rental and lease units
amounting to $832,000;
o payments of programming rights amounting to $1.8 million; and
o maintenance and other capital expenditures and intangibles totaling
approximately $6.7 million.
Financings
Pegasus Media & Communications, Inc. completed an $85.0 million notes
offering on July 7, 1995. The notes were sold at a $4.0 million discount. The
proceeds from the notes offering, together with cash on hand, were used to:
o repay approximately $38.6 million in loans and other obligations,
o repurchase $25.6 million of notes for approximately $13.0 million, which
resulted in a $10.2 million extraordinary gain net of expenses,
o make a $12.5 million distribution to Pegasus Communications Holdings,
Inc.,
o escrow $9.7 million for the purpose of paying interest on the notes,
o pay $3.3 million in fees and expenses, and
o fund $8.8 million of the cash portion of the purchase price of the WPXT
acquisition.
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During July 1995, Pegasus Media & Communications entered into a credit
facility in the amount of $10.0 million. This credit facility was retired in
August 1996 from borrowings under the 1996 Pegasus Media & Communications credit
facility.
In 1996, Pegasus Media & Communications entered into a credit facility
which provided for borrowings up to $50.0 million. This credit facility was
retired in December 1997 from borrowings under the 1997 Pegasus Media &
Communications credit facility.
In 1996, Digital Television Services, Inc. entered into a credit facility
which provides for borrowings up to $90.0 million. Approximately $50.4 million
was outstanding as of March 1, 1999. The credit facility expires in July 2003.
On October 8, 1996, Pegasus completed its initial public offering in which
it sold 3.0 million shares of its Class A common stock to the public at a price
of $14.00 per share resulting in net proceeds to Pegasus of approximately $38.1
million. Pegasus applied the net proceeds from the initial public offering as
follows:
o $29.9 million for the payment of the cash portion of the purchase price
of direct broadcast satellite assets from two independent providers of
DIRECTV services during the fourth quarter of 1996, and
o other payments in connection with certain other acquisitions and the
repayment of indebtedness.
On January 27, 1997, Pegasus completed an offering in which it sold 100,000
units, consisting of 100,000 shares of preferred stock and 100,000 warrants to
purchase 193,600 shares of Class A common stock. This offering resulted in net
proceeds to Pegasus of $95.8 million. Pegasus applied the net proceeds from the
offering as follows:
o $30.1 million to the repayment of all outstanding indebtedness under the
1996 Pegasus Media & Communications credit facility and expenses related
to it, and
o $56.5 million for the payment of the cash portion of the purchase price
of direct broadcast satellite assets from various independent DIRECTV
providers. The remaining net proceeds were used for working capital,
general corporate purposes and to finance other acquisitions.
On July 9, 1997, Pegasus Satellite Holdings, Inc. entered into a $130.0
million credit facility, which was collateralized by substantially all of the
assets of Pegasus Satellite Holdings and its subsidiaries. The facility
consisted of a $40.0 million seven-year senior term loan and a $90.0 million
six-year senior revolving credit facility. On October 21, 1997, outstanding
balances under the credit facility were repaid from the proceeds of the offering
of senior notes discussed below and commitments under the Pegasus Satellite
Holdings credit facility were terminated. Deferred financing fees relating to
the $130.0 million revolving credit facility were written off, resulting in an
extraordinary loss of $1.7 million on the refinancing transaction.
On October 21, 1997, Pegasus completed an offering in which it sold $115.0
million of its 9.625% senior notes, resulting in net proceeds to Pegasus of
approximately $111.0 million. Pegasus applied the net proceeds from the offering
as follows:
o $94.2 million to the repayment of all outstanding indebtedness under the
Pegasus Satellite Holdings credit facility, and
o $16.8 million for the payment of the cash portion of the purchase price
of direct broadcast satellite assets from various independent DIRECTV
providers.
On December 10, 1997, Pegasus Media & Communications entered into a credit
facility. The credit facility is a $180.0 million six-year, collateralized,
reducing revolving credit facility. Borrowings under the credit facility are
available for acquisitions, subject to the approval of the lenders in certain
circumstances, working capital, capital expenditures and for general corporate
purposes. Approximately $35.0 million was outstanding as of March 1, 1999. The
credit facility expires in December 2003.
On November 30, 1998, Pegasus completed an offering of $100.0 million
9 3/4% senior notes due 2006, resulting in net proceeds to Pegasus of
approximately $96.8 million. Pegasus applied $64.0 million of the net proceeds
to pay down indebtedness under the Pegasus Media & Communications credit
facility and $32.8 million to the cash portion of certain completed direct
broadcast satellite acquisitions.
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Pegasus believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations for at
least the next twelve months. However, Pegasus is highly leveraged and our
ability in the future to repay our existing indebtedness will depend upon the
success of our business strategy, prevailing economic conditions, regulatory
matters, levels of interest rates and financial, business and other factors that
are beyond our control. We cannot assure you that we will be able to generate
the substantial increases in cash flow from operations that we will need to meet
the obligations under our indebtedness. Furthermore, our agreements with respect
to our indebtedness contain numerous covenants that, among other things:
o restrict our ability to pay dividends and make certain other payments and
investments;
o borrow additional funds;
o create liens; and
o to sell our assets.
Failing to make debt payments or comply with our covenants could result in an
event of default which if not cured or waived could have a material adverse
effect on us. See Risk Factors.
Pegasus closely monitors conditions in the capital markets to identify
opportunities for the effective use of financial leverage. In financing its
future expansion and acquisition requirements, Pegasus would expect to avail
itself of such opportunities and thereby increase its indebtedness. This could
result in increased debt service requirements. We cannot assure you that such
debt financing can be completed on terms satisfactory to Pegasus or at all.
Pegasus may also issue additional equity to fund its future expansion and
acquisition requirements.
Year 2000
The year 2000 issue is a general term used to describe the various problems
that may result from the improper processing of dates and date-sensitive
calculations by computers and other equipment as the year 2000 approaches and is
reached. These problems generally arise from the fact that most computer
hardware and software have historically used only two digits to identify the
year in a date, often resulting in the computer failing to distinguish dates in
the 2000's from dates in the 1900's. These problems may also arise from
additional sources, such as the use of special codes and conventions in software
utilizing the date field.
Pegasus has reviewed all of its systems as to the year 2000 issue. Pegasus'
primary focus has been on its own internal systems. Pegasus has in the past
three years replaced or upgraded, or is in the process of replacing or
upgrading, all of its TV traffic systems, cable billing systems and corporate
accounting systems. All of these new systems are expected to be in place by May
31, 1999. However, if any necessary changes are not made or completed in a
timely fashion or unanticipated problems arise, the year 2000 issue may take
longer for Pegasus to address and may have a material adverse impact on Pegasus'
financial condition and its results of operations.
Pegasus relies on outside vendors for the operation of its direct broadcast
satellite control and billing systems, including DIRECTV, National Rural
Telecommunications and their respective vendors. Pegasus has established a
policy to ensure that these vendors are currently in compliance with the year
2000 issue or have a plan in place to be in compliance with the year 2000 issue
by the first quarter of 1999. In addition, Pegasus has had initial
communications with certain of its other significant suppliers, distributors,
financial institutions, lessors and parties with which it conducts business to
evaluate their year 2000 compliance plans and state of readiness and to
determine the extent to which Pegasus' systems may be affected by the failure of
others to remediate their own year 2000 issues. To date, however, Pegasus has
received only preliminary feedback from such parties and has not independently
confirmed any information received from other parties with respect to the year
2000 issue. As such, we cannot assure you that these other parties will complete
their year 2000 conversion in a timely fashion or will not suffer a year 2000
business disruption that may adversely affect Pegasus' financial condition and
its results of operations.
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Because Pegasus' year 2000 conversion is expected to be completed prior to
any potential disruption to Pegasus' business, Pegasus has not yet completed the
development of a comprehensive year 2000-specific contingency plan. However, as
part of its year 2000 contingency planning effort, Pegasus examines information
received from external sources for date integrity before bringing it into its
internal systems. If Pegasus determines that its business or a segment thereof
is at material risk of disruption due to the year 2000 issue or anticipates that
its year 2000 conversion will not be completed in a timely fashion, it will work
to enhance its contingency plan. Costs to date relating to the year 2000 issue
amounted to approximately $150,000. Costs to be incurred beyond December 31,
1998, relating to the year 2000 issue are expected to be approximately $200,000.
Dividend Policy
As a holding company, Pegasus' ability to pay dividends is dependent upon
the receipt of dividends from its direct and indirect subsidiaries. Credit
facilities and publicly held debt securities of Pegasus' principal subsidiaries
restrict them from paying dividends to Pegasus. In addition, Pegasus' ability to
pay dividends and Pegasus' and its subsidiaries' ability to incur indebtedness
are subject to certain restrictions contained in Pegasus' and its subsidiaries'
credit facilities and publicly held debt securities and in the terms of Pegasus'
Series A preferred stock.
Seasonality
Pegasus' revenues vary throughout the year. As is typical in the broadcast
television industry, Pegasus' first quarter generally produces the lowest
revenues for the year and the fourth quarter generally produces the highest
revenues for the year. Pegasus' operating results in any period may be affected
by the incurrence of advertising and promotion expenses that do not necessarily
produce commensurate revenues in the short-term until the impact of such
advertising and promotion is realized in future periods.
Inflation
Pegasus believes that inflation has not been a material factor affecting
its business. In general, Pegasus' revenues and expenses are impacted to the
same extent by inflation. A majority of Pegasus' indebtedness bears interest at
a fixed rate.
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The Company
In this section we give a brief overview of our business, focusing
particularly on our direct broadcast satellite business. To learn more detail
about our business, you should read the description in our most recent Form 10-K
report filed with the SEC, which we have incorporated by reference in this
prospectus. To obtain a copy of our SEC filings, please refer to the section
entitled "Where You Can Find More Information."
Information in this section includes the pending acquisitions described
below.
Pegasus
Pegasus Communications Corporation is:
o The largest independent distributor of DIRECTV(R) with 464,000
subscribers at January 31, 1999. We have the exclusive right to
distribute DIRECTV digital broadcast satellite services to over 4.8
million rural households in 36 states. We distribute DIRECTV through the
Pegasus retail network, a network of approximately 2,000 independent
retailers.
o The owner or programmer of nine TV stations affiliated with either Fox,
UPN or the WB network and the owner of a large cable system in Puerto
Rico serving approximately 50,000 subscribers.
o One of the fastest growing media companies in the United States. We have
increased our revenues at a compound growth rate of 100% per annum since
our inception in 1991.
Direct Broadcast Satellite Television
The introduction of direct broadcast satellite, or direct broadcast
satellite, receivers is widely regarded as the most successful introduction of a
consumer electronics product in U.S. history, surpassing the introduction of
color televisions, videocasette recorders and compact disc players. According to
a recent Paul Kagan study, in 1998 direct broadcast satellite was the fastest
growing multiple-channel television service in the country, capturing almost 2
out of every 3 new subscribers to those services. There are currently three
national direct broadcast satellite programming services: DIRECTV, Primestar and
EchoStar. At January 31, 1999, there were 8.9 million direct broadcast satellite
subscribers in the United States:
o 4.6 million DIRECTV subscribers, including approximately 3.6 million
subscribers served by DIRECTV itself, 464,000 subscribers served by
Pegasus and 500,000 subscribers served by the approximately 100 other
DIRECTV rural affiliates;
o 2.3 million Primestar subscribers;
o 2.0 million EchoStar subscribers;
All three direct broadcast satellite programming services are digital
satellite services, and therefore require that a subscriber install a satellite
receiving antenna or dish and a digital receiver. DIRECTV and EchoStar require a
satellite dish of approximately 18 inches in diameter that may be installed by
the consumer without professional assistance. Primestar requires a dish of
approximately 36 inches in diameter that generally must be professionally
installed. The market shares of DIRECTV, Primestar and EchoStar among all direct
broadcast satellite subscribers nationally are currently 51%, 26% and 23%,
respectively. The Carmel Group has estimated that the number of direct broadcast
satellite subscribers will grow to 21.1 million by 2003. As described below
under Recent Direct Broadcast Satellite Developments, DIRECTV has announced an
agreement to acquire Primestar's business.
DIRECTV
DIRECTV is a service of Hughes Electronics. After completing its announced
acquisition of United States Satellite Broadcasting and Primestar described
below, DIRECTV will offer in excess of 370 entertainment channels of near laser
disc quality video and compact disc quality audio programming. DIRECTV currently
transmits via three high-power Ku band satellites and has announced its
intention to launch a fourth Ku band satellite in the third quarter of this
year. We believe that DIRECTV's extensive line-up of cable networks,
pay-per-view movies and events and sports packages,
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including the exclusive "NFL Sunday Ticket," have enabled DIRECTV to capture a
majority market share of existing direct broadcast satellite subscribers and
will continue to drive strong subscriber growth for DIRECTV services in the
future. DIRECTV added 1.2 million new subscribers in 1998, which was a greater
increase than any other direct broadcast satellite service and accounted for
approximately 48% of all new direct broadcast satellite subscribers in that
year.
DIRECTV Rural Affiliates
Prior to the launch of DIRECTV's programming service, Hughes entered into
an agreement with the National Rural Telecommunications Cooperative authorizing
the cooperative to offer its members and associates the opportunity to acquire
exclusive rights to distribute DIRECTV programming services in rural areas of
the United States. National Rural Telecommunications is a cooperative
organization whose members and associates are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the United
States. Approximately 250 cooperative members and associates acquired such
exclusive rights, thereby becoming DIRECTV rural affiliates. The DIRECTV
exclusive territories acquired by DIRECTV's rural affiliates include
approximately 9.0 million rural households. Pegasus was the largest of the
original DIRECTV rural affiliates, acquiring a DIRECTV exclusive territory of
approximately 500,000 homes in four New England states. Since 1996, we have
increased our DIRECTV exclusive territories to more than 4.8 million homes
through the completed or pending acquisitions of 81 other DIRECTV rural
affiliates, including acquisitions by Digital Television Services, Inc., with
which we merged in 1998.
Pegasus Rural Focus and Strategy
We believe that direct broadcast satellite and other digital satellite
services will achieve disproportionately greater consumer acceptance in rural
areas than in metropolitan areas. Direct broadcast satellite services have
already achieved a penetration of more than 17% in rural areas of the United
States, as compared to approximately 5% in metropolitan areas.
Our long-term goal is to become an integrated distributor of direct
broadcast satellite and other digital satellite services for the approximately
76.0 million people, 30.0 million homes and 3.0 million businesses located in
rural areas of the United States. To accomplish our goal, we are pursuing the
following strategy:
o Continue to Grow Our Rural Subscriber Base by Aggressively Marketing
DIRECTV: Pegasus currently serves in excess of 464,000 DIRECTV
subscribers, which represents a penetration of approximately 10%. We
estimate that we have a 55% share of all direct broadcast satellite
subscribers in our DIRECTV exclusive territories and that the remaining
direct broadcast satellite subscribers are shared approximately equally
between Primestar and EchoStar. Our rate of growth has accelerated as we
have increased our scale and expanded the Pegasus network of independent
retailers.
o Continue to Acquire Other DIRECTV Rural Affiliates: We currently own
approximately 55% of the DIRECTV exclusive territories held by DIRECTV's
rural affiliates. We have had an excellent track record of acquiring
DIRECTV rural affiliates and believe that we have a competitive advantage
in acquiring additional DIRECTV rural affiliates. We base this belief on
our position as the largest DIRECTV rural affiliate, our access to the
capital markets and our strong reputation in the direct broadcast
satellite industry. We will continue to pursue our strategy of acquiring
other DIRECTV rural affiliates.
o Continue to Develop the Pegasus Retail Network: We have established the
Pegasus network of independent retailers in order to distribute DIRECTV
in our DIRECTV exclusive territories. Our consolidation of DIRECTV's
rural affiliates has enabled us to expand the Pegasus retail network to
2,000 independent retailers in 36 states. We believe that the Pegasus
retail network is one of the few sales and distribution channels for
digital satellite services with broad and effective reach in rural areas
of the U.S. We intend to further expand the Pegasus retail network in
order to increase the penetration of DIRECTV in rural areas and to enable
us to distribute additional digital satellite services that will
complement our distribution of DIRECTV.
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o Generate Future Growth By Bundling Additional Digital Satellite Services
with DIRECTV: We believe that new digital satellite services, such as
digital audio services, broadband multimedia services and mobile
satellite services, will be introduced to consumers and businesses in the
next five years. These services, like direct broadcast satellite, should
achieve disproportionate success in rural areas. However, because there
are limited sales and distribution channels in rural areas, new digital
satellite service providers will confront the same difficulties that
direct broadcast satellite service providers have encountered in
establishing broad distribution in rural areas, as compared to
metropolitan areas. We believe that the Pegasus retail network will
enable us to establish relationships with digital satellite service
providers that will position us to capitalize on these new opportunities.
Satellite Services in Rural Areas
Rural areas include approximately 85% of the total landmass of the
continental United States and have an average home density of less than 12 homes
per square mile. Because the cost of reaching a household by a cable or other
wireline distribution system is generally inversely proportional to home density
and the cost of providing satellite service is not, satellite services have
strong cost advantages over cable in rural areas.
There are approximately 76.0 million people, 30.0 million households and
3.0 million businesses located in rural areas of the United States. Annual
household income in rural areas totaled over $1.1 trillion in 1997, an average
of approximately $38,000 per household. Rural areas therefore represent a large
and attractive market for direct broadcast satellite and other digital satellite
services. Approximately 65% of all U.S. direct broadcast satellite subscribers
reside in rural areas. It is likely that future digital satellite services, such
as soon to be launched digital audio services and satellite broadband multimedia
services, will also achieve disproportionate success in rural areas as compared
to metropolitan areas.
It is difficult, however, for satellite and other service providers to
establish sales and distribution channels in rural areas. In contrast to
metropolitan areas, where there are many strong national retail chains, few
national retailers have a presence in rural areas. Most retailers in rural areas
are independently owned and have only one or two store locations. For these
reasons, satellite providers seeking to establish broad and effective rural
distribution have limited alternatives:
o They may seek to distribute their services through one of the few
national retailers, such as Radio Shack or Wal-Mart, that have a strong
retail presence in rural areas.
o They may seek to establish direct sales channels in rural areas, as
Primestar initially sought to do through its cable partners.
o They may seek to distribute through networks of independent retailers
serving rural areas, such as have been established by EchoStar and by
Pegasus.
Consolidation of DIRECTV Rural Affiliates
When DIRECTV was launched in 1994, small DIRECTV rural affiliates held
approximately 95% of the DIRECTV rural affiliate exclusive territories. In 1996,
Pegasus first acquired another DIRECTV rural affiliate, thereby beginning a
process of consolidation that has significantly changed the composition of
DIRECTV's rural affiliates. Since 1996, Pegasus, its subsidiary, Digital
Television Services, Inc., or Golden Sky Systems has acquired approximately 150
DIRECTV rural affiliates. Today, Pegasus represents 55% of the DIRECTV exclusive
territories held by DIRECTV's rural affiliates, Golden Sky holds 19%, and the
approximately 100 remaining rural affiliates total 26%. Pegasus believes that
consolidation among DIRECTV's rural affiliates will continue.
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Upon completion of our pending acquisitions, we will have the exclusive
right to distribute DIRECTV in the following DIRECTV exclusive territories:
<TABLE>
<CAPTION>
Homes
Total Not Homes
Exclusive Homes Passed Passed Penetration
DIRECTV in by by Total --------------------------------
Territory Territory Cable Cable Subscribers Total Uncabled Cabled
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Northeast 751,745 182,245 569,500 65,189 8.7% 30.0% 1.9%
Central 1,163,510 287,306 876,204 105,523 9.1% 26.8% 3.2%
Southeast 993,379 343,805 649,574 99,476 10.0% 24.1% 2.5%
Midwest 612,579 183,098 429,481 65,930 10.8% 30.3% 2.4%
Central Plains 375,410 73,516 301,894 29,174 7.8% 29.0% 2.6%
Texas 465,835 150,987 314,848 50,448 10.8% 25.6% 3.8%
Southwest 322,438 57,028 265,410 32,442 10.1% 36.0% 4.5%
Northwest 143,754 56,726 87,028 15,487 10.8% 21.9% 3.5%
Total 4,828,650 1,334,711 3,493,939 463,669 9.6% 27.2% 2.9%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Total homes in territory, homes not passed by cable, and homes passed by cable
are based on estimates of primary residences by Claritas, Inc.
The Pegasus Retail Network
The Pegasus retail network is a network of 2,000 independent satellite,
consumer electronics and other retailers serving rural areas. We began the
development of this network in 1995 in order to distribute DIRECTV in our
original DIRECTV exclusive territories in New England. We have expanded this
network into 36 states as a result of our acquisitions of DIRECTV rural
affiliates since 1996. Today, the Pegasus retail network is one of the few sales
and distribution channels available to digital satellite service providers
seeking broad and effective distribution in rural areas throughout the
continental United States.
We believe that the national reach of the Pegasus retail network has
positioned us to:
o Improve the penetration of DIRECTV in DIRECTV exclusive territories that
we now own or that we may acquire from other DIRECTV rural affiliates.
o Assist DIRECTV in improving DIRECTV's direct broadcast satellite market
share in rural areas outside of the DIRECTV exclusive territories held by
DIRECTV rural affiliates.
o Offer distributors of new digital satellite services, such as the soon to
be launched digital audio and broadband multimedia satellite services, an
effective and convenient means for reaching the approximately 30% of
America's population that live and work in rural areas.
Recent Direct Broadcast Satellite Developments
Three important events have occurred recently in the direct broadcast
satellite industry.
DIRECTV/Hughes Acquisition of United States Satellite Broadcasting Company,
Inc. In December 1998, Hughes Electronics, the parent company of DIRECTV,
announced that it had reached an agreement with United States Satellite
Broadcasting to acquire its business and assets for approximately $1.3 billion
in cash and stock. The transaction will enable DIRECTV to add such premium
networks as multichannel HBO, Cinemax and Showtime. We expect these added
offerings to increase DIRECTV's appeal to consumers and drive subscriber growth.
DIRECTV and United States Satellite Broadcasting have said that they expect the
transaction to close in the first half of this year. It is subject to review and
approval by the FCC and other conditions. We are still evaluating the impact of
this transaction on our business.
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DIRECTV/ Hughes Acquisition of Primestar. In January 1999, Hughes announced
that it reached agreement with Primestar to acquire Primestar's direct broadcast
satellite business and rights to acquire certain other direct broadcast
satellite satellite assets in two transactions valued at approximately $1.8
billion. DIRECTV has stated that it intends to operate Primestar's business for
approximately two years, during which time it will attempt to transition
Primestar's approximately 2.3 million subscribers to the DIRECTV service.
DIRECTV has also said it expects that its acquisition of the other Primestar
direct broadcast satellite assets along with its pending acquisition of assets
of United States Satellite will enable DIRECTV to offer more than 370
entertainment channels, almost twice its current channel capacity. If the
Primestar and United States Satellite transactions are consummated, we expect
that DIRECTV and EchoStar will be the only distributors of direct broadcast
satellite services. The Primestar transactions are subject to approval of the
FCC and antitrust agencies and other conditions. We estimate that there are
between 200,000 and 250,000 Primestar subscribers in our DIRECTV exclusive
territories. Our estimate is based on DIRECTV's estimate of the proportion of
Primestar subscribers in the exclusive territories of DIRECTV rural affiliates
and our proportionate ownership of those territories. We are targeting Primestar
customers in our territories with promotions that we hope will encourage them to
convert to DIRECTV. EchoStar is doing the same thing. It is not possible to
predict with certainty how well these efforts will succeed. We are continuing to
evaluate the effects of the Primestar transactions on our business.
EchoStar-News Corporation-MCI Settlement. In November 1998, EchoStar, News
Corporation, MCI WorldCom Inc. and certain other parties reached an agreement
for the transfer to EchoStar of a license to operate a direct broadcast
satellite business at the 110o west longitude orbital location and certain other
direct broadcast satellite assets in exchange for shares of EchoStar. EchoStar
already operates a direct broadcast satellite business at the 119o west
longitude orbital location. The agreement with News Corporation and MCI has been
approved by the Department of Justice and is pending approval of the FCC.
EchoStar plans to launch satellites for operation at the 110o west longitude
orbital slot in 1999. While we believe that this transacation, if completed,
will help increase the overall competitive position of direct broadcast
satellite relative to cable, it could also increase EchoStar's competitive
position relative to DIRECTV. See Risk Factors -- Other Risks of Our Business --
We Face Significant Competition: the Competitive Landscape Changes Constantly.
Pegasus' Cable and Broadcast Businesses
We own and operate a cable system serving areas of western and southwestern
Puerto Rico, and are acquiring a contiguous system serving areas of northwestern
Puerto Rico. The combined systems will hold franchises for communities
representing almost 20% of Puerto Rico, will pass in excess of 170,000 homes and
will serve approximately 50,000 subscribers. Our strategy in cable is to
increase our penetration by adding Spanish language networks, locally originated
programming and Internet access and other broadband and telecommunications
services.
Other cable operators serving Puerto Rico include Century Communications
serving San Juan and surrounding areas, TCI International serving eastern and
northern Puerto Rico, and an independent system serving Ponce. Century has
recently announced that it is considering strategic alternatives, including a
possible sale of its assets. We believe that it is possible that other strategic
transactions may soon occur involving other cable operators in Puerto Rico or
that consolidation may occur among some or all of Puerto Rico's cable operators.
We currently own or program nine broadcast television stations in six
Nielsen designated market areas. We own five of these stations and program four
others pursuant to local marketing agreements which authorize us to program the
stations and to sell advertising spots in the programming aired on them. Our TV
stations are affiliated with Fox, UPN and the WB. Our operating strategy in
broadcast focuses on developing strong local sales organizations, improving our
programming, promotion and technical facilities, and maintaining careful control
over operating costs. We have affiliated with Fox, UPN and the WB because we
believe that their audience ratings will continue to grow and that continued
audience growth will enable our TV stations to significantly increase their
market shares.
38
<PAGE>
Recent Pegasus Developments
Completed Direct Broadcast Satellite Acquisitions
From January 1, 1999 through February 28, 1999, we made five acquisitions
from independent DIRECTV providers of rights to provide DIRECTV programming in
rural areas of Indiana, Colorado, Illinois, Minnesota and Texas. These
territories include, in the aggregate, approximately 155,000 television
households, including approximately 7,700 seasonal residences and 15,500
business locations, and approximately 10,000 subscribers. The aggregate
consideration paid for these acquisitions was approximately $21.5 million in
cash and $1.3 million in promissory notes.
Pending Direct Broadcast Satellite Acquisitions
As of February 28, 1999, we have entered into letters of intent or
definitive agreements to acquire DIRECTV distribution rights in rural areas of
Colorado, Indiana, Minnesota, and Ohio. These territories include approximately
115,000, television households, including approximately 5,800 seasonal
residences and 11,600 business locations, and approximately 9,400 subscribers.
In the aggregate, the consideration for the pending direct broadcast satellite
acquisitions is $14.4 million in cash, and $3.1 million in promissory notes and
assumed liabilities. The closings of these acquisitions are subject to the
negotiation of definitive agreements, third party approvals and other customary
conditions. We cannot assure you that these conditions will be satisfied. See
Risk Factors -- Other Risks of Our Business -- Our Acquisition Strategy May Not
Be Successful Which Could Adversely Affect Our Financial Performance.
Pending Cable Acquisition
We have entered into an agreement to purchase a cable system serving
Aguadilla, Puerto Rico and neighboring communities for a purchase price of
approximately $42.0 million in cash. As of December 31, 1998, the Aguadilla
cable system serves approximately 21,500 subscribers and passes approximately
81,300 of the 83,300 homes in the franchise area. The Aguadilla cable system is
contiguous to our existing Puerto Rico cable system and, upon completion of the
purchase, we intend to consolidate the Aguadilla cable system with our existing
cable system. The closing of this acquisition is subject to third party
approvals and other customary conditions. One of these conditions is that the
Puerto Rico franchising authority will not impose greater burdens on us than it
imposes on the present owner. We expect we will have to negotiate terms with the
Puerto Rico authority. While we believe we will reach a satisfactory agreement,
we cannot be sure. If we do, and the other conditions are met, we expect to
close the acquisition in the first half of 1999. See Risk Factors -- Other Risks
of Our Business -- Our Acquisition Strategy May Not Be Successful Which Could
Adversely Affect Our Financial Performance.
Fox Affiliation Agreements
Our network affiliation agreements with the Fox Broadcasting Company
formally expired on January 30, 1999, except the affiliation agreement for
television station WTLH, which is scheduled to expire on December 31, 2000.
Except in the case of WTLH, we currently broadcast Fox programming under
arrangements between Pegasus and Fox which have generally conformed in practice
to the pre-existing affiliation agreements. We have been informed by Fox that it
is revising its form affiliation agreement. Pending completion of its revised
form agreement, Fox has proposed entering into new agreements based on its
current form subject to termination by Fox or Pegasus upon 90 days prior written
notice to the other party. Negotiations with Fox are continuing, and we believe
that we will enter into new affiliation agreements on satisfactory terms with no
disruption in programming. If we are mistaken in this belief, our broadcast
operations could be materially and adversely affected by the loss of the ability
to carry Fox programming.
Legal and Other Proceedings
Federal Communications Commission Matters
In connection with the pending license renewal application of television
station WDBD, we have learned that there were a substantial number of violations
at that station of the FCC's rule establishing limits on the amount of
commercial material in programs directed to children. The FCC has options
available to address
39
<PAGE>
violations of its rules ranging from a letter of admonishment to the revocation
of a station license. We expect that the violations at television station WDBD
will result in a monetary fine but not in revocation or nonrenewal of the
station license. The FCC has not yet completed its review of the matter,
however, so the outcome cannot be assured.
Direct Broadcast Satellite Late Fee Litigation
In November 1998, we were sued in Indiana for allegedly charging direct
broadcast satellite subscribers excessive fees for late payments. The
plaintiffs, who claim to represent a class consisting of residential DIRECTV
customers in Indiana, seek unspecified damages for the purported class and
modification of our late-fee policy. We are in the process of evaluating our
response and are unable to estimate the amount involved or to determine whether
this suit is material to Pegasus. Similar suits have been brought against
DIRECTV and various cable operators in other parts of the United States.
40
<PAGE>
Management
Executive Officers and Directors
Set forth below is certain information concerning the executive officers
and directors of Pegasus.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Marshall W. Pagon (1) .............. 43 Chairman of the Board, President and Chief Executive
Officer
Robert N. Verdecchio ............... 42 Senior Vice President, Chief Financial Officer, Treasurer,
Assistant Secretary and Director
Ted S. Lodge ....................... 42 Senior Vice President, Chief Administrative Officer,
General Counsel and Secretary
Howard E. Verlin ................... 37 Vice President and Assistant Secretary
Nicholas A. Pagon .................. 42 Vice President
Michael C. Brooks (1) .............. 54 Director
Harry F. Hopper III (2) ............ 45 Director
James J. McEntee, III (2) .......... 41 Director
Mary C. Metzger (1)(3) ............. 53 Director
William P. Phoenix ................. 41 Director
Riordon B. Smith (3) ............... 37 Director
Donald W. Weber (2)(3) ............. 62 Director
</TABLE>
- ------------
(1) Member of Nominating Commitee.
(2) Member of Compensation Commitee.
(3) Member of Audit Commitee.
Marshall W. Pagon has served as President, Chief Executive Officer and
Chairman of the Board of Pegasus since its incorporation, and served as
Treasurer of Pegasus from its incorporation to June 1997. From 1991 to October
1994, when the assets of various affiliates of Pegasus Media & Communications,
Inc., principally limited partnerships that owned and operated Pegasus'
broadcast and cable operations, were transferred to Pegasus Media &
Communication's subsidiaries, entities controlled by Mr. Pagon served as the
general partners of these partnerships and conducted the business of Pegasus.
Mr. Pagon's background includes over 18 years of experience in the media and
communications industry. Mr. Pagon is the brother of Nicholas A. Pagon.
Robert N. Verdecchio has served as Pegasus' Senior Vice President, Chief
Financial Officer and Assistant Secretary since its inception and as Pegasus'
Treasurer since June 1997. He has also served similar functions for Pegasus
Media & Communication's affiliates and predecessors in interest since 1990. Mr.
Verdecchio has been a director of Pegasus and Pegasus Media & Communications
since December 18, 1997. Mr. Verdecchio is a certified public accountant and
has over 13 years of experience in the media and communications industry. Mr.
Verdecchio is serving as a director of Pegasus as Marshall W. Pagon's designee
to the board of directors.
Ted S. Lodge has served as Senior Vice President, Chief Administrative
Officer, General Counsel and Assistant Secretary of Pegasus since July 1, 1996.
In June 1997, Mr. Lodge became Pegasus' Secretary. From June 1992 through June
1996, Mr. Lodge practiced law with the law firm of Lodge & Company. During that
period, Mr. Lodge was engaged by Pegasus as its outside legal counsel in
connection with various matters.
Howard E. Verlin is a Vice President and Assistant Secretary of Pegasus and
is responsible for operating activities of Pegasus' direct broadcast satellite
and cable subsidiaries, including supervision of their general managers. Mr.
Verlin has served similar functions with respect to Pegasus' predecessors in
interest and affiliates since 1987 and has over 15 years of experience in the
media and communications industry.
41
<PAGE>
Nicholas A. Pagon has served as a Vice President of Pegasus and Chief
Executive Officer of its broadcast subsidiaries since November 1998 and is
responsible for all broadcast television activities of Pegasus. From January to
November 1998, Mr. Pagon served as President of Pegasus Development
Corporation, a subsidiary of Pegasus. From 1990 through December 1998, Mr.
Pagon was President of Wellspring Consulting, Inc., a telecommunications
consulting business. Mr. Pagon is the brother of Marshall W. Pagon.
Michael C. Brooks has been a director of Pegasus since April 27, 1998.
From February 1997 until April 27, 1997, Mr. Brooks had been a director of
Digital Television Services, Inc. He has been a general partner of J.H. Whitney
& Co., a venture capital firm, since January 1985 and currently serves as
Senior Partner. Mr. Brooks is also a director of SunGard Data Systems Inc.,
Nitinol Medical Technologies, Inc. and several private companies. Mr. Brooks is
serving as a director of Pegasus as Whitney's designee to the board of
directors.
Harry F. Hopper III has been a director of Pegasus since April 27, 1998.
From June 1996 until April 27, 1998, Mr. Hopper had been a director of Digital
Television Services, Inc., or a manager of its predecessor, Digital Television
Services, LLC. Mr. Hopper is a Managing Director of Columbia Capital Corporation
which he joined in January 1994. Columbia Capital is a venture capital firm with
an investment focus on communications services, and information and
communication technologies. Mr. Hopper is serving as a director of Pegasus as
Columbia's designee to the board of directors.
James J. McEntee, III has been a director of Pegasus since October 8,
1996. Mr. McEntee has been a member of the law firm of Lamb, Windle & McErlane,
P.C. for the past six years and a principal of that law firm for the past five
years.
Mary C. Metzger has been a director of Pegasus since November 14, 1996.
Ms. Metzger has been Chairman of Personalized Media Communications L.L.C. and
its predecessor company, Personalized Media Communications Corp. since February
1989. Ms. Metzger has also been Managing Director of Video Technologies
International, Inc. since June 1986.
William P. Phoenix has been a director of Pegasus since June 17, 1998. He
is a Managing Director of CIBC Oppenheimer Corp. and co-head of its Credit
Capital Markets Group. Mr. Phoenix is also a member of CIBC Oppenheimer Corp.'s
credit investment and risk committees. Prior to joining CIBC Oppenheimer Corp.
in 1995, Mr. Phoenix had been a Managing Director of Canadian Imperial Bank of
Commerce with management responsibilities for the bank's acquisition finance,
mezzanine finance and loan workout and restructuring businesses. Mr. Phoenix
joined Canadian Imperial Bank of Commerce in 1982. Mr. Phoenix is one of
Marshall W. Pagon's designees to the board of directors pursuant to a voting
agreement.
Riordon B. Smith has been a director of Pegasus since April 27, 1998. From
February 1997 until April 27, 1998, Mr. Smith had been a director of Digital
Television Services, Inc., or a manager of its predecessor, Digital Television
Services, LLC. Mr. Smith is a Senior Vice President of Fleet Private Equity
Co., Inc., which he joined in 1990. Fleet Private Equity Co., Inc. is a private
equity fund with an investment focus in media and information,
telecommunications services, healthcare services, industrial manufacturing
business services and consumer products and services. Mr. Smith is serving as a
director of Pegasus as Chisholm Partners, III, L.P.'s designee to the board of
directors.
Donald W. Weber has been a director of Pegasus since its incorporation and
a director of Pegasus Media & Communications since November 1995. Until its
acquisition by Pegasus in November 1997, Mr. Weber had been the President and
Chief Executive Officer of ViewStar Entertainment Services, Inc., a National
Rural Telecommunications associate that distributed DIRECTV services in North
Georgia, since August 1993. From November 1991 through August 1993, Mr. Weber
was a private investor and consultant to various communication companies. Prior
to that time, Mr. Weber was President and Chief Executive Officer of Contel
Corporation until its merger with GTE Corporation in 1991. Mr. Weber is
currently a member of the boards of directors of Powertel, Inc. and Healthdyne
Information Enterprises, Inc., which are publicly-traded companies.
42
<PAGE>
In connection with the acquisition of DIRECTV rights and related assets
from Harron Communications Corp., Pegasus Communications Holdings, Inc.,
Pegasus' parent corporation, agreed to nominate a designee of Harron as a member
of Pegasus' board of directors. Effective October 8, 1996, James J. McEntee,
III, was appointed to Pegasus' board of directors as Harron's designee. Harron's
right to designate a board member terminated on October 8, 1998.
Executive Compensation
The following table sets forth certain information for Pegasus' last three
fiscal years concerning the compensation paid to the Chief Executive Officer and
to each of Pegasus' most highly compensated officers. The most highly
compensated officers are those whose total annual salary and bonus for the
fiscal year ended December 31, 1998 exceeded $100,000.
Prior to the consummation of Pegasus' initial public offering of common
stock in October of 1996, Pegasus' executive officers never received any salary
or bonus compensation from Pegasus. The salary amounts presented below under
"Annual Compensation" for January 1, 1996 through October 8, 1996 were paid by
an affiliate of Pegasus. After October 8, 1996, Pegasus' executive officers'
salaries were paid by Pegasus. There are no employment agreements between
Pegasus and its executive officers.
Upon Pegasus' initial public offering in October of 1996, certain shares of
Class B common stock were exchanged for shares of Class A common stock and
distributed to certain members of management, including 38,807 shares of Class A
common stock that were distributed to Mr. Verdecchio. This information is set
forth under the column "Restricted Stock" below.
Unless otherwise indicated, the amounts listed under the column "All Other
Compensation" represent Pegasus' contributions under its 401(k) plans.
<TABLE>
<CAPTION>
Long Term Compensation Awards
Annual --------------------------------------------
Compensation Restricted Securities
------------------------ Stock Underlying All Other
Name Principal Position Year Salary Award Options Compensation
---- ------------------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon ............ President and 1998 $ 200,000 $ 77,161 85,000 $ 67,274(1)
Chief Executive 1997 $ 200,000 $100,558 85,000 $ 63,228(1)
Officer 1996 $ 150,000 -- -- $ 62,253(1)
Robert N. Verdecchio ......... Senior Vice 1998 $ 150,000 $ 38,580 40,000 $ 12,720
President and 1997 $ 150,000 $ 50,279 40,000 $ 9,500
Chief Financial 1996 $ 125,000 $555,940 -- $ 6,875
Officer
Ted S. Lodge ................. Senior Vice Presi- 1998 $ 150,000 $ 30,864 60,000 $ 9,263
dent, Chief
Administrative 1997 $ 150,000 $ 40,223 40,000 $ 1,800
Officer and General 1996 $ 75,000(2) -- -- --
Counsel
Howard E. Verlin ............. Vice President, 1998 $ 135,000 $110,125 40,000 $ 5,480
Satellite and 1997 $ 135,000 $100,558 40,000 $ 1,685
Cable Television 1996 $ 100,000 -- -- $ 1,100
</TABLE>
- ------------
(1) Of the amounts listed for Mr. Pagon for 1998, 1997 and 1996, $53,728,
$53,728 and $53,728, respectively, represent the actuarial benefit to Mr.
Pagon of premiums paid by Pegasus in connection with the split dollar
agreement entered into by Pegasus with the trustees of insurance trust
established by Mr. Pagon. See Certain Relationships and Related Transactions
-- Split Dollar Agreement. The remainder represents Pegasus' contributions
under its 401(k) plans.
(2) Mr. Lodge became an employee of Pegasus on July 1, 1996.
43
<PAGE>
Pegasus granted options to employees to purchase a total of 336,800 shares
during 1998. The amounts set forth below in the columns entitled "5%" and "10%"
represent hypothetical gains that could be achieved for the respective options
if exercised at the end of the option term. These gains are based on assumed
rates of stock appreciation of 5% and 10% compounded annually from the date the
respective options were granted to their expiration date.
Option Grants in 1998
Potential Realizable Value
<TABLE>
<CAPTION>
% of Total
Options
Granted to Exercise Expira-
Options Employees in Price tion
Name Granted Fiscal Year Per Share Date 5% 10%
---- --------- -------------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon ............ 85,000 25.24% $ 21.375 2-16-08 $1,142,623 $2,895,631
Robert N. Verdecchio ......... 40,000 11.88% $ 21.375 2-16-08 $ 537,705 $1,362,650
Ted S. Lodge ................. 60,000 17.81% $ 21.375 2-16-08 $ 806,557 $2,043,975
Howard E. Verlin ............. 40,000 11.88% $ 21.375 2-16-08 $ 537,705 $1,362,650
</TABLE>
The table below shows aggregated stock option exercises by the named
executive officers in 1998, and 1998 year-end values. In-the-money options,
which are listed in the last two columns, are those in which the fair market
value of the underlying securities exceeds the exercise price of the option. The
closing price of Pegasus' Class A common stock on December 31, 1998 was $25.06
per share.
Aggregated Option Exercises in 1998 and
1998 Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of
Unexercised Unexercised
Options at Fiscal In-the-Money Options
Shares Year End at Fiscal Year End
Acquired ----------------------------- ----------------------------
on Value Un- Un-
Name Exercise Realized Exercisable exercisable Exercisable exercisable
---- ---------- ---------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon ............ -- -- 17,000 153,000 $239,020 $1,259,305
Robert N. Verdecchio ......... -- -- 9,090 70,910 $127,805 $ 581,995
Ted S. Lodge ................. -- -- 9,090 90,910 $127,805 $ 655,695
Howard E. Verlin ............. -- -- 9,090 70,910 $127,805 $ 581,995
</TABLE>
Compensation of Directors
Under Pegasus' by-laws, each director is entitled to receive such
compensation, if any, as may from time to time be fixed by the board of
directors. Pegasus currently pays its directors who are not employees or
officers of Pegasus an annual retainer of $10,000 plus $750 for each board
meeting attended in person, $350 for each meeting of a committee of the board
and $375 for each board meeting held by telephone. Pegasus also reimburses each
director for all reasonable expenses incurred in traveling to and from the place
of each meeting of the board or committee of the board.
On February 17, 1998, James J. McEntee, III, Mary C. Metzger, and Donald W.
Weber, who were then all of Pegasus' nonemployee directors, each received
options to purchase 5,000 shares of Class A common stock under the Pegasus
Communications 1996 stock option plan. Each option vests in annual installments
of 2,500 shares, was issued at an exercise price of $21.375 per share, the
closing price of the Class A common stock at the time of the grant, and is
exercisable until the tenth anniversary from the date of grant.
Compensation Committee Interlocks and Insider Participation
During 1998, the board of directors generally made decisions concerning
executive compensation of executive officers. The board included Marshall W.
Pagon, the President and Chief Executive Officer of Pegasus, and Robert N.
Verdecchio, Pegasus' Senior Vice President and Chief Financial Officer. A
special stock option committee, however, made certain decisions regarding option
grants under the stock option plan. Both the stock option plan and restricted
stock plan are discussed below.
44
<PAGE>
Incentive Program
General
The incentive program, which includes the restricted stock plan, the 401(k)
plans and the stock option plan, is designed to promote growth in stockholder
value by providing employees with restricted stock awards in the form of Class A
common stock and grants of options to purchase Class A common stock. Awards
under the restricted stock plan, other than excess and discretionary awards, and
the 401(k) plans, other than matching contributions, are in proportion to annual
increases in location cash flow. For this purpose we automaticaly adjust
location cash flow for acquisitions. As a result, for the purpose of calculating
the annual increase in location cash flow, the location cash flow of the
acquired properties is included as if it had been a part of Pegasus' financial
results for the comparable period of the prior year.
Pegasus believes that the restricted stock plan and 401(k) plans result in
greater increases in stockholder value than result from a conventional stock
option program. The basis of this belief is that these plans create a clear
cause and effect relationship between initiatives taken to increase location
cash flow and the amount of incentive compensation that results from these
initiatives.
Although the restricted stock plan and 401(k) plans like conventional stock
option programs provide compensation to employees as a function of growth in
stockholder value, the tax and accounting treatments of these programs are
different. For tax purposes, incentive compensation awarded under the restricted
stock plan generally and the 401(k) plans is fully tax deductible as compared to
conventional stock option grants which generally are only partially tax
deductible upon exercise. For accounting purposes, conventional stock option
programs generally do not result in a charge to earnings while compensation
under the restricted stock plan generally and the 401(k) plans do result in a
charge to earnings. Pegasus believes that these differences result in a lack of
comparability between the EBITDA of companies that utilize conventional stock
option programs and Pegasus' EBITDA. The table below lists the specific maximum
components of the restricted stock plan and the 401(k) plans in terms of a $1
increase in annual location cash flow. The table does not list excess and
discretionary awards under the restricted stock plan or matching contributions
under the 401(k) plans.
<TABLE>
<CAPTION>
Component Amount
--------- ------
<S> <C>
Restricted stock grants to general managers based on the increase in annual location cash
flow of individual business units ....................................................... 6 Cents
Restricted stock grants to department managers based on the increase in annual location
cash flow of individual business units .................................................. 6 Cents
Restricted stock grants to corporate managers, other than executive officers, based on the
company-wide increase in annual location cash flow ...................................... 3 Cents
Restricted stock grants to employees selected for special recognition .................... 5 Cents
Restricted stock grants under the 401(k) plans for the benefit of all eligible employees
and allocated pro-rata based on wages ................................................... 10 Cents
---------
Total ................................................................................... 30 Cents
=========
</TABLE>
As of December 31, 1998, we had 749 full-time and 130 part-time employees.
We also had 8 general managers, 37 department managers and 9 corporate managers
as of this date.
45
<PAGE>
Executive officers and non-employee directors are not eligible to receive
profit sharing awards under the restricted stock plan. Executive officers are
eligible to receive awards under the restricted stock plan consisting of:
o special recognition awards.
o excess awards made to the extent that an employee does not receive a
matching contribution under the 401(k) plans because of restrictions of
the Internal Revenue Code of 1986, as amended, or the Puerto Rico
Internal Revenue Code.
o discretionary restricted stock awards determined by a board committee, or
the full board.
Executive officers, non-employee directors and, effective December 18,
1998, all employees are eligible to receive options under the stock option plan.
Restricted Stock Plan
The Pegasus restricted stock plan became effective in September 1996 and
will terminate in September 2006. Under the restricted stock plan, 350,000
shares of Class A common stock are available for granting restricted stock
awards to eligible employees of Pegasus. The restricted stock plan provides for
four types of restricted stock awards that are made in the form of Class A
common stock as shown in the table above:
o profit sharing awards to general managers, department managers and
corporate managers, other than executive officers.
o special recognition awards for consistency, initiative, problem solving
and individual excellence.
o excess awards that are made to the extent that an employee does not
receive a matching contribution under the U.S. 401(k) plan or Puerto Rico
401(k) plan because of restrictions of the Internal Revenue Code or the
Puerto Rico Internal Revenue Code.
o discretionary restricted stock awards.
Restricted stock awards other than special recognition awards vest 34%
after two years of service with Pegasus, 67% after three years of service and
100% after four years of service. Special recognition awards are fully vested on
the date of the grant. Effective December 18, 1998, grantees may elect to
receive certain types of awards under the restricted stock plan in the form of
an option rather than stock subject to a vesting schedule.
Stock Option Plan
The Pegasus Communications 1996 Stock Option Plan became effective in
September 1996 and terminates in September 2006. Under the stock option plan, up
to 970,000 shares of Class A common stock are available for the granting of
nonqualified stock options and options qualifying as incentive stock options
under Section 422 of the Internal Revenue Code. Effective December 18, 1998, all
Pegasus employees are eligible to receive non-qualified stock options and
incentive stock options under the stock option plan. No employee, however, may
be granted options covering more than 550,000 shares of Class A common stock
under the stock option plan. Directors of Pegasus who are not employees of
Pegasus are eligible to receive non-qualified stock options under the stock
option plan. Currently, seven non-employee directors are eligible to receive
options under the stock option plan. The stock option plan provides for
discretionary option grants made by a board committee or the full board. In
addition, as of December 18, 1998 each full time employee of Pegasus who is not
an executive officer is eligible to receive a grant of an option to purchase 100
shares of Class A common stock under the stock option plan.
46
<PAGE>
401(k) Plans
Effective January 1, 1996, Pegasus Media & Communications, Inc. adopted the
Pegasus Communications Savings Plan for eligible employees of that company and
its domestic subsidiaries. Effective October 1, 1996, the Pegasus' Puerto Rico
subsidiary adopted the Pegasus Communications Puerto Rico Savings Plan for
eligible employees of the Pegasus' Puerto Rico subsidiaries. Substantially all
Pegasus employees who, as of the enrollment date under the 401(k) plans, have
completed at least one year of service with Pegasus are eligible to participate
in one of the 401(k) plans. Participants may make salary deferral contributions
of 2% to 6% of salary to the 401(k) plans. Pegasus may make three types of
contributions to the 401(k) plans, each allocable to a participant's account if
the participant completes at least 1,000 hours of service in the applicable plan
year, and is employed on the last day of the applicable plan year.
o Pegasus matches 100% of a participant's salary deferral contributions to
the extent the participant invested his or her salary deferral
contributions in Class A common stock at the time of his or her initial
contribution to the 401(k) plans.
o Pegasus, in its discretion, may contribute an amount that equals up to
10% of the annual increase in company-wide location cash flow. These
discretionary contributions, if any, are allocated to eligible
participants' accounts based on each participant's salary for the plan
year.
o Pegasus also matches a participant's rollover contribution, if any, to
the 401(k) plans, to the extent the participant invests his or her
rollover contribution in Class A common stock at the time of his or her
initial contribution to the 401(k) plans.
Pegasus makes discretionary contributions and matches of employee salary
deferral contributions and rollover contributions in the form of Class A common
stock, or in cash used to purchase Class A common stock. Pegasus has authorized
and reserved for issuance up to 205,000 shares of Class A common stock in
connection with the 401(k) plans. Pegasus' contributions to the 401(k) plans are
subject to limitations under applicable laws and regulations.
All employee contributions to the 401(k) plans are fully vested at all
times and all Pegasus contributions, if any, vest 34% after two years of service
with Pegasus, including years before the 401(k) plans were established; 67%
after three years of service; and 100% after four years of service. A
participant also becomes fully vested in company contributions to the 401(k)
plans upon attaining age 65 or upon his or her death or disability.
47
<PAGE>
Principal and Selling Stockholders
The following table sets forth as of the date of this prospectus certain
information regarding the beneficial ownership of the Class A common stock and
Class B common stock before and after this offering by:
o each stockholder known to Pegasus to be the beneficial owner, as defined
in Rule 13d-3 under the Exchange Act of more than 5% of the Class A
common stock and Class B common stock, based upon company records or the
records of the SEC. o each director of Pegasus.
o each of the most highly compensated officers whose total annual salary
and bonus for the fiscal year ended December 31, 1998 exceeded $100,000.
o all executive officers and directors of Pegasus as a group.
The table also sets forth information regarding the beneficial ownership of
Class A common stock and Class B common stock of each of the selling
stockholders before and after this offering.
The Class B common stock is currently convertible at the discretion of the
holders into an equal amount of shares of Class A common stock. Each of the
stockholders named below has sole voting power and sole investment power with
respect to the shares shown as beneficially owned, unless otherwise stated.
<TABLE>
<CAPTION>
Pegasus Class A
Common Stock Shares
Beneficially Owned Shares
Prior to Offering Offered
----------------------------------------- ---------
Number %
<S> <C> <C> <C>
Marshall W.
Pagon(1)(2) .............. 6,769,840(3)(4)(5) 42.4 --
Robert N. Verdecchio ...... 291,296(5)(6)(7) 2.6 10,000
Howard E. Verlin .......... 73,243(6)(7) * --
Ted S. Lodge .............. 63,849(8) * --
James J. McEntee, III ..... 8,000(9) * --
Mary C. Metzger ........... 8,000(9) * --
Donald W. Weber ........... 295,920(10) 2.6 --
Harron Communica-
tions Corp. .............. 852,110 7.5 --
Columbia Capital Cor-
poration(11) ............. 6,769,840(3)(4) 42.4 285,884
Columbia DBS,
Inc.(11) ................. 6,769,840(3)(4) 42.4 18,316
Mark R. Warner(11) ........ 501,892 4.4 150,000
David P. Mixer(11) ........ 511,891 4.5 150,000
Robert B. Blow(11) ........ 510,606 4.5 150,000
James B. Murray,
Jr.(11) .................. 511,891 4.5 150,000
Mark J. Kington(11) ....... 511,891 4.5 150,000
Whitney Equity Part-
ners, L.P.(12) ........... 6,769,840(3)(4) 42.4 --
Fleet Entities(13) ........ 6,769,840(3)(4) 42.4 --
Riordon B. Smith (14) 6,769,840(3)(4) 42.4 --
Michael C. Brooks (15) 6,769,840(3)(4) 42.4 --
Harry F. Hopper III
(11) ..................... 237,998 2.1 42,000
William P. Phoenix ........ -- -- --
T. Rowe Price Associ-
ates, Inc.(16) ........... 750,200 6.6 --
PAR Capital Manage-
ment, Inc. and
related entities(17) ..... 650,200 5.7 --
Directors and Execu-
tive Officers as a
Group (12 persons)
(18) ..................... 7,651,374 47.4 52,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus Class B
Pegasus Class A Common Stock Shares
Common Stock Shares Beneficially Owned
Beneficially Owned Prior to and After
After Offering Offering
---------------------- ------------------------------
Shares % Shares %
<S> <C> <C> <C> <C>
Marshall W.
Pagon(1)(2) .............. 6,465,640 34.1 4,581,900(4) 100.0
Robert N. Verdecchio ...... 281,296 2.0 -- --
Howard E. Verlin .......... 73,243 * -- --
Ted S. Lodge .............. 63,849 * -- --
James J. McEntee, III ..... 8,000 * -- --
Mary C. Metzger ........... 8,000 * -- --
Donald W. Weber ........... 295,920 2.1 -- --
Harron Communica-
tions Corp. .............. 852,110 6.0 -- --
Columbia Capital Cor-
poration(11) ............. 6,465,640 34.1 4,581,900(4) 100.0
Columbia DBS,
Inc.(11) ................. 6,465,640 34.1 4,581,900(4) 100.0
Mark R. Warner(11) ........ 351,892 2.5 -- --
David P. Mixer(11) ........ 361,891 2.5 -- --
Robert B. Blow(11) ........ 360,606 2.5 -- --
James B. Murray,
Jr.(11) .................. 361,891 2.5 -- --
Mark J. Kington(11) ....... 361,891 2.5 -- --
Whitney Equity Part-
ners, L.P.(12) ........... 6,465,640 34.1 4,581,900(4) 100.0
Fleet Entities(13) ........ 6,465,640 34.1 4,581,900(4) 100.0
Riordon B. Smith (14) 6,465,640 34.1 4,581,900(4) 100.0
Michael C. Brooks (15) 6,465,640 34.1 4,581,900(4) 100.0
Harry F. Hopper III
(11) ..................... 195,998 1.4 -- --
William P. Phoenix ........ -- -- --
T. Rowe Price Associ-
ates, Inc.(16) ........... 750,200 5.2 -- --
PAR Capital Manage-
ment, Inc. and
related entities(17) ..... 650,200 4.5 -- --
Directors and Execu-
tive Officers as a
Group (12 persons)
(18) ..................... 7,299,674 38.2 4,581,900 100.0
</TABLE>
48
<PAGE>
- ------------
* Represents less than 1% of the outstanding shares of Class A common stock.
(1) The address of this person is c/o Pegasus Communications Management
Company, 5 Radnor Corporate Center, Suite 454, 100 Matsonford Road, Radnor,
Pennsylvania 19087.
(2) Pegasus Capital, L.P. holds 1,217,348 shares of Class B common stock. Mr.
Pagon is the sole shareholder of the general partner of Pegasus Capital,
L.P. and is deemed to be the beneficial owner of these shares. All of the
3,364,552 remaining shares of Class B common stock are owned by Pegasus
Communications Holdings, Inc. and two of its subsidiaries. All the capital
stock of Pegasus Communications Holdings, Inc. are held by Pegasus
Communications Limited Partnership. Mr. Pagon controls Pegasus
Communications Limited Partnership by reason of his ownership of all the
outstanding voting stock of the sole general partner of a limited
partnership that is, in turn, the sole general partner in Pegasus
Communications Limited Partnership. Therefore, apart from the voting
agreement described in note 4 below, Mr. Pagon is the beneficial owner of
100% of Class B common stock with sole voting and investment power over all
such shares.
(3) Includes 4,581,900 shares of Class B common stock, which are convertible
into shares of Class A common stock on a one-for-one basis and 59,500
shares of Class A common stock which are issuable upon the exercise of the
vested portion of outstanding stock options, and 17,000 shares of Class A
common stock which are issuable upon the exercise of the portion of an
outstanding stock option which vests on March 21, 1999.
(4) Mr. Pagon, Pegasus, Pegasus Capital, L.P., the parent, Pegasus Northwest
Officer Corp, Pegasus Scranton Offer Corp, Columbia Capital Corporation and
Columbia DBS, Inc., which are discussed in note 11 below, and Whitney
Equity Partners, L.P. and the Fleet entities, which are discussed in note
14 below, have entered into the voting agreement, which provides that these
parties vote all shares held by them in the manner specified in the voting
agreement. As a consequence of being parties to the voting agreement, each
of these parties is deemed to have shared voting power over certain shares
beneficially owned by them in the aggregate for the purposes specified in
the voting agreement. Therefore, the parties to the voting agreement are
each deemed to be the beneficial owner with respect to 4,581,900 shares of
Class B common stock and 6,769,840 shares of Class A common stock,
including 4,581,900 shares of Class A common stock issuable upon conversion
of the all outstanding shares of Class B common stock. The shares of Class
A common stock beneficially owned after the offering by this person have
been adjusted to reflect the sale of 285,884 shares by Columbia Capital
Corporation and the sale of 18,316 shares by Columbia DBS, Inc. See Certain
Relationships and Related Transactions -- Voting Agreement.
(5) Includes 96,772 shares of Class A common stock held in Pegasus' 401(k)
plan, over which Messrs. Pagon and Verdecchio share voting power in their
capacities as co-trustees.
(6) On March 26, 1997, the SEC declared effective a registration statement
filed by Pegasus which would permit Messrs. Verdecchio and Verlin to sell
shares of Class A common stock subject to certain vesting and other
restrictions. As of the date of this prospectus, Mr. Verdecchio, a director
of Pegasus, is permitted to sell 150,000 shares and Mr. Verlin 29,321
shares of Class A common stock pursuant to the registration statement.
Messrs. Verdecchio and Verlin have sole voting and investment power over
their shares, subject to certain vesting restrictions.
(7) Includes 29,090 shares of Class A common stock which are issuable upon the
exercises of the vested portion of outstanding stock options, and 9,090
shares of Class A common stock which are issuable upon the exercise of an
outstanding stock option which vests on March 21, 1999.
(8) Includes 1,500 shares of Class A common stock owned by Mr. Lodge's wife, of
which Mr. Lodge disclaims beneficial ownership, 5,079 shares of Class A
common stock issued to Mr. Lodge and his wife, subject to certain vesting
restrictions, 39,090 shares of Class A common stock which are issuable upon
the exercise of the vested portion of outstanding stock options and 9,090
shares of Class A common stock which are issuable upon the exercise of the
portion of an outstanding stock option which vests on March 21, 1999.
49
<PAGE>
(9) Includes 5,000 shares of Class A common stock which are issuable upon the
exercise of the vested portion of outstanding stock options, and 2,500
shares of Class A common stock which are issuable upon the exercise of the
portion of an outstanding stock option which vests on March 21, 1999.
(10) Includes 8,385 shares of Class A common stock issuable upon the exercise of
the vested portion of outstanding stock options, and 2,500 shares of Class
A common stock which are issuable upon the exercise of the portion of an
outstanding stock option which vests on March 21, 1999. Mr. Weber is a
director of Pegasus.
(11) Columbia Capital Corporation directly holds 285,884 shares of Class A
common stock and Columbia DBS, Inc. directly holds 18,316 shares of Class A
common stock. Columbia Capital Corporation has directors who also serve as
directors of Columbia DBS, Inc. Columbia Capital Corporation and Columbia
DBS, Inc. each disclaim beneficial ownership of all shares of Class A
common stock held by the other entity. Messrs. Warner, Mixer, Blow, Murray,
Kington and Hopper are principals and/or substantial owners of Columbia
Capital Corporation, a former stockholder of Digital Television Services,
Inc., a subsidiary of Pegasus, and/or of Columbia DBS, Inc. Columbia
Capital Corporation has certain rights under the voting agreement described
in note 4. The address of each of the Columbia entities is 201 N. Union
Street, Suite 300, Alexandria, Virginia 22314-2642.
(12) Includes 959,473 shares of Class A common stock held directly by Whitney
over which it has, with the exception of matters covered by the voting
agreement, sole voting and investment power. The shares of Class A common
stock held directly by Whitney represent 8.5% of the shares of Class A
common stock. The address of Whitney is 177 Broad Street, Stamford,
Connecticut 06901.
(13) The Fleet entities consist of Fleet Venture Resources, Inc., Fleet Equity
Partners VI, L.P., Chisholm Partners III, L.P. and Kennedy Plaza Partners.
Each Fleet entity holds the following number of shares of Class A common
stock: Fleet Venture Resources (406,186); Fleet Equity Partners (174,079);
Chisholm (147,611); and Kennedy Plaza Partners (10,179). The address of
each of the Fleet entities is 50 Kennedy Plaza, RI MO F12C, Providence,
Rhode Island 02903.
(14) The information for Mr. Smith includes the shares of Class A common stock
held by the Fleet entities. Mr. Smith is a Senior Vice President of each of
the managing general partners of Fleet Equity Partners VI, a Senior Vice
President of Fleet Venture Resources, a Senior Vice President of the
corporation that is the general partner of the partnership that is the
general partner of Chisholm Partners III, L.P. and a partner of Kennedy
Plaza Partners. He is a Senior Vice President of Fleet Growth Resources II,
Inc. and Silverado IV Corp., the two general partners of Fleet Equity
Partners, and Senior Vice President of Fleet Venture Resources and
Silverado III Corp., the general partner of the partnership Silverado III,
L.P., which is the general partner of Chisholm Partners III, L.P. Mr. Smith
disclaims beneficial ownership for all shares held directly by Fleet
Venture Resources and all shares held directly by Fleet Equity Partners,
Chisholm Partners III, L.P. and Kennedy Plaza Partners, except for his
pecuniary interest therein. The address of this person is 50 Kennedy Plaza,
RI MO F12C, Providence, Rhode Island 02903.
(15) The information for Mr. Brooks includes 959,473 shares of Class A common
stock held by Whitney Equity Partners, L.P. Mr. Brooks has shared voting
and investment power over such shares of Class A common stock with the
managing members of the general partner of Whitney Equity Partners, L.P.
and disclaims beneficial ownership of such shares of Class A common stock.
The address of this person is 177 Broad Street, Stamford, Connecticut
06901.
(16) These shares are owned by various individual and institutional investors
which T. Rowe Price Associates, Inc. serves as investment adviser. Price
Associates has sole investment power with respect to all of these shares
and sole voting power with respect to 57,400 shares. Price Associates
disclaims beneficial of these shares. The address of Price Associates is
100 East Pratt Street, Baltimore, Maryland 21202.
(17) PAR Investment Partners, L.P. has sole voting and investment power with
respect to all of these shares. The sole general partner of PAR Investment
Partners, L.P. is PAR Group, L.P., whole sole general partner is PAR
Capital Management, Inc. As a consequence, each of PAR Group, L.P. and PAR
Capital Management, Inc. may be deemed to be the beneficial owner of the
shares held by PAR Investment Partners, L.P. with sole voting and
investment power with respect to such shares. The address of PAR Investment
Partners, L.P. is One Financial Center, Suite 1600, Boston, Massachusetts
02111.
(18) See the notes above for information about the holdings of the directors and
named executive officers. Includes 4,500 shares of Class A common stock
purchased by an executive officer of Pegasus in this offering.
50
<PAGE>
Certain Relationships and Related Transactions
Split Dollar Agreement
In December 1996, Pegasus entered into a split dollar agreement with the
trustees of an insurance trust established by Marshall W. Pagon. Under the split
dollar agreement, Pegasus agreed to pay a portion of the premiums for certain
life insurance policies covering Mr. Pagon owned by the insurance trust. The
agreement provides that Pegasus will be repaid for all amounts it expends for
such premiums, either from the cash surrender value or the proceeds of the
insurance policies. The actuarial benefit to Mr. Pagon of premiums paid by
Pegasus amounted to $53,728 in 1996, $53,728 in 1997 and $53,728 in 1998.
ViewStar Direct Broadcast Satellite Acquisition
Effective October 31, 1997, Pegasus acquired DIRECTV distribution rights
for certain rural areas of Georgia and related assets from ViewStar
Entertainment Services, Inc. Prior to the acquisition, Donald W. Weber, a
director of Pegasus, was President and Chief Executive Officer of ViewStar and
together with his son owned approximately 73% of the outstanding stock of
ViewStar. The purchase price of the ViewStar acquisition consisted of
approximately $6.4 million in cash and 397,035 shares of Class A common stock.
The acquisition involved the execution of noncompetition agreements by Mr. Weber
and his son and the execution of a shareholders agreement, which included the
granting of certain registration rights on the shares of Class A common stock
issued in connection with the acquisition.
Relationship with W.W. Keen Butcher and Affiliated Entities
Pegasus entered into an arrangement in 1998 with W.W. Keen Butcher, the
stepfather of Marshall W. Pagon and Nicholas A. Pagon, certain entities
controlled by him and the owner of a minority interest in one of the entities.
Under this agreement, Pegasus agreed to provide and maintain collateral for up
to $4.0 million in principal amount of bank loans to Mr. Butcher and the
minority owner. Mr. Butcher and the minority owner must lend or contribute the
proceeds of those bank loans to one or more of the entities owned by Mr. Butcher
for the acquisition of television broadcast stations to be operated by Pegasus
pursuant to local marketing agreements.
Under this arrangement, on November 10, 1998, Pegasus sold to one of the
Butcher companies the FCC license for the television station then known as WOLF
for $500,000 and leased certain related assets to the Butcher company, including
leases and subleases for studio, office, tower and transmitter space and
equipment for ongoing rental payments of approximately $18,000 per year plus
operating expenses. WOLF is now known as WSWB and is one of Pegasus' television
stations serving the northeastern Pennsylvania designated television market
area. Mr. Butcher and the minority owner borrowed the $500,000 under the loan
collateral arrangement described above. Concurrently with the closing under the
agreement described above, one of the Butcher companies assumed a local
marketing agreement, under which Pegasus provides programming to WSWB and
retains all revenues generated from advertising in exchange for payments to the
Butcher company of $4,000 per month plus reimbursement of certain expenses. The
term of the local marketing agreement is three years, with two three-year
automatic renewals. The Butcher company also granted Pegasus an option to
purchase the station license and assets if it becomes legal to do so for the
costs incurred by the Butcher company relating to the station, plus compound
interest at 12% per year.
On July 2, 1998, Pegasus assigned to one of the Butcher companies its
option to acquire the FCC authorization for television station WFXU, which
rebroadcasts WTLH pursuant to a local marketing agreement. The Butcher company
will pay to Pegasus $50,000 for the option upon the FCC's approval of the
authorization's transfer to the Butcher company, and will assume the obligations
of the authorization's former owner under the local marketing agreement with
Pegasus. The Butcher company will borrow the $50,000 under the loan collateral
arrangement, and the company will grant to Pegasus an option to purchase the
station on essentially the same terms described above for WOLF. The local
marketing agreement provides for a reimbursement of expenses by Pegasus and a
term of five years, with one automatic five-year renewal.
51
<PAGE>
Pegasus believes that the WOLF and WFXU transactions were done at fair
value and that any future transactions that may be entered into with the Butcher
companies or similar entities will also be done at fair value.
Acquisition of Digital Television Services, Inc.
On April 27, 1998, Pegasus acquired Digital Television Services, Inc.
through the merger of a subsidiary of Pegasus into Digital Television Services.
Prior to the merger, Digital Television Services was the second largest
independent distributor of DIRECTV services serving 140,000 subscribers in 11
states.
In connection with the merger, Pegasus issued approximately 5.5 million
shares of its Class A common stock to the stockholders of Digital Television
Services and assumed approximately $159 million of liabilities. Pegasus also
granted registration rights to certain of Digital Television Service's
stockholders, including Columbia Capital Corporation, Columbia DBS, Inc.,
Whitney Equity Partners, L.P. and Fleet Venture Resources, Inc. and its
affiliates and Harry F. Hopper III. Mr. Hopper received shares of Class A common
stock in the Digital Television Services merger and has an ownership interest in
Columbia Capital Corporation, which received 429,812 shares. As a result of the
Digital Television Services merger and the voting agreement described below,
Michael C. Brooks, Harry F. Hopper III and Riordon B. Smith were elected to
Pegasus' board of directors.
Voting Agreement
On April 27, 1998, in connection with the Digital Television Services
merger, Pegasus, Marshall W. Pagon and a number of partnerships and corporations
controlled by him, and Fleet Venture Resources, Fleet Equity Partners, Chisholm
Partners III, L.P., Kennedy Plaza Partners, Whitney Equity Partners, Columbia
Capital Corporation and Columbia DBS, Inc. entered into a voting agreement. The
voting agreement covers all shares of Class B common stock and other voting
securities of Pegasus held at any time by Mr. Pagon and his controlled entities
and shares of Class A common stock received in the Digital Television Services
merger by Chisholm, Columbia, Whitney and the other former stockholders of
Digital Television Services. It provides that holders of such shares vote their
respective shares in the manner specified in the voting agreement. In
particular, the voting agreement establishes that the board of directors of
Pegasus will consist initially of nine members: three independent directors,
three directors designated by Mr. Pagon and one director to be designated by
each of Chisholm Partners III, L.P., Columbia Capital Corporation and Whitney
Equity Partners. The voting agreement also provides that the committees of the
board of directors will consist of an audit committee, a compensation committee
and a nominating committee. Each committee shall consist of one independent
director, one director designated by Mr. Pagon and one director designated by a
majority of the directors designated by Chisholm Parters III, L.P., Columbia
Capital Corporation and Whitney Equity Partners. As a result of the voting
agreement, the parties to the agreement have sufficient voting power without the
need for the vote of any other shareholder, to elect the entire board of
directors. James J. McEntee, III, Mary C. Metzger and Donald W. Weber are
serving as independent directors of Pegasus. Marshall W. Pagon, Robert N.
Verdecchio and William P. Phoenix are serving as directors of Pegasus as
designees of Mr. Pagon. Harry F. Hopper III is serving as a director of Pegasus
as a designee of Columbia Capital Corporation; Michael C. Brooks is serving as a
director of Pegasus as a designee of Whitney Equity Partners; and Riordon B.
Smith is serving as a director of Pegasus as a designee of Chisholm Partners
III, L.P.
The voting agreement terminates with respect to any covered share upon the
sale or transfer of any such share to any person other than a permitted
transferee. In addition, the right of Chisholm Partners III, L.P., Columbia
Capital Corporation and Whitney Equity Partners to designate a director
terminates when the Fleet entities, Columbia Capital Corporation and Whitney
Equity Partners cease owning one-half of the shares originally received by each
of them in the Digital Television Services merger or in certain other
circumstances.
Communications License Re-Auction
PCS Partners, a company owned and controlled by Marshall W. Pagon,
currently holds a personal communications system license in Puerto Rico and is
qualified to participate in the FCC's upcoming
52
<PAGE>
re-auction of certain other PCS licenses. Pegasus itself does not meet the
qualification criteria for this re-auction. We have advanced approximately $3.4
million, with interest at 10% per year, to PCS Partners for the purpose of
funding its participation in this re-auction. We are separately evaluating an
investment in or contractual relationship with PCS Partners.
CIBC Oppenheimer and Affiliates
William P. Phoenix is a managing director of CIBC Oppenheimer Corp. CIBC
Oppenheimer and its affiliates have provided various services to Pegasus and its
subsidiaries, including Digital Television Services, since the beginning of
1997. Services to Digital Television Services described below include services
provided prior to that company becoming a subsidiary of Pegasus on April 27,
1998.
CIBC Oppenheimer Corp. has historically performed a number of services for
Pegasus, including serving as one of the initial purchasers in Pegasus' November
1998 Rule 144A senior notes offering. In this capacity, CIBC Oppenheimer
received customary underwriting discounts and commissions.
CIBC Oppenheimer has also performed the following services for Pegasus:
o provided a fair market value appraisal in connection with the
contribution to Pegasus of certain assets between related parties.
o provided fairness opinions to Pegasus and/or its affiliates in connection
with certain intercompany loans and other intercompany transactions.
o provided fairness opinions to Pegasus in connection with the acquisition
of ViewStar Entertainment Services, Inc. from Donald W. Weber, a director
of Pegasus.
o acted as a standby purchaser in connection with Digital Television
Service's offer to repurchase its senior subordinated notes as a result
of the change in control arising by Pegasus' acquisition of the company.
In 1998, for services rendered, Pegasus or its subsidiaries, including
Digital Television Services, paid or will pay to CIBC Oppenheimer an aggregate
of $3.3 million in fees. Pegasus believes that all fees paid to CIBC Oppenheimer
in connection with the transactions described above were customary. Pegasus
anticipates that it or its subsidiaries may engage the services of CIBC
Oppenheimer in the future, although no such engagement is currently
contemplated.
Other Transactions
In December 1998, Pegasus agreed to lend $199,999 to Nicholas A. Pagon,
Pegasus' Vice President of Broadcast Operations, bearing interest at the rate
of 6% per annum, with the principal amount due on the fifth anniversary of the
date of the promissory note. Mr. Pagon is required to use half of the proceeds
of the loan to purchase shares of Class A common stock, and the loan will be
collateralized by those shares. The balance of the loan proceeds may be used at
Mr. Pagon's discretion. Mr. Pagon is purchasing 4,500 shares of Class A common
stock in this offering.
53
<PAGE>
Description of Certain Indebtedness
Information with respect to our indebtedness is contained below and in the
Section Risk Factors -- Other Risks of Our Business -- Our Substantial
Indebtedness Could Adversely Affect Your Investment.
Our principal indebtedness is owned by corporations at different levels of
our corporate structure:
o Pegasus Media & Communications: Pegasus Media & Communications, Inc., a
wholly-owned subsidiary of Pegasus Communications Corporation, owes the
indebtedness described below under Pegasus Media & Communications Credit
Facility and Pegasus Media & Communications Notes. Most of Pegasus Media &
Communications' subsidiaries have guaranteed that indebtedness. Pegasus Media &
Communications conducts through subsidiaries approximately 58% of our direct
broadcast satellite business and all of our broadcast and cable business.
o Digital Television Services: Digital Television Services, Inc., a
subsidiary of Pegasus Communications Corporation, owes the indebtedness
described below under Digital Television Services Credit Facility and Digital
Television Services Notes. Digital Television Services' subsidiaries have
guaranteed that indebtedness. Digital Television Services conducts the direct
broadcast satellite business that we acquired in the Digital Television Services
merger in April 1998, which currently equals 42% of our direct broadcast
satellite business.
o Pegasus: Pegasus Communications Corporation, whose stock is being offered
in this offering, owes the indebtedness described below under 1998 Notes and
1997 Notes. None of Pegasus' subsidiaries have guaranteed that indebtedness.
Pegasus is also the issuer of the Series A preferred stock described in the next
section. If Pegasus elects to exchange the Series A preferred stock for the
exchange notes described below in this section, Pegasus would owe the
indebtedness under the exchange notes.
Pegasus Media & Communications Credit Facility
In December 1997, Pegasus Media & Communications entered into a $180.0
million six-year, secured, reducing revolving credit facility. Pegasus Media &
Communications can use borrowings under the credit facility for acquisitions and
general corporate purposes. The following summary of the material provisions of
the credit facility is not complete, and is subject to all the provisions of the
credit facility.
All subsidiaries of Pegasus Media & Communications, with certain
exceptions, are guarantors of the credit facility, which is collateralized, with
certain exceptions, by a security interest in all assets of, and all stock in
Pegasus Media & Communications' subsidiaries. The credit facility is also
secured by a pledge by Pegasus of its stock in Pegasus Media & Communications.
Borrowings under the credit facility bear interest at LIBOR or the prime
rate, as selected by Pegasus Media & Communications, plus spreads that vary with
its ratio of total debt to a measure of its cash flow. The credit facility
requires an annual commitment fee of 0.5% of the unused portion of the revolving
credit commitment. The credit facility requires Pegasus Media & Communications
to purchase an interest rate hedging contract covering an amount equal to at
least 50% of the total amount of borrowings from the revolving credit facility
for at least the first three years of the credit facility.
The Pegasus Media & Communications credit facility requires prepayments and
concurrent reductions of the commitment from asset sales or other transactions
outside the ordinary course of business. These requirements are subject,
however, to provisions permitting the proceeds of certain sales to be used to
make approved acquisitions within stated time periods without reducing the
commitments of the lenders. The credit facility:
o limits the amounts of indebtedness that Pegasus Media & Communications
and its subsidiaries may incur,
o requires Pegasus Media & Communications to maintain a maximum leverage
ratio, a minimum interest coverage, and a minimum fixed charge coverage,
and
o limits dividends and other restricted payments.
54
<PAGE>
Unless there is a default under the credit facility, Pegasus Media &
Communications can distribute to Pegasus enough money to pay its interest and
dividend obligations under its publicly held debt securities and, after July 1,
2002, its Series A preferred stock. The credit facility contains other customary
covenants, representations, warranties, indemnities, conditions precedent to
closing and borrowing, and events of default.
Beginning September 30, 1999, the revolving credit commitments under the
credit facility will reduce in quarterly amounts ranging from $2.7 million per
quarter in 1999 to approximately $16.7 million in 2003.
Digital Television Services Credit Facility
In July 1997, Digital Television Services, now a wholly-owned subsidiary of
Pegasus, entered into an amended and restated revolving credit facility to
provide for:
o revolving credit in the current amount of $70.0 million, with a $50.0
million sublimit for letters of credit, and
o a $20.0 million term loan facility.
Digital Television Services can use borrowings under the Digital Television
Services credit facility for acquisitions, capital expenditures, working capital
and general corporate purposes. The following summary of the material provisions
of the credit facility is not complete, and is subject to all of the provisions
of the credit facility.
All subsidiaries of Digital Television Services are guarantors of the
credit facility, which is collateralized by a first priority security interest
in all assets of, and a pledge of all the equity interests in, Digital
Television Services' direct and indirect subsidiaries.
Borrowings under the credit facility bear interest at LIBOR or the prime
rate, as selected by Digital Television Services, plus spreads that vary with
its ratio of total debt to a measure of its cash flow.
The term loan must be repaid in 20 consecutive quarterly installments of
$200,000 each, commencing September 30, 1998, with the remaining balance due on
July 30, 2003. Borrowings under the revolving credit facility will be available
to Digital Television Services until July 31, 2003. The commitments under the
Digital Television Services credit facility will reduce quarterly commencing on
September 30, 1999 at a rate of 3.5% per quarter through 1999, 5.75% per quarter
in 2000, 7.0% per quarter in 2001, 9.0% per quarter in 2002 and 3.0% per quarter
until June 30, 2003. All of the loans outstanding will be repayable on July 31,
2003. The making of each loan under the credit facility is subject to the
satisfaction of certain conditions, including not exceeding a borrowing base
based on the number of paying subscribers and households within the rural
DIRECTV service territories served by Digital Television Services.
The credit facility requires Digital Television Services to maintain:
o minimum subscriber penetration levels;
o annualized contribution per paying subscriber levels based on net income
plus certain sales, administrative and payroll expenses;
o a maximum ratio of total debt to equity beginning in the first quarter of
2000;
o a maximum ratio of total senior debt to annualized operating cash flow
and a ratio of total debt to annualized operating cash flow beginning in
the first quarter of 2000;
o a maximum ratio of total debt to adjusted annualized operating cash
beginning in the first quarter of 1999 and continuing until the last
quarter of 2000; and
o a maximum percentage of general and administrative expenses to revenues.
In addition, the credit facility requires Digital Television Services to
make mandatory prepayments from the net proceeds of certain sales or other
dispositions by it or any of its subsidiaries of material assets and with 50% of
any excess operating cash flow with respect to any fiscal year after the fiscal
year ending December 31, 1998.
55
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1998 Notes
Pegasus has outstanding $100.0 million in aggregate principal of 9 3/4%
senior notes due 2006. The 1998 notes are subject to an indenture between
Pegasus and First Union National Bank, as trustee. The following summary of the
material provisions of the 1998 notes indenture is not complete, and is subject
to all of the provisions of the indenture and those terms made a part of the
indenture by the Trust Indenture Act of 1939, as amended.
General. The 1998 notes will mature on December 1, 2006 and bear interest
at 9 3/4% per annum, payable semi-annually in arrears on June 1 and December 1
of each year, commencing on June 1, 1999. The 1998 notes are general unsecured
obligations of Pegasus and rank senior in right of payment to all existing and
future subordinated debt of Pegasus and rank equal in right of payment with all
existing and future senior debt. Pegasus' obligations under the 1998 notes may
be guaranteed on a senior unsecured basis, jointly and severally, by each
subsidiary of Pegasus that executes a supplemental indenture to the 1998
indenture.
Optional Redemption. The 1998 notes may be redeemed, in whole or in part,
at the option of Pegasus on or after December 1, 2002, at the redemption prices,
plus accrued interest, starting at 104.875% of principal during the 12-month
period beginning December 1, 2002 and declining annually to 100% of principal on
December 1, 2005 and thereafter.
Pegasus also has the right, until December 1, 2001, to use the net proceeds
of one or more offerings of its capital stock to redeem up to 35% of the
aggregate principal amount of the notes at a redemption price of 109.750% of the
principal, plus accrued and unpaid interest and liquidated damages, if any, to
the date of redemption. If Pegasus does this, it must leave at least $65.0
million of the 1998 notes outstanding, and the redemption must occur within 90
days of the date of closing of the offering of its capital stock.
Change of Control. If a change of control of Pegasus occurs, each holder of
1998 notes will have the right to require Pegasus to repurchase all or a portion
of the holder's 1998 notes at purchase price equal to 101% of the principal,
plus accrued and unpaid interest and liquidated damages, if any, thereon to the
date of repurchase. Generally, a change of control includes any of the
following:
o the sale of all or substantially all of Pegasus' assets to any person
other than Marshall W. Pagon or his related parties, as described in the
indenture,
o the adoption of a plan relating to the liquidation or dissolution of
Pegasus,
o the consummation of any transaction in which a person becomes the
beneficial owner of more of the voting power of all our voting stock than
is beneficially owned at such time by Mr. Pagon and his related parties,
o the consummation of any transaction in which Mr. Pagon and his related
parties cease to have at least 30% of the combined voting power of all of
our voting stock, or Mr. Pagon and his affiliates acquire in the
aggregate beneficial ownership of more than 66 2/3% of our Class A common
stock, or
o the first day on which a majority of the members of the board of
directors of Pegasus are not continuing directors -- essentially, the
current directors and replacements elected or recommended by the current
directors or by such replacements.
Certain Covenants. The 1998 notes indenture contains a number of covenants
restricting the operations of Pegasus, which, among other things, limit the
ability of Pegasus to incur additional indebtedness, pay certain dividends or
make distributions, make certain investments, sell assets, issue subsidiary
stock, restrict distributions from subsidiaries, create certain liens, enter
into certain consolidations or mergers and enter into certain transactions with
affiliates.
Exchange Offer; Registration Rights. Pursuant to a registration rights
agreement among Pegasus and the initial purchasers of the 1998 notes, Pegasus
has agreed to file a registration statement with respect to an offer to exchange
the 1998 notes for a new issue of debt securities of Pegasus registered under
the Securities Act,
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with terms substantially identical to those of the 1998 notes. Under certain
circumstances, Pegasus may be required to provide a shelf registration statement
to cover resales of the 1998 notes by holders. If Pegasus fails to satisfy these
registration obligations, it will be required to pay liquidated damages to the
holders of 1998 notes under certain circumstances.
Events of Default. Events of default under the 1998 notes indenture
include the following:
o a default for 30 days in the payment when due of interest on, or
liquidated damages with respect to, the 1998 notes;
o default in payment when due of the principal of or premium, if any, on
the 1998 notes;
o failure by Pegasus or any subsidiary to comply with certain provisions of
the 1998 notes indenture, subject, in some but not all cases, to notice
and cure periods;
o default under certain items of indebtedness for money borrowed by Pegasus
or certain of its subsidiaries;
o failure by Pegasus or certain of its subsidiaries to pay final judgments
aggregating in excess of $5.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; or
o certain events of bankruptcy or insolvency with respect to Pegasus or
certain of its subsidiaries.
If an event of default occurs, with certain exceptions, the trustee under
the 1998 notes indenture or the holders of at least 25% in principal amount of
the then outstanding 1998 notes may accelerate the maturity of all the 1998
notes.
1997 Notes
Pegasus has outstanding $115.0 million in aggregate principal amount of its
9 5/8% senior notes due 2005. The 1997 notes are subject to an indenture between
Pegasus and First Union National Bank, as trustee. The following summary of the
material provisions of the indenture is not complete, and is subject to all of
the provisions of the 1997 indenture and those terms made a part of the
indenture by the Trust Indenture Act.
General. The 1997 notes will mature on October 15, 2005 and bear interest
at 9 5/8% per annum, payable semi-annually in arrears on April 15 and October 15
of each year. The 1997 notes are general unsecured obligations of Pegasus and
rank senior in right of payment to all existing and future subordinated debt of
Pegasus and rank in equal in right of payment with all existing and future
senior debt. Pegasus' obligations under the 1997 notes may be guaranteed on a
senior unsecured basis, jointly and severally, by each subsidiary of Pegasus
that executes a supplemental indenture.
Optional Redemption. The 1997 notes may be redeemed, in whole or in part,
at the option of Pegasus on or after October 15, 2001, at the redemption prices,
plus accrued interest, starting at 104.813% of principal during the 12-month
period beginning October 15, 2001 and declining annually to 100% of principal on
October 15, 2003 and thereafter.
Pegasus also has the right, until October 21, 2000, to use the net proceeds
of one or more offerings of its capital stock to redeem up to 35% of the
aggregate principal amount of the notes at a redemption price of 109.625% of the
principal, plus accrued and unpaid interest to the date of redemption. If
Pegasus does this, it must leave at least $75.0 million of the notes outstanding
after the redemption, and the redemption must occur within 90 days of the date
of closing of the offering of capital stock of Pegasus.
Change of Control. If a change of control of Pegasus occurs, each holder of
the 1997 notes may require Pegasus to repurchase all or a portion of the
holder's 1997 notes at a purchase price equal to 101% of the principal, together
with accrued and unpaid interest and liquidated damages thereon, if any, to the
date of repurchase.
Generally, a change of control, includes any of the following events:
o the sale of all or substantially all of Pegasus' assets to any person
other than Marshall W. Pagon or his related parties, as described in the
indenture,
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o the adoption of a plan relating to the liquidation or dissolution of
Pegasus,
o the consummation of any transaction in which a person becomes the
beneficial owner of more of the voting power of all our voting stock than
is beneficially owned at such time by Mr. Pagon and his related parties,
o the consummation of any transaction in which Mr. Pagon and his related
parties cease to have at least 30% of the combined voting power of all of
our voting stock, or Mr. Pagon and his affiliates acquire in the
aggregate beneficial ownership of more than 66 2/3% of our Class A common
stock, or
o the first day on which a majority of the members of the board of
directors of Pegasus are not continuing directors -- essentially, the
current directors and replacements elected or recommended by the current
directors or by such replacements.
Certain Covenants. The 1997 notes indenture contains a number of covenants
restricting the operations of Pegasus, which, among other things, limit the
ability of Pegasus to incur additional indebtedness, pay certain dividends or
make distributions, make certain investments, sell assets, issue subsidiary
stock, restrict distributions from subsidiaries, create certain liens, enter
into certain consolidations or mergers and enter into certain transactions with
affiliates.
Events of Default. Events of default under the indenture include the
following:
o a default for 30 days in the payment when due of interest on the 1997
notes;
o default in payment when due of the principal of or premium, if any, on
the 1997 notes;
o failure by Pegasus to comply with certain provisions of the indenture,
subject, in some but not all cases, to notice and cure periods;
o default under certain items of indebtedness for money borrowed by Pegasus
or certain of its subsidiaries;
o failure by Pegasus or certain of its subsidiaries to pay final judgments
aggregating in excess of $5.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; or
o certain events of bankruptcy or insolvency with respect to Pegasus or
certain of its subsidiaries.
If an event of default occurs, with certain exceptions, the trustee under
the 1997 notes indenture or the holders of at least 25% in principal amount of
the then outstanding 1997 notes may accelerate the maturity of all the 1997
notes.
Pegasus Media & Communications Notes
Pegasus Media & Communications has outstanding $85.0 million in aggregate
principal amount of its 12 1/2% senior subordinated notes due 2005. The Pegasus
Media & Communications notes are subject to an indenture among Pegasus Media &
Communications, certain of its direct and indirect subsidiaries, as guarantors,
and First Union National Bank, as trustee. The following summary of the material
provisions of the indenture is not complete, and is subject to all of the
provisions of the indenture and those terms made a part of the indenture by the
Trust Indenture Act.
General. The Pegasus Media & Communications notes will mature on July 1,
2005 and bear interest at 12 1/2% per annum, payable semi-annually on January 1
and July 1 of each year. The notes are general unsecured obligations of Pegasus
Media & Communications and are subordinated in right of payment to all existing
and future senior debt of that company. The notes are unconditionally
guaranteed, on an unsecured senior subordinated basis, jointly and severally, by
the guarantor subsidiaries.
Optional Redemption. The Pegasus Media & Communications notes are subject
to redemption at any time, at the option of Pegasus Media & Communications, in
whole or in part, on or after July 1, 2000 at redemption prices, plus accrued
interest, starting at 106.25% of principal during the 12-month period beginning
July 1, 2000 and declining annually to 100% of principal on July 1, 2003 and
thereafter.
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Change of Control. If a change of control of Pegasus occurs, each holder of
the Pegasus Media & Communications notes may require Pegasus Media &
Communications to repurchase all or a portion of the holder's Pegasus Media &
Communications notes at a purchase price equal to 101% of the principal,
together with accrued and unpaid interest, if any, to the date of repurchase.
Generally, a change of control, includes any of the following events:
o the sale of all or substantially all of Pegasus Media & Communications'
assets to any person other than Marshall W. Pagon or his related parties,
as described in the indenture;
o the adoption of a plan relating to the liquidation or dissolution of
Pegasus Media & Communications;
o the consummation of any transaction in which a person becomes the
beneficial owner of more of the voting stock of Pegasus than is
beneficially owned at that time by Mr. Pagon and his related parties; or
o the first day on which a majority of the members of the board of
directors of Pegasus Media & Communications or Pegasus are not continuing
directors -- essentially, the current directors and replacements elected
or recommended by the current directors or by such replacements.
Subordination. The Pegasus Media & Communications notes are general
unsecured obligations and are subordinate to all existing and future senior debt
of it. The notes rank senior in right of payment to all junior subordinated
indebtedness of Pegasus Media & Communications. The subsidiary guarantees are
general unsecured obligations of the guarantors of the notes and are
subordinated to the senior debt and to the guarantees of senior debt of the
guarantors. The subsidiary guarantees rank senior in right of payment to all
junior subordinated indebtedness of the guarantors.
Certain Covenants. The Pegasus Media & Communications notes indenture
contains a number of covenants restricting the operations of it, which, among
other things,
o limit the ability of it to incur additional indebtedness, pay dividends
or make distributions,
o make certain investments, sell assets, issue subsidiary stock, restrict
distributions from subsidiaries, and
o create certain liens, enter into certain consolidations or mergers and
enter into certain transactions with affiliates.
Events of Default. Events of default under the Pegasus Media &
Communications notes indenture include the following:
o a default for 30 days in the payment when due of interest on the notes;
o default in payment when due of the principal of or premium, if any, on
the notes;
o failure by Pegasus Media & Communications to comply with certain
provisions of the indenture, subject, in some but not all cases, to
notice and cure periods;
o default under certain items of indebtedness for money borrowed by Pegasus
Media & Communications or certain of its subsidiaries;
o failure by Pegasus Media & Communications or certain of its subsidiaries
to pay final judgments aggregating in excess of $2.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days;
o except as permitted by the indenture, any subsidiary guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any subsidiary
guarantor, or any person acting on behalf of any guarantor, shall deny or
disaffirm its obligations under its subsidiary guarantee; or
o certain events of bankruptcy or insolvency with respect to Pegasus Media
& Communications or certain of its subsidiaries.
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If an event of default occurs, with certain exceptions, the trustee under
the indenture or the holders of at least 25% in principal amount of the then
outstanding Pegasus Media & Communications notes may accelerate the maturity of
all the notes as provided in the indenture.
Digital Television Services Notes
Digital Television Services has outstanding $155.0 million in aggregate
principal amount of its 12 1/2% Series B senior subordinated notes due 2007. The
Digital Television Services notes are subject to an indenture among Digital
Television Services, certain of its direct and indirect subsidiaries, as
guarantors, and The Bank of New York, as trustee. The following summary of the
material provisions of the Digital Television Services indenture is not
complete, and is subject to all of the provisions of the Digital Television
Services indenture and those terms made a part of the indenture by the Trust
Indenture Act.
General. The Digital Television Services notes will mature on August 1,
2007 and bear interest at 12 1/2% per annum, payable semi-annually on February 1
and August 1 of each year. The Digital Television Services notes are general
obligations of Digital Television Services. Except for a first priority security
interest granted in an interest escrow account to provide for payment of the
installments of interest on the Digital Television Services notes due through
August 1, 1999, the Digital Television Services notes are unsecured. The Digital
Television Services notes are unconditionally guaranteed, on an unsecured senior
subordinated basis, jointly and severally, by the Digital Television Services
guarantor subsidiaries.
Optional Redemption. The Digital Television Services notes are subject to
redemption at any time, at the option of Digital Television Services, in whole
or in part, on or after August 1, 2002 at redemption prices, plus accrued
interest, starting at 106.25% of principal during the 12-month period beginning
August 1, 2002 and declining annually to 100% of principal on August 1, 2005 and
thereafter.
In addition, prior to August 1, 2000, Digital Television Services may
redeem up to 35% of the aggregate principal amount of the notes with the net
proceeds of certain public or private offerings of its common equity at a price
equal to 112.5% of the principal amount plus accrued interest. If Digital
Television Services does this, it must leave at least 65% of the Digital
Television Services notes outstanding.
Change of Control. If a change of control of Digital Television Services
occurs, each holder of the Digital Television Services notes may require Digital
Television Services to repurchase all or a portion of the holder's Digital
Television Services notes at a purchase price equal to 101% of principal,
together with accrued and unpaid interest, if any, to the date of repurchase.
Generally, a change of control, means any of the following, with certain
exceptions:
o any person becomes the beneficial owner of more than 45% of the total
voting power of Digital Television Services outstanding equity interests;
o a change in the composition of Digital Television Services' board of
directors over any two-year period such that the individuals who
constitute the board of directors at the beginning of the period cease to
constitute a majority of the board of directors; or
o the liquidation or dissolution of Digital Television Services.
Subordination. The Digital Television Services notes are general unsecured
obligations and are subordinate to all existing and future senior debt of it.
The Digital Television Services notes rank senior in right of payment to all
junior subordinated debt of Digital Television Services. The guarantees of the
guarantors of the Digital Television Services notes are general unsecured
obligations of the guarantors and are subordinated to the senior debt and to
guarantees of senior debt of the guarantors. The guarantees of the notes by the
guarantors rank senior in right of payment to all junior subordinated debt of
the guarantors.
Certain Covenants. The Digital Television Services indenture contains a
number of covenants restricting the operations of Digital Television Services,
which, among other things, limit the ability of Digital Television Services to:
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o incur additional indebtedness,
o pay dividends or make distributions,
o make certain investments,
o sell assets,
o issue subsidiary stock,
o restrict distributions from subsidiaries,
o create certain liens,
o enter into certain consolidations or mergers, and
o enter into certain transactions with affiliates.
Events of Default. Events of default under the Digital Television Services
notes indenture include the following:
o a default for 30 days in the payment when due of interest on the Digital
Television Services notes;
o default in payment when due of the principal of or premium, if any, on
the notes;
o failure by Digital Television Services to comply with certain provisions
of the notes indenture (subject, in some but not all cases, to notice and
cure periods);
o default under certain items of indebtedness for money borrowed by Digital
Television Services or any of its significant restricted subsidiaries in
the amount of $5.0 million or more;
o failure by Digital Television Services or any restricted subsidiary that
would be a significant subsidiary to pay final judgments aggregating in
excess of $2.0 million, which judgments are not paid, discharged or
stayed for a period of 60 days;
o except as permitted by the Digital Television Services notes indenture,
any subsidiary guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or cease to be in full force and effect;
o any subsidiary guarantor, or person acting on its behalf, denies or
disaffirms its obligations as a guarantor; or
o certain events of bankruptcy or insolvency with respect to Digital
Television Services or certain of its subsidiaries.
If an event of default occurs, with certain exceptions, the trustee under
the Digital Television Services notes indenture or the holders of at least 25%
in principal amount of the then outstanding notes may accelerate the maturity of
all the notes.
Exchange Notes
Pegasus may, at its option, under certain circumstances exchange, in whole,
but not in part, the then outstanding shares of Series A preferred stock for
exchange notes. The exchange notes will, if and when issued, be issued pursuant
to an indenture between Pegasus and First Union National Bank, as trustee. The
terms of the exchange notes include those stated in the exchange note indenture
and those made part of the exchange note indenture by reference to the Trust
Indenture Act. The following summary of certain provisions of the exchange note
indenture is not complete, and is subject to all of the provisions of the
exchange note indenture.
Principal, Maturity and Interest. The exchange notes will mature on January
1, 2007. Interest on the exchange notes will accrue at the rate of 12 3/4% per
annum and will be payable semi-annually in arrears on January 1 and July 1 of
each year. Interest will be payable in cash, except that on each interest
payment date occurring prior to January 1, 2002, interest may be paid, at
Pegasus' option, by the issuance of additional exchange notes having an
aggregate principal amount equal to the amount of such interest.
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Subordination. The payment of principal or, premium, if any, and interest
on the exchange notes will be subordinated in right of payment, as described in
the exchange note indenture, to the prior payment in full of all senior debt,
whether outstanding on the date of the exchange note indenture or thereafter
incurred.
Optional Redemption. The exchange notes will not be redeemable at Pegasus'
option prior to January 1, 2002. The exchange notes may be redeemed, in whole or
in part, at the option of Pegasus on or after January 1, 2002, at the redemption
prices, in each case, together with accrued and unpaid interest, if any,
starting at 106.375% of principal during the 12-month period beginning January
1, 2002 and declining annually to 100% of principal on January 1, 2005 and
thereafter.
In addition, prior to January 1, 2000, Pegasus may, on any one or more
occasions, use the net proceeds of one or more offerings of its Class A common
stock to redeem up to 25% of the aggregate principal amount of the notes at the
redemption price of 112.750% of principal plus accrued and unpaid interest to
the date of redemption. If Pegasus does this, it must leave at least $75.0
million of the notes outstanding, and the redemption must occur within 90 days
of the date of closing of the offering.
Change of Control. If a change of control of Pegasus occurs, each holder of
exchange notes will have the right to require Pegasus to repurchase all or any
part of the holder's exchange notes at an offer price in cash equal to 101% of
the aggregate principal plus accrued and unpaid interest, if any, thereon to the
date of purchase. See the description of our Series A preferred stock under
Description of Capital Stock for what constitutes a change of control under the
exchange notes.
Certain Covenants. The exchange note indenture contains a number of
covenants restricting the operations of Pegasus and its subsidiaries, which,
among other things, limit the ability of Pegasus and/or its subsidiaries to:
o incur additional indebtedness,
o pay dividends or make distributions,
o make certain investments,
o sell assets,
o issue subsidiary stock,
o create certain liens,
o enter into certain consolidations or mergers, and
o enter into certain transactions with affiliates.
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Description of Capital Stock
Our authorized capital stock consists of:
o 30,000,000 shares of Class A common stock, par value $.01 per share
o 15,000,000 shares of Class B common stock, par value $.01 per share
o 5,000,000 shares of preferred stock, par value $.01 per share
Of the 5,000,000 shares of preferred stock that we are authorized to issue,
approximately 126,978 shares have been designated as Series A preferred stock.
As of March 16, 1999, we had outstanding 11,317,751 shares of Class A common
stock and 4,581,900 shares of Class B common stock.
The following summary description relating to our capital stock sets forth
the material terms of our capital stock. This summary is not intended to be
complete. It is subject to, and qualified in its entirety by reference to, our
amended and restated certificate of incorporation and the certificate of
designation.
Description of Common Stock
Voting, Dividend and Other Rights. The voting powers, preferences and
relative rights of the Class A common stock and the Class B common stock are
identical in all respects, except for the following differences:
o holders of Class A common stock are entitled to one vote per share and
holders of Class B common stock are entitled to ten votes per share;
o stock dividends on Class A common stock may be paid only in shares of
Class A common stock and stock dividends on Class B common stock may be
paid only in shares of Class B common stock; and
o shares of Class B common stock can be converted into Class A common stock
and are subject to certain restrictions on ownership and transfer.
Holders of a majority of the outstanding shares of each class of common
stock, voting as separate classes, must approve any amendment to the amended and
restated certificate of incorporation that has any of the following effects:
o any decrease in the voting rights per share of Class A common stock or
any increase in the voting rights of Class B common stock;
o any increase in the number of shares of Class A common stock into which
shares of Class B common stock are convertible;
o any relaxation on the restrictions on transfer of the Class B common
stock; or
o any change in the powers, preferences or special rights of either class
of common stock adversely affecting the holders of the Class A common
stock.
Holders of a majority of the outstanding shares of each class of common
stock, voting as separate classes, must approve the authorization or issuance of
additional shares of Class B common stock, except when Pegasus takes parallel
action with respect to Class A common stock in connection with stock dividends,
stock splits, recapitalizations, and similar changes. Except as described above
or as required by law, holders of Class A common stock and Class B common stock
vote together on all matters presented to the stockholders for their vote or
approval, including the election of directors.
The outstanding shares of Class A common stock equal approximately 71.2% of
the total common stock outstanding, and the holders of Class B common stock have
control of approximately 80.2% of the combined voting power of the common stock.
The holders of Class B common stock have the power to elect our entire board of
directors. In general, Marshall W. Pagon, by virtue of his beneficial ownership
of all of the Class B common stock, may determine the outcome of any matter
submitted to the stockholders for approval including the outcome of all
corporate transactions. Mr. Pagon and the Class B common stock are currently
subject to the terms of a voting agreement. See Certain Relationships and
Relation Transactions -- Voting Agreement.
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Each share of common stock is entitled to receive dividends as declared by
the board of directors out of funds legally available. The Class A common stock
and Class B common stock share equally on a share-for-share basis in cash
dividends.
In the event of a merger or consolidation to which we are a party, each
share of Class A common stock and Class B common stock will be entitled to
receive the same consideration, except that, if we are not the surviving
corporation, holders of Class B common stock may receive stock with greater
voting power in lieu of stock with lesser voting power received by holders of
Class A common stock.
Our stockholders have no preemptive or other rights to subscribe for
additional shares. Subject to any rights of holders of any preferred stock, all
holders of common stock, regardless of class, are entitled to share equally on a
share-for-share basis in any assets available for distribution to stockholders
if we liquidate, dissolve or wind up. No shares of common stock are subject to
redemption or a sinking fund. All issued common stock is validly issued, fully
paid and nonassessable. In the event of any change in the number of outstanding
shares of either class of common stock from a stock split, combination,
consolidation or reclassification, we are required to take parallel action with
respect to the other class so that the number of shares of each class bears the
same relationship to each other as they did before the event.
Conversion Rights and Restrictions on Transfer of Class B Common Stock. The
Class A common stock has no conversion rights. Each share of Class B common
stock is convertible at the option of the holder at any time and from time to
time into one share of Class A common stock. Any holder of shares of Class B
common stock desiring to transfer shares of Class B common stock must present
those shares to Pegasus for conversion into an equal number of shares of Class A
common stock. After conversion, the converted shares may be freely transferred,
subject to applicable securities laws. A holder of Class B common stock may
transfer shares of Class B common stock without conversion if the transfer is to
one of the following:
o Marshall W. Pagon or any of his immediate family members. For purposes of
this paragraph, immediate family member includes Mr. Pagon's spouse and
parents, the lineal descendents of either of his parents, and the spouses
of their lineal descendents. Adoptive and step relationships are included
for purposes of defining parentage and descent;
o the estate of Marshall W. Pagon or any of his immediate family members
until the property of such estate is distributed in accordance with such
deceased's will or applicable law; or
o any voting or other trust, corporation, partnership or other entity, more
than 50% of the voting equity interests of which are owned directly or
indirectly by, and which is controlled by, Marshall W. Pagon or any of
his immediate family members.
If ownership or voting rights of shares of Class B common stock are
transferred other than in accordance with the preceding paragraph, or a
transferee loses the status that allowed him or her to hold shares of Class B
common stock without conversion, such shares of Class B common stock will
automatically convert into an equal number of shares of Class A common stock.
Because of these restrictions, no trading market is expected to develop in the
Class B common stock and the Class B common stock will not be listed or traded
on any exchange or in any market.
Effects of Disproportionate Voting Rights. The disproportionate voting
rights of the classes of common stock could have an adverse effect on the market
price of the Class A common stock. For example, we could not be acquired in a
hostile takeover without Marshall W. Pagon's approval as long as he has voting
control. Merger proposals, tender offers, or proxy contests may be discouraged
even if such actions were favored by holders of Class A common stock.
Accordingly, holders of Class A common stock may be unable to sell their shares
at a premium over prevailing market prices, since takeover bids frequently
involve purchases of stock directly from shareholders at a premium price.
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Description of Series A Preferred Stock
General. Pursuant to the Certificate of Designation, we have issued
approximately 126,978 shares of Series A preferred stock with a liquidation
preference of $1,000 per share. This includes shares issued to pay in-kind
dividends on the Series A preferred stock. On January 1, 2007, we must redeem,
subject to the legal availability of funds, all outstanding shares of Series A
preferred stock at a price in cash equal to the liquidation preference, plus
accrued and unpaid dividends, if any, to the date of redemption.
Dividends. The holders of shares of the Series A preferred stock are
entitled to receive, as dividends are declared by the board of directors out of
funds legally available, cumulative preferential dividends from the issue date
of the Series A preferred stock accruing at the rate per share of 12 3/4% per
annum, payable semi-annually in arrears on January 1 and July 1 of each year.
Accumulated unpaid dividends bear interest at a per annum rate 200 basis points
in excess of the annual dividend rate on the Series A preferred stock. Dividends
are payable in cash, except that on or prior to January 1, 2002, dividends may
be paid, at our option, by the issuance of additional shares of Series A
preferred stock having an aggregate liquidation preference equal to the amount
of such dividends.
Optional Redemption. We do not have the option to redeem Series A preferred
stock until after January 1, 2002. We may redeem the Series A preferred stock
after that date, starting at 106.375% of the liquidation preference during the
12-month period beginning January 1, 2002 and declining annually to 100% of the
liquidation preference on January 1, 2005 and thereafter.
In addition, we may, on any one or more occasions, redeem up to 25% of the
shares of Series A preferred stock then outstanding, whether initially issued or
issued in lieu of cash dividends, at a redemption price of 112.750% of the
liquidation preference plus, without duplication, accumulated and unpaid
dividends to the date of redemption. Such a redemption is subject to the
following conditions:
o the redemption must occur prior to January 1, 2000;
o we must pay for the redemption out of the net proceeds of an offering of
Class A common stock, and must redeem within 90 days of the date of
closing of such offering; and
o after the redemption, at least $75.0 million in aggregate liquidation
preference of Series A preferred stock must remain outstanding.
Change of Control. If a change of control of Pegasus occurs, each holder of
shares of Series A preferred stock will have the right to require the us to
repurchase all or any part of such holder's Series A preferred stock at an offer
price in cash equal to 101% of the aggregate liquidation preference of the
preferred stock the holder wishes to sell, plus accrued and unpaid dividends, if
any, to the date of purchase. Generally, a change of control means the
occurrence of any of the following:
o the sale of all or substantially all of our assets to any person other
than Marshall W. Pagon or his related parties as described in the
certificate of designation,
o the adoption of a plan relating to the liquidation or dissolution of
Pegasus,
o the consummation of any transaction in which a person becomes a
beneficial owner of more of our Class A common stock than is beneficially
owned at such time by Marshall W. Pagon and his related parties,
o the consummation of any transaction in which Mr. Pagon and his related
parties cease to have at least 30% of the combined voting power of all
our voting stock or Mr. Pagon and his affiliates acquire beneficial
ownership of more than 66 2/3% of our Class A common stock, or
o the first day on which a majority of the members of the board of
directors are not continuing directors -- essentially, directors elected
or recommended by the current board of directors or their designated
replacements.
Certain Covenants. The certificate of designation contains a number of
covenants restricting our operations and those of our subsidiaries. For
example, the covenants limit Pegasus' ability to issue capital
65
<PAGE>
stock ranking on parity with or senior to the Series A preferred stock, and the
ability of Pegasus and its subsidiaries to incur additional indebtedness, pay
dividends or make distributions, make certain investments, issue subsidiary
stock, enter into certain consolidations or mergers and enter into certain
transactions with affiliates.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is First Union
National Bank.
Limitation on Directors' Liability
The Delaware General Corporation Law authorizes corporations to limit or
eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of the fiduciary duty of care. The
duty of care requires that, when acting on behalf of the corporation, directors
exercise an informed business judgment based on all material information
reasonably available to them. In the absence of the limitations authorized by
the Delaware statute, directors could be accountable to corporations and their
stockholders for monetary damages for conduct that does not satisfy their duty
of care. Although the statute does not change directors' duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. Our amended and restated certificate of incorporation
limits the liability of our directors to us or our stockholders to the fullest
extent permitted by the Delaware statute. Specifically, our directors will not
be personally liable for monetary damages for breach of fiduciary duty as
directors, except in the following circumstances:
o breach of the duty of loyalty to Pegasus or its stockholders.
o acts or omissions not in good faith.
o intentional misconduct or a knowing violation of law.
o unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law.
o any transaction from which a director derived an improper personal
benefit.
The inclusion of this provision in our amended and restated certificate of
incorporation may reduce the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing a
lawsuit against a director for breach of the duty of care, even though such an
action, if successful, might otherwise have benefited us and our stockholders.
66
<PAGE>
Future Sales of Common Stock
After this offering, Pegasus will have 14,317,751 shares of Class A common
stock issued and outstanding, 14,933,681 shares if the underwriters'
over-allotment option is exercised in full. Pegasus will also have outstanding
4,581,900 shares of Class B common stock issued and outstanding. All of the
Class B common stock is convertible into shares of Class A common stock on a
share for share basis.
After this offering, assuming the over-allotment option is not exercised,
we will have 14,317,751 shares of Class A common stock outstanding. Our Class B
common stock, of which there are currently 4,581,900 shares outstanding, is
convertible into Class A common stock on a one-for-one basis. Of these shares:
o 7,175,226 shares will be held by the public.
o 4,658,400 shares, after conversion of all Class B common stock, including
vested stock options, will be held or controlled by Marshall W. Pagon.
o 336,464 other shares held by two current and one former officer may be
sold at any time under an effective registration statement under the
Securities Act.
o 271,180 other shares, including vested stock options, held by directors
and executive officers can currently be sold subject to the volume and
other limitations under SEC Rule 144.
o 4,220,497 other shares have demand registration rights, which means the
holders can require us to register them for sale into the public market.
o 193,600 other shares can be acquired on exercise of outstanding warrants.
Those shares have been registered under the Securities Act.
o 1,337,000 other shares can be sold into the market without registration
under SEC Rule 144.
Approximately 9,920,492 shares of Class A common stock and all of the
4,581,900 shares of Class B common stock are restricted securities under the
Securities Act. Restricted securities and any shares purchased by affiliates of
Pegasus in this offering may be sold only if they are registered under the
Securities Act or under an applicable exemption from the registration
requirements of the Securities Act, including SEC Rule 144.
In general, under Rule 144 as currently in effect, if a period of at least
one year has elapsed between the later of the date on which restricted shares
were acquired from Pegasus and the date on which they were acquired from an
affiliate of Pegasus then the holder of the restricted shares is entitled to
sell a number of shares within any three-month period that does not exceed the
greater of:
(1) one percent of the then outstanding shares of the Class A common
stock, or
(2) the average weekly reported volume of trading of the Class A common
stock during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to certain requirements pertaining to the
manner of the sale, notices of the sale and the availability of current public
information concerning Pegasus. Affiliates of Pegasus may sell shares not
constituting restricted shares in accordance with these volume limitations and
other requirements but without regard to the one-year period. Under Rule 144(k),
if a period of at least two years has elapsed between the later of the date on
which the restricted shares were acquired from Pegasus and the date on which
they were acquired from an affiliate, a holder of the restricted shares who is
not an affiliate at the time of the sale and has not been an affiliate for at
least three months prior to the sale would be entitled to sell the shares
immediately without regard to the volume limitations and other conditions
described above. This description of Rule 144 is not intended to be complete.
Sales of significant amounts of Class A common stock, or the perception
that these sales could occur, could have an adverse impact on the market price
of Pegasus' Class A common stock. Pegasus, all of its directors and officers and
certain stockholders, with certain exceptions, have agreed that during the
period beginning on the date of this prospectus and continuing to and including
the date 120 days after the date of this prospectus, they will not offer, sell,
contract to sell or otherwise dispose of any shares of Class A common
67
<PAGE>
stock beneficially owned by them without the consent of Donaldson, Lufkin &
Jenrette Securities Corporation, on behalf of the underwriters of this offering.
Persons holding an additional 1,697,528 shares have agreed not to sell their
shares for 90 days after the date of this prospectus. The agreements entered
into by these persons also cover any securities of Pegasus that are
substantially similar to the shares of the Class A common stock or that are
convertible or exchangeable into Class A common stock or substantially similar
securities, with certain exceptions pertaining to employee benefit plans. Shares
offered in connection with this offering are not covered by these agreements.
Registration Rights
Digital Television Services, Inc. Registration Rights
The former stockholders of Digital Television Services, Inc. received
registration rights for 3,921,462 of the shares of our Class A common stock
issued to them when we acquired that company in April 1998. A brief description
of these registration rights follows.
o Underwritten Demand Registration: The Digital Television Service
stockholders can require us to register their shares for an underwritten
offering until April 27, 2003. They can do this no more than twice. Any
demand must include at least 346,346 shares. We can delay a demand
registration in case of material developments.
o S-3 Shelf Registration: The Digital Television Service stockholders can
require us to register their shares on a shelf registration any number of
times until April 27, 2003. A shelf registration could cover shares to be
sold into the market or in negotiated transactions. Any demand must
include at least 100,000 shares. We do not have to keep any shelf
registration effective for more than 90 days, and we can require that 90
days elapse between shelf registrations. We can delay a shelf
registration in case of material developments.
o Piggyback Registration: The Digital Television Services stockholders have
the right to include shares in any registration we make for ourselves or
for other stockholders. There are exceptions to this, such as
registrations for acquisitions and employee benefit plans. We can reduce
the shares they want to include if we or our underwriters decide the
offering would be too large.
We would have to pay expenses of any registration, except that the selling
Digital Television Services stockholders would have to pay underwriting
discounts, brokerage commissions and the like.
ViewStar Entertainment Services, Inc. Registration Rights
The former stockholders of ViewStar Entertainment Services, Inc. received
registration rights for the 397,035 shares of our Class A common stock issued to
them when we acquired it in October 1997. One of the former ViewStar
stockholders is Donald W. Weber, a director of Pegasus. See Certain
Relationships and Related Transactions. Because of a later sale by Mr. Weber,
these registration rights will cover 299,035 shares after this offering. A brief
description of these registration rights follows.
o Underwritten Demand Registration: The ViewStar Entertainment Services
stockholders can require us to register their shares for an underwritten
offering until April 27, 2003. They can do this no more than once. We can
delay a demand registration in case of material developments.
o S-3 Shelf Registration: Mr. Weber can require us to register his shares
on a shelf registration if he ceases to be an affiliate of Pegasus. He
may do this no more than once. A shelf registration could cover shares to
be sold into the market or in negotiated transactions. We do not have to
keep the shelf registration effective for more than 180 days. We can
delay a shelf registration in case of material developments.
o Piggyback Registration: The ViewStar Entertainment Services stockholders
have the right to include shares in any registration we make for
ourselves or for other stockholders. There are exceptions to this, such
as registrations for acquisitions and employee benefit plans. We can
reduce the shares they want to include if we or our underwriters decide
the offering would be too large.
68
<PAGE>
We would have to pay expenses of any registration, except that the selling
ViewStar Entertainment Services stockholders would have to pay underwriting
discounts, brokerage commissions and the like.
The ViewStar Entertainment Services stockholders' registration rights
terminate when their shares can be sold under Rule 144 and we have authorized
the removal of restrictive legends from their shares.
Management Share Registration
We have registered shares held by Robert N. Verdecchio and Howard E.
Verlin, two of our officers, and one of our former officers for sales by them
into the market. A total of 336,464 shares can now be sold under this
registration.
69
<PAGE>
Underwriters
Subject to the terms and conditions contained in an underwriting agreement,
dated March 16, 1999 the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, C.E. Unterberg, Towbin and
ING Baring Furman Selz LLC have severally agreed to purchase from Pegasus and
the selling stockholders the number of shares set forth opposite their names
below:
Number of
Shares
-----------
Underwriters:
Donaldson, Lufkin & Jenrette Securities Corporation ......... 1,642,480
Bear, Stearns & Co. Inc. .................................... 821,240
Merrill Lynch, Pierce, Fenner & Smith Incorporated .......... 1,231,860
C.E. Unterberg, Towbin ...................................... 205,310
ING Baring Furman Selz LLC .................................. 205,310
---------
Total ...................................................... 4,106,200
=========
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of certain legal matters by their counsel and
to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares, other than those covered by the
over-allotment option described below, if they purchase any of the shares.
Pegasus' Class A common stock is listed on the Nasdaq National Market.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to certain dealers at the public offering
price less a concession not in excess of $0.66 per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $0.10 per
share on sales to certain other dealers. After the initial offering of the
shares to the public, the representatives of the Underwriters may change the
public offering price and such concessions. The underwriters do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by Pegasus and the selling stockholders in connection with this
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional shares of Class A common stock.
No Exercise Full Exercise
----------- -------------
Pegasus:
Per share .......................... $ 1.10 $ 1.10
Total .............................. $3,300,000 $3,977,523
Selling Stockholders:
Per share .......................... $ 1.10 $ 1.10
Total .............................. $1,216,820 $1,216,820
Pegasus has granted to the underwriters an option, exercisable for 30 days
from the date of the Underwriting Agreement, to purchase up to 615,930
additional shares at the public offering price less the underwriting fees. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment. Pegasus
estimates its expenses relating to the offering to be $660,000.
The underwriters have reserved for sale, at the public offering price, up
to 4,500 of the shares of Class A common stock offered hereby by Pegasus to
Pegasus' employees and certain other individuals who have expressed an interest
in purchasing shares in this offering. The number of shares available for sale
to the general public will be reduced if these persons purchase these reserved
shares. The underwriters will offer any unpurchased reserved shares to the
general public on the same basis as the other shares offered in this prospectus.
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<PAGE>
Pegasus, certain of its subsidiaries, the selling stockholders and the
underwriters have agreed to indemnify each other against certain liabilities,
including liabilities under the Securities Act.
Each of Pegasus, its executive officers and directors and certain
stockholders of Pegasus, including the selling stockholders, has agreed, with
certain exceptions, that, for a period of either 90 days or 120 days from the
date of this prospectus, they will not, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation:
o offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
o enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock regardless of whether any of the transactions described in this
paragraph is to be settled by the delivery of common stock, or such other
securities, in cash or otherwise.
In addition, during such period, Pegasus has agreed not to file any registration
statement, with certain exceptions, with respect to any shares of common stock
or any securities convertible into or exercisable for common stock without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
Each of Pegasus' executive officers and directors and certain of its
stockholders, including the selling stockholders, has also agreed not to make
any demand for, or exercise any right with respect to, such a registration
statement.
Other than in the United States, no action has been taken by Pegasus, the
selling stockholders or the underwriters that would permit a public offering of
the shares of Class A common stock included in this offering in any jurisdiction
where action for that purpose is required. The shares included in this offering
may not be offered or sold, directly or indirectly, nor may this prospectus or
any other offering material or advertisement in connection with the offer and
sale of any such shares be distributed or published in any jurisdiction, except
under circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons who receive this prospectus should
inform themselves about and observe any restrictions relating to the offering of
the Class A common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of Class A common stock included in this offering in any jurisdiction
where that would not be permitted or legal.
Merrill Lynch & Co. provided Pegasus with a fairness opinion in connection
with the acquisition by Pegasus of Digital Television Services, Inc. in April
1998 for which it was paid $1.35 million in fees.
Stabilization
In connection with this offering, certain underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the Class
A common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of Class A common stock in the open market to cover
syndicate short positions or to stabilize the price of the Class A common stock.
In addition, the underwriting syndicate may reclaim selling concessions from
syndicate members if Donaldson, Lufkin & Jenrette Securities Corporation
repurchases previously distributed Class A common stock in syndicate covering
transactions, in stabilizing transactions or otherwise or if Donaldson, Lufkin &
Jenrette Securities Corporation receives a report that indicates that the
clients of such syndicate members have "flipped" the Class A common stock. These
activities may stabilize or maintain the market price of the Class A common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
71
<PAGE>
Legal Matters
Drinker Biddle & Reath LLP, counsel for Pegasus, will pass upon the
validity of the Class A common stock offered in this prospectus. Michael B.
Jordan, a partner of Drinker Biddle & Reath LLP, is an Assistant Secretary of
Pegasus. Latham & Watkins, New York, New York will pass upon certain legal
matters relating to this offering for the underwriters. Latham & Watkins
occasionally renders legal services to Pegasus.
Experts
Pegasus' consolidated balance sheets as of December 31, 1997 and 1998 and
the related consolidated statements of operations, statements of changes in
total equity and statements of cash flows for each of the three years in the
period ended December 31, 1998 included in this prospectus, have been included
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants given upon the authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of Digital Television Services, Inc.
as of December 31, 1996 and 1997 and for the period from inception (January 30,
1996) through December 31, 1996 and for the year ended December 31, 1997
incorporated by reference in this registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are incorporated herein in reliance upon the
authority of said firm as experts in giving said reports.
72
<PAGE>
Pegasus Communications Corporation
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Pegasus Communications Corporation
Report of PricewaterhouseCoopers LLP ..................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 ............................. F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997
and 1998................................................................................ F-4
Consolidated Statements of Changes in Total Equity for the years ended December 31, 1996,
1997 and 1998 .......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997
and 1998............................................................................... F-6
Notes to Consolidated Financial Statements ............................................... F-7
Pro Forma Consolidated Financial Information -- Pegasus Communications Corporation ....... F-23
Pro Forma Consolidated Statement of Operations Data for the year ended December 31, 1998.. F-24
Notes to Pro Forma Consolidated Statements of Operations Data ............................ F-25
Pro Forma Consolidated Balance Sheet as of December 31, 1998 ............................. F-27
Notes to Pro Forma Consolidated Balance Sheet ............................................ F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pegasus Communications Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Pegasus
Communications Corporation and its subsidiaries at December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 12, 1999
F-2
<PAGE>
Pegasus Communications Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1998
---------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 44,049,097 $ 54,505,473
Restricted cash ............................................................ 1,220,056 21,479,305
Accounts receivable, less allowance for doubtful accounts of $319,000
and $567,000, respectively ................................................ 13,819,571 20,882,260
Inventory .................................................................. 974,920 5,426,348
Program rights ............................................................. 2,059,346 3,156,715
Deferred taxes ............................................................. 2,602,453 2,602,453
Prepaid expenses and other ................................................. 788,669 1,207,312
------------- --------------
Total current assets .................................................... 65,514,112 109,259,866
Property and equipment, net ................................................... 27,686,646 34,066,502
Intangible assets, net ........................................................ 284,774,027 729,405,657
Program rights ................................................................ 2,262,299 3,428,382
Deferred taxes ................................................................ -- 9,277,280
Deposits and other ............................................................ 624,629 872,386
------------- --------------
Total assets ............................................................ $ 380,861,713 $ 886,310,073
============= ==============
LIABILITIES AND TOTAL EQUITY
Current liabilities:
Current portion of long-term debt .......................................... $ 6,357,320 $ 14,399,046
Accounts payable ........................................................... 4,151,226 4,794,809
Accrued interest ........................................................... 8,177,261 17,465,493
Accrued satellite programming and fees ..................................... 6,089,389 19,352,780
Accrued expenses ........................................................... 6,973,297 12,926,864
Current portion of program rights payable .................................. 1,418,581 2,431,515
------------- --------------
Total current liabilities ............................................... 33,167,074 71,370,507
Long-term debt ................................................................ 201,997,811 544,629,706
Program rights payable ........................................................ 1,416,446 2,472,367
Deferred taxes ................................................................ 2,652,454 80,671,714
------------- --------------
Total liabilities ....................................................... 239,233,785 699,144,294
------------- --------------
Commitments and contingent liabilities ........................................ -- --
Minority interest ............................................................. 3,000,000 3,000,000
Preferred Stock; $0.01 par value; 5.0 million shares authorized ............... -- --
Series A Preferred Stock; $0.01 par value; 112,215 and 126,978 shares autho-
rized; 105,490 and 119,369 issued and outstanding ............................ 111,264,424 126,027,871
Common stockholders' equity:
Class A Common Stock; $0.01 par value; 30.0 million shares autho-
rized; 5,739,842 and 11,315,809 issued and outstanding .................... 57,399 113,158
Class B Common Stock; $0.01 par value; 15.0 million shares autho-
rized; 4,581,900 issued and outstanding ................................... 45,819 45,819
Additional paid-in capital ................................................. 64,034,687 173,870,633
Deficit .................................................................... (36,774,401) (115,891,702)
------------- --------------
Total common stockholders' equity ....................................... 27,363,504 58,137,908
------------- --------------
Total liabilities and stockholders' equity ................................. $ 380,861,713 $ 886,310,073
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1996 1997 1998
---------------- ---------------- -----------------
<S> <C> <C> <C>
Net revenues:
DBS ........................................................ $ 5,829,097 $ 38,254,186 $147,142,347
Broadcast .................................................. 28,603,516 31,875,744 34,310,898
Cable ...................................................... 13,496,019 16,688,496 13,767,400
------------ ------------ ------------
Total net revenues ....................................... 47,928,632 86,818,426 195,220,645
Operating expenses:
DBS
Programming, technical, general and administrative........ 4,311,604 26,042,185 102,419,612
Marketing and selling .................................... 646,073 5,973,013 45,706,233
Incentive compensation ................................... 145,757 794,838 1,158,919
Depreciation and amortization ............................ 1,786,181 17,042,149 59,076,759
Broadcast
Programming, technical, general and administrative........ 13,902,769 15,672,405 18,056,173
Marketing and selling .................................... 4,850,597 5,703,858 5,992,751
Incentive compensation ................................... 691,436 297,734 177,345
Depreciation and amortization ............................ 4,040,905 3,754,400 4,556,654
Cable
Programming, technical, general and administrative........ 7,102,573 8,426,755 7,556,548
Marketing and selling .................................... 89,625 266,588 340,591
Incentive compensation ................................... 148,172 181,300 115,430
Depreciation and amortization ............................ 5,245,255 5,642,901 4,992,833
Corporate expenses ......................................... 1,429,252 2,256,233 3,613,858
Corporate depreciation and amortization .................... 988,157 1,352,453 2,105,249
------------ ------------ ------------
Income (loss) from operations .............................. 2,550,276 (6,588,386) (60,648,310)
Interest expense ............................................ (12,454,891) (16,094,037) (44,604,055)
Interest income ............................................. 232,361 1,538,569 2,036,061
Other expenses, net ......................................... (171,289) (723,439) (1,523,074)
Gain on sale of cable systems ............................... -- 4,451,320 24,726,432
------------ ------------ ------------
Loss before income taxes ................................... (9,843,543) (17,415,973) (80,012,946)
Provision (benefit) for income taxes ........................ (120,000) 200,000 (895,645)
------------ ------------ ------------
Loss before extraordinary items ............................ (9,723,543) (17,615,973) (79,117,301)
Extraordinary loss from extinguishment of debt, net ......... (250,603) (1,656,164) --
------------ ------------ ------------
Net loss ................................................... (9,974,146) (19,272,137) (79,117,301)
Preferred stock dividends .................................. -- 12,215,000 14,763,447
------------ ------------ ------------
Net loss applicable to common shares ....................... ($ 9,974,146) ($ 31,487,137) ($ 93,880,748)
============ ============ ============
Basic and diluted earnings per common share:
Loss before extraordinary items ............................ ($ 1.56) ($ 3.02) ($ 6.64)
Extraordinary loss ......................................... (0.04) (0.17) --
------------ ------------ ------------
Net loss ................................................... ($ 1.60) ($ 3.19) ($ 6.64)
============ ============ ============
Weighted average shares outstanding ........................ 6,239,646 9,858,244 14,129,602
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Changes in Total Equity
<TABLE>
<CAPTION>
Common Stock
Series A --------------------------
Preferred Number Par
Stock of Shares Value
--------------- ------------- -----------
<S> <C> <C> <C>
Balances at January 1, 1996 ...... 170,000 $ 1,700
Net loss .........................
Contributions by Parent ..........
Distributions to Parent ..........
Issuance of Class A common
stock due to: ...................
Initial Public Offering ........ 3,000,000 30,000
Acquisitions ................... 934,253 9,342
Awards ......................... 3,614 36
Issuance of Class B common stock
due to:
Acquisition .................... 71,429 714
Conversions of partnerships ......
Exchange of PM&C Class B ......... 183,275 1,833
Exchange of PM&C Class A ......... 4,882,541 48,826
------------ --------- --------
Balances at December 31,
1996 ............................ 9,245,112 92,451
Net loss .........................
Issuance of Class A common
stock due to:
Acquisitions ................... 957,860 9,579
Incentive compensation
and awards .................... 118,770 1,188
Issuance of Class A preferred stock
due to:
Unit Offering .................. $100,000,000
Paid and accrued
dividends ..................... 12,215,000
Issuance of warrants due to:
Acquisition .....................
Unit Offering ................... (950,576)
------------ --------- --------
Balances at December 31,
1997 ............................ 111,264,424 10,321,742 103,218
Net loss .........................
Issuance of Class A common
stock due to:
Acquisitions ................... 5,508,600 55,086
Incentive compensation
and awards .................... 67,367 673
Issuance of Class A preferred stock
due to:
Paid and accrued
dividends ..................... 14,763,447
Issuance of warrants and
options due to:
Acquisitions ...................
------------ --------- --------
Balances at December 31,
1998 ............................ $126,027,871 15,897,709 $158,977
============ ========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Additional Retained Partners' Common
Paid-In Earnings Capital Stockholders'
Capital (Deficit) (Deficit) Equity
--------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Balances at January 1, 1996 ...... $ 7,880,848 $ 1,825,283 ($ 9,458,814) $ 249,017
Net loss ......................... (5,934,261) (4,039,885) (9,974,146)
Contributions by Parent .......... 579,152 105,413 684,565
Distributions to Parent .......... (2,946,379) (2,946,379)
Issuance of Class A common
stock due to: ...................
Initial Public Offering ........ 38,153,000 38,183,000
Acquisitions ................... 13,070,204 13,079,546
Awards ......................... 50,559 50,595
Issuance of Class B common stock
due to:
Acquisition .................... 999,286 1,000,000
Conversions of partnerships ...... (13,393,286) 13,393,286
Exchange of PM&C Class B ......... (1,833)
Exchange of PM&C Class A ......... (48,826)
------------- ------------- ------------ --------------
Balances at December 31,
1996 ............................ 57,736,011 (17,502,264) -- 40,326,198
Net loss ......................... (19,272,137) (19,272,137)
Issuance of Class A common
stock due to:
Acquisitions ................... 15,187,924 15,197,503
Incentive compensation
and awards .................... 1,307,453 1,308,641
Issuance of Class A preferred stock
due to:
Unit Offering ..................
Paid and accrued
dividends ..................... (12,215,000) (12,215,000)
Issuance of warrants due to:
Acquisition ..................... 1,067,723 1,067,723
Unit Offering ................... 950,576 950,576
------------- ------------- ------------ --------------
Balances at December 31,
1997 ............................ 64,034,687 (36,774,401) -- 27,363,504
Net loss ......................... (79,117,301) (79,117,301)
Issuance of Class A common
stock due to:
Acquisitions ................... 119,640,387 119,695,473
Incentive compensation
and awards .................... 1,413,670 1,414,343
Issuance of Class A preferred stock
due to:
Paid and accrued
dividends ..................... (14,763,447) (14,763,447)
Issuance of warrants and
options due to:
Acquisitions ................... 3,545,336 3,545,336
------------- ------------- ------------ --------------
Balances at December 31,
1998 ............................ $ 173,870,633 ($ 115,891,702) -- $ 58,137,908
============= ============= =========== ==============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1996 1997 1998
---------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................. ($ 9,974,146) ($ 19,272,137) ($ 79,117,301)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Extraordinary loss on extinguishment of debt, net ...... 250,603 1,656,164 --
Depreciation and amortization .......................... 12,060,498 27,791,903 70,731,495
Program rights amortization ............................ 1,514,122 1,715,556 2,366,429
Accretion on discount of bonds and seller notes ........ 392,324 394,219 1,319,520
Stock incentive compensation ........................... 985,365 1,273,872 1,451,694
Gain on sale of cable systems .......................... -- (4,451,320) (24,726,432)
Bad debt expense ....................................... 335,956 1,141,913 2,850,666
Change in assets and liabilities:
Accounts receivable ................................... (4,607,356) (5,608,113) (6,463,976)
Inventory ............................................. 402,942 (115,800) (3,105,260)
Prepaid expenses and other ............................ (521,697) 305,066 (243,818)
Accounts payable and accrued expenses ................. 3,617,863 6,034,149 8,850,741
Advances payable -- related party ..................... (468,327) -- --
Accrued interest ...................................... 418,338 2,585,178 4,371,950
Capitalized subscriber acquisition costs .............. (1,272,383) (4,514,874) --
Deposits and other .................................... (74,173) (458,131) (247,757)
------------ ------------- -------------
Net cash provided (used) by operating activities ......... 3,059,929 8,477,645 (21,962,049)
------------ ------------- -------------
Cash flows from investing activities:
Acquisitions ........................................... (72,567,216) (133,886,247) (109,339,673)
Cash acquired from acquisitions ........................ -- 379,044 3,284,382
Capital expenditures ................................... (6,294,352) (9,929,181) (12,399,650)
Purchase of intangible assets .......................... (486,444) (3,033,471) (10,489,397)
Payments for programming rights ........................ (1,830,903) (2,584,241) (2,561,026)
Proceeds from sale of cable systems .................... -- 6,945,270 30,132,826
------------ ------------- -------------
Net cash used for investing activities ................... (81,178,915) (142,108,826) (101,372,538)
------------ ------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt ........................... -- 115,000,000 100,000,000
Repayments of long-term debt ........................... (103,639) (320,612) (14,572,446)
Borrowings on bank credit facilities ................... 41,400,000 94,726,250 108,800,000
Repayments of bank credit facilities ................... (11,800,000) (124,326,250) (64,400,000)
Restricted cash ........................................ 9,881,198 (1,220,056) 7,541,140
Debt issuance costs .................................... (304,237) (10,236,823) (3,178,634)
Capital lease repayments ............................... (267,900) (336,680) (399,097)
Contributions by Parent ................................ 684,565 -- --
Distributions to Parent ................................ (2,946,379) -- --
Proceeds from issuance of common stock ................. 42,000,000 -- --
Underwriting and IPO costs ............................. (3,817,000) -- --
Proceeds from issuance of Series A preferred stock ..... -- 100,000,000 --
Underwriting and preferred offering costs .............. -- (4,187,920) --
------------ ------------- -------------
Net cash provided by financing activities ................ 74,726,608 169,097,909 133,790,963
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents ...... (3,392,378) 35,466,728 10,456,376
Cash and cash equivalents, beginning of year .............. 11,974,747 8,582,369 44,049,097
------------ ------------- -------------
Cash and cash equivalents, end of year .................... $ 8,582,369 $ 44,049,097 $ 54,505,473
============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Pegasus Communications Corporation ("Pegasus" or together with its
subsidiaries stated below, the "Company") operates in growing segments of the
media industry and is a direct subsidiary of Pegasus Communications Holdings,
Inc. ("PCH" or the "Parent"). Pegasus' significant direct operating
subsidiaries are Pegasus Media & Communications, Inc. ("PM&C") and Digital
Television Services, Inc. ("DTS").
PM&C's subsidiaries provide direct broadcast satellite television ("DBS")
services to customers in certain rural areas of the United States; own and/or
program broadcast television ("Broadcast" or "TV") stations affiliated with the
Fox Broadcasting Company ("Fox"), United Paramount Network ("UPN") and The WB
Television Network ("WB"); and own and operate a cable television ("Cable")
system that provides service to individual and commercial subscribers in Puerto
Rico. DTS and its subsidiaries, which were acquired by the Company on April 27,
1998, provide DBS services to customers in certain rural areas of the United
States.
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The accompanying consolidated financial statements include the accounts of
Pegasus and all of its subsidiaries. All intercompany transactions and balances
have been eliminated. Certain amounts for 1996 and 1997 have been reclassified
for comparative purposes.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and the disclosure of contingencies. Actual results could differ
from those estimates. Significant estimates relate to barter transactions and
the useful lives and recoverability of intangible assets.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid investments purchased with
an initial maturity of three months or less. The Company has cash balances in
excess of the federally insured limits at various banks.
Restricted Cash:
The Company has restricted cash held in escrow of approximately $21.5
million at December 31, 1998 of which $18.9 million is to fund interest payments
on the DTS Notes, $1.6 million is to collateralize certain outstanding letters
of credit and $1.0 million is held in escrow in connection with the pending
purchase of a cable system serving Aguadilla, Puerto Rico.
Inventories:
Inventories consist of equipment held for resale to customers and
installation supplies. Inventories are stated at the lower of cost or market on
a first-in, first-out basis.
Long-Lived Assets:
The Company's assets are reviewed for impairment whenever events or
circumstances provide evidence which suggest the carrying amounts may not be
recoverable. The Company assesses the recoverability of its assets by
determining whether the depreciation or amortization of the respective asset
balance can be recovered through projected undiscounted future cash flows. To
date, no such impairments have occurred.
F-7
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies: -- (Continued)
Property and Equipment:
Property and equipment are stated at cost. The cost and related accumulated
depreciation of assets fully depreciated, sold, retired or otherwise disposed of
are removed from the respective accounts and any resulting gains or losses are
included in the statement of operations. For cable television systems, initial
subscriber installation costs including material, labor and overhead costs of
the hookup are capitalized as part of the distribution facilities. The costs of
disconnection and reconnection are charged to expense. Satellite equipment that
is leased to customers is stated at cost.
Depreciation is computed for financial reporting purposes using the
straight-line method based upon the following lives:
Reception and distribution facilities ......... 7 to 11 years
Transmitter equipment ......................... 5 to 10 years
Equipment, furniture and fixtures ............. 5 to 10 years
Building and improvements ..................... 12 to 39 years
Vehicles ...................................... 3 to 5 years
Intangible Assets:
Intangible assets are stated at cost. The cost and related accumulated
amortization of assets fully amortized, sold, retired or otherwise disposed of
are removed from the respective accounts and any resulting gains or losses are
included in the statement of operations. Costs of successful franchise
applications are capitalized and amortized over the lives of the related
franchise agreements, while unsuccessful franchise applications and abandoned
franchises are charged to expense. Financing costs incurred in obtaining
long-term financing are amortized over the term of the applicable loan.
The Company's policy is to capitalize subscriber acquisition costs, such as
commissions and equipment subsidies, directly related to new subscribers who
sign a programming contract. These costs are amortized over the life of the
contract. The Company expenses its subscriber acquisition costs when no contract
is obtained. Subsequent to September 30, 1997, the Company does not require new
DBS customers to sign programming contracts and as a result subscriber
acquisition costs are charged to operations in the period incurred.
Amortization of intangible assets is computed for financial reporting
purposes using the straight-line method based upon the following lives:
Broadcast licenses ..................... 40 years
Network affiliation agreements ......... 40 years
Goodwill ............................... 40 years
DBS rights ............................. 10 years
Subscriber acquisition costs ........... 1 year
Other intangibles ...................... 2 to 14 years
Revenue:
The Company operates in growing segments of the media industry: DBS,
Broadcast and Cable. The Company recognizes revenue in its DBS and Cable
operations when video and audio services are provided. The Company recognizes
revenue in its Broadcast operations when advertising spots are broadcast.
The Company obtains a portion of its TV programming through its network
affiliations with Fox, UPN and WB and also through independent producers. The
Company does not make any direct payments for this
F-8
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies: -- (Continued)
programming. Instead, the Company retains a portion of the available
advertisement spots to sell on its own account. Barter programming revenue and
the related expense are recognized when the advertisements sold by the networks
or independent producers are broadcast. Gross barter amounts of $6.3 million,
$7.5 million and $8.1 million for 1996, 1997 and 1998, respectively, are
included in Broadcast revenue and programming expense in the accompanying
consolidated statements of operations.
Advertising Costs:
Advertising costs are charged to operations in the period incurred and
totaled approximately $1.1 million, $3.6 million and $14.0 million for the years
ended December 31, 1996, 1997 and 1998, respectively.
Program Rights:
The Company enters into agreements to show motion pictures and syndicated
programs on television. The Company records the right and associated liabilities
for those films and programs when they are currently available for showing.
These rights are recorded at the lower of unamortized cost or estimated net
realizable value and are amortized on the straight-line method over the license
period, which approximates amortization based on the estimated number of
showings during the contract period. Amortization of $1.5 million, $1.7 million
and $2.4 million is included in Broadcast programming expense for the years
ended December 31, 1996, 1997 and 1998, respectively. The obligations arising
from the acquisition of film rights are recorded at the gross amount. Payments
for the contracts are made pursuant to the contractual terms over periods which
are generally shorter than the license periods.
Income Taxes:
The Company accounts for income taxes utilizing the asset and liability
approach, whereby deferred tax assets and liabilities are recorded for the tax
effect of differences between the financial statement carrying values and tax
bases of assets and liabilities. A valuation allowance is recorded for deferred
taxes where it appears more likely than not that the Company will not be able to
recover the deferred tax asset. MCT Cablevision, L.P., a subsidiary of the
Company, is treated as a partnership for federal and state income tax purposes
but taxed as a corporation for Puerto Rico income tax purposes.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables, cash and
cash equivalents.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base and
their dispersion across different businesses and geographic regions. As of
December 31, 1997 and 1998, the Company had no significant concentrations of
credit risk.
Reliance on DIRECTV:
A substantial portion of the Company's business is derived from providing
DBS services as an independent DIRECTV(R) ("DIRECTV") provider. Because the
Company is a distributor of DIRECTV services, the Company would be adversely
affected by any material adverse changes in the assets, financial condition,
programming, technological capabilities or services of DIRECTV or its parent,
Hughes Electronics Corporation.
New Accounting Pronouncements:
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP
98-5"), which is effective for fiscal years beginning after December 15, 1998.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
F-9
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies: -- (Continued)
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is effective for fiscal
quarters of fiscal years beginning after June 15, 1999. Management has reviewed
the provisions of SOP 98-5 and SFAS No. 133 and the implementation of these
standards is not expected to have any significant impact on its consolidated
financial statements.
3. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
---------------- ----------------
<S> <C> <C>
Reception and distribution facilities ......... $ 27,012,297 $ 20,712,511
Transmitter equipment ......................... 15,306,589 17,728,338
Equipment, furniture and fixtures ............. 3,091,363 8,530,100
Building and improvements ..................... 2,293,755 3,410,466
Land .......................................... 947,712 1,229,163
Vehicles ...................................... 983,256 1,111,665
Other equipment ............................... 2,612,332 5,893,561
------------- -------------
52,247,304 58,615,804
Accumulated depreciation ...................... (24,560,658) (24,549,302)
------------- -------------
Net property and equipment .................... $ 27,686,646 $ 34,066,502
============= =============
</TABLE>
Depreciation expense amounted to $5.2 million, $5.7 million and $6.2
million for the years ended December 31, 1996, 1997 and 1998, respectively.
4. Intangibles:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
---------------- -----------------
<S> <C> <C>
DBS rights ...................................... $ 203,379,952 $ 712,231,669
Deferred financing costs ........................ 16,654,186 33,762,651
Franchise costs ................................. 35,332,755 31,157,958
Goodwill ........................................ 28,490,035 28,033,368
Broadcast licenses and affiliation agreements ... 19,094,212 19,062,241
Consultancy and non-compete agreements .......... 6,010,838 7,022,688
Subscriber acquisition costs .................... 5,787,156 --
Other deferred costs ............................ 8,571,281 13,121,413
------------- --------------
323,320,415 844,391,988
Accumulated amortization ........................ (38,546,388) (114,986,331)
------------- --------------
Net intangible assets ........................... $ 284,774,027 $ 729,405,657
============= ==============
</TABLE>
Amortization expense amounted to $6.9 million, $22.1 million and $64.5
million for the years ended December 31, 1996, 1997 and 1998, respectively.
5. Common Stock:
In October 1996, Pegasus completed an initial public offering in which it
sold 3.0 million shares of its Class A Common Stock to the public at a price of
$14 per share, resulting in net proceeds to the Company of $38.1 million.
F-10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Common Stock: -- (Continued)
As of December 31, 1997 and 1998, the Company had two classes of Common
Stock: Class A Common Stock and Class B Common Stock. Holders of Class A Common
Stock and Class B Common Stock are entitled to one vote per share and ten votes
per share, respectively.
The Company's ability to pay dividends on its Common Stock is subject to
certain restrictions.
6. Preferred Stock:
As of December 31, 1997 and 1998, the Company had 5.0 million shares of
Preferred Stock authorized of which 112,215 and 126,978 shares have been
designated as Series A Preferred Stock, respectively.
In January 1997, Pegasus completed a unit offering (the "Unit Offering") in
which it sold 100,000 shares of 12.75% Series A Cumulative Exchangeable
Preferred Stock (the "Series A Preferred Stock") and warrants to purchase
193,600 shares of Class A Common Stock, at an exercise price of $15 per share,
to the public at a price of $1,000 per unit, resulting in net proceeds to the
Company of $95.8 million.
As a result of the Unit Offering and dividends subsequently paid on the
Series A Preferred Stock, the Company had approximately 105,490 and 119,369
shares of Series A Preferred Stock issued and outstanding at December 31, 1997
and 1998, respectively. On December 18, 1998 the Board of Directors declared a
dividend on the Series A Preferred Stock in the aggregate of approximately 7,610
shares of Series A Preferred Stock, payable on January 1, 1999 to shareholders
of record on December 15, 1998. Each whole share of Series A Preferred Stock has
a liquidation preference of $1,000 per share (the "Liquidation Preference").
Cumulative dividends, at a rate of 12.75% are payable semi-annually on January 1
and July 1. Dividends may be paid, occurring on or prior to January 1, 2002, at
the option of the Company, either in cash or by the issuance of additional
shares of Series A Preferred Stock. Subject to certain conditions, the Series A
Preferred Stock is exchangeable in whole, but not in part, at the option of the
Company, for Pegasus' 12.75% Senior Subordinated Exchange Notes due 2007 (the
"Exchange Notes"). The Exchange Notes would contain substantially the same
redemption provisions, restrictions and other terms as the Series A Preferred
Stock. Pegasus is required to redeem all of the Series A Preferred Stock
outstanding on January 1, 2007 at a redemption price equal to the Liquidation
Preference thereof, plus accrued dividends.
The carrying amount of the Series A Preferred Stock is periodically
increased by amounts representing dividends not currently declared or paid but
which will be payable under the mandatory redemption features. The increase in
carrying amount is effected by charges against retained earnings, or in the
absence of retained earnings, by charges against paid-in capital.
Under the terms of the Series A Preferred Stock, Pegasus' ability to pay
dividends on its Common Stock is subject to certain restrictions.
F-11
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
-------------- ---------------
<S> <C> <C>
Series B Senior Notes payable by Pegasus, due 2005, interest at
9.625%, payable semi-annually in arrears on April 15 and
October 15 ....................................................... $115,000,000 $115,000,000
Series A Senior Notes payable by Pegasus, due 2006, interest at
9.75%, payable semi-annually in arrears on June 1 and
December 1, commencing on June 1, 1999 ........................... -- 100,000,000
Senior six-year $180.0 million revolving credit facility, payable
by PM&C, interest at PM&C's option at either the bank's base rate
plus an applicable margin or LIBOR plus an applicable margin
(7.8125% at December 31, 1998) ................................... -- 27,500,000
Senior six-year $70.0 million revolving credit facility, payable by
DTS, interest at DTS' option at either the bank's base rate or
the Eurodollar Rate (8.94% at December 31, 1998) ................. -- 26,800,000
Senior six-year $20.0 million term loan facility, payable by DTS,
interest at DTS' option at either the bank's base rate or the
Eurodollar Rate (9.03% at December 31, 1998) ..................... -- 19,600,000
Series B Notes payable by PM&C, due 2005, interest at 12.5%,
payable semi-annually in arrears on January 1 and July 1, net
of unamortized discount of $3,018,003 and $2,621,878 as of
December 31, 1997 and 1998, respectively ......................... 81,981,997 82,378,122
Series B Notes payable by DTS, due 2007, interest at 12.5%,
payable semi-annually in arrears on February 1 and August 1,
net of unamortized discount of $1,784,844 as of December 31,
1998 ............................................................. -- 153,215,156
Mortgage payable, due 2000, interest at 8.75% ..................... 477,664 454,965
Note payable, due 1998, interest at 10% ........................... 3,050,000 --
Sellers' notes, due 1999 to 2005, interest at 3% to 8% ............ 7,171,621 33,537,788
Capital leases and other .......................................... 673,849 542,721
------------ ------------
208,355,131 559,028,752
Less current maturities ........................................... 6,357,320 14,399,046
------------ ------------
Long-term debt .................................................... $201,997,811 $544,629,706
============ ============
</TABLE>
Certain of the Company's sellers' notes are secured by stand-by letters of
credit issued pursuant to the PM&C Credit Facility and the DTS Credit Facility.
DTS maintains a $70.0 million senior revolving credit facility and a $20.0
million senior term credit facility (collectively, the "DTS Credit Facility")
which expires in 2003 and is collateralized by substantially all of the assets
of DTS and its subsidiaries. The DTS Credit Facility is subject to certain
financial covenants as defined in the loan agreement, including a debt to
adjusted cash flow covenant. As of December 31, 1998, $18.5 million of stand-by
letters of credit were issued pursuant to the DTS Credit Facility.
Prior to being acquired by Pegasus, DTS completed a senior subordinated
notes offering (the "DTS Notes Offering") in which it sold $155.0 million of its
12.5% Series A Senior Subordinated Notes due 2007 (the "DTS Series A Notes"). A
portion of the net proceeds from the DTS Notes Offering was used to fund an
interest escrow account, which is included in restricted cash on the Company's
consolidated balance sheets, for the first four semi-annual interest payments on
the DTS Series A Notes. DTS exchanged its DTS Series A
F-12
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Long-Term Debt: -- (Continued)
Notes for its 12.5% Series B Senior Subordinated Notes due 2007 (the "DTS Series
B Notes" and, together with the DTS Series A Notes, the "DTS Notes"). The DTS
Series B Notes have substantially the same terms and provisions as the DTS
Series A Notes. The DTS Series B Notes are guaranteed on a full, unconditional,
senior subordinated basis, jointly and severally by all direct and indirect
subsidiaries of DTS, except DTS Capital, which is a co-issuer of the DTS Notes
and has nominal assets and does not conduct any operations.
In October 1997, Pegasus completed an offering of senior notes (the "9.625%
Senior Notes Offering") in which it sold $115.0 million of its 9.625% Series A
Senior Notes due 2005 (the "9.625% Series A Notes"), resulting in net proceeds
to the Company of approximately $111.0 million. A portion of the net proceeds
from the 9.625% Senior Notes Offering was used to retire an existing $130.0
million credit facility (the "PSH Credit Facility"). The PSH Credit Facility was
refinanced with the PM&C Credit Facility. Deferred financing fees relating to
the PSH Credit Facility were written off, resulting in an extraordinary loss of
approximately $1.7 million on the refinancing transaction. Pegasus exchanged its
9.625% Series A Notes for its 9.625% Series B Senior Notes due 2005 (the "9.625%
Series B Notes" and, together with the 9.625% Series A Notes, the "9.625% Senior
Notes"). The 9.625% Series B Notes have substantially the same terms and
provisions as the 9.625% Series A Notes.
In December 1997, PM&C entered into a $180.0 million senior revolving
credit facility (the "PM&C Credit Facility") which expires in 2003 and is
collateralized by substantially all of the assets of PM&C and its subsidiaries.
The PM&C Credit Facility is subject to certain financial covenants as defined in
the loan agreement, including a debt to adjusted cash flow covenant. As of
December 31, 1998, $49.6 million of stand-by letters of credit were issued
pursuant to the PM&C Credit Facility.
In November 1998, Pegasus completed an offering of senior notes (the "9.75%
Senior Notes Offering") in which it sold $100.0 million of its 9.75% Series A
Senior Notes due 2006 (the "9.75% Series A Notes"), resulting in net proceeds to
the Company of approximately $96.8 million. $64.0 million of the net proceeds
from the 9.75% Senior Notes Offering were used to repay a portion of the
outstanding indebtedness under the PM&C Credit Facility.
Certain of the Company's notes may be redeemed, at the option of the
Company, in whole or in part, at various points in time after July 1, 2000 at
the redemption prices specified in the indentures governing the respective
notes, plus accrued and unpaid interest thereon.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company to incur additional
indebtedness, create liens and to pay dividends.
At December 31, 1998, maturities of long-term debt and capital leases are
as follows:
1999 ...................................... $ 14,399,046
2000 ...................................... 11,318,785
2001 ...................................... 8,108,254
2002 ...................................... 3,105,629
2003 ...................................... 71,003,760
Thereafter ................................ 451,093,278
------------
$559,028,752
============
F-13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Earnings Per Common Share:
Calculation of basic and diluted earnings per common share:
The following table sets forth the computation of the number of shares used
in the computation of basic and diluted earnings per common share (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---------------- ----------------- -----------------
<S> <C> <C> <C>
Net loss applicable to common shares .................. ($ 9,974,146) ($ 31,487,137) ($ 93,880,748)
=========== ============ ============
Weighted average common shares outstanding ............ 6,239,646 9,858,244 14,129,602
=========== ============ ============
Total shares used for calculation of basic earnings per
common share ......................................... 6,239,646 9,858,244 14,129,602
Stock options ......................................... -- -- --
----------- ------------ ------------
Total shares used for calculation of diluted earnings
per common share ..................................... 6,239,646 9,858,244 14,129,602
=========== ============ ============
</TABLE>
Basic earnings per share amounts are based on net income after deducting
preferred stock dividend requirements divided by the weighted average number of
Class A and Class B Common Shares outstanding during the year.
For the years ended December 31, 1997 and 1998, net loss per common share
was determined by dividing net loss, as adjusted by the aggregate amount of
dividends on the Company's Series A Preferred Stock, approximately $12.2 million
and $14.8 million, respectively, by applicable shares outstanding.
Securities that have not been issued and are antidilutive amounted to 2,539
shares in 1996, 582,493 shares in 1997 and 1,299,863 shares in 1998.
9. Leases:
The Company leases certain studios, towers, utility pole attachments, and
occupancy of underground conduits and headend sites under operating leases. The
Company also leases office space, vehicles and various types of equipment
through separate operating lease agreements. The operating leases expire at
various dates through 2004. Rent expense for the years ended December 31, 1996,
1997 and 1998 was $712,000, $1.1 million and $1.6 million, respectively. The
Company leases equipment under long-term leases and has the option to purchase
the equipment for a nominal cost at the termination of the leases. The related
obligations are included in long-term debt. Property and equipment at December
31 include the following amounts for leases that have been capitalized:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Equipment, furniture and fixtures .......... $ 700,807 $ 662,276
Vehicles ................................... 516,642 541,068
---------- ----------
1,217,449 1,203,344
Accumulated depreciation ................... (512,307) (562,403)
---------- ----------
Total ...................................... $ 705,142 $ 640,941
========== ==========
</TABLE>
F-14
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Leases: -- (Continued)
Future minimum lease payments on noncancellable operating and capital
leases at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------------- -----------
<S> <C> <C>
1999 .............................................. $1,887,217 $216,795
2000 .............................................. 1,651,919 207,635
2001 .............................................. 1,521,132 157,286
2002 .............................................. 1,075,957 57,902
2003 .............................................. 630,623 1,560
Thereafter ........................................ 393,013 --
---------- --------
Total minimum payments ............................ $7,159,861 641,178
==========
Less: amount representing interest ................ 98,457
--------
Present value of net minimum lease payments
including current maturities of $168,117 ......... $542,721
========
</TABLE>
10. Income Taxes:
The following is a summary of the components of income taxes from
operations:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- ----------- ----------------
<S> <C> <C> <C>
Federal -- deferred ............................ ($ 169,000) ($ 1,070,645)
State and local -- current ..................... 49,000 $200,000 175,000
--------- -------- -----------
Provision (benefit) for income taxes .......... ($ 120,000) $200,000 ($ 895,645)
========= ======== ===========
</TABLE>
The deferred income tax assets and liabilities recorded in the consolidated
balance sheets at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
---------------- ----------------
<S> <C> <C>
Assets:
Receivables ......................................................... $ 73,547 $ 215,451
Excess of tax basis over book basis from tax gain recognized upon
incorporation of subsidiaries ..................................... 1,890,025 2,112,381
Loss carryforwards .................................................. 18,046,889 56,700,200
Other ............................................................... 870,305 972,694
------------ ------------
Total deferred tax assets ......................................... 20,880,766 60,000,726
------------ ------------
Liabilities:
Excess of book basis over tax basis of property, plant and equipment 1,938,899 1,906,903
Excess of book basis over tax basis of amortizable intangible assets. 5,695,313 78,764,811
------------ ------------
Total deferred tax liabilities .................................... 7,634,212 80,671,714
------------ ------------
Net deferred tax assets (liabilities) ............................... 13,246,554 (20,670,988)
Valuation allowance ............................................... (13,296,554) (48,120,993)
------------ ------------
Net deferred tax liabilities ........................................ ($ 50,000) ($ 68,791,981)
============ ============
</TABLE>
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the expiration of
the Company's net operating loss carryforwards and portions of other deferred
tax assets related to prior acquisitions. The valuation allowance increased
primarily as the result of net operating loss carryforwards generated during
1998, which may not be utilized.
F-15
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Income Taxes: -- (Continued)
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $149.2 million which are available to offset future taxable income
and expire through 2018.
A reconciliation of the Federal statutory rate to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
U.S. statutory federal income tax rate .......... 34.00% 34.00% 35.00%
Foreign net operating loss ...................... 1.73 -- --
Valuation allowance ............................. (36.92) (34.38) (34.40)
Other ........................................... -- 1.43 0.70
------- ------ ------
Effective tax rate .............................. (1.19%) 1.05% 1.30%
======= ====== ======
</TABLE>
11. Supplemental Cash Flow Information:
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1996 1997 1998
------------- ------------- --------------
<S> <C> <C> <C>
Barter revenue and related expense ...................... $6,337,220 $7,520,000 $ 8,078,000
Acquisition of program rights and assumption of
related program payables ............................... 1,140,072 3,452,779 4,629,881
Acquisition of plant under capital leases ............... 312,578 529,072 36,500
Capital contribution and related acquisition of intan-
gibles ................................................. 14,079,546 15,197,503 119,695,473
Execution of license agreement option ................... 3,050,000 -- --
Minority interest and related acquisition of intan-
gibles ................................................. -- 3,000,000 --
Notes payable and related acquisition of intangibles..... -- 7,113,689 219,889,144
Series A Preferred Stock dividend and reduction of
paid-in capital ........................................ -- 12,215,000 14,763,447
Deferred taxes, net and related acquisition of intan-
gibles ................................................. -- -- 82,934,179
</TABLE>
For the years ended December 31, 1996, 1997 and 1998, the Company paid cash
for interest in the amount of $12.0 million, $13.5 million and $35.3 million,
respectively. The Company paid no federal income taxes for the years ended
December 31, 1996, 1997 and 1998.
12. Acquisitions and Dispositions:
In 1997, the Company acquired, from 25 independent DIRECTV providers, the
rights to provide DIRECTV programming in certain rural areas of the United
States and the related assets in exchange for total consideration of
approximately $161.2 million, which consisted of $133.9 million in cash, 923,860
shares of the Company's Class A Common Stock (amounting to $14.9 million at the
time of issuance), $3.0 million in preferred stock of a subsidiary of Pegasus,
warrants to purchase a total of 283,969 shares of the Company's Class A Common
Stock (amounting to $1.1 million at the time of issuance), $7.1 million in
promissory notes and $1.2 million in assumed net liabilities.
Effective January 31, 1997, the Company sold substantially all the assets
of its New Hampshire cable system to State Cable TV Corporation for
approximately $6.9 million in cash, net of certain selling costs. The Company
recognized a gain on the transaction of approximately $4.5 million.
F-16
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. Acquisitions and Dispositions: -- (Continued)
In 1998, the Company acquired (exclusive of the acquisition of DTS), from
26 independent DIRECTV providers, the rights to provide DIRECTV programming in
certain rural areas of the United States and the related assets in exchange for
total consideration of approximately $132.1 million, which consisted of $109.3
million in cash, 37,304 shares of the Company's Class A Common Stock (amounting
to $900,000 at the time of issuance), warrants to purchase a total of 25,000
shares of the Company's Class A Common Stock (amounting to $222,000 at the time
of issuance), $20.4 million in promissory notes and $1.3 million in assumed net
liabilities.
On April 27, 1998, the Company acquired DTS, which holds the rights to
provide DIRECTV programming in certain rural areas of California, Colorado,
Georgia, Indiana, Kansas, Kentucky, New Hampshire, New Mexico, New York, South
Carolina and Vermont, in exchange for total consideration of approximately
$363.9 million, which consisted of approximately 5.5 million shares of the
Company's Class A Common Stock (amounting to $118.8 million at a price of $21.71
per share, the average closing price per share five days prior and subsequent to
the acquisition announcement), options and warrants to purchase a total of
224,038 shares of the Company's Class A Common Stock (amounting to $3.3 million
at the time of issuance), approximately $158.9 million in assumed net
liabilities and approximately $82.9 million of a deferred tax liability.
Effective July 1, 1998, the Company sold substantially all the assets of
its remaining New England cable systems to Avalon Cable of New England, LLC for
approximately $30.1 million in cash. The Company recognized a gain on the
transaction of approximately $24.7 million.
Unless otherwise noted, the value assigned to the Class A Common Stock was
computed by multiplying the number of shares issued by the closing price per
share on the day prior to the date of consummation of the acquisition.
The following unaudited summary, prepared on a pro forma basis, combines
the results of operations as if the above DBS territories and cable systems had
been acquired or sold as of the beginning of the periods presented, after
including the impact of certain adjustments, such as the amortization of
intangibles, interest expense, preferred stock dividends and related income tax
effects. The pro forma information does not purport to be indicative of what
would have occurred had the acquisitions/dispositions been made on those dates
or of results which may occur in the future. This pro forma information does not
include any acquisitions that occurred subsequent to December 31, 1998.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
(in thousands, except earnings per share) (unaudited)
1997 1998
------------- -------------
<S> <C> <C>
Net revenues ...................................... $ 178,769 $ 236,293
========= =========
Operating loss .................................... ($ 64,304) ($ 78,798)
========= =========
Net loss .......................................... ($ 120,873) ($ 133,988)
Less: Preferred stock dividends ................... (13,156) (14,763)
--------- ---------
Net loss available to common stockholders ......... ($ 134,029) ($ 148,751)
========= =========
Net loss per common share ......................... $ 8.50) $ 9.37)
========= =========
</TABLE>
On July 23, 1998, the Company entered into an agreement to purchase a cable
system serving Aguadilla, Puerto Rico and neighboring communities for a purchase
price of approximately $42.0 million in cash. The Aguadilla cable system serves
approximately 21,500 subscribers and passes approximately 81,000 of the 90,000
homes in the franchise area. The Aguadilla cable system is contiguous to the
Company's existing
F-17
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. Acquisitions and Dispositions: -- (Continued)
Puerto Rico cable system and, upon completion of the purchase, the Company
intends to consolidate the Aguadilla cable system with its existing cable
system. The closing of this acquisition is subject to regulatory and other
approvals, as well as customary conditions, and the Company expects this
transaction to close in the first half of 1999.
13. Financial Instruments:
The carrying values and fair values of the Company's financial instruments
at December 31 consisted of:
<TABLE>
<CAPTION>
1997 1998
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ----------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Long-term debt, including current portion ......... $208,355 $240,086 $559,029 $583,460
Series A Preferred Stock .......................... 111,264 114,750 126,028 126,978
</TABLE>
Long-term debt: The fair value of long-term debt is estimated based on the
quoted market price for the same or similar instruments.
Series A Preferred Stock: The fair value of Series A Preferred Stock is
estimated based on the quoted market price for the same or similar instruments.
All other financial instruments are stated at cost which approximates fair
market value.
14. Warrants:
In January 1997, in connection with the Unit Offering, the Company issued
warrants to purchase 193,600 shares of Class A Common Stock at an exercise price
of $15 per share. These warrants are exercisable through January 1, 2007. At
December 31, 1998, none of these warrants have been exercised. The fair value of
these warrants was estimated using the Black-Scholes pricing model and was
approximately $951,000. The value assigned to these warrants reduced the
carrying amount of the Series A Preferred Stock and was effected by an increase
in paid-in-capital.
In March 1997, in connection with the acquisition of DBS properties, the
Company issued warrants to purchase 283,969 shares of Class A Common Stock at an
exercise price of $11.81 per share. These warrants are exercisable through March
10, 2006. At December 31, 1998, none of these warrants had been exercised. The
fair value of these warrants was estimated using the Black-Scholes pricing model
and was approximately $1.1 million. The value assigned to these warrants
increased the carrying amount of the DBS rights acquired and was effected by an
increase in paid-in-capital.
In 1998, in connection with the acquisition of DBS properties, the Company
issued warrants to purchase 181,996 shares of Class A Common Stock at exercise
prices between $14.64 and $24.26 per share. These warrants are exercisable
through October 10, 2007. At December 31, 1998, warrants to purchase 1,929
shares of Class A Common Stock have been exercised. The fair value of the
warrants issued was estimated using the Black-Scholes pricing model and was
approximately $2.7 million. The value assigned to these warrants increased the
carrying amount of the DBS rights acquired and was effected by an increase in
paid-in-capital.
15. Employee Benefit Plans:
The Company has two active stock plans available to grant stock options
(the "Stock Option Plan") and restricted stock awards (the "Restricted Stock
Plan") to eligible employees, executive officers and non-employee directors of
the Company. The Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
stock plans. The Company has adopted the disclosure-only provisions of SFAS No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123").
F-18
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
15. Employee Benefit Plans: -- (Continued)
Stock Option Plan
The Stock Option Plan provides for the granting of nonqualified and
qualified options to purchase a maximum of 970,000 shares (subject to adjustment
to reflect stock dividends, stock splits, recapitalizations and similar changes
in the capitalization of Pegasus) of Class A Common Stock of the Company. The
Stock Option Plan terminates in September 2006. As of December 31, 1998, options
to purchase an aggregate of 642,227 shares of Class A Common Stock at exercise
prices between $11.00 and $25.13 were outstanding, including 638,842 options
outstanding under the Stock Option Plan, of which 67,042 were issued in
connection with the acquisition of DTS. All options granted under the Stock
Option Plan have been granted at fair market value at the time of grant.
Under SFAS 123, companies can either continue to account for stock
compensation plans pursuant to existing accounting standards or elect to expense
the value derived from using an option pricing model. The Company is continuing
to apply existing accounting standards. However, SFAS 123 requires disclosures
of pro forma net income and earnings per share as if the Company had adopted the
expensing provisions of SFAS 123.
The fair value of options was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions for 1996, 1997 and
1998:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate ................. 5.56% 6.35% 5.11%
Dividend Yield .......................... 0.00% 0.00% 0.00%
Volatility Factor ....................... 0.00 0.403 0.479
Weighted average expected life .......... 5 years 5 years 4.5 years
</TABLE>
Pro forma net losses for 1996, 1997 and 1998 would have been $10.0 million,
$31.7 million and $94.7 million, respectively; pro forma net losses per common
share for 1996, 1997 and 1998 would have been $1.60, $3.22 and $6.70,
respectively. The weighted average fair value of options granted were $3.40,
$4.99 and $11.19 for 1996, 1997 and 1998, respectively.
The following table summarizes stock option activity over the past three
years:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
----------- ---------------
<S> <C> <C>
Outstanding at January 1, 1996 ................... -- --
Granted .......................................... 3,385 $ 14.00
Exercised ........................................ -- --
Canceled or expired .............................. -- --
----- -------
Outstanding at December 31, 1996 ................. 3,385 14.00
Granted .......................................... 220,000 11.00
Exercised ........................................ -- --
Canceled or expired .............................. -- --
------- -------
Outstanding at December 31, 1997 ................. 223,385 11.05
Granted .......................................... 418,842 21.23
Exercised ........................................ -- --
Canceled or expired .............................. -- --
======= =======
Outstanding at December 31, 1998 ................. 642,227 $ 17.69
======= =======
Options exercisable at December 31, 1996 ......... 3,385 $ 14.00
Options exercisable at December 31, 1997 ......... 3,385 14.00
Options exercisable at December 31, 1998 ......... 143,728 15.09
</TABLE>
F-19
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
15. Employee Benefit Plans: -- (Continued)
Restricted Stock Plan
The Restricted Stock Plan provides for the granting of four types of
restricted stock awards representing a maximum of 350,000 shares (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus) of Class A Common Stock of the
Company to eligible employees who have completed at least one year of service.
Restricted stock received under the Restricted Stock Plan vests based on years
of service with the Company and are fully vested for employees who have four
years of service with the Company with the exception of special recognition
awards which are fully vested on the date of grant. The Restricted Stock Plan
terminates in September 2006. As of December 31, 1998, 138,379 shares of Class A
Common Stock had been granted under the Restricted Stock Plan. The expense for
this plan amounted to $501,139, $800,768 and $1.0 million in 1996, 1997 and
1998, respectively.
401(k) Plans
Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings
Plan (the "US 401(k) Plan") for eligible employees of PM&C and its domestic
subsidiaries. Effective October 1, 1996, the Company's Puerto Rico subsidiary
adopted the Pegasus Communications Puerto Rico Savings Plan (the "Puerto Rico
401(k) Plan" and, together with the US 401(k) Plan, the "401(k) Plans") for
eligible employees of the Company's Puerto Rico subsidiaries. Substantially all
Company employees who, as of the enrollment date under the 401(k) Plans, have
completed at least one year of service with the Company are eligible to
participate in one of the 401(k) Plans. Participants may make salary deferral
contributions of 2% to 6% of their salary to the 401(k) Plans. The expense for
this plan amounted to $484,226, $473,104 and $450,883 in 1996, 1997 and 1998,
respectively.
The Company may make three types of contributions to the 401(k) Plans, each
allocable to a participant's account if the participant completes at least 1,000
hours of service in the applicable plan year, and is employed on the last day of
the applicable plan year. Discretionary Company contributions and Company
matches of employee salary deferral contributions and rollover contributions are
made in the form of Class A Common Stock, or in cash used to purchase Class A
Common Stock. The Company has authorized and reserved for issuance up to 205,000
shares of Class A Common Stock in connection with the 401(k) Plans. Company
contributions to the 401(k) Plans are subject to limitations under applicable
laws and regulations. All employee contributions to the 401(k) Plans are fully
vested at all times and all Company contributions, if any, vest based on years
of service with the Company and are fully vested for employees who have four
years of service with the Company. A participant also becomes fully vested in
Company contributions to the 401(k) Plans upon attaining age 65 or upon his or
her death or disability.
16. Commitments and Contingent Liabilities:
Legal Matters:
In connection with the pending license renewal application of one of the
Company's television stations, it has come to the attention of the Company that,
at that station, there were violations of the FCC's rules establishing limits on
the amount of commercial material in programs directed to children.
The Company was notified that is has been sued in Indiana for allegedly
charging DBS subscribers excessive fees for late payments. The plaintiffs, who
purport to represent a class consisting of residential DIRECTV customers in
Indiana, seek unspecified damages for the purported class and modification of
the Company's late-fee policy. The Company is advised that similar suits have
been brought against DIRECTV and various cable operators in other parts of the
United States.
From time to time the Company is involved with claims that arise in the
normal course of business.
F-20
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. Commitments and Contingent Liabilities: -- (Continued)
In the opinion of management, the ultimate liability with respect to the
aforementioned claims and matters will not have a material adverse effect on the
consolidated operations, liquidity, cash flows or financial position of the
Company.
Program Rights:
The Company has entered into agreements totaling $6.9 million as of
December 31, 1998 for film rights and programs that are not yet available for
showing at December 31, 1998, and accordingly, are not recorded by the Company.
At December 31, 1998, the Company has commitments for future program rights of
approximately $3.1 million, $3.6 million, $3.1 million, $1.3 million, $214,000
and $428,000 in 1999, 2000, 2001, 2002, 2003 and thereafter, respectively.
17. Related Party Transactions:
Effective October 31, 1997, the Company acquired DIRECTV distribution
rights for certain rural areas of Georgia and the related assets (the "ViewStar
DBS Acquisition") from ViewStar Entertainment Services, Inc. ("ViewStar"). Prior
to the acquisition, Donald W. Weber, a director of Pegasus, was the President
and Chief Executive Officer of ViewStar and together with his son owned
approximately 73% of the outstanding stock of ViewStar. The ViewStar DBS
Acquisition was effected through a merger of ViewStar into a subsidiary of
Pegasus. The purchase price of the ViewStar DBS Acquisition consisted of
approximately $6.4 million in cash and 397,035 shares of Class A Common Stock.
The acquisition involved the execution of noncompetition agreements by Mr. Weber
and his son and the execution of a shareholders agreement (which included the
granting of certain registration rights on the shares of Class A Common Stock
issued in connection with the acquisition).
The Company entered into an arrangement in 1998 with W.W. Keen Butcher (the
stepfather of Marshall W. Pagon, the Company's President and Chief Executive
Officer, and Nicholas A. Pagon, a Vice President of Pegasus), certain entities
controlled by him (the "KB Companies") and the owner of a minority interest in
one of the KB Companies, under which the Company agreed to provide and maintain
collateral for up to $4.0 million in principal amount of bank loans to Mr.
Butcher and the minority owner. Mr. Butcher and the minority owner must lend or
contribute the proceeds of those bank loans to one or more of the KB Companies
for the acquisition of television broadcast stations to be operated by the
Company pursuant to local marketing agreements. As of December 31, 1998, the
Company had provided collateral of $1.6 million pursuant to this arrangement,
which is included as restricted cash on the Company's consolidated balance
sheets.
William P. Phoenix, a director of Pegasus since June 1998, is a managing
director of CIBC Oppenheimer Corporation ("CIBC"). CIBC and its affiliates have
provided financial services to the Company, including serving as one of the
initial purchasers in the 9.75% Senior Notes Offering, providing a fair market
value appraisal in connection with the contribution to Pegasus of certain assets
between related parties, providing fairness opinions in connection with the
ViewStar DBS Acquisition and certain intercompany transactions and acting as a
standby purchaser in connection with DTS' offer to repurchase the DTS Notes as a
result of the change of control arising by Pegasus' acquisition of DTS. Total
fees and expenses were approximately $3.3 million for the year ended December
31, 1998.
18. Industry Segments:
The Company operates in growing segments of the media industry: DBS,
Broadcast and Cable. DBS consists of providing direct broadcast satellite
television services to customers in certain rural areas of 36 states. Broadcast
consists of television stations affiliated with Fox, United Paramount Network
and the WB and two transmitting towers, all located in the eastern United
States. Cable consists of providing cable television services to individual and
commercial subscribers in Puerto Rico.
F-21
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
18. Industry Segments: -- (Continued)
All of the Company's revenues are derived from external customers. Capital
expenditures for the Company's DBS segment were $855,000, $506,000 and $2.0 for
1996, 1997 and 1998, respectively. Capital expenditures for the Company's
Broadcast segment were $2.3 million, $6.4 million and $6.8 million for 1996,
1997 and 1998, respectively. Capital expenditures for the Company's Cable
segment were $3.1 million, $2.9 million and $2.0 million for 1996, 1997 and
1998, respectively. Identifiable total assets for the Company's DBS segment were
$209.5 million and $715.6 million as of December 31, 1997 and 1998,
respectively. Identifiable total assets for the Company's Broadcast segment were
$63.0 million and $67.1 million as of December 31, 1997 and 1998, respectively.
Identifiable total assets for the Company's Cable segment were $51.7 million and
$47.0 million as of December 31, 1997 and 1998, respectively.
19. Subsequent Events:
As of February 12, 1999, the Company acquired, from five independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Colorado, Illinois, Indiana, Minnesota and Texas and the related assets
in exchange for total consideration of approximately $22.6 million, which
consisted of $21.5 million in cash and a $1.3 million promissory note, payable
over one year.
20. Quarterly Information (unaudited):
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------
(in thousands, except per share data) March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1998
Net revenues ................................. $ 28,784 $ 46,739 $ 55,507 $ 64,190
Operating loss ............................... (6,302) (8,877) (18,590) (26,879)
Loss before extraordinary items .............. (15,936) (22,804) (10,751) (44,389)
Net loss applicable to common shares ......... ($ 15,936) ($ 22,804) ($ 10,751) ($ 44,389)
Basic and diluted earnings per share:
Loss before extraordinary items .............. ($ 1.54) ($ 1.59) ($ 0.68) ($ 2.79)
Net loss ..................................... ($ 1.54) ($ 1.59) ($ 0.68) ($ 2.79)
</TABLE>
The Company had no extraordinary gains or losses for the year ended
December 31, 1998.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------
(in thousands, except per share data) March 31, June 30, September 30, December 31,
1997 1997 1997 1997
----------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1997
Net revenues ................................. $15,897 $19,778 $21,927 $ 29,216
Operating loss ............................... (366) (113) (1,308) (4,801)
Loss before extraordinary items .............. (692) (6,270) (9,015) (13,854)
Net loss applicable to common shares ......... ($ 692) ($ 6,270) ($ 9,015) ($ 15,510)
Basic and diluted earnings per share:
Loss before extraordinary items .............. ($ 0.07) ($ 0.64) ($ 0.91) ($ 1.36)
Net loss ..................................... ($ 0.07) ($ 0.64) ($ 0.91) ($ 1.53)
</TABLE>
For the fourth quarter of 1997, the Company had an extraordinary loss of
approximately $1.7 million or $0.16 per share in connection with the refinancing
of certain credit facilities.
F-22
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Pro forma consolidated statement of operations data and other data for the
year ended December 31, 1998 include (i) our pending acquisition of a cable
system serving Aguadilla, Puerto Rico, (ii) the completed and pending DBS
acquisitions described in this prospectus under "The Company -- Recent Pegasus
Developments," (iii) the sale of our New England cable systems, and (iv) this
offering, all as if these events had occurred at the beginning of the period.
The pro forma consolidated balance sheet as of December 31, 1998 includes
payments in connection with (i) our pending acquisition of a cable system
serving Aguadilla, Puerto Rico, (ii) the completed and pending DBS acquisitions
described in this prospectus under "The Company -- Recent Pegasus Developments,"
(iii) the repayment of seller notes, and (iv) this offering, as if these events
had occurred on December 31, 1998.
The acquisitions are accounted for using the purchase method of accounting.
The total costs of such acquisitions are allocated to the tangible and
intangible assets acquired and liabilities assumed based upon their respective
fair values. The allocation of the purchase price included in the pro forma
financial statements is preliminary. We do not expect that the final allocation
of the purchase price will materially differ from the preliminary allocation.
The pro forma adjustments are based upon available information and upon
certain assumptions that we believe are reasonable. The pro forma consolidated
financial information should be read in conjunction with our consolidated
financial statements and notes thereto. The pro forma consolidated financial
information is not necessarily indicative of our future results of operations.
There can be no assurance whether or when the pending DBS acquisitions or the
acquisition of the Puerto Rico cable system will be consummated.
F-23
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Statement of Operations Data
Year Ended December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
DBS Acquisitions
---------------------------- New England
Actual Completed(a) Pending(b) Cable Sale(c)
------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Net revenues:
DBS ........................... $147,142 $ 46,082 $4,189
Broadcast ..................... 34,311
Cable ......................... 13,768 ($3,277)
-------- -------- ------ -------
Total revenues ............... 195,221 46,082 4,189 (3,277)
Operating expenses:
DBS
Programming, technical,
and general and
administrative .............. 102,420 31,743 2,462
Marketing and selling ........ 45,706 10,979 593
Incentive compensation ....... 1,159
Depreciation and
amortization ................ 59,077 8,180 42
Broadcast
Programming, technical,
and general and
administrative .............. 18,056
Marketing and selling ........ 5,993
Incentive compensation ....... 177
Depreciation and
amortization ................ 4,557
Cable
Programming, technical,
and general and
administrative .............. 7,557 (1,602)
Marketing and selling ........ 341 (12)
Incentive compensation ....... 115 (75)
Depreciation and
amortization ................ 4,993 (835)
Corporate expenses ............ 3,614 196 (98)
Corporate depreciation and
amortization ................. 2,105
-------- -------- ------ -------
Income (loss) from
operations .................. (60,649) (5,016) 1,092 (655)
Interest expense ............... (44,604) (8,435) (17) 938
Interest income ................ 2,036
Other income (expenses), net ... (1,523) 387 27
Gain on sale of cable systems 24,726
-------- -------- ------ -------
Income (loss) before income
taxes ........................ (80,014) (13,064) 1,075 310
Provision (benefit) for income
taxes ......................... (896) 88 (5)
-------- -------- ------ -------
Net income (loss) ............. (79,118) (13,152) 1,075 315
Preferred stock dividends ..... 14,763
-------- -------- ------ -------
Net income (loss) applicable
to common shares ............. ($ 93,881) ($ 13,152) $1,075 $ 315
======== ======== ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pending
Cable The
Acquisition(d) Adjustments Subtotal Offering Pro Forma
---------------- --------------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net revenues:
DBS ........................... $ 197,413 $ 197,413
Broadcast ..................... 34,311 34,311
Cable ......................... $ 9,079 19,570 19,570
-------- ------------ --------- ------- ---------
Total revenues ............... 9,079 251,294 251,294
Operating expenses:
DBS
Programming, technical,
and general and
administrative .............. 136,625 136,625
Marketing and selling ........ 57,278 57,278
Incentive compensation ....... 1,159 1,159
Depreciation and
amortization ................ 16,384 (e) 83,683 83,683
Broadcast
Programming, technical,
and general and
administrative .............. 18,056 18,056
Marketing and selling ........ 5,993 5,993
Incentive compensation ....... 177 177
Depreciation and
amortization ................ 4,557 4,557
Cable
Programming, technical,
and general and
administrative .............. 4,409 10,364 10,364
Marketing and selling ........ 329 329
Incentive compensation ....... 75 (f) 115 115
Depreciation and
amortization ................ 982 1,732 (e) 6,872 6,872
Corporate expenses ............ 997 (1,095)(g) 3,614 3,614
Corporate depreciation and
amortization ................. 2,105 2,105
-------- ------------ --------- ------- ---------
Income (loss) from
operations .................. 2,691 (17,096) (79,633) (79,633)
Interest expense ............... (1,618) (7,379)(h) (61,115) 4,753(l) (56,362)
Interest income ................ 2,036 2,036
Other income (expenses), net ... (44) 231 (i) (922) (922)
Gain on sale of cable systems (24,726)(j)
-------- ------------ --------- ------- ---------
Income (loss) before income
taxes ........................ 1,029 (48,970) (139,634) 4,753 (134,881)
Provision (benefit) for income
taxes ......................... 922 (1,005)(k) (896) (896)
-------- ------------ --------- ------- ---------
Net income (loss) ............. 107 (47,965) (138,738) 4,753 (133,985)
Preferred stock dividends ..... 14,763 14,763
-------- ------------ --------- ------- ---------
Net income (loss) applicable
to common shares ............. $ 107 ($ 47,965) ($ 153,501) $ 4,753 ($ 148,748)
======== ============ ========= ======= =========
</TABLE>
F-24
<PAGE>
Notes to Pro forma Consolidated Statements of Operations Data
(a) Represents the combined financial results of the completed DBS acquisitions
from the beginning of the period presented to the date of acquisition by the
Company or the end of the period, as follows (dollars in thousands):
For the year ended
December 31, 1998
--------------------------------------------
Income
(loss)
Income applicable
(loss) to
Effective Net from common
Date Revenues operations Shares
NRTC # 211 3/9/98 $ 638 $ 121 $ 112
NRTC # 334 3/9/98 161 11 8
NRTC # 174 4/9/98 759 91 91
NRTC # 1011 4/9/98 108 18 16
NRTC # 1017 4/27/98 177 24 24
DTS 4/27/98 24,276 (7,962) (15,940)
NRTC# 267 5/11/98 355 79 49
NRTC# 368 5/11/98 150 67 67
NRTC# 379 5/11/98 221 42 54
NRTC# 121 6/10/98 207 55 51
NRTC# 128 6/10/98 833 110 98
NRTC# 364 6/10/98 115 (6) (4)
NRTC# 365 6/10/98 202 65 65
NRTC# 37 7/10/98 520 94 94
NRTC# 250 7/10/98 1,092 167 111
NRTC# 460 7/10/98 1,008 (200) (200)
NRTC# 289 8/10/98 371 46 31
NRTC# 83 9/10/98 808 326 326
NRTC# 378 9/10/98 863 5 1
NRTC# 433 9/10/98 696 66 66
NRTC# 475 9/10/98 4,037 490 597
NRTC# 363 10/9/98 241 97 97
NRTC# 13 11/9/98 834 (162) (162)
NRTC# 131 11/9/98 235 96 96
NRTC# 454 11/9/98 1,187 12 (83)
NRTC# 1027 12/9/98 589 68 68
NRTC# 1075 12/9/98 771 233 219
NRTC# 87 1/9/99 504 59 59
NRTC# 348 1/9/99 279 90 90
NRTC# 377 1/9/99 677 (103) (138)
NRTC# 1015 1/9/99 428 157 157
NRTC# 177 2/9/99 2,740 728 728
------- ------- --------
Total $46,082 $(5,016) $(13,152)
======= ======= ========
Entities with an effective date of 4/27/98 represent DTS acquisitions that
occurred prior to the DTS acquisition by Pegasus.
F-25
<PAGE>
(b) Represents the combined financial results of the pending DBS acquisitions
from the beginning of the period presented to the end of the period, as
follows (dollars in thousands):
For the year ended
December 31, 1998
---------------------------------------
Income
(loss)
Income applicable
(loss) to
Effective Net from common
Date Revenues operations Shares
NRTC # 110 Pending $ 540 $ 96 $ 96
NRTC # 223 Pending 538 191 191
NRTC # 248 Pending 621 25 8
NRTC # 273 Pending 2,490 780 780
------ ------ ------
Total $4,189 $1,092 $1,075
====== ====== ======
(c) Financial results of the New England operations of Pegasus Cable Television.
The pro forma income statement data for the year ended December 31, 1998
does not include a $24.7 million gain resulting from the sale of our New
England cable systems.
(d) Financial results of the pending Puerto Rico cable acquisition.
(e) To record additional amortization and depreciation expense resulting from
the purchase accounting treatment of the completed DBS acquisitions, the
pending DBS acquisitions, the pending Puerto Rico cable acquisition and the
sale of our New England cable systems. Substantially all of the purchase
price for the completed and pending DBS acquisitions has been allocated to
DBS rights of the $42.0 million purchase price for the pending Puerto Rico
cable acquisition, $5.5 million and $36.5 million has been allocated to
property, plant and equipment and franchise rights, respectively. Such
amounts are based on a preliminary allocation of the total consideration.
The actual depreciation and amortization may change immaterially based upon
the final allocation of the total consideration to be paid to the tangible,
and intangible assets acquired.
(f) To record the incentive compensation for the completed and pending DBS
acquisitions as per the Company's current incentive compensation plan.
(g) To eliminate corporate expenses charged by prior owners. These costs
represent management fees charged by the prior owners in addition to their
regular salaries, benefits and other related costs. These costs will not be
incurred in future periods as the Company's corporate expenses do not
include fees in excess of actual allocated costs.
(h) To record interest expense, as follows (dollars in thousands):
Pro Forma
Year Ended
Interest Rate 12/31/98
Interest expense
PM&C Credit Facility 7.7% $ 382
DTS Credit Facility 8.0 3,712
PCC 1998 Notes 9.75 9,750
PCC 1997 Notes 9.625 11,069
DTS Notes 12.5 19,375
PM&C Notes 12.5 10,625
Sellers' Notes various 1,346
Capital leases and other various 103
-------
Total $56,362
=======
(i) To eliminate certain nonrecurring income and expenses, net. These expenses
are primarily composed of legal and professional fees incurred by prior
owners.
(j) To eliminate the nonrecurring gain on sale of New England cable systems.
(k) To eliminate the net tax provision in connection with the acquisitions.
(l) To remove interest expense as a result of the pay down of debt from this
offering. See footnote h.
F-26
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Balance Sheet
December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
DBS Acquisitions
----------------------------
Actual Completed(a) Pending(b)
------------- -------------- ------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents .......... $ 54,505 ($ 13,975) ($ 14,420)
Restricted cash .................... 21,479
Accounts receivable, net ........... 20,882
Inventory .......................... 3,157
Prepaid expenses and other
current assets .................... 9,236
Property and equipment, net ........ 34,067
Intangibles, net ................... 729,406 22,725 17,470
Other assets ....................... 13,578
----------- -------- --------
Total assets ..................... $ 886,310 $ 8,750 $ 3,050
=========== ======== ========
LIABILITIES AND TOTAL
EQUITY
Accounts payable and accrued
expenses .......................... $ 37,074 $ 1,000
Accrued interest ................... 17,465
Current portion of long-term
debt .............................. 14,399 $ 1,250 1,883
Current portion of program
rights payable .................... 2,432
Long-term debt, net ................ 20,137 167
Senior Notes ....................... 215,000
PM&C Notes ......................... 82,378
DTS Notes .......................... 153,215
Credit Facilities .................. 73,900 7,500
Program rights payable, net ........ 2,472
Other long-term liabilities ........ 80,672
Minority Interest .................. 3,000
Series A Preferred Stock ........... 126,028
Class A Common Stock ............... 113
Class B Common Stock ............... 46
Additional paid in capital ......... 173,871
Deficit ............................ (115,892)
----------- -------- --------
Total liabilities and equity ..... $ 886,310 $ 8,750 $ 3,050
=========== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pending
Cable The
Acquisition(c) Other(d) Subtotal Offering(e) Pro Forma
---------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .......... ($ 19,908) $ 6,202 $ 6,202
Restricted cash .................... 21,479 21,479
Accounts receivable, net ........... 20,882 20,882
Inventory .......................... 3,157 3,157
Prepaid expenses and other
current assets .................... 9,236 9,236
Property and equipment, net ........ $ 5,460 39,527 39,527
Intangibles, net ................... 36,540 806,141 806,141
Other assets ....................... 13,578 13,578
------- -------- ----------- -------- -----------
Total assets ..................... $42,000 ($ 19,908) $ 920,202 $ 0 $ 920,202
======= ======== =========== ======== ===========
LIABILITIES AND TOTAL
EQUITY
Accounts payable and accrued
expenses .......................... $ 38,074 $ 38,074
Accrued interest ................... 17,465 17,465
Current portion of long-term
debt .............................. 17,532 17,532
Current portion of program
rights payable .................... 2,432 2,432
Long-term debt, net ................ ($ 9,908) 10,396 10,396
Senior Notes ....................... 215,000 215,000
PM&C Notes ......................... 82,378 82,378
DTS Notes .......................... 153,215 153,215
Credit Facilities .................. $42,000 (10,000) 113,400 ($ 62,040) 51,360
Program rights payable, net ........ 2,472 2,472
Other long-term liabilities ........ 80,672 80,672
Minority Interest .................. 3,000 3,000
Series A Preferred Stock ........... 126,028 126,028
Class A Common Stock ............... 113 30 143
Class B Common Stock ............... 46 46
Additional paid in capital ......... 173,871 62,010 235,881
Deficit ............................ (115,892) (115,892)
------- -------- ----------- -------- -----------
Total liabilities and equity ..... $42,000 ($ 19,908) $ 920,202 $ 0 $ 920,202
======= ======== =========== ======== ===========
</TABLE>
F-27
<PAGE>
Notes to Pro Forma Consolidated Balance Sheet (dollars in thousands)
(a) To record the five completed DBS acquisitions which occurred subsequent to
December 31, 1998. Intangible assets purchased consist entirely of DBS
rights, which are being amortized over a 10-year period, as follows:
Completed Total
DBS Acquisitions Consideration Cash Notes
---------------- ------------- ---- -----
NRTC System No. 0348 ......... $ 1,100 $ 1,100
NRTC System No. 0177 ......... 14,500 14,500
NRTC System No. 0087 ......... 2,500 1,250 $1,250
NRTC System No. 0377 ......... 3,025 3,025
NRTC System No. 1015 ......... 1,600 1,600
------- ------- ------
Total ..................... $22,725 $21,475 $1,250
======= ======= ======
(b) To record the four pending DBS acquisitions. Intangible assets to be
purchased consist of $17.0 million of DBS rights and $500,000 of
non-complete covenants, which are being amortized over a 10-year period and
the term of the related non-complete covenants (3-5 years), respectively, as
follows:
<TABLE>
<CAPTION>
Pending Total Assumed
DBS Acquisitions Consideration Cash Notes Liabilities
---------------- ------------- ---- ----- -----------
<S> <C> <C> <C> <C>
NRTC System No. 0110 ......... $ 2,400 $ 2,400
NRTC System No. 0248 ......... 3,100 1,550 $1,550
NRTC System No. 0223 ......... 2,120 2,120
NRTC System No. 0273 ......... 9,850 8,350 500 $1,000
------- ------- ------ ------
Total ..................... $17,470 $14,420 $2,050 $1,000
======= ======= ====== ======
</TABLE>
(c) To record the pending Puerto Rico cable acquisition. Assets to be purchased
consist of $5.5 million of property, plant and equipment and $36.5 million
of franchise rights, which are being amortized over a 20-year period and a
15-year period, respectively. The total consideration is $42.0 million in
cash.
(d) To record additional borrowings under the credit facilities and payments of
sellers' notes.
(e) To record the proceeds from the offering and the uses of such proceeds.
F-28
<PAGE>
================================================================================
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ........................... 3
Where You Can Find More Information .......... 8
Risk Factors ................................. 9
Use of Proceeds .............................. 17
Dividend Policy .............................. 18
Price Range of Class A Common Stock .......... 18
Dilution ..................................... 19
Capitalization ............................... 20
Selected Historical and Pro Forma
Consolidated Financial Data ............... 21
Management's Discussion and Analysis
of Financial Condition and Results of
Operations................................. 23
The Company .................................. 34
Management ................................... 41
Principal and Selling Stockholders ........... 48
Certain Relationships and Related
Transactions .............................. 51
Description of Certain Indebtedness .......... 54
Description of Capital Stock ................. 63
Future Sales of Common Stock ................. 67
Underwriters ................................. 70
Legal Matters ................................ 72
Experts ...................................... 72
Index to Financial Statements ................ F-1
Pro Forma Consolidated Financial Information.. F-23
================================================================================
<PAGE>
================================================================================
4,106,200 Shares
[GRAPHIC OMITTED]
Class A Common Stock
--------------
PROSPECTUS
--------------
March 16, 1999
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
Merrill Lynch & Co.
C.E. Unterberg, Towbin
ING Baring Furman Selz LLC
================================================================================
