-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B+vA4MIHTkbFHkbgMmW+1M7Xw/k9aOlqbHIeAiwsEDnhH6RDJitVUwY9XDJXmiag E2hIyOTGc8RQr1j6WfybjQ== 0001135338-02-000023.txt : 20020814 0001135338-02-000023.hdr.sgml : 20020814 20020814174636 ACCESSION NUMBER: 0001135338-02-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEGASUS COMMUNICATIONS CORP / CENTRAL INDEX KEY: 0001135338 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 233070336 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-32383 FILM NUMBER: 02737313 BUSINESS ADDRESS: STREET 1: 225 CITY LINE AVE STREET 2: STE 200 CITY: BALA CYNWYD STATE: PA ZIP: 19004 BUSINESS PHONE: 8884387488 MAIL ADDRESS: STREET 1: 225 CITY LINE AVE STREET 2: STE 200 CITY: BALA CYNWYD STATE: PA ZIP: 19004 FORMER COMPANY: FORMER CONFORMED NAME: PEGASUS HOLDINGS CORP I DATE OF NAME CHANGE: 20010221 10-Q 1 pcc_2q0210q.txt PCC FORM 2Q02 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2002 ------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from__________ to __________ Commission File Number 0-32383 PEGASUS COMMUNICATIONS CORPORATION ---------------------------------- (Exact name of Registrant as specified in its charter) Delaware 23-3070336 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) c/o Pegasus Communications Management Company; 225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004 ------------------------------------------------ ----- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (888) 438-7488 -------------- Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No___ Number of shares of each class of the Registrant's common stock outstanding as of August 9, 2002: Class A, Common Stock, $0.01 par value 51,588,777 Class B, Common Stock, $0.01 par value 9,163,800 Non-Voting, Common Stock, $0.01 par value - PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 2 PEGASUS COMMUNICATIONS CORPORATION Form 10-Q Table of Contents For the Quarterly Period Ended June 30, 2002 Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets June 30, 2002 and December 31, 2001 4 Consolidated Statements of Operations and Comprehensive Loss Three months ended June 30, 2002 and 2001 5 Consolidated Statements of Operations and Comprehensive Loss Six months ended June 30, 2002 and 2001 6 Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2002 and 2001 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings 27 Item 3. Defaults Upon Senior Securities 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 6. Exhibits and Reports on Form 8-K 28 Signature 29 3 Pegasus Communications Corporation Condensed Consolidated Balance Sheets (In thousands)
June 30, December 31, 2002 2001 ----------- ------------ (unaudited) Currents assets: Cash and cash equivalents $ 117,024 $ 144,673 Accounts receivable, net: Trade 23,656 34,744 Other 11,086 12,915 Deferred subscriber acquisition costs, net 19,002 15,194 Prepaid expenses 11,672 14,218 Other current assets 24,900 27,899 ---------- ---------- Total current assets 207,340 249,643 Property and equipment, net 96,163 91,811 Intangible assets, net 1,791,889 1,868,809 Investment in others 112,309 102,397 Other noncurrent assets 59,206 63,171 ---------- ---------- Total $2,266,907 $2,375,831 ========== ========== Current liabilities: Current portion of long term debt $ 5,809 $ 8,728 Accounts payable 12,436 10,872 Accrued interest 37,557 27,979 Accrued programming fees 66,770 67,225 Accrued commissions and subsidies 41,349 45,746 Other accrued expenses 39,693 32,863 Other current liabilities 3,844 4,755 ---------- ---------- Total current liabilities 207,458 198,168 Long term debt 1,318,757 1,329,923 Other noncurrent liabilities 43,045 78,375 ---------- ---------- Total liabilities 1,569,260 1,606,466 ---------- ---------- Commitments and contingent liabilities (see Note 14) Minority interest 1,802 1,315 Redeemable preferred stocks 439,369 472,048 Common stockholders' equity: Common stock 607 592 Other common stockholders' equity 255,869 295,410 ---------- ---------- Total common stockholders' equity 256,476 296,002 ---------- ---------- Total $2,266,907 $2,375,831 ========== ==========
See accompanying notes to consolidated financial statements 4 Pegasus Communications Corporation Consolidated Statements of Operations and Comprehensive Loss (In thousands, except per share amounts)
Three Months Ended June 30, 2002 2001 ---------- ---------- (unaudited) Net revenues: DBS $ 216,447 $ 206,015 Other businesses 8,856 9,477 --------- --------- Total net revenues 225,303 215,492 --------- --------- Operating expenses: DBS Programming 96,016 87,772 Other subscriber related expenses 49,086 51,841 --------- --------- Direct operating expenses (excluding depreciation and amortization shown below) 145,102 139,613 Promotions and incentives 2,027 12,375 Advertising and selling 7,820 32,375 General and administrative 6,865 9,092 Depreciation and amortization 41,487 63,250 --------- --------- Total DBS 203,301 256,705 --------- --------- Other businesses Programming 3,283 3,477 Other direct operating expenses 2,126 1,811 --------- --------- Direct operating expenses (excluding depreciation and amortization shown below) 5,409 5,288 Advertising and selling 2,059 2,145 General and administrative 1,111 1,250 Depreciation and amortization 1,136 1,254 --------- --------- Total other businesses 9,715 9,937 --------- --------- Corporate and development expenses 4,976 5,250 Corporate depreciation and amortization 7,972 384 Other operating expenses, net 6,456 5,951 --------- --------- Loss from operations (7,117) (62,735) Interest expense (36,310) (34,876) Interest income 218 1,346 Loss on impairment of marketable securities (3,063) -- Other nonoperating income (expense), net 113 (35) --------- --------- Loss before equity in affiliates, income taxes, continued operations, and extraordinary item (46,159) (96,300) Equity in earnings of affiliates 173 6,100 Benefit for income taxes (17,490) (31,736) --------- --------- Loss before discontinued operations and extraordinary item (28,496) (58,464) Discontinued operations: Loss on broadband operations, net of income tax benefit of $841 and $2,047, respectively (1,372) (3,340) --------- --------- Loss before extraordinary item (29,868) (61,804) Extraordinary loss from extinguishment of debt, net of income tax benefit of $604 -- (986) --------- --------- Net loss (29,868) (62,790) --------- --------- Other comprehensive income (loss): Unrealized (loss) gain on marketable securities, net of income tax benefit of $465 and $1,528, respectively (758) 2,493 Reclassification adjustment for accumulated unrealized loss on marketable securities included in net loss, net of income tax benefit of $1,164 1,899 -- --------- --------- Net other comprehensive income 1,141 2,493 --------- --------- Comprehensive loss $ (28,727) $ (60,297) ========= ========= Basic and diluted per common share amounts: Loss from continuing operations, including $8,954 and $10,421, respectively, representing accrued and deemed preferred stock dividends and accretion $ (0.62) $ (1.23) Discontinued operations (0.02) (0.06) --------- --------- Loss before extraordinary item, including accrued and deemed preferred stock dividends and accretion (0.64) (1.29) Extraordinary item -- (0.02) --------- --------- Net loss applicable to common shares $ (0.64) $ (1.31) ========= ========= Weighted average number of common shares outstanding 60,332 55,679 ========= =========
See accompanying notes to consolidated financial statements 5 Pegasus Communications Corporation Consolidated Statements of Operations and Comprehensive Loss (In thousands, except per share amounts)
Six Months Ended June 30, 2002 2001 ---------- ---------- (unaudited) Net revenues: DBS $ 431,171 $ 411,853 Other businesses 17,209 17,466 --------- --------- Total net revenues 448,380 429,319 --------- --------- Operating expenses: DBS Programming 192,334 175,934 Other subscriber related expenses 100,827 100,743 --------- --------- Direct operating expenses (excluding depreciation and amortization shown below) 293,161 276,677 Promotions and incentives 3,770 29,308 Advertising and selling 16,121 69,434 General and administrative 14,782 18,254 Depreciation and amortization 80,937 126,004 --------- --------- Total DBS 408,771 519,677 --------- --------- Other businesses Programming 6,625 6,195 Other direct operating expenses 4,152 3,616 --------- --------- Direct operating expenses (excluding depreciation and amortization shown below) 10,777 9,811 Advertising and selling 3,891 4,027 General and administrative 2,259 2,329 Depreciation and amortization 2,316 2,586 --------- --------- Total other businesses 19,243 18,753 --------- --------- Corporate and development expenses 10,520 9,699 Corporate depreciation and amortization 15,915 727 Other operating expenses, net 15,921 14,474 --------- --------- Loss from operations (21,990) (134,011) Interest expense (72,362) (69,207) Interest income 436 4,053 Loss on impairment of marketable securities (3,063) -- Other nonoperating income (expense), net 1,239 (3,686) --------- --------- Loss before equity in affiliates, income taxes, discontinued operations, and extraordinary item (95,740) (202,851) Equity in earnings of affiliates 349 14,101 Benefit for income taxes (36,107) (66,014) --------- --------- Loss before discontinued operations and extraordinary item (59,284) (122,736) Discontinued operations: Loss on broadband operations, net of income tax benefit of $1,424 and $3,264, respectively (2,324) (5,325) --------- --------- Loss before extraordinary item (61,608) (128,061) Extraordinary loss from extinguishment of debt, net of income tax benefit of $604 -- (986) --------- --------- Net loss (61,608) (129,047) --------- --------- Other comprehensive loss: Unrealized loss on marketable securities, net of income tax benefit of $1,780 and $3,137, respectively (2,904) (5,118) Reclassification adjustment for accumulated unrealized loss on marketable securities included in net loss, net of income tax benefit of $1,164 1,899 -- --------- --------- Net other comprehensive loss (1,005) (5,118) --------- --------- Comprehensive loss $ (62,613) $(134,165) ========= ========= Basic and diluted per common share amounts: Loss from continuing operations, including $16,943 and $20,841, respectively, representing accrued and deemed preferred stock dividends and accretion $ (1.27) $ (2.58) Discontinued operations (0.04) (0.10) --------- --------- Loss before extraordinary item, including accrued and deemed preferred stock dividends and accretion (1.31) (2.68) Extraordinary item -- (0.02) --------- --------- Net loss applicable to common shares $ (1.31) $ (2.70) ========= ========= Weighted average number of common shares outstanding 60,018 55,503 ========= =========
See accompanying notes to consolidated financial statements 6 Pegasus Communications Corporation Condensed Consolidated Statements of Cash Flows (In thousands)
Six Months Ended June 30, 2002 2001 ---------- ----------- (unaudited) Net cash used for operating activities $ 23,675 $ (95,747) --------- --------- Cash flows from investing activities: DBS equipment capitalized (13,497) (8,056) Other capital expenditures (2,996) (14,509) Purchases of intangible assets (346) (7,721) Other -- (889) --------- --------- Net cash used for investing activities (16,839) (31,175) --------- --------- Cash flows from financing activities: Proceeds from term facility 63,156 -- Net repayments on revolving credit facilities (80,000) -- Repayments of other long term debt (7,281) (8,227) Redemption of preferred stock (5,717) -- Repurchase of preferred stock (4,964) -- Changes in restricted cash, net of cash acquired 1,139 (15,464) Debt financing costs (213) (1,672) Other (605) 1,663 --------- --------- Net cash used for financing activities (34,485) (23,700) --------- --------- Net decrease in cash and cash equivalents (27,649) (150,622) Cash and cash equivalents, beginning of year 144,673 214,361 --------- --------- Cash and cash equivalents, end of period $ 117,024 $ 63,739 ========= =========
See accompanying notes to consolidated financial statements 7 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General "We", "us", and "our" refer to Pegasus Communications Corporation together with its subsidiaries. "PCC" refers to Pegasus Communications Corporation individually as a separate entity. "PSC" refers to Pegasus Satellite Communications, Inc., one of PCC's subsidiaries. "PM&C" refers to Pegasus Media & Communications, Inc., a subsidiary of PSC. "DBS" refers to direct broadcast satellite. Significant Risks and Uncertainties We are highly leveraged. At June 30, 2002, we had a combined carrying amount of debt and redeemable preferred stocks outstanding of $1.7 billion. We reduced our leveraged position by $160.1 million, excluding applicable accrued dividends, in transactions subsequent to June 30, 2002 as indicated in notes 7 and 8. Because we are highly leveraged, we are more vulnerable to adverse economic and industry conditions. We dedicate a substantial portion of cash to pay amounts associated with debt. In the first six months of 2002, we paid interest of $49.3 million. We were scheduled to begin paying cash dividends on PSC's 12-3/4% series preferred stock in July 2002. However, we did not declare the scheduled semiannual dividend payable July 1, 2002 for this series (see note 7). Further, we did not declare the scheduled quarterly dividends payable April 30, 2002 and July 31, 2002 for our Series C preferred stock (see note 7). In the past, dividends payable on Series C were paid with shares of our Class A common stock, as permitted under the certificate of designation. We redeemed $5.7 million of Series B preferred stock in cash in March 2002. We have received notice of redemption from holders for $5.0 million of Series E preferred stock. However, we are not permitted nor obligated to redeem the related shares while dividends on preferred stock senior to the series are in arrears. Under these circumstances, our inability to redeem the Series E shares is not an event of default. We have also used cash to purchase our common stock, preferred stock, and debt. See notes 5, 7, and 8, respectively, for a discussion of these transactions. Using cash for the above noted payments reduces the availability of funds to us for working capital, capital expenditures, and other activities, and limits our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate, although we will reduce the amount of cash paid to unaffiliated parties in connection with the preferred stocks and debt we repurchased. Our ability to make payments on and to refinance indebtedness and redeemable preferred stocks outstanding and to fund planned capital expenditures and other activities depends on our ability to generate cash in the future. Our ability to generate cash depends upon the success of our business strategy, prevailing economic conditions, regulatory risks, our ability to integrate acquired assets successfully into our operations, competitive activities by other parties, equipment strategies, technological developments, level of programming costs, levels of interest rates, and financial, business, and other factors that are beyond our control. We cannot assure that our business will generate sufficient cash flow from operations or that alternative financing will be available to us in amounts sufficient to service outstanding debt and redeemable preferred stocks or to fund other liquidity needs. Our indebtedness and preferred stocks contain numerous covenants that, among other things, generally limit the ability to incur additional indebtedness and liens, issue other securities, make certain payments and investments, pay dividends, transfer cash, dispose of assets, and enter into other transactions, and impose limitations on the activities of our subsidiaries. Failure to make debt payments or comply with covenants could result in an event of default that, if not cured or waived, could have a material adverse effect on us. 2. Basis of Presentation The unaudited financial statements herein include the accounts of PCC and all of its subsidiaries on a consolidated basis. All intercompany transactions and balances have been eliminated. The balance sheets and statements of cash flows are presented on a condensed basis. These financial statements are prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements reflect all adjustments consisting of normal recurring items that, in our opinion, are necessary for a fair presentation, in all material respects, of our financial position and the results of our operations and comprehensive loss and our cash flows for the interim period. The interim results of operations contained herein may not necessarily be indicative of the results of operations for the full fiscal year. Prior year amounts have been reclassified where appropriate to conform to the current year classification for comparative purposes. 8 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. Adoption of FAS 141 On January 1, 2002, we adopted in its entirety Statement of Financial Accounting Standards No. 141 "Business Combinations" ("FAS 141"). FAS 141, as well as FAS 142 discussed below, makes a distinction between intangible assets that are goodwill and intangible assets that are other than goodwill. When we use the term "intangible asset or assets", we mean it to be an intangible asset or assets other than goodwill, and when we use the term "goodwill", we mean it to be separate from intangible assets. The principal impact to us of adopting FAS 141 was the requirement to reassess at January 1, 2002 the classification on our balance sheet of the carrying amounts of our goodwill and intangible assets recorded in acquisitions we made before July 1, 2001. The adoption of FAS 141 did not have a significant impact on our financial position. 4. Adoption of FAS 142 In the first quarter 2002, effective on January 1, 2002, we adopted in its entirety Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("FAS 142"). A principal provision of the standard is that goodwill and intangible assets that have indefinite lives are not subject to amortization, but are subject to an impairment test at least annually. The principal impacts to us of adopting FAS 142 were: 1) reassessing on January 1, 2002 the useful lives of intangible assets existing on that date that we had recorded in acquisitions we made before July 1, 2001 and adjusting remaining amortization periods as appropriate; 2) ceasing amortization of goodwill and intangible assets with indefinite lives effective January 1, 2002; 3) establishing reporting units as needed for the purpose of testing goodwill for impairment; 4) testing on January 1, 2002 goodwill and intangible assets with indefinite lives existing on that date for impairment; and 5) separating goodwill from intangible assets. The provisions of this standard were not permitted to be retroactively applied to periods before the date we adopted FAS 142. We believe that the estimated remaining useful life of the DBS rights assets should be based on the estimated useful lives of the satellites at the 1010 west longitude orbital location available to provide DirecTV services under the NRTC-DirecTV contract. The contract sets forth the terms and conditions under which the lives of those satellites are deemed to expire, based on fuel levels and transponder functionality. We estimate that the useful life of the DirecTV satellite resources provided under the contract (without regard to renewal rights) expires in November 2016. Because the cash flows for all of our DBS rights assets emanate from the same source, we believe that it is appropriate for all of the estimated useful lives of our DBS rights assets to end at the same time. Prior to the adoption of FAS 142, our DBS rights assets had estimated useful lives of 10 years from the date we obtained the rights. Linking the lives of our DBS rights assets in such fashion extended the amortization period for the unamortized carrying amount of the assets and the range of the useful lives of the rights from the date of their inception. The life of our DBS rights is subject to litigation. See note 14 for information regarding this litigation. We determined that our broadcast licenses had indefinite lives because under past and existing Federal Communications Commission's regulations the licenses can be routinely renewed indefinitely with little cost. Ceasing amortization on goodwill and broadcast licenses had no material effect. The adoption of FAS 142 did not have a significant effect on our other intangible assets other than those discussed above. Our industry segments already established equate to the reporting units required under the standard. We determined that there were no impairments to be recorded upon the adoption of FAS 142. 9 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) At June 30, 2002 and December 31, 2001, intangible assets that were amortized had the following balances (in thousands): June 30, December 31, 2002 2001 ---------- ----------- Cost: DBS rights assets $2,291,422 $2,259,231 Other 226,135 286,430 ---------- ----------- 2,517,557 2,545,661 ---------- ----------- Accumulated amortization: DBS rights assets 697,154 624,115 Other 44,439 52,737 ---------- ----------- 741,593 676,852 ---------- ----------- Net $1,775,964 $1,868,809 ========== =========== At June 30, 2002, intangible assets that were not amortized consisted of broadcast licenses with a carrying amount of $15.9 million. We had no intangible assets that were not amortized at December 31, 2001. At June 30, 2002 and December 31, 2001, total goodwill had a carrying amount of $15.8 million and was all associated with our broadcast segment. Because the carrying amount of goodwill is not significant, it is included in other noncurrent assets on the balance sheet. Loss before extraordinary items and net loss, each as adjusted for the effects of applying FAS 142, for the three and six months ended June 30, 2001 were as follows (in thousands, except per share amounts): For the three months ended: Per share --------- Loss before extraordinary items, as adjusted $(45,004) $(0.99) Net loss, as adjusted (45,990) (1.01) For the six months ended: Loss before extraordinary items, as adjusted (94,356) (2.07) Net loss, as adjusted (95,342) (2.09) A reconciliation of net loss, as reported to net loss, as adjusted for the three and six months ended June 30, 2001 is as follows (in thousands, except per share amounts): Per share --------- For the three months ended: Net loss, as reported $(62,790) $(1.31) Add back goodwill amortization 101 - Add back amortization on broadcast licenses 101 - Adjust amortization for a change in the useful life of DBS rights assets 16,598 .30 ---------- -------- Net loss, adjusted $(45,990) $(1.01) ========== ======== For the six months ended: Net loss, as reported $(129,047) $(2.70) Add back goodwill amortization 202 - Add back amortization on broadcast licenses 202 - Adjust amortization for a change in the useful life of DBS rights assets 33,301 .61 ----------- -------- Net loss, as adjusted $ (95,342) $(2.09) =========== ======== 10 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Aggregate amortization expense for the six months ended June 30, 2002 and 2001 was $74.3 million and $122.5 million, respectively. Aggregate amortization expense for 2001 was $245.4 million. The estimated aggregate amount of amortization expense for the remainder of 2002 and for each of the next five years thereafter is $73.6 million, $129.0 million, $129.0 million, $126.8 million, $123.5 million, and $122.8 million, respectively. 5. Common Stock The number of shares of PCC's Class A common stock at June 30, 2002 was 51,493,223 issued and 51,413,503 outstanding, and at December 31, 2001 was 49,995,099 issued and 49,991,463 outstanding. Class A shares issued during the six months ended June 30, 2002 were as follows: Payment for dividends on preferred stocks 576,394 Conversion of Series C preferred stock (see note 7) 570,410 Employee benefit and award plans, net 275,236 In July 2002, PCC issued 95,554 shares of Class A in connection with employee benefit plans. In July and into August 2002, PSC purchased 475,400 shares of PCC's Class A through a combination of a negotiated transaction with an unaffiliated holder and open market purchases for $408 thousand in cash. The shares purchased will be accounted for as treasury stock in our consolidated financial statements prepared for the third quarter 2002. No dividends were declared or paid for common stocks during the six months ended June 30, 2002. At our annual stockholders' meeting held in May 2002, stockholders authorized the board of directors to effect a reverse stock split of PCC's issued and outstanding Class A and B common stocks at any time prior to the next annual stockholders' meeting. The reverse split would be based upon a determination by the board of directors that the reverse stock split and reverse stock split ratio are in our and the stockholders' best interests. The ratio of the reverse split would be not less than 1 for 2 and not more than 1 for 10. Also at the annual stockholders' meeting, stockholders approved amendments to certain of our employee benefit plans. The 1996 stock option plan was amended to increase the number of shares of Class A that may be issued under the plan to 10.0 million from 6.0 million and to increase the maximum number of shares of Class A that may be issued under options granted to any employee under the plan to 2.0 million from 1.5 million. The restricted stock plan was amended to increase the number of shares of Class A that may be issued under the plan to 2.0 million from 1.5 million. 6. Changes in Other Stockholders' Equity The change in other stockholders' equity from December 31, 2001 to June 30, 2002 consisted of (in thousands): Net loss $(61,608) Repurchase of preferred stock at amounts less than carrying value (see note 7) 28,774 Deemed dividends (see note 7), dividends accrued, and accretion associated with preferred stocks (16,943) Common stock issued in conversion of Series C preferred stock (see note 7) 7,613 Common stock issued as payment for preferred stock dividends 5,201 Common stock issued for employee plans and awards, net 1,083 Net change in accumulated other comprehensive loss (1,005) Beneficial conversion feature recovered associated with preferred stock redeemed (see note 7) (2,441) Preferred stock original issue costs written off in connection with preferred stock converted (215) 11 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. Redeemable Preferred Stocks The aggregate carrying amount of redeemable preferred stocks at June 30, 2002 of $439.4 million consisted of $159.4 million in 12-3/4% series of PSC and $280.0 million in preferred stocks of PCC. The aggregate carrying amount at June 30, 2002 decreased by $32.7 million from that at December 31, 2001. This decrease consisted of: $(33.7) million associated with repurchases of shares of the 12-3/4% series; a net $(6.5) million associated with the conversion of Series C into Class A common stock; net accrued dividends and accretion of $18.5 million; dividends of $(5.2) million paid in Class A common stock; dividends paid in cash of $(10) thousand; and the redemption of Series B junior convertible participating in cash of $(5.7) million. After giving effect to the purchase transactions occurring after June 30, 2002 described below, along with associated accrued dividends and related stock issuance costs, the pro forma aggregate carrying amount of redeemable preferred stocks at June 30, 2002 was $304.0 million. The number of shares of preferred stock issued and outstanding at June 30, 2002 and December 31, 2001, respectively, was: 150,240 and 172,952 of 12-3/4% Series of PSC; 2,582,796 and 2,650,300 of Series C; 12,500 of Series D at each date; and 10,000 of Series E at each date. The net decrease in the number of shares for the 12-3/4% series resulted from an increase of 11,026 shares issued for the semiannual dividend declared and paid in January 2002 aggregating $11.0 million that was paid in like kind shares and a decrease of 33,738 for shares purchased by PSC. The decrease in Series C was due to the conversion of shares into shares of Class A common stock. Annual dividends on Series D and E of $500 thousand and $400 thousand, respectively, were paid in January 2002 with an aggregate of 87,138 shares of PCC's Class A common stock. In January 2002, the regularly scheduled quarterly dividend for Series C of $4.3 million was paid with 489,256 shares of PCC's Class A common stock. All 5,707 outstanding shares of Series B were redeemed in March 2002 at a redemption price of $1,000 per share, plus accrued and unpaid dividends to the date of redemption of $10 thousand. The redemption price and accrued dividends were paid in cash. As a result of the redemption, $2.4 million of the beneficial conversion feature previously recognized for this series when it was issued was recovered as a negative deemed dividend. This deemed dividend was included in determining the net loss applicable to common shares in 2002. In May 2002, 67,504 shares of Series C amounting to $6.8 million liquidation preference value, excluding accrued dividends, were converted into 570,410 shares of Class A common stock. The conversion rate used exceeded the conversion rate specified in the series' certificate of designation. As a result, $869 thousand of the consideration paid in the conversion was determined to be an inducement to the holder of the Series C shares to convert and was treated as a deemed dividend. This deemed dividend was included in determining the net loss applicable to common shares for 2002. An allocable portion of the original issue costs for Series C associated with the shares converted included in the net carrying amount of Series C of $216 thousand was charged to additional paid in capital. In July 2002, in a series of negotiated transactions with unaffiliated holders, PCC purchased 774,682 shares of Series C with a liquidation preference value, excluding accrued dividends, of $77.5 million for $6.1 million in cash. The shares purchased will be accounted for as constructively retired, with the difference between the liquidation preference value and purchase price recorded as an adjustment to other stockholders' equity in the balance sheet, in the third quarter 2002. In June 2002, PCC purchased in a series of negotiated transactions with unaffiliated holders 33,738 shares of the 12-3/4% series with a liquidation preference value, excluding accrued dividends, of $33.7 million for $4.9 million in cash. For our consolidated financial reporting purposes, the stock purchased was considered as constructively retired. Accordingly, the liquidation preference value and dividends associated with these shares have been eliminated from PCC's financial statements. The differential of $28.8 million between the liquidation preference value and the purchase price was recorded as an adjustment to other stockholders' equity in the balance sheet. In July 2002, PCC purchased in a series of negotiated transactions with unaffiliated holders an additional 54,828 shares of the 12-3/4% series with a liquidation preference value, excluding accrued dividends, of $54.8 million for $11.5 million. The shares purchased will be accounted for as constructively retired in the third quarter 2002. 12 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) At the discretion of our board of directors as permitted by the certificate of designation for Series C, we did not declare the scheduled quarterly dividends payable April 30 and July 31, 2002 for this series. The total amount of dividends in arrears on Series C to unaffiliated holders through the most recent dividend payable date of July 31, 2002, after giving effect to shares repurchased through that date as discussed above, was $5.9 million, at a rate of 6.5% per $100 liquidation preference value for each share outstanding. Dividends not declared accumulate in arrears until later declared and paid. Dividends on the Series C accrue without interest. Unless full cumulative dividends in arrears have been paid or set aside for payment, PCC, but not its subsidiaries, may not, with certain exceptions, 1) declare, pay, or set aside amounts for payment of future cash dividends or distributions, or 2) purchase, redeem, or otherwise acquire for value any shares of its capital stock junior or on a parity with Series C. Series D and E preferred stock are junior securities with respect to Series C. As permitted in the certificate of designation, PCC has the option of paying dividends declared on Series C in cash, shares of PCC's Class A common stock, or a combination of both. Dividends declared on Series C in the past have been paid with shares of the Class A common stock. At the discretion of our board of directors as permitted by the certificate of designation for the 12-3/4% series, we did not declare the scheduled semiannual dividend payable July 1, 2002 for this series. The amount of the dividend scheduled to be paid on that date and in arrears to unaffiliated holders was $9.6 million. Dividends in arrears on this series accrue interest at a rate of 14.75% per year until later declared and paid. Unless full cumulative dividends in arrears on the 12-3/4% series have been paid or set aside for payment, PSC may not, with certain exceptions, 1) declare, pay, or set aside amounts for payment of future cash dividends or distributions, or 2) purchase, redeem, or otherwise acquire for value any shares of its capital stock junior to the 12-3/4% series. After giving effect to shares repurchased after June 30, 2002 as discussed above, dividends in arrears to unaffiliated holders were $6.1 million. Despite the restrictions placed on PSC regarding cash dividend payments discussed in the preceding paragraph, permissible means are available to transfer funds within the PCC consolidated group while dividends on PSC's preferred stock are in arrears. 8. Long Term Debt During the three months ended June 30, 2002, amounts borrowed and repayments of amounts borrowed under PM&C's revolving credit facility were equal. There was no principal amount outstanding under the revolving credit facility at June 30, 2002, compared to $80.0 million outstanding at December 31, 2001. Letters of credit outstanding under the revolving credit facility, which reduce the availability thereunder, were $60.9 million at June 30, 2002 and $63.2 million at December 31, 2001. At June 30, 2002, the commitment for the revolving credit facility was permanently reduced by approximately $8.4 million as scheduled under the terms of the credit agreement to $185.6 million. The commitment for the revolving credit facility will continue to be permanently reduced by approximately $8.4 million in each of September and December 2002. Availability under the revolving credit facility at June 30, 2002 was approximately $124.5 million. We repaid $688 thousand of outstanding principal under PM&C's term loan facility during the second quarter 2002, as scheduled in the credit agreement, which reduced the total principal amount outstanding to $270.9 million. The weighted average variable rate of interest including applicable margins on principal amounts outstanding under the term facility was approximately 5.4% at June 30, 2002 and December 31, 2001. In June 2002, PM&C borrowed $63.2 million in incremental term loans under its credit agreement out of $200.0 million capacity specified for such purpose thereunder. Our option to request additional funding from the unused portion of the incremental term loan capacity of $136.8 million expired June 30, 2002. Principal amounts outstanding under the incremental term loan facility are payable quarterly in increasing increments over the remaining term of the facility beginning September 30, 2002. All unpaid principal and interest outstanding under the incremental term loans are due July 31, 2005. Quarterly principal payments scheduled for the remainder of 2002 are $158 thousand in each of September and December, with total payments of $632 thousand, $16.3 million, and $45.9 million in 2003, 2004, and 2005, respectively. Amounts repaid under the incremental term loan facility may not be reborrowed. Margins on incremental term loans are 2.5% for base rates and 3.5% for LIBOR rates. Interest on outstanding principal borrowed under base rates is due and payable quarterly and interest on outstanding principal borrowed under LIBOR rates is due and payable the earlier of the end of the contracted interest rate period or three months. The weighted average rate of interest including applicable margins on principal amounts outstanding under the incremental loan term facility at June 30, 2002 was 7.25%. 13 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) In July 2002, PSC purchased $17.1 million in maturity value of PM&C's 12-1/2% notes due July 2005 for $17.1 million in a negotiated transaction with an unaffiliated holder. In August 2002, PSC purchased $10.7 million in maturity value of its 13-1/2% senior subordinated discount notes due March 2007 for $2.8 million in negotiated transactions with an unaffiliated holder. The notes purchased will be accounted for as constructively retired, with any associated gain or loss recognized in earnings in the third quarter 2002. 9. Per Common Share Amounts Within each respective period presented on the statements of operations and comprehensive loss, basic and diluted per common share amounts were the same because all potential common stock items were antidilutive and excluded from the computation. The number of shares of potential common stock items derived from convertible preferred stocks, warrants and stock options at June 30, 2002 and December 31, 2001 was 13.7 million and 12.5 million, respectively. Dividends and accretion on preferred stock and deemed dividends associated with preferred stock issuances, conversions, and redemptions adjust, as appropriate, net income or loss and results from continuing operations to arrive at the amount applicable to common shares. Such amounts for the periods presented were as follows (in thousands): Three Months Six Months Ended June 30, Ended June 30, 2002 2001 2002 2001 ------- ------- --------- -------- Accrued dividends on preferred stock $8,061 $10,397 $18,467 $20,793 Deemed dividends associated with preferred stock 869 - (1,572) - Accretion on preferred stock 24 24 48 48 ------- ------- --------- -------- $8,954 $10,421 $16,943 $20,841 ======= ======= ========= ======== The amounts in the table exclude dividends associated with preferred stock held by entities within the PCC consolidated group. 10. Supplemental Cash Flow Information Significant noncash investing and financing activities were as follows (in thousands): Six Months Ended June 30, 2002 2001 -------- --------- Preferred stock dividends, accrued and deemed, and accretion on preferred stock $16,943 $20,841 Payment of 12-3/4% series preferred stock dividends in like kind shares 11,026 9,744 Payment of other preferred stock dividends with common stock 5,207 11,050 Common stock issued for employee benefit and award plans 1,691 2,971 NRTC patronage capital investment accrued 9,555 10,850 Net change in other comprehensive loss 1,005 5,118 Beneficial conversion feature recovered in additional paid in capital in association with preferred stock redeemed with common stock 2,441 -- Conversion of preferred stock into common stock 7,619 -- Differential between cash purchase price and liquidation preference value, excluding accrued dividends, for PSC preferred stock repurchased 28,774 -- 14 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. Loss on Impairment of Marketable Securities Based on the significance and duration of the loss in fair value, at June 30, 2002, we determined that our sole investment in marketable securities held had incurred an other than temporary decline in fair market value. Accordingly, we wrote down the cost basis in the marketable securities to their fair market value at June 30, 2002 and charged earnings in the amount of $3.1 million for the impairment loss realized. The income tax benefit recorded in income taxes for continuing operations associated with this charge was $1.2 million. Concurrently, we made a reclassification adjustment to other comprehensive loss for the three and six months ended June 30, 2002 and other stockholders' equity at June 30, 2002 of $1.9 million, net of income tax benefit of $1.2 million, to remove all of the net unrealized losses on the marketable securities accumulated at that date that were realized and recorded in earnings as noted above. 12. Discontinued Operations Because our Pegasus Express two way satellite internet access business no longer fits into our near term strategic plans, we entered into an agreement with an unaffiliated party in June 2002 to sell our Pegasus Express subscribers and the Pegasus Express equipment inventory for cash. Transfer of the subscribers is expected to occur in mid August 2002, and transfer of the equipment is expected to be completed by the end of August 2002. We anticipate that the cash proceeds from the sale of the subscribers will be about $1.6 million, subject to adjustment for the number of our subscribers that ultimately are authorized into the buyer's internet access service. We anticipate that the cash proceeds from the sale of the equipment will be about $2.6 million, subject to the actual number of units transferred, and will be payable in four equal monthly payments ending November 2002. Upon the sale of the subscribers and equipment, we will no longer operate the Pegasus Express business. As Pegasus Express is the only business within our broadband operation, we are reporting the broadband operation as discontinued effective June 30, 2002 for all periods presented. Revenues and pretax loss from operations of the broadband operation follows (in thousands): Three Months Six Months Ended June 30, Ended June 30, 2002 2001 2002 2001 -------- ------- --------- -------- Revenues $ 1,177 $ - $ 2,327 $ 167 Pretax loss (2,213) (5,371) (3,748) (8,589) Included in discontinued operations for the three and six months ended June 30, 2002 is an impairment loss recognized on the equipment inventory of $837 thousand. This impairment writes down the carrying amount of the equipment to its fair market value based on the per unit sale price of the equipment specified in the sale agreement. Also included in discontinued operations for these periods is an aggregate impairment loss of $847 thousand for valuation reserves placed against other assets that we believe have diminished utility to the broadband operation as a result of the pending subscriber and equipment sale and discontinuance of the operations. Pegasus Express equipment inventory subject to sale with a carrying amount of $2.8 million at June 30, 2002 is included in other current assets in the balance sheet. 13. Industry Segments Our only reportable segment at June 30, 2002 was the DBS business. Information on DBS' revenue and measure of profit/loss and how these contribute to our consolidated loss from continuing operations before income taxes for each period reported is as presented on the statements of operations and comprehensive loss. DBS derived all of its revenues from external customers for each period presented. Identifiable total assets for DBS were approximately $1.9 billion at June 30, 2002, which did not change significantly from the total DBS assets at December 31, 2001. 15 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. Commitments and Contingent Liabilities Legal Matters DIRECTV Litigation: National Rural Telecommunications Cooperative Our subsidiaries, Pegasus Satellite Television ("PST") and Golden Sky Systems ("GSS"), are affiliates of the National Rural Telecommunications Cooperative ("NRTC") that participate through agreements in the NRTC's direct broadcast satellite program. "DIRECTV" refers to the programming services provided by DirecTV, Inc. ("DirecTV"). On June 3, 1999, the NRTC filed a lawsuit in United States District Court, Central District of California against DirecTV seeking a court order to enforce the NRTC's contractual rights to obtain from DirecTV certain premium programming formerly distributed by United States Satellite Broadcasting Company, Inc. for exclusive distribution by the NRTC's members and affiliates in their rural markets. On July 22, 1999, DirecTV filed a counterclaim seeking judicial clarification of certain provisions of DirecTV's contract with the NRTC. As part of the counterclaim, DirecTV is seeking a declaratory judgment that the term of the NRTC's agreement with DirecTV is measured only by the orbital life of DBS-1, the first DIRECTV satellite launched, and not by the orbital lives of the other DIRECTV satellites at the 101(degree)W orbital location. While the NRTC has a right of first refusal to receive certain services from any successor DIRECTV satellite, the scope and terms of this right of first refusal are also being disputed in the litigation, as discussed below. If DirecTV were to prevail on its counterclaim, any failure of DBS-1 could have a material adverse effect on our DIRECTV rights. On August 26, 1999, the NRTC filed a separate lawsuit in federal court against DirecTV claiming that DirecTV had failed to provide to the NRTC its share of launch fees and other benefits that DirecTV and its affiliates have received relating to programming and other services. On November 15, 1999, the court granted a motion by DirecTV and dismissed the portion of this lawsuit asserting tort claims, but left in place the remaining claims asserted by the NRTC. The NRTC and DirecTV have also filed indemnity claims against one another that pertain to the alleged obligation, if any, of the NRTC to indemnify DirecTV for costs incurred in various lawsuits described herein. These claims have been severed from the other claims in the case and will be tried separately. On July 3, 2002, the court granted a motion for summary judgment filed by DirecTV, holding that NRTC is liable to indemnify DirecTV for the costs of defense and liabilities that DirecTV incurs in a patent case filed by Pegasus Development Corporation and Personalized Media Communications, L.L.C., which is more fully described below. Pegasus Satellite Television and Golden Sky Systems On January 10, 2000, PST and GSS filed a class action lawsuit in federal court in Los Angeles against DirecTV as representatives of a proposed class that would include all members and affiliates of the NRTC that are distributors of DIRECTV. The complaint contained causes of action for various torts, common counts and declaratory relief based on DirecTV's failure to provide the NRTC with certain premium programming, and on DirecTV's position with respect to launch fees and other benefits, term and right of first refusal. The complaint sought monetary damages and a court order regarding the rights of the NRTC and its members and affiliates. On February 10, 2000, PST and GSS filed an amended complaint which added new tort claims against DirecTV for interference with PST's and GSS' relationships with manufacturers, distributors and dealers of direct broadcast satellite equipment. The class action allegations PST and GSS previously filed were withdrawn to allow a new class action to be filed on behalf of the members and affiliates of the NRTC. The new class action was filed on February 29, 2000. The court certified the plaintiff's class on December 28, 2000. On March 9, 2001, DirecTV filed a counterclaim against PST and GSS, as well as the class members. In the counterclaim, DirecTV seeks two claims for relief: (i) a declaratory judgment that PST and GSS have no right of first refusal in their agreements with the NRTC to have DirecTV provide any services after the expiration of the term of these agreements, and (ii) an order that DBS-1 is the satellite (and the only satellite) that measures the term of PST's and GSS' agreements with the NRTC. 16 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) On June 22, 2001, DirecTV brought suit against PST and GSS in Los Angeles County Superior Court for breach of contract and common counts. The lawsuit pertains to the seamless marketing agreement dated August 9, 2000, as amended, between DirecTV and PST and GSS. On July 13, 2001, PST and GSS terminated the seamless marketing agreement. On July 16, 2001, PST and GSS filed a cross complaint against DirecTV alleging, among other things, that (i) DirecTV has breached the seamless marketing agreement, and (ii) DirecTV has engaged in unlawful and/or unfair business practices, as defined in Section 17200, et seq. of California Business and Professions Code. This suit has since been moved to the United States District Court, Central District of California. Both of the NRTC's lawsuits against DirecTV have been consolidated for discovery and pretrial purposes. All five lawsuits discussed above, including both lawsuits brought by the NRTC, the class action, and PST's and GSS' lawsuit, are pending before the same judge. The court has set a trial date of April 1, 2003, although, as noted above, it is not clear whether all the lawsuits will be tried together. Patent Infringement Litigation: On December 4, 2000, one of our subsidiaries, Pegasus Development Corporation ("Pegasus Development"), and Personalized Media Communications, L.L.C. ("Personalized Media"), a company in which Pegasus Development has an investment in and licensing arrangement with, filed a patent infringement lawsuit in the United States District Court, District of Delaware against DirecTV, Hughes Electronics Corporation, Thomson Consumer Electronics ("Thomson") and Philips Electronics North America Corporation. Pegasus Development and Personalized Media are seeking injunctive relief and monetary damages for the defendants' alleged patent infringement and unauthorized manufacture, use, sale, offer to sell and importation of products, services, and systems that fall within the scope of Personalized Media's portfolio of patented media and communications technologies, of which Pegasus Development is an exclusive licensee within a field of use. The technologies covered by Pegasus Development's exclusive license include services distributed to consumers using certain Ku band BSS frequencies and Ka band frequencies, including frequencies licensed to affiliates of Hughes Electronics and used by DirecTV to provide services to its subscribers. We are unable to predict the possible effects of this litigation on our relationship with DirecTV. DirecTV has also filed a counterclaim against Pegasus Development alleging unfair competition under the federal Lanham Act. In a separate counterclaim, DirecTV has alleged that both Pegasus Development's and Personalized Media's patent infringement lawsuit constitutes "abuse of process." Those counterclaims have since been dismissed by the court or voluntarily by DirecTV. Separately, Thomson has filed counterclaims against Pegasus Development, Personalized Media, Gemstar-TV Guide, Inc. (and two Gemstar-TV Guide affiliated companies, TVG-PMC, Inc. and Starsight Telecast, Inc.), alleging violations of the federal Sherman Act and California unfair competition law as a result of alleged licensing practices. In December 2001, one of our subsidiaries (along with DirectTV, Inc., Hughes Electronics Corporation, Echostar Communications Corporation, and others) was served with a complaint in patent infringement lawsuit by Broadcast Innovations, L.L.C. The precise nature of the plaintiff's claims is not clear from the complaint. However, the plaintiff claims in response to interrogatories that the satellite broadcast systems and equipment of defendants, including those used for DIRECTV programming services, infringe its patent. The defendants named in the complaint have denied the allegation and have raised defenses of patent invalidity and noninfringement. We still are in the process of evaluating the matter in order to determine whether it is material to our business. Other Legal Matters: In addition to the matters discussed above, from time to time we are involved with claims that arise in the normal course of our business. In our opinion, the ultimate liability, if any, with respect to these claims will not have a material adverse effect on our operations, cash flows, or financial position. 17 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Commitments We negotiated a new agreement with our provider of communications services commencing in the first quarter 2002. Under this new agreement, our annual minimum commitment was reduced to $6.0 million over the three year term of the agreement, from $7.0 million under the prior agreement. In July 2002, we gave notice to the party that provides call center services to us that we intend to terminate the agreement for the services at the end of 12 months from the date of notice. We will pay a termination fee of $4.5 million at the agreement termination date. 15. New Accounting Pronouncements Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" addresses financial accounting and reporting for obligations associated with the retirement of tangible long lived assets and the associated asset retirement costs. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We are studying the provisions of this statement and have not yet determined the impacts, if any, that this statement may have on us. Statement of Financial Accounting Standards No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued in April 2002. A principal provision of this statement is the reporting of gains and losses associated with extinguishments of debt. In the past, we have extinguished debt, and may do so in the future. We are studying the provisions of this statement and have not yet determined the impacts, if any, that this statement may have on us. Statement of Financial Accounting Standards No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" was issued in June 2002. This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We are studying the provisions of this statement and have not yet determined the impacts, if any, that this statement may have on us. 18 PEGASUS COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains certain forward looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to us that are based on our beliefs, as well as assumptions made by and information currently available to us. When used in this report, the words "estimate," "project," "believe," "anticipate," "hope," "intend," "expect," and similar expressions are intended to identify forward looking statements. Such statements reflect our current views with respect to future events and are subject to unknown risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated in such forward looking statements. Such factors include, among other things, the following: general economic and business conditions, both nationally, internationally and in the regions in which we operate; catastrophic events, including acts of terrorism; relationships with and events affecting other parties like DirecTV, Inc. and the National Rural Telecommunications Cooperative; litigation with DirecTV; the proposed merger of Hughes Electronics Corporation with EchoStar Communications Corporation; demographic changes; existing government regulations and changes in, or the failure to comply with government regulations; competition, including the provision of local channels by a competing direct broadcast satellite provider in markets where DirecTV does not offer local channels; the loss of any significant numbers of subscribers or viewers; changes in business strategy or development plans; the cost of pursuing new business initiatives; an expansion of land based communications systems; technological developments and difficulties; the ability to obtain intellectual property licenses and to avoid committing intellectual property infringement; the ability to attract and retain qualified personnel; our significant indebtedness; the availability and terms of capital to fund the expansion of our businesses; and other factors referenced in this report and in reports and registration statements filed from time to time with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date of this report. We do not undertake any obligation to publicly release any revisions to these forward looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following discussion of our financial condition, results of operations, and liquidity and capital resources should be read in conjunction with the consolidated financial statements and related notes herein. General "We", "us", and "our" refer to Pegasus Communications Corporation together with its subsidiaries. "PCC" refers to Pegasus Communications Corporation individually as a separate entity. "PSC" refers to Pegasus Satellite Communications, Inc., one of PCC's subsidiaries. "PM&C" refers to Pegasus Media & Communications, Inc., a subsidiary of PSC. "DBS" refers to direct broadcast satellite. Approximately 96% of our consolidated revenues and 87% of the expenses within consolidated loss from operations for the six months ended June 30, 2002, and 83% of our assets at June 30, 2002, were associated with our DBS business that provides multichannel DIRECTV(R) audio and video services as an independent DIRECTV provider. DIRECTV is a service of DirectTV, Inc. ("DirecTV"). We may be adversely affected by any material adverse changes in the assets, financial condition, programming, technological capabilities, or services of DirecTV. Separately, we are involved in litigation with DirecTV. An outcome in this litigation that is unfavorable to us could have a material adverse effect on our DBS business. See Note 14 of the Notes to Consolidated Financial Statements for information on the litigation. Additionally, Hughes Electronics Corporation, which is the parent company of DirecTV, has agreed to merge with EchoStar Communications Corporation, which owns the only other nationally branded DBS programming service in the United States. At this time, we are unable to predict the effect of our litigation with DirecTV or the merger of EchoStar and Hughes, should it occur, on our financial position, results of operations, cash flows, and future operations. 19 PEGASUS COMMUNICATIONS CORPORATION Results of Operations In this section, amounts and changes specified are for the three and six months ended June 30, 2002 compared to the corresponding three and six months ended June 30, 2001, unless indicated otherwise. With respect to our loss from operations, we focus on our DBS business, as this is our only significant business. DBS Business Revenues: Revenues increased $10.4 million to $216.4 million and $19.3 million to $431.2 million for the three and six months, respectively. The increases were primarily due to the rate increase for our core packages that we instituted in the fourth quarter 2001. Effective July 1, 2002, we began passing on to subscribers, in the form of a royalty fee, a portion of the royalty costs charged to us in providing DIRECTV service. The fee is $1.25 or $1.50 to each subscriber based on the subscriber's core programming package. Direct Operating Expenses: Programming increased $8.2 million to $96.0 million and $16.4 million to $192.3 million for the three and six months, respectively. The increases were primarily due to an increase instituted in January 2002 in programming rates charged to us by the National Rural Telecommunications Cooperative, through which we receive our DIRECTV programming. Other subscriber related expenses decreased $2.8 million to $49.1 million and increased $84 thousand to $100.8 million for the three and six months, respectively. The decrease for the three months was principally due to a reduction in bad debt expense as a result of more favorable churn experience in the second quarter 2002, offset in part by increased royalty costs incurred by us resulting from increased associated revenues. For the six months, increased royalty costs were mostly offset by decreased bad debt expense. Royalty costs are charged to us based on certain subscription, demand, and certain fee revenue we bill to subscribers. Operating Margins: Our operating margin is the difference between net revenues and direct operating expenses (excluding depreciation and amortization). Operating margins for the three and six months ended June 30, 2002 and 2001 were $71.3 million and $138.0 million, respectively, and $66.4 million and $135.2 million, respectively. There were no significant differences in our operating margin ratios between the corresponding current and prior year periods within the three and six months ended June 30, 2002 and 2001. Other Operating Expenses: Promotions and incentives decreased $10.3 million to $2.0 million and $25.5 million to $3.8 million for the three and six months, respectively. The decreases were mainly due to the increased amounts of promotions and incentive costs we deferred and/or capitalized of $6.4 million and $16.4 million in the three and six months ended June 30, 2002, respectively. We are able to defer the direct and incremental costs we incur related to our subscription plans that have minimum service commitment periods, not to exceed the amount of applicable termination fees associated with the plans. These costs are amortized over the period of the commitment for which the early termination fees apply, which is generally 12 months, and are charged to amortization expense. We did not defer any costs in the three and six months ended June 30, 2001. All of our subscription plans starting February 2002 contain minimum commitment periods and early termination fees. In 2001, we instituted such provisions for only certain of our plans after June 30, and subsequently increased the number of plans having such provisions in the fourth quarter 2001. We are able to capitalize equipment costs and subsidies as fixed assets under our subscription plans in which we retain or take title to the equipment delivered to subscribers. The equipment costs and subsidies related to this equipment are capitalized as fixed assets and depreciated over their estimated useful lives of three years. Additionally, we incurred reduced subsidies of $3.7 million and $8.7 million for the three and six months ended June 30, 2002, respectively, due to reduced gross subscriber additions during the 2002 periods compared to the corresponding 2001 periods. 20 PEGASUS COMMUNICATIONS CORPORATION Advertising and selling decreased $24.6 million to $7.8 million and $53.3 million to $16.1 million for the three and six months, respectively. A part of these decreases was due to the commissions we incurred in the respective corresponding 2001 periods of $9.7 million and $20.6 million due to the seamless marketing agreement with DirecTV that was in effect during 2001. We terminated the seamless marketing agreement in July 2001. Commissions we pay directly to our sales and distribution channels decreased $6.5 million and $17.5 million for the three and six months ended June 30, 2002, respectively, principally due to reduced gross subscriber additions during the 2002 periods compared to the corresponding 2001 periods. Our advertising costs decreased $3.5 million and $6.9 million for the three and six months ended June 30, 2002, respectively, as a part of a focused cost reduction initiative. Additionally, we deferred $3.8 million and $6.4 million of commissions in the three and six months ended June 30, 2002, respectively, in accordance with our deferral practice described in the preceding paragraph that otherwise would have been included in advertising and selling costs in the current year periods. We did not defer advertising and selling costs in the respective corresponding 2001 periods. All of our subscription plans starting February 2002 contain minimum commitment periods and early termination fees. In 2001, we instituted such provisions for only certain of our plans after June 30, and subsequently increased the number of plans having such provisions in the fourth quarter 2001. Our promotion and incentives and advertising and selling costs constitute our subscriber acquisition costs ("SAC"). Gross SAC costs, that is, before deferring and capitalizing costs, for the three and six months ended June 30, 2002 and 2001 were $25.0 million and $50.7 million, respectively, and $49.7 million and $106.8 million, respectively. General and administrative expenses decreased $2.2 million to $6.9 million and $3.5 million to $14.8 million for the three and six months, respectively, due to a broad based cost reduction effort that we are undergoing in 2002. Depreciation and amortization decreased $21.8 million to $41.5 million and $45.1 million to $80.9 million for the three and six months, respectively. This principally resulted from our adoption in the first quarter 2002 of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("FAS 142") in its entirety on January 1, 2002. In accordance with FAS 142, we reassessed the estimated lives of our intangible assets. We believe that the estimated remaining useful life of the DBS rights assets should be based on the estimated useful lives of the satellites at the 101(Degree) west longitude orbital location available to provide DirecTV services under the NRTC-DirecTV contract. The contract sets forth the terms and conditions under which the lives of those satellites are deemed to expire, based on fuel levels and transponder functionality. We estimate that the useful life of the DirecTV satellite resources provided under the contract (without regard to renewal rights) expires in November 2016. Because the cash flows for all of our DBS rights assets emanate from the same source, we believe that it is appropriate for all of the estimated useful lives of our DBS rights assets to end at the same time. Prior to the adoption of FAS 142, our DBS rights assets had estimated useful lives of 10 years from the date we obtained the rights. Linking the lives of our DBS rights assets in such fashion extended the amortization period for the unamortized carrying amount of the assets and the range of the useful lives of the rights from the date of their inception. The life of our DBS rights is subject to litigation. See "Legal Matters" under Note 14 of the Notes to Consolidated Financial Statements for information regarding this litigation. Included in depreciation and amortization for the six months ended June 30, 2002 and 2001 was aggregate depreciation and amortization of promotions and incentives costs capitalized or deferred and advertising and selling costs deferred of $19.5 million and $2.0 million, respectively. Subscribers: Our number of subscribers at June 30, 2002 was 1,372,000. We experienced a net reduction in the number of subscribers of approximately six thousand and 10 thousand for the three and six months ended June 30, 2002, respectively, as the number of our subscribers that churned was more than the number of the subscribers we added. These decreases exclude the one time adjustment to decrease subscriber counts that we made and reported in the first quarter 2002 of 138,000. We believe that the reasons for the decrease were due to: 1) our focus on enrolling more creditworthy subscribers; 2) competition from digital 21 PEGASUS COMMUNICATIONS CORPORATION cable providers and a competing direct broadcast satellite provider in the territories we serve; 3) the economic slow down that has decelerated our growth; and 4) a reduction in the number of new subscribers we obtain from DirecTV's national retail chains. We will continue to focus on enrolling more creditworthy subscribers. We will also continue to face intensive competition from other providers throughout 2002. This competition includes the provision of local channels by a competing direct broadcast satellite provider in markets where DirecTV does not offer local channels. We also anticipate a continued reduction in the number of new subscribers obtained from DirecTV's national retail chains during the rest of 2002. The reduction in the number of subscribers from national retail chains under arrangements directly with DirecTV is the result of efforts by DirecTV to minimize certain subscriber acquisition costs that they have paid to national retail chains for their enrollment of subscribers who reside in our exclusive territories. We are most interested in adding high quality, creditworthy subscribers. Our subscriber acquisition efforts in 2002 and beyond now include: 1) the diversification of our sales and distribution channels; 2) the alignment of channel economics more closely to expected quality and longevity of subscribers; and 3) the refinement and expansion of our offers and promotions to consumers. This focus has lead to a more recent favorable churn rate. However, improvements in churn could be offset or churn could increase due to: 1) our service becoming less affordable as a result of our royalty cost pass through to subscribers; 2) competition from a competing direct broadcast satellite provider with respect to equipment, service pricing, and service content, including the provision of local channels by a competing direct broadcast satellite provider in market where DirecTV doe not offer local channels; and 3) the effect of general economic conditions on our subscribers. We believe that net reductions in our number of subscribers for all of 2002, if any, will not have a significant effect on our operating margins for 2002. Other Statement of Operations and Comprehensive Loss Items For the three and six months ended June 30, 2002 and 2001, our other businesses primarily consisted of our broadcast operations. Our broadband operations had been included with our other businesses until the second quarter 2002 when we first reported the broadband operations as discontinued for all periods presented in our statements of operations and comprehensive loss. The discontinued broadband operations are discussed below. The broadcast operations had revenues for the three and six months ended June 30, 2002 and 2001 of $8.8 million and $16.7 million and $9.2 million and $16.8 million, respectively, and net losses from operations for the three and six months ended June 30, 2002 and 2001 of $672 thousand and $2.1 million, respectively, and $568 thousand and $1.5 million, respectively. We have provided these amounts for our broadcast operations to give a perspective of the amounts contained within our other businesses. The operations of broadcast and the other businesses are not significant to an understanding of our consolidated results of operations. Corporate depreciation and amortization increased $7.6 million to $8.0 million and $15.2 million to $15.9 million for the three and six month, respectively, due to amortization that commenced in 2002 associated with certain licenses held by our subsidiary Pegasus Development Corporation. Interest expense increased $1.4 million to $36.3 million and $3.2 million to $72.4 million for the three and six months, respectively. The increase was principally due to the issuance of PSC's 11-1/4% notes in December 2001, incremental amortization on our 13-1/2% senior discount notes, and additionally for the six months ended, increased interest incurred with respect to our swap instruments, offset in part by repayment of all principal amounts outstanding under Golden Sky Systems' credit facility in May 2001 with the concurrent termination of the facility and lower average amounts outstanding at lower average variable rates of interest under PM&C's term and revolving credit facilities in 2002 versus 2001. Interest income decreased $1.1 million to $218 thousand and $3.6 million to $436 thousand for the three and six months, respectively, due to reduced cash amounts available for earning interest income and much lower interest rates available during 2002 compared to 2001. Based on the significance and duration of the loss in fair value, at June 30, 2002, we determined that our sole investment in marketable securities held had incurred an other than temporary decline in fair market value. Accordingly, we wrote down the cost basis in the marketable securities to their fair market value at June 30, 2002 and charged earnings in the amount of $3.1 million for the impairment loss realized. 22 PEGASUS COMMUNICATIONS CORPORATION We had other nonoperating income, net of $1.2 million for the six months ended June 30, 2002, compared to other nonoperating expense, net of $3.7 million for the six months ended June 30, 2001. This difference was primarily due to the increase in the fair value of our interest rate instruments. For the six months 2002 we recorded income of $1.3 million for the increase in the fair value of the instruments, whereas for the six months 2001 we recorded a charge of $2.8 million for the decrease in the fair value of the instruments. Equity in earnings of affiliates decreased $5.9 million to $173 thousand and $13.8 million to $349 thousand for the three and six months, respectively, because the prior year included gain on sales of licenses made by one of our affiliates. The income tax benefit on the loss from continuing operations decreased $14.2 million to $17.5 million and $29.9 million to $36.1 million, respectively, primarily due to a reduced amount of pretax losses in the current year periods compared to the respective corresponding prior year periods. Our noncurrent deferred income tax balance netted to a deferred income tax asset in the second quarter 2002. The balance was $6.3 million at June 30, 2002. We believe that a valuation allowance for the net deferred income tax asset was not necessary at June 30, 2002 as we anticipate sufficient taxable income will be available to apply against net operating losses before they expire. Because our Pegasus Express two way satellite internet access business no longer fits into our near term strategic plans, we entered into an agreement with an unaffiliated party in June 2002 to sell our Pegasus Express subscribers and the Pegasus Express equipment inventory for cash. Upon the sale of the subscribers and equipment, we will no longer be operating our Pegasus Express business. As Pegasus Express is the only business within our broadband operation, we are reporting the broadband operation as discontinued effective June 30, 2002 for all periods presented in the statements of operations and comprehensive loss. Transfer of the subscribers is expected to occur in mid August 2002, and transfer of the equipment is expected to be completed by the end of August 2002. We anticipate that the cash proceeds from the sale of the subscribers will be about $1.6 million, subject to adjustment for the number of our subscribers that ultimately are authorized into the buyer's internet access service. We anticipate that the cash proceeds from the sale of the equipment will be about $2.6 million, subject to the actual number of units transferred, and will be payable in four equal monthly payments ending November 2002. Revenues and pretax loss from operations of the broadband operation follows (in thousands): Three Months Six Months Ended June 30, Ended June 30, 2002 2001 2002 2001 -------- ------- --------- ------- Revenues $ 1,177 $ - $ 2,327 $ 167 Pretax loss (2,213) (5,371) (3,748) (8,589) Included in discontinued operations for the three and six months ended June 30, 2002 is an impairment loss recognized on the equipment inventory of $837 thousand. This impairment writes down the carrying amount of the equipment to its fair market value based on the per unit sale price of the equipment specified in the sale agreement. Also included in discontinued operations for these periods is an aggregate impairment loss of $847 thousand for valuation reserves placed against other assets that we believe have diminished utility to the broadband operation as a result of the pending subscriber and equipment sale and discontinuance of the operations. New Accounting Pronouncements Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" addresses financial accounting and reporting for obligations associated with the retirement of tangible long lived assets and the associated asset retirement costs. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We are studying the provisions of this statement and have not yet determined the impacts, if any, that this statement may have on us. 23 PEGASUS COMMUNICATIONS CORPORATION Statement of Financial Accounting Standards No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued April 30, 2002. A principal provision of this statement is the reporting of gains and losses associated with extinguishments of debt. In the past, we have extinguished debt, and may do so in the future. We are studying the provisions of this statement and have not yet determined the impacts, if any, that this statement may have on us. Statement of Financial Accounting Standards No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" was issued in June 2002. This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We are studying the provisions of this statement and have not yet determined the impacts, if any, that this statement may have on us. Liquidity and Capital Resources We are highly leveraged. At June 30, 2002, we had a combined carrying amount of debt and redeemable preferred stocks outstanding of $1.7 billion. Because we are highly leveraged, we are more vulnerable to adverse economic and industry conditions. We dedicate a substantial portion of cash to pay amounts associated with debt. In the first six months of 2002, we paid interest of $49.3 million. We were scheduled to begin paying cash dividends on PSC's 12-3/4% series preferred stock in July 2002. However, we did not declare the scheduled semiannual dividend payable July 1, 2002 on this series. See the discussion below concerning the nondeclaration of dividends on this series and Series C preferred stock. We have received notice of redemption from holders for $5.0 million of Series E preferred stock. However, we are not permitted nor obligated to redeem the related shares while dividends on preferred stock senior to the series are in arrears. Under these circumstances, our inability to redeem the Series E shares is not an event of default. We were involved in a series of transactions with respect to our securities into August 2002 that reduced our leveraged position by $206.3 million, offset in part by $63.7 million borrowed by us during the year to date as discussed below. All outstanding shares of Series B junior convertible participating preferred stock were redeemed in March 2002 for $5.7 million cash plus accrued and unpaid dividends on the series to the date of redemption of $10 thousand. In May 2002, 67,504 shares of 6-1/2% Series C convertible preferred stock amounting to $6.8 million liquidation preference value, excluding accrued dividends, were converted into 570,410 shares of our Class A common stock. In June 2002, PCC purchased in a series of negotiated transactions with unaffiliated holders 33,738 shares of the 12-3/4% series with a liquidation preference value, excluding accrued dividends, of $33.7 million for $4.9 million in cash. In July 2002, PCC purchased in a series of negotiated transactions with unaffiliated holders 54,828 shares of 12-3/4% preferred stock with a liquidation preference value of $54.8 million for $11.5 million and 774,682 shares of Series C preferred stock with a liquidation preference value, excluding accrued dividends, of $77.5 million for $6.1 million in cash. PSC purchased in separate negotiated transactions with unaffiliated holders $17.1 million in maturity value of PM&C's 12-1/2% notes due July 2005 for $17.1 million in July 2002 and $10.7 million in maturity value of its 13-1/2% senior subordinated discount notes due March 2007 for $2.8 million in August 2002. From time to time, we may engage in further transactions in which we acquire through purchases and/or exchanges our securities and the securities of our subsidiaries. Such transactions may be made in the open market or in privately negotiated transactions and may involve cash or the issuance of securities, including shares of our Class A common stock. The amount and timing of such transactions, if any, will depend on market conditions and other considerations. Using cash for the above noted payments reduces the availability of funds for working capital, capital expenditures, and other activities, and limits our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate, although we will reduce the amount of cash paid to unaffiliated parties in connection with some of our preferred stocks and debt we repurchased. Our ability to make payments on and to refinance indebtedness and redeemable preferred stocks outstanding and to fund planned capital expenditures and other activities depends on our ability to generate cash in the future. Our ability to generate cash depends upon the success of our business strategy, prevailing economic conditions, regulatory risks, our ability to integrate acquired assets successfully into our operations, competitive activities by other parties, equipment strategies, technological developments, level of programming costs, levels of interest rates, and financial, business, and other factors that are beyond our control. We cannot assure that our business will generate sufficient cash flow from operations or that alternative 24 PEGASUS COMMUNICATIONS CORPORATION financing will be available to us in amounts sufficient to service outstanding debt and redeemable preferred stocks or to fund other liquidity needs. Our indebtedness and preferred stocks contain numerous covenants that, among other things, generally limit the ability to incur additional indebtedness and liens, issue other securities, make certain payments and investments, pay dividends, transfer cash, dispose of assets, and enter into other transactions, and impose limitations on the activities of our subsidiaries. Failure to make debt payments or comply with covenants could result in an event of default that, if not cured or waived, could have a material adverse effect on us. At the discretion of our board of directors as permitted by the certificate of designation for the 12-3/4% series, we did not declare the scheduled semiannual dividend payable July 1, 2002 for this series. The amount of the dividend scheduled to be paid on that date and in arrears to unaffiliated holders was $9.6 million in cash. After giving effect to shares of this series repurchased after June 30, 2002 as discussed above, dividends in arrears to unaffiliated holders were $6.1 million. Further, at the discretion of our board of directors as permitted by the certificate of designation for the Series C preferred stock, we did not declare the scheduled quarterly dividends payable April 30, 2002 and July 31, 2002 on this series. The total amount of dividends in arrears on Series C to unaffiliated holders through the most recent dividend payable date of July 31, 2002, after giving effect to shares repurchased through that date as discussed above, was $5.9 million. In the past, dividends payable on Series C were paid with shares of our Class A common stock, as permitted under the certificate of designation. Unpaid dividends on the 12-3/4% series and Series C accumulate in arrears, with interest accruing on dividends in arrears for the 12-3/4% series at a rate of 14.75%. Unless full cumulative dividends in arrears on Series C have been paid or set aside for payment, PCC, but not its subsidiaries, may not, with certain exceptions, 1) declare, pay, or set aside amounts for payment of future cash dividends or distributions, or 2) purchase, redeem, or otherwise acquire for value any shares of its capital stock junior or on a parity with Series C. Series D and E preferred stock are junior securities with respect to Series C. Unless full cumulative dividends in arrears on the 12-3/4% series have been paid or set aside for payment, PSC may not, with certain exceptions, 1) declare, pay, or set aside amounts for payment of future cash dividends or distributions, or 2) purchase, redeem, or otherwise acquire for value any shares of its capital stock junior to the 12-3/4% series. Foregoing paying dividends on the 12-3/4% series increases the availability of funds for working capital, capital expenditures, and other activities. Because of the very low market price for our common stock in 2002, paying dividends on Series C would have a much greater dilution effect on holdings in our common stock than was experienced in the past when the market price of the common stock was higher. Despite the restrictions placed on PSC regarding cash dividend payments discussed in the preceding paragraph, permissible means are available to transfer funds within the PCC consolidated group while dividends on PSC's preferred stock are in arrears. We do not believe that we will experience any adverse effects on liquidity while dividends are in arrears. We had cash and cash equivalents on hand at June 30, 2002 of $117.0 million compared to $144.7 million at December 31, 2001. The change in cash is discussed below in terms of the amounts shown in our cash flow statement. At June 30, 2002, the commitment for PM&C's revolving credit facility was permanently reduced by approximately $8.4 million to $185.6 million as scheduled under the terms of the credit agreement. The commitment for the revolving credit facility will continue to be permanently reduced by approximately $8.4 million in each of September and December 2002 as scheduled. Availability under PM&C's revolving credit facility at June 30, 2002 was $124.5 million. In June 2002, PM&C borrowed $63.2 million in incremental term loans under its credit agreement out of $200.0 million capacity specified for such purpose thereunder. Our option to request additional funding from the unused portion of the incremental term loan capacity of $136.8 million expired June 30, 2002. Principal amounts outstanding under the incremental term loan facility are payable quarterly in increasing increments over the remaining term of the facility beginning September 30, 2002. All unpaid principal and interest outstanding under the incremental term loans are due July 31, 2005. Quarterly principal payments scheduled for the remainder of 2002 are $158 thousand in each of September and December, with total payments of $632 thousand, $16.3 million, and $45.9 million in 2003, 2004, and 2005, respectively. Amounts repaid under the incremental term loan facility may not be reborrowed. Margins on incremental term loans are 2.5% for base rates and 3.5% for LIBOR rates. Interest on outstanding principal borrowed under base rates is due and payable quarterly and interest on outstanding principal borrowed under LIBOR rates is due and payable the earlier of the end of the contracted interest rate period or three months. 25 PEGASUS COMMUNICATIONS CORPORATION Net cash was provided by operating activities for the six months ended June 30, 2002 of $23.7 million, compared to net cash used by operating activities of $95.7 million for the six months ended June 30, 2001. The principal reasons for the change were: 1) much less subscriber acquisition costs paid in the current year period compared to the prior year period primarily as a result of reduced gross subscriber additions in the current year period than in the prior year period; 2) taxes paid in 2001 for the sale of our cable operations in 2000; 3) reduced cash interest paid in the six months ended 2002 primarily due to the timing of when payments were due in 2002 versus 2001 and reduced amounts of borrowings outstanding under our revolving credit and term loan facilities and at lower variable rates of interest in 2002 versus 2001; and 4) increased operating margins in the current year period compared to the prior year period that provided greater net cash inflows. For the six months ended June 30, 2002 and 2001, net cash used for investing activities was $16.8 million and $31.2 million, respectively. The primary investing activity for 2002 was for costs incurred with DBS equipment capitalized of $13.5 million. In 2001, the primary investing activities were for DBS equipment capitalized of $8.1 million, other capital expenditures of $14.5 million, of which $3.7 million was associated with a new call center, and acquisition of intangible assets of $7.7 million, of which $3.7 million was for additional guardband licenses. For the six months ended June 30, 2002 and 2001, net cash used for financing activities was $34.5 million and $23.7 million, respectively. The primary financing activities for 2002 were: 1) $63.2 million borrowed under the incremental term loan facility; 2) $80.0 million repayments of amounts outstanding under our revolving credit facility; 3) $7.3 million repayments of other long term debt; and 4) $10.7 million for redemption and repurchases of our preferred stock. The primary financing activities for 2001 were repayments of long term debt of $8.2 million and $14.0 million in restricted cash that was used as collateral for a letter of credit. Premarketing cash flow of our DBS business was $123.2 million and $116.9 million for the six months ended June 30, 2002 and 2001, respectively. EBITDA for our DBS business was $103.3 million and $18.2 million for the six months ended June 30, 2002 and 2001, respectively. DBS premarketing cash flow is calculated by subtracting DBS' direct operating expenses and general and administrative expenses from their revenues. DBS EBITDA is DBS premarketing cash flow less DBS' promotions and incentives and advertising and selling expenses. We present DBS premarketing cash flow and DBS EBITDA because the DBS business is our only significant segment and this business forms the principal portion of our results of operations and cash flows. DBS premarketing cash flow and DBS EBITDA 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. DBS premarketing cash flow and DBS EBITDA also do not necessarily indicate whether our cash flow will be sufficient to fund working capital, capital expenditures, or to react to changes in our industry or the economy generally. We believe that DBS premarketing cash flow and DBS EBITDA are important because people who follow our industry frequently use them as measures of financial performance and ability to pay debt service, and they are measures that we, our lenders, and investors use to monitor our financial performance and debt leverage. Although EBITDA is a common measure used by other companies, our calculation of EBITDA may not be comparable with that of others. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our principal market risk exposure continues to be interest rate risk. Our primary exposure is variable rates of interest associated with borrowings under our credit facilities. The amount of interest we incur also depends upon the amount of borrowings outstanding. The way we manage these risks did not change during the six months ended June 30, 2002, and we have not experienced any material changes in interest rates or effects of our interest rate instruments during this period. We have interest rate swaps that effectively fix the interest rate on $72.1 million of notional amount at a weighted average rate of 7.19%. For the six months ended June 30, 2002, we incurred additional cash interest expense of $1.7 million on the swaps due to the low variable market rates of interest during the period that were unfavorable relative to our swap position. The effect of the swaps added 122 basis points into our aggregate weighted average variable interest rate for the six months ended June 30, 2002 of 6.67%. 26 PEGASUS COMMUNICATIONS CORPORATION PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS For information relating to litigation with DirecTV, Inc. and others, we incorporate by reference herein the disclosure reported under Note 14 to the Notes to Consolidated Financial Statements. The Notes to Consolidated Financial Statements can be found under Part I, Item 1 of this Quarterly Report on Form 10-Q. We have previously filed reports during the fiscal year disclosing some or all of the legal proceedings referenced above. In particular, we have reported on such proceedings in our Annual Report on Form 10-K for the year ended December 31, 2001 and in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002. ITEM 3. DEFAULTS UPON SENIOR SECURITIES At the discretion of our board of directors as permitted by the certificate of designation for the 6-1/2% Series C convertible preferred stock of Pegasus Communications Corporation, we did not declare the scheduled quarterly dividends payable April 30, 2002 and July 31, 2002 on this series. The cumulative dividends in arrears on this series to unaffiliated holders, after giving effect to shares of this series repurchased to date (refer to Note 7 of the Notes to Consolidated Financial Statements), was $5.9 million. At the discretion of our board of directors as permitted by the certificate of designation for the 12-3/4% cumulative exchangeable preferred stock of Pegasus Satellite Communications, Inc., we did not declare the scheduled semiannual dividend payable July 1, 2002 for this series. The amount of the dividend in arrears on this series to unaffiliated holders, after giving effect to shares of this series repurchased to date (refer to Note 7 of the Notes to Consolidated Financial Statements), was $6.1 million. Dividends in arrears on this series accrue interest at a rate of 14.75%. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 31, 2002, Pegasus held its annual meeting of stockholders. At this meeting, Marshall W. Pagon, Ted S. Lodge, Robert F. Benbow, Harry F. Hopper III, James J. McEntee, III, Mary C. Metzger, William P. Phoenix, and Robert N. Verdecchio were re-elected to Pegasus' Board of Directors. In such election, the following votes were cast for each director: For Withheld Authority Abstain Pagon 123,502,523 6,570,308 0 Lodge 124,996,250 5,076,581 0 Benbow 122,265,311 7,807,520 0 Hopper 124,993,150 5,079,681 0 McEntee 125,011,450 5,061,381 0 Metzger 124,995,750 5,077,081 0 Phoenix 124,993,110 5,079,721 0 Verdecchio 124,996,160 5,076,671 0 Approval to Authorize the Board of Directors to Amend the Existing Amended and Restated Certificate of Incorporation of Pegasus Communications Corporation to Effect a Reverse Stock Split of Pegasus' Issued and Outstanding Shares of Class A Common Stock And Class B Common Stock. Stockholders approved authorizing the Board of Directors to amend the certificate of incorporation at any time prior to the next annual stockholders' meeting to effect a reverse split based upon a determination by the Board that the reverse stock split and reverse stock split ratio are in the company's and the stockholders' best interests. The ratio of the reverse split would be not less than 1 for 2 and not more than 1 for 10. 120,901,814 votes were cast in favor of the proposal, 9,119,270 votes were case against and 51,747 votes abstained. 27 PEGASUS COMMUNICATIONS CORPORATION Approval to Amend the Pegasus Communications 1996 Stock Option Plan to Increase the Number of Shares of Class A Common Stock that May be Issued Under the Plan. Stockholders approved an amendment to increase the number of shares of Class A common stock that may be issued under the plan to 10,000,000 from 6,000,000 and to increase the maximum number of shares of Class A common stock that may be issued under options granted to any employee under the plan to 2,000,000 from 1,500,000. 102,956,275 votes were cast in favor, 19,712,515 votes were cast against, and 6,689 votes abstained. Approval to Amend the Pegasus Communications Restricted Stock Plan to Increase the Number of Shares of Class A Common Stock that May be Issued Under the Plan. Stockholders approved an amendment to increase the number of shares of Class A common stock that may be issued under the plan to 2,000,000 from 1,500,000. 106,214,818 votes were cast in favor, 16,452,838 votes were cast against, and 7,823 votes abstained. Ratification of Appointment of Accountants. Stockholders also voted at the meeting to ratify the appointment of PricewaterhouseCoopers, LLP as independent accountants for Pegasus for the current fiscal year. With respect to this proposal, 129,241,570 votes were cast in favor, 829,381 votes were cast against, and 1,880 votes were held in abstention. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 10.1 Executive Employment Agreement effective June 1, 2002 for Ted S. Lodge 10.2 Pegasus Communications Corporation Short Term Incentive Plan (Corporate, Satellite and Business Development) for calendar year 2002 10.3 Supplemental Description of Pegasus Communications Corporation Short Term Incentive Plan (Corporate, Satellite and Business Development) for calendar year 2002 10.4 Description of Long Term Incentive Compensation Program applicable to Executive Officers 10.5 Pegasus Communications 1996 Stock Option Plan, as amended and restated effective as of February 13, 2002 (which is incorporated herein by reference to Appendix B to the definitive proxy statement of Pegasus Communications Corporation as filed with the Securities and Exchange Commission on May 9, 2002) 10.6 Pegasus Communications Restricted Stock Plan, as amended and restated effective as of February 13, 2002 (which is incorporated herein by reference to Appendix C to the definitive proxy statement of Pegasus Communications Corporation as filed with the Securities and Exchange Commission on May 9, 2002) 28 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Pegasus Communications Corporation has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Pegasus Communications Corporation August 14, 2002 By: /s/ Joseph W. Pooler, Jr. - ------------------------------ ----------------------------------- Date Joseph W. Pooler, Jr. Vice President - Finance and Controller (Principal Financial and Accounting Officer) 29 Exhibit Index Exhibit Number 10.1 Executive Employment Agreement effective June 1, 2002 for Ted S. Lodge 10.2 Pegasus Communications Corporation Short Term Incentive Plan (Corporate, Satellite and Business Development) for calendar year 2002 10.3 Supplemental Description of Pegasus Communications Corporation Short Term Incentive Plan (Corporate, Satellite and Business Development) for calendar year 2002 10.4 Description of Long Term Incentive Compensation Program applicable to Executive Officers 10.5 Pegasus Communications 1996 Stock Option Plan, as amended and restated effective as of February 13, 2002 (which is incorporated herein by reference to Appendix B to the definitive proxy statement of Pegasus Communications Corporation as filed with the Securities and Exchange Commission on May 9, 2002) 10.6 Pegasus Communications Restricted Stock Plan, as amended and restated effective as of February 13, 2002 (which is incorporated herein by reference to Appendix C to the definitive proxy statement of Pegasus Communications Corporation as filed with the Securities and Exchange Commission on May 9, 2002) EX-10 3 exh10_1.txt EXH 10.1 Exhibit 10.1 EXECUTIVE EMPLOYMENT AGREEMENT This is an Employment Agreement (the "Agreement") between PEGASUS COMMUNICATIONS CORPORATION, a Delaware corporation ("Pegasus" or the "Corporation") and Ted S. Lodge (the "Executive"), a resident of Pennsylvania. In consideration of the promises and mutual covenants contained in this Agreement and intending to be legally bound, Pegasus agrees to continue to employ the Executive, and the Executive hereby agrees to continue his employment relationship with Pegasus, under the following terms and conditions: 1. Definitions. The following terms, when used in this Agreement and ----------- initially capitalized, have the meanings assigned below: 1.1 "Base Salary" means the Executive's annual compensation as set by the Corporation in accordance with its regular compensation review practices applicable to executive officers. It does not include the value of any incentive compensation, annual incentive or other bonus, benefit or expense reimbursement. 1.2 "Board" means the Board of Directors of Pegasus Communications Corporation or, other than for purposes of Section 1.5.3, its delegee. 1.3 "Cause" means: 1.3.1 the willful or gross neglect of the Executive's duties under this Agreement, including the refusal of the Executive to follow the written directives of the Board; 1.3.2 the Executive's felony conviction; or 1.3.3 any act of willful or gross misconduct by the Executive which is materially injurious to the Corporation, monetarily or otherwise. 1.4 "CEO" means the Chief Executive Officer of the Corporation. 1.5 "Change in Control" means: 1.5.1 the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Corporation and its Subsidiaries taken as a whole to any Person other than the Principal or his Related Parties; 1.5.2 the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that (a) any Person (other than the Executive) becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time, upon the happening of an event or otherwise), directly or indirectly, of more of the Voting Stock of the Corporation (measured by voting power rather than number of shares) than is at the time beneficially owned (as defined above) by the Principal and his Related Parties in the aggregate, (b) the Principal and his Related Parties collectively cease to beneficially own (as defined above) Voting Stock of the Corporation having at least thirty percent (30%) of the combined voting power of all classes of Voting Stock of the Corporation then outstanding, or (c) the Principal and his Related Parties acquire, in the aggregate, beneficial ownership (as defined above) of more than sixty-six and two-thirds percent (66-2/3%) of the shares of Class A Common Stock at the time outstanding; 1.5.3 the first day on which a majority of the members of the Board of Directors of the Corporation are not Continuing Directors; or 1.5.4 the adoption of a plan relating to the liquidation or dissolution of the Corporation. 1.6 "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as enacted at Sections 601, et seq., of the Employee Retirement Income Security Act of 1974, as amended. 1.7 "Continuing Directors" means, as of any date of determination, any member of the Board who (a) was a member of such Board on the date of this Agreement or (b) was nominated for election or elected to such Board with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. 1.8 "Effective Date" means June 1, 2002. 1.9 "Good Reason" means the occurrence (without the Executive's express written consent) of any of the following acts by the Corporation within six (6) full calendar months prior to the effective date of a Change in Control, or within two (2) years following the effective date of a Change in Control: 1 1.9.1 Demotion, reduction in title, substantial reduction of position responsibilities, or substantial change in reporting responsibilities or reporting level from the Executive's position immediately prior to a Change in Control or Potential Change in Control, or assignment of duties or responsibilities inconsistent with such position, which remains uncorrected for five (5) days after the Executive provides written notice to the Corporation of such event, or which recurs after previous correction; 1.9.2 Failure by the Corporation to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement; 1.9.3 Relocation of the Executive's primary office more than fifty (50) miles from the Executive's current office location; 1.9.4 Reduction in the Executive's Base Salary; or 1.9.5 Reduction in or modification of the Corporation's long-term incentive plan for executive employees, or in any short-term or annual incentive or employee benefit policy or program, which remains uncorrected for five (5) days after the Executive provides written notice to the Corporation of such event, or which recurs after previous correction; provided, however, that a reduction or modification which is of general application to all other similarly situated executive employees will constitute Good Reason only if, in the aggregate, the reduction or modification may reasonably be expected to reduce the Executive's annual compensation by more than ten percent (10%). Notwithstanding the foregoing, the Executive shall not be deemed to have terminated employment for Good Reason unless he provides the Corporation with Notice of Termination within ninety (90) days after the act giving rise to Good Reason for the termination. 1.10 "Intellectual Property" means all inventions, creations, trade secrets, patents (utility or design) and other intellectual property relating to any programming, documentation, technology, material, product, service, idea, process, plan or strategy concerning the business or interests of the Corporation that the Executive conceives, develops or delivers to the Corporation, in whole or in part, at any time during his employment with the Corporation, including without limitation, all copyrights, inventions, discoveries and improvements, trademarks, designs and all other intellectual property rights. 1.11 "LTD Plan" means the Pegasus Communications Corporation Long-Term Disability Plan, or any successor to that plan. 1.12 "Notice of Termination" means a written notice that specifies the termination provision in this Agreement upon which the party is relying and, if applicable, the facts, circumstances and reason(s) for terminating the employment relationship. 1.13 "Person" shall have the meaning defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended. 1.14 "Potential Change in Control" shall be deemed to have occurred if any one of the conditions set forth in any one of the following paragraphs shall have been satisfied: 1.14.1 the Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; 1.14.2 the Corporation or any other Person publicly announces a good faith intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; or 1.14.3 the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 1.15 "Principal" means Marshall W. Pagon. 1.16 "Qualifying Termination" means any termination of the Executive's employment within six (6) full calendar months prior to the effective date of a Change in Control, or within two (2) years following the effective date of a Change in Control, other than (a) a termination described in Section 5.1, 5.2 or 5.3, or (b) a termination by the Executive other than for Good Reason. 1.17 "Related Party" with respect to the Principal means (a) any immediate family member of the Principal, (b) any trust, corporation, partnership or other entity, more than 50% of the equity or beneficial interests (whether or not voting) of which are owned directly or indirectly by the Principal and/or such other Persons referred to in the immediately preceding clause (a), or (c) the estate of any Person referred to in the preceding clause (a), until such time as such estate is distributed in accordance with his or her will or applicable state law. For purposes of this definition, "immediate family member" means (i) the spouse or any parent of the Principal, (ii) any lineal descendant of a parent of the Principal, and (iii) the spouse of any such lineal descendant (parentage and descent in each case to include adoptive and step relationships). 2 1.18 "Voting Stock" of the Corporation means capital stock with voting power, under ordinary circumstances and without regard to the occurrence of any contingency, to elect the directors or other managers or trustees of the Corporation. 2. Position and Duties. The Executive shall serve as Pegasus's President and Chief Operating Officer and shall have such additional titles, duties, authority and responsibilities at Pegasus and/or its subsidiaries and affiliates as the Board may reasonably prescribe or request from time to time. The Executive shall perform all of his duties and responsibilities diligently and competently, and to the best of his ability, and shall devote his full time, energies and skills to his employment under this Agreement. Nothing in this Agreement shall prevent the Executive from engaging in social, community, charitable, political, family and other similar activities, so long as those activities are not adverse to the interests of the Corporation and do not interfere with the performance of the Executive's duties under this Agreement. The Executive shall comply with all applicable employment policies and procedures of the Corporation as in effect from time to time. 3. Term. Subject to Section 5 below, the Executive's term of employment under this Agreement shall begin on the Effective Date and shall expire on May 31, 2005; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the term of this Agreement shall automatically be extended for one additional year (so that the then remaining term is two (2) years), unless, not later than ninety (90) days prior to any such anniversary date, either party provides written notice that it does not wish to extend the Agreement; and provided, further, that the Corporation may not provide notice of nonrenewal during the pendency of, or within one year following, a Potential Change in Control. 4. Compensation and Benefits. Subject to Section 5, the Executive shall -------------------------- be entitled to the following compensation and benefits: 4.1 Base Salary. During his employment under this Agreement, Pegasus shall pay to the Executive a Base Salary at an annual rate of no less than the Executive's current annual base salary with the Corporation, payable in accordance with the Corporation's policies applicable to the Corporation's officers from time to time. The Corporation will review at least annually and may increase, but not decrease, the Executive's Base Salary. 4.2 Incentive Compensation. During the term of this Agreement, the Board shall have the discretion to award the Executive short-term or annual incentive compensation under the Corporation's Short-Term Incentive Plan ("STIP"), or any successor plan, subject to the terms and conditions of such plan. In addition, the Executive shall be entitled to participate in any long-term incentive plan ("LTIP") available to executive officers of the Corporation, subject to the terms and conditions of such plan. Nothing in this Agreement shall limit the Corporation's right to amend or terminate the STIP or LTIP. 4.3 Employee Benefits. In addition to Base Salary, the Executive shall be entitled to participate in the Corporation's employee benefit plans and perquisites that are generally available to the Corporation's executive officers from time to time, which shall include a short-term disability benefit providing payments to a disabled participant during the LTD Plan elimination period at the rate of one-hundred percent (100%) of Base Salary. All benefits and perquisites provided under this Agreement are subject to the terms and conditions of the applicable benefit plans or programs, and nothing in this Agreement shall limit the Corporation's right to amend or terminate any employee benefit plan or program. The Executive shall not be eligible to participate in any severance program of general applicability maintained for Pegasus employees or officers. In addition to the Corporation's employee benefit plans and perquisites that are generally available to the Corporation's executive officers from time to time, the Executive shall also be entitled to the following benefits: 4.3.1 Supplemental life insurance coverage in an amount determined by the Compensation Committee of the Board of Directors, which shall be in the amount of term life insurance that could be purchased for aggregate premiums and tax gross up of approximately $15,000 annually; and 4.3.2 Supplemental long-term disability coverage of $15,000 per month, the aggregate premiums and tax gross up for which shall not exceed $15,000 annually. 4.4 Reimbursement of Expenses. Pegasus will reimburse the Executive for expenses that he reasonably and properly incurs in performing his duties, as well as unreimbursed expenses incurred while serving as the director of such business corporations as the CEO may approve, so long as he incurs and accounts for those expenses in accordance with the Corporation's expense reimbursement policy in effect from time to time. 3 5. Termination. ----------- 5.1 Death. The Executive's employment under this Agreement shall terminate upon the Executive's death. If the Executive's employment terminates as a result of his death, the Executive's estate (or his beneficiary, as may be appropriate) shall be entitled to receive: 5.1.1 any Base Salary earned to the date of the Executive's termination, to the extent theretofore unpaid; 5.1.2 any STIP or LTIP award earned to the date of the Executive's termination, but solely to the extent provided under the terms of the respective plan; 5.1.3 any expense reimbursement to which the Executive is entitled at the time of termination under Section 4.4; and 5.1.4 any other benefits payable under any employee benefit plan of the Corporation in which the Executive participated at the time of his termination. 5.2 Disability. If the Executive is unable to perform his duties under this Agreement due to a disability which entitles him to benefits under the Pegasus Communications Corporation short-term disability plan or LTD Plan, the Corporation may place the Executive on unpaid leave of absence in accordance with its normal employment practices. If the Executive becomes eligible for benefits under the LTD Plan, the Corporation may terminate this Agreement in accordance with its normal employment practices by giving advance Notice of Termination to the Executive. Such termination shall be effective as of the date set forth in the Notice, and the Executive shall be entitled to the payments and benefits set forth in Section 5.1 as of the date of termination. The Corporation will not be deemed to have terminated the Executive's employment, or be in breach of this Agreement, as a result of assigning to another person any duties or responsibilities of the Executive which the Executive is not capable of performing due to disability. 5.3 For Cause by Pegasus. Pegasus may terminate the Executive's employment under this Agreement at any time for Cause by giving Notice of Termination to the Executive. Such termination will be effective as of the date of such Notice. Upon termination of employment for Cause, the Executive shall be entitled to the payments set forth in Section 5.1 as of the date of termination, and the Corporation shall have no further obligations under this Agreement except as may be provided under any applicable employee benefit plan of the Corporation. 5.4 Other Than for Cause by Pegasus. Pegasus may terminate the Executive's employment under this Agreement at any time for reasons other than Cause by giving advance Notice of Termination to the Executive. Such termination will be effective as of the date set forth in such Notice. Except as provided in Section 5.6 or 6, and subject to the restrictions below, if the Corporation terminates the Executive's employment without Cause, the Corporation shall pay the Executive the following amounts or benefits: 5.4.1 the payments set forth in Section 5.1 as of his date of termination; 5.4.2 an amount equal to two (2) times his annual Base Salary in effect on the date of the Notice of Termination, payable in twenty-four (24) equal monthly installments during the twenty-four (24) month period following such termination (the "Severance Period"); 5.4.3 an amount equal to two (2) times the average annual amount of the Executive's annual award payments under the STIP for the three (3) year period ending with the calendar year preceding the date of termination, payable in twenty-four (24) equal monthly installments during the Severance Period. If, however, the Executive has not received annual incentive payments for each year in such three (3) year period, then the average shall be determined based on the actual number of years for which the Executive has received annual incentive payments during such lesser period for which annual incentive payments have been made or credited; 5.4.4 continuation of coverage for health, dental and/or vision benefits for the Executive and any covered beneficiary during the twenty four (24) month period following the Executive's termination of employment (as such coverage may be amended from time to time for similarly situated executive officers who continue in employment); provided, however, that, as a condition for such coverage: (a) the Executive shall elect to continue such coverage (for himself and any qualified beneficiary) during the applicable COBRA period, and (b) the Executive shall continue to pay the amount from time to time payable for such coverage by similarly situated executive officers who continue in employment, which amount may be withheld from the payments under Section 5.4.2; 4 5.4.5 a lump sum payment equal to (a) the aggregate taxable cost of coverage provided under Section 5.4.4 not paid by the Executive, divided by (b) sixty five hundredths (.65). This amount shall be paid prior to the end of the Severance Period; and 5.4.6 professional outplacement assistance, provided by an executive outplacement firm acceptable to the Executive, for such level and duration, as the Corporation reasonably determines to be commensurate with the Executive's salary and position; provided, however, that the cost to the Corporation of such outplacement assistance shall not exceed $25,000. In addition to the foregoing, if the Participant's termination of employment is, in the good faith determination of the Corporation, attributable to a reduction in force, sale or closure of a division or other business unit, corporate downsizing, or other economic reason, all outstanding stock options held by the Executive at the time of termination shall become immediately vested and exercisable. In the case of any termination not described in the preceding sentence, the Executive shall be vested in his then outstanding stock options in accordance with the vesting schedule applicable to such options, as though the Executive terminated employment on the vesting date immediately following such termination, and any unvested options shall expire in accordance with their terms. Nothing in this paragraph shall extend the time for exercising any stock options beyond the period after the date of the Participant's termination of employment provided in the applicable option agreement. Notwithstanding the foregoing, no severance payment shall be due or owing under Sections 5.4.2 to 5.4.6, inclusive, if the Executive declines to sign and return the Waiver and Release Agreement set forth in Appendix A hereto within the time specified by the Corporation after termination of employment (but in no event less than twenty one (21) days), or revokes or attempts to revoke such Waiver and Release Agreement. Prior to a Change in Control or Potential Change in Control, the Corporation may amend Appendix A from time to time to address changes in applicable law, provided that any such amendment is uniformly applicable to executive officers of the Corporation. 5.5 Voluntary Resignation or Retirement by Executive. The Executive may terminate his employment under this Agreement at any time and for any reason by giving the Corporation Notice of Termination at least ninety (90) days before such termination is to become effective. On or after receipt of written notice of resignation or retirement by the Executive (whether or not such notice complies with the requirements for Notice of Termination under this Section 5.5), the Corporation may, in its discretion, terminate the Executive's employment prior to expiration of the ninety (90) day period, which termination will be treated as voluntary resignation by the Executive for purposes of this Agreement. If the Executive voluntarily terminates his employment with the Corporation or retires, he shall be entitled only to the payments set forth in Section 5.1. If, however, the Executive resigns for Good Reason in a Qualifying Termination under Section 6, then the termination provisions set forth in Section 6 shall apply. 5.6 Nonrenewal. Except as provided in Section 6 below, if the Executive's employment is terminated concurrent with expiration of the Agreement because the Corporation declines to renew the Agreement at the expiration of the initial term or any renewal term prior to the Executive's Normal Retirement Date (as defined in the Pegasus 401(k) Plan), then the Corporation will pay the Executive the following amounts: 5.6.1 the payments set forth in Section 5.1 as of his date of termination; and 5.6.2 an amount equal to one (1) times his annual Base Salary in effect on the date of termination, payable in twelve (12) equal monthly installments during the twelve (12) month period following such termination. If the parties have not otherwise agreed to the terms of a new agreement, or to the extension or renewal of this Agreement, before the end of the applicable term, this Section 5.6 shall not apply if the Corporation has made a written offer to the Executive, prior to the expiration of the applicable term, to extend the Executive's employment for a subsequent term upon terms at least as favorable to the Executive as provided under the Agreement as then in effect, and such offer remains effective on the last day of the applicable term. Nothing in this Section 5.6 precludes the Corporation from terminating the Executive's employment at any time, in which event Section 5.3 or 5.4 (whichever is applicable) shall apply in lieu of this Section 5.6. 5.7 Effect of Termination on Payments and Benefits. Except as provided in this Agreement or under any applicable employee benefit plan, all obligations of the Corporation to the Executive, or to his estate or beneficiary, shall cease when the employment relationship terminates, regardless of the reason for such termination. 5.8 Withholding. All payments under this Agreement shall be subject to such withholding of federal, state, city or other taxes as the Corporation reasonably determines may be required by law or governmental regulation or ruling. Prior to a Change in Control, the Corporation may offset severance payments under this 5 Agreement for any expense advances or other indebtedness to the Corporation evidenced in a writing signed by the Executive. 6. Change in Control. The following provisions shall apply if a ------------------- termination otherwise described in Section 5.4, 5.5 or 5.6 constitutes a Qualifying Termination. 6.1 Amount of Change in Control Severance. If the Executive's employment terminates in a Qualifying Termination, then in lieu of the severance and other benefits that would otherwise be payable to the Executive under Section 5.4, 5.5 or 5.6, whichever is applicable, the Executive shall receive the following amounts in a single lump sum payment (or in the case of the benefits described in Section 6.1.4 and 6.1.6, such benefits shall commence to be provided) within thirty (30) days after the effective date of the Waiver and Release Agreement described below: 6.1.1 the payments set forth in Section 5.1 as of his date of termination, including any STIP and LTIP amounts earned by the Executive with respect to the year preceding termination to the extent not previously paid; 6.1.2 an amount equal to three (3) times his annual Base Salary in effect at (a) the date of termination, (b) if applicable, immediately prior to the event identified in the Notice of Termination as Good Reason for such termination, or (c) immediately prior to the Change in Control, whichever is greatest; 6.1.3 an amount equal to three (3) times the average annual amount of the Executive's annual award payments under the STIP for the three (3) year period ending with the calendar year preceding (i) the date of termination, (ii) if applicable, the event identified in the Notice of Termination as Good Reason for such termination, or (iii) the Change in Control, whichever produces the greatest average annual incentive. If, however, the Executive has not received annual incentive payments for each year in such three (3) year period, then the average shall be determined based on the actual number of years for which the Executive has received annual incentive payments during such lesser period for which annual incentive payments have been made or credited; 6.1.4 continuation of coverage for health, dental and/or vision benefits for the Executive and any covered beneficiary during the thirty six (36) month period following the Executive's termination of employment (as such coverage may be amended from time to time for similarly situated executive officers who continue in employment); provided, however, that (a) as a condition for such coverage, the Corporation may require the Executive to elect to continue such coverage (for himself and any qualified beneficiary) under COBRA at any time during the benefit continuation period, but without liability for premium payments, and (b) coverage hereunder shall terminate upon the Executive becoming covered under another group health plan under circumstances permitting termination of coverage under COBRA; 6.1.5 a lump sum payment equal to (a) the aggregate taxable cost of coverage provided under Section 6.1.4 not paid by the Executive, divided by (b) sixty five hundredths (.65); and 6.1.6 professional outplacement assistance, provided by an executive outplacement firm acceptable to the Executive, for such level and duration, as the the Corporation reasonably determines to be commensurate with the Executive's salary and position; provided, however, that the cost to the Corporation of such outplacement assistance shall not exceed $25,000. Notwithstanding the foregoing, no severance payment or benefit shall be due or owing under Sections 6.1.2 to 6.1.6, inclusive, or Section 6.2, if the Executive declines to sign and return the Waiver and Release Agreement set forth in Appendix A hereto within the time specified by the Corporation after termination of employment (but in no event less than twenty one (21) days), or revokes or attempts to revoke such Waiver and Release Agreement. 6.2 Employee Benefits. If the Executive's employment terminates in a Qualifying Termination, the Executive shall become immediately fully vested in all outstanding option shares. Except as provided herein, the Executive's employment shall be deemed to have terminated for purposes of all other employee benefit plans of the Corporation upon his actual date of termination, and the Executive's right to any benefits thereunder shall be governed by the terms of the respective employee benefit plans. 6.3 Limitation on Parachute Payments. If any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Corporation or any subsidiary (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject the Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the 6 provisions of this Section 6.3 shall apply to determine the amounts payable to the Executive pursuant to this Agreement. This Section 6.3 shall not apply if Section 280G of the Code does not apply to payments made by the Corporation. 6.3.1 Immediately following delivery of any Notice of Termination, or after the date of the Executive's actual date of termination, if applicable, the Corporation shall notify the Executive of the aggregate present value of all benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected or actual date of termination, together with the projected maximum payments, determined as of such projected or actual date of termination, that could be paid without the Executive being subject to the Excise Tax. 6.3.2 If the aggregate value of all Covered Payments to be paid or provided to the Executive under this Agreement and any other plan, agreement or arrangement with the Corporation exceeds the amount which can be paid to the Executive without the Executive incurring an Excise Tax, then the amounts payable to the Executive under Section 6 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). If the Executive receives reduced benefits hereunder, the Executive shall have the right to designate which of the benefits otherwise provided for in this Agreement he will receive in connection with the application of the Payment Cap. 6.3.3 For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax: (i) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Corporation's independent certified public accountants appointed prior to the Change of Control or tax counsel selected by such accountants (the "Accountants"), the Corporation has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (ii) the value of any non-cash payments or any deferred payments shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.3.4 If the Executive receives reduced benefits under this Section 6.3 (or this Section 6.3 is determined not to apply to the Executive because the Accountants conclude that the Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of the Executive and the Corporation in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to the Executive or for the Executive's benefit are in an amount that would result in the Executive being subject to an Excise Tax, the Executive will still be subject to the Payment Cap under the provisions of Section 6.3.2, and the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Corporation on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If the Executive receives reduced benefits by reason of this Section 6.3 and it is established pursuant to a Final Determination either that the Executive could have received a greater amount without exceeding the Payment Cap or that the benefits granted to the Executive were not subject to the provisions of Sections 280G and 4999, then the Corporation shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Corporation. 7 7. Confidential Information. Except as required in the performance of his duties to Pegasus under this Agreement, the Executive shall not, during or after the term of this Agreement, use for himself or others, or disclose to others, any confidential information of or about the Corporation or any of its affiliates, including information and knowledge pertaining to products and services, ideas, plans, trade secrets, know-how, proprietary information, advertising, distribution and sales methods and systems, sales figures, customer and account lists, and the relationships between the Corporation, its affiliates, and their accounts, clients and suppliers, unless authorized in writing to do so by the Corporation. The Executive understands that this undertaking applies to information of either a technical or commercial or other nature and that any information not made available to the general public is to be considered confidential. The Executive acknowledges that such confidential information as is acquired and used by the Corporation or its affiliates is a special, valuable and unique asset. All records, files, materials and confidential information obtained by the Executive in the course of his employment with the Corporation are confidential and proprietary and shall remain the exclusive property of Pegasus or its affiliates, as the case may be. However, this provision shall not preclude the Executive from providing truthful information to the extent required by subpoena, court order, search warrant or other legal process, provided that the Executive immediately notifies the Corporation of such request in order to provide the Corporation an opportunity to object to such request in the appropriate forum and to obtain a ruling on such objection. 8. Return of Documents and Property. Upon the termination of the Executive's employment (regardless of reason), or at any time upon the request of the Corporation, the Executive (or his heirs or personal representative) shall deliver to the Corporation all property belonging to it, including without limitation, any automobile(s), computer programs or equipment, cellular telephones, beepers or other property belonging to the Corporation, and documents, property and data of any nature and in any form, including electronic or magnetic form, and rolodex files, reflecting any confidential information described in Section 7. 9. Noncompetition; Nonsolicitation. For one calendar year following termination of the Executive's employment under Section 5.5 (other than for Good Reason in a Qualifying Termination), the Executive agrees that he will not, without the prior written consent of the CEO, directly or indirectly, whether as a principal, agent, employee, consultant, contractor, advisor, representative, stockholder (other than as a holder of an interest of five percent (5%) or less in the equity of a publicly traded corporation), or in any other capacity: (a) own, have any interest in, or provide services, advice or assistance to, any business, person or entity which engages directly or indirectly in the business of providing or selling satellite television within the United States; (b) offer employment to or hire any employee of the Corporation; or (c) intentionally entice, induce or solicit, or attempt to entice, induce or solicit, any individual or entity having a business relationship with the Corporation, whether as an employee, consultant, customer or otherwise, to terminate or cease such relationship. By entering into this Agreement, the Executive acknowledges that these prohibitions are reasonable as to time, geographical area and scope of activity and do not impose a restriction greater than is necessary to protect the Corporation's goodwill, proprietary information and business interests. The Executive agrees that this Agreement provides enhanced protections and benefits to which he was not otherwise entitled prior to its execution and that such protections and benefits constitute valuable consideration sufficient to support the non-competition and non-solicitation obligations described above. 10. Intellectual Property. All Intellectual Property shall be considered work made for hire by the Executive and owned by the Corporation. The Executive agrees to perform, upon the request of the Corporation, during or after his employment, such acts as may be necessary or desirable to transfer, perfect and defend the Corporation's ownership and any resulting registrations of the Intellectual Property. 11. Disparagement. The Executive agrees not to make any derogatory, unfavorable, negative or disparaging statements concerning the Corporation and its affiliates, officers, directors, managers, employees or agents, or its or their business affairs or performance. This provision shall not be construed to limit the Executive's ability to give non-malicious and truthful testimony should you be subpoenaed to do so by competent authority having jurisdiction. 12. Enforcement. Any claim arising out of or relating to this Agreement or the Executive's employment with the Corporation or the termination thereof, other than an action for injunctive relief as provided below, shall be resolved by confidential, final and binding arbitration conducted before one arbitrator (or, at the Corporation's election, a panel of three arbitrators) in accordance with the commercial arbitration rules of the American Arbitration Association ("AAA") to be held in Philadelphia, Pennsylvania, under the then-existing AAA rules, rather than by litigation in court, trial by jury, administrative proceeding, or in any other forum. Judgment upon the award rendered by the arbitrator(s) may be 8 entered in any court having jurisdiction thereof. The Corporation shall bear the arbitrator's fee and costs. In addition, the Corporation shall promptly pay all costs and expenses, including without limitation reasonable attorneys' fees, incurred by the Executive or his beneficiaries in resolving any claim hereunder in which the Executive or his beneficiaries shall prevail. In all other cases the parties shall bear their own costs and expenses, except that the Executive shall pay all costs and expenses, including, without limitation, reasonable attorney's fees incurred by the Corporation in resolving such claim if the arbitrator(s) determine such claim to have been brought by the Executive in bad faith or without any reasonable basis. Notwithstanding the foregoing, the parties agree that any breach of Section 7, 9, 10 or 11 above is likely to cause irreparable injury to the Corporation and that damages for any breach of Section 7, 9, 10 or 11 are difficult to calculate. Therefore, upon breach of Section 7, 9, 10 or 11 hereof, the Corporation shall, at its election, be entitled to injunctive and other equitable relief from a court or such other relief or remedies, including damages, to which it may be entitled, and shall not be required to submit the matter to arbitration. Notwithstanding the foregoing, following the occurrence of a Change in Control, the Corporation shall reimburse the Executive for the attorney and/or accounting fees and costs reasonably incurred by the Executive (a) in assessing whether the Excise Tax calculation performed under Section 6.3 was correct and/or (b) in enforcing his rights under this Agreement; provided, however, that the Corporation shall not be required to pay any such fees or costs incurred in connection with a claim pursued by the Executive (or his attorney) in bad faith or without reasonable basis. 13. Indemnity. Pegasus shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Corporation or any of its subsidiaries, or in any other capacity in which the Executive served at the request of the Corporation, to the greatest extent permitted under the by-laws of the Corporation at the time such claim, loss or cause of action is asserted. 14. Notices. All notices and other communications provided for herein that one party intends to give to the other party shall be in writing and shall be considered given when mailed, return receipt requested, or couriered by overnight delivery service, return receipt requested, or personally delivered, either to the party or at its respective address set forth below (or to such other address as a party shall designate by notice hereunder): If to Pegasus: Pegasus Communications Corporation 225 City Line Ave. Bala Cynwyd, PA 19004 If to the Executive: Ted S. Lodge 9159 Green Tree Road Philadelphia, PA 19118 15. No Mitigation. Executive shall have no duty to mitigate the Corporation's obligation with respect to the termination payments set forth herein by seeking other employment following termination of his or her employment, nor shall such termination payments be subject to offset or reductions by reason of any compensation received by Executive from such other employment. The Corporation's obligations to make any payments hereunder shall not terminate in the event Executive accepts other full time employment. 16. Amendments. This Agreement may be amended, modified or superseded only ---------- by a written instrument executed by both of the parties hereto. 17. Binding Effect. This Agreement shall inure to the benefit of and shall --------------- be binding upon Pegasus and the Executive and their respective heirs, executors, personal representatives, successors and permitted assigns. 18. Assignability. This Agreement will be binding upon and inure to the benefit of the Corporation and any successor to the Corporation, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Corporation whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the "Corporation" for the purposes of this Agreement, other than for purposes of Section 1.5), but will not otherwise be assignable or delegable by the Corporation. The Corporation will require any such successor, by agreement in form and substance identical hereto, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Corporation would be required to perform if no such succession had taken place. This Agreement will inure to the benefit of and be enforceable by, if then applicable, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees, but shall not otherwise be assignable by the Executive, whether by pledge, creation of a security interest or otherwise. 9 19. Governing Law. This Agreement shall be governed by the laws of the -------------- Commonwealth of Pennsylvania. 20. Entire Agreement. The parties hereto acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement constitutes the complete and exclusive statement of the agreement between the parties and supersedes all proposals (oral or written), understandings, representations, conditions, covenants, and all other communications between the parties relating to the subject matter hereof. 21. Waiver. Any term or provision of this Agreement may be waived in writing at any time by the party entitled to the benefit thereof. The failure of either party at any time to require performance of any provision of this Agreement shall not affect such party's right at a later time to enforce such provision. No consent or waiver by either party to any default or to any breach of a condition or term in this Agreement shall be deemed or construed to be a consent or waiver to any other breach or default. 22. Invalidity of Portion of Agreement. If any provision of this Agreement or the application thereof to either party shall be invalid or unenforceable to any extent, the remainder of this Agreement shall not be affected thereby and shall be enforceable to the fullest extent of the law. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the date stated below effective as stated herein. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Mark Pagon Date: August 14, 2002 EXECUTIVE By: /s/ Ted S. Lodge Date: July 21, 2002 10 EX-10 4 exh10_2.txt EXH 10.2 Exhibit 10.2 Short-Term Incentive Plan Corporate, Satellite and Business Development The Short-Term Incentive Plan (the "Plan") of Pegasus Communications Corporation (the "Company") is designed to align business, stockholder, and Participant interests, provide competitive compensation, and reward performance based on individual and business achievements. In line with its purpose, participation in the Plan is accordingly restricted to those full-time employees of the Company or its business units who are in Management positions. To be entitled to payments under the terms of this Plan, employees must be employed by the Company and/or business unit at the time of payment. Employees who were hired by the Company or any of its business units after the start of a calendar year, or who were promoted to a position eligible for Plan participation after the start of the year, may be designated Participants and be eligible for participation in Tiers 1 and 2 effective the first of the month following their hire or promotion date. Newhires are eligible for participation in Tier 3 provided they were employed prior to October 1 of the year. Their payout will be pro-rated base on their hire date. To be eligible for a payout, a Plan Participant must have satisfactory performance. If a participant is on a formal written warning, they are not eligible to receive a monthly incentive for 30 days from the date of the written warning and continued eligibility will be re-evaluated at the end of the 30 days. A Participant will be disqualified from Plan participation for acts of misconduct, including, but not limited to, falsification of records, manipulation of accounts, violation of policy, or other misconduct determined sufficient for disqualification. This Plan shall be administered by a committee appointed by the Chief Executive Officer of the Company (the "Committee"). This Committee shall be empowered to designate Plan Participants for each calendar year, to determine target incentive award opportunities for each Participant, to establish performance standards for the Company and/or business units, and to determine whether a Plan Participant's performance is satisfactory. Following the end of each month and at the end of the calendar year, the Committee will measure the achievements of the overall Company or unit, as applicable, and determine the performance award payments earned by each Plan Participant. All determinations made by the Committee under the Plan shall be final and binding on the Participants, the Company, and any other parties. Each Plan Participant shall be assigned a short-term incentive Tier 1 target award opportunity which shall be expressed as a percentage of the Participant's annual base salary for the calendar year (or for the portion of the year during which the employee participates in the Plan). Additionally, each participant will be assigned a Tier 2 and 3 percentage that is their Tier 1 target as a percentage of the total Tier 1 targets. Incentive percentages are established for each management level (e.g., manager, director, vice president, etc.) and are designed to reflect competitive incentive levels using market data and job responsibilities as a guide. Payout of Tiers 1, 2 and 3 is based upon achievement of business goals established and circulated to Plan Participants for a calendar year. Depending upon whether a goal is established for the Company or a business unit, business performance goals will be based on the following criteria: o Free Cash Flow Positive (Corporate, Satellite and Business Development) o Monthly Actual Costs vs Monthly Budgeted Costs (Business Development) o Achievement of an FCC compliant contract by August to construct an initial satellite at one of the Company's Ka orbital locations (Business Development) The Committee reserves the right to adjust payouts in the event of significant windfalls, shortfalls, or other economic factors which are beyond the Participant's control. Short-term incentive Payouts will be made as soon as practical after performance is known. For calendar year 2002, Payouts will be based upon Participant's annual base salary as in effect on December 31, 2001 (or such later date that an employee becomes a Plan Participant). Nothing in this Plan shall be construed as guaranteeing any Participant any rights to continued employment with the Company or any of its business units, any rights to award payments with respect to any year in which the employee has been designated a Plan Participant, or any rights to continued Plan participation in subsequent years unless the Committee shall expressly designate the employee a Plan Participant in such subsequent years. In order to receive an award payment for any month, a Participant must have been in the continuous full-time employ of the Company or a participating business unit for the entire period since first being designated a Plan Participant by the Committee with respect to such month, must be employed at the time of payment, and must have satisfactory performance. A Participant whose employment terminates for any reason other than death, permanent disability, or retirement will receive no further incentive payments (including payments earned for the preceding month but not yet paid). A Participant whose employment terminates due to death, permanent disability, or retirement may, at the discretion of the Committee, receive payment of any incentive payments earned to the date of such termination (based on compensation through the date of termination). If a Participant dies prior to receiving his or her earned incentive, the Participant's spouse, or, in the case of an unmarried Participant, the Participant's estate, will be paid the employee's earned incentive payments. Participants who are promoted, reassigned or otherwise transferred during a calendar year will receive payout based upon (i) the length of time in each eligible position, (ii) the base salary for each eligible position, and (iii) the Tier 1 target and Tiers 2 & 3 percentage determined for each eligible position. The Plan is governed by the laws of the Commonwealth of Pennsylvania, except to the extent that federal law may apply. The Plan shall become effective for the calendar year commencing on April 1, 2002 and shall continue in effect until December 31, 2002, unless it shall be extended by the Committee. The Committee shall be empowered to amend or terminate the Plan at anytime (including prior to payout of an award with respect to a year) and for any reason. EX-10 5 exh10_3.txt EXH 10.3 Exhibit 10.3 Supplemental Description of Pegasus Communications Corporation Short-Term Incentive Plan (Corporate, Satellite and Business Development) for Calendar Year 2002 Executive officers of Pegasus Communications Corporation participate in the Pegasus Communications Corporation Short-Term Incentive Plan (Corporate, Satellite and Business Development) for calendar year 2002 (the "Plan"), see Exhibit 10.2 to this Form 10-Q, along with corporate, satellite and business development management. This description is intended to supplement Exhibit 10.2 to provide a more specific description of the criteria and types of payments that can be made under the Plan. For 2002, the amount of short-term incentive that can be earned is based upon "free cash flow". The term "free cash flow" used in the Plan ("Plan Free Cash Flow") is unique to the Plan and is not identical to the amounts of free cash flow publicly reported by Pegasus. For purposes of the Plan, "free cash flow" consists of various inclusions and exclusions specific to particular operations or divisions of Pegasus or events affecting Pegasus. For calendar year 2002, employees receive payments under the Plan based upon an April to December Plan year. The Plan provides for three tiers of payments as follows: (i) Tier 1 Payments: if Plan Free Cash Flow achieves $250,000 in a calendar month, participants will receive 1/12 of their annual targets for each month that Pegasus achieves this Plan Free Cash Flow; (ii) Tier 2 Payments: if Plan Free Cash Flow is greater than $250,000 in any calendar month, 35% of the excess amount for a given month will be allocated to the participants based upon their respective short-term incentive targets as a percentage of total short-term incentive targets; and Tier 3 Payments: if Pegasus achieves net positive Plan Free Cash Flow for the period from April to December 2002, an additional $1,000,000 will be allocated to participants based upon their respective short-term incentive targets as a percent of total short term incentive targets. Payments made under the Plan are made in cash and are payable monthly after the conclusion of a calendar month once the amount of Plan Free Cash Flow is determined (with the exception of Tier 3 payments, which, if applicable, will be paid in early 2003). EX-10 6 exh10_4.txt EXH 10.4 Exhibit 10.4 Description Of Long-Term Incentive Compensation Program Applicable to Executive Officers The Compensation Committee of the Board of Directors of Pegasus Communications Corporation has established on June 18, 2002 a long-term incentive program (the "Program") with respect to calendar year 2002, whereby participating officers would be granted restricted stock awards under the Pegasus Communications Restricted Stock Plan. The number of shares to be granted will be based upon the aggregate amount of short-term incentive earned by the officer with respect to calendar year 2002 pursuant to the Pegasus Communications Corporation Short-Term Incentive Plan (Corporate, Satellite and Business Development) for calendar year 2002 (the "STI Plan") (See Exhibit 10.2 and 10.3 to this Form 10-Q for information relating to the STI Plan). The number of shares to be issued will be calculated by taking the aggregate amount of short-term incentive paid to the officer under the STI Plan with respect to calendar year 2002 and dividing it by $1.03, the closing price of Pegasus' Class A common stock on the day prior to the Program being adopted. Shares will be issued in the first quarter of 2003 after (i) a determination of the final amount of aggregate short-term incentive earned with respect to calendar year 2002 and (ii) formal action taken by the Compensation Committee to grant the shares. If and when granted, the restricted stock award will be 50% vested upon the date of grant. An additional 25% will vest on the first and second anniversaries from the date of grant. -----END PRIVACY-ENHANCED MESSAGE-----