January 16, 2004

MORGAN
JOSEPH

Pegasus Communications (PGTV)

PGTV Set to take Flight
Table 1: Pegasus Communications Indicative Issue Data as of 15 Jan 04
Issue

Coupon

Amount

Maturity

Ratings

Price

YTW

Senior Notes

9.625%

$82.0

10/15/05

Ca/CCC-

96.0

12.23%

Senior Notes

12.375%

$158.0

08/01/06

Ca/CCC-

100.0

12.38%

Senior Notes

12.50%

$119.0

08/01/07

Ca/CCC-

98.0

13.22%

Senior Notes

11.25%

$342.0

01/15/10

Ca/CCC-

100.0

11.25%

Sr Dsc Nts **

0/13.50%

$126.0

03/01/07

C/CCC-

96.0

14.55%

** Subordinated Debt
Source: Morgan Joseph & Co and Company Reports

HIGH YIELD RESEARCH

Summary and Recommendation:

Trading in Pegasus securities continues to revolve around the potential roll-up of Pegasus by
DirecTV following the governments approval of the News Corp. and DirecTV merger.
Nevertheless, Pegasus financial results continue to demonstrate the competitive pressures in
multi-channel television as well as the companys inability to aggressively market its DirecTV
product.
We believe the transaction is likely to occur, and could take the form of a roll-up of the Pegasus
Satellite Communications (PSC) entity. PSC is a wholly-owned subsidiary of Pegasus
Communications Corp (PGTV). PSC would then become a subsidiary of DirecTV, with the bonds
likely trading to their call prices. We believe the 11.25% notes have even greater upside, and
could trade in-line with the DirecTV high yield notes. Furthermore, we believe the 11.25% notes,
which are callable in early 2006, may benefit from a tender given the high coupon. Table 2
(below) demonstrates the potential trading levels and returns of the Pegasus notes under our rollup scenario. The highest returns are achieved in the 11.25% senior notes; therefore, we
recommend a swap out of the shorter-term paper into the 11.25% notes. We recommend more
aggressive investors buy the 11.25% senior notes outright.
Table 2: Pegasus Communications Potential Returns

Coupon
9.63%
12.38%
12.50%
11.25%
13.50%

Current
Call
Price
Maturity
Date
96.00 10/15/2005 Current
100.00 8/1/2006
Current
98.00 8/1/2007
Current
100.00 1/15/2010 1/15/2006
96.00 3/1/2007 3/1/2004

Source: Morgan Joseph & Co and Company Reports

Call
Price
100.00
110.00
104.17
105.63
106.75

Potential
Trade Price Potential
8/1/2004
Return
100.00
17.64%
110.00
31.19%
104.17
24.20%
116.75
42.85%
106.75
32.18%

The Disclosure section may be found on the last page of this report.

Joseph Galzerano
212-218-3701

JGALZERANO@ MORGANJOSEPH. COM

Pegas us Communications

January 16, 2004

Table 3: Pegasus Communications Capital Structure at 09/30/03

Ratings
Pegasus Media & Communications
Revolver due Oct '04
Term B due Apr '05
Term C due Apr '05
Term D
Total Drawn Bank Debt

Pro forma
9/30/2003
$

B3/BB3/B-

12.5% Sr. Sub Nts due Jul '05

Other PM&C Debt
Total Pegasus Media Debt

75.6
17.7
300.0
393.3
0.4
393.7

Pegasus Satellite Corporation

12.50% Term Loan
9.625% Sr Nts '05
9.75% Sr Nts '06
12.5% Sr. Nts '07
11.25% Sr. Nts '10
12.375% Sr. sub notes 06
0/13.5% Sr. Dsc Nts (subordinated) '07

NR/NR
Ca/CCCCa/CCCCa/CCCCa/CCCCa/CCCC/CCC-

Other Debt
Total PSC Debt

92.0
81.6
71.1
118.5
341.7
158.2
126.0
59.6
1,048.7

Total Debt through PSC

1,442.4

12.75% Exchangeable Preferred

177.1

Total Debt & Preferred

1,619.5

Source: Company Reports

The potential returns were calculated using the current trading price and potential trade price at August 1, 2004. Our August
1, 2004 trade date is based on our belief that the potential transaction with DirecTV is most likely to occur by June 30, 2004.
We mo re conservatively used August 1, because the call prices for both the 12.375% notes and 12.50% notes decrease by 2
points on that date. As shown in Table 2, the two largest returns occur for the 11.25% senior notes and the 13.5%
subordinated notes. However, we continue to favor the 11.25% senior notes because we believe there remains further upside
potential given its call protection. For the 11.25% notes we are using a potential trade price of $117.0 which is a 5% YTW
slightly behind the DirecTV 8.375% senior notes of 2013. However, this trade price could rise to above $120.0 if News Corp
decides to refinance at a much lower rate and tender at Treasury plus.
Liquidity:
As of September 30, 2003, the company had $60 million of cash. Recent results and our 2004 estimates indicate PGTVs
cash position will be more than adequate to fund its cash burn. During 2003, management has focused on extending the
maturity of its bonds and reducing near-term amortization payments. In this regard, PGTV exchanged $162 million of its
11.25% senior notes maturing in 2010 for $164 million of notes maturing between 2005 and 2007. In addition, the company
has also refinanced the vast majority of its bank debt due in 2004 and 2005. As a result, PGTV significantly reduced its debt
amortization, as is shown in Table 4 (next page).

Pegasus Communications

January 16, 2004

Table 4: Pegasus Communications Amortization Schedule 2004 and 2005

Term B
Term C
Term D

2003
0.8

2004
2005
$
75.6
17.7
3.0
3.0

9.625% Sr. Nts

Total

0.8

3.0

Source: Company Reports

81.6
177.9

In August 2003, the company successfully negotiated a new $100 million term loan to refinance the 12.5% senior
subordinated notes of Pegasus Media. The senior subordinated notes were hindering the companys ability to refinance the
bank debt at Pegasus Media given the 2005 maturity. With this accomplished, the company obtained its new $300 million
bank facility to refinance the vast majority of the Pegasus Media credit facilities.
Current Issues:
We continue to believe a high probability exists that DirecTV will roll-up Pegasus Satellite Communications (PSC). The
relationship from the start has been dysfunctional and as a result both entities have suffered. Radio Shacks (RSH) recent
announcement that it has stopped selling the DirecTV product is just one example of the negative impact of the current
relationship between both satellite comp anies. Two years ago DirecTV had an exclusive relationship with Radio Shack.
Although DirecTV was a significant product for RSH, RSH requested one master agreement throughout the country rather
than separate agreements with both DirecTV and PGTV. However, PGTV was unwilling to operate under a master
agreement because it lacked the financial capability to aggressively market the DirecTV product or pay the selling
commissions DirecTV could afford. Thus, Radio Shack company-owned stores stopped selling DirecTV in the PGTV
territories. Soon after, Echostar entered into a distribution agreement with RSH and now is the exclusive provider of DBS in
RSH company owned stores. As a result of the above, PGTV gross additions were significantly impacted during the past two
years and DirecTVs RHS relationship diminished to the point where it is no longer sold in Radio Shack.
Investment Questions:
Could DirecTV significantly boost subscriber acquisition costs (SAC) to quickly attract 1 million subscribers rather
than acquire PGTV? Assuming boosting SAC to around $1,200 per subscriber (i.e. 3-4 free boxes and a years worth of free
programming) would achieve this goal, we believe it would be difficult for DirecTV to later reverse course. We believe this
marketing strategy could have a long-lasting affect on the DirecTV business and the DBS industry and would permanently
cause new buyers to expect incentives much like the car industry.
Why would DirecTV pay PGTV roughly almost double the current SAC? We believe the ability to acquire 1 million
subscribers and add 7.5 million rural households have economic value. We also believe there are significant economies of
scale since DirecTV in -orbit satellites already service the PGTV territories. In the spring, DirecTV will launch its 7S satellite
to boost its local-into-local capabilities to 130 markets. As a result, Pegasus subscribers capable of receiving local channels
will double. Lastly, DirecTVs current territories may benefit from the roll-up since distribution agreements with the large
national consumer electronic chains (Best Buy, Circuit City) and potential new agreements (i.e. Regional Bell Operating
Companies) can be simplified and established under one master agreement.
Why should DirecTV roll-up PGTV now? PGTVs business has been suffering and management may be forced into a
transaction. Based on PGTVs current liquidity and the companys ability to extend debt amortization as shown above, we
believe it could be 2 years before PGTV would be forced into a transaction. Given the dysfunctional relationship and
benefits to DirecTV described above, we believe the immediate benefit out weighs the potential savings of a reduced
purchase price. Furthermore, PGTV continues to lose subscribers to DirecTVs DBS competitor Echostar Communications,
who could join a bidding process if the opportunity arose. Although Echostar would have to change out equipment, it could
still be economical.

Pegasus Communications

January 16, 2004

Table 5: Pegasus Communications Pegasus Satellite Valuation

Per Subscriber Value:
Est. Subs at 3/31/04
Subscriber Value ($mm)
Television Assets
Cash
Total
Less: PSC Debt
Less: PSC Pfd
PSC Equity Value

$1,400
1,137,600

$1,500
1,137,600

$1,592.6
100.0
118.0
1,810.6

1,706.4
100.0
118.0
1,924.4

1,398.0
177.1
235.5

1,398.0
177.1
349.3

Source: Morgan Joseph & Co and Company Reports

The subscriber valuations of roughly $1.6B and $1.7B are based on per subscriber values of $1,400 and $1,500. These
valuations equate to 7.0 times and 7.5 times, respectively our 2004 pre-marketing cash flow estimate of $229 million. We
believe pre-marketing cash flow is the appropriate financial metric given our belief that DirecTV is simply acquiring the
subscribers and not the PGTV business.

I High Yield Department

600 FIFTH AVENUE, 18TH FLOOR
NEW Y ORK, NY 10020

TELEPHONE 212.218.3701
FACSIMILE 212.218.3705

Sales
NAME

TITLE E- MAIL

MATTHEW STEDMAN
GREGORY BEHLING
LAURENCE BERGER
CONNELL BYRNE
TEE FAIRCLOTH
KEVIN MC DONALD
CHARLES PEOS
DAVID WEISS

MANAGING DIRECTOR ,
DIRECTOR OF SALES
V ICE PRESIDENT, SALES
SENIOR V ICE PRESIDENT, SALES
SENIOR V ICE PRESIDENT, SALES
SENIOR V ICEPRESIDENT, SALES
V ICEPRESIDENT, SALES
SENIOR V ICE PRESIDENT, SALES
SENIOR V ICE PRESIDENT, SALES

MSTEDMAN@MORGANJOSEPH .COM
GBEHLING@MORGANJOSEPH .COM
LBERGER @MORGANJOSEPH .COM
CBYRNE@MORGANJOSEPH .COM
TFAIRCLOTH @MORGANJOSEPH .COM
KMCDONALD @MORGANJOSEPH .COM
CPEOS @MORGANJOSEPH .COM
DWEISS@MORGANJOSEPH .COM

Trading
NAME

TITLE E- MAIL

JAMES TUMULTY

MANAGING DIRECTOR ,
DIRECTOR OF TRADING
MANAGING DIRECTOR , TRADING
MANAGING DIRECTOR , TRADING
V ICE PRESIDENT, TRADING

MICHAEL CAPPA
KERRY STEIN
TODD SEPSICK

JTUMULTY @MORGANJOSEPH .COM

MCAPPA@MORGANJOSEPH .COM
KSTEIN @MORGANJOSEPH .COM
TSEPSICK@MORGANJOSEPH .COM

Research
NAME

TITLE E- MAIL

HOWARD GOLDBERG

MANAGING DIRECTOR ,
DIRECTOR OF RESEARCH
SENIOR V ICE PRESIDENT, RESEARCH
SENIOR V ICE PRESIDENT, RESEARCH
V ICE PRESIDENT, RESEARCH

JOSEPH GALZERANO
DAN TRAVERS
JOSEPHINE SHEA

HGOLDBERG@MORGANJOSEPH .COM
JGALZERANO@MORGANJOSEPH .COM
DTRAVERS@MORGANJOSEPH .COM
JSHEA@MORGANJOSEPH .COM

Administration
NAME

E- MAIL

V ANESSA DOOLEY

VDOOLEY @MORGANJOSEPH .COM

I, Joseph Galzerano the author of this research report, certify that the views expressed in this report
accurately reflect my personal views about the subject securities and issuers, and no part of my
compensation was, is, or will be directly or indirectly tied to the specific recommendations or views
contained in this research report.
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NOTE THAT INCOME FROM SUCH SECURITIES, IF ANY , MAY FLUCTUATE AND THAT EACH SECURITY S PRICE OR VALUE
MAY RISE OR FALL. ACCORDINGLY , INVESTORS MAY RECEI VE FEWER FUNDS THAN ORIGINALLY INVESTED . PAST
PERFORMANCE IS NOT NECESSARILY A GUIDE TO FUTURE PERFORMANCE.
5