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Offering Memorandum and
Consent Solicitation Statement Confidential
[LOGO]
PEGASUS
COMMUNICATIONS
PEGASUS COMMUNICATIONS CORPORATION
(to be renamed Pegasus Satellite Communications, Inc.)
Offer to Exchange
its 12 3/4% Series A Cumulative Exchangeable Preferred Stock
for any and all
(but not less than a majority) of the
12 3/4% Series A Cumulative Exchangeable Preferred Stock,
when issued, of our new holding company
(to be renamed Pegasus Communications Corporation)
and Solicitation of Consents
We are making this exchange offer and solicitation of consents in
conjunction with our reorganization into a new holding company structure. You
now hold Series A preferred stock of Pegasus Communications Corporation. As a
result of the reorganization, Pegasus Communications Corporation will cease to
be a publicly-held company and will become a subsidiary of a new publicly-held
holding company. In the reorganization, your Series A preferred stock will
automatically become identical Series A preferred stock of the new holding
company. We are making this exchange offer so that you can continue to hold
your Series A preferred stock interest in the same company in which you
currently own your interest, rather than in the new holding company.
In the reorganization, Pegasus Communications Corporation will change its
name to "Pegasus Satellite Communications, Inc.," and the new holding company
will be named "Pegasus Communications Corporation." We use these new names --
or shortened versions of them -- below to refer to the two corporations. We
expect the closing of this exchange offer to occur shortly after the holding
company reorganization.
o Pegasus Satellite is offering to exchange new 12 3/4% Series A Cumulative
Exchangeable Preferred Stock for outstanding 12 3/4% Series A Cumulative
Exchangeable Preferred Stock of Pegasus Communications, when issued, of
which approximately $162.6 million in liquidation preference is
anticipated to be issued and outstanding as of the exchange offer
expiration date. The exchange offer will not be consummated unless a
majority of the outstanding shares of the Pegasus Communications preferred
stock is tendered, or unless Pegasus Satellite waives this condition in
its sole discretion.
o Pegasus Satellite has agreed that following the exchange offer, it will
file a registration statement under the Securities Act of 1933 relating to
new preferred stock to be offered in exchange for the new Pegasus
Satellite preferred stock and with respect to the new Pegasus Satellite
exchange notes, if issued.
o The new Pegasus Satellite preferred stock is expected to be eligible for
trading in the Private Offerings, Resale and Trading through Automated
Linkages (PORTAL) market of the National Association of Securities
Dealers, Inc. We do not intend to apply for the listing of the new Pegasus
Satellite preferred stock on any national securities exchange or for
quotation through the Nasdaq National Market.
o Concurrently with the exchange offer, we are soliciting consents from
holders of the Pegasus Communications preferred stock, when issued, to
amend the Pegasus Communications preferred stock certificate of
designation to eliminate substantially all of the restrictive covenants in
the certificate of designation.
o The exchange offer will expire at 5:00 p.m., New York City time, on
January 18, 2001, unless extended or earlier terminated. To tender your
preferred stock, you must consent to the proposed amendments to the
Pegasus Communications preferred stock certificate of designation. The
consent expiration date is January 18, 2001, if, on that date, we have
received duly executed and unrevoked consents to the proposed amendments
from holders representing a majority of the outstanding shares of the
Pegasus Communications preferred stock then outstanding, or such later
date that we first receive the requisite consents. Tendered Pegasus
Communications preferred stock may be withdrawn and consents revoked at
any time at or before 5:00 p.m., New York City time, on the consent
expiration date, but not after that time except under limited
circumstances.
o We reserve the right to terminate the exchange offer and consent
solicitation at any time, as well as the right to cancel our planned
holding company reorganization or to consummate it on terms other than
those described in this offering memorandum.
o No fee will be paid to exchanging and consenting holders.
o You should contact the dealer manager listed below for further
information. You should contact the exchange agent listed on the back page
of this offering memorandum to request copies of the exchange offer
materials.
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This investment involves risks. See Risk Factors beginning on page 14.
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The new Pegasus Satellite preferred stock offered by this offering memorandum
has not been registered under the Securities Act or any state securities law
and, unless so registered, may not be offered or sold within the U.S. or to, or
for the account or benefit of, U.S. persons except under an exemption from, or
in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. Accordingly, the new
Pegasus Satellite preferred stock is being offered and sold by this offering
memorandum only (a) to "qualified institutional buyers" (as defined in Rule
144A under the Securities Act) in reliance on the exemption from the
registration requirements of the Securities Act provided by Rule 144A
thereunder, (b) to a limited number of "accredited investors," as defined in
Rule 501(a)(1), (2), (3), (5), (6), (7) or (8) of the Securities Act, (c) to a
limited number of unaccredited investors under Rule 506 of the Securities Act
and (d) outside the U.S. in compliance with Regulation S under the Securities
Act.
The dealer manager for the exchange offer and consent solicitation is:
CIBC World Markets
December 19, 2000
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This confidential offering memorandum does not constitute an offer to sell
any of the new Pegasus Satellite preferred stock, or a solicitation of an offer
to buy any of the new Pegasus Satellite preferred stock by any person in any
jurisdiction in which it is unlawful for that person to make an offering or a
solicitation. Neither the delivery of this offering memorandum nor any sale
made under this offering memorandum will under any circumstances imply that
there has been no change in Pegasus Satellite's or Pegasus Communications'
affairs, or that the information provided in this offering memorandum is
correct as of any date after the date of this offering memorandum.
This offering is being made in the U.S. in reliance on exemptions from
registration under the Securities Act for an offer and sale of securities that
does not involve a public offering. Each holder of Pegasus Communications
preferred stock accepting the exchange offer and making its exchange will be
deemed to have made the acknowledgments, representations and agreements
described in this offering memorandum under Notice to Investors. The new
Pegasus Satellite preferred stock has not been registered under the Securities
Act or any state securities laws and, unless so registered, may not be offered
or sold except under an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. You may be required to bear the financial risks of this investment for an
indefinite period of time.
This offering memorandum is highly confidential and has been prepared by
Pegasus Satellite solely for use in this offering. Pegasus Satellite reserves
the right, as described in this offering memorandum, to terminate the exchange
offer and to reject any offer to tender Pegasus Communications preferred stock,
in whole or in part, for any reason. This offering memorandum is personal to
each offeree and does not constitute an offer to any other person or to the
public generally to subscribe for or otherwise acquire the new Pegasus
Satellite preferred stock. Distribution of this offering memorandum to any
person other than the offeree and those persons, if any, retained to advise the
offeree with respect to this offering memorandum is unauthorized, and any
disclosure of any of its contents, without the prior consent of Pegasus
Satellite, is prohibited. Each offeree, by accepting delivery of this offering
memorandum, agrees to the foregoing and to make no photocopies of this offering
memorandum or any documents referred to in this offering memorandum and, if the
offeree does not purchase the new Pegasus Satellite preferred stock or the
exchange offer is terminated, to return this offering memorandum and all
documents referred to in this offering memorandum to the dealer manager, CIBC
World Markets Corp., 425 Lexington Avenue, New York, New York 10017.
Each person receiving this offering memorandum expressly acknowledges
that:
o the person was afforded an opportunity to request from Pegasus Satellite
and to review, and has received, all additional information considered by
it to be necessary to verify the accuracy of or to supplement the
information in this offering memorandum and to make an investment
decision;
o the person has not relied on the dealer manager or any person affiliated
with the dealer manager in connection with its investigation of the
accuracy of the information or its investment decision; and
o no person has been authorized to give information or to make any
representations concerning Pegasus Satellite or the new Pegasus Satellite
preferred stock other than as contained in this offering memorandum and,
if given or made, such other representations should not be relied upon as
having been authorized by Pegasus Satellite or the dealer manager.
Each person receiving this offering memorandum represents that the
person's investment decision is based solely on this offering memorandum and
that the person is not relying on any other information it may have received
from Pegasus Satellite, Pegasus Communications, the dealer manager or any other
person.
The dealer manager makes no representation or warranty, express or
implied, as to the accuracy or completeness of the information provided or
incorporated by reference in this offering memorandum, and nothing contained or
incorporated by reference in this offering memorandum is, or will be relied on
as a promise or representation, whether as to the past or the future. The
dealer manager has not independently verified the information contained in this
offering memorandum and assumes no responsibility for its accuracy or
completeness.
The new Pegasus Satellite preferred stock has not been registered with,
recommended by or approved by the SEC or any other federal or state securities
commission or regulatory authority, nor have any of the foregoing authorities
reviewed, passed upon or endorsed the merits of this private offering or the
accuracy or adequacy of this offering memorandum. Any representation to the
contrary is a criminal offense.
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None of Pegasus Satellite, the dealer manager or any of their respective
representatives is making any representation to any holder of Pegasus
Communications preferred stock exchanging its preferred stock for the new
Pegasus Satellite preferred stock offered by this offering memorandum regarding
the legality of any investment by that person under appropriate investment or
similar laws. The contents of this offering memorandum are not to be construed
as legal, business or tax advice. Each investor should consult with its own
advisors as to legal, tax, business, financial and related aspects of an
exchange of Pegasus Communications preferred stock for the new Pegasus
Satellite preferred stock.
The logo appearing on the front and back covers of this offering
memorandum is a trademark of Pegasus Communications Corporation.
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TABLE OF CONTENTS
<TABLE>
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Page
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WHERE YOU CAN FIND MORE INFORMATION .................................. iv
OFFERING MEMORANDUM SUMMARY .......................................... 1
SUMMARY OF SECURITIES OFFERED ........................................ 7
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA FOR
PEGASUS SATELLITE AND PEGASUS COMMUNICATIONS ........................ 10
RISK FACTORS ......................................................... 14
RECENT DEVELOPMENTS .................................................. 23
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS ........... 27
USE OF PROCEEDS ...................................................... 27
CAPITALIZATION OF PEGASUS SATELLITE .................................. 28
CAPITALIZATION OF PEGASUS COMMUNICATIONS ............................. 29
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA FOR
PEGASUS SATELLITE AND PEGASUS COMMUNICATIONS ........................ 30
PROPOSED HOLDING COMPANY REORGANIZATION .............................. 35
THE EXCHANGE OFFER AND CONSENT SOLICITATION .......................... 40
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS ............................ 49
PROPOSED AMENDMENTS TO THE PEGASUS COMMUNICATIONS PREFERRED STOCK
CERTIFICATE OF DESIGNATION AND EXCHANGE NOTES INDENTURE ............. 50
DESCRIPTION OF NEW PEGASUS SATELLITE PREFERRED STOCK AND EXCHANGE
NOTES ............................................................... 54
DESCRIPTION OF CERTAIN INDEBTEDNESS .................................. 103
DESCRIPTION OF CAPITAL STOCK ......................................... 114
MARKET PRICES OF THE PEGASUS COMMUNICATIONS PREFERRED STOCK .......... 117
NOTICE TO INVESTORS .................................................. 118
LEGAL MATTERS ........................................................ 121
INDEPENDENT ACCOUNTANTS .............................................. 121
</TABLE>
ANNEX A -- UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION
ANNEX B -- FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
ANNEX C -- FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
ANNEX D -- GOLDEN SKY HOLDINGS, INC. FINANCIAL STATEMENTS
ANNEX E -- GOLDEN SKY DBS, INC. 10-Q FOR THE QUARTER ENDED
MARCH 31, 2000
ANNEX F -- FORM 8-K DATED MAY 5, 2000
ANNEX G -- FORM 8-K DATED SEPTEMBER 15, 2000
ANNEX H -- FORM 8-K DATED NOVEMBER 9, 2000
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WHERE YOU CAN FIND MORE INFORMATION
Pegasus Satellite (under its present name, Pegasus Communications
Corporation) files annual, quarterly and current reports, as well as proxy
statements and other information with the SEC. You may read and copy any of the
documents it files with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, NW, Washington, DC 20549 or at its Regional Offices located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may obtain
further information about the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. These SEC filings are also available to the public
over the Internet at the SEC's web site at http://www.sec.gov, which contains
reports, proxy statements and other information regarding registrants like
Pegasus Communications that file electronically with the SEC. Pegasus
Communications' Class A common stock is quoted on the Nasdaq National Market
and reports and other information about Pegasus Communications may be inspected
at the Nasdaq National Market at 1735 K Street, NW, Washington, DC 20007-1500.
We have agreed that, whether or not we are required to do so by SEC rules
and regulations, for so long as any shares of Series A cumulative exchangeable
preferred stock remain outstanding, we will furnish to the holders of Series A
cumulative exchangeable preferred stock and file with the SEC (unless the SEC
will not accept such a filing) (1) all quarterly and annual financial
information that would be required to be contained in a filing with the SEC on
Forms 10-Q and 10-K if we were required to file those forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and a report on the annual financial information by Pegasus
Communications' certified independent accountants, and (2) all reports that
would be required to be filed with the SEC on Form 8-K if we were required to
file those reports. In addition, for so long as any shares of Series A
cumulative exchangeable preferred stock remain outstanding, we have agreed to
make available to any prospective purchaser or beneficial owner of any shares
of Series A cumulative exchangeable preferred stock in connection with any sale
of the preferred stock the information required by Rule 144A(d)(4) under the
Securities Act.
We are incorporating by reference the following documents that Pegasus
Satellite (under its present name, Pegasus Communications Corporation) or its
subsidiaries have filed with the SEC:
o Annual Report on Form 10-K filed with the SEC on March 10, 2000 for the
fiscal year ended December 31, 1999;
o Quarterly Report on Form 10-Q filed with the SEC on November 14, 2000 for
the nine-month period ended September 30, 2000;
o Current Reports on Form 8-K filed with the SEC on May 19, 2000, dated May
5, 2000, filed with the SEC on September 29, 2000, dated September 15,
2000, filed with the SEC on November 13, 2000, dated November 9, 2000 and
filed with the SEC on December 5, 2000, dated December 4, 2000;
o The section entitled "Golden Sky Holdings, Inc." beginning on page F-26
of the proxy statement/prospectus contained in our Registration Statement
on Form S-4 (File No. 333-31080) filed with the SEC on February 25, 2000;
o Quarterly Report on Form 10-Q filed with the SEC by Golden Sky DBS, Inc.
on May 15, 2000 for the quarter ended March 31, 2000; and
o The description of Class A common stock contained in the registration
statement on Form 8-A (File No. 000-21389) filed with the SEC on September
18, 1996, including any amendments or reports filed for the purpose of
updating the description.
Copies of Pegasus Communications' and Pegasus Satellite's pro forma
consolidated financial information are attached as Annex A; Pegasus
Communications' Form 10-K and 10-Q are attached as Annexes B and C,
respectively; the Golden Sky Holdings, Inc. financial statements are attached
as Annex D; Golden Sky DBS, Inc.'s 10-Q is attached as Annex E; and Pegasus
Communications' Form 8-Ks dated May 5, 2000, September 15, 2000 and November 9,
2000 are attached as Annexes F, G and H, respectively.
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Any statement in a document incorporated by reference into this offering
memorandum will be deemed to be modified or superseded for purposes of this
offering memorandum to the extent that a statement contained in (1) this
offering memorandum or (2) any other document subsequently filed with the SEC
that is incorporated by reference into this offering memorandum, modifies or
supersedes the statement. This incorporation by reference will not be deemed
specifically to incorporate by reference the information referred to in Item
402(a)(8) of Regulation S-K under the Securities Act.
You should rely only on the information provided in this offering
memorandum or incorporated by reference. Pegasus Satellite has not authorized
anyone to provide you with different information. You should not assume that
the information in this offering memorandum is accurate as of any date other
than the date on the cover page of this offering memorandum. Pegasus Satellite
is not making this offer of securities in any state or country in which the
offer or sale is not permitted.
You may request a copy of any or all of the documents referred to above,
other than exhibits to the documents that are not specifically incorporated by
reference in the documents. You should direct written or telephone requests to
Pegasus Satellite Communications, Inc. c/o Pegasus Communications Management
Company, 225 City Line Avenue, Suite 200, Bala Cynwyd, Pennsylvania 19004,
Attention: Vice President, Corporate Communications.
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OFFERING MEMORANDUM SUMMARY
This summary highlights information contained elsewhere in this offering
memorandum. This summary is not complete and may not contain all of the
information that you should consider before deciding to exchange your Pegasus
Communications preferred stock for new Pegasus Satellite preferred stock. We
urge you to read the entire offering memorandum carefully, including the Risk
Factors section and the SEC filings and financial statements that we have
included as annexes.
Our historical financial and other data are presented below on a
consolidated basis. When we describe the size of our business in this summary
-- for example, the number of households and how many subscribers we have --
unless otherwise noted, we are assuming that we will complete the pending
acquisitions described in the Recent Developments section. We cannot assure you
that we will complete the pending acquisitions according to the terms
described, if at all.
Pegasus Satellite
Pegasus Satellite Communications, Inc. is:
o The largest independent distributor of DIRECTV(R) with 1.3 million
subscribers at September 30, 2000. We have the exclusive right to
distribute DIRECTV digital broadcast satellite services to approximately
7.5 million rural households in 41 states. We distribute DIRECTV through
the Pegasus retail network, a network in excess of 3,000 independent
retailers.
o The owner or programmer of ten TV stations affiliated with either Fox,
UPN or the WB.
o One of the fastest growing media companies in the United States. We have
increased our combined direct broadcast satellite and broadcast television
revenues at a compound growth rate of 78% per annum from 1994 through
1999.
We were incorporated in Delaware in May 1996. Our principal executive
office is c/o Pegasus Communications Management Company, 225 City Line Avenue,
Suite 200, Bala Cynwyd, Pennsylvania 19004. Our telephone number is (888)
438-7488.
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The Exchange Offer And Consent Solicitation
Holding company
reorganization.......... We have decided to reorganize our corporate
structure. The details of the reorganization and the
reasons for it are described more fully in the
section called Proposed Holding Company
Reorganization, but the main effects of the
reorganization will be:
o To make the existing public company (in which you
now hold your Series A preferred stock) a
subsidiary of a new publicly-held holding
company;
o To provide us with increased flexibility to
pursue new activities and initiatives through
other subsidiaries of the new holding company
rather than through the existing company; and
o To transfer certain assets from the existing
company to the new holding company, together with
approximately $1.5 million in cash, and to allow
us to transfer additional assets and cash more
easily in the future.
The principal assets to be transferred to the new
holding company are the intellectual property
rights we acquired from Personalized Media
Communications L.L.C. in January 2000 and certain
pending applications filed with the FCC for
satellite licenses. The existing company will
retain its DIRECTV direct broadcast satellite
business and its broadcast television business, as
well as the assets associated with our broadband
business and initiatives.
When the reorganization is effected, the existing
public company will become a subsidiary of the new
holding company and will be renamed "Pegasus
Satellite Communications, Inc." The new
publicly-held holding company will be named
"Pegasus Communications Corporation." We use these
new names, or shortened versions of them, in this
offering memorandum to refer to these two
corporations.
We reserve the right to cancel our planned holding
company reorganization or to consummate it on terms
other than those described in this offering
memorandum.
Purpose of the
exchange offer........... In our current structure, the publicly-held parent
company is subject to operating restrictions and
other covenants, including restrictions on incurring
debt and distributing assets. These arise both under
our publicly-held debt securities and under our
Series A preferred stock. In the reorganization, the
publicly-held debt securities will remain with
Pegasus Satellite when it becomes a subsidiary of
Pegasus Communications, the new holding company. But
because of the way in which we intend to effect the
reorganization under Delaware law, the existing
Series A preferred stock will automatically become
preferred stock of the new holding company.
We are making this exchange offer so that holders
of Series A preferred stock can retain securities
of the same issuer that they now hold. In that way,
Pegasus Satellite (the existing company) will
remain subject to the same restrictions and
covenants that
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now benefit the holders of Series A preferred
stock, but Pegasus Communications, the new holding
company, will not be subject to these restrictions.
Series A holders who accept the exchange offer will
continue their investment in the same company and
will not become further "structurally subordinated"
(beyond the subordination inherent in holding
preferred stock rather than a debt security) by
becoming investors in the new holding company. They
will also be insulated to an extent from adverse
developments that could arise in the businesses to
be conducted by the new holding company, which are
as yet unproven. Conversely, they will have no
recourse to any of the assets held outside of
Pegasus Satellite and its subsidiaries to satisfy
the claims arising from the new Pegasus Satellite
preferred stock.
We may terminate the exchange offer and consent
solicitation in our sole discretion.
Purpose of the consent
solicitation............ We are also seeking consents to the proposed
amendments to the Pegasus Communications preferred
stock certificate of designation in the consent
solicitation. The primary purpose of the proposed
amendments is to eliminate substantially all of the
restrictive covenants in the Pegasus Communications
preferred stock certificate of designation. See
Proposed Amendments to the Pegasus Communications
Preferred Stock Certificate of Designation and
Exchange Notes Indenture. The proposed amendments
will become effective if adopted by the holders of a
majority of the outstanding shares of Pegasus
Communications preferred stock, but will not become
operative until consummation of the exchange offer.
Series A Preferred Stock
Pegasus Communications
preferred stock......... As of the exchange offer expiration date, Pegasus
Communications will have approximately $162.6
million in liquidation preference of its registered
12 3/4% Series A Cumulative Exchangeable Preferred
Stock issued and outstanding. The Pegasus
Communications preferred stock is registered and is
therefore not subject to restrictions on transfer.
The new Pegasus Satellite
preferred stock......... We are offering up to approximately $162.6 million
in liquidation preference of Pegasus Satellite's
12 3/4% Series A Cumulative Exchangeable Preferred
Stock through this offering memorandum. We have not
registered the new Pegasus Satellite preferred stock
under the Securities Act, and it will be subject to
restrictions on transfer. However, we will agree to
file a registration statement with respect to the
new Pegasus Satellite preferred stock and the new
Pegasus Satellite exchange notes. See Description of
New Pegasus Satellite Preferred Stock and Exchange
Notes -- Registration Rights; Liquidated Damages.
The exchange offer....... We are offering to exchange $1,000 in liquidation
preference of new Pegasus Satellite preferred stock
in return for each $1,000 in liquidation preference
of Pegasus Communications preferred stock
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tendered for exchange. We will issue the new
Pegasus Satellite preferred stock in fractional
shares, as necessary. The exchange offer is subject
to the conditions discussed below.
The consent
solicitation............. Concurrently with the exchange offer, Pegasus
Satellite is soliciting consents from holders of
Pegasus Communications preferred stock with respect
to proposed amendments to the Pegasus Communications
preferred stock certificate of designation and
exchange notes indenture. The proposed amendments
would eliminate substantially all of the restrictive
covenants in the certificate of designation. Holders
cannot tender Pegasus Communications preferred stock
in the exchange offer unless they also consent to
the proposed amendments. The proposed amendments
will become effective upon amendment of the
certificate of designation, but will become
operative only upon consummation of the exchange
offer.
Requisite consents....... Consents from holders of a majority of the
outstanding shares of Pegasus Communications
preferred stock are required to approve the
amendments to the Pegasus Communications preferred
stock certificate of designation.
Consent expiration date... The consent expiration date is January 18, 2001,
at 5:00 p.m., New York City time, if on that date
Pegasus Satellite has the requisite consents to the
proposed amendments, or such later date as Pegasus
Satellite first receives the requisite consents and
the holding company reorganization is completed.
Pegasus Communications will amend the certificate of
designation promptly after the consent expiration
date.
Exchange offer
expiration date......... The exchange offer expiration date is 5:00 p.m.,
New York City time, on January 18, 2001, unless we
extend the exchange offer.
Settlement date.......... The settlement date will be the third business day
following the exchange offer expiration date, or as
soon as practicable after that day.
Accumulated dividends.... If we accept your Pegasus Communications preferred
stock for exchange, your new Pegasus Satellite
preferred stock will include accumulated and unpaid
dividends on the Pegasus Communications preferred
stock up to, but not including, the settlement date,
and will continue to accumulate dividends from the
date of issuance of the new Pegasus Satellite
preferred stock. We will not pay any accumulated and
unpaid dividends on the Pegasus Communications
preferred stock on the settlement date of the
exchange offer. The new Pegasus Satellite preferred
stock will accumulate dividends from and including
the date of issuance of the new Pegasus Satellite
preferred stock.
Conditions of the exchange
offer................... Pegasus Satellite's obligation to accept validly
tendered Pegasus Communications preferred stock is
conditioned, among other things, on:
o at least a majority of the outstanding shares of
Pegasus Communications preferred stock being
validly tendered and not withdrawn before the
exchange offer expiration date;
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o receipt of the requisite consents; and
o completion of the holding company reorganization.
Pegasus Satellite may waive any conditions in its
sole discretion.
Right to terminate....... We can terminate the exchange offer in our sole
discretion. If we terminate the exchange offer, we
will return all tendered preferred stock, and the
proposed amendments to the Pegasus Communications
preferred stock certificate of designation will not
become operative.
Procedures for tendering and
consenting.............. If you hold Pegasus Communications preferred stock
and you wish to accept this offer, you must complete
a consent and letter of transmittal and deliver it
to the exchange agent. You must follow the
instructions contained in that letter and in this
offering memorandum. For further information, call
the exchange agent or the dealer manager at the
phone numbers listed on the back of this offering
memorandum or consult your broker, dealer,
commercial bank or trust company for assistance. A
beneficial owner whose preferred stock is held by a
broker, dealer, commercial bank, trust company or
other nominee must contact that nominee if the
beneficial owner desires to tender preferred stock
and to consent to the proposed amendments. The
Depository Trust Company participants may, in lieu
of physically completing and signing the letter of
transmittal, transmit their acceptance to The
Depository Trust Company through the Automated
Tender Offer Program.
Withdrawal rights........ Tenders of Pegasus Communications preferred stock
may be withdrawn and consents may be revoked at any
time before 5:00 p.m., New York City time, on the
consent expiration date by following the procedures
described in this offering memorandum. A valid
withdrawal of tendered preferred stock before that
time will be deemed a revocation of the consent.
Tenders of preferred stock may not be withdrawn and
consents may not be revoked after 5:00 p.m., New
York City time, on the consent expiration date
except under limited circumstances. See The Exchange
Offer and Consent Solicitation -- Withdrawal of
Tenders and Revocation of Consents.
Guaranteed delivery
procedures.............. If you wish to tender your shares of Pegasus
Communications preferred stock and you cannot
deliver them, the consent and letter of transmittal
or any other required documents before this offer
expires, you must tender your Pegasus Communications
preferred stock according to procedures we discuss
below in The Exchange Offer and Consent Solicitation
-- Guaranteed Delivery Procedures. You can use these
procedures only if you tender through an eligible
institution as described in The Exchange Offer and
Consent Solicitation -- Procedures for Tendering and
Consenting.
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Delivery of new Pegasus Satellite
preferred stock......... Pegasus Satellite will accept all validly tendered
Pegasus Communications preferred stock, subject to
the conditions described above, and deliver new
Pegasus Satellite preferred stock to the tendering
holders on the settlement date.
No appraisal rights...... No appraisal rights are available to holders of
Pegasus Communications preferred stock in connection
with the exchange offer.
Waivers; extension;
amendments.............. Pegasus Satellite expressly reserves the right, in
its sole discretion, subject to applicable law, at
any time or from time to time, to:
o waive any condition to the exchange offer and
consent solicitation and accept all Pegasus
Communications preferred stock previously
tendered in the exchange offer and consent
solicitation;
o extend the exchange offer expiration date and
consent solicitation and retain all preferred
stock tendered in this exchange offer, subject,
however, to the withdrawal rights of holders as
described under The Exchange Offer and Consent
Solicitation -- Withdrawal of Tenders and
Revocation of Consents;
o amend the terms of the exchange offer and consent
solicitation; and
o terminate the exchange offer and consent
solicitation.
Any amendment to the exchange offer and consent
solicitation will apply to all Pegasus
Communications preferred stock tendered and
consents delivered in the exchange offer and
consent solicitation. See The Exchange Offer and
Consent Solicitation -- Expiration; Extensions;
Amendments; Appraisal Rights.
Certain United States federal
income tax consequences of
the exchange offer...... We anticipate that your exchange of Pegasus
Communications preferred stock for the new Pegasus
Satellite preferred stock will not be a taxable
event. We discuss certain federal income tax
considerations relating to the exchange offer and
consent solicitation in Certain Federal Income Tax
Considerations.
Dealer manager........... CIBC World Markets Corp. is serving as dealer
manager and solicitation agent in connection with
the exchange offer and consent solicitation.
Exchange agent........... First Union National Bank is serving as the
exchange agent in connection with the exchange offer
and consent solicitation.
6
<PAGE>
SUMMARY OF SECURITIES OFFERED
The terms of the new Pegasus Satellite preferred stock and exchange notes,
if issued, will be substantially the same as the terms of the Pegasus
Communications preferred stock and exchange notes. The following is a summary
of certain terms of these securities. The terms of both series of preferred
stock are contained in the respective certificates of designation. This summary
is not intended to be complete and is subject to, and qualified in its entirety
by reference to, Pegasus Satellite's certificate of incorporation, the new
Pegasus Satellite preferred stock certificate of designation and the Pegasus
Satellite exchange note indenture, and Pegasus Communications' amended and
restated certificate of incorporation, the Pegasus Communications preferred
stock certificate of designation and the Pegasus Communications exchange note
indenture. For more information, please see Description of New Pegasus
Satellite Preferred Stock and Exchange Notes and Description of Certain
Indebtedness and consult the documents described above, which we will provide
to you upon request free of charge. You may obtain copies of these documents by
contacting us at the following address:
Pegasus Satellite Communications, Inc.
c/o Pegasus Communications Management Company
225 City Line Avenue, Suite 200
Bala Cynwyd, Pennsylvania 19004
Attention: Vice President -- Corporate Communications
Telephone: (888) 438-7488
New Pegasus Satellite Preferred Stock
New Pegasus Satellite preferred
stock offered........... We are offering approximately 162,588 shares of
12 3/4% Series A cumulative exchangeable preferred
stock with a liquidation preference of $1,000 per
share.
Dividends................ The holders of shares of the new Pegasus Satellite
preferred stock are entitled to receive, as
dividends are declared by the board of directors out
of legally available funds, cumulative preferential
dividends from January 1, 2001 (the last date on
which dividends are anticipated to be paid on the
existing preferred stock), accruing at the rate per
share of 12 3/4% per annum, payable semi-annually in
arrears on January 1 and July 1 of each year.
Accumulated unpaid dividends bear interest at a per
annum rate 200 basis points in excess of the annual
dividend rate on the new Pegasus Satellite preferred
stock. Dividends are payable in cash, except that on
or before January 1, 2002, dividends may be paid, at
our option, by the issuance of additional shares of
new Pegasus Satellite preferred stock having an
aggregate liquidation preference equal to the amount
of the dividends.
Optional redemption...... We do not have the option to redeem the new
Pegasus Satellite preferred stock until after
January 1, 2002. We may redeem the new Pegasus
Satellite preferred stock after that date, starting
at 106.375% of the liquidation preference during the
12-month period beginning January 1, 2002 and
declining annually to 100.000% of the liquidation
preference on January 1, 2005 and thereafter.
7
<PAGE>
Mandatory redemption..... On January 1, 2007, we must redeem, subject to the
legal availability of funds, all outstanding shares
of new Pegasus Satellite preferred stock at a price
in cash equal to the liquidation preference, plus
accrued and unpaid dividends, if any, to the date of
redemption.
Mandatory offer
to purchase.............. Upon a change of control of Pegasus Satellite, each
holder of shares of new Pegasus Satellite preferred
stock will have the right to require us to
repurchase all or any part of that holder's
preferred stock at an offer price in cash equal to
101% of the aggregate liquidation preference of the
preferred stock the holder wishes to sell, plus
accrued and unpaid dividends, if any, to the date of
purchase. Generally, a change of control means the
occurrence of any of the following:
o the sale of all or substantially all of our
assets to any person other than Marshall W. Pagon
or his related parties as described in the
certificate of designation;
o the adoption of a plan relating to the
liquidation or dissolution of Pegasus Satellite;
o the consummation of any transaction in which a
person becomes a beneficial owner of more of the
voting power of all of Pegasus Satellite's voting
stock (measured by voting power and not number of
shares), than is beneficially owned at that time
by Mr. Pagon and his related parties;
o the consummation of any transaction in which Mr.
Pagon and his related parties cease to have at
least 30% of the combined voting power of all of
Pegasus Satellite's voting stock or Mr. Pagon and
his affiliates acquire beneficial ownership of
more than 66 2/3% of Pegasus Satellite's Class A
common stock; or
o the first day on which a majority of the members
of Pegasus Satellite's board of directors are not
continuing directors -- essentially, directors
elected or recommended by the current board of
directors or their designated replacements.
Basic covenants of the
certificate
of designation.......... The certificate of designation will contain a
number of covenants restricting our operations and
those of our subsidiaries. For example, the
covenants limit Pegasus Satellite's ability to issue
capital stock ranking on parity with or senior to
the new Pegasus Satellite preferred stock, and the
ability of Pegasus Satellite and its subsidiaries to
incur additional indebtedness, pay dividends or make
distributions, make certain investments, issue
subsidiary stock, enter into certain consolidations
or mergers and enter into certain transactions with
affiliates.
8
<PAGE>
New Pegasus Satellite Exchange Notes
New Pegasus Satellite exchange
notes offered........... We are offering 12 3/4% senior subordinated
exchange notes due 2007 issuable in exchange for the
new Pegasus Satellite preferred stock in an
aggregate principal amount equal to the liquidation
preference of the new Pegasus Satellite preferred
stock so exchanged. There are currently no Pegasus
Communications 12 3/4% senior subordinated exchange
notes outstanding.
Maturity date............ The exchange notes, if issued, mature on January
1, 2007.
Interest rate............ The exchange notes, if issued, will bear interest
at a rate of 12 3/4% per annum. Interest may be paid
at our option on any interest payment date occurring
on or before January 1, 2002 either in cash or in
additional exchange notes. Interest will accrue from
the date of issuance or from the most recent
interest payment date for which interest has been
paid or provided.
Interest payment dates... Interest on the exchange notes, if issued, will
accrue from the exchange date and will be payable on
each January 1 and July 1, commencing with the first
such date after the exchange date. Interest is
payable in cash, except that on or before January 1,
2002, interest may be paid, at our option, by the
issuance of additional exchange notes having a
principal amount equal to the amount of the interest
payable.
Ranking.................. The exchange notes, if issued, will be unsecured,
senior subordinated obligations of Pegasus Satellite
that will be subordinated to all of Pegasus
Satellite's existing and future senior debt. The
exchange notes will rank senior in right of payment
to all of Pegasus Satellite's subordinated
indebtedness. The exchange notes effectively will be
subordinated to all indebtedness of Pegasus
Satellite's subsidiaries. See Risk Factors -- Risk
of Investing in the New Pegasus Satellite Preferred
Stock and Exchange Notes -- Your Right to Receive
Interest on the New Pegasus Satellite Exchange Notes
is Junior to Our Existing and Future Indebtedness
and to All Liabilities of Our Subsidiaries.
Optional redemption...... The exchange notes, if issued, will be redeemable,
at our option in whole or in part, at any time on or
after January 1, 2002, at the redemption prices
provided in this offering memorandum, plus accrued
and unpaid interest to the date of redemption.
Mandatory offer
to purchase.............. Subject to certain exceptions, if we sell certain
assets or experience specific kinds of changes in
control, we must offer to repurchase the exchange
notes.
Certain covenants........ If we issue the exchange notes, we will do so
under an indenture. The indenture will restrict our
ability and the ability of our subsidiaries to:
o incur indebtedness and create liens;
o make certain payments, including dividends;
o engage in certain transactions with affiliates;
and
o merge or consolidate.
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
FOR PEGASUS SATELLITE AND PEGASUS COMMUNICATIONS
The following table shows summary historical and pro forma consolidated
financial data for Pegasus Satellite and Pegasus Communications. This
information should be read in conjunction with the financial statements and the
notes to the financial statements, as well as Selected Historical and Pro Forma
Consolidated Financial Data, for Pegasus Satellite and Pegasus Communications,
included elsewhere in this offering memorandum. You should also read the
paragraphs that follow this table for more detail.
<TABLE>
<CAPTION>
Pegasus Communications Corporation
-----------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------------ ------------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operating Data:
Net revenues:
DBS .................................... $ 1,469 $ 5,829 $ 38,254 $ 147,142 $ 286,353
Broadcast .............................. 20,073 28,604 31,876 34,311 36,415
--------- ---------- ----------- ---------- ----------
Total net revenues .................... 21,542 34,433 70,130 181,453 322,768
Operating expenses:
DBS
Programming, technical and general
and administrative .................. 1,379 4,312 26,042 102,419 201,158
Marketing and selling ................. -- 646 5,973 45,706 117,774
Incentive compensation ................ 9 146 795 1,159 1,592
Depreciation and amortization ......... 640 1,786 17,042 59,077 82,744
Broadcast
Programming, technical and general
and administrative .................. 10,181 13,903 15,672 18,056 22,812
Marketing and selling ................. 3,789 4,851 5,704 5,993 6,304
Incentive compensation ................ 415 691 298 177 57
Depreciation and amortization ......... 2,934 4,041 3,754 4,557 5,144
Corporate and other expenses ........... 1,871 2,556 4,239 7,128 11,089
--------- ---------- ----------- ---------- ----------
Income (loss) from operations before
income taxes .......................... $ 324 $ 1,501 $ (9,389) $ (62,819) $ (125,906)
========= ========== =========== ========== ==========
Other Data:
Pre-marketing cash flow from continuing
operations:
DBS .................................... $ 90 $ 1,517 $ 12,212 $ 44,723 $ 85,195
Broadcast .............................. 6,103 9,850 10,500 10,262 7,299
--------- ---------- ----------- ---------- ----------
Total pre-marketing cash flow from
continuing operations ............... $ 6,193 $ 11,367 $ 22,712 $ 54,985 $ 92,494
========= ========== =========== ========== ==========
Location cash flow from continuing
operations ............................. $ 6,193 $ 10,721 $ 16,739 $ 9,279 $ (25,280)
Operating cash flow from continuing
operations ............................. 4,829 9,292 14,483 5,665 (31,255)
Capital expenditures .................... 2,640 6,294 9,929 12,400 14,784
Net cash provided by (used for):
Operating activities ................... 5,783 3,059 8,478 (21,962) (88,879)
Investing activities ................... (6,047) (81,179) (142,109) (101,373) (133,981)
Financing activities ................... 10,859 74,727 169,098 133,791 208,808
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus Pegasus Satellite
Communications Communications, Inc.
Corporation Pro Forma
-------------------- ------------------------------------
Year Ended
Nine Months Ended December 31, Nine Months Ended
September 30, 2000 1999 September 30, 2000
-------------------- -------------- --------------------
(In thousands)
<S> <C> <C> <C>
Statement of Operating Data:
Net revenues:
DBS .................................... $ 389,851 $ 426,926 $ 447,912
Broadcast .............................. 26,128 36,415 26,213
---------- ---------- ----------
Total net revenues .................... 415,979 463,341 474,125
Operating expenses:
DBS
Programming, technical and general
and administrative .................. 272,925 324,507 319,419
Marketing and selling ................. 111,646 182,707 121,211
Incentive compensation ................ 1,835 2,374 1,983
Depreciation and amortization ......... 141,696 244,402 195,957
Broadcast
Programming, technical and general
and administrative .................. 18,253 22,812 18,253
Marketing and selling ................. 5,523 6,304 5,523
Incentive compensation ................ 204 57 204
Depreciation and amortization ......... 3,860 5,144 3,860
Corporate and other expenses ........... 12,895 11,089 14,411
---------- ---------- ----------
Income (loss) from operations before
income taxes .......................... $ (152,858) $ (336,055) $ (206,696)
========== ========== ==========
Other Data:
Pre-marketing cash flow from continuing
operations:
DBS .................................... $ 116,926 $ 102,419 $ 128,493
Broadcast .............................. 2,352 7,299 2,437
---------- ---------- ----------
Total pre-marketing cash flow from
continuing operations ............... $ 119,278 $ 109,718 $ 130,930
========== ========== ==========
Location cash flow from continuing
operations ............................. $ 7,632 $ (72,989) $ 9,719
Operating cash flow from continuing
operations ............................. 1,591 (78,964) 1,729
Capital expenditures .................... 36,080 11,355 17,737
Net cash provided by (used for):
Operating activities ................... (65,250)
Investing activities ................... (15,032)
Financing activities ................... 346,730
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus Communications
Corporation
Pro Forma
-----------------------------------
Year Ended
December 31, Nine Months Ended
1999 September 30, 2000
-------------- -------------------
(In thousands)
<S> <C> <C>
Statement of Operating Data:
Net revenues:
DBS .................................... $ 426,926 $ 447,912
Broadcast .............................. 36,415 26,213
---------- ----------
Total net revenues .................... 463,341 474,125
Operating expenses:
DBS
Programming, technical and general
and administrative .................. 324,507 319,419
Marketing and selling ................. 182,707 121,211
Incentive compensation ................ 2,374 1,983
Depreciation and amortization ......... 244,402 195,957
Broadcast
Programming, technical and general
and administrative .................. 22,812 18,253
Marketing and selling ................. 6,304 5,523
Incentive compensation ................ 57 204
Depreciation and amortization ......... 5,144 3,860
Corporate and other expenses ........... 11,089 14,586
---------- ----------
Income (loss) from operations before
income taxes .......................... $ (336,055) $ (206,871)
========== ==========
Other Data:
Pre-marketing cash flow from continuing
operations:
DBS .................................... $ 102,419 $ 128,493
Broadcast .............................. 7,299 2,437
---------- ----------
Total pre-marketing cash flow from
continuing operations ............... $ 109,718 $ 130,930
========== ==========
Location cash flow from continuing
operations ............................. $ (72,989) $ 9,719
Operating cash flow from continuing
operations ............................. (78,964) 3,678
Capital expenditures .................... 12,839 32,493
Net cash provided by (used for):
Operating activities ...................
Investing activities ...................
Financing activities ...................
10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus Communications Corporation
-----------------------------------------------------------------------------------
As of December 31,
-------------------------------------------------------------
As of
1995 1996 1997 1998 1999 September 30, 2000
---------- ----------- ---------- ---------- ------------ --------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ......... $21,856 $ 8,582 $ 45,269 $ 75,985 $ 42,832 $ 314,858
Working capital (deficiency) ...... 17,566 6,430 32,347 37,889 (4,936) 203,586
Total assets ...................... 95,770 173,680 380,862 886,310 945,332 2,930,015
Total debt (including current
portion) ......................... 82,896 115,575 208,355 559,029 684,414 1,128,915
Total liabilities ................. 95,521 133,354 239,234 699,144 862,725 1,921,680
Redeemable preferred stock ........ -- -- 111,264 126,028 142,734 195,853
Convertible preferred stock ....... -- -- -- -- -- 300,000
Minority interest ................. -- -- 3,000 3,000 3,000 877
Total common equity (deficit) ..... 249 40,326 27,364 58,138 (63,127) 811,605
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus Satellite Pegasus Communications
Communications, Inc. Corporation
Pro Forma Pro Forma
As of As of
September 30, 2000 September 30, 2000
---------------------- ------------------------
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ......... $ 312,708 $ 314,208
Working capital (deficiency) ...... 201,611 202,936
Total assets ...................... 2,810,660 2,929,365
Total debt (including current
portion) ......................... 1,128,915 1,128,915
Total liabilities ................. 1,921,505 1,921,680
Redeemable preferred stock ........ 162,588 39,087
Convertible preferred stock ....... -- 300,000
Minority interest ................. 877 163,465
Total common equity (deficit) ..... 725,690 505,133
</TABLE>
11
<PAGE>
The historical information for Pegasus Communications is presented for
comparative purposes, because it is the predecessor to both Pegasus Satellite
and the new parent holding company to be named Pegasus Communications.
Historical information for the year ended December 31, 1999 and for the nine
months ended and at September 30, 2000 is the basis upon which the pro forma
information for these periods is derived. The historical financial information
for the years ended and at December 31, 1995, 1996, 1997, 1998 and 1999 have
been derived from audited consolidated financial statements previously filed
with the SEC. The historical financial information for the nine months ended
and at September 30, 2000 have been derived from unaudited financial statements
previously filed with the SEC. This unaudited information, in our opinion,
contains all adjustments necessary for a fair presentation of the information.
The financial information for the nine months ended and at September 30, 2000
should not be regarded as indicative of the results that may be expected for
the entire year.
The statement of operating data and other data present net revenues and
operating expenses from our continuing operations exclusive of income taxes,
interest expense and income, other non-operating expenses and equity in
affiliates. The historical and pro forma statement of operating data and pro
forma other data for all periods presented exclude discontinued operations
associated with our cable segment that we sold in September 2000. Pro forma
statement of operating data and other data exclude estimated recurring expenses
to be incurred within the next 12 months for the exchange offer, reorganization
and associated recapitalization following the completion of these transactions
of $650,000.
Pro forma statement of operating data and other data for the year ended
December 31, 1999 for Pegasus Satellite and Pegasus Communications include the
effects of our acquisition in May 2000 of Golden Sky and the new credit
facility of our Pegasus Media & Communications subsidiary entered into in
January 2000 as if each had occurred at the beginning of the period. Pro forma
statement of operating data and other data for the year ended December 31, 1999
for Pegasus Satellite exclude amounts associated with intellectual property
assets, related liabilities and other assets and cash that are expected to be
distributed by Pegasus Satellite to Pegasus Communications in the corporate
reorganization. Pro forma statement of operating data and other data for the
year ended December 31, 1999 for Pegasus Communications include the effects of
four preferred stock offerings made in the first quarter of 2000 as if they had
occurred at the beginning of the period.
Pro forma statement of operating data and other data for the nine months
ended September 30, 2000 for Pegasus Satellite and Pegasus Communications
include the effects of our acquisition of Golden Sky as if the acquisition had
occurred at the beginning of the period. Pro forma statement of operating data
and other data for the nine months ended September 30, 2000 for Pegasus
Satellite exclude amounts associated with intellectual property assets, related
liabilities and other assets and cash that are expected to be distributed by
Pegasus Satellite to Pegasus Communications in the reorganization and preferred
dividends associated with the four preferred stock offerings. The dividends for
these offerings are excluded because the related preferred stock is assumed not
to be outstanding for Pegasus Satellite due to the recapitalization that
Pegasus Satellite will undergo in connection with the reorganization.
Pro forma balance sheet data as of September 30, 2000 for Pegasus
Satellite and Pegasus Communications reflect the effects of the exchange offer.
Pro forma balance sheet data as of September 30, 2000 for Pegasus Satellite
exclude amounts outstanding at that date associated with intellectual property
assets, related liabilities and other assets and cash of Pegasus Satellite
expected to be distributed by Pegasus Satellite to Pegasus Communications in
the reorganization. It includes the effects of the recapitalization that
Pegasus Satellite will undergo in the reorganization and assumes that the
exchange offer was completed on that date. Pro forma balance sheet data as of
September 30, 2000 for Pegasus Communications also assumes that the exchange
offer occurred on that date and reflects the new Series A preferred stock of
Pegasus Satellite assumed to be outstanding at that date as a minority interest
in Pegasus Communications.
We use the terms pre-marketing cash flow and location cash flow in the
financial data presented above. Pre-marketing cash flow of the DBS business is
calculated by taking the DBS revenues and deducting from them their related
programming, technical, general and administrative expenses. Location cash flow
of the DBS business is its pre-marketing cash flow less DBS marketing and
selling expenses. The DBS marketing and selling expenses are also known as
subscriber acquisition costs. Subscriber acquisition costs are sales and
12
<PAGE>
marketing expenses incurred and promotional programming provided in connection
with the addition of new DBS subscribers. Location cash flow for the broadcast
television business is calculated by taking the broadcast revenues and deducting
from them their related programming, technical, general and administrative and
marketing and selling expenses.
Pre-marketing cash and location cash flows are not, and should not be
considered, alternatives to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing and location cash flows 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 pre-marketing and location cash flows are
important for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to monitor our
financial performance and debt leverage.
We refer you to the pro forma consolidated financial information included
elsewhere in this offering memorandum.
13
<PAGE>
RISK FACTORS
You should consider carefully the risks described below before you decide
to exchange your Pegasus Communications preferred stock for new Pegasus
Satellite preferred stock. The risks described below could materially and
adversely affect our financial condition and results of operation and impair
our ability to pay dividends on the new Pegasus Satellite preferred stock, and
you might lose all or part of your investment as a result. You should also
consider the more detailed information contained elsewhere in this offering
memorandum together with the information in the annexes to this offering
memorandum.
Risk of Investing in the New Pegasus Satellite Preferred Stock and Exchange
Notes
Absence of a Public Market for the New Pegasus Satellite Preferred Stock
The new Pegasus Satellite preferred stock is a new security for which
there currently is no market. We do not intend to apply for listing of the new
Pegasus Satellite preferred stock on any securities exchange or for inclusion
in any automated quotation system. However, we expect that the new Pegasus
Satellite preferred stock will be eligible for trading in the PORTAL market of
the National Association of Securities Dealers, Inc. Accordingly, we cannot
assure you as to the development or liquidity of any market for the new Pegasus
Satellite preferred stock. If a market for the new Pegasus Satellite preferred
stock were to develop, it could trade at prices that may fluctuate depending
upon many factors, including our operating results, the markets for similar
securities and other factors beyond our control, including general economic and
market conditions. Historically and recently, the market for preferred stock
has been subject to disruptions that have caused substantial volatility in the
prices of securities similar to the new Pegasus Satellite preferred stock. We
cannot assure you that, if a market for the new Pegasus Satellite preferred
stock were to develop, the market would not be subject to similar disruptions.
The new Pegasus Satellite preferred stock has not been registered under
the Securities Act or any state securities laws and, unless so registered, may
not be offered or sold except under an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act and applicable
state securities laws. See Notice to Investors. Under the registration rights
agreements, we will agree to use our best efforts to file a registration
statement relating to an exchange offer involving a new series of Pegasus
Satellite preferred stock to be offered in exchange for the new Pegasus
Satellite preferred stock and the new Pegasus Satellite exchange notes or,
instead, to file and use our reasonable best efforts to cause to become
effective a shelf registration statement registering the new Pegasus Satellite
preferred stock and the new Pegasus Satellite exchange notes, in each case
within the time periods described under the caption Description of New Pegasus
Satellite Preferred Stock and Exchange Notes -- Registration Rights; Liquidated
Damages. However, the SEC has broad discretion to determine whether any
registration statement will be declared effective and may delay or deny the
effectiveness of any registration statement filed by us for a variety of
reasons. We cannot assure you that we will be able to file and cause to become
effective the registration statements within the required time periods provided
in the registration rights agreement, or at all. If the SEC fails to declare
our registration statement effective, the liquidity and price of the new
Pegasus Satellite preferred stock and the new Pegasus Satellite exchange notes,
if issued, could be adversely affected and we could become liable for
liquidated damages under the registration rights agreement.
Our Substantial Indebtedness Could Adversely Affect Your New Investment
Pegasus Satellite has now and, after the exchange offer, will continue to
have a significant amount of indebtedness. Our substantial indebtedness could
have important consequences to you. For example, it could:
o make it more difficult for us to satisfy our obligations under these
securities;
o increase our vulnerability to generally adverse economic and industry
conditions;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, acquisitions and other activities;
14
<PAGE>
o limit our flexibility in planning for, or reacting to, changes in our
business and the industries in which we operate; and
o place us at a competitive disadvantage compared to our competitors that
have less debt.
The following table shows certain important information about Pegasus
Satellite and is presented with the assumption that we have consummated the
exchange offer and the holding company reorganization.
Pro Forma
September 30, 2000
-----------------------
(dollars in thousands)
Total debt .......................... $ 1,128,915
Common stockholder's equity ......... $ 725,690
Debt to equity ratio ................ 1.6x
On the assumption that the holding company reorganization and the exchange
offer had occurred at the beginning of each period, our earnings would have
been inadequate to cover our combined fixed charges and preferred stock
dividends by $210.8 million for the year ended December 31, 1999 and by $243.1
million for the nine months ended September 30, 2000. Earnings exclude
estimated nonrecurring expenses to be incurred within the next 12 months for
the exchange offer, reorganization and associated recapitalization following
the completion of these transactions of $650,000. Neither total debt nor common
stockholder's equity, as shown above, include the approximately $162.6 million
in Series A preferred stock assumed to be outstanding after the exchange offer,
$339.1 million, including accrued and unpaid dividends, in other outstanding
preferred stock of Pegasus Communications, or an $877,000 minority interest in
one of our subsidiaries. Also excluded from total debt is $74.0 million in
outstanding letters of credit.
We and Our Subsidiaries May Still Be Able to Incur Substantially More Debt,
Which Could Exacerbate the Risks Described Above
Pegasus Satellite and its subsidiaries may be able to incur substantial
additional indebtedness in the future. If new debt is added to our current debt
levels, the risks described above that we now face could intensify. The terms
of the new Pegasus Satellite preferred stock do not fully prohibit us and our
subsidiaries from doing so. At September 30, 2000, our credit facilities would
have permitted our subsidiaries to borrow up to an additional $206.6 million,
and all of those borrowings effectively would be senior to the new Pegasus
Satellite preferred stock.
We May Not Be Able to Generate Enough Cash to Service Our Debt
Pegasus Satellite's ability to make payments on and to refinance its
indebtedness and to fund planned capital expenditures and other activities will
depend on our ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other conditions that are beyond our control. Accordingly, we
cannot assure you that our business will generate sufficient cash flow to
service our debt. In any event, the cash flow of the broadband, intellectual
property and other subsidiaries of Pegasus Communications will not be available
to service Pegasus Satellite's debt.
Based on our current level of operations, we believe Pegasus Satellite's
cash flow from operations, available cash and available borrowings under our
credit facilities will be adequate to meet our future liquidity needs for at
least the next few years.
Pegasus Satellite cannot assure you that:
o our business will generate sufficient cash flow from operations; or
o future borrowings will be available to us under our credit facilities in
amounts sufficient to enable us to pay our indebtedness, or to fund our
other liquidity needs.
We may need to refinance all or a portion of our indebtedness on or before
maturity. We cannot assure you that we will be able to refinance any of our
indebtedness, including our credit facilities, on commercially reasonable terms
or at all.
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We May Have Difficulty Obtaining Cash from Our Subsidiaries to Pay Cash
Dividends and Interest and to Make Redemption Payments, Which Could
Adversely Affect Your Investment
Pegasus Satellite's only source for the cash we need to pay cash dividends
and make redemption payments on the new Pegasus Satellite preferred stock and
to pay interest on the exchange notes, if issued, and our other debt is the
cash that our subsidiaries generate from their operations or their borrowings.
The credit facility of one of our principal subsidiaries permits that
subsidiary to distribute cash to Pegasus Satellite to pay cash dividends after
January 1, 2002 on the new Pegasus Satellite preferred stock and to pay cash
interest after January 1, 2002 on the exchange notes, if issued, and certain
series of our senior debt, but not while the subsidiary is in default under
that credit facility. If the subsidiary defaults under it, we may have no cash
to pay cash dividends on the new Pegasus Satellite preferred stock or interest
on the exchange notes, if issued.
We Are Restricted from Paying Cash Dividends and from Redeeming New Pegasus
Satellite Preferred Stock
The terms of the new Pegasus Satellite preferred stock permit us to use
cash to pay dividends and redeem the new Pegasus Satellite preferred stock.
However, the terms of the instruments governing our indebtedness restrict our
ability to pay cash dividends and to redeem the new Pegasus Satellite preferred
stock. Our ability to pay cash dividends and redeem the new Pegasus Satellite
preferred stock will depend on our meeting specified financial criteria. We
cannot assure you that we will be able to meet these criteria. Even if the
terms of the instruments governing our indebtedness allow us to pay cash
dividends and to redeem the new Pegasus Satellite preferred stock, under
Delaware law we can make such payments only from our "surplus" -- meaning the
excess of our total assets over the sum of our liabilities plus the par value
of our outstanding capital stock -- or net income. We cannot assure you that we
will have any surplus or net income.
If a Change of Control Occurs, We May Be Unable to Refinance Our Publicly
Held Debt, Bank Debt and Preferred Stock
If certain kinds of change of control events occur, Pegasus Satellite will
be required to offer to repurchase all outstanding publicly held debt
securities and the new Pegasus Satellite preferred stock in an amount of $941.6
million based on balances outstanding at September 30, 2000. Our bank debt of
$327.0 million outstanding at September 30, 2000 would also come due on a
change of control. If a change of control occurs, and we are unable to finance
it, we would be in default. See Description of New Pegasus Satellite Preferred
Stock and Exchange Notes -- Description of Series A Preferred Stock -- Change
of Control.
Your Right to Receive Liquidation and Dividend Payments on the New Pegasus
Satellite Preferred Stock is Junior to Our Existing and Future Indebtedness
and to All of the Liabilities of Our Subsidiaries
Pegasus Satellite's obligations with respect to the new Pegasus Satellite
preferred stock do not constitute indebtedness. With respect to liquidation and
dividend payments, our obligations under these securities rank junior to all of
our present and future indebtedness and other payment obligations and those of
our subsidiaries and on parity with all future capital stock designated as on
parity, and senior to all classes of common stock and any junior preferred
stock. Further, the claims of creditors of our subsidiaries effectively will be
senior to all payments, including liquidation and dividend payments, on the new
Pegasus Satellite preferred stock. As of September 30, 2000, assuming we had
consummated this exchange and the holding company reorganization, Pegasus
Satellite had approximately $1.3 billion of indebtedness and other liabilities,
all of which would have been senior in right of payment to the new Pegasus
Satellite preferred stock. In the event of our bankruptcy, liquidation or
reorganization, the assets of Pegasus Satellite and its subsidiaries will be
available to pay obligations on the new Pegasus Satellite preferred stock only
after all of the indebtedness and other liabilities have been paid; and there
may not be sufficient assets remaining to pay amounts due on any or all of the
new Pegasus Satellite preferred stock then outstanding and any preferred stock
ranking on parity with the new Pegasus Satellite preferred stock. See
Description of New Pegasus Satellite Preferred Stock and Exchange Notes --
Description of Series A Preferred Stock -- Ranking.
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Your Right to Receive Interest on the New Pegasus Satellite Exchange Notes
Is Junior to Our Existing and Future Indebtedness and to All Liabilities of
Our Subsidiaries.
The new Pegasus Satellite exchange notes, if issued, will be unsecured,
senior subordinated obligations of Pegasus Satellite. The exchange notes will
be subordinated to all of our existing and future senior indebtedness and the
liabilities of our subsidiaries and will not be guaranteed by any of our
subsidiaries. In the event of our bankruptcy, liquidation or reorganization,
the assets of Pegasus Satellite and its subsidiaries will be available to pay
obligations on the new Pegasus Satellite exchange notes, if issued, only after
all of their indebtedness and other liabilities have been paid; and there may
not be sufficient assets remaining to pay amounts due on any or all of the
exchange notes then outstanding. See Description of New Pegasus Satellite
Preferred Stock and Exchange Notes -- Description of Exchange Notes --
Subordination.
Risks of Our Direct Broadcast Satellite Business
Satellite and Direct Broadcast Satellite Technology Could Fail or Be
Impaired
If any of the DIRECTV satellites are damaged or stop working partially or
completely for any of a number of reasons, DIRECTV customers would lose
programming. We would in turn likely lose customers, which could materially and
adversely affect our operations, financial performance and our ability to pay
dividends on the new Pegasus Satellite preferred stock.
Direct broadcast satellite technology is highly complex and is still
evolving. As with any high-tech product or system, it might not function as
expected. In particular, the satellites at the 101o W orbital location may not
last for their expected lives. In July 1998, DIRECTV reported that the primary
spacecraft control processor failed on DBS-1. As it was designed to do, the
satellite automatically switched to its on-board spare processor with no
interruption of service to DIRECTV subscribers. A more substantial failure of
the DIRECTV direct broadcast satellite system could occur in the future.
Events at DIRECTV Could Adversely Affect Us
Because we are an intermediary for DIRECTV, events at DIRECTV that we do
not control could adversely affect us. One of the most important of these is
DIRECTV's ability to provide programming that appeals to mass audiences.
DIRECTV generally does not produce its own programming; it purchases it from
third parties. DIRECTV's success -- and therefore ours -- depends in large part
on DIRECTV's ability to make good judgments about programming sources and
obtain programming on favorable terms. We have no control or influence over
this.
Programming Costs May Increase, Which Could Adversely Affect Our Direct
Broadcast Satellite Business
Programmers could increase the rates that DIRECTV pays for programming. As
a result, our costs would increase. This could cause us to increase our rates
and lose either customers or revenues.
The law requires programming suppliers that are affiliated with cable
companies to provide programming to all multi-channel distributors -- including
DIRECTV -- on nondiscriminatory terms. The rules implementing this law are
scheduled to expire in 2002. If they are not extended, these programmers could
increase DIRECTV's rates, and therefore ours. If we increase our rates, we may
lose customers. If we do not increase our rates, our revenues and financial
performance could be adversely affected.
We May Lose Our DIRECTV Rights after the Initial Term of Our Agreements
with the National Rural Telecommunications Cooperative
We may or may not be able to continue in the DIRECTV business after the
initial term of our agreement with the National Rural Telecommunications
Cooperative. If we can continue, we cannot predict what it will cost us to do
so.
As part of a counterclaim in the litigation between the National Rural
Telecommunications Cooperative and DIRECTV, DIRECTV is seeking a declaratory
judgement that the term of the National Rural Telecommunications Cooperative's
agreement with DIRECTV is measured only by the orbital life of DBS-1,
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the first DIRECTV satellite launched, and not by the orbital lives of the other
DIRECTV satellites at the 101(degrees) W orbital location. According to DIRECTV,
DBS-1 suffered a failure of its primary control processor in July 1998 and since
that time has been operating normally using a spare control processor. If
DIRECTV were to prevail on its counterclaim, any failure of DBS-1 could have a
material adverse effect on our DIRECTV rights. While the National Rural
Telecommunications Cooperative 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. This right is not
expressly provided for in our agreements with the National Rural
Telecommunications Cooperative. We have been informed that DIRECTV may amend
its counterclaim against the National Rural Telecommunications Cooperative to
include additional claims, which may include breach of contract, declaratory
relief and unfair competition, based in part on the National Rural
Telecommunications Cooperative having out-of-territory subscribers. If such
claims prevail, our ability to offer DIRECTV may be affected.
On January 10, 2000, Golden Sky Systems, Inc. and we 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 National
Rural Telecommunications Cooperative that are distributors of DIRECTV. The
complaint contained causes of action for various torts, common law counts and
declaratory relief based on DIRECTV's failure to provide the National Rural
Telecommunications Cooperative 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 National Rural Telecommunications Cooperative and
its members and affiliates.
On February 10, 2000, Golden Sky and we filed an amended complaint which
added new tort claims against DIRECTV for interference with our relationships
with manufacturers, distributors and dealers of direct broadcast satellite
equipment. Golden Sky and we later withdrew the class action allegations
previously filed to allow a new class action to be filed on behalf of the
members and affiliates of the National Rural Telecommunications Cooperative.
The class action was filed on February 27, 2000. All four actions are pending
before the same judge. On December 4, 2000, the court heard argument on the
motion for class certification and DIRECTV's motion to dismiss certain of our
claims and claims by the class members. The court issued an order on December
8, 2000 in which it denied DIRECTV's motion. DIRECTV's motion for partial
summary judgment on the right of first refusal was heard on December 11, 2000.
The court has not yet issued an order on the partial summary judgment motion.
The court has set a trial date of November 27, 2001 for all four actions.
The outcome of this litigation and the litigation filed by the National
Rural Telecommunications Cooperative could have a material adverse effect on
our direct broadcast satellite business.
Our revenues and financial performance would be adversely affected if we
were unable to continue in the DIRECTV business for the reasons described
above.
The Effect of New Federal Satellite Television Legislation on Our Business
Is Unclear
On November 29, 1999, The Satellite Home Viewer Improvement Act of 1999
became law. The FCC and other federal agencies have undertaken rulemakings and
studies in connection with this legislation. Therefore, we cannot predict the
full effect of this law on our business at this time.
The Act resolves many of the issues involved in years of litigation
between the networks and the direct broadcast satellite industry regarding
retransmission of network programming to direct broadcast satellite
subscribers. Generally, it preserves the industry's right to retransmit distant
network programming to subscribers in "unserved" areas. It also extends through
December 31, 2004 the statutory right, for a copyright royalty fee, of the
industry to retransmit independent programming -- so-called superstations -- to
subscribers as "distant" signals. Further, satellite carriers will be required
to deliver signals only to households that cannot clearly receive over-the-air
network signals with a rooftop antenna.
The Act also directs the FCC to take actions to prescribe the picture
quality standard that the FCC uses to predict what households do not receive a
strong enough network broadcast signal over the air and therefore are eligible
to receive distant network signals. The effect on our business of these FCC
actions and other studies and rulemakings that the FCC will undertake cannot be
predicted at this time.
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We Could Lose Money Because of Signal Theft
If signal theft becomes widespread, our revenues would suffer. Signal
theft has long been a problem in the cable and direct broadcast satellite
industries. DIRECTV uses encryption technology to prevent people from receiving
programming without paying for it. The technology is not foolproof and there
have been published reports that the technology has been compromised.
We Could Lose Revenues if We Have Out-of-Territory Subscribers
Just as we have exclusive DIRECTV distribution rights in our territories,
we are not allowed to have customers outside our territories. The problem is
that customers are not always truthful about where they live. If it turns out
that large numbers of our subscribers are not in our territories, we would lose
substantial revenues when we disconnect them. We could also face legal
consequences for having subscribers in Canada, where DIRECTV reception is
illegal. In addition, the existence of out-of-territory subscribers by the
National Rural Telecommunications Cooperative and/or us could affect our rights
to offer DIRECTV.
Direct Broadcast Satellite Services Face Competition from Cable Operators
One of the competitive advantages of direct broadcast satellite systems is
their ability to provide customers with more channels and a better-quality
digital signal than traditional analog cable television systems. Many cable
television operators are making significant investments to upgrade their
systems from analog to digital. This upgrade will significantly increase the
number of channels that cable television operators can provide to their
customers and the quality of the transmission. In addition, many cable
television operators are upgrading their systems to provide their customers
with high-speed Internet access. These upgrades could make cable television a
more attractive alternative for consumers, which could have an adverse effect
on our direct broadcast satellite business.
Direct Broadcast Satellite Equipment Shortages Could Adversely Affect Our
Direct Broadcast Business
There have been periodic shortages of direct broadcast satellite equipment
and there may be such shortages in the future. During such periods, we may be
unable to accept new subscribers and, as a result, potential revenue could be
lost. If we are unable to obtain direct broadcast satellite equipment in the
future, or if we cannot obtain such equipment on favorable terms, our
subscriber base and revenues could be adversely affected.
Risks of Our Broadcast Television Business
Our Broadcast Operations Could Be Adversely Affected if We Fail to
Negotiate Successfully Our Network Affiliation Agreements
Our network affiliation agreements with Fox formally expired on January
30, 1999 (other than the affiliation agreement for television station WTLH,
which is scheduled to expire on December 31, 2000). Except in the case of WTLH,
we currently broadcast Fox programming under arrangements between Pegasus
Satellite and Fox which have generally conformed in practice to such
affiliation agreements, and we are in the process of negotiating new
affiliation agreements. If we are not successful in these negotiations, our
broadcast operations could suffer materially.
Fox Could Cancel Our Affiliation Agreements if It Acquires a Significant
Ownership Interest in One of Our Markets
In addition, if Fox acquires a significant ownership interest in another
station in one of our markets, it could cancel our affiliation agreement or
arrangement for that market without penalty. Fox has done this in the past to
other broadcasters.
Our Broadcast Operations Could Be Adversely Affected if the FCC Prevents
Our Local Marketing Agreement Strategy
One of our important strategies in broadcast television is to achieve
economies of scale by programming two stations in each of our markets. Because
the FCC did not allow a broadcaster to own more than one television station in
the same market, we implemented our strategy -- like other broadcasters --
through arrangements known as local marketing agreements. Under these
arrangements, we contracted to provide
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programming and other services to the licensee of a separate television station
in the market. We currently have local marketing agreements to program second
stations in three of the markets where we own a station and in a fourth market
where we do not own a station. We are working on arrangements to program an
additional station under such an agreement in one or more markets by 2001, but
we cannot assure you when or whether we will be able to do so.
In August 1999, the FCC revised its television ownership rules to permit,
in certain circumstances, the common ownership of two stations in a television
market. The FCC also decided to treat most television local marketing
agreements as if the station providing programming owned the programmed
station. These decisions could prohibit us from programming or acquiring
additional in-market stations and could also require us to terminate some of
our existing local marketing agreements by August 2001. We will vigorously seek
to obtain favorable rulings from the FCC and to preserve and expand our
broadcast television strategy through the grandfathering of our existing
arrangements or outright common ownership. Unfavorable implementation decisions
by the FCC, however, could cost us significant revenues and could affect our
broadcast operations materially and adversely.
Antitrust Laws Could Limit Our Local Marketing Agreement Strategy
Apart from the FCC, federal agencies that administer the antitrust laws
have been reviewing market concentrations in television, including through
local marketing agreements that the FCC permits. These agencies could limit
partially or altogether our ability to program stations through local marketing
agreements. We cannot predict how this will affect us.
Our Inability to Control Licensees Under Our Local Marketing Agreements
Could Adversely Affect Our Broadcast Operations
Even if we can keep our current local marketing agreements or enter into
new ones, because we do not control the licensees that actually own the
stations and hold the stations' FCC licenses, the licensee has the right to
pre-empt our programming to comply with FCC rules. Also in an extreme case, the
licensee could cease to meet FCC qualifications and put its license in
jeopardy, in which case, we could lose the ability to program the station.
The Planned Industry Conversion to Digital Television Could Adversely
Affect Our Broadcast Business
All commercial television stations in the United States must start
broadcasting in digital format by May 2002 and must abandon the present analog
format by 2006, though the FCC may extend these dates, creating the following
risks:
o It will be expensive to convert from the current analog format to digital
format. We cannot now determine what that cost will be.
o The digital technology will allow us to broadcast multiple channels,
compared to only one today. We cannot predict whether or at what cost we
will be able to obtain programming for the additional channels. Increased
revenues from the additional channels may not make up for the conversion
cost and additional programming expenses. Also, multiple channels
programmed by other stations could increase competition in our markets.
o The FCC has generally made available much higher power allocations to
digital stations that will replace stations on existing channels 2 through
13 than to digital stations that will replace existing channels 14 through
69. All of our existing stations are on channels 14 through 69. This power
disparity could put us at a disadvantage to our competitors that now
operate on channels 2 through 13.
o In some cases, when we convert a station to digital television, the
signal may not be received in as large a coverage area, or it may suffer
from additional interference. Also, because of the technical standards
adopted by the FCC, the digital signal may be subject to interference to a
greater degree than current analog transmissions. As a result, viewers
using antennas located inside their homes, as opposed to outdoor, roof-top
antennas, may not receive a reliable signal. If viewers do not receive a
high-quality, reliable signal from our stations, they may be encouraged to
seek service from our competitors.
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o The availability of consumer reception devices at reasonable prices could
delay the implementation of DTV, or reduce audiences for DTV programming.
o The FCC is considering whether to require cable companies to carry both
the analog and the digital signals of their local broadcasters when
television stations will be broadcasting both signals, during the
transition period until 2006 when analog signals must be returned under
the current timetable. If the FCC does not require this, cable customers
in our broadcast markets may not receive our digital signal, which could
affect us unfavorably.
The Satellite Home Viewer Improvement Act of 1999 Could Have an Adverse
Effect on Our Broadcast Stations' Audience Share and Advertising Revenues.
This legislation allows satellite carriers to provide the signal of
distant stations with the same network affiliation as our stations to more
television viewers in our markets than would have been permitted under previous
law. In addition, the legislation allows satellite carriers to provide local
television signals by satellite within a station market, but does not require
satellite carriers to carry all local stations in a market until 2002.
Satellite carriers could decide to carry other stations in our markets, but not
our stations, which could adversely affect our stations' audience share and
revenues.
Other Risks of Our Business
We Face Certain Other Regulatory Risks
The direct broadcast satellite and television broadcast industries are
subject to regulation by the FCC and, to a certain extent, by state and local
authorities. Proceedings to implement the Communications Act are ongoing, and
we cannot predict the outcomes of these proceedings or their effect on our
business. We depend on broadcast licenses from the FCC to operate our broadcast
stations, and DIRECTV depends on FCC licenses to operate its digital broadcast
satellite service. If the FCC cancels, revokes, suspends, or fails to renew any
of these licenses, or fails to approve our pending licenses, it could have a
harmful effect on us.
We Have a History of Substantial Losses; We Expect Them To Continue; Losses
Could Adversely Affect Our Access to Capital Markets
We have never made a profit, except in 1995, when we had a $10.2 million
extraordinary gain. Because of interest expense on our substantial debt and
because of high expense in amortizing goodwill from our acquisitions, we do not
expect to have net income for the foreseeable future. To the extent investors
measure our performance by net income or loss, rather than alternative measures
based on cash flow, continuing losses could adversely affect our access to
capital markets.
We Face Significant Competition; the Competitive Landscape Changes
Constantly
Our direct broadcast satellite business faces competition from other
current or potential multi-channel programming distributors, including other
direct broadcast satellite operators, direct-to-home distributors, cable
operators, wireless cable operators, Internet and local and long-distance
telephone companies, which may be able to offer more competitive packages or
pricing than we or DIRECTV can provide. In addition, the direct broadcast
satellite industry is still evolving and recent or future competitive
developments could adversely affect us.
Our TV stations compete for audience share, programming and advertising
revenue with other television stations in their respective markets and with
direct broadcast satellite operators, cable operators and other advertising
media. Direct broadcast satellite and cable operators in particular are
competing more aggressively than in the past for advertising revenues in our TV
stations' markets. This competition could adversely affect our stations'
revenues and performance in the future.
In addition, the markets in which we operate are in a constant state of
change due to technological, economic and regulatory developments. We are
unable to predict what forms of competition will develop in the future, the
extent of such competition or its possible effects on our businesses.
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Our Acquisition Strategy May Become Too Expensive Which Could Adversely
Affect Our Financial Performance
We may not be able to keep making acquisitions on attractive terms. If we
cannot continue to make acquisitions on attractive terms, our financial
performance and stock price could suffer.
If we pay for an acquisition with our stock, the acquisition could dilute
existing stockholders, depending on its terms. If we finance an acquisition by
borrowing, we would increase our already high leverage and interest expense.
We May Not Be Able to Get the Consents Necessary to Implement Our
Acquisition Strategy
We have been able to get the necessary consents to make acquisitions in
the past, but this could change, or become more difficult, or require us to
incur additional costs for reasons we cannot predict. Our acquisitions normally
require consents from third-parties that we do not control. These consents
include those from DIRECTV and the National Rural Telecommunications
Cooperative for direct broadcast satellite acquisitions and the FCC and the
television networks for broadcast TV acquisitions. Some acquisitions also
require the consent of our lenders.
We May Not Be Able to Integrate Acquired Companies Successfully Which Could
Affect Our Financial Performance
We could encounter difficulties integrating any given acquired business
into our operations. These difficulties can cost money and divert management's
attention from other important matters.
We May Not Be Aware of All Risks
These risks and uncertainties are not the only ones we face. Others that
we do not know about now, or that we do not now think are important, may impair
our business.
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RECENT DEVELOPMENTS
Pegasus Satellite Transactions
The following are completed and pending transactions pertaining to the
business that Pegasus Satellite will retain after the holding company
reorganization.
Seamless Marketing and Customer Service Agreements with DIRECTV. On August
9, 2000, we agreed with DIRECTV, Inc. to provide seamless marketing and sales
for DIRECTV retailers and distributors and to provide seamless customer service
to all of our existing and prospective customers. Under the terms of the
agreements, we and DIRECTV reimburse each other for some of the costs incurred
in the activation of new customers in our respective territories. The
agreements also allow us to provide customers more expansive service selection
during activation and a simplified and consolidated billing process, and
dealers receive compensation regardless of where a customer activates service.
In particular, we obtained the right to provide our customers with video
services currently distributed by DIRECTV from certain frequencies, including
the right to provide the premium services HBO, Showtime, Cinemax and The Movie
Channel, which are the subject of litigation between DIRECTV and us as well as
sports programming, local TV stations and DIRECTV PARA TODOS' Spanish-language
programming packages. Under the agreement, we will retain 10% to 20% of the
revenues associated with these additional programming services, with the
exception of DIRECTV PARA TODOS' Spanish-language programming packages, from
which we will retain 80% of all revenues. Under the terms of the agreement, we
will be responsible for all sales, marketing, billing, customer care, and in
the case of PARA TODOS, programming costs associated with providing these
services to our customers.
Acquisition of PRIMESTAR Customers. On July 19, 2000, under the terms of
an agreement with DIRECTV, we purchased exclusive access to the PRIMESTAR BY
DIRECTV(R) customers in our territories that have not yet converted to the
DIRECTV high-power platform. In consideration for access to the remaining
customers, we paid DIRECTV a one-time fee of $300 per converted customer and
assumed responsibility for all costs involved in converting the customers
within our territory.
Completed Direct Broadcast Satellite Acquisitions. From January 1, 2000
through September 30, 2000, apart from our acquisition of Golden Sky, we
completed 16 acquisitions for DIRECTV distribution rights in rural areas of ten
states. In the aggregate, the consideration for the completed direct broadcast
satellite acquisitions was $95.6 million in cash, 873,184 shares of Class A
common stock, and warrants to purchase 3,000 shares of Class A common stock.
The territories covered by these transactions include approximately 638,000
households and approximately 83,000 subscribers.
Sale of Puerto Rico Cable System. On September 15, 2000, subsidiaries of
Pegasus Satellite sold the assets of their entire cable system in Puerto Rico
to Centennial Puerto Rico Cable TV Corp., a subsidiary of Centennial
Communications Corp., for the purchase price of $170 million in cash (subject
to certain adjustments). The Puerto Rico cable system served approximately
57,000 subscribers and passed over approximately 170,000 homes in Aguadilla,
Mayaguez, San German and surrounding communities in the western part of Puerto
Rico.
Sale of Broadcast Tower Assets. On July 17, 2000, under the terms of an
agreement with SpectraSite Broadcast Group, a division of SpectraSite Holdings,
Inc., we sold our interest in 11 broadcast towers to SpectraSite for
approximately 1.4 million shares of SpectraSite common stock in a transaction
valued at approximately $37.5 million based on the July 17, 2000 closing price
per share of SpectraSite common stock of $27.313. The SpectraSite stock we
received was valued at $25.5 million at September 30, 2000. Under the terms of
the agreement, SpectraSite will lease back eight of the 11 tower facilities it
purchased and will build several new digital television towers for use by
Pegasus Broadcast Television, Inc. SpectraSite will also have preferential
bidding rights for future tower facilities we may need.
Pending Direct Broadcast Satellite Acquisitions. As of September 30, 2000,
we have entered into letters of intent or definitive agreements to acquire
DIRECTV distribution rights in rural areas of five states. In the aggregate,
the consideration for these pending direct broadcast satellite acquisitions is
$61.0 million in cash. The territories covered by the letters of intent or
definitive agreements include approximately 155,000
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households and approximately 31,000 subscribers. The closings of these
acquisitions are subject to negotiation of definitive agreements, third-party
approvals and other customary conditions. We cannot assure you that these
conditions will be satisfied and that we will complete these acquisitions.
Pegasus Broadband/Hughes Agreement. On July 19, 2000, we reached an
agreement with Hughes Network Systems, a unit of Hughes Electronics
Corporation, which also owns DIRECTV, that will enable us to offer high-speed
Internet access by satellite via "Pegasus Express powered by DirecPC" to rural
and underserved households and businesses that we and our retail network serve.
We expect to launch this service in the first quarter of 2001. We plan to
market the new service through our 3,000-plus network of independent retailers.
The new service will require users to install a satellite dish and
USB-connected satellite modem, and will offer users 400 kilobit-per-second
downstream Internet access speeds via satellite, as opposed to a maximum of 56
kilobits-per-second currently available through dial-up modems. Aside from
offering "Pegasus Express powered by DirecPC," we also plan to deliver Internet
services through technology not based on DirecPC. A number of factors could
prevent or inhibit us from carrying out our Internet plans. These include
technological issues, ability to develop and obtain products, market
acceptance, competition and ability to secure financing.
Broadband Initiatives. During the first quarter of 2001, we expect to
introduce Pegasus iTV, our "TV-centric" Internet access and interactive
television service. Pegasus iTV, which we plan to deliver via an interactive TV
set-top box, will offer consumers an easy-to-use, low-cost TV based alternative
to a computer for Internet access as well as interactive TV services, on-line
home shopping and other options. Our research tends to show that many consumers
may be more comfortable in a "TV-centric" environment, where the TV is the main
interactive interface, than in a "PC-centric" environment, where the personal
computer is the Internet access device.
During the first quarter of 2001, we plan to introduce Pegasus Express and
Pegasus Express Pro, our satellite broadband Internet access services. Under
Pegasus Broadband's July 2000 agreement with Hughes Network Systems, we will
offer "Pegasus Express powered by DirecPC." See -- Pegasus Broadband/Hughes
Agreement. These services, which will be delivered via a two-way satellite dish
and satellite modem connected to a PC by a USB connection, will provide
consumers and businesses high speed, broadband access to the Internet. Our
research tends to show that there is a significant and growing market for
broadband access to the Internet among both consumers and businesses. In
metropolitan areas, we believe that satellite broadband services will compete
with cable modem and telephone company DSL broadband services. However, in many
rural and underserved areas, cable modem or DSL broadband access services are
not currently available and broadband Internet access will likely be available
only via satellite and terrestrial wireless broadband access for the
foreseeable future. Because of our previous success in introducing DBS services
to rural and underserved areas, we believe that we will be well situated to now
introduce satellite based broadband Internet access to rural and underserved
areas, though we cannot assure you that we will be successful.
We plan to introduce our Internet product offerings in several phases over
the next five years, beginning with a basic product and evolving into more
sophisticated set-top boxes and a consumer premises unit that can be networked
with other devices in the home, such as computers and "smart" entertainment
devices. Each product phase is expected to be designed to build on the
preceding one and extend the hardware platform for increased functionality,
greater speed and expanded applications.
Acquisition of Guard Band Licenses. On September 25, 2000, as part of an
auction process, the FCC announced that Pegasus Guard Band, LLC, one of our
subsidiaries, was the high bidder for 31 guard band licenses in consideration
of a payment of $91.5 million. Pegasus Guard Band has submitted the requisite
FCC forms and down payment necessary to obtain these license authorizations.
Assuming that no qualification issues are raised against Pegasus Guard Band, we
expect that the FCC will process the application and grant the licenses in the
near future. We cannot assure you that the FCC will not raise qualification
issues in connection with these licenses.
The guard band licenses are located in the 700 MHz frequency band between
the portion of the 700 MHz spectrum reserved for public safety operations and
the portion allocated for commercial wireless services. The
24
<PAGE>
FCC's rules limit the power levels, height of facilities, types of systems, and
the uses that may be employed for these guard bands in order to reduce the
possibility of harmful interference to either the public safety operations or
commercial wireless services. Formerly, the 700 MHz frequency band was reserved
for use by UHF television channels 60 through 69 until the FCC reallocated 36
MHz of this spectrum for commercial use and 24 MHz for public safety use at the
direction of Congress. Currently, incumbent television broadcasters operate in
portions of the spectrum and are permitted by statute to continue operations
until their markets are converted from analog to digital television. This
conversion is an ongoing effort that may not be fully completed until at least
December 31, 2006.
All 31 of Pegasus Guard Band's licenses are designated as "A" licenses,
which means that each license is 2 MHz consisting of a pair of 1 MHz guard band
frequencies. These licenses include major economic areas such as Boston,
Chicago, Detroit, New York City, Philadelphia, Portland, San Francisco/Oakland
and Seattle. The FCC has also authorized and auctioned "B" licenses of 4 MHz,
consisting of a pair of 2 MHz guard band frequencies, in each of the major
economic areas in the country. The term of Pegasus Guard Band's licenses runs
through January 1, 2015, unless Pegasus Guard Band uses the licenses to provide
new broadcast-type operations beginning on or before January 1, 2006, in which
case it will be required to renew the license eight years after the beginning
of these new broadcast-type operations.
As manager of the guard band licenses, Pegasus Guard Band must lease at
least 50.1% of the licensed spectrum in a geographic area to unaffiliated
parties on a for-profit basis. Pegasus Guard Band may not lease more than 49.9%
of the licensed spectrum in any geographic area to its own affiliates. Pegasus
Guard Band may subdivide its spectrum in any manner it chooses and make it
available to system operators or directly to end-users for fixed or mobile
communications, consistent with the frequency coordination and interface rules
specified for the bands.
Under applicable performance requirements, by January 1, 2015, Pegasus
Guard Band must provide substantial service to the service areas covered by
these 31 licenses. The FCC's rules provide for a presumption of substantial
service if the licensee either leases a predominant amount of the licensed
spectrum in at least 50% of the geographic area covered by the license or
provides coverage to at least 50% of the service area's population. We cannot
assure you that we will be able to provide substantial service according to the
FCC's requirements. Pegasus Guard Band must also monitor all compliance and
interference protection standards for its 31 licenses. These requirements
include complying with, and ensuring that licensees comply with, limits on
out-of-band emission levels, providing mandatory advanced notification of
technical parameters to nearby guard band users and public safety frequency
coordinators and cooperating with officials and other guard band managers to
resolve problems.
We have not fully developed our plans for use of the guard band licenses
in our business at this time.
Pegasus Communications Transactions
The following are pending transactions pertaining to the businesses that
Pegasus Communications will conduct through subsidiaries other than Pegasus
Satellite after the holding company reorganization. We reserve the right not to
distribute the following to Pegasus Communications in connection with our
proposed holding company reorganization, as well as to cancel our proposed
holding company reorganization or to consummate it on terms other than those
described in this offering memorandum.
Pending Ka License Application. We have an application pending before the
FCC that requests authority to operate Ka-band geostationary satellites at five
different orbital locations. Two of these orbital locations would permit
service to the entire continental U.S., and three of them are primarily for
service outside of the U.S. Ka-band geostationary satellite systems are capable
of providing two-way, "always on," high-speed or broadband Internet access
directly to residential and small office/home office consumers as well as high
quality video and audio services channels. If all or part of this application
is approved, we intend to construct and launch these satellites and associated
ground systems, or engage third parties to do so on our behalf, in connection
with the delivery of broadband Internet access, video and audio streaming and
video broadcast services to consumers and businesses.
25
<PAGE>
The construction and launch of the satellites and ground systems described
above may require us to secure financing. We cannot assure you that we will be
able to secure such financing on attractive terms, if at all. In addition,
there are currently more applicants for orbital slots than there are available
slots; therefore, we cannot assure you that the FCC will grant our application
in whole or in part. We have requested that the FCC waive certain rules in
connection with our application. We cannot assure you that the FCC will grant
this request or that the terms under which the FCC might grant a license would
be commercially viable. In addition, the FCC may assign us orbital slots that
do not meet our business requirements. If so, we would not be able to launch
the satellites, Finally, regulations require us to bring these satellites into
use by either 2004 or 2005. Because of the long lead-time to procure
satellites, if the FCC does not act before the end of 2001, it may be difficult
or impossible for us to procure the necessary satellites within the regulatory
timeframe.
Pending Terrestrial Broadband Licenses. We are one of two applicants
currently competing for FCC licenses to a nationwide allocation of 500 MHz of
spectrum to operate a terrestrial radio system in the 12 GHz band, though there
is a third applicant seeking to provide service only in several Midwest states.
There may be additional future applicants for these licenses. The FCC has
decided that the spectrum may be used for video programming and data services.
We filed the application for the purpose of providing these services, including
local television broadcast signals throughout the United States. A full
build-out of the radio system as specified in our application will require
construction of transmitting sites in over 2000 markets throughout the country.
Because the proposed services would operate in the frequency band authorized
for use by direct broadcast satellite licensees, we have proposed in our
application to operate on a secondary basis to protect direct broadcast
licensees and their customers.
Our application followed the 1999 applications by affiliates of Northpoint
Technology, Ltd. to provide similar terrestrial services in the same band.
Northpoint has opposed our application. The Northpoint applications have been
opposed by direct broadcast satellite operators, such as DIRECTV, Echostar
Communications Corporation, Primestar, Inc., and others. Although we have
committed to operate these licenses, if granted, only to the extent that
independent tests demonstrate that operations would not cause interference to
direct broadcast satellite services, our application may be similarly opposed
once it has been accepted for filing and put on public notice by the FCC.
Because the FCC has not yet adopted specific technical or service rules or
conducted a licensing proceeding, we cannot assure you that the FCC will permit
us to provide terrestrial service in the 12.2-12.7 GHz band. We cannot assure
you that the FCC will grant our application, and even if the FCC grants our
application, it may put restrictions on the licenses that could materially
impair the use of the licenses in our broadband business. The FCC may use an
auction to select licensees.
Northpoint Technology holds two issued U.S. patents and, based on these
patents, has publicly asserted that any FCC licensee operating in the proposed
terrestrial service will infringe on its patents. Northpoint Technology has
also notified us directly of the existence of the patents. Because the FCC has
not yet granted any terrestrial broadband licenses, we do not know the
conditions under which a licensee would be permitted to operate the terrestrial
service. Therefore, we are unable to evaluate whether implementation of our
system would implicate Northpoint Technology's patents.
If our application is granted, we plan to use the licenses to provide
subscription broadband data and multi-channel video services. As stated above,
a number of factors could prevent or inhibit us from carrying out these plans,
including: technological issues, our ability to develop and obtain products,
market acceptance, competition and our ability to secure financing.
Patent Infringement Lawsuit
On December 4, 2000, our subsidiary -- Pegasus Development Corporation --
and Personalized Media Communications, L.L.C. filed a patent infringement
lawsuit in the United States District Court of Delaware against DIRECTV, Inc.,
Hughes Electronics Corporation, Thomson Consumer Electronics and Philips
Electronics North America Corporation. We 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 we are an exclusive licensee.
26
<PAGE>
The technologies covered by our exclusive license include services distributed
to consumers using certain Ku band BSS frequencies and Ka band frequencies,
including frequencies licensed to affiliates of Hughes 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.
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
The following table provides our ratio of earnings to fixed charges for
the nine months ended September 30, 2000 and for each of the last five years
(in thousands).
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------------------------
Nine Months Ended
1995 1996 1997 1998 1999 September 30, 2000
------------ ------------ ------------- -------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Deficiency in earnings to fixed
charges ...................... $ (3,449) $ (7,166) $ (22,156) $ (105,792) $ (189,454) $ (227,353)
</TABLE>
Assuming that the holding company reorganization and exchange offer had
occurred at the beginning of 1999, the deficiency in earnings for fixed charges
would have been the same as historical at December 31, 1999 and $227.2 million
at September 30, 2000.
Earnings were inadequate to cover combined fixed charges and preferred
stock dividends by approximately $3.4 million, $7.2 million, $34.5 million,
$102.6 million, $206.2 million and $252.4 million for the years ended December
31, 1995, 1996, 1997, 1998 and 1999, and the nine months ended September 30,
2000, respectively. Assuming that the holding company reorganization and
exchange offer had occurred at the beginning of 1999, earnings would have been
inadequate to cover combined fixed charges and preferred stock dividends by
approximately $210.8 million at December 31, 1999 and $243.1 million at
September 30, 2000. For the purposes of the calculation of the above ratios,
fixed charges consist of interest expense, amortization of deferred financing
costs and the component of operating lease expense that management believes
represents an appropriate interest factor. Also, earnings exclude estimated
nonrecurring expenses to be incurred within the next 12 months for the exchange
offer, reorganization and associated recapitalization following the completion
of these transactions of $650,000.
USE OF PROCEEDS
We will not receive any cash proceeds from the exchange offer. We will
retire and cannot reissue the Pegasus Communications preferred stock that
holders surrender in exchange for new Pegasus Satellite preferred stock.
27
<PAGE>
CAPITALIZATION OF PEGASUS SATELLITE
The following table shows Pegasus Satellite's capitalization:
o on an actual basis as of September 30, 2000;
o as adjusted to reflect pending acquisitions (see Recent Developments);
and
o on a pro forma basis to reflect this offering (assuming holders tender
all of their preferred stock), the holding company reorganization, the
associated recapitalization and the pending acquisitions.
<TABLE>
<CAPTION>
As of September 30, 2000
--------------------------------------------
Pro Forma,
Actual As Adjusted As Adjusted
------------- ------------- ------------
(in thousands)
<S> <C> <C> <C>
Cash -- general funds .............................. $ 306,901 $ 245,856 $ 243,706
Restricted Cash .................................... 7,957 7,957 7,957
---------- ---------- ----------
Total cash ........................................ $ 314,858 $ 253,813 $ 251,663
========== ========== ==========
Total debt:
PM&C credit facility .............................. $ 275,000 $ 275,000 $ 275,000
Golden Sky credit facility ........................ 52,000 52,000 52,000
Senior notes -- PSC -- due 2006 ................... 100,000 100,000 100,000
Senior notes -- PSC -- due 2005 ................... 115,000 115,000 115,000
Senior notes -- PSC -- due 2007 ................... 155,000 155,000 155,000
Senior subordinated notes -- PM&C -- Due 2005...... 83,076 83,076 83,076
Senior notes -- GSDBS -- due 2007 ................. 123,613 123,613 123,613
Senior subordinated notes -- GSS -- Due 2006 ...... 195,000 195,000 195,000
Sellers' notes .................................... 21,249 21,249 21,249
Mortgage payable -- due 2010 ...................... 8,704 8,704 8,704
Capital leases and other .......................... 273 273 273
---------- ---------- ----------
Total debt ........................................ 1,128,915 1,128,915 1,128,915
Series A preferred stock, $1,000 liquidation
preference per share .............................. 156,766 156,766 162,588
Series B preferred stock, $1,000 liquidation
preference per share .............................. 5,749 5,749 --
Series C convertible preferred stock, $100
liquidation preference per share .................. 300,000 300,000 --
Series D junior participating convertible preferred
stock, $1,000 liquidation preference per share..... 23,100 23,100 --
Series E convertible preferred stock, $1,000
liquidation preference per share .................. 10,238 10,238 --
Minority interest .................................. 877 877 877
Total common stockholders' equity .................. 511,605 511,605 725,690
---------- ---------- ----------
Total capitalization ............................... $2,137,250 $2,137,250 $2,018,070
========== ========== ==========
</TABLE>
Minority interest represents preferred stock of a subsidiary of Pegasus
Communications issued in connection with a completed direct broadcast satellite
acquisition.
Series B, C, D and E preferred stock are recapitalized into 100 shares of
new Class B $.01 par value common stock in connection with the reorganization.
For a description of the principal terms of the debt and preferred stock
listed above, see Description of Certain Indebtedness. You should read this
table in conjunction with Annex A.
28
<PAGE>
CAPITALIZATION OF PEGASUS COMMUNICATIONS
The following table shows Pegasus Communications' capitalization:
o on an actual basis as of September 30, 2000;
o as adjusted to reflect pending acquisitions (see Recent Developments);
and
o on a pro forma basis to reflect this offering (assuming holders tender
all of their preferred stock), the holding company reorganization and
pending acquisitions.
<TABLE>
<CAPTION>
As of September 30, 2000
--------------------------------------------
Pro Forma,
Actual As Adjusted As Adjusted
------------- ------------- ------------
(in thousands)
<S> <C> <C> <C>
Cash -- general funds .................................. $ 306,901 $ 245,856 $ 245,206
Restricted Cash ........................................ 7,957 7,957 7,957
---------- ---------- ----------
Total cash ............................................ $ 314,858 $ 253,813 $ 253,163
========== ========== ==========
Total debt:
PM&C credit facility .................................. $ 275,000 $ 275,000 $ 275,000
Golden Sky credit facility ............................ 52,000 52,000 52,000
Senior notes -- PSC -- due 2006 ....................... 100,000 100,000 100,000
Senior notes -- PSC -- due 2005 ....................... 115,000 115,000 115,000
Senior notes -- PSC -- due 2007 ....................... 155,000 155,000 155,000
Senior subordinated notes -- PM&C -- due 2005 ......... 83,076 83,076 83,076
Senior notes -- GSDBS -- due 2007 ..................... 123,613 123,613 123,613
Senior subordinated notes -- GSS -- due 2006 .......... 195,000 195,000 195,000
Sellers' notes ........................................ 21,249 21,249 21,249
Mortgage payable -- due 2010 .......................... 8,704 8,704 8,704
Capital leases and other .............................. 273 273 273
---------- ---------- ----------
Total debt ............................................ 1,128,915 1,128,915 1,128,915
Series A preferred stock, $1,000 liquidation
preference per share .................................. 156,766 156,766 --
Series B preferred stock, $1,000 liquidation
preference per share .................................. 5,749 5,749 5,749
Series C convertible preferred stock, $100
liquidation preference per share ...................... 300,000 300,000 300,000
Series D junior participating convertible preferred
stock, $1,000 liquidation preference per share......... 23,100 23,100 23,100
Series E convertible preferred stock, $1,000
liquidation preference per share ...................... 10,238 10,238 10,238
Minority interest ...................................... 877 877 163,465
Total common stockholders' equity ...................... 511,605 511,605 505,133
---------- ---------- ----------
Total capitalization ................................... $2,137,250 $2,137,250 $2,136,600
========== ========== ==========
</TABLE>
Minority interest represents preferred stock of a subsidiary of Pegasus
Communications issued in connection with a completed direct broadcast satellite
acquisition of $877,000 and the Series A preferred stock of Pegasus Satellite
of $162.6 million assumed to be outstanding after the exchange offer.
For a description of the principal terms of the debt and preferred stock
listed above, see Description of Certain Indebtedness. You should read this
table in conjunction with Annex A.
29
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
FOR PEGASUS SATELLITE AND PEGASUS COMMUNICATIONS
The following table shows selected historical and pro forma consolidated
financial data for Pegasus Satellite and Pegasus Communications. This
information should be read in conjunction with the financial statements and the
notes to the financial statements, as well as Summary Historical and Pro Forma
Consolidated Financial Data for Pegasus Satellite and Pegasus Communications,
and the information contained in Annex A included elsewhere in this offering
memorandum. You should also read the paragraphs that follow this table for more
detail.
<TABLE>
<CAPTION>
Pegasus Communications Corporation
--------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ------------ ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operating Data:
Net revenues:
DBS ........................................ $ 1,469 $ 5,829 $ 38,254 $ 147,142 $ 286,353
Broadcast .................................. 20,073 28,604 31,876 34,311 36,415
--------- --------- ---------- ----------- -----------
Total net revenues ........................ 21,542 34,433 70,130 181,453 322,768
Operating expenses:
DBS
Programming, technical and general
and administrative ........................ 1,379 4,312 26,042 102,419 201,158
Marketing and selling ..................... -- 646 5,973 45,706 117,774
Incentive compensation .................... 9 146 795 1,159 1,592
Depreciation and amortization ............. 640 1,786 17,042 59,077 82,744
Broadcast
Programming, technical and general
and administrative ........................ 10,181 13,903 15,672 18,056 22,812
Marketing and selling ..................... 3,789 4,851 5,704 5,993 6,304
Incentive compensation .................... 415 691 298 177 57
Depreciation and amortization ............. 2,934 4,041 3,754 4,557 5,144
Corporate and other expenses ............... 1,871 2,556 4,239 7,128 11,089
--------- --------- ---------- ----------- -----------
Income (loss) from operations .............. 324 1,501 (9,389) (62,819) (125,906)
Interest expense ............................ (4,135) (8,885) (14,275) (44,559) (64,904)
Interest income ............................. 362 218 1,508 1,586 1,356
Other non-operating, net .................... -- -- -- -- --
--------- --------- ---------- ----------- -----------
Loss from continuing operations before
income taxes, equity loss and
extraordinary items ....................... (3,449) (7,166) (22,156) (105,792) (189,454)
Provision (benefit) for income taxes ........ 10 (145) 168 (901) (8,892)
Equity in net loss of unconsolidated
affiliate .................................. -- -- -- -- (201)
--------- --------- ---------- ----------- -----------
Loss from continuing operations before
extraordinary items ....................... (3,459) (7,021) (22,324) (104,891) (180,763)
Discontinued operations:
Income (loss) from discontinued
operations of cable segment, net of
income taxes .............................. (4,698) (2,703) 257 1,047 2,128
Gain on sale of discontinued operations,
net of income taxes ....................... -- -- 4,451 24,727 --
--------- --------- ---------- ----------- -----------
Loss before extraordinary items ............ (8,157) (9,724) (17,616) (79,117) (178,635)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus Pegasus Satellite
Communications Communications, Inc.
Corporation Pro Forma
-------------------- ------------------------------------
Year Ended
Nine Months Ended December 31, Nine Months Ended
September 30, 2000 1999 September 30, 2000
-------------------- -------------- --------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Statement of Operating Data:
Net revenues:
DBS ........................................ $ 389,851 $ 426,926 $ 447,912
Broadcast .................................. 26,128 36,415 26,213
----------- ----------- -----------
Total net revenues ........................ 415,979 463,341 474,125
Operating expenses:
DBS
Programming, technical and general
and administrative ........................ 272,925 324,507 319,419
Marketing and selling ..................... 111,646 182,707 121,211
Incentive compensation .................... 1,835 2,374 1,983
Depreciation and amortization ............. 141,696 244,402 195,957
Broadcast
Programming, technical and general
and administrative ........................ 18,253 22,812 18,253
Marketing and selling ..................... 5,523 6,304 5,523
Incentive compensation .................... 204 57 204
Depreciation and amortization ............. 3,860 5,144 3,860
Corporate and other expenses ............... 12,895 11,089 14,411
----------- ----------- -----------
Income (loss) from operations .............. (152,858) (336,055) (206,696)
Interest expense ............................ (86,185) (119,898) (102,531)
Interest income ............................. 11,142 3,749 11,433
Other non-operating, net .................... 234 (1,259) (965)
----------- ----------- -----------
Loss from continuing operations before
income taxes, equity loss and
extraordinary items ....................... (227,667) (453,463) (298,759)
Provision (benefit) for income taxes ........ (30,022) (8,892) (30,022)
Equity in net loss of unconsolidated
affiliate ..................................
----------- ----------- -----------
Loss from continuing operations before
extraordinary items ....................... (197,645) (444,571) (268,737)
Discontinued operations:
Income (loss) from discontinued
operations of cable segment, net of
income taxes .............................. 1,234
Gain on sale of discontinued operations,
net of income taxes ....................... 59,366
-----------
Loss before extraordinary items ............ (137,045)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus Communications
Corporation
Pro Forma
-----------------------------------
Year Ended
December 31, Nine Months Ended
1999 September 30, 2000
-------------- -------------------
(In thousands, except per share
data)
<S> <C> <C>
Statement of Operating Data:
Net revenues:
DBS ........................................ $ 426,926 $ 447,912
Broadcast .................................. 36,415 26,213
----------- -----------
Total net revenues ........................ 463,341 474,125
Operating expenses:
DBS
Programming, technical and general
and administrative ........................ 324,507 319,419
Marketing and selling ..................... 182,707 121,211
Incentive compensation .................... 2,374 1,983
Depreciation and amortization ............. 244,402 195,957
Broadcast
Programming, technical and general
and administrative ........................ 22,812 18,253
Marketing and selling ..................... 6,304 5,523
Incentive compensation .................... 57 204
Depreciation and amortization ............. 5,144 3,860
Corporate and other expenses ............... 11,089 14,586
----------- -----------
Income (loss) from operations .............. (336,055) (206,871)
Interest expense ............................ (119,898) (102,531)
Interest income ............................. 3,749 11,433
Other non-operating, net .................... (1,259) (1,279)
----------- -----------
Loss from continuing operations before
income taxes, equity loss and
extraordinary items ....................... (453,463) (299,248)
Provision (benefit) for income taxes ........ (8,892) (30,022)
Equity in net loss of unconsolidated
affiliate .................................. (201)
----------- -----------
Loss from continuing operations before
extraordinary items ....................... (444,772) (269,226)
Discontinued operations:
Income (loss) from discontinued
operations of cable segment, net of
income taxes ..............................
Gain on sale of discontinued operations,
net of income taxes .......................
Loss before extraordinary items ............
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Pegasus Communications Corporation
--------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ------------- ------------ -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Extraordinary gain (loss) from
extinguishment of debt, net ............... 10,211 (250) (1,656) -- (6,178)
--------- --------- ---------- ---------- ----------
Net income (loss) ......................... 2,054 (9,974) (19,272) (79,117) (184,813)
Preferred stock dividends ................. -- -- 12,215 14,764 16,706
--------- --------- ---------- ---------- ----------
Net income (loss) applicable to common
shares ................................... $ 2,054 $ (9,974) $ (31,487) $ (93,881) $ (201,519)
========= ========= ========== ========== ==========
Loss per common share:
Loss from continuing operations ........... $ (0.56) $ (1.75) $ (4.23) $ (5.23)
Income (loss) from discontinued
operations ............................... (0.22) 0.01 0.04 0.05
Gain on sale of discontinued operations ... -- 0.23 0.87 --
--------- ---------- ---------- ----------
Loss before extraordinary items ........... (0.78) (1.51) (3.32) (5.18)
Extraordinary item ........................ (0.02) (0.08) -- (0.16)
--------- ---------- ---------- ----------
Loss per common share ..................... $ (0.80) $ (1.59) $ (3.32) $ (5.34)
========= ========== ========== ==========
Weighted average number of common
shares outstanding ....................... 12,479 19,716 28,259 37,750
Other Data:
Pre-marketing cash flow from continuing
operations:
DBS ....................................... $ 90 $ 1,517 $ 12,212 $ 44,723 $ 85,195
Broadcast ................................. 6,103 9,850 10,500 10,262 7,299
--------- --------- ---------- ---------- ----------
Total pre-marketing cash flow from
continuing operations .................. $ 6,193 $ 11,367 $ 22,712 $ 54,985 $ 92,494
========= ========= ========== ========== ==========
Location cash flow from continuing
operations ................................ $ 6,193 $ 10,721 $ 16,739 $ 9,279 $ (25,280)
Operating cash flow from continuing
operations ................................ 4,829 9,292 14,483 5,665 (31,255)
Capital expenditures ....................... 2,640 6,294 9,929 12,400 14,784
Net cash provided by (used for):
Operating activities ...................... 5,783 3,059 8,478 (21,962) (88,879)
Investing activities ...................... (6,047) (81,179) (142,109) (101,373) (133,981)
Financing activities ...................... 10,859 74,727 169,098 133,791 208,808
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus Pegasus Satellite
Communications Communications, Inc.
Corporation Pro Forma
-------------------- ------------------------------------
Year Ended
Nine Months Ended December 31, Nine Months Ended
September 30, 2000 1999 September 30, 2000
-------------------- -------------- --------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Extraordinary gain (loss) from
extinguishment of debt, net ............... (9,280)
----------
Net income (loss) ......................... (146,325)
Preferred stock dividends ................. 25,042 21,391 15,878
---------- ---------- ----------
Net income (loss) applicable to common
shares ................................... $ (171,367) $ (465,962) $ (284,615)
========== ========== ==========
Loss per common share:
Loss from continuing operations ........... $ (4.63)
Income (loss) from discontinued
operations ............................... 0.03
Gain on sale of discontinued operations ... 1.23
----------
Loss before extraordinary items ........... (3.37)
Extraordinary item ........................ (0.19)
----------
Loss per common share ..................... $ (3.56)
==========
Weighted average number of common
shares outstanding ....................... 48,097
Other Data:
Pre-marketing cash flow from continuing
operations:
DBS ....................................... $ 116,926 $ 102,419 $ 128,493
Broadcast ................................. 2,352 7,299 2,437
---------- ---------- ----------
Total pre-marketing cash flow from
continuing operations .................. $ 119,278 $ 109,718 $ 130,930
========== ========== ==========
Location cash flow from continuing
operations ................................ $ 7,632 $ (72,989) $ 9,719
Operating cash flow from continuing
operations ................................ 1,591 (78,964) 1,729
Capital expenditures ....................... 36,080 11,355 17,737
Net cash provided by (used for):
Operating activities ...................... (65,250)
Investing activities ...................... (15,032)
Financing activities ...................... 346,730
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus Communications
Corporation
Pro Forma
-----------------------------------
Year Ended
December 31, Nine Months Ended
1999 September 30, 2000
-------------- -------------------
(In thousands, except per share data)
<S> <C> <C>
Extraordinary gain (loss) from
extinguishment of debt, net ...............
Net income (loss) .........................
Preferred stock dividends ................. 42,248 26,888
---------- ----------
Net income (loss) applicable to common
shares ................................... $ (487,020) $ (296,114)
========== ==========
Loss per common share:
Loss from continuing operations ........... $ (9.75) $ (5.68)
Income (loss) from discontinued
operations ...............................
Gain on sale of discontinued operations ...
Loss before extraordinary items ...........
Extraordinary item ........................
---------- ----------
Loss per common share ..................... $ (9.75) $ (5.68)
========== ==========
Weighted average number of common
shares outstanding ....................... 49,930 52,157
Other Data:
Pre-marketing cash flow from continuing
operations:
DBS ....................................... $ 102,419 $ 128,493
Broadcast ................................. 7,299 2,437
---------- ----------
Total pre-marketing cash flow from
continuing operations .................. $ 109,718 $ 130,930
========== ==========
Location cash flow from continuing
operations ................................ $ (72,989) $ 9,719
Operating cash flow from continuing
operations ................................ (78,964) 3,678
Capital expenditures ....................... 12,839 32,493
Net cash provided by (used for):
Operating activities ......................
Investing activities ......................
Financing activities ......................
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Pegasus Communications Corporation
-----------------------------------------------------------------------------------
As of December 31,
-------------------------------------------------------------
As of
1995 1996 1997 1998 1999 September 30, 2000
---------- ----------- ---------- ---------- ------------ --------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ......... $21,856 $ 8,582 $ 45,269 $ 75,985 $ 42,832 $ 314,858
Working capital (deficiency) ...... 17,566 6,430 32,347 37,889 (4,936) 203,586
Total assets ...................... 95,770 173,680 380,862 886,310 945,332 2,930,015
Total debt (including current
portion) ......................... 82,896 115,575 208,355 559,029 684,414 1,128,915
Total liabilities ................. 95,521 133,354 239,234 699,144 862,725 1,921,680
Redeemable preferred stock ........ -- -- 111,264 126,028 142,734 195,853
Convertible preferred stock ....... -- -- -- -- -- 300,000
Minority interest ................. -- -- 3,000 3,000 3,000 877
Total common equity (deficit) ..... 249 40,326 27,364 58,138 (63,127) 811,605
<CAPTION>
Pegasus Satellite Pegasus Communications
Communications, Inc. Corporation
Pro Forma Pro Forma
As of As of
September 30, 2000 September 30, 2000
---------------------- ------------------------
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ......... $ 312,708 $ 314,208
Working capital (deficiency) ...... 201,611 202,936
Total assets ...................... 2,810,660 2,929,365
Total debt (including current
portion) ......................... 1,128,915 1,128,915
Total liabilities ................. 1,921,505 1,921,680
Redeemable preferred stock ........ 162,588 39,087
Convertible preferred stock ....... -- 300,000
Minority interest ................. 877 163,465
Total common equity (deficit) ..... 725,690 505,133
</TABLE>
32
<PAGE>
The historical information for Pegasus Communications is presented for
comparative purposes, as it is the predecessor to both Pegasus Satellite and
the new parent holding company to be named Pegasus Communications. Historical
information for the year ended December 31, 1999 and for the nine months ended
and at September 30, 2000 is the basis upon which the pro forma information for
these periods is derived. The historical financial information for the years
ended and at December 31, 1995, 1996, 1997, 1998 and 1999 have been derived
from audited consolidated financial statements previously filed with the SEC.
The historical financial information for the nine months ended and at September
30, 2000 have been derived from unaudited financial statements previously filed
with the SEC. This unaudited information, in our opinion, contains all
adjustments necessary for a fair presentation of the information. The financial
information for the nine months ended and at September 30, 2000 should not be
regarded as indicative of the results that may be expected for the entire year.
Discontinued operations for all periods presented represent our cable
segment that we sold in September 2000. Pro forma amounts for all periods
exclude discontinued operations. The weighted average number of common shares
outstanding and per common share amounts for the years ended 1995 through 1999
reflect the two-for-one split of our Class A and Class B common stock that was
approved by the Board of Directors on May 10, 2000 and paid on May 30, 2000.
Pro forma statement of operating data and other data exclude estimated
nonrecurring expenses to be incurred within the next 12 months for the exchange
offer, reorganization and associated recapitalization following completion of
these transactions of $650,000.
Pro forma statement of operating data and other data for the year ended
December 31, 1999 for Pegasus Satellite and Pegasus Communications include the
effects of our acquisition in May 2000 of Golden Sky, the new credit facility
of our Pegasus Media & Communications subsidiary entered into in January 2000
and the effects of the exchange offer as if each had occurred at the beginning
of the period. Pro forma statement of operating data and other data for the
year ended December 31, 1999 for Pegasus Satellite exclude amounts associated
with intellectual property assets, related liabilities and other assets and
cash that are expected to be distributed by Pegasus Satellite to Pegasus
Communications in the corporate reorganization. Pro forma statement of
operating data and other data for the year ended December 31, 1999 for Pegasus
Communications include the effects of four preferred stock offerings made in
the first quarter of 2000 as if they had occurred at the beginning of the
period.
Pro forma statement of operating data and other data for the nine months
ended September 30, 2000 for Pegasus Satellite and Pegasus Communications
include the effects of our acquisition of Golden Sky and the effects of the
exchange offer as if each had occurred at the beginning of the period. Pro
forma statement of operating data and other data for the nine months ended
September 30, 2000 for Pegasus Satellite exclude amounts associated with
intellectual property assets, related liabilities and other assets and cash
that are expected to be distributed by Pegasus Satellite to Pegasus
Communications in the reorganization and preferred dividends associated with
four preferred stock offerings. The dividends for these offerings are excluded
because the related preferred stock is assumed not to be outstanding for
Pegasus Satellite due to the recapitalization that Pegasus Satellite will
undergo in connection with the reorganization.
Pro forma balance sheet data as of September 30, 2000 for Pegasus
Satellite and Pegasus Communications reflect the effects of the exchange offer.
Pro forma balance sheet data as of September 30, 2000 for Pegasus Satellite
exclude amounts outstanding at that date associated with intellectual property
assets, related liabilities and other assets and cash of Pegasus Satellite
expected to be distributed by Pegasus Satellite to Pegasus Communications in
the reorganization. It includes the effects of the recapitalization that
Pegasus Satellite will undergo in the reorganization and assumes that the
exchange offer was completed on that date. Pro forma balance sheet data as of
September 30, 2000 for Pegasus Communications also assumes that the exchange
offer occurred on that date and reflects the new Series A preferred stock of
Pegasus Satellite assumed to be outstanding at that date as a minority interest
in Pegasus Communications.
We use the terms pre-marketing cash flow and location cash flow in the
financial data presented above. Pre-marketing cash flow of the DBS business is
calculated by taking the DBS revenues and deducting from them their related
programming, technical, general and administrative expenses. Location cash flow
of the DBS business is its pre-marketing cash flow less DBS marketing and
selling expenses. The DBS marketing and selling expenses are also known as
subscriber acquisition costs. Subscriber acquisition costs are sales and
33
<PAGE>
marketing expenses incurred and promotional programming provided in connection
with the addition of new DBS subscribers. Location cash flow for the broadcast
television business is calculated by taking the broadcast revenues and
deducting from them their related programming, technical, general and
administrative and marketing and selling expenses.
Pre-marketing cash and location cash flows are not, and should not be
considered, alternatives to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing and location cash flows 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 pre-marketing and location cash flows are
important for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to monitor our
financial performance and debt leverage.
We refer you to the pro forma consolidated financial information included
elsewhere in this offering memorandum.
34
<PAGE>
PROPOSED HOLDING COMPANY REORGANIZATION
Our board of directors has approved a reorganization of our current
corporate structure. In our current structure, the company now named Pegasus
Communications Corporation is the publicly-held parent corporation and it owns
the stock of three principal groups of subsidiaries:
o Pegasus Media & Communications, Inc., which conducts, through its own
subsidiaries, our broadcast television business and most of our direct
broadcast satellite business;
o Golden Sky Holdings, Inc., which conducts, through its own subsidiaries,
the remainder of our direct broadcast satellite business; and
o other subsidiaries through which we conduct or are planning to conduct
our broadband business and that hold the intellectual property rights we
acquired from Personalized Media Communications, L.L.C. in January 2000.
The first chart following this section illustrates our current corporate
structure.
Our publicly-held debt securities and existing Series A preferred stock
impose on Pegasus Communications Corporation and its subsidiaries operating
restrictions and other covenants -- including restrictions on debt incurrence
and payment of dividends. These also affect Pegasus Media & Communications and
its subsidiaries because they are "restricted subsidiaries." Golden Sky
Holdings and the broadband and intellectual property subsidiaries, on the other
hand, are unrestricted subsidiaries of Pegasus Communications Corporation.
Our decision to reorganize our corporate structure is based on our belief
that the broadband and intellectual property subsidiaries' status as
unrestricted subsidiaries provides them with less than optimal flexibility for
their potential future operations and financing needs. The effect of our
restructuring is to create a new holding company that will replace Pegasus
Communications Corporation as the publicly-held parent corporation and that
will hold as separate subsidiaries Pegasus Communications Corporation --
renamed Pegasus Satellite Communications, Inc. -- and the intellectual property
subsidiaries. Although we do not intend to do so as part of our proposed
reorganization, we may in the future decide to transfer our broadband
subsidiaries to the newly created public holding company. Pegasus Media &
Communications and Golden Sky Holdings would continue to be subsidiaries of the
newly renamed Pegasus Satellite Communications, Inc. The second chart following
this section illustrates our proposed new corporate structure.
In the reorganization, all common and preferred stock of Pegasus
Communications Corporation will be exchanged for identical common and preferred
stock of the new holding company. The new holding company will be renamed
Pegasus Communications Corporation, and its Class A common stock will continue
to be traded on the Nasdaq National Market under the symbol "PGTV."
Completion of the reorganization is not subject to any regulatory filings
or consents, except regulatory consents that we have already obtained. Our
proposed reorganization does not require a vote by our shareholders and would
not be a taxable event to us or to our shareholders.
After the reorganization, Pegasus Communications Corporation -- renamed
Pegasus Satellite Communications, Inc. -- will remain liable on its
publicly-held debt securities. Neither the new holding company nor its
intellectual property subsidiaries will be liable to pay these securities or
subject to the covenants and restrictions contained in these securities. But
because of the way we have structured the reorganization under Delaware law,
the existing Series A preferred stock will become preferred stock of the new
holding company.
The purpose of the exchange offer is to permit the holders of the existing
Series A preferred stock to retain securities of the same issuer they now hold.
In that way, Pegasus Satellite (the existing company under its new name) will
remain subject to the same restrictions and covenants that now benefit the
holders of Series A preferred stock, but Pegasus Communications, the new
holding company, and its intellectual property subsidiaries, and any new
subsidiaries will not be subject to those restrictions and covenants. Series A
holders who accept the exchange offer will continue their investment in the
same company and will not become further "structurally subordinated" (beyond
the subordination inherent in holding preferred stock rather than a
35
<PAGE>
debt security) by becoming investors in the new holding company. They will also
be insulated to an extent from potential adverse developments in the business
as a result of activities conducted by the intellectual property subsidiary.
Conversely, they will not have access to Pegasus Communications' interest in
the equity of its intellectual property subsidiary to satisfy their claims
under the new Pegasus Satellite preferred stock, because the stock of this
corporation will be distributed to the new holding company. We also intend to
distribute approximately $1.5 million of cash to the new holding company to
finance its initial operations.
The following discussion describes our intellectual property assets,
together with other assets that we plan to distribute to our new holding
company. We currently have sufficient restricted payment capacity under our
publicly-held debt securities to allow us to make these distributions. As we
have stated above, we reserve the right not to distribute one or more of these
assets to our new holding company and not to consummate the reorganization.
We plan to deploy Ka band satellites in the next two to five years in
connection with our broadband service offering. Currently, we have an
application pending before the FCC to operate Ka band geostationary satellites
at five different orbital locations. Two of these locations are for domestic
full continental U.S. slots and three applications are for international slots.
See Recent Developments -- Pegasus Communications Transactions -- Pending Ka
License Application. Our goal is to acquire the necessary rights to at least
one full continental U.S. Ka band orbital location. In addition, we are
actively pursuing one or more opportunities for deployment of interim satellite
broadband services beginning within the next quarter. We plan to use these
interim services to build a customer base and potentially grow average revenue
per subscriber across our entire subscriber base. We cannot assure you that the
FCC will grant these licenses on terms that are favorable to us, if at all. If
the FCC grants our application, we also cannot assure you that we will be able
to secure the financing necessary to deploy these satellites or that the Ka
band satellites will not fail or be impaired.
We may also use terrestrial broadband licenses to provide our Internet
broadband services. We are one of only two applicants currently competing for
FCC licenses for a potential nationwide allocation of 500 MHz of spectrum in
the 12 GHz band for terrestrial use. See Recent Developments -- Pegasus
Communications Transactions -- Pending Terrestrial Broadband Licenses. The FCC
has asked for public comment regarding the use of this spectrum for
consumer-oriented subscription television distribution services and broadband
services. We may use all or part of this spectrum to enhance our direct
broadcast satellite and broadband service offerings. However, if licensed to
the full 500 MHz, we would be capable of deploying a fully competitive,
stand-alone multi-channel television service, although we have no current plans
to do so. We cannot assure you that the FCC will grant our application on terms
that are favorable to us, if at all. We also cannot assure you that we will be
able to secure financing necessary to develop this terrestrial broadband
delivery service or that the service will operate effectively, if at all.
A number of factors could prevent or inhibit us from carrying out our
broadband Internet plans as described above. These include technological
issues, ability to develop and obtain products, market acceptance, competition
and ability to obtain financing.
The new holding company will also have certain intellectual property that
we acquired in January 2000 from Personalized Media Communications. This
intellectual property consists of seven issued U.S. patents and over 10,000
claims submitted in several hundred pending U.S. patent applications. It also
consists of an exclusive license for the distribution of satellite based
services using Ku band BSS frequencies at 101o, 110o and 119o orbital locations
and Ka band FSS frequencies at the 99o, 101o, 103o and 125o orbital locations,
which frequencies have been licensed by the FCC to affiliates of Hughes
Electronics Corporation.
Personalized Media also granted us the right to license on an exclusive
basis and on favorable terms Personalized Media's patent portfolio in
connection with other frequencies that may be licensed to us in the future.
This license provides rights to all claims covered by Personalized Media's
patent portfolio, including functionality for automating the insertion of
programming at a direct broadcast satellite uplink, the enabling of
36
<PAGE>
pay-per-view buying, the authorization of receivers, the assembly of records of
product and service selections made by viewers, including the communication of
this information to billing and fulfillment operations, the customizing of
interactive program guide features and functions made by viewers and the
downloading of software to receivers by broadcasters.
Although our board of directors has authorized and approved our proposed
reorganization, we reserve the right to decide not to proceed with it or to
effect it differently than as described above. If we decide not to consummate
the reorganization, we will withdraw this exchange offer.
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Current Corporate Structure
------------------------------------------------------------------------------------------------------------------------------------
Pegasus Communications Corporation
(to be renamed Pegasus Satellite Communications, Inc.)
Issuer of $115.0 million senior notes due 2005
Issuer of $100.0 million senior notes due 2006
Issuer of $155.0 million senior notes due 2007
Issuer of $162.6 million in liquidation preference (including accrued and unpaid dividends)
of Series A cumulative exchangeable preferred stock
Issuer of $5.7 million in liquidation preference (excluding accrued and unpaid dividends)
of Series B junior convertible participating preferred stock
Issuer of $300.0 million in liquidation preference of Series C convertible preferred stock
Issuer of $22.5 million in liquidation preference (excluding accrued and unpaid dividends)
of Series D junior convertible participating preferred stock
Issuer of $10.0 million in liquidation preference (excluding accrued and unpaid dividends)
of Series E junior convertible participating preferred stock
------------------------------------------------------------------------------------------------------------------------------------
----------------------------- ----------------------- -------------------------------
Broadband and Pegasus Media Golden Sky
Intellectual property & Holdings, Inc.
subsidiaries Communications, Inc.
Guarantor of a $115.0 million
revolving credit facility
Issuer of $85.0 million and a $35.0 million term
(unrestricted subsidiaries of senior subordinated loan facility
Pegasus Communications notes due 2005 (unrestricted subsidiary of
Corporation) Borrower under a $500.0 Pegasus Communications
million credit facility Corporation)
----------------------------- ----------------------- -------------------------------
----------------- -------------------- -------------------------------
Pegasus Pegasus Satellite Golden Sky
Broadcast Television, Inc. DBS, Inc.
Television, Inc. and subsidiaries
and subsidiaries (direct broadcast Issuer of $193.1 million
satellite senior discount
distributor) notes due 2007
----------------- -------------------- Guarantor of a $115.0 million
revolving credit facility
and a $35.0 million term
loan facility
(unrestricted subsidiary of
Pegasus Communications
Corporation)
-------------------------------
-------------------------------
Golden Sky
Systems, Inc.
Issuer of $195.0 million
senior subordinated
notes due 2006
Borrower under a
$115.0 million
revolving credit facility
and a $35.0 million term
loan facility
(unrestricted subsidiary of
Pegasus Communications
Corporation)
-------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Corporate Structure After Reorganization and Exchange Offer
------------------------------------------------------------------------------------------------------------------------------------
Pegasus Communications Corporation
Issuer of $5.7 million in liquidation preference (excluding accrued and unpaid dividends)
of Series B junior convertible participating preferred stock
Issuer of $300.0 million in liquidation preference of Series C convertible preferred stock
Issuer of $22.5 million in liquidation preference (excluding accrued and unpaid dividends)
of Series D junior convertible participating preferred stock
Issuer of $10.0 million in liquidation preference (excluding accrued and unpaid dividends)
of Series E junior convertible participating preferred stock
------------------------------------------------------------------------------------------------------------------------------------
---------------------------- ----------------------------------------------------------------------------------------------------
Intellectual property Pegasus Satellite Communications, Inc.
subsidiary (formerly named Pegasus Communications Corporation)
(unrestricted subsidiary of Issuer of $115.0 million senior notes due 2005
Pegasus Communications Issuer of $100.0 million senior notes due 2006
Corporation) Issuer of $155.0 million senior notes due 2007
Issuer of $162.6 million in liquidation preference
---------------------------- of Series A cumulative exchangeable preferred stock
(restricted subsidiary of Pegasus Communications Corporation)
----------------------------------------------------------------------------------------------------
------------------------------ ------------------------- -------------------------------
Pegasus Media Golden Sky
Broadband & Holdings, Inc.
subsidiaries Communications, Inc.
Guarantor of a $115.0 million
Issuer of $85.0 million revolving credit facility
(unrestricted subsidiaries of senior subordinated and a $35.0 million term
Pegasus Satellite notes due 2005 loan facility
Communications, Inc.) Borrower under a $500.0 (unrestricted subsidiary of
million credit facility Pegasus Satellite
Communications, Inc.)
------------------------------ ------------------------- -------------------------------
------------------ ------------------- -------------------------------
Pegasus Pegasus Satellite Golden Sky
Broadcast Television, Inc. DBS, Inc.
Television, Inc. and subsidiaries
and subsidiaries (direct broadcast Issuer of $193.1 million
satellite senior discount
distributor) notes due 2007
------------------ ------------------- Guarantor of a $115.0 million
revolving credit facility
and a $35.0 million term
loan facility
(unrestricted subsidiary of
Pegasus Satellite
Communications, Inc.)
-------------------------------
-------------------------------
Golden Sky
Systems, Inc.
Issuer of $195.0 million
senior subordinated
notes due 2006
Borrower under a
$115.0 million
revolving credit facility
and a $35.0 million term
loan facility
(unrestricted subsidiary of
Pegasus Satellite
Communications, Inc.)
-------------------------------
</TABLE>
39
<PAGE>
THE EXCHANGE OFFER AND CONSENT SOLICITATION
In addition to the exchange offer discussed above, we are also seeking
consents to the proposed amendments to the Pegasus Communications preferred
stock certificate of designation, including the Pegasus Communications exchange
notes indenture, in the consent solicitation. The primary purpose of the
proposed amendments is to eliminate substantially all of the restrictive
covenants in the Pegasus Communications preferred stock certificate of
designation and the indenture. See Proposed Amendments to the Pegasus
Communications Preferred Stock Certificate of Designation and Exchange Notes
Indenture. The proposed amendments will become effective if adopted by the
holders of a majority of the outstanding shares of Pegasus Communications
preferred stock, but will not become operative until the settlement date.
Terms of the Exchange Offer
Subject to the terms and conditions provided below, including if this
exchange offer is supplemented or amended and the conditions in the
accompanying letter of transmittal, we will accept any and all Pegasus
Communications preferred stock validly tendered and not withdrawn before the
exchange offer expiration date. Pegasus Satellite will be deemed to have
accepted validly tendered preferred stock in the exchange offer and validly
delivered consents in the consent solicitation when, as and if Pegasus
Satellite has given oral or written notice of its acceptance to the exchange
agent. The exchange agent will act as agent for the tendering holders of
Pegasus Communications preferred stock for the purpose of receiving new Pegasus
Satellite preferred stock from Pegasus Satellite. Holders who tender their
Pegasus Communications preferred stock in the exchange offer and in accordance
with the procedures described in this offering memorandum will be deemed to
have consented to the proposed amendments to the Pegasus Communications
preferred stock certificate of designation.
We will issue one share of new Pegasus Satellite preferred stock in
exchange for each outstanding share of Pegasus Communications preferred stock
that would otherwise be issuable in the reorganization. We will not be required
to consummate the exchange offer unless we receive tenders of at least a
majority of the outstanding shares of Pegasus Communications preferred stock.
As of the exchange offer expiration date, approximately $162.6 million in
aggregate liquidation preference of the Pegasus Communications preferred stock
is anticipated to be outstanding and registered in the name of Cede & Co., as
nominee for The Depository Trust Company. Only a registered holder of the
Pegasus Communications preferred stock or the holder's legal representative or
attorney-in-fact, as reflected on the records of First Union National Bank, may
participate in the exchange offer. There will be no fixed record date for
determining which registered holders of the Pegasus Communications preferred
stock may participate in the exchange offer.
Expiration; Extensions; Amendments; Appraisal Rights
The exchange offer will expire at 5:00 p.m., New York City time, on
January 18, 2001 unless we extend it in our sole discretion.
To extend the exchange offer, we must notify the exchange agent and the
registered holders of the Pegasus Communications preferred stock by mail or
other means we select before 9:00 a.m., New York City time, on the next
business day after the previously scheduled exchange offer expiration date.
We may delay or end the exchange offer by notifying the exchange agent if
the conditions to the offer described below are not satisfied. We will notify
the holders by mail or other means we select of any such delay, extension or
ending as promptly as practicable.
We may amend the exchange offer in our discretion. If the amendment is
material, we will promptly disclose the amendment in an offering memorandum
supplement that we will distribute to registered holders.
We will have no obligation to publish, advertise, or otherwise communicate
any such public announcement, other than by making a timely release to an
appropriate news agency.
40
<PAGE>
No appraisal rights are available to Pegasus Communications preferred
stockholders in connection with the exchange offer.
The Consent Solicitation
Concurrently with the exchange offer, Pegasus Satellite is soliciting
consents from holders of the Pegasus Communications preferred stock with
respect to the proposed amendments to the Pegasus Communications preferred
stock certificate of designation. Holders of Pegasus Communications preferred
stock who desire to accept the exchange offer must consent to the proposed
amendments.
The exchange offer is subject to, among other things, the condition that
consents of holders representing a majority of the outstanding shares of
Pegasus Communications preferred stock will have been received and not revoked
on or before the consent expiration date. The consent expiration date will be
January 18, 2001 if we have received the requisite consents by 5:00 p.m., New
York City time, on that date. If we have not received the requisite consents by
the consent expiration date, the consent expiration date will occur as soon
thereafter as we receive the requisite consents. The proposed amendments will
become effective upon receipt of the requisite consents, but will not become
operative until consummation of the exchange offer. The primary purpose of the
proposed amendments is to eliminate substantially all of the restrictive
covenants in the Pegasus Communications preferred stock certificate of
designation.
The proposed amendments require the consent of holders of a majority of
the outstanding shares of Pegasus Communications preferred stock. In addition,
for any of the proposed amendments to become effective, the certificate of
designation for the Pegasus Communications preferred stock, including the
Pegasus Communications exchange notes indenture, must be amended by Pegasus
Communications. See Proposed Amendments to the Pegasus Communications Preferred
Stock Certificate of Designation and Exchange Notes Indenture and Offering
Memorandum Summary -- Series A Preferred Stock.
Upon receipt of the requisite consents from holders of Pegasus
Communications preferred stock and the requisite tender of preferred stock,
Pegasus Satellite will deliver the consents to the exchange agent along with a
written certification that the requisite consents to the adoption of the
proposed amendments have been received. After receipt by the exchange agent of
the certification, in addition to any other documents the exchange agent may
require, Pegasus Communications will amend the certificate of designation, and
all consents to the proposed amendments previously received will be
irrevocable. Except as explained under -- Guaranteed Delivery Procedures,
consents from tendering holders of Pegasus Communications preferred stock will
not be counted towards determining whether Pegasus Satellite has received the
requisite consents unless Pegasus Satellite is prepared to accept the tender of
Pegasus Communications preferred stock to which those consents relate or to
waive any defects in the tender. Pegasus Satellite will not be obligated to
accept tendered preferred stock unless, among other things, it has received the
requisite consents to the adoption of the proposed amendments to the Pegasus
Communications certificate of designation and exchange notes indenture.
Pegasus Satellite will not be obligated to issue the new Pegasus Satellite
preferred stock under the exchange offer unless, among other things, the
requisite consents to the adoption of the proposed amendments have been
received from the Pegasus Communications preferred stockholders. See --
Conditions of the Exchange Offer and Consent Solicitation.
Only a registered holder of Pegasus Communications preferred stock can
effectively deliver a consent to the proposed amendments. Under the terms of
the Pegasus Communications preferred stock certificate of designation,
subsequent transfers of Pegasus Communications preferred stock on the
applicable security register for the preferred stock will not have the effect
of revoking any consent previously given by the registered holder of the
Pegasus Communications preferred stock. These consents will remain valid unless
revoked by the transferee holder in accordance with the procedures described in
this offering memorandum under the heading -- Withdrawal of Tenders and
Revocation of Consents.
Procedures for Tendering and Consenting
The tendering of Pegasus Communications preferred stock under the exchange
offer and in accordance with the procedures described below will be deemed to
constitute the delivery of a consent with respect to the preferred stock
tendered.
41
<PAGE>
Only a registered holder of Pegasus Communications preferred stock may
consent to the proposed amendments and tender Pegasus Communications preferred
stock in the exchange offer. To tender, a holder must complete, sign and date
the letter of transmittal including the consent to the proposed amendments. If
required by the letter of transmittal, the holder must have the signatures on
the letter of transmittal guaranteed by one of the eligible institutions we
describe below. The holder must then deliver the letter of transmittal to the
exchange agent at the address given in the letter. In addition:
o the exchange agent must receive certificates for the tendered Pegasus
Communications preferred stock along with the letter of transmittal;
o the exchange agent must receive a confirmation of a book-entry transfer
of the tendered Pegasus Communications preferred stock into the exchange
agent's account at The Depository Trust Company before the end of the
exchange offer; or
o the holder must comply with the guaranteed delivery procedures described
below.
Holders who do not timely withdraw their tenders or consents will have
agreed with the terms and conditions discussed in this offering memorandum and
in the letter of transmittal.
Holders select the method of delivery of Pegasus Communications preferred
stock and the letter of transmittal and all other required documents to the
exchange agent at their own risk. We recommend that holders use a properly
insured overnight or hand delivery service instead of the mails. Holders should
allow sufficient time to assure delivery to the exchange agent before the end
of the offer. Holders must not send a letter of transmittal or Pegasus
Communications preferred stock to Pegasus Satellite or to Pegasus
Communications. Holders may ask their respective brokers, dealers, commercial
banks, trust companies or nominees to complete the transaction for them.
Holders of Pegasus Communications preferred stock will not be able to
validly tender in the exchange offer unless they consent to the proposed
amendments. Tendering holders who sign the letter of transmittal or tender
through the Automated Tender Offer Program will be deemed to have consented to
the proposed amendments.
Any beneficial owner whose Pegasus Communications preferred stock is
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct the registered holder to tender on its behalf. If the
beneficial owner wishes to tender on the owner's own behalf, then before
completing and executing the letter of transmittal and delivering the owner's
Pegasus Communications preferred stock, the owner must either register
ownership of the Pegasus Communications preferred stock in the owner's name or
obtain a properly completed stock power from the registered holder. The
transfer of registered ownership may take considerable time.
An eligible institution must guarantee signatures on a letter of
transmittal or a notice of withdrawal described below unless the Pegasus
Communications preferred stock is tendered:
o by a registered holder who has not completed the box entitled "Special
Delivery Instructions" on the letter of transmittal; or
o for the account of an eligible institution.
The following are eligible institutions:
o a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.;
o a commercial bank or trust company having an office or correspondent in
the United States; or
o an eligible guarantor institution within the meaning of SEC Rule 17Ad-15
that is a member of one of the recognized signature guarantee programs
identified in the letter of transmittal.
If a person other than the registered holder of any Pegasus Communications
preferred stock signs the letter of transmittal, the Pegasus Communications
preferred stock must be endorsed or accompanied by a properly completed stock
power signed by the registered holder in the same manner as the registered
holder's name appears on the preferred stock.
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If a trustee, executor, administrator, guardian, attorney-in-fact, officer
of a corporation or other person or entity acting in a fiduciary or
representative capacity is signing the letter of transmittal or any Pegasus
Communications preferred stock or stock powers, the person should so indicate
when signing. Unless we waive this requirement, those persons should submit
evidence of their authority with the letter of transmittal.
The exchange agent and The Depository Trust Company have confirmed that
any financial institution that is a participant in The Depository Trust
Company's system may tender Pegasus Communications preferred stock through The
Depository Trust Company's Automated Tender Offer Program.
We will determine all questions as to the validity, form, eligibility,
including time of receipt, acceptance and withdrawal of tendered Pegasus
Communications preferred stock. Our determination will be final and binding. We
may reject any and all Pegasus Communications preferred stock not properly
tendered or any Pegasus Communications preferred stock our acceptance of which
would, in the opinion of our counsel, be unlawful. We also reserve the right to
waive any defects, irregularities or conditions of tender as to particular
Pegasus Communications preferred stock.
Our interpretation of the terms and conditions of the exchange offer and
consent solicitation, including the instructions in the letter of transmittal,
will be final and binding. A holder must cure any defects or irregularities in
connection with tenders of Pegasus Communications preferred stock within the
time frame that we will determine. Although we intend to notify holders of
defects or irregularities, no one will incur any liability for failure to
notify. A tender will not be effective until the holder has cured or we have
waived any defects or irregularities.
Return of Pegasus Communications Preferred Stock
If we reject any tendered Pegasus Communications preferred stock, or if
holders withdraw Pegasus Communications preferred stock or submit them for a
greater liquidation preference than the holders desire to exchange, or if less
than a majority of the outstanding shares of Pegasus Communications preferred
stock is tendered and we do not waive the condition or the new holding company
reorganization is not completed, we will return Pegasus Communications
preferred stock without expense to the tendering holder as promptly as
practicable. If the holder tenders by book-entry transfer into the exchange
agent's account at The Depository Trust Company, the holder's Pegasus
Communications preferred stock will be credited to an account maintained with
The Depository Trust Company.
Book-Entry Transfer
The exchange agent will request to establish an account for the Pegasus
Communications preferred stock at The Depository Trust Company. Any financial
institution that is a participant in The Depository Trust Company's system may
make book-entry delivery of Pegasus Communications preferred stock by causing
the depository to transfer the participant's Pegasus Communications preferred
stock into the exchange agent's account at The Depository Trust Company.
Although holders may deliver Pegasus Communications preferred stock through
book-entry transfer, holders must transmit, and the exchange agent must
receive, the letter of transmittal, with any required signature guarantees and
any other required documents at the address given below on or before the end of
this offer or under the guaranteed delivery procedures described below.
The exchange agent and The Depository Trust Company have confirmed that
the exchange offer is eligible for the Automated Tender Offer Program. To
effectively tender preferred stock that is held through The Depository Trust
Company, The Depository Trust Company participants, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, may electronically transmit their acceptance through the
program, thereby providing their consents to the proposed amendments, and The
Depository Trust Company will then verify the acceptance and send an agent's
message to the exchange agent for its acceptance. Delivery of tendered
preferred stock must be made to the exchange agent under the book-entry
delivery procedures described below.
The term "agent's message" means a message transmitted by The Depository
Trust Company and received by the exchange agent and forming part of a
book-entry confirmation that states that The Depository Trust Company has
received an express acknowledgment from a participant in The Depository Trust
Company
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tendering preferred stock that is the subject of the book-entry confirmation,
that the participant has received and agrees to be bound by the terms of the
letter of transmittal and that Pegasus Satellite may enforce the agreement
against the participant. Delivery of the agent's message by The Depository
Trust Company will satisfy terms of the exchange offer and consent solicitation
as to execution and delivery of a letter of transmittal by the participant
identified in the agent's message.
Guaranteed Delivery Procedures
Holders who wish to tender their Pegasus Communications preferred stock
and whose Pegasus Communications preferred stock is not immediately available
or who cannot deliver their Pegasus Communications preferred stock, the letter
of transmittal or any other required documents to the exchange agent before the
end of the exchange offer, may effect a tender if all of the following
conditions are satisfied:
o the holder tenders through an eligible institution;
o before the end of the exchange offer, the exchange agent receives from an
eligible institution a properly completed and duly executed notice of
guaranteed delivery substantially in the form provided by us. This form
must provide the name and address of the holder, the certificate number(s)
of the holder's shares of Pegasus Communications preferred stock and the
liquidation preference of Pegasus Communications preferred stock tendered.
This form must further state that a tender is being made and must
guarantee that, within three business days after the expiration of this
offer, an eligible institution will deposit the letter of transmittal
together with the certificate(s) representing the Pegasus Communications
preferred stock in proper form for transfer or a book-entry confirmation,
as the case may be, and any other documents required by the letter of
transmittal with the exchange agent; and
o the exchange agent receives within three business days of the end of the
offer the properly executed letter of transmittal or facsimile of the
letter of transmittal, and the certificate(s) representing all tendered
Pegasus Communications preferred stock in proper form for transfer and all
other documents required by the letter of transmittal.
Upon request, the exchange agent will send a notice of guaranteed delivery
to holders who wish to tender their Pegasus Communications preferred stock
according to the guaranteed delivery procedures.
Withdrawal of Tenders and Revocation of Consents
Tenders of Pegasus Communications preferred stock under the exchange offer
may be withdrawn and consents may be revoked at any time until the requisite
consents have been delivered by Pegasus Satellite to the exchange agent and the
amendment to the Pegasus Communications preferred stock certificate of
designation has been executed. Once those consents have been delivered and the
amendments executed, tenders may only be withdrawn and consents may only be
revoked if the exchange offer is terminated without any Pegasus Communications
preferred stock being accepted for exchange under the exchange offer. The
withdrawal of Pegasus Communications preferred stock before 5:00 p.m., New York
City time, on the consent expiration date in accordance with the procedures
provided in this offering memorandum will effect a revocation of the related
consent. For a holder of Pegasus Communications preferred stock to revoke a
consent, the holder must withdraw the related tendered preferred stock.
For the withdrawal to be effective, the exchange agent must receive a
written or facsimile transmission notice of withdrawal or revocation at its
address provided below before the consent expiration date. The notice of
withdrawal or revocation must:
o specify the name of the person who deposited the Pegasus Communications
preferred stock to be withdrawn or granted the consent to be revoked;
o identify the Pegasus Communications preferred stock to be withdrawn or
with respect to which consent is to be revoked, including the certificate
number or numbers and liquidation preference of the Pegasus Communications
preferred stock;
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o be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the Pegasus Communications preferred
stock was tendered and consent granted including any required signature
guarantees; and
o if Pegasus Communications preferred stock has been tendered or consents
delivered under the book-entry procedures described above, specify the
name and number of the account at the book-entry transfer facility to be
credited with the withdrawn preferred stock.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of those notices. We will deem preferred stock
withdrawn not to have been validly tendered for purposes of the exchange offer.
No new Pegasus Satellite preferred stock will be issued with respect to
withdrawn tenders unless the Pegasus Communications preferred stock so
withdrawn are validly retendered. Properly withdrawn Pegasus Communications
preferred stock may be retendered by following one of the procedures described
above at any time before the exchange offer ends.
Conditions of the Exchange Offer and Consent Solicitation
If the exchange offer violates applicable law, rule or regulation or an
applicable interpretation of the SEC's staff, we will not accept for exchange
any Pegasus Communications preferred stock and may end the exchange offer
before we accept any Pegasus Communications preferred stock. If we determine
that any of these violations may be present, we can extend or amend the
exchange offer and attempt to cure the problem. Pegasus Satellite will not be
required to accept any Pegasus Communications preferred stock for exchange, and
may terminate or amend the exchange offer and consent solicitation before
acceptance of any Pegasus Communications preferred stock, if the exchange offer
has not been consummated. See -- Expiration; Extensions; Amendments; Appraisal
Rights above for a discussion of the relevant procedures.
In addition, we may terminate, extend or amend the exchange offer or the
consent solicitation and may postpone the acceptance of Pegasus Communications
preferred stock tendered and consents that have been delivered on or before the
exchange offer expiration date if any of the following occurs:
o The minimum tender of Pegasus Communications preferred stock has not
been satisfied.
o The requisite consents have not been validly delivered or are revoked.
o The new holding company reorganization has not been completed.
o The certificate of designation containing the proposed amendments has
not been executed.
o Any action is taken or threatened or is pending before any governmental,
regulatory or administrative agency or authority or by any court or
tribunal or any statute, rule, regulation, judgment, order stay, decree
or injunction proposed, sought, promulgated, enacted, entered, enforced
or deemed applicable to the exchange offer or consent solicitation,
which:
-- in Pegasus Satellite's sole judgment, might directly or indirectly
prohibit, prevent, restrict or delay consummation of the exchange
offer or consent solicitation or otherwise relates to either the
exchange offer or consent solicitation;
-- in Pegasus Satellite's sole judgment, could affect materially and
adversely the business, condition (financial or otherwise), income,
operations, properties, assets, liabilities or prospects of Pegasus
Satellite; or
-- in Pegasus Satellite's sole judgment, could materially impair the
contemplated benefits of the exchange offer or consent solicitation
to Pegasus Satellite or be material to holders of the Pegasus
Communications preferred stock in deciding whether to accept the
exchange offer or consent solicitation.
o Any event affecting the business or financial affairs of Pegasus
Satellite that, in the sole judgment of Pegasus Satellite, would or might
result in any of the consequences referred to above has occurred or is
likely to occur.
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o One of the following has occurred:
-- any general suspension of, or limitation on prices for, trading in
securities in the United States securities or financial markets or
any other significant adverse change in United States securities or
financial markets;
-- any significant adverse change in the price of the Pegasus
Communications preferred stock;
-- a material impairment in the trading market for securities generally;
-- a declaration of a banking moratorium or any suspension of payments
in respect of banks by federal or state authorities in the United
States (whether or not mandatory);
-- a declaration of a national emergency or commencement of a war, armed
hostilities or other national or international crises directly or
indirectly involving the United States;
-- any limitation (whether or not mandatory) by any government or
regulatory authority on, or any other event that, in the sole
judgment of Pegasus Satellite, might affect the nature or extension
of credit by banks or other financial institutions;
-- any significant change in United States currency exchange rates or a
suspension of, or limitation on, the markets for currency exchange
rates (whether or not mandatory); or
-- in the case of any of the foregoing existing at the time of the
commencement of the exchange offer and consent solicitation, in the
sole judgment of Pegasus Satellite, a material acceleration,
escalation or worsening of the foregoing.
o There is, in our sole judgment, any actual or threatened legal impediment
(including a default under an agreement, indenture or other instrument or
obligation to which Pegasus Satellite or Pegasus Communications is a
party, or by which either of them is bound) to the acceptance of new
Pegasus Satellite preferred stock in exchange for Pegasus Communications
preferred stock, or to the scope, validity or effectiveness of the
consents solicited using this offering memorandum.
o Any event affecting the business or financial affairs of Pegasus
Satellite has occurred or is likely to occur that, in the sole judgment
of Pegasus Satellite, could prevent, restrict or delay consummation of
the exchange offer or the consent solicitation or materially impair the
contemplated benefits of the exchange offer and the consent solicitation.
We may assert any of the foregoing conditions in our sole discretion
regardless of the circumstances giving rise to the condition. In addition, we
may waive any of the foregoing conditions in whole or in part.
Termination
In addition to the conditions listed above, we may terminate the exchange
offer or consent solicitation for any business reason we determine, in our sole
discretion. If we terminate the exchange offer for any reason, we will return
your preferred stock as soon as practicable after the date of termination at no
cost to you. If we terminate this exchange offer, the proposed amendments will
not take effect.
Exchange Agent
We have appointed First Union National Bank as exchange agent. Questions
and requests for assistance, requests for additional copies of this offering
memorandum or of the letter of transmittal and requests for notice of
guaranteed delivery should be directed to First Union National Bank as follows:
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<TABLE>
<CAPTION>
By Mail: By Hand/Overnight Express: By Facsimile:
(704) 590-7628
<S> <C> <C>
First Union National Bank First Union National Bank
1525 West W.T. Harris Blvd., 3C3 1525 West W.T. Harris Blvd., 3C3
Charlotte, NC 28288 Charlotte, NC 28262
Attention: Michael Klotz Attention: Michael Klotz To confirm receipt:
Telephone: (704) 590-7408 Telephone: (704) 590-7408 (704) 590-7408
</TABLE>
Dealer Manager/Solicitation Agent
Pegasus Satellite has retained CIBC World Markets Corp. to act as the
dealer manager and solicitation agent in connection with the exchange offer and
consent solicitation. In this capacity, the dealer manager may contact holders
of Pegasus Communications preferred stock and may request brokers, dealers,
commercial banks, trust companies and other nominees to forward this offering
memorandum and related materials to beneficial owners of the Pegasus
Communications preferred stock.
Subject to the terms of the Dealer Manager Agreement dated December 19,
2000, between Pegasus Satellite and the dealer manager, Pegasus Satellite will
reimburse the dealer manager for its reasonable out-of-pocket expenses in
connection with the exchange offer and consent solicitation. Pegasus Satellite
has agreed to indemnify the dealer manager and its affiliates against certain
liabilities under federal or state securities laws caused by, relating to or
arising out of the exchange offer and consent solicitation.
At any time, the dealer manager may trade the new Pegasus Satellite
preferred stock for its own account or for the accounts of customers and,
accordingly, may hold a long or short position on the new Pegasus Satellite
preferred stock.
Any holder that has questions concerning the terms of the exchange offer
and the consent solicitation may contact the dealer manager at the address and
telephone number provided on the back cover of this offering memorandum.
An affiliate of CIBC World Markets is one of the lenders under Pegasus
Media & Communications' credit facility. Affiliates of the dealer manager have
in the past acted as agents and lenders to Pegasus Satellite or its
subsidiaries, and as underwriters for their securities and may act in such
capacities in connection with future credit facilities, and have and expect to
receive customary fees and commissions for their services. CIBC World Markets
has also from time to time provided financial advisory services to Pegasus
Satellite and has received customary fees and expenses for its services.
CIBC World Markets has performed the following services for Pegasus
Satellite:
o provided a fair market value appraisal in connection with the merger of
Digital Television Services, Inc. into a wholly-owned subsidiary of
Pegasus Satellite and the designation of Digital Television Services as a
restricted subsidiary;
o served as an initial purchaser in Pegasus Satellite's Rule 144A offering
of $300.0 million in aggregate liquidation preference of Series C
convertible preferred stock;
o acted as a dealer manager in connection with an offer by Pegasus
Satellite to exchange its 12 1/2% Series A senior notes due 2007 for
senior subordinated notes of Digital Television Services and DTS Capital,
Inc. and a related consent solicitation;
o issued letters of credit in connection with bridge financing obtained by
Pegasus Satellite;
o provided fairness opinions to Pegasus Satellite and/or its affiliates in
connection with certain intercompany loans and other intercompany
transactions;
o acted as lender in connection with the Pegasus Media & Communications
credit facility;
o provided a fairness opinion in connection with the Golden Sky merger;
o acted as administrative agent in connection with a credit facility of
Digital Television Services;
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o acted as underwriter in Pegasus Satellite's 1999 equity offering; and
o agreed to purchase any and all Golden Sky notes tendered in response to
Golden Sky's offers to purchase the notes.
In the first nine months of 2000 and during 1999, for services rendered,
Pegasus Satellite or its subsidiaries paid to CIBC World Markets an aggregate
of $4.4 million and $940,000, respectively, in fees. Pegasus Satellite believes
that all fees paid to CIBC World Markets in connection with the transactions
described above were customary. Pegasus Satellite anticipates that it or its
subsidiaries may engage the services of CIBC World Markets in the future,
although no such engagement is currently contemplated. William P. Phoenix, a
Managing Director of CIBC World Markets, is a director of Pegasus
Communications and Pegasus Satellite.
Fees and Expenses; Accounting Treatment
We will bear the expenses of soliciting tenders and consents. We are
making the principal solicitation by mail; however, we may make additional
solicitation by telegraph, telephone or in person by our officers, regular
employees and affiliates.
No fee, commission or discount has been or will be paid or allowed to any
broker, dealer or other person, other than the dealer manager and exchange
agent, in connection with the exchange offer or the consent solicitation.
We will pay the cash expenses we incur in the exchange offer
reorganization and associated recapitalization and consent solicitation. These
nonrecurring expenses are estimated in the aggregate to be approximately
$650,000. These expenses include registration fees, fees and expenses of the
dealer manager and the exchange agent, accounting and legal fees and printing
costs, among others. These nonrecurring expenses are expected to be incurred
within the next 12 months following the completion of the above described
transactions and charged to our results of operations.
We will pay all transfer taxes, if any, applicable to the exchange of
Pegasus Communications preferred stock. If, however, a transfer tax is imposed
for any reason other than the exchange of the Pegasus Communications preferred
stock, then the amount of these transfer taxes, whether imposed on the
registered holder or any other persons, will be payable by the tendering
holder. If the tendering holder does not submit satisfactory evidence of
payment of these taxes or exemption from these taxes with the letter of
transmittal, we will bill the taxes directly to the tendering holder.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Federal Income Tax Consequences of the Exchange Offer to Tendering Owners.
The following discussion summarizes certain material United States federal
income tax consequences of the exchange offer to owners of Pegasus
Communications preferred stock. The discussion is based on the Internal Revenue
Code, Treasury regulations promulgated under it, IRS rulings and pronouncements
and judicial decisions, all as in effect on the date hereof, and all of which
are subject to change at any time by legislative, judicial or administrative
action. Any such change may be applied retroactively. We have not sought and
will not seek any rulings from the IRS, nor have we sought or received any
opinion of counsel, with respect to any of the matters discussed in this
offering memorandum. The following discussion does not address consequences to
owners who do not accept the exchange offer.
Persons who accept the exchange offer will be treated for federal income
tax purposes as having, in substance, transferred Pegasus Communications
preferred stock directly for new Pegasus Satellite preferred stock. Because the
new Pegasus Satellite preferred stock will be issued by the same issuer (albeit
with a changed name) as the Pegasus Communications preferred stock and will
have terms that are identical in substance to the Pegasus Communications
preferred stock, the transfer of the Pegasus Communications preferred stock for
the new Pegasus Satellite preferred stock will not be considered an exchange of
property differing materially either in kind or extent and, therefore, will not
be a taxable event. Accordingly, a tendering owner will recognize no gain or
loss on the receipt of new Pegasus Satellite preferred stock, will have the
same basis in the new Pegasus Satellite preferred stock as in the Pegasus
Communications preferred stock, and will have a holding period in the new
Pegasus Satellite stock that includes the holding period in the Pegasus
Communications preferred stock.
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PROPOSED AMENDMENTS TO THE PEGASUS COMMUNICATIONS PREFERRED STOCK CERTIFICATE
OF DESIGNATION AND EXCHANGE NOTES INDENTURE
The proposed amendments are provided in the amended certificate of
designation and exchange notes indenture, which Pegasus Satellite will provide
upon any Pegasus Communications preferred stockholder's request. Upon Pegasus
Satellite's receipt of consents representing a majority of the outstanding
shares of Pegasus Communications preferred stock, the amended certificate of
designation, including the indenture, will become effective. The amended
certificate of designation and indenture, if adopted, will be binding on all
Pegasus Communications preferred stockholders who do not tender their preferred
stock in the exchange offer. The proposed amendments will not become operative,
however, until the settlement date. The proposed amendments, if adopted and
operative, will eliminate substantially all of the covenants in the Pegasus
Communications preferred stock certificate of designation and exchange notes
indenture other than the covenants to pay dividends accrued on the Pegasus
Communications preferred stock when due, pay the interest on the exchange
notes, if issued, the obligations to repurchase preferred stock upon a change
of control and the obligation to repurchase the exchange notes, if issued, upon
a change of control. The following are summaries of the proposed amendments.
For more complete information regarding the Pegasus Communications preferred
stock certificate of designation and exchange notes indenture, you should
consult the Pegasus Communications preferred stock certificate of designation,
the amended certificate of designation, the exchange notes indenture and the
amended exchange notes indenture, all of which will be provided to you by
Pegasus Satellite upon request.
The proposed amendments to the Pegasus Communications preferred stock
certificate of designation and exchange note indenture would eliminate
covenants that currently prohibit or restrict the ability of Pegasus
Communications and some or all of its subsidiaries, subject to specified
exceptions, to:
o declare or pay any dividend or make any payment or distribution on
account of Pegasus Communications' securities ranking on a parity with or
junior to the Pegasus Communications preferred stock or on account of
specified stock of its subsidiaries, or make any payment or distribution
to or for the benefit of holders of Pegasus Communications' securities
ranking on a parity with or junior to the Pegasus Communications
preferred stock or the holders of specified stock of its subsidiaries,
other than some dividends or distributions payable in Pegasus
Communications' equity;
o acquire or retire for value any securities ranking on a parity with or
junior to the Pegasus Communications preferred stock or that of any
direct or indirect affiliate of Pegasus Communications;
o make any payment on, or acquire or retire for value any securities
ranking junior to the Pegasus Communications preferred stock, except
payments of the junior stock's liquidation preference at final maturity;
o make any loan, advance, capital contribution to or other investment in,
or guarantee any obligation of, any affiliate of Pegasus Communications;
o forgive loans or make any advancement to or other obligation of any
affiliate of Pegasus Communications;
o make so-called restricted investments;
o incur any indebtedness, issue any equity interest with redemption rights
maturing earlier than the mandatory redemption date of the Pegasus
Communications preferred stock or exchange notes, if issued, or permit
any subsidiaries to do so unless, in each case, Pegasus Communications'
debt to operating cash flow ratio would be 7.0 to 1 or less;
o consolidate or merge with or into, or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties
or assets in one or more related transactions, to another entity;
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o dispose of any of its properties or assets to, or purchase any property
or assets from, or enter into any agreement with, or for the benefit of,
any affiliate unless the transaction is on terms that are no less
favorable to Pegasus Communications or the relevant "restricted
subsidiary" than those that would have resulted from a transaction with
an unrelated party;
o cause to exist or become effective any encumbrance or restriction on the
ability of any restricted subsidiary to:
-- pay dividends or make any other distributions to Pegasus Communications
or any of its restricted subsidiaries (a) on its capital stock or (b)
with respect to any other interest or participation in, or measured by,
its profits;
-- pay any indebtedness owed to Pegasus Communications or any of its
restricted subsidiaries;
-- make loans or advances to Pegasus Communications or any of its
restricted subsidiaries; or
-- transfer any of its properties or assets to Pegasus Communications or
any of its restricted subsidiaries.
o dispose of less than all of the capital stock of any wholly owned
restricted subsidiary of Pegasus Communications;
o allow certain subsidiaries to issue any of their equity interests to any
entity other than to Pegasus Communications or a wholly-owned restricted
subsidiary of Pegasus Communications;
o sell assets other than in the ordinary course of business or issue equity
interests resulting in proceeds of more than $1 million, unless the
proceeds are used to reduce debt or acquire another business in Pegasus
Communications' line of business, and unless:
-- Pegasus Communications or the restricted subsidiary receives
consideration at the time of the asset sale or equity issuance at least
equal to the fair value of the assets or equity interests disposed of;
and
-- at least 85% of the consideration received by Pegasus Communications or
the restricted subsidiary is in the form of cash;
o make any payment on, acquire or retire for value any debt that is
subordinated to the exchange notes, if issued, except at final maturity;
o in the case of the exchange notes, if issued, incur any lien on any
asset, or any income or profits from those assets except specified liens,
or assign or convey any right to receive income from those assets;
o designate a restricted subsidiary as an unrestricted subsidiary unless,
in the case of the preferred stock, the designation does not trigger the
preferred stockholders' voting rights and, in the case of the exchange
notes, the designation does not cause a default or an event of default;
o discontinue the corporate existence, rights, licenses or franchises of
Pegasus Communications or any of its restricted subsidiaries; or
o offer to purchase the Pegasus Communications preferred stock or the
exchange notes, if issued, in the event of a change of control.
Both the certificate of designation and the indenture currently require
Pegasus Communications, whether or not required by the SEC's rules and
regulations and for so long as any preferred stock or exchange notes are
outstanding, to:
o furnish to the holders of preferred stock or exchange notes, if issued:
-- all quarterly and annual financial information that would be required
to be contained in a filing with the SEC on Forms 10-Q and 10-K if
Pegasus Communications were required to file the forms, and a report on
the annual information by Pegasus Communications' certified independent
accountants; and
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-- all current reports that would be required to be filed with the SEC on
Form 8-K if Pegasus Communications were required to file the reports.
o file a copy of all such information and reports with the SEC for public
availability and make the information available to securities analysts
and prospective investors upon request. In addition to the financial
information required by the Exchange Act, each such quarterly and annual
report will be required to contain summarized financial information.
The revised certificate of designation would eliminate these requirements.
The definitions relating solely to the eliminated covenants will be
eliminated. Some other sections of the Pegasus Communications preferred stock
certificate of designation and the exchange notes indenture may be amended to
reflect the elimination of the foregoing covenants.
The proposed amendments would not eliminate covenants that currently
require Pegasus Communications and some or all of its subsidiaries, to do the
following:
o pay accrued dividends on the Pegasus Communications preferred stock in
the manner provided in the certificate of designation;
o pay accrued interest on the Pegasus Communications exchange notes, if
issued, in the manner provided for in the indenture;
o maintain an office or agency for notice purposes; and
o not to claim the benefit of any stay or extension law or usury law that
would prohibit or forgive payment of accrued dividends under the Pegasus
Communications preferred stock or accrued interest under the exchange
notes indenture.
In addition, substantially all of the conditions to legal and covenant
defeasance in the exchange notes indenture would be eliminated, including the
condition that Pegasus Communications must deliver to the trustee an opinion of
counsel confirming that holders of Pegasus Communications exchange notes will
not recognize income, gain or loss for federal income tax purposes as a result
of defeasance.
As a result of the proposed amendments, the only remaining conditions to
legal or covenant defeasance would be:
o that Pegasus Communications irrevocably deposit with the trustee under
the exchange notes indenture for the benefit of the holders, cash in U.S.
dollars, non-callable U.S. Government securities, or a combination of the
two, in amounts sufficient to pay the principal of, premium, if any, and
interest on the outstanding exchange notes, if any, on the stated
maturity or applicable redemption date; and
o that Pegasus Communications deliver an officer's certificate to the
trustee of the exchange notes indenture stating that all conditions
precedent to the legal or covenant defeasance have been satisfied.
The proposed amendments to the Pegasus Communications preferred stock
certificate of designation require the consent of holders of a majority of the
outstanding shares of the Pegasus Communications preferred stock. In addition,
for any of the proposed amendments to the certificate of designation to become
effective, Pegasus Communications must execute an amended certificate of
designation. See The Exchange Offer and Consent Solicitation -- Conditions of
the Exchange Offer and Consent Solicitation and Offering Memorandum Summary --
Summary of Securities Offered. In addition, the consents are subject to a
number of conditions. These are discussed above in The Exchange Offer and
Consent Solicitation -- Conditions of the Exchange Offer and Consent
Solicitation.
If the proposed amendments become effective:
o Pegasus Communications, as soon as practicable, will transmit a notice
describing the amendments to the certificate of designation to all
registered holders of Pegasus Communications preferred stock that remain
outstanding; and
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o non-tendering holders will hold their Pegasus Communications preferred
stock under the Pegasus Communications preferred stock certificate of
designation, as amended by the proposed amendments, whether or not that
holder consented to the proposed amendments.
Consents given by holders of Pegasus Communications preferred stock
tendered but rejected by us will not be counted for the purpose of determining
whether the requisite consents have been obtained.
Only a registered holder can effectively deliver a consent to the proposed
amendments. Under the terms of the Pegasus Communications preferred stock
certificate of designation, subsequent transfers of Pegasus Communications
preferred stock on the applicable security register for the Pegasus
Communications preferred stock will not have the effect of revoking any consent
previously given by the registered holder of the Pegasus Communications
preferred stock. Those consents will remain valid unless revoked by the
transferee holder in accordance with the procedures described in this offering
memorandum under the heading The Exchange Offer and Consent Solicitation --
Withdrawal of Tenders and Revocation of Consents.
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DESCRIPTION OF NEW PEGASUS SATELLITE PREFERRED STOCK AND EXCHANGE NOTES
Description of Series A Preferred Stock
General
The following is a summary of some of the terms of the new Pegasus
Satellite preferred stock we are offering through this offering memorandum. The
terms of the new Pegasus Satellite preferred stock will be contained in the
certificate of designation. This summary is not intended to be complete and is
subject to, and qualified in its entirety by reference to, Pegasus Satellite's
amended and restated certificate of incorporation and the certificate of
designation for the new Pegasus Satellite preferred stock. Some of the
capitalized terms used in this summary are defined in -- Certain Definitions.
Substantially all of Pegasus Satellite's operations are conducted through
its Subsidiaries, which means that Pegasus Satellite depends on its
Subsidiaries' cash flow to meet its obligations, including those created by the
new Pegasus Satellite preferred stock. Pegasus Satellite's rights to its
Subsidiaries' assets effectively will be subordinated to the claims of its
Subsidiaries' creditors. On a pro forma basis, as of September 30, 2000,
Pegasus Satellite's aggregate Indebtedness and other obligations that
effectively would rank senior in right of payment to the obligations of Pegasus
Satellite under the new Pegasus Satellite preferred stock were approximately
$1.3 billion. See Risk Factors -- Risk of Investing in the New Pegasus
Satellite Preferred Stock and Exchange Notes -- Our Substantial Indebtedness
Could Affect Your New Investment.
Under the certificate of designation, approximately 162,588 shares of new
Pegasus Satellite preferred stock with a liquidation preference of $1,000 per
share will be authorized for issuance, plus additional shares as necessary for
the payment of dividends on the preferred stock. The new Pegasus Satellite
preferred stock will, when issued, be fully paid and nonassessable, and its
holders will have no preemptive rights.
The new Pegasus Satellite preferred stock's liquidation preference is not
necessarily indicative of the price at which shares of the new Pegasus
Satellite preferred stock will actually trade at or after the time of its
issuance, and the new Pegasus Satellite preferred stock may trade at prices
below its liquidation preference. You can expect the market price of the new
Pegasus Satellite preferred stock to fluctuate with changes in the financial
markets and economic conditions, Pegasus Satellite's financial condition and
prospects and other factors that generally influence the market prices of
securities. See Risk Factors -- Risk of Investing in the New Pegasus Satellite
Preferred Stock and Exchange Notes -- Absence of a Public Market for the New
Pegasus Satellite Preferred Stock
The transfer agent for the new Pegasus Satellite preferred stock will be
First Union National Bank unless and until Pegasus Satellite selects a
successor.
Ranking
The new Pegasus Satellite preferred stock will rank senior in right of
payment to all other classes or series of Pegasus Satellite's Capital Stock as
to dividends and upon Pegasus Satellite's liquidation, dissolution or winding
up. The certificate of designation will provide that Pegasus Satellite may not,
without the consent of the holders of a majority of the then outstanding shares
of new Pegasus Satellite preferred stock, authorize, create or issue any class
or series of Capital Stock ranking on a parity with the new Pegasus Satellite
preferred stock or any Obligation or security convertible or exchangeable into
or evidencing a right to purchase, shares of any class or series of securities
ranking on a parity with the new Pegasus Satellite preferred stock. The
certificate of designation will provide that Pegasus Satellite may not, without
the consent of the holders of at least two-thirds of the then outstanding
shares of new Pegasus Satellite preferred stock, authorize, create or issue any
class or series of Capital Stock ranking senior to the new Pegasus Satellite
preferred stock or any Obligation or security convertible or exchangeable into
or evidencing a right to purchase, shares of any class or series of securities
ranking senior to the new Pegasus Satellite preferred stock.
Dividends
The new Pegasus Satellite preferred stockholders will be entitled to
receive, when, as and if dividends are declared by the board of directors out
of Pegasus Satellite's funds legally available for the payment of
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dividends, cumulative preferential dividends from July 1, 2000 accruing at the
rate of 12 3/4% per annum, payable semi-annually in arrears on each January 1
and July 1 or, if those dates fall on a non-business day, then on the next
succeeding business day, to the holders of record as of the immediately
preceding December 15 and June 15, respectively. Dividends are payable in cash,
except that on each dividend payment date occurring on or before January 1,
2002, dividends may be paid, at Pegasus Satellite's option, by the issuance of
additional shares of new Pegasus Satellite preferred stock (including
fractional shares) having an aggregate liquidation preference equal to the
amount of dividends payable. The issuance of the additional shares of new
Pegasus Satellite preferred stock will constitute payment of the related
dividend for all purposes of the certificate of designation. Dividends payable
on the new Pegasus Satellite preferred stock will be computed on the basis of a
360-day year consisting of twelve 30-day months and will be deemed to accrue on
a daily basis.
Dividends on the new Pegasus Satellite preferred stock will accrue whether
or not Pegasus Satellite has earnings or profits, whether or not there are
funds legally available for the payment of the dividends and whether or not
dividends are declared. Dividends will accumulate to the extent they are not
paid on the dividend payment date for the period to which they relate.
Accumulated unpaid dividends will bear interest at a per annum rate 200 basis
points in excess of the annual dividend rate on the new Pegasus Satellite
preferred stock. The certificate of designation will provide that Pegasus
Satellite will take all actions required or permitted under the Delaware
General Corporation Law to permit the payment of dividends on the new Pegasus
Satellite preferred stock, including, without limitation, through the
revaluation of its assets in accordance with the Delaware General Corporation
Law, to make or keep funds legally available for the payment of dividends.
No dividend will be declared or paid upon, nor any sum set apart for the
payment of dividends upon, any outstanding share of the new Pegasus Satellite
preferred stock with respect to any dividend period unless all dividends for
all preceding dividend periods have been declared and paid, or declared and a
sufficient sum set apart for the payment of the dividend, upon all outstanding
shares of new Pegasus Satellite preferred stock. Unless full cumulative
dividends on all outstanding shares of new Pegasus Satellite preferred stock
for all past dividend periods have been declared and paid, or declared and a
sufficient sum for payment set apart, then:
o no dividend (other than a dividend payable solely in shares of any class
of stock ranking junior to the new Pegasus Satellite preferred stock as
to the payment of dividends and as to rights in Pegasus Satellite's
liquidation, dissolution or winding up of its affairs) will be declared
or paid upon, or any sum set apart for the payment of dividends upon, any
shares of securities ranking junior to the new Pegasus Satellite
preferred stock;
o no other distribution will be declared or made upon, or any sum set apart
for the payment of any distribution upon, any shares of securities
ranking junior to the new Pegasus Satellite preferred stock, other than a
distribution consisting solely of securities ranking junior to the new
Pegasus Satellite preferred stock;
o no shares of securities ranking junior to the new Pegasus Satellite
preferred stock will be purchased, redeemed or otherwise acquired or
retired for value (excluding an exchange for shares of other securities
ranking junior to the new Pegasus Satellite preferred stock) by Pegasus
Satellite or any of its Subsidiaries; and
o no monies will be paid into or set apart or made available for a sinking
or other like fund for the purchase, redemption or other acquisition or
retirement for value of any shares of securities ranking junior to the
new Pegasus Satellite preferred stock by Pegasus Satellite or any of its
Subsidiaries.
Holders of the new Pegasus Satellite preferred stock will not be entitled
to any dividends, whether payable in cash, property or stock, in excess of the
full cumulative dividends as described in this offering memorandum.
Any future credit agreements or other agreements relating to Indebtedness
to which Pegasus Satellite becomes a party may restrict Pegasus Satellite's
ability to pay dividends on the new Pegasus Satellite preferred stock.
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Voting Rights
Holders of record of shares of the new Pegasus Satellite preferred stock
will have no voting rights, except as required by law and as provided in the
certificate of designation. The certificate of designation will provide that if
any of the following "Voting Rights Triggering Events" occur, the number of
members of Pegasus Satellite's board of directors immediately and automatically
will increase by two, and the holders of a majority of the outstanding shares
of new Pegasus Satellite preferred stock, voting as a separate class, will be
entitled to elect two members to Pegasus Satellite's board of directors:
o the accumulation of accrued and unpaid dividends on the outstanding new
Pegasus Satellite preferred stock in an amount equal to three full
semi-annual dividends (whether or not consecutive);
o Pegasus Satellite's failure to satisfy any mandatory redemption or
repurchase obligation (including, without limitation, under any required
Change of Control offer) with respect to the new Pegasus Satellite
preferred stock;
o Pegasus Satellite's failure to make a Change of Control offer on the
terms and in accordance with the provisions described below under the
caption -- Change of Control;
o Pegasus Satellite's failure to comply with any of the other covenants or
agreements provided in the certificate of designation and the continuance
of that failure for 60 consecutive days or more; or
o default under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any Indebtedness
for money borrowed by Pegasus Satellite or any of its Subsidiaries (or
the payment of which is guaranteed by Pegasus Satellite or any of its
Subsidiaries) whether or not the Indebtedness or Guarantee now exists,
which Default:
-- is caused by a failure to pay principal of or premium, if any, or
interest on the Indebtedness before the expiration of the grace period
provided in the Indebtedness on the date of the default; or
-- results in the acceleration of the Indebtedness before its express
maturity and, in each case, the principal amount of the Indebtedness,
together with the principal amount of any other Indebtedness under
which there has been a payment default or the maturity of which has
been so accelerated, aggregates $5.0 million or more.
Voting rights arising as a result of a Voting Rights Triggering Event will
continue until all dividends in arrears on the new Pegasus Satellite preferred
stock are paid in full and all other Voting Rights Triggering Events have been
cured or waived.
In addition, as provided above under -- Ranking, Pegasus Satellite may not
authorize, create (by way of reclassification or otherwise) or issue:
o any securities ranking on a parity with the new Pegasus Satellite
preferred stock, or any Obligation or security convertible into or
evidencing the right to purchase any securities ranking on a parity with
the new Pegasus Satellite preferred stock without the affirmative vote or
consent of the holders of a majority of the then outstanding shares of
new Pegasus Satellite preferred stock, voting as a separate class; and
o any securities ranking senior to the new Pegasus Satellite preferred
stock, or any Obligation or security convertible into or evidencing the
right to purchase securities ranking senior to the new Pegasus Satellite
preferred stock, without the affirmative vote or consent of the holders
of at least two-thirds of the then outstanding shares of new Pegasus
Satellite preferred stock, voting as a separate class.
Exchange
Pegasus Satellite may, at its option, on any dividend payment date,
exchange, in whole, but not in part, the then outstanding shares of new Pegasus
Satellite preferred stock for 12 3/4% senior subordinated exchange notes;
provided, that:
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o on the date of the exchange there are no accumulated and unpaid dividends
on the new Pegasus Satellite preferred stock (including the dividend
payable on that date) or other contractual impediments to the exchange;
o there are legally available funds sufficient to pay the dividends due on
that date;
o no Voting Rights Triggering Event has occurred and is continuing at the
time of the exchange;
o immediately after giving effect to the exchange, no Default or Event of
Default would exist under the exchange note indenture, and no default or
event of default would exist under any material instrument governing
Indebtedness outstanding at the time;
o the exchange note indenture has been qualified under the Trust Indenture
Act, if this qualification is required at the time of exchange; and
o Pegasus Satellite has delivered a written opinion to the exchange note
trustee to the effect that all conditions to be satisfied before the
exchange have been satisfied.
The exchange notes will be issuable in principal amounts of $1,000 and
integral multiples of $1,000 to the extent possible, and will also be issuable
in principal amounts less than $1,000 so that each holder of new Pegasus
Satellite preferred stock will receive certificates representing the entire
amount of exchange notes to which the holder's shares of new Pegasus Satellite
preferred stock entitle the holder; provided that Pegasus Satellite may pay
cash in lieu of issuing an exchange note having a principal amount less than
$1,000. Notice of the intention to exchange will be sent by or on behalf of
Pegasus Satellite not more than 60 days nor less than 30 days before the
exchange date, by first class mail, postage prepaid, to each holder of record
of new Pegasus Satellite preferred stock at its registered address. In addition
to any information required by law or by the applicable rules of any exchange
upon which the new Pegasus Satellite preferred stock may be listed or admitted
to trading, the notice will state:
o the exchange date;
o the place or places where certificates for the shares are to be
surrendered for exchange, including any procedures applicable to
exchanges to be accomplished through book-entry transfers; and
o that dividends on the shares of new Pegasus Satellite preferred stock to
be exchanged will cease to accrue on the exchange date.
If notice of any exchange has been properly given, and if on or before the
exchange date the exchange notes have been duly executed and authenticated and
an amount in cash or additional shares of new Pegasus Satellite preferred
stock, as applicable, equal to all accrued and unpaid dividends, if any, on the
new Pegasus Satellite preferred stock through the exchange date has been
deposited with the transfer agent, then on and after the close of business on
the exchange date, the shares of new Pegasus Satellite preferred stock to be
exchanged will no longer be deemed to be outstanding. After that time, the new
Pegasus Satellite preferred stock may be issued in the same manner as the other
authorized but unissued new Pegasus Satellite preferred stock, but not as
Series A preferred stock, and all rights of the preferred stockholders as
stockholders of Pegasus Satellite will cease, except the right of the holders
to receive, upon surrender of their certificates, the exchange notes and all
accrued and unpaid dividends, if any, on the new Pegasus Satellite preferred
stock through the exchange date.
Redemption
Mandatory Redemption
On January 1, 2007, Pegasus Satellite will be required to redeem (subject
to the legal availability of funds for the redemption) all outstanding shares
of new Pegasus Satellite preferred stock at a price in cash equal to the
liquidation preference of the new Pegasus Satellite preferred stock, plus
accrued and unpaid dividends, if any, to the date of redemption. Pegasus
Satellite will not be required to make sinking fund payments with respect to
the new Pegasus Satellite preferred stock. The certificate of designation will
provide that Pegasus Satellite will take all actions required or permitted
under Delaware law to permit the redemption.
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Optional Redemption
The new Pegasus Satellite preferred stock may not be redeemed at Pegasus
Satellite's option before January 1, 2002. The new Pegasus Satellite preferred
stock may be redeemed, in whole or in part, at Pegasus Satellite's option on or
after January 1, 2002, at the redemption prices specified below (expressed as
percentages of the liquidation preference of the new Pegasus Satellite
preferred stock), in each case, together with accrued and unpaid dividends, if
any, to the date of redemption, upon not less than 30 nor more than 60 days'
prior written notice, if redeemed during the 12-month period commencing on
January 1 of each of the years set forth below:
Redemption
Year Rate
---- ----
2002 ................................. 106.375%
2003 ................................. 104.250%
2004 ................................. 102.125%
2005 and thereafter .................. 100.000%
Liquidation Rights
Upon any voluntary or involuntary liquidation, dissolution or winding up
of Pegasus Satellite's affairs or reduction or decrease in its Capital Stock
resulting in a distribution of assets to the holders of any class or series of
Pegasus Satellite's Capital Stock, each holder of new Pegasus Satellite
preferred stock will be entitled to payment out of Pegasus Satellite's assets
available for distribution, an amount equal to the liquidation preference per
share of new Pegasus Satellite preferred stock held by the holder. The holder
will also be entitled to accrued and unpaid dividends, if any, to the date
fixed for liquidation, dissolution, winding up or reduction or decrease in
Capital Stock, before any distribution is made on any securities ranking junior
to the new Pegasus Satellite preferred stock, including, without limitation,
common stock of Pegasus Satellite. After payment in full of the liquidation
preference and all accrued dividends, if any, to which holders of new Pegasus
Satellite preferred stock are entitled, the holders will not be entitled to any
further participation in any distribution of Pegasus Satellite's assets.
However, neither the voluntary sale, conveyance, exchange or transfer (for
cash, shares of stock, securities or other consideration) of all or
substantially all of Pegasus Satellite's property or assets, nor the
consolidation or merger of Pegasus Satellite with or into one or more
corporations will be deemed to be a voluntary or involuntary liquidation,
dissolution or winding up of Pegasus Satellite or reduction or decrease in
Capital Stock, unless the sale, conveyance, exchange or transfer occurs in
connection with a liquidation, dissolution or winding up of Pegasus Satellite's
business or reduction or decrease in Capital Stock.
The certificate of designation will not contain any provision requiring
funds to be set aside to protect the new Pegasus Satellite preferred stock's
liquidation preference, although the liquidation preference will be
substantially in excess of the new Pegasus Satellite preferred stock's par
value.
Change of Control
Upon a Change of Control, each new Pegasus Satellite preferred stockholder
will have the right to require Pegasus Satellite to repurchase all or any part
of the holder's new Pegasus Satellite preferred stock under the offer described
below at an offer price in cash equal to 101% of the aggregate liquidation
preference of the new Pegasus Satellite preferred stock plus accrued and unpaid
dividends, if any, on the new Pegasus Satellite preferred stock through the
date of purchase. However, a holder requiring redemption of less than all of
its new Pegasus Satellite preferred stock cannot exercise this right with
respect to any fractional shares.
The certificate of designation will provide that within 30 days following
any Change of Control, Pegasus Satellite will mail a notice to each holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase all outstanding shares of new Pegasus
Satellite preferred stock under the procedures required by the certificate of
designation and described in the notice. Pegasus Satellite will comply
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with the requirements of Rule l4e-1 under the Exchange Act and any other
securities laws and regulations under the Exchange Act to the extent those laws
and regulations are applicable in connection with the repurchase of the new
Pegasus Satellite preferred stock as a result of a Change of Control.
On the Change of Control payment date, Pegasus Satellite will, to the
extent lawful:
o accept for payment all shares of new Pegasus Satellite preferred stock or
portions of shares properly tendered under the Change of Control offer;
o deposit with the paying agent an amount equal to the Change of Control
payment in respect of all shares of new Pegasus Satellite preferred stock
or portions of shares so tendered; and
o deliver or cause to be delivered to the transfer agent the shares of new
Pegasus Satellite preferred stock so accepted together with an officers'
certificate stating the aggregate liquidation preference of the shares of
new Pegasus Satellite preferred stock or portions of shares being
purchased by Pegasus Satellite.
The paying agent will promptly mail to each holder of new Pegasus
Satellite preferred stock so tendered the Change of Control payment for the new
Pegasus Satellite preferred stock, and the transfer agent will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new certificate representing the shares of new Pegasus Satellite preferred
stock equal in liquidation preference amount to any unpurchased portion of the
shares of new Pegasus Satellite preferred stock surrendered, if any. The
certificate of designation will provide that, before complying with the
provisions of this covenant, but in any event within 90 days following a Change
of Control, Pegasus Satellite will either repay all outstanding Indebtedness or
obtain the requisite consents, if any, under all agreements governing
outstanding Indebtedness to permit the repurchase of new Pegasus Satellite
preferred stock required by this covenant. Pegasus Satellite will publicly
announce the results of the Change of Control offer on or as soon as
practicable after the Change of Control payment date.
The Change of Control provisions described above will apply whether or not
any other provisions of the certificate of designation apply. Except as
described above with respect to a Change of Control, the certificate of
designation does not contain provisions that permit the holders of the new
Pegasus Satellite preferred stock to require that Pegasus Satellite repurchase
or redeem the new Pegasus Satellite preferred stock in the event of a takeover,
recapitalization or similar transaction.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of Pegasus Satellite and its Restricted Subsidiaries taken
as a whole. Although there is a developing body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law. Accordingly, a holder of new Pegasus Satellite
preferred stock's ability to require Pegasus Satellite to repurchase the new
Pegasus Satellite preferred stock as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of Pegasus
Satellite and its Restricted Subsidiaries taken as a whole to another Person or
group may be uncertain.
The Pegasus Media & Communications credit facility, the Golden Sky credit
facility, the Pegasus Media & Communications notes, the Golden Sky DBS notes
and the Golden Sky Systems notes -- each as described in Description of Certain
Indebtedness -- restrict most of Pegasus Satellite's current Subsidiaries from
paying any dividends or making any other distribution to Pegasus Satellite. The
1999 notes, the 1998 notes and the 1997 notes -- each as described in
Description of Certain Indebtedness -- also restrict Pegasus Satellite's
ability to purchase the new Pegasus Satellite preferred stock. Thus, if a
Change of Control occurs, Pegasus Satellite could seek the consent of its
Subsidiaries' lenders and of its noteholders to the purchase of the new Pegasus
Satellite preferred stock or could attempt to refinance the borrowings that
contain the restrictions. If Pegasus Satellite does not obtain the consent or
repay the borrowings, Pegasus Satellite will likely not have the financial
resources to purchase the new Pegasus Satellite preferred stock and the
Subsidiaries will be restricted in paying dividends to Pegasus Satellite for
the purchase. In any event, we cannot assure you that Pegasus Satellite's
Subsidiaries will have the resources available to make the dividend or
distribution. In that case, Pegasus Satellite's failure to make a Change of
Control offer when required or to
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purchase tendered shares of new Pegasus Satellite preferred stock would
constitute a Voting Rights Triggering Event under the certificate of
designation. See Risk Factors -- Risk of Investing in the New Pegasus Satellite
Preferred Stock and Exchange Notes -- If a Change of Control Occurs, We May Be
Unable to Refinance Our Publicly Held Debt, Bank Debt and Preferred Stock and
-- We Are Restricted from Paying Cash Dividends and from Redeeming New Pegasus
Satellite Preferred Stock and -- Your Right to Receive Liquidation and Dividend
Payments on the New Pegasus Satellite Preferred Stock is Junior to Our Existing
and Future Indebtedness and to All of the Liabilities of Our Subsidiaries.
Any future credit agreements or other agreements relating to Indebtedness
to which Pegasus Satellite becomes a party may prohibit Pegasus Satellite from
purchasing any new Pegasus Satellite preferred stock before its maturity, and
may also provide that some Change of Control events with respect to Pegasus
Satellite would constitute a default under the credit agreements or other
agreements. If a Change of Control occurs at a time when Pegasus Satellite is
prohibited from purchasing new Pegasus Satellite preferred stock, Pegasus
Satellite could seek the consent of its lenders to the purchase of new Pegasus
Satellite preferred stock or could attempt to refinance the borrowings that
contain the prohibition. If Pegasus Satellite does not obtain the consent or
repay the borrowings, Pegasus Satellite will remain prohibited from purchasing
new Pegasus Satellite preferred stock. In that case, the holders of a majority
of the outstanding shares of new Pegasus Satellite preferred stock, voting as a
separate class, may be entitled to elect two members to the board of directors
of Pegasus Satellite. See Risk Factors -- Risk of Investing in the New Pegasus
Satellite Preferred Stock and Exchange Notes -- We are Restricted from Paying
Cash Dividends and from Redeeming New Pegasus Satellite Preferred Stock and --
If a Change of Control Occurs, We May Be Unable to Refinance Our Publicly Held
Debt, Bank Debt and Preferred Stock.
Pegasus Satellite will not be required to make a Change of Control offer
to the holders of new Pegasus Satellite preferred stock upon a Change of
Control if a third party makes the Change of Control offer described above in
the manner, at the times and otherwise in compliance with the requirements
provided in the certificate of designation and purchases all shares of new
Pegasus Satellite preferred stock validly tendered and not withdrawn under the
Change of Control offer.
Certain Covenants
Restricted Payments
The certificate of designation will provide that Pegasus Satellite will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly:
o declare or pay any dividend or make any payment or distribution on
account of Pegasus Satellite's securities ranking on a parity with the
new Pegasus Satellite preferred stock or securities ranking junior to the
new Pegasus Satellite preferred stock (including, without limitation, any
payment in connection with any merger or consolidation involving Pegasus
Satellite) or on account of any Qualified Subsidiary Stock or make any
payment or distribution to or for the benefit of the direct or indirect
holders of Pegasus Satellite's securities ranking on a parity with the
new Pegasus Satellite preferred stock or securities ranking junior to the
new Pegasus Satellite preferred stock or the direct or indirect holders
of any Qualified Subsidiary Stock in their capacities as such (other than
dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of Pegasus Satellite);
o purchase, redeem or otherwise acquire or retire for value any securities
ranking on a parity with the new Pegasus Satellite preferred stock or
securities ranking junior to the new Pegasus Satellite preferred stock of
Pegasus Satellite or any direct or indirect parent of Pegasus Satellite
or other Affiliate of Pegasus Satellite (other than any Equity Interests
owned by Pegasus Satellite or any of its Restricted Subsidiaries and
other than the acquisition of Equity Interests in Subsidiaries of Pegasus
Satellite solely in exchange for Equity Interests (other than
Disqualified Stock) of Pegasus Satellite);
o make any payment on, or purchase, redeem, defease or otherwise acquire or
retire for value any securities ranking junior to the new Pegasus
Satellite preferred stock, except payments of the new Pegasus Satellite
preferred stock's liquidation preference at final maturity;
o make any loan, advance, capital contribution to or other investment in,
or guarantee any obligation of, any Affiliate of Pegasus Satellite other
than a Permitted Investment;
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o forgive any loan or advance to or other obligation of any Affiliate of
Pegasus Satellite (other than a loan or advance to or other obligation of
a Wholly Owned Restricted Subsidiary) that at the time made was not a
Restricted Payment that was permitted to be made; or
o make any Restricted Investment (together with the payments and actions
described in the five preceding clauses, "Restricted Payments"),
unless, at the time of and immediately after giving effect to the
Restricted Payment:
o no Voting Rights Triggering Event has occurred and is continuing or would
occur as a consequence of the Restricted Payment;
o Pegasus Satellite would be permitted to incur $1.00 of additional
Indebtedness under the Indebtedness to Adjusted Operating Cash Flow Ratio
described in the first paragraph of the covenant described under the
caption -- Incurrence of Indebtedness and Issuance of Preferred Stock;
and
o the Restricted Payment, together with the aggregate of all other
Restricted Payments made by Pegasus Satellite and its Restricted
Subsidiaries after January 27, 1997, is less than the sum of:
-- an amount equal to the Cumulative Operating Cash Flow for the period
(taken as one accounting period) from the beginning of the first full
month commencing after January 27, 1997 to the end of Pegasus
Satellite's most recently ended fiscal quarter for which internal
financial statements are available at the time of the Restricted
Payment less 1.4 times Pegasus Satellite's Cumulative Total Interest
Expense for that period; plus
-- 100% of the aggregate net cash proceeds and, in the case of proceeds
consisting of assets constituting or used in a Permitted Business, 100%
of the fair market value of the aggregate net proceeds other than cash
received since January 27, 1997 (1) by Pegasus Satellite as capital
contributions to Pegasus Satellite (other than from a Subsidiary) or
(2)from Pegasus Satellite's sale (other than to a Subsidiary) of its
Equity Interests (other than Disqualified Stock); plus
-- without duplication, to the extent that any Restricted Investment that
was made after January 27, 1997 is sold for cash or otherwise
liquidated or repaid for cash, the Net Proceeds received by Pegasus
Satellite or a Wholly Owned Restricted Subsidiary of Pegasus Satellite
upon the sale of the Restricted Investment; plus
-- without duplication, to the extent that any Unrestricted Subsidiary is
designated by Pegasus Satellite as a Restricted Subsidiary, an amount
equal to the fair market value of the Investment at the time of the
designation; plus
-- $2.5 million.
The foregoing provisions will not prohibit:
o the payment of any dividend within 60 days after the date on which the
dividend is declared, if at the date of declaration the payment would
have complied with the provisions of the certificate of designation;
o the redemption, repurchase, retirement or other acquisition of any Equity
Interests of Pegasus Satellite in exchange for, or out of the net
proceeds of, the substantially concurrent sale (other than to a
Subsidiary of Pegasus Satellite) of other Equity Interests of Pegasus
Satellite (other than any Disqualified Stock); provided that the amount
of the net proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition will be excluded from net
cash proceeds referred to in the second clause in the calculation of the
sum to be compared to the sum of Pegasus Satellite's Restricted Payments,
above;
o Pegasus Satellite's payment of advances under the Split Dollar Agreement
in an amount not to exceed $250,000 in any four-quarter period;
o the repurchase or redemption from employees of Pegasus Satellite and its
Subsidiaries (other than the Principal) of Pegasus Satellite's Capital
Stock in an amount not to exceed an aggregate of $3.0 million;
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o the payment of dividends on the new Pegasus Satellite preferred stock in
accordance with the new Pegasus Satellite preferred stock's terms as in
effect on the closing date of the exchange offer;
o the issuance of exchange notes in exchange for shares of the new Pegasus
Satellite preferred stock; provided that the issuance is permitted by the
covenant described below under the caption -- Incurrence of Indebtedness
and Issuance of Preferred Stock; and
o if Pegasus Satellite elects to issue exchange notes in exchange for new
Pegasus Satellite preferred stock, cash payments made in lieu of the
issuance of exchange notes having a face amount less than $1,000 and any
cash payments representing accrued and unpaid dividends in respect of the
new Pegasus Satellite preferred stock, not to exceed $100,000 in the
aggregate in any fiscal year.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) proposed to
be transferred by Pegasus Satellite or the applicable Restricted Subsidiary, as
the case may be, net of any liabilities proposed to be assumed by the
transferee and novated under a written agreement releasing Pegasus Satellite
and its Subsidiaries. Not later than the date of making any Restricted Payment,
Pegasus Satellite must deliver to its board of directors an officers'
certificate stating that the Restricted Payment is permitted and providing the
basis upon which the calculations required by this covenant were computed,
which calculations may be based upon Pegasus Satellite's latest available
financial statements.
The board of directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Voting Rights
Triggering Event. For purposes of making that determination, all outstanding
Investments by Pegasus Satellite and its Restricted Subsidiaries in the
Subsidiary so designated will be deemed to be Restricted Payments at the time
of the designation (valued as set forth below) and will reduce the amount
available for Restricted Payments under the first paragraph of this covenant.
All of those outstanding Investments will be deemed to constitute Investments
in an amount equal to the fair market value of the Investments at the time of
the designation. The designation will be permitted only if the Restricted
Payment would be permitted at that time and if the Restricted Subsidiary would
otherwise meet the definition of an Unrestricted Subsidiary.
Incurrence of Indebtedness and Issuance of Preferred Stock
The certificate of designation will provide that Pegasus Satellite may
not, and may not permit any of its Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to (collectively,
"incur") any Indebtedness (including Acquired Debt) and may not issue any
Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of preferred stock (other than Qualified Subsidiary Stock); provided,
however, that (a) Pegasus Satellite may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock and (b) a Restricted Subsidiary of
Pegasus Satellite may incur Indebtedness (including Acquired Debt) or issue
shares of preferred stock (including Disqualified Stock) if, in each case,
Pegasus Satellite's Indebtedness to Adjusted Operating Cash Flow Ratio as of
the date on which the Indebtedness is incurred or the Disqualified Stock or
preferred stock is issued would have been 7.0 to 1 or less, determined on a pro
forma basis (including a pro forma application of the net proceeds from the
issuance), as if the additional Indebtedness had been incurred, or the
Disqualified Stock or preferred stock had been issued, as the case may be, as
of the date of the calculation.
The foregoing provisions will not apply to:
o the incurrence by Pegasus Satellite's Unrestricted Subsidiaries of
Non-Recourse Debt or the issuance by those Unrestricted Subsidiaries of
preferred stock; provided, however, that if any of the Indebtedness
ceases to be Non-Recourse Debt of an Unrestricted Subsidiary or any of
the preferred stock becomes preferred stock (other than Qualified
Subsidiary Stock) of a Restricted Subsidiary, as the case may be, the
event will be deemed to constitute an incurrence of Indebtedness by or an
issuance of preferred stock (other than Qualified Subsidiary Stock) of,
as the case may be, a Restricted Subsidiary of Pegasus Satellite;
o the incurrence by Pegasus Satellite or any of its Restricted Subsidiaries
of Indebtedness under one or more Bank Facilities, so long as the
aggregate principal amount at any time outstanding of Indebtedness
incurred pursuant to this clause does not exceed $50.0 million;
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o the incurrence by Pegasus Satellite or any of its Restricted Subsidiaries
of the Existing Indebtedness;
o the incurrence by Pegasus Satellite of Indebtedness under the exchange
notes;
o the incurrence by Pegasus Satellite or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among Pegasus Satellite and any
of its Wholly Owned Restricted Subsidiaries; provided, however, that any
subsequent issuance or transfer of Equity Interests that result in any
such Indebtedness being held by a Person other than Pegasus Satellite or
a Wholly Owned Restricted Subsidiary of Pegasus Satellite, and any sale
or other transfer of the Indebtedness to a Person that is not either
Pegasus Satellite or a Wholly Owned Restricted Subsidiary of Pegasus
Satellite will be deemed, in each case, to constitute an incurrence of
that Indebtedness by Pegasus Satellite or the Restricted Subsidiary, as
the case may be;
o the incurrence by Pegasus Satellite or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property used in the business of Pegasus
Satellite or the Restricted Subsidiary, in an aggregate principal amount
not to exceed $5.0 million at any time outstanding;
o the incurrence by Pegasus Satellite or any of its Restricted Subsidiaries
of Permitted Refinancing Debt in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the certificate of designation to be
incurred; and
o the incurrence by Pegasus Satellite or any of its Restricted Subsidiaries
of Indebtedness, in addition to Indebtedness permitted by any other
clause of this paragraph, in an aggregate principal amount at any time
outstanding not to exceed $5.0 million.
If an item of Indebtedness is permitted to be incurred on the basis of the
first paragraph of this covenant and also on the basis of one or more of the
eight clauses above, or is permitted to be incurred on the basis of two or more
of the eight clauses above, then Pegasus Satellite will classify the basis on
which the item of Indebtedness is incurred. If an item of Indebtedness is
repaid with the proceeds of an incurrence of other Indebtedness (whether from
the same or a different creditor), Pegasus Satellite may classify the other
Indebtedness as having been incurred on the same basis as the Indebtedness
being repaid or on a different basis permitted under this covenant. For
purposes of this paragraph, "Indebtedness" includes Disqualified Stock and
preferred stock of Subsidiaries. Accrual of interest and the accretion of
accreted value will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.
Merger, Consolidation or Sale of Assets
The certificate of designation will provide that Pegasus Satellite may not
consolidate or merge with or into (whether or not Pegasus Satellite is the
surviving corporation), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions, to another corporation, Person or entity unless:
o Pegasus Satellite is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other
than Pegasus Satellite) or to which the sale, assignment, transfer,
lease, conveyance or other disposition shall have been made is a
corporation organized or existing under the laws of the United States,
any state in the United States or the District of Columbia;
o the new Pegasus Satellite preferred stock will be converted into or
exchanged for and will become shares of the successor, transferee or
resulting Person, having in respect of the successor, transferee or
resulting Person the same powers, preferences and relative participating,
optional or other special rights and the qualifications, limitations or
restrictions on the new Pegasus Satellite preferred stock, that the new
Pegasus Satellite preferred stock had immediately before the transaction;
o immediately after the transaction no Voting Rights Triggering Event
exists; and
o Pegasus Satellite or the entity or Person formed by or surviving any such
consolidation or merger (if other than Pegasus Satellite), or to which
the sale, assignment, transfer, lease, conveyance or other
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disposition shall have been made will, at the time of the transaction and
after giving pro forma effect to the transaction as if it had occurred at
the beginning of the applicable four-quarter period, be permitted to incur
at least $1.00 of additional Indebtedness under the Indebtedness to
Adjusted Operating Cash Flow Ratio provided in the first paragraph of the
covenant described under the caption -- Incurrence of Indebtedness and
Issuance of Preferred Stock.
Transactions with Affiliates
The certificate of designation will provide that Pegasus Satellite may
not, and may not permit any of its Restricted Subsidiaries to, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make any contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless:
o the Affiliate Transaction is on terms that are no less favorable to
Pegasus Satellite or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by Pegasus Satellite
or the Restricted Subsidiary with an unrelated Person; and
o Pegasus Satellite delivers to the holders:
-- with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the board of directors provided in an
officers' certificate certifying that the Affiliate Transaction
complies with the first clause above and that the Affiliate Transaction
has been approved by a majority of the disinterested members of the
board of directors and a majority of the Independent Directors; and
-- with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, an opinion as to the fairness to Pegasus Satellite or the
Restricted Subsidiary of the Affiliate Transaction from a financial
point of view issued by an investment banking firm of national
standing; provided that Pegasus Satellite will not, and will not permit
any of its Restricted Subsidiaries to, engage in any Affiliate
Transaction involving aggregate consideration in excess of $1.0 million
at any time that there is not at least one Independent Director on
Pegasus Satellite's board of directors; and provided further that the
following will not be considered to be Affiliate Transactions:
o any employment agreement entered into by Pegasus Satellite or any of its
Restricted Subsidiaries in the ordinary course of business and consistent
with the past practice of Pegasus Satellite or the Restricted Subsidiary;
o transactions between or among Pegasus Satellite and/or its Restricted
Subsidiaries;
o the payment of any dividend on, or the issuance of the exchange notes in
exchange for, the new Pegasus Satellite preferred stock, provided that
the dividends are paid on a pro rata basis and the exchange notes are
issued in accordance with the certificate of designation; and
o transactions permitted by the provisions of the covenant described under
the caption -- Certain Covenants -- Restricted Payments.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The certificate of designation will provide that Pegasus Satellite will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any Restricted Subsidiary to:
o (1) pay dividends or make any other distributions to Pegasus Satellite or
any of its Restricted Subsidiaries (a) on its Capital Stock; or (b) with
respect to any other interest or participation in, or measured by, its
profits, or (2) pay any indebtedness owed to Pegasus Satellite or any of
its Restricted Subsidiaries;
o make loans or advances to Pegasus Satellite or any of its Restricted
Subsidiaries; or
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o transfer any of its properties or assets to Pegasus Satellite or any of
its Restricted Subsidiaries, except for encumbrances or restrictions
existing under or by reason of:
-- the terms of any Indebtedness permitted by the certificate of
designation to be incurred by any Subsidiary of Pegasus Satellite;
-- Existing Indebtedness as in effect on January 27, 1997;
-- applicable law;
-- any instrument governing Indebtedness or Capital Stock of a Person
acquired by Pegasus Satellite or any of its Restricted Subsidiaries as
in effect at the time of the acquisition (except to the extent the
Indebtedness was incurred in connection with or in contemplation of the
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the
Person and its Subsidiaries, or the property or assets of the Person
and its Subsidiaries, so acquired; or
-- by reason of customary non-assignment provisions in leases and other
contracts entered into in the ordinary course of business and
consistent with past practices.
Limitation on Issuances and Sales of Capital Stock of Wholly Owned
Restricted Subsidiaries
The certificate of designation will provide that Pegasus Satellite:
o will not, and will not permit any Wholly Owned Restricted Subsidiary of
Pegasus Satellite to, transfer, convey, sell or otherwise dispose of any
Capital Stock (other than Qualified Subsidiary Stock) of any Wholly Owned
Restricted Subsidiary of Pegasus Satellite to any Person (other than
Pegasus Satellite or a Wholly Owned Restricted Subsidiary of Pegasus
Satellite), unless the transfer, conveyance, sale, lease or other
disposition is of all the Capital Stock of the Wholly Owned Restricted
Subsidiary; and
o will not permit any Wholly Owned Restricted Subsidiary of Pegasus
Satellite to issue any of its Equity Interests (other than Qualified
Subsidiary Stock and, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to
Pegasus Satellite or a Wholly Owned Restricted Subsidiary of Pegasus
Satellite.
Reports
The certificate of designation will provide that, whether or not required
by the SEC's rules and regulations, so long as any shares of new Pegasus
Satellite preferred stock are outstanding, Pegasus Satellite will furnish to
the holders of new Pegasus Satellite preferred stock:
o all quarterly and annual financial information that would be required to
be contained in a filing with the SEC on Forms 10-Q and 10-K if Pegasus
Satellite were required to file the Forms, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report on the annual
information by Pegasus Satellite's certified independent accountants; and
o all current reports that would be required to be filed with the SEC on
Form 8-K if Pegasus Satellite were required to file the reports.
In addition, whether or not required by the SEC's rules and regulations,
Pegasus Satellite will file a copy of all the above listed information and
reports with the SEC for public availability (unless the SEC will not accept
the filing) and make the information available to securities analysts and
prospective investors upon request. In addition to the financial information
required by the Exchange Act, each such quarterly and annual report will be
required to contain "summarized financial information" (as defined in Rule
1-02(aa)(1) of Regulation S-X under the Exchange Act) and will also include
Adjusted Operating Cash Flow for Pegasus Satellite and its Restricted
Subsidiaries, on a consolidated basis, where Adjusted Operating Cash Flow for
Pegasus Satellite is calculated in a manner consistent with the manner
described under the definition of "Adjusted Operating Cash Flow" contained in
this offering memorandum. The summarized financial information required under
the preceding sentence may, at Pegasus Satellite's election, be included in the
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footnotes to Pegasus Satellite's audited consolidated financial statements or
unaudited quarterly financial statements and will be as of the same dates and
for the same periods as the consolidated financial statements of Pegasus
Satellite and its Subsidiaries required under the Exchange Act.
Transfer and Exchange
A holder may transfer or exchange new Pegasus Satellite preferred stock in
accordance with the certificate of designation if the requirements of the
transfer agent for the transfer or exchange are met. The transfer agent may
require a holder, among other things, to furnish appropriate endorsements and
transfer documents and Pegasus Satellite may require a holder to pay any taxes
and fees required by law or permitted by the certificate of designation.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, and subject to
the Delaware General Corporation Law, the certificate of designation may be
amended with the consent of the holders of a majority of outstanding shares of
the new Pegasus Satellite preferred stock, and any existing Voting Rights
Triggering Event or compliance with any provision of the certificate of
designation may be waived with the consent of the holders of a majority of
outstanding shares of new Pegasus Satellite preferred stock.
Notwithstanding the foregoing, without the consent of each holder
affected, an amendment or waiver may not (with respect to any shares of new
Pegasus Satellite preferred stock held by a non-consenting holder):
o alter the voting rights with respect to the new Pegasus Satellite
preferred stock or reduce the number of shares of new Pegasus Satellite
preferred stock whose holders must consent to an amendment, supplement or
waiver;
o reduce the liquidation preference of or change the mandatory redemption
date of any share of new Pegasus Satellite preferred stock or alter the
provisions with respect to the redemption of the new Pegasus Satellite
preferred stock (other than provisions relating to the covenant described
above under the caption -- Change of Control);
o reduce the rate of or change the time for payment of dividends on any
share of new Pegasus Satellite preferred stock;
o waive the consequences of any failure to pay dividends on the new Pegasus
Satellite preferred stock;
o make any share of new Pegasus Satellite preferred stock payable in any
form other than that stated in the certificate of designation;
o make any change in the certificate of designation's provisions relating
to waivers of the rights of holders of new Pegasus Satellite preferred
stock to receive the liquidation preference and dividends on the new
Pegasus Satellite preferred stock,
o waive a redemption payment with respect to any share of new Pegasus
Satellite preferred stock (other than a payment required by the covenant
described above under the caption -- Change of Control); or
o make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of new
Pegasus Satellite preferred stock, Pegasus Satellite may (to the extent
permitted by Delaware law) amend or supplement the certificate of designation
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
new Pegasus Satellite preferred stock in addition to or in place of
certificated new Pegasus Satellite preferred stock or to make any change that
would provide any additional rights or benefits to the holders of new Pegasus
Satellite preferred stock or that does not affect adversely any holder's legal
rights under the certificate of designation.
Reissuance
Shares of the new Pegasus Satellite preferred stock redeemed or otherwise
acquired by Pegasus Satellite will assume the status of authorized but unissued
new Pegasus Satellite preferred stock and may thereafter be reissued in the
same manner as the other authorized but unissued new Pegasus Satellite
preferred stock, but not as Series A preferred stock.
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Book Entry; The Depository Trust Company
The new Pegasus Satellite preferred stock is being offered and sold to
qualified institutional buyers in reliance on Rule 144A, to a limited number of
accredited and unaccredited investors under Rule 506 and outside the U.S. in
compliance with Regulation S. Except as described below, the new Pegasus
preferred stock will be issued in registered, global form in minimum
denominations of $1,000 and integral multiples of $1,000 in excess of $1,000.
The new Pegasus Satellite preferred stock will be issued only if the conditions
described in The Exchange Offer and Consent Solicitation -- Conditions of the
Exchange Offer and Consent Solicitation have been satisfied.
The new Pegasus Satellite preferred stock initially will be represented by
one or more shares of new Pegasus Satellite preferred stock in registered
global form (collectively, the "Global Shares"). The Global Shares will be
deposited upon issuance with the transfer agent as custodian for The Depository
Trust Company, in New York, New York, and registered in the name of The
Depository Trust Company or its nominee, in each case for credit to an account
of a direct or indirect participant in The Depository Trust Company as
described below.
Except as described below, the Global Shares may be transferred, in whole
and not in part, only to another nominee of The Depository Trust Company or to
a successor of The Depository Trust Company or its nominee. Beneficial
interests in the Global Shares may not be exchanged for new Pegasus Satellite
preferred stock in certificated form except in the limited circumstances
described below. See -- Exchange of Global Shares for Certificated Shares.
Except in the limited circumstances described below, owners of beneficial
interests in the Global Shares will not be entitled to receive physical
delivery of new Pegasus Satellite preferred stock in certificated form.
The new Pegasus Satellite preferred stock (including beneficial interests
in the Global Shares) will be subject to certain restrictions on transfer and
will bear a restrictive legend as described under Notice to Investors. In
addition, transfers of beneficial interests in the Global Shares will be
subject to the applicable rules and procedures of The Depository Trust Company
and its direct or indirect participants, which may change from time to time.
Depository Procedures
The following description of the operations and procedures of The
Depository Trust Company are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. We take no
responsibility for these operations and procedures and urge investors to
contact the system or their participants directly to discuss these matters.
The Depository Trust Company has advised us that The Depository Trust
Company is a limited-purpose trust company created to hold securities for its
participating organizations (collectively, the "Participants") and to
facilitate the clearance and settlement of transactions in those securities
between Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers
(including the initial purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to The Depository Trust
Company's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of The Depository Trust Company only
through the Participants or the Indirect Participants. The ownership interests
in, and transfers of ownership interests in, each security held by or on behalf
of The Depository Trust Company are recorded on the records of the Participants
and Indirect Participants.
The Depository Trust Company has also advised us that, under procedures
established by it upon deposit of the Global Shares, The Depository Trust
Company will credit the accounts of Participants designated by the initial
purchasers with portions of the principal amount of the Global Shares; and (2)
ownership of these interests in the Global Shares will be shown on, and the
transfer of ownership of these interests will be effected only through, records
maintained by The Depository Trust Company -- with respect to the Participants
-- or by the Participants and the Indirect Participants -- with respect to
other owners of beneficial interest in the Global Shares.
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Investors in the Global Shares who are Participants in The Depository
Trust Company's system may hold their interests in the Global Shares directly
through The Depository Trust Company. Investors in the Global Shares who are
not Participants may hold their interests in the Global Shares indirectly
through organizations that are Participants in the system. All interests in a
Global Share are subject to the procedures and requirements of The Depository
Trust Company. The laws of some states require that certain persons take
physical delivery in definitive form of securities that they own. Consequently,
the ability to transfer beneficial interests in a Global Share to these persons
will be limited to that extent. Because The Depository Trust Company can act
only on behalf of Participants, which in turn act on behalf of Indirect
Participants, the ability of a person having beneficial interests in a Global
Share to pledge those interests to persons that do not participate in The
Depository Trust Company system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing
such interests.
Except as described below, owners of interests in the Global Shares will
not have new Pegasus Satellite preferred stock registered in their names, will
not receive physical delivery of new Pegasus Satellite preferred stock in
certificated form and will not be considered the registered owners or "Holders"
of the new Pegasus Satellite preferred stock under the Certificate of
Designation for any purpose.
Payments in respect of a Global Share registered in the name of The
Depository Trust Company or its nominee will be payable to The Depository Trust
Company in its capacity as the registered holder under the Certificate of
Designation. Under the terms of the Certificate of Designation, we and the
transfer agent will treat the persons in whose names the new Pegasus Satellite
preferred stock, including the Global Shares, is registered as the owners of
the new Pegasus Satellite preferred stock for the purpose of receiving payments
and for all other purposes. Consequently, neither we, the transfer agent, not
any agent of ours or the transfer agent has or will have any responsibility or
liability for:
o any aspect of The Depository Trust Company's records or any Participant's
or Indirect Participant's records relating to or payments made on account
of a beneficial ownership interest in the Global Shares or for
maintaining, supervising or reviewing any of The Depository Trust
Company's records or any Participant's or Indirect Participant's records
relating to the beneficial ownership interests in the Global Shares; or
o any other matter relating to the actions and practices of The Depository
Trust Company or any of its Participants or Indirect Participants.
The Depository Trust Company has advised us that its current practice,
upon receipt of any payment in respect of securities such as the new Pegasus
Satellite preferred stock, is to credit the accounts of the relevant
Participants with the payment on the payment date unless The Depository Trust
Company has reason to believe it will not receive payment on that payment date.
Each relevant Participant is credited with an amount proportionate to its
beneficial ownership of an interest in the principal amount of the relevant
security as shown on The Depository Trust Company's records. Payments by the
Participants and the Indirect Participants to the beneficial owners of new
Pegasus Satellite preferred stock will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of The Depository
Trust Company, the transfer agent or us. Neither we nor the transfer agent will
be liable for any delay by The Depository Trust Company or any of its
Participants in identifying the beneficial owners of the new Pegasus Satellite
preferred stock, and we and the transfer agent may rely conclusively on and
will be protected in relying on instructions from The Depository Trust Company
or its nominee for all purposes.
Subject to the transfer restrictions described under Notice to Investors,
transfers between Participants in The Depository Trust Company will be effected
in accordance with The Depository Trust Company's procedures, and will be
settled in same-day funds.
The Depository Trust Company has advised us that it will take any action
permitted to be taken by a holder of new Pegasus Satellite preferred stock only
at the direction of one or more Participants to whose account The Depository
Trust Company has credited the interests in the Global Shares and only in
respect of the portion of the aggregate liquidation value of the new Pegasus
Satellite preferred stock as to which the Participant or Participants has or
have given the direction.
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Exchange of Global Shares for Certificated Shares
A Global Share is exchangeable for definitive shares of new Pegasus
Satellite preferred stock in registered certificated form ("Certificated
Shares") if:
o The Depository Trust Company (a) notifies us that is unwilling or unable
to continue as depositary for the Global Shares and we fail to appoint a
successor depositary or (b) has ceased to be a clearing agency registered
under the Exchange Act; or
o we, at our option, notify the transfer agent in writing that we elect to
cause the issuance of the Certificated Shares.
In addition, beneficial interests in a Global Share may be exchanged for
Certificated Shares upon prior written notice given to the transfer agent by or
on behalf of The Depository Trust Company in accordance with the Certificate of
Designation. In all cases, Certificated Shares delivered in exchange for any
Global Share or beneficial interests in Global Shares will be registered in the
names, and issued in any approved denominations, requested by or on behalf of
the depositary (in accordance with its customary procedures) and will bear the
restrictive legend referred to in Notice to Investors, unless that legend is
not required by applicable law.
Same Day Settlement and Payment
We will make payments in respect of the new Pegasus Satellite preferred
stock represented by the global shares by wire transfer of immediately
available funds to the accounts specified by the Global Share holder. We will
make all payments with respect to Certificated Shares by wire transfer of
immediately available funds to the accounts specified by the holders of the
Certificated Shares or, if no account is specified or permitted to be
specified, by mailing a check to the holder's registered address. The new
Pegasus Satellite preferred stock represented by the Global Shares are expected
to be eligible to trade in the PORTAL market and to trade in The Depository
Trust Company's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in the new Pegasus Satellite preferred stock will,
therefore, be required by The Depository Trust Company to be settled in
immediately available funds. We expect that secondary trading in any
Certificated Shares will also be settled in immediately available funds.
Transfer and Exchange
A holder may transfer or exchange interests in the new Pegasus Satellite
preferred stock in accordance with procedures described in -- Book Entry; The
Depository Trust Company -- Depository Procedures. The transfer agent and the
trustee may require a holder, among other things, to furnish appropriate
endorsements and transfer documents and we may require a holder to pay any
taxes and fees required by law or permitted by the Certificate of Designation.
We are not required to transfer or exchange any new Pegasus Satellite preferred
stock selected for redemption. Also, we are not required to transfer or
exchange any new Pegasus Satellite preferred stock for a period of 15 days
before a selection of new Pegasus Satellite preferred stock to be redeemed.
The registered holder of new Pegasus Satellite preferred stock will be
treated as the owner of it for all purposes.
Description of Exchange Notes
General
The exchange notes will, if and when issued, be issued under an indenture
between Pegasus Satellite and First Union National Bank, as trustee. There are
currently no outstanding Pegasus Communications exchange notes. The terms of
the exchange notes include those stated in the exchange note indenture and
those made part of the exchange note indenture by reference to the Trust
Indenture Act of 1939, as amended. The exchange notes will be subject to all of
those terms, and holders of exchange notes are referred to the exchange note
indenture and the Trust Indenture Act for a statement of those terms. The
following summary of certain provisions of the exchange note indenture does not
purport to be complete and is qualified in its entirety by reference to the
exchange note indenture. The definitions of certain terms used in the exchange
note indenture and in the following summary are provided below under -- Certain
Definitions.
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The exchange notes will be subordinated in right of payment to all of
Pegasus Satellite's existing and future Senior Debt. In addition, the exchange
notes effectively will be subordinated to all Indebtedness of Pegasus
Satellite's Subsidiaries.
Substantially all of Pegasus Satellite's operations are conducted through
its Subsidiaries and, therefore, Pegasus Satellite is dependent upon the cash
flow of its Subsidiaries to meet its obligations, including its obligations
under the exchange notes. Any right of Pegasus Satellite to receive assets of
any of its Subsidiaries will be effectively subordinated to the claims of that
Subsidiary's creditors. On a pro forma basis, as of September 30, 2000, Pegasus
Satellite's aggregate Indebtedness and other obligations of Pegasus Satellite's
Subsidiaries that effectively would rank senior in right of payment to Pegasus
Satellite's obligations under the exchange notes were approximately $1.3
billion. See Risk Factors -- Risk of Investing in the New Pegasus Satellite
Preferred Stock and Exchange Notes -- Our Substantial Indebtedness Could
Adversely Affect Your New Investment and -- Your Right to Receive Interest on
the New Pegasus Satellite Exchange Notes is Junior to Our Existing and Future
Indebtedness and to All Liabilities of Our Subsidiaries.
Principal, Maturity and Interest
The exchange notes will be limited in aggregate principal amount to the
amount of the liquidation preference of the new Pegasus Satellite for which
they are exchanged, plus additional notes as necessary for the payment of
interest in kind on the exchange notes. The exchange notes will mature on
January 1, 2007. Interest on the exchange notes will accrue at the rate of
12 3/4% per annum and will be payable semi-annually in arrears on each January 1
and July 1 to holders of record on the immediately preceding December 15 and
June 15, respectively. Interest will be payable in cash, except that on each
interest payment date occurring on or before January 1, 2002, interest may be
paid, at Pegasus Satellite's option, by the issuance of additional exchange
notes having an aggregate principal amount equal to the amount of the interest.
The issuance of the additional exchange notes will constitute "payment" of the
related interest for all purposes of the exchange note indenture. Interest on
the exchange notes will accrue from the most recent date to which interest has
been paid or, if no interest has been paid, from the date of original issuance.
Interest will be computed on the basis of a 360-day year consisting of twelve
30-day months. The exchange notes will be issuable in principal amounts of
$1,000 and integral multiples of $1,000 to the extent possible, and will also
be issuable in principal amounts less than $1,000 so that each holder of new
Pegasus Satellite preferred stock will receive certificates representing the
entire amount of exchange notes to which the holder's shares of new Pegasus
Satellite preferred stock entitle the holder. However, Pegasus Satellite may
pay cash in lieu of an exchange note in principal amount less than $1,000.
Subordination
The payment of principal of, premium, if any, and interest on the exchange
notes will be subordinated in right of payment, as provided in the exchange
note indenture, to the prior payment in full of all Senior Debt, whether
outstanding on the date of the exchange note indenture or incurred afterward.
If any distribution is made to Pegasus Satellite's creditors in a
liquidation, dissolution, bankruptcy, reorganization, insolvency, receivership
or similar proceeding relating to Pegasus Satellite or its property, or in an
assignment for the benefit of creditors or any marshalling of Pegasus
Satellite's assets and liabilities, the holders of Senior Debt will be entitled
to receive payment in full of all Obligations due in respect of Senior Debt,
including interest after the commencement of any of those proceedings at the
rate specified in the applicable Senior Debt, whether or not an allowable
claim, before the holders will be entitled to receive any payment with respect
to the exchange notes. Further, until all Obligations with respect to Senior
Debt are paid in full, any distribution to which the holders would be entitled
will be made to the holders of Senior Debt. In either case, however, holders
may receive:
o securities that are subordinated at least to the same extent as the
exchange notes to Senior Debt and any securities issued in exchange for
Senior Debt; and
o payments made from the trust described below under -- Legal Defeasance
and Covenant Defeasance.
Pegasus Satellite also may not make any payment upon or in respect of the
exchange notes (except as described above), if:
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o a default in the payment of the principal of, premium, if any, or
interest on Designated Senior Debt occurs and is continuing; or
o any other default occurs and is continuing with respect to Designated
Senior Debt that permits holders of Designated Senior Debt as to which
the default relates to accelerate its maturity and the trustee receives a
notice of the default (a "Payment Blockage Notice") from Pegasus
Satellite or the holders of any Designated Senior Debt.
Payments on the exchange notes may and are required to be resumed:
o in the case of a payment default, upon the date on which the default is
cured or waived; and
o in the case of a nonpayment default, the earlier of the date on which the
nonpayment default is cured or waived or 179 days after the date on which
the applicable Payment Blockage Notice is received, unless the maturity
of any Designated Senior Debt has been accelerated.
No new period of payment blockage may be commenced unless and until:
o 360 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice; and
o all scheduled payments of principal, premium, if any, interest on the
exchange notes that have come due have been paid in full.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the exchange note trustee can be
made, the basis for a subsequent Payment Blockage Notice.
The exchange note indenture will further require that Pegasus Satellite
promptly notify the holders of Senior Debt if payment of the exchange notes is
accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, holders may recover less ratably than creditors
of Pegasus Satellite who are holders of Senior Debt or other creditors of
Pegasus Satellite who are not subordinated to holders of Senior Debt. As of
September 30, 2000, Pegasus Satellite and its Subsidiaries had indebtedness and
liabilities of approximately $1.3 billion that were senior in right of payment
to the exchange notes. The exchange note indenture will limit, subject to
certain financial tests, the amount of additional Indebtedness, including
Senior Debt, that Pegasus Satellite and its Subsidiaries may incur. See --
Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock.
Optional Redemption
The exchange notes will not be redeemable at Pegasus Satellite's option
before January 1, 2002. The exchange notes may be redeemed, in whole or in
part, at Pegasus Satellite's option on or after January 1, 2002, at the
redemption prices specified below (expressed as percentages of the principal
amount of the exchange notes), in each case, together with accrued and unpaid
interest, if any, on the exchange notes to the date of redemption, upon not
less than 30 nor more than 60 days' notice, if redeemed during the twelve-month
period beginning on January 1 of the years indicated below:
Redemption
Year Rate
---- ----
2002 ................................. 106.375%
2003 ................................. 104.250%
2004 ................................. 102.125%
2005 and thereafter .................. 100.000%
Selection and Notice
If less than all of the exchange notes are to be redeemed at any time,
selection of exchange notes for redemption will be made by the exchange note
trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the exchange notes are listed, or, if the
exchange notes are not so listed, on a pro rata basis, by lot or by the method
the exchange note trustee deems fair and appropriate.
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Notices of redemption will be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each holder of exchange notes
to be redeemed at its registered address. If any exchange note is to be
redeemed in part only, the notice of redemption that relates to the exchange
note will state the portion of the principal amount of the exchange note to be
redeemed. A new exchange note in principal amount equal to the unredeemed
portion of the exchange note will be issued in the name of the holder of the
exchange note upon cancellation of the original exchange note. On and after the
redemption date, interest ceases to accrue on exchange notes or portions of
them called for redemption.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each holder of exchange notes
will have the right to require Pegasus Satellite to repurchase all or any part
of the holder's exchange notes under the offer described below at an offer
price in cash equal to 101% of the aggregate principal amount of the exchange
notes plus accrued and unpaid interest, if any, on the exchange notes to the
date of purchase, except that a holder requiring redemption of less than all of
its exchange notes cannot exercise the right for less than $1,000 principal
amount. Within ten days following any Change of Control, Pegasus Satellite will
mail a notice to each holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase exchange notes
under the procedures required by the exchange note indenture and described in
the notice. Pegasus Satellite will comply with the requirements of Rule l4e-1
under the Exchange Act and any other securities laws and regulations under the
Exchange Act to the extent those laws and regulations are applicable in
connection with the repurchase of the exchange notes as a result of a Change of
Control.
On the Change of Control payment date, Pegasus Satellite will, to the
extent lawful:
o accept for payment all exchange notes or portions of exchange notes
properly tendered under the Change of Control Offer;
o deposit with the paying agent an amount equal to the Change of Control
payment in respect of all exchange notes or portions of exchange notes so
tendered; and
o deliver or cause to be delivered to the exchange note trustee the
exchange notes so accepted together with an officers' certificate stating
the aggregate principal amount of exchange notes or portions of exchange
notes being purchased by Pegasus Satellite.
The paying agent will promptly mail to each holder of exchange notes so
tendered the Change of Control payment for the exchange notes, and the exchange
note trustee will promptly authenticate and mail, or cause to be transferred by
book entry, to each holder a new exchange note equal in principal amount to any
unpurchased portion of the exchange notes surrendered, if any. Pegasus
Satellite will publicly announce the results of the Change of Control offer on
or as soon as practicable after the Change of Control payment date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the exchange note indenture are
applicable. Except as described above with respect to a Change of Control, the
exchange note indenture does not contain provisions that permit the holders of
the exchange notes to require that Pegasus Satellite repurchase or redeem the
exchange notes in the event of a takeover, recapitalization or similar
transaction.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of Pegasus Satellite's assets of Pegasus Satellite and those of its
Restricted Subsidiaries taken as a whole. Although there is a developing body
of case law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, a
holder's ability to require Pegasus Satellite to repurchase the exchange notes
as a result of a sale, lease, transfer, conveyance or other disposition of less
than all of Pegasus Satellite's assets and those of its Restricted Subsidiaries
taken as a whole to another Person or group may be uncertain.
The Pegasus Media & Communications credit facility, the Golden Sky credit
facility, the Pegasus Media & Communications notes, the Golden Sky DBS notes
and the Golden Sky Systems notes -- each as described in Description of Certain
Indebtedness -- restrict most of Pegasus Satellite's current Subsidiaries from
paying
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any dividends or making any other distribution to Pegasus Satellite. The 1999
notes, the 1998 notes and the 1997 notes -- each as described in Description of
Certain Indebtedness -- also restrict Pegasus Satellite's ability to purchase
the new Pegasus Satellite exchange notes. Thus, if a Change of Control occurs,
Pegasus Satellite could seek the consent of its Subsidiaries' lenders and of
its noteholders to the purchase of the exchange notes or could attempt to
refinance the borrowings that contain the restrictions. If Pegasus Satellite
does not obtain the consent or repay the borrowings, Pegasus Satellite will
likely not have the financial resources to purchase exchange notes and the
Subsidiaries will be restricted in paying dividends to Pegasus Satellite for
the purchase. In any event, there can be no assurance that Pegasus Satellite's
Subsidiaries will have the resources available to make any dividend payment or
other distribution. In addition, it is expected that the terms of any Senior
Debt incurred by Pegasus Satellite would restrict Pegasus Satellite's ability
to make a Change of Control offer or Change of Control payment. In any such
case, Pegasus Satellite's failure to make a Change of Control offer when
required or to purchase tendered exchange notes would constitute an Event of
Default under the exchange note indenture. See Risk Factors -- Risk of
Investing in the New Pegasus Satellite Preferred Stock and Exchange Notes -- If
a Change of Control Occurs, We May Be Unable to Refinance Our Publicly Held
Debt, Bank Debt and Preferred Stock. The exchange note indenture will provide
that, before complying with the provisions of this covenant, but in any event
within 90 days following a Change of Control, Pegasus Satellite will either
repay all outstanding Senior Debt or obtain the requisite consents, if any,
under all agreements covering outstanding Senior Debt to permit the repurchase
of exchange notes as required by this covenant.
Any future credit agreements or other agreements relating to Indebtedness
to which Pegasus Satellite becomes a party may prohibit Pegasus Satellite from
purchasing any exchange note before its maturity, and may also provide that
certain Change of Control events with respect to Pegasus Satellite would
constitute a default under the credit agreements or other agreements. If a
Change of Control occurs at a time when Pegasus Satellite is prohibited from
purchasing exchange notes, Pegasus Satellite could seek the consent of its
lenders to the purchase of exchange notes or could attempt to refinance the
borrowings that contain the prohibition. If Pegasus Satellite does not obtain
that consent or repay those borrowings, Pegasus Satellite will remain
prohibited from purchasing exchange notes. In that case, Pegasus Satellite's
failure to purchase tendered exchange notes would constitute an Event of
Default under the exchange note indenture. In those circumstances, the
subordination provisions in the exchange note indenture would likely restrict
payments to the holders of exchange notes. See Risk Factors -- Risk of
Investing in the New Pegasus Satellite Preferred Stock and Exchange Notes --
Your Right to Receive Interest on the New Pegasus Satellite Exchange Notes is
Junior to Our Existing and Future Indebtedness and to All Liabilities of Our
Subsidiaries.
Pegasus Satellite will not be required to make a Change of Control offer
upon a Change of Control if a third party makes the Change of Control offer in
the manner, at the times and otherwise in compliance with the requirements
provided in the exchange note indenture applicable to a Change of Control Offer
made by Pegasus Satellite and purchases all exchange notes validly tendered and
not withdrawn under the Change of Control offer.
Asset Sales
The exchange note indenture will provide that Pegasus Satellite will not,
and will not permit any of its Restricted Subsidiaries to, engage in an Asset
Sale unless:
o Pegasus Satellite (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of the Asset Sale at least equal to
the fair value (evidenced by a resolution of the board of directors set
forth in an officers' certificate delivered to the exchange note trustee)
of the assets or Equity Interests issued or sold or otherwise disposed
of; and
o at least 85% of the consideration therefor received by Pegasus Satellite
or the Restricted Subsidiary is in the form of cash;
provided that the amount of (x) any liabilities (as shown on Pegasus
Satellite's or the Restricted Subsidiary's most recent balance sheet or in the
notes to the balance sheet), of Pegasus Satellite or any Restricted Subsidiary
(other than liabilities that are by their terms subordinated to the exchange
notes or any guarantee of the exchange notes) that are assumed by the
transferee of any of those assets and (y) any notes or other obligations
received by Pegasus Satellite or any such Restricted Subsidiary from the
transferee that are
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immediately converted by Pegasus Satellite or the Restricted Subsidiary into
cash (to the extent of the cash received), will be deemed to be cash for
purposes of this provision. Notwithstanding the foregoing, Pegasus Satellite
and its Restricted Subsidiaries may engage in Asset Swaps (which will not be
deemed to be Asset Sales for purposes of this covenant); provided that,
immediately after giving effect to the Asset Swap, Pegasus Satellite would be
permitted to incur at least $1.00 of additional Indebtedness under the
Indebtedness to Adjusted Operating Cash Flow Ratio set forth in the first
paragraph of the covenant described under the caption -- Certain Covenants --
Incurrence of Indebtedness and Issuance of Preferred Stock.
Within 180 days after the receipt of any Net Proceeds from an Asset Sale,
Pegasus Satellite or the applicable Restricted Subsidiary may, at its option,
apply the Net Proceeds:
o to permanently reduce Indebtedness outstanding under any Senior Debt (and
to permanently reduce the commitments under the Indebtedness by a
corresponding amount);
o to permanently reduce Indebtedness of any of Pegasus Satellite's
Restricted Subsidiaries; or
o to the acquisition of another business, the making of a capital
expenditure or the acquisition of other long-term assets, in each case,
in a Permitted Business; provided, however, that if Pegasus Satellite or
the applicable Restricted Subsidiary enters into a binding agreement to
reinvest the Net Proceeds in accordance with this clause within 180 days
after the receipt of the Net Proceeds, the provisions of this covenant
will be satisfied so long as the binding agreement is consummated within
one year after the receipt of the Net Proceeds.
If any such legally binding agreement to reinvest the Net Proceeds is
terminated, then Pegasus Satellite may, within 90 days of the termination, or
within 180 days of the Asset Sale, whichever is later, apply the Net Proceeds
as provided the first three clauses above (without regard to the proviso
contained in the third clause above). Pending the final application of the Net
Proceeds, Pegasus Satellite or the applicable Restricted Subsidiary may
temporarily reduce Indebtedness under any Bank Facility or otherwise invest the
Net Proceeds in any manner that is not prohibited by the exchange note
indenture. A reduction of Indebtedness under any Bank Facility is not
"permanent" for purposes of the first clause above if an amount equal to the
amount of the reduction is reborrowed and used to make an acquisition described
in the third clause above within the time period specified in this covenant.
Any Net Proceeds from Asset Sales that are not applied or invested as provided
in the three clauses above will be deemed to constitute "Excess Proceeds."
Within five days of each date on which the aggregate amount of Excess Proceeds
exceeds $10.0 million, Pegasus Satellite will be required to make an offer to
all holders of exchange notes and the holders of Pari Passu Debt, to the extent
required by the terms of the debt (an "Asset Sale Offer"), to purchase the
maximum principal amount of exchange notes and Pari Passu Debt that may be
purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus, in each case, accrued and
unpaid interest thereon, if any, to the date of purchase, in accordance with
the procedures provided in the exchange note indenture or the agreements
governing Pari Passu Debt, as applicable; provided, however, that Pegasus
Satellite may only purchase Pari Passu Debt in an Asset Sale Offer that was
issued under an indenture having a provision substantially similar to the Asset
Sale Offer provision contained in the exchange note indenture. To the extent
that the aggregate amount of exchange notes and Pari Passu Debt tendered in an
Asset Sale Offer is less than the Excess Proceeds, Pegasus Satellite may use
any remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of exchange notes and Pari Passu Debt surrendered exceeds the
amount of Excess Proceeds, the exchange note trustee will select the exchange
notes and Pari Passu Debt to be purchased on a pro rata basis, based upon the
principal amount thereof surrendered in the Asset Sale Offer. Upon completion
of the offer to purchase, the amount of Excess Proceeds will be reset at zero.
Certain Covenants
Restricted Payments
The exchange note indenture will provide that Pegasus Satellite will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly:
o declare or pay any dividend or make any payment or distribution on
account of Pegasus Satellite's Equity Interests (including, without
limitation, any payment in connection with any merger or
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consolidation involving Pegasus Satellite) or on account of any Qualified
Subsidiary Stock or make any payment or distribution (other than
compensation paid to, or reimbursement of expenses of, employees in the
ordinary course of business) to or for the benefit of the direct or
indirect holders of Pegasus Satellite's Equity Interests or the direct or
indirect holders of any Qualified Subsidiary Stock in their capacities as
such (other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of Pegasus Satellite);
o purchase, redeem or otherwise acquire or retire for value any Equity
Interests of Pegasus Satellite or any direct or indirect parent of Pegasus
Satellite or other Affiliate of Pegasus Satellite (other than any such
Equity Interests owned by Pegasus Satellite or any of its Restricted
Subsidiaries and other than the acquisition of Equity Interests in
Subsidiaries of Pegasus Satellite solely in exchange for Equity Interests
(other than Disqualified Stock) of Pegasus Satellite);
o make any payment on, or purchase, redeem, defease or otherwise acquire or
retire for value any Indebtedness that is subordinated to the exchange
notes, except at final maturity;
o make any loan, advance, capital contribution to or other investment in,
or guarantee any obligation of, any Affiliate of Pegasus Satellite other
than a Permitted Investment;
o forgive any loan or advance to or other obligation of any Affiliate of
Pegasus Satellite (other than a loan or advance to or other obligation of
a Wholly Owned Restricted Subsidiary) which at the time it was made was
not a Restricted Payment that was permitted to be made; or
o make any Restricted Investment (collectively, all payments and other
actions described in the first five clauses above, "Restricted Payments"),
unless, at the time of and immediately after giving effect to the
Restricted Payment:
o no Default or Event of Default has occurred and is continuing or would
occur as a consequence thereof, and
o Pegasus Satellite would be permitted to incur $1.00 of additional
Indebtedness under the Indebtedness to Adjusted Operating Cash Flow Ratio
described in the first paragraph of the covenant described under the
caption -- Incurrence of Indebtedness and Issuance of Preferred Stock; and
o the Restricted Payment, together with the aggregate of all other
Restricted Payments made by Pegasus Satellite and its Restricted
Subsidiaries after January 27, 1997 (excluding Restricted Payments
permitted by the third clause of the next succeeding paragraph), is less
than the sum of:
-- an amount equal to the Cumulative Operating Cash Flow for the period
(taken as one accounting period) from the beginning of the first full
month commencing after January 27, 1997 to the end of Pegasus
Satellite's most recently ended fiscal quarter for which internal
financial statements are available at the time of the Restricted
Payment (the "Basket Period") less 1.4 times Pegasus Satellite's
Cumulative Total Interest Expense for the Basket Period, plus
-- 100% of the aggregate net cash proceeds and, in the case of proceeds
consisting of assets constituting or used in a Permitted Business, 100%
of the fair market value of the aggregate net proceeds other than cash
received since January 27, 1997 (1) by Pegasus Satellite as capital
contributions to Pegasus Satellite (other than from a Subsidiary) or
(2) from the sale by Pegasus Satellite (other than to a Subsidiary) of
its Equity Interests (other than Disqualified Stock), plus
-- without duplication, to the extent that any Restricted Investment that
was made after January 27, 1997 is sold for cash or otherwise
liquidated or repaid for cash, the Net Proceeds received by Pegasus
Satellite or a Wholly Owned Restricted Subsidiary of Pegasus Satellite
upon the sale of the Restricted Investment, plus
-- without duplication, to the extent that any Unrestricted Subsidiary is
designated by Pegasus Satellite as a Restricted Subsidiary, an amount
equal to the fair market value of the Investment at the time of the
designation, plus
-- $2.5 million.
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The foregoing provisions will not prohibit:
o the payment of any dividend within 60 days after the date of declaration
of the dividend, if at that date the payment would have complied with the
provisions of the exchange note indenture;
o the redemption, repurchase, retirement or other acquisition of any Equity
Interests of Pegasus Satellite in exchange for, or out of the net proceeds
of, the substantially concurrent sale (other than to a Subsidiary of
Pegasus Satellite) of other Equity Interests of Pegasus Satellite (other
than any Disqualified Stock); provided that the amount of any such net
proceeds that are utilized for the redemption, repurchase, retirement or
other acquisition will be excluded from net cash proceeds referred to in
the second clause in the calculation of the sum to be compared to the sum
of the Restricted Payments, above;
o the defeasance, redemption or repurchase of Indebtedness with the
proceeds of a substantially concurrent issuance of Permitted Refinancing
Debt in accordance with the provisions of the covenant described under the
caption -- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock;
o Pegasus Satellite's payment of advances under the Split Dollar Agreement
in an amount not to exceed $250,000 in any four-quarter period;
o the repurchase or redemption from employees of Pegasus Satellite and its
Subsidiaries (other than the Principal) of Pegasus Satellite's Capital
Stock in an amount not to exceed an aggregate of $3.0 million; and
o cash payments made in lieu of the issuance of additional exchange notes
having a face amount less than $1,000 and any cash payments representing
accrued and unpaid interest in respect of the exchange notes, not to
exceed $100,000 in the aggregate in any fiscal year.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) proposed to
be transferred by Pegasus Satellite or the applicable Restricted Subsidiary, as
the case may be, net of any liabilities proposed to be assumed by the
transferee and novated under a written agreement releasing Pegasus Satellite
and its Subsidiaries. Not later than the date of making any Restricted Payment,
Pegasus Satellite will deliver to the exchange note trustee an officers'
certificate stating that the Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this covenant were computed,
which calculations may be based upon Pegasus Satellite's latest available
financial statements.
The board of directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if the designation would not cause a Default or an
Event of Default. For purposes of making this determination, all outstanding
Investments by Pegasus Satellite and its Restricted Subsidiaries in the
Subsidiary so designated will be deemed to be Restricted Payments at the time
of the designation (valued as provided below) and will reduce the amount
available for Restricted Payments under the first paragraph of this covenant.
All such outstanding Investments will be deemed to constitute Investments in an
amount equal to the fair market value of the Investments at the time of the
designation. The designation will be permitted only if the Restricted Payment
would be permitted at that time and if the Restricted Subsidiary would
otherwise meet the definition of an Unrestricted Subsidiary.
Incurrence of Indebtedness and Issuance of Preferred Stock
The exchange note indenture will provide that Pegasus Satellite may not,
and may not permit any of its Subsidiaries to, directly or indirectly, create,
incur, issue, assume, guarantee or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and may not issue any Disqualified Stock
and will not permit any of its Subsidiaries to issue any shares of preferred
stock (other than Qualified Subsidiary Stock), unless, in each case, Pegasus
Satellite's Indebtedness to Adjusted Operating Cash Flow Ratio as of the date
on which the Indebtedness is incurred or the Disqualified Stock or preferred
stock is issued would have been 7.0 to 1 or less, determined on a pro forma
basis (including a pro forma application of the net proceeds from the
issuance), as if the additional Indebtedness had been incurred, or the
Disqualified Stock or preferred stock had been issued, as the case may be, as
of the date of the calculation:
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The foregoing provisions will not apply to:
o Pegasus Satellite's Unrestricted Subsidiaries' incurrence of Non-Recourse
Debt or the issuance by those Unrestricted Subsidiaries of preferred
stock; provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary or any such preferred
stock becomes preferred stock (other than Qualified Subsidiary Stock) of a
Restricted Subsidiary, as the case may be, the event will be deemed to
constitute an Incurrence of Indebtedness by or an issuance of preferred
stock (other than Qualified Subsidiary Stock) of, as the case may be, a
Restricted Subsidiary of Pegasus Satellite;
o Pegasus Satellite's incurrence or any of its Restricted Subsidiaries of
Indebtedness under one or more Bank Facilities, so long as the aggregate
principal amount at any time outstanding of Indebtedness incurred under
this clause does not exceed $50.0 million;
o Pegasus Satellite's or any of its Restricted Subsidiaries' incurrence of
the Existing Indebtedness;
o Indebtedness under the exchange notes (including any exchange notes
issued to pay interest on outstanding exchange notes);
o Pegasus Satellite's or any of its Restricted Subsidiaries' incurrence of
intercompany Indebtedness between or among Pegasus Satellite and any of
its Wholly Owned Restricted Subsidiaries; provided, however, that:
-- if Pegasus Satellite is the obligor on the Indebtedness, the
Indebtedness is expressly subordinated to the prior payment in full in
cash of all obligations with respect to the exchange notes; and
-- (1) any subsequent issuance or transfer of Equity Interests that
result in any of the Indebtedness being held by a Person other than
Pegasus Satellite or a Wholly Owned Restricted Subsidiary of Pegasus
Satellite and (2) any sale or other transfer of the Indebtedness to a
Person that is not either Pegasus Satellite or a Wholly Owned
Restricted Subsidiary of Pegasus Satellite will be deemed, in each
case, to constitute an Incurrence of the Indebtedness by Pegasus
Satellite or the Restricted Subsidiary, as the case may be;
o Pegasus Satellite's or any of its Restricted Subsidiaries' incurrence of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in the business of Pegasus Satellite or the
Restricted Subsidiary, in an aggregate principal amount not to exceed $5.0
million at any time outstanding;
o Pegasus Satellite's or any of its Restricted Subsidiaries' incurrence of
Permitted Refinancing Debt in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the exchange note indenture to be
incurred; and
o Pegasus Satellite's or any of its Restricted Subsidiaries' incurrence of
Indebtedness (in addition to Indebtedness permitted by any other clause of
this paragraph) in an aggregate principal amount at any time outstanding
not to exceed $5.0 million.
If an item of Indebtedness is permitted to be incurred on the basis of the
first paragraph of this covenant and also on the basis of one or more of the
first eight clauses above, or is permitted to be incurred on the basis of two
or more of the first eight clauses above, then Pegasus Satellite will classify
the basis on which the item of Indebtedness is incurred. If an item of
Indebtedness is repaid with the proceeds of an Incurrence of other Indebtedness
(whether from the same of a different creditor), Pegasus Satellite may classify
the other Indebtedness as having been incurred on the same basis as the
Indebtedness being repaid or on a different basis permitted under this
covenant. For purposes of this paragraph, "Indebtedness" includes Disqualified
Stock and preferred stock of Subsidiaries. Accrual of interest and the
accretion of accreted value will not be deemed to be an Incurrence of
Indebtedness for purposes of this covenant.
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Liens
The exchange note indenture will provide that Pegasus Satellite will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly create, incur, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired, or any income or profits from those assets, or
assign or convey any right to receive income from those assets, except
Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The exchange note indenture will provide that Pegasus Satellite will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any Restricted Subsidiary to:
o (1) pay dividends or make any other distributions to Pegasus Satellite or
any of its Restricted Subsidiaries (a) on its Capital Stock or (b) with
respect to any other interest or participation in, or measured by, its
profits, or (2) pay any Indebtedness owed to Pegasus Satellite or any of
its Restricted Subsidiaries;
o make loans or advances to Pegasus Satellite or any of its Restricted
Subsidiaries; or
o transfer any of its properties or assets to Pegasus Satellite or any of
its Restricted Subsidiaries, except for encumbrances or restrictions
existing under or by reason of:
-- the terms of any Indebtedness permitted by the exchange note indenture
to be incurred by any Subsidiary of Pegasus Satellite;
-- Existing Indebtedness as in effect on January 27, 1997;
-- the exchange note indenture and the exchange notes;
-- applicable law;
-- any instrument governing Indebtedness or Capital Stock of a Person
acquired by Pegasus Satellite or any of its Restricted Subsidiaries as
in effect at the time of the acquisition (except to the extent the
Indebtedness was incurred in connection with or in contemplation of the
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the
Person and its Subsidiaries, or the property or assets of the Person
and its Subsidiaries, so acquired; or
-- by reason of customary non-assignment provisions in leases and other
contracts entered into in the ordinary course of business and
consistent with past practices.
Merger, Consolidation or Sale of Assets
The exchange note indenture will provide that Pegasus Satellite may not
consolidate or merge with or into (whether or not Pegasus Satellite is the
surviving corporation), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions, to another corporation, Person or entity unless:
o Pegasus Satellite is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other
than Pegasus Satellite) or to which the sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia;
o the entity or Person formed by or surviving the consolidation or merger
(if other than Pegasus Satellite) or the entity or Person to which the
sale, assignment, transfer, lease, conveyance or other disposition shall
have been made assumes all the Obligations of Pegasus Satellite under the
exchange notes and the exchange note indenture under a supplemental
indenture in a form reasonably satisfactory to the exchange note trustee;
o immediately after the transaction no Default or Event of Default exists;
and
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o Pegasus Satellite or the entity or Person formed by or surviving the
consolidation or merger (if other than Pegasus Satellite), or to which the
sale, assignment, transfer, lease, conveyance or other disposition shall
have been made will, at the time of the transaction and after giving pro
forma effect thereto as if the transaction had occurred at the beginning
of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness under the Indebtedness to Adjusted
Operating Cash Flow Ratio set forth in the first paragraph of the covenant
described under the caption -- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock.
Transactions with Affiliates
The exchange note indenture will provide that Pegasus Satellite may not,
and may not permit any of its Restricted Subsidiaries to, sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless:
o the Affiliate Transaction is on terms that are no less favorable to
Pegasus Satellite or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by Pegasus Satellite
or the Restricted Subsidiary with an unrelated Person; and
o Pegasus Satellite delivers to the holders:
-- with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the board of directors set forth in an
officers' certificate certifying that the Affiliate Transaction
complies with the first clause above and that the Affiliate Transaction
has been approved by a majority of the disinterested members of the
board of directors and a majority of the Independent Directors; and
-- with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, an opinion as to the fairness to Pegasus Satellite or the
Restricted Subsidiary of the Affiliate Transaction from a financial
point of view issued by an investment banking firm of national
standing;
provided that Pegasus Satellite may not, and will not permit any of its
Restricted Subsidiaries to, engage in any Affiliate Transaction involving
aggregate consideration in excess of $1.0 million at any time that there is not
at least one Independent Director on Pegasus Satellite's board of directors;
and provided further that:
o any employment agreement entered into by Pegasus Satellite or any of its
Restricted Subsidiaries in the ordinary course of business and consistent
with the past practice of Pegasus Satellite or the Restricted Subsidiary;
o transactions between or among Pegasus Satellite and/or its Restricted
Subsidiaries;
o the payment of any dividend on, or the issuance of additional exchange
notes in exchange for, the Series A Preferred Stock, provided that the
dividends are paid on a pro rata basis and the additional exchange notes
are issued in accordance with the certificate of designation; and
o transactions permitted by the provisions of the covenant described under
the caption -- Restricted Payments, in each case, will not be deemed
Affiliate Transactions.
No Senior Subordinated Debt
The exchange note indenture will provide that, notwithstanding the
provisions of the covenant described under the caption -- Incurrence of
Indebtedness and Issuance of Preferred Stock, Pegasus Satellite will not incur,
create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Debt and senior in any respect in right of payment to the exchange notes.
Limitation on Issuances and Sales of Capital Stock of Wholly Owned
Restricted Subsidiaries
The exchange note indenture will provide that Pegasus Satellite:
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o will not, and will not permit any Wholly Owned Restricted Subsidiary of
Pegasus Satellite to, transfer, convey, sell or otherwise dispose of any
Capital Stock (other than Qualified Subsidiary Stock) of any Wholly Owned
Restricted Subsidiary of Pegasus Satellite to any Person (other than
Pegasus Satellite or a Wholly Owned Restricted Subsidiary of Pegasus
Satellite), unless:
-- the transfer, conveyance, sale, lease or other disposition is of all
the Capital Stock of the Wholly Owned Restricted Subsidiary; and
-- the cash Net Proceeds from the transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant described
under the above caption -- Repurchase at the Option of Holders -- Asset
Sales; and
o will not permit any Wholly Owned Restricted Subsidiary of Pegasus
Satellite to issue any of its Equity Interests (other than Qualified
Subsidiary Stock and, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to
Pegasus Satellite or a Wholly Owned Restricted Subsidiary of Pegasus
Satellite.
Reports
The exchange note indenture will provide that, whether or not required by
the SEC's rules and regulations, so long as any exchange notes are outstanding,
Pegasus Satellite will furnish to the holders of exchange notes:
o all quarterly and annual financial information that would be required to
be contained in a filing with the SEC on Forms 10-Q and 10-K if Pegasus
Satellite were required to file the Forms, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report on the annual
information by Pegasus Satellite's certified independent accountants; and
o all current reports that would be required to be filed with the SEC on
Form 8-K if Pegasus Satellite were required to file the reports.
In addition, whether or not required by the SEC's rules and regulations,
Pegasus Satellite will file a copy of all such information and reports with the
SEC for public availability (unless the SEC will not accept the filing) and
make the information available to securities analysts and prospective investors
upon request. In addition to the financial information required by the Exchange
Act, each such quarterly and annual report will be required to contain
"summarized financial information" (as defined in Rule 1-02(aa)(1) of
Regulation S-X under the Exchange Act) and will also include Adjusted Operating
Cash Flow for Pegasus Satellite and its Restricted Subsidiaries, on a
consolidated basis, where Adjusted Operating Cash Flow for Pegasus Satellite is
calculated in a manner consistent with the manner described under the
definition of "Adjusted Operating Cash Flow" contained in this offering
memorandum. The summarized financial information required under the preceding
sentence may, at the election of Pegasus Satellite, be included in the
footnotes to audited consolidated financial statements or unaudited quarterly
financial statements of Pegasus Satellite and will be as of the same dates and
for the same periods as the consolidated financial statements of Pegasus
Satellite and its Subsidiaries required under the Exchange Act.
Events of Default and Remedies
The exchange note indenture will provide that each of the following
constitutes an Event of Default:
o Pegasus Satellite's default in the payment of interest on the exchange
notes when the interest becomes due and payable and the Default continues
for a period of 30 days (whether or not the payment is prohibited by the
subordination provisions of the exchange note indenture);
o Pegasus Satellite's default in the payment of the principal of or
premium, if any, on the exchange notes when the principal or premium
becomes due and payable at maturity, upon redemption or otherwise (whether
or not the payment is prohibited by the subordination provisions of the
exchange note indenture);
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o Pegasus Satellite's failure to comply with the provisions described under
the captions -- Repurchase at the Option of Holders -- Change of Control,
-- Repurchase at the Option of Holders -- Asset Sales, -- Certain
Covenants -- Restricted Payments, -- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock or -- Certain Covenants --
Merger, Consolidation or Sale of Assets;
o Pegasus Satellite's failure for 60 days after notice to comply with any
of its other agreements in the exchange note indenture or the exchange
notes;
o default under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any Indebtedness
for money borrowed by Pegasus Satellite or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by Pegasus Satellite
or any of its Restricted Subsidiaries), whether the Indebtedness or
Guarantee now exists, or will be created hereafter, which default:
-- is caused by a failure to pay principal of or premium, if any, or
interest on the Indebtedness before the expiration of the grace period
provided in the Indebtedness on the date of the default (a "Payment
Default"); or
-- results in the acceleration of the Indebtedness before its express
maturity and, in each case, the principal amount of the Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has
been so accelerated, aggregates $5.0 million or more;
o a final judgment or final judgments for the payment of money are entered
by a court or courts of competent jurisdiction against Pegasus Satellite
or any Restricted Subsidiary that would be a Significant Subsidiary and
such judgment or judgments remain unpaid, undischarged or unstayed for a
period of 60 days, provided that the aggregate of all the undischarged
judgments exceeds $5.0 million; and
o certain events of bankruptcy or insolvency with respect to Pegasus
Satellite, any Restricted Subsidiary that would constitute a Significant
Subsidiary or any group of Restricted Subsidiaries that, taken together,
would constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the exchange note
trustee or the holders of at least 25% in principal amount of the then
outstanding exchange notes may declare all the exchange notes to be due and
payable immediately. Notwithstanding the foregoing, in the case of an Event of
Default arising from certain events of bankruptcy or insolvency with respect to
Pegasus Satellite, any Restricted Subsidiary that would constitute a
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding exchange
notes will become due and payable without further action or notice. Holders of
the exchange notes may not enforce the exchange note indenture or the exchange
notes except as provided in the exchange note indenture. Subject to certain
limitations, holders of a majority in principal amount of the then outstanding
exchange notes may direct the exchange note trustee in its exercise of any
trust or power. The exchange note trustee may withhold from holders of the
exchange notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest)
if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of Pegasus Satellite
with the intention of avoiding payment of the premium that Pegasus Satellite
would have had to pay if Pegasus Satellite then had elected to redeem the
exchange notes under the optional redemption provisions of the exchange note
indenture, an equivalent premium will also become and be immediately due and
payable to the extent permitted by law upon the acceleration of the exchange
notes. If an Event of Default occurs before January 1, 2002 by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of Pegasus
Satellite with the intention of avoiding the prohibition on redemption of the
exchange notes before January 1, 2002, then the premium specified in the
exchange note indenture will also become immediately due and payable to the
extent permitted by law upon the acceleration of the exchange notes.
The holders of a majority in aggregate principal amount of the exchange
notes then outstanding by notice to the exchange note trustee may on behalf of
the holders of all of the exchange notes waive any existing Default or Event of
Default and its consequences under the exchange note indenture except a
continuing Default or Event of Default in the payment of interest on, or the
principal of, the exchange notes.
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Pegasus Satellite is required to deliver to the exchange note trustee
annually a statement regarding compliance with the exchange note indenture, and
Pegasus Satellite is required upon becoming aware of any Default or Event of
Default, to deliver to the exchange note trustee a statement specifying the
Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of Pegasus
Satellite, as such, will have any liability for any of Pegasus Satellite's
obligations under the exchange notes or the exchange note indenture or for any
claim based on, in respect of, or by reason of, the obligations or their
creation. Each holder of exchange notes by accepting a exchange note waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the exchange notes. The waiver may not be
effective to waive liabilities under the federal securities laws and it is the
SEC's view that such a waiver is against public policy.
Legal Defeasance and Covenant Defeasance
Pegasus Satellite may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding exchange notes
("Legal Defeasance") except for:
o the rights of holders of outstanding exchange notes to receive payments
in respect of the principal of, premium, if any, and interest on the
exchange notes when the payments are due from the trust referred to below;
o Pegasus Satellite's obligations with respect to the exchange notes
concerning issuing temporary exchange notes, registration of exchange
notes, mutilated, destroyed, lost or stolen exchange notes and the
maintenance of an office or agency for payment and to hold money for
security payments held in trust;
o the rights, powers, trusts, duties and immunities of the exchange note
trustee, and Pegasus Satellite's Obligations in connection therewith; and
o the Legal Defeasance provisions of the exchange note indenture.
In addition, Pegasus Satellite may, at its option and at any time, elect
to have the obligations of Pegasus Satellite released with respect to certain
covenants that are described in the exchange note indenture ("Covenant
Defeasance") and thereafter any omission to comply with those obligations will
not constitute a Default or Event of Default with respect to the exchange
notes. In the event Covenant Defeasance occurs, certain events -- not including
non-payment, bankruptcy, receivership, rehabilitation and insolvency events --
described under -- Events of Default will no longer constitute an Event of
Default with respect to the exchange notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
o Pegasus Satellite must irrevocably deposit with the exchange note
trustee, in trust, for the benefit of the holders of the exchange notes,
cash in United States Dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay
the principal of, premium, if any, and interest on the outstanding
exchange notes on the stated maturity or on the applicable redemption
date, as the case may be, and Pegasus Satellite must specify whether the
exchange notes are being defeased to maturity or to a particular
redemption date;
o in the case of Legal Defeasance, Pegasus Satellite must have delivered to
the exchange note trustee an opinion of counsel in the United States
reasonably acceptable to the exchange note trustee confirming that:
-- Pegasus Satellite has received from, or there has been published by,
the Internal Revenue Service a ruling; or
-- since the date of the exchange note indenture, there has been a change
in the applicable federal income tax law, in either case to the effect
that, and based thereon the opinion of counsel will
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confirm that, the holders of the outstanding exchange notes will not
recognize income, gain or loss for federal income tax purposes as a
result of the Legal Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as
would have been the case if the Legal Defeasance had not occurred;
o in the case of Covenant Defeasance, Pegasus Satellite must have delivered
to the exchange note trustee an opinion of counsel in the United States
reasonably acceptable to the exchange note trustee confirming that the
holders of the outstanding exchange notes will not recognize income, gain
or loss for federal income tax purposes as a result of the Covenant
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
the Covenant Defeasance had not occurred;
o no Default or Event of Default shall have occurred and be continuing on
the date of the deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to the deposit) or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date
of deposit (or greater period of time in which any such deposit of trust
funds may remain subject to bankruptcy or insolvency laws insofar as those
apply to the deposit by Pegasus Satellite);
o the Legal Defeasance or Covenant Defeasance will not result in a breach
or violation of, or constitute a default under any material agreement or
instrument -- other than the exchange note indenture -- to which Pegasus
Satellite or any of its Subsidiaries is a party or by which Pegasus
Satellite or any of its Subsidiaries is bound;
o Pegasus Satellite must have delivered to the exchange note trustee an
opinion of counsel to the effect that, as of the date of the opinion:
-- the trust funds will not be subject to rights of holders of
Indebtedness other than the exchange notes; and
-- assuming no intervening bankruptcy of Pegasus Satellite between the
date of deposit and the 91st day following the deposit and assuming no
holder of exchange notes is an insider of Pegasus Satellite, after the
91st day following the deposit, the trust funds will not be subject to
the effects of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally under any applicable
United States or state law;
o Pegasus Satellite must deliver to the exchange note trustee an officers'
certificate stating that the deposit was not made by Pegasus Satellite
with the intent of preferring the holders of exchange notes over the other
creditors of Pegasus Satellite or with the intent of defeating, hindering,
delaying or defrauding creditors of Pegasus Satellite or others; and
o Pegasus Satellite must deliver to the exchange note trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
Transfer and Exchange
A holder may transfer or exchange notes in accordance with the exchange
note indenture. The registrar and the exchange note trustee may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents and Pegasus Satellite may require a holder to pay any taxes and fees
required by law or permitted by the exchange note indenture. Pegasus Satellite
is not required to transfer or exchange any exchange note selected for
redemption. Also, Pegasus Satellite is not required to transfer or exchange any
exchange note for a period of 15 days before a selection of exchange notes to
be redeemed.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the exchange
note indenture or the exchange notes may be amended or supplemented with the
consent of the holders of at least a majority in principal amount of the
exchange notes then outstanding -- including, without limitation, consents
obtained in
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connection with a purchase of, or tender offer or exchange offer for, exchange
notes -- and any existing Default or compliance with any provision of the
exchange note indenture or the exchange notes may be waived with the consent of
the holders of a majority in principal amount of the then outstanding exchange
notes -- including consents obtained in connection with a purchase of, or
tender offer or exchange offer for, exchange notes.
Without the consent of each holder affected, an amendment or waiver may
not, with respect to any exchange notes held by a non-consenting holder:
o reduce the principal amount of exchange notes whose holders must consent
to an amendment, supplement or waiver;
o reduce the principal of or change the fixed maturity of any exchange note
or alter the provisions with respect to the redemption of the exchange
notes (other than provisions relating to the covenants described above
under the caption -- Repurchase at the Option of Holders);
o reduce the rate of or change the time for payment of interest on any
exchange note;
o waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the exchange notes, except a rescission of
acceleration of the exchange notes by the holders of a majority in
aggregate principal amount of the exchange notes and a waiver of the
payment Default that resulted from the acceleration;
o make any exchange note payable in money other than that stated in the
exchange notes;
o make any change in the provisions of the exchange note indenture relating
to waivers of past Defaults or the rights of holders of exchange notes to
receive payments of principal of or premium, if any, or interest on the
exchange notes;
o waive a redemption payment with respect to any exchange note, other than
a payment required by one of the covenants described above under the
caption -- Repurchase at the Option of Holders; or
o make any change in the foregoing amendment and waiver provisions.
In addition, any amendment to the provisions of Article 10 of the exchange
note indenture, which relates to subordination, including the related
definitions, will require the consent of the holders of at least 75% in
aggregate principal amount of the exchange notes then outstanding if the
amendment would adversely affect the rights of holders of exchange notes.
Notwithstanding the foregoing, without the consent of any holder of
exchange notes, Pegasus Satellite and the exchange note trustee may amend or
supplement the exchange note indenture or the exchange notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated exchange
notes in addition to or in place of certificated exchange notes, to provide for
the assumption of Pegasus Satellite's obligations to holders of exchange notes
in the case of a merger or consolidation, to make any change that would provide
any additional rights or benefits to the holders of exchange notes or that does
not adversely affect the legal rights under the exchange note indenture of any
such holder, or to comply with the SEC's requirements in order to maintain the
qualification of the exchange note indenture under the Trust Indenture Act.
Concerning the Exchange Note Trustee
The exchange note indenture contains limitations on the rights of the
exchange note trustee, should it become a creditor of Pegasus Satellite, to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The exchange
note trustee will be permitted to engage in other transactions. However, if it
acquires any conflicting interest it must eliminate the conflict within 90
days, apply to the SEC for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding
exchange notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the exchange
note trustee, subject to some exceptions. The exchange note indenture provides
that in case an Event of Default occurs -- which has not be cured -- the
exchange note trustee will be required, in the exercise of
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its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to those provisions, the exchange note trustee will be under
no Obligation to exercise any of its rights or powers under the exchange note
indenture at the request of any holder of exchange notes, unless the holder
shall have offered to the exchange note trustee security and indemnity
satisfactory to it against any loss, liability or expense.
Book-Entry, Delivery and Form
The new Pegasus Satellite exchange notes, if issued, are being offered and
sold to qualified institutional buyers in reliance on Rule 144A ("Rule 144A
Notes") and to a limited number of accredited and unaccredited investors in
reliance on Rule 506 ("Rule 506 Notes"). Notes also may be offered and sold in
offshore transactions in reliance on Regulation S ("Regulation S Notes").
Except as set forth below, notes will be issued in registered, global form in
minimum denominations of $1,000 and integral multiples of $1,000 in excess
thereof. The new Pegasus Satellite exchange notes will be issued only against
payment in immediately available funds.
Rule 144A Notes initially will be represented by one or more notes in
registered, global form without interest coupons (collectively, the "Rule 144A
Global Notes"). Regulation S Notes initially will be represented by one or more
notes in registered, global form without interest coupons (collectively, the
"Regulation S Global Notes" and, together with the Rule 144A Global Notes, the
"Global Notes"). The Global Notes will be deposited upon issuance with the
Trustee as custodian for The Depository Trust Company, in New York, New York,
and registered in the name of The Depository Trust Company or its nominee, in
each case for credit to an account of a direct or indirect participant in The
Depository Trust Company as described below. Through and including the 40th day
after the later of the commencement of the exchange offer and the closing of
the exchange offer (such period through and including such 40th day, the
"Restricted Period"), beneficial interests in the Regulation S Global Notes may
be held only through Euroclear and Cedel (as indirect participants in The
Depository Trust Company), unless transferred to a person that takes delivery
through a Rule 144A Global Note in accordance with the certification
requirements described below. Beneficial interests in the Rule 144A Global
Notes may not be exchanged for beneficial interests in the Regulation S Global
Notes at any time except in the limited circumstances described below. See --
Exchanges Between Regulation S Notes and Rule 144A Notes.
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of The Depository Trust Company or to
a successor of The Depository Trust Company or its nominee. Beneficial
interests in the Global Notes may not be exchanged for notes in certificated
form except in the limited circumstances described below. See -- Exchange of
Book-Entry Notes for Certificated Notes. Except in the limited circumstances
described below, owners of beneficial interests in the Global Notes will not be
entitled to receive physical delivery of Certificated Notes (as defined below).
Rule 144A Notes (including beneficial interests in the Rule 144A Global Notes)
will be subject to certain restrictions on transfer and will bear a restrictive
legend as described under Notice to Investors.
Regulation S Notes will also bear the legend as described under Notice to
Investors. In addition, transfers of beneficial interests in the Global Notes
will be subject to the applicable rules and procedures of The Depository Trust
Company and its direct or indirect participants (including, if applicable,
those of Euroclear and Cedel), which may change from time to time.
Initially, the trustee will act as paying agent and registrar. The new
Pegasus Satellite exchange notes may be presented for registration of transfer
and exchange at the offices of the registrar.
Depository Procedures
The following description of the operations and procedures of The
Depository Trust Company, Euroclear and Cedel are provided solely as a matter
of convenience. These operations and procedures are solely within the control
of the respective settlement systems and are subject to changes by them from
time to time. We take no responsibility for these operations and procedures and
urges investors to contact the system or their participants directly to discuss
these matters.
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The Depository Trust Company has advised us that The Depository Trust
Company is a limited-purpose trust company created to hold securities for its
participating organizations (collectively, the "Participants") and to
facilitate the clearance and settlement of transactions in those securities
between Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Access
to The Depository Trust Company's system is also available to other entities
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of The
Depository Trust Company only through the Participants or the Indirect
Participants. The ownership interests in, and transfers of ownership interests
in, each security held by or on behalf of The Depository Trust Company are
recorded on the records of the Participants and Indirect Participants.
The Depository Trust Company has also advised us that, under the
procedures established by it:
o upon deposit of the Global Notes, The Depository Trust Company will
credit the accounts of Participants we designate with portions of the
principal amount of the Global Notes; and
o ownership of these interests in the Global Notes will be shown on, and
the transfer of ownership thereof will be effected only through, records
maintained by The Depository Trust Company (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interest in the Global Notes).
Investors in the Rule 144A Global Notes may hold their interests directly
through The Depository Trust Company, if they are Participants in that system,
or indirectly through organizations (including Euroclear and Cedel) that are
Participants in the system. Investors in the Regulation S Global Notes must
initially hold their interests through Euroclear or Cedel, if they are
participants in those systems, or indirectly through organizations that are
participants in those systems. After the expiration of the Restricted Period
(but not earlier), investors may also hold interests in the Regulation S Global
Notes through Participants in The Depository Trust Company system other than
Euroclear and Cedel. Euroclear and Cedel will hold interests in the Regulation
S Global Notes on behalf of their participants through customers' securities
accounts in their respective names on the books of their respective
depositories, which are Morgan Guaranty Trust Company of New York, Brussels
office, as operator of Euroclear, and Citibank, N.A., as operator of Cedel. All
interests in a Global Note, including those held through Euroclear or Cedel,
may be subject to the procedures and requirements of The Depository Trust
Company. Those interests held through Euroclear or Cedel may also be subject to
the procedures and requirements of those systems. The laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Note to such persons will be limited to that extent.
Because The Depository Trust Company can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants and certain banks, the
ability of a person having beneficial interests in a Global Note to pledge such
interests to persons or entities that do not participate in The Depository
Trust Company system, or otherwise take actions in respect of such interests,
may be affected by the lack of a physical certificate evidencing those such
interests.
Except as described below, owners of interest in the Global Notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
holders thereof under the indenture for any purpose.
Payments in respect of the principal of, and premium, if any, liquidated
damages, if any, and interest on a Global Note registered in the name of The
Depository Trust Company or its nominee will be payable to The Depository Trust
Company in its capacity as the registered holder under the Indenture. Under the
terms of the indenture, we and the trustee will treat the persons in whose
names the notes, including the Global Notes, are registered as the owners for
the purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither we, the trustee nor any agent of ours or the
trustee has or will have any responsibility or liability for:
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o any aspect of The Depository Trust Company's records or any Participant's
or Indirect Participant's records relating to or payments made on account
of beneficial ownership interest in the Global Notes, or for maintaining,
supervising or reviewing any of The Depository Trust Company's records or
any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Notes; or
o any other matter relating to the actions and practices of The Depository
Trust Company or any of its Participants or Indirect Participants.
The Depository Trust Company has advised us that its current practice,
upon receipt of any payment in respect of securities such as the new Pegasus
Satellite exchange notes (including principal and interest), is to credit the
accounts of the relevant Participants with the payment on the payment date, in
amounts proportionate to their respective holdings in the principal amount of
beneficial interest in the relevant security as shown on the records of The
Depository Trust Company unless The Depository Trust Company has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will
not be the responsibility of The Depository Trust Company, the trustee or us.
Neither we nor the trustee will be liable for any delay by The Depository Trust
Company or any of its Participants in identifying the beneficial owners of the
notes, and we and the trustee may conclusively rely on and will be protected in
relying on instructions from The Depository Trust Company or its nominee for
all purposes. Except for trades involving only Euroclear and Cedel
participants, interest in the Global Notes are expected to be eligible to trade
in The Depository Trust Company's Same-Day Funds Settlement System and
secondary market trading activity in such interests will, therefore, settle in
immediately available funds, subject in all cases to the rules and procedures
of The Depository Trust Company and its Participants. See -- Same Day
Settlement and Payment.
Subject to the transfer restrictions described under Notice to Investors,
transfers between Participants in The Depository Trust Company will be effected
in accordance with The Depository Trust Company's procedures, and will be
settled in same day funds, and transfers between participants in Euroclear and
Cedel will be effected in the ordinary way in accordance with their respective
rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the new
Pegasus Satellite exchange notes described herein, cross-market transfers
between the Participants in The Depository Trust Company, on the one hand, and
Euroclear or Cedel participants, on the other hand, will be effected through
The Depository Trust Company in accordance with The Depository Trust Company's
rules on behalf of Euroclear or Cedel, as the case may be, by its respective
depositary; however, such cross-market transactions will require delivery of
instructions to Euroclear or Cedel, as the case may be, by the counterparty in
such system in accordance with the rules and procedures and within the
established deadlines (Brussels time) of such system. Euroclear or Cedel, as
the case may be, will, if the transaction meets its settlement requirements,
deliver instructions to its respective depositary to take action to effect
final settlement on its behalf by delivering or receiving interests in the
relevant Global Note in The Depository Trust Company, and making or receiving
payment in accordance with normal procedures for same-day funds settlement
applicable to The Depository Trust Company. Euroclear participants and Cedel
participants may not deliver instructions directly to the depositories for
Euroclear or Cedel.
The Depository Trust Company has advised us that it will take any action
permitted to be taken by a holder of new Pegasus Satellite exchange notes only
at the direction of one or more Participants to whose account The Depository
Trust Company has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of the new Pegasus
Satellite exchange notes as to which the Participant or Participants has or
have given such direction. However, if there is an Event of Default under the
new Pegasus Satellite exchange notes, The Depository Trust Company reserves the
right to exchange the Global Notes for legended notes in certificated form, and
to distribute such notes to its Participants.
Although The Depository Trust Company, Euroclear and Cedel have agreed to
the foregoing procedures to facilitate transfers of interests in the Regulation
S Global Notes and in the Rule 144A Global Notes among Participants in The
Depository Trust Company, Euroclear and Cedel, they are under no obligation to
perform
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or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither we nor the trustee nor any of their
respective agents will have any responsibility for the performance by The
Depository Trust Company, Euroclear or Cedel or their respective participants
or indirect participants of their respective obligations under the rules and
procedures governing their operations.
Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:
o The Depository Trust Company notifies us that it is unwilling or unable
to continue as depositary for the Global Notes and we then fail to appoint
a successor depositary, or has ceased to be a clearing agency registered
under the Exchange Act;
o we, at our option, notify the trustee in writing that we elect to cause
the issuance of the Certificated Notes; or
o there shall have occurred and be continuing a Default or Event of Default
with respect to the new Pegasus Satellite exchange notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon request but only upon prior written notice given to the
trustee by or on behalf of The Depository Trust Company in accordance with the
indenture. In all cases, Certificated Notes delivered in exchange for any
Global Note or beneficial interests therein will be registered in the names,
and issued in any approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures) and will bear the
applicable restrictive legend referred to in Notice to Investors, unless we
determine otherwise in compliance with applicable law.
Exchange of Certificated Notes for Book-Entry Notes
New Pegasus Satellite exchange notes issued in certificated form may not
be exchanged for beneficial interests in any Global Note unless the transferor
first delivers to the trustee a written certificate (in the form provided in
the indenture) to the effect that the transfer will comply with the appropriate
transfer restrictions applicable to the notes. See Notice to Investors.
Exchanges Between Regulation S Notes and Rule 144A Notes
Before the expiration of the Restricted Period, beneficial interests in
the Regulation S Global Note may be exchanged for beneficial interests in the
Rule 144A Global Note only if the exchange occurs in connection with a transfer
of the notes under Rule 144A and the transferor first delivers to the trustee a
written certificate (in the form provided in the indenture) to the effect that
the notes are being transferred to a person who the transferor reasonably
believes to be a qualified institutional buyer within the meaning of Rule 144A,
purchasing for its own account or the account of a qualified institutional
buyer in a transaction meeting the requirements of Rule 144A and in accordance
with all applicable securities laws of the states of the United States and
other jurisdictions.
Beneficial interest in a Rule 144A Global Note may be transferred to a
person who takes delivery in the form of an interest in the Regulation S Global
Note, whether before or after the expiration of the Restricted Period, only if
the transferor first delivers to the trustee a written certificate (in the form
provided in the Indenture) to the effect that the transfer is being made in
accordance with Rule 903 or 904 of Regulation S or Rule 144 (if available) and
that, if the transfer occurs before the expiration of the Restricted Period,
the interest transferred will be held immediately thereafter through Euroclear
or Cedel.
Transfers involving an exchange of a beneficial interest in the Regulation
S Global Note for a beneficial interest in a Rule 144A Global Note or vice
versa will be effected in The Depository Trust Company by means of an
instruction originated by the trustee through The Depository Trust Company
Deposit/Withdraw at Custodian system. Accordingly, in connection with any such
transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount of the Regulation S Global Note and a corresponding increase
in the principal amount of the Rule 144A Global Note or vice versa, as
applicable. Any beneficial interest in one of
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the Global Notes that is transferred to a person who takes delivery in the form
of an interest in the other Global Note will, upon transfer, cease to be an
interest in such Global Note and will become an interest in the other Global
Note and, accordingly, will thereafter be subject to all transfer restrictions
and other procedures applicable to beneficial interest in such other Global
Note for so long as it remains such an interest. The policies and practices of
The Depository Trust Company may prohibit transfers of beneficial interests in
the Regulation S Global Note before the expiration of the Restricted Period.
Same Day Settlement and Payment
The indenture will require that payments in respect of the new Pegasus
Satellite exchange notes represented by the Global Notes (including principal,
premium, if any, interest and liquidated damages, if any) be made by wire
transfer of immediately available funds to the accounts specified by the Global
Note Holders. With respect to new Pegasus Satellite exchange notes in
certificated form, we will make all payments of principal, premium, if any,
interest and liquidated damages, if any, by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address. The notes, if issued, represented by the Global Notes are expected to
be eligible to trade in the PORTAL market and to trade in the Depositary's
Same-Day Funds Settlement System, and any permitted secondary market trading
activity in such notes will, therefore, be required by the Depositary to be
settled in immediately available funds. We expect that secondary trading in any
certificated notes will also be settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant in
The Depository Trust Company will be credited, and any such crediting will be
reported to the relevant Euroclear or Cedel participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Cedel) immediately following the settlement date. The Depository Trust Company
has advised us that cash received in Euroclear or Cedel as a result of sales of
interests in a Global Note by or through a Euroclear or Cedel participant to a
Participant in The Depository Trust Company will be received with value on the
settlement date of The Depository Trust Company but will be available in the
relevant Euroclear or Cedel cash account only as of the business day for
Euroclear or Cedel following The Depository Trust Company's settlement date.
Registration Rights; Liquidated Damages
Pegasus Satellite will enter into a registration rights agreement on or
before the closing of this exchange offer. Your acceptance of the exchange
offer either by execution of the letter of transmittal in connection with this
exchange offer or by transmittal of acceptance to The Depository Trust Company
through the Automated Tender Offer Program will be deemed to constitute your
agreement to the registration rights agreement's terms. The registration rights
agreement will provide that:
o Pegasus Satellite will file with the SEC a registration statement related
to the preferred stock received in this exchange offer and the exchange
notes on or before 90 days after the closing of this exchange offer;
o Pegasus Satellite will use its best efforts to have the registration
statement declared effective by the SEC on or before 90 days after filing
the registration statement; and
o unless prohibited by applicable law or SEC policy, Pegasus Satellite will
commence the registered exchange offer and use its best efforts to issue
on or before 30 business days after the date on which the registration
statement was declared effective by the SEC, registered preferred stock in
exchange for all preferred stock received in this exchange offer.
The foregoing registration requirements will only apply to the preferred
stock received in this exchange offer until:
o the date on which the preferred stock has been exchanged by a person
other than a broker-dealer for registered preferred stock;
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o following the exchange by a broker-dealer in the registered exchange
offer for registered preferred stock, the date on which the registered
preferred stock is sold to a purchaser who receives from the broker-dealer
on or before the date of sale a copy of the prospectus contained in the
registration statement;
o the date on which the preferred stock has been registered under the
Securities Act and disposed of in accordance with the registration
statement; or
o the date on which the preferred stock is distributed to the public under
Rule 144 of the Securities Act.
Pegasus Satellite will be required to file with the SEC a separate resale
shelf registration statement to cover resales of the preferred stock and
exchange notes, if:
o Pegasus Satellite is not required to file the exchange offer registration
statement or is not permitted to consummate the registered exchange offer
because the registered exchange offer is prohibited by applicable law or
SEC policy; or
o any holder of preferred stock notifies Pegasus Satellite before the 20th
day following consummation of the registered exchange offer that:
-- it is prohibited by law or SEC policy from participating in the
registered exchange offer;
-- it may not resell the registered preferred stock acquired in the
registered exchange offer and the exchange notes, if issued, without
delivering a prospectus and the prospectus contained in the
registration statement is not appropriate or available for resales; or
-- it is a broker-dealer and owns preferred stock or exchange notes, if
issued, acquired directly from Pegasus Satellite or an Affiliate of
Pegasus Satellite.
If obligated to file the resale shelf registration statement, Pegasus
Satellite will use its best efforts to file it with the SEC on or before 90
days after the filing obligation arises, and in any event within 150 days of
the closing of this exchange offer. Once filed, Pegasus Satellite will use its
best efforts to cause the resale shelf registration statement to be declared
effective by the SEC on or before the 90th day after the expiration of that
period.
Pegasus Satellite will pay liquidated damages to each holder of preferred
stock or exchange notes, if issued, with respect to the first 90-day period
immediately following Pegasus Satellite's first default in its registration
obligations in an amount equal to $0.05 per week per $1,000 in aggregate
liquidation preference of preferred stock (or principal amount of exchange
notes, if issued) held by that holder, if Pegasus Satellite defaults in its
obligations under the registration rights agreement in any of the following
ways:
o Pegasus Satellite fails to file a registration statement required by the
registration rights agreement on or before the date specified for the
filing;
o a registration statement is not declared effective by the SEC on or
before the date specified for effectiveness in the registration rights
agreement;
o Pegasus Satellite fails to consummate the registered exchange offer
within 30 business days of the date specified for effectiveness of the
registration statement for the registered exchange offer; or
o the registration statement is declared effective, but then ceases to be
effective or usable during the periods specified in the registration
rights agreement.
The amount of the liquidated damages will increase by an additional $0.05
per week per $1,000 in liquidation value of the preferred stock (or principal
amount of exchange notes, if issued) with respect to each subsequent 90-day
period until all of the defaults described above have been cured, up to a
maximum of $0.30 per week per $1,000 in liquidation value of the preferred
stock (or principal amount of exchange notes, if issued). All accrued
liquidated damages will be paid by Pegasus Satellite on each payment date to
the holder of the global share or global note, if issued, by wire transfer of
immediately available funds or by
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federal funds check and to the holders of certificated shares or notes, if
issued by wire transfer to the accounts specified by them or by mailing checks
to their registered addresses if no accounts have been specified. Following the
cure of all defaults, the accrual of liquidated damages will cease.
Preferred stockholders will be required to make representations to Pegasus
Satellite to participate in the registered exchange offer and will be required
to deliver information to be used in connection with the resale shelf
registration statement and to provide comments on the resale shelf registration
statement within the time periods provided in the registration rights agreement
to have their notes included in the resale shelf registration statement and to
benefit from the provisions regarding liquidated damages described above.
Certain Definitions
The following are defined terms used in the certificate of designation and
the exchange note indenture. We refer you to the certificate of designation and
the exchange note indenture for a full discussion of all of the following
terms.
"Acquired Debt" means, with respect to any specified Person:
o Indebtedness of any other Person existing at the time the other Person is
merged with or into or became a Subsidiary of the specified Person,
including, without limitation, Indebtedness incurred in connection with,
or in contemplation of, the other Person merging with or into or becoming
a Subsidiary of the specified Person; and
o Indebtedness secured by a Lien encumbering any asset acquired by the
specified Person.
"Adjusted Operating Cash Flow" means, for the four most recent fiscal
quarters for which internal financial statements are available, Operating Cash
Flow of the Person and its Restricted Subsidiaries less DBS Cash Flow for the
most recent four-quarter period plus DBS Cash Flow for the most recent
quarterly period, multiplied by four.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, will mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of the Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person will
be deemed to be control.
"Asset Sale" means:
o the sale, lease, conveyance or other disposition of any assets
(including, without limitation, by way of a sale and leaseback) other than
in the ordinary course of business consistent with past practices
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of Pegasus Satellite and its Subsidiaries
taken as a whole will be governed by the provisions described above under
the captions -- Repurchase at the Option of Holders -- Change of Control
and/or the provisions described above under the captions -- Certain
Covenants -- Merger, Consolidation or Sale of Assets and not by the
provision of the Asset Sale covenant); and
o the issue or sale by Pegasus Satellite or any of its Restricted
Subsidiaries of Equity Interests of any of Pegasus Satellite's Restricted
Subsidiaries, in the case of either this clause of the prior clause,
whether in a single transaction or a series of related transactions:
-- that have a fair market value in excess of $1.0 million; or
-- for Net Proceeds in excess of $1.0 million.
Notwithstanding the foregoing, the following transactions will not be
deemed to be Asset Sales:
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o a transfer of assets by Pegasus Satellite to a Wholly Owned Restricted
Subsidiary of Pegasus Satellite or by a Wholly Owned Restricted Subsidiary
of Pegasus Satellite to Pegasus Satellite or to another Wholly Owned
Restricted Subsidiary of Pegasus Satellite;
o an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary
of Pegasus Satellite to Pegasus Satellite or to another Wholly Owned
Restricted Subsidiary of Pegasus Satellite; and
o a Restricted Payment that is permitted by the provisions of the covenant
described above under the captions -- Certain Covenants -- Restricted
Payments.
"Asset Swap" means an exchange of assets by Pegasus Satellite or a
Restricted Subsidiary of Pegasus Satellite for one or more Permitted Businesses
or for a controlling Equity Interest in any Person whose assets consist
primarily of one or more Permitted Businesses.
"Bank Facilities" means, with respect to Pegasus Satellite or any of its
Restricted Subsidiaries, one or more debt facilities or commercial paper
facilities with banks or other institutional lenders providing for revolving
credit loans, term loans, receivables financing (including through the sale of
receivables to the lenders or to special purpose entities formed to borrow from
the lenders against the receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at the time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
o in the case of a corporation, corporate stock;
o in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock;
o in the case of a partnership, partnership interests (whether general or
limited); and
o any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets
of, the issuing Person.
"Cash Equivalents" means:
o United States dollars;
o securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof having
maturities of not more than six months from the date of acquisition;
o certificates of deposit and eurodollar time deposits with maturities of
six months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each
case with any domestic commercial bank having capital and surplus in
excess of $500 million and a Thompson Bank Watch Rating of "B" or better;
o repurchase obligations with a term of not more than seven days or on
demand for underlying securities of the types described in the first two
clauses above entered into with any financial institution meeting the
qualifications specified in the third and fourth clauses above; and
o commercial paper having the highest rating at acquisition obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Ratings Services and
in each case maturing within six months after the date of acquisition.
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"Change of Control" means the occurrence of any of the following:
o 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 Pegasus
Satellite and its Restricted Subsidiaries taken as a whole to any "person"
(as the term is used in Section 13(d)(3) of the Exchange Act) other than
the Principal or his Related Parties (as defined below);
o the adoption of a plan relating to the liquidation or dissolution of
Pegasus Satellite;
o the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that:
-- any "person" (as defined above) becomes the "beneficial owner" (as the
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act,
except that a person will be deemed to have "beneficial ownership" of
all securities that the person has the right to acquire, whether the
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 (measured by voting power rather than
number of shares) of Pegasus Satellite than is beneficially owned (as
defined above) at the time by the Principal and his Related Parties in
the aggregate;
-- the Principal and his Related Parties collectively cease to
beneficially own (as defined above) Voting Stock of Pegasus Satellite
having at least 30% of the combined voting power of all classes of
Voting Stock of Pegasus Satellite then outstanding; or
-- the Principal and his Affiliates acquire, in the aggregate, beneficial
ownership (as defined above) of more than 662/3% of the shares of
Pegasus Satellite's Class A common stock at the time outstanding; or
o the first day on which a majority of the members of the board of
directors of Pegasus Satellite are not Continuing Directors.
In applying the third clause above, if Pegasus Satellite is a subsidiary
of another corporation, all references to Pegasus Satellite will instead be
references to the other corporation.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of the Person and its Restricted
Subsidiaries for the period, on a consolidated basis, determined in accordance
with GAAP; provided that:
o the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting will be included
only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Wholly Owned Restricted Subsidiary
thereof;
o the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of the acquisition will be
excluded;
o the cumulative effect of a change in accounting principles will be
excluded; and
o the Net Income of any Unrestricted Subsidiary will be excluded, whether
or not distributed to Pegasus Satellite or one of its Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the board of directors of Pegasus Satellite who:
o was a member of the board of directors of Pegasus Satellite on January
27, 1997; or
o was nominated for election or elected to the board of directors of
Pegasus Satellite, with the approval of a majority of the Continuing
Directors who were members of the board at the time of the nomination or
election.
"Cumulative Operating Cash Flow" means, as of any date of determination,
Operating Cash Flow for Pegasus Satellite and its Restricted Subsidiaries for
the period (taken as one accounting period) from the
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beginning of the first full month commencing after January 27, 1997 to the end
of the most recently ended fiscal quarter for which internal financial
statements are available at the date of determination, plus all cash dividends
received by Pegasus Satellite or a Wholly Owned Restricted Subsidiary of
Pegasus Satellite from any Unrestricted Subsidiary of Pegasus Satellite or
Wholly Owned Restricted Subsidiary of Pegasus Satellite to the extent that the
dividends are not included in the calculation of permitted Restricted Payments
under the third paragraph of the covenant described under the captions --
Certain Covenants -- Restricted Payments by virtue of the third clause of that
paragraph.
"Cumulative Total Interest Expense" means, with respect to Pegasus
Satellite and its Restricted Subsidiaries, as of any date of determination,
Total Interest Expense for the period (taken as one accounting period) from the
beginning of the first full month commencing after January 27, 1997 to the end
of the most recently ended fiscal quarter for which internal financial
statements are available at the date of determination.
"DBS Cash Flow" means income from operations -- before depreciation,
amortization and Non-Cash Incentive Compensation to the extent deducted in
arriving at income from operations -- for the Satellite Segment determined on a
basis consistent with the segment data contained in Pegasus Satellite's
consolidated audited financial statements.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Designated Senior Debt" means any Senior Debt permitted under the
exchange note indenture the principal amount of which is $10.0 million or more
and that has been designated by Pegasus Satellite as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock -- other than the Series A
Preferred Stock -- that, by its terms, or by the terms of any security into
which it is convertible or for which it is exchangeable, or upon the happening
of any event, matures or is mandatorily redeemable, under a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or before the mandatory redemption date of the new Pegasus
Satellite preferred stock unless, in any such case, the issuer's obligation to
pay, purchase or redeem the Capital Stock is expressly conditioned on its
ability to do so in compliance with the provisions of the covenant described
under the captions -- Certain Covenants -- Restricted Payments.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"Existing Indebtedness" means all Indebtedness of Pegasus Satellite and
its Subsidiaries in existence on January 27, 1997, until the amounts are
repaid.
"Fair Market Value" means, with respect to assets or aggregate net
proceeds having a fair market value:
o of less than $5.0 million, the fair market value of the assets or
proceeds determined in good faith by the board of directors of Pegasus
Satellite, including a majority of the board's Independent Directors, and
evidenced by a board resolution; and
o equal to or in excess of $5.0 million, the fair market value of the
assets or proceeds as determined by an independent appraisal firm with
experience in the valuation of the classes and types of assets in
question; provided that the fair market value of the assets purchased in
an arms'-length transaction by an Affiliate of Pegasus Satellite -- other
than a Subsidiary -- from a third party that is not also an Affiliate of
Pegasus Satellite or of the purchaser and contributed to Pegasus Satellite
within five business days of the consummation of the acquisition of the
assets by the Affiliate will be deemed to be the aggregate consideration
paid by the Affiliate, which may include the fair market value of any
non-cash consideration to the extent that the valuation requirements of
this definition are complied with as to any such non-cash consideration.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in the other statements by the
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the closing of this exchange offer.
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"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States for the payment of which guarantee or
obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee -- other than by endorsement of negotiable
instruments for collection in the ordinary course of business -- direct or
indirect, in any manner, including, without limitation, co-borrowing
arrangements, letters of credit and reimbursement agreements in respect of
these arrangements, of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations
of the Person under:
o interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements; and
o other agreements or arrangements designed to protect the Person against
fluctuations in interest rates.
"Indebtedness" means, with respect to any Person, any indebtedness of the
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit -- or
reimbursement agreements in respect of these arrangements -- or banker's
acceptances or representing any Capital Lease Obligations or the balance
deferred and unpaid of the purchase price of any property or representing any
Hedging Obligations, except any such balance that constitutes an accrued
expense or trade payable, if and to the extent any of the foregoing
indebtedness, other than letters of credit and Hedging Obligations, would
appear as a liability upon a balance sheet of the Person prepared in accordance
with GAAP, as well as all indebtedness of others secured by a Lien on any asset
of the Person, whether or not the indebtedness is assumed by the Person, and,
to the extent not otherwise included, the Guarantee by the Person of any
indebtedness of any other Person. The amount of Indebtedness of any Person at
any date will be the outstanding balance at that date of all unconditional
obligations as described above and the maximum liability, upon the occurrence
of the contingency giving rise to the obligation, of any contingent obligations
at that date; provided that the amount outstanding at any time of any
Indebtedness issued with original issue discount is the full amount of the
Indebtedness less the remaining unamortized portion of the original issue
discount of the Indebtedness at such time as determined in conformity with
GAAP.
"Indebtedness to Adjusted Operating Cash Flow Ratio" means, as of any date
of determination, the ratio of:
o the aggregate principal amount of all outstanding Indebtedness of a
Person and its Restricted Subsidiaries as of that date on a consolidated
basis, plus the aggregate liquidation preference of all outstanding new
Pegasus Satellite preferred stock -- other than Qualified Subsidiary
Stock -- of the Restricted Subsidiaries of the Person as of that date,
excluding any such new Pegasus Satellite preferred stock held by the
Person or a Wholly Owned Restricted Subsidiary of the Person, plus the
aggregate liquidation preference or redemption amount of all Disqualified
Stock of that Person, excluding any Disqualified Stock held by that
Person or a Wholly Owned Restricted Subsidiary of that Person, as of that
date,
to:
o Adjusted Operating Cash Flow of the Person and its Restricted
Subsidiaries for the most recent four-quarter period for which internal
financial statements are available determined on a pro forma basis after
giving effect to all acquisitions and dispositions of assets --
notwithstanding the second clause of the definition of "Consolidated Net
Income" -- including, without limitation, Asset Swaps, made by the Person
and its Restricted Subsidiaries since the beginning of that four-quarter
period through that date as if the acquisitions and dispositions had
occurred at the beginning of that four-quarter period.
"Independent Director" means a member of the board of directors who is
neither an officer nor an employee of Pegasus Satellite or any of its
Affiliates.
"Investments" means, with respect to any Person, all investments by the
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of indebtedness or other obligations),
advances or capital contributions -- excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business --
purchases or other acquisitions for
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consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP; provided that an acquisition of assets,
Equity Interests or other securities by Pegasus Satellite for consideration
consisting of common equity securities, or new Pegasus Satellite preferred
stock which is not Disqualified Stock, of Pegasus Satellite will not be deemed
to be an Investment.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of the asset,
whether or not filed, recorded or otherwise perfected under applicable law --
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code, or equivalent statutes of any jurisdiction.
"Net Income" means, with respect to any Person, the net income (loss) of
the Person, determined in accordance with GAAP and before any reduction in
respect of new Pegasus Satellite preferred stock dividends, excluding, however:
o any gain (but not loss), together with any related provision for taxes on
the gain (but not loss), realized in connection with;
-- any Asset Sale (including, without limitation, dispositions under sale
and leaseback transactions); or
-- the disposition of any securities by that Person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness of
that Person or any of its Restricted Subsidiaries; and
o any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on the extraordinary or nonrecurring gain (but
not loss).
"Net Proceeds" means the aggregate cash proceeds received by Pegasus
Satellite or any of its Restricted Subsidiaries in respect of any Asset Sale --
including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale -- net of
the direct costs relating to the Asset Sale, including, without limitation,
legal, accounting, investment banking fees and sales commissions, and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof after taking into account any available tax credits or
deductions and any tax sharing arrangements, amounts required to be applied to
the repayment of Indebtedness in connection with the Asset Sale and any reserve
for adjustment in respect of the sale price of the asset or assets established
in accordance with GAAP.
"Non-Cash Incentive Compensation" means incentive compensation paid to any
officer, employee or director of Pegasus Satellite or any of its Subsidiaries
in the form of common stock of Pegasus Satellite or its parent corporation or
options to purchase common stock of Pegasus Satellite or its parent corporation
under the Pegasus Communications Restricted Stock Plan or the Pegasus
Communications 1996 Stock Option Plan.
"Non-Recourse Debt" means Indebtedness
o as to which neither Pegasus Satellite nor any of its Restricted
Subsidiaries:
-- provides credit support of any kind, including any undertaking,
agreement or instrument that would constitute Indebtedness;
-- is directly or indirectly liable, as a guarantor or otherwise; or
-- constitutes the lender;
o no default with respect to which, including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary, would permit upon notice, lapse of time or both any holder of
any other Indebtedness of Pegasus Satellite or any of its Restricted
Subsidiaries to declare a default on the other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity;
and
o as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of Pegasus Satellite or any of
its Restricted Subsidiaries.
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"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Operating Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of the Person for the period:
o plus:
-- extraordinary net losses and net losses on sales of assets outside the
ordinary course of business during the period, to the extent the losses
were deducted in computing the Consolidated Net Income;
-- provision for taxes based on income or profits, to the extent the
provision for taxes was included in computing the Consolidated Net
Income, and any provision for taxes utilized in computing the net
losses under the first clause hereof;
-- consolidated interest expense of the Person and its Subsidiaries for
the period, whether paid or accrued and whether or not capitalized --
including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated
with Capital Lease Obligations, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments, if any, under Hedging
Obligations -- to the extent that any such expense was deducted in
computing the Consolidated Net Income;
-- depreciation, amortization -- including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period -- and other non-cash charges,
excluding any such non-cash charge to the extent that it represents an
accrual of or reserve for cash charges in any future period or
amortization of a prepaid cash expense that was paid in a prior period,
of the Person and its Subsidiaries for the period to the extent that
the depreciation, amortization and other non-cash charges were deducted
in computing the Consolidated Net Income; and
-- Non-Cash Incentive Compensation to the extent the compensation expense
was deducted in computing the Consolidated Net Income and to the extent
not included in the fourth clause of this definition;
o less all non-cash income for the period, excluding any such non-cash
income to the extent it represents an accrual of cash income in any
future period or amortization of cash income received in a prior period.
"Pari Passu Debt" means senior subordinated Indebtedness of Pegasus
Satellite permitted by the covenant described under the captions -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock, other
than the exchange notes, which is pari passu in right of payment with the
exchange notes.
"Permitted Businesses" means:
o any media or communications business, including but not limited to, any
broadcast television station, cable franchise or other business in the
television broadcasting, cable or direct-to-home satellite television
industries; and
o any business reasonably related or ancillary to any of the foregoing
businesses.
"Permitted Investments" means
o any Investments in Pegasus Satellite or in a Wholly Owned Restricted
Subsidiary of Pegasus Satellite;
o any Investments in Cash Equivalents;
o Investments by Pegasus Satellite or any Restricted Subsidiary of Pegasus
Satellite in a Person, if as a result of the Investment:
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-- the Person becomes a Wholly Owned Restricted Subsidiary of Pegasus
Satellite; or
-- the Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, Pegasus Satellite or a Wholly Owned Restricted
Subsidiary of Pegasus Satellite;
o Investments made as a result of the receipt of non-cash consideration
from an Asset Sale that was made under and in compliance with the
provisions of the covenant described under the caption -- Description of
Exchange Notes -- Repurchase at the Option of Holders -- Asset Sales; and
o other Investments -- measured as of the time made and without giving
effect to subsequent changes in value -- that do not exceed an amount
equal to $5.0 million plus, to the extent any such Investments are sold
for cash or are otherwise liquidated or repaid for cash, any gains less
any losses realized on the disposition of the Investments.
"Permitted Liens" means:
o Liens securing Senior Debt;
o Liens securing Indebtedness of a Subsidiary that was permitted to be
incurred under the exchange note indenture;
o Liens on property of a Person existing at the time the Person is merged
into or consolidated with Pegasus Satellite or any Subsidiary of Pegasus
Satellite; provided that the Liens were not created in contemplation of
the merger or consolidation and do not extend to any assets other than
those of the Person merged into or consolidated with Pegasus Satellite or
any Restricted Subsidiary of Pegasus Satellite;
o Liens on property existing at the time of acquisition thereof by Pegasus
Satellite or any Subsidiary of Pegasus Satellite; provided that the Liens
were not created in contemplation of the acquisition;
o Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
o Liens existing on January 27, 1997;
o Liens to secure Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations permitted by the sixth
clause of the second paragraph of the covenant described under the
captions -- Certain Covenants -- Incurrence of Indebtedness and Issuance
of Preferred Stock, covering only the assets acquired with the
Indebtedness;
o Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
o Liens incurred in the ordinary course of business of Pegasus Satellite or
any Subsidiary of Pegasus Satellite with respect to obligations that do
not exceed $1.0 million at any one time outstanding; and
o Liens on assets of or Equity Interests in Unrestricted Subsidiaries that
secure Non-Recourse Debt of Unrestricted Subsidiaries.
"Permitted Refinancing Debt" means any Indebtedness of Pegasus Satellite
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Pegasus Satellite or any of its Restricted
Subsidiaries; provided that:
o the principal amount of the Permitted Refinancing Debt does not exceed
the principal amount of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded, plus (a) the amount of
reasonable expenses incurred in connection with Indebtedness and (b) the
amount of any premium required to be paid in connection with the
refinancing under the terms of the refinancing or deemed by Pegasus
Satellite or the Restricted Subsidiary necessary to be paid in order to
effectuate the refinancing;
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o the Permitted Refinancing Debt has a final maturity date not earlier than
the final maturity date of, and has a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
o if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the exchange
notes, the Permitted Refinancing Debt has a final maturity date later
than the final maturity date of the exchange notes, and is subordinated
in right of payment to the exchange notes on terms at least as favorable
to the holders of exchange notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and
o the Indebtedness is incurred either by Pegasus Satellite or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Principal" means Marshall W. Pagon.
"Qualified Subsidiary Stock" means Capital Stock of a Subsidiary of
Pegasus Satellite which by its terms:
o does not mature, or is not mandatorily redeemable, under a sinking fund
obligation or otherwise, and is not redeemable at the option of its
holder, in whole or in part, prior to January 1, 2008, in each case,
whether automatically or upon the happening of any event, unless, in any
such case, the issuer's obligation to pay, purchase or redeem the Capital
Stock is expressly conditioned on its ability to do so in compliance with
the provisions of the covenant described under the caption -- Certain
Covenants -- Restricted Payments;
o is automatically exchangeable into shares of Capital Stock of Pegasus
Satellite that is not Disqualified Stock, or into Capital Stock of
Pegasus Satellite's parent, upon the earlier to occur of:
-- the occurrence of a Voting Rights Triggering Event or an Event of
Default and
-- January 1, 2006;
o has no voting or remedial rights; and
o does not permit the payment of cash dividends prior to January 1, 2007,
unless, in the case of this clause, the issuer's ability to pay cash
dividends is expressly conditioned on its ability to do so in compliance
with the provisions of the covenant described under the caption --
Certain Covenants -- Restricted Payments.
"Related Party" with respect to the Principal means:
o any immediate family member of the Principal; or
o any trust, corporation, partnership or other entity, more than 50% of the
voting Equity Interests of which are owned directly or indirectly by, and
which is controlled by, the Principal and/or the other Persons referred
to in the immediately preceding clause.
For purposes of this definition:
o "immediate family member" means spouse, parent, step-parent, child,
sibling or step-sibling; and
o "control" has the meaning specified in the definition of "Affiliate"
contained under the caption -- Certain Definitions. In addition, the
Principal's estate will be deemed to be a Related Party until such time
as such estate is distributed in accordance with the Principal's will or
applicable state law.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Satellite Segment" means the business involved in the marketing of video
and audio programming and data information services through transmission media
consisting of space-based satellite broadcasting services,
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the assets related to the conduct of the business held by Pegasus Satellite and
its Restricted Subsidiaries on the Closing Date, plus all other assets acquired
by Pegasus Satellite or any of its Restricted Subsidiaries that are directly
related to the business, excluding, without limitation, the terrestrial
television broadcasting business and the assets related to this business and
the cable television business and the assets related to this business; provided
that any assets acquired by Pegasus Satellite or any of its Restricted
Subsidiaries after January 27, 1997 that are not directly related to the
business will not be included for purposes of this definition.
"Senior Bank Debt" means any Indebtedness of Pegasus Satellite (including
letters of credit) outstanding under, and any other Obligations of Pegasus
Satellite with respect to, Bank Facilities, to the extent that any such
Indebtedness and other Obligations are permitted by the exchange note indenture
to be incurred.
"Senior Debt" means the Senior Bank Debt (to the extent it constitutes
Indebtedness of Pegasus Satellite) and any other Indebtedness of Pegasus
Satellite permitted to be incurred by Pegasus Satellite under the terms of the
exchange note indenture, unless the instrument under which the Indebtedness is
incurred expressly provides that it is on a parity with or subordinated in
right of payment to the exchange notes. Notwithstanding anything to the
contrary in the foregoing, Senior Debt will not include:
o any liability for federal, state, local or other taxes owed or owing by
Pegasus Satellite;
o any Indebtedness of Pegasus Satellite to any of its Subsidiaries or other
Affiliates;
o any trade payables; or
o any Indebtedness that is incurred in violation of the exchange note
indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, under the
Securities Act, as in effect on January 27, 1997.
"Split Dollar Agreement" means the Split Dollar Agreement between Pegasus
Satellite and Nicholas A. Pagon, Holly T. Pagon and Michael B. Jordan, as
trustees of an insurance trust established by Marshall W. Pagon, as in effect
on January 27, 1997.
"Subsidiary" means, with respect to any Person:
o any corporation, association or other business entity of which more than
50% of the total voting power of shares of Capital Stock entitled,
without regard to the occurrence of any contingency, to vote in the
election of directors, managers or trustees thereof is at the time owned
or controlled, directly or indirectly, by the Person or one or more of
the other Subsidiaries of that Person or a combination thereof; and
o any partnership:
-- the sole general partner or the managing general partner of which is
the Person or a Subsidiary of the Person; or
-- the only general partners of which are the Person or of one or more
Subsidiaries of the Person (or any combination thereof).
"Total Interest Expense" means, with respect to any Person for any period,
the sum of:
o the consolidated interest expense of the Person and its Restricted
Subsidiaries for the period, whether paid or accrued -- including,
without limitation, amortization of original issue discount, non-cash
interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and
charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments, if any, under Hedging Obligations;
o the consolidated interest expense of the Person and its Restricted
Subsidiaries that was capitalized during the period, to the extent the
amounts are not included in the first clause of this definition;
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o any interest expense for the period on Indebtedness of another Person
that is Guaranteed by the Person or one of its Restricted Subsidiaries or
secured by a Lien on assets -- other than Equity Interests in
Unrestricted Subsidiaries securing Indebtedness of Unrestricted
Subsidiaries -- of the Person or one of its Restricted Subsidiaries,
whether or not the Guarantee or Lien is called upon; and
o all cash and non-cash dividend payments during the period on any series
of new Pegasus Satellite preferred stock of a Restricted Subsidiary of
the Person.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
board of directors as an Unrestricted Subsidiary under a board resolution; but
only to the extent that the Subsidiary:
o has no Indebtedness other than Non-Recourse Debt;
o is not party to any agreement, contract, arrangement or understanding
with Pegasus Satellite or any Restricted Subsidiary of Pegasus Satellite
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to Pegasus Satellite or the
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of Pegasus Satellite;
o is a Person with respect to which neither Pegasus Satellite nor any of
its Restricted Subsidiaries has any direct or indirect obligation:
-- to subscribe for additional Equity Interests; or
-- to maintain or preserve the Person's financial condition or to cause
the Person to achieve any specified levels of operating results;
o has not Guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of Pegasus Satellite or any of its
Restricted Subsidiaries; and
o has at least one executive officer that is not a director or executive
officer of Pegasus Satellite or any of its Restricted Subsidiaries.
Any such designation made by Pegasus Satellite's board of directors at a
time when any exchange notes are outstanding will be evidenced to the trustee
by filing with the trustee a certified copy of the board resolution giving
effect to the designation and an officers' certificate certifying that the
designation complied with the foregoing conditions and was permitted by the
provisions of the covenant described under the caption -- Certain Covenants --
Restricted Payments. If, at any time, any Unrestricted Subsidiary would fail to
meet the foregoing requirements as an Unrestricted Subsidiary, it will
thereafter cease to be an Unrestricted Subsidiary for purposes of the
certificate of designation or the exchange note indenture, as the case may be,
and any Indebtedness of the Subsidiary will be deemed to be incurred by a
Restricted Subsidiary of Pegasus Satellite as of that date -- and, if the
Indebtedness is not permitted to be incurred as of that date under the
provisions of the covenant described under the caption -- Certain Covenants --
Incurrence of Indebtedness and Issuance of Preferred Stock -- treating the
Subsidiary as a Restricted Subsidiary for the purpose for the period relevant
to that covenant, Pegasus Satellite will be in default of the covenant;
provided, however, that in the event an Unrestricted Subsidiary ceases to meet
the requirement set forth in the fifth clause of this definition, the
Unrestricted Subsidiary will have 60 days to meet the requirement before the
Unrestricted Subsidiary will cease to be an Unrestricted Subsidiary. The board
of directors of Pegasus Satellite may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that the designation will be
deemed to be an Incurrence of Indebtedness by a Restricted Subsidiary of
Pegasus Satellite of any outstanding Indebtedness of the Unrestricted
Subsidiary and the designation will be permitted only if:
o the Indebtedness is permitted under the covenant described under the
provisions of the covenant described under the caption -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock
treating the Subsidiary as a Restricted Subsidiary for the purpose for
the period relevant to that covenant; and
o no Voting Rights Triggering Event, or no Default or Event of Default, as
the case may be, would be in existence following the designation.
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"Voting Stock" means with respect to any specified Person, 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 Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
o the sum of the products obtained by multiplying:
-- the amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment at
final maturity, in respect thereof; by
-- the number of years (calculated to the nearest one-twelfth) that will
elapse between that date and the making of the payment; by
o the then outstanding principal amount of the Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of the Person all of the outstanding Capital Stock, other than
Qualified Subsidiary Stock, or other ownership interests of which, other than
directors' qualifying shares, will at the time be owned by the Person and/or by
one or more Wholly Owned Restricted Subsidiaries of the Person.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Information with respect to our indebtedness is contained below and in the
section Risk Factors -- Risk of Investing in the New Pegasus Satellite
Preferred Stock and Exchange Notes -- Our Substantial Indebtedness Could
Adversely Affect Your Investment.
Our principal indebtedness is owed by corporations at different levels of
our corporate structure. See the organizational charts presented in Proposed
Holding Company Reorganization.
Pegasus Media & Communications Credit Facility
On January 14, 2000, Pegasus Media & Communications, Inc., a wholly-owned
subsidiary of Pegasus Communications, entered into a $500.0 million credit
facility. This Pegasus Media & Communications credit facility replaced the
previous Pegasus Media & Communications and the Digital Television Services
credit facilities. Pegasus Media & Communications can use borrowings under the
credit facility for acquisitions and general corporate purposes. The following
summary of the material provisions of the credit facility is not complete, and
is subject to all the provisions of the credit facility.
The facility includes a $225.0 million secured reducing revolving credit
facility that will mature on October 31, 2004, as well as a $275.0 million
secured term loan maturing April 30, 2005. Furthermore, Pegasus Media &
Communications will be permitted to borrow up to $200.0 million under an
incremental secured term loan maturing on July 31, 2005, if Pegasus Media &
Communications seeks and obtains commitments for such loan. The facility is
secured by substantially all assets of Pegasus Media & Communications and a
pledge of all capital stock of its and certain of its principal subsidiaries.
Borrowings under the credit facility bear interest at LIBOR or the prime
rate, as selected by Pegasus Media & Communications, plus spreads that vary
with its ratio of total debt to a measure of its cash flow. The credit facility
requires an annual commitment fee of 0.75% of the unused portion of the
revolving credit commitment when less than 50% of the revolving credit
commitment is utilized, and an annual commitment fee of 0.50% of the unused
portion of the revolving credit commitment when greater than 50% of the
revolving credit commitment is utilized. The credit facility requires Pegasus
Media & Communications to purchase an interest rate hedging contract covering
an amount equal to at least 50% of the total amount of the term loan. The
facility contains hedging requirements for the revolving credit facility and
the term loan that are customary for such transactions.
The Pegasus Media & Communications credit facility requires prepayments
and concurrent reductions of the commitment customary for credit facilities of
this nature. The credit facility:
o limits the amounts of indebtedness that Pegasus Media & Communications
and its subsidiaries may incur;
o requires Pegasus Media & Communications to maintain a maximum leverage
ratio, a minimum interest coverage, and a minimum fixed charge coverage;
and
o limits dividends and other restricted payments.
The credit facility contains customary covenants, representations, warranties,
indemnities, conditions precedent to closing and borrowing, and events of
default. Currently, the credit facility does not allow Pegasus Media &
Communications to make distributions to Pegasus Satellite of enough money to
pay its dividend obligations that begin in 2002 under the new Pegasus Satellite
preferred stock. However, we are in the process of obtaining the consents of
our lenders so that we can do so (except if there has been a default under the
credit facility). Unless there is a default under the credit facility, Pegasus
Media & Communications can make distributions to Pegasus Satellite, including
the distribution of enough money to pay interest and dividend obligations on
Pegasus Satellite's other publicly held debt securities.
Beginning March 31, 2001, the revolving credit commitment under the credit
facility will begin to reduce in quarterly amounts ranging from a 10%
annualized reduction in 2001 to a 50% annualized reduction in
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2004. Amortization will begin on the term loan on March 31, 2001 in quarterly
amounts ranging from 0.25% in 2001 to 25% in 2005, with the balance due at
maturity. The incremental term loan will be accessible until June 30, 2001 with
amortization commencing in quarterly amounts ranging from 0.25% in 2001 to 25%
on December 31, 2004, with the balance due at maturity.
Golden Sky Credit Facility
In May 1998, Golden Sky Systems, Inc. entered into an amended and restated
revolving credit facility to provide for:
o revolving credit in the amount of $115.0 million, with a $40.0 million
sublimit for letters of credit; and
o a $35.0 million term loan facility.
Golden Sky Systems can use borrowings under the Golden Sky credit facility
for acquisitions, capital expenditures, working capital and general corporate
purposes. The following summary of the material provisions of the credit
facility is not complete, and is subject to all of the provisions of the credit
facility.
Golden Sky Holdings, Golden Sky DBS Inc., and all subsidiaries of Golden
Sky Systems, Inc., except for South Plains DBS Limited Partnership and DCE
Satellite Entertainment, LLC, are guarantors of the credit facility, which is
secured by:
o a pledge by Golden Sky Holdings of all capital stock of Golden Sky DBS;
o a pledge by Golden Sky DBS of all capital stock of Golden Sky Systems;
o an equal and ratable pledge of all capital stock of Golden Sky System's
subsidiaries;
o a first priority security interest in all assets of Golden Sky Systems'
subsidiaries; and
o a collateral assignment of Golden Sky DBS's agreements with the National
Rural Telecommunications Cooperative.
Borrowings under the credit facility bear interest at the quotation
offered in the New York interbank Eurodollar market or the prime rate, as
selected by Golden Sky DBS, plus spreads that vary with its ratio of total debt
to a measure of its cash flow.
The term loan must be repaid in 15 consecutive quarterly installments of
approximately $88,000 each, commencing March 31, 2002, with the remaining
balance due on December 31, 2005. Borrowings under the revolving credit
facility will be available to Golden Sky DBS until September 30, 2005. The
commitments under the Golden Sky DBS credit facility reduce quarterly
commencing on March 31, 2001 at a rate of approximately $1.2 million per
quarter through 2001, approximately $3.4 million per quarter in 2002,
approximately $6.9 million per quarter in 2003, approximately $8.6 million per
quarter in 2004 and approximately $11.5 million per quarter until September 30,
2005. The making of each loan under the credit facility is subject to the
satisfaction of certain conditions, including not exceeding a borrowing base
based on the number of paying subscribers and households within the rural
DIRECTV service territories served by Golden Sky DBS.
The credit facility contains specified financial and operating covenants,
including minimum interest coverage ratios and limits on general and
administrative expenses.
In addition, the credit facility provides for mandatory prepayments from
the net proceeds of sales or other dispositions of capital stock or material
assets and a percentage of any excess operating cash flow with respect to any
fiscal year equal to 75%.
1999 Notes
Pegasus Satellite has outstanding $155.0 million in aggregate principal
amount of its 12 1/2% Series A senior subordinated notes due 2007. The 1999
notes are subject to an indenture among Pegasus Satellite and
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First Union National Bank, as trustee. The following summary of the material
provisions of the 1999 notes indenture is not complete, and is subject to all
of the provisions of the 1999 notes indenture and those terms made a part of
the indenture by the Trust Indenture Act.
General. The 1999 notes will mature on August 1, 2007 and bear interest at
12 1/2% per annum, payable semi-annually on February 1 and August 1 of each
year. The 1999 notes are general unsecured obligations of Pegasus Satellite and
rank senior in right of payment to all existing and future subordinated debt of
Pegasus Satellite and rank equal in right of payment with all existing and
future senior subordinated debt. The 1999 notes may be guaranteed, on a senior
subordinated unsecured basis, jointly and severally, by each subsidiary of
Pegasus Satellite that issues a supplemental indenture to the 1999 notes
indenture.
Optional Redemption. The 1999 notes are subject to redemption at any time,
at the option of Pegasus Satellite, in whole or in part, on or after August 1,
2003 at redemption prices, plus accrued interest, starting at 106.25% of
principal during the 12-month period beginning August 1, 2003 and declining
annually to 100% of principal on August 1, 2006 and thereafter.
Change of Control. If a change of control of Pegasus Satellite occurs,
each holder of the 1999 notes may require Pegasus Satellite to repurchase all
or a portion of the holder's 1999 notes at a purchase price equal to 101% of
principal, together with accrued and unpaid interest, if any, to the date of
repurchase. Generally, a change of control, means any of the following, with
certain exceptions:
o the sale of all or substantially all of Pegasus Satellite's assets to any
person other than Marshall W. Pagon or his related parties, as described
in the indenture;
o the adoption of a plan relating to the liquidation or dissolution of
Pegasus Satellite;
o the consummation of any transaction in which a person becomes the
beneficial owner of more of the voting power of all Pegasus Satellite's
voting stock than is beneficially owned at such time by Mr. Pagon and his
related parties;
o the consummation of any transaction in which Mr. Pagon and his related
parties cease to have at least 30% of the combined voting power of all of
Pegasus Satellite's voting stock, or in which Mr. Pagon and his
affiliates acquire in the aggregate beneficial ownership of more than
66 2/3% of Pegasus Satellite's Class A common stock; or
o the first day on which a majority of the members of the board of
directors of Pegasus Satellite are not continuing directors --
essentially, the current directors and replacements elected or
recommended by the current directors or by such replacements.
Certain Covenants. The 1999 notes indenture contains a number of covenants
restricting the operations of Pegasus Satellite, which, among other things,
limit its ability to:
o incur additional indebtedness;
o pay dividends or make distributions;
o make certain investments;
o sell assets;
o issue subsidiary stock;
o restrict distributions from subsidiaries;
o create certain liens;
o enter into certain consolidations or mergers; and
o enter into certain transactions with affiliates.
Events of Default. Events of default under the 1999 notes indenture
include the following:
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o a default for 30 days in the payment when due of interest on, or
liquidated damages with respect to, the 1999 notes;
o default in payment when due of the principal of or premium, if any, on
the notes;
o failure by Pegasus Satellite to comply with certain provisions of the
notes indenture (subject, in some but not all cases, to notice and cure
periods);
o default under certain items of indebtedness for money borrowed by Pegasus
Satellite or any of its significant restricted subsidiaries in the amount
of $5.0 million or more;
o failure by Pegasus Satellite or any restricted subsidiary to pay final
judgments in excess of $5.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; and
o certain events of bankruptcy or insolvency with respect to Pegasus
Satellite or certain of its subsidiaries.
If an event of default occurs, with certain exceptions, the trustee under
the 1999 notes indenture or the holders of at least 25% in principal amount of
the then outstanding notes may accelerate the maturity of all the 1999 notes.
1998 Notes
Pegasus Satellite has outstanding $100.0 million in aggregate principal of
9 3/4% senior notes due 2006. The 1998 notes are subject to an indenture between
Pegasus Satellite and First Union National Bank, as trustee. The following
summary of the material provisions of the 1998 notes indenture is not complete,
and is subject to all of the provisions of the indenture and those terms made a
part of the indenture by the Trust Indenture Act.
General. The 1998 notes will mature on December 1, 2006 and bear interest
at 9 3/4% per annum, payable semi-annually in arrears on June 1 and December 1
of each year. The 1998 notes are general unsecured obligations of Pegasus
Satellite and rank senior in right of payment to all existing and future
subordinated debt of Pegasus Satellite and rank equal in right of payment with
all existing and future senior debt. Pegasus Satellite's obligations under the
1998 notes may be guaranteed on a senior unsecured basis, jointly and
severally, by each subsidiary of Pegasus Satellite that executes a supplemental
indenture to the 1998 notes indenture.
Optional Redemption. The 1998 notes may be redeemed, in whole or in part,
at the option of Pegasus Satellite on or after December 1, 2002, at the
redemption prices, plus accrued interest, starting at 104.875% of principal
during the 12-month period beginning December 1, 2002 and declining annually to
100% of principal on December 1, 2005 and thereafter.
Pegasus Satellite also has the right, until December 1, 2001, to use the
net proceeds of one or more offerings of its capital stock to redeem up to 35%
of the aggregate principal amount of the notes at a redemption price of
109.750% of the principal, plus accrued and unpaid interest and liquidated
damages, if any, to the date of redemption. If Pegasus Satellite does this, it
must leave at least $65.0 million of the 1998 notes outstanding, and the
redemption must occur within 90 days of the date of closing of the offering of
its capital stock.
Change of Control. If a change of control of Pegasus Satellite occurs,
each holder of 1998 notes will have the right to require Pegasus Satellite to
repurchase all or a portion of the holder's 1998 notes at a purchase price
equal to 101% of the principal, plus accrued and unpaid interest and liquidated
damages, if any, thereon to the date of repurchase. Generally, a change of
control includes any of the following:
o the sale of all or substantially all of Pegasus Satellite's assets to any
person other than Marshall W. Pagon or his related parties, as described
in the indenture;
o the adoption of a plan relating to the liquidation or dissolution of
Pegasus Satellite;
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o the consummation of any transaction in which a person becomes the
beneficial owner of more of the voting power of all Pegasus Satellite's
voting stock than is beneficially owned at such time by Mr. Pagon and his
related parties;
o the consummation of any transaction in which Mr. Pagon and his related
parties cease to have at least 30% of the combined voting power of all of
Pegasus Satellite's voting stock, or Mr. Pagon and his affiliates acquire
in the aggregate beneficial ownership of more than 66 2/3% of Pegasus
Satellite's Class A common stock; or
o the first day on which a majority of the members of the board of
directors of Pegasus Satellite are not continuing directors --
essentially, the current directors and replacements elected or recommended
by the current directors or by such replacements.
Certain Covenants. The 1998 notes indenture contains a number of covenants
restricting Pegasus Satellite's operations, which, among other things, limit
the ability of Pegasus Satellite Communications to:
o incur additional indebtedness;
o pay dividends or make distributions;
o make certain investments;
o sell assets;
o issue subsidiary stock;
o restrict distributions from subsidiaries;
o create certain liens;
o enter into certain consolidations or mergers; and
o enter into certain transactions with affiliates.
Events of Default. Events of default under the 1998 notes indenture
include the following:
o a default for 30 days in the payment when due of interest on, or
liquidated damages with respect to, the 1998 notes;
o default in payment when due of the principal of or premium, if any, on
the 1998 notes;
o failure by Pegasus Satellite or any subsidiary to comply with certain
provisions of the 1998 notes indenture, subject, in some but not all
cases, to notice and cure periods;
o default under certain items of indebtedness for money borrowed by Pegasus
Satellite or certain of its subsidiaries;
o failure by Pegasus Satellite or certain of its subsidiaries to pay final
judgments aggregating in excess of $5.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days; or
o certain events of bankruptcy or insolvency with respect to Pegasus
Satellite or certain of its subsidiaries.
If an event of default occurs, with certain exceptions, the trustee under
the 1998 notes indenture or the holders of at least 25% in principal amount of
the then outstanding 1998 notes may accelerate the maturity of all the 1998
notes.
1997 Notes
Pegasus Satellite has outstanding $115.0 million in aggregate principal
amount of its 9 5/8% senior notes due 2005. The 1997 notes are subject to an
indenture between Pegasus Satellite and First Union National Bank, as trustee.
The following summary of the material provisions of the indenture is not
complete, and is subject to all of the provisions of the 1997 notes indenture
and those terms made a part of the indenture by the Trust Indenture Act.
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General. The 1997 notes will mature on October 15, 2005 and bear interest
at 9 5/8% per annum, payable semi-annually in arrears on April 15 and October 15
of each year. The 1997 notes are general unsecured obligations of Pegasus
Satellite and rank senior in right of payment to all existing and future
subordinated debt of Pegasus Satellite and rank equal in right of payment with
all existing and future senior debt. Pegasus Satellite's obligations under the
1997 notes may be guaranteed on a senior unsecured basis, jointly and
severally, by each subsidiary of Pegasus Satellite that executes a supplemental
indenture to the 1997 notes indenture.
Optional Redemption. The 1997 notes may be redeemed, in whole or in part,
at the option of Pegasus Satellite on or after October 15, 2001, at the
redemption prices, plus accrued interest, starting at 104.813% of principal
during the 12-month period beginning October 15, 2001 and declining annually to
100% of principal on October 15, 2003 and thereafter.
Change of Control. If a change of control of Pegasus Satellite occurs,
each holder of the 1997 notes may require Pegasus Satellite to repurchase all
or a portion of the holder's 1997 notes at a purchase price equal to 101% of
the principal, together with accrued and unpaid interest and liquidated damages
thereon, if any, to the date of repurchase.
Generally, a change of control, includes any of the following events:
o the sale of all or substantially all of Pegasus Satellite's assets to any
person other than Marshall W. Pagon or his related parties, as described
in the indenture;
o the adoption of a plan relating to the liquidation or dissolution of
Pegasus Satellite;
o the consummation of any transaction in which a person becomes the
beneficial owner of more of the voting power of all Pegasus Satellite's
voting stock than is beneficially owned at such time by Mr. Pagon and his
related parties;
o the consummation of any transaction in which Mr. Pagon and his related
parties cease to have at least 30% of the combined voting power of all of
Pegasus Satellite's voting stock, or in which Mr. Pagon and his
affiliates acquire in the aggregate beneficial ownership of more than
66 2/3% of Pegasus Satellite's Class A common stock; or
o the first day on which a majority of the members of the board of
directors of Pegasus Satellite are not continuing directors --
essentially, the current directors and replacements elected or
recommended by the current directors or by such replacements.
Certain Covenants. The 1997 notes indenture contains a number of covenants
restricting the operations of Pegasus Satellite, which, among other things,
limit the ability of Pegasus Satellite to:
o incur additional indebtedness;
o pay dividends or make distributions;
o make certain investments;
o sell assets;
o issue subsidiary stock;
o restrict distributions from subsidiaries;
o create certain liens;
o enter into certain consolidations or mergers; and
o enter into certain transactions with affiliates.
Events of Default. Events of default under the indenture include the
following:
o a default for 30 days in the payment when due of interest on the 1997
notes;
o default in payment when due of the principal of or premium, if any, on
the 1997 notes;
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o failure by Pegasus Satellite to comply with certain provisions of the
indenture, subject, in some but not all cases, to notice and cure periods;
o default under certain items of indebtedness for money borrowed by Pegasus
Satellite or certain of its subsidiaries;
o failure by Pegasus Satellite or certain of its subsidiaries to pay final
judgments aggregating in excess of $5.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days; or
o certain events of bankruptcy or insolvency with respect to Pegasus
Satellite or certain of its subsidiaries.
If an event of default occurs, with certain exceptions, the trustee under
the 1997 notes indenture or the holders of at least 25% in principal amount of
the then outstanding 1997 notes may accelerate the maturity of all the 1997
notes.
Pegasus Media & Communications Notes
Pegasus Media & Communications has outstanding $85.0 million in aggregate
principal amount of its 12 1/2% senior subordinated notes due 2005. The Pegasus
Media & Communications notes are subject to an indenture among Pegasus Media &
Communications, certain of its direct and indirect subsidiaries, as guarantors,
and First Union National Bank, as trustee. The following summary of the
material provisions of the indenture is not complete, and is subject to all of
the provisions of the indenture and those terms made a part of the indenture by
the Trust Indenture Act.
General. The Pegasus Media & Communications notes will mature on July 1,
2005 and bear interest at 12 1/2% per annum, payable, semi-annually on January 1
and July 1 of each year. The notes are general unsecured obligations of Pegasus
Media & Communications and are subordinated in right of payment to all existing
and future senior debt of that company. The notes are unconditionally
guaranteed, on an unsecured senior subordinated basis, jointly and severally,
by certain subsidiaries of Pegasus Media & Communications.
Optional Redemption. The Pegasus Media & Communications notes are subject
to redemption at any time, at the option of Pegasus Media & Communications, in
whole or in part, on or after July 1, 2000 at redemption prices, plus accrued
interest, starting at 106.25% of principal during the 12-month period beginning
July 1, 2000 and declining annually to 100% of principal on July 1, 2003 and
thereafter.
Change of Control. If a change of control of Pegasus Communications
occurs, each holder of the Pegasus Media & Communications notes may require
Pegasus Communications to repurchase all or a portion of the holder's Pegasus
Media & Communications notes at a purchase price equal to 101% of the
principal, together with accrued and unpaid interest, if any, to the date of
repurchase.
Generally, a change of control, includes any of the following events:
o the sale of all or substantially all of Pegasus Media & Communications
assets to any person other than Marshall W. Pagon or his related parties,
as described in the indenture;
o the adoption of a plan relating to the liquidation or dissolution of
Pegasus Media & Communications;
o the consummation of any transaction in which a person becomes the
beneficial owner of more of the voting stock of Pegasus Satellite than is
beneficially owned at that time by Mr. Pagon and his related parties; or
o the first day on which a majority of the members of the board of
directors of Pegasus Media & Communications or Pegasus Satellite are not
continuing directors -- essentially, the current directors and
replacements elected or recommended by the current directors or by such
replacements.
Subordination. The Pegasus Media & Communications notes are general
unsecured obligations and are subordinate to all existing and future senior
debt of Pegasus Media & Communications. The notes rank senior in right of
payment to all junior subordinated indebtedness of Pegasus Media &
Communications. The
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subsidiary guarantees are general unsecured obligations of the guarantors of
the notes and are subordinated to the senior debt and to the guarantees of
senior debt of the guarantor. The subsidiary guarantees rank senior in right of
payment to all junior subordinated indebtedness of the guarantors.
Certain Covenants. The Pegasus Media & Communications notes indenture
contains a number of covenants restricting the operations of it, which, among
other things,
o limit the ability of it to incur additional indebtedness, pay dividends,
or make distributions;
o make certain investments, sell assets, issue subsidiary stock, restrict
distributions from subsidiaries; and
o create certain liens, enter into certain consolidations or mergers and
enter into certain transactions with affiliates.
Events of Default. Events of default under the Pegasus Media &
Communications notes indenture include the following:
o a default for 30 days in the payment when due of interest on the notes;
o default in payment when due of the principal of or premium, if any, on
the notes;
o failure by Pegasus Media & Communications to comply with certain
provisions of the indenture, subject, in some but not all cases, to
notice and cure periods;
o default under certain items of indebtedness for money borrowed by Pegasus
Media & Communications or certain of its subsidiaries;
o failure by Pegasus Media & Communications or certain of its subsidiaries
to pay final judgments aggregating in excess of $2.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days;
o except as permitted by the indenture, any subsidiary guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect of any subsidiary
guarantor, or any person acting on behalf of any guarantor, shall deny or
disaffirm its obligations under its subsidiary guarantee; or
o certain events of bankruptcy or insolvency with respect to Pegasus Media
& Communications or certain of its subsidiaries.
If an event of default occurs, with certain exceptions, the trustee under
the indenture or the holders of at least 25% in principal amount of the then
outstanding Pegasus Media & Communications notes may accelerate the maturity of
all the notes as provided in the indenture.
Golden Sky DBS Notes
Golden Sky DBS, Inc. has outstanding $193.1 million in aggregate principal
amount of its 13 1/2% Series B senior discount notes due 2007. The Golden Sky
DBS notes are subject to an indenture among Golden Sky DBS, Inc. and United
States Trust Company of New York, as trustee. The following summary of the
material provisions of the Golden Sky DBS notes indenture is not complete, and
is subject to all of the provisions of the Golden Sky DBS notes indenture and
those terms made a part of the indenture by the Trust Indenture Act.
General. The Golden Sky DBS notes will mature on March 1, 2007 and bear
interest at 13 1/2% per annum, payable semi-annually on March 1 and September 1
of each year. The Golden Sky DBS notes are general unsecured obligations of
Golden Sky DBS and rank senior in right of payment to all existing and future
subordinated debt of Golden Sky DBS and rank equal in right of payment with all
existing and future senior debt. The notes are neither guaranteed by the
subsidiaries of Golden Sky DBS nor secured by the assets of such subsidiaries.
Optional Redemption. The Golden Sky DBS notes are subject to redemption at
any time, at the option of Golden Sky DBS, in whole or in part, on or after
March 1, 2004 at redemption prices, plus accrued interest, starting at 106.750%
of the accreted amount during the 12-month period beginning March 1, 2004 and
declining annually to 100% of principal on March 1, 2006 and thereafter.
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In addition, prior to March 1, 2002, Golden Sky DBS may redeem up to 35%
of the aggregate principal amount of the notes with the net proceeds of certain
public offerings of its common equity at a price equal to 113.5% of the
principal amount plus accrued interest. If Golden Sky DBS does this, it must
leave at least 65% of the Golden Sky DBS notes outstanding.
Change of Control. If a change of control of Golden Sky DBS occurs, each
holder of the Golden Sky DBS notes may require Golden Sky DBS to repurchase all
or a portion of the holder's Golden Sky DBS notes at a purchase price equal to
101% of principal, together with accrued and unpaid interest, if any, to the
date of repurchase. Generally, a change of control, means any of the following,
with certain exceptions:
o any person or group becomes the beneficial owner of more than 50% of the
total voting equity of Golden Sky DBS;
o Golden Sky DBS consolidates with, or merges with or into another entity,
or sells or otherwise disposes of substantially all its assets to any
entity;
o Any entity consolidates with, or merges with or into Golden Sky DBS
pursuant to a transaction in which the voting equity of Golden Sky DBS is
converted into or exchanged for cash, securities or other property, with
certain exceptions;
o during any two-year period, individuals who at the beginning of the
period constituted the board of directors of Golden Sky DBS, together with
new directors approved by a vote of a majority of directors in office at
the beginning of such period or whose election was previously so approved,
cease for any reason other than the action of certain noteholders, to
constitute a majority of the board; and
o the approval by its stockholders of any liquidation or dissolution of
Golden Sky DBS.
Certain Covenants. The Golden Sky DBS notes indenture contains a number of
covenants restricting the operations of Golden Sky DBS, which, among other
things, limit the ability of Golden Sky DBS to:
o incur additional indebtedness;
o pay dividends or make distributions;
o make certain investments;
o sell assets;
o issue subsidiary stock;
o restrict distributions from subsidiaries;
o create certain liens;
o enter into certain consolidations or mergers; and
o enter into certain transactions with affiliates.
Events of Default. Events of default under the Golden Sky DBS notes
indenture include the following:
o a default for 30 days in the payment when due of interest on, or
liquidated damages with respect to, the Golden Sky DBS notes;
o default in payment when due of the principal of or premium, if any, on
the notes;
o failure by Golden Sky DBS to comply with certain provisions of the notes
indenture (subject, in some but not all cases, to notice and cure
periods);
o default under certain items of indebtedness for money borrowed by Golden
Sky DBS or any of its significant restricted subsidiaries in the amount of
$15.0 million or more;
o failure by Golden Sky DBS or any restricted subsidiary to pay final
judgments in excess of $15.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; and
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o certain events of bankruptcy or insolvency with respect to Golden Sky DBS
or certain of its subsidiaries.
If an event of default occurs, with certain exceptions, the trustee under
the Golden Sky DBS notes indenture or the holders of at least 25% in principal
amount of the then outstanding notes may accelerate the maturity of all the
Golden Sky DBS notes.
Golden Sky Systems Notes
Golden Sky Systems, Inc. has outstanding $195.0 million in aggregate
principal amount of its 12 3/8% Series B senior subordinated notes due 2006. The
Golden Sky Systems notes are subject to an indenture among Golden Sky Systems
and State Street Bank and Trust Company of Missouri, N.A., as trustee. The
following summary of the material provisions of the Golden Sky Systems notes
indenture is not complete, and is subject to all of the provisions of the
Golden Sky Systems notes indenture and those terms made a part of the indenture
by the Trust Indenture Act.
General. The Golden Sky Systems notes will mature on August 1, 2006 and
bear interest at 12 3/8% per annum, payable semi-annually on February 1 and
August 1 of each year. The Golden Sky Systems notes are general unsecured
obligations of Golden Sky Systems and rank equal in right of payment to all
existing and future senior subordinated debt of Golden Sky Systems and rank
senior in right of payment with all existing and future junior subordinated
debt. The Golden Sky Systems notes are guaranteed, on a senior subordinated
basis, jointly and severally, by Golden Sky Systems' wholly-owned subsidiaries,
Argos Support Services Company and PrimeWatch, Inc., and may in the future be
guaranteed by other subsidiaries.
Optional Redemption. The Golden Sky Systems notes are subject to
redemption at any time, at the option of Golden Sky Systems, in whole or in
part, on or after August 1, 2003 at redemption prices, plus accrued interest,
starting at 112% of principal during the 12-month period beginning August 1,
2003 and declining annually to 108% of principal on August 1, 2005 and
thereafter.
In addition, prior to August 1, 2001, Golden Sky Systems may redeem up to
35% of the aggregate principal amount of the notes with the net proceeds of
certain public offerings of its common equity at a price equal to 112.375% of
the principal amount plus accrued interest. If Golden Sky Systems does this, it
must leave at least 65% of the Golden Sky Systems notes outstanding.
Change of Control. If a change of control of Golden Sky Systems occurs,
each holder of the Golden Sky Systems notes may require Golden Sky Systems to
repurchase all or a portion of the holder's Golden Sky Systems notes at a
purchase price equal to 101% of principal, together with accrued and unpaid
interest, if any, to the date of repurchase. Generally, a change of control,
means any of the following, with certain exceptions:
o any person or group becomes the beneficial owner of more than 50% of the
total voting equity of Golden Sky Systems;
o Golden Sky Systems consolidates with, or merges with or into another
entity, or sells or otherwise disposes of substantially all its assets to
any entity;
o any entity consolidates with, or merges with or into Golden Sky Systems
pursuant to a transaction in which the voting equity of Golden Sky Systems
is converted into or exchanged for cash, securities or other property,
with certain exceptions;
o during any two-year period, individuals who at the beginning of the
period constituted the board of directors of Golden Sky Systems, together
with new directors approved by a vote of a majority of directors, in
office at the beginning of such period or whose election was previously so
approved, cease for any reason other than the action of certain
noteholders, to constitute a majority of the board; or
o the approval by its stockholders of any liquidation or dissolution of
Golden Sky Systems.
Certain Covenants. The Golden Sky Systems notes indenture contains a
number of covenants restricting the operations of Golden Sky Systems, which,
among other things, limit the ability of Golden Sky Systems to:
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o incur additional indebtedness;
o pay dividends or make distributions;
o make certain investments;
o sell assets;
o issue subsidiary stock;
o restrict distributions from subsidiaries;
o create certain liens;
o enter into certain consolidations or mergers; and
o enter into certain transactions with affiliates.
Events of Default. Events of default under the Golden Sky Systems notes
indenture include the following:
o a default for 30 days in the payment when due of interest on, or
liquidated damages with respect to, the Golden Sky Systems notes;
o default in payment when due of the principal of or premium, if any, on
the notes;
o failure by Golden Sky Systems to comply with certain provisions of the
notes indenture (subject, in some but not all cases, to notice and cure
periods);
o default under certain items of indebtedness for money borrowed by Golden
Sky Systems or any of its significant restricted subsidiaries in the
amount of $15.0 million or more;
o failure by Golden Sky Systems or any restricted subsidiary to pay final
judgments in excess of $15.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; and
o certain events of bankruptcy or insolvency with respect to Golden Sky
Systems or certain of its subsidiaries.
If an event of default occurs, with certain exceptions, the trustee under
the Golden Sky Systems notes indenture or the holders of at least 25% in
principal amount of the then outstanding notes may accelerate the maturity of
all the Golden Sky Systems notes.
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DESCRIPTION OF CAPITAL STOCK
Our current authorized capital stock consists of:
o 250,000,000 shares of Class A common stock, par value $.01 per share;
o 30,000,000 shares of Class B common stock, par value $.01 per share;
o 200,000,000 shares of non-voting common stock, par value $.01 per share;
and
o 20,000,000 shares of preferred stock, par value $.01 per share.
As part of the reorganization, all of the common and preferred stock
described above will become common and preferred stock of our new holding
company.
After the reorganization, Pegasus Satellite's authorized and preferred
stock will consist of:
o 250,000,000 shares of Class A common stock, par value $.01 per share;
o 30,000,000 shares of Class B common stock, par value $.01 per share;
o 200,000,000 shares of non-voting common stock, par value $.01 per share;
and
o 20,000,000 shares of preferred stock, par value $.01 per share.
After the reorganization, Pegasus Communications will own 100 shares of
Pegasus Satellite's Class B common stock; and, assuming this exchange offer is
completed and all preferred stock is exchanged, there will be approximately
162,588 shares of new Pegasus Satellite Series A cumulative exchangeable
preferred stock outstanding. There will be no shares of Pegasus Satellite Class
A common stock outstanding after the reorganization.
The following summary description relating to Pegasus Satellite's capital
stock describes the material terms of Pegasus Satellite's capital stock. This
summary is not intended to be complete. It is subject to, and qualified in its
entirety by reference to, Pegasus Satellite's amended and restated certificate
of incorporation and the certificate of designation for the new Pegasus
Satellite preferred stock.
Description of Common Stock
Voting, Dividend and Other Rights. The voting powers, preferences and
relative rights of the Class A common stock, Class B common stock and
non-voting common stock are identical in all respects, except for the following
differences:
o holders of Class A common stock are entitled to one vote per share,
holders of Class B common stock are entitled to ten votes per share and
holders of non-voting common stock have no voting rights except as
provided by law;
o stock dividends on Class A common stock may be paid only in shares of
Class A common stock or non-voting common stock, stock dividends on Class
B common stock may be paid only in shares of Class B common stock or
non-voting common stock, and stock dividends on non-voting common stock
may be paid only in shares of non-voting common stock; and
o shares of Class B common stock can be converted into Class A common stock
and are subject to certain restrictions on ownership and transfer.
Holders of a majority of the outstanding shares of the Class A common
stock and the Class B common stock, voting as separate classes, must approve
any amendment to the amended and restated certificate of incorporation that has
any of the following effects:
o any decrease in the voting rights per share of Class A common stock or
any increase in the voting rights of Class B common stock;
o any increase in the number of shares of Class A common stock into which
shares of Class B common stock are convertible;
o any relaxation on the restrictions on transfer of the Class B common
stock; or
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o any change in the powers, preferences or special rights of the Class A
common stock or the Class B common stock adversely affecting the holders
of the Class A common stock.
In addition, any act or transaction by or involving Pegasus Satellite that
requires for its adoption under the Delaware General Corporation Law or under
Pegasus Satellite's certificate of incorporation, other than the election or
removal of Pegasus Satellite's directors, also requires for its adoption the
approval of Pegasus Communications' Class A and Class B common stockholders
(voting as separate classes), by the same vote required under the Delaware
General Corporation Law or Pegasus Satellite's certificate of incorporation.
Except as described or as required by law, holders of Class A common stock
and Class B common stock vote together on all matters presented to the
stockholders for their vote or approval, including the election of directors.
Holders of non-voting common stock are not entitled to vote on amendments to
our certificate of incorporation, whether such amendment increases or decreases
the number of shares of non-voting common stock, or otherwise. Where holders of
non-voting common stock are entitled to a vote by law, they are entitled to one
vote per share, and they will vote together as a single class with the holders
of the Class A common stock and Class B common stock, unless the law requires a
separate vote. Holders of a majority of the outstanding shares of each Class A
common stock and Class B common stock, voting as separate classes, must approve
the authorization or issuance of additional shares of Class B common stock,
except when we take parallel action with respect to Class A common stock in
connection with stock dividends, stock splits, recapitalizations, and similar
changes.
Each share of common stock is entitled to receive dividends as declared by
the board of directors out of legally available funds. The Class A common
stock, Class B common stock and non-voting common stock share equally on a
share-for-share basis in cash dividends.
In the event of a merger or consolidation to which Pegasus Satellite is a
party, each share of Class A common stock, Class B common stock and non-voting
common stock will be entitled to receive the same consideration, except that,
if Pegasus Satellite is not the surviving corporation, holders of Class B
common stock may receive stock with greater voting power in lieu of stock with
lesser voting power received by holders of Class A common stock, and holders of
non-voting common stock may receive stock with no voting rights.
Pegasus Satellite's stockholders have no preemptive or other rights to
subscribe for additional shares. Subject to any rights of holders of any
preferred stock, all holders of common stock, regardless of class, are entitled
to share equally on a share-for-share basis in any assets available for
distribution to stockholders if Pegasus Satellite liquidates, dissolves or
winds up. No shares of common stock are subject to redemption or to a sinking
fund. All issued common stock is validly issued, fully paid and nonassessable.
In the event of any change in the number of outstanding shares of either class
of common stock from a stock split, combination, consolidation or
reclassification, Pegasus Satellite is required to take parallel action with
respect to the other class so that the number of shares of each class bears the
same relationship to each other as they did before the event. Cumulative voting
is not permitted.
Conversion Rights and Restrictions on Transfer. The Class A common stock
has no conversion rights. Each share of Class B common stock is convertible at
the option of the holder at any time and from time to time into one share of
Class A common stock. Any holder of shares of Class B common stock desiring to
transfer shares of Class B common stock must present those shares to us for
conversion into an equal number of shares of Class A common stock. After
conversion, the converted shares may be freely transferred, subject to
applicable securities laws. A holder of Class B common stock may transfer
shares of Class B common stock without conversion if the transfer is to one of
the following:
o Marshall W. Pagon or any of his immediate family members. For purposes of
this paragraph, immediate family member includes Mr. Pagon's spouse and
parents, the lineal descendents of either of his parents, and the spouses
of their lineal descendents. Adoptive and step relationships are included
for purposes of defining parentage and descent;
o the estate of Marshall W. Pagon or any of his immediate family members
until the property of such estate is distributed in accordance with such
deceased's will or applicable law; or
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o any voting or other trust, corporation, partnership or other entity, more
than 50% of the voting equity interests of which are owned directly or
indirectly by, and which is controlled by, Marshall W. Pagon or any of
his immediate family members.
If ownership or voting rights of shares of Class B common stock are
transferred other than in accordance with the preceding paragraph, or a
transferee loses the status that allowed him or her to hold shares of Class B
common stock without conversion, such shares of Class B common stock will
automatically convert into an equal number of shares of Class A common stock.
Because of these restrictions, no trading market is expected to develop in the
Class B common stock and the Class B common stock will not be listed or traded
on any exchange or in any market. Pegasus Satellite's Class A common stock also
will not be listed or traded on any exchange, and we do not expect a trading
market to develop for the stock.
Description of Preferred Stock
Our board of directors may issue 20,000,000 shares of preferred stock par
value $.01 per share without shareholder approval, and may determine their
terms, including the following:
o the designation of the series of preferred stock and the number of shares
which will constitute such series;
o the public offering price;
o any discount paid to, or received by, any underwriters;
o the voting powers, if any;
o the dividend rate of such series and any preferences in relation to the
dividends payable on any other class or series of our capital stock and
any limitations or conditions on the payment of dividends;
o the redemption price and terms of redemption, if redeemable;
o the amount payable upon our liquidation, dissolution or winding up;
o the amount of a sinking fund, if any;
o conversion rights, if any, including the conversion price or rate of
exchange and the adjustment, if any, to be made to the conversion price
or rate of exchange;
o any other designation, preferences and relative, participating, optional
or other special rights; and
o any other qualifications, limitations or restrictions relating to the
preferred stock.
Pegasus Satellite's board of directors may delegate the power to determine
the terms listed above to a committee of our board of directors. The board or
committee may authorize issuance in one or more classes or series so
authorized. Their action could adversely affect the voting power of the holders
of the common stock or could have the effect of discouraging or making
difficult any attempt by a person or group to obtain control of Pegasus
Satellite.
In addition to the terms set by Pegasus Satellite's board of directors or
finance committee, Delaware law provides that the holders of preferred stock
have the right to vote separately as a class on any proposal involving a
fundamental change in the rights of holders of such preferred stock.
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MARKET PRICES OF THE PEGASUS COMMUNICATIONS PREFERRED STOCK
In general, there has been limited trading of the Pegasus Communications
preferred stock and the trading has taken place primarily in the
over-the-counter market. Prices and trading volumes of the Pegasus
Communications preferred stock in the over-the-counter market are not reported
and can be difficult to monitor. Quotations for securities that are not widely
traded, such as the Pegasus Communications preferred stock, may differ from
actual trading prices and should be viewed as approximations. Holders of
Pegasus Communications preferred stock are urged to contact their brokers with
respect to current information regarding the Pegasus Communications preferred
stock that they hold.
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NOTICE TO INVESTORS
Because the following restrictions will apply unless Pegasus Satellite
causes a registration statement with respect to the resale of the new Pegasus
Satellite preferred stock and exchange notes to be declared effective,
purchasers are advised to consult legal counsel before making any offer,
resale, pledge or transfer of new Pegasus Satellite preferred stock.
Each holder of Pegasus Communications preferred stock exchanging its
Pegasus Communications preferred stock for new Pegasus Satellite preferred
stock, by its acceptance of the new Pegasus Satellite preferred stock, will be
deemed to have acknowledged, represented to and agreed with us as follows:
o The shares of new Pegasus Satellite preferred stock and the new Pegasus
Satellite exchange notes have not been registered under the Securities Act
or any U.S. securities law and they are being offered for resale in
transactions not requiring registration under the Securities Act. After
the exchange, the shares of new Pegasus Satellite preferred stock and the
new Pegasus Satellite exchange notes, if issued, may not be reoffered,
resold, pledged or otherwise transferred except:
-- to a person whom the purchaser reasonably believes is a qualified
institutional buyer ("QIB") in a transaction meeting the requirements
of Rule 144A;
-- in an offshore transaction complying with Rule 904 of Regulation S;
-- pursuant to an exemption from registration under the Securities Act
provided by Rule 144 thereunder (if available);
-- to an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act)
that, prior to such transfer, furnishes the transfer agent a signed
letter containing certain representations and agreements relating to
the transfer of the shares of new Pegasus Satellite preferred stock
and the new Pegasus Satellite exchange notes and, if such transfer is
in respect of an aggregate liquidation preference or principal
amount, as the case may be, of less than $100,000, an opinion of
counsel;
-- in accordance with another exemption from the registration
requirements of the Securities Act (and based upon an opinion of
counsel acceptable to us);
-- to us or our subsidiaries; or
-- pursuant to an effective registration statement under the Securities
Act, and, in each case, in accordance with all applicable U.S. state
securities laws.
o The purchaser will, and each subsequent holder is required to, notify any
subsequent purchaser from it of the shares of new Pegasus Satellite
preferred stock and the new Pegasus Satellite exchange notes of the resale
restrictions set forth in the preceding sentence. No representation is
being made as to the availability of the exemption provided by Rule 144
for resales of the shares of new Pegasus Satellite preferred stock and the
new Pegasus Satellite exchange notes.
o It is not an "affiliate" (as defined in Rule 144 under the Securities
Act) of ours, it is not acting on behalf of us and is:
-- a qualified institutional buyer and is aware that the sale to it will
be made in reliance on Rule 144A, and the acquisition will be for its
own account or for the account of another qualified institutional
buyer;
-- an "accredited investor," as defined in Rule 501(a)(1), (2), (3),
(5), (6), (7) or (8) under the Securities Act, and is aware that the
sale to it will be made in reliance on Rule 506; or
-- a person who is not a U.S. person, including dealers or other
professional fiduciaries in the U.S. acting on a discretionary basis
for foreign beneficial owners, other than an estate or trust, who is
making the exchange in an offshore transaction, as defined in
Regulation S of the Securities Act.
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We will make the exchange offer available to a limited number of
unaccredited investors under SEC Rule 506. Unaccredited investors who
accept this exchange offer will be deemed to have made all of the
representations in this Notice to Investors, except for the immediately
preceding three representations.
o It is relying on the information contained in this offering memorandum in
making its investment decision with respect to the shares of new Pegasus
Satellite preferred stock or the new Pegasus Satellite exchange notes. It
acknowledges that no representation or warranty is made by the dealer
manager as to the accuracy or completeness of such materials. It further
acknowledges that neither we nor the dealer manager or any person
representing us or the dealer manager has made any representation to it
with respect to us or the offering or sale of any shares of new Pegasus
Satellite preferred stock or the new Pegasus Satellite exchange notes
other than the information contained in this offering memorandum. It has
had access to such financial and other information concerning our company
and the shares of new Pegasus Satellite preferred stock and the new
Pegasus Satellite exchange notes as it has deemed necessary in connection
with its decision to purchase any of the shares of new Pegasus Satellite
preferred stock or the new Pegasus Satellite exchange notes, including an
opportunity to ask questions of and request information from us and the
initial purchasers.
o The purchaser understands that, until registered under the Securities
Act, the shares of new Pegasus Satellite preferred stock and the new
Pegasus Satellite exchange notes, if issued, will bear a legend to the
following effect unless otherwise agreed by us and the holder thereof:
"This security (or its predecessor) has not been registered under the
U.S. Securities Act of 1933, as amended (the "Securities Act"), and,
accordingly, may not be offered, sold, pledged or otherwise transferred
within the United States or to, or for the account or benefit of, U.S.
persons, except as set forth in the next sentence. By its acquisition
hereof or of a beneficial interest herein, the holder:
-- Represents that (a) it is a Qualified Institutional Buyer, or "QIB"
(as defined in Rule 144A under the Securities Act), (b) it has
acquired this Security in an offshore transaction in compliance with
Regulation S under the Securities Act, (c) it is an "Accredited
Investor" (as defined in Rule 501(a)(1), (2), (3), (5), (6), (7) or
(8) of Regulation D under the Securities Act) or (d) an unaccredited
investor under Rule 506 of the Securities Act;
-- Agrees that it will not resell or otherwise transfer this Security
except (a) to the Company or any of its subsidiaries, (b) to a person
whom the seller reasonably believes is a QIB purchasing for its own
account or for the account of a QIB in a transaction meeting the
requirements of Rule 144A, (c) in an offshore transaction meeting the
requirements of Rule 904 of the Securities Act, (d) in a transaction
meeting the requirements of Rule 144 under the Securities Act, (e) to
an institutional Accredited Investor (as defined in Rule 501(a)(1),
(2), (3) or (7)) that, prior to such transfer, furnishes the trustee
a signed letter containing certain representations and agreements
relating to the transfer of this Security (the form of which can be
obtained from us or the transfer agent) and, if such transfer is in
respect of an aggregate [liquidation] [principal] amount of [shares]
[notes] less than $100,000, an opinion of counsel acceptable to the
Company that such transfer is in compliance with the Securities Act,
(f) in accordance with another exemption from the registration
requirements of the Securities Act (and based upon an opinion of
counsel acceptable to us) or (g) pursuant to an effective
registration statement and, in each case, in accordance with the
applicable securities laws of any state of the United States or any
other applicable jurisdiction; and
-- Agrees that it will deliver to each person to whom this Security or
an interest in this Security is transferred a notice substantially to
the effect of this legend.
As used herein, the terms "offshore transaction" and "United States"
have the meanings given to them by Rule 902 of Regulation S under the
Securities Act.
o Each purchaser represents and covenants that it is not, and is not
acquiring the shares of new Pegasus Satellite preferred stock with the
assets of, or for or on behalf of, and will not sell or otherwise transfer
the new Pegasus Satellite exchange notes issuable upon exchange of the new
Pegasus Satellite
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preferred stock to, any employee benefit plan (as defined in section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended, which
we refer to as "ERISA") or other arrangement that is subject to ERISA or
Section 4975 of the Code, which we refer to as a "Plan," or any entity
whose underlying assets include assets of a Plan pursuant to 29 C.F.R.
Section 2510.3-101 or otherwise, except to the extent that the acquisition
and holding of the shares of new Pegasus Satellite preferred stock or any
of the new Pegasus Satellite exchange notes issuable upon the exchange of
the new Pegasus Satellite preferred stock:
-- (a) are made solely with the assets of a bank collective investment
fund and (b) satisfy the requirements and conditions of Prohibited
Transaction Class Exemption 91-38 issued by the Department of Labor;
-- (a) are made solely with assets of an insurance company pooled
separate account and (b) satisfy the requirements and conditions of
Prohibited Transaction Class Exemption 90-1 issued by the Department
of Labor;
-- (a) are made solely with assets managed by a qualified professional
asset manager and (b) satisfy the requirements and conditions of
Prohibited Transaction Class Exemption 84-14 issued by the Department
of Labor;
-- are made solely with assets of a governmental plan (as defined in
Section 3(32) of ERISA) which is not subject to the provisions of
Section 401 of the Code;
-- (a) are made solely with assets of an insurance company general
account and (b) satisfy the requirements and conditions of Prohibited
Transaction Class Exemption 95-60 issued by the Department of Labor;
or
-- (a) are made solely with assets managed by an in-house asset manager
and (b) satisfy the requirements and conditions of Prohibited
Transaction Class Exemption 96-23 issued by the Department of Labor.
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LEGAL MATTERS
Drinker Biddle & Reath LLP, counsel for Pegasus Satellite, has passed upon
the validity of the new Pegasus Satellite preferred stock. Michael B. Jordan, a
partner of Drinker Biddle & Reath LLP, is an Assistant Secretary of Pegasus
Satellite.
INDEPENDENT ACCOUNTANTS
The financial statements of Pegasus Communications Corporation as of
December 31, 1997 1998 and 1999 for each of the three years in the period ended
December 31, 1999, which are included as Annex B in this offering memorandum,
have been audited by PricewaterhouseCoopers LLP, independent accountants, as
stated in their report appearing herein.
Golden Sky Holdings, Inc.'s consolidated balance sheets as of December 31,
1998 and 1999, and the related consolidated statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1999, are included as Annex D of this offering memorandum,
in reliance on the report of KPMG LLP, independent accountants, given and on
the authority of that firm as experts in accounting and auditing.
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ANNEX A
<PAGE>
PEGASUS SATELLITE COMMUNICATIONS INC. AND
PEGASUS COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Unaudited Pro Forma Consolidated Financial Information ................................... A-2
Pegasus Satellite Communications, Inc. Pro Forma Consolidated Balance Sheet at
September 30, 2000 ..................................................................... A-4
Pegasus Satellite Communications, Inc. Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1999 ........................................ A-5
Pegasus Satellite Communications, Inc. Pro Forma Consolidated Statement of
Operations for the Nine Months ended September 30, 2000 ................................ A-6
Pegasus Communications Corporation Pro Forma Consolidated Balance Sheet at
September 30, 2000 ..................................................................... A-7
Pegasus Communications Corporation Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1999 ........................................ A-8
Pegasus Communications Corporation Pro Forma Consolidated Statement of
Operations for the Nine Months ended September 30, 2000 ................................ A-10
</TABLE>
A-1
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma financial information presents
statements of operations for the year ended December 31, 1999 and the nine
months ended September 30, 2000 and financial position as of September 30, 2000
for each of Pegasus Satellite and the new parent holding company to be named
Pegasus Communications. The pro forma financial information reflects the
effects of the exchange offer, corporate reorganization and associated
recapitalization for Pegasus Satellite and the effect of the exchange offer for
Pegasus Communications discussed in the offering memorandum, as well as the
effects of significant transactions to each that have occurred since the end of
our latest annual period ending December 31, 1999. Estimated nonrecurring
expenses to be incurred within the next 12 months for the exchange offer,
reorganization and recapitalization of $650,000 are not reflected in the pro
forma statements of operations. The pro forma information assumes that the
exchange offer will occur after the next dividend payable date of January 1,
2001 for our Series A preferred stock and includes the effects of dividends
through that date. The effects of these transactions are more fully discussed
below and in the notes to the pro forma financial statements. The pro forma
consolidated statements of operations are based upon the actual results from
continuing operations of Pegasus Communications, our existing holding company,
and those of Golden Sky for the year ended December 31, 1999 and the nine
months ended September 30, 2000. Our existing holding company is the
predecessor to both Pegasus Satellite and our new holding company. Golden Sky's
results of operations contained in the nine months ended September 30, 2000 are
presented separately to the extent not already included in our actual results.
The pro forma balance sheet is based upon our existing holding company's actual
financial position as of September 30, 2000.
The pro forma statement of operations for the year ended December 31, 1999
for Pegasus Satellite and Pegasus Communications include the effects of our
acquisition of Golden Sky Holdings, Inc. in May 2000, the new credit facility
of our Pegasus Media & Communications subsidiary entered into in January 2000
and the effects of the exchange offer as if each had occurred at the beginning
of the period. The pro forma statement of operations for the year ended
December 31, 1999 for Pegasus Satellite exclude amounts associated with
intellectual property assets, related liabilities and other assets and cash
that are expected to be distributed by Pegasus Satellite to Pegasus
Communications in the corporate reorganization. The pro forma statement of
operations for the year ended December 31, 1999 for Pegasus Communications
include the effects of the issuances in the first quarter of 2000 of the
following series of preferred stock as if they had occurred at the beginning of
the period: 5,707 shares of series B junior participating convertible, 3.0
million shares of series C convertible, 22,500 shares of series D junior
participating convertible, and 10,000 shares of series E junior participating
convertible.
The pro forma statement of operations for the nine months ended September
30, 2000 for Pegasus Satellite and Pegasus Communications give effect to our
acquisition of Golden Sky and the effects of the exchange offer as if each had
occurred at the beginning of the period, to the extent not already included in
actual results. The pro forma statement of operations for the nine months ended
September 30, 2000 for Pegasus Satellite exclude amounts associated with
intellectual property assets, related liabilities and other assets and cash
that are expected to be distributed by Pegasus Satellite to Pegasus
Communications in the reorganization and preferred dividends associated with
four preferred stock offerings. The dividends for these offerings are excluded
because the related preferred stock is assumed not to be outstanding for
Pegasus Satellite due to the recapitalization that Pegasus Satellite will
undergo in connection with the reorganization.
The pro forma balance sheet as of September 30, 2000 for Pegasus Satellite
excludes amounts outstanding at that date associated with intellectual property
assets, related liabilities and other assets and cash of Pegasus Satellite
expected to be distributed by Pegasus Satellite to Pegasus Communications in
the reorganization. It also includes the effects of the recapitalization that
Pegasus Satellite will undergo in the reorganization and assumes that the
exchange offer was completed on this date. The pro forma balance sheet as of
September 30, 2000 for Pegasus Communications also assumes that the exchange
offer occurred on this date and reflects the new Series A preferred stock of
Pegasus Satellite that would be outstanding at that date as a minority interest
in Pegasus Communications.
The acquisition of Golden Sky was accounted for using the purchase method
of accounting. The purchase method of accounting allocates the aggregate
acquisition cost to the assets acquired and liabilities assumed
A-2
<PAGE>
based upon their respective fair values. The acquisition cost of approximately
$1.5 billion consisted of approximately 12.2 million shares of Class A common
stock valued at $579.0 million, options to purchase approximately 698,000
shares of Class A common stock valued at $33.2 million, net liabilities of
Golden Sky assumed by us of $383.0 million, a deferred income tax liability
incurred of $489.5 million and acquisition costs incurred of $20.7 million. The
deferred tax liability was allocated to direct broadcast satellite rights and
was attributed to non-deductible amortization. Of the total acquisition cost,
approximately $1.3 billion (including the amount attributed to the deferred tax
liability incurred) was allocated to direct broadcast satellite rights with the
remainder allocated to other assets and liabilities. Amounts allocated to the
direct satellite broadcast rights are being amortized over 10 years.
The average number of common shares and per share amounts for the year
ended December 31, 1999 and the shares issued in the acquisition of Golden Sky
reflect the two-for-one split of Pegasus Communications' Class A and Class B
common stocks that was approved by the Board of Directors on May 10, 2000 and
paid on May 30, 2000.
The pro forma financial information is presented for informational
purposes only. It is based upon available information, assumptions and
adjustments that we believe are reasonable in the circumstances. The pro forma
financial information is not necessarily indicative of our results of
operations or financial position that actually would have existed had the noted
transactions occurred at the time indicated or that may exist in the future.
You should read the pro forma financial information in conjunction with our
other financial information included elsewhere in this offering memorandum.
A-3
<PAGE>
Pegasus Satellite Communications, Inc.
Pro Forma Consolidated Balance Sheet
September 30, 2000
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Effects of the
Pegasus Reorganization, Pegasus
Communications Recapitalization Satellite
Corporation and Exchange Communications
Actual Offer Pro Forma
---------------- ------------------- -----------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents ......................... $ 306,901 $ (2,150)(a) $ 304,751
Restricted cash ................................... 7,957 7,957
Accounts receivable, net .......................... 45,000 45,000
Inventory ......................................... 20,415 20,415
Prepaid expenses and other current assets ......... 18,791 18,791
Property and equipment, net ....................... 58,162 58,162
Intangibles, net .................................. 2,253,818 (806)(b) 2,253,012
Other non-current assets .......................... 218,971 (116,399)(b) 102,572
----------- ----------- ----------
Total assets .................................... $ 2,930,015 $ (119,355) $ 2,810,660
=========== =========== ===========
LIABILITIES AND EQUITY
Current portion of long-term debt ................. $ 14,451 $ 14,451
Accounts payable and accrued expenses ............. 120,542 $ (175)(b) 120,367
Accrued interest .................................. 21,017 21,017
Other current liabilities ......................... 39,468 39,468
Long-term debt, net ............................... 1,114,464 1,114,464
Other noncurrent obligations ...................... 40,142 40,142
Deferred taxes .................................... 571,596 571,596
Minority interest ................................. 877 877
Redeemable preferred stock ........................ 195,853 (39,087)(c) 162,588(e)
5,822 (d)
Series C preferred stock .......................... 300,000 (300,000)(c) --
Common stock ...................................... 549 (549)(c) --
Additional paid in capital ........................ 970,404 215,284 (f) 1,185,688
Accumulated deficit ............................... (447,029) (650)(g) (447,679)
Other common equity ............................... (12,319) (12,319)
----------- ----------- ----------
Total liabilities and equity .................... $ 2,930,015 $ (119,355) $ 2,810,660
=========== =========== ===========
</TABLE>
--------------------------------------------------------------------------------
Notes to Pro Forma Consolidated Balance Sheet at September 30, 2000:
(a) Cash of Pegasus Satellite Communications of $1.5 million expected to be
distributed to Pegasus Communications Corporation in the reorganization
and estimated nonrecurring expenses to be incurred in the
reorganization, recapitalization and exchange offer of $ 650,000.
(b) Intellectual property assets, related liabilities and other assets and
cash expected to be distributed to Pegasus Communications Corporation
in the reorganization.
(c) Recapitalization of redeemable preferred stock Series B, D and E,
Series C preferred stock and all outstanding shares of Class A and B
$.01 par value common stock aggregating 54.9 million shares into 100
shares of new Class B $.01 par value common stock in connection with
the reorganization.
(d) Additional dividends on Series A preferred stock to be accrued through
the next dividend payable date of January 1, 2001, assuming that the
exchange offer occurs after that date.
(e) New Series A preferred stock outstanding after the reorganization and
exchange offer, assuming that these occur after the next Series A
preferred stock dividend payable date.
(f) Net effect of the following (000s):
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Expected distribution of intellectual property assets, related liabilities and other
assets and cash to Pegasus Communications Corporation $ (118,530)
Recapitalization of redeemable Series B, D and E preferred stock 39,087
Recapitalization of Series C preferred stock 300,000
Recapitalization of Class A and B common stock 549
Additional dividends on Series A preferred stock to be accrued (5,822)
----------
$ 215,284
==========
</TABLE>
(g) Estimated nonrecurring expenses to be incurred
A-4
<PAGE>
Pegasus Satellite Communications, Inc.
Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Pegasus Pegasus
Communications Effects of the Satellite
Corporation Reorganization and Communications
Actual Exchange Offer Subtotal
---------------- -------------------- ----------------
<S> <C> <C> <C>
Net revenues:
DBS ................................... $ 286,353 $ 286,353
Broadcast ............................. 36,415 36,415
---------- ----------
Total net revenues ................... 322,768 322,768
Operating expenses:
DBS
Programming, technical and
general and administrative ........... 201,158 201,158
Marketing and selling ................. 117,774 117,774
Incentive compensation ................ 1,592 1,592
Depreciation and amortization ......... 82,744 82,744
Broadcast
Programming, technical and
general and administrative ........... 22,812 22,812
Marketing and selling ................. 6,304 6,304
Incentive compensation ................ 57 57
Depreciation and amortization ......... 5,144 5,144
Corporate expenses ..................... 5,975 5,975
Corporate depreciation and
amortization .......................... 3,119 3,119
Other expense, net ..................... 1,995 1,995
---------- ----------
Loss from operations ................. (125,906) (125,906)
Interest expense ....................... (64,904) (64,904)
Interest income ........................ 1,356 1,356
Other non-operating expenses ...........
---------- ----------
Loss from continuing
operations before income
taxes and equity loss ............... (189,454) (189,454)
Benefit for income taxes ............... (8,892) (8,892)
Equity in net loss of unconsolidated
affiliate ............................. (201) $ 201(a)
---------- -------- ----------
Loss from continuing
operations .......................... (180,763) 201 (180,562)
Preferred stock dividends .............. 16,706 4,685(b) 21,391
---------- -------- ----------
Net loss from continuing operations
applicable to parent company .......... $ (197,469) $ (4,484) $ (201,953)
========== ======== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Golden Sky Acquisition Pegasus
---------------------------------- Satellite
Actual for New Credit Communications
Golden Sky Adjustments Subtotal Facility Pro Forma
-------------- ------------------ ------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Net revenues:
DBS ................................... $ 140,573 $ 426,926 $ 426,926
Broadcast ............................. 36,415 36,415
---------- ---------- ----------
Total net revenues ................... 140,573 463,341 463,341
Operating expenses:
DBS
Programming, technical and
general and administrative ........... 124,131 $ (782)(c) 324,507 324,507
Marketing and selling ................. 64,933 182,707 182,707
Incentive compensation ................ 782(c) 2,374 2,374
Depreciation and amortization ......... 35,963 125,695(d) 244,402 244,402
Broadcast
Programming, technical and
general and administrative ........... 22,812 22,812
Marketing and selling ................. 6,304 6,304
Incentive compensation ................ 57 57
Depreciation and amortization ......... 5,144 5,144
Corporate expenses ..................... 5,975 5,975
Corporate depreciation and
amortization .......................... 3,119 3,119
Other expense, net ..................... 1,995 1,995
---------- ----------- ---------- ----------
Loss from operations ................. (84,454) (125,695) (336,055) (336,055)
Interest expense ....................... (45,012) (109,916) $ (9,982)(f) (119,898)
Interest income ........................ 2,393 3,749 3,749
Other non-operating expenses ........... (1,259) (1,259) (1,259)
---------- ----------- ---------- --------- ----------
Loss from continuing
operations before income
taxes and equity loss ............... (128,332) (125,695) (443,481) (9,982) (453,463)
Benefit for income taxes ............... (8,892) (8,892)
Equity in net loss of unconsolidated
affiliate .............................
---------- ----------- ---------- --------- ----------
Loss from continuing
operations .......................... (128,332) (125,695) (434,589) (9,982) (444,571)
Preferred stock dividends .............. 17,920 (17,920)(e) 21,391 21,391
---------- ----------- ---------- --------- ----------
Net loss from continuing operations
applicable to parent company .......... $ (146,252) $ (107,775) $ (455,980) $ (9,982) $ (465,962)
========== =========== ========== ========= ==========
</TABLE>
--------------------------------------------------------------------------------
Notes to Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1999:
(a) Associated with intellectual property assets, related liabilities and other
assets and cash expected to be distributed to Pegasus Communications
Corporation in the reorganization.
(b) Additional preferred stock dividends associated with the assumed issuance
of 162,588 shares of new Series A preferred stock in the exchange offer.
(c) Reclassification for consistent classification.
(d) Additional amortization expense resulting from the purchase accounting
treatment of the Golden Sky merger and capitalized acquisition costs.
Computed based on the portion of the purchase price allocated to DBS
rights of approximately $1.26 billion amortized over 10 years.
(e) Elimination of Golden Sky's preferred stock outstanding as a result of the
merger.
(f) Net effect of Pegasus Media & Communications' new credit facility, as
follows (000's):
Senior notes ....................... $40,194
Senior subordinated notes .......... 10,625
Credit facilities .................. 22,000
Sellers' notes ..................... 2,056
Capital leases and other ........... 11
-------
Total interest expense ............ 74,886
Actual interest expense ............ 64,904
-------
Adjustment ......................... $ 9,982
=======
Credit facilities aggregating $275.0 million are subject to variable rates of
interest. A 1/8% change in the assumed variable rate of interest of 8.0% used
to compute the interest expense associated with the credit facilities would
change that interest expense by $344,000.
A-5
<PAGE>
Pegasus Satellite Communications, Inc.
Pro Forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 2000
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Pegasus Effects of the
Communications Reorganization
Corporation and Exchange
Actual Offer
---------------- ------------------
<S> <C> <C>
Net revenues:
DBS .................................. $ 389,851
Broadcast ............................ 26,128
----------
Total net revenues .................. 415,979
Operating expenses:
DBS
Programming, technical and
general and administrative ......... 272,925
Marketing and selling ............... 111,646
Incentive compensation .............. 1,835
Depreciation and amortization ....... 141,696
Broadcast
Programming, technical and
general and administrative ......... 18,253
Marketing and selling ............... 5,523
Incentive compensation .............. 204
Depreciation and amortization ....... 3,860
Corporate expenses ................... 6,041
Corporate depreciation and
amortization ........................ 1,116
Other expense, net ................... 5,738 $ (175) (a)
---------- -----------
Loss from operations ................ (152,858) 175
Interest expense ..................... (86,185)
Interest income ...................... 11,142
Other non-operating expenses ......... 234 314 (a)
---------- -----------
Loss from continuing operations
before income taxes ................ (227,667) 489
Benefit for income taxes ............. (30,022)
---------- -----------
Loss from continuing operations ..... (197,645) 489
Preferred stock dividends ............ 25,042 (9,164) (b)
---------- -----------
Net loss from continuing
operations applicable to parent
company ............................ $ (222,687) $ 9,653
========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus Golden Sky Acquisition Pegasus
Satellite --------------------------------- Satellite
Communications Actual for Communications
Subtotal Golden Sky Adjustments Pro Forma
---------------- ------------ ------------------- ---------------
<S> <C> <C> <C> <C>
Net revenues:
DBS .................................. $ 389,851 $ 58,061 $ 447,912
Broadcast ............................ 26,128 85 26,213
--------- --------- ----------
Total net revenues .................. 415,979 58,146 474,125
Operating expenses:
DBS
Programming, technical and
general and administrative ......... 272,925 46,642 $ (148)(d) 319,419
Marketing and selling ............... 111,646 9,565 121,211
Incentive compensation .............. 1,835 148 (d) 1,983
Depreciation and amortization ....... 141,696 12,363 41,898 (e) 195,957
Broadcast
Programming, technical and
general and administrative ......... 18,253 18,253
Marketing and selling ............... 5,523 5,523
Incentive compensation .............. 204 204
Depreciation and amortization ....... 3,860 3,860
Corporate expenses ................... 6,041 6,041
Corporate depreciation and
amortization ........................ 1,116 1,116
Other expense, net ................... 5,563 1,691 7,254
--------- --------- ----------- ----------
Loss from operations ................ (152,683) (12,115) (41,898) (206,696)
Interest expense ..................... (86,185) (16,346) (102,531)
Interest income ...................... 11,142 291 11,433
Other non-operating expenses ......... 548 (1,513) (965)
--------- --------- ----------- ----------
Loss from continuing operations
before income taxes ................ (227,178) (29,683) (41,898) (298,759)
Benefit for income taxes ............. (30,022) (30,022)
--------- --------- ----------- ----------
Loss from continuing operations ..... (197,156) (29,683) (41,898) (268,737)
Preferred stock dividends ............ 15,878 (c) 6,571 (6,571) (f) 15,878
--------- --------- ----------- ----------
Net loss from continuing
operations applicable to parent
company ............................ $(213,034) $ (36,254) $ (35,327) $ (284,615)
========= ========= =========== ==========
</TABLE>
--------------------------------------------------------------------------------
Notes to Pro Forma Consolidated Statement of Operations for the Nine Months
Ended September 30, 2000.
(a) Associated with intellectual property assets, related liabilities and other
assets and cash expected to be distributed to Pegasus Communications
Corporation in the reorganization.
(b) Net of reversal of dividends recognized on Series B, C, D and E preferred
stock issued during the period that would not be outstanding assuming the
recapitalization effected by the reorganization had occurred at the
beginning of the period of $(11.0) million, and additional preferred stock
dividends associated with the assumed issuance of 162,588 shares of new
Series A preferred stock in the exchange offer of $1.8 million.
(c) Accrued and unpaid dividends on new Series A preferred stock.
(d) Reclassification for consistent classification.
(e) Additional amortization expense resulting from the purchase accounting
treatment of the Golden Sky merger and capitalized acquisition costs.
Reflects four months of additional annual amortization of approximately
$126.0 million.
(f) Elimination of Golden Sky's preferred stock outstanding as a result of the
merger.
A-6
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Balance Sheet
September 30, 2000
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Pegasus Pegasus
Communications Effects of the Communications
Corporation Reorganization and Corporation
Actual Exchange Offer Pro Forma
---------------- -------------------- ---------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents ......................... $ 306,901 $ (650)(a) $ 306,251
Restricted cash ................................... 7,957 7,957
Accounts receivable, net .......................... 45,000 45,000
Inventory ......................................... 20,415 20,415
Prepaid expenses and other current assets ......... 18,791 18,791
Property and equipment, net ....................... 58,162 58,162
Intangibles, net .................................. 2,253,818 2,253,818
Other non-current assets .......................... 218,971 218,971
----------- ----------- -----------
Total assets .................................... $ 2,930,015 $ (650) $ 2,929,365
=========== =========== ===========
LIABILITIES AND EQUITY ............................
Current portion of long-term debt ................. $ 14,451 $ 14,451
Accounts payable and accrued expenses ............. 120,542 120,542
Accrued interest .................................. 21,017 21,017
Other current liabilities ......................... 39,468 39,468
Long-term debt, net ............................... 1,114,464 1,114,464
Other noncurrent obligations ...................... 40,142 40,142
Deferred taxes .................................... 571,596 571,596
Minority interest ................................. 877 $ 162,588 (b) 163,465
Redeemable preferred stock ........................ 195,853 (156,766)(c) 39,087
Series C preferred stock .......................... 300,000 300,000
Common stock ...................................... 549 549
Additional paid in capital ........................ 970,404 (5,822)(d) 964,582
Retained deficit .................................. (447,029) (650)(a) (447,679)
Other common stockholders' equity ................. (12,319) (12,319)
----------- ----------- -----------
Total liabilities and equity .................... $ 2,930,015 $ (650) $ 2,929,365
=========== =========== ===========
</TABLE>
--------------------------------------------------------------------------------
Notes to Pro Forma Consolidated Balance Sheet at September 30, 2000:
(a) Estimated nonrecurring expenses to be incurred in the reorganization and
exchange offer.
(b) Assumed issuance of 162,588 shares of Pegasus Satellite's new Series A
preferred stock assuming that the issuance occurs after the next Series A
preferred stock dividend payable date of January 1, 2001. New Series A
preferred stock of Pegasus Satellite represents a minority interest in the
consolidated balance sheet of Pegasus Communications Corporation.
(c) Assumed exchange and cancellation of Pegasus Communications' Series A
preferred stock outstanding at September 30, 2000.
(d) Additional dividends on Series A preferred stock to be accrued through the
next dividend payable date.
A-7
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1999
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Pegasus Golden Sky Acquisition
Communications Effect of the ---------------------------------------
Corporation Exchange Actual for
Actual Offer Golden Sky Adjustments
---------------- ----------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Net revenues:
DBS .................................... $ 286,353 $ 140,573
Broadcast .............................. 36,415
---------- ---------
Total net revenues .................... 322,768 140,573
Operating expenses:
DBS
Programming, technical and
general and administrative ........... 201,158 124,131 $ (782) (a)
Marketing and selling ................. 117,774 64,933
Incentive compensation ................ 1,592 782 (a)
Depreciation and amortization ......... 82,744 35,963 125,695 (b)
Broadcast
Programming, technical and
general and administrative ........... 22,812
Marketing and selling ................. 6,304
Incentive compensation ................ 57
Depreciation and amortization ......... 5,144
Corporate expenses .................... 5,975
Corporate depreciation and
amortization ......................... 3,119
Other expense, net .................... 1,995
---------- --------- ----------
Loss from operations ................. (125,906) (84,454) (125,695)
Interest expense ....................... (64,904) (45,012)
Interest income ........................ 1,356 2,393
Other non-operating expenses ........... (1,259)
---------- --------- ----------
Loss from continuing
operations before income
taxes and equity loss ............... (189,454) (128,332) (125,695)
Benefit for income taxes ............... (8,892)
Equity in net loss of unconsolidated
affiliate ............................. (201)
---------- --------- ----------
Loss from continuing operations ....... (180,763) (128,332) (125,695)
Preferred stock dividends .............. 16,706 $ 4,685 (f) 17,920 (17,920) (c)
---------- -------- --------- ----------
Net loss from continuing
operations applicable to
common shares ........................ $ (197,469) $ (4,685) $(146,252) $ (107,775)
========== ======== ========= ==========
Basic and diluted loss per common
share (g) ............................. $ (5.23)
Weighted average number of
common shares outstanding ............. 37,750 12,180 (h)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pegasus
Adjustments Communications
for Other Corporation
Transactions Pro Forma
-------------------- ---------------
<S> <C> <C>
Net revenues:
DBS .................................... $ 426,926
Broadcast .............................. 36,415
----------
Total net revenues .................... 463,341
Operating expenses:
DBS
Programming, technical and
general and administrative ........... 324,507
Marketing and selling ................. 182,707
Incentive compensation ................ 2,374
Depreciation and amortization ......... 244,402
Broadcast
Programming, technical and
general and administrative ........... 22,812
Marketing and selling ................. 6,304
Incentive compensation ................ 57
Depreciation and amortization ......... 5,144
Corporate expenses .................... 5,975
Corporate depreciation and
amortization ......................... 3,119
Other expense, net .................... 1,995
----------
Loss from operations ................. (336,055)
Interest expense ....................... $ (9,982) (d) (119,898)
Interest income ........................ 3,749
Other non-operating expenses ........... (1,259)
---------- ----------
Loss from continuing
operations before income
taxes and equity loss ............... (9,982) (453,463)
Benefit for income taxes ............... (8,892)
Equity in net loss of unconsolidated
affiliate ............................. (201)
---------- ----------
Loss from continuing operations ....... (9,982) (444,772)
Preferred stock dividends .............. 20,857 (e) 42,248
---------- ----------
Net loss from continuing
operations applicable to
common shares ........................ $ (30,839) $ (487,020)
========== ==========
Basic and diluted loss per common
share (g) ............................. $ (9.75)
Weighted average number of
common shares outstanding ............. 49,930
</TABLE>
A-8
<PAGE>
Notes to Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1999:
(a) Reclassification for consistent classification.
(b) Additional amortization expense resulting from the purchase accounting
treatment of the Golden Sky merger and capitalized acquisition costs.
Computed based on the portion of the purchase price allocated to DBS
rights of approximately $1.26 billion amortized over 10 years.
(c) Elimination of Golden Sky's preferred stock outstanding as a result of the
merger.
(d) Net effect of Pegasus Media & Communications' new credit facility, as
follows (000's):
Senior notes $40,194
Senior subordinated notes 10,625
Credit facilities 22,000
Sellers' notes 2,056
Capital leases and other 11
-------
Total interest expense 74,886
Actual interest expense 64,904
-------
Adjustment $ 9,982
=======
Credit facilities aggregating $275.0 million are subject to variable rates of
interest. A 1/8% change in the assumed variable rate of interest of 8.0% used to
compute the interest expense associated with the credit facilities would change
that interest expense by $344,000. (e) Additional preferred dividends associated
with the issuances of preferred stock in 2000, as follows (000's):
Series C $19,500
Series B 57
Series D 900
Series E 400
-------
Adjustment $20,857
=======
(f) Additional dividends associated with the assumed issuance of 162,588 shares
of new Series A preferred stock.
(g) Basic and diluted per share amounts are the same because all of the
company's common stock equivalents and convertible securities outstanding
are antidilutive.
(h) Number of shares issued in the Golden Sky acquisition.
A-9
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 2000
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Pegasus
Communications Effect of the
Corporation Exchange
Actual Offer
---------------- -----------------
<S> <C> <C>
Net revenues:
DBS ......................................... $ 389,851
Broadcast ................................... 26,128
-----------
Total net revenues ........................ 415,979
Operating expenses:
DBS
Programming, technical and general
and administrative ....................... 272,925
Marketing and selling ...................... 111,646
Incentive compensation ..................... 1,835
Depreciation and amortization .............. 141,696
Broadcast
Programming, technical and general
and administrative ....................... 18,253
Marketing and selling ...................... 5,523
Incentive compensation ..................... 204
Depreciation and amortization .............. 3,860
Corporate expenses .......................... 6,041
Corporate depreciation and amortization 1,116
Other expense, net .......................... 5,738
-----------
Loss from operations ...................... (152,858)
Interest expense ............................ (86,185)
Interest income ............................. 11,142
Other non-operating expenses ................ 234
-----------
Loss from continuing operations
before income taxes ..................... (227,667)
Benefit for income taxes .................... (30,022)
-----------
Loss from continuing operations .......... (197,645)
Preferred stock dividends ................... 25,042 $ 1,846 (d)
----------- --------
Net loss from continuing operations
applicable to common shares ............. $ (222,687) $ (1,846)
=========== ========
Basic and diluted loss per common share
(e) ........................................ $ (4.63)
Weighted average number of common
shares outstanding ......................... 48,097
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Golden Sky Acquisition Pegasus
------------------------------------ Communications
Actual for Corporation
Golden Sky Adjustments Pro Forma
----------------- ----------------- ---------------
<S> <C> <C> <C>
Net revenues:
DBS ......................................... $ 58,061 $ 447,912
Broadcast ................................... 85 26,213
-------- -----------
Total net revenues ........................ 58,146 474,125
Operating expenses:
DBS
Programming, technical and general
and administrative ....................... 46,642 $ (148)(a) 319,419
Marketing and selling ...................... 9,565 121,211
Incentive compensation ..................... 148 (a) 1,983
Depreciation and amortization .............. 12,363 41,898 (b) 195,957
Broadcast
Programming, technical and general
and administrative ....................... 18,253
Marketing and selling ...................... 5,523
Incentive compensation ..................... 204
Depreciation and amortization .............. 3,860
Corporate expenses .......................... 6,041
Corporate depreciation and amortization 1,116
Other expense, net .......................... 1,691 7,429
-------- --------- -----------
Loss from operations ...................... (12,115) (41,898) (206,871)
Interest expense ............................ (16,346) (102,531)
Interest income ............................. 291 11,433
Other non-operating expenses ................ (1,513) (1,279)
-------- --------- -----------
Loss from continuing operations
before income taxes ..................... (29,683) (41,898) (299,248)
Benefit for income taxes .................... (30,022)
-------- --------- -----------
Loss from continuing operations .......... (29,683) (41,898) (269,226)
Preferred stock dividends ................... 6,571 (6,571)(c) 26,888
-------- --------- -----------
Net loss from continuing operations
applicable to common shares ............. $ (36,254) $ (35,327) $ (296,114)
========= ========= ===========
Basic and diluted loss per common share
(e) ........................................ $ (5.68)
Weighted average number of common
shares outstanding ......................... 4,060 (f) 52,157
</TABLE>
--------------------------------------------------------------------------------
Notes to Pro Forma Consolidated Statement of Operations for the Nine Months
Ended September 30, 2000:
(a) Reclassification for consistent classification.
(b) Additional amortization expense resulting from the purchase accounting
treatment of the Golden Sky merger and capitalized acquisition costs.
Reflects four months of additional annual amortization of approximately
$126.0 million.
(c) Elimination of Golden Sky's preferred stock outstanding as a result of the
merger.
(d) Additional dividends associated with the assumed issuance of 162,588 shares
of new Series A preferred stock.
(e) Basic and diluted per share amounts are the same because all of the
company's common stock equivalents and convertible securities outstanding
are antidilutive.
(f) Weighted effect of the number of shares issued in the Golden Sky
acquisition.
A-10
<PAGE>
ANNEX B
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from_______ to _______
Commission File Number 0-21389
PEGASUS COMMUNICATIONS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0374669
------------------------------- ----------------------
(State of other jurisdiction of (IRS Employer
incorporation of 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
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Title of each class
-------------------
Common Stock, Class A; $0.01 par value
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___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (Class A Common Stock)
held by non-affiliates of the Registrant as of the close of business on February
29, 2000 was approximately $1,789,932,200 based on the average bid and asked
prices of the Class A Common Stock on such date on the Nasdaq National Market.
(Reference is made to the paragraph captioned "Calculation of Aggregate Market
Value of Nonaffiliate Shares" of "Part II, Item 5 herein for a statement of
assumptions upon which this calculation is based.)
Number of shares of each class of the registrant's common stock
outstanding as of February 29, 2000:
Class A, Common Stock, $0.01 par value 15,905,844
Class B, Common Stock, $0.01 par value 4,581,900
B-1
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I
Item 1. Business......................................................................................3
Item 2. Properties...................................................................................22
Item 3. Legal Proceedings............................................................................23
Item 4. Submission of Matters to a Vote of Security Holders..........................................24
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters....................25
Item 6. Selected Financial Data......................................................................27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................40
Item 8. Financial Statements and Supplementary Data..................................................41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........41
PART III
Item 10. Directors and Executive Officers of the Registrant...........................................42
Item 11. Executive Compensation.......................................................................44
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................49
Item 13. Certain Relationships and Related Transactions...............................................52
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................56
</TABLE>
B-2
<PAGE>
PART I
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to us that are based on the beliefs of our management, as
well as assumptions made by and information currently available to our
management. When used in this Report, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect" and similar expressions are intended
to identify forward-looking statements. Such statements reflect our current
views with respect to future events and are subject to unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those contemplated in such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, both nationally, internationally and in the regions in which we
operate; demographic changes; existing government regulations and changes in, or
the failure to comply with government regulations; competition; the loss of any
significant numbers of subscribers or viewers; changes in business strategy or
development plans; technological developments and difficulties; the ability to
attract and retain qualified personnel; our significant indebtedness; the
availability and terms of capital to fund the expansion of our businesses; our
relationships with DIRECTV and the National Rural Telecommunications
Cooperative; and other factors referenced in this Report.
The information is this Report assumes the completion of the
acquisition of Golden Sky Holdings, Inc. and other pending acquisitions
described in "Item 1: Business -- Recent Completed and Pending Transactions,"
unless otherwise noted.
ITEM 1: BUSINESS
General
Pegasus is:
o The largest independent distributor of DIRECTV(R) with 1.1
million subscribers at February 29, 2000. We have the
exclusive right to distribute DIRECTV digital broadcast
satellite services to over 7.2 million rural households in 41
states. We distribute DIRECTV through the Pegasus retail
network, a network in excess of 2,500 independent retailers.
o The owner or programmer of ten TV stations affiliated with
either Fox, UPN or the WB.
o One of the fastest growing media companies in the United
States. We have increased our revenues at a compound growth
rate of 89% per annum since our inception in 1991.
Direct Broadcast Satellite Television
The introduction of direct broadcast satellite receivers is widely
regarded as the most successful introduction of a consumer electronics product
in U.S. history, surpassing the rollout of color televisions, videocassette
recorders and compact disc players. According to a recent Paul Kagan study, in
1998 direct broadcast satellite was the fastest growing multichannel television
service in the country, capturing almost two out of every three new subscribers
to those services. There are currently three nationally branded direct broadcast
satellite programming services: DIRECTV, Primestar and EchoStar. At December 31,
1999, there were 11.5 million direct broadcast satellite subscribers in the
United States:
o 6.7 million DIRECTV subscribers, including approximately 5.2
million subscribers served by DIRECTV itself, 1.1 million
subscribers served by Pegasus and Golden Sky and 400,000
subscribers served by the approximately 100 other DIRECTV
rural affiliates;
o 1.4 million Primestar subscribers; and
o 3.4 million EchoStar subscribers.
All three direct broadcast satellite programming services are digital satellite
services, and therefore require that a subscriber install a satellite receiving
antenna or dish and a digital receiver. DIRECTV and EchoStar require a satellite
dish of approximately 18 inches in diameter that may be installed by the
consumer without professional assistance. Primestar requires a dish of
approximately 36 inches in diameter that generally must be professionally
installed. The market shares of DIRECTV, Primestar and EchoStar among all direct
broadcast satellite subscribers nationally are currently 58%, 12% and 30%,
respectively. The Carmel Group has estimated that the number of direct broadcast
satellite subscribers will grow to 21.1 million by 2003.
B-3
<PAGE>
Hughes completed the acquisition of Primestar's medium-power direct
broadcast satellite business on May 22, 1999, and completed the acquisition of
related high-power satellite assets on June 8, 1999. Hughes is currently
operating Primestar only during a transition period while it converts Primestar
subscribers to DIRECTV subscribers. At the time of the acquisition, we estimated
that there were approximately 250,000 Primestar subscribers in our DIRECTV
exclusive territories who could become our subscribers if they choose to receive
DIRECTV programming.
DIRECTV
DIRECTV is a service of Hughes Electronics, a subsidiary of General
Motors Corporation. DIRECTV offers in excess of 200 entertainment channels of
near laser disc quality video and compact disc quality audio programming.
DIRECTV currently transmits via four high-power Ku band satellites. We believe
that DIRECTV's extensive line-up of cable networks, pay-per-view movies and
events and sports packages, including the exclusive "NFL Sunday Ticket," have
enabled DIRECTV to capture a majority market share of existing direct broadcast
satellite subscribers and will continue to drive strong subscriber growth for
DIRECTV services in the future. DIRECTV added 1.6 million new subscribers in
1999.
DIRECTV Rural Affiliates
Prior to the launch of DIRECTV's programming service, Hughes
Electronics, which was succeeded by its subsidiary DIRECTV, entered into an
agreement with the National Rural Telecommunications Cooperative authorizing the
National Rural Telecommunications Cooperative to offer its members and
affiliates the opportunity to acquire exclusive rights to distribute DIRECTV
programming services in rural areas of the United States. The National Rural
Telecommunications Cooperative is a cooperative organization whose members and
affiliates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. Approximately 250
National Rural Telecommunications Cooperative members and affiliates acquired
such exclusive rights, thereby becoming DIRECTV rural affiliates. The DIRECTV
exclusive territories acquired by DIRECTV's rural affiliates include
approximately 9.0 million rural households. Pegasus was the largest of the
original DIRECTV rural affiliates, acquiring a DIRECTV exclusive territory of
approximately 500,000 homes in four New England states. Since 1996 we have
increased our DIRECTV exclusive territories to approximately 7.2 million homes
through the completed or pending acquisitions of approximately 150 other DIRECTV
rural affiliates, including the completed acquisition of Digital Television
Services, Inc., with which we merged in 1998, and the pending acquisition of
Golden Sky Holdings, Inc.
Pegasus Rural Focus and Strategy
We believe that direct broadcast satellite and other digital satellite
services will achieve disproportionately greater consumer acceptance in rural
areas than in metropolitan areas. Direct broadcast satellite services have
already achieved a penetration of more than 22% in rural areas of the United
States, as compared to approximately 5% in metropolitan areas.
Our long-term goal is to become an integrated provider of direct
broadcast satellite and other digital satellite services for the 79.8 million
people, 32.3 million homes and 3.1 million businesses located in rural areas of
the United States. To accomplish our goal, we are pursuing the following
strategy:
o Continue to Grow Our Rural Subscriber Base by Aggressively
Marketing DIRECTV. Pegasus currently serves in excess of 1.1
million DIRECTV subscribers, which represents a penetration of
approximately 15.7%. Our rate of growth has accelerated as we
have increased our scale and expanded the Pegasus network of
independent retailers.
o Continue to Acquire Other DIRECTV Rural Affiliates. We
currently own approximately 80% of the DIRECTV exclusive
territories held by DIRECTV's rural affiliates. We have had an
excellent track record of acquiring DIRECTV rural affiliates
and believe that we have a competitive advantage in acquiring
additional DIRECTV rural affiliates. We base this belief on
our position as the largest DIRECTV rural affiliate, our
access to the capital markets and our strong reputation in the
direct broadcast satellite industry. We will continue to
pursue our strategy of acquiring other DIRECTV rural
affiliates.
o Continue to Develop the Pegasus Retail Network. We have
established the Pegasus network of independent retailers in order
to distribute DIRECTV in our DIRECTV exclusive territories. Our
consolidation of DIRECTV's rural affiliates has enabled us to
expand the Pegasus retail network to over 2,500 independent
retailers in 41 states. We believe that the Pegasus retail network
is one of the few sales and distribution channels for digital
satellite services with broad and effective reach in rural areas
of the U.S. We intend to further expand the Pegasus retail network
in order to increase the penetration of DIRECTV in rural areas and
to enable us to distribute additional digital satellite services
that will complement our distribution of DIRECTV.
B-4
<PAGE>
o Generate Future Growth By Bundling Additional Digital Satellite
Services with DIRECTV. We believe that new digital satellite
services, such as digital audio services, broadband multimedia
services and mobile satellite services, will be introduced to
consumers and businesses in the next five years. These services,
like direct broadcast satellite, should achieve disproportionate
success in rural areas. However, because there are limited sales
and distribution channels in rural areas, new digital satellite
service providers will confront the same difficulties that direct
broadcast satellite service providers have encountered in
establishing broad distribution in rural areas, as compared to
metropolitan areas. We believe that the Pegasus retail network
will enable us to establish relationships with digital satellite
service providers that will position us to capitalize on these new
opportunities.
Satellite Services in Rural Areas
Rural areas include approximately 85% of the total landmass of the
continental United States and have an average home density of less than 12 homes
per square mile. Because the cost of reaching a household by a cable or other
wireline distribution system is generally inversely proportional to home density
and the cost of providing satellite service is not, satellite services have
strong cost advantages over cable in rural areas.
There are approximately 79.8 million people, 32.3 million households
and 3.1 million businesses located in rural areas of the United States. Rural
areas therefore represent a large and attractive market for direct broadcast
satellite and other digital satellite services. Approximately 65% of all U.S.
direct broadcast satellite subscribers reside in rural areas. It is likely that
future digital satellite services, such as soon to be launched digital audio
services and satellite broadband multimedia services, will also achieve
disproportionate success in rural areas as compared to metropolitan areas.
It is difficult, however, for satellite and other service providers to
establish sales and distribution channels in rural areas. In contrast to
metropolitan areas, where there are many strong national retail chains, few
national retailers have a presence in rural areas. Most retailers in rural areas
are independently owned and have only one or two store locations. For these
reasons, satellite providers seeking to establish broad and effective rural
distribution have limited alternatives:
o They may seek to distribute their services through one of the
few national retailers, such as Radio Shack or Wal-Mart, that
have a strong retail presence in rural areas.
o They may seek to establish direct sales channels in rural
areas, as Primestar initially sought to do through its cable
partners.
o They may seek to distribute through national networks of
independent retailers serving rural areas, such as have been
established by EchoStar and by Pegasus.
Consolidation of DIRECTV Rural Affiliates
When DIRECTV was launched in 1994, small DIRECTV rural affiliates held
approximately 95% of the DIRECTV rural affiliate exclusive territories. In 1996,
Pegasus first acquired another DIRECTV rural affiliate, thereby beginning a
process of consolidation that has significantly changed the composition of
DIRECTV's rural affiliates. Since 1996, Pegasus, Golden Sky Systems have
acquired approximately 150 DIRECTV rural affiliates. Today, Pegasus represents
80% of the DIRECTV exclusive territories held by DIRECTV's rural affiliates,
including 21% held by Golden Sky, and the approximately 100 remaining rural
affiliates total 20%. Pegasus believes that consolidation among DIRECTV's rural
affiliates will continue.
As of February 29, 2000, we distributed DIRECTV in the following
DIRECTV exclusive territories:
<TABLE>
<CAPTION>
Exclusive Total
DIRECTV Homes in Total
Territories Territory Subscribers Penetration
----------- --------- ----------- -----------
<S> <C> <C> <C>
Northeast............................ 751,745 87,176 11.6%
Central.............................. 1,138,651 169,197 14.9%
Southeast............................ 1,327,517 241,014 18.2%
Midwest.............................. 1,323,406 197,273 14.9%
Central Plains....................... 623,104 94,228 15.1%
Texas................................ 793,708 147,227 18.5%
West................................. 1,229,234 193,374 15.7%
--------- ------- -----
Total........................... 7,187,365 1,129,489 15.7%
========= ========= =====
</TABLE>
B-5
<PAGE>
Total homes in territory, homes not passed by cable, and homes passed by cable
are based on estimates of primary residences by Claritas, Inc.
The Pegasus Retail Network
The Pegasus retail network is a network of over 2,500 independent
satellite, consumer electronics and other retailers serving rural areas. We
began the development of the Pegasus retail network in 1995 in order to
distribute DIRECTV in our original DIRECTV exclusive territories in New England.
We have expanded this network into 41 states as a result of our acquisitions of
DIRECTV rural affiliates since 1996. Today, the Pegasus retail network is one of
the few sales and distribution channels available to digital satellite service
providers seeking broad and effective distribution in rural areas throughout the
continental United States.
We believe that the national reach of the Pegasus retail network has
positioned us to:
o improve the penetration of DIRECTV in DIRECTV exclusive
territories that we now own or that we may acquire from other
DIRECTV rural affiliates;
o assist DIRECTV in improving DIRECTV's direct broadcast
satellite market share in rural areas outside of the DIRECTV
exclusive territories held by DIRECTV rural affiliates; and
o offer providers of new digital satellite services, such as the
soon to be launched digital audio and broadband multimedia
satellite services, an effective and convenient means for
reaching the approximately 30% of America's population that
live and work in rural areas.
Broadcast Television
Our operating strategy in broadcast television is focused on:
o developing strong local sales forces and sales management to
maximize the value of our stations' inventory of advertising
spots;
o improving the stations' programming, promotion and technical
facilities in order to maximize their ratings in a
cost-effective manner; and
o maintaining strict control over operating costs while
motivating employees through the use of incentive plans, which
reward our employees in proportion to annual increases in
location cash flow.
We have purchased or launched TV stations affiliated with the "emerging
networks" of Fox, the WB and UPN, because, while affiliates of these networks
generally have lower revenue shares than stations affiliated with ABC, CBS and
NBC, we believe that they will experience growing audience ratings and therefore
afford us greater opportunities for increasing their revenue share. We have
entered into local marketing agreements in markets where we already own a
station because they provide additional opportunities for increasing revenue
share with limited additional operating expenses. However, the FCC has recently
adopted rules which in most instances would prohibit us from expanding in our
existing markets through local marketing agreements and may require us to modify
or terminate our existing agreements. We have entered into local marketing
agreements to program one station as an affiliate of Fox, two stations as
affiliates of the WB network and one station as an affiliate of UPN. We plan to
program an additional station pursuant to a local marketing agreement in 2000,
if permitted by the FCC.
The following table sets forth general information for each of Pegasus'
stations.
<TABLE>
<CAPTION>
Station
Station Acquisition Date Affiliation Market Area DMA (1) Households(2)
------- ---------------- ----------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
WDBD-40......................... May 1993 Fox Jackson, MS 89 306,000
WDSI-61......................... May 1993 Fox Chattanooga, TN 84 327,000
WGFL-53 (3)..................... (3) WB Gainesville, FL 165 104,000
WOLF-56/WILF-53 (4)............. May 1993 Fox Northeastern PA 51 555,000
WSWB-38 (4)..................... (4) WB Northeastern PA 51 555,000
WPXT-51......................... January 1996 Fox Portland, ME 80 355,000
WPME-35 (5)..................... (5) UPN Portland, ME 80 355,000
WTLH-49/WFXU (6)................ March 1996 Fox Tallahassee, FL 109 104,000
</TABLE>
---------------
B-6
<PAGE>
(1) There are 211 designated market areas in the United States with each
county in the continental United States assigned uniquely to one
designated market area. Ranking of designated market are is based upon
Nielsen estimates of the number of television households.
(2) Represents total homes in a designated market area for each television
station as estimated by Broadcast Investment Analysts.
(3) Pegasus began programming WGFL in October 1997 pursuant to a local
marketing agreement as an affiliate of the WB network.
(4) WILF and WWLF until November 1998 had simulcast the programming of
WOLF. In November 1998, the station then known as WOLF (Channel 38) was
sold to KB Prime Media LLC. That station has changed its call letters to
WSWB, and is now programmed by Pegasus pursuant to a local marketing
agreement as an affiliate of the WB network. The station formerly know as
WWLF changed its call letters to WOLF, and simulcasts Fox programming on
WILF.
(5) Pegasus began programming WPME in August 1997 pursuant to a local
marketing agreement as an affiliate of UPN.
(6) Pegasus programs WFXU pursuant to a local marketing agreement. WFXU has
simulcast the programming of WTLH since July 1998.
Cable Television
We own and operate a cable system serving areas of western,
southwestern and northwestern Puerto Rico. Our Puerto Rico cable system serves
franchised areas of approximately 170,000 households and serves approximately
55,000 subscribers.
We have entered into a letter of intent to sell the assets of our cable
system business in Puerto Rico to a subsidiary of Centennial Cellular
Corporation for $170.0 million in cash, subject to certain adjustments. The sale
of this cable system is subject to the negotiation of a definitive agreement,
third-party approvals, including regulatory approvals, and other customary
conditions. The sale is also subject to approval by our board of directors. We
cannot assure you that these conditions will be satisfied and that the sale will
be consummated.
Recent Completed and Pending Transactions
Completed Transactions
Completed Direct Broadcast Satellite Acquisitions. From January 1, 2000
through March 1, 2000, we completed five acquisitions for DIRECTV distribution
rights in rural areas of California, Indiana, Illinois, Oregon and South Dakota.
In the aggregate, the consideration for the completed direct broadcast satellite
acquisitions was $23.5 million in cash, $22.5 million in Series D junior
converible participating preferred stock, $10.0 million in Series E junior
convertible participating preferred stock, $39.7 million in Pegasus' Class A
common stock, $200,000 in promissory notes and $381,000 in assumed net
liabilities. The territories covered by these transactions include approximately
355,800 households, including approximately 17,800 seasonal residences and
35,600 business locations and 42,800 subscribers. In January 2000, we completed
an acquisition for DIRECTV distribution rights in rural areas of Michigan that
was effective December 14, 1999. In the aggregate, the total consideration for
this direct broadcast satellite acquisition was $707,000 in cash, $5.7 million
in Series B junior convertible participating preferred stock, $315,000 in
promissory notes and $61,000 in assumed net liabilities. The territories covered
by this transaction include approximately 27,700 households, including
approximately 1,400 seasonal residences and 2,800 business locations and 3,700
subscribers.
Convertible Preferred Stock Offering. On January 25, 2000, Pegasus
completed an offering of $300.0 million in liquidation amount of its 61/2%
Series C convertible preferred stock. Dividends on the Series C convertible
preferred stock will be payable in cash or, at Pegasus' option, in Class A
common stock. Each share of Series C convertible preferred stock is convertible
at any time into the number of whole shares of our Class A common stock equal to
the stated liquidation preference of $100 per share divided by an initial
conversion price of $127.50 per share, subject to adjustment if certain events
should occur. Pegasus may redeem the Series C convertible preferred stock at any
time beginning on February 1, 2003 at redemption prices set forth in the
certificate of designation. In addition, from August 1, 2001 to February 1,
2003, Pegasus may redeem the Series C convertible preferred stock at a
redemption premium of 105.525% of the stated liquidation preference, plus
accumulated and unpaid dividends, if any, if the trading price of Pegasus' Class
A common stock equals or exceeds $191.25 for a specified trading period. In the
event of a change of control of Pegasus, holders of Series C convertible
preferred stock will have a one-time option to convert such holder's shares into
Class A common stock at a conversion price equal to the greater of (1) the
market price of our Class A common stock at the change of control date or (2)
$68.00 per share. In lieu of issuing Class A common stock, we may, at our
option, make a cash payment equal to the
B-7
<PAGE>
market value of the shares. Pegasus plans to use the net proceeds of the
offering for working capital and general corporate purposes.
Investment in Personalized Media Communications, LLC and Licensing of
Patents. On January 13, 2000, Pegasus made an investment in Personalized Media
Communications, LLC, an advanced communications technology company. A subsidiary
of Personalized Media granted to Pegasus an exclusive license for use of
Personalized Media's patent portfolio in the distribution of satellite services
from specified orbital locations. Mary C. Metzger, Chairman of Personalized
Media and a member of Pegasus' board of directors, and John C. Harvey, Managing
Member of Personalized Media and Ms. Metzger's husband, own a majority of and
control Personalized Media.
Pegasus acquired preferred interests of Personalized Media for
approximately $14.3 million cash, 200,000 shares of Pegasus' Class A common
stock and Pegasus' agreement, subject to certain conditions, to issue warrants
to purchase 1.0 million shares of Pegasus' Class A common stock at an exercise
price of $90.00 per share and with a term of ten years. See Item 13: Certain
Relationships and Related Transactions.
Pegasus Media & Communications Credit Facility. On January 14, 2000,
Pegasus Media & Communications, Inc., a wholly-owned subsidiary of Pegasus,
entered into a $500.0 million credit facility. The new Pegasus Media &
Communications credit facility replaced the previous Pegasus Media &
Communications and Digital Television Services credit facilities. Pegasus Media
& Communications can use borrowings under the credit facility for acquisitions
and general corporate purposes. In connection with the closing of the new
Pegasus Media & Communications credit facility, Digital Television Services was
merged with and into a subsidiary of Pegasus Media & Communications.
Pending Transactions
Merger with Golden Sky Holdings, Inc. On January 10, 2000, Pegasus
entered into a definitive merger agreement with Golden Sky Holdings, Inc. Golden
Sky is the second largest independent provider of DIRECTV. It operates in 24
states and its territories include approximately 1.9 million households and
350,500 subscribers. In connection with the merger, Pegasus will issue up to 6.5
million of its Class A common stock, subject to certain downward adjustments,
including sales by the Golden Sky stockholders of their stock to Pegasus for up
to $25.0 million in cash, and will assume certain liabilities and incur merger
costs, resulting in aggregate consideration for the Golden Sky transaction
estimated to be $1.3 billion at the time the definitive agreement was signed.
The transaction is subject to the fulfillment of customary conditions, including
the (1) obtaining of all requisite consents or approvals by any governmental
authority or third parties, including the expiration or termination of the
waiting period under Hart-Scott-Rodino Antitrust Improvements Act of 1976; (2)
approval of the merger proposal by our stockholders and Golden Sky's
stockholders; (3) absence of a material adverse change with respect to the other
party; and (4) absence of certain litigation or related actions affecting the
other party. Pegasus' shareholder meeting is scheduled for March 22, 2000. In
connection with the acquisition of Golden Sky, the voting agreement among Mr.
Pagon and certain existing Pegasus shareholders will be amended and restated.
See Item 13; Certain Relationships and Related Transactions.
Pending Direct Broadcast Satellite Acqusitions. As of March 1, 2000,
without giving effect to the Golden Sky acquisition, we have entered into
letters of intent or definitive agreements to acquire DIRECTV distribution
rights in rural areas of three states. In the aggregate, the consideration for
these pending direct broadcast satellite acquisitions is $15.7 million in cash.
The territories covered by the letters of intent or definitive agreements
include approximately 81,500 television households, including approximately
4,100 seasonal residences and 8,200 business locations and 7,900 subscribers.
The closings of these acquisitions are subject to negotiation of definitive
agreements, third-party approvals and other customary conditions. We cannot
assure you that these conditions will be satisfied.
Sale of Puerto Rico Cable System. We have entered into a letter of
intent to sell the assets of our cable system in Puerto Rico. See -- Cable
Television.
Competition
Our direct broadcast satellite business faces competition from other
current or potential multichannel programming distributors, including other
direct broadcast satellite operators, direct-to-home providers, cable operators,
wireless cable operators, Internet and local and long-distance telephone
companies, which may be able to offer more competitive packages or pricing than
we or DIRECTV can provide. In addition, the direct broadcast satellite industry
is still evolving and recent or future competitive developments could adversely
affect us.
Our TV stations compete for audience share, programming and advertising
revenue with other television stations in their respective markets and with
direct broadcast satellite operators, cable operators and other advertising
media. Direct broadcast satellite and cable operators in particular are
competing more aggressively than in the past for advertising revenues in our TV
stations' markets. This competition could adversely affect our stations'
revenues and performance in the future.
B-8
<PAGE>
Our cable systems face competition from television stations, satellite
master antennae television systems, wireless cable systems, direct-to-home
providers, direct broadcast satellite systems and open video systems.
In addition, the markets in which we operate are in a constant state of
change due to technological, economic and regulatory developments. We are unable
to predict what forms of competition will develop in the future, the extent of
such competition or its possible effects on our businesses.
Employees
As of December 31, 1999, we had 1,006 full-time and 347 part-time
employees. We also had 8 general managers, 48 department managers and 12
corporate managers as of this date. We are not a party to any collective
bargaining agreements, and we consider our relations with our employees to be
good.
Executive Officers of the Registrant
For biographies and other information about our executive officers, see
Item 10: Directors and Executive Officers of the Registrant.
Direct Broadcast Satellite Agreements, Licenses, Local Marketing Agreements and
Cable Franchises
Direct Broadcast Satellite Agreements
Prior to the launch of the first DIRECTV satellite in 1993, Hughes
entered into various agreements intended to assist it in the introduction of
DIRECTV services, including agreements with RCA/Thomson for the development and
manufacture of direct broadcast satellite reception equipment and with USSB for
the sale of five transponders on the first satellite. In an agreement concluded
in 1994, Hughes offered members and affiliates of the National Rural
Telecommunications Cooperative the opportunity to become the exclusive providers
of certain direct broadcast satellite services using the DIRECTV satellites at
the 101(degree) W orbital location, generally including DIRECTV programming, to
specified residences and commercial subscribers in rural areas of the U.S. The
National Rural Telecommunications Cooperative is a cooperative organization
whose members and affiliates are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the U.S.
National Rural Telecommunications Cooperative members and affiliates that
participated in its direct broadcast satellite program acquired the rights to
provide the direct broadcast satellite services described above in their service
areas. The service areas purchased by participating National Rural
Telecommunications Cooperative members and affiliates comprise approximately 9.0
million television households and were initially acquired for aggregate
commitment payments exceeding $100 million.
We are an affiliate of the National Rural Telecommunications
Cooperative, participating through agreements in its direct broadcast satellite
program.The agreement between Hughes (and DIRECTV as its successor) and National
Rural Telecommunications Cooperative, and related agreements between the
National Rural Telecommunications Cooperative and its participating members and
affiliates, provide those members and affiliates with substantial rights and
benefits from distribution in their service areas of the direct broadcast
satellite services, including the right to set pricing, to retain all
subscription remittances and to appoint sales agents. In exchange for such
rights and benefits, the participating members and affiliates made substantial
commitment payments to DIRECTV. In addition, the participating members and
affiliates are required to reimburse DIRECTV for their allocable shares of
certain common expenses, such as programming, satellite-specific costs and
expenses associated with the billing and authorization systems, and to remit to
DIRECTV a 5% fee on subscription revenues.
DIRECTV has disputed the extent of the rights held by the participating
National Rural Telecommunications Cooperative members and affiliates. See Item
3: Legal Proceedings. Those disputes include the rights asserted by
participating members and affiliates:
o to provide all services offered by DIRECTV that are
transmitted over 27 frequencies that the FCC has authorized
for DIRECTV's use for a term running through the life of
DIRECTV's satellites at the 101(degree) W orbital location;
o to provide certain other services over the DIRECTV satellites; and
o to have the National Rural Telecommunications Cooperative
exercise a right of first refusal to acquire comparable rights
in the event that DIRECTV elects to launch successor
satellites upon the removal of the DIRECTV satellites from
their orbital location at the end of their lives.
The financial terms of the right of first refusal are likely to be the
subject of negotiation and Pegasus is unable to predict whether substantial
additional expenditures by the National Rural Telecommunications Cooperative
will be required in connection
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with the exercise of such right of first refusal.
The agreements between the National Rural Telecommunications
Cooperative and participating National Rural Telecommunications Cooperative
members and affiliates terminate when the DIRECTV satellites are removed from
their orbital location at the end of their lives. If the satellites are removed
earlier than June 2004, the tenth anniversary of the commencement of DIRECTV
services, Pegasus will receive a prorated refund of its original purchase price
for the DIRECTV rights. Our agreements with the National Rural
Telecommunications Cooperative may also be terminated as follows:
o If the agreement between DIRECTV and the National Rural
Telecommunications Cooperative is terminated because of a
breach by DIRECTV, the National Rural Telecommunications
Cooperative may terminate its agreements with us, but the
National Rural Telecommunications Cooperative will be
responsible for paying to us our pro rata portion of any
refunds that the National Rural Telecommunications Cooperative
receives from DIRECTV.
o If we fail to make any payment due to the National Rural
Telecommunications Cooperative or otherwise breach a material
obligation of our agreements with the National Rural
Telecommunications Cooperative, the National Rural
Telecommunications Cooperative may terminate our agreement
with the National Rural Telecommunications Cooperative in
addition to exercising other rights and remedies against us.
o If the National Rural Telecommunications Cooperative's
agreement with DIRECTV is terminated because of a breach by
the National Rural Telecommunications Cooperative, DIRECTV is
obligated to continue to provide DIRECTV services to Pegasus
by assuming the National Rural Telecommunications
Cooperative's rights and obligations under the National Rural
Telecommunications Cooperative's agreement with DIRECTV or
under a new agreement containing substantially the same terms
and conditions as National Rural Telecommunications
Cooperative's agreement with DIRECTV.
We are not permitted under our agreements with the National Rural
Telecommunications Cooperative to assign or transfer, directly or indirectly,
our rights under these agreements without the prior written consent of the
National Rural Telecommunications Cooperative and DIRECTV, which consents cannot
be unreasonably withheld.
The National Rural Telecommunications Cooperative has adopted a policy
requiring any party acquiring DIRECTV distribution rights from a National Rural
Telecommunications Cooperative member or affiliate to post a letter of credit to
secure payment of National Rural Telecommunications Cooperative's billings if
the acquiring person's monthly payments to the National Rural Telecommunications
Cooperative, including payments on account of the acquired territory, exceeds a
specified amount. Pursuant to this policy, Pegasus or its subsidiaries have
posted letters of credit of approximately $23.7 million in connection with
completed direct broadcast satellite acquisitions. Although this requirement can
be expected to reduce somewhat our acquisition capacity inasmuch as it ties up
capital that could otherwise be used to make acquisitions, we expect this
reduction to be manageable. There can be no assurance, however, that the
National Rural Telecommunications Cooperative will not in the future seek to
institute other policies, or to change this policy, in ways that would be
material to us.
<PAGE>
Broadcast Television
FCC Licensing. The broadcast television industry is subject to
regulation by the FCC pursuant to the Communications Act of 1934, as amended.
Approval by the FCC is required for the issuance, renewal, transfer and
assignment of broadcast station operating licenses. Television license terms are
generally eight years. While in the vast majority of cases such licenses are
renewed by the FCC, there can be no assurance that our licenses or the licenses
for the TV stations that we program pursuant to local marketing agreements will
be renewed at their expiration dates or that such renewals will be for full
terms. The licenses with respect to TV stations WOLF/WILF, WPXT, WDSI, WTLH and
WDBD are scheduled to expire on August 1, 2007, April 1, 2007, August 1, 2005,
April 1, 2005, and June 1, 2005, respectively. The licenses with respect to
WSWB, WFXU, WGFL and WPME, stations we program pursuant to local marketing
agreements, expire on August 1, 2007, February 1, 2005, February 1, 2005 and
April 1, 2007, respectively.
Fox Affiliation Agreement. Our network affiliation agreements with the
Fox Broadcasting Company formally expired on January 30, 1999, except for the
affiliation agreement for television station WTLH, which is scheduled to expire
on December 31, 2000. Except in the case of WTLH, we currently broadcast Fox
programming under arrangements between Pegasus and Fox which have generally
conformed in practice to such affiliation agreements. Negotiations with Fox are
continuing, and we believe that we will enter into new affiliation agreements on
satisfactory terms with no disruption in programming. If we are mistaken in this
belief, the loss of the ability to carry Fox programming could have a material
and adverse effect on our broadcast television operations.
The station affiliation agreement with Fox for WTLH provides WTLH with
the right to broadcast programming which Fox and Fox Children's Network, Inc.
make available for broadcasting in Tallahassee, Florida, the community to which
WTLH is licensed by the FCC. Fox has committed to supply approximately six hours
of programming each weekday, although, from time to time, some
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Fox time periods have been available to the station for programming. On
weekends, Fox generally supplies more programming than during the week,
including sports programming such as National Football Conference games and
pre-game shows. WTLH has agreed to broadcast all such Fox programs in their
entirety, including all commercial announcements. In each Fox program, WTLH may
sell the advertising time generally made available by Fox in such program to its
affiliates on a national basis, and, generally, may retain the revenues from
such sales. Fox retains the right to sell the remaining advertising time in each
Fox program. WOLF, WPXT, WDSI and WDBD have also operated under substantially
the same terms and conditions.
Under its station affiliation agreement with Fox, WTLH is entitled to
receive payments from Fox Kids Worldwide, Inc. as compensation for relinquishing
its former interests in the profits of Fox Children's Network and for continuing
to carry Fox Children's Network programming on the station. Those payments,
together with certain revenues from commercials and from retransmission
arrangements with Fox, will be returned to Fox to defray the costs of providing
NFL programming to the station. Under specified circumstances, however, Fox or
WTLH may cancel the arrangements for broadcast of NFL programming, in which case
the Fox Children's Network-related compensation would thereafter be paid to the
station. In the event that WTLH ceases to carry Fox Children's Network
programming prior to June 30, 2008, after having received NFL programming, Fox
may have a claim for amounts under the terms of the station affiliation
agreement.
WTLH's station affiliation agreement with Fox expires December 31,
2000, but is renewable for two successive two-year periods, at the discretion of
Fox and upon acceptance by Pegasus. Fox may terminate the station affiliation
agreement upon:
o a change in any material aspect of the station's operation,
including its transmitter location, power, frequency,
programming format or hours of operation, with 30 days written
notice;
o acquisition by Fox, directly or indirectly, of a significant
ownership and/or controlling interest in any television
station in the same market, with 60 days written notice;
o assignment or attempted assignment by Pegasus of the station
affiliation agreement, with 30 days written notice;
o three or more unauthorized preemptions of Fox programming
within a 12-month period, with 30 days written notice; or
o WTLH deciding not to accept a change in Fox operations
applicable to Fox affiliates generally.
Either Fox or WTLH may terminate the station affiliation agreement upon
occurrence of a force majeure event which substantially interrupts Fox's ability
to provide programming or the station's ability to broadcast the programming.
UPN Affiliation Agreement. The Portland TV station programmed by
Pegasus pursuant to a local marketing agreement, WPME, is affiliated with UPN
pursuant to a station affiliation agreement. Under the station affiliation
agreement with UPN, UPN grants Pegasus an exclusive license to broadcast all
programming, including commercial announcements, network identifications,
promotions and credits, which UPN makes available to serve the community of
Lewiston, Maine. UPN has committed to supply approximately four hours of
programming during specified time periods. The station affiliation agreement
with UPN allots to each party a specified amount of advertising time during each
hour of programming, and each party is entitled to the revenue realized from its
sale of advertising time.
The term of the station affiliation agreement with UPN expires January
15, 2001, and automatically renews for a three-year period unless either party
has given written notice to the other party of its election not to renew. UPN
may terminate the station affiliation agreement upon prior written notice in the
event of:
o a material reduction or modification of WPME's transmitter
location, power, frequency, programming format or hours of
operation;
o any assignment or transfer of control of the station's license; or
o three or more unauthorized preemptions of UPN programming by
the station during any 12-month period, which have actually
occurred or which UPN reasonably believes will occur.
Either UPN or Pegasus may terminate the station affiliation agreement
upon the occurrence of a force majeure event that causes UPN substantially to
fail to provide programming or Pegasus substantially to fail to broadcast UPN's
programming, for either four consecutive weeks or an aggregate of six weeks in
any 12-month period.
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WB Affiliation Agreements. We program TV stations WSWB and WGFL as
affiliates of WB and are in the process of negotiating affiliation agreements
with respect to these stations.
Local Marketing Agreements. In the past, the FCC rules precluded the
ownership of more than one television station in a market, unless such stations
were operated as a satellite of a primary station. In recent years, in a number
of markets across the country, certain television owners entered into agreements
to provide the bulk of the broadcast programming on stations owned by other
licensees, and to retain the advertising revenues generated from such
programming. Such agreements are commonly referred to as local marketing
agreements. Local marketing agreements were not considered attributable
interests under the FCC's old multiple ownership rules.
In August 1999, the FCC revised its attribution and multiple ownership
rules. The new rules generally provide that television local marketing
agreements are attributable if the programmer owns a station in the same market
as the station it is programming pursuant to a local marketing agreement. Local
marketing agreements entered into on or after November 5, 1996 must comply with
the new ownership rules by August 5, 2001 or such local marketing agreements
will terminate. Local marketing agreements entered into before November 5, 1996,
will be grandfathered until the conclusion of the FCC's 2004 biennial review.
The new rules also generally allow one entity to own two television stations in
the same market if there would be eight full-power commercial and non-commercial
television stations in the market after the combination, or if the acquired
station is economically distressed and could not be built or operated without
combining with another station in the market. In certain cases, parties with
grandfathered local marketing agreements may rely on the circumstances at the
time the local marketing agreement was entered into in advancing any proposal
for co-ownership of the stations. The markets in which Pegasus programs a second
station pursuant to a local marketing agreement do not have eight full-power
commercial and non-commercial television stations. Pegasus has not yet filed any
application to acquire any of the stations with which it has local marketing
agreements based on a showing of economic distress, and cannot predict the
outcome of such a filing should one be made. Pegasus' local marketing agreements
with WSWB and WFXU were entered into after November 5, 1996. The local marketing
agreement with WPME was entered into prior to November 5, 1996. The local
marketing agreement with WGFL was entered into after November 5, 1996. However,
Pegasus does not own other stations in the WGFL market, and thus the WGFL local
marketing agreement is not currently affected by these changes. Petitions for
reconsideration of the new rules, including a petition submitted by Pegasus, are
currently pending before the FCC. We cannot predict the outcome of these
petitions.
When operating pursuant to a local marketing agreement, while the bulk
of the programming is provided by someone other than the licensee of the
station, the station licensee must retain control of the station for FCC
purposes. Thus, the licensee has the ultimate responsibility for the programming
broadcast on the station and for the station's compliance with all FCC rules,
regulations, and policies. The licensee must retain the right to preempt
programming supplied pursuant to the local marketing agreement where the
licensee determines, in its sole discretion, that the programming does not
promote the public interest or where the licensee believes that the substitution
of other programming would better serve the public interest. The licensee must
also have the primary operational control over the transmission facilities of
the station.
Pegasus programs WPME (Portland, Maine), WGFL (Gainesville, Florida),
WSWB (Northeastern Pennsylvania), and WFXU (Tallahassee, Florida) through the
use of local marketing agreements, but there can be no assurance that the
licensees of such stations will not unreasonably exercise their right to preempt
the programming of Pegasus, or that the licensees of such stations will continue
to maintain the transmission facilities of the stations in a manner sufficient
to broadcast a high quality signal over the station. As the licensee must also
maintain all of the qualifications necessary to be a licensee of the FCC, and as
the principals of the licensee are not under the control of Pegasus, there can
be no assurances that these licenses will be maintained by the entities which
currently hold them.
Cable Franchises
Cable systems are generally constructed and operated under
non-exclusive franchises granted by state or local governmental authorities. The
franchise agreements may contain many conditions, such as the payment of
franchise fees; time limitations on commencement and completion of construction;
conditions of service, including the number of channels, the carriage of public,
educational and governmental access channels, the carriage of broad categories
of programming agreed to by the cable operator, and the provision of free
service to schools and certain other public institutions; and the maintenance of
insurance and indemnity bonds. Certain provisions of local franchises are
subject to limitations under the Cable Television Consumer Protection and
Competition Act of 1992.
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Pegasus holds four cable franchises, all of which are non-exclusive.
Our cable franchises have terms that expire in 2003, 2004, 2008 and 2009. We
have never had a franchise revoked. All of the franchises of the systems
eligible for renewal have been renewed or extended at or prior to their stated
expirations.
The Communications Act provides, among other things, for an orderly
franchise renewal process in which renewal will not be unreasonably withheld. In
addition, the Communications Act establishes comprehensive renewal procedures
which require that an incumbent franchisee's renewal application be assessed on
its own merit and not as part of a comparative process with competing
applications. We believe that we have good relations with our franchising
authorities. The Communications Act prohibits franchising authorities from
imposing annual franchise fees in excess of 5% of gross revenues and permits the
cable system operator to seek renegotiations and modification of franchise
requirements if warranted by changed circumstances.
Legislation and Regulation
In February 1996, Congress passed the Telecommunications Act, which
substantially amended the Communications Act. This Act has altered and will
continue to alter federal, state and local laws and regulations regarding
telecommunications providers and services, including Pegasus and the cable
television and other telecommunications services provided by Pegasus.
On November 29, 1999, Congress enacted the Satellite Home Viewer
Improvement Act of 1999, which amended the Satellite Home Viewer Act. This Act,
for the first time, permits direct broadcast satellite operators to transmit
local television signals into local markets. In other important statutory
amendments of significance to satellite carriers and television broadcasters,
the law generally seeks to place satellite operators on an equal footing with
cable television operators as regards the availability of television broadcast
programming.
Direct Broadcast Satellite
Unlike a common carrier, such as a telephone company, or a cable
operator, direct broadcast satellite operators such as DIRECTV are free to set
prices and serve customers according to their business judgment, without rate of
return or other regulation or the obligation not to discriminate among
customers. However, there are laws and regulations that affect DIRECTV and,
therefore, affect Pegasus. As an operator of a privately owned U.S. satellite
system, DIRECTV is subject to the regulatory jurisdiction of the FCC, primarily
with respect to:
o the licensing of individual satellites (i.e., the requirement
that DIRECTV meet minimum financial, legal and technical
standards);
o avoidance of interference with radio stations; and
o compliance with rules that the FCC has established
specifically for direct broadcast satellite licenses,
including rules that the FCC is in the process of adopting to
govern the retransmission of television broadcast stations by
direct broadcast satellite operators.
As a distributor of television programming, DIRECTV is also affected by
numerous other laws and regulations. The Telecommunications Act clarifies that
the FCC has exclusive jurisdiction over direct-to-home satellite services and
that criminal penalties may be imposed for piracy of direct-to-home satellite
services. The Telecommunications Act also offers direct-to-home operators relief
from private and local government-imposed restrictions on the placement of
receiving antennae. In some instances, direct-to-home operators have been unable
to serve areas due to laws, zoning ordinances, homeowner association rules, or
restrictive property covenants banning the installation of antennae on or near
homes. The FCC has promulgated rules designed to implement Congress' intent by
prohibiting any restriction, including zoning, land use or building regulation,
or any private covenant, homeowners' association rule, or similar restriction on
property within the exclusive use or control of the antenna user where the user
has a direct or indirect ownership interest in the property, to the extent it
impairs the installation, maintenance or use of a direct broadcast satellite
receiving antenna that is one meter or less in diameter or diagonal measurement,
except where such restriction is necessary to accomplish a clearly defined
safety objective or to preserve a recognized historic district. Local
governments and associations may apply to the FCC for a waiver of this rule
based on local concerns of a highly specialized or unusual nature. The FCC also
issued a further order giving renters the right to install antennas in areas of
their rental property in which they have exclusive use, e.g. balconies or
<PAGE>
patios. The Telecommunications Act also preempted local (but not state)
governments from imposing taxes or fees on direct-to-home services, including
direct broadcast satellite. Finally, the Telecommunications Act required that
multichannel video programming distributors such as direct-to-home operators
fully scramble or block channels providing indecent or sexually explicit adult
programming. If a multichannel video programming distributor could not fully
scramble or block such programming, it was required to restrict transmission to
those hours of the day when children are unlikely to view the programming (as
determined by the FCC). Rules adopted by the FCC implementing the scrambling
provision became effective on May 18, 1997. However, on December 28, 1998, the
requirement to scramble sexually explicit programming was ruled unconstitutional
by the U.S. District Court in Wilmington, Delaware. This decision was appealed
to the U.S. Supreme Court and a decision is expected this year.
In addition to regulating pricing practices and competition within the
franchise cable television industry, the Communications Act is intended to
establish and support existing and new multi-channel video services, such as
wireless cable and direct-to-home, to provide subscription television services.
DIRECTV and Pegasus have benefited from the programming access provisions of the
Communications Act and implementing rules in that DIRECTV has been able to gain
access to previously unavailable programming
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services and, in some circumstances, has obtained certain programming services
at reduced cost. Any amendment to, or interpretation of, the Communications Act
or the FCC's rules that would permit cable companies or entities affiliated with
cable companies to discriminate against competitors such as DIRECTV in making
programming available (or to discriminate in the terms and conditions of such
programming) could adversely affect DIRECTV's ability to acquire programming on
a cost-effective basis, which would have an adverse impact on Pegasus. Certain
of the restrictions on cable-affiliated programmers will expire in 2002 unless
the FCC extends such restrictions.
The FCC has adopted rules imposing public interest requirements for
providing video programming on direct-to-home licensees, including, at a
minimum, reasonable and non-discriminatory access by qualified federal
candidates for office at the lowest unit rates and the obligation to set aside
four percent of the licensee's channel capacity for non-commercial programming
of an educational or informational nature. Within this set-aside requirement,
direct-to-home providers must make capacity available to "national educational
programming suppliers" at rates not exceeding 50% of the direct-to-home
provider's direct costs of making the capacity available to the programmer.
Petitions for reconsideration of these rules are currently pending at the FCC.
The Satellite Home Viewer Improvement Act of 1999 ("SHVIA"), enacted by
Congress late last year, amends the Copyright Act and the Communications Act in
order to clarify the terms and conditions under which a DBS operator may
retransmit local and distant broadcast television stations to subscribers. The
new law was intended to promote the ability of satellite services to compete
with cable television systems and to resolve disputes that had arisen between
broadcasters and satellite carriers regarding the delivery of broadcast
television station programming to satellite service subscribers.
The SHVIA creates a new "statutory" copyright license applicable to the
retransmission of local broadcast television stations to DBS subscribers.
Although there is no royalty payment obligation associated with this new
license, eligibility for the license is conditioned on the satellite carrier's
compliance with the applicable Communications Act provisions and FCC rules
governing the retransmission of local broadcast television stations to satellite
service subscribers. Noncompliance with the Communications Act and/or FCC
requirements could subject a satellite carrier to liability for copyright
infringement.
The amendments to the Communications Act contained in the SHVIA provide
that, until May 29, 2000, a DBS operator is permitted to retransmit a broadcast
television station to satellite subscribers in the station's local market
without the station's consent. However, after May 29, 2000, the satellite
provider must have obtained the station's express consent and failure to comply
with this requirement could subject a satellite provider to substantial
liability. The FCC is currently considering the adoption of rules governing the
retransmission consent process, including rules prohibiting a broadcast
television station from entering into exclusive retransmission consent
agreements or from failing to engage in good faith negotiations for
retransmission consent.
In addition, beginning January 1, 2002, a satellite provider that
retransmits at least one broadcast television station to subscribers residing in
the station's local television market pursuant to the statutory copyright
license will be required to retransmit upon request all other broadcast
television stations located in that market.
In a future rulemaking, the FCC will promulgate "must carry" rules on
satellite carriers similar to those imposed on cable systems. The lengthy
transition period for "must carry" is expected to place satellite carriers in a
comparable position to cable operators.
Other provisions contained in the SHVIA address the retransmisison by a
satellite service provider of a broadcast television station to subscribers who
reside outside the local market of the station being retransmitted. A DBS
provider may retransmit such "distant" broadcast stations affiliated with the
national broadcast television networks to those subscribers meeting certain
specified eligibility criteria which the FCC is directed to implement. The
primary determinant of a subscribers eligibility to receive a distant affiliate
of a particular network is whether the subscriber is able to receive a "Grade B"
strength signal from an affiliate of that network using a conventional rooftop
broadcast television antenna. The SHVIA also directs the FCC to adopt rules that
would subject the satellite retransmission of certain distant stations to
program "blackout" rules similar to rules currently applicable to the
retransmisison of distant broadcast television stations by cable systems.
The SHVIA also makes a number of revisions to the statutory copyright
license provisions applicable to the retransmission of distant broadcast
television stations to satellite service subscribers. These changes include
reducing the monthly per subscriber royalty rate payable under the distant
signal compulsory copyright license and creating a new compulsory copyright
license applicable to the retransmission of a national PBS programming feed. The
compulsory copyright license applicable to the retransmission of distant
broadcast signals to satellite service subscribers will expire on January 1,
2005 unless it is extended by Congress. If the license expires, DBS operators
will be required to negotiate in the marketplace to obtain the copyright
clearances necessary for the retransmission of distant broadcast signals to
satellite service subscribers.
<PAGE>
The final outcome of ongoing and future FCC rulemakings cannot yet be
determined. Any regulatory changes could adversely affect Pegasus' operations.
Must carry requirements could cause the displacement of possibly more attractive
programming.
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The foregoing does not purport to describe all present and proposed
federal regulations and legislation relating to the direct broadcast satellite
industry.
Broadcast Television
The ownership, operation and sale of television stations, including
those licensed to our subsidiaries, are subject to the jurisdiction of the FCC
under authority granted it pursuant to the Communications Act. Matters subject
to FCC oversight include, but are not limited to,
o the assignment of frequency bands for broadcast television;
o the approval of a television station's frequency, location and
operating power;
o the issuance, renewal, revocation or modification of a television
station's FCC license;
o the approval of changes in the ownership or control of a
television station's licensee;
o the regulation of equipment used by television stations; and
o the adoption and implementation of regulations and policies
concerning the ownership, operation and employment practices
of television stations.
The FCC has the power to impose penalties, including fines or license
revocations, upon a licensee of a television station for violations of the FCC's
rules and regulations. The following is a brief summary of certain provisions of
the Communications Act and of specific FCC regulations and policies affecting
broadcast television. Reference should be made to the Communications Act, FCC
rules and the public notices and rulings of the FCC for further information
concerning the nature and extent of FCC regulation of broadcast television
stations.
License Renewal. Television station licenses are granted for a maximum
allowable period of eight years and are renewable thereafter for additional
eight year periods. The FCC may revoke or deny licenses, after a hearing, for
serious violations of its regulations, and it may impose fines on licensees for
less serious infractions. Petitions to deny renewal of a license may be filed on
or before the first day of the last month of a license term. Generally, however,
in the absence of serious violations of FCC rules or policies, license renewal
is expected in the ordinary course. The FCC will grant a license renewal if the
FCC finds that the station seeking renewal has served the public interest,
convenience and necessity, that there have been no serious violations by the
licensee of the Communications Act or the rules and regulations of the FCC, and
that there have been no other violations by the licensee of the Communications
Act or the rules and regulations of the FCC that, when taken together, would
constitute a pattern of abuse. The licenses with respect to TV stations
WOLF/WILF, WPXT, WDSI, WTLH and WDBD are scheduled to expire on August 1, 2007,
April 1, 2007, August 1, 2005, April 1, 2005 and June 1, 2005, respectively. The
licenses with respect to WSWB, WFXU and WGFL, stations Pegasus programs pursuant
to local marketing agreements, expire on August 1, 2007, February 1, 2005 and
February 1, 2005, respectively. The other television station Pegasus programs,
WPME, has a license application pending at the FCC.
Ownership Matters. The Communications Act contains a number of
restrictions on the ownership and control of broadcast licenses. The
Communications Act prohibits the assignment of a broadcast license or the
transfer of control of a broadcast licensee without the prior approval of the
FCC. The Communications Act and the FCC's rules also place limitations on alien
ownership; common ownership of broadcast, cable and newspaper properties;
ownership by those not having the requisite "character" qualifications and those
persons holding "attributable" interests in the licensee.
Attribution Rules. The FCC generally applies its ownership limits to
"attributable" interests held by an individual, corporation, partnership or
other association. In the case of corporations holding, or through subsidiaries
controlling, broadcast licenses, the interests of officers, directors and those
who, directly or indirectly, have the right to vote 5% or more of the
corporation's stock (or 20% or more of such stock in the case of insurance
companies, investment companies and bank trust departments that are passive
investors) are generally attributable, except that, in general, no minority
voting stock interest will be attributable if there is a single holder of more
than 50% of the outstanding voting power of the corporation.
The FCC recently adopted a new rule, known as the equity-debt plus
rule, that causes certain creditors or investors to be attributable owners of a
station, regardless of whether there is a single majority stockholder or other
applicable exception to the FCC's attribution rules. Under this new rule, a
major programming supplier -- any programming supplier that provides more than
15% of the station's weekly programming hours -- or same-market media entity
will be an attributable owner of a station if the supplier or same-market media
entity holds debt or equity, or both, in the station that is greater than 33% of
the value of the station's total debt plus
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equity. For purposes of this rule, equity includes all stock, whether voting or
nonvoting, and equity held by insulated limited partners in a limited
partnership. Debt includes all liabilities, whether long-term or short-term.
Alien Ownership Restrictions. The Communications Act restricts the
ability of foreign entities to own or hold interests in broadcast licenses.
Foreign governments, representatives of foreign governments, non-citizens and
representatives of non-citizens, corporations and partnerships organized under
the laws of a foreign nation are barred from holding broadcast licenses.
Non-citizens, foreign governments, foreign corporations and representatives of
any of the foregoing, collectively, may directly or indirectly own or vote up to
20% of the capital stock of a broadcast licensee. In addition, a broadcast
license may not be granted to or held by any corporation that is controlled,
directly or indirectly, by any other corporation more than one-fourth of whose
capital stock is owned or voted by non-citizens or their representatives, by
foreign governments or their representatives, or by non-U.S. corporations, if
the FCC finds that the public interest will be served by the refusal or the
revocation of such license. The FCC has interpreted this provision of the
Communications Act to require an affirmative public interest finding before a
broadcast license may be granted to or held by any such corporation. Because of
these provisions, we may be prohibited from having more than one-fourth of our
stock owned or voted directly or indirectly by non-citizens, foreign
governments, foreign corporations or representatives of any of the foregoing.
Multiple Ownership Rules. FCC rules limit the number of television
stations any one entity can acquire or own. The FCC's television national
multiple ownership rule limits the combined audience of television stations in
which an entity may hold an attributable interest to 35% of total U.S. audience
reach. Under the FCC's new local television ownership rules, a party may own two
television stations in a market if:
o there is no Grade B overlap between the stations;
o if the stations are in two different Nielsen designated market
areas; or
o if the market containing both stations contains at least eight
separately-owned full-power television stations, and both
stations are not among the top four rated stations in the
market.
In addition, a party may request a waiver of the rule to acquire a
second station in the market if the station to be acquired is economically
distressed or unbuilt and there is no party who does not own a local television
station who would purchase the station for a reasonable price.
Cross-Ownership Rules. The FCC's cross-ownership rules generally permit
a party to own a combination of up to two television stations and six radio
stations depending on the number of other, independent media voices in the
market. A "media voice" includes each independently owned and operating full
power television station, each independently owned and operating radio station,
and each independently owned daily newspaper with a circulation exceeding 5% of
the households in the market. In addition, all cable systems operating in the
market are counted as one voice. In addition, the Telecommunications Act
eliminates the statutory prohibition against the ownership of television
stations and cable systems in the same geographic market, although FCC rules
prohibiting such ownership are still in place.
Programming and Operation. The Communications Act requires broadcasters
to serve the "public interest." Broadcast station licensees are required to
present programming that is responsive to local community problems, needs and
interests and to maintain certain records demonstrating such responsiveness.
Complaints from viewers concerning a station's programming often will be
considered by the FCC when it evaluates license renewal applications, although
such complaints may be filed at any time and generally may be considered by the
FCC at any time. The FCC has initiated a proceeding to clarify the public
interest obligations of broadcasters, although we cannot predict the outcome of
such proceeding. Stations also must follow various FCC rules that regulate,
among other things, political advertising, sponsorship identifications, the
advertisements of contests and lotteries, programming directed to children,
obscene and indecent broadcasts, television violence, closed captioning and
technical operations, including limits on radio frequency radiation. The FCC
recently adopted rules to require broadcast licensees to create equal employment
opportunity outreach programs and maintain records and make filings with the FCC
evidencing such efforts.
<PAGE>
Must Carry and Retransmission Consent. The Communications Act requires
each television broadcaster to make an election to exercise either certain "must
carry" or, alternatively, "retransmission consent" rights in connection with its
carriage by cable systems in the station's local market. If a broadcaster
chooses to exercise its must carry rights, it may demand carriage on a specified
channel on cable systems within its defined market. Must carry rights are not
absolute, and their exercise is dependent on variables such as the number of
activated channels on, and the location and size of, the cable system and the
amount of duplicative programming on a broadcast station. Under certain
circumstances, a cable system may decline carriage of a given station. If a
broadcaster chooses to exercise its retransmission consent rights, it may
prohibit cable systems from carrying its signal, or permit carriage under a
negotiated compensation arrangement. The FCC's must carry requirements took
effect in June 1993. Pegasus' stations exercised retransmission consent rights
in 1993 and 1996 and either elected retransmission consent or must carry in
1999. Television stations must make a new
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election between must carry and retransmission consent rights every three years.
The next required election date is October 1, 2002.
The FCC has initiated a rulemaking proceeding to consider whether to
apply the must-carry rules to require cable companies to carry both the analog
and the digital signals of local broadcasters when television stations will be
broadcasting both signals, during the digital television transition period
between 2002 (at the latest) and 2006. If the FCC does not require digital
television must-carry, cable customers in our broadcast markets may not receive
the station's digital signal, which could adversely affect us.
Digital Television. The FCC has taken a number of steps to implement
digital television broadcasting service in the U.S. In December 1996, the FCC
adopted a digital television broadcast standard and has since adopted decisions
in several pending rulemaking proceedings that establish service rules and a
plan for implementing digital television. The FCC adopted a digital television
table of allotments that provides all television stations authorized as of April
1997 with a second channel on which to broadcast a digital television signal.
The FCC has attempted to provide digital television coverage areas that are
comparable to stations' existing service areas. The FCC has ruled that
television broadcast licensees may use their digital channels for a wide variety
of services such as high-definition television, multiple standard definition
television programming, audio, data, and other types of communications, subject
to the requirement that each broadcaster provide at least one free video channel
equal in quality to the current technical standard and further subject to the
requirement that broadcast licensees pay a fee of 5% of gross revenues on all
digital television subscription services.
The FCC required that affiliates of ABC, CBS, Fox and NBC in the top
ten television markets begin digital broadcasting by May 1, 1999, and that
affiliates of these networks in markets 11 through 30 begin digital broadcasting
by November 1999. All other commercial stations are required to begin digital
broadcasting by May 1, 2002. The FCC's plan calls for the digital television
transition period to end in the year 2006 at which time the FCC expects that
television broadcasters will have ceased broadcasting on their non-digital
channels, allowing that spectrum to be recovered by the government for other
uses. Under the Balanced Budget Act signed into law by President Clinton,
however, the FCC is authorized to extend the December 31, 2006 deadline for
reclamation of a television station's non-digital channel if, in any given case:
o one or more television stations affiliated with one of the
four major networks in a market are not broadcasting
digitally, and the FCC determines that the station(s) has
(have) "exercised due diligence" in attempting to convert to
digital broadcasting;
o less than 85% of the television households in the station's
market subscribe to a multichannel video service (cable,
wireless cable or direct broadcast satellite) that carries at
least one digital channel from each of the local stations in
that market; or
o less than 85% of the television households in the station's
market can receive digital signals off the air using either a
set-top converter box for an analog television set or a new
digital television set.
The Balanced Budget Act also directs the FCC to auction the non-digital
channels by September 30, 2002 even though they are not to be reclaimed by the
government until at least December 31, 2006. The Balanced Budget Act also
permits broadcasters to bid on the non-digital channels in cities with
populations greater than 400,000 provided the channels are used for digital
television. The FCC has opened separate proceedings to consider the surrender of
existing television channels and how those frequencies will be used after they
are eventually recovered from television broadcasters and to what extent the
cable must-carry requirements will apply to digital television signals.
In addition, the digital order restricts current stations' abilities to
relocate transmitter sites and otherwise change technical facilities in any
manner that could impact proposed digital television stations. This may preclude
the improvement of the facilities of certain stations owned or programmed by
Pegasus. The order also allotted digital television stations at the current
analog transmitter sites. Changes in the location of digital stations are
dependent on the lack of interference to other digital and analog stations.
Pegasus has filed applications with the FCC for digital television construction
permits for all of its stations.
<PAGE>
Implementation of digital television will improve the technical quality
of television signals receivable by viewers. Under certain circumstances,
however, conversion to digital operation may reduce a station's geographic
coverage area or result in some increased interference. The FCC's digital
television allotment plan also results in current UHF stations having
considerably less signal power within their service areas than present VHF
stations that move to digital television channels. While the 1998 orders of the
FCC present current UHF stations with some options to overcome this power
disparity, it is unknown at this time whether Pegasus will be able to benefit
from these options. Implementation of digital television will also impose
substantial additional costs on television stations because of the need to
replace equipment and because some stations will need to operate at higher
utility costs. The FCC has also proposed imposing new public interest
requirements on television licensees in exchange for their receipt of digital
television channels. A petition has been filed at the FCC, supported by a number
of television broadcast licensees including Pegasus, questioning whether the
digital transmission system standard adopted by the FCC is adequate to provide
acceptable service to television viewers,
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or whether television broadcasters should be free to adopt another standard.
Thus far, the FCC has not acted on this petition. We cannot predict what future
actions the FCC might take with respect to digital television, nor can we
predict the effect of the FCC's present digital television implementation plan
or such future actions on our business.
Pending or Proposed Legislation and FCC Rulemakings. The FCC has
initiated a proceeding seeking comment on whether the public interest would be
served by establishing limits on the amount of commercial matter broadcast by
television stations. The FCC also is conducting a rulemaking proceeding
concerning the implementation of a Class A low power television service, which
would afford qualifying low power stations certain rights accorded to full power
stations. Other matters which could affect our broadcast properties include
technological innovations affecting the mass communications industry and
technical allocation matters, including assignment by the FCC of channels for
additional broadcast stations, low-power television stations and wireless cable
systems and their relationship to and competition with full power television
service, as well as possible spectrum fees or other changes imposed on
broadcasters for the use of their channels. The ultimate outcome of these
pending proceedings cannot be predicted at this time.
The Congress and the FCC have considered in the past and may consider
and adopt in the future:
o other changes to existing laws, regulations and policies or
o new laws, regulations and policies regarding a wide variety of
matters that could affect, directly or indirectly, the
operation, ownership, and profitability of Pegasus' broadcast
stations, result in the loss of audience share and advertising
revenues for these stations or affect the ability of Pegasus
to acquire additional broadcast stations or finance such
acquisitions.
Additionally, irrespective of the FCC rules, the Department of Justice
and the Federal Trade Commission have the authority to determine that a
particular transaction presents antitrust concerns. These federal agencies have
increased their scrutiny of the television and radio industries, and have
indicated their intention to review matters related to the concentration of
ownership within markets, including local marketing agreements, even when the
ownership or local marketing agreement in question is permitted under the
regulations of the FCC. There can be no assurance that future policy and
rulemaking activities of these agencies will not impact Pegasus' operations
(including existing stations or markets) or expansion strategy.
Cable Television
The Communications Act, as amended by The Cable Communications Policy
Act of 1984, Cable Television Consumer Protection and Competition Act of 1992,
and the Telecommunications Act of 1996. The Communications Act as amended,
establishes uniform national standards and guidelines for the regulation of
cable systems. Among other things, the Communications Act affirms the right of
franchising authorities (state or local, depending on the practice in individual
states) to award one or more franchises within their jurisdictions. It also
prohibits non-grandfathered cable systems from operating without a franchise in
such jurisdictions.
The Communications Act provides for regulation with respect to, among
other things:
o cable system rates for basic services;
o programming access and exclusivity arrangements;
o access to cable channels by unaffiliated programming services;
o leased access terms and conditions;
o horizontal and vertical ownership of cable systems;
o customer service requirements;
o franchise renewals;
o television broadcast signal carriage and retransmission consent;
o technical standards;
o subscriber privacy;
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o consumer protection issues;
o cable equipment compatibility;
o obscene or indecent programming; and
o cable system requirements that subscribers subscribe to tiers
of service other than basic service as a condition of
purchasing premium services.
Additionally, the legislation encourages competition with existing
cable systems by allowing municipalities to own and operate their own cable
systems without having to obtain a franchise; preventing franchising authorities
from granting exclusive franchises or unreasonably refusing to award additional
franchises covering an existing cable system's service area. The Communications
Act also precludes video programmers affiliated with cable television companies
from favoring those operators over competitors and requires such programmers to
sell their programming to other multichannel video distributors. This provision
limits the ability of cable program suppliers to offer exclusive programming
arrangements to cable television companies. The FCC, the principal federal
regulatory agency with jurisdiction over cable television, has adopted many
regulations to implement the provisions of the Communications Act.
The FCC has the authority to enforce these regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate transmission facilities often used in connection with
cable operations.
Congress and the FCC have frequently revisited the subject of cable
television regulation and may do so again. Future legislative and regulatory
changes could adversely affect Pegasus' operations.
Cable Rate Regulation. Under the Communications Act, rate regulation is
precluded wherever a cable operator faces "effective competition." Although
cable operators are presumed not to be subject to effective competition, an
operator can rebut this presumption by demonstrating that it meets any one of
four separate tests: (i) fewer than 30 percent of the households in the
franchise area subscribe (the "low penetration" test); (ii) at least two
competing multichannel video providers offer service to at least 50 percent of
the franchise area and the number of households subscribing to providers other
than the largest provider exceeds 15 percent of the franchise households; (iii)
a municipally-owned cable system offers service to at least 50 percent of the
franchise households; and (iv) a local exchange carrier offers "comparable"
video programming services to subscribers in the franchise area by a means other
than direct broadcast satellite. The FCC has found that all of Pegasus' cable
television systems are subject to effective competition under the "low
penetration" standard and therefore are not currently subject to rate
regulation.
Indecent Programming on Leased Access Channels. FCC regulations
pursuant to the Communications Act permit cable operators to restrict or refuse
the carriage of indecent programming on so-called "leased access" channels,
i.e., channels the operator must set aside for commercial use by persons
unaffiliated with the operator. Operators were also permitted to prohibit
indecent programming on public access channels. In June 1996, the Supreme Court
ruled unconstitutional the indecency prohibitions on public access programming
as well as the "segregate and block" restriction on indecent leased access
programming.
Scrambling. The Communications Act requires that upon the request of a
cable subscriber, the cable operator must, free of charge, fully scramble or
otherwise fully block the audio and video programming of any channel the
subscriber does not want to receive.
Cable operators were also required by the Communications Act to fully
scramble or otherwise fully block the video and audio portion of sexually
explicit or other programming that is indecent on any programming channel that
is primarily dedicated to sexually oriented programming so that a non-subscriber
to such channel may not receive it. Until full scrambling or blocking occurred,
cable operators were required to limit the carriage of such programming to hours
when a significant number of children are not likely to view the programming, so
called "safe-harbor periods." On December 28, 1998, this requirement to scramble
sexually explicit programming was ruled unconstitutional by the U.S. District
Court in Wilmington, Delaware, and the FCC was directed to stop enforcing this
requirement. Pegasus' systems do not presently have the necessary technical
capability to comply with the scrambling requirement; however, prior to the
December 28, 1998 ruling, such programming was only carried during the
safe-harbor period.
Cable Entry Into Telecommunications. The Telecommunications Act
declares that no state or local laws or regulations may prohibit or have the
effect of prohibiting the ability of any entity to provide any interstate or
intrastate telecommunications service. States are authorized to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection. The Telecommunications
Act further provides that cable operators and affiliates providing
telecommunications services are not required to obtain a separate franchise from
local franchising authorities for such services. The
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FCC had held that local franchising authorities may not place telecommunications
conditions in their grants of cable construction permits. The Telecommunications
Act prohibits local franchising authorities from requiring cable operators to
provide telecommunications service or facilities as a condition of a grant of a
franchise, franchise renewal, or franchise transfer, except that local
franchising authorities can seek "institutional networks" as part of franchise
negotiations.
The Telecommunications Act clarifies that traditional cable franchise
fees may only be based on revenues related to the provision of cable television
services. However, when cable operators provide telecommunications services,
local franchising authorities may require reasonable, competitively neutral
compensation for management of the public rights-of-way.
Interconnection and Other Telecommunications Carrier Obligations. To
facilitate the entry of new telecommunications providers including cable
operators, the Telecommunications Act imposes interconnection obligations on all
telecommunications carriers. All carriers must interconnect their networks with
other carriers and may not deploy network features and functions that interfere
with interoperability. On August 8, 1996, the FCC released its First Report and
Order to implement the interconnection provisions of the 1996 Act. While the
U.S. Court of Appeals for the Eighth Circuit invalidated significant aspects of
the First Report and Order, on January 25, 1999, the U.S. Supreme Court upheld
most of the FCC's interconnection order.
Telephone Company Entry Into Cable Television. The Telecommunications
Act allows telephone companies to compete directly with cable operators by
repealing the telephone company-cable cross-ownership ban and the FCC's video
dialtone regulations. This will allow local exchange carriers, including the
Bell Operating Companies, to compete with cable both inside and outside their
telephone service areas.
The Telecommunications Act replaces the FCC's video dialtone rules with
an "open video system" plan by which wireline competitors can provide cable
service with decreased regulatory burdens. Open video systems complying with the
FCC open video system regulations will receive relaxed oversight. Only the
program access, negative option billing prohibition, subscriber privacy, Equal
Employment Opportunity, public education and government access requirements,
must-carry and retransmission consent provisions of the Communications Act will
apply to entities providing an open video system. Rate regulation, customer
service provisions, leased access and equipment compatibility will not apply.
Local franchising authorities may require open video system operators to pay
"franchise fees" only to the extent that the open video system provider or its
affiliates provide cable services over the open video system. Such fees may not
exceed the franchise fees charged to cable operators in the area, and the open
video service provider may pass through the fees as a separate subscriber bill
item. Open video system operators will be subject to local franchising
authorities. A general right-of-way management regulations, and local
franchising authorities may require the open video service operator to obtain
local authorizations to provide service.
As required by the Telecommunications Act, the FCC has adopted
regulations prohibiting an open video system operator from discriminating among
programmers, and ensuring that open video system rates, terms, and conditions
for service are reasonable and nondiscriminatory. Further, the FCC has adopted
regulations prohibiting a local exchange carrier-open video system operator, or
its affiliates, from occupying more than one-third of a system's activated
channels when demand for channels exceeds supply, although there are no numeric
limits.
The FCC also has adopted open video system regulations governing
channel sharing; extending the FCC's sports exclusivity, network nonduplication,
and syndex regulations; and controlling the positioning of programmers on menus
and program guides. The Telecommunications Act does not require local exchange
carriers to use separate subsidiaries to provide incidental inter Local Access
and Transport Area video or audio programming services to subscribers or for
their own programming ventures. Most of the FCC's open video system rules were
affirmed by the Fifth Circuit U.S. Court of Appeals on January 19, 1999.
Cable Cross-Ownership. The Telecommunications Act eliminates statutory
restrictions on broadcast/cable cross-ownership, including broadcast
network/cable restrictions, but leaves in place existing FCC regulations
prohibiting local cross-ownership between television stations and cable systems.
The Telecommunications Act leaves in place existing restrictions on cable
cross-ownership with satellite master antenna television and multichannel
multi-point distribution systems facilities, but lifts those restrictions where
the cable operator is subject to effective competition. In January 1995,
however, the FCC adopted regulations which permit cable operators to own and
operate satellite master antenna television systems within their franchise area,
provided that such operation is consistent with local cable franchise
requirements.
<PAGE>
Regulation of Signal Carriage. The Communications Act grants
broadcasters a choice of must carry right or retransmission consent rights. The
rules adopted by the FCC generally provided for mandatory carriage by cable
systems of all local full power commercial television broadcast signals
selecting must carry rights and, depending on a cable system's channel capacity,
non-commercial television broadcast signals. Such statutorily mandated carriage
of broadcast stations coupled with the provisions of the Cable Communications
Policy Act could adversely affect some of Pegasus' cable systems by limiting the
programming services they can offer. The Communications Policy Act requires
cable television systems of 36 or more "activated" channels to reserve a
percentage of such channels for commercial use by unaffiliated third parties and
permits franchise authorities to require the cable
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operator to provide channel capacity, equipment and facilities for public,
educational, and governmental access channels. The FCC has initiated a
proceeding to determine the extent to which cable operators must carry all
digital signals transmitted by broadcasters. The imposition of such additional
must carry regulations could further limit the amount of satellite delivered
programming Pegasus could carry on its cable television systems.
Closed Captioning Regulation. The Telecommunications Act also required
the FCC to establish rules and an implementation schedule to ensure that video
programming is fully accessible to the hearing impaired through closed
captioning. The rules adopted by the FCC will require substantial closed
captioning over an eight or ten year phase-in period with only limited
exceptions.
Emergency Alert System. In September 1997, the FCC released its rules
establishing the deadlines by which cable operators must comply with the new
Emergency Alert System. These deadlines vary depending on how many subscribers
are served by the particular cable system. Pegasus, like all other cable
operators, is responsible for compliance with the Emergency Alert System rules.
Copyright Licensing. Cable systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a statutory license to certain
retransmit broadcast signals. Bills have been introduced in Congress over the
past several years that would eliminate or modify the cable statutory license.
The Communications Act's retransmission consent provisions expressly provide
that retransmission consent agreements between television stations and cable
operators do not obviate the need for cable operators to obtain a copyright
license for the programming carried on each broadcaster's signal.
Electric Utility Entry Into Telecommunications. The Telecommunications
Act provides that registered utility holding companies and subsidiaries may
provide telecommunications services, including cable, notwithstanding the Public
Utility Holding Company Act. Electric utilities must establish separate
subsidiaries, known as "exempt telecommunications companies" and must apply to
the FCC for operating authority. It is anticipated that large utility holding
companies will become significant competitors to both cable television and other
telecommunications providers.
State and Local Regulation. Because a cable system uses streets and
rights-of-way, cable systems are subject to state and local regulation,
typically imposed through the franchising process. State and/or local officials
are usually involved in franchisee selection, system design and construction,
safety, consumer relations, billing practices and community-related programming
and services among other matters. Cable systems generally are operated pursuant
to nonexclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Franchises generally are granted for
fixed terms and in many cases are terminable if the franchise operator fails to
comply with material provisions. The Communications Act prohibits the award of
exclusive franchises and allows franchising authorities to exercise greater
control over the operation of franchised cable systems, especially in the area
of customer service and rate regulation. The Communications Act also allows
franchising authorities to operate their own multichannel video distribution
system without having to obtain a franchise and permits states or local
franchising authorities to adopt certain restrictions on the ownership of cable
systems. Moreover, franchising authorities are immunized from monetary damage
awards arising from regulation of cable systems or decisions made on franchise
grants, renewals, transfers and amendments. Under certain circumstances, local
franchising authorities may become certified to regulate basic cable service
rates.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of the
cable system. Cable franchises generally contain provisions governing fees to be
paid to the franchising authority, length of the franchise term, renewal, sale
or transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public streets and number and
types of cable services provided.
Although federal law has established certain procedural safeguards to
protect incumbent cable television franchisees against arbitrary denials of
renewal, the renewal of a franchise cannot be assured unless the franchisee has
met certain statutory standards. Moreover, even if a franchise is renewed, a
franchising authority may impose new and stricter requirements, such as the
upgrading of facilities and equipment or higher franchise fees, subject,
however, to limits set by federal law. To date, however, no request of Pegasus
for franchise renewals or extensions has been denied. Despite favorable
legislation and good relationships with its franchising authorities, there can
be no assurance that franchises will be renewed or extended.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable systems, and several states have adopted
legislation subjecting cable systems to the jurisdiction of centralized state
governmental agencies, some that impose regulation similar to that of a public
utility. Attempts in other states to regulate cable systems are continuing and
can be expected to increase. Such proposals and legislation may be preempted by
federal statute and/or FCC regulation. Puerto Rico has recently adopted new
state level regulations.
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The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable systems operate. Neither the outcome of these proceedings nor the
impact upon the cable industry or Pegasus' cable systems can be predicted at
this time.
Inside Wiring. In a 1997 order, the FCC established rules that require
an incumbent cable operator upon expiration or termination of a multiple
dwelling unit service contract to sell, abandon, or remove "home run" wiring
that was installed by the cable operator in a multiple dwelling unit building.
These inside wiring rules will assist building owners in their attempts to
replace existing cable operators with new video programming providers who are
willing to pay the building owner a higher fee. Additionally, the FCC has
proposed abrogating all exclusive multiple dwelling unit contracts held by cable
operators, but at the same time allowing competitors to cable to enter into
exclusive multiple dwelling unit service contracts.
Internet Service Regulation. Although there is no significant federal
regulation of cable system delivery of Internet services at the current time,
and the FCC issued a report to Congress in January 1999 finding no immediate
need to impose such regulation, this situation may change as cable systems
expand their broadband delivery of Internet services. In particular, proposals
have been advanced at the FCC that would require cable operators to provide
access to unaffiliated internet service providers and online service providers.
Certain Internet service providers also are attempting to use existing
commercial leased access provisions of the Telecommunications Act to gain access
to cable system delivery. Finally, some local franchising authorities have
imposed or are considering the imposition of mandatory Internet access
requirements as part of cable franchise renewals or transfer approvals.
Other FCC Regulations. In addition to the FCC regulations noted above,
there are other FCC regulations covering such areas as:
o equal employment opportunity;
o customer privacy;
o programming practices -- including, among other things,
syndicated program exclusivity, network program
nonduplication, local sports blackouts, indecent programming,
lottery programming, political programming, sponsorship
identification, and children's programming advertisements;
o registration of cable systems and facilities licensing;
o maintenance of various records and public inspection files;
o frequency usage;
o lockbox availability;
o antenna structure notification;
o tower marking and lighting;
o consumer protection and customer service standards;
o technical standards; and
o consumer electronics equipment compatibility.
ITEM 2: PROPERTIES
Our corporate headquarters are located in Bala Cynwyd, Pennsylvania. In
February 2000, we purchased our corporate headquarters building for $12.5
million, with mortgage financing of approximately $8.8 million.
Our direct broadcast satellite operations are headquartered in
Marlborough, Massachusetts and we operate call centers out of leased space in
San Luis Obispo, California, Marlborough, Massachusetts, and Louisville,
Kentucky. These leases expire on various dates through 2002. In connection with
our TV operations, we own or lease various transmitting equipment, television
stations, and office space. Our cable operations include office, head end, and
warehouse space in Puerto Rico. The property that we do not own in Puerto Rico
is operated under various leases expiring at various dates through 2004. Our
property in Puerto Rico will be sold in connection with the pending sale of our
Puerto Rico cable system.
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ITEM 3: LEGAL PROCEEDINGS
DIRECTV/NRTC Litigation. On June 3, 1999, the National Rural
Telecommunications Cooperative filed a lawsuit in federal court against DIRECTV
seeking a court order to enforce the National Rural Telecommunications
Cooperative's contractual rights to obtain from DIRECTV certain premium
programming formerly distributed by United States Satellite Broadcasting
Company, Inc. for exclusive distribution by the National Rural
Telecommunications Cooperative's members and affiliates in their rural markets.
The National Rural Telecommunications Cooperative also sought a temporary
restraining order preventing DIRECTV from marketing the premium programming in
such markets and requiring DIRECTV to provide the National Rural
Telecommunications Cooperative with the premium programming for exclusive
distribution in those areas. The court, in an order dated June 17, 1999, denied
the National Rural Telecommunications Cooperative a preliminary injunction on
such matters, without deciding the underlying claims. On July 22, 1999, DIRECTV
responded to the National Rural Telecommunications Cooperative's continuing
lawsuit by rejecting the National Rural Telecommunications Cooperative's claims
to exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the National
Rural Telecommunications Cooperative. In particular, DIRECTV contends in its
counterclaim that the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative is measured solely by the orbital life of DBS-1,
the first DIRECTV satellite launched into orbit at the 101o W orbital location,
without regard to the orbital lives of the other DIRECTV satellites at the 101o
W orbital location. DIRECTV also alleges in its counterclaim that the National
Rural Telecommunications Cooperative's right of first refusal, which is
effective at the end of the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative, does not provide for certain programming and
other rights comparable to those now provided under the contract. On September
8, 1999, the court denied a motion by DIRECTV to dismiss certain of the National
Rural Telecommunications Cooperative's claims, leaving all of the causes of
action asserted by the National Rural Telecommunications Cooperative at issue.
On September 9, 1999, the National Rural Telecommunications Cooperative
filed a response to DIRECTV's counterclaim contesting DIRECTV's interpretations
of the end of term and right of first refusal provisions. On August 26, 1999,
the National Rural Telecommunications Cooperative filed a separate lawsuit in
federal court against DIRECTV claiming that DIRECTV had failed to provide to the
National Rural Telecommunications Cooperative 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 a portion of the National Rural Telecommunications Cooperative's
lawsuit regarding launch fees and other benefits. In particular, the court
dismissed the tort claim asserted by the National Rural Telecommunications
Cooperative, but left in place the remaining claims asserted by the National
Rural Telecommunications Cooperative. The court also consolidated that lawsuit
with the other pending National Rural Telecommunications Cooperative/DIRECTV
lawsuit. The court set various discovery and motion deadlines for the spring and
summer of 2000 but did not set a trial date.
On December 29, 1999, DIRECTV filed a motion for partial summary
judgment. The motion seeks a court order that the National Rural
Telecommunications Cooperative's right of first refusal, effective at the
termination of DIRECTV's contract with the National Rural Telecommunications
Cooperative, does not include programming services and is limited to 20 program
channels of transponder capacity. The hearing date on DIRECTV's motion was
vacated by the court pending resolution of certain procedural issues raised by a
new lawsuit we and Golden Sky filed against DIRECTV, discussed below. The court
has not yet set a trial date on the merits of the motion for partial summary
judgment.
On January 10, 2000, we and Golden Sky 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 National Rural
Telecommunications Cooperative that are distributors of DIRECTV. The complaint
contains causes of action for various torts, common counts and declaratory
relief based on DIRECTV's failure to provide the National Rural
Telecommunications Cooperative with premium programming, thereby preventing the
National Rural Telecommunications Cooperative from providing this programming to
the class members and affiliates. The claims are also based on DIRECTV's
position with respect to launch fees and other benefits, term and rights of
first refusal. The complaint seeks monetary damages and a court order regarding
the rights of the National Rural Telecommunications Cooperative and its members
and affiliates.
On February 10, 2000, we and Golden Sky filed an amended complaint
which added new tort claims against DIRECTV for interference with plaintiffs'
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. We and Golden Sky also withdrew the class action
allegations to allow a new class action to be filed on behalf of the members and
affiliates of the National Rural Telecommunications Cooperative. The outcome of
this litigation and the litigation filed by the National Rural
Telecommunications Cooperative could have a material adverse effect on our
direct broadcast satellite business.
DBS Late Fee Litigation. In November 1998 we were sued in Indiana for
allegedly charging DBS subscribers excessive fees for late payments. The
plaintiffs, who claim to represent a class consisting of residential DIRECTV
customers in Indiana, seek
B-23
<PAGE>
unspecified damages for the purported class and modification of our late-fee
policy. We are unable to estimate the amount involved or to determine whether
this suit is material to us. Similar suits have been brought against DIRECTV and
various cable operators in other parts of the United States.
Other 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 with respect to these claims
will not have a material adverse effect on our consolidated operations, cash
flows or financial position.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the
fourth quarter of 1999.
B-24
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Class A Common Stock
Our Class A common stock is traded on the Nasdaq National Market under
the symbol "PGTV." The sale prices reflect inter-dealer quotations, do not
include retail markups, markdowns or commission, and do not necessarily
represent actual transactions. We urge you to obtain current market quotations.
The stock prices listed below represent the high and low closing sale prices of
the Class A common stock, as reported on the Nasdaq National Market since
January 1, 1998.
Price Range of Common Stock
---------------------------
High Low
---- ---
Year Ended December 31, 1998:
First Quarter................................... 26 19 7/8
Second Quarter.................................. 25 5/8 20 7/8
Third Quarter................................... 25 15 7/8
Fourth Quarter.................................. 25 1/2 10 5/8
Year Ended December 31, 1999:
First Quarter................................... 28 7/8 21 3/16
Second Quarter.................................. 50 1/2 27 7/8
Third Quarter................................... 46 37
Fourth Quarter.................................. 102 3/4 42 1/2
The closing sale price of the Class A common stock was $128 3/8 on
March 8, 2000. As of March 8, 2000, Pegasus had 143 shareholders of record.
Dividend Policy
Common Stock: Pegasus has not paid any cash dividends on its Class A
common stock and does not anticipate paying cash dividends on its common stock
in the foreseeable future. Our policy is to retain cash for operations and
expansion. Payment of cash dividends on the common stock is restricted by
Pegasus' publicly held debt securities and preferred stock. Our ability to
obtain cash from our subsidiaries with which to pay cash dividends is also
restricted by the subsidiaries' publicly held debt securities and bank
agreements.
Preferred Stock: We are allowed to pay dividends on our Series C
convertible preferred stock by issuing shares of our Class A common stock
instead of paying cash, and until July 1, 2002, we are allowed to pay dividends
on our Series A preferred stock by issuing more shares of that stock instead of
paying cash. We expect to issue shares of our Class A common stock and Series A
preferred stock to pay these dividends, and in any event our publicly held debt
securities do not permit us to pay cash dividends on our Series A preferred
stock until July 1, 2002. We are also obligated to pay cash dividends of $1.4
million per year in the aggregate on our Series B, Series D and Series E junior
convertible participating preferred stock. These payments are subject to
compliance with outstanding indentures and the certificate of designation with
respect to the Series A preferred stock.
Calculation of Aggregate Market Value of Nonaffiliate Shares
For the purposes of calculating the aggregate market value of the
shares of Class A common stock of Pegasus held by nonaffiliates, as shown on the
cover page of this Report, it has been assumed that all the outstanding shares
were held by nonaffiliates except for the shares held by directors, including
Marshall W. Pagon, Pegasus' President and Chief Executive Officer. However, this
should not be deemed to constitute an admission that all directors of Pegasus
are, in fact, affiliates of Pegasus, or that there are not other persons who may
be deemed to be affiliates of Pegasus. Further information concerning
shareholdings of officers, directors and principal stockholders is included in
Item 12: Security Ownership of Certain Beneficial Owners and Management.
Recent Sales of Unregistered Securities
All sales for the period covered by this Report have been previously
reported by Pegasus on its Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1999, June 30, 1999 and September 30, 1999 with the following
exceptions:
B-25
<PAGE>
1. On November 19, 1999, Pegasus exchanged its 12.5% Series A senior notes due
2007 for Digital Television Services, Inc.'s outstanding 12.5% Series B
senior subordinated notes due 2007 of which $155.0 million in principal
amount at maturity were outstanding. Pegasus' 12.5% Series A notes due 2007
have substantially the same terms and provisions as Digital Television
Services, Inc's 12.5% Series B senior subordinated notes due 2007. These
transactions were effected by Pegasus in reliance upon exemptions from
registration under the Securities Act of 1933 as provided in Rule 144A and
Regulation S.
2. On December 16, 1999, Pegasus issued 7,500 shares of its Class A common
stock upon the exercise of a warrant previously issued on August 10, 1998 in
connection with an acquisition of DIRECTV rights and related assets from an
independent provider of DIRECTV in certain rural portions of Oregon. The
exercise price of the warrant was $21.8604, resulting in consideration of
$163,953 being received by Pegasus. In issuing these shares, Pegasus relied
upon the exemption from registration set forth in Section 4(2) of the
Securities Act.
3. On January 4, 2000, in connection with the acquisition by merger of Carr
Rural TV, Inc., Pegasus issued 5,707 shares of Series B junior convertible
participating preferred stock with a liquidation preference of $1,000 per
share convertible, at $61.596873, into approximately 92,651 shares of Class
A common stock. These transactions were effected by Pegasus in reliance upon
exemptions from registration under the Securities Act as provided in Section
4(2) thereof. Each certificate issued for unregistered securities contained
a legend stating that the securities have not been registered under the
Securities Act and setting forth the restrictions on the transferability and
the sale of the securities. None of the transactions involved a public
offering.
4. On January 6, 2000, Pegasus issued 5,000 shares of its Class A common stock
upon the exercise of a warrant previously issued in May 1998 in connection
with an acquisition of DIRECTV rights and related assets from an independent
provider of DIRECTV in certain rural portions of Oregon. The exercise price
of the warrant was $24.2653, resulting in consideration of $121,326 being
received by Pegasus. In issuing these shares, Pegasus relied upon the
exemption from registration set forth in Section 4(2) of the Securities Act.
5. On January 13, 2000, in partial consideration for the acquisition of
preferred interests of Personalized Media Communications, LLC, Pegasus
issued 200,000 shares of Pegasus' Class A common stock and agreed, subject
to certain conditions, to issue warrants to purchase 1.0 million shares of
Pegasus' Class A common stock at an exercise price of $90.00 per share and
with a term of ten years. These transactions were effected by Pegasus in
reliance upon exemptions from registration under the Securities Act of 1933
as provided in Section 4(2) thereof. Each certificate issued for
unregistered securities contained a legend stating that the securities have
not been registered under the Securities Act and setting forth the
restrictions on the transferability and the sale of the securities. None of
the transactions involved a public offering.
6. On January 25, 2000, Pegasus completed a private offering of $300.0 million
in liquidation amount of its 61/2% Series C convertible preferred stock. The
Series C convertible preferred stock was issued to Donaldson, Lufkin &
Jenrette Securities Corporation, Bear, Stearns & Co. Inc., Banc of America
Securities LLC, Deutsche Bank Securities Inc. and CIBC World Markets Corp.,
as initial purchasers in a transaction exempt from the registration
requirements of the Securities Act pursuant to Regulation D. The initial
purchasers then sold the Series C convertible preferred stock to a limited
number of institutional investors in transactions exempt from the
registration requirements of the Securities Act pursuant to Rule 144A
thereof. Discounts and commissions of approximately 3.0% of the offering
were paid to the initial purchasers in connection with the issuance of the
Series C convertible preferred stock.
Each share of Series C convertible preferred stock is convertible at any
time into the number of whole shares of our Class A common stock equal to
the stated liquidation preference of $100 per share divided by an initial
conversion price of $127.50 per share, subject to adjustment if certain
events should occur. Pegasus may redeem the Series C convertible preferred
stock at any time beginning on February 1, 2003 at redemption prices set
forth in the certificate of designation. In addition, from August 1, 2001 to
February 1, 2003, Pegasus may redeem the Series C convertible preferred
stock at a redemption premium of 105.525% of the stated liquidation
preference, plus accumulated and unpaid dividends, if any, if the trading
price of Pegasus' Class A common stock equals or exceeds $191.25 for a
specified trading period. In the event of a change of control of Pegasus,
holders of Series C convertible preferred stock will have a one-time option
to convert such holder's shares into Class A common stock at a conversion
price equal to the greater of (1) the market price of our Class A common
stock at the change of control date or (2) $68.00 per share. In lieu of
issuing Class A common stock, we may, at our option, make a cash payment
equal to the market value of the shares. Pegasus plans to use the net
proceeds of the offering for working capital and general corporate purposes.
B-26
<PAGE>
7. On February 1, 2000, in partial consideration for the acquisition
of assets of South Coast Satellite Cooperative, Inc., Pegasus
issued 22,500 shares of Series D junior convertible participating
preferred stock with a liquidation preference of $1,000 per share
convertible, at $102.40755, into approximately 219,711 shares of
Class A common stock. These transactions were effected by Pegasus
in reliance upon exemptions from registration under the Securities
Act as provided in Section 4(2) thereof. Each certificate issued
for unregistered securities contained a legend stating that the
securities have not been registered under the Securities Act and
setting forth the restrictions on the transferability and the sale
of the securities. None of the transactions involved a public
offering.
8. On February 14, 2000, in connection with the acquisition by
merger of Unlimited Visions, Inc., trading as Skyquest, Pegasus
issued 436,592 shares of Class A common stock. In addition, on
February 14, 2000, in partial consideration for the acquisition of
assets of Kennebec CATV Company, Pegasus issued warrants to
purchase 1,500 shares of Class A common stock at an exercise price
of $92.23 per share, expiring on February 15, 2005. These
transactions were effected by Pegasus in reliance upon exemptions
from registration under the Securities Act as provided in Section
4(2) thereof. Each certificate issued for unregistered securities
contained a legend stating that the securities have not been
registered under the Securities Act and setting forth the
restrictions on the transferability and the sale of the
securities. None of the transactions involved a public offering.
9. On February 25, 2000, in partial consideration for the acquisition
of assets of Casco Communications Inc., Pegasus issued 10,000
shares of Series E junior convertible participating preferred
stock with a liquidation preference of $1,000 per share
convertible, at $99.7667, into approximately 100,234 shares of
Class A common stock. These transactions were effected by Pegasus
in reliance upon exemptions from registration under the Securities
Act as provided in Section 4(2) thereof. Each certificate issued
for unregistered securities contained a legend stating that the
securities have not been registered under the Securities Act and
setting forth the restrictions on the transferability and the sale
of the securities. None of the transactions involved a public
offering.
ITEM 6: SELECTED FINANCIAL DATA
The selected historical consolidated financial data have been derived
from Pegasus' audited consolidated financial statements which have been audited
by PricewaterhouseCoopers LLP. The information should be read in conjunction
with the consolidated financial statements, related notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which are included elsewhere herein. The statement of operating data
reflects net revenues and operating expenses from our continuing operations. The
results of operations from the entire cable segment have been classified as
discontinued and certain amounts for 1995 through 1998 have been restated. The
paragraphs following the table provide an explanation of certain portions of it.
B-27
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
Statement of Operating Data: 1995 1996
------- -------
(Dollars in thousands,
except per share data)
<S> <C> <C>
Net revenues:
DBS...................................................................................... $ 1,469 $ 5,829
Broadcast................................................................................ 20,073 28,604
------- -------
Total net revenues...................................................................... 21,542 34,433
Operating expenses:
DBS
Programming, technical and general and administrative................................... 1,379 4,312
Marketing and selling................................................................... -- 646
Incentive compensation.................................................................. 9 146
Depreciation and amortization........................................................... 640 1,786
Broadcast
Programming, technical and general and administrative................................... 10,181 13,903
Marketing and selling................................................................... 3,789 4,851
Incentive compensation.................................................................. 415 691
Depreciation and amortization........................................................... 2,934 4,041
Corporate expenses....................................................................... 1,364 1,429
Corporate depreciation and amortization.................................................. 492 988
Other expense, net....................................................................... 15 139
------- -------
Income (loss) from operations........................................................... 324 1,501
Interest expense........................................................................... (4,135) (8,885)
Interest income............................................................................ 362 218
------- -------
Loss from continiuing operations before income taxes, equity loss and
extraordinary items..................................................................... (3,449) (7,166)
Provision (benefit) for income taxes....................................................... 10 (145)
Equity in net loss of unconsolidated affiliate............................................. -- --
------- -------
Loss from continuing operations before extraordinary items............................... (3,459) (7,021)
Discontinued operations:
Income (loss) from discontinued operations of cable
segment, net of income taxes............................................................ (4,698) (2,703)
Gain on sale of discontinued operations, net of income taxes............................. -- --
Loss before extraordinary items.......................................................... (8,157) (9,724)
Extraordinary gain (loss) from extinguishment of debt, net................................. 10,211 (250)
------- -------
Net income (loss)........................................................................ 2,054 (9,974)
Preferred stock dividends................................................................ -- --
------- -------
Net income (loss) applicable to common shares............................................ $2,054 ($9,974)
======= =======
Loss per common share:
Loss from continuing operations......................................................... $1.13)
Income (loss) from discontinued operations.............................................. (0.43)
Gain on sale of discontinued operations................................................. --
-------
Loss before extraordinary items......................................................... (1.56)
Extraordinary item...................................................................... (0.04)
-------
Loss per common share................................................................... $1.60)
=======
Weighted average shares outstanding (000's)............................................ 6,240
=======
Other Data:
Pre-marketing cash flow from continuing operations:
DBS...................................................................................... $90 $1,517
Broadcast................................................................................ 6,103 9,850
------- -------
Total pre-marketing cash flow from continuing operations................................. $ 6,193 $11,367
======= =======
Location cash flow from continuing operations.............................................. $ 6,193 $10,721
Operating cash flow from continuing operations............................................. 4,829 9,292
Capital expenditures....................................................................... 2,640 6,294
Net cash provided by (used for):
Operating activities..................................................................... 5,783 3,059
Investing activities..................................................................... (6,047) (81,179)
Financing activities..................................................................... 10,859 74,727
</TABLE>
B-28
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
Statement of Operating Data: 1997 1998 1999
------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Net revenues:
DBS......................................................................... $38,254 $147,142 $286,353
Broadcast................................................................... 31,876 34,311 36,415
------- -------- --------
Total net revenues......................................................... 70,130 181,453 322,768
Operating expenses:
DBS
Programming, technical and general and administrative...................... 26,042 102,419 201,158
Marketing and selling...................................................... 5,973 45,706 117,774
Incentive compensation..................................................... 795 1,159 1,592
Depreciation and amortization.............................................. 17,042 59,077 82,744
Broadcast
Programming, technical and general and administrative...................... 15,672 18,056 22,812
Marketing and selling...................................................... 5,704 5,993 6,304
Incentive compensation..................................................... 298 177 57
Depreciation and amortization.............................................. 3,754 4,557 5,144
Corporate expenses.......................................................... 2,256 3,614 5,975
Corporate depreciation and amortization..................................... 1,353 2,105 3,119
Other expense, net.......................................................... 630 1,409 1,995
------- -------- --------
Income (loss) from operations.............................................. (9,389) (62,819) (125,906)
Interest expense.............................................................. (14,275) (44,559) (64,904)
Interest income............................................................... 1,508 1,586 1,356
------- -------- --------
Loss from continiuing operations before income taxes, equity loss and
extraordinary items........................................................ (22,156) (105,792) (189,454)
Provision (benefit) for income taxes.......................................... 168 (901) (8,892)
Equity in net loss of unconsolidated affiliate................................ -- -- (201)
------- -------- --------
Loss from continuing operations before extraordinary items.................. (22,324) (104,891) (180,763)
Discontinued operations:
Income (loss) from discontinued operations of cable
segment, net of income taxes............................................... 257 1,047 2,128
Gain on sale of discontinued operations, net of income taxes................ 4,451 24,727 --
------- -------- --------
Loss before extraordinary items............................................. (17,616) (79,117) (178,635)
Extraordinary gain (loss) from extinguishment of debt, net.................... (1,656) -- (6,178)
------- -------- --------
Net income (loss)........................................................... (19,272) (79,117) (184,813)
Preferred stock dividends................................................... 12,215 14,764 16,706
------- -------- --------
Net income (loss) applicable to common shares............................... ($31,487) ($93,881) ($201,519)
======= ======== ========
Loss per common share:
Loss from continuing operations............................................ $3.50) $8.46) $10.46)
Income (loss) from discontinued operations................................. 0.03 0.07 0.11
Gain on sale of discontinued operations.................................... 0.45 1.75 --
------- -------- --------
Loss before extraordinary items............................................ (3.02) (6.64) (10.35)
Extraordinary item......................................................... (0.17) -- (0.33)
------- -------- --------
Loss per common share...................................................... $3.19) $6.64) $10.68)
======= ======== ========
Weighted average shares outstanding (000's)................................ 9,858 14,130 18,875
======= ======== ========
Other Data:
Pre-marketing cash flow from continuing operations:
DBS......................................................................... $12,212 $44,723 $85,195
Broadcast................................................................... 10,500 10,262 7,299
------- -------- --------
Total pre-marketing cash flow from continuing operations.................... $22,712 $54,985 $92,494
======= ======== ========
Location cash flow from continuing operations................................. $16,739 $9,279 ($25,280)
Operating cash flow from continuing operations................................ 14,483 5,665 (31,255)
Capital expenditures.......................................................... 9,929 12,400 14,784
Net cash provided by (used for):
Operating activities........................................................ 8,478 (21,962) (88,879)
Investing activities........................................................ (142,109) (101,373) (133,981)
Financing activities........................................................ 169,098 133,791 208,808
</TABLE>
B-29
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
1995 1996 1997 1998 1999
------- -------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............................. $21,856 $ 8,582 $ 45,269 $ 75,985 $ 42,832
Working capital (deficiency)........................... 17,566 6,430 32,347 37,889 (4,936)
Total assets........................................... 95,770 173,680 380,862 886,310 945,332
Total debt (including current)......................... 82,896 115,575 208,355 559,029 684,414
Total liabilities...................................... 95,521 133,354 239,234 699,144 862,725
Redeemable preferred stock............................. -- -- 111,264 126,028 142,734
Minority interest...................................... -- -- 3,000 3,000 3,000
Total common stockholders' equity (deficit)............ 249 40,326 27,364 58,138 (63,127)
</TABLE>
In this section we use the terms pre-marketing cash flow from
continuing operations and location cash flow from continuing operations.
Pre-marketing cash flow from continuing operations is calculated by taking our
earnings and adding back the following expenses:
o interest and income taxes;
o depreciation and amortization and corporate overhead;
o extraordinary and non-recurring items;
o non-cash charges, such as incentive compensation under our
restricted stock plan and 401(k) plans;
o results of discontinued operations; and
o DBS subscriber acquisition costs, which are sales and marketing
expenses incurred to acquire new DBS subscribers.
Location cash flow from continuing operations is pre-marketing cash
flow from continuing operations less DBS subscriber acquisition costs.
Pre-marketing cash flow from continuing operations and location cash
flow from continuing operations 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 U.S. generally accepted accounting
principles. Pre-marketing cash flow from continuing operations and location cash
flow from continuing operations also do not necessarily indicate whether our
cash flow will be sufficient to fund working capital, capital expenditures, or
to react to changes in Pegasus' industry or the economy generally. We believe
that pre-marketing cash flow from continuing operations and location cash flow
from continuing operations are important, however, for the following reasons:
o people who follow our industry frequently use them as measures
of financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to
monitor our financial performance and debt leverage.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of Pegasus should be read in conjunction with the consolidated
financial statements and related notes which are included elsewhere herein. This
Report contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein.
GENERAL
Pegasus Communications Corporation is:
o The largest independent provider of DIRECTV with 771,000
subscribers at February 29, 2000, on an actual basis, without
giving effect to the Golden Sky acquisition. We have the
exclusive right to distribute DIRECTV digital broadcast
satellite services to 5.2 million rural households in 36
states. We distribute DIRECTV through the Pegasus retail
network, a network in excess of 2,500 independent retailers.
o The owner or programmer of ten TV stations affiliated with
either Fox, UPN or the WB and the owner of a large cable
system in Puerto Rico serving approximately 55,000
subscribers.
o We have increased our revenues at a compound growth rate of
89% per annum since our inception in 1991.
B-30
<PAGE>
DBS revenues are principally derived from monthly customer
subscriptions and pay-per-view services. Broadcast revenues are derived from the
sale of broadcast airtime to local and national advertisers.
In January 2000, we entered into a letter of intent to sell the assets
of our entire cable system business in Puerto Rico to a subsidiary of Centennial
Cellular Corporation for $170.0 million in cash, subject to certain adjustments.
The closing of this sale is anticipated to occur during the third quarter of
2000 and is subject to the negotiation of a definitive agreement, third-party
approvals, including regulatory approvals, and other customary conditions. The
sale is also subject to approval by Pegasus' board of directors. Accordingly,
the results of our cable segment have been presented as discontinued operations
in our consolidated statements of operations.
In this section we use the terms pre-marketing cash flow from
continuing operations and location cash flow from continuing operations.
Pre-marketing cash flow from continuing operations is calculated by taking our
earnings and adding back the following expenses:
o interest;
o income taxes;
o depreciation and amortization;
o non-cash charges;
o corporate overhead;
o extraordinary and non-recurring items;
o results of discontinued operations; and
o DBS subscriber acquisition costs, which are sales and
marketing expenses incurred to acquire new DBS subscribers.
Location cash flow from continuing operations is pre-marketing cash
flow from continuing operations less DBS subscriber acquisition costs.
Pre-marketing cash flow from continuing operations and location cash
flow from continuing operations are not, and should not be considered,
alternatives to income from operations, net income, net cash provided by
operating activities or any other measure for determining our operating
performance or liquidity, as determined under generally accepted accounting
principles. Pre-marketing cash flow from continuing operations and location cash
flow from continuing operations also do not necessarily indicate whether our
cash flow will be sufficient to fund working capital, capital expenditures, or
to react to changes in Pegasus' industry or the economy generally. We believe
that pre-marketing cash flow from continuing operations and location cash flow
from continuing operations are important, however, for the following reasons:
o people who follow our industry frequently use them as measures
of financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to
monitor our financial performance and debt leverage.
Pegasus generally does not require new DBS customers to sign
programming contracts and, as a result, subscriber acquisition costs are
currently being charged to operations in the period incurred.
Results of Operations
Year ended December 31, 1999 compared to the year ended December 31, 1998
Total net revenues from continuing operations in 1999 were $322.8
million, an increase of $141.3 million, or 78%, compared to total net revenues
of $181.5 million in 1998. The increase in total net revenues in 1999 was
primarily due to an increase in DBS revenues of $139.2 million attributable to
acquisitions and to internal growth in Pegasus' DBS subscriber base. Total
operating expenses from continuing operations in 1999 were $448.7 million, an
increase of $204.4 million, or 84%, compared to total operating expenses of
$244.3 million in 1998. The increase was primarily due to an increase of $194.9
million in operating expenses attributable
B-31
<PAGE>
to the growth in Pegasus' DBS business.
Total corporate expenses from continuing operations, including
corporate depreciation and amortization, were $9.1 million in 1999, an increase
of $3.4 million, or 59%, compared to $5.7 million in 1998. The increase in
corporate expenses is primarily attributable to the growth in Pegasus' business.
The increase in corporate depreciation and amortization is primarily due to
amortization of deferred financing costs associated with the issuance of $100.0
million of senior notes in November 1998.
Other expenses from continuing operations were $2.0 million in 1999, an
increase of $586,000, or 42%, compared to other expenses of $1.4 million in
1998. The increase is primarily due to increased investor relations activities,
board related costs and development costs.
Interest expense from continuing operations was $64.9 million in 1999,
an increase of $20.3 million, or 46%, compared to interest expense of $44.6
million in 1998. The increase in interest expense is primarily due to interest
on Pegasus' $100.0 million senior notes issued in November 1998 and an increase
in bank borrowings and seller notes associated with Pegasus' DBS acquisitions.
Interest income from continuing operations was $1.4 million in 1999, a decrease
of $229,000, or 14%, compared to interest income of $1.6 million in 1998. The
decrease in interest income is due to lower average cash balances in 1999
compared to 1998.
The benefit for income taxes from continuing operations amounted to
$8.9 million in 1999, an increase of $8.0 million, compared to a benefit of
$901,000 in 1998. The increase is primarily attributable to the amortization of
the deferred tax liability that originated from the acquisition of Digital
Television Services, Inc. in April 1998.
Equity in the net loss of an unconsolidated affiliate, resulting from
an investment in Pegasus PCS Partners, LP in August 1999, amounted to $201,000
for the year ended December 31, 1999.
Income from discontinued operations of the cable segment, net of income
taxes, was $2.1 million in 1999, an increase of $1.1 million, or 103%, compared
to $1.0 million in 1998. The increase is primarily attributable to the
acquisition of the Aguadilla, Puerto Rico cable system effective March 31, 1999.
Pegasus had approximately 55,000 cable subscribers at December 31, 1999 compared
to 28,800 at December 31, 1998.
Pegasus sold its remaining New England cable systems in 1998 for $30.1
million resulting in a gain on the sale of discontinued operations, net of
income taxes, of $24.7 million.
Extraordinary loss from the extinguishment of debt was $6.2 million in
1999. In November 1999, Pegasus exchanged $155.0 million in principal amount of
its' senior notes due 2007 for $155.0 million in principal amount of outstanding
senior subordinated notes due 2007 of its subsidiaries, Digital Television
Services, Inc. and DTS Capital, Inc. Accordingly, the deferred financing costs
related to the senior subordinated notes due 2007 of its subsidiaries were
written off. No such refinancings occurred in 1998.
Preferred stock dividends were $16.7 million in 1999, an increase of
$1.9 million, or 13%, compared to $14.8 million in preferred stock dividends in
1998. The increase is attributable to a greater number of shares of Pegasus'
preferred stock outstanding in 1999 compared to 1998 as the result of payment of
dividends in kind.
DBS
During 1999, Pegasus acquired, through acquisitions, approximately
39,000 subscribers and the exclusive DIRECTV distribution rights to
approximately 336,000 households in rural areas of the United States. At
December 31, 1999, Pegasus had exclusive DIRECTV distribution rights to 4.9
million households and 702,000 subscribers as compared to 4.6 million households
and 435,000 subscribers at December 31, 1998. Pegasus had 7.2 million households
and 1.1 million subscribers at December 31, 1999, including pending acquisitions
(which include the acquisition of Golden Sky). At December 31, 1998, subscribers
would have been 733,000, including pending and completed acquisitions.
Subscriber penetration increased from 10.3% at December 31, 1998 to 15.3% at
December 31, 1999, including pending and completed acquisitions.
Total DBS net revenues were $286.4 million in 1999, an increase of
$139.2 million, or 95%, compared to DBS net revenues of $147.1 million in 1998.
The increase is primarily due to an increase in the average number of
subscribers in 1999 compared to 1998. The average monthly revenue per subscriber
was $43.94 in 1999 compared to $41.63 in 1998. Pro forma DBS net revenues,
including pending acquisitions at December 31, 1999 (which include the
acquisition of Golden Sky), were $434.8 million, an increase of $134.3 million,
or 45%, compared to pro forma DBS net revenues of $300.5 million in 1998.
Programming, technical, and general and administrative expenses were
$201.2 million in 1999, an increase of $98.7 million, or 96%, compared to $102.4
million in 1998. The increase is attributable to significant growth in
subscribers and territory in 1999. As a percentage of revenue, programming,
technical, and general and administrative expenses were 70.2% in 1999 compared
to 69.6% in
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1998.
Subscriber acquisition costs were $117.8 million, an increase of $72.1
million compared to $45.7 million in 1998. Gross subscriber additions were
337,300 in 1999 compared to 132,700 in 1998. The total subscriber acquisition
costs per gross subscriber addition were $349 in 1999 compared to $344 in 1998.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $1.6 million in 1999, an increase of $433,000, or
37%, compared to $1.2 million in 1998. The increase resulted from a larger gain
in pro forma location cash flow during 1999 as compared to 1998.
Depreciation and amortization was $82.7 million in 1999, an increase of
$23.7 million, or 40%, compared to $59.1 million in 1998. The increase in
depreciation and amortization is primarily due to an increase in the fixed and
intangible asset base as the result of DBS acquisitions that occurred in 1998
and 1999.
Broadcast
In 1999, Pegasus owned or programmed ten broadcast television stations
in six markets. Two new stations were launched during the second half of 1998
and one new station was launched in December 1999. Total net broadcast revenues
in 1999 were $36.4 million, an increase of $2.1 million, or 6%, compared to net
broadcast revenues of $34.3 million in 1998. The increase was primarily
attributable to an increase of $1.6 million in net broadcast revenues from the
four stations that began operations in 1997 and 1998.
Programming, technical, and general and administrative expenses were
$22.8 million in 1999, an increase of $4.8 million, or 26%, compared to $18.1
million in 1998. The increase is primarily due to higher programming costs in
1999 and an increase in news related expenses associated with the launch of
self-produced news in our Portland, Maine and Chattanooga, Tennessee markets.
Marketing and selling expenses were $6.3 million in 1999, an increase
of $311,000, or 5%, compared to $6.0 million in 1998. The increase in marketing
and selling expenses was due to an increase in promotional costs associated with
the launch of the new stations and news programs.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $57,000 in 1999, a decrease of $120,000, or 68%,
compared to $177,000 in 1998. The decrease resulted from a lower gain in pro
forma location cash flow during 1999 as compared to 1998.
Depreciation and amortization was $5.1 million in 1999, an increase of
$587,000, or 13%, compared to $4.6 million in 1998. The increase is due to
capital expenditures associated with the launch of the new stations and our news
initiative.
Year ended December 31, 1998 compared to the year ended December 31, 1997
Total net revenues from continuing operations in 1998 were $181.5
million, an increase of $111.3 million, or 159%, compared to total net revenues
of $70.1 million in 1997. The increase in total net revenues in 1998 was
primarily due to an increase in DBS revenues of $108.9 million attributable to
acquisitions and to internal growth in Pegasus' DBS subscriber base. Total
operating expenses from continuing operations in 1998 were $244.3 million, an
increase of $164.8 million, or 207%, compared to total operating expenses of
$79.5 million in 1997. The increase was primarily due to an increase of $158.5
million in operating expenses attributable to the growth in Pegasus' DBS
business.
Total corporate expenses from continuing operations, including
corporate depreciation and amortization, were $5.7 million in 1998, an increase
of $2.1 million, or 58%, compared to $3.6 million in 1997. The increase in
corporate expenses is primarily attributable to the growth in Pegasus' business.
The increase in corporate depreciation and amortization is due to amortization
of deferred financing costs associated with the issuance of $100.0 million of
preferred stock in January 1997, $115.0 million of senior notes in October 1997
and $100.0 million of senior notes in November 1998.
Other expenses from continuing operations were $1.4 million in 1998, an
increase of $779,000, or 124%, compared to other expenses of $630,000 in 1997.
The increase is primarily due to increased investor relations activities and
other board related costs.
Interest expense from continuing operations was $44.6 million in 1998,
an increase of $30.3 million, or 212%, compared to interest expense of $14.3
million in 1997. The increase in interest expense is primarily due to a full
year's interest on Pegasus' $115.0 million senior notes and an increase in bank
borrowings and seller notes associated with Pegasus' DBS acquisitions. Interest
income from continuing operations was $1.6 million in 1998, an increase of
$77,000, or 5%, compared to interest income of $1.5 million in 1997. The
increase in interest income is due to greater average cash balances in 1998
compared to 1997.
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The provision for income taxes from continuing operations declined by
approximately $1.1 million primarily as a result of the amortization of the
deferred tax liability that originated from the acquisition of Digital
Television Services, Inc.
Income from discontinued operations of the cable segment, net of income
taxes, was $1.0 million in 1998, an increase of $791,000, or 308%, compared to
$257,000 in 1997. The increase is primarily attributable to a decrease in
interest expense in 1998 compared to 1997 as a result of the sale of Pegasus'
existing New England cable systems effective July 1, 1998. In September 1998,
Hurricane Georges swept through Puerto Rico damaging Pegasus' cable system.
Prior to the hurricane, Pegasus had approximately 29,000 subscribers. At
December 31, 1998, Pegasus had approximately 28,800 subscribers compared to
27,300 subscribers in 1997.
The gain on sale of discontinued operations, net of income taxes, was
$24.7 million in 1998 compared to $4.5 million in 1997. In 1997, Pegasus sold
its New Hampshire cable system for $6.9 million resulting in a gain of $4.5
million. In 1998, Pegasus sold its remaining New England cable systems for $30.1
million resulting in a gain of $24.7 million.
Extraordinary loss from the extinguishment of debt decreased $1.7
million in 1998. In 1997, Pegasus refinanced its existing $130.0 million credit
facility with a new $180.0 million credit facility and accordingly, the deferred
financing costs associated with the $130.0 million credit facility were written
off. No such refinancings occurred in 1998.
Preferred stock dividends were $14.8 million in 1998, an increase of
$2.6 million, or 21%, compared to $12.2 million in preferred stock dividends in
1997. The increase is attributable to a greater number of shares of Pegasus'
preferred stock outstanding in 1998 compared to 1997 as the result of payment of
dividends in preferred stock and to the preferred stock being outstanding for a
full year.
DBS
Pegasus' DBS business experienced significant growth in 1998. During
1998, Pegasus acquired approximately 217,000 subscribers and the exclusive
DIRECTV distribution rights to approximately 2.4 million households in rural
areas of the United States. At December 31, 1998, Pegasus had exclusive DIRECTV
distribution rights to 4.6 million households and 435,000 subscribers as
compared to 2.2 million households and 132,000 subscribers at December 31, 1997.
Subscriber penetration increased from 6.7% at December 31, 1997 to 10.3% at
December 31, 1998, including pending and completed acquisitions.
Total DBS net revenues were $147.1 million in 1998, an increase of
$109.0 million, or 285%, compared to DBS net revenues of $38.3 million in 1997.
The increase is primarily due to an increase in the average number of
subscribers in 1998 compared to 1997. Pegasus' 1998 DBS acquisitions represented
$70.4 million, or 65%, of the $109.0 million increase in DBS net revenues. The
average monthly revenue per subscriber was $41.63 in 1998 compared to $40.72 in
1997.
Programming, technical, and general and administrative expenses were
$102.4 million in 1998, an increase of $76.4 million, or 293%, compared to $26.0
million in 1997. The increase is attributable to significant growth in
subscribers and territory in 1998. Pegasus' 1998 DBS acquisitions represented
$45.7 million, or 60%, of the $76.4 million increase in programming, technical,
and general and administrative expenses. As a percentage of revenue,
programming, technical, and general and administrative expenses were 69.6% in
1998 compared to 68.1% in 1997.
Subscriber acquisition costs were $45.7 million, an increase of $35.2
million compared to $10.5 million in 1997. In 1997, $4.5 million in subscriber
acquisition costs were capitalized as a significant number of subscribers
entered into extended programming contracts. Pegasus generally did not require
new subscribers to sign programming contracts in 1998. The total subscriber
acquisition costs per gross subscriber addition were $344 in 1998 compared to
$281 in 1997. The increase is attributable to increases in sales commissions
paid to Pegasus' dealers, promotional programming and advertising.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $1.2 million in 1998, an increase of $364,000, or
46%, compared to $795,000 in 1997. The increase resulted from a larger gain in
pro forma location cash flow during 1998 as compared to 1997.
Depreciation and amortization was $59.1 million in 1998, an increase of
$42.0 million, or 247%, compared to $17.0 million in 1997. The increase in
depreciation and amortization is primarily due to an increase in the fixed and
intangible asset base as the result of DBS acquisitions that occurred in 1997
and 1998.
Broadcast
In 1998, Pegasus owned or programmed nine broadcast television stations
in six markets. Two new stations were launched during the second half of 1998.
Total net broadcast revenues in 1998 were $34.3 million, an increase of $2.4
million, or 8%, compared to net broadcast revenues of $31.9 million in 1997. The
increase was primarily attributable to an increase of $1.3 million in net
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<PAGE>
broadcast revenues from stations that began operations in 1997 and a $558,000
increase in barter revenue. Net broadcast revenues from the two stations
launched in 1998 were minimal.
Programming, technical, and general and administrative expenses were
$18.1 million in 1998, an increase of $2.4 million, or 15%, compared to $15.7
million in 1997. The increase is primarily due to a full year's expenses from
the two stations launched in 1997 and higher programming costs in 1998.
Marketing and selling expenses were $6.0 million in 1998, an increase
of $289,000, or 5%, compared to $5.7 million in 1997. The increase in marketing
and selling expenses was due to an increase in promotional costs associated with
the launch of the new stations and news programs.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $177,000 in 1998, a decrease of $120,000, or 40%,
compared to $298,000 in 1997. The decrease resulted from a lower gain in pro
forma location cash flow during 1998 as compared to 1997.
Depreciation and amortization was $4.6 million in 1998, an increase of
$802,000, or 21%, compared to $3.8 million in 1997. The increase in depreciation
and amortization is due to an increase in fixed assets associated with the
construction of the new stations in 1997 and 1998.
Liquidity and Capital Resources
Pegasus' primary sources of liquidity have been the net cash provided
by its DBS, broadcast and cable operations, credit available under its credit
facilities and proceeds from public and private offerings. Pegasus' principal
uses of its cash has been to fund acquisitions, to meet debt service
obligations, to fund DBS subscriber acquisition costs, to fund DBS programming
costs and dealer commissions and to fund investments in its broadcast and cable
technical facilities.
Pre-marketing cash flow from continuing operations increased by
approximately $37.5 million, or 68%, for the year ended December 31, 1999 as
compared to the same period in 1998. Pre-marketing cash flow from continuing
operations increased as a result of:
o a $40.5 million, or 90%, increase in DBS pre-marketing cash
flow of which $13.3 million, or 33%, was due to an increase in
same territory pre-marketing cash flow and $27.2 million or
67% was attributable to territories acquired in 1998 and 1999;
and
o a $3.0 million, or 29%, decrease in broadcast location cash
flow as the result of a $2.6 million, or 25%, decrease in same
station location cash flow and a $406,000 decrease
attributable to the three new stations launched in July 1998,
November 1998 and December 1999.
During the year ended December 31, 1999, $54.5 million of cash on hand
at the beginning of the year, together with $208.8 million of net cash provided
by Pegasus' financing activities, was used to fund operating activities of
approximately $88.9 million and other investing activities of $134.0 million.
Investing activities consisted of:
o the purchase of a cable system serving Aguadilla, Puerto Rico
and neighboring communities for approximately $42.1 million;
o the acquisition of DBS assets from fifteen independent DIRECTV
providers during 1999 for approximately $64.6 million;
o the purchase of a building for broadcast operations in our
Northeastern Pennsylvania market for approximately $1.8 million;
o broadcast expenditures associated with the launch of
self-produced news in our Portland, Maine and Chattanooga,
Tennessee markets totaling approximately $1.0 million;
o broadcast expenditures in connection with our new station in
Jackson, Mississippi and other construction costs for
$708,000;
o DBS facility upgrades of approximately $4.5 million;
o the expansion, enhancements and capitalized costs of the
Puerto Rico cable system amounting to approximately $6.1
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<PAGE>
million, including $213,000 related to hurricane damage;
o payments of programming rights amounting to $3.5 million;
o proceeds from the sale of DBS assets to an independent DIRECTV
provider of $509,000;
o new business development costs of $373,000;
o investment in affiliate of $4.8 million; and
o other capital expenditures and intangibles totaling $5.0 million.
Financing activities consisted of:
o the issuance of approximately 3.8 million shares of Class A
common stock resulting in net proceeds to Pegasus of
approximately $77.7 million;
o net borrowings on bank credit facilities totaling $130.3 million;
o the repayment of approximately $14.5 million of long-term
debt, primarily sellers' notes and capital leases;
o net restricted cash draws of approximately $18.1 million for
interest payments and $1.0 million in connection with the
acquisition of the Aguadilla, Puerto Rico cable system;
o capitalized costs relating to Pegasus' financings of approximately
$3.6 million; and
o the repurchase of Class A common stock in treasury of $187,000.
As of December 31, 1999, cash on hand amounted to $40.5 million plus
restricted cash of $2.4 million.
Pre-marketing cash flow from continuing operations increased by
approximately $32.3 million, or 142%, for the year ended December 31, 1998 as
compared to the same period in 1997. Pre-marketing cash flow from continuing
operations increased as a result of:
o a $32.5 million, or 266%, increase in DBS pre-marketing cash
flow of which $3.8 million, or 12%, was due to an increase in
same territory pre-marketing cash flow and $28.7 million or
88% was attributable to territories acquired in 1997 and 1998;
and
o a $238,000, or 2%, decrease in broadcast location cash flow as
the result of a $110,000, or 1%, decrease in same station
location cash flow and a $128,000 decrease attributable to the
four new stations launched in August 1997, October 1997, July
1998 and November 1998.
During the year ended December 31, 1998, proceeds from the sale of
Pegasus' remaining New England cable systems amounted to $30.1 million, which
together with $44.0 million of cash on hand at the beginning of the year, $3.3
million of cash acquired from acquisitions and $133.8 million of net cash
provided by Pegasus' financing activities, was used to fund operating activities
of approximately $22.0 million and other investing activities of $134.8 million.
Investing activities, net of cash acquired from acquisitions and proceeds from
the sale of the New England cable systems, consisted of:
o the acquisition of DBS assets, excluding Digital Television
Services, Inc., from twenty-six independent DIRECTV providers
during 1998 for approximately $109.3 million;
o approximately $6.8 million of broadcast expenditures for
broadcast television transmitter, tower and facility
constructions and upgrades. Pegasus commenced the programming
of four new broadcast stations over the last two years, WPME
in August 1997, WGFL in October 1997, WFXU in July 1998 and
WSWB in November 1998;
o DBS facility upgrades of approximately $1.2 million;
o the expansion and enhancements of the Puerto Rico cable system
amounting to approximately $2.0 million;
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<PAGE>
o payments of programming rights amounting to $2.6 million;
o capitalized costs relating to Pegasus' financing of approximately
$4.4 million;
o capitalized costs relating to the acquisition of Digital Television
Services, Inc. of approximately $4.3 million; and
o maintenance and other capital expenditures and intangibles
totaling approximately $4.2 million.
Financing activities consisted of:
o the $100.0 million 93/4% senior notes offering resulting in
proceeds to Pegasus of approximately $96.8 million;
o net borrowings on bank credit facilities totaling $44.4 million;
o the repayment of approximately $15.0 million of long-term
debt, primarily sellers' notes and capital leases; and
o net restricted cash draws of approximately $7.5 million for
interest payments.
As of December 31, 1998, cash on hand amounted to $54.5 million plus
restricted cash of $21.5 million. Pegasus had $27.5 million drawn and standby
letters of credit amounting to $49.6 million under the $180.0 million Pegasus
Media & Communications credit facility. Additionally, there was $46.4 million
drawn and standby letters of credit of $18.5 million outstanding under the $90.0
million Digital Television Services credit facility.
During the year ended December 31, 1997, net cash provided by operating
activities was approximately $8.5 million. This amount, together with $8.6
million of cash on hand, $6.9 million of net proceeds from the sale of the New
Hampshire cable system and $169.1 million of net cash provided by Pegasus'
financing activities was used to fund other investing activities totaling $149.1
million. Financing activities consisted of:
o raising $95.8 million in net proceeds from Pegasus' preferred
stock offering in January 1997 and $111.0 million in net
proceeds from Pegasus' offering of senior notes in October
1997;
o borrowing $94.2 million under a former bank credit facility;
o repayment of all $94.2 million of that indebtedness and $29.6
million of indebtedness under a still earlier credit facility;
o net repayment of approximately $657,000 of other long-term debt;
o designating $1.2 million as restricted cash to collateralize a
letter of credit; and
o the incurrence of approximately $6.2 million in debt issuance
costs associated with various credit facilities.
Investing activities, net of the proceeds from the sale of the
New Hampshire cable system, consisted of:
o the acquisition of DBS assets from twenty-five independent
DIRECTV providers during 1997, for approximately $133.9
million;
o broadcast television transmitter, tower and facility
constructions and upgrades totaling approximately $5.8
million;
o the interconnection and expansion of the Puerto Rico cable systems
amounting to approximately $1.8 million;
o payments of programming rights amounting to $2.6 million; and
o maintenance and other capital expenditures and intangibles
totaling approximately $5.4 million.
As defined in the certificate of designation governing Pegasus' Series
A preferred stock and the indentures governing Pegasus' senior notes, Pegasus is
required to provide adjusted operating cash flow data for Pegasus and its
restricted subsidiaries on a consolidated basis where adjusted operating cash
flow is defined as "for the four most recent fiscal quarters for which internal
financial statements are available, operating cash flow of such person and its
restricted subsidiaries less DBS cash flow for the most
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<PAGE>
recent four-quarter period plus DBS cash flow for the most recent quarterly
period, multiplied by four." Operating cash flow is income from operations
before income taxes, depreciation and amortization, interest expense,
extraordinary items and non-cash charges. Although adjusted operating cash flow
is not a measure of performance under generally accepted accounting principles,
we believe that location cash flow, operating cash flow and adjusted operating
cash flow are accepted within our business segments as generally recognized
measures of performance and are used by analysts who report publicly on the
performance of companies operating in such segments. Restricted subsidiaries
carries the same meaning as in the certificate of designation. Digital
Television Services, Inc., among certain other of Pegasus' subsidiaries, are not
included in the definition of restricted subsidiaries and, accordingly, their
operating results are not included in the adjusted operating cash flow data
provided below. Pro forma for the acquisition of the Aguadilla, Puerto Rico
cable system, the three completed DBS acquisitions occurring in the fourth
quarter of 1999 and the sale of our New England cable systems, as if such
acquisitions/disposition occurred on January 1, 1999, adjusted operating cash
flow would have been approximately $75.1 million as follows:
<TABLE>
<CAPTION>
Four Quarters Ended
December 31, 1999
--------------------
(in thousands)
<S> <C>
Revenues.............................................................................. $244,645
Direct operating expenses, excluding depreciation, amortization and
other non-cash charges.............................................................. 164,997
Income from operations before incentive compensation, corporate expenses,
depreciation and amortization and other non-cash charges............................ 79,628
Corporate expenses.................................................................... 4,569
-------
Adjusted operating cash flow.......................................................... $75,059
=======
</TABLE>
Financings
In 1999, Pegasus Media & Communications maintained a $180.0 million
senior, reducing revolving credit facility. Borrowings under the credit facility
were available for acquisitions, subject to the approval of the lenders in
certain circumstances, working capital, capital expenditures and for general
corporate purposes. As of December 31, 1999, $142.5 million was outstanding
under its $180.0 million credit facility. The credit facility was amended and
restated in January 2000.
In 1999, Digital Television Services maintained a $70.0 million senior,
reducing revolving credit facility and a $20.0 million senior term credit
facility. Borrowings under the credit facilities were available to refinance
certain indebtedness and for acquisitions, subject to the approval of the
lenders in certain circumstances, working capital, capital expenditures and for
general corporate purposes. As of December 31, 1999, $61.7 million was
outstanding and standby letters of credit amounting to $10.4 million were issued
under its $90.0 million credit facilities, including $2.6 million
collateralizing certain outstanding sellers' notes. The credit facilities were
refinanced in January 2000 with the first amended and restated Pegasus Media &
Communications credit facility.
In March 1999, Pegasus completed its secondary public offering in which
it sold approximately 3.6 million shares of its Class A common stock to the
public at a price of $22.00 per share, resulting in net proceeds to Pegasus of
approximately $74.9 million. Pegasus applied $49.9 million of the net proceeds
to pay down indebtedness under the Pegasus Media & Communications credit
facility and $25.0 million towards the acquisition of the cable system serving
Aguadilla, Puerto Rico and neighboring communities.
In December 1999, Pegasus entered into a $35.5 million interim letter
of credit facility. As of December 31, 1999, $35.5 million of standby letters of
credit were issued under the credit facility, including $19.5 million
collateralizing certain outstanding sellers' notes.
In January 2000, Pegasus Media & Communications entered into a first
amended and restated credit facility, which consists of a $225.0 million senior
revolving credit facility which expires in 2004 and a $275.0 million senior term
credit facility which expires in 2005. This new credit facility amends Pegasus
Media & Communications' existing $180.0 million senior, reducing revolving
credit facility. The new credit facility is collateralized by substantially all
of the assets of Pegasus Media & Communications and its subsidiaries and is
subject to certain financial covenants as defined in the loan agreement,
including a debt to adjusted cash flow covenant. Borrowings under the new
Pegasus Media & Communications credit facility can be used for acquisitions and
general corporate purposes.
<PAGE>
Commensurate with the closing of the new Pegasus Media & Communications
credit facility, Pegasus borrowed $275.0 million under the term loan,
outstanding balances under Pegasus Media & Communications' existing $180.0
million senior, reducing revolving credit facility, Digital Television Services'
existing $90.0 million credit facilities and Pegasus' existing $35.5 million
interim letter of credit facility were repaid and commitments under Digital
Television Services' existing $90.0 million credit facilities and Pegasus'
existing $35.5 million interim letter of credit facility were terminated.
Additionally, in connection with the closing of the new Pegasus Media &
Communications credit facility, Digital Television Services was merged with and
into a subsidiary of Pegasus
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Media & Communications.
In January 2000, Pegasus completed an offering of 3,000,000 shares of
its 6.5% Series C convertible preferred stock, with a liquidation preference of
$100 per share plus any accrued but unpaid dividends. Each share of 6.5% Series
C convertible preferred stock will initially be convertible at the option of the
holder into 0.7843 shares of Pegasus' Class A common stock. Pegasus may redeem
the 6.5% Series C convertible preferred stock on or after August 1, 2001,
subject to certain conditions, at redemption prices set forth in the certificate
of designation, plus accumulated and unpaid dividends, if any.
Pegasus believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations for at
least the next twelve months. However, Pegasus is highly leveraged and our
ability in the future to repay our existing indebtedness will depend upon the
success of our business strategy, prevailing economic conditions, regulatory
matters, levels of interest rates and financial, business and other factors that
are beyond our control. We cannot assure you that we will be able to generate
the substantial increases in cash flow from operations that we will need to meet
the obligations under our indebtedness. Furthermore, our agreements with respect
to our indebtedness contain numerous covenants that, among other things,
restrict our ability to:
o pay dividends and make certain other payments and investments;
o borrow additional funds;
o create liens; and
o sell our assets.
Failure to make debt payments or comply with our covenants could result
in an event of default which if not cured or waived could have a material
adverse effect on us.
Pegasus closely monitors conditions in the capital markets to identify
opportunities for the effective use of financial leverage. In financing its
future expansion and acquisition requirements, Pegasus would expect to avail
itself of such opportunities and thereby increase its indebtedness. This could
result in increased debt service requirements. We cannot assure you that such
debt financing can be completed on terms satisfactory to Pegasus or at all.
Pegasus may also issue additional equity to fund its future expansion and
acquisition requirements.
Year 2000
The year 2000 issue is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the year 2000 is
approached and reached. An issue exists for all companies that rely on
computers. This issue involves computer programs and applications that were
written using two digits rather than four to identify the applicable year, and
could result in systems failures or miscalculations. We have completed an
assessment of and taken corrective measures to mitigate the potential adverse
effects the year 2000 issue may have on our operations. Costs in connection with
any modifications to make our systems compliant have not been and are not
expected to be material. We are not currently aware of any operational or
technical problems as a result of the change to the year 2000 and will continue
to monitor the potential adverse impact of the year 2000 issue on our business;
however, there can be no assurance that the year 2000 issue will not have a
material adverse impact on our financial condition or our results of operations
in the future.
Dividend Policy
As a holding company, Pegasus' ability to pay dividends is dependent
upon the receipt of dividends from its direct and indirect subsidiaries. Pegasus
Media & Communiations' credit facility and publicly held debt securities
restricts it from paying dividends to Pegasus. In addition, Pegasus' ability to
pay dividends and to incur indebtedness are subject to certain restrictions
contained in Pegasus' publicly held debt securities, in the terms of Pegasus'
Series A preferred stock and by Pegasus Media & Communications' credit facility
and publicly held debt securities.
Seasonality
Pegasus' revenues vary throughout the year. As is typical in the
broadcast television industry, Pegasus' first quarter generally produces the
lowest revenues for the year and the fourth quarter generally produces the
highest revenues for the year. Pegasus' operating results in any period may be
affected by the incurrence of advertising and promotion expenses that do not
necessarily produce commensurate revenues in the short-term until the impact of
such advertising and promotion is realized in future periods.
B-39
<PAGE>
Inflation
Pegasus believes that inflation has not been a material factor
affecting its business. In general, Pegasus' revenues and expenses are impacted
to the same extent by inflation. A majority of Pegasus' indebtedness bears
interest at a fixed rate.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). As a result of the
subsequent issuance of SFAS No. 137, SFAS No. 133 is now effective for fiscal
years beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. We do
not expect that the adoption of SFAS No. 133 will have a material effect on our
business, financial position or results of operations.
Other
In January 2000, Pegasus entered into an agreement and plan of merger
to acquire Golden Sky Holdings, Inc. for up to 6.5 million shares of Pegasus'
Class A common stock and the assumed net liabilities of Golden Sky Holdings,
Inc. As of February 29, 2000, Golden Sky Holdings, Inc.'s operations consisted
of providing DIRECTV services to approximately 350,500 subscribers in certain
rural areas of 24 states in which Golden Sky Holdings, Inc. holds the exclusive
rights to provide such services. Upon completion of the acquisition of Golden
Sky Holdings, Inc., it will become a wholly owned subsidiary of Pegasus.
In January 2000, Pegasus made an investment in Personalized Media
Communications, LLC, an advanced communications technology company, of
approximately $111.8 million, which consisted of $14.3 million in cash, 200,000
shares of Pegasus' Class A common stock (amounting to $18.8 million) and
Pegasus' agreement, subject to certain conditions, to issue warrants to purchase
1.0 million shares of Pegasus' Class A common stock at an exercise price of
$90.00 per share and with a term of ten years. The fair value of the warrants to
be issued was estimated using the Black-Scholes pricing model and is
approximately $78.8 million. A subsidiary of Personalized Media Communications,
LLC granted to Pegasus an exclusive license for use of Personalized Media
Communications, LLC's patent portfolio in the distribution of satellite services
from specified orbital locations.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about Pegasus' market sensitive financial instruments is
provided below and constitutes a "forward-looking statement." Pegasus' major
market risk exposure is changing interest rates that relate to its credit
facilities, debt obligations and preferred stock. Pegasus' objective in managing
its exposure to interest rate changes is to limit the impact of interest rate
changes on earnings and cash flow and to lower its overall borrowing costs.
Pegasus has entered into interest rate protection agreements on its credit
facilities to limit its exposure to market interest rate fluctuations.
Pegasus Media & Communications maintained a $180.0 million senior,
reducing revolving credit facility. As of December 31, 1999, $142.5 million was
outstanding. Interest on the credit facility is calculated on either the bank's
base rate or LIBOR, plus an applicable margin. The credit facility was amended
and restated in January 2000.
Digital Television Services maintained a $70.0 million senior, reducing
revolving credit facility and a $20.0 million senior term credit facility. As of
December 31, 1999, $42.7 million was outstanding and stand-by letters of credit
amounting to $10.4 million were issued under its $70.0 million revolving credit
facility. As of December 31, 1999, $19.0 million was outstanding under its $20.0
million term credit facility. Interest on the credit facilities is calculated at
either the bank's base rate or the Eurodollar Rate, plus an applicable margin.
The credit facilities were refinanced in January 2000 with the first amended and
restated Pegasus Media & Communications credit facility.
In January 2000, Pegasus Media & Communications entered into a first
amended and restated credit facility, which consists of a $225.0 million senior
revolving credit facility and a $275.0 million senior term credit facility.
Availability of borrowings under the revolving credit facility will reduce by
specified amounts quarterly commencing on March 31, 2001 through maturity. The
term credit facility is to be repaid in specified amounts quarterly commencing
on March 31, 2001, with the balance due at maturity. Interest on the credit
facility is calculated on either the bank's base rate or LIBOR, plus an
applicable margin. The revolving credit facility expires in October 2004, and
the term credit facility expires in April 2005.
Commensurate with the closing of the first amended and restated Pegasus
Media & Communications credit facility, Pegasus Media & Communications borrowed
$275.0 million under the term loan, outstanding balances under Pegasus Media &
Communications' existing $180.0 million credit facility and Digital Television
Services' existing $90.0 million credit facilities were
B-40
<PAGE>
repaid and commitments under Digital Television Services' credit facilities were
terminated.
As of December 31, 1999, Pegasus estimated the fair value of its debt
and preferred stock to be approximately $708.0 million and $149.9 million,
respectively, using quoted market prices. The market risk associated with
Pegasus' debt and preferred stock is the potential increase in fair value
resulting from a decrease in interest rates. A 10% decrease in assumed interest
rates would increase the fair value of Pegasus' debt and preferred stock to
approximately $717.5 million and $153.9 million, respectively.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages F-1 through
F-24.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
B-41
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning the executive
officers and directors of Pegasus.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Marshall W. Pagon...................... 44 Chairman of the Board, President and Chief Executive Officer
Robert N. Verdecchio................... 43 Senior Vice President, Chief Financial Officer, Treasurer,
Assistant Secretary and Director
Ted S. Lodge........................... 43 Senior Vice President, Chief Administrative Officer, General
Counsel, Secretary and Director Designee
Howard E. Verlin....................... 38 Vice President and Assistant Secretary
Nicholas A. Pagon...................... 43 Vice President
M. Kasin Smith......................... 39 Vice President and Acting Chief Financial Officer
Michael C. Brooks...................... 55 Director
Harry F. Hopper III.................... 46 Director
James J. McEntee, III.................. 42 Director
Mary C. Metzger........................ 54 Director
William P. Phoenix..................... 42 Director
Riordon B. Smith....................... 39 Director
Donald W. Weber........................ 63 Director
Robert F. Benbow....................... 64 Director Designee
William P. Collatos.................... 45 Director Designee
</TABLE>
Marshall W. Pagon has served as President, Chief Executive Officer and
Chairman of the Board of Pegasus since its incorporation, and served as
Treasurer of Pegasus from its incorporation to June 1997. From 1991 to October
1994, when the assets of various affiliates of Pegasus Media & Communications,
Inc., principally limited partnerships that owned and operated Pegasus'
broadcast and cable operations, were transferred to Pegasus Media &
Communication's subsidiaries, entities controlled by Mr. Pagon served as the
general partners of these partnerships and conducted the business of Pegasus.
Mr. Pagon's background includes over 18 years of experience in the media and
communications industry. Mr. Pagon is the brother of Nicholas A. Pagon.
Robert N. Verdecchio has served as Pegasus' Senior Vice President,
Chief Financial Officer and Assistant Secretary since its inception and as
Pegasus' Treasurer since June 1997. He has also served similar functions for
Pegasus Media & Communication's affiliates and predecessors in interest since
1990. Mr. Verdecchio has been a director of Pegasus and Pegasus Media &
Communications since December 18, 1997. Mr. Verdecchio is a certified public
accountant and has over 13 years of experience in the media and communications
industry. Mr. Verdecchio is serving as a director of Pegasus as Marshall W.
Pagon's designee to the board of directors. Mr. Verdecchio is currently on a
leave of absence from Pegasus.
Ted S. Lodge has served as Senior Vice President, Chief Administrative
Officer, General Counsel and Assistant Secretary of Pegasus since July 1, 1996.
In June 1997, Mr. Lodge became Pegasus' Secretary. From June 1992 through June
1996, Mr. Lodge practiced law with the law firm of Lodge & Company. During that
period, Mr. Lodge was engaged by Pegasus as its outside legal counsel in
connection with various matters. Mr. Lodge is expected to be elected a director
of Pegasus, as one of Mr. Pagon's designees, at the time of the special meeting
in connection with the Golden Sky acquisition.
Howard E. Verlin is a Vice President and Assistant Secretary of Pegasus
and is responsible for operating activities of Pegasus' direct broadcast
satellite and cable subsidiaries, including supervision of their general
managers. Mr. Verlin has served similar functions with respect to Pegasus'
predecessors in interest and affiliates since 1987 and has over 15 years of
experience in the media and communications industry.
Nicholas A. Pagon has served as a Vice President of Pegasus and Chief
Executive Officer of its broadcast subsidiaries since November 1998 and is
responsible for all broadcast television activities of Pegasus. From January to
November 1998, Mr. Pagon served as President of Pegasus Development Corporation,
a subsidiary of Pegasus. From 1990 through December 1998, Mr. Pagon was
President of Wellspring Consulting, Inc., a telecommunications consulting
business. Mr. Pagon is the brother of Marshall W. Pagon.
M. Kasin Smith served as a financial analyst of Pegasus from September
1998 through February 1999 and has served as Vice President of Finance since
February 1999 and Acting Chief Financial Officer since August 1999. From May
1997 through September 1998, Mr. Smith served as a General Manager, Northwest
region, of SkyView World Media Group, a master system operator for DIRECTV. From
November 1996 to May 1997, Mr. Smith was Director of Finance for Sky Zone Media
Access, LLC, a distributor of DIRECTV to apartments and multiple dwelling units.
From 1993 to November 1996, Mr. Smith served as a manager at
PricewaterhouseCoopers LLP. Mr. Smith is a certified public accountant and has
over 8 years of public accounting experience.
B-42
<PAGE>
Michael C. Brooks has been a director of Pegasus since April 27, 1998.
From February 1997 until April 27, 1998, Mr. Brooks had been a director of
Digital Television Services, Inc. He has been a general partner of J.H. Whitney
& Co., a venture capital firm, since January 1985. Mr. Brooks is also a director
of Media Matrix, an Internet audience measurement company, SunGuard Data Systems
Inc., a computer services company, USinternetworking, Inc., a web-based
applications hosting company, and several private companies. Mr. Brooks is
serving as a director of Pegasus as Whitney's designee to the board of directors
and has informed Pegasus that he intends to resign from the Pegasus board at the
time of the special meeting in connection with the Golden Sky acquisition.
Harry F. Hopper III has been a director of Pegasus since April 27,
1998. From June 1996 until April 27, 1998, Mr. Hopper had been a director of
Digital Television Services, Inc., or a manager of its predecessor, Digital
Television Services, LLC. Mr. Hopper is a Managing Director of Columbia Capital
Corporation and Columbia Capital LLC, which he joined in January 1994. Columbia
Capital is a venture capital firm with an investment focus on communications
services, network infrastructure and technologies and electronic commerce. Mr.
Hopper is also a director of eBiz.Net, Inc., a web-hosting company, Pacific
Internet Exchange Corporation, an Internet peering and data center company,
Xemod, Inc., a producer of next-generation linear power amplifiers,
Singleshop.com, Inc., a business-to-business, outsourced Internet shopping
platform, and Broadslate Networks, Inc., a digital subscriber line service
provider. Mr. Hopper is serving as a director of Pegasus as Columbia's designee
to the board of directors.
James J. McEntee, III has been a director of Pegasus since October 8,
1996. Mr. McEntee has been a member of the law firm of Lamb, Windle & McErlane,
P.C. for the past eight years and a principal of that law firm for the past six
years. Mr. McEntee is one of the directors designated as an independent director
under the voting agreement.
Mary C. Metzger has been a director of Pegasus since November 14, 1996.
Ms. Metzger has been Chairman of Personalized Media Communications LLC and its
predecessor company, Personalized Media Communications Corp. since February
1989. Ms. Metzger has also been Managing Director of Video Technologies
International, Inc. since June 1986. Ms. Metzer is one of the directors
designated as an independent director under the voting agreement. She is also a
designee of Personalized Media under the agreement between Pegasus and
Personalized Media. See Item 13: Certain Relationships and Related Transactions.
William P. Phoenix has been a director of Pegasus since June 17, 1998.
He is a Managing Director of CIBC World Markets Corp. and co-head of its Credit
Capital Markets Group. Mr. Phoenix is also a member of CIBC World Markets
Corp.'s credit investment and risk committees. Prior to joining CIBC World
Markets Corp. in 1995, Mr. Phoenix had been a Managing Director of Canadian
Imperial Bank of Commerce with management responsibilities for the bank's
acquisition finance, mezzanine finance and loan workout and restructuring
businesses. Mr. Phoenix joined Canadian Imperial Bank of Commerce in 1982. Mr.
Phoenix is one of the directors designated as an independent director under the
voting agreement.
Riordon B. Smith has been a director of Pegasus since April 27, 1998.
From February 1997 until April 27, 1998, Mr. Smith had been a director of
Digital Television Services, Inc., or a manager of its predecessor, Digital
Television Services, LLC. Mr. Smith is a Senior Vice President of Fleet Private
Equity Co., Inc., which he joined in 1990. Fleet Private Equity Co., Inc. is a
private equity fund with an investment focus in media and information,
telecommunications, healthcare services, industrial manufacturing and business
services. Mr. Smith also serves as a director of FreeRide.com LLC, a provider of
online loyalty programs and direct marketing services, The MVL Group, Inc., a
provider of custom market research and data collection services, HASCO
International, Inc., a direct marketer of in-hospital infant portraits, and Root
Communications Group, L.P., an operator of radio stations in the Southeast. Mr.
Smith is serving as a director of Pegasus as Fleet's designee to the board of
directors.
Donald W. Weber has been a director of Pegasus since its incorporation
and a director of Pegasus Media & Communications since November 1995. Until its
acquisition by Pegasus in November 1997, Mr. Weber had been the President and
Chief Executive Officer of ViewStar Entertainment Services, Inc., a National
Rural Telecommunications Cooperative affiliate that distributed DIRECTV services
in North Georgia, from August 1993 to November 1997. Mr. Weber is currently a
member of the boards of directors of Powertel, Inc., a provider of wireless
communications service, Knology Holdings, Inc., a provider of broadband
communications service, Headhunter.net an online employment recruiter, and HIE,
Inc., a producer of healthcare software, which are publicly-traded companies.
Mr. Weber is one of the directors designated as an independent director under
the voting agreement.
Robert F. Benbow will be designated as a director by Alta
Communications under the amended and restated voting agreement. Mr. Benbow has
been a director of Golden Sky and its predecessors since February 1997. He is a
Vice President of Burr, Egan, Deleage & Co., a private venture capital firm, and
a managing general partner of Alta Communications, Inc., a private venture
capital firm. Prior to joining Burr, Egan, Deleage & Co. in 1990, Mr. Benbow
spent 22 years with the Bank of New England N.A., where he was a Senior Vice
President responsible for special industries lending in the areas of media,
project finance and energy. Additionally, he serves as a director of Diginet
Americas, Inc., a fixed wireless local loop service provider throughout South
America, of Advanced Telcom Group, Inc., a competitive local exchange carrier,
and of Preferred Networks, Inc., a public paging company.
William P. Collatos will be designated as a director by Spectrum Equity
Investors under the amended and restated voting
B-43
<PAGE>
agreement. Mr. Collatos has been a director of Golden Sky and its predecessors
since March 1997. He is a managing general partner of Spectrum Equity Investors,
a private equity investment firm focused on the communications services,
networking infrastructure, electronic commerce and media industries, which he
founded in 1993. He serves as director of Galaxy Telecom, GP, the general
partner of Galaxy Telecom, L.P., which owns, operates and develops cable
television systems, ITXC Corp., a global provider of Internet-based voice, fax
and voice-enabled services, and JazzTel, a competitive local exchange provider
based in Madrid, Spain.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Pegasus' executive officers and directors and persons
who own more than ten percent of a registered class of Pegasus' equity
securities (collectively, the "reporting persons") to file reports of ownership
and changes in ownership with the Securities and Exchange Commission and to
furnish Pegasus with copies of these reports. Based on Pegasus' review of the
copies of these reports received by it, and written representations, if any,
received from reporting persons with respect to the filing of reports on Form 3,
4 and 5, Pegasus believes that all filings required to be made by the reporting
persons for 1999 were made on a timely basis for 1999 with the following
exception: a Form 4 for Nicholas A. Pagon, an executive officer of Pegasus,
reporting the grant in December 1998 of options to purchase 40,000 shares of
Class A common stock was filed in April 1999. The grant should have been
reported on a Form 4 filed in January 1999 or a Form 5 filed in February 1999.
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth certain information for Pegasus' last
three fiscal years concerning the compensation paid to the Chief Executive
Officer and to each of Pegasus' four most highly compensated officers. The most
highly compensated officers are those whose total annual salary and bonus for
the fiscal year ended December 31, 1999 exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation
---------------------- Other Annual
Name Principal Position Year Salary Compensation(1)
---- ------------------ ---- ------ ---------------
<S> <C> <C> <C> <C>
Marshall W. Pagon President and Chief 1999 $274,743 --
Executive Officer 1998 $200,000 --
1997 $200,000 --
Robert N. Verdecchio Senior VP and Chief 1999 $188,717 $50,000
Financial Officer 1998 $150,000 --
1997 $150,000 --
Ted S. Lodge Senior VP, Chief 1999 $164,647 $50,000
Administrative
Officer 1998 $150,000 --
and General Counsel 1997 $150,000 --
Howard E. Verlin VP, Satellite and 1999 $155,974 $45,000
Cable Television 1998 $135,000 --
1997 $135,000 --
Nicholas A. Pagon Vice President 1999 $133,442 --
1998 $ 13,666(5) --
</TABLE>
B-44
<PAGE>
Long-Term
Compensation Awards
----------------------------
Restricted Securities
Stock Underlying All Other
Name Award(2) Options Compensation(3)
---- --------- ---------- ---------------
Marshall W. Pagon $124,978 190,000 $60,096(4)
$77,161 85,000 $67,274(4)
$100,558 85,000 $63,228(4)
Robert N. Verdecchio $49,967 70,000 $6,380
$38,580 40,000 $12,720
$50,279 40,000 $9,500
Ted S. Lodge $54,068 85,000 $3,600
$30,864 60,000 $9,263
$40,223 40,000 $1,800
Howard E. Verlin $99,974 95,000 $1,620
$110,125 40,000 $5,480
$100,558 40,000 $1,685
Nicholas A. Pagon -- 45,000 --
-- 40,000 --
(1) Pursuant to Pegasus' restricted stock plan, an executive officer may
elect to receive a portion of the award in the form of cash. The
amounts listed in this column reflect the cash portion of discretionary
awards granted under the restricted stock plan.
(2) During fiscal 1999, an aggregate of 3,164, 2,531, 2,685 and 3,670
shares were granted to Messrs. Marshall Pagon, Verdecchio, Lodge and
Verlin, respectively. Based upon the closing price of the Class A
common stock on December 31, 1999 of $97.75 per share, the shares
awarded to Messrs. Marshall Pagon, Verdecchio, Lodge and Verlin during
fiscal 1999 had a value of $309,281, $247,405, $262,459, and $358,743,
respectively, on December 31, 1999. All awards made during fiscal 1999
were fully vested on the date of grant. Generally, awards made under
Pegasus' restricted stock plan were based upon years of service with
Pegasus from date of initial employment. As a consequence, all awards
made to Messrs. Marshall Pagon, Verdecchio and Verlin were fully vested
in 1997 and 1998 on the date of grant. During 1997, 9,090, 4,545, and
9,090 shares issued to Messrs. Marshall Pagon, Verdecchio, and Verlin
were fully vested on March 21, 1997, the date they were granted. During
1998, 3,609, 1,804 and 5,152 shares issued to Messrs. Marshall Pagon,
Verdecchio and Verlin were fully vested on February 17, 1998, the date
they were granted. Mr. Lodge's employment with Pegasus began on July 1,
1996. Mr. Lodge's awards granted in fiscal 1998 were vested as to 34%
on July 1, 1998, an additional 33% on July 1, 1999 and the remaining
33% on July 1, 2000.
(3) Unless otherwise indicated, the amounts listed represent Pegasus'
contributions under its 401(k) plans.
(4) Of the amounts listed for Marshall W. Pagon in each of the years of
1999, 1998 and 1997, $53,728, represents the actuarial benefit to Mr.
Pagon of premiums paid by Pegasus in connection with the split dollar
agreement entered into by Pegasus with the trustees of insurance trust
established by Mr. Pagon. See Item 13: Certain Relationships and
Related Transactions -- Split Dollar Agreement. The remainder
represents Pegasus' contributions under its 401(k) plans.
(5) Nicholas A. Pagon became an employee of Pegasus on November 5, 1998.
Pegasus granted options to employees to purchase a total of 727,346
shares during 1999. The amounts set forth below in the columns entitled "5%" and
"10%" represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. The gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from the
date the respective options were granted to their expiration date.
B-45
<PAGE>
Option Grants in 1999
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation
Individual Grants for Option Term
----------------- --------------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees Exercise
Options in Fiscal Price Per Expiration
Name Granted Year Share Date 5% 10%
---- ------- ---- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon........... 95,000 13.1% $39.500 5/4/2009 $2,359,927 $5,980,519
95,000 13.1% $80.875 12/17/2009 $4,831,876 $12,244,923
Robert N. Verdecchio........ 45,000 6.2% $39.500 5/4/2009 $1,117,860 $2,832,877
25,000 3.4% $80.875 12/17/2009 $1,271,546 $3,222,348
Howard E. Verlin............ 45,000 6.2% $39.500 5/4/2009 $1,117,860 $2,832,877
50,000 6.9% $80.875 12/17/2009 $2,543,093 $6,444,696
Ted S. Lodge................ 45,000 6.2% $39.500 5/4/2009 $1,117,860 $2,832,877
40,000 5.5% $80.875 12/17/2009 $2034,474 $5,155,757
Nicholas A. Pagon........... 20,000 2.7% $39.500 5/4/2009 $496,827 $1,259,057
25,000 3.4% $80.875 12/17/2009 $1,271,546 $3,222,348
</TABLE>
The table below shows aggregated stock option exercises by the named
executive officers in 1999 and 1999 year-end values. In-the-money options, which
are listed in the last two columns, are those in which the fair market value of
the underlying securities exceeds the exercise price of the option. The closing
price of Pegasus' Class A common stock on December 31, 1999 was $97.75 per
share.
Aggregated Option Exercises in 1999 and 1999 Year-End Option Values
<TABLE>
<CAPTION> Number of Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year-End at Fiscal Year-End
Shares -------------------- --------------------
Acquired on Value Execis- Unexercis- Exercis- Unexercis-
Name Exercise Realized able able able able
---- -------- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon............... 0 -- 76,500 283,500 $6,200,750 $14,812,375
Robert N. Verdecchio............ 0 -- 38,180 111,820 $3,107,115 $6,466,010
Howard E. Verlin................ 0 -- 38,180 136,820 $3,107,115 $6,887,885
Ted S. Lodge.................... 0 -- 48,180 136,820 $3,872,115 $7,484,135
Nicholas A. Pagon............... 0 -- 8,000 77,000 $581,000 $3,910,875
</TABLE>
Compensation of Directors
Under Pegasus' by-laws, each director is entitled to receive such
compensation, if any, as may from time to time be fixed by the board of
directors. Pegasus currently pays its directors who are not employees or
officers of Pegasus an annual retainer of $10,000 plus $750 for each board
meeting attended in person, $350 for each meeting of a committee of the board
and $375 for each board meeting held by telephone. The annual retainer is
payable, at each director's option, in cash or in the form of options to
purchase Pegasus' Class A common stock. Pegasus also reimburses each director
for all reasonable expenses incurred in traveling to and from the place of each
meeting of the board or committee of the board.
On May 5, 1999, James J. McEntee, III, Mary C. Metzger, Donald W.
Weber, William P. Phoenix, Harry F. Hopper III, Michael C. Brooks, and Riordon
B. Smith, who were then all of Pegasus' nonemployee directors, each received
options to purchase 5,000 shares of Class A common stock under Pegasus' stock
option plan. Each option vests in annual installments of 2,500 shares, was
issued at an exercise price of $39.50 per share -- the closing price of the
Class A common stock at the time of the grant -- and is exercisable until the
tenth anniversary from the date of grants. On December 17, 1999, James J.
McEntee, III, Mary C. Metzger, Donald W. Weber, William P. Phoenix, Harry F.
Hopper III, Michael C. Brooks, and Riordon B. Smith, who were then all of
Pegasus' nonemployee directors, each received options to purchase 5,000 shares
of Class A common stock under Pegasus' stock option plan.
B-46
<PAGE>
Each option vests in annual installments of 2,500 shares, was issued at an
exercise price of $80.875 per share -- the closing price of the Class A common
stock at the time of the grant -- and is exercisable until the tenth anniversary
from the date of grant.
Compensation Committee Interlocks and Insider Participation
During 1999, the board of directors generally made decisions concerning
executive compensation of executive officers. The board included Marshall W.
Pagon, the President and Chief Executive Officer of Pegasus, and Robert N.
Verdecchio, Pegasus' Senior Vice President and Chief Financial Officer. A
special stock option committee, however, made certain decisions regarding option
grants under the stock option plan. Both the stock option plan and restricted
stock plan are discussed below.
Incentive Program
General
The incentive program, which includes the restricted stock plan, the
401(k) plans and the stock option plan, is designed to promote growth in
stockholder value by providing employees with restricted stock awards in the
form of Class A common stock and grants of options to purchase Class A common
stock. Awards under the restricted stock plan, other than excess and
discretionary awards, and the 401(k) plans, other than matching contributions,
are in proportion to annual increases in location cash flow. For this purpose we
automatically adjust location cash flow for acquisitions. As a result, for the
purpose of calculating the annual increase in location cash flow, the location
cash flow of the acquired properties is included as if it had been a part of
Pegasus' financial results for the comparable period of the prior year.
Pegasus believes that the restricted stock plan and 401(k) plans result
in greater increases in stockholder value than result from a conventional stock
option program. The basis of this belief is that these plans create a clear
cause and effect relationship between initiatives taken to increase location
cash flow and the amount of incentive compensation that results from these
initiatives.
Although the restricted stock plan and 401(k) plans, like conventional
stock option programs provide compensation to employees as a function of growth
in stockholder value, the tax and accounting treatments of these programs are
different. For tax purposes, incentive compensation awarded under the restricted
stock plan generally and the 401(k) plans is fully tax deductible as compared to
conventional stock option grants which generally are only partially tax
deductible upon exercise. For accounting purposes, conventional stock option
programs generally do not result in a charge to earnings while compensation
under the restricted stock plan generally and the 401(k) plans do result in a
charge to earnings. Pegasus believes that these differences result in a lack of
comparability between the EBITDA of companies that utilize conventional stock
option programs and Pegasus' EBITDA. The table below lists the specific maximum
components of the restricted stock plan and the 401(k) plans in terms of a $1
increase in annual location cash flow. The table does not list excess and
discretionary awards under the restricted stock plan or matching contributions
under the 401(k) plans.
<TABLE>
<CAPTION>
Component Amount
--------- ------
<S> <C>
Restricted stock grants to general managers based on the increase in annual location cash
flow of individual business units................................................................ 6 Cents
Restricted stock grants to department managers based on the increase in annual location
cash flow of individual business units........................................................... 6 Cents
Restricted stock grants to corporate managers (other than executive officers) based on the
company-wide increase in annual location cash flow............................................... 3 Cents
Restricted stock grants to employees selected for special recognition.............................. 5 Cents
Restricted stock grants under the 401(k) plans for the benefit of all eligible employees
and allocated pro-rata based on wages............................................................ 10 Cents
Total.............................................................................................. 30 Cents
</TABLE>
Executive officers and non-employee directors are not eligible to
receive profit sharing awards under the restricted stock plan. Executive
officers are eligible to receive awards under the restricted stock plan
consisting of:
o special recognition awards.
o excess awards made to the extent that an employee does not
receive a matching contribution under the 401(k) plans because
of restrictions of the Internal Revenue Code or the Puerto
Rico Internal Revenue Code.
B-47
<PAGE>
o discretionary restricted stock awards determined by a board
committee, or the full board.
Executive officers, non-employee directors and, effective December 18,
1998, all employees are eligible to receive options under the stock option plan.
Restricted Stock Plan
The Pegasus restricted stock plan became effective in September 1996
and will terminate in September 2006. Under the restricted stock plan, 350,000
shares of Class A common stock are available for granting restricted stock
awards to eligible employees of Pegasus. The restricted stock plan provides for
four types of restricted stock awards that are made in the form of Class A
common stock as shown in the table above:
o profit sharing awards to general managers, department managers
and corporate managers (other than executive officers).
o special recognition awards for consistency, initiative,
problem solving and individual excellence.
o excess awards that are made to the extent that an employee
does not receive a matching contribution under the U.S. 401(k)
plan or Puerto Rico 401(k) plan because of restrictions of the
Internal Revenue Code or the Puerto Rico Internal Revenue
Code.
o discretionary restricted stock awards.
Restricted stock awards other than special recognition awards vest 34%
after two years of service with Pegasus, 67% after three years of service and
100% after four years of service. Special recognition awards are fully vested on
the date of the grant. Effective December 18, 1998, grantees may elect to
receive certain types of awards under the restricted stock plan in the form of
an option rather than stock subject to a vesting schedule.
Stock Option Plan
The Pegasus Communications 1996 Stock Option Plan became effective in
September 1996 and terminates in September 2006. Under the stock option plan, up
to 1,300,000 shares of Class A common stock are available for the granting of
nonqualified stock options and options qualifying as incentive stock options
under Section 422 of the Internal Revenue Code. Effective December 18, 1998, all
Pegasus employees are eligible to receive non-qualified stock options and
incentive stock options under the stock option plan. No employee, however, may
be granted options covering more than 550,000 shares of Class A common stock
under the stock option plan. Directors of Pegasus who are not employees of
Pegasus are eligible to receive non-qualified stock options under the stock
option plan. Currently, seven non-employee directors are eligible to receive
options under the stock option plan. The stock option plan provides for
discretionary option grants made by a board committee or the full board. In
addition, as of December 18, 1998 each full time employee of Pegasus who is not
an executive officer is eligible to receive a grant of an option to purchase 100
shares of Class A common stock under the stock option plan.
401(k) Plans
Effective January 1, 1996, Pegasus Media & Communications, Inc. adopted
the Pegasus Communications Savings Plan for eligible employees of that company
and its domestic subsidiaries. Effective October 1, 1996, the Pegasus' Puerto
Rico subsidiary adopted the Pegasus Communications Puerto Rico Savings Plan for
eligible employees of Pegasus' Puerto Rico subsidiaries. Substantially all
Pegasus employees who, as of the enrollment date under the 401(k) plans, have
completed at least one year of service with Pegasus are eligible to participate
in one of the 401(k) plans. Participants may make salary deferral contributions
of 2% to 6% of salary to the 401(k) plans. Pegasus may make three types of
contributions to the 401(k) plans, each allocable to a participant's account if
the participant completes at least 1,000 hours of service in the applicable plan
year, and is employed on the last day of the applicable plan year.
o Pegasus matches 100% of a participant's salary deferral
contributions to the extent the participant invested his or
her salary deferral contributions in Class A common stock at
the time of his or her initial contribution to the 401(k)
Plans.
o Pegasus, in its discretion, may contribute an amount that
equals up to 10% of the annual increase in company-wide
location cash flow. These company discretionary contributions,
if any, are allocated to eligible participants' accounts based
on each participant's salary for the plan year.
B-48
<PAGE>
o Pegasus also matches a participant's rollover contribution, if
any, to the 401(k) plans, to the extent the participant
invests his or her rollover contribution in Class A common
stock at the time of his or her initial contribution to the
401(k) plans.
Pegasus makes discretionary company contributions and company matches
of employee salary deferral contributions and rollover contributions in the form
of Class A common stock, or in cash used to purchase Class A common stock.
Pegasus has authorized and reserved for issuance up to 205,000 shares of Class A
common stock in connection with the 401(k) plans. Company contributions to the
401(k) plans are subject to limitations under applicable laws and regulations.
All employee contributions to the 401(k) Plans are fully vested at all
times and all company contributions, if any, vest 34% after two years of service
with Pegasus, including years before the 401(k) plans were established; 67%
after three years of service; and 100% after four years of service. A
participant also becomes fully vested in company contributions to the 401(k)
plans upon attaining age 65 or upon his or her death or disability.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth share information as of March 6, 2000,
regarding the beneficial ownership of the Class A common stock and Class B
common stock by:
o each stockholder known to Pegasus to be the beneficial owner,
as defined in Rule 13d-3 under the Securities Exchange Act of
1934, of more than 5% of the Class A common stock and Class B
common stock, based upon Pegasus' records or the records of
the SEC;
o each director of Pegasus;
o each person who will be elected to Pegasus' board of directors
upon consummation of the acquisition of Golden Sky;
o each of the top five most highly compensated officers whose
total annual salary and bonus or the fiscal year ended
December 31, 1999 exceeded $100,000; and
o all executive officers and directors of Pegasus as a group.
Holders of Class A common stock are entitled to one vote per share on
all matters submitted to a vote of stockholders generally, and holders of Class
B common stock are entitled to ten votes per share. Shares of Class B common
stock are convertible into shares of Class A common stock on a one-for-one
basis, and accordingly, holders of Class B common stock are deemed to own the
same number of shares of Class A common stock. Pegasus Communications Holdings,
Inc., two of its subsidiaries and Pegasus Capital, L.P. hold in the aggregate
all shares of Class B common stock, representing on a fully diluted basis 21.8%
of the common stock, and without giving effect to the voting agreement, 73.6 %
of the combined voting power of all voting stock. Without giving effect to the
voting agreement, Marshall W. Pagon is deemed to be the beneficial owner of all
of the Class B common stock; the table gives effect to the voting agreement. The
outstanding capital stock of Pegasus Communications Holdings, Inc. consists of
64,119 shares of Class A voting common stock and 5,000 shares of non-voting
stock, all of which are beneficially owned by Marshall W. Pagon.
Unless otherwise provided, the address of each natural person is c/o
Pegasus Communications Management Company, 225 City Line Avenue, Suite 200, Bala
Cynwyd, Pennsylvania 19004.
<TABLE>
<CAPTION>
Pegasus Class A
Common Stock
Name and address of Beneficially
Beneficial Owner Owned
------------------- ----------------------------
Shares %
-------------- ----
<S> <C> <C>
Marshall W. Pagon(1)............................................. 5,528,751(2)(3)(4) 26.7
Robert N. Verdecchio............................................. 345,052(4)(5)(6) 2.2
Howard E. Verlin................................................. 123,198(5)(7) *
Ted S. Lodge..................................................... 116,699(8) *
Nicholas A. Pagon................................................ 23,941(9) *
James J. McEntee, III............................................ 18,670(10) *
Mary C. Metzger.................................................. 213,000(11) 1.3
</TABLE>
B-49
<PAGE>
<TABLE>
<S> <C> <C>
Donald W. Weber.................................................. 175,920(12) 1.1
William P. Phoenix............................................... 2,670(13) *
Harry F. Hopper III.............................................. 198,668(14) 1.3
Michael C. Brooks................................................ 33,716(15) *
Riordon B. Smith................................................. 5,528,751(3)(16) 26.7
Harron Communications Corp.(17).................................. 852,110 5.4
T. Rowe Price Associates, Inc. and related
entities(18)................................................... 1,400,000 8.8
Wellington Management Company, LLP(19)........................... 1,600,000 10.1
PAR Capital Management, Inc.(20)................................. 950,000 6.0
Fleet Venture Resources, Inc. and related
entities(21)................................................... 5,528,751(3) 26.7
Robert F. Benbow(22)............................................. -- --
William P. Collatos(22).......................................... -- --
Putnam Investments, Inc.(23)..................................... 1,970,586 12.4
Directors and executive officers as a group(24)
(consists of 13 persons)....................................... 6,660,376 31.7
</TABLE>
<TABLE>
<CAPTION>
Pegasus Class B
Common Stock
Name and address of Beneficially Voting
Beneficial Owner Owned Power
------------------- --------------- ------
Shares % %
--------- --- ----
<S> <C> <C> <C>
Marshall W. Pagon(1)............................................... 4,581,900(3) 100 75.5
Robert N. Verdecchio............................................... -- -- *
Howard E. Verlin................................................... -- -- *
Ted S. Lodge....................................................... -- -- *
Nicholas A. Pagon.................................................. -- -- *
James J. McEntee, III.............................................. -- -- *
Mary C. Metzger.................................................... -- -- *
Donald W. Weber.................................................... -- -- *
William P. Phoenix................................................. -- -- *
Harry F. Hopper III................................................ -- -- *
Michael C. Brooks.................................................. -- -- *
Riordon B. Smith................................................... 4,581,900(3) 100 75.5
Harron Communications Corp.(17).................................... -- -- 1.4
T. Rowe Price Associates, Inc. and related
entities(18)..................................................... -- -- 2.3
Wellington Management Company, LLP(19)............................. -- -- 2.6
PAR Capital Management, Inc.(20)................................... -- -- 1.5
Fleet Venture Resources, Inc. and related
entities(21)..................................................... 4,581,900(3) 100 75.5
Robert F. Benbow(22)............................................... -- -- --
William P. Collatos(22)............................................ -- -- --
Putnam Investments, Inc.(23)....................................... -- -- --
Directors and executive officers as a group(23)
(consists of 13 persons)......................................... 4,581,900 100 76.9
</TABLE>
----------------
* Represents less than 1% of the outstanding shares of Class A common stock
or less than 1% of the voting power, as applicable.
(1) Pegasus Capital, L.P. holds 1,217,348 shares of Class B common stock. Mr.
Pagon is the sole shareholder of the general partner of Pegasus Capital,
L.P. and is deemed to be the beneficial owner of these shares. All of the
3,364,552 remaining shares of Class B common stock are owned by Pegasus
Communications Holdings, Inc. and two of its subsidiaries. All the capital
stock of Pegasus Communications Holdings, Inc. are held by Pegasus
Communications Limited Partnership. Mr. Pagon controls Pegasus
Communications Limited Partnership by reason of his ownership of all the
outstanding voting stock of the sole general partner of a limited
partnership that is, in turn, the sole general partner in Pegasus
Communications Limited Partnership. Therefore, apart from the voting
agreement described in note 3 below, Mr. Pagon is the beneficial owner
B-50
<PAGE>
of 100% of Class B common stock with sole voting and investment power over
all such shares.
(2) Includes 4,581,900 shares of Class B common stock, which are
convertible into shares of Class A common stock on a one-for-one basis
and 186,911 shares of Class A common stock which are issuable upon the
exercise of the vested portion of outstanding stock options.
(3) The following persons are parties to a voting agreement: Marshall W.
Pagon; Pegasus, Pegasus Capital, L.P., Pegasus Communications Holdings,
Inc., Pegasus Scranton Offer Corp, and Pegasus Northwest Offer Corp; Fleet
Venture Resources, Inc., Fleet Equity Partners VI, L.P., Chisholm Partners
III, L.P. and Kennedy Plaza Partners (which are discussed in note 21
below).
The voting agreement provides that these parties vote all shares held
by them in the manner specified in the voting agreement. As a
consequence of being parties to the voting agreement, each of these
parties is deemed to have shared voting power over certain shares
beneficially owned by them in the aggregate for the purposes specified
in the voting agreement. Therefore, the parties to the voting agreement
are each deemed to be the beneficial owner with respect to 4,581,900
shares of Class B common stock and 5,528,751 shares of Class A common
stock, including 4,581,900 shares of Class A common stock issuable upon
conversion of the all outstanding shares of Class B common stock.
(4) This includes 120,009 shares of Class A common stock held in Pegasus'
401(k) plan, over which Messrs. Pagon and Verdecchio share voting power
in their capacities as co-trustees.
(5) On March 26, 1997, the SEC declared effective a registration statement
filed by Pegasus, which would permit Messrs. Verdecchio and Verlin to
sell certain shares of their Class A common stock subject to certain
vesting and other restrictions. Messrs. Verdecchio and Verlin have sole
voting and investment power over their shares, subject to certain
vesting restrictions.
(6) This includes 88,770 shares of Class A common stock which are issuable
upon the exercise of the vested portion of outstanding stock options.
(7) This includes 71,500 shares of Class A common stock which are issuable
upon the exercises of the vested portion of outstanding stock options.
(8) This includes 1,500 shares of Class A common stock owned by Mr. Lodge's
wife, for which Mr. Lodge disclaims beneficial ownership, and 109,770
shares of Class A common stock which are issuable upon the exercise of
the vested portion of outstanding stock options.
(9) This includes 18,000 shares of Class A common stock which are issuable
upon the exercise of the vested portion of outstanding stock options.
(10) This includes 12,670 shares of Class A common stock which are issuable
upon the exercise of the vested portion of outstanding stock options
and 1,000 shares held beneficially by Mr. McEntee's wife, for which Mr.
McEntee disclaims beneficial ownership.
(11) This includes 200,000 shares of Class A common stock received in the
investment of Pegasus in Personalized Media & Communications, LLC, of
which Ms. Metzger is Chairman. See Item 13: Certain Relationships and
Related Transactions -- Investment in Personalized Media
Communications, LLC and Licensing of Patents. Also includes 9,500
shares of Class A common stock, which are issuable upon the exercise of
the vested portion of the outstanding stock options.
(12) This includes 15,885 shares of Class A common stock issuable upon the
exercise of the vested portion of outstanding stock options.
(13) This consists of 2,670 shares of Class A common stock issuable upon the
exercise of the vested portion of outstanding stock options.
(14) This includes 2,670 shares of Class A common stock issuable upon the
exercise of the vested portion of outstanding stock options, and 4,750
shares held by the Hopper Family Foundation, of which Mr. Hopper is a
trustee and officer. The address of this person is c/o Columbia Capital
Corporation, 201 N. Union Street, Suite 300, Alexandria, Virginia
22314-2642.
(15) This includes 2,670 shares of Class A common stock issuable upon the
exercise of the vested portion of outstanding stock options. The
address of this person is 177 Broad Street, Stamford, Connecticut
06901.
B-51
<PAGE>
(16) The information for Mr. Smith includes all shares of Class A common
stock held by Fleet Venture Resources, Inc. and its related entities,
as described below in note 21. Mr. Smith is a Senior Vice President of
each of the managing general partners of Fleet Equity Partners VI, a
Senior Vice President of Fleet Venture Resources, a Senior Vice
President of the corporation that is the general partner of the
partnership that is the general partner of Chisholm Partners III, and a
partner of Kennedy Plaza Partners. As a Senior Vice President of Fleet
Growth Resources II, Inc. and Silverado IV Corp., the two general
partners of Fleet Equity Partners, and as a Senior Vice President of
Fleet Venture Resources and Silverado III Corp., the general partner of
the partnership Silverado III, L.P., which is the general partner of
Chisholm Partners III, and as a partner of Kennedy Plaza Partners, Mr.
Smith disclaims beneficial ownership for all shares held directly by
those entities, except for his pecuniary interest therein. The
information for Mr. Smith also includes 2,500 shares of Class A common
stock, which are issuable upon the exercise of the vested portion of
outstanding stock options. The address of this person is 50 Kennedy
Plaza, RI MO F12C, Providence, Rhode Island 02903.
(17) The address of Harron Communications Corp. is 70 East Lancaster Avenue,
Frazer, Pennsylvania 19355.
(18) The address of T. Rowe Price Associates is 100 East Pratt St., Baltimore,
Maryland 21202.
(19) The address of Wellington Management Company is 75 State Street, Boston,
Massachusetts 02109.
(20) The address of this entity is Suite 1600, One Financial Center, Boston,
Massachusetts 02111.
(21) This includes the following number of shares of Class A common stock held
by the designated entity: Fleet Venture Resources, Inc. (351,186); Fleet
Equity Partners VI, L.P. (150,479); Chisholm Partners III, L.P. (127,611);
and Kennedy Plaza Partners (8,155). The address of each of these entities
is 50 Kennedy Plaza, RI MO F12C, Providence, Rhode Island 02903.
(22) This is a designee for director who will become a director upon completion
of the Golden Sky Merger.
(23) This includes the following number of shares of Class A common stock held
by the designated entity: Putnam Investments, Inc. (985,293); Putnam
Investment Management, Inc. (709,193); and The Putnam Advisory Company,
Inc. (276,100). The address of these entities is One Post Office Square,
Boston, MA 02109.
(24) See notes 1, 2 and 4 with respect to Mr. Marshall W. Pagon, notes 4, 5,
6, 7, 8, and 9 with respect to Messrs. Verdecchio, Verlin, Lodge and
Nicholas A. Pagon, notes 10, 11, 12, 13, 14, 15 and 16 with respect to
Ms. Metzger and Messrs. McEntee, Phoenix, Hopper, Brooks and Smith, and
note 3 with respect to the voting agreement currently in place. Also
includes 100 shares of Class A common stock, which are issuable upon
the vested portion of outstanding stock options.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Split Dollar Agreement
In December 1996, Pegasus entered into a split dollar agreement with
the trustees of an insurance trust established by Marshall W. Pagon. Under the
split dollar agreement, Pegasus agreed to pay a portion of the premiums for
certain life insurance policies covering Mr. Pagon owned by the insurance trust.
The agreement provides that Pegasus will be repaid for all amounts it expends
for such premiums, either from the cash surrender value or the proceeds of the
insurance policies. The actuarial benefit to Mr. Pagon of premiums paid by
Pegasus amounted to $53,728 in each of the years of 1997, 1998 and 1999.
Relationship with W.W. Keen Butcher and Affiliated Entities
Pegasus entered into an arrangement in 1998 with W.W. Keen Butcher, the
stepfather of Marshall W. Pagon and Nicholas A. Pagon, certain entities
controlled by him and the owner of a minority interest in one of the entities.
Under this agreement, Pegasus agreed to provide and maintain collateral for up
to $4.0 million in principal amount of bank loans to Mr. Butcher and the
minority owner. Mr. Butcher and the minority owner must lend or contribute the
proceeds of those bank loans to one or more of the entities owned by Mr. Butcher
for the acquisition of television broadcast stations to be programmed by Pegasus
pursuant to local marketing agreements.
Pegasus amended its agreement with W.W. Keen Butcher and his affiliated
entities in the fourth quarter of 1999 to increase the amount of collateral that
Pegasus will maintain for bank loans to Mr. Butcher and the affiliated entities.
Under the amendment, Pegasus will maintain collateral for up to $8.0 million in
principal amount such bank loans. Mr. Butcher and the affiliated entities must
continue to contribute the proceeds from these bank loans to one or more
entities owned by Mr. Butcher for acquisition of
B-52
<PAGE>
television broadcast stations to be programmed by Pegasus pursuant to local
marketing agreements.
Under this arrangement, on November 10, 1998, Pegasus sold to one of
the Butcher companies the FCC license for the television station then known as
WOLF for $500,000 and leased certain related assets to the Butcher company,
including leases and subleases for studio, office, tower and transmitter space
and equipment, for ongoing rental payments of approximately $18,000 per year
plus operating expenses. WOLF is now known as WSWB and is one of the television
stations serving the northeastern Pennsylvania designated television market area
that is programmed by Pegasus. Mr. Butcher and the minority owner borrowed the
$500,000 under the loan collateral arrangement described above. Concurrently
with the closing under the agreement described above, one of the Butcher
companies assumed a local marketing agreement, under which Pegasus provides
programming to WSWB and retains all revenues generated from advertising in
exchange for payments to the Butcher company of $4,000 per month plus
reimbursement of certain expenses. The term of the local marketing agreement is
three years, with two three-year automatic renewals. The Butcher company also
granted Pegasus an option to purchase the station license and assets if it
becomes legal to do so for the costs incurred by the Butcher company relating to
the station, plus compound interest at 12% per year.
On July 2, 1998, Pegasus assigned to one of the Butcher companies its
option to acquire the FCC license for television station WFXU, which
rebroadcasts WTLH pursuant to a local marketing agreement with Pegasus. The
Butcher company paid Pegasus $50,000 for the option. In May 1999, the Butcher
company purchased the station and assumed the obligations under the local
marketing agreement with Pegasus. The Butcher company borrowed the $50,000 under
the loan collateral arrangement, and granted Pegasus an option to purchase the
station on essentially the same terms described above for WOLF. The local
marketing agreement provides for a reimbursement of expenses by Pegasus and a
term of five years, with one automatic five-year renewal.
Pegasus currently provides programming under a local marketing
agreement to television station WPME. Under the local marketing agreement,
Pegasus also holds an option to purchase WPME. One of the Butcher companies
expects to acquire WPME and the FCC license from the current owner in the near
future. The Butcher company would continue the local marketing agreement with
Pegasus and Pegasus would retain its option to acquire WPME. Pegasus believes
that the WOLF and WFXU transactions were done at fair value and that any future
transactions that may be entered into with the Butcher companies or similar
entities, including the WPME transaction as described, will also be done at fair
value.
Acquisition of Digital Television Services, Inc.
On April 27, 1998, Pegasus acquired Digital Television Services, Inc.
through the merger of a subsidiary of Pegasus into Digital Television Services.
Prior to the merger, Digital Television Services was the second largest
independent distributor of DIRECTV services serving 140,000 subscribers in 11
states.
In connection with the merger, Pegasus issued approximately 5.5 million
shares of its Class A common stock to the stockholders of Digital Television
Services and assumed approximately $159 million of liabilities. Pegasus also
granted registration rights to certain of Digital Television Service's
stockholders, including Columbia Capital Corporation, Columbia DBS, Inc.,
Whitney Equity Partners, L.P., Fleet Venture Resources, Inc. and its affiliates
and Harry F. Hopper III. Mr. Hopper received shares of Class A common stock in
the Digital Television Services merger and has an ownership interest in Columbia
Capital Corporation, which received 429,812 shares. As a result of the Digital
Television Services merger and the voting agreement described below, Michael C.
Brooks, Harry F. Hopper, III and Riordon B. Smith were elected to Pegasus' board
of directors.
<PAGE>
Voting Agreement
On April 27, 1998, in connection with the Digital Television Services
merger, Pegasus, Marshall W. Pagon and a number of partnerships and corporations
controlled by him, and Fleet Venture Resources, Fleet Equity Partners, Chisholm
Partners III, L.P., Kennedy Plaza Partners, Whitney Equity Partners, Columbia
Capital Corporation and Columbia DBS, Inc. entered into a voting agreement. The
voting agreement covers all shares of Class B common stock and other voting
securities of Pegasus held at any time by Mr. Pagon and his controlled entities
and shares of Class A common stock received in the Digital Television Services
merger by Chisholm and the Fleet entities, Columbia and Whitney. It provides
that holders of such shares vote their respective shares in the manner specified
in the voting agreement. In particular, the voting agreement establishes that
Pegasus' board of directors will consist initially of nine members: three
independent directors, three directors designated by Mr. Pagon and one director
to be designated by each of Chisholm Partners III, L.P., Columbia Capital
Corporation and Whitney Equity Partners. The voting agreement also provides that
the committees of the board of directors will consist of an audit committee, a
compensation committee and a nominating committee. Each committee shall consist
of one independent director, one director designated by Mr. Pagon and one
director designated by a majority of the directors designated by Chisholm
Partners III, L.P., Columbia Capital Corporation and Whitney Equity Partners. As
a result of the voting agreement, the parties to the agreement have sufficient
voting power without the need for the vote of any other shareholder, to elect
the entire board of directors. James J. McEntee, III, Mary C. Metzger, William
P. Phoenix and Donald W. Weber are serving as independent directors of Pegasus.
Marshall W. Pagon and Robert N. Verdecchio are serving as directors of Pegasus
as designees of Mr. Pagon. Harry F. Hopper III is serving as a director of
Pegasus as a designee of Columbia Capital
B-53
<PAGE>
Corporation; Michael C. Brooks is serving as a director of Pegasus as a designee
of Whitney Equity Partners; and Riordon B. Smith is serving as a director of
Pegasus as a designee of Chisholm Partners III, L.P. When the transaction is
completed, the existing voting agreement with certain of Pegasus' stockholders
will be amended to increase the board of directors to eleven members, to give
certain of Golden Sky's stockholders the right to designate two directors, and
to give Mr. Marshall Pagon the right to designate four directors. See Item 1:
Business -- Recent Completed and Pending Transactions -- Pending Transactions --
Merger with Golden Sky Holdings, Inc.
The voting agreement terminates with respect to any covered share upon
the sale or transfer of any such share to any person other than a permitted
transferee. In addition, the right of Chisholm Partners III, L.P., Columbia
Capital Corporation and Whitney Equity Partners to designate a director
terminates when the Fleet entities, Columbia Capital Corporation and certain of
its owners, and Whitney Equity Partners cease owning one-half of the shares
originally received by each of them in the Digital Television Services merger or
in certain other circumstances. Whitney distributed shares it owned to its
partners in 1999 and, thus, has lost its right to designate a director under the
voting agreement. Columbia Capital Corporation and its subsidiaries and owners
have sold more than one-half of the shares originally received by them. Columbia
Capital Corporation has therefore also lost its right to designate a director
under the voting agreement.
Communications License Re-Auction
Pegasus PCS Partners, a company owned and controlled by Marshall W.
Pagon, holds personal communications system licenses in Puerto Rico. We have
made an approximately $4.8 million investment in Pegasus PCS Partners. Pegasus
itself did not meet the qualification criteria for the FCC's re-auction in which
Pegasus PCS Partners acquired certain of its licenses.
CIBC World Markets Corp. and Affiliates
William P. Phoenix is a Managing Director of CIBC World Markets Corp.
CIBC World Markets and its affiliates have provided various services to Pegasus
and its subsidiaries since the beginning of 1997. CIBC World Markets has
historically performed a number of services for Pegasus, including serving as
one of the initial purchasers in Pegasus' January 2000 Rule 144A offering of
$300.0 million in aggregate liquidation preference of Series C convertible
preferred stock. In this capacity, CIBC World Markets received customary
underwriting discounts and commissions.
CIBC World Markets has also performed the following services for
Pegasus:
o provided a fair market value appraisal in connection with the
merger of Digital Television Services, Inc. into a
wholly-owned subsidiary of Pegasus and the designation of
Digital Television Services as a restricted subsidiary;
o acted as a dealer manager in connection with an offer by
Pegasus to exchange its 121/2% Series A senior notes due 2007
for senior subordinated notes of Digital Television Services
and DTS Capital, Inc. and a related consent solicitation;
o issued letters of credit in connection with bridge financing
obtained by Pegasus;
o provided fairness opinions to Pegasus and/or its affiliates in
connection with certain intercompany loans and other
intercompany transactions;
o acted as lender in connection with the Pegasus Media &
Communications credit facility;
o provided a fairness opinion in connection with this merger;
o acted as Administrative Agent in connection with a credit facility
of Digital Television Services; and
o acted as underwriter in Pegasus' 1999 equity offering.
In addition, CIBC World Markets has agreed to purchase, subject to
definitive documentation, any and all Golden Sky notes tendered in response to
Golden Sky's offer to purchase such notes. CIBC World Markets will receive fees
of approximately $1.0 million under this arrangement.
In the first two months of 2000 and during 1999, for services rendered,
Pegasus or its subsidiaries paid to CIBC World Markets an aggregate of $3.4
million and $940,000, respectively, in fees. Pegasus believes that all fees paid
to CIBC World Markets in connection with the transactions described above were
customary. Pegasus anticipates that it or its subsidiaries may engage the
services of CIBC World Markets in the future, although no such engagement is
currently contemplated.
B-54
<PAGE>
Investment in Personalized Media Communications, LLC and Licensing of Patents
On January 13, 2000, Pegasus made an investment in Personalized Media
Communications, LLC. Personalized Media is an advanced communications technology
company that owns as intellectual property portfolio consisting of seven issued
U.S. patents and over 10,000 claims submitted in several hundred pending U.S.
patent applications. A majority of pending claims are based on a 1981 filing
date, with the remainder based on a 1987 filing date. Mary C. Metzger, Chairman
of Personalized Media and a member of Pegasus' board of directors, and John C.
Harvey, Managing Member of Personalized Media and Ms. Metzger's husband, own a
majority of and control Personalized Media as general partners of the Harvey
Family Limited Partnership.
A subsidiary of Personalized Media granted Pegasus an exclusive license
for the distribution of satellite based services using Ku band BSS frequencies
at the 101o, 110o and 119o West Longitude orbital locations and Ka band FSS
frequencies at the 99(degree), 101(degree), 103(degree) and 125(degree) West
Longitude orbital locations, which frequencies have been licensed by the FCC to
affiliates of Hughes Electronics Corporation. In addition, Personalized Media
granted to Pegasus the right to license on an exclusive basis and on favorable
terms the patent portfolio of Personalized Media in connection with other
frequencies that may be licensed to Pegasus in the future.
The license granted by Personalized Media's subsidiary provides rights
to all claims covered by Personalized Media's patent portfolio, including
functionality for automating the insertion of programming at a direct broadcast
satellite uplink, the enabling of pay-per-view buying, the authorization of
receivers, the assembly of records of product and service selections made by
viewers including the communication of this information to billing and
fulfillment operations, the customizing of interactive program guide features
and functions made by viewers and the downloading of software to receivers by
broadcasters. Pegasus will pay license fees to Personalized Media of $100,000
per year for three years.
Pegasus acquired preferred interests of Personalized Media for
approximately $14.3 million in cash, 200,000 shares of Pegasus' Class A common
stock and Pegasus' agreement, subject to certain conditions, to issue warrants
to purchase 1.0 million shares of Pegasus' Class A common stock at an exercise
price of $90.00 per share and with a term of ten years. After certain periods of
time, Personalized Media may redeem the preferred interests, and Pegasus may
require the redemption of preferred interests, in consideration for Personalized
Media's transfer to Pegasus of Personalized Media's ownership interest in its
wholly-owned subsidiary that holds the exclusive license from Personalized Media
for the rights that are licensed to Pegasus. Pegasus may also be required to
make an additional payment to Personalized Media if certain contingencies occur
that Pegasus believes are unlikely to occur. Because of the speculative nature
of the contingencies, it is not possible to estimate the amount of any such
additional payments, but in some cases it could be material. As part of the
transaction, Personalized Media will be entitled to designate one nominee to
serve on Pegasus' board of directors. Mary C. Metzger is currently serving as
Personalized Media's designee.
Other Transactions
In 1999, Pegasus loaned $199,999 to Nicholas A. Pagon, Pegasus' Vice
President of Broadcast Operations, bearing interest at the rate of 6% per annum,
with the principal amount due on the fifth anniversary of the date of the
promissory note. Mr. Pagon is required to use half of the proceeds of the loan
to purchase shares of Class A common stock, and the loan is collateralized by
those shares. The balance of the loan proceeds may be used at Mr. Pagon's
discretion.
B-55
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements
The financial statements filed as part of this Report
are listed on the Index to Financial Statements on
page F-1.
(2) Financial Statement Schedules
Page
----
Report of PricewaterhouseCoopers LLP.....................S-1
Schedule II - Valuation and Qualifying Accounts..........S-2
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(3) Exhibits
Exhibit
Number Description of Document
------- -----------------------
2.1 Agreement and Plan of Merger dated January 10, 2000, as amended on
January 25, 2000, by and among Pegasus, Golden Sky and certain
stockholders of Pegasus and Golden Sky (which is incorporated by
reference to Exhibit 2.1 to Pegasus' Registration Statement on Form
S-4 (File No. 333-31080)).
2.2 Asset Purchase Agreement dated as of January 16, 1998 between
Avalon Cable of New England, LLC and Pegasus Cable Television, Inc.
and Pegasus Cable Television of Connecticut, Inc. (which is
incorporated by reference herein to Pegasus' Form 8-K dated January
16, 1998).
2.3 Asset Purchase Agreement dated as of July 23, 1998 among Pegasus
Cable Television, Inc., Cable Systems USA, Partners, J&J Cable
Partners, Inc. and PS&G Cable Partners, Inc. (which is incorporated
by reference herein to Pegasus' Form 10-Q dated August 13, 1998).
3.1 Certificate of Incorporation of Pegasus, as amended (which is
incorporated by reference herein to Exhibit 3.1 to Pegasus' Form
10-Q dated August 13, 1999).
3.2 By-Laws of Pegasus, as amended, (which is incorporated by reference
to Exhibit 3.1 to Pegasus' Form 10-Q dated May 14, 1998).
3.3 Certificate of Designation, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock
and Qualifications, Limitations and Restrictions Thereof of 12.75%
Series A Cumulative Exchangeable Preferred Stock which is
incorporated by reference to Exhibit 3.3 to Pegasus' Registration
Statement on Form S-1 (File No. 333-23595).
3.4 Certificate of Designation, Preferences and Rights of Series B
Junior Convertible Participating Preferred Stock (which is
incorporated by reference to Exhibit 3.4 to Pegasus' Registration
Statement on Form S-4 (File No. 333-31080)).
3.5 Certificate of Designation, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock
and Qualifications, Limitation and Restrictions Thereof of 61/2%
Series C Convertible Preferred Stock (which is incorporated by
reference to Exhibit 3.5 to Pegasus' Registration Statement on Form
S-4 (File No. 333-31080)).
3.6 Certificate of Designation, Preferences and Rights of Series D
Junior Convertible Participating Preferred Stock (which is
incorporated by reference to Exhibit 3.6 to Pegasus' Registration
Statement on Form S-4 (File No. 333-31080)).
3.7* Certificate of Designation, Preferences and Rights of Series E
Junior Convertible Participating Preferred Stock.
B-56
<PAGE>
Exhibit
Number Description of Document
------- -----------------------
4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media &
Communications, Inc., the Guarantors (as this term is defined in
the Indenture), and First Fidelity Bank, National Association, as
Trustee, relating to the 12 1/2% Series B Senior Subordinated
Notes due 2005 (including the form of Notes and Subsidiary
Guarantee) (which is incorporated herein by reference to Exhibit
4.1 to Pegasus Media & Communications, Inc.'s Registration
Statement on Form S-4 (File No. 33-95042)).
4.2 Form of 12 1/2% Series B Senior Subordinated Notes due 2005
(included in Exhibit 4.1 above).
4.3 Form of Subsidiary Guarantee with respect to the 12 1/2% Series B
Senior Subordinated Notes due 2005 (included in Exhibit 4.1
above).
4.4 Indenture by and between Pegasus and First Union National Bank,
as trustee, relating to the Exchange Notes (which is incorporated
herein by reference to Exhibit 4.4 to Pegasus' Registration
Statement on Form S-1 (File No. 333-18739)).
4.5 Indenture, dated as of October 21, 1997, by and between Pegasus
Communications Corporation and First Union National Bank, as
trustee, relating to the 9 5/8% Senior Notes due 2005 (which is
incorporated by reference herein to Exhibit 4.1 to Amendment No.
1 to Pegasus' Form 8-K dated September 8, 1997).
4.6 Indenture, dated as of November 30, 1998, by and between Pegasus
Communications Corporation and First Union National Bank, as
trustee, relating to the 9 3/4% Senior Notes due 2006 (which is
incorporated by reference to Exhibit 4.6 to Pegasus' Registration
Statement on Form S-3 (File No. 333-70949)).
4.7 Indenture, dated as of November 19, 1999, by and between Pegasus
and First Union National Bank, as Trustee, relating to the
12 1/2% Senior Notes due 2007 (which is incorporated by reference
to Exhibit 4.1 to Pegasus' Registration Statement on Form S-4
(File No. 333-94231)).
10.1 Station Affiliation Agreement, dated March 30, 1992, between Fox
Broadcasting Company and D. & K. Broadcast Properties L.P.
relating to television station WDBD (which is incorporated herein
by reference to Exhibit 10.5 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
10.2 Agreement and Amendment to Station Affiliation Agreement, dated
as of June 11, 1993, between Fox Broadcasting Company and
Donatelli & Klein Broadcast relating to television station WDBD
(which is incorporated herein by reference to Exhibit 10.6 to
Pegasus Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042)).
10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox
Broadcast Company and Scranton TV Partners Ltd. relating to
television station WOLF (which is incorporated herein by
reference to Exhibit 10.8 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
10.4 Agreement and Amendment to Station Affiliation Agreement, dated
June 11, 1993, between Fox Broadcasting Company and Scranton TV
Partners, Ltd. relating to television station WOLF (which is
incorporated herein by reference to Exhibit 10.9 to Pegasus Media
& Communications, Inc.'s Registration Statement on Form S-4 (File
No. 33-95042)).
10.5 Amendment to Fox Broadcasting Company Station Affiliation
Agreement Regarding Network Nonduplication Protection, dated
December 2, 1993, between Fox Broadcasting Company and Pegasus
Broadcast Television, L.P. relating to television stations WOLF,
WWLF, and WILF (which is incorporated herein by reference to
Exhibit 10.10 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042)).
10.6 Consent to Assignment, dated May 1, 1993, between Fox
Broadcasting Company and Pegasus Broadcast Television, L.P.
relating to television station WOLF (which is incorporated herein
by reference to Exhibit 10.11 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
10.7 Station Affiliation Agreement, dated March 30, 1992, between Fox
Broadcasting Company and WDSI Ltd. relating to television station
WDSI (which is incorporated herein by reference to Exhibit 10.12
to Pegasus Media & Communications, Inc.'s Registration Statement
on Form S-4 (File No. 33-95042)).
<PAGE>
10.8 Agreement and Amendment to Station Affiliation Agreement, dated
June 11, 1993, between Fox Broadcasting Company and Pegasus
Broadcast Television, L.P. relating to television station WDSI
(which is incorporated herein by reference to Exhibit 10.13 to
Pegasus Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042)).
B-57
<PAGE>
Exhibit
Number Description of Document
------- -----------------------
10.9 Franchise Agreement for Mayaguez, Puerto Rico (which is
incorporated herein by reference to Exhibit 10.14 to Pegasus
Media & Communications, Inc.'s Registration Statement on Form S-4
(File No. 33-95042)).
10.10 NRTC/Member Agreement for Marketing and Distribution of DBS
Services, dated June 24, 1993, between the National Rural
Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
(which is incorporated herein by reference to Exhibit 10.28 to
Pegasus Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042) (other similar agreements with the
National Rural Telecommunications Cooperative are not being filed
but will be furnished upon request, subject to restrictions on
confidentiality)).
10.11 Amendment to NRTC/Member Agreement for Marketing and Distribution
of DBS Services, dated June 24, 1993, between the National Rural
Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
(which is incorporated herein by reference to Exhibit 10.29 to
Pegasus Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042)).
10.12 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV,
Inc. and Pegasus Satellite Television, Inc. (which is
incorporated herein by reference to Exhibit 10.30 to Pegasus
Media & Communications, Inc.'s Registration Statement on Form S-4
(File No. 33-95042)).
10.13 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build
and operate cable television systems for the municipalities of
Cabo Rojo, San German, Lajas, Hormigueros, Guanica, Sabana Grande
and Maricao (which is incorporated herein by reference to Exhibit
2 to Pegasus Media & Communications, Inc.'s Form 8-K dated March
21, 1996).
10.14 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build
and operate cable television systems for the municipalities of
Anasco, Rincon and Las Marias (which is incorporated herein by
reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s
Form 8-K dated March 21, 1996).
10.15 Credit Agreement dated January 14, 2000 among Pegasus Media &
Communications, Inc., the lenders thereto, CIBC World Markets
Corp., Deutsche Bank Securities Inc., Canadian Imperial Bank of
Commerce, Bankers Trust Company and Fleet National Bank (which is
incorporated by reference to Exhibit 10.7 to Pegasus'
Registration Statement on Form S-4 (File No. 333-31080)).
10.16+ Pegasus Restricted Stock Plan (as amended and restated generally
effective as of December 18, 1998) (which is incorporated by
reference to Exhibit 10.2 to Pegasus' Form 10-Q dated August 13,
1999).
10.17+ Option Agreement for Donald W. Weber (which is incorporated by
reference to Exhibit 10.29 Pegasus' Registration Statement on
Form S-1 (File No. 333-05057)).
10.18+ Pegasus Communications 1996 Stock Option Plan (as amended and
restated effective as of April 23, 1999) (which is incorporated
by reference to Exhibit 10.1 to Pegasus' Form 10-Q dated August
13, 1999).
10.19+ Amendment to Option Agreement for Donald W. Weber, dated December
19, 1996 (which is incorporated by reference to Exhibit 10.31 to
Pegasus' Registration Statement on Form S-1 (File No.
333-18739)).
10.20 Warrant Agreement between Pegasus and First Union National Bank,
as Warrant Agent relating to the Warrants issued in connection
with Pegasus' Series A preferred stock (which is incorporated by
reference to Exhibit 10.32 to Pegasus' Registration Statement on
Form S-1 (File No. 333-23595)).
10.21 Class B Preferred Unit Subscription Agreement between Pegasus
Communications Corporation and Personalized Media Communications,
L.L.C. dated January 10, 2000 (which is incorporated by reference
to Exhibit 10.3 to Pegasus' Registration Statement on Form S-4
(File No. 333-31080)).
10.22 Amendment No. 1, dated January 24, 2000, to the Class B
Preferred Unit Subscription Agreement between Pegasus
Communications Corporation and Personalized Media Communications,
L.L.C. dated January 10, 2000 (which is incorporated by reference
to Exhibit 10.9 to Pegasus' Registration Statement on Form S-4
(File No. 333-31080)).
<PAGE>
10.23 Patent License Agreement dated January 13, 2000 between PMC
Satellite Development, L.L.C. and Personalized Media
Communications L.L.C. (which is incorporated by reference to
Exhibit 10.4 to Pegasus' Registration Statement on Form S-4 (File
No. 333-31080)).
10.24 Second Amended and Restated Operating Agreement of Personalized
Media Communications, L.L.C. dated January 13, 2000 between
Pegasus Communications Corporation and Personalized
B-58
<PAGE>
Exhibit
Number Description of Document
------- -----------------------
Media Communications L.L.C. (which is incorporated by reference
to Exhibit 10.5 to Pegasus' Registration Statement on Form S-4
(File No. 333-31080)).
10.25 Series PMC Warrant Agreement dated January 13, 2000 between
Pegasus Communications Corporation and Personalized Media
Communications, L.L.C. (which is incorporated by reference to
Exhibit 10.6 to Pegagus' Registration Statement on Form S-4 (File
No. 333-31080)).
10.26 Agreement, effective as of September 13, 1999, by and among ADS
Alliance Data Systems, Inc., Pegasus Satellite Television, Inc.
and Digital Television Services, Inc. (which is incorporated by
reference to Exhibit 10.1 to Pegasus' Form 10-Q dated November
12, 1999).
10.27 Amendment dated December 30, 1999, to ADS Alliance Agreement
among ADS Alliance Data Systems, Inc., Pegasus Satellite
Television, Inc. and Digital Television Securities, Inc., dated
September 13, 1999 (which is incorporated by reference to Exhibit
10.8 to Pegasus' Registration Statement on Form S-4 (File No.
333-31080)).
10.28 Patent License Agreement dated January 13, 2000 between PMC
Satellite Development, L.L.C. and Pegasus Development Corporation
(which is incorporated by reference to Exhibit 10.10 to Pegasus'
Registration Statement on Form S-4 (File No. 333-31080)).
10.29* Renewal Franchise Agreement dated as of March 19, 1999, granted
to Pegasus Cable Television of San German, Inc. to build and
operate cable television systems for the municipalities of
Aguadilla, Aguada, Quebradillas, Moca and Isabela.
21.1* Subsidiaries of Pegasus.
23.1* Consent of PricewaterhouseCoopers LLP.
24.1* Powers of Attorney (included in Signatures and Powers of
Attorney).
27.1 Financial Data Schedule (which is incorporated by reference to
Exhibit 27.1 to Pegasus' Registration Statement on Form S-4 (File
No. 333-31080)).
---------------------------------
* Filed herewith.
+ Indicates a management contract or compensatory plan.
(b) Reports on Form 8-K.
On January 12, 2000, Pegasus filed a Current Report on Form
8-K dated January 12, 2000 reporting under Item 5 its intention to offer its
Series C Convertible Preferred Stock in a private offering.
On January 12, 2000, Pegasus filed a Current Report on Form
8-K dated November 19, 1999 reporting under Item 5 the following events: (i) the
completion of an offer to exchange $155.0 million in principal amount of
Pegasus' 121/2% Series A Senior Notes due 2007 for $155.0 million in principal
amount of outstanding Senior Subordinated Notes due 2007 of its subsidiaries,
Digital Television Services, Inc. and DTS Capital, Inc. (ii) the results of
Pegasus' fourth quarter; (iii) Pegasus entering into a merger agreement with
Golden Sky Holdings, Inc., the second largest independent distributor of DIRECTV
programming; (iv) information relating to other pending Direct Broadcast
Satellite acquisitions; (v) the completion of certain direct broadcast satellite
acquisitions that had been made from October 1, 1999 through January 10, 2000;
(vi) Pegasus' investment in Personalized Media Communications, LLC; (vii)
Pegasus entering into a letter of intent to sell its cable system in Puerto
Rico; (viii) the intention of Pegasus Media & Communications, a wholly-owned
subsidiary, to enter into a new credit facility; and (ix) certain information
regarding the litigation with DIRECTV.
On February 2, 2000, Pegasus filed Amendment No. 1 to its
Current Report on Form 8-K dated November 19, 1999 to report updated information
relating to the consummation of its private offering of $300.0 million in
liquidation preference of its Series C Convertible Preferred Stock. Amendment
No. 1 included under Item 7 certain financial statements relating to Pegasus'
proposed merger with Golden Sky Holdings, Inc.
On February 16, 2000, Pegasus filed Amendment No. 2 to its
Current Report on Form 8-K dated November 19, 1999, as amended by Amendment No.
1 filed on February 2, 2000 to report updated information regarding the
litigation with DIRECTV and to amend and replace certain information in Item 7
with the filing of a new exhibit 99.3.
B-59
<PAGE>
SIGNATURES AND POWERS OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEGASUS COMMUNICATIONS CORPORATION
By: /s/ Marshall W. Pagon
-------------------------
Marshall W. Pagon
Chairman of the Board,
Chief Executive Officer and President
Date: March 9, 2000
Know all men by these presents, that each person whose signature
appears below hereby constitutes and appoints Marshall W. Pagon, Robert N.
Verdecchio and Ted S. Lodge and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each of such attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Marshall W. Pagon Chairman of the Board, Chief March 9, 2000
--------------------- Executive Officer and President
Marshall W. Pagon
(Principal Executive Officer)
/s/ Robert N. Verdecchio Senior Vice President and Director March 9, 2000
------------------------
Robert N. Verdecchio
/s/ M. Kasin Smith Vice President and Acting Chief March 9, 2000
------------------ Financial Officer
M. Kasin Smith
(Principal Financial and Accounting Officer)
/s/ Michael C. Brooks Director March 9, 2000
--------------------
Michael C. Brooks
/s/ Harry F. Hopper III Director March 9, 2000
-----------------------
Harry F. Hopper III
/s/ James J. McEntee, III Director March 9, 2000
-------------------------
James J. McEntee, III
/s/ Mary C. Metzger Director March 9, 2000
-------------------
Mary C. Metzger
/s/ William P. Phoenix Director March 9, 2000
----------------------
William P. Phoenix
/s/ Donald W. Weber Director March 9, 2000
-------------------
Donald W. Weber
/s/ Riordon B. Smith Director March 9, 2000
--------------------
Riordon B. Smith
</TABLE>
B-60
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of PricewaterhouseCoopers LLP.............................................................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999.....................................................F-3
Consolidated Statements of Operations for the years ended December 31, 1997,
1998 and 1999.................................................................................................F-4
Consolidated Statements of Changes in Total Equity (Deficit) for the years ended
December 31, 1997, 1998 and 1999...............................................................................F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1998 and 1999.................................................................................................F-6
Notes to Consolidated Financial Statements.......................................................................F-7
</TABLE>
B-61
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Pegasus Communications
Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and changes in total equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of Pegasus Communications Corporation and its subsidiaries at December 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
accounting standards generally accepted in the United States which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 11, 2000
B-62
<PAGE>
Pegasus Communications Corporation
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $54,505 $40,453
Restricted cash.................................................................... 21,479 2,379
Accounts receivable, less allowance of $567 and $1,410, respectively............... 20,882 31,984
Inventory.......................................................................... 5,427 10,020
Program rights..................................................................... 3,157 4,373
Deferred taxes..................................................................... 2,603 536
Prepaid expenses and other......................................................... 1,207 4,597
-------- --------
Total current assets............................................................. 109,260 94,342
Property and equipment, net.......................................................... 34,067 44,415
Intangible assets, net............................................................... 729,406 760,637
Program rights....................................................................... 3,428 5,732
Deferred taxes....................................................................... 9,277 30,371
Investment in affiliate.............................................................. -- 4,598
Deposits and other................................................................... 872 5,237
-------- --------
Total assets..................................................................... $886,310 $945,332
======== ========
LIABILITIES AND TOTAL EQUITY
Current liabilities:
Current portion of long-term debt.................................................. $14,399 $15,488
Accounts payable................................................................... 4,795 8,999
Accrued interest................................................................... 17,465 11,592
Accrued satellite programming, fees and commissions................................ 22,681 37,885
Accrued expenses................................................................... 9,599 14,139
Amounts due seller................................................................. -- 6,729
Current portion of program rights payable.......................................... 2,432 4,446
-------- --------
Total current liabilities........................................................ 71,371 99,278
Long-term debt....................................................................... 544,629 668,926
Program rights payable............................................................... 2,472 4,211
Deferred taxes....................................................................... 80,672 90,310
-------- --------
Total liabilities................................................................ 699,144 862,725
-------- --------
Commitments and contingent liabilities............................................... -- --
Minority interest.................................................................... 3,000 3,000
Preferred Stock; $0.01 par value; 5.0 million shares authorized...................... -- --
Series A Preferred Stock; $0.01 par value; 143,684 shares authorized;
119,369 and 135,073 issued and outstanding......................................... 126,028 142,734
Common stockholders' equity (deficit):
Class A Common Stock; $0.01 par value; 50.0 million shares authorized;
11,315,809 and 15,216,510 issued and outstanding................................. 113 152
Class B Common Stock; $0.01 par value; 15.0 million shares authorized;
4,581,900 issued and outstanding................................................. 46 46
Non-Voting Common Stock; $0.01 par value; 20.0 million shares
authorized....................................................................... -- --
Additional paid-in capital......................................................... 173,871 237,566
Deficit............................................................................ (115,892) (300,704)
Class A Common Stock in treasury, at cost; 4,253 shares............................ -- (187)
-------- --------
Total common stockholders' equity (deficit)...................................... 58,138 (63,127)
-------- --------
Total liabilities and stockholders' equity (deficit)............................. $886,310 $945,332
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
B-63
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues:
DBS...................................................................... $ 38,254 $147,142 $286,353
Broadcast................................................................ 31,876 34,311 36,415
-------- -------- ---------
Total net revenues..................................................... 70,130 181,453 322,768
Operating expenses:
DBS
Programming, technical, general and administrative..................... 26,042 102,419 201,158
Marketing and selling.................................................. 5,973 45,706 117,774
Incentive compensation................................................. 795 1,159 1,592
Depreciation and amortization.......................................... 17,042 59,077 82,744
Broadcast
Programming, technical, general and administrative..................... 15,672 18,056 22,812
Marketing and selling.................................................. 5,704 5,993 6,304
Incentive compensation................................................. 298 177 57
Depreciation and amortization.......................................... 3,754 4,557 5,144
Corporate expenses....................................................... 2,256 3,614 5,975
Corporate depreciation and amortization.................................. 1,353 2,105 3,119
Other expense, net....................................................... 630 1,409 1,995
-------- -------- ---------
Loss from operations.................................................. (9,389) (62,819) (125,906)
Interest expense........................................................... (14,275) (44,559) (64,904)
Interest income............................................................ 1,508 1,586 1,356
-------- -------- ---------
Loss from continuing operations before income taxes, equity loss
and extraordinary items................................................ (22,156) (105,792) (189,454)
Provision (benefit) for income taxes....................................... 168 (901) (8,892)
Equity in net loss of unconsolidated affiliate............................. -- -- (201)
-------- -------- ---------
Loss from continuing operations before extraordinary items............... (22,324) (104,891) (180,763)
Discontinued operations:
Income from discontinued operations of cable segment, net of
income taxes........................................................... 257 1,047 2,128
Gain on sale of discontinued operations, net of income taxes............. 4,451 24,727 --
-------- -------- ---------
Loss before extraordinary items.......................................... (17,616) (79,117) (178,635)
Extraordinary loss from extinquishment of debt, net........................ (1,656) -- (6,178)
-------- -------- ---------
Net loss................................................................. (19,272) (79,117) (184,813)
Preferred stock dividends................................................ 12,215 14,764 16,706
-------- -------- ---------
Net loss applicable to common shares..................................... ($31,487) ($93,881) ($201,519)
======== ======== =========
Basic and diluted earnings per common share:
Loss from continuing operations.......................................... $(3.50) $(8.46) $(10.46)
Income from discontinued operations...................................... 0.03 0.07 0.11
Gain on sale of discontinued operations.................................. 0.45 1.75 --
------ ------ -------
Loss before extraordinary items.......................................... (3.02) (6.64) (10.35)
Extraordinary loss....................................................... (0.17) -- (0.33)
------ ------ -------
Net loss................................................................. $(3.19) $(6.64) $(10.68)
====== ====== =======
Weighted average shares outstanding (000's).............................. 9,858 14,130 18,875
====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements
B-64
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Changes in Total Equity (Deficit)
(In thousands)
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------------------
Series A Additional
Preferred Number Par Paid-In
Stock of Shares Value Capital
--------- --------- ----- ----------
<S> <C> <C> <C> <C>
Balances at January 1, 1997................................... -- 9,245 $92 $57,736
Net loss
Issuance of Class A Common Stock due to:
Acquisitions................................................ 958 10 15,188
Incentive compensation and awards........................... 119 1 1,307
Issuance of Series A Preferred Stock due to:
Unit Offering............................................... $100,000
Paid and accrued dividends.................................. 12,215 (12,215)
Issuance of warrants due to:
Acquisitions................................................ 1,068
Unit Offering............................................... (951) 951
-------- --------
Balances at December 31, 1997................................. 111,264 10,322 103 64,035
Net loss
Issuance of Class A Common Stock due to:
Acquisitions................................................ 5,509 55 119,641
Incentive compensation and awards........................... 67 1 1,414
Issuance of Series A Preferred Stock due to:
Paid and accrued dividends.................................. 14,764 (14,764)
Issuance of warrants and options due to:
Acquisitions................................................ 3,545
--------
Balances at December 31, 1998................................. 126,028 15,898 159 173,871
Net loss
Issuance of Class A Common Stock due to:
Secondary Offering.......................................... 3,616 36 74,857
Acquisitions................................................ 12 -- 550
Exercise of warrants and options............................ 220 2 2,781
Incentive compensation and awards........................... 52 1 1,399
Issuance of Series A Preferred Stock due to:
Paid and accrued dividends.................................. 16,706 (16,706)
Issuance of warrants due to:
Acquisitions................................................ 814
Repurchase of Class A Common Stock
Balances at December 31, 1999................................. $142,734 19,798 $198 $237,566
======== ====== ==== ========
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements
B-65
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Changes in Total Equity (Deficit)
(In thousands)
<TABLE>
<CAPTION>
Treasury Stock Total
Retained ---------------------- Common
Earnings Number Stockholders'
(Deficit) of Shares Cost Equity (Deficit)
--------- --------- ---- ----------------
<S> <C> <C> <C> <C>
Balances at January 1, 1997............................. ($17,502) -- -- $40,326
Net loss................................................ (19,272) (19,272)
Issuance of Class A Common Stock due to:
Acquisitions.......................................... 15,198
Incentive compensation and awards..................... 1,308
Issuance of Series A Preferred Stock due to:
Unit Offering
Paid and accrued dividends............................ (12,215)
Issuance of warrants due to:
Acquisitions.......................................... 1,068
Unit Offering......................................... 951
--------
Balances at December 31, 1997........................... (36,774) -- -- 27,364
Net loss................................................ (79,117) (79,117)
Issuance of Class A Common Stock due to:
Acquisitions.......................................... 119,696
Incentive compensation and awards..................... 1,415
Issuance of Series A Preferred Stock due to:
Paid and accrued dividends............................ (14,764)
Issuance of warrants and options due to:
Acquisitions.......................................... 3,545
--------
Balances at December 31, 1998........................... (115,891) -- -- 58,139
Net loss................................................ (184,813) (184,813)
Issuance of Class A Common Stock due to:
Secondary Offering.................................... 74,893
Acquisitions.......................................... 550
Exercise of warrants and options...................... 2,783
Incentive compensation and awards..................... 1,400
Issuance of Series A Preferred Stock due to:
Paid and accrued dividends............................ (16,706)
Issuance of warrants due to:
Acquisitions.......................................... 814
Repurchase of Class A Common Stock...................... 4 ($187) (187)
- ----- --------
Balances at December 31, 1999........................... ($300,704) 4 ($187) ($63,127)
========= = ===== ========
</TABLE>
See accompanying notes to consolidated financial statements
B-66
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................ ($19,272) ($79,117) ($184,813)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Extraordinary loss on extinguishment of debt, net.................. 1,656 -- 6,178
Depreciation and amortization...................................... 27,792 70,731 97,989
Program rights amortization........................................ 1,716 2,366 3,686
Accretion on discount of bonds and seller notes.................... 394 1,320 1,446
Stock incentive compensation....................................... 1,274 1,452 2,002
Gain on disposal of assets......................................... -- -- (78)
Gain on sale of cable systems...................................... (4,451) (24,727) --
Equity in net loss of unconsolidated affiliate..................... -- -- 201
Bad debt expense................................................... 1,142 2,851 8,369
Deferred income taxes.............................................. 200 (896) (8,892)
Change in assets and liabilities:
Accounts receivable............................................... (5,608) (6,464) (18,982)
Inventory......................................................... (116) (3,105) (4,422)
Prepaid expenses and other........................................ 305 (244) (3,315)
Accounts payable and accrued expenses............................. 5,834 9,747 21,985
Accrued interest.................................................. 2,585 4,372 (5,873)
Capitalized subscriber acquisition costs.......................... (4,515) -- --
Deposits and other................................................ (458) (248) (4,360)
-------- -------- ---------
Net cash provided (used) by operating activities................... 8,478 (21,962) (88,879)
-------- -------- ---------
Cash flows from investing activities:
Acquisitions....................................................... (133,886) (109,340) (106,907)
Cash acquired from acquisitions.................................... 379 3,284 5
Capital expenditures............................................... (9,929) (12,400) (14,784)
Purchase of intangible assets...................................... (3,034) (10,489) (4,552)
Payments for programming rights.................................... (2,584) (2,561) (3,452)
Proceeds from sale of assets....................................... -- -- 509
Proceeds from sale of cable system................................. 6,945 30,133 --
Investment in affiliate............................................ -- -- (4,800)
-------- -------- ---------
Net cash used for investing activities.............................. (142,109) (101,373) (133,981)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from long-term debt....................................... 115,000 100,000 --
Repayments of long-term debt....................................... (320) (14,572) (14,291)
Borrowings on bank credit facilities............................... 94,726 108,800 180,900
Repayments of bank credit facilities............................... (124,326) (64,400) (50,600)
Restricted cash.................................................... (1,220) 7,541 19,100
Debt issuance costs................................................ (10,237) (3,179) (3,608)
Capital lease repayments........................................... (337) (399) (183)
Proceeds from issuance of Class A Common Stock..................... -- -- 82,334
Proceeds from issuance of Series A Preferred Stock................. 100,000 -- --
Underwriting and stock offering costs.............................. (4,188) -- (4,657)
Repurchase of Class A Common Stock................................. -- -- (187)
-------- -------- ---------
Net cash provided by financing activities........................... 169,098 133,791 208,808
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents.................. 35,467 10,456 (14,052)
Cash and cash equivalents, beginning of year.......................... 8,582 44,049 54,505
-------- -------- ---------
Cash and cash equivalents, end of year................................ $44,049 $54,505 $40,453
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements
B-67
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Pegasus Communications Corporation ("Pegasus" or together with its
subsidiaries, the "Company") operates in growing segments of the media industry
and is a direct subsidiary of Pegasus Communications Holdings, Inc. ("PCH" or
the "Parent"). Pegasus' significant direct operating subsidiaries are Pegasus
Media & Communications, Inc. ("PM&C") and Digital Television Services, Inc.
("DTS").
PM&C's subsidiaries provide direct broadcast satellite television
("DBS") services to customers in certain rural areas of the United States; own
and/or program broadcast television ("Broadcast" or "TV") stations affiliated
with the Fox Broadcasting Company ("Fox"), United Paramount Network ("UPN") and
The WB Television Network ("WB"); and own and operate a cable television
("Cable") system that provides service to individual and commercial subscribers
in Puerto Rico. DTS and its subsidiaries provide DBS services to customers in
certain rural areas of the United States.
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The accompanying consolidated financial statements include the accounts
of Pegasus and all of its subsidiaries. All intercompany transactions and
balances have been eliminated. Certain amounts for 1997 and 1998 have been
reclassified for comparative purposes.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and the disclosure of contingencies. Actual results could differ
from those estimates. Significant estimates relate to barter transactions and
the useful lives and recoverability of intangible assets.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid investments purchased
with an initial maturity of three months or less. The Company has cash balances
in excess of the federally insured limits at various banks.
Restricted Cash:
The Company had restricted cash held in escrow of approximately $21.5
million and $2.4 million at December 31, 1998 and 1999, respectively. At
December 31, 1998, $18.9 million was to fund interest payments on the DTS Notes,
$1.6 million was to collateralize certain outstanding loans and $1.0 million was
held in escrow for the purchase of a cable system serving Aguadilla, Puerto
Rico. At December 31, 1999, $2.4 million is to collateralize certain outstanding
loans.
Inventories:
Inventories consist of equipment held for resale to customers and
installation supplies. Inventories are stated at the lower of cost or market on
a first-in, first-out basis.
Long-Lived Assets:
The Company's assets are reviewed for impairment whenever events or
circumstances provide evidence which suggest the carrying amounts may not be
recoverable. The Company assesses the recoverability of its assets by
determining whether the depreciation or amortization of the respective asset
balance can be recovered through projected undiscounted future cash flows. To
date, no such impairments have occurred.
Property and Equipment:
Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets fully depreciated, sold, retired or otherwise
disposed of are removed from the respective accounts and any resulting gains or
losses are included in the
B-68
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies: -- (Continued)
statement of operations. For cable television systems, initial subscriber
installation costs including material, labor and overhead costs of the hookup
are capitalized as part of the distribution facilities. The costs of
disconnection and reconnection are charged to expense. Satellite equipment that
is leased to customers is stated at cost.
Depreciation is computed for financial reporting purposes using the
straight-line method based upon the following lives:
Reception and distribution facilities........... 7 to 11 years
Transmitter equipment........................... 5 to 10 years
Equipment, furniture and fixtures............... 5 to 10 years
Building and improvements....................... 12 to 39 years
Vehicles and other equipment.................... 3 to 5 years
Intangible Assets:
Intangible assets are stated at cost. The cost and related accumulated
amortization of assets fully amortized, sold, retired or otherwise disposed of
are removed from the respective accounts and any resulting gains or losses are
included in the statement of operations. Costs of successful franchise
applications are capitalized and amortized over the lives of the related
franchise agreements, while unsuccessful franchise applications and abandoned
franchises are charged to expense. Financing costs incurred in obtaining
long-term financing are amortized over the term of the applicable loan.
Amortization of intangible assets is computed for financial reporting
purposes using the straight-line method based upon the following lives:
Network affiliation agreements.................. 40 years
Goodwill........................................ 40 years
DBS rights...................................... 10 years
Broadcast licenses.............................. 7 years
Other intangibles............................... 2 to 14 years
Revenue:
The Company operates in growing segments of the media industry: DBS and
Broadcast. The Company recognizes revenue in its DBS operations when video and
audio services are provided. The Company recognizes revenue in its Broadcast
operations when advertising spots are broadcast.
The Company obtains a portion of its TV programming through its network
affiliations with Fox, UPN and WB and also through independent producers. The
Company does not make any direct payments for this programming. Instead, the
Company retains a portion of the available advertisement spots to sell on its
own account. Barter programming revenue and the related expense are recognized
when the advertisements sold by the networks or independent producers are
broadcast. Gross barter amounts of $7.5 million, $8.1 million and $7.6 million
for 1997, 1998 and 1999, respectively, are included in Broadcast revenue and
programming expense in the accompanying consolidated statements of operations.
Advertising Costs:
Advertising costs are charged to operations in the period incurred and
totaled approximately $3.6 million, $14.0 million and $23.3 million for the
years ended December 31, 1997, 1998 and 1999, respectively.
B-69
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies: -- (Continued)
Program Rights:
The Company enters into agreements to show motion pictures and
syndicated programs on television. The Company records the right and associated
liabilities for those films and programs when they are currently available for
showing. These rights are recorded at the lower of unamortized cost or estimated
net realizable value and are amortized on the straight-line method over the
license period, which approximates amortization based on the estimated number of
showings during the contract period. Amortization of $1.7 million, $2.4 million
and $3.7 million is included in Broadcast programming expense for the years
ended December 31, 1997, 1998 and 1999, respectively. The obligations arising
from the acquisition of film rights are recorded at the gross amount. Payments
for the contracts are made pursuant to the contractual terms over periods which
are generally shorter than the license periods.
Income Taxes:
The Company accounts for income taxes utilizing the asset and liability
approach, whereby deferred tax assets and liabilities are recorded for the tax
effect of differences between the financial statement carrying values and tax
bases of assets and liabilities. A valuation allowance is recorded for deferred
taxes where it appears more likely than not that the Company will not be able to
recover the deferred tax asset. MCT Cablevision, LP, a subsidiary of the
Company, is treated as a partnership for federal and state income tax purposes
but taxed as a corporation for Puerto Rico income tax purposes.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables, cash and
cash equivalents.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base and their dispersion across different businesses and geographic regions. As
of December 31, 1998 and 1999, the Company had no other significant
concentrations of credit risk.
Reliance on DIRECTV:
A substantial portion of the Company's business is derived from
providing DBS services as an independent DIRECTV(R) ("DIRECTV") provider.
Because the Company is a distributor of DIRECTV services, the Company may be
adversely affected by any material adverse changes in the assets, financial
condition, programming, technological capabilities or services of DIRECTV or its
parent, Hughes Electronics Corporation ("Hughes").
New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). As a result of the
subsequent issuance of SFAS No. 137 in July 1999, SFAS No. 133 is now effective
for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. The Company does not expect the adoption of SFAS No. 133 to have a
material effect on our business, financial position or results of operations.
B-70
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Property and Equipment:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Reception and distribution facilities.................................. $20,713 $32,179
Transmitter equipment.................................................. 17,728 16,940
Equipment, furniture and fixtures...................................... 8,530 12,491
Building and improvements.............................................. 3,410 7,951
Land................................................................... 1,229 1,618
Vehicles............................................................... 1,112 2,122
Other equipment........................................................ 5,894 3,500
------- -------
58,616 76,801
Accumulated depreciation............................................... (24,549) (32,386)
------- -------
Net property and equipment............................................. $34,067 $44,415
======= =======
</TABLE>
Depreciation expense amounted to $5.7 million, $6.2 million and $7.9
million for the years ended December 31, 1997, 1998 and 1999, respectively.
4. Intangibles:
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
DBS rights.................................................................... $712,232 $793,040
Deferred financing costs...................................................... 33,763 32,927
Franchise costs............................................................... 31,158 71,657
Goodwill...................................................................... 28,033 28,033
Broadcast licenses and affiliation agreements................................. 19,062 20,436
Consultancy and non-compete agreements........................................ 7,023 7,964
Other deferred costs.......................................................... 13,121 16,873
-------- --------
844,392 970,930
Accumulated amortization...................................................... (114,986) (210,293)
-------- --------
Net intangible assets......................................................... $729,406 $760,637
======== ========
</TABLE>
Amortization expense amounted to $22.1 million, $64.5 million and $90.1
million for the years ended December 31, 1997, 1998 and 1999, respectively.
5. Equity Investment in Affiliate:
Pegasus Development Corporation ("PDC"), a subsidiary of Pegasus, has a
93% investment in Pegasus PCS Partners, LP ("PCS") which is accounted for by the
equity method. PCS, a jointly owned limited partnership, acquires, owns,
controls and manages wireless licenses. Pegasus PCS, Inc. is the sole general
partner of PCS and is controlled by Marshall W. Pagon, the Company's President
and Chief Executive Officer. PDC's share of undistributed losses of PCS included
in continuing operations was a loss of $201,000 for 1999. PDC's total investment
in PCS at December 31, 1999 was $4.6 million.
B-71
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Common Stock:
In March 1999, Pegasus completed a secondary public offering in which
it sold approximately 3.6 million shares of its Class A Common Stock to the
public at a price of $22 per share, resulting in net proceeds to the Company of
$74.9 million.
On June 21, 1999, the Company amended Pegasus' Certificate of
Incorporation, increasing the number of authorized shares of Class A Common
Stock from 30.0 million to 50.0 million and authorizing 20.0 million shares of
Non-Voting Common Stock, par value $0.01 per share.
During 1999, the Company repurchased 4,253 shares of its Class A Common
Stock for $186,822. The shares, which are held in treasury, were surrendered by
employees to satisfy withholding obligations under the Company's restricted
stock plan. The Company applies the cost method in accounting for treasury
stock.
As of December 31, 1998 and 1999, the Company had three classes of
Common Stock: Class A Common Stock, Class B Common Stock and Non-Voting Common
Stock. Holders of Class A Common Stock and Class B Common Stock are entitled to
one vote per share and ten votes per share, respectively.
The Company's ability to pay dividends on its Common Stock is subject
to certain restrictions.
7. Preferred Stock:
As of December 31, 1998 and 1999, the Company had 5.0 million shares of
Preferred Stock authorized of which 126,978 and 143,684 shares have been
designated as 12.75% Series A Cumulative Exchangeable Preferred Stock (the
"Series A Preferred Stock").
The Company had approximately 119,369 and 135,073 shares of Series A
Preferred Stock issued and outstanding at December 31, 1998 and 1999,
respectively. In December, 1999 the Board of Directors declared a dividend on
the Series A Preferred Stock in the aggregate of approximately 8,611 shares of
Series A Preferred Stock, payable on January 1, 2000. Each whole share of Series
A Preferred Stock has a liquidation preference of $1,000 per share (the
"Liquidation Preference"). Cumulative dividends, at a rate of 12.75% are payable
semi-annually on January 1 and July 1. Dividends may be paid, occurring on or
prior to January 1, 2002, at the option of the Company, either in cash or by the
issuance of additional shares of Series A Preferred Stock. Subject to certain
conditions, the Series A Preferred Stock is exchangeable in whole, but not in
part, at the option of the Company, for Pegasus' 12.75% Senior Subordinated
Exchange Notes due 2007 (the "Exchange Notes"). The Exchange Notes would contain
substantially the same redemption provisions, restrictions and other terms as
the Series A Preferred Stock. Pegasus is required to redeem all of the Series A
Preferred Stock outstanding on January 1, 2007 at a redemption price equal to
the Liquidation Preference thereof, plus accrued dividends.
The carrying amount of the Series A Preferred Stock is periodically
increased by amounts representing dividends not currently declared or paid but
which will be payable under the mandatory redemption features. The increase in
carrying amount is effected by charges against retained earnings, or in the
absence of retained earnings, by charges against paid-in capital.
Under the terms of the Series A Preferred Stock, Pegasus' ability to
pay dividends on its Common Stock is subject to certain restrictions.
B-72
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Long-Term Debt:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Series B Senior Notes payable by Pegasus, due 2005, interest at 9.625%,
payable semi-annually in arrears on April 15 and October 15.......................... $115,000 $115,000
Series B Senior Notes payable by Pegasus, due 2006, interest at 9.75%,
payable semi-annually in arrears on June 1 and December 1............................ 100,000 100,000
Series A Senior Notes payable by Pegasus, due 2007, interest at 12.5%,
payable semi-annually in arrears on February 1 and August 1.......................... -- 155,000
Senior six-year $180.0 million revolving credit facility, payable by PM&C,
interest at PM&C's option at either the bank's base rate plus an applicable
margin or LIBOR plus an applicable margin (8.25% at
December 31, 1999)................................................................... 27,500 142,500
Senior six-year $70.0 million revolving credit facility, payable by DTS,
interest at DTS' option at either the bank's base rate plus an applicable
margin or the Eurodollar Rate plus an applicable margin (10.04% at
December 31, 1999)................................................................... 26,800 42,700
Senior six-year $20.0 million term loan facility, payable by DTS, interest at
DTS' option at either the bank's base rate plus an applicable margin or the
Eurodollar Rate plus an applicable margin (10.75% at December 31,
1999)................................................................................ 19,600 19,000
Series B Notes payable by PM&C, due 2005, interest at 12.5%, payable
semi-annually in arrears on January 1 and July 1, net of unamortized discount
of $2.6 million and $2.2 million as of December 31, 1998 and
1999, respectively................................................................... 82,378 82,776
Series B Notes payable by DTS, due 2007, interest at 12.5%, payable
semi-annually in arrears on February 1 and August 1, net of unamortized
discount of $1.8 million as of December 31, 1998..................................... 153,215 --
Mortgage payable, due 2000, interest at 8.75%.......................................... 455 431
Sellers' notes, due 2000 to 2005, interest at 3% to 8%................................. 33,538 26,648
Capital leases and other............................................................... 543 359
-------- --------
559,029 684,414
Less current maturities................................................................ 14,399 15,488
-------- --------
Long-term debt......................................................................... $544,629 $668,926
======== ========
</TABLE>
Certain of the Company's sellers' notes are collateralized by stand-by
letters of credit issued pursuant to the PM&C Credit Facility and the DTS Credit
Facility.
DTS maintains a $70.0 million senior revolving credit facility and a
$20.0 million senior term credit facility (collectively, the "DTS Credit
Facility") which expires in 2003 and is collateralized by substantially all of
the assets of DTS and its subsidiaries. The DTS Credit Facility is subject to
certain financial covenants as defined in the loan agreement, including a debt
to adjusted cash flow covenant. As of December 31, 1999, $10.4 million of
stand-by letters of credit were issued pursuant to the DTS Credit Facility,
including $2.6 million collateralizing certain of the Company's outstanding
sellers' notes.
PM&C maintains a $180.0 million senior revolving credit facility (the
"PM&C Credit Facility") which expires in 2003 and is collateralized by
substantially all of the assets of PM&C and its subsidiaries. The PM&C Credit
Facility is subject to certain financial covenants as defined in the loan
agreement, including a debt to adjusted cash flow covenant.
B-73
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Long-Term Debt: -- (Continued)
In November 1998, Pegasus completed an offering of senior notes (the
"9.75% Senior Notes Offering") in which it sold $100.0 million of its 9.75%
Series A Senior Notes due 2006 (the "9.75% Series A Notes"), resulting in net
proceeds to the Company of approximately $96.8 million. $64.0 million of the net
proceeds from the 9.75% Senior Notes Offering were used to repay a portion of
the outstanding indebtedness under the PM&C Credit Facility.
In November 1999, Pegasus exchanged its 12.5% Series A senior notes due
2007 (the "12.5% Series A Notes") for DTS' outstanding 12.5% Series B senior
subordinated notes due 2007 (the "DTS Series B Notes"), of which $155.0 million
in principal amount at maturity were outstanding (the "DTS Exchange Offer"). The
12.5% Series A Notes have substantially the same terms and provisions as the DTS
Series B Notes. Deferred financing fees related to the DTS Series B Notes were
written off, resulting in an extraordinary loss of approximately $6.2 million on
the refinancing transaction.
In December 1999, Pegasus entered into a $35.5 million interim letter
of credit facility (the "PCC Credit Facility"). As of December 31, 1999, $35.5
million of stand-by letters of credit were issued pursuant to the PCC Credit
Facility, including $19.5 million collateralizing certain of the Company's
outstanding sellers' notes.
The Company's publicly held notes may be redeemed, at the option of the
Company, in whole or in part, at various points in time after July 1, 2000 at
the redemption prices specified in the indentures governing the respective
notes, plus accrued and unpaid interest thereon.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company to incur additional
indebtedness, create liens and to pay dividends.
At December 31, 1999, maturities of long-term debt and capital leases
are as follows (in thousands):
2000................ $ 15,488
2001................ 9,752
2002................ 3,550
2003................ 59,848
2004................ 142,800
Thereafter.......... 452,976
--------
$684,414
========
9. Earnings Per Common Share:
Calculation of basic and diluted earnings per common share:
The following table sets forth the computation of the number of shares
used in the computation of basic and diluted earnings per common share (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Net loss applicable to common shares.............................. ($31,487) ($93,881) ($201,519)
-------- -------- ---------
Weighted average common shares outstanding........................ 9,858 14,130 18,875
-------- -------- ---------
Total shares used for calculation of basic earnings per
common share.................................................... 9,858 14,130 18,875
Stock options..................................................... -- -- --
-------- -------- ---------
Total shares used for calculation of diluted earnings
per common share................................................ 9,858 14,130 18,875
-------- -------- ---------
</TABLE>
Basic earnings per share amounts are based on net loss after deducting
preferred stock dividend requirements divided by the weighted average number of
Class A, Class B and Non-Voting Common Stock outstanding during the year.
B-74
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Earnings Per Common Share: -- (Continued)
For the years ended December 31, 1997, 1998 and 1999, net loss per
common share was determined by dividing net loss, as adjusted by the aggregate
amount of dividends on the Company's Series A Preferred Stock, approximately
$12.2 million, $14.8 million and $16.7 million, respectively, by applicable
shares outstanding.
Securities that have not been issued and are antidilutive amounted to
approximately 582,000 shares in 1997, 1.3 million shares in 1998 and 1.8 million
shares in 1999.
10. Leases:
The Company leases certain studios, towers, utility pole attachments,
and occupancy of underground conduits and headend sites under operating leases.
The Company also leases office space, vehicles and various types of equipment
through separate operating lease agreements. The operating leases expire at
various dates through 2004. Rent expense for the years ended December 31, 1997,
1998 and 1999 was $1.1 million, $1.6 million and $2.3 million, respectively. The
Company leases equipment under long-term leases and has the option to purchase
the equipment for a nominal cost at the termination of the leases. The related
obligations are included in long-term debt. Property and equipment at December
31 include the following amounts for leases that have been capitalized (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Equipment, furniture and fixtures.................................. $662 $320
Vehicles........................................................... 541 422
---- ----
1,203 742
Accumulated depreciation........................................... (562) (322)
----- ----
Total........................................................... $641 $420
==== ====
</TABLE>
Future minimum lease payments on noncancellable operating and capital
leases at December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
2000.................................................................. $1,899 $192
2001.................................................................. 1,629 153
2002.................................................................. 1,108 58
2003.................................................................. 682 2
2004.................................................................. 609 --
Thereafter............................................................ 15 --
------ ----
Total minimum payments................................................ $5,942 405
======
Less: amount representing interest.................................... 46
----
Present value of net minimum lease payments including current
maturities of $161.................................................... $359
====
</TABLE>
B-75
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. Income Taxes:
The following is a summary of the components of income taxes from
continuing operations (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal -- deferred................................... ($1,071) ($9,388)
State and local -- current............................ $168 170 496
---- ------- -------
Provision (benefit) for income taxes......... $168 ($901) ($8,892)
==== ======= =======
</TABLE>
The deferred income tax assets and liabilities recorded in the
consolidated balance sheets at December 31, 1998 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Assets:
Receivables........................................................ $216 $536
Excess of tax basis over book basis from tax gain recognized
upon incorporation of subsidiaries............................... 2,112 --
Loss carryforwards................................................. 56,700 125,856
Other.............................................................. 973 --
-------- --------
Total deferred tax assets...................................... 60,001 126,392
-------- --------
Liabilities:
Excess of book basis over tax basis of property, plant and
equipment........................................................ 1,907 4,383
Excess of book basis over tax basis of amortizable intangible
assets........................................................ 78,765 85,927
-------- --------
Total deferred tax liabilities..................................... 80,672 90,310
-------- --------
Net deferred tax assets (liabilities)....................................... (20,671) 36,082
-------- --------
Valuation allowance............................................... (48,121) (95,485)
-------- --------
Net deferred tax liabilities................................................ ($68,792) ($59,403)
======== ========
</TABLE>
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the expiration of
the Company's net operating loss carryforwards and portions of other deferred
tax assets related to prior acquisitions. The valuation allowance increased
primarily as the result of net operating loss carryforwards generated during
1999, which may not be utilized.
At December 31, 1999, the Company has net operating loss carryforwards
of approximately $331.2 million which are available to offset future taxable
income and expire through 2018.
A reconciliation of the Federal statutory rate to the effective tax
rate is as follows:
1997 1998 1999
---- ---- ----
U.S. statutory federal income tax rate...... 34.00% 35.00% 35.00%
Valuation allowance......................... (34.38) (34.40) (30.24)
Other....................................... 1.43 0.70 --
------ ------ ------
Effective tax rate......................... 1.05% 1.30% 4.76%
====== ====== ======
B-76
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. Supplemental Cash Flow Information:
Significant noncash investing and financing activities are as follows
(in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Barter revenue and related expense............................................... $7,520 $8,078 $7,598
Acquisition of program rights and assumption of related
program payables............................................................... 3,453 4,630 7,205
Acquisition of plant under capital leases........................................ 529 37 --
Capital contribution and related acquisition of intangibles...................... 15,198 123,241 1,364
Minority interest and related acquisition of intangibles......................... 3,000 -- --
Notes payable and related acquisition of intangibles............................. 7,114 219,889 6,467
Series A Preferred Stock dividend and reduction of paid-in
capital........................................................................ 12,215 14,763 16,706
Deferred taxes, net and related acquisition of intangibles....................... -- 82,934 29
</TABLE>
For the years ended December 31, 1997, 1998 and 1999 the Company paid
cash for interest in the amount of $13.5 million, $35.3 million and $70.8
million, respectively. The Company paid no federal income taxes for the years
ended December 31, 1997, 1998 and 1999.
13. Acquisitions:
In 1998, the Company acquired (exclusive of the acquisition of DTS),
from 26 independent DIRECTV providers, the rights to provide DIRECTV programming
in certain rural areas of the United States and the related assets in exchange
for total consideration of approximately $132.1 million, which consisted of
$109.3 million in cash, 37,304 shares of the Company's Class A Common Stock
(amounting to $900,000), warrants to purchase a total of 25,000 shares of the
Company's Class A Common Stock (amounting to $222,000), $20.4 million in
promissory notes and $1.3 million in assumed net liabilities.
On April 27, 1998, the Company acquired DTS, which holds the rights to
provide DIRECTV programming in certain rural areas of eleven states, in exchange
for total consideration of approximately $363.9 million, which consisted of
approximately 5.5 million shares of the Company's Class A Common Stock
(amounting to $118.8 million), options and warrants to purchase a total of
224,038 shares of the Company's Class A Common Stock (amounting to $3.3
million), approximately $158.9 million in assumed net liabilities and
approximately $82.9 million of a deferred tax liability.
In 1999, the Company acquired, from fifteen independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
the United States and the related assets in exchange for total consideration of
approximately $79.5 million, which consisted of $64.6 million in cash, 12,339
shares of PCC's Class A Common Stock (amounting to $550,000), warrants to
purchase a total of 25,000 shares of PCC's Class A Common Stock (amounting to
$814,000), $6.5 million in promissory notes, $6.7 million in accrued expenses
and $365,000 in assumed net liabilities.
The Company's 1999 acquisitions of rights to provide DIRECTV
programming were not significant, and accordingly, the pro forma impact of those
acquisitions has not been presented. Unaudited pro forma net revenues from
continuing operations, unaudited net loss and unaudited net loss applicable to
common shares for the year ended December 31, 1998 approximated $225.8 million,
$124.9 million and $149.0 million, respectively. This unaudited pro forma
information reflects the Company's 1998 acquisitions of rights to provide
DIRECTV programming and the disposition of the Cable segment as if each such DBS
territory and the Cable segment had been acquired or sold as of the beginning of
1998 and includes the impact of certain adjustments, such as the depreciation of
fixed assets, amortization of intangibles, interest expense, preferred stock
dividends and related income tax effects. This information does not purport to
be indicative of what would have occurred had the acquisitions/disposition been
made on that date or of results which may occur in the future.
14. Discontinued Operations:
Effective January 31, 1997, the Company sold substantially all the
assets of its New Hampshire cable system for approximately $6.9 million in cash,
net of certain selling costs and recognized a gain on the transaction of
approximately $4.5 million.
Effective July 1, 1998, the Company sold substantially all the assets
of its remaining New England cable systems for approximately $30.1 million in
cash and recognized a gain on the transaction of approximately $24.7 million.
B-77
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
14. Discontinued Operations: -- (Continued)
Effective March 31, 1999, the Company purchased a cable system serving
Aguadilla, Puerto Rico and neighboring communities for approximately $42.1
million in cash. The Aguadilla cable system is contiguous to the Company's other
Puerto Rico cable system and the Company has consolidated the Aguadilla cable
system with its existing cable system.
On January, 10, 2000, the Company entered into a letter of intent to
sell its remaining Cable operations for $170.0 million in cash, subject to
certain adjustments. The Company anticipates closing this sale during the third
quarter of 2000. Accordingly, the results of operations from the entire Cable
segment have been classified as discontinued with prior years restated.
Net revenues and income from discontinued operations were as follows
(in thousands):
Years Ended December 31,
------------------------
(unaudited)
1997 1998 1999
---- ---- ----
Net revenues.............................. $16,688 $13,767 $21,158
Income from operations.................... 2,077 648 2,110
Provision for income taxes................ 32 5 --
Income from discontinued operations....... 257 1,047 2,128
Gain on sale of discontinued operations... 4,451 24,727 --
15. Financial Instruments:
The carrying values and fair values of the Company's financial
instruments at December 31, 1999 consisted of (in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Long-term debt, including current portion .... $559,029 $583,460 $684,414 $707,988
Series A Preferred Stock...................... 126,028 126,978 142,734 149,871
</TABLE>
Long-term debt: The fair value of long-term debt is estimated based on
the quoted market price for the same or similar instruments.
Series A Preferred Stock: The fair value of Series A Preferred Stock is
estimated based on the quoted market price for the same or similar instruments.
All other financial instruments are stated at cost which approximates
fair market value.
16. Warrants:
In 1998, in connection with the acquisition of DBS properties, the
Company issued warrants to purchase approximately 182,000 shares of Class A
Common Stock at exercise prices between $14.64 and $24.26 per share. These
warrants are exercisable through October 10, 2007. At December 31, 1999,
warrants to purchase approximately 119,000 shares of Class A Common Stock have
been exercised. The fair value of the warrants issued was estimated using the
Black-Scholes pricing model and was approximately $2.7 million. The value
assigned to these warrants increased the carrying amount of the DBS rights
acquired and was effected by an increase in paid-in-capital.
In 1999, in connection with the acquisition of DBS properties, the
Company issued warrants to purchase 25,000 shares of Class A Common Stock at an
exercise price of $24.18 per share. These warrants are exercisable through April
13, 2004. At December 31, 1999, none of these warrants had been exercised. The
fair value of the warrants issued was estimated using the Black-Scholes pricing
model and was approximately $814,000. The value assigned to these warrants
increased the carrying amount of the DBS rights acquired and was effected by an
increase in paid-in-capital.
B-78
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
17. Employee Benefit Plans:
The Company has two active stock plans available to grant stock options
(the "Stock Option Plan") and restricted stock awards (the "Restricted Stock
Plan") to eligible employees, executive officers and non-employee directors of
the Company. The Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
stock plans. The Company has adopted the disclosure-only provisions of SFAS No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123").
Stock Option Plan
The Stock Option Plan provides for the granting of nonqualified and
qualified options to purchase a maximum of 1,300,000 shares (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus) of Class A Common Stock of the
Company. The Stock Option Plan terminates in September 2006. As of December 31,
1999, options to purchase an aggregate of approximately 1.3 million shares of
Class A Common Stock at exercise prices between $11.00 and $80.88 were
outstanding. All options granted under the Stock Option Plan have been granted
at fair market value at the time of grant.
The following table summarizes information about the Company's stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Weighted Exercisable Weighted
Range of at 12/31/99 Average at12/31/99 Average
Exercise Price (in thousands) Exercise Price (in thousands) Exercise Price
-------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
11-$19 242 $11.37 124 $11.66
20-29 338 22.51 186 22.87
30-39 372 39.48 25 39.50
40-49 50 42.32 -- --
80-81 315 80.88 -- --
------- ----- ------ --- ------
$11-$81 1,317 $39.97 335 $19.97
======= ===== ====== === ======
</TABLE>
Under SFAS 123, companies can either continue to account for stock
compensation plans pursuant to existing accounting standards or elect to expense
the value derived from using an option pricing model. The Company is continuing
to apply existing accounting standards. However, SFAS 123 requires disclosures
of pro forma net income and earnings per share as if the Company had adopted the
expensing provisions of SFAS 123.
The fair value of options was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions for 1997, 1998 and
1999:
1997 1998 1999
---- ---- ----
Risk-free interest rate.................... 6.35% 5.11% 5.56%
Dividend Yield............................. 0.00% 0.00% 0.00%
Volatility Factor.......................... 0.403 0.479 0.536
Weighted average expected life.............5 years 4.5 years 4.4 years
Pro forma net losses for 1997, 1998 and 1999 would have been $31.7
million, $94.7 million and $205.2 million, respectively; pro forma net losses
per common share for 1997, 1998 and 1999 would have been $3.22, $6.70 and
$10.87, respectively. The weighted average fair value of options granted were
$4.99, $11.19 and $26.74 for 1997, 1998 and 1999, respectively.
B-79
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
17. Employee Benefit Plans: -- (Continued)
The following table summarizes stock option activity over the past
three years:
Weighted
Number of Average
Shares Exercise Price
------ --------------
Outstanding at January 1, 1997.............. 3,385 $14.00
Granted..................................... 220,000 11.00
--------- ------
Outstanding at December 31, 1997............ 223,385 11.05
Granted..................................... 418,842 21.23
--------- ------
Outstanding at December 31, 1998............ 642,227 17.69
Granted..................................... 797,346 55.58
Exercised................................... (83,577) 18.99
Canceled or expired......................... (38,667) 37.09
--------- ------
Outstanding at December 31, 1999............1,317,329 $39.97
========= ======
Options exercisable at December 31, 1997.... 3,385 $14.00
Options exercisable at December 31, 1998.... 143,7281 15.09
Options exercisable at December 31, 1999.... 334,8071 19.97
Restricted Stock Plan
The Restricted Stock Plan provides for the granting of four types of
restricted stock awards representing a maximum of 350,000 shares (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus) of Class A Common Stock of the
Company to eligible employees who have completed at least one year of service.
Restricted stock received under the Restricted Stock Plan vests based on years
of service with the Company and are fully vested for employees who have four
years of service with the Company, with the exception of special recognition
awards which are fully vested on the date of grant. The Restricted Stock Plan
terminates in September 2006. As of December 31, 1999, approximately 184,000
shares of Class A Common Stock had been granted under the Restricted Stock Plan.
The expense for this plan amounted to $823,000, $763,000 and $819,000 in 1997,
1998 and 1999, respectively.
401(k) Plans
Substantially all Company employees who, as of the enrollment date
under the 401(k) plans, have completed at least one year of service with the
Company are eligible to participate in one of the 401(k) plans. Participants may
make salary deferral contributions of 2% to 6% of their salary to the 401(k)
plans.
The Company may make three types of contributions to the 401(k) plans,
each allocable to a participant's account if the participant completes at least
1,000 hours of service in the applicable plan year, and is employed on the last
day of the applicable plan year. Discretionary Company contributions and Company
matches of employee salary deferral contributions and rollover contributions are
made in the form of Class A Common Stock, or in cash used to purchase Class A
Common Stock. The Company has authorized and reserved for issuance up to 205,000
shares of Class A Common Stock in connection with the 401(k) plans. Company
contributions to the 401(k) plans are subject to limitations under applicable
laws and regulations. All employee contributions to the 401(k) plans are fully
vested at all times and all Company contributions, if any, vest based on years
of service with the Company and are fully vested for employees who have four
years of service with the Company. A participant also becomes fully vested in
Company contributions to the 401(k) plans upon attaining age 65 or upon his or
her death or disability. The expense for these plans amounted to $451,000,
$689,000 and $1.2 million in 1997, 1998 and 1999, respectively.
B-80
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
18. Commitments and Contingent Liabilities:
Legal Matters:
The Company has been sued in Indiana for allegedly charging DBS
subscribers excessive fees for late payments. The plaintiffs, who purport to
represent a class consisting of residential DIRECTV customers in Indiana, seek
unspecified damages for the purported class and modification of the Company's
late-fee policy. The Company is advised that similar suits have been brought
against DIRECTV and various cable operators in other parts of the United States.
From time to time the Company is involved with claims that arise in the
normal course of business.
In the opinion of management, the ultimate liability with respect to
the aforementioned claims and matters will not have a material adverse effect on
the consolidated operations, liquidity, cash flows or financial position of the
Company.
The Company is a rural affiliate of the National Rural
Telecommunications Cooperative ("NRTC"). The NRTC is a cooperative organization
whose members and affiliates are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the United
States. The Company's ability to distribute DIRECTV programming services is
dependent upon agreements between the NRTC and Hughes and between the Company
and the NRTC.
On June 3, 1999, the NRTC filed a lawsuit in federal court 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
responded to the NRTC's continuing lawsuit by rejecting the NRTC's claims to
exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the NRTC. In
particular, DIRECTV contends in its counterclaim that the term of DIRECTV's
contract with the NRTC is measured solely by the orbital life of DBS-1, the
first DIRECTV satellite launched into orbit at the 101o W orbital location,
without regard to the orbital lives of the other DIRECTV satellites at the 101o
W orbital location. DIRECTV also alleges in its counterclaim that the NRTC's
right of first refusal, which is effective at the end of the term of DIRECTV's
contract with the NRTC, does not provide for certain programming and other
rights comparable to those now provided under the contract.
On August 26, 1999, the NRTC filed a separate lawsuit in federal court
against DIRECTV claiming that DIRECTV has 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 September 9, 1999, the
NRTC filed a response to DIRECTV's counterclaim contesting DIRECTV's
interpretations of the end of term and right of first refusal provisions.
On January 10, 2000, the Company and Golden Sky Systems, Inc. ("Golden
Sky", a subsidiary of Golden Sky Holdings, Inc.) filed a lawsuit in federal
court against DIRECTV which contains causes of action for various torts, common
counts and declaratory relief based on DIRECTV's failure to provide the NRTC
with premium programming, thereby preventing the NRTC from providing this
programming to the Company and Golden Sky. The claims are also based on
DIRECTV's position with respect to launch fees and other benefits, term and
rights of first refusal. The complaint seeks monetary damages and a court order
regarding the rights of the NRTC and its members and affiliates.
Management is not currently able to predict the outcome of the DIRECTV
litigation matters or the effect such outcome will have on the consolidated
operations, liquidity, cash flows or financial position of the Company.
Commitments:
The Company has entered into a multi-year agreement with a provider of
integrated marketing, information and transaction services to provide customer
relationship management services which will significantly increase the Company's
existing call center
B-81
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
18. Commitments and Contingent Liabilities: (Continued)
capacity. The initial term of the agreement ends on December 31, 2004. Beginning
January 1, 2000, the Company must pay minimum fees to the provider as follows
(in thousands):
Annual
Minimum
Year Fees
---- ----
2000............................ $12,600
2001............................ 18,216
2002............................ 20,250
2003............................ 20,250
2004............................ 20,250
-------
Total minimum payments........................ $91,566
=======
Program Rights:
The Company has entered into agreements totaling $7.4 million as of
December 31, 1999 for film rights and programs that are not yet available for
showing at December 31, 1999, and accordingly, are not recorded by the Company.
At December 31, 1999, the Company has commitments for future program rights of
approximately $3.3 million, $1.4 million, $214,000 and $87,000 in 2000, 2001,
2002 and 2003.
19. Related Party Transactions:
The Company entered into an arrangement in 1998 with W.W. Keen Butcher
(the stepfather of Marshall W. Pagon, the Company's President and Chief
Executive Officer, and Nicholas A. Pagon, a Vice President of Pegasus), certain
entities controlled by him (the "KB Companies") and the owner of a minority
interest in one of the KB Companies, under which the Company agreed to provide
and maintain collateral for up to $4.0 million in principal amount of bank loans
to Mr. Butcher and the minority owner. The agreement was recently amended to
increase the amount of collateral that the Company will maintain for such loans
to up to $8.0 million. Mr. Butcher and the minority owner must lend or
contribute the proceeds of those bank loans to one or more of the KB Companies
for the acquisition of television broadcast stations to be operated by the
Company pursuant to local marketing agreements. As of December 31, 1998 and
1999, the Company had provided collateral of $1.6 million and $2.4 million
pursuant to this arrangement, respectively, which is included as restricted cash
on the Company's consolidated balance sheets.
William P. Phoenix, a director of Pegasus since June 1998, is a
managing director of CIBC World Markets Corporation ("CIBC"). CIBC and its
affiliates have provided various services to the Company since the beginning of
1997, including serving as one of the initial purchasers in the 9.75% Senior
Notes Offering, providing a fair market value appraisal in connection with the
contribution to Pegasus of certain assets between related parties, providing
fairness opinions in connection with an acquisition and certain intercompany
transactions, acting as a standby purchaser in connection with DTS' offer to
repurchase the DTS Notes as a result of the change of control arising by
Pegasus' acquisition of DTS, acting as a dealer manager in connection with the
DTS Exchange Offer, issuing letters of credit pursuant to the PCC Credit
Facility and acting as an Administrative Agent in connection with the DTS Credit
Facility. Total fees and expenses were approximately $3.3 million and $940,000
for the years ended December 31, 1998 and 1999, respectively.
In 1999, Pegasus loaned $199,999 to Nicholas A. Pagon, Pegasus' Vice
President of Broadcast Operations, bearing interest at the rate of 6% per annum,
with the principal amount due on the fifth anniversary of the date of the
promissory note. Mr. Pagon is required to use half of the proceeds of the loan
to purchase shares of Class A Common Stock, and the loan is collateralized by
those shares. The balance of the loan proceeds may be used at Mr. Pagon's
discretion.
20. Industry Segments:
The Company operates in growing segments of the media industry: DBS and
Broadcast. DBS consists of providing direct broadcast satellite television
services to customers in certain rural areas of 36 states. Broadcast consists of
ten television stations affiliated with Fox, UPN and the WB and two transmitting
towers, all located in the eastern United States.
B-82
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
20. Industry Segments: (Continued)
All of the Company's revenues are derived from external customers.
Capital expenditures for the Company's DBS segment were $506,000, $2.0 million
and $3.6 million for 1997, 1998 and 1999, respectively. Capital expenditures for
the Company's Broadcast segment were $6.4 million, $6.8 million and $4.1 million
for 1997, 1998 and 1999, respectively. Capital expenditures for the Company's
discontinued Cable segment were $2.9 million, $2.0 million and $5.6 million for
1997, 1998 and 1999, respectively. All other capital expenditures for 1997, 1998
and 1999 were at the corporate level. Identifiable total assets for the
Company's DBS segment were $715.6 million and $701.9 million as of December 31,
1998 and 1999, respectively. Identifiable total assets for the Company's
Broadcast segment were $67.1 million and $70.6 million as of December 31, 1998
and 1999, respectively. Identifiable total assets for the Company's discontinued
Cable segment were $47.0 million and $86.5 million as of December 31, 1998 and
1999, respectively. All other identifiable assets as of December 31, 1998 and
1999 were at the corporate level.
21. Subsequent Events (unaudited):
In January 2000, the Company entered into a an agreement and plan of
merger to acquire Golden Sky Holdings, Inc. ("GSH"), for approximately 6.5
million shares of the Company's Class A Common Stock and the assumed net
liabilities of GSH. As of December 31, 1999, GSH's operations consisted of
providing DIRECTV services to approximately 345,200 subscribers in certain rural
areas of 24 states in which GSH holds the exclusive rights to provide such
services. Upon completion of the acquisition of GSH, GSH will become a wholly
owned subsidiary of Pegasus.
In January 2000, the Company made an investment in Personalized Media
Communications, LLC ("PMC"), an advanced communications technology company, of
approximately $111.8 million, which consisted of $14.3 million in cash, 200,000
shares of the Company's Class A Common Stock (amounting to $18.8 million) and
Pegasus' agreement, subject to certain conditions, to issue warrants to purchase
1.0 million shares of the Company's Class A Common Stock at an exercise price of
$90.00 per share and with a term of ten years. The fair value of the warrants to
be issued was estimated using the Black-Scholes pricing model and is
approximately $78.8 million. A subsidiary of PMC granted to Pegasus an exclusive
license for use of PMC's patent portfolio in the distribution of satellite
services from specified orbital locations. Mary C. Metzger, Chairman of PMC and
a member of the Company's board of directors, and John C. Harvey, Managing
Member of PMC and Ms. Metzger's husband, own a majority of and control PMC.
In January 2000, PM&C entered into a first amended and restated credit
facility, which consists of a $225.0 million senior revolving credit facility
which expires in 2004 and a $275.0 million senior term credit facility which
expires in 2005 (collectively, the "New PM&C Credit Facility"). The New PM&C
Credit Facility amends the PM&C Credit Facility, is collateralized by
substantially all of the assets of PM&C and its subsidiaries and is subject to
certain financial covenants as defined in the loan agreement, including a debt
to adjusted cash flow covenant. Borrowings under the New PM&C Credit Facility
can be used for acquisitions and general corporate purposes.
Commensurate with the closing of the New PM&C Credit Facility, the
Company borrowed $275.0 million under the term loan, outstanding balances under
the PM&C Credit Facility, the DTS Credit Facility, and the PCC Credit Facility
were repaid and commitments under the DTS Credit Facility and the PCC Credit
Facility were terminated. Additionally, in connection with the closing of the
New PM&C Credit Facility, DTS was merged with and into a subsidiary of PM&C.
In January 2000, Pegasus issued 5,707 shares of its Series B junior
convertible participating preferred stock, with a liquidation preference of
$1,000 per share plus any accrued but unpaid dividends (the "Series B Preferred
Stock"), as part of an acquisition of DIRECTV distribution rights from an
independent DIRECTV provider. Each share of Series B Preferred Stock will
initially be convertible at the option of the holder into 16.24 shares of the
Company's Class A Common Stock.
In January 2000, Pegasus completed an offering of 3,000,000 shares of
its 6.5% Series C convertible preferred stock, with a liquidation preference of
$100 per share plus any accrued but unpaid dividends (the "Series C Preferred
Stock"). Each share of Series C Preferred Stock will initially be convertible at
the option of the holder into 0.7843 shares of the Company's Class A Common
Stock. Pegasus may redeem the Series C Preferred Stock on or after August 1,
2001, subject to certain conditions, at redemption prices set forth in the
certificate of designation, plus accumulated and unpaid dividends, if any.
In February 2000, Pegasus issued 22,500 shares of its Series D junior
convertible participating preferred stock, with a liquidation preference of
$1,000 per share plus any accrued but unpaid dividends (the "Series D Preferred
Stock"), as part of an acquisition of DIRECTV distribution rights from an
independent DIRECTV provider. Each share of Series D Preferred Stock will
initially be convertible at the option of the holder into 9.77 shares of the
Company's Class A Common Stock.
B-83
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
21. Subsequent Events (unaudited): (Continued)
As of February 11, 2000, the Company acquired, from two independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of California, Indiana and Oregon and the related assets in exchange for
total consideration of approximately $35.0 million, which consisted of $11.9
million in cash, 22,500 shares of the Company's Series D Preferred Stock
(amounting to $22.5 million), $200,000 in promissory notes, payable over two
years, and $381,000 in assumed net liabilities.
22. Quarterly Information (unaudited):
The net revenues and loss from operations data provided in the tables
below are from continuing operations and therefore will not necessarily agree to
quarterly information previously reported.
<TABLE>
<CAPTION>
Quarter Ended
-------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenues....................................... $66,285 $73,740 $84,668 $98,075
Loss from operations............................... (27,218) (30,546) (39,788) (28,354)
Loss before extraordinary items.................... (45,925) (48,672) (56,432) (44,312)
Net loss applicable to common shares............... (45,925) (48,672) (56,432) (50,490)
Basic and diluted earnings per share:
Loss from operations............................... $ 1.66) $ 1.56) $ 2.02) $ 1.44)
Loss before extraordinary items.................... (2.81) (2.48) (2.86) (2.24)
Net loss........................................... (2.81) (2.48) (2.86) (2.56)
</TABLE>
For the fourth quarter of 1999, the Company had an extraordinary loss
of approximately $6.2 million or $0.32 per share in connection with the DTS
Exchange Offer.
<TABLE>
<CAPTION>
Quarter Ended
-------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenues....................................... $24,389 $42,162 $52,659 $62,243
Loss from operations............................... (7,053) (9,967) (18,993) (26,806)
Loss before extraordinary items.................... (15,936) (22,804) (10,752) (44,389)
Net loss applicable to common shares............... (15,936) (22,804) (10,752) (44,389)
Basic and diluted earnings per share:
Loss from operations .............................. $ 0.68) $ 0.70) $ 1.19) $ 1.69)
Loss before extraordinary items.................... (1.54) (1.59) (0.68) (2.79)
Net loss .......................................... (1.54) (1.59) (0.68) (2.79)
</TABLE>
The Company had no extraordinary gains or losses for the year ended
December 31, 1998.
B-84
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Pegasus
Communication Corporation and its subsidiaries is included on page F-2 of this
Form 10-K. In connection with our audits of such financial statements, we have
also audited the related financial statement schedule on page S-2 of this Form
10-K.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 11, 2000
B-85
<PAGE>
PEGASUS COMMUNCATIONS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1998 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Additions Additions Balance at
Beginning Charged To Charged To End of
Description of Period Expenses Other Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
Allowance for
Uncollectible
Accounts Receivable
Year 1997 $ 243 $ 1,142 $ -- $ 1,066(b) $ 319
Year 1998 $ 319 $ 2,851 $ 183(a) $ 2,786(b) $ 567
Year 1999 $ 567 $ 8,369 $ -- $ 7,526(b) $ 1,410
Valuation Allowance for
Deferred Tax Assets
Year 1997 $10,684 $ 7,584 $ -- $ 4,971 $13,297
Year 1998 $13,297 $41,070 $ -- $ 6,246 $48,121
Year 1999 $48,121 $69,500 $ -- $ 22,136 $95,485
</TABLE>
(a) Amount acquired as a result of the merger with Digital Television Services,
Inc.
(b) Amounts written off, net of recoveries.
B-86
<PAGE>
ANNEX C
<PAGE>
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 September 30, 2000
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from__________ to __________
Commission File Number 0-21389
------------------------------
PEGASUS COMMUNICATIONS CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 51-0374669
------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
c/o Pegasus Communications Management Company;
225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004
------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
--------------
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes_X_ No___
Number of shares of each class of the Registrant's common stock
outstanding as of November 3, 2000:
Class A, Common Stock, $0.01 par value 45,903,240
Class B, Common Stock, $0.01 par value 9,163,800
Non-Voting, Common Stock, $0.01 par value -
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
Form 10-Q
Table of Contents
For the Quarterly Period Ended September 30, 2000
Page
Part I. Financial Information
Item 1 Financial Statements 3
Condensed Consolidated Balance Sheets
December 31, 1999 and September 30, 2000 3
Consolidated Statements of Operations and
Comprehensive Loss
Three months ended September 30, 1999 and 2000 4
Consolidated Statements of Operations and
Comprehensive Loss
Nine months ended September 30, 1999 and 2000 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 25
Part II. Other Information
Item 1 Legal Proceedings 26
Item 2 Changes in Securities and Use of Proceeds 26
Item 6 Exhibits and Reports on Form 8-K 26
Signature 27
C-2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Pegasus Communications Corporation
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $40,453 $306,901
Restricted cash 2,379 7,957
Accounts receivable, net 31,984 45,000
Inventory 10,020 20,415
Program rights 4,373 4,505
Deferred taxes 536 845
Prepaid expenses and other 4,597 13,441
-------- ----------
Total current assets 94,342 399,064
Property and equipment, net 44,415 58,162
Intangible assets, net 736,806 2,253,818
Deferred financing costs, net 23,831 31,427
Program rights 5,732 5,416
Deferred taxes 30,371 23,876
Investment in affiliates 4,598 116,399
Marketable securities - 25,497
Deposits and other 5,237 16,356
-------- ----------
Total assets $945,332 $2,930,015
======== ==========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $15,488 $14,451
Current portion of program rights payable 4,446 4,727
Taxes payable - 28,000
Accounts payable 8,999 4,080
Accrued interest 11,592 21,017
Accrued satellite programming, fees and commissions 37,885 62,182
Accrued expenses 14,139 54,280
Amounts due seller 6,729 6,741
-------- ----------
Total current liabilities 99,278 195,478
Long-term debt 668,926 1,114,464
Finance obligation - 36,120
Program rights payable 4,211 4,022
Deferred taxes 90,310 571,596
-------- ----------
Total liabilities 862,725 1,921,680
-------- ----------
Commitments and contingent liabilities
Minority interest 3,000 877
Redeemable preferred stock 142,734 195,853
Stockholders' equity (deficit):
Series C preferred stock - 300,000
Common stock 396 549
Other stockholders' equity (63,523) 511,056
-------- ----------
Total stockholders' equity (deficit) (63,127) 811,605
-------- ----------
Total liabilities and stockholders' equity (deficit) $945,332 $2,930,015
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements
C-3
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 2000
---- ----
(unaudited)
<S> <C> <C>
Net revenues:
DBS $75,727 $159,583
Broadcast 8,941 8,718
-------- ---------
Total net revenues 84,668 168,301
Operating expenses:
DBS
Programming, technical, general and administrative 53,526 110,918
Marketing and selling 38,830 55,077
Incentive compensation 350 648
Depreciation and amortization 20,401 68,719
Broadcast
Programming, technical, general and administrative 5,766 6,207
Marketing and selling 1,369 1,612
Incentive compensation - 158
Depreciation and amortization 1,319 1,318
Corporate expenses 1,484 2,593
Corporate depreciation and amortization 746 360
Development costs 74 1,141
Other expense, net 593 1,052
-------- ---------
Loss from operations (39,790) (81,502)
Interest expense (16,236) (34,182)
Interest income 257 3,664
Other non-operating income, net - 896
-------- ---------
Loss from continuing operations before income taxes (55,769) (111,124)
Benefit for income taxes (3,016) (14,743)
------- --------
Loss from continuing operations (52,753) (96,381)
Discontinued operations:
Income from discontinued operations of cable segment 626 580
Gain on sale of discontinued operations, net of taxes - 59,366
-------- ---------
Net loss (52,127) (36,435)
Preferred stock dividends 4,305 10,086
-------- ---------
Net loss applicable to common shares (56,432) (46,521)
Other comprehensive loss - (12,019)
-------- ---------
Comprehensive loss ($56,432) ($58,540)
======== ========
Basic and diluted per common share amounts:
Loss from continuing operations, less preferred stock dividends ($1.45) ($1.94)
Income from discontinued operations 0.02 0.01
Gain on sale of discontinued operations - 1.08
-------- ---------
Net loss applicable to common shares ($1.43) ($0.85)
====== ======
Weighted average number of common shares outstanding 39,442 54,742
====== ======
</TABLE>
See accompanying notes to consolidated financial statements
C-4
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 2000
---- ----
(unaudited)
<S> <C> <C>
Net revenues:
DBS $198,181 $389,851
Broadcast 26,512 26,128
--------- ---------
Total net revenues 224,693 415,979
Operating expenses:
DBS
Programming, technical, general and administrative 137,891 272,925
Marketing and selling 88,720 111,646
Incentive compensation 1,140 1,835
Depreciation and amortization 62,334 141,696
Broadcast
Programming, technical, general and administrative 15,920 18,253
Marketing and selling 4,448 5,523
Incentive compensation 202 204
Depreciation and amortization 3,801 3,860
Corporate expenses 4,108 6,041
Corporate depreciation and amortization 2,196 1,116
Development costs 76 2,310
Other expense, net 1,410 3,428
--------- ---------
Loss from operations (97,553) (152,858)
Interest expense (47,497) (86,185)
Interest income 1,015 11,142
Other non-operating income, net - 234
--------- ---------
Loss from continuing operations before income taxes
and extraordinary items (144,035) (227,667)
Benefit for income taxes (4,031) (30,022)
--------- ---------
Loss from continuing operations before
extraordinary items (140,004) (197,645)
Discontinued operations:
Income from discontinued operations of cable segment 1,375 1,234
Gain on sale of discontinued operations, net of taxes - 59,366
--------- ---------
Loss before extraordinary items (138,629) (137,045)
Extraordinary loss from extinquishment of debt - (9,280)
--------- ---------
Net loss (138,629) (146,325)
Preferred stock dividends 12,400 25,042
--------- ---------
Net loss applicable to common shares (151,029) (171,367)
Other comprehensive loss - (12,019)
--------- ---------
Comprehensive loss ($151,029) ($183,386)
========= =========
Basic and diluted per common share amounts:
Loss from continuing operations, less preferred stock dividends ($4.10) ($4.63)
Income from discontinued operations 0.04 0.03
Gain on sale of discontinued operations - 1.23
------ ------
Loss before extraordinary items (4.06) (3.37)
Extraordinary loss - (0.19)
------ ------
Net loss applicable to common shares ($4.06) ($3.56)
====== ======
Weighted average number of common shares outstanding 37,158 48,097
====== ======
</TABLE>
See accompanying notes to consolidated financial statements
C-5
<PAGE>
Pegasus Communications Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 2000
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net cash used for operating activities ($67,257) ($65,250)
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired (104,059) (116,384)
Capital expenditures (10,700) (36,080)
Purchase of intangible assets (2,243) (12,042)
Payments for programming rights (2,155) (3,334)
Proceeds from sale of cable operations - 166,937
Investment in affiliates - (14,560)
Other 510 431
-------- -------
Net cash used for investing activities (118,647) (15,032)
-------- -------
Cash flows from financing activities:
Proceeds from long-term debt - 8,750
Repayments of long-term debt (13,621) (13,887)
Net borrowings on bank credit facilities 73,700 62,800
Restricted cash 19,499 6,303
Debt financing costs (1,760) (9,752)
Proceeds from issuance of Class A common stock 81,132 3,088
Proceeds from issuance of Series C preferred stock - 300,000
Underwriting and stock offering costs (4,657) (9,570)
Repurchase of Class A common stock - (352)
Other (137) (650)
-------- -------
Net cash provided by financing activities 154,156 346,730
-------- -------
Net increase (decrease) in cash and cash equivalents (31,748) 266,448
Cash and cash equivalents, beginning of year 54,505 40,453
-------- -------
Cash and cash equivalents, end of period $ 22,757 $306,901
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
C-6
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Pegasus Communications Corporation ("Pegasus" or together with its
subsidiaries, the "Company") operates in growing segments of the media industry
and is a direct subsidiary of Pegasus Communications Holdings, Inc. ("PCH" or
the "Parent"). The Company's principal direct operating subsidiaries are Pegasus
Media & Communications, Inc. ("PM&C") and Golden Sky Holdings, Inc. ("GSH").
PM&C's principal subsidiaries provide direct broadcast satellite
television ("DBS") services to customers in various rural areas of the United
States and own and/or program broadcast television ("Broadcast") stations. GSH's
subsidiaries provide DBS services to customers in various rural areas of the
United States. GSH and its subsidiaries were acquired by the Company on May 5,
2000 (see Note 8). Discontinued operations on the statements of operations and
comprehensive loss represent PM&C's cable operations, which were sold on
September 15, 2000 (see Note 9).
In January 2000, Digital Television Services, Inc. ("DTS"), a direct
subsidiary of Pegasus, was merged with and into a subsidiary of PM&C.
On September 15, 2000, Pegasus' Board of Directors approved a
reorganization of the current corporate structure. Under the new structure, a
new publicly-held parent holding company ("New PCC") will be formed and will
assume the identity and capital stock structure of the existing Pegasus
Communications Corporation ("Old PCC"). New PCC will issue common and preferred
securities identical in terms, conditions and amounts as that present with Old
PCC. The ownership interests and rights of common and preferred shareholders of
New PCC will be exactly the same in New PCC as in Old PCC. Debt securities held
by Old PCC will remain with Old PCC. New PCC will not issue or hold any debt
securities as a consequence of the reorganization. In the reorganization, Old
PCC will become a direct wholly-owned subsidiary of New PCC and will be renamed
Pegasus Satellite Communications, Inc. ("Satellite"). In the reorganization, Old
PCC will distribute to New PCC its investments in its following presently direct
wholly-owned subsidiaries: Pegasus Development Corporation ("PDC"), Pegasus
Communications Management Company, Pegasus Communications Corporation PAC,
Pegasus Real Estate Company and Pegasus Travel, Inc. These companies will become
direct wholly-owned subsidiaries of New PCC. It is expected that the
reorganization will be accounted for as a recapitalization in which the
historical basis of assets and liabilities are not changed. All entities will
retain their book values existing at the date of the reorganization. The
reorganization is expected to become effective by the end of 2000.
As stated above, all of the existing Old PCC preferred stock, including
the 12.75% Series A Cumulative Exchangeable Preferred Stock ("Series A preferred
stock") will become identical New PCC preferred stock as a result of the
reorganization. In connection with the reorganization, Satellite will initiate
an offer to exchange the Series A preferred stock of New PCC for a new series of
preferred stock of Satellite having identical terms as the Series A preferred
stock.
2. Basis of Presentation
The accompanying unaudited consolidated 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 unaudited consolidated financial statements reflect
all adjustments consisting of normal recurring items that are, in the opinion of
management, necessary for a fair presentation, in all material respects, of the
financial position of the Company and the results of its operations and
comprehensive loss and its cash flows for the interim period. The amounts on the
balance sheet as of December 31, 1999 were derived from the audited balance
sheet as of that date. For further information, refer to the consolidated
financial statements and footnotes thereto included in Pegasus' Annual Report on
Form 10-K for the year ended December 31, 1999.
The financial statements include the accounts of Pegasus and all of its
subsidiaries on a consolidated basis. All intercompany transactions and balances
have been eliminated. The balance sheet and statement of cash flows are
presented on a condensed basis. Certain amounts for 1999 have been reclassified
for comparative purposes.
C-7
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Basis of Presentation (continued)
Stock Split:
On May 10, 2000, Pegasus announced a two-for-one stock split of its
Class A and Class B common stock in the form of a stock dividend, effective May
30, 2000, to shareholders of record on May 19, 2000. The dividend was effected
by a charge to paid-in capital in the amount of $268,000, the par value of the
additional Class A and Class B common shares that were issued. All references to
shares, per share amounts and exercise prices included in the accompanying
financial statements and notes reflect the effect of the stock split.
Development Costs:
Development costs on the statements of operations and comprehensive
loss represent the combined expenses of other corporate initiatives that are in
their infancy of development. Most of these initiatives are presently being
sponsored by PDC. The operations of each initiative will be separately presented
on the statements of operations and comprehensive loss when they are determined
to be of a material continuing nature.
3. Investment in Affiliates
In January 2000, PDC made an investment of approximately $112.0 million
in Personalized Media Communications, LLC ("PMC"), an advanced communications
technology company, that is accounted for by the equity method. The investment
consisted of $14.4 million in cash, 400,000 shares of Pegasus' Class A common
stock (amounting to $18.8 million) and warrants to purchase 2.0 million shares
of the Class A common stock at an exercise price of $45.00 per share and with a
term of ten years. These warrants at the time of their issuance were estimated
to have a fair value of $78.8 million. A subsidiary of PMC granted to the
Company an exclusive license for use of PMC's patent portfolio in the
distribution of satellite services from specified orbital locations. Through
September 30, 2000, PDC's equity in the losses of PMC was not material.
4. Common Stock and Other Stockholders' Equity
On March 22, 2000, Pegasus amended its Certificate of Incorporation by
increasing the number of its authorized shares of common stock as follows: Class
A to 250.0 million from 50.0 million; Class B to 30.0 million from 15.0 million;
and Non-Voting to 200.0 million from 20.0 million. The number of shares of Class
A outstanding at September 30, 2000 and December 31, 1999 was 45.8 million and
30.4 million, respectively. The number of shares outstanding at each date for
Class B was 9.2 million. No shares were outstanding at either date for
Non-Voting. Class A shares issued in 2000 through September 30 were 13.5 million
as consideration in acquisitions, 1.0 million for exercises of options and
warrants, and 763,000 for other purposes. Pegasus issued 130,221 shares of Class
A in payment of the dividend on the Series C preferred stock that was payable on
October 31, 2000. For the nine months ended September 30, 2000, common stock
issued in connection with acquisitions and investment in affiliates provided
additional paid-in capital of $752.9 million.
5. Preferred Stock
On March 22, 2000, Pegasus amended its Certificate of Incorporation,
increasing the aggregate number of authorized shares of preferred stock to 20.0
million from 5.0 million.
Redeemable Preferred Stocks:
Series A Preferred Stock
------------------------
The number of shares issued and outstanding at September 30, 2000 of
Series A preferred stock increased to 152,844 from 135,073 at December 31, 1999.
This increase was due to dividends on Series A payable in 2000 that were paid in
shares of Series A preferred stock. The carrying amount increased by $14.0
million to $156.8 million due to accrued and unpaid dividends payable under the
mandatory redemption features.
C-8
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Preferred Stock (continued)
Series B, Series D and Series E Preferred Stock
-----------------------------------------------
In connection with DBS acquisitions in the first quarter of 2000,
Pegasus issued 5,707 shares of Series B Junior Convertible Participating
Preferred Stock (the "Series B preferred stock"), 22,500 shares of Series D
Junior Convertible Participating Preferred Stock (the "Series D preferred
stock") and 10,000 shares of Series E Junior Convertible Participating Preferred
Stock (the "Series E preferred stock"). Each whole share of Series B, Series D
and Series E preferred stock has a liquidation preference equal to its stated
value of $1,000 per share plus any accrued and unpaid dividends. Each share of
Series B, Series D and Series E preferred stock is convertible at any time at
the option of the holder into 32.47 shares, 19.54 shares and 16.04 shares,
respectively, of Pegasus' Class A common stock, subject to adjustment under
certain circumstances. Additionally, each share of Series B, Series D and Series
E preferred stock is redeemable at the option of the holder at a price of $1,000
plus any accrued and unpaid dividends. Each series may be redeemed at the option
of holders as follows: Series B in whole any time after January 4, 2002; Series
D 10,000 shares on any day after March 1, 2000, an additional 6,125 shares
beginning on February 1, 2002, and the remaining shares on February 1, 2003;
Series E 5,000 shares on any day after February 25, 2002, and the remaining
shares beginning February 25, 2003. Pegasus may redeem at its option shares of
each series in whole as follows: Series B any time after January 4, 2005 at a
price of $1,000 per share; Series D at any time at a price of $1,000 per share;
Series E any time up to February 25, 2001 at a price of $1,100 per share, and
any time thereafter at a price of $1,000 per share. The preceding redemption
prices are in addition to any accrued and unpaid dividends. Holders of shares of
Series B preferred stock are entitled to receive, when, as and if declared by
Pegasus' Board of Directors, cash dividends at an annual rate of 1% payable
semi-annually on January 1 and July 1 commencing July 1, 2000. Holders of shares
of Series D and Series E preferred stock are entitled to receive, when, as and
if declared by the Board of Directors, dividends at an annual rate of 4% payable
annually on January 1 commencing January 1, 2001. Dividends on Series D and
Series E preferred stock are payable in cash or shares of Pegasus Class A common
stock, at the option of Pegasus. Dividends on Series B, Series D and Series E
preferred stock are cumulative and accrue from the date of original issuance.
The carrying amounts of Series B, Series D, and Series E preferred stock are
increased by amounts representing dividends not currently declared or paid but
that are payable under the redemption features. In the event of liquidation,
Series B, Series D and Series E preferred stock rank, to the extent of their
respective liquidation preferences, junior to Series A and Series C preferred
stock, senior to all classes of Pegasus' common stock and on a parity with each
other. Upon liquidation, holders of Series B, Series D and Series E preferred
stock are entitled to participate with holders of Pegasus common stock and other
participating stock, if any, in the remaining assets of the Company after
certain other distributions have been satisfied. Generally, Series B, Series D
and Series E preferred stock have no voting rights other than those granted by
law.
The carrying amounts of Series B, Series D and Series E preferred stock
increased by $42,000, $600,000 and $238,000, respectively, to $5.7 million,
$23.1 million and $10.2 million, respectively, at September 30, 2000. These
increases represent accrued and unpaid dividends payable under the mandatory
redemption features. At September 30, 2000, 5,707, 22,500 and 10,000 shares of
Series B, Series D and Series E preferred stock, respectively, were issued and
outstanding.
Preferred Stock in Stockholders' Equity:
Series C Preferred Stock
------------------------
In January 2000, Pegasus completed an offering of 3.0 million shares of
6 1/2% Series C Convertible Preferred Stock (the "Series C preferred stock"),
resulting in net proceeds of $290.4 million. Each whole share of Series C
preferred stock has a liquidation preference equal to its stated value of $100
per share, plus any accrued and unpaid dividends, and is convertible at any time
at the option of the holder into 1.5686 shares of Pegasus' Class A common stock.
This conversion ratio is subject to adjustment under certain circumstances.
Holders of shares of Series C preferred stock are entitled to receive, when, as
and if declared by the Board of Directors, dividends at a rate of 6.5% payable
quarterly on January 31, April 30, July 31 and October 31 commencing April 30,
2000. Dividends are payable in cash, shares of Pegasus Class A common stock or a
combination thereof, at the option of Pegasus. Dividends on Series C preferred
stock are cumulative and accrue from the date of original issuance. In the event
of liquidation, Series C preferred stock ranks junior to Series A preferred
stock, senior to Series B, Series D and Series E preferred stocks and senior to
all classes of Pegasus' common stock. Pegasus at its option may redeem shares,
in whole or in part, of Series C preferred stock at any
C-9
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Preferred Stock (continued)
time from February 1, 2003, and under certain circumstances from August 1, 2001
to prior to February 1, 2003, at premiums specified in Series C's certificate of
designation, plus any accrued and unpaid dividends. Holders of Series C
preferred stock have no voting rights other than those granted by law, except
that holders voting as a class are entitled to elect two directors to the Board
of Directors in the event dividends payable on Series C preferred stock are in
arrears for six quarterly periods until such arrearage is paid in full and
concerning matters that effect the terms and ranking of the series or amendments
to Pegasus' charter that may adversely affect their rights. At September 30,
2000, 3.0 million shares of Series C preferred stock were issued and
outstanding.
6. Long-Term Debt
In January 2000, PM&C amended and restated its credit facility,
consisting of a $225.0 million senior revolving credit facility that expires in
2004, a $275.0 million senior term credit facility that expires in 2005 and an
uncommitted facility for an additional $200.0 million through June 30, 2001
(collectively, the "New PM&C Credit Facility"). The New PM&C Credit Facility is
collateralized by substantially all of the assets of PM&C and its subsidiaries
and is subject to certain financial covenants as defined in the loan agreement,
including a debt to adjusted cash flow covenant. With the closing of the New
PM&C Credit Facility, PM&C borrowed $275.0 million under the term loan facility
and used a portion of the proceeds to pay off balances aggregating $221.5
million outstanding under other credit facilities. These other credit facilities
along with their related commitments and a letter of credit facility were then
terminated. At September 30, 2000, $275.0 million was outstanding under the term
loan facility, with $38.2 million of stand-by letters of credit issued
thereunder.
Golden Sky Systems, Inc. ("GSS"), a subsidiary of GSH, maintains a
$115.0 million senior revolving credit facility and a $35.0 million senior term
credit facility (collectively, the "GSS Credit Facility"), that are
collateralized by substantially all of the assets of GSS and its subsidiaries.
The facility expires in 2005. This facility had been entered into prior to
Pegasus' acquisition of GSH. The GSS Credit Facility is subject to certain
financial covenants as defined in the loan agreement, including a debt to
adjusted cash flow covenant. In January 2000, GSS amended the GSS Credit
Facility. This amendment waived GSS' third quarter 1999 covenant violations and
amended certain fourth quarter 1999 and year 2000 covenant requirements. The
amendment limited further availability under the revolving credit portion
through December 31, 2000 to an additional $20.0 million above amounts already
outstanding at the time of the amendment. As of September 30, 2000, GSS was in
compliance with the GSS Credit Facility's amended covenants. At September 30,
2000, amounts outstanding under the revolving and term facilities were $17.0
million and $35.0 million, respectively, with $35.9 million of stand-by letters
of credit issued thereunder.
GSS has outstanding $195.0 million of 12.375% Senior Subordinated Notes
due 2006 (the "GSS Notes") that were issued prior to Pegasus' acquisition of
GSH. The GSS Notes are guaranteed on a full, unconditional, senior subordinated
basis, jointly and severally by GSS' subsidiaries. A portion of the net proceeds
from the GSS Notes held in an interest escrow account that had been included in
restricted cash on the balance sheet was released and used to pay interest due
on the GSS Notes. No further escrow balances or requirements exist with respect
to the GSS Notes.
Golden Sky DBS, Inc. ("GSDBS"), a direct subsidiary of GSH and GSS'
parent, has outstanding 13.5% Senior Discount Notes due 2007 (the "GSDBS Notes")
that were issued prior to Pegasus' acquisition of GSH. These notes have an
aggregate stated maturity of $193.1 million. The GSDBS Notes are unsecured and
effectively rank below all of the liabilities of GSDBS' direct and indirect
subsidiaries. These notes were issued at a discount. Non-cash interest accretes
on these notes until March 1, 2004. Thereafter, cash interest will accrue and be
payable. From the date of the GSH acquisition through September 30, 2000, the
Company has recognized amortization of discount on the notes of $6.5 million.
C-10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Per Common Share Amounts
Within each respective period presented on the statement 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. Per common share amounts are readily computed from the face of the
statements of operations and comprehensive loss.
8. Acquisitions
On May 5, 2000, Pegasus acquired GSH, which holds the rights to provide
DIRECTV(R) ("DIRECTV") programming in various rural areas of 24 states, along
with its assets and liabilities in exchange for total consideration of
approximately $1.5 billion. The consideration consisted of approximately 12.2
million shares of Class A common stock valued at $579.0 million (based on a
price of $47.54 per share, which was the average closing price per share five
days prior and subsequent to the acquisition announcement), options to purchase
approximately 698,000 shares of Class A common stock valued at $33.2 million,
net liabilities of GSH assumed by Pegasus of $383.0 million and a deferred tax
liability incurred of $489.5 million. The deferred tax liability was allocated
to DBS rights and was attributed to non-deductible amortization related thereto.
Costs of $20.7 million have been incurred in the acquisition. The acquisition of
GSH was accounted for by the purchase method, which allocates the cost of the
acquisition to the assets acquired and liabilities assumed based on their
estimated fair values on the date of acquisition. Of the total acquisition cost,
approximately $1.3 billion (including the amount attributed to the deferred tax
liability incurred) have been allocated to DBS rights. DBS rights are amortized
on a straight-line basis over 10 years. The Company's results of operations
include the operations of GSH from the date of acquisition.
During the nine months ended September 30, 2000, the Company completed
16 other acquisitions of independent providers of DIRECTV. These acquisitions
principally consisted of the rights to provide DIRECTV programming in various
rural areas of the United States. The total consideration paid by the Company
for these acquisitions of $194.5 million consisted of cash of $95.6 million,
873,184 shares of Pegasus Class A common stock (amounting to $39.7 million),
22,500 shares of Pegasus Series D preferred stock (amounting to $22.5 million),
10,000 shares of Pegasus Series E preferred stock (amounting to $10.0 million),
warrants to purchase 3,000 shares of Pegasus Class A common stock (amounting to
$166,000), a deferred tax liability incurred of $24.4 million, $200,000 in
promissory notes and $1.8 million in assumed net liabilities. These acquisitions
were accounted for by the purchase method, wherein substantially all of the
total consideration for these acquisitions was allocated to DBS rights. The DBS
rights are being amortized on a straight-line basis over 10 years. The Company's
results of operations include the operations of these acquisitions from their
respective effective dates of acquisition.
The following unaudited pro forma financial information presents the
Company's consolidated results of operations as if the above noted acquisitions
had occurred at the beginning of the periods presented. This unaudited pro forma
financial information is presented for comparative purposes only and does not
necessarily reflect the results of operations of the Company had the
acquisitions occurred on the dates indicated nor results that may occur in the
future.
C-11
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Acquisitions (continued)
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Nine Months Ended September 30,
1999 2000
---- ----
(unaudited)
<S> <C> <C>
Net revenues............................................................... $343,943 $480,587
======== ========
Loss before extraordinary items, after preferred stock dividends............. (334,615) (248,131)
========= =========
Net loss applicable to common shares....................................... (337,550) (257,411)
========= =========
Loss before extraordinary items per common share........................... (6.69) (4.61)
====== ======
Net loss applicable to common shares per common share...................... (6.75) (4.79)
====== ======
</TABLE>
9. Discontinued Operations
Discontinued operations on the statements of operations and
comprehensive loss represent PM&C's cable operations located in Puerto Rico. The
measurement date for accounting for the cable operations as discontinued was
December 31, 1999. Since net income from and a gain on the sale of the
operations was expected, net income and gain after the measurement date were
recognized when earned. Revenues of the Puerto Rico cable operations for the
three and nine months ended September 30, 2000 and 1999 were $5.4 million and
$18.1 million, respectively, and $6.2 million and $14.9 million, respectively.
No income taxes were allocated to discontinued operations because of the
Company's net operating loss carryforward position.
On September 15, 2000, PM&C sold to an unrelated third party its
interests in the assets of its entire cable operations in Puerto Rico. The sale
price was $170.0 million cash. Cash proceeds received at closing, after
adjustment for transaction costs paid at that time and $3.0 million placed in
escrow, were $164.5 million. The after tax gain on the sale was $59.4 million.
The net amount of assets and liabilities associated with the sale was $80.5
million and $1.2 million, respectively. The net assets primarily consisted of
net property, plant and equipment of $19.1 million and net intangibles
associated with prior acquisitions amounting to $60.9 million. Escrow remaining
after satisfaction of valid claims of indemnification, if any, made by the buyer
pursuant to the asset purchase agreement will be released to the Company. Taxes
recognized on the gain from the sale of $28.0 million are for Puerto Rico
capital gains and withholding taxes and are currently payable.
10. Extraordinary Loss from Extinguishment of Debt
In connection with the outstanding borrowings paid off in January 2000
with the proceeds of the New PM&C Credit Facility, unamortized balances of
deferred financing costs in the amount of $9.3 million associated with the
borrowings paid off were written off. No income taxes were allocated to this
loss because of the Company's net operating loss carryforward position.
11. Sale and Leaseback of Tower Assets and Related Accounting
On July 17, 2000, the Company sold through two wholly-owned
subsidiaries 11 broadcast towers and related assets for approximately 1.4
million shares of restricted common stock of the buyer. The value of the buyer's
common stock on the sale closing date was approximately $37.5 million, and the
book value of the assets sold was $2.3 million. Coincident with the sale of the
towers, PM&C leased back from the buyer eight of the 11 towers sold. The lease
has an initial term of 10 years with five successive 10-year renewal periods at
the option of the Company. Aggregate minimum lease payments in each of the next
five fiscal years and in total over the remaining initial lease term are:
$683,000 in 2001; $711,000 in 2002; $739,000 in 2003; $769,000 in 2004; $799,000
in 2005; and $4.1 million in total thereafter. The Company recognized a gain of
$1.0 million on the three towers sold outright. The
C-12
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Sale and Leaseback of Tower Assets and Related Accounting (continued)
Company's receipt of the buyer's common stock represents a continuing
involvement by the Company in the eight towers sold and leased back.
Accordingly, the sale and leaseback of these towers is accounted for as a
financing.
As a result the Company recorded a finance obligation in the amount of
$36.1 million, which in essence represents a deferral of the net gain and
related costs of the sale that might be otherwise recognized on the date of
sale. Under the finance method, lease payments made on the assets leased back
are allocated between a reduction of the finance obligation and interest as
appropriate. Because of the amount of the finance obligation relative to the
amount of the payments, the Company expects that all future payments will be
applied to interest expense. The eight towers and related assets remain on the
Company's records and continue to be depreciated by the Company as long as the
financing method applies. The accounting as a financing of the eight towers sold
and leased back will continue as long as the Company's continuing involvement in
the towers, as represented by the Company's ownership of the buyer's common
stock, remains.
The stock received by the Company in the towers sale is accounted for
as an investment in marketable securities available for sale. Accordingly,
unrealized gain or loss on the investment is recorded as a component of the
Company's stockholders' equity. Other comprehensive loss on the statements of
operations and comprehensive loss reflects the unrealized loss on this
investment amounting to $12.0 million at September 30, 2000.
The Company has an agreement with the buyer of the tower assets in
which the buyer will build future towers for the Company as determined by the
Company.
12. Income Taxes
The Company is in a net operating loss carryforward position for income
tax purposes. The tax benefit recognized represents the reversal of deferred tax
liabilities recognized in acquisitions.
13. Industry Segments
At September 30, 2000, the Company's two reportable segments were DBS
and Broadcast. Information on each of these segments' revenue and measure of
profit or loss is as presented on the statements of operations and comprehensive
loss. Each segment derived its revenues from external customers for each period
presented therein. Identifiable total assets for DBS increased from December 31,
1999 by $1.56 billion to $2.23 billion at September 30, 2000. This increase was
principally due to additional DBS rights obtained in acquisitions completed
during 2000. Broadcast's identifiable total assets increased from December 31,
1999 by $26.2 million to $86.6 million at September 30, 2000 principally due to
the current fair market value of the common stock received in the sale and
leaseback of the tower assets.
14. Supplemental Cash Flow Information
Significant noncash investing and financing activities were as follows
(in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 2000
---- ----
<S> <C> <C>
Barter revenue and related expense.............................................. $5,657 $5,377
Marketable securities received in sale of tower assets.......................... - 37,516
Customer conversion costs and costs of related equipment........................ - 17,787
Acquisition of program rights and assumption of related program payables........ 6,072 3,426
Capital issued and related acquisition of intangibles........................... 1,364 693,620
Minority interest and related acquisition of intangibles........................ - 852
Capital issued and related investment in affiliates............................. - 97,555
Notes payable and related acquisition of intangibles............................ 4,690 379,773
Preferred stock dividends and reduction of paid-in capital...................... 12,400 14,912
Deferred taxes, net and related acquisition of intangibles...................... 29 517,451
</TABLE>
C-13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. Commitments and Contingent Liabilities
Legal Matters:
From time to time the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
consolidated operations, liquidity, cash flows or financial position of the
Company.
The Company is a rural affiliate of the National Rural
Telecommunications Cooperative ("NRTC"). The NRTC is a cooperative organization
whose members and affiliates are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the United
States. The Company's ability to distribute DIRECTV programming services is
dependent upon agreements between the NRTC and Hughes Electronics Corporation,
DIRECTV's parent, and between the Company and the NRTC.
On September 3, 1999, the NRTC filed a lawsuit in federal court 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
responded to the NRTC's continuing lawsuit by rejecting the NRTC's claims to
exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the NRTC. In
particular, DIRECTV contends in its counterclaim that the term of DIRECTV's
contract with the NRTC is measured solely by the orbital life of DBS-1, the
first DIRECTV satellite launched into orbit at the 101(Degree) W orbital
location, without regard to the orbital lives of the other DIRECTV satellites at
the 101(Degree) W orbital location. DIRECTV also alleges in its counterclaim
that the NRTC's right of first refusal, which is effective at the end of the
term of DIRECTV's contract with the NRTC, does not provide for certain
programming and other rights comparable to those now provided under the
contract.
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 September 9, 1999, the
NRTC filed a response to DIRECTV's counterclaim contesting DIRECTV's
interpretations of the end of term and right of first refusal provisions.
On January 10, 2000, GSS and the Company filed a lawsuit in federal
court against DIRECTV which contains causes of action for various torts, common
law counts and declaratory relief based on DIRECTV's failure to provide the NRTC
with premium programming, thereby preventing the NRTC from providing this
programming to GSS and the Company. The claims are also based on DIRECTV's
position with respect to launch fees and other benefits, term and rights of
first refusal. The complaint seeks monetary damages and a court order regarding
the rights of the NRTC and its members and affiliates.
On February 10, 2000, GSS and the Company filed an amended complaint
which added new tort claims against DIRECTV for interference with plaintiffs'
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. GSS and the Company later withdrew the class action
allegations previously filed to allow a new class action to be filed on behalf
of the members and affiliates of the NRTC. The class action was filed on
February 27, 2000. All four actions are pending before the same judge. On
November 20, 2000, the court will hear argument on the motion for class
certification and on DIRECTV's motion to dismiss certain of the Company's claims
and claims by the class members. DIRECTV's motion for partial summary judgment
on the right of first refusal will be heard on or about December 11, 2000. The
court has set a trial date of November 27, 2001 for all four actions.
C-14
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. Commitments and Contingent Liabilities (continued)
Management is not currently able to predict the outcome of the DIRECTV
litigation matters or the effect such outcome will have on the consolidated
operations, liquidity, cash flows or financial position of the Company.
16. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS
No. 138, becomes effective for the Company starting January 1, 2001, SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. At September 30, 2000, the Company's use of derivative
instruments is confined to two interest rate swap and two interest rate cap
instruments. These instruments were entered into in connection with PM&C's
credit facility. The Company does not use these instruments for trading or
speculative purposes. The notional amounts associated with these instruments
range from $33.9 million to $37.1 million. The Company believes that it does not
possess any derivative instruments that may be embedded in other contracts or
agreements. The Company continues to analyze SFAS 133 for any material impacts
of its adoption that it is not presently aware of. Because of the limited number
and use of derivative instruments that the Company has and the relatively minor
notional amounts associated with these instruments, the Company believes at the
present time that the accounting for its derivative instruments under SFAS 133
will not have a material impact on the Company.
The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
addresses revenue recognition policies and practices of companies that report to
the SEC. The Company will adopt SAB 101 in the fourth quarter of 2000. The
Company believes that the adoption of SAB 101 will not have a material impact.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement revises standards for accounting
for securitizations and other transfers of financial assets and collateral. The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This standard
is effective for transfers occurring after March 31, 2001 and for fiscal years
ending after December 15, 2000 with respect to recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral. The Company is still analyzing the requirements of this statement
and does not fully know whether or not the impact of this statement will be
material. At the present time, the Company is not involved with any
securitization transactions.
C-15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to us that are based on the beliefs of our management, as
well as assumptions made by and information currently available to our
management. When used in this Report, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect" and similar expressions are intended
to identify forward-looking statements. Such statements reflect our current
views with respect to future events and are subject to unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those contemplated in such forward-looking statements. Such
factors include, among other things, the following: general economic and
business conditions, both nationally, internationally and in the regions in
which we operate; relationships with and events affecting third parties like
DIRECTV, Inc.; litigation with DIRECTV; demographic changes; existing government
regulations and changes in, or the failure to comply with government
regulations; competition; the loss of any significant numbers of subscribers or
viewers; changes in business strategy or development plans; technological
developments and difficulties; the ability to attract and retain qualified
personnel; our significant indebtedness; the availability and terms of capital
to fund the expansion of our businesses; and other factors referenced in this
Report and in reports and registration statements filed from time to time with
the Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as the date
hereof. We do not undertake any obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes which are included on pages 4-16 herein.
Significant Developments during 2000
In January 2000, Pegasus Media & Communications amended and restated
its credit facility, consisting of a $225.0 million senior revolving credit
facility that expires in 2004, a $275.0 million senior term credit facility that
expires in 2005 and an uncommitted facility for an additional $200.0 million
through June 30, 2001. With the closing of the new credit facility, PM&C
borrowed $275.0 million under the term loan facility and used a portion of the
proceeds to pay off balances aggregating $221.5 million outstanding under other
credit facilities. In January 2000, we completed an offering of 3.0 million
shares of 6 1/2% Series C convertible preferred stock, resulting in net proceeds
to us of $290.4 million.
On May 5, 2000, we acquired Golden Sky Holdings, Inc., which holds the
rights to provide DIRECTV(R) ("DIRECTV") programming in various rural areas of
24 states, along with its assets and liabilities in exchange for total
consideration of approximately $1.5 billion. At the date of the acquisition,
Golden Sky had a subscriber base of 345,100. The consideration we paid consisted
of approximately 12.2 million shares of our Class A common stock valued at
$579.0 million (based on a price of $47.54 per share, which was the average
closing price per share five days prior and subsequent to the acquisition
announcement), options to purchase approximately 698,000 shares of our Class A
common stock valued at $33.2 million, net liabilities of Golden Sky assumed by
us of $383.0 million and a deferred tax liability incurred of $489.5 million.
Costs of $20.7 million have been incurred in the acquisition. Of the total
acquisition cost, approximately $1.3 billion have been allocated to direct
broadcast satellite television ("DBS") rights.
During the nine months ended September 30, 2000, we completed 16 other
acquisitions of independent providers of DIRECTV. These acquisitions principally
consisted of the rights to provide DIRECTV programming in various rural areas of
the United States. The total consideration we paid for these acquisitions of
$194.5 million consisted of cash of $95.6 million, 873,184 shares of our Class A
common stock (amounting to $39.7 million), 22,500 shares of Series D preferred
stock (amounting to $22.5 million), 10,000 shares of Series E preferred stock
(amounting to $10.0 million), warrants to purchase 3,000 shares of Class A
common stock (amounting to $166,000), a deferred tax liability incurred of $24.4
million, $200,000 in promissory notes and $1.8 million in assumed net
liabilities. Substantially all of the total consideration for these acquisitions
was allocated to DBS rights.
C-16
<PAGE>
On July 17, 2000, we sold 11 broadcast towers and related assets for
approximately 1.4 million shares of restricted common stock of the buyer. The
value of the buyer's common stock on the sale closing date was approximately
$37.5 million, and the book value of the assets we sold was $2.3 million.
Coincident with the sale of the towers, we leased back from the buyer eight of
the towers sold. The aggregate minimum lease payments in each of the next five
fiscal years and in total over the remaining initial lease term are: $683,000 in
2001; $711,000 in 2002; $739,000 in 2003; $769,000 in 2004; $799,000 in 2005;
and $4.1 million in total thereafter. We recognized a gain of $1.0 million on
the three towers sold outright. Our receipt of the buyer's common stock and
resultant ownership interest in the buyer represents a continuing involvement by
us in the tower assets sold and leased back. As a result, the gain that would
otherwise be recognized on the sale of these at the date of sale is deferred as
a finance obligation amounting to $36.1 million. While we continue to own the
buyer's common stock, we expect that the lease payments we make on the assets
leased back will be allocated to interest expense due to the amount of the
finance obligation relative to the amount of the payments. We also will continue
to depreciate the tower assets sold as if we still owned them while the
financing method applies.
On September 15, 2000, Pegasus Media & Communications sold to an
unrelated third party its interests in the assets of its entire cable operations
in Puerto Rico. The cash proceeds we received at closing, after adjustment for
transaction costs paid at that time and $3.0 million placed in escrow, were
$164.5 million and the after tax gain on the sale was $59.4 million. Escrow
remaining after satisfaction of valid claims of indemnification, if any, made by
the buyer pursuant to the asset purchase agreement will be released to the
Company.
On September 15, 2000, our board of directors approved a reorganization
of the current corporate structure. Under the new structure, a new publicly-held
parent holding company ("New PCC") will be formed and will assume the identity
and capital stock structure of the existing Pegasus Communications Corporation
("Old PCC"). New PCC will issue common and preferred securities identical in
terms, conditions and amounts as that present with Old PCC. The ownership
interests and rights of common and preferred shareholders of New PCC will be
exactly the same in New PCC as in Old PCC. Debt securities held by Old PCC will
remain with Old PCC. New PCC will not issue or hold any debt securities as a
consequence of the reorganization. In the reorganization, Old PCC will become a
direct wholly-owned subsidiary of New PCC and will be renamed Pegasus Satellite
Communications, Inc. In the reorganization, Old PCC will distribute to New PCC
its investments in its following presently direct wholly-owned subsidiaries:
Pegasus Development Corporation, Pegasus Communications Management Company,
Pegasus Communications Corporation PAC, Pegasus Real Estate Company and Pegasus
Travel, Inc. These companies will become direct wholly-owned subsidiaries of New
PCC. It is anticipated that the reorganization will be accounted for as a
recapitalization in which the historical basis of assets and liabilities are not
changed. All entities will retain their book values existing at the date of the
reorganization. The reorganization is expected to become effective by the end of
2000.
As stated above, all of the existing Old PCC preferred stock, including
the 12.75% Series A Cumulative Exchangeable Preferred Stock, will become
identical New PCC preferred stock as a result of the reorganization. In
connection with the reorganization, Satellite will initiate an offer to exchange
the Series A preferred stock of New PCC for a new series of preferred stock of
Satellite having identical terms as the Series A preferred stock.
Pre-marketing and Location Cash Flows
In this section we use the terms pre-marketing cash flow and location
cash flow. Pre-marketing cash flow of the DBS business is calculated by taking
the DBS revenues and deducting from them their related programming, technical,
general and administrative expenses. Location cash flow of the DBS business is
its pre-marketing cash flow less DBS marketing and selling expenses. The DBS
marketing and selling expenses are also known as subscriber acquisition costs.
Subscriber acquisition costs are sales and marketing expenses incurred and
promotional programming provided in connection with the addition of new DBS
subscribers. Location cash flow for the broadcast television ("Broadcast")
business is calculated by taking the Broadcast revenues and deducting from them
their related programming, technical, general and administrative and marketing
and selling expenses.
C-17
<PAGE>
Pre-marketing cash and location cash flows are not, and should not be
considered, alternatives to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing and location cash flows 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 pre-marketing and location cash flows are
important for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to monitor
our financial performance and debt leverage.
General
We are a rapidly growing company that is highly leveraged. We have a
history of reported losses from our operations principally due to our
significant amounts of interest expense and amortization and depreciation and we
are likely to continue to report losses for the foreseeable future due to these
two items.
At the present, our principal operations are based on the distribution
of DBS services from DIRECTV. We are currently 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. Refer herein to Note 15 of the
Notes to Consolidated Financial Statements and Item 1 - Legal Proceedings under
Part II for a more descriptive account of the litigation.
Results of Operations
In this section, amounts specified for three and nine months ended
periods are for the periods ended September 30, 2000, and the changes to these
amounts are with respect to the corresponding periods ended September 30, 1999,
unless indicated otherwise.
Comparison of Three and Nine Months Ended September 30, 2000 and 1999
DBS Business
Revenues increased $83.9 million to $159.6 million for the three months
ended and increased $191.7 million to $389.9 million for the nine months ended.
These increases were primarily due to the incremental impacts of acquisitions we
made over the last 12 months. During the 12 months ended September 30, 2000,
through acquisitions we obtained 433,500 subscribers and the exclusive DIRECTV
distribution rights to approximately 2.6 million households in rural areas of
the United States. The Golden Sky acquisition added 345,100 subscribers and 1.9
million households. Additionally, we added 247,100 subscribers during the last
12 months through internal growth. At September 30, 2000, we had exclusive
DIRECTV distribution rights to 7.4 million households and 1.3 million
subscribers compared to 4.8 million households and 630,900 subscribers at
September 30, 1999. Our subscriber penetration within territories in which we
have exclusive DIRECTV distribution rights increased to 17.8% at September 30,
2000 from 13.0% at September 30, 1999. During the three months ended September
30, 2000, we added 77,300 subscribers through internal growth and 32,300
subscribers from acquisitions. Average monthly revenue per subscriber was $43.41
for the three months ended compared to $44.80 for the corresponding 1999 period,
and $43.33 for the nine months ended 2000 and 1999. The variance in the average
monthly revenue per subscriber for the three months ended was due to a
combination of lower contributions from pay per view and lower average revenues
of subscribers obtained in acquisitions relative to our other subscribers.
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<PAGE>
Programming, technical and general and administrative expenses
increased $57.4 million to $110.9 million for the three months ended and
increased $135.0 million to $272.9 million for the nine months ended. These
increases were due to the growth in the number of subscribers. The rate of
increase of these expenses in each period was consistent with the increased
average number of customers within each period.
Subscriber acquisition costs increased $16.2 million to $55.1 million
for the three months ended and increased $22.9 million to $111.6 million for the
nine months ended. These increases were principally due to increased commissions
and subsidies to our dealer network resulting from the subscriber growth we
experienced and due to revisions to our commission and subsidy plans. During
2000, we revised our commission and subsidy plans to be more competitive. In the
current three months ended period, we also expanded our commission plans to
include large, national dealers affiliated with DIRECTV to whom commissions
previously were paid directly by DIRECTV. Advertising and promotional
programming expenses also impact our subscriber acquisition costs. Advertising
and promotional programming expenses are discretionary expenditures and vary
depending in large part based on sales initiatives that we want to promote
and/or expand. Advertising and promotional programming expenses increased in the
current three months ended largely due to our efforts to attract additional
subscribers in the territory obtained in the Golden Sky acquisition. Subscriber
acquisition costs per gross subscriber based on subscribers added through
internal growth was $440 for 125,200 subscribers added and $379 for 294,400
subscribers added for the three and nine months ended, respectively, compared to
$319 for 121,600 subscribers added and $356 for 249,200 subscribers added for
the same 1999 periods, respectively.
Depreciation and amortization increased $48.3 million to $68.7 million
for the three months ended and increased $79.4 million to $141.7 million for the
nine months ended. These increases were primarily due to increased amortization
of DBS rights as a result of additional DBS rights incurred in acquisitions over
the 12 months ended September 30, 2000 amounting to $1.49 billion. Of these
total additional DBS rights incurred, $60.6 million and $1.47 billion were
incurred in the three and nine months ended, respectively, with $1.28 billion
resulting from the Golden Sky acquisition. Also adding to these increased
expenses is depreciation of DBS equipment that is rented to subscribers. Renting
units to subscribers commenced in the second quarter of 2000 with respect to our
conversions of subscribers of a former DBS provider into our subscribers. These
converted subscribers had rented their equipment from the former DBS provider
and we have added this service as a convenience to these subscribers. Rented
equipment capitalized was $5.4 million for the three months ended and $10.3
million for the nine months ended. Rental units are depreciated over a
three-year period. We expect that rental units and related depreciation will
increase as more of our subscribers choose a rental alternative.
Pre-marketing cash flow was $48.7 million and $116.9 million for the
three and nine months ended, respectively, compared to $22.2 million and $60.3
million for the corresponding 1999 periods, respectively. Location cash flow was
$(6.4) million and $5.3 million for the three and nine months ended,
respectively, compared to $(16.6) million and $(28.4) million for the
corresponding 1999 periods, respectively.
Broadcast Business
Revenues decreased $223,000 to $8.7 million for the three months ended
and decreased $384,000 to $26.1 million for the nine months ended. Reduced
ratings this year for our affiliated Fox network stations combined with lowered
television advertising in general in 2000 contributed to these decreases. Also,
contributing to the decrease is that the nine months ended in 1999 include
revenues related to the National Football League's Super Bowl held in January
1999 that was carried by the Fox network. Despite strong revenues of our other
affiliated stations, we expect overall that revenues for the fourth quarter and
year 2000 will be lower relative to the prior year.
Programming, technical, and general and administrative expenses
increased $441,000 to $6.2 million for the three months ended and increased $2.3
million to $18.3 million for the nine months ended. These increases principally
reflect increased amortization of additional programming costs incurred and fees
charged by the Fox network that commenced in July 1999. The additional
programming costs were incurred in the purchase of new and additional
programming, some of which were for premier shows that have a higher programming
premium associated with them.
Marketing and selling expenses increased $243,000 to $1.6 million for
the three months ended and increased $1.1 million to $5.5 million for the nine
months ended. These increases were primarily due to increased promotional costs
associated with the launch of new stations and news programs.
Location cash flow was $899,000 and $2.4 million for the three and nine
months ended, respectively, compared to $1.8 million and $6.1 million for the
corresponding 1999 periods, respectively.
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<PAGE>
Other Statements of Operations and Comprehensive Loss Items
Corporate expenses increased $1.1 million to $2.6 million for the three
months ended and increased $1.9 million to $6.0 million for the nine months
ended. These increases reflect growth in the corporate infrastructure in support
of the overall growth in business experienced by us.
Development costs of $1.1 million and $2.3 million for the three and
nine months ended, respectively, represent the combined expenses of corporate
initiatives that are in their infancy of development and not yet of a material,
continuing nature. Most of these initiatives are presently being sponsored by
Pegasus Development Corporation. Actual and potential impacts of these
initiatives on liquidity and capital resources are addressed in the section so
entitled.
Other expenses, net from continuing operations increased $459,000 to
$1.1 million for the three months ended and increased $2.0 million to $3.4
million for the nine months ended. These increases principally reflect expenses
associated with our ongoing litigation with DIRECTV. Expenses incurred in the
DIRECTV litigation were $600,000 and $1.5 million for the three and nine months
ended, respectively.
Interest expense increased $17.9 million to $34.2 million for the three
months ended and increased $38.7 million to $86.2 million for the nine months
ended. These increases were due to additional borrowings outstanding and higher
rates of interest incurred during the periods. Fixed rate borrowings increased
by $328.9 million from September 30, 1999 to $780.4 million at September 30,
2000. This increase was principally due to debt of Golden Sky totaling $318.6
million at a combined weighted average interest rate of 12.44% that we assumed
in the acquisition of Golden Sky. Variable rate borrowings under credit
facilities we maintain increased from September 30, 1999 by $179.4 million to
$327.0 million at September 30, 2000. This increase was primarily due to net
additional amounts borrowed under the credit facility of Pegasus Media &
Communications of $127.4 million and debt outstanding under credit facilities
maintained by Golden Sky of $52.0 million that we assumed in the acquisition.
The weighted average amount of principal and interest rates associated with
outstanding variable rate debt were: principal of $327.0 million at 10.25% and
$301.3 million at 9.97% for the three and nine months ended September 30, 2000,
respectively, and $122.8 million at 7.96% and $91.3 million at 8.12% for the
corresponding 1999 periods, respectively.
Interest income increased $3.4 million to $3.7 million for the three
months ended and $10.1 million to $11.1 million for the nine months ended. These
increases were due to significantly higher average cash balances available for
short-term investing. These higher balances principally reflect unused portions
of the proceeds received from the Series C preferred stock we issued in January
2000.
Other non-operating income, net for the three months ended of $896,000
primarily represents the gain on the portion of the tower assets sold outright
of $1.0 million.
We are in a net operating loss carryforward position for income tax
purposes. The tax benefit recognized represents the reversal of deferred tax
liabilities recognized in acquisitions.
Within discontinued operations, a gain of $59.4 million, net of taxes
of $28.0 million, was recognized in the three and nine months ended periods on
the sale of our Puerto Rico cable operations. The taxes recognized on the gain
relate to Puerto Rico capital gain and withholding taxes and are currently
payable.
An extraordinary loss from the extinguishment of debt in the amount of
$9.3 million was recognized for the nine months ended. This reflects the
write-off of unamortized balances of deferred financing costs connected with our
debt that was refinanced when Pegasus Media & Communications' credit facility
was amended in January 2000. No income taxes were allocated to the loss because
of our net operating loss carryforward position.
Preferred stock dividends increased $5.8 million to $10.1 million for
the three months ended and increased $12.6 million to $25.0 million for the nine
months ended. These increases resulted from a greater number of shares of our
preferred stock outstanding during the respective current year periods. The
greater number of shares of preferred stock outstanding primarily reflect the
issuance in the first quarter of 2000 of 5,707 shares of Series B with a
dividend rate of 1%, 3.0 million shares of Series C with a dividend rate of 6
1/2%, 22,500 shares of Series D with a dividend rate of 4% and 10,000 shares of
Series E with a dividend rate of 4%.
Other comprehensive loss represents the unrealized loss on the common
stock we obtained in the sale and leaseback of our tower assets.
C-20
<PAGE>
Liquidity and Capital Resources
Our primary sources of liquidity have been the net cash provided by our
operations, amounts available under our credit facilities and proceeds from
security offerings. Our principal uses of cash have been for the funding of
acquisitions, meeting debt service requirements and the funding of DBS
subscriber acquisition costs, programming costs and dealer commissions,
investments in broadcast facilities and our operations in general.
We are a rapidly growing and expanding company. As a result, access to
and availability within the capital markets, especially the equity segment of
the market, has been and will continue to be critical to our growth strategy and
success. Our capital stock has been a major source of capital for us. During
2000, in connection with acquisitions and obtaining an investment interest in
others we issued 13.6 million shares of Class A common stock, 5,707 shares of
Series B preferred stock, 22,500 shares of Series D preferred stock and 10,000
shares of Series E preferred stock. In January 2000, we completed an offering of
3.0 million shares of 6 1/2% Series C preferred stock that resulted in net
proceeds to us of $290.4 million. During 2000 through September 30, we issued
59,422 shares of our Class A common stock as compensation to employees and
others and 195,927 shares in payment of dividends on our preferred stock.
Additionally, in 2000 we issued 17,771 shares of our Series A preferred stock in
payment of dividends payable on this preferred stock. On October 31, 2000, we
issued 130,221 shares of Class A common stock in payment of the dividend on the
Series C preferred stock that was payable on October 31, 2000.
Each share of Series B, Series D and Series E preferred stock noted
above is convertible at any time at the option of the holder into 32.47 shares,
19.54 shares and 16.04 shares, respectively, of our Class A common stock,
subject to adjustment under certain circumstances. Each share of Series B,
Series D and Series E preferred stock is redeemable at the option of the holder
at a price of $1,000. Each series may be redeemed at the option of holders as
follows: Series B in whole any time after January 4, 2002; Series D 10,000
shares on any day after March 1, 2000, an additional 6,125 shares beginning on
February 1, 2002, and the remaining shares on February 1, 2003; Series E 5,000
shares on any day after February 25, 2002, and the remaining shares beginning
February 25, 2003. Each share of Series C preferred stock is convertible at any
time at the option of the holder into 1.5686 shares of our Class A common stock,
subject to adjustment under certain circumstances.
In January 2000, Pegasus Media & Communications amended and restated
its credit facility, consisting of a $225.0 million senior revolving credit
facility that expires in 2004, a $275.0 million senior term credit facility that
expires in 2005 and an uncommitted facility for an additional $200.0 million
through June 30, 2001. The new credit facility is collateralized by
substantially all of the assets of PM&C and its subsidiaries and is subject to
certain financial covenants as defined in the loan agreement, including a debt
to adjusted cash flow covenant. Borrowings under the new credit facility are
available for acquisitions, to retire certain indebtedness, to fund interest
payments, for working capital, capital expenditures and general corporate
purposes. With the closing of the new credit facility, PM&C borrowed $275.0
million under the term loan facility and used a portion of the proceeds to pay
off balances aggregating $221.5 million outstanding under other credit
facilities. These other credit facilities along with their related commitments
and a letter of credit facility were then terminated. At September 30, 2000,
$275.0 million was outstanding under the new credit facility, with $38.2 million
of stand-by letters of credit issued thereunder.
Our Golden Sky Systems, Inc. subsidiary maintains a $115.0 million
senior revolving credit facility and a $35.0 million senior term credit facility
that are collateralized by substantially all of its assets and those of its
subsidiaries. The facility expires in 2005. These facilities had been entered
into prior to our acquisition of the Golden Sky companies. This credit facility
is subject to certain financial covenants as defined in the loan agreement,
including a debt to adjusted cash flow covenant. Borrowings under the credit
facility are available for acquisitions, to retire certain indebtedness, for
working capital, capital expenditures and general corporate purposes. In January
2000, Golden Sky Systems amended the credit facility. This amendment waived
Golden Sky Systems' third quarter 1999 covenant violations and amended certain
fourth quarter 1999 and year 2000 covenant requirements. The amendment limited
further availability under the revolving credit portion through December 31,
2000 to an additional $20.0 million above amounts already outstanding at the
time of the amendment. As of September 30, 2000, Golden Sky Systems was in
compliance with the credit facility. At September 30, 2000, amounts outstanding
under the revolving and term facilities were $17.0 million and $35.0 million,
respectively, with $35.9 million of stand-by letters of credit issued
thereunder. At September 30, 2000, $20.0 million was available under the credit
facility.
Golden Sky Systems has outstanding $195.0 million of 12.375% Senior
Subordinated Notes due 2006 that were issued prior to our acquisition of the
Golden Sky companies. Golden Sky DBS, Inc., another one of our subsidiaries
acquired with the Golden Sky companies, has outstanding 13.5% Senior Discount
Notes due 2007 that had been issued prior to the acquisition. These notes have
an aggregate stated maturity of $193.1 million.
C-21
<PAGE>
Net cash used for operating activities was $65.3 million for the nine
months ended September 30, 2000 compared to $67.3 million for the corresponding
period of the prior year. Cash from revenues less cash for operating needs was
greater in the current year than in the prior year, but interest payments were
greater in the current year than in the prior year. The net cash usage for
operating activities was funded by a combination of proceeds from the Series C
preferred stock issuance and Pegasus Media & Communications' credit facility.
Pre-marketing cash flow increased $25.6 million to $49.6 million and
increased $52.8 million to $119.3 million for the three and nine months ended
September 30, 2000, respectively. Our DBS business contributed increases of
$26.5 million and $56.6 million, respectively, whereas our Broadcast business
generated decreases of $907,000 and $3.8 million, respectively.
Net cash used for investing activities for the nine months ended
September 30, 2000 amounted to $15.0 million. Acquisitions of $116.4 million
were all for DBS businesses. Capital expenditures increased $25.4 million to
$36.1 million compared to the corresponding period of the prior year,
principally due to purchases of and improvements to office facilities of $22.3
million and purchases of DBS rental equipment of $6.4 million. We expect that
the purchases of DBS rental equipment will grow as more of our subscribers
choose a rental alternative. Investments in affiliates of $14.6 million
represent the cash portion of our investment in Personalized Media
Communications. Net cash used for investing activities was principally funded
with proceeds available from the Series C preferred stock issuance and Pegasus
Media & Communications' credit facility. Cash from the sale of the Puerto Rico
cable operations of $166.9 million was received in mid September. Of the amount
received, $163.9 million was placed in short-term interest-bearing accounts for
immediate availability when needed and $3.0 million was placed in escrow to
cover claims that may arise out of the cable sale. The use of the proceeds from
the cable sale are limited by Pegasus Media & Communications' credit facility to
permitted acquisitions, paying down amounts outstanding under the credit
facility and payment of costs associated with the cable sale.
Net cash provided by financing activities was $346.7 million for the
nine months ended September 30, 2000. The principal sources of cash were the net
proceeds of the Series C preferred stock issuance of $290.4 million, net of
related costs of $9.6 million, and net borrowings under Pegasus Media &
Communications' credit facility of $62.8 million.
On September 25, 2000, we were the successful bidder on 31 guard band
licenses in an auction conducted by the Federal Communications Commission. The
total price of the licenses is $91.5 million. We already paid a required down
payment of $5.4 million for these licenses. When we receive final FCC approval
for the licenses, the remaining $86.1 million will be payable in one amount. We
expect that the payment will be made from existing cash sources. We anticipate
that the FCC will grant its approval for the licenses anytime from late November
2000 to January 2001.
We are in the process of developing a broadband business that will be a
new service provided by us. We have already entered into an agreement with a
party that will enable us to offer this broadband high-speed internet access by
satellite to rural and underserved areas. We expect that this service will offer
two-way (send and receive capability) satellite access. Our plans are to launch
this new service in the first quarter of 2001. The capital requirements and
sources of the capital to finance this business are still being developed. We
cannot make any assurances as to the prospects of this new business.
At September 30, 2000, we had an unrestricted cash balance of $306.9
million. We had availability under the Pegasus Media & Communications credit
facility of $186.6 million plus access to an additional $200.0 million in
uncommitted funds. Additionally, Golden Sky had availability of $20.0 million
under its credit facility at September 30, 2000. We believe that we have
adequate resources to meet our working capital, maintenance capital expenditure
and debt service and preferred stock requirements for at least the next twelve
months. However, because we are highly leveraged, our ability to repay our
existing debt and preferred stock will depend upon the success of our business
strategy, prevailing economic conditions, regulatory matters, levels of interest
rates and financial, business and other factors that are beyond our control. We
cannot assure you that we will be able to generate the substantial increases in
cash flow from operations that we will need to meet our debt and preferred stock
requirements. Furthermore, our agreements with respect to our indebtedness
contain numerous covenants that, among other things, restrict our ability to:
o pay dividends and make certain other payments and investments;
o borrow additional funds;
o create liens; and
o sell our assets.
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Failure to make debt payments or comply with our covenants could result in an
event of default which if not cured or waived could have a material adverse
effect on us.
We closely monitor conditions in the capital markets to identify
opportunities for the effective use of financial leverage. In financing our
future expansion and acquisition requirements, we expect to increase our
leverage. This could result in increased debt service or preferred stock
requirements. We cannot assure you that such financing can be completed on terms
satisfactory to us or at all.
As previously discussed, we expect that we will effect our corporate
reorganization into a new publicly-held parent holding company by the end of
2000. Under the current organization structure, the existing publicly-held
parent is subject to operating restrictions and other covenants arising from our
existing publicly-held debt securities and Series A preferred stock. After
giving effect to the reorganization and a concurrent exchange offer for the
Series A preferred stock of New PCC for identical preferred stock of Old PCC
(assuming that a sufficient number of shares of Series A preferred Stock of New
PCC are exchanged), Old PCC will hold the publicly-held debt and the Series A
preferred stock containing the restrictive covenants. As a result, the new
publicly-held parent will not be subject to the provisions of these securities.
We believe this reorganization will provide New PCC with more flexibility
regarding future investments, operations and financing alternatives, including
the ability to incur debt and distribute assets.
In compliance with the certificates of designation governing our Series
A and Series C preferred stock and the indentures governing our senior notes, we
provide below adjusted operating cash flow data for our restricted subsidiaries
on a consolidated basis. Under the governing documents, adjusted operating cash
flow is defined as "for the four most recent fiscal quarters for which internal
financial statements are available, operating cash flow of such person and its
restricted subsidiaries less DBS cash flow for the most recent four-quarter
period plus DBS cash flow for the most recent quarterly period, multiplied by
four." Operating cash flow is income from operations before income taxes,
depreciation and amortization, interest expense, extraordinary items and
non-cash charges. Although adjusted operating cash flow is not a measure of
performance under generally accepted accounting principles, we believe that
adjusted operating cash flow is accepted as a recognized measure of performance
within the industries that we operate. This data is also used by analysts who
report publicly on the performance of companies in the industries in which we
operate. Including in the calculation the effects of DBS acquisitions completed
in the third quarter of 2000, as if these acquisitions had occurred on October
1, 1999, pro forma adjusted operating cash flow would have been as follows:
<TABLE>
<CAPTION>
Four Quarters Ended
(in thousands) September 30, 2000
------------------
<S> <C>
Revenues........................................................................ $462,326
Direct operating expenses, excluding depreciation, amortization and other
non-cash charges............................................................ 326,419
-------
Income from operations before incentive compensation, corporate
expenses, depreciation and amortization and other non-cash charges........... 135,907
Corporate expenses.............................................................. 7,736
-----
Adjusted operating cash flow.................................................... $128,171
========
</TABLE>
Seasonality
Our revenues vary throughout the year. As is typical in the broadcast
television industry, our first quarter generally produces the lowest revenues
for the year and the fourth quarter generally produces the highest revenues for
the year. Our operating results in any period may be affected by the incurrence
of advertising and promotional expenses that do not necessarily produce
commensurate revenues in the short-term until the impact of such advertising and
promotion is realized in future periods.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 138,
becomes effective for us starting January 1, 2001. SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. At September 30, 2000, our use of derivative instruments is confined
to two interest rate swap and two interest rate cap instruments. These
instruments were entered into in connection with Pegasus Media & Communications'
credit facility. We do not use these instruments for trading or speculative
purposes. The notional amounts associated with these instruments range from
$33.9 million to $37.1 million. At the present time, we believe that we do not
possess any derivative instruments that may be embedded in other contracts or
agreements. We continue to analyze SFAS 133 for any material
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<PAGE>
impacts of its adoption that we are not presently aware of. Because of the
limited number and use of derivative instruments that we have and the relatively
minor notional amounts associated with these instruments, we believe at the
present time that the accounting for our derivative instruments under SFAS 133
will not have a material impact on us.
The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements". SAB 101 addresses revenue
recognition policies and practices of companies that report to the SEC. We will
adopt SAB 101 in the fourth quarter of 2000. The Company believes that our
adoption will not have a material impact.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement revises standards for accounting
for securitizations and other transfers of financial assets and collateral. The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This standard
is effective for transfers occurring after March 31, 2001 and for fiscal years
ending after December 15, 2000 with respect to recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral. We are still analyzing the requirements of this statement and we do
not fully know whether or not the impact of this statement will be material. At
the present time, we are not involved with any securitization transactions.
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal market risk exposure is changing interest rates that
relate to our credit facilities, debt obligations and preferred stock. Our
objective in managing this exposure is to limit the impact of interest rate
changes on earnings and cash flow and to lower overall borrowing costs. As a
highly-leveraged company, we may not have as much of an ability to minimize
interest rates incurred on our debt facilities and preferred stock securities as
less leveraged entities. The market risks we are exposed to and the way we
manage these risks did not change during the three and nine months ended
September 30, 2000.
Our primary exposure is to variable rates of interest associated with
borrowings under our credit facilities. At September 30, 2000, the total amount
of borrowings subject to variable interest rates is $327.0 million. In
connection with Pegasus Media & Communications' credit facility, we entered into
interest rate protection instruments. These are confined to two interest rate
swaps and two interest rate caps with aggregate notional amounts of $140.0
million. With the interest rate swaps, we exchange variable interest for fixed
interest on a total notional amount of $72.1 million. We do not use these
instruments for trading or speculative purposes and the notional amounts are not
subject to exchange or payment. With respect to the interest rate swaps, for the
three months ended September 30, 2000, we received from the counterparties total
interest of $411,000 and for the nine months ended September 30, 2000 we paid to
the counterparties total interest of $185,000. No amounts have been paid or
received with respect to the interest rate caps in the three and nine months
ended September 30, 2000.
In the first quarter of 2000, we entered into new interest rate
protection instruments and terminated all other interest rate protection
instruments then outstanding. We received $927,000 in settlement of the
instruments terminated, and paid $262,000 in premiums to initiate new interest
rate cap instruments.
C-25
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DIRECTV/NRTC Litigation:
We hereby incorporate by reference the disclosure relating to
"DIRECTV/NRTC Litigation" set forth under "Item 3: Legal Proceedings" on pages
25 and 26 of our Annual Report on Form 10-K filed with the SEC on March 10, 2000
for the fiscal year ended December 31, 1999. The last paragraph of this
disclosure is deleted and replaced in its entirety by the paragraphs set forth
below. To the extent the disclosure set forth below supersedes or updates other
disclosure under "Item 3: Legal Proceedings," such disclosure is hereby deemed
to be modified, superseded and/or updated.
On February 10, 2000, Golden Sky and we filed an amended complaint
which added new tort claims against DIRECTV for interference with our
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. Golden Sky and we later withdrew the class action
allegations we previously filed to allow a new class action to be filed on
behalf of the members and affiliates of the National Rural Telecommunications
Cooperative. The class action was filed on February 27, 2000. All four actions
are pending before the same judge. On November 20, 2000, the court will hear
argument on the motion for class certification and on DIRECTV's motion to
dismiss certain of our claims and claims by the class members. DIRECTV's motion
for partial summary judgment on the right of first refusal will be heard on or
about December 11, 2000. The court has set a trial date of November 27, 2001 for
all four actions.
The outcome of this litigation and the litigation filed by the National
Rural Telecommunications Cooperative could have a material adverse effect on our
direct broadcast satellite business.
Other 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 with respect to these claims will not have a
material adverse effect on our consolidated operations, cash flows or financial
position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 25, 2000, Pegasus issued warrants to purchase 10,000
shares of its Class A common stock as partial consideration for the acquisition
of DIRECTV rights and related assets from an independent provider of DIRECTV in
certain rural areas of North Dakota. The warrants are exercisable on or before
September 25, 2005 at a price of $46.90 per share, subject to certain
adjustments. In issuing the warrants, Pegasus relied upon an exemption from
registration set forth in Section 4(2) of the Securities Act of 1933, as
amended.
On September 26, 2000, Pegasus issued 50,000 shares of its Class A
common stock upon the exercise of a warrant previously issued in connection with
an acquisition. Upon exercise of the warrant, Pegasus received approximately
$604,428 in cash, which was the amount of the exercise price (as adjusted for
Pegasus' May 2000 stock dividend) specified in the original warrant. In issuing
these shares, Pegasus relied upon the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On September 29, 2000, we filed a Current Report on Form 8-K dated
September 15, 2000 reporting under Item 5 the sale of our Puerto Rico cable
operations.
C-26
<PAGE>
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
November 14, 2000 By: /s/ M. Kasin Smith
----------------- ----------------------
Date M. Kasin Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
C-27
<PAGE>
Exhibit 27. Financial Data Schedule
Pegasus Communications Corporation
First Quarter Form 10-Q
Article 5
Multiplier 1
Currency U.S. Dollars
Period - Type 9 Months
Fiscal Year End December 31, 2000
Period-End September 30, 2000
Exchange Rate 1
Cash 306,901
Securities 0
Receivables 48,048
Allowances 3,048
Inventory 20,415
Current Assets 399,064
PP&E 88,328
Depreciation 30,166
Total Assets 2,930,015
Current Liabilities 195,478
Bonds 771,689
Preferred - Mandatory 195,853
Preferred 300,877
Common 549
Other - SE 511,056
Total Liabilities and Equity 2,930,015
Sales 415,979
Total Revenues 415,979
CGS 0
Total Costs 568,837
Other Expenses (11,376)
Loss - Provision 0
Interest Expense 86,185
Income Pretax (227,667)
Income Tax (30,022)
Income Continuing (197,645)
Discontinued 60,600
Extraordinary (9,280)
Changes 0
Net Income (146,325)
EPS - Basic (3.56)
EPS - Diluted (3.56)
C-28
<PAGE>
ANNEX D
<PAGE>
GOLDEN SKY HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets at December 31, 1998 and 1999........................................................ D-2
Consolidated Statements of Operations for the years ended December 31, 1997,
1998 and 1999................................................................................................. D-3
Consolidated Statements of Stockholders' Equity (Deficit)........................................................ D-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1998 and 1999................................................................................................. D-5
Notes to Consolidated Financial Statements....................................................................... D-6
</TABLE>
D-1
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................................. $4,488 $3,270
Restricted cash, current portion...................................................... 28,083 23,731
Subscriber receivables (net of allowance for uncollectible accounts of $293
and $973, respectively)............................................................. 8,632 12,333
Other receivables..................................................................... 2,465 742
Inventory............................................................................. 10,146 3,108
Prepaid expenses and other............................................................ 1,859 1,652
-------- --------
Total current assets.................................................................... 55,673 44,836
Restricted cash, net of current portion................................................. 23,534 --
Property and equipment (net of accumulated depreciation of $3,214 and $5,918,
respectively)......................................................................... 4,994 5,853
Intangible assets, net.................................................................. 233,139 236,926
Deferred financing costs................................................................ 10,541 11,462
Other assets............................................................................ 218 260
-------- --------
Total assets........................................................................ $328,099 $299,337
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Trade accounts payable................................................................ $13,539 $22,893
Interest payable...................................................................... 11,009 11,679
Current maturities of long-term obligations........................................... 8,916 3,248
Unearned revenue...................................................................... 5,574 8,669
Accrued payroll and other............................................................. 1,391 933
-------- --------
Total current liabilities............................................................... 40,429 47,422
Long-term obligations, net of current maturities:
12 3/8% Notes......................................................................... 195,000 195,000
13 1/2% Notes......................................................................... -- 112,095
Bank debt............................................................................. 67,000 52,000
Seller notes payable.................................................................. 6,912 6,932
Other notes payable and obligations under capital leases.............................. 376 103
Minority interest..................................................................... 2,420 936
-------- --------
Total long-term obligations, net of current maturities.................................. 271,708 367,066
-------- --------
Total liabilities....................................................................... 312,137 414,488
Mandatorily Redeemable Preferred Stock:
Series A Convertible Participating Preferred Stock, par value $.01; 418,000
shares authorized, issued and outstanding........................................... 56,488 65,135
Series B Convertible Participating Preferred Stock, par value $.01; 228,500
shares authorized, 228,442 shares issued and outstanding............................ 53,489 61,677
Series C Senior Convertible Preferred Stock, par value $.01; 51,000 shares
authorized, issued and outstanding.................................................. 10,455 11,540
-------- --------
120,432 138,352
Commitments and contingencies
Stockholders' Equity (Deficit):
Common Stock, par value $.01; 1,000,000 shares authorized, 24,931 shares
issued and outstanding at December 31, 1998; 25,399 shares issued and
outstanding at December 31, 1999.................................................... -- --
Additional paid-in capital............................................................ 25 179
Accumulated deficit................................................................... (104,495) (253,682)
--------- ---------
Total stockholders' equity (deficit).................................................... (104,470) (253,503)
--------- ---------
Total liabilities and stockholders' equity (deficit)................................ $328,099 $299,337
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
D-2
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue:
DBS services........................................................ $16,452 $74,910 $139,933
Lease and other..................................................... 944 1,014 640
--------- --------- ----------
Total revenue......................................................... 17,396 75,924 140,573
Costs and expenses:
Costs of DBS services............................................... 9,304 45,291 88,690
System operations................................................... 3,796 11,021 19,733
Sales and marketing................................................. 7,316 32,201 64,933
General and administrative.......................................... 2,331 7,431 15,708
Depreciation and amortization....................................... 7,300 23,166 35,963
--------- --------- ----------
Total costs and expenses.............................................. 30,047 119,110 225,027
--------- --------- ----------
Operating loss........................................................ (12,651) (43,186) (84,454)
Non-operating items:
Interest and investment income...................................... 40 1,573 2,393
Interest expense.................................................... (3,246) (20,538) (45,012)
Merger, initial public offering and other non-operating
expenses.......................................................... -- -- (1,259)
--------- --------- ----------
Total non-operating items............................................. (3,206) (18,965) (43,878)
--------- --------- ----------
Loss before income taxes.............................................. (15,857) (62,151) (128,332)
Income taxes.......................................................... -- -- --
--------- --------- ----------
Loss before extraordinary charge...................................... (15,857) (62,151) (128,332)
Extraordinary charge on early retirement of debt...................... -- (2,577) (2,935)
--------- --------- ----------
Net loss.............................................................. (15,857) (64,728) (131,267)
Preferred stock dividend requirements................................. (7,888) (14,855) (17,920)
--------- --------- ----------
Net loss attributable to common shareholders.......................... $(23,745) $ (79,583) $(149,187)
========= ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
D-3
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
----- ------- ------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1996.................................... $-- $1 $(1,167) $(1,166)
Cancellation of originally issued Golden Sky Systems
Common Stock.................................................. -- (1) -- (1)
Issuance of 100 shares of Golden Sky Holdings Common
Stock upon formation of Golden Sky Holdings, Inc.............. -- -- -- --
Dividends accrued on Series A Preferred Stock................... -- -- (7,189) (7,189)
Dividends accrued on Series B Preferred Stock................... -- -- (699) (699)
Net loss........................................................ -- -- (15,857) (15,857)
--- ---- --------- ---------
Balance at December 31, 1997.................................... -- -- (24,912) (24,912)
Issuance of 24,831 shares of Golden Sky Holdings
Common Stock pursuant to stock options exercised.............. -- 25 -- 25
Dividends accrued on Series A Preferred Stock................... -- -- (7,499) (7,499)
Dividends accrued on Series B Preferred Stock................... -- -- (7,101) (7,101)
Dividends accrued on Series C Preferred Stock................... -- -- (255) (255)
Net loss........................................................ -- -- (64,728) (64,728)
-- -- --------- ---------
Balance at December 31, 1998.................................... -- 25 (104,495) (104,470)
Issuance of 468 shares of Golden Sky Holdings Common
Stock pursuant to stock options exercised..................... -- -- -- --
Dividends accrued on Series A Preferred Stock................... -- -- (8,647) (8,647)
Dividends accrued on Series B Preferred Stock................... -- -- (8,188) (8,188)
Dividends accrued on Series C Preferred Stock................... -- -- (1,085) (1,085)
Deferred compensation pursuant to issuance of Common
Stock options................................................. -- 154 -- 154
Net loss........................................................ -- -- (131,267) (131,267)
-- -- --------- ---------
Balance at December 31, 1999.................................... $-- $179 $(253,682) $(253,503)
=== ==== ========= =========
</TABLE>
See accompanying Notes to Consolidated FInancial Statements.
D-4
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss..................................................................... $(15,857) $(64,728) $(131,267)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................... 7,300 23,166 35,963
Amortization of debt discount, deferred financing costs and other........... 215 977 13,676
Deferred compensation pursuant to issuance of Common Stock options.......... -- -- 154
Extraordinary charge on early retirement of debt............................ -- 2,577 2,935
Change in operating assets and liabilities, net of acquisitions:
Subscriber receivables, net of unearned revenue........................... (2,501) (1,757) (541)
Other receivables......................................................... (161) (1,568) 1,188
Inventory................................................................. (1,604) (8,049) 7,038
Prepaid expenses and other................................................ (203) (1,228) 207
Trade accounts payable.................................................... 7,515 5,068 9,354
Interest payable.......................................................... 806 10,223 670
Accrued payroll and other................................................. 1,379 (1,270) (478)
--------- -------- --------
Net cash used in operating activities........................................ (3,111) (36,589) (61,101)
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets........................................ (120,051) (104,487) (35,339)
Purchases of minority interests.............................................. -- -- (1,439)
Proceeds from interest escrow account........................................ -- (51,617) 24,224
Release of amounts reserved for contingent reduction of bank debt............ -- -- 5,449
Investment earnings placed in escrow......................................... -- -- (1,787)
Purchases of property and equipment.......................................... (998) (3,317) (3,452)
Other........................................................................ 320 (500) 112
--------- -------- --------
Net cash used in investing activities........................................ (120,729) (159,921) (12,232)
Cash Flows From Financing Activities
Proceeds from issuance of Series A preferred stock........................... 35,489 -- --
Proceeds from bridge loan.................................................... 10,000 -- --
Proceeds from issuance of Series B preferred stock........................... 35,616 -- --
Net proceeds from issuance of 123/8% Notes................................... -- 189,150 --
Net proceeds from issuance of 131/2% Notes................................... -- -- 100,049
Borrowings on bank debt...................................................... 75,000 90,000 38,000
Principal payments on bank debt.............................................. (15,000) (83,000) (53,000)
Proceeds from issuance of notes payable...................................... 2,115 -- --
Principal payments on notes payable and obligations under capital leases..... (2,902) (3,675) (8,846)
Proceeds from issuance of Common Stock....................................... -- 25 --
Increase in deferred financing costs......................................... (3,321) (5,138) (5,516)
Capital contribution from minority partner................................... -- -- 1,428
--------- -------- --------
Net cash provided by financing activities.................................... 136,997 187,362 72,115
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........................ 13,157 (9,148) (1,218)
Cash and cash equivalents, beginning of period.............................. 479 13,636 4,488
--------- -------- --------
Cash and cash equivalents, end of period.................................... $13,636 $4,488 $3,270
========= ======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid for interest....................................................... $2,225 $9,337 $30,014
Property and equipment acquired under capitalized lease obligations.......... 554 609 78
Retirement of Credit Agreement from borrowings under the Credit
Facility.................................................................... -- 88,000 --
Issuance of seller notes payable in acquisitions............................. 8,600 10,157 --
Conversion of notes payable and subscriptions to Series A preferred stock.... 6,311 -- --
Conversion of notes payable to Series B preferred stock...................... 10,073 -- --
Issuance of note payable in purchase of minority interest.................... -- -- 2,925
Series C preferred stock issued in acquisition............................... -- 10,200 --
Preferred dividend requirements accrued and unpaid........................... 7,888 14,855 17,920
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
D-5
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Organization and Legal Structure
Golden Sky Holdings, Inc. ("Holdings," and together with its
subsidiaries, "Golden Sky") is a Delaware corporation formed on September 9,
1997 for the purpose of holding all the common and preferred stock of Golden Sky
Systems, Inc. ("Systems"). Upon the formation of Holdings, Systems issued 1,000
shares of its common stock to Holdings and all the shareholders of the then
outstanding preferred stock of Systems were issued equivalent shares of Holdings
stock with identical features to Systems' preferred stock (the "Exchange"). The
Exchange was accounted for as a reorganization of entities under common control
and the historical cost basis of consolidated assets and liabilities was not
affected by the transaction. Holdings has no significant assets or liabilities
other than its investment in Systems. Accordingly, Systems has been treated as
the predecessor to Holdings and the historical financial statements of Holdings
presented for periods prior to September 9, 1997 are those of Systems.
Until February 1999, Systems was a wholly-owned subsidiary of Holdings.
On February 2, 1999, Golden Sky DBS, Inc. ("Golden Sky DBS") was formed for the
purpose of effecting an offering of senior discount notes. Upon formation,
Golden Sky DBS issued 100 shares of its common stock to Holdings in exchange for
$100 and the subsequent transfer of all of the capital stock of Systems to
Golden Sky DBS. Upon completion of the aforementioned transfer, Systems became a
wholly-owned subsidiary of Golden Sky DBS.
Principal Business
Systems is the second largest independent provider of DIRECTV
subscription television services. DIRECTV is the leading direct broadcast
satellite ("DBS") company serving the continental United States. Systems, a
Delaware corporation formed on June 25, 1996 ("Inception"), is a non-voting
affiliate of the National Rural Telecommunications Cooperative (the "NRTC"). The
NRTC has contracted with Hughes Communications Galaxy, Inc. ("Hughes") for the
exclusive right to distribute DIRECTV programming to homes in certain rural
territories of the United States ("Rural DIRECTV Markets"). As of December 31,
1999, Systems had acquired 57 Rural DIRECTV Markets in 24 states with
approximately 1.9 million households. As of that same date, Systems served
approximately 345,200 subscribers.
Pegasus Merger
Holdings entered into a definitive merger agreement with Pegasus
Communications Corporation ("Pegasus") on January 10, 2000. Pegasus is the
largest independent provider of DIRECTV subscription television services in the
United States. The combined operations of Pegasus and Holdings will serve in
excess of 1.1 million subscribers in 41 states and have the exclusive right to
serve approximately 7.2 million rural households. Under the terms of the
agreement, Pegasus will issue up to 6.5 million shares of its Class A common
stock to Holdings shareholders. The value of the Pegasus shares to be issued to
Holdings shareholders approximated $632 million as of the date of execution of
the definitive merger agreement. Upon completion of the merger, Holdings will
become a wholly owned subsidiary of Pegasus. Consummation of the merger, which
is subject to certain conditions and approvals, is expected in the first or
second quarter of 2000.
Significant Risks and Uncertainties
Substantial Leverage. Golden Sky is highly leveraged, making it
vulnerable to changes in general economic conditions and interest rates. As of
December 31, 1999, Golden Sky had outstanding long-term debt (including current
portion) totaling approximately $369.4 million. Substantially all of Golden
Sky's assets are pledged as collateral on its long-term debt. Further, the terms
associated with Golden Sky's long-term debt obligations significantly restrict
its ability to incur additional indebtedness. Thus, it may be difficult for
Golden Sky and its subsidiaries to obtain additional debt financing if desired
or required in order to further implement Golden Sky's business strategy.
D-6
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. Organization and Nature of Operations -- (Continued)
Expected Operating Losses. Due to the substantial expenditures required
to acquire Rural DIRECTV Markets and subscribers, Golden Sky has sustained
significant losses since Inception. Golden Sky's operating losses were $12.7
million, $43.2 million, and $84.5 million for the years ended December 31, 1997,
1998 and 1999 respectively. Golden Sky's net losses during those same periods
aggregated $15.9 million, $64.7 million, and $131.3 million respectively.
Improvement in Golden Sky's results of operations is principally dependent upon
its ability to cost effectively expand its subscriber base, control subscriber
churn (i.e., the rate at which subscribers terminate service), and effectively
manage its operating and overhead costs. Golden Sky plans to reduce its future
operating and overhead costs by transitioning its direct sales distribution
model to an indirect (i.e., retail) distribution model. Accordingly, during the
year ending December 31, 2000 Golden Sky plans, among other things, to: (i)
close approximately 30 of its 68 local sales offices; (ii) reduce its corporate
overhead expenses through headcount and other expense reductions; and (iii)
increase the number of third-party retailers in its Rural DIRECTV Markets.
Golden Sky estimates that it will incur aggregate, non-recurring costs of
approximately $1.5 million in connection with these actions. These costs are
expected to primarily consist of employee severance and lease termination
expenses. There can be no assurance that Golden Sky will be effective with
regard to these plans. Golden Sky incurs significant costs to acquire DIRECTV
subscribers. The high cost of obtaining new subscribers magnifies the negative
effects of subscriber churn. Golden Sky anticipates that it will continue to
experience operating losses through at least 2000. There can be no assurance
that such operating losses will not continue beyond 2000 or that Golden Sky's
operations will generate sufficient cash flows to pay its obligations, including
its obligations on its long-term debt.
Restrictions on Dividends and Other Distributions. The ability of
Systems and its subsidiaries to pay dividends and make other distributions and
advances is subject to, among other things, the terms of its long-term debt
obligations and applicable law. As a result, Systems may be limited in its
ability to make dividend payments and other distributions to Golden Sky DBS or
Holdings at the time such distributions are needed by Golden Sky DBS or Holdings
to meet their obligations.
Reliance on DIRECTV/NRTC. Golden Sky obtains substantially all of its
revenue from the distribution of DIRECTV programming services. As a result,
Golden Sky would be materially adversely affected by any material change in the
assets, financial condition, programming, technological capabilities or services
of DIRECTV or Hughes. Further, Golden Sky relies upon DIRECTV to continue to
provide programming services on a basis consistent with its past practice. Any
change in such practice due to, for example, a failure to replace a satellite
upon the expiration of its useful orbital life or a delay in launching a
successor satellite may prevent Golden Sky from continuing to provide DBS
services and could have a material adverse effect on Golden Sky's financial
condition and results of operations. Additionally, Golden Sky's ability to offer
DIRECTV programming services depends upon agreements between the NRTC and Hughes
and between Golden Sky and the NRTC. The NRTC's interests may differ from Golden
Sky's interests. Golden Sky would be materially and adversely affected by the
termination of the NRTC's agreement with Hughes and/or the termination of Golden
Sky's agreements with the NRTC. Golden Sky's agreements with the NRTC require
that it use the NRTC for certain support services including subscriber
information and data reporting capability, retail billing services and central
office subscriber services. Such services are critical to the operation and
management of Golden Sky's business.
On January 10, 2000, Pegasus and Golden Sky filed a lawsuit in federal
court in Los Angeles against DIRECTV (see Note 10). The outcome of this
litigation and similar litigation filed by the NRTC against DIRECTV could have a
material adverse effect on the scope and duration of Golden Sky's right to
provide DIRECTV programming in its Rural DIRECTV Markets, its capital
requirements and its costs of operations.
Competition. The subscription television industry is highly
competitive. Golden Sky faces competition from companies offering video, audio,
data, programming and entertainment services. Many of these competitors have
substantially greater financial and marketing resources than Golden Sky. Golden
Sky's ability to effectively compete in the subscription television industry
will depend on a number of factors, including competitive factors (such as the
introduction of new technologies or the entry of additional strong competitors)
and the level of consumer demand for such services.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the financial statements
of Holdings and its majority-owned, direct and indirect subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Minority interest represents the cumulative earnings and losses, after capital
contributions, attributable to minority partners and stockholders.
D-7
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make a number of
estimates and assumptions which affect the reported amounts of assets and
liabilities, as well as the reported amounts of revenue and expenses during the
period. Actual results could differ from these estimates.
Cash and Cash Equivalents
Golden Sky considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. As of December 31,
1998 and 1999, cash and cash equivalents consisted of cash on hand, demand
deposits and money market accounts.
Restricted Cash
Restricted cash, as reflected in the accompanying consolidated balance
sheets, includes cash restricted by the indenture associated with Systems' 12
3/8% Notes (see Note 5), plus investment earnings thereon. Restricted cash,
which is held in escrow, is invested in certain permitted debt and other
marketable investment securities until disbursed for the express purposes
identified in the indenture. As of December 31, 1998 and 1999, restricted cash
was composed entirely of U.S. treasury notes.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or
market and consists of receivers, satellite dishes and accessories ("DBS
Equipment"). Golden Sky subsidizes the cost to the consumer of such equipment,
which is required to receive DIRECTV programming services. Additionally, Golden
Sky subsidizes the cost to the consumer of installation of DBS Equipment.
Equipment and installation revenues and related expenses are recognized upon
delivery and installation of DBS Equipment. Net transaction costs associated
with the sale and installation of DBS Equipment are reported as a component of
sales and marketing expenses in the accompanying consolidated statements of
operations. During the periods ended December 31, 1997, 1998 and 1999, aggregate
proceeds from the sale and installation of DBS Equipment totaled $3.8 million,
$11.0 million, and $9.3 million respectively; related cost of sales totaled $4.6
million, $25.8 million, and $44.3 million during those same periods.
Long-lived Assets
Golden Sky reviews its long-lived assets (e.g., property and equipment)
and certain identifiable intangible assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. For assets which are held and used in
operations, the asset would be impaired if the book value of the asset exceeded
the undiscounted future cash flows related to the asset. For those assets that
are to be disposed of, the assets would be impaired to the extent the fair value
does not exceed the book value. Golden Sky considers relevant cash flow,
estimated future operating results, trends and other available information
including the fair value of DIRECTV distribution rights owned, in assessing
whether the carrying value of assets can be recovered.
Property and Equipment
Property and equipment, consisting of computer hardware and software,
furniture, vehicles, and office and other equipment, is recorded at cost.
Depreciation is recognized on a straight-line basis over the related estimated
useful lives, which range from two to five years.
DIRECTV Distribution Rights
DIRECTV distribution rights, which represent the excess of the purchase
price over the fair value of net assets acquired, are amortized on a
straight-line basis over the periods expected to be benefited. The expected
period to be benefited corresponds to the remaining estimated orbital lives of
the satellites used by Hughes for distribution of DIRECTV programming services.
D-8
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Deferred Financing Costs
Deferred financing costs represent fees and other costs incurred in
conjunction with the issuance of long-term debt. These costs are amortized over
the term of the related debt using the effective interest method. Amortization
of these costs totaled $215,000, $977,000, and $2,164,000 during 1997, 1998 and
1999, respectively.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents: The carrying value approximates fair value
as a result of the short maturity of these instruments.
Receivables and payables: These assets are carried at cost, which
approximates fair value as a result of the short-term nature of the
instruments.
Long-term debt and notes payable: Fair value of Golden Sky's
publicly-traded debt securities is based on quoted market prices. The
carrying value of Golden Sky's bank debt and other notes payable
approximates fair value, as interest rates are variable or approximate
market rates. As of December 31, 1999, the carrying and fair values of
Golden Sky's publicly-traded debt securities were as follows (in
thousands):
Carrying Fair
Value Value
----- -----
12 3/8% Notes.................................. $195,000 $211,575
13 1/2% Notes.................................. 112,095 121,653
Revenue Recognition
DBS services revenue is recognized in the month service is provided.
Unearned revenue represents subscriber advance billings for one or more months;
related revenue recognition is deferred until service is provided.
System Operations Expense
System operations expense includes payroll and other administrative
costs related to Golden Sky's local offices and national call center.
Advertising Costs
Advertising costs are expensed as incurred. Such costs aggregated $1.4
million, $5.1 million, and $5.9 million during the years ended December 31,
1997, 1998 and 1999, respectively.
Free Programming Promotions
Certain DIRECTV national sales promotions offer free programming,
generally for up to three months of service, to new subscribers. The cost of
such free programming is expensed as sales and marketing expense in the period
the services are provided. During 1999, sales and marketing expenses
attributable to such promotions totaled $2.5 million.
D-9
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Income Taxes
Golden Sky uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. This method also requires the
recognition of future tax benefits, such as net operating loss carryforwards, to
the extent that realization of such benefits is more likely than not.
Effects of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS No. 133"). As a result of the subsequent issuance of FAS No.
137, FAS No. 133 is now effective for fiscal years beginning after June 15,
2000. FAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. Currently, Golden Sky has no derivative
instruments or hedging arrangements. Accordingly, adoption of FAS No. 133 is not
expected to have a material effect on Golden Sky's financial position or results
of operations.
Comprehensive Income
Golden Sky has no components of comprehensive income other than net
loss.
3. Acquisitions
Golden Sky accounts for its acquisitions using the purchase method.
Golden Sky's consolidated statements of operations for the periods ended
December 31, 1997, 1998 and 1999 include the results of operations of acquired
Rural DIRECTV Markets from the respective acquisition dates.
The aggregate purchase price (including direct acquisition costs) for
the acquisitions completed during 1997, 1998 and 1999 were allocated as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
DIRECTV distribution rights........................... $116,394 $114,747 $31,809
Customer lists........................................ 9,450 7,114 --
Non-compete agreements................................ 4,879 2,587 4,869
Property and equipment................................ 1,953 204 --
Minority interest..................................... (2,931) -- --
Working capital, net.................................. (20) 192 100
-------- -------- -------
$129,725 $124,844 $36,778
======== ======== =======
</TABLE>
D-10
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Acquisitions -- (Continued)
The following summarizes Golden Sky's acquisitions of Rural DIRECTV
Markets consummated during 1997, 1998 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
Aggregate
Seller Acquisition Date State Consideration
------ ---------------- ----- -------------
<S> <C> <C> <C>
Deep East Texas Telecommunications, Inc.................... February 7, 1997 Texas $1,919
Images DBS Kansas, L.C., Images DBS Oklahoma,
L.C. and Total Communications, Inc....................... February 12, 1997 Kansas/Oklahoma 12,702
Direct Satellite TV, LTD................................... February 28, 1997 Texas 3,746
Thunderbolt Systems, Inc................................... March 11, 1997 Missouri 6,127
Western Montana DBS, Inc. dba Rocky Mountain
DBS...................................................... May 1, 1997 Colorado 4,774
TEG DBS Services, Inc...................................... June 12, 1997 Nevada 5,237
GVEC Rural TV, Inc......................................... July 8, 1997 Texas 5,176
Satellite Entertainment, Inc............................... July 14, 1997 Minnesota/Michigan 9,640
Direct Vision.............................................. July 15, 1997 Minnesota 7,452
Argos Support Services Company............................. August 8, 1997 Florida/Texas/Utah 18,217
JECTV, a segment of Jackson Electric Cooperative........... August 26, 1997 Texas 9,453
Lakes Area TV.............................................. September 2, 1997 Minnesota 1,355
DCE Satellite Entertainment, LLC........................... October 13, 1997 Wisconsin 313
Direct Broadcast Satellite, a segment of CTS
Communication Corporation................................ November 7, 1997 Michigan 4,293
DBS, L.C................................................... November 17, 1997 Iowa 1,911
Panora Telecommunications, Inc............................. November 20, 1997 Iowa 1,131
Souris River Television, Inc............................... November 21, 1997 North Dakota 7,276
Cal-Ore Digital TV, Inc.................................... December 8, 1997 California/Oregon 5,095
NRTC System No. 0093, a segment of Cable and
Communications Corporation............................... December 17, 1997 Montana 3,876
Western Montana Entertainment Television, Inc.............. December 22, 1997 Montana 7,067
South Plains DBS........................................... December 23, 1997 Texas 9,143
Lakeland DBS............................................... December 24, 1997 Oklahoma 3,822
--------
Total 1997 acquisitions.................................. $129,725
========
</TABLE>
D-11
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Acquisitions -- (Continued)
<TABLE>
<CAPTION>
Aggregate
Seller Acquisition Date State Consideration
------ ---------------- ----- -------------
<S> <C> <C> <C>
Direct Broadcast Satellite, a segment of Nemont
Communications Inc........................................ January 14, 1998 Montana/Wyoming $8,284
Triangle Communications System, Inc......................... January 20, 1998 Montana 9,765
Wyoming Mutual Telephone.................................... January 21, 1998 Iowa 527
North Willamette Telephone.................................. March 10, 1998 Oregon 6,015
Northwest Communications.................................... March 10, 1998 North Dakota 1,363
Beulahland Communications, Inc.............................. March 19, 1998 Colorado 835
Direct Broadcast Satellite, a segment of SCS
Communications & Security, Inc............................ April 20, 1998 Oregon 5,386
PrimeWatch, Inc............................................. May 8, 1998 North Carolina 7,988
Mega TV..................................................... May 11, 1998 Georgia 2,103
Direct Broadcast Satellite, a division of Baldwin
County Electric Membership Corporation.................... June 29, 1998 Alabama 11,769
Frontier Corporation........................................ July 8, 1998 Wisconsin 734
North Texas Communications.................................. August 6, 1998 Texas 3,118
SEMO Communications Corporation............................. August 26, 1998 Missouri 2,918
DBS Segment of Cumby Cellular, Inc.......................... August 31, 1998 Texas 7,553
Minburn Telephone........................................... September 18, 1998 Iowa 447
Western Montana DBS, Inc. dba Rocky Mountain
DBS....................................................... October 2, 1998 Idaho/Montana 20,740
Direct Broadcast Satellite, a segment of Volcano
Vision, Inc............................................... October 9, 1998 California 31,425
North Central Missouri Electric Coop........................ November 2, 1998 Missouri 1,745
Star Search Rural Television, Inc........................... November 5, 1998 Oklahoma 2,129
--------
Total 1998 acquisitions................................... $124,844
========
Breda Telephone Corporation................................. January 11, 1999 Iowa/Nebraska $8,605
Thunderbolt Systems Inc..................................... January 15, 1999 Missouri 2,731
Siskiyou Ruralvision, Inc................................... February 28, 1999 California 4,735
Baraga Telephone Co......................................... March 31, 1999 Michigan 4,546
E. Ritter Communications.................................... April 2, 1999 Arkansas 2,689
Yelcot Telephone Co......................................... April 2, 1999 Arkansas 6,246
Van Buren DBS............................................... April 14, 1999 Iowa 2,914
Kertel Communications, Inc.................................. June 24, 1999 California 2,033
Mutual Telephone Company.................................... August 5, 1999 Iowa 620
Dubois Telephone............................................ December 8, 1999 Montana 220
-------
Total 1999 acquisitions................................... $35,339
=======
</TABLE>
Golden Sky's 1999 acquisitions of Rural DIRECTV Markets were not
material and, accordingly, the pro forma impact of those acquisitions has not
been presented. Unaudited pro forma total revenue and unaudited pro forma loss
before extraordinary charge for the year ended December 31, 1998 approximated
$87.9 million and $79.8 million, respectively. This unaudited pro forma
information reflects Golden Sky's significant acquisitions of Rural DIRECTV
Markets consummated during 1998 as if each such acquisition had occurred as of
the beginning of 1998. These results are not necessarily indicative of future
operating results or of what would have occurred had the acquisitions been
consummated as of that date.
During 1997, Golden Sky acquired a controlling interest in DCE
Satellite Entertainment, LLC ("DCE"). In June 1999, Golden Sky acquired the
remaining ownership interest in DCE that it did not hold in exchange for cash of
$1.0 million and the issuance of seller notes payable totaling the $2.9 million.
Also during 1999, Golden Sky acquired certain other minority interests for
$496,000.
D-12
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Intangible Assets
Intangible assets, which are amortized using the straight-line method
over the related estimated useful lives, consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
------------
Estimated
1998 1999 Useful Life
---- ---- -----------
<S> <C> <C> <C>
DIRECTV distribution rights........................... $236,531 $266,874 9 - 12 years
Customer lists........................................ 17,018 18,603 5 years
Non-compete agreements................................ 7,501 12,370 3 years
-------- --------
261,050 297,847
Less accumulated amortization......................... (27,911) (60,921)
-------- --------
Intangible assets, net............................ $233,139 $236,926
======== ========
</TABLE>
5. Long-Term Obligations
Long-term obligations consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
---- ----
<S> <C> <C>
12 3/8% Notes........................................................... $195,000 $195,000
13 1/2% Notes........................................................... -- 112,095
Bank debt............................................................... 67,000 52,000
Seller notes payable.................................................... 15,407 9,823
Other notes payable and obligations under capital
leases................................................................ 797 460
Minority interest....................................................... 2,420 936
-------- --------
Total long-term obligations............................................. 280,624 370,314
Less current maturities................................................. (8,916) (3,248)
-------- --------
Long-term obligations, net of current maturities $271,708 $367,066
======== ========
</TABLE>
12 3/8% Notes
On July 31, 1998, Systems consummated an offering (the "12 3/8% Notes
Offering") of 12 3/8% Senior Subordinated Notes due 2006 (the "12 3/8% Notes").
Interest on the 12 3/8% Notes is payable in cash semi-annually in arrears on
February 1 and August 1 of each year, commencing February 1, 1999. The 12 3/8%
Notes mature on August 1, 2006. The 12 3/8% Notes Offering resulted in net
proceeds to Golden Sky of approximately $189.2 million (after payment of
underwriting discounts and other issuance costs aggregating approximately $5.8
million). Approximately $45.2 million of the net proceeds of the 12 3/8% Notes
Offering were placed in escrow to fund the first four semi-annual interest
payments (through August 1, 2000) on the 12 3/8% Notes. Additionally, $5.3
million was reserved to fund a portion of a then contingent reduction of Golden
Sky's availability under its Credit Facility.
The 12 3/8% Notes are unsecured senior subordinated obligations and are
subordinated in right of payment to all existing and future senior indebtedness
of Systems. The 12 3/8% Notes rank pari passu in right of payment with all other
existing and future senior subordinated indebtedness, if any, of Systems and
senior in right of payment to all existing and future subordinated indebtedness,
if any, of Systems. The 12 3/8% Notes are guaranteed on a full, unconditional,
joint and several basis by Argos Support Services Company ("Argos") and
PrimeWatch, Inc. ("PrimeWatch"). Both Argos and PrimeWatch are wholly-owned
subsidiaries of Golden Sky.
D-13
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Long-Term Obligations -- (Continued)
The 12 3/8% Notes are redeemable, in whole or in part, at Systems'
option on or after August 1, 2003, at redemption prices decreasing from 112%
during the year commencing August 1, 2003 to 108% on or after August 1, 2005,
plus accrued and unpaid interest, if any, to the date of redemption. In
addition, on or prior to August 1, 2001, Systems may, at its option, redeem up
to 35% of the originally issued aggregate principal amount of the 12 3/8% Notes,
at a redemption price equal to 112.375% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of redemption solely
with the net proceeds of a public equity offering of Systems or Holdings
yielding gross proceeds of at least $40.0 million and any subsequent public
equity offerings (provided that, in the case of any such offering or offerings
by Holdings, all the net proceeds thereof are contributed to Systems); provided,
further that immediately after any such redemption the aggregate principal
amount of Notes outstanding must equal at least 65% of the originally issued
aggregate principal amount of the 12 3/8% Notes.
The indenture related to the 12 3/8% Notes (the "12 3/8% Notes
Indenture") contains restrictive covenants that, among other things, impose
limitations on Systems' ability to incur additional indebtedness, pay dividends
or make certain other restricted payments, consummate certain asset sales, enter
into certain transactions with affiliates, incur indebtedness that is
subordinate in right of payment to any senior indebtedness and senior in right
of payment to the 12 3/8% Notes, incur liens, permit restrictions on the ability
of subsidiaries to pay dividends or make certain payments to Systems, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of Systems' assets.
In the event of a change of control, as defined in the 123/8% Notes
Indenture, each holder of 12 3/8% Notes will have the right to require Systems
to purchase all or a portion of such holder's 12 3/8% Notes at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. Golden Sky's merger with Pegasus will constitute a
change of control as defined in the 12 3/8% Notes Indenture. Accordingly, upon
closing of the merger with Pegasus, Golden Sky will be required to make an offer
to the holders of the 12 3/8% Notes to purchase those notes consistent with the
terms described above. If Golden Sky's offer for the 12 3/8% Notes is accepted
by any of its note holders, and it is unable to purchase those notes, Golden Sky
may be in default of the terms of the 12 3/8% Notes Indenture. Pegasus has
entered into a commitment letter with an investment bank under which that
investment bank has agreed to purchase any and all 123/8% Notes tendered in
response to Golden Sky's offer to purchase. This commitment is subject to the
execution of definitive documentation and customary closing conditions. There
can be no assurance that Pegasus will be able to agree on definitive
documentation with the investment bank or make alternative arrangements if
necessary.
The 12 3/8% Notes were issued in a private placement pursuant to Rule
144A of the Securities Act of 1933, as amended (the "Securities Act"). During
1998, Systems filed a registration statement with the Securities and Exchange
Commission (the "SEC") relating to the exchange of the privately issued notes
for publicly registered notes with substantially identical terms (including
principal amount, interest rate, maturity, security and ranking). Because the
registration statement was not declared effective within the time period
required under the registration rights agreement associated with the 12 3/8%
Notes Offering, from December 29, 1998 through March 22, 1999 (the date the
registration statement was declared effective), Systems was required to pay
liquidated damages of $18,750 per week to holders of the 12 3/8% Notes.
13 1/2% Notes
On February 19, 1999, Golden Sky DBS consummated the 13 1/2% Notes
Offering, which resulted in net proceeds to Golden Sky DBS of approximately
$95.4 million (after initial purchasers' discount and other offering expenses).
The 13 1/2% Notes have an aggregate balance due at stated maturity of $193.1
million. Golden Sky DBS contributed the net proceeds of the 131/2% Notes
Offering to Golden Sky Systems, of which $53.0 million was used to repay
existing revolving credit indebtedness. Cash interest on the 13 1/2% Notes will
not accrue prior to March 1, 2004. Thereafter, cash interest will accrue at a
rate of 13 1/2% per annum and be payable in arrears on March 1 and September 1
of each year, commencing September 1, 2004. The 13 1/2% Notes mature on March 1,
2007.
D-14
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Long-Term Obligations -- (Continued)
The 13 1/2% Notes are unsecured and effectively rank below all of the
liabilities of Golden Sky DBS' direct and indirect subsidiaries. Golden Sky DBS'
ability to pay interest on the notes when interest is due and to redeem the
notes at maturity will depend on whether its direct and indirect subsidiaries
can pay dividends or make other distributions to it under the terms of such
subsidiaries' indebtedness and applicable law.
The 13 1/2% Notes are redeemable, in whole or in part, at the option of
Golden Sky DBS on or after March 1, 2004, at redemption prices decreasing from
106.75% during the year commencing March 1, 2004 to 103.375% on or after March
1, 2005, plus accrued and unpaid interest, if any, to the date of redemption. In
addition, on or prior to March 1, 2002, Golden Sky DBS may, at its option,
redeem up to 35% of the originally issued aggregate principal amount of 13 1/2%
Notes, at a redemption price equal to 113.5% of the accreted value of the 13
1/2% Notes at the date of redemption solely with the net proceeds of a public
equity offering of Golden Sky DBS yielding gross proceeds of at least $40
million and any subsequent public equity offerings; provided, however, that not
less than 65% of the originally issued aggregate principal amount of 131/2%
Notes are outstanding following such redemption.
The indenture governing the 13 1/2% Notes (the "13 1/2% Notes
Indenture") contains restrictive covenants that, among other things, impose
limitations on the ability of Golden Sky DBS and its subsidiaries to incur
additional indebtedness; pay dividends on, redeem or repurchase capital stock;
make investments; issue or sell capital stock of certain subsidiaries; create
specific types of liens; sell assets; engage in transactions with affiliates;
and consolidate, merge or transfer all or substantially all of their assets.
In the event of a change of control, as defined in the 13 1/2% Notes
Indenture, each holder of the 13 1/2% Notes will have the right to require
Golden Sky DBS to purchase all or a portion of such holder's 13 1/2% Notes at a
price equal to 101% of the accreted value of the notes, plus accrued and unpaid
interest, if any, to the date of purchase. Golden Sky's merger with Pegasus will
constitute a change of control as defined in the 13 1/2% Notes Indenture.
Accordingly, upon closing of the merger with Pegasus, Golden Sky will be
required to make an offer to the holders of the 13 1/2% Notes to purchase those
notes consistent with the terms described above. If Golden Sky's offer for the
13 1/2% Notes is accepted by any of its note holders, and it is unable to
purchase those notes, Golden Sky may be in default of the terms of the 13 1/2%
Notes Indenture. Pegasus has entered into a commitment letter with an investment
bank under which that investment bank has agreed to purchase any and all 13 1/2%
Notes tendered in response to Golden Sky's offer to purchase. This commitment is
subject to the execution of definitive documentation and customary closing
conditions. There can be no assurance that Pegasus will be able to agree on
definitive documentation with the investment bank or make alternative
arrangements if necessary.
Bank Debt
During 1997, Systems entered into a credit agreement (the "Credit
Agreement") with a group of financial institutions, which provided for
borrowings of $100.0 million. Loans outstanding under the Credit Agreement bore
interest at variable rates (prime rate or LIBOR plus an applicable margin).
During May 1998, Systems entered into a seven-year, $150.0 million
amended credit facility (the "Credit Facility") with a syndicate of lenders.
Upon execution of the Credit Facility, Systems recognized an extraordinary
charge of approximately $2.6 million to write-off unamortized deferred financing
costs associated with the Credit Agreement. In February 1999, Systems' Credit
Facility was amended to permit, among other things, the 13 1/2% Notes Offering.
Upon execution of the February 1999 amendment to the Credit Facility, Systems
recognized an extraordinary charge of approximately $2.9 million to write off
unamortized deferred financing costs associated with the Credit Facility.
The Credit Facility provides for a term loan commitment of $35.0
million and a revolving loan commitment of $115.0 million. The Credit Facility's
term loan commitment amortizes in specified quarterly installments from March
31, 2002 through maturity on December 31, 2005. The availability of revolving
loan borrowings under the Credit Facility reduces by specified amounts over the
period from March 31, 2001 through maturity on September 30, 2005.
D-15
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Long-Term Obligations -- (Continued)
Borrowings under the Credit Facility bear interest at variable rates
(approximately 10% as of December 31, 1999) calculated on a base rate, such as
the prime rate or LIBOR, plus an applicable margin. Commitment fees are payable
on unused amounts available under the Credit Facility. Such commitment fees,
which are payable quarterly in arrears, range from 0.50% per annum to 1.25% per
annum based on Systems' utilization of such commitments. As of December 31,
1999, aggregate borrowings outstanding under the Credit Facility totaled $52.0
million, including $35.0 million borrowed pursuant to the Credit Facility's term
loan commitment.
The Credit Facility contains a number of restrictive covenants that,
among other things, limit Systems' ability to incur additional indebtedness and
guaranty obligations, create liens and other encumbrances, make certain
payments, investments, loans and advances, pay dividends or make other
distributions in respect of Systems' capital stock, sell or otherwise dispose of
assets, make capital expenditures, merge or consolidate with another entity,
create subsidiaries, make amendments to its organizational documents or transact
with affiliates. As of each of December 31, 1997, 1998 and 1999, no amounts were
available for distribution to Holdings.
The Credit Facility also contains a number of financial covenants that
require Systems to meet certain financial ratios and financial condition tests.
These financial covenants, in certain instances, become effective at different
points in time and vary over time. The covenants include limitations on
indebtedness per subscriber, limitations on subscriber acquisition costs,
maintenance of a minimum fixed charge coverage ratio, maintenance of minimum
interest coverage ratios, and limitations on indebtedness to pro forma EBITDA
(earnings before interest, taxes, depreciation and amortization) ratios.
Revolving credit availability under the Credit Facility depends upon
satisfaction of the various covenants as well as minimum subscriber base
requirements.
As of September 30, 1999, Systems was not in compliance with certain of
the restrictive covenants prescribed by the Credit Facility. During January
2000, the Credit Facility was amended to modify certain fourth quarter 1999 and
year 2000 covenant requirements. Further, in conjunction with the amendment,
Golden Sky's third quarter 1999 covenant violations were waived. Pursuant to the
amendment, which was effective as of December 31, 1999, Golden Sky may borrow up
to an additional $20.0 million under the Credit Facility prior to March 31,
2000. Any such incremental borrowings, which are secured by letters of credit
provided by certain of Golden Sky Holdings' shareholders, must be repaid by
March 31, 2000 from the proceeds of either a private or public equity offering.
The required repayment date relative to these year 2000 incremental borrowings
may be deferred until May 31, 2000 under certain conditions. Upon repayment,
systems will have potential incremental borrowing capacity during the year
ending December 31, 2000 equal to the lesser of the proceeds received from
either a public or private equity offering or $20.0 million. Coincident with the
amendment of the Credit Facility, Holdings entered into stock subscription
agreements with certain of its shareholders for an aggregate of $20.0 million of
its preferred stock (see note 6). Also in January 2000, the Credit Facility was
further amended to approve the change in ownership of Holdings that would result
from the merger with Pegasus. As of December 31, 1999, Systems was in compliance
with the Credit Facility's amended covenants.
Seller Notes Payable
Seller notes payable bear interest at rates ranging from 7% to 10% and
are collateralized by bank letters of credit.
D-16
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Long-Term Obligations -- (Continued)
Other Notes Payable
In November 1996, Golden Sky issued $2.0 million in promissory notes to
a group of lenders under a bridge financing agreement. The notes bore interest
at the rate of 10% per annum. In February 1997, these notes, along with $1.8
million in additional promissory notes issued in January 1997, were exchanged
for Systems' Series A Convertible Participating Preferred Stock. In connection
with the bridge agreement, Systems' issued warrants exercisable for 5,682 shares
of its Common Stock at an exercise price of $.01 per share. These warrants were
immediately exercisable and expire on February 12, 2007. At the date of
issuance, the fair value of the warrants was not material. These warrants were
assumed by Holdings after its formation and remain outstanding as of December
31, 1999.
Future maturities of amounts outstanding under Golden Sky's long-term
obligations as of December 31, 1999 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Seller
12 2/8% 13 1/2% Notes
Notes Notes Bank Debt Payable Other Total
----- ----- --------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Year Ending December 31,
2000......................... $-- $-- $-- $2,891 $357 $3,248
2001......................... -- -- -- 2,970 76 3,046
2002......................... -- -- 263 2,962 23 3,248
2003......................... -- -- 350 1,000 4 1,354
2004......................... -- -- 350 -- -- 350
Thereafter................... 195,000 112,095 51,037 -- -- 358,132
------- ------- ------- ------ ---- --------
Total debt................. $195,000 $112,095 $52,000 $9,823 $460 $369,378
======== ======== ======= ====== ==== ========
</TABLE>
6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity (Deficit)
During 1996, Systems issued 1,000 shares of Common Stock, par value
$.01, for aggregate consideration of $1,000 cash. In February 1997, Systems (i)
amended its certificate of incorporation to cancel its outstanding shares of
Common Stock; (ii) created new classes of common and preferred stock and (iii)
exchanged all of the canceled shares of Systems' Common Stock for an aggregate
of ten shares of Systems' Series A Convertible Participating Preferred Stock
(the "Series A Preferred Stock").
In February 1997, Systems issued 24,990 shares of Series A Preferred
Stock in fulfillment of an investor's subscription to purchase Series A
Preferred Stock that was outstanding at December 31, 1996 (aggregate
consideration of $2,499,000). During that same month, Systems issued 100 shares
of its Common Stock (par value $.01) for aggregate consideration of $100 cash
and a total of 38,107 shares of Series A Preferred Stock upon the conversion of
convertible promissory notes (plus accrued interest of approximately $62,000)
issued in November 1996 ($2.0 million) and January 1997 ($1.8 million). In
February and March 1997, Systems issued 342,893 additional shares of Series A
Preferred Stock for cash totaling $34.3 million. Upon the formation of Holdings
in September 1997, all shareholders of Systems' Common Stock and Series A
Preferred Stock were issued equivalent shares of Holdings stock. Concurrent
therewith, Systems issued 1,000 shares of its Common Stock (par value $0.01) to
Holdings for cash proceeds of $10 and all previously outstanding shares of
Systems' Common Stock and Series A Preferred Stock were canceled.
D-17
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
(Deficit) -- (Continued)
At December 31, 1999, Holdings' preferred stock consists of:
Series A Convertible Participating Preferred Stock ("Series A Preferred Stock")
Holders of Series A Preferred Stock are entitled to voting rights equal
to the largest number of shares of common stock into which the Series A
Preferred Stock can be converted. These shares are entitled to mandatory,
cumulative, compounded cash dividends at the rate of 19.5% of the liquidation
preference through December 31, 1997, and 14.5% thereafter, payable upon
redemption, liquidation, sale of substantially all of the assets, or certain
mergers. In addition the Series A Preferred Stock shall be entitled to dividends
at the same rate as dividends are paid with respect to the common stock based
upon the largest number of shares of Common Stock into which the Series A
Preferred Stock can be converted. In the event of liquidation, holders of Series
A Preferred Stock are entitled to receive, to the extent available, the sum of
$100 per share plus any unpaid dividends.
The Series A Preferred Stock ranks on par with the Series B Convertible
Participating Preferred Stock, while the Series C Senior Convertible Preferred
Stock ranks senior to the Series A Preferred Stock and Series B Convertible
Participating Preferred Stock for liquidation purposes. In a liquidation, the
Series C Senior Convertible Preferred Stock shall be entitled to be paid out of
assets of Golden Sky available for distribution to stockholders the sum of $200
per share plus any accrued and unpaid dividends before any amount shall be paid
or distributed to the holders of the Series A Preferred Stock, Series B
Convertible Participating Preferred Stock, Series A Redeemable Preferred Stock,
Series B Redeemable Preferred Stock, Common Stock or any stock ranking on
liquidation junior to the Series C Senior Convertible Preferred Stock. After
such amounts have been paid to the holders of the Series C Senior Convertible
Preferred Stock, the Series A Preferred Stock, together with other preferred
stockholders ranking junior to the Series C Senior Convertible Preferred Stock,
will, after their respective liquidation preferences have been satisfied, share
ratably with the holders of common stock in the value received for the remaining
assets, as if each share of Series A Preferred Stock had been converted into
Common Stock.
The Series A Preferred Stock may be converted in certain circumstances
into one share of common stock and 0.95 shares of Series A Redeemable Preferred
Stock, with such redeemable preferred shares each having a liquidation
preference equal to the sum of $100 plus accrued and unpaid dividends on the
redeemable preferred stock. Series A Preferred Stock will be automatically
converted upon the closing of Golden Sky's first underwritten public offering of
common stock with net proceeds to Golden Sky equal to or exceeding $35 million,
where the shares are offered to the public at a price per share of no less than
$300, appropriately adjusted for any stock split, combination, reorganization,
recapitalization, reclassification, stock distribution, stock dividend, or
similar event, and in which all redeemable preferred stock issuable upon
conversion is redeemed at the closing or sufficient cash to do so is segregated
for that purpose (a "QPO"). Each share of Series A Preferred is also convertible
into common stock and redeemable preferred stock upon election of 58% of the
outstanding shareholders. Any accrued but unpaid dividends on the Series A
Preferred at the time of conversion will remain deferred and accrued and will be
for the benefit of the shares of the Series A Redeemable Preferred Stock into
which the Series A Preferred Stock was converted. As of December 31, 1999, the
cumulative, unpaid dividends associated with the Series A Preferred Stock
amounted to approximately $23.3 million, or $55.83 per share.
Series A Preferred Stock is mandatorily redeemable for $100 per share,
plus unpaid cumulative dividends, plus the fair value of one share of Common
Stock, upon approval of holders of at least 58% of the outstanding shares of
Series A Preferred Stock on or after February 12, 2002. It is also redeemable at
the option of Golden Sky after December 31, 2002 at the same redemption price.
In the event of a change of management or control of Golden Sky, and upon
election of holders of at least 58% of the outstanding shares, the Series A
Preferred Stock is redeemable on or after February 12, 2000.
D-18
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
(Deficit) -- (Continued)
Series B Convertible Participating Preferred Stock ("Series B Preferred Stock")
The Series B Preferred Stock has features similar to the Series A
Preferred Stock except that mandatory, cumulative, compounded cash dividends
accrue at 14.5% of the liquidation preference, and upon liquidation, the Series
B Preferred Stock shareholders are entitled to a preference of $200 per share
plus any unpaid dividends. Upon conversion, each share of the Series B Preferred
Stock is convertible into one share of common stock and 0.95 shares of Series B
Redeemable Preferred Stock having a liquidation preference equal to the sum of
$200 plus accrued and unpaid dividends. A QPO with respect to Series B Preferred
Stock requires a price of $600 per share rather than the $300 per share required
with respect to Series A Redeemable Preferred Stock. As of December 31, 1999,
the cumulative unpaid dividends associated with the Series B Preferred Stock
amounted to approximately $16.0 million or $69.99 per share.
Series C Senior Convertible Preferred Stock ("Series C Preferred Stock")
Holders of the Series C Preferred Stock are entitled to voting rights
equal to the largest number of shares of common stock into which each share of
Series C Preferred Stock can be converted. These shares are entitled to
mandatory, cumulative, compound cash dividends at the rate of 10.0% of the
liquidation preference, payable upon any liquidation event, sale of
substantially all of the assets, certain mergers, or redemption. In the event of
liquidation, holders of Series C Preferred Stock are entitled to receive, to the
extent available, the sum of $200 per share plus any unpaid dividends prior to
any distributions to other stock.
The Series C Preferred Stock will be automatically converted into
common stock upon the closing of Golden Sky's first underwritten public offering
of common stock with net proceeds to Golden Sky equal to or exceeding $35
million where the shares are offered to the public at a price per share of no
less than $200 per share, appropriately adjusted. The shares of Series C
Preferred Stock are convertible into common stock upon election of holders of at
least 58% of the outstanding shares of the Series A Preferred Stock and the
Series B Preferred Stock, voting separately by class, to convert all outstanding
shares of Series A Preferred Stock and Series B Preferred Stock into shares of
common stock and redeemable preferred stock. Any holder of Series C Preferred
Stock may also elect to convert any or all of its shares at any time. Upon
conversion, each share of the Series C Preferred Stock is convertible into one
share of Common Stock, and accrued and unpaid dividends are also converted into
common shares based on a $200 per share valuation.
In addition the Series C Preferred Stock of any holder is mandatorily
redeemable for $200 per share plus accrued and unpaid cumulative dividends upon
the written request of such holder on or after September 30, 2003. All the
shares of Series C Preferred Stock are redeemable at the option of Golden Sky
after September 30, 2004 at the same redemption price. As of December 31, 1999,
the cumulative unpaid dividends associated with the Series C Preferred Stock
amounted to approximately $1.3 million, or $26.28 per share.
Series A and Series B Redeemable Preferred Stock
A total of 646,500 shares of Series A and Series B Redeemable Preferred
Stock, $0.01 par value, have been authorized. No shares of Series A or Series B
Redeemable Preferred Stock were issued or outstanding at December 31, 1999. The
Series A and Series B Redeemable Preferred Stock have the same dividend rights
as the Series A Preferred Stock and the Series B Preferred Stock and are
redeemable under similar conditions as the Series A Preferred Stock and Series B
Preferred Stock. The Series A and Series B Redeemable Preferred Stock are also
redeemable upon election of holders of at least 58% of the shares in the series
following certain mergers or sale of substantially all of the assets, and are
mandatorily redeemed as of the closing of a QPO. The redemption price and the
liquidation preference for Series A and Series B Redeemable Preferred Stock are
$100 and $200 per share, respectively, plus accrued and unpaid dividends. Series
A and Series B Redeemable Preferred Stock have no voting rights, other than
rights to elect certain directors and to approve certain specified corporate
actions.
Undesignated Preferred Stock
A total of 300,000 shares of Undesignated Preferred Stock has been
authorized by the Board of Directors. No shares of Undesignated Preferred Stock,
$.01 par value, were issued or outstanding at December 31, 1999. The Board of
Directors has the authority to designate the class of stock, dividend rates,
voting powers, redemption options and conversion options of these shares.
D-19
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
(Deficit) -- (Continued)
Series D Redeemable Preferred Stock
During January 2000, Holdings entered into a stock purchase agreement
for the sale of up to $20.0 million of its Series D Redeemable Preferred Stock
(the "Series D Preferred Stock") to certain of its shareholders in connection
with an amendment to Systems' Credit Facility. The Series D Preferred Stock will
rank senior to all other series of Golden Sky's preferred and common stock with
respect to dividends and liquidation. Holders of Series D Preferred Stock will
be entitled to 10.0% mandatory, cumulative dividends compounded quarterly. These
dividends are payable in additional shares of Series D Preferred Stock, which is
valued at $200 per share, subject to anti-dilution adjustments. The Series D
Preferred Stock has no voting rights. It has redemption and other rights similar
to Golden Sky's other series of redeemable preferred stock. In connection with
the execution of the stock purchase agreement, Golden Sky issued warrants to
purchase a total of 3,500 shares of its common stock to the Series D investors.
These warrants are immediately exercisable and have an exercise price of $0.01
per share. Golden Sky will issue additional warrants for the purchase of 3,500
shares of its common stock upon the sale of the Series D Preferred Stock and,
subject to certain conditions, has agreed to issue warrants for the purchase of
up to an additional 7,000 shares of Common Stock.
7. Stock Incentive Plan
In July 1997 Systems adopted the Golden Sky Systems, Inc. Stock Option
and Restricted Stock Purchase Plan (the "Stock Incentive Plan") to provide
incentive to attract and retain certain officers, directors and key employees.
Options issued pursuant to the Stock Incentive Plan are exercisable during a
period of up to ten years after grant and vest over a three-year period.
Effective September 9, 1997, Holdings assumed the Stock Incentive Plan.
Participants in the Holdings' Stock Incentive Plan received options with terms
identical to those under Systems' Stock Incentive Plan and all previously
outstanding options were canceled.
The following summarizes incentive stock option activity during the
three-year period ended December 31, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year..................................... -- $ -- 62,525 $1.00 48,745 $1.00
Granted................................... 62,525 1.00 18,693 1.00 11,600 1.00
Exercised................................. -- -- (24,831) 1.00 (468) 1.00
Forfeited................................. -- -- (7,642) 1.00 (1,025) 1.00
------ ----- ------- ---- ------- ----
Options outstanding, end of year.......... 62,525 $1.00 48,745 $1.00 58,852 $1.00
====== ===== ====== ===== ====== =====
Options exercisable, end of year.......... 8,684 $1.00 5,595 $1.00 30,165 $1.00
====== ===== ====== ===== ====== =====
</TABLE>
Accounting for Stock-Based Compensation
Golden Sky has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for the Stock Incentive Plan. Under APB 25, if the
exercise price of employee stock options granted pursuant to the Stock Incentive
Plan is equal to or greater than the fair value of the underlying stock on the
date of grant, no compensation expense is recognized. In October 1995, the FASB
issued FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123"),
which established an alternative method of expense recognition for stock-based
compensation awards to employees based on fair values. Golden Sky elected to not
adopt FAS No. 123 for expense recognition purposes.
D-20
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Stock Incentive Plan -- (Continued)
For options granted during 1999, the estimated aggregate fair value of
Golden Sky's Common Stock on the respective grant dates exceeded the related
aggregate exercise price by approximately $462,000. This amount will be
recognized as compensation expense over the vesting period of the related stock
options. Accordingly, compensation cost of $154,000 was recorded during the year
ended December 31, 1999. For options granted in 1998 and 1997, the exercise
prices of the related stock options was not less than the fair value of Golden
Sky's Common Stock as of the respective grant dates and, accordingly, no
compensation expense was recognized relative to those options. The fair value of
Golden Sky's Common Stock was estimated by management using trading prices for
other similar publicly-traded companies, as adjusted for specific factors and
differences deemed relevant to the valuation of Golden Sky's Common Stock.
Pro forma information regarding net income is required by FAS No. 123
and has been determined as if Golden Sky had accounted for its stock-based
compensation using the fair value method prescribed by that statement. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the corresponding vesting period. All options are
initially assumed to vest. Compensation previously recognized is reversed to the
extent applicable to forfeitures of unvested options. The fair value of each
option grant was estimated at the date of the grant using a Black-Scholes option
valuation model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate............................. 6.0% 6.0% 6.0%
Dividend yield...................................... 0.0% 0.0% 0.0%
Volatility factor................................... 0.0% 0.0% 0.0%
Expected term of options............................ 10 years 10 years 10 years
</TABLE>
Using the preceding assumptions, there was no pro forma effect on
Golden Sky's net loss from applying the fair value method under FAS No. 123.
8. 401(k) Retirement Plan
Golden Sky sponsors a 401(k) Retirement Plan (the "401(k) Plan") for
eligible employees. Employer matching contributions to the 401(k) Plan, which
became effective as of January 1, 1997, are discretionary. During the years
ended December 31, 1997, 1998 and 1999, Golden Sky made no discretionary
employer matching contributions to the 401(k) Plan. Administrative expenses
associated with the 401(k) Plan during those same periods were not material.
D-21
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Income Taxes
The components of Golden Sky's (provision for) benefit from income
taxes are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current (provision) benefit:
Federal.................................................. $ 3,911 $ 16,325 $ 36,437
State.................................................... 742 3,097 6,913
Increase in valuation allowance.......................... (4,653) (19,422) (43,350)
------- -------- --------
Total current (provision) benefit......................... -- -- --
Deferred benefit:
Federal.................................................. 1,639 3,111 3,122
State.................................................... 311 590 592
Increase in valuation allowance.......................... (1,950) (3,701) (3,714)
------- -------- --------
Total deferred benefit.................................... -- -- --
------- -------- --------
Total benefit (provision)............................. $ -- $ -- $ --
======= ======== ========
</TABLE>
As of December 31, 1999, Golden Sky had net operating loss
carryforwards ("NOLs") for federal income tax purposes of approximately $179.0
million. The NOLs expire beginning in the year 2011. Use of the NOLs is subject
to statutory and regulatory limitations regarding changes in ownership. FAS No.
109, "Accounting for Income Taxes" ("FAS No. 109"), requires that the potential
future tax benefit of NOLs be recorded as an asset. FAS No. 109 also requires
that deferred tax assets and liabilities be recorded for the estimated future
tax effects of temporary differences between the tax basis and book value of
assets and liabilities. Deferred tax assets are offset by a valuation allowance
if deemed necessary.
In 1999, Holdings increased its valuation allowance sufficient to fully
offset net deferred tax assets arising during the year. Realization of net
deferred tax assets is not assured and is principally dependent on generating
future taxable income prior to expiration of the NOLs. Management frequently
reviews the adequacy of its valuation allowance. Future decreases to the
valuation allowance will be made only as changes in circumstances indicate that
it is more likely than not the additional benefits will be realized. Any future
adjustments to the valuation allowance will be recognized as a separate
component of Holdings' provision for income taxes.
D-22
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Income Taxes -- (Continued)
The temporary differences that give rise to deferred tax assets and
liabilities as of December 31, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
---- ----
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts..................................... $ 115 $ 383
Amortization of intangible assets................................... -- --
Accrued expenses.................................................... 104 337
--------- --------
Gross current deferred tax assets.................................... 219 720
Valuation allowance.................................................. (219) (720)
--------- --------
Net current deferred tax assets...................................... -- --
Non-current deferred tax assets:
Depreciation........................................................ 92 139
Amortization of intangible assets................................... 5,931 8,255
Partnerships........................................................ -- 841
Net operating loss carryforwards.................................... 28,407 71,738
Other............................................................... -- 20
--------- --------
Total non-current deferred tax assets................................ 34,430 80,993
Valuation allowance.................................................. (34,430) (80,993)
--------- --------
Net non-current deferred tax assets.................................. -- --
--------- --------
Net deferred tax assets.............................................. $ -- $ --
========= ========
</TABLE>
The actual income tax benefit (provision) for 1997, 1998 and 1999
reconciles to the amounts computed by applying the statutory federal tax rate to
income before income taxes as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1998 1999
---- ---- ----
Tax Rate Tax Rate Tax Rate
--- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
Statutory rate...................................... $ 5,391 34.0% $21,131 34.0% $ 43,633 34.0%
State income taxes, net of federal benefit.......... 695 4.4 2,433 3.9 4,953 3.9
Non-deductible amortization of intangible
assets............................................. (291) (1.8) (415) (0.7) (1,507) (1.2)
Other............................................... (12) (0.1) (26) -- (15) --
Increase in valuation allowance..................... (5,783) (36.5) (23,123) (37.2) (47,064) (36.7)
------- ----- -------- ----- -------- -----
Income taxes........................................ $ -- --% $ -- --% $ -- --%
======= ===== ======= ===== ======== =====
</TABLE>
10. Commitments and Contingencies
DIRECTV Litigation
In May 1999, Hughes acquired United States Satellite Broadcasting
Company, Inc. ("USSB"). Prior to its acquisition by Hughes, USSB offered premium
programming packages consisting of HBO, Showtime, Cinemax and The Movie Channel
to subscribers throughout the United States, including those within the NRTC's
rural DIRECTV markets. After completing its acquisition of USSB, Hughes combined
its DIRECTV business with USSB's assets to expand its programming lineup through
the addition of HBO, Showtime, Cinemax and The Movie Channel.
D-23
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10 Commitments and Contingencies -- (Continued)
On June 3, 1999, the NRTC filed suit against DIRECTV and Hughes
alleging breach of contract and seeking a court order requiring DIRECTV to
provide NRTC members and affiliates with HBO, Showtime, Cinemax and The Movie
Channel programming for exclusive distribution in the NRTC's rural DIRECTV
markets and a temporary restraining order and preliminary injunction preventing
DIRECTV from providing, marketing, selling or billing for this programming in
the NRTC's rural markets. On June 17, 1999, the court denied the NRTC's request
for a temporary restraining order and preliminary injunction. On July 12, 1999,
the NRTC amended its complaint to add a second claim for breach of contract and
to seek a declaratory judgment that, if the court determines that the NRTC does
not have the exclusive right to provide HBO, Showtime, Cinemax and The Movie
Channel programming in its rural markets, then the NRTC has the non-exclusive
right to distribute this programming in its rural markets. In July 1999, DIRECTV
and Hughes filed a motion to dismiss this portion of the NRTC's complaint on the
grounds that it fails to state a claim upon which relief may be granted because
DIRECTV is in the process of negotiating USSB programming distribution rights
with the NRTC and the DBS Distribution Agreement requires the parties to
arbitrate any claims regarding the terms and conditions of these rights. The
Court denied the motion to dismiss on September 8, 1999.
In July 1999, DIRECTV and Hughes filed a counterclaim against the NRTC.
In the counterclaim, DIRECTV seeks the following declaratory judgments:
1. That DBS-1, the first satellite launched by Hughes, is the only
relevant satellite for determining the term of the DBS Distribution
Agreement; and
2. That the DIRECTV-1R satellite, which was launched in October 1999,
is a successor satellite to DBS-1 within the scope and meaning of
the DBS Distribution Agreement; that DIRECTV appropriately and
prudently exercised its discretion, including its sole discretion to
determine when and under what conditions a successor satellite
should be launched, in determining to launch DIRECTV-1R in order to
prevent a disruption in service; that the NRTC's right of first
refusal under the DBS Distribution Agreement will be based on the
satellite expiration date of DBS-1; and that pursuant to its right
of first refusal, the NRTC has no right to specified programming
services currently required to be provided under the DBS
Distribution Agreement or more than 20 program channels of
transponder capacity.
On August 26, 1999, the NRTC filed a separate lawsuit against DIRECTV
and Hughes in the United States District Court for the Central District of
California. In this suit, the NRTC alleges that DIRECTV and Hughes have
breached their fiduciary duty to the NRTC as well as the NRTC's agreement
with Hughes and have engaged in unfair business practices in violation of
California law by withholding from the NRTC various revenues, cost savings,
discounts and other benefits belonging to the NRTC under its agreement with
Hughes. On October 15, 1999 DIRECTV moved to have the NRTC's breach of
fiduciary duty (and related breach of confidential relationship claims)
dismissed. The court granted DIRECTV's motion on November 15, 1999.
A trial date has not been set on the merits of any of the claims made
by the NRTC or DIRECTV and Hughes in either lawsuit. We are unable to predict
the outcome of these matters or how they will impact the business
relationship between the NRTC and DIRECTV.
On January 10, 2000, Golden Sky and Pegasus filed a lawsuit against
DIRECTV and Hughes in the United States District Court, Central District of
California. The action asserts various claims, including intentional
interference with contractual relations and interference with prospective
economic advantage, and seeks declaratory relief. The claims are based on
DIRECTV's failure to provide NRTC with certain premium programming, thereby
preventing NRTC from providing said premium programming to the class action
members. The claims are also based on DIRECTV's position with respect to
launch fees and other benefits it has received, contract term and rights of
refusal. We are unable to predict the outcome of this matter or how it will
impact our business, financial condition or results of operations.
Other Litigation
Golden Sky is subject to various other legal proceedings and claims
which arise in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to those actions will
not materially affect Golden Sky's financial position or results of operations.
D-24
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Commitments and Contingencies -- (Continued)
Operating Leases
Golden Sky has non-cancelable operating leases for office, warehouse
and storage space and equipment that expire at various dates. Future minimum
lease payments as of December 31, 1999 are summarized as follows (dollars in
thousands):
2000....................................................... $2,116
2001....................................................... 1,611
2002....................................................... 1,050
2003....................................................... 255
2004 and thereafter........................................ 79
------
Total..................................................... $5,111
======
11. Related Party Transactions
In 1997, Systems paid $66,000 to a company affiliated with Systems'
president for consulting services received by Systems. Additionally, during
1997, 1998 and 1999 Systems paid $77,000, $159,000 (including $75,000 paid in
connection with a 1998 acquisition) and $84,000, respectively, to one of its
directors for consulting services.
During 1996, Golden Sky's president provided Systems with a short-term
loan in the amount of $381,000. In 1997, Golden Sky received an additional
$150,000 short-term loan from its president and a $215,000 short-term loan from
a shareholder. Each of these loans bore interest at an annual rate of 10% and
was repaid during 1997.
Through December 31, 1999, Golden Sky contracted with an entity owned
by its president for air transportation services, including the lease of an
aircraft. This lease, which was canceled effective December 31, 1999, required
monthly payments equal to the greater of $20,000 or an aggregate fixed hourly
operating charge. The fixed hourly operating charge was based on prevailing
market prices. The total cost of such services approximated $109,000, $506,000
and $300,000 during 1997, 1998 and 1999, respectively.
12. Valuation and Qualifying Accounts
Golden Sky's valuation and qualifying accounts as of December 31, 1997,
1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning of period..................... $ 4 $138 $ 293
Charged to costs and expenses............................................ 417 1,537 3,909
Deductions............................................................... (283) (1,382) (3,229)
----- ------- ------
Allowance for doubtful accounts, end of period........................... $ 138 $ 293 $ 973
===== ======= =======
</TABLE>
D-25
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors
Consolidating financial information for Golden Sky, Golden Sky's
guarantor subsidiaries, and Golden Sky's non-guarantor subsidiaries is as
follows (dollars in thousands):
Consolidating Statement of Operations -- Year Ended December 31, 1997
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Holdings Systems Subsidiaries Subsidiaries Adjustments Consolidated
-------- ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
DBS services....................... $ -- $ 13,356 $2,787 $309 $ -- $ 16,452
Lease and other.................... -- 931 -- 13 -- 944
---- -------- ------ ---- ----- --------
Total revenue....................... -- 14,287 2,787 322 -- 17,396
Costs and Expenses:
Costs of DBS services.............. -- 7,514 1,601 189 -- 9,304
System operations.................. -- 2,830 876 100 (10) 3,796
Sales and marketing................ -- 6,597 693 26 -- 7,316
General and administrative......... -- 2,260 59 12 -- 2,331
Depreciation and amortization...... -- 6,312 109 79 800 7,300
---- -------- ------ ---- ----- --------
Total costs and expenses............ -- 25,513 3,338 406 790 30,047
---- -------- ------ ---- ----- --------
Operating loss...................... -- (11,226) (551) (84) (790) (12,651)
Non-operating items:
Interest and investment income..... -- 30 10 -- -- 40
Interest expense................... (73) (3,170) (3) -- -- (3,246)
---- -------- ------ ---- ----- --------
Total non-operating items........... (73) (3,140) 7 -- -- (3,206)
---- -------- ------ ---- ----- --------
Loss before income taxes............ (73) (14,366) (544) (84) (790) (15,857)
Income taxes........................ -- -- -- -- -- --
---- -------- ------ ---- ----- --------
Net loss............................ $(73) $(14,366) $ (544) $(84) $(790) $(15,857)
==== ======== ====== ==== ===== ========
</TABLE>
D-26
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
Consolidating Statement of Cash Flows -- Year Ended December 31, 1997
<TABLE>
<CAPTION>
Guarantor
Holdings Systems Subsidiaries
-------- ------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss....................................................... $ (73) $ (14,366) $ (544)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization................................ -- 6,312 109
Amortization of debt discount, deferred
financing costs and other................................. -- 215 --
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of unearned
revenue.................................................. -- (1,827) (615)
Other receivables......................................... (586) (185) 24
Inventory................................................. -- (1,499) (34)
Prepaid expenses and other................................ -- (201) 8
Trade accounts payable.................................... -- 7,683 (320)
Interest payable.......................................... 73 733 --
Accrued payroll and other................................. 574 (1,461) 2,460
------- --------- ------
Net cash provided by (used in) operating
activities................................................ (12) (4,596) 1,088
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets........................ -- (120,051) --
Purchases of property and equipment.......................... -- (992) (6)
Other........................................................ -- 320 --
------- --------- ------
Net cash provided by (used in) investing
activities................................................ -- (120,723) (6)
Cash Flows From Financing Activities
Proceeds from issuance of Series A
Preferred Stock........................................... 1,200 34,289 --
Proceeds from bridge loan.................................... 10,000 -- --
Proceeds from issuance of Series B
Preferred Stock........................................... 35,616 -- --
Borrowings under the Credit Agreement........................ -- 75,000 --
Principal payments on the Credit
Agreement................................................. -- (14,995) (5)
Proceeds from issuance of notes payable...................... -- 2,115 --
Principal payments on notes payable and
obligations under capital leases.......................... -- (2,902) --
Contribution from Holdings................................... (46,800) 46,800 --
Increase in deferred financing costs......................... -- (3,321) --
------- --------- ------
Net cash provided by (used in) financing
activities................................................ 16 136,986 (5)
Net increase in cash and cash equivalents... 4 11,667 1,077
Cash and cash equivalents, beginning of
period.................................................... -- 479 --
------- --------- ------
Cash and cash equivalents, end of period ... $4 $ 12,146 $1,077
======= ========= ======
</TABLE>
D-27
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
<TABLE>
<CAPTION>
Consolidating
Non- and
guarantor Eliminating
Subsidiaries Adjustments Consolidated
------------ ----------- ------------
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net loss ......................................................... $ (84) $ (790) $ (15,857)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .................................. 79 800 7,300
Amortization of debt discount, deferred
financing costs and other .................................... -- -- 215
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of unearned
revenue .................................................... (59) -- (2,501)
Other receivables ............................................ -- 586 (161)
Inventory .................................................... (71) -- (1,604)
Prepaid expenses and other ................................... (10) -- (203)
Trade accounts payable ....................................... 152 -- 7,515
Interest payable ............................................. -- -- 806
Accrued payroll and other .................................... 402 (596) 1,379
--------- --------- ---------
Net cash provided by (used in) operating
activities ................................................... 409 -- (3,111)
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets .......................... -- -- (120,051)
Purchases of property and equipment ............................ -- -- (998)
Other .......................................................... -- -- 320
--------- --------- ---------
Net cash provided by (used in) investing
activities ................................................... -- -- (120,729)
Cash Flows From Financing Activities
Proceeds from issuance of Series A
Preferred Stock .............................................. -- -- 35,489
Proceeds from bridge loan ...................................... -- -- 10,000
Proceeds from issuance of Series B
Preferred Stock .............................................. -- -- 35,616
Borrowings under the Credit Agreement .......................... -- -- 75,000
Principal payments on the Credit
Agreement .................................................... -- -- (15,000)
Proceeds from issuance of notes payable ........................ -- -- 2,115
Principal payments on notes payable and
obligations under capital leases ............................. -- -- (2,902)
Contribution from Holdings ..................................... -- -- --
Increase in deferred financing costs ........................... -- -- (3,321)
--------- --------- ---------
Net cash provided by (used in) financing
activities ................................................... -- -- 136,997
Net increase in cash and cash equivalents ...................... 409 -- 13,157
Cash and cash equivalents, beginning of
period ....................................................... -- -- 479
--------- --------- ---------
Cash and cash equivalents, end of period ....................... $ 409 $ -- $ 13,636
========= ========= =========
</TABLE>
D-28
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
Consolidating Balance Sheet -- December 31, 1998
<TABLE>
<CAPTION>
Guarantor
Holdings Systems Subsidiaries
-------- ------- ------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ......................................... $ 28 $ 827 $ 1,189
Restricted cash, current portion .................................. -- 28,083 --
Subscriber receivables, net ....................................... -- 6,815 1,043
Other receivables ................................................. -- 2,360 87
Intercompany receivables .......................................... 12 11,521 --
Inventory ......................................................... -- 9,255 583
Prepaid expenses and other ........................................ -- 1,819 37
-------- -------- --------
Total current assets ................................................ 40 60,680 2,939
Restricted cash, net of current portion ............................. -- 23,534 --
Property and equipment, net ......................................... -- 4,418 381
Investment in subsidiaries .......................................... 15,922 22,518 --
Intangible assets, net .............................................. -- 199,867 25,051
Deferred financing costs ............................................ -- 10,541 --
Other assets ........................................................ -- 133 85
-------- -------- --------
Total assets ................................................... $ 15,962 $321,691 $ 28,456
======== ======== ========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Trade accounts payable ............................................ $ -- $ 13,482 $ 49
Interest payable .................................................. -- 11,009 --
Current maturities of long-term
obligations ...................................................... -- 8,916 --
Unearned revenue .................................................. -- 4,380 789
Accrued payroll and other ......................................... -- 1,028 6,263
-------- -------- --------
Total current liabilities ........................................... -- 38,815 7,101
Long-term obligations, net of current
maturities:
12 3/8% Notes ..................................................... -- 195,000 --
Bank debt ......................................................... -- 67,000 --
Seller notes payable .............................................. -- 6,912 --
Other notes payable and obligations
under capital leases ............................................. -- 318 58
Minority interest ................................................. -- -- --
-------- -------- --------
Total long-term obligations, net of current
maturities ........................................................ -- 269,230 58
-------- -------- --------
Total liabilities ................................................... -- 308,045 7,159
Mandatorily redeemable preferred stock:
Series A Preferred Stock .......................................... 56,488 -- --
Series B Preferred stock .......................................... 53,489 -- --
Series C Preferred Stock .......................................... 10,455 -- --
-------- -------- --------
120,432 -- --
</TABLE>
D-29
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Stockholders' Equity (Deficit):
Common Stock .................................................... -- -- 896
Additional paid-in capital ...................................... 25 97,600 1,967
Retained earnings (accumulated deficit) ......................... (104,495) (83,954) 18,434
--------- --------- ---------
Total stockholders' equity (deficit) .............................. (104,470) 13,646 21,297
--------- --------- ---------
Total liabilities and stockholders'
equity (deficit) ........................................... $ 15,962 $ 321,691 $ 28,456
========= ========= =========
</TABLE>
D-30
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
<TABLE>
<CAPTION>
Consolidating
Non- and
guarantor Eliminating
Subsidiaries Adjustments Consolidated
------------ ----------- ------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ....................................... $ 2,444 $-- $ 4,488
Restricted cash, current portion ................................ -- -- 28,083
Subscriber receivables, net ..................................... 774 -- 8,632
Other receivables ............................................... 18 -- 2,465
Intercompany receivables ........................................ -- (11,533) --
Inventory ....................................................... 308 -- 10,146
Prepaid expenses and other ...................................... 3 -- 1,859
--------- --------- ---------
Total current assets .............................................. 3,547 (11,533) 55,673
Restricted cash, net of current portion ........................... -- -- 23,534
Property and equipment, net ....................................... 195 -- 4,994
Investment in subsidiaries ........................................ -- (38,440) --
Intangible assets, net ............................................ 3,525 4,696 233,139
Deferred financing costs .......................................... -- -- 10,541
Other assets ...................................................... -- -- 218
--------- --------- ---------
Total assets .................................................. $ 7,267 $ (45,277) $ 328,099
========= ========= =========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Trade accounts payable .......................................... $ 8 $ -- $ 13,539
Interest payable ................................................ -- -- 11,009
Current maturities of long-term
obligations .................................................... -- -- 8,916
Unearned revenue ................................................ 405 -- 5,574
Accrued payroll and other ....................................... 5,633 (11,533) 1,391
--------- --------- ---------
Total current liabilities ......................................... 6,046 (11,533) 40,429
Long-term obligations, net of current
maturities:
12 3/8% Notes ................................................... -- -- 195,000
Bank debt ....................................................... -- -- 67,000
Seller notes payable ............................................ -- -- 6,912
Other notes payable and obligations
under capital leases ........................................... -- -- 376
Minority interest ............................................... -- 2,420 2,420
--------- --------- ---------
Total long-term obligations, net of current
maturities ...................................................... -- 2,420 271,708
--------- --------- ---------
Total liabilities ................................................. 6,046 (9,113) 312,137
Mandatorily redeemable preferred stock:
Series A Preferred Stock ........................................ -- -- 56,488
Series B Preferred stock ........................................ -- -- 53,489
Series C Preferred Stock ........................................ -- -- 10,455
--------- --------- ---------
-- -- 120,432
Stockholders' Equity (Deficit):
Common Stock .................................................... -- (896) --
Additional paid-in capital ...................................... -- (99,567) 25
Retained earnings (accumulated deficit) ......................... 1,221 64,299 (104,495)
--------- --------- ---------
Total stockholders' equity (deficit) .............................. 1,221 (36,164) (104,470)
--------- --------- ---------
Total liabilities and stockholders'
equity (deficit) ........................................... $ 7,267 $ (45,277) $ 328,099
========= ========= =========
</TABLE>
D-31
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
Consolidating Statement of Operations - Year Ended December 31, 1998
<TABLE>
<CAPTION>
Guarantor
Holdings Systems Subsidiaries
-------- ------- ------------
<S> <C> <C> <C>
Revenue:
DBS services ................................................... $ -- $ 57,437 $ 11,172
Lease and other ................................................ -- 982 22
-------- -------- --------
Total revenue .................................................... -- 58,419 11,194
Costs and Expenses:
Costs of DBS services .......................................... -- 34,640 6,813
System operations .............................................. -- 7,683 2,533
Sales and marketing ............................................ -- 23,753 5,045
General and administrative ..................................... -- 7,000 267
Depreciation and amortization .................................. -- 19,336 996
-------- -------- --------
Total costs and expenses ......................................... -- 92,412 15,654
-------- -------- --------
Operating loss ................................................... -- (33,993) (4,460)
Non-operating items:
Interest and investment income ................................. -- 1,571 2
Interest expense ............................................... (1) (20,497) (28)
-------- -------- --------
Total non-operating items ........................................ (1) (18,926) (26)
-------- -------- --------
Loss before income taxes ......................................... (1) (52,919) (4,486)
Income taxes ..................................................... -- -- --
-------- -------- --------
Loss before extraordinary charge ................................. (1) (52,919) (4,486)
Extraordinary charge on early retire-
ment of debt ................................................... -- (2,577) --
-------- -------- --------
Net loss ......................................................... $ (1) $(55,496) $ (4,486)
======== ======== ========
</TABLE>
D-32
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13....... Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
<TABLE>
<CAPTION>
Consolidating
Non- and
guarantor Eliminating
Subsidiaries Adjustments Consolidated
------------ ----------- ------------
<S> <C> <C> <C>
Revenue:
DBS services ................................................ $ 6,301 $-- $ 74,910
Lease and other ............................................. 10 -- 1,014
--------- --------- ---------
Total revenue ................................................. 6,311 -- 75,924
Costs and Expenses:
Costs of DBS services ....................................... 3,838 -- 45,291
System operations ........................................... 1,318 (513) 11,021
Sales and marketing ......................................... 3,403 -- 32,201
General and administrative .................................. 164 -- 7,431
Depreciation and amortization ............................... 340 2,494 23,166
--------- --------- ---------
Total costs and expenses ...................................... 9,063 1,981 119,110
--------- --------- ---------
Operating loss ................................................ (2,752) (1,981) (43,186)
Non-operating items:
Interest and investment income .............................. -- -- 1,573
Interest expense ............................................ (12) -- (20,538)
--------- --------- ---------
Total non-operating items ..................................... (12) -- (18,965)
--------- --------- ---------
Loss before income taxes ...................................... (2,764) (1,981) (62,151)
Income taxes .................................................. -- -- --
--------- --------- ---------
Loss before extraordinary charge .............................. (2,764) (1,981) (62,151)
Extraordinary charge on early retire-
ment of debt ................................................ -- -- 2,577
--------- --------- ---------
Net loss ...................................................... $ (2,764) $ (1,981) $ (64,728)
========= ========= =========
</TABLE>
D-33
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
Consolidating Statement of Cash Flows - Year Ended December 31, 1998
<TABLE>
<CAPTION>
Guarantor
Holdings Systems Subsidiaries
-------- ------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss ......................................................... $ (1) $ (55,496) $ (4,486)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .................................. -- 19,336 996
Amortization of debt discount, deferred
financing and other ......................................... -- 977 --
Extraordinary charge on early
retirement of debt .......................................... -- 2,577 --
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue ........................................... -- (1,283) (222)
Other receivables ........................................... 574 (2,144) 32
Inventory ................................................... -- (7,335) (477)
Prepaid expenses and other .................................. -- (1,189) (36)
Trade accounts payable ...................................... -- 5,357 (145)
Interest payable ............................................ -- 10,223 --
Accrued payroll and other ................................... (574) (10,253) 4,827
--------- --------- ---------
Net cash provided by (used in) operating
activities ..................................................... (1) (39,230) 489
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets ............................ -- (104,487) --
Offering proceeds and investment earn-
ings placed in escrow .......................................... -- (51,617) --
Purchases of property and equipment .............................. -- (2,858) (341)
Other ............................................................ -- (500) --
--------- --------- ---------
Net cash used in investing activities ............................ -- (159,462) (341)
Cash Flows From Financing Activities
Net proceeds from issuance of 12 3/8%
Notes .......................................................... -- 189,150 --
Borrowings under bank debt ....................................... -- 90,000 --
Principal payments on bank debt .................................. -- (83,000) --
Principal payments on notes payable and
obligations under capital leases ............................... -- (3,639) (36)
Proceeds from the issuance of Common
Stock .......................................................... 25 -- --
Increase in deferred financing costs ............................. -- (5,138) --
--------- --------- ---------
Net cash provided by (used in) financing
activities ..................................................... 25 187,373 (36)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents .................................................... 24 (11,319) 112
Cash and cash equivalents, beginning of
period ......................................................... 4 12,146 1,077
--------- --------- ---------
Cash and cash equivalents, end of period ......................... $ 28 $ 827 $ 1,189
========= ========= =========
</TABLE>
D-34
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
<TABLE>
<CAPTION>
Consolidating
Non- and
guarantor Eliminating
Subsidiaries Adjustments Consolidated
------------ ----------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss ......................................................... $ (2,764) $ (1,981) $ (64,728)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .................................. 340 2,494 23,166
Amortization of debt discount, deferred
financing and other .......................................... -- -- 977
Extraordinary charge on early
retirement of debt ........................................... -- -- 2,577
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue ........................................... (252) -- (1,757)
Other receivables ............................................ (18) (12) (1,568)
Inventory .................................................... (237) -- (8,049)
Prepaid expenses and other ................................... (3) -- (1,228)
Trade accounts payable ....................................... (144) -- 5,068
Interest payable ............................................. -- -- 10,223
Accrued payroll and other .................................... 5,231 (501) (1,270)
--------- --------- ---------
Net cash provided by (used in) operating
activities ..................................................... 2,153 -- (36,589)
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets ............................ -- -- (104,487)
Offering proceeds and investment earn-
ings placed in escrow .......................................... -- -- (51,617)
Purchases of property and equipment .............................. (118) -- (3,317)
Other ............................................................ -- -- (500)
--------- --------- ---------
Net cash used in investing activities ............................ (118) -- (159,921)
Cash Flows From Financing Activities
Net proceeds from issuance of 12 3/8%
Notes .......................................................... -- -- 189,150
Borrowings under bank debt ....................................... -- -- 90,000
Principal payments on bank debt .................................. -- -- (83,000)
Principal payments on notes payable and
obligations under capital leases ............................... -- -- (3,675)
Proceeds from the issuance of Common
Stock .......................................................... -- -- 25
Increase in deferred financing costs ............................. -- -- (5,138)
--------- --------- ---------
Net cash provided by (used in) financing
activities ..................................................... -- -- 187,362
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents .................................................... 2,035 -- (9,148)
Cash and cash equivalents, beginning of
period ......................................................... 409 -- 13,636
--------- --------- ---------
Cash and cash equivalents, end of period ......................... $ 2,444 $ -- $ 4,488
========= ========= =========
</TABLE>
D-35
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
Consolidating Balance Sheet -- December 31, 1999
<TABLE>
<CAPTION>
Holdings DBS Systems
-------- --- -------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ......................................... $ 29 $ 5 $ 2,850
Restricted cash, current portion .................................. -- -- 23,731
Subscriber receivables, net ....................................... -- -- 10,118
Other receivables ................................................. -- -- 742
Intercompany receivables .......................................... 10 -- 6,412
Inventory ......................................................... -- -- 2,525
Prepaid expenses and other ........................................ -- -- 1,642
-------- -------- --------
Total current assets ................................................ 39 5 48,020
Property and equipment, net ......................................... -- -- 5,459
Investment in subsidiaries .......................................... -- -- 17,144
Intangible assets, net .............................................. -- -- 213,229
Deferred financing costs ............................................ -- 4,144 7,318
Other assets ........................................................ -- -- 173
-------- -------- --------
Total assets ................................................... $ 39 $ 4,149 $291,343
======== ======== ========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Trade accounts payable ............................................ $ -- $ -- $ 22,858
Interest payable .................................................. -- 20 11,659
Current maturities of long-term
obligations .................................................... -- -- 3,248
Unearned revenue .................................................. -- -- 7,146
Accrued payroll and other ......................................... 391 466 734
-------- -------- --------
Total current liabilities ........................................... 391 486 45,645
Long-term obligations, net of current
maturities:
12 3/8% Notes ..................................................... -- -- 195,000
13 1/2% Notes ..................................................... -- 112,095 --
Bank debt ......................................................... -- -- 52,000
Seller notes payable .............................................. -- -- 6,932
Other notes payable and obligations
under capital leases ........................................... -- -- 103
Minority interest ................................................. -- -- --
-------- -------- --------
Total long-term obligations, net of current
maturities ........................................................ -- 112,095 254,035
Losses of subsidiaries in excess of
original basis .................................................... 114,799 15,491 --
-------- -------- --------
Total liabilities ................................................... 115,190 128,072 299,680
</TABLE>
D-36
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
<TABLE>
<CAPTION>
<S> <C>
Mandatorily redeemable preferred stock:
Series A Preferred Stock ....................................... 65,135 -- --
Series B Preferred stock ....................................... 61,677 -- --
Series C Preferred Stock ....................................... 11,540 -- --
--------- --------- ---------
138,352 -- --
Stockholder's Equity (Deficit):
Common Stock ................................................... -- -- --
Additional paid-in capital ..................................... 179 -- 193,145
Retained earnings (accumulated
deficit) .................................................... (253,682) (123,923) (201,482)
--------- --------- ---------
Total stockholders' equity (deficit) ............................. (253,503) (123,923) (8,337)
--------- --------- ---------
Total liabilities and stockholders'
equity (deficit) ........................................... $ 39 $ 4,149 $ 291,343
========= ========= =========
</TABLE>
D-37
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Subsidiaries Subsidiaries Adjustments Consolidated
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................................. $ 132 $ 254 $ -- $ 3,270
Restricted cash, current portion ........................... -- -- -- 23,731
Subscriber receivables, net ................................ 1,445 770 -- 12,333
Other receivables .......................................... -- -- -- 742
Intercompany receivables ................................... -- -- (6,422) --
Inventory .................................................. 331 252 -- 3,108
Prepaid expenses and other ................................. 8 2 -- 1,652
--------- --------- --------- ---------
Total current assets ......................................... 1,916 1,278 (6,422) 44,836
Property and equipment, net .................................. 256 138 -- 5,853
Investment in subsidiaries ................................... -- -- (17,144) --
Intangible assets, net ....................................... 22,930 767 -- 236,926
Deferred financing costs ..................................... -- -- -- 11,462
Other assets ................................................. 87 -- -- 260
--------- --------- --------- ---------
Total assets ............................................. $ 25,189 $ 2,183 $ (23,566) $ 299,337
========= ========= ========= =========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Trade accounts payable ..................................... $ 18 $ 17 $ -- $ 22,893
Interest payable ........................................... -- -- -- 11,679
Current maturities of long-term
obligations .............................................. -- -- -- 3,248
Unearned revenue ........................................... 1,065 458 -- 8,669
Accrued payroll and other .................................. 7,032 1,638 (9,328) 933
--------- --------- --------- ---------
Total current liabilities .................................... 8,115 2,113 (9,328) 47,422
Long-term obligations, net of current
maturities:
12 3/8% Notes .............................................. -- -- -- 195,000
13 1/2% Notes .............................................. -- -- -- 112,095
Bank debt .................................................. -- -- -- 52,000
Seller notes payable ....................................... -- -- -- 6,932
Other notes payable and obligations
under capital leases ..................................... -- -- -- 103
Minority interest .......................................... -- -- 936 936
--------- --------- --------- ---------
Total long-term obligations, net of current
maturities ................................................. -- -- 936 367,066
Losses of subsidiaries in excess of
original basis ............................................. -- -- (130,290) --
--------- --------- --------- ---------
Total liabilities ............................................ 8,115 2,113 (138,682) 414,488
Mandatorily redeemable preferred stock:
Series A Preferred Stock ................................... -- -- -- 65,135
Series B Preferred stock ................................... -- -- -- 61,677
Series C Preferred Stock ................................... -- -- -- 11,540
--------- --------- --------- ---------
-- -- -- 138,352
Stockholder's Equity (Deficit):
Common Stock ............................................... 896 -- (896) --
Additional paid-in capital ................................. 1,967 -- (195,112) 179
Retained earnings (accumulated
deficit) ................................................. 14,211 70 311,124 (253,682)
--------- --------- --------- ---------
Total stockholders' equity (deficit) ......................... 17,074 70 115,116 (253,503)
--------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficit) ........................................ $ 25,189 $ 2,183 $ (23,566) $ 299,337
========= ========= ========= =========
</TABLE>
D-38
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
Consolidating Statement of Operations - Year Ended December 31, 1999
<TABLE>
<CAPTION>
Holdings DBS Systems
-------- --- -------
<S> <C> <C> <C>
Revenue:
DBS services ................................................ $ -- $ -- $ 112,714
Lease and other ............................................. -- -- 636
--------- --------- ---------
Total revenue ................................................. -- -- 113,350
Costs and Expenses:
Costs of DBS services ....................................... -- -- 71,510
System operations ........................................... -- -- 14,349
Sales and marketing ......................................... -- -- 58,452
General and administrative .................................. -- 5 15,703
Depreciation and amortization ............................... -- -- 32,562
--------- --------- ---------
Total costs and expenses ...................................... -- 5 192,576
--------- --------- ---------
Operating income (loss) ....................................... -- (5) (79,226)
Non-operating items:
Interest and investment income .............................. 1 -- 2,392
Interest expense ............................................ -- (12,570) (32,435)
Other non-operating expenses ................................ (391) (466) (258)
--------- --------- ---------
Total non-operating items ..................................... (390) (13,036) (30,301)
--------- --------- ---------
Income (loss) before income taxes ............................. (390) (13,041) (109,527)
Income taxes .................................................. -- -- --
--------- --------- ---------
Income (loss) before extraordinary
charge ...................................................... (390) (13,041) (109,527)
Extraordinary charge on early
retirement of debt .......................................... -- -- (2,935)
--------- --------- ---------
Net income (loss) ............................................. $ (390) $ (13,041) $(112,462)
========= ========= =========
</TABLE>
D-39
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Subsidiaries Subsidiaries Adjustments Consolidated
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
DBS services ..................................... $ 18,130 $ 9,089 $ -- $ 139,933
Lease and other .................................. 3 1 -- 640
--------- --------- --------- ---------
Total revenue ...................................... 18,133 9,090 -- 140,573
Costs and Expenses:
Costs of DBS services ............................ 11,516 5,664 -- 88,690
System operations ................................ 3,495 2,155 (266) 19,733
Sales and marketing .............................. 4,142 2,339 -- 64,933
General and administrative ....................... -- -- -- 15,708
Depreciation and amortization .................... 3,054 347 -- 35,963
--------- --------- --------- ---------
Total costs and expenses ........................... 22,207 10,505 (266) 225,027
--------- --------- --------- ---------
Operating income (loss) ............................ (4,074) (1,415) 266 (84,454)
Non-operating items:
Interest and investment income ................... -- -- -- 2,393
Interest expense ................................. (5) (2) -- (45,012)
Other non-operating expenses ..................... (144) -- -- (1,259)
--------- --------- --------- ---------
Total non-operating items .......................... (149) (2) -- (43,878)
--------- --------- --------- ---------
Income (loss) before income taxes .................. (4,223) (1,417) 266 (128,332)
Income taxes ....................................... -- -- -- --
--------- --------- --------- ---------
Income (loss) before extraordinary
charge ........................................... (4,223) (1,417) 266 (128,332)
Extraordinary charge on early
retirement of debt ............................... -- -- -- (2,935)
--------- --------- --------- ---------
Net income (loss) .................................. $ (4,223) $ (1,417) $ 266 $(131,267)
========= ========= ========= =========
</TABLE>
D-40
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
Consolidating Statement of Cash Flows - Year Ended December 31, 1999
<TABLE>
<CAPTION>
Holdings DBS Systems
-------- --- -------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) ................................................ $ (390) $ (13,041) $(112,462)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .................................. -- -- 32,562
Amortization of debt discount, deferred
financing costs and other ................................... -- 12,550 1,126
Earned stock compensation ...................................... -- -- 154
Extraordinary charge on early
retirement of debt .......................................... -- -- 2,935
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue ........................................... -- -- (472)
Other receivables ........................................... -- -- 238
Inventory ................................................... -- -- 6,730
Prepaid expenses and other .................................. -- -- 177
Trade accounts payable ...................................... -- -- 9,376
Interest payable ............................................ -- 20 650
Accrued payroll and other ................................... 391 466 1,105
--------- --------- ---------
Net cash provided by (used in) operating
activities ..................................................... 1 (5) (57,881)
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets ............................ -- -- (35,339)
Purchases of minority interests .................................. -- -- (1,439)
Proceeds from interest escrow account ............................ -- -- 24,224
Release of amounts reserved for
contingent reduction of bank debt .............................. -- -- 5,449
Investment earnings placed in escrow ............................. -- -- (1,787)
Purchases of property and equipment .............................. -- -- (3,423)
Other ............................................................ -- -- 114
--------- --------- ---------
Net cash used in investing activities ............................ -- -- (12,201)
Cash Flows From Financing Activities
Bank borrowing ................................................... -- -- 38,000
Principal payments on bank debt .................................. -- -- (53,000)
Principal payments on notes payable and
obligations under capital leases ............................... -- -- (8,846)
Increase in deferred financing costs ............................. -- (4,648) (868)
Capital contribution from minority
partner ........................................................ -- -- 1,428
Capital Contribution to Systems .................................. -- (95,391) 95,391
Net proceeds from issuance of 13 1/2%
Notes .......................................................... -- 100,049 --
--------- --------- ---------
Net cash provided by financing activities ........................ -- 10 72,105
--------- --------- ---------
</TABLE>
D-41
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents ....................................................... 1 5 2,023
Cash and cash equivalents, beginning of
period ............................................................ 28 -- 827
------ ------ ------
Cash and cash equivalents, end of period ............................ $ 29 $ 5 $2,850
====== ====== ======
</TABLE>
D-42
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors --
(Continued)
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Subsidiaries Subsidiaries Adjustments Consolidated
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) .......................................... $ (4,223) $ (1,417) $ 266 $(131,267)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization ............................ 3,054 347 -- 35,963
Amortization of debt discount, deferred
financing costs and other .............................. -- 266 (266) 13,676
Earned stock compensation ................................ -- -- -- 154
Extraordinary charge on early
retirement of debt ..................................... -- -- -- 2,935
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue ...................................... (126) 57 -- (541)
Other receivables ...................................... 87 18 845 1,188
Inventory .............................................. 252 56 -- 7,038
Prepaid expenses and other ............................. 29 1 -- 207
Trade accounts payable ................................. (31) 9 -- 9,354
Interest payable ....................................... -- -- -- 670
Accrued payroll and other .............................. (97) (1,498) (845) (478)
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities ............................................... (1,055) (2,161) -- (61,101)
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets ...................... -- -- -- (35,339)
Purchases of minority interests ............................ -- -- -- (1,439)
Proceeds from interest escrow account ...................... -- -- -- 24,224
Release of amounts reserved for
contingent reduction of bank debt ........................ -- -- -- 5,449
Investment earnings placed in escrow ....................... -- -- -- (1,787)
Purchases of property and equipment ........................ -- (29) -- (3,452)
Other ...................................................... (2) -- -- 112
--------- --------- --------- ---------
Net cash used in investing activities ...................... (2) (29) -- (12,232)
Cash Flows From Financing Activities
Bank borrowing ............................................. -- -- -- 38,000
Principal payments on bank debt ............................ -- -- -- (53,000)
Principal payments on notes payable and
obligations under capital leases ......................... -- -- -- (8,846)
Increase in deferred financing costs ....................... -- -- -- (5,516)
Capital contribution from minority
partner .................................................. -- -- -- 1,428
Capital Contribution to Systems ............................ -- -- -- --
Net proceeds from issuance of 13 1/2%
Notes .................................................... -- -- -- 100,049
--------- --------- --------- ---------
Net cash provided by financing activities .................. -- -- -- 72,115
--------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents .............................................. (1,057) (2,190) -- (1,218)
Cash and cash equivalents, beginning of
period ................................................... 1,189 2,444 -- 4,488
--------- --------- --------- ---------
Cash and cash equivalents, end of period ................... $ 132 $ 254 $ -- $ 3,270
========= ========= ========= =========
</TABLE>
D-43
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
14. Quarterly Financial Data (Unaudited)
Golden Sky's quarterly results of operations are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Period Ended December 31, 1998:
Total revenue .................................... $ 14,129 $ 16,849 $ 19,912 $ 25,034
Operating loss ................................... (6,034) (8,806) (11,462) (16,884)
Loss before extraordinary charge ................. (8,287) (11,761) (17,354) (24,749)
Net loss ......................................... (8,287) (14,338) (17,354) (24,749)
Period Ended December 31, 1999:
Total revenue .................................... $ 29,036 $ 31,389 $ 36,732 $ 43,416
Operating loss ................................... (16,734) (19,166) (29,930) (18,624)
Loss before extraordinary charge ................. (25,872) (30,104) (41,087) (31,269)
Net loss ......................................... (28,807) (30,104) (41,087) (31,269)
</TABLE>
D-44
<PAGE>
ANNEX E
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 March 31, 2000
--------------
--------------
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 333-76413
GOLDEN SKY DBS, INC.
--------------------
(Exact name of Registrant as specified in its charter)
Delaware 43-1839531
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
c/o Pegasus Communication Management Company
225 City Line Avenue, Suite 200 Bala Cynwyd, PA 19004
----------------------------------------------- -----
(Address of principal executive offices) (Zip code)
(888) 438-7488
--------------
(Registrant's telephone number, including area code)
4700 Belleview Avenue, Suite 300
Kansas City, MO 64112
---------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 ___
-------
As of May 9, 2000, the Registrant had 100 shares of common stock
outstanding.
E-1
<PAGE>
GOLDEN SKY, DBS, INC.
Form 10-Q
Table of Contents
For the Quarterly Period Ended March 31, 2000
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
<S> <C> <C>
Consolidated Balance Sheets as of December 31, 1999 and March 31, 2000............ 3
Consolidated Statements of Operations for the three months ended
March 31, 1999 and 2000........................................................... 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 2000........................................................... 5
Notes to Consolidated Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 16
Item 5. Other Information................................................................. 17
Item 6. Exhibits and Reports on Form 8-K.................................................. 17
Signature....................................................................................... 19
</TABLE>
E-2
<PAGE>
GOLDEN SKY DBS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000
----------------- --------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents.................................. $3,241 $31
Restricted cash............................................ 23,731 11,821
Accounts receivable, less allowance for doubtful accounts
of $973 and $942, respectively............................ 4,797 4,277
Inventory.................................................. 3,108 2,799
Prepaid expenses and other................................. 1,652 1,301
-------- --------
Total current assets............................................ 36,529 20,229
Property and equipment, net..................................... 5,853 4,963
Intangible assets, net.......................................... 236,926 229,349
Deferred financing costs, net................................... 11,462 11,931
Deposits and other.............................................. 260 115
-------- --------
Total assets............................................... $291,030 $266,587
======== ========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt.......................... $3,248 $3,205
Accounts payable........................................... 8,089 5,538
Accrued interest........................................... 11,679 4,355
Accrued satellite programming, fees and commissions........ 14,804 14,960
Accrued expenses........................................... 943 1,391
-------- --------
Total current liabilities....................................... 38,763 29,449
Long-term debt.................................................. 366,130 372,789
-------- --------
Total liabilities.......................................... 404,893 402,238
Commitments and contingent liabilities.......................... -- --
Minority interest............................................... 936 868
Stockholder's equity (deficit):
Common stock; $.01 par value; 1,000 shares authorized; 100
issued and outstanding..................................... -- --
Additional paid-in capital................................. 97,754 97,869
Deficit.................................................... (212,553) (234,388)
-------- --------
Total stockholder's equity (deficit) ...................... (114,799) (136,519)
-------- --------
Total liabilities and stockholder's equity (deficit).... $291,030 $266,587
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
E-3
<PAGE>
GOLDEN SKY DBS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 2000
---- ----
<S> <C> <C>
(unaudited)
Revenue:
DBS services............................................... $28,388 $43,491
Lease and other............................................ 197 57
-------- --------
Total revenue................................................... 28,585 43,548
Operating expenses:
Programming and technical.................................. 17,961 25,956
General and administrative................................. 7,200 8,698
Marketing and selling...................................... 11,920 7,586
Incentive compensation..................................... 18 115
Lease termination and severance............................ -- 1,222
Depreciation and amortization.............................. 8,220 9,335
-------- --------
Total costs and expenses........................................ 45,319 52,912
Loss from operations............................................ (16,734) (9,364)
Interest expense................................................ (9,961) (12,153)
Interest income................................................. 823 205
Other expense, net.............................................. -- (523)
Loss before income taxes........................................ (25,872) (21,835)
Income taxes.................................................... -- --
Loss before extraordinary items................................. (25,872) (21,835)
Extraordinary loss from extinguishment of debt, net............. (2,935) --
Net loss........................................................ ($28,807) ($21,835)
</TABLE>
See accompanying notes to consolidated financial statements
E-4
<PAGE>
GOLDEN SKY DBS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 2000
---- ----
<S> <C> <C>
(unaudited)
Cash flows from operating activities:
Net loss................................................... ($28,807) ($21,835)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.............................. 8,220 9,335
Amortization of debt discount and deferred financing costs. 1,840 4,141
Stock incentive compensation............................... 18 115
Extraordinary loss on extinguishment of debt, net.......... 2,935 --
Bad debt expense........................................... 370 1,050
Change in assets and liabilities:
Accounts receivable................................... 1,147 (174)
Inventory............................................. 1,463 309
Prepaid expenses and other............................ 683 351
Accounts payable and accrued expenses................. 1,554 (1,816)
Accrued interest...................................... (6,661) (7,324)
-------- --------
Net cash used for operating activities.......................... (17,238) (15,848)
Cash flows from investing activities:
Acquisitions............................................... (20,334) (1,486)
Capital expenditures....................................... (1,144) (47)
Other...................................................... (48) 324
Net cash used for investing activities..................... (21,526) (1,209)
Cash flows from financing activities:
Proceeds from issuance of 13.5% Notes...................... 100,049 --
Borrowings on bank credit facilities....................... 21,000 6,000
Repayments of bank credit facilities....................... (53,000) --
Repayments of long-term debt and capital leases............ (6,032) (3,086)
Restricted cash............................................ 16,898 11,910
Increase in deferred financing costs....................... (5,335) (977)
Net cash provided by financing activities....................... 73,580 13,847
Net increase (decrease) in cash and cash equivalents............ 34,816 (3,210)
Cash and cash equivalents, beginning of year.................... 4,460 3,241
Cash and cash equivalents, end of period........................ $39,276 $31
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest..................................... $14,390 $15,216
Property and equipment acquired under capital leases....... 78 --
</TABLE>
See accompanying notes to consolidated financial statements
E-5
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Golden Sky DBS, Inc. ("Golden Sky DBS" or together with its
subsidiaries, the "Company") is a holding company which operates primarily
through its subsidiaries. Golden Sky DBS' subsidiaries provide direct broadcast
satellite television ("DBS") services to customers in certain rural areas of 24
states.
Golden Sky DBS was formed in February 1999 for the purpose of
completing a private offering (the "13.5% Notes Offering") of 13.5% Senior
Discount Notes due 2007 (the "13.5% Notes"). Upon formation, Golden Sky DBS
issued 100 shares of its common stock to Golden Sky Holdings, Inc. ("GSH") in
exchange for $100 and the subsequent transfer of all of the capital stock of
Golden Sky Systems, Inc. ("GSS") to Golden Sky DBS. Until February 1999, GSS was
a wholly owned subsidiary of GSH. Upon completion of the aforementioned
transfer, GSS became a wholly owned subsidiary of Golden Sky DBS and Golden Sky
DBS became a wholly owned subsidiary of GSH. Accordingly, GSS has been treated
as the predecessor to Golden Sky DBS and the historical financial statements of
Golden Sky DBS prior to February 1999 are those of GSS.
On May 5, 2000, GSH merged (the "Merger") with Pegasus GSS Merger Sub,
Inc., a wholly owned subsidiary of Pegasus Communications Corporation ("Pegasus"
or the "Parent") in a transaction accounted for as a purchase. In connection
with the Merger, the stockholders of GSH exchanged all of their outstanding
capital stock for approximately 6.1 million shares of Pegasus' Class A Common
Stock and options to purchase a total of approximately 349,000 shares of
Pegasus' Class A Common Stock and, as a consequence, GSH became a wholly owned
subsidiary of Pegasus. Pegasus did not assume, guarantee or otherwise have any
liability for GSH's outstanding indebtedness or any other liability of GSH or
its subsidiaries. After the Merger, except to the extent permitted under the
terms of the 13.5% Notes and GSS' 12.375%, Senior Subordinated Notes due 2006,
GSH did not assume, guarantee or otherwise have any liability for any
indebtedness or other liability of Pegasus or any of Pegasus' subsidiaries.
Total consideration for the Merger was approximately $1.3 billion,
which consisted of approximately 6.1 million shares of Pegasus' Class A Common
Stock (amounting to $579.0 million at a price of $95.07 per share, the average
closing price per share five days prior and subsequent to the acquisition
announcement), options to purchase a total of 349,000 shares of Pegasus' Class A
Common Stock (amounting to $33.1 million), approximately $377.8 million of
assumed net liabilities (as of March 31, 2000) and a deferred tax liability of
approximately $342.8 million, primarily as a result of non-deductible
amortization. The accompanying financial statements do not reflect the
application of purchase accounting for this transaction.
2. Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial statements include the accounts of Golden
Sky DBS and all of its subsidiaries. All intercompany transactions and balances
have been eliminated. Certain amounts for 1999 have been reclassified for
comparative purposes.
The unaudited financial statements reflect all adjustments consisting
of normal recurring items which are, in the opinion of management, necessary for
a fair presentation, in all material respects, of the financial position of the
Company and the results of its operations and its cash flows for the interim
period. For further information, refer to the consolidated financial statements
and footnotes thereto for the year ended December 31, 1999 included in the
Company's Annual Report on Form 10-K for the year then ended.
E-6
<PAGE>
3. Equity:
On May 5, 2000, in connection with the Merger, the stockholders of GSH
exchanged all of their outstanding capital stock for shares of Pegasus' Class A
Common Stock and options to purchase shares of Pegasus' Class A Common Stock
and, as a result, the Company became an indirect wholly owned subsidiary of
Pegasus.
As of December 31, 1999 and March 31, 2000, the Company had one class
of Common Stock. The Company's ability to pay dividends on its Common Stock is
subject to certain restrictions.
4. Long-Term Debt:
<TABLE>
<CAPTION>
Long-term debt consists of the following (in thousands): December 31, March 31,
1999 2000
---- ----
<S> <C> <C>
Senior Subordinated Notes payable by GSS, due 2006, interest at 12.375%, payable
semi-annually in arrears on February 1 and August 1.......................... $195,000 $195,000
Senior Discount Notes payable by Golden Sky DBS, due 2007, interest at 13.5%,
payable semi-annually on March 1 and September 1, beginning September 1,
2004, net of unamortized discount of $81.0 million and $77.3 million as of
December 31, 1999 and March 31, 2000, respectively........................... 112,095 115,797
Senior seven-year $115.0 million revolving credit facility, payable by GSS,
interest at GSS' option at either the bank's rate plus an applicable margin
or LIBOR plus an applicabel margin........................................... 17,000 23,000
Senior seven-year $35.0 million term loan facility, payable by GSS, interest at
GSS' option at either the bank's rate plus an applicable margin or LIBOR
plus an applicable margin................................................... 35,000 35,000
Seller's notes, due 2000 to 2003, interest at 6.75% to 7%......................... 9,823 6,916
Capital leases and other.......................................................... 460 281
-------- --------
369,378 375,994
Less current maturities .......................................................... 3,248 3,205
Long-term debt ................................................................... $366,130 $372,789
</TABLE>
GSS maintains a $115.0 million senior revolving credit facility and a
$35.0 million senior term credit facility (collectively, the "GSS Credit
Facility"), which is collateralized by substantially all of the assets of GSS
and its subsidiaries. The GSS Credit Facility is subject to certain financial
covenants as defined in the loan agreement, including a debt to adjusted cash
flow covenant. As of March 31, 2000, $35.9 million of stand-by letters of credit
were issued pursuant to the GSS Credit Facility, including $6.9 million
collateralizing the Company's outstanding sellers' notes.
In January 2000, GSS completed an amendment to the GSS Credit Facility.
The amendment, which was effective as of December 31, 1999, waived GSS' third
quarter 1999 covenant violations and amended certain fourth quarter 1999 and
year 2000 covenant requirements. Pursuant to the amendment, GSS was authorized
to borrow up to an additional $20.0 million under the GSS Credit Facility prior
to March 31, 2000. These incremental borrowings, which were secured by letters
of credit provided by certain of GSH's shareholders, were required to be repaid
by May 31, 2000. Upon repayment of the incremental borrowings, GSS will have
potential incremental
E-7
<PAGE>
4. Long-Term Debt: - (Continued)
borrowing capacity during the remainder of the year ending December 31, 2000
equal to the lesser of equity contributed by Pegasus to repay the incremental
borrowings and fund other working capital requirements or $20.0 million. On May
9, 2000, Pegasus made an $8.0 million capital contribution to GSS that was used
to repay the incremental borrowings. GSS anticipates that it will receive
additional capital contributions from Pegasus, thereby resulting in additional
borrowing capacity. As of March 31, 2000, GSS was in compliance with the GSS
Credit Facility's amended covenants.
GSS will be required to make an offer (the "12.375% Notes Offer") to
the holders of its 12.375% Senior Subordinated Notes due 2006 (the "12.375%
Notes") to purchase the 12.375% Notes for 101% of their principal amount plus
accrued interest as a result of the Merger. If the 12.375% Notes Offer is
accepted by any of the note holders and GSS is unable to purchase the 12.375%
Notes tendered, GSS may be in default of the terms of the 12.375% Notes
Indenture. Pegasus has entered into an agreement with an investment bank under
which that investment bank has agreed to purchase any and all 12.375% Notes
tendered in response to the 12.375% Notes Offer.
Golden Sky DBS will be required to make an offer (the "13.5% Notes
Offer") to the holders of its 13.5% Notes to purchase the 13.5% Notes for 101%
of their accreted value plus accrued interest as a result of the Merger. If the
13.5% Notes Offer is accepted by any of the note holders and Golden Sky DBS is
unable to purchase the 13.5% Notes tendered, Golden Sky DBS may be in default of
the terms of the 13.5% Notes Indenture. Pegasus has entered into an agreement
with an investment bank under which that investment bank has agreed to purchase
any and all of the 13.5% Notes tendered in response to the 13.5% Notes Offer.
The 12.375% Notes may be redeemed, at the option of GSS, in whole or in
part, at various points of time after August 1, 2003 at the redemption prices
specified in the 12.375% Notes Indenture, plus accrued and unpaid interest
thereon.
The 13.5% Notes may be redeemed, at the option of Golden Sky DBS, in
whole or in part, at various points of time after March 1, 2004 at the
redemption prices specified in the 13.5% Notes Indenture, plus accrued and
unpaid interest thereon.
The Company's indebtedness contains certain financial and operating
covenants, including restrictions on the Company's ability to incur additional
indebtedness, to create liens and to pay dividends.
5. Commitments and Contingent Liabilities:
Legal Matters:
From time to time the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
consolidated operations, liquidity, cash flows or financial position of the
Company.
The Company is a rural affiliate of the National Rural
Telecommunications Cooperative ("NRTC"). The NRTC is a cooperative organization
whose members and affiliates are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the United
States. The Company's ability to distribute DIRECTV programming services is
dependent upon agreements between the NRTC and Hughes Electronics Corporation,
DIRECTV's parent, and between the Company and the NRTC.
On June 3, 1999, the NRTC filed a lawsuit in federal court 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
responded to the NRTC's continuing lawsuit by rejecting the NRTC's claims to
exclusive distribution rights and by filing a counterclaim seeking judicial
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5. Commitments and Contingent Liabilities: - (Continued)
clarification of certain provisions of DIRECTV's contract with the NRTC. In
particular, DIRECTV contends in its counterclaim that the term of DIRECTV's
contract with the NRTC is measured solely by the orbital life of DBS-1, the
first DIRECTV satellite launched into orbit at the 101(Degree) W orbital
location, without regard to the orbital lives of the other DIRECTV satellites at
the 101(Degree) W orbital location. DIRECTV also alleges in its
counterclaim that the NRTC's right of first refusal, which is effective at the
end of the term of DIRECTV's contract with the NRTC, does not provide for
certain programming and other rights comparable to those now provided under the
contract.
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 September 9, 1999, the
NRTC filed a response to DIRECTV's counterclaim contesting DIRECTV's
interpretations of the end of term and right of first refusal provisions.
On January 10, 2000, the Company and Pegasus filed a lawsuit in federal
court against DIRECTV which contains causes of action for various torts, common
counts and declaratory relief based on DIRECTV's failure to provide the NRTC
with premium programming, thereby preventing the NRTC from providing this
programming to the Company and Pegasus. The claims are also based on DIRECTV's
position with respect to launch fees and other benefits, term and rights of
first refusal. The complaint seeks monetary damages and a court order regarding
the rights of the NRTC and its members and affiliates.
On February 10, 2000, the Company and Pegasus filed an amended
complaint which added new tort claims against DIRECTV for interference with
plaintiffs' relationships with manufacturers, distributors and dealers of direct
broadcast satellite equipment. The Company and Pegasus also withdrew the class
action allegations to allow a new class action to be filed on behalf of the
members and affiliates of the NRTC. The class action was filed on February 27,
2000 and has been transferred to the judge assigned to the actions filed by the
Company and Pegasus and by the NRTC.
Management is not currently able to predict the outcome of the DIRECTV
litigation matters or the effect such outcome will have on the consolidated
operations, liquidity, cash flows or financial position of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to us that are based on the beliefs of our management, as
well as assumptions made by and information currently available to our
management. When used in this Report, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect" and similar expressions are intended
to identify forward-looking statements. Such statements reflect our current
views with respect to future events and are subject to unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those contemplated in such forward-looking statements. Such
factors include, among other things, the following: general economic and
business conditions, both nationally, internationally and in the regions in
which we operate; relationships with and events affecting third parties like
DIRECTV, Inc.; litigation with DIRECTV; demographic changes; existing government
regulations and changes in, or the failure to comply with government
regulations; competition; the loss of any significant numbers of subscribers;
changes in business strategy or development plans; technological developments
and difficulties; the ability to attract and retain qualified personnel; our
significant indebtedness; the availability and terms of capital to fund the
expansion of our business; and other factors referenced in this Report and in
reports and registration statements filed by Golden Sky DBS and its parent
company, Pegasus Communications Corporation, from time to time with the
Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as the date
hereof. We do not undertake any obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
The following discussion of the financial condition and results of
operations of Golden Sky DBS should be read in conjunction with the consolidated
financial statements and related notes which are included on pages 3-9 herein.
General
Golden Sky DBS, Inc. is:
o A wholly owned subsidiary of Golden Sky Holdings, Inc., which is a
wholly owned subsidiary of Pegasus Communications Corporation.
o An independent provider of DIRECTV with 351,000 subscribers at
March 31, 2000. We have the exclusive right to distribute DIRECTV
digital broadcast satellite services to approximately 1.9 million
rural households in 24 states.
We are a holding company and were originally formed in February 1999.
We operate primarily through our subsidiary, Golden Sky Systems, Inc. Golden Sky
Systems was originally formed in June 1996 to acquire, own and manage rights to
distribute DIRECTV services to residential households and commercial
establishments in certain rural areas of the United States. On May 5, 2000, we
became a wholly owned subsidiary of Pegasus Communications Corporation, the
largest independent provider of DIRECTV, through a merger of Golden Sky Holdings
with a subsidiary of Pegasus.
In connection with the merger, the stockholders of Golden Sky Holdings
exchanged all of their capital stock for approximately 6.1 million shares of
Pegasus' Class A Common Stock and options to purchase a total of 349,000 shares
of Pegasus' Class A Common Stock and, as a consequence, we became a wholly owned
subsidiary of Pegasus Communications Corporation.
Total consideration for the merger was approximately $1.3 billion,
which consisted of:
o approximately 6.1 million shares of Pegasus' Class A Common Stock
(amounting to $579.0 million),
o options to purchase a total of 349,000 shares of Pegasus' Class A
Common Stock (amounting to $33.1 million),
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o approximately $377.8 million in assumed net liabilities (as of
March 31, 2000), and
o a deferred tax liability of approximately $342.8 million,
primarily as a result of non-deductible amortization.
Revenues are principally derived from monthly customer subscription and
pay-per-view services.
In this section, we use the terms pre-marketing operating expenses,
pre-marketing cash flow and location cash flow. Pre-marketing operating expenses
consist of:
o programming and technical expenses, including amounts paid to
programming suppliers, digital satellite system authorization
charges and satellite control fees, each of which is paid on a per
subscriber basis, and DIRECTV royalties which are equal to 5% of
DBS services revenue, and
o general and administrative expenses, including administrative
costs associated with our sales and customer service operations.
Pre-marketing cash flow is calculated by taking our earnings and adding
back the following expenses:
o interest,
o income taxes,
o depreciation and amortization,
o non-cash charges, such as incentive compensation under our stock
option plan,
o extraordinary items,
o non-recurring charges, such as costs associated with our merger
with Pegasus, and
o subscriber acquisition costs, which are sales and marketing
expenses incurred and promotional programming provided in
connection with the addition of new subscribers.
Location cash flow is pre-marketing cash flow less subscriber
acquisition costs.
Pre-marketing cash flow and location cash flow are not, and should not
be considered, an alternative to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing cash flow and location cash flow also do
not necessarily indicate whether our cash flow will be sufficient to fund
working capital, capital expenditures, or to react to changes in our industry or
the economy generally. We believe that pre-marketing cash flow and location cash
flow are important, however, for the following reasons:
o those who follow our industry frequently use them as measures of
performance and ability to pay debt service, and
o they are measures that we, our lenders and investors use to
monitor our financial performance and debt leverage.
Results of Operations
Three months ended March 31, 2000 compared to the three months ended
March 31, 1999
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At March 31, 2000, we had exclusive DIRECTV distribution rights to
approximately 1.9 million households. At March 31, 2000, we served 351,000
subscribers, as compared to 257,000 subscribers at March 31, 1999. Subscriber
penetration increased from 14.3% at March 31, 1999 to 18.9% at March 31, 2000.
Revenues for the three months ended March 31, 2000 were $43.5 million,
an increase of $15.0 million, or 52%, compared to revenues of $28.6 million for
the same period in 1999. The increase is primarily due to an increase in the
average number of subscribers in the first quarter of 2000 compared to the first
quarter of 1999. The average monthly revenue per subscriber was $41.61 for the
three months ended March 31, 2000 compared to $39.28 for the same period in
1999.
Pre-marketing operating expenses were $34.7 million for the three
months ended March 31, 2000, an increase of $9.5 million, or 38%, compared to
$25.2 million for the same period in 1999. The increase is attributable to
significant growth in subscribers over the last twelve months. As a percentage
of revenue, pre-marketing operating expenses were 79.6% for the three months
ended March 31, 2000 compared to 88.0% for the same period in 1999.
Subscriber acquisition costs were $7.6 million for the three months
ended March 31, 2000, a decrease of $4.3 million compared to $11.9 million for
the same period in 1999. Gross subscriber additions were 25,400 during the three
months ended March 31, 2000 compared to 30,600 for the same period in 1999.
Subscriber acquisition costs per gross subscriber addition were $298 for the
three months ended March 31, 2000 compared to $389 for the same period in 1999.
The decrease in subscriber acquisition costs per gross subscriber addition is
due to a decrease in promotional programming.
Incentive compensation under our stock option plan was $115,000 for the
three months ended March 31, 2000 compared to $18,000 for the same period in
1999.
Lease termination and severance expenses totaled $1.2 million for the
three months ended March 31, 2000. These expenses resulted from the
implementation of our previously disclosed plans to close our local sales
offices during 2000 and to reduce corporate overhead expenses through headcount
and other expense reductions. During the three months ended March 31, 2000, we
closed or sold to third-party retailers 36 of our local sales offices. As a
result of our merger with Pegasus on May 5, 2000, we anticipate closing our
remaining local sales offices during the balance of the year. Also as part of
our plan to transition from a principally direct sales distribution model to a
largely indirect, retail sales distribution model, we have increased the number
of third-party retailers of our direct broadcast satellite television service in
our markets. Our number of employees decreased from approximately 900 at the
beginning of 2000 to less than 500 as of March 31, 2000. Further reductions in
our workforce are expected as a result of our plans described above.
Depreciation and amortization expense was $9.3 million for the three
months ended March 31, 2000, an increase of $1.1 million, or 14%, compared to
$8.2 million for the same period in 1999. The increase in depreciation and
amortization is primarily due to an increase in the intangible asset base as the
result of DBS acquisitions that occurred in 1999.
Interest expense was $12.2 million for the three months ended March 31,
2000, an increase of $2.2 million, or 22%, compared to $10.0 million for the
same period in 1999. The increase in interest expense is primarily due to higher
outstanding debt balances in the first quarter of 2000 as compared to the first
quarter of 1999 and an increase in our weighted-average interest rate resulting
from the issuance of our 13.5% senior discount notes in February 1999. Interest
income was $205,000 for the three months ended March 31, 2000, a decrease of
$618,000, or 75%, compared to interest income of $823,000 for the same period in
1999. The decrease in interest income is due to lower average cash balances,
including restricted cash, in the first quarter of 2000 as compared to the first
quarter of 1999.
Other expenses were $523,000 for the three months ended March 31, 2000.
These expenses primarily reflect merger costs.
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Liquidity and Capital Resources
Golden Sky DBS and its subsidiaries have required significant capital
since their formation in order to fund acquisitions, to implement the
infrastructure to support their operations, to meet debt service obligations, to
fund DBS subscriber acquisition costs and to fund DBS programming costs. Golden
Sky DBS and its subsidiaries' primary sources of liquidity have been credit
available under their credit facilities, the issuance of sellers' notes and
proceeds from public and private offerings.
Pre-marketing cash flow approximated $8.9 million for the three months
ended March 31, 2000, an increase of $5.5 million, or 160%, compared to $3.4
million for the same period in 1999. Pre-marketing cash flow increased as a
result of acquisitions and internal growth in Golden Sky DBS' subscriber base
and lower operating and corporate overhead expenses as previously described.
During the three months ended March 31, 2000, $3.2 million of cash on
hand at the beginning of the year, together with $13.8 million of net cash
provided by Golden Sky DBS' financing activities, were used to fund operating
activities of approximately $15.8 million and investing activities of
approximately $1.2 million. Investing activities consisted of:
o the purchase of minority interest rights during the first quarter
of 2000 for approximately $1.5 million;
o capital expenditures totaling $47,000; and
o proceeds from the disposition of property and equipment and other
amounting to $324,000.
Financing activities consisted of:
o borrowings on bank credit facilities totaling $6.0 million;
o the repayment of approximately $3.1 million of long-term debt,
primarily sellers' notes and capital leases;
o net restricted cash draws of approximately $11.9 million to pay
interest on Golden Sky Systems' 12.375% senior subordinated notes
due 2006; and
o an increase in deferred financing costs of $977,000.
As of March 31, 2000, cash on hand amounted to $31,000 plus restricted
cash of $11.8 million.
Golden Sky Systems maintains a $115.0 million senior, reducing
revolving credit facility and a $35.0 million senior term credit facility.
Borrowings under the credit facilities are available for working capital,
capital expenditures and for general corporate purposes. As of March 31, 2000,
$58.0 million was outstanding and stand-by letters of credit amounting to $35.9
million were issued under our $150.0 million credit facilities. The revolving
credit and term loan facilities expire on September 30, 2005 and December 31,
2005, respectively.
In January 2000, Golden Sky Systems completed an amendment to its
credit facilities. The amendment, which was effective as of December 31, 1999,
waived Golden Sky Systems' third quarter 1999 covenant violations and amended
certain fourth quarter 1999 and year 2000 covenant requirements. Pursuant to the
amendment, Golden Sky Systems was authorized to borrow up to an additional $20.0
million under its credit facilities prior to March 31, 2000. These incremental
borrowings, which were secured by letters of credit provided by certain of
Golden Sky Holdings' shareholders, were required to be repaid by May 31, 2000.
Upon repayment of the incremental borrowings, Golden Sky Systems will have
potential incremental borrowing capacity during the remainder of the year ending
December 31, 2000 equal to the lesser of equity contributed by Pegasus to repay
the incremental borrowings and fund other working capital requirements or $20.0
million. On May 9, 2000, Pegasus made an $8.0 million capital contribution to
Golden Sky Systems that was used to repay the incremental borrowings described
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above. Golden Sky Systems anticipates that it will receive additional capital
contributions from Pegasus, thereby resulting in additional borrowing capacity.
As of March 31, 2000, Golden Sky Systems was in compliance with the credit
facilities' amended covenants.
Golden Sky Systems will be required to make an offer to the holders of
its 12.375% senior subordinated notes due 2006 to purchase those notes for 101%
of their principal amount plus accrued interest as a result of the merger with
Pegasus on May 5, 2000. If the offer for the 12.375% senior subordinated notes
due 2006 is accepted by any of the note holders and Golden Sky Systems is unable
to purchase those notes, Golden Sky Systems may be in default of the terms of
the indenture governing the 12.375% senior subordinated notes due 2006. Pegasus
has entered into an agreement with an investment bank under which that
investment bank has agreed to purchase any and all 12.375% senior subordinated
notes due 2006 tendered in response to Golden Sky Systems' offer to purchase
such notes.
Golden Sky DBS will be required to make an offer to the holders of its
13.5% senior discount notes due 2007 to purchase those notes for 101% of their
accreted value plus accrued interest as a result of the merger with Pegasus on
May 5, 2000. If the offer for the 13.5% senior discount notes due 2007 is
accepted by any of the note holders and we are unable to purchase those notes,
we may be in default of the terms of the indenture governing the 13.5% senior
discount notes due 2007. Pegasus has entered into an agreement with an
investment bank under which that investment bank has agreed to purchase any and
all 13.5% senior discount notes due 2007 tendered in response to our offer to
purchase such notes.
Golden Sky DBS believes that it has adequate resources to meet its
working capital, maintenance capital expenditure and debt service obligations
for at least the next twelve months. However, Golden Sky DBS is highly leveraged
and our ability in the future to repay our existing indebtedness will depend
upon the success of our business strategy, prevailing economic conditions,
regulatory matters, levels of interest rates and financial, business and other
factors that are beyond our control. We cannot assure you that we will be able
to generate the substantial increases in cash flow from operations that we will
need to meet the obligations under our indebtedness. Furthermore, our agreements
with respect to our indebtedness contain numerous covenants that, among other
things, restrict our ability to:
o pay dividends and make certain other payments and investments;
o borrow additional funds;
o create liens; and
o sell our assets.
Failure to make debt payments or comply with our covenants could result in an
event of default which if not cured or waived could have a material adverse
effect on us.
Golden Sky DBS closely monitors conditions in the capital markets to
identify opportunities for the effective use of financial leverage. In financing
its future expansion requirements, Golden Sky DBS would expect to avail itself
of such opportunities and thereby increase its indebtedness. This could result
in increased debt service requirements. We cannot assure you that such debt
financing can be completed on terms satisfactory to Golden Sky DBS or at all.
Golden Sky DBS may also issue additional equity to fund its future expansion
requirements.
Year 2000
The year 2000 issue is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the year 2000 is
approached and reached. An issue exists for all companies that rely on
computers. This issue involves computer programs and applications that were
written using two digits rather than four to identify the applicable year, and
could result in systems failures or miscalculations. We have completed an
assessment of and taken corrective measures to mitigate the potential adverse
effects the year 2000 issue may have on our operations. Costs in connection with
any modifications to make our systems compliant have not been and are not
expected to be
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material. We are not currently aware of any operational or technical problems as
a result of the change to the year 2000 and will continue to monitor the
potential adverse impact of the year 2000 issue on our business; however, there
can be no assurance that the year 2000 issue will not have a material adverse
impact on our financial condition or our results of operations in the future.
Seasonality
Golden Sky DBS' operating results in any period may be affected by the
incurrence of advertising and promotion expenses that do not necessarily produce
commensurate revenues in the short-term until the impact of such advertising and
promotion is realized in future periods.
Inflation
Golden Sky DBS believes that inflation has not been a material factor
affecting its business. In general, Golden Sky DBS' revenues and expenses are
impacted to the same extent by inflation. A majority of Golden Sky DBS'
indebtedness bears interest at a fixed rate.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). As a result of the
subsequent issuance of SFAS No. 137 in July 1999, SFAS No. 133 is now effective
for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. Management believes that the adoption of SFAS No. 133 will not have
a material effect on our business, financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"), which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met in order to recognize revenue and provides guidance for
disclosure related to revenue recognition policies. The subsequent issuance of
SAB 101A has deferred the timing of the adoption of the requirements until the
second quarter of 2000. Management believes that the adoption of SAB 101 will
not have a material effect on our business, financial position or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about Golden Sky DBS' market sensitive financial
instruments is provided below and constitutes a "forward-looking statement."
Golden Sky DBS' major market risk exposure is changing interest rates under its
credit facilities and debt obligations. Golden Sky DBS' objective in managing
its exposure to interest rate changes is to limit the impact of interest rate
changes on earnings and cash flow and to lower its overall borrowing costs.
Golden Sky DBS' policy is to manage interest rates through the use of floating
rate debt.
Golden Sky Systems maintains a $115.0 million senior, reducing
revolving credit facility and a $35.0 million senior term credit facility.
Availability of borrowings under the revolving credit facility will reduce by
specified amounts quarterly commencing on March 31, 2001 through maturity. The
term credit facility is to be repaid in specified amounts quarterly commencing
on March 31, 2002, with the balance due at maturity. As of March 31, 2000, $23.0
million was outstanding and stand-by letters of credit amounting to $35.9
million were issued under its $115.0 million revolving credit facility. As of
March 31, 2000, $35.0 million was outstanding under its $35.0 million term
credit facility. Interest on the credit facilities is calculated at either the
bank's base rate or LIBOR, plus an applicable margin. The revolving credit and
term facilities expire on September 30, 2005 and December 31, 2005,
respectively.
As of March 31, 2000, Golden Sky DBS estimated the fair value of its
debt to be approximately $407.1 million, using quoted market prices. The market
risk associated with Golden Sky DBS' debt is the potential increase in fair
value resulting from a decrease in interest rates. A 10% decrease in assumed
interest rates would increase the fair value of Golden Sky DBS' debt to
approximately $418.4 million.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
DIRECTV/NRTC Litigation. On June 3, 1999, the National Rural
Telecommunications Cooperative filed a lawsuit in federal court against DIRECTV
seeking a court order to enforce the National Rural Telecommunications
Cooperative's contractual rights to obtain from DIRECTV certain premium
programming formerly distributed by United States Satellite Broadcasting
Company, Inc. for exclusive distribution by the National Rural
Telecommunications Cooperative's members and affiliates in their rural markets.
The National Rural Telecommunications Cooperative also sought a temporary
restraining order preventing DIRECTV from marketing the premium programming in
such markets and requiring DIRECTV to provide the National Rural
Telecommunications Cooperative with the premium programming for exclusive
distribution in those areas. The court, in an order dated June 17, 1999, denied
the National Rural Telecommunications Cooperative a preliminary injunction on
such matters, without deciding the underlying claims. On July 22, 1999, DIRECTV
responded to the National Rural Telecommunications Cooperative's continuing
lawsuit by rejecting the National Rural Telecommunications Cooperative's claims
to exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the National
Rural Telecommunications Cooperative. In particular, DIRECTV contends in its
counterclaim that the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative is measured solely by the orbital life of DBS-1,
the first DIRECTV satellite launched into orbit at the 101(degree)W orbital
location, without regard to the orbital lives of the other DIRECTV satellites at
the 101(degree)W orbital location. DIRECTV also alleges in its counterclaim that
the National Rural Telecommunications Cooperative's right of first refusal,
which is effective at the end of the term of DIRECTV's contract with the
National Rural Telecommunications Cooperative, does not provide for certain
programming and other rights comparable to those now provided under the
contract. On September 8, 1999, the court denied a motion by DIRECTV to dismiss
certain of the National Rural Telecommunications Cooperative's claims, leaving
all of the causes of action asserted by the National Rural Telecommunications
Cooperative at issue.
On August 26, 1999, the National Rural Telecommunications Cooperative
filed a separate lawsuit in federal court against DIRECTV claiming that DIRECTV
had failed to provide to the National Rural Telecommunications Cooperative its
share of launch fees and other benefits that DIRECTV and its affiliates have
received relating to programming and other services. On September 9, 1999, the
National Rural Telecommunications Cooperative filed a response to DIRECTV's
counterclaim contesting DIRECTV's interpretations of the end of term and right
of first refusal provisions. On November 15, 1999, the court granted a motion by
DIRECTV and dismissed a portion of the National Rural Telecommunications
Cooperative's lawsuit regarding launch fees and other benefits. In particular,
the court dismissed the tort claim asserted by the National Rural
Telecommunications Cooperative, but left in place the remaining claims asserted
by the National Rural Telecommunications Cooperative. The court also
consolidated that lawsuit with the other pending National Rural
Telecommunications Cooperative/DIRECTV lawsuit. The court set various discovery
and motion deadlines for the spring and summer of 2000 but did not set a trial
date.
On December 29, 1999, DIRECTV filed a motion for partial summary
judgment. The motion seeks a court order that the National Rural
Telecommunications Cooperative's right of first refusal, effective at the
termination of DIRECTV's contract with the National Rural Telecommunications
Cooperative, does not include programming services and is limited to 20 program
channels of transponder capacity. The hearing date on DIRECTV's motion was
vacated by the court pending resolution of certain procedural issues raised by a
new lawsuit we and Pegasus filed against DIRECTV, discussed below. The court has
not yet set a trial date on the merits of the motion for partial summary
judgment.
On January 10, 2000, we and Pegasus Satellite Television, Inc. 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 National Rural Telecommunications Cooperative that are
distributors of DIRECTV. The complaint contains causes of action for various
torts, common counts and declaratory relief based on DIRECTV's failure to
provide the National Rural Telecommunications Cooperative with premium
programming, thereby preventing the National Rural Telecommunications
Cooperative from providing this programming to the class members and affiliates.
The claims are also based on DIRECTV's position with respect to launch fees and
other benefits, term and
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rights of first refusal. The complaint seeks monetary damages and a court order
regarding the rights of the National Rural Telecommunications Cooperative and
its members and affiliates.
On February 10, 2000, we and Pegasus Satellite Television, Inc. filed
an amended complaint which added new tort claims against DIRECTV for
interference with plaintiffs' relationships with manufacturers, distributors and
dealers of direct broadcast satellite equipment. We and Pegasus Satellite
Television also withdrew the class action allegations to allow a new class
action to be filed on behalf of the members and affiliates of the National Rural
Telecommunications Cooperative. The outcome of this litigation and the
litigation filed by the National Rural Telecommunications Cooperative and its
members and affiliates could have a material adverse effect on our direct
broadcast satellite business.
Other 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 with respect to these claims
will not have a material adverse effect on our consolidated operations, cash
flows or financial position.
ITEM 5. OTHER INFORMATION
On May 5, 2000, pursuant to the terms of an Agreement and Plan of
Merger among Pegasus Communications Corporation, Golden Sky Holdings, Inc., our
indirect parent, Pegasus GSS Merger Sub, Inc., a wholly owned subsidiary of
Pegasus, certain stockholders of Pegasus and certain stockholders of Golden Sky
Holdings, Inc., Golden Sky Holdings, Inc. was merged into Pegasus GSS Merger
Sub, Inc. and became a wholly owned subsidiary of Pegasus Communications
Corporation. As a consequence, we became an indirect wholly owned subsidiary of
Pegasus Communications Corporation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following documents are filed as Exhibits to this Report on Form
10-Q or incorporated by reference herein. Each document incorporated by
reference is identified by a parenthetical reference to the prior filing in
which it was included.
10.21 Stock and Warrant Purchase Agreement, dated as of January 4,
2000, by and among Golden Sky Holdings, Inc. and the
investors identified therein ((Exhibit 10.21 to Annual
Report on Form 10-K for the period ended December 31,
1999)(File No. 333-64367)).
10.22 Agreement and Plan of Merger, dated as of January 10, 2000,
among Pegasus Communications Corporation and certain of its
shareholders, Pegasus GSS Merger Sub, Inc., Golden Sky
Holdings, Inc. and certain of its shareholders. ((Exhibit
2.1 to Registration Statement on Form S-4)(File No.
333-31080)).
10.23 Second Amendment, Consent and Waiver, dated as of January 4,
2000, among Golden Sky Holdings, Inc., Golden Sky Systems,
Inc., the Banks party thereto from time to time, Paribas
(formerly known as Banque Paribas), as Syndication Agent,
Fleet National Bank, as Administrative Agent and General
Electric Capital Corporation, as Documentation Agent
((Exhibit 10.23 to Annual Report on Form 10-K for the period
ended December 31, 1999)(File No. 333-64367)).
10.24 Third Amendment, Consent and Waiver, dated as of January 20,
2000, among Golden Sky Holdings, Inc., Golden Sky Systems,
Inc., the Banks party thereto from time to time,
E-17
<PAGE>
Paribas (formerly known as Banque Paribas), as Syndication
Agent, Fleet National Bank, as Administrative Agent and
General Electric Capital Corporation, as Documentation Agent
((Exhibit 10.24 to Annual Report on Form 10-K for the period
ended December 31, 1999)(File No. 333-64367)).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On January 18, 2000, we filed a Current Report on Form 8-K reporting,
under Item 5, that Golden Sky Holdings, Inc. had entered into a definitive
merger agreement with Pegasus Communications Corporation.
E-18
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Golden Sky DBS, Inc. has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
GOLDEN SKY DBS, INC.
May 12, 2000 By: /s/ M. Kasin Smith
------------ --------------------------------------------
Date M. Kasin Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
E-19
<PAGE>
Exhibit 27.1 Financial Data Schedule
Golden Sky DBS, Inc.
First Quarter 2000 Form 10-Q
This schedule contains summary financial information extracted from the
consolidated balance sheet of Golden Sky DBS, Inc. as of March 31, 2000
(unaudited) and the related consolidated statement of operations for the three
months ended March 31, 2000 (unaudited). This information is qualified in its
entirety by reference to such financial statements. (Dollars in thousands,
except per share data)
Multiplier 1
Currency U.S. Dollars
Period - Type 3 Months
Fiscal Year End December 31, 2000
Period-End March 31, 2000
Exchange Rate 1
Cash 31
Securities 0
Receivables 5,219
Allowances 942
Inventory 2,799
Current Assets 20,229
PP&E 9,387
Depreciation 4,424
Total Assets 266,587
Current Liabilities 29,449
Bonds 310,797
Preferred - Mandatory 0
Preferred 868
Common 0
Other - SE (136,519)
Total Liability and Equity 266,587
Sales 43,548
Total Revenues 43,548
CGS 0
Total Costs 52,912
Other Expenses 318
Loss - Provision 0
Interest Expense 12,153
Income Pretax (21,835)
Income Tax 0
Income Continuing (21,835)
Discontinued 0
Extraordinary 0
Changes 0
Net Income (21,835)
EPS - Basic (218,350.00)
EPS - Diluted (218,350.00)
E-20
<PAGE>
ANNEX F
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 5, 2000
-----------
PEGASUS COMMUNICATIONS CORPORATION
----------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-21389 51-0374669
----------------------------------------------------------------
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
c/o Pegasus Communications Management Company, 225 City Line Avenue,
Suite 200, Bala Cynwyd, Pennsylvania 19004
------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 888-438-7488
------------
================================================================================
(Former Name or Former Address, if Changed Since Last Report)
F-1
<PAGE>
Pegasus Communications Corporation's registration statement on form S-4
(file no. 333-31080) containing substantially the same information required in
this form to report the acquisition of Golden Sky Holdings, Inc., became
effective on February 29, 2000 and accordingly the acquisition of Golden Sky was
"previously reported" within the meaning of the General Instructions to Form
8-K. Since the number of shares actually issued to stockholders and former
employees of Golden Sky does not materially affect the pro forma financial
information set forth in the registration statement, the acquisition of Golden
Sky is reported under Item 5 below.
Item 5. Other Events.
Acquisition of Golden Sky
On May 5, 2000, Pegasus acquired Golden Sky through the merger of a
subsidiary of Pegasus into Golden Sky. Prior to the merger, Golden Sky was the
second largest independent provider of DIRECTV. Golden Sky operated in 23 states
and its territories included approximately 1.8 million households and 345,000
subscribers.
In connection with the merger, Pegasus issued 6,090,145 shares of its
Class A common stock to stockholders and former employees of Golden Sky at a
price of $95.07 per share, the average closing price per share, five days prior
and subsequent to the merger announcement. In addition, holders of Golden Sky
options received options to purchase an aggregate of 348,964 shares of Pegasus'
Class A common stock. Pegasus also granted registration rights to certain of
Golden Sky's stockholders, including Alta Communications VI, L.P. and two of its
affiliates and Spectrum Equity Investors L.P. and one of its affiliates.
Pursuant to the acquisition of Golden Sky, the registration rights
agreement and amended voting agreement were entered into and Robert F. Benbow,
William P. Collatos and Ted S. Lodge were elected to Pegasus' board of directors
as the designees of Alta, Spectrum and Marshall W. Pagon, respectively, under
the amended voting agreement.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
Not Applicable
(b) Pro Forma Financial Information.
Not Applicable
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated
January 10, 2000, as amended on January
25, 2000, by and among Pegasus
Communications Corporation, Golden Sky
Holdings, Inc. Pegasus GSS Merger Sub,
Inc., a wholly-owned subsidiary of
Pegasus and certain stockholders of
Pegasus and Golden Sky (which is
incorporated by reference herein to
Exhibit 2.1 to Pegasus' Registration
Statement on Form S-4 (File No.
333-31080)).
10.1 Amended and Restated Voting Agreement,
dated May 5, 2000, among Pegasus
Communications Corporation, Fleet
Venture Resources, Inc., Fleet Equity
Partners VI, L.P., Chisholm Partners
III, L.P., and Kennedy Plaza Partners,
Spectrum Equity Investors, L.P. and
Spectrum Equity Investors II, L.P., Alta
Communications VI, L.P., Alta
Subordinated Debt Partners III, L.P. and
Alta-Comm S BY S, LLC, and Pegasus
Communications Holdings, Inc., Pegasus
Capital, L.P., Pegasus Scranton Offer
Corp, Pegasus Northwest Offer Corp, and
Marshall W. Pagon, an individual.
10.2 Registration Rights Agreement dated May
5, 2000 among Pegasus Communications
Corporation and the parties thereto.
F-2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS COMMUNICATIONS CORPORATION
By: /s/ Scott A. Blank
------------------
Scott A. Blank
Vice President
May 19, 2000
F-3
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
2.1 Agreement and Plan of Merger, dated January 10, 2000, as
amended on January 25, 2000, by and among Pegasus
Communications Corporation, Golden Sky Holdings, Inc.
Pegasus GSS Merger Sub, Inc., a wholly-owned subsidiary of
Pegasus and certain stockholders of Pegasus and Golden Sky
(which is incorporated by reference herein to Exhibit 2.1
to Pegasus' Registration Statement on Form S-4 (File No.
333-31080)).
10.1 Amended and Restated Voting Agreement, dated May 5, 2000,
among Pegasus Communications Corporation, Fleet Venture
Resources, Inc., Fleet Equity Partners VI, L.P., Chisholm
Partners III, L.P., and Kennedy Plaza Partners, Spectrum
Equity Investors, L.P. and Spectrum Equity Investors II,
L.P., Alta Communications VI, L.P., Alta Subordinated Debt
Partners III, L.P. and Alta-Comm S BY S, LLC, and Pegasus
Communications Holdings, Inc., Pegasus Capital, L.P.,
Pegasus Scranton Offer Corp, Pegasus Northwest Offer Corp,
and Marshall W. Pagon, an individual.
10.2 Registration Rights Agreement dated May 5, 2000 among
Pegasus Communications Corporation and the parties
thereto.
F-4
<PAGE>
ANNEX G
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 15, 2000
------------------
PEGASUS COMMUNICATIONS CORPORATION
----------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-21389 51-0374669
--------------- ----------- ------------------
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
c/o Pegasus Communications Management Company, 225 City Line Avenue,
Suite 200, Bala Cynwyd, Pennsylvania 19004
--------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 888-438-7488
------------
--------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
G-1
<PAGE>
Our quarterly report on Form 10-Q for the quarterly period ended June
30, 2000 contained substantially the same information required in this form to
report the disposition of the entire cable system business in Puerto Rico.
Accordingly, the disposition was "previously reported" within the meaning of the
General Instructions to Form 8-K.
Item 5. Other Events.
Sale of Puerto Rico Cable System. On September 15, 2000, pursuant to
the terms of an Asset Purchase Agreement, MCT Cablevision, LP and Pegasus Cable
Television of San German, Inc. sold the assets of their entire cable system in
Puerto Rico to Centennial Puerto Rico Cable TV Corp., a subsidiary of Centennial
Communications Corp., for the purchase price of $170,000,000 in cash (subject to
certain adjustments). Pegasus Communications Corporation, through one of its
operating subsidiaries, Pegasus Media & Communications, Inc., is the indirect
parent of MCT Cablevision, LP and Pegasus Cable Television of San German, Inc.
The Puerto Rico cable system served approximately 57,000 subscribers and passed
over approximately 170,000 homes in Aguadilla, Mayaguez, San German and
surrounding communities in the western part of Puerto Rico.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Acquired or to be Acquired Businesses.
Not applicable.
(b) Pro Forma Financial Information.
Not applicable.
(c) Exhibits.
2.1 Asset Purchase Agreement dated as of May
15, 2000 among Centennial Puerto Rico Cable
TV Corp., Pegasus Communications
Corporation, Pegasus Cable Television of
San German, Inc. and MCT Cablevision,
Limited Partnership. (Schedules have been
omitted but will be provided to the SEC
upon request).
G-2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS COMMUNICATIONS CORPORATION
By: /s/ Scott A. Blank
-------------------------------
Scott A. Blank
Vice President
September 29, 2000
G-3
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 Asset Purchase Agreement dated as of May 15,
2000 among Centennial Puerto Rico Cable TV
Corp., Pegasus Communications Corporation,
Pegasus Cable Television of San German, Inc.
and MCT Cablevision, Limited Partnership.
(Schedules have been omitted but will be
provided to the SEC upon request).
G-4
<PAGE>
ANNEX H
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 9, 2000
----------------
PEGASUS COMMUNICATIONS CORPORATION
----------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-21389 51-0374669
------------------------------------------------------------
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
c/o Pegasus Communications Management Company, 225 City Line Avenue,
Suite 200, Bala Cynwyd, Pennsylvania 19004
------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 888-438-7488
------------
================================================================================
(Former Name or Former Address, if Changed Since Last Report)
H-1
<PAGE>
Item 5. Other Events.
On November 9, 2000, Pegasus Communications Corporation (the "Company")
announced its intention, subject to the receipt of regulatory approval, to
effect a new holding company structure under Section 251(g) of the Delaware
General Corporation Law. In connection with its reorganization, the Company
further announced the formation of a new broadband subsidiary, and, in a
separate release, its intention to make an exchange offer to the holders of its
12 3/4% Series A Cumulative Exchangeable Preferred Stock. Copies of the two
press releases are filed as Exhibits 99.1 and 99.2, each of which are
incorporated by reference into this report.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits.
99.1 Registrant's press release, dated November 9, 2000.
99.2 Registrant's press release, dated November 9, 2000.
Item 9. Regulation FD Disclosure.
The Registrant held a conference call on November 9, 2000 to report
earnings results for the third quarter. On the call, the Registrant provided
certain financial guidance for the fourth quarter of 2000. When providing
guidance on fourth quarter 2000 revenues, the Registrant used an incorrect
figure for DBS revenues and omitted revenues from its other operations. After
giving effect to the correct numbers, the Registrant anticipates fourth quarter
DBS revenues of approximately $188 million (compared to the $180 million
announced on the conference call) and total revenues of $198 million.
Set forth below is a table which provides financial guidance with
respect to revenues, contribution margin, pre-marketing cash flow and SAC for
the fourth quarter of 2000 as compared to the fourth quarter of 1999. The
information provided below with respect to fourth quarter 2000 is a
forward-looking statement. See "Cautionary Statement" below.
<TABLE>
<CAPTION>
Q4 '99 Q4 '00
------ ------
Total Per Sub Total Per Sub
----- ------- ----- -------
<S> <C> <C> <C> <C>
Revenues:
DBS $88,200 $45.37 $188,600 $46.40
Other 9,900 9,900
----- -----
98,100 198,500
Contribution margin:
DBS 29,700 15.28 62,600 15.40
Other 1,100 1,700
----- -----
30,800 64,300
Pre-marketing cash flow:
DBS 24,900 12.81 55,200 13.60
Other 1,100 1,700
----- -----
26,000 56,900
SAC 29,100 330 72,000 480
</TABLE>
H-2
<PAGE>
Cautionary Statement
--------------------
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to us that are based on the beliefs of our management, as
well as assumptions made by and information currently available to our
management. When used in this Report, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect" and similar expressions are intended
to identify forward-looking statements. Such statements reflect our current
views with respect to future events and are subject to unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those contemplated in such forward-looking statements. Such
factors include, among other things, the following: general economic and
business conditions, both nationally, internationally and in the regions in
which we operate; relationships with and events affecting third parties like
DIRECTV, Inc.; litigation with DIRECTV; demographic changes; existing government
regulations and changes in, or the failure to comply with government
regulations; competition; the loss of any significant numbers of subscribers or
viewers; changes in business strategy or development plans; technological
developments and difficulties; 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 discussed under the
section entitled "Risk Factors" of the Registrant's Proxy Statement dated
February 29, 2000 and filed with the Securities and Exchange Commission on March
1, 2000 in connection with a special meeting of stockholders to be held on March
22, 2000 and other reports and registration statements filed by the Registrant,
from time to time, with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as the date hereof. We do not undertake any obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
H-3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS COMMUNICATIONS CORPORATION
November 13, 2000 By: /s/ Scott A. Blank
-------------------
Scott A. Blank
Vice President
H-4
<PAGE>
Exhibit Index
Exhibit No. Description
----------- -----------
99.1 Registrant's press release, dated November 9, 2000.
99.2 Registrant's press release, dated November 9, 2000.
H-5
<PAGE>
EXHIBIT 99.1
PEGASUS COMMUNICATIONS ANNOUNCES
CREATION OF NEW HOLDING COMPANY AND
FORMATION OF NEW BROADBAND SUBSIDIARY
BALA CYNWYD, PA, November 9, 2000 - Pegasus Communications Corporation (NASDAQ:
PGTV) announced today that it will reorganize its existing businesses under a
newly created holding company. The new holding company will assume the name
Pegasus Communications Corporation. In connection with the reorganization:
o Pegasus' broadband and TV centric Internet access businesses will
be operated by Pegasus Broadband Communications, Inc. (Pegasus
Broadband), which will become a subsidiary of the new holding
company.
o Pegasus' existing DBS business will be retained by Pegasus
Communications Corporation, which will be renamed Pegasus Satellite
Communications, Inc. (Pegasus Satellite). Pegasus Satellite will
also hold Pegasus' broadcast television business. As a result of
the reorganization, Pegasus Satellite will become a direct
subsidiary of the new holding company.
o Pegasus' other assets (including intellectual property rights
licensed from Personalized Media Communications) will be held by
other direct subsidiaries of the new holding company.
Pegasus is effecting this reorganization to facilitate the anticipated
growth of its broadband and TV centric Internet access businesses and the
capital requirements that we anticipate that these businesses will require.
As a result of the reorganization, all of the capital stock of the
existing Pegasus Communications Corporation, including its Class A Common Stock
and preferred stock, will be exchanged for shares of the new holding company.
The Class A Common Stock of the new holding company will trade on the NASDAQ
National Market under the symbol "PGTV." Pegasus Communications Corporation's
existing debt will remain obligations of Pegasus Satellite. We anticipate that
the reorganization, which is subject to regulatory approval, will be completed
prior to yearend.
A separate press release has been issued today relating to an exchange
offer of the Series A Preferred Stock to be held by the new holding company.
About Pegasus
Pegasus Communications Corporation (www.pgtv.com) is one of the fastest
growing media companies in the United States and serves approximately 1.3
million DBS subscribers in 42 states. Pegasus is the tenth largest multichannel
video provider in the United States and the only publicly traded cable,
satellite TV or Internet services company exclusively focused on providing
service to rural and underserved areas. Through agreements with MetaTV, Liberate
Technologies, ZipLink, Hughes Network Systems and other companies, Pegasus is
expanding the array of advanced digital products and services it offers through
the more than 3,000 independent retailers in the Pegasus Retail Network to
include interactive television, narrowband TV centric Internet access and
broadband Internet access to TV's, PC's and other Internet access appliances.
H-6
<PAGE>
Safe Harbor
Certain matters contained in this news release concerning the business
outlook, which are not historical facts in this press release are made pursuant
to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995, and will be considered forward looking statements. Such forward looking
statements may be identified with words such as "we expect", "we predict", "we
believe", "we project", "we anticipate" and similar expressions. Pegasus' actual
results may differ materially from those expressed or indicated by
forward-looking statements. There can be no assurance that these future events
will occur as anticipated or that the Company's results will be as estimated.
Factors which can affect the Company's performance are described in the
Company's filings with the Securities and Exchange Commission. This press
release also contains information about pending transactions and there can be no
assurances that these transactions will be completed.
###
For further information, contact:
Yolanda Robins Jeff Majtyka
Pegasus Communications Corporation Brainerd Communicators, Inc.
(610) 934-7000 (212) 986-6667
[email protected] [email protected]
H-7
<PAGE>
EXHIBIT 99.2
PEGASUS COMMUNICATIONS CORPORATION ANNOUNCES
EXCHANGE OFFER FOR SERIES A PREFERRED STOCK
BALA CYNWYD, PA, November 9, 2000 - Pegasus Communications Corporation (NASDAQ:
PGTV) announced today that it will offer to issue shares of a newly issued
series of preferred stock in exchange for the Series A Preferred Stock to be
issued by its new holding company upon completion of its holding company
reorganization.
In the reorganization, which Pegasus announced separately today, the
existing company that operates under the name Pegasus Communications Corporation
will change its name to Pegasus Satellite Communications, Inc. and become a
subsidiary of a new holding company (the "New Holding Company") that will assume
the name Pegasus Communications Corporation. In the reorganization, the existing
Series A Preferred Stock will become identical Series A Preferred Stock of the
New Holding Company. In the exchange offer, Pegasus Satellite Communications,
Inc. will offer to exchange a new series of its preferred stock for the New
Holding Company's Series A Preferred Stock. The terms of the new series will be
identical to those of the existing series. The offer will not affect the other
series of preferred stock. It is intended that the exchange offer and the
reorganization will be completed concurrently.
The securities being offered in the exchange offer will not be
registered under the Securities Act of 1933 and may not be offered or sold in
the United States without registration or an applicable exemption from
registration requirements.
About Pegasus
Pegasus Communications Corporation (www.pgtv.com) is one of the fastest
growing media companies in the United States and serves approximately 1.3
million DBS customers in 42 states. Pegasus is the tenth largest multichannel
video provider in the United States and the only publicly traded cable,
satellite TV or Internet services company exclusively focused on providing
service to rural and underserved areas. Through agreements with MetaTV, Liberate
Technologies, ZipLink, Hughes Network Systems and other companies, Pegasus is
expanding the array of advanced digital products and services it offers through
the more than 3,000 independent retailers in the Pegasus Retail Network to
include interactive television, narrowband TV centric Internet access and
broadband Internet access to TV's, PC's and other Internet access appliances.
Safe Harbor
Certain matters contained in this news release concerning the business
outlook, which are not historical facts in this press release are made pursuant
to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995, and will be considered forward looking statements. Such forward looking
statements may be identified with words such as "we expect", "we predict", "we
believe", "we project", "we anticipate" and similar expressions. Pegasus' actual
results may differ materially from those expressed or indicated by
forward-looking statements. There can be no assurance that these future events
will occur as anticipated or that the Company's results will be as estimated.
Factors which can affect the Company's performance are described in the
Company's filings with the Securities and Exchange Commission. This press
release also contains information about pending transactions and there can be no
assurances that these transactions will be completed.
###
For further information, please contact:
Yolanda Robins Jeff Majtyka
Pegasus Communications Corporation Brainerd Communications, Inc.
(610) 934-7030 (212) 986-6667
[email protected] [email protected]
H-8
<PAGE>
================================================================================
December 19, 2000 Confidential
PEGASUS
COMMUNICATIONS
[LOGO]
PEGASUS COMMUNICATIONS CORPORATION
(to be renamed Pegasus Satellite Communications, Inc.)
Offer to Exchange
its 12 3/4% Series A Cumulative Exchangeable Preferred Stock
for any and all
but not less than a majority of the
12 3/4% Series A Cumulative Exchangeable Preferred Stock,
when issued, of our new holding company
(to be renamed Pegasus Communications Corporation)
and Solicitation of Consents
-------------------------------------
OFFERING MEMORANDUM AND
CONSENT SOLICITATION STATEMENT
-------------------------------------
Exchange Agent:
First Union National Bank
1525 West W.T. Harris Blvd., 3C3
Charlotte, NC 28288
Attention: Michael Klotz
Telephone: (704) 590-7408
Facsimile: (704) 590-7628
--------------------------------------------------------------------------------
Dealer Manger and Solicitation Agent:
CIBC World Markets Corp.
425 Lexington Avenue
New York, NY 10017
-------------------------------------
We have not authorized any dealer, salesperson or any other person to give
any information or represent anything not contained in this offering
memorandum. You must not rely on any unauthorized information. This offering
memorandum does not offer to sell or buy any preferred stock in any
jurisdiction where it is unlawful.
-------------------------------------
================================================================================
