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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
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(Exact name of registrant as specified in its charter)
Delaware 51-0374669
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(State of other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
c/o Pegasus Communications Management Company; 19004
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225 City Line Avenue, Suite 200, Bala Cynwyd, PA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (888) 438-7488
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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
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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
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PART I
Item 1. Business .................................................................................. 2
Item 2. Properties ................................................................................ 25
Item 3. Legal Proceedings ......................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 26
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................. 27
Item 6. Selected Financial Data ................................................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 43
Item 8. Financial Statements and Supplementary Data ............................................... 43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 43
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 44
Item 11. Executive Compensation .................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 51
Item 13. Certain Relationships and Related Transactions ............................................ 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 59
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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
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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.
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.
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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.
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.
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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:
Exclusive Total
DIRECTV Homes in Total
Territories Territory Subscribers Penetration
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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%
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Total ............... 7,187,365 1,129,489 15.7%
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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.
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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.
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Station
Station Acquisition Date Affiliation Market Area DMA (1) Households (2)
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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
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(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.
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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 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.
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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.
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.
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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- 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- 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 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:
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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.
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.
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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 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:
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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.
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
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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.
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.
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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
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 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.
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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.
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.
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;
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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 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
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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.
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
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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 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
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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.
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, 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
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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;
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.
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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 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.
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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.
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
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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 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.
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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.
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;
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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.
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
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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 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.
26
<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.
27
<PAGE>
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:
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
28
<PAGE>
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.
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.
29
<PAGE>
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.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
Statement of Operating Data: 1995 1996
(Dollars in thousands,
except per share data)
Net revenues:
<S> <C> <C>
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>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
Statement of Operating Data: 1997 1998 1999
(Dollars in thousands, except per share
data)
Net revenues:
<S> <C> <C> <C>
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>
30
<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.
31
<PAGE>
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.
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
32
<PAGE>
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 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.
33
<PAGE>
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 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.
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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.
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.
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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
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.
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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 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.
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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;
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;
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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 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
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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.
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 Media & Communications.
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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
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highest revenues for the year. Pegasus' operating results in any period may be
affected by the incurrence of advertising and promotion expenses that do not
necessarily produce commensurate revenues in the short-term until the impact of
such advertising and promotion is realized in future periods.
Inflation
Pegasus believes that inflation has not been a material factor affecting
its business. In general, Pegasus' revenues and expenses are impacted to the
same extent by inflation. A majority of Pegasus' indebtedness bears interest at
a fixed rate.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). As a result of the subsequent
issuance of SFAS No. 137, SFAS No. 133 is now effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. 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.
42
<PAGE>
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 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.
43
<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.
44
<PAGE>
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.
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
45
<PAGE>
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 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.
46
<PAGE>
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>
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
--------------------------
Restricted Securities
Stock Underlying All Other
Name Award(2) Options Compensation(3)
------ ------------ ------------ ----------------
<S> <C> <C> <C>
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 --
</TABLE>
- ------------
(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.
47
<PAGE>
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.
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
48
<PAGE>
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. 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>
49
<PAGE>
Executive officers and non-employee directors are not eligible to receive
profit sharing awards under the restricted stock plan. Executive officers are
eligible to receive awards under the restricted stock plan consisting of:
o special recognition awards.
o excess awards made to the extent that an employee does not receive a
matching contribution under the 401(k) plans because of restrictions of
the Internal Revenue Code or the Puerto Rico Internal Revenue Code.
o discretionary restricted stock awards determined by a board committee,
or the full board.
Executive officers, non-employee directors and, effective December 18,
1998, all employees are eligible to receive options under the stock option
plan.
Restricted Stock Plan
The Pegasus restricted stock plan became effective in September 1996 and
will terminate in September 2006. Under the restricted stock plan, 350,000
shares of Class A common stock are available for granting restricted stock
awards to eligible employees of Pegasus. The restricted stock plan provides for
four types of restricted stock awards that are made in the form of Class A
common stock as shown in the table above:
o profit sharing awards to general managers, department managers and
corporate managers (other than executive officers).
o special recognition awards for consistency, initiative, problem solving
and individual excellence.
o excess awards that are made to the extent that an employee does not
receive a matching contribution under the U.S. 401(k) plan or Puerto Rico
401(k) plan because of restrictions of the Internal Revenue Code or the
Puerto Rico Internal Revenue Code.
o discretionary restricted stock awards.
Restricted stock awards other than special recognition awards vest 34%
after two years of service with Pegasus, 67% after three years of service and
100% after four years of service. Special recognition awards are fully vested
on the date of the grant. Effective December 18, 1998, grantees may elect to
receive certain types of awards under the restricted stock plan in the form of
an option rather than stock subject to a vesting schedule.
Stock Option Plan
The Pegasus Communications 1996 Stock Option Plan became effective in
September 1996 and terminates in September 2006. Under the stock option plan,
up to 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.
50
<PAGE>
401(k) Plans
Effective January 1, 1996, Pegasus Media & Communications, Inc. adopted
the Pegasus Communications Savings Plan for eligible employees of that company
and its domestic subsidiaries. Effective October 1, 1996, the Pegasus' Puerto
Rico subsidiary adopted the Pegasus Communications Puerto Rico Savings Plan for
eligible employees of 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.
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.
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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
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>
<PAGE>
<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 of
100% of Class B common stock with sole voting and investment power over
all such shares.
52
<PAGE>
(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:
o Marshall W. Pagon;
o Pegasus, Pegasus Capital, L.P., Pegasus Communications Holdings, Inc.,
Pegasus Scranton Offer Corp, and Pegasus Northwest Offer Corp;
o 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.
(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
53
<PAGE>
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.
54
<PAGE>
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 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.
55
<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 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.
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<PAGE>
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.
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 99o, 101o, 103o and 125o 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.
57
<PAGE>
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.
58
<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
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- -------- -----------------------
<S> <C>
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)).
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ---------- -----------------------
<S> <C>
3.7* Certificate of Designation, Preferences and Rights of Series E Junior Convertible Participating
Preferred Stock.
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 121/2% 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 121/2% Series B Senior Subordinated Notes due 2005 (included in Exhibit 4.1 above).
4.3 Form of Subsidiary Guarantee with respect to the 121/2% 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 95/8% 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 93/4% 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 121/2% 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)).
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ---------- -----------------------
<S> <C>
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)).
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)).
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)).
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ----------- -----------------------
<S> <C>
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)).
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
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).
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- -------- -----------------------
<S> <C>
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)).
</TABLE>
- ------------
* 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.
63
<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>
<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>
64
<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>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pegasus Communications Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and 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
F-2
<PAGE>
Pegasus Communications Corporation
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
-------------- -------------
<S> <C> <C>
ASSETS
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
F-3
<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
F-4
<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>
<PAGE>
<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
F-5
<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
F-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"). 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
F-7
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies: -- (Continued)
gains or losses are included in the statement of operations. For cable
television systems, initial subscriber installation costs including material,
labor and overhead costs of the hookup are capitalized as part of the
distribution facilities. The costs of disconnection and reconnection are
charged to expense. Satellite equipment that is leased to customers is stated
at cost.
Depreciation is computed for financial reporting purposes using the
straight-line method based upon the following lives:
Reception and distribution facilities ......... 7 to 11 years
Transmitter equipment ......................... 5 to 10 years
Equipment, furniture and fixtures ............. 5 to 10 years
Building and improvements ..................... 12 to 39 years
Vehicles 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.
F-8
<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.
F-9
<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.
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.
F-10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Common Stock: -- (Continued)
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.
F-11
<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.
F-12
<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
--------
$684,414
========
F-13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Earnings Per Common Share:
Calculation of basic and diluted earnings per common share:
The following table sets forth the computation of the number of shares
used in the computation of basic and diluted earnings per common share (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Net loss applicable to common shares .................. ($ 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.
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):
1998 1999
-------- ---------
Equipment, furniture and fixtures .......... $ 662 $ 320
Vehicles ................................... 541 422
------ ------
1,203 742
Accumulated depreciation ................... (562) (322)
------ ------
Total .................................... $ 641 $ 420
====== ======
F-14
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Leases: -- (Continued)
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 ......................................... $359
====
</TABLE>
11. Income Taxes:
The following is a summary of the components of income taxes from
continuing operations (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------------ ------------
<S> <C> <C> <C>
Federal -- deferred .............................. ($ 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>
F-15
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. Income Taxes: -- (Continued)
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:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
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%
====== ====== ======
</TABLE>
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.
F-16
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Acquisitions: -- (Continued)
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.
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):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
(unaudited)
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
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 --
</TABLE>
F-17
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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.
F-18
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
17. Employee Benefit Plans: -- (Continued)
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 at 12/31/99 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:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
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
</TABLE>
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.
The following table summarizes stock option activity over the past three
years:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
------------- ---------------
<S> <C> <C>
Outstanding at January 1, 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 ......... 143,728 15.09
Options exercisable at December 31, 1999 ......... 334,807 19.97
</TABLE>
F-19
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
17. Employee Benefit Plans: -- (Continued)
Restricted Stock Plan
The Restricted Stock Plan provides for the granting of four types of
restricted stock awards representing a maximum of 350,000 shares (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus) of Class A Common Stock of
the Company to eligible employees who have completed at least one year of
service. Restricted stock received under the Restricted Stock Plan vests based
on years of service with the Company and are fully vested for employees who
have four years of service with the Company, with the exception of special
recognition awards which are fully vested on the date of grant. The Restricted
Stock Plan terminates in September 2006. As of December 31, 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.
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.
F-20
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
18. Commitments and Contingent Liabilities: -- (Continued)
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 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.
F-21
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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
F-22
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
21. Subsequent Events (unaudited): -- (Continued)
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.
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
F-23
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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>
1999
- ----
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>
1998
- ----
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.
F-24
<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
S-1
<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.
S-2
<PAGE>
EXHIBIT 3.7
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS
OF
SERIES E JUNIOR CONVERTIBLE PARTICIPATING PREFERRED STOCK
of
PEGASUS COMMUNICATIONS CORPORATION
Pegasus Communications Corporation, a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY THAT, pursuant to authority conferred upon
the Board of Directors by the Amended and Restated Certificate of Incorporation
of the Corporation, as amended (the "Certificate of Incorporation"), and
pursuant to the provisions of Section 151 of Title 8 of the Delaware Code, a
duly constituted committee of the Board of Directors, pursuant to unanimous
written consent dated February 14, 2000, adopted the following resolutions
providing for the designations, preferences and relative, participating,
optional and other rights, and the qualifications, limitations and restrictions
of the Series E Junior Convertible Participating Preferred Stock:
RESOLVED, that pursuant to the Corporation's Certificate of
Incorporation there is hereby established a series of Preferred Stock, the
distinctive serial designation of which shall be "Series E Junior Convertible
Participating Preferred Stock," par value $0.01 per share.
FURTHER RESOLVED, that the proper officers of this Corporation
are hereby authorized and directed to execute and file on behalf of the
Corporation such certificate or statement, or certificates or statements
required to effectuate the foregoing resolutions under Delaware law and to take
such other actions as they consider necessary or appropriate to carry out the
foregoing resolutions.
FURTHER RESOLVED, that the voting rights, preferences,
limitations, and special rights of the Series E Junior Convertible Participating
Preferred Stock not set forth in the Corporation's Certificate of Incorporation
shall be as follows:
1. Designation of Series. The distinctive serial designation
of this series shall be "Series E Junior Convertible Participating Preferred
Stock" (herein referred to as the "Series E Preferred Stock"). Each share of
Series E Preferred Stock shall be identical in all respects with the other
shares of Series E Preferred Stock.
2. Number of Shares. The number of shares of Series E
Preferred Stock shall be 10,000.
<PAGE>
3. Dividends. Subject to the prior and superior rights of the
holders of Senior Stock, the holders of shares of Series E Preferred Stock shall
be entitled to receive, when and as declared by the Board of Directors of the
Corporation out of funds legally available for such purpose, dividends at the
rate of 4% of the outstanding liquidation preference per share per annum, and no
more, payable annually on January 1 , commencing on January 1, 2001. Dividends
on the Series E Preferred Stock shall be cumulative and shall accrue from the
date of the original issuance of the Series E Preferred Stock. At the
Corporation's option, dividends shall be payable in cash or in the number of
shares of the Class A Common Stock that can be purchased at the Market Price at
the time the applicable cash dividend is due.
In no event, so long as any Series E Preferred Stock shall
remain outstanding, shall any dividend whatsoever be declared or paid upon, nor
shall any distribution be made upon, any Junior Stock, nor (without the written
consent of the holders of a majority of the outstanding Series E Preferred
Stock) shall any shares of Junior Stock be purchased or redeemed by the
Corporation, nor shall any moneys be paid to or made available for a sinking
fund for the purchase or redemption of any Junior Stock, unless in each instance
dividends on all outstanding shares of the Series E Preferred Stock for all past
dividend periods shall have been paid and any arrears in the mandatory
redemption of the Preferred Stock shall have been made good.
4. Liquidation Rights.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, the holders of
Series E Preferred Stock shall be entitled, after the payment of all amounts
payable to the holders of Senior Stock, and before any distribution or payment
is made to the holders of any Junior Stock, to be paid in full the Liquidation
Preference of each share of Series E Preferred Stock.
(b) If, upon such liquidation, dissolution or winding up, the
amounts available for distribution to the holders of Series E Preferred Stock
and all Parity Stock shall be insufficient to permit the payment in full to such
holders of the preferential amounts to which they are entitled, then such
amounts shall be paid ratably among the shares of Series E Preferred Stock and
Parity Stock in accordance with the respective preferential amounts (including
unpaid cumulative dividends on such Parity Stock) payable with respect thereto,
if paid in full.
(c) If payment of the Liquidation Preference on liquidation,
dissolution or winding up of the affairs of the Corporation shall have been made
in full to the holders of all shares of Series E Preferred Stock, all Parity
Stock, and all Junior Stock (other than Common Stock), the remaining assets of
the Corporation shall be distributed, first, to the holders of Common Stock in
an amount equal to the amount paid on the Series E Preferred Stock pursuant to
subparagraph 4(a) and any amounts paid on any other class or series of
Participating Stock, and second, among the holders of Common Stock, the Series E
Preferred Stock and any other Participating Stock in accordance with the number
of shares of Common Stock outstanding, assuming, for purposes of this clause
second only, that (1) all shares of Class A Common Stock then issuable upon
conversion of the Series E Preferred Stock are outstanding and held by the
holders of the Series E Preferred Stock and (2) all shares of Common Stock then
issuable upon the conversion of any other Participating Stock are outstanding
and held by the holders thereof.
-2-
<PAGE>
(d) For purposes of this Section 4, the consolidation or
merger of the Corporation with or into any other corporation, the conveyance or
transfer of the property and assets of the Corporation as, or substantially as,
an entirety, or the reclassification of the capital stock of the Corporation or
the redemption or purchase of less than all of the shares of the capital stock
of the Corporation, shall not be deemed to constitute a liquidation, dissolution
or winding up of the Corporation.
5. Redemption.
(a) Redemption at Option of Corporation. The Corporation may
redeem all (but not less than all, without the consent of all holders of Series
E Preferred Stock) of the outstanding shares of Series E Preferred Stock (1) at
any time up until the first anniversary of issuance, at the Accelerated
Redemption Price, and (2) at any time thereafter, at a price per share equal to
the Redemption Price. Notice of every redemption of shares of Series E Preferred
Stock at the option of the Corporation shall be mailed by first class mail,
postage prepaid, addressed to the holders of record of the shares to be redeemed
at their respective last addresses as they shall appear on the books of the
Corporation. Such mailing shall be made at least 30 days prior to the Redemption
Date. The notice of redemption shall state: (1) the Redemption Date; (2) the
amount of the Accelerated Redemption Price or the Redemption Price, as
applicable; (3) that on the Redemption Date the Accelerated Redemption Price or
the Redemption Price, as applicable, will become due and payable upon surrender
of certificates representing each share of Series E Preferred Stock; and (4) the
place or places where certificates representing shares of Series E Preferred
Stock to be redeemed are to be surrendered for payment of the Accelerated
Redemption Price or the Redemption Price, as applicable. Notwithstanding the
foregoing, any holder of Series E Preferred Stock shall have the right, after
receiving notice of the Corporation's intention to redeem, to convert the Series
E Preferred Stock, as provided in Section 6, upon serving written notice of such
election no later than five business days prior to the Corporation's proposed
redemption.
(b) Redemption at Option of Holders. Except as provided in the
next sentence, the holders of all outstanding shares of Series E Preferred Stock
shall have the right to require the Corporation to redeem 5,000 of the
outstanding shares of Series E Preferred Stock, at a price per share equal to
the Redemption Price, by providing written notice of redemption to the
Corporation on any day after February 25, 2002, redeem the remaining 5,000 of
the outstanding shares of Series E Preferred Stock beginning on February 25,
2003. Notwithstanding the preceding sentence, the Corporation shall have no
obligation to redeem any of the Series E Preferred Stock unless it is able at
the time to do so in compliance with: (1) Section 8(a) of the Certificate of
Designation, Preferences and Relative, Participating, Optional and Other Special
Rights of Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of the Corporation's 12.75% Series A Cumulative Exchangeable Preferred
Stock, (2) Section 2(C) of the Certificate of Designation, Preferences and
Relative, Participating, Optional and Other Special Rights of Preferred Stock
and the Qualifications, Limitations and Restrictions Thereof of the 6 1/2%
Series C Convertible Preferred Stock of the Corporation, (3) Section 4.07 of the
Indenture dated as of October 21, 1997, between the Corporation and First Union
National Bank as trustee, (4) Section 4.07 of the Indenture dated as of November
30, 1998, between the Corporation and First Union National Bank, as trustee, (5)
Section 4.09 of the Indenture dated as of November 19, 1999, between the
-3-
<PAGE>
Corporation and First Union National Bank, as trustee, and (6) any similar or
comparable provision, now or hereafter in effect, in the terms of any Preferred
Stock of the Corporation or any indenture, note, bond, debenture or other
agreement or instrument pursuant to which the Corporation has issued securities
or borrowed money. Notice of every redemption of shares of Series E Preferred
Stock at the option of the holders shall be mailed by first class mail, postage
prepaid, addressed to the Corporation at its principal office. Such mailing
shall be at least 30 days and not more than 60 days prior to the Redemption Date
and shall state the Redemption Date and the amount of the Redemption Price.
(c) Payment of Redemption Price; Deposit of Funds. In the case
of any redemption under subsection (a) or (b), the Corporation shall pay to the
holders of the Series E Preferred Stock, on or before the Redemption Date, the
full amount of the Redemption Price upon surrender by such holders of
certificates representing the shares of Series E Preferred Stock being redeemed.
The Corporation may elect to effect any such redemption by depositing with the
bank or trust company hereinafter mentioned (and, in the case of a redemption
under subsection (a), may irrevocably authorize such bank or trust company to
give the notice of redemption) the funds necessary for such redemption in trust
for the pro rata benefit of the holders of the shares called for redemption,
whereupon, notwithstanding that any certificates for shares so called for
redemption shall not have been surrendered for cancellation, from and after the
Redemption Date, all shares so called for redemption shall no longer be deemed
to be outstanding and all rights with respect to such shares shall forthwith
cease and terminate, except only the right of the holders thereof to receive
from such bank or trust company at any time after the time of such deposit the
full amount of the Redemption Price, without interest. Upon surrender to the
Corporation or to such bank or trust company by any holder of either (i) the
certificates representing the shares of the Series E Preferred Stock being
redeemed; or (ii) a lost share affidavit in a form satisfactory to the
Corporation and such bank or trust company, together with an indemnity bond the
amount, terms, form and issuer of which are reasonably satisfactory to the
Corporation and such bank or trust company with respect to any certificate which
has been lost or destroyed, the bank or trust company shall promptly pay to such
holder the full amount of the redemption price being redeemed by such holder.
Any interest accrued on such funds shall be paid to the Corporation from time to
time. The aforesaid bank or trust company shall be organized and in good
standing under the laws of the United States of America or any state thereof,
shall be doing business in the United Shares of America, shall have capital,
surplus and undivided profits aggregating at least $10,000,000 according to its
last published statement of condition, and shall be identified in the notice of
redemption. Any funds so set aside or deposited, as the case may be, and
unclaimed at the end of two years from such Redemption Date shall, to the extent
permitted by law, be released or repaid to the Corporation, after which
repayment the holders of the shares so called for redemption shall look only to
the Corporation for payment thereof.
(d) Status of Redeemed Series E Preferred Stock. Shares of
Series E Preferred Stock which are redeemed shall be restored to the status of
authorized but unissued shares of Preferred Stock undesignated as to series.
6. Conversion.
(a) Right to Convert. Subject to the terms and conditions of
this Section 6, the holder of any share or shares of Series E Preferred Stock
-4-
<PAGE>
shall have the right, at its option at any time, to convert any such shares of
Series E Preferred Stock (except that upon any liquidation of the Corporation
the right of conversion shall terminate at the close of business on the last
full business day next preceding the date fixed for payment of the amount
distributable on the Series E Preferred Stock) into such number of fully paid
and nonassessable whole shares of Class A Common Stock as is obtained by
dividing $1,000 by the Conversion Price. Such rights of conversion shall be
exercised by the holder thereof by giving written notice that the holder elects
to convert a stated number of shares of Series E Preferred Stock into Class A
Common Stock and by surrender of a certificate or certificates for the shares so
to be converted to the Corporation at its principal office (or such other office
or agency of the Corporation as the Corporation may designate by notice in
writing to the holders of the Series E Preferred Stock) at any time during its
usual business hours on the date set forth in such notice, together with a
statement of the name or names (with address) in which the certificate or
certificates for shares of Class A Common Stock shall be issued.
(b) Issuance of Certificates; Time Conversion Effected.
Promptly after the receipt of the written notice referred to in Section 6(a) and
surrender of the certificate or certificates for the share or shares of Series E
Preferred Stock to be converted, the Corporation shall issue and deliver, or
cause to be issued and delivered, to the holder, registered in such name or
names as such holder may direct, a certificate or certificates for the number of
whole shares of Class A Common Stock issuable upon the conversion of such share
or shares of Series E Preferred Stock. To the extent permitted by law, such
conversion shall be deemed to have been effected and the Conversion Price shall
be determined as of the close of business on the date on which such written
notice shall have been received by the Corporation and the certificate or
certificates for such share or shares shall have been surrendered as aforesaid,
and at such time the rights of the holder of such share or shares of Series E
Preferred Stock shall cease, and the person or persons in whose name or names
any certificate or certificates for shares of Class A Common Stock shall be
issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby.
(c) Fractional Shares; Dividends; Partial Conversion. No
fractional shares shall be issued upon conversion of Series E Preferred Stock
into Class A Common Stock and no payment or adjustment shall be made upon any
conversion on account of any cash dividends on the Class A Common Stock issued
upon such conversion. At the time of each conversion, the Corporation shall pay
in cash an amount equal to all dividends accumulated and unpaid on the shares
surrendered for conversion to the date upon which such conversion is deemed to
take place as provided in Section 6(b). In case the number of shares of Series E
Preferred Stock represented by the certificate or certificates surrendered
pursuant to Section 6(a) exceeds the number of shares converted, the Corporation
shall, upon such conversion, execute and deliver to the holder thereof, at the
expense of the Corporation, a new certificate or certificates for the number of
shares of Series E Preferred Stock represented by the certificate or
certificates surrendered which are not to be converted. If any fractional
interest in a share of Class A Common Stock would, except for the provisions of
the first sentence of this Section 6(c), be delivered upon any such conversion,
the Corporation, in lieu of delivering the fractional share thereof, shall pay
to the holder surrendering the Series E Preferred Stock for conversion an amount
in cash equal to the current market price of such fractional interest as
determined in good faith by the Board of Directors of the Corporation.
-5-
<PAGE>
(d) Adjustment for Change in Capital Stock. If at any time
after the date hereof, the Corporation:
(1) pays a dividend or makes a distribution on its Class A
Common Stock in shares of its Class A Common Stock;
(2) subdivides its outstanding shares of Class A Common Stock
into a greater number of shares;
(3) combines its outstanding shares of Class A Common Stock
into a smaller number of shares;
(4) makes a distribution on its Class A Common Stock in shares
of its capital stock other than Class A Common Stock; or
(5) issues by reclassification of its Class A Common Stock any
shares of its capital stock;
then the number of shares of Class A Common Stock receivable upon conversion of
the Series E Preferred Stock and the Conversion Price, as in effect immediately
prior to such action, shall be adjusted so that the holders may receive upon
conversion of the Series E Preferred Stock and payment of the same aggregate
Conversion Price the number of shares of capital stock of the Corporation which
the holders would have owned immediately following such action if the holders
had converted the Series E Preferred Stock immediately prior to such action. The
adjustment shall become effective immediately after the record date in the case
of a dividend or distribution and immediately after the effective date in the
case of a subdivision, combination or reclassification.
(e) Notice to Holders upon Certain Events. In the event that:
(1) the Corporation shall authorize the issuance to holders of
its Class A Common Stock of rights, warrants, options or convertible securities
to subscribe for or purchase shares of its Class A Common Stock or of any other
subscription rights, warrants, options or convertible securities; or
(2) the Corporation shall authorize the distribution to
holders of its Class A Common Stock of evidences of its indebtedness or assets;
or
(3) the Corporation is the subject of a voluntary or
involuntary dissolution, liquidation or winding-up proceeding;
then the Corporation shall cause to be mailed by first-class mail to the holders
of the Corporation's Series E Preferred Stock, at least ten (10) days prior to
the applicable record or effective date, a notice stating (A) the date as of
which the holders of Class A Common Stock of record to be entitled to receive
any such rights, warrants, options or convertible securities or distributions
referred to in clauses (1) and (2) above are to be determined, or (B) the date
on which any such dissolution, liquidation or winding-up referred to in clause
(3) above is expected to become effective, and the date as of which it is
-6-
<PAGE>
expected that holders of Common Stock of record will be entitled to exchange
their shares of Class A Common Stock for securities or other property, if any,
deliverable upon such reorganization, reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up.
(f) Reclassification, Reorganization, Consolidation or Merger.
In the event of any reclassification, capital reorganization or other change of
outstanding shares of Class A Common Stock of the Corporation (other than a
subdivision or combination of the outstanding Class A Common Stock and other
than a change in the par value of the Class A Common Stock) or in the event of
any consolidation or merger of the Corporation with or into another corporation
or a non-corporate entity (other than a merger in which the Corporation is the
continuing corporation and that does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock) or in the
event of any sale, lease, transfer or conveyance to another corporation or
non-corporate entity of the property and assets of the Corporation as an
entirety or substantially as an entirety, the Corporation shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
holders of the Corporation's Series E Preferred Stock shall have the right
thereafter, by converting the Series E Preferred Stock, to purchase the kind and
amount of shares of stock and other securities and property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Class A Common Stock that might have been received upon conversion of the Series
E Preferred Stock immediately prior to such reclassification, capital
reorganization, change, consolidation, merger, sale or conveyance. The foregoing
provisions of this Section shall similarly apply to successive reclassification,
capital reorganizations and changes of shares of Class A Common Stock and to
successive consolidations, mergers, sales or conveyances.
(g) Stock to be Reserved. The Corporation shall at all times
reserve and keep available out of its authorized Class A Common Stock or its
treasury shares, solely for the purpose of issuance upon the conversion of the
Series E Preferred Stock as herein provided, such number of shares of Class A
Common Stock as shall then be issuable upon the conversion of all outstanding
shares of Series E Preferred Stock. The Corporation covenants that all shares of
Class A Common Stock which shall be so issued shall be duly and validly issued
and fully paid and nonassessable.
7. Voting Rights.
(a) Except as otherwise required by law, the holders of Series
E Preferred Stock shall have no right to vote on any matter to be voted on by
the stockholders of the Corporation. Without limiting the generality of the
foregoing, the Corporation may authorize, issue or amend the terms of Senior
Stock, Parity Stock or Junior Stock, or may increase or decrease the number of
authorized shares of Preferred Stock, Series E Preferred Stock, Senior Stock,
Parity Stock or Junior Stock, without the vote or consent of any holder of
Series E Preferred Stock.
(b) In any matter upon which the holders of the Series E
Preferred Stock shall be entitled by law to vote, the holders of Series E
Preferred Stock shall be entitled to one vote per share, and shall not be
entitled to vote as a separate class or series unless otherwise required by law.
-7-
<PAGE>
8. Definitions. As used herein, the following terms have the
following meanings:
The "Accelerated Redemption Price" per share of Series E
Preferred Stocks means $1,100 plus accumulated and unpaid dividends.
"Class A Common Stock" means the Class A Common Stock of the
Corporation, par value $0.01.
"Common Stock" means stock of any class of the Corporation
which has no preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation and which is not subject to redemption by the Corporation.
"Conversion Price" means $124.70834 per share or, in case an
adjustment of such price shall have taken place pursuant to the provisions of
Section 6, then the such price as last adjusted and in effect at the date any
share or shares of Series E Preferred Stock are surrendered for conversion.
"Junior Stock" means the Common Stock and all other stock of
the Corporation hereafter authorized, issues or outstanding that by its terms
ranks junior to Series E Preferred Stock in whole or in part as to distribution
of assets upon liquidation.
The "Liquidation Preference" per share of Series E Preferred
Stock means $1,000 plus accumulated and unpaid dividends.
"Parity Stock" means all stock of the Corporation hereafter
authorized, issued or outstanding other than Senior Stock and Junior Stock.
"Participating Stock" means any stock of the Corporation
hereafter authorized that participates with the Common Stock as to distribution
of assets upon liquidation on terms similar to those in subparagraph 4(c).
"Redemption Date" means the date on which Series E Preferred
Stock is to be redeemed and the Redemption Price paid in accordance herewith.
The "Redemption Price" per share of Series E Preferred Stock
means $1,000 plus accumulated and unpaid dividends.
"Senior Stock" means the 12.75% Series A Cumulative
Exchangeable Preferred Stock of the Corporation, the 6 1/2 % Series C
Convertible Preferred Stock of the Corporation and all other stock of the
Corporation hereafter authorized, issued or outstanding that by its terms ranks
senior to the Series E Preferred Stock in whole or in part as to distribution of
assets upon liquidation.
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IN WITNESS WHEREOF, the undersigned has executed this
Certificate this 25th day of February, 2000.
PEGASUS COMMUNICATIONS CORPORATION
By: /s/ Ted S. Lodge
-------------------------------------
Ted S. Lodge
Senior Vice President
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<PAGE>
RENEWAL FRANCHISE AGREEMENT
BETWEEN THE TELECOMMUNICATIONS REGULATORY BOARD,
CABLE SYSTEMS USA, PARTNERS AND
PEGASUS CABLE TELEVISION OF SAN GERMAN, INC.
WHEREAS, Cable Systems USA, Partners (the "Company" or
"Franchisee") has been operating a cable communications system within the
municipalities of Aguadilla, Aguada, Quebradillas, Moca and Isabela, Puerto Rico
(the "Municipalities") pursuant to Franchise FC-53 originally issued by the
Public Service Commission on September 26, 1983, as amended; and
WHEREAS, the Telecommunications Regulatory Board of Puerto
Rico ("the Board") has been authorized to renew cable television franchises
pursuant to its authority under Public Law 213 of September 12, 1996, known as
the "Telecommunications Act of Puerto Rico of 1996" and Public Law 170 of August
12, 1988 known as the "Uniform Administrative Procedures Act".
WHEREAS, the Company has asked the Board to renew the
nonexclusive franchise ("Prior Franchise") to construct, install, maintain and
operate a cable communications system in the Municipalities; and
WHEREAS, Grantor has a legitimate and necessary regulatory
role in ensuring the maximum feasible availability of cable communications
service, the high technical capability and reliability of cable systems in its
jurisdiction, the availability of local programming, including public,
educational, and governmental access programming, optimum customer service, and
fair rates, subject to the limitations of applicable law and
<PAGE>
WHEREAS, the basis for the Grantor's lawful regulatory
authority to establish an enforceable franchise agreement and associated
regulatory mechanisms are the Grantee's use of public resources for its
distribution network, limited competition in the cable service market within the
franchise area, and applicable federal law authorizing the provision of cable
services only through a local franchise agreement; and
WHEREAS, diversity in cable service, local and non-local
programming is an important policy goal. Grantee's cable system should offer a
wide range of programming services which individually may not be desired by all
subscribers, but collectively present a substantial share of the overall value
of cable to current and prospective subscribers, including local programming;
and
WHEREAS, flexibility to respond to changes in technology,
subscriber interests, and competitive factors is an important policy goal; and
WHEREAS, the Board has reviewed the Company's performance
under the Prior Franchise, and the quality of service during prior franchise
term; has identified the future cable-related needs and interests of the
community; has considered the financial, technical, and legal qualifications of
the Company; and has determined whether the Company's plans for constructing,
operating and maintaining its cable System are adequate; and
WHEREAS, based on the Company's representations and
information, the Board has determined that, subject to the terms and conditions
set forth herein, the grant of a new nonexclusive franchise to the Company, to
supersede the Prior Franchise, is consistent with the public interest; and
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WHEREAS, the Company has signed an Asset Purchase Agreement
("Purchase Agreement") with, among other parties, Pegasus Cable Television,
Inc., which is the parent company of Pegasus Cable Television of San German,
Inc. ("Pegasus"), under which, after certain conditions are met, the Company
will transfer the Franchise to Pegasus;
WHEREAS, the Board has reviewed the Pegasus's performance
under its Franchise, has identified the future cable-related needs and interests
of the community; has considered its financial, technical, and legal
qualifications; and has determined whether Pegasus' plans for constructing and
operating its cable System are adequate; and
WHEREAS, based on the Company's and on Pegasus's
representations and information, the Board has determined that, subject to the
terms and conditions set forth herein, the grant of a new nonexclusive franchise
to the Company, to supersede the Prior Franchise, is consistent with the public
interest; and
WHEREAS, based on the terms of the Purchase Agreement and the
representations made by the parties during the renewal and transfer hearing held
on October 20, 1998, the Board has determined that it will agree to the renewal
of the Franchise to the Company (independent of the closing of the Purchase
Agreement), and to the transfer the Franchise to Pegasus, subject to the closing
of the Purchase Agreement; and
WHEREAS, the Board and the Company have reached agreement on
the terms and conditions of such a Franchise Agreement; and
NOW, THEREFORE, in consideration of the Board's renewal of the
Company's Franchise; the Company's and Pegasus' promise to provide Cable Service
to residents of the Municipalities under the terms and conditions set forth
herein; the promises
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and undertakings herein, and other good and valuable consideration, the receipt
and the adequacy of which is hereby acknowledged, the Board, the Company and
Pegasus hereby agree as follows:
1. DEFINITIONS
The following definitions shall apply;
a) Board - The Telecommunications Regulatory Board of Puerto Rico
b) Board Regulations - The regulations of the Board applicable to cable
television companies as adopted by the Board on January 28, 1998.
c) Cable Service shall mean: (1) the one-way transmission to subscribers of
video programming or other programming services and (2) subscriber
interaction, if any, which is required for the selection or use of such
video programming or programming service. Cable Service includes the
provision of Internet access over the cable system.
d) Cable System or System: shall mean a facility consisting of a set of
closed transmission paths and associated signal generation, reception,
and control equipment that is designed to provide Cable Service which
includes video programming and/or producing, receiving, amplifying,
storing, processing, switching, or distributing audio, video, digital or
other forms of electronic Signals sold or distributed to subscribers,
but such term does not include (1) a facility that services only to
retransmit the television signals of one or more television broadcast
stations; (2) a facility that serves Subscribers without using any
Public Rights of Way (3) a facility of a common carrier which is
subject, in
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whole or in part, to the provisions of Title II of the Communications
Act of 1934, as amended, except that such facility shall be considered a
cable system to the extent such facility is used in the transmission of
video programming directly to subscribers, unless the extent of such use
is solely to provide interactive on-demand services; (4) an open video
system that complies with 47 U.S.C. ss. 573 of the Cable Act, the rules
and regulations of the FCC, and local law; or (5) any facilities of any
electric utility used solely for operating its electric utility systems.
The foregoing definition of "Cable System" shall not be deemed to
circumscribe or limit the valid authority of the Board to Regulate or
Franchise the activities of any other communications system or provider
of communication services to the full extent permitted by law.
e) Channel: Shall mean a band of frequencies in the electromagnetic
spectrum, or any other means of transmission (including, without
limitation, optical fibers or any other means now available or that may
become available), which is capable of carrying a video Signal, an audio
Signal, a voice Signal, or a data Signal.
f) FCC: shall mean the Federal Communications Commission.
g) Franchise Agreement or Agreement: shall mean this contract and any
amendments,
h) Owner: shall mean a person with a legal or equitable interest in
ownership of real property
i) Person: shall mean any corporation, partnership, proprietorship,
individual or organization, governmental organization, or any natural
person
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j) Public Right-of-way: shall mean the surface, air space above the
surface, and the area below any public street, road, highway, lane,
path, parkway, waterway, easement or right-of-way now or hereafter held
by Municipalities or dedicated for use by the Municipalities, use by the
general public, or use compatible with cable system operations.
k) Franchisee: shall mean the Company and its successors, transferees or
assignees.
l) Franchise Area: shall mean the geographical area of the Municipalities,
as delineated in Exhibit A.
m) Gross Revenues: Any and all cable television subscriber revenues
obtained by the Franchisee for the delivery of cable television
programming which shall include residential cable subscriber revenue;
revenue from commercial accounts for the delivery of cable television
programming; and bulk billing revenue from the provision of cable
television programming. Gross Revenues include, by way of illustration
and not limitation, monthly fees charged to Subscribers for any basic,
optional, premium, per channel, per-program service, or cable
programming service; installation, disconnection, reconnection, and
change-in-service fees; leased channel fees; late fees and
administrative fees; revenues from rentals or sales of Converters or
other equipment; any studio rental, production equipment, and personnel
fees; advertising revenues; barter; revenues from program guides; and
revenues from the sale of carriage of other cable-related services.
Gross Revenues shall include revenues received by an entity other than
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the Franchisee, an Affiliate, or another entity that operates the System
where necessary to prevent evasion or avoidance of the obligation under
this Agreement to pay the franchise fee. Gross Revenues shall not
include any taxes on services furnished by the Franchisee which are
imposed directly on any Subscriber or user by the state, or other
governmental unit and which are collected by the Franchisee on behalf of
said governmental unit. A Franchise fee is not such a tax. Gross
Revenues shall not include revenues from home shopping and bank-at-home
channels; bad debt, up to 2% of gross revenue; and fees, payments, or
other consideration received from programmers for carriage of
programming on the System, and accounted for as revenue or an expense
off-set under GAAP.
n) Normal Business Hours: Those hours during which most similar businesses
in the community are open to serve customers. In all cases, "normal
business hours" must include some evening hours at least one night per
week and/or some weekend hours.
o) Normal Operating Conditions: Those service conditions, which are within
the control of the cable operator. Those conditions which are not within
the control of the cable operator include, but are not limited to,
natural disasters, civil disturbances, power outages, telephone network
outages, and severe or unusual weather conditions. Those conditions
which are within the control of the cable operator include, but are not
limited to, special promotions, routine pay-per-view events, rate
increase, regular peak or seasonal demand periods, and maintenance of
the cable system.
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p) PEG: Public, educational, and governmental.
q) Service Interruption: The loss of picture or sound on one or more cable
Channels or Channel Equivalents.
r) System outage: A Service Interruption affecting more than 15 Subscribers
at a particular area.
s) System Rebuild or Rebuild: A major improvement or enhancement in the
technology or service capabilities made by the Franchisee to the Cable
System, as more fully described in Section 6(d).
t) Transfer of the Franchise: Any transaction in which: (1) an ownership or
other interest in the Franchisee is transferred, directly or indirectly,
from one Person or group of Persons to another Person or group of
Persons so that control of the Franchisee is transferred; or (2) the
rights held by the Franchisee under this Franchise Agreement are
transferred or assigned to another Person or group of Persons. The mere
pledge of system assets, including the franchise, shall not be
considered a transfer of the franchise.
u) Transfer of an Interest: The sale or transfer, directly or indirectly,
of an existing or newly created equity interest in the Franchisee that
does not result in a transfer of control of the Franchisee.
v) Public Property shall mean any real property owned by Municipalities
other than a street.
w) Purchase Agreement shall mean the Asset Purchase Agreement among Cable
Systems USA, Partners, J & J Cable Partners, Inc., PS&G Cable Partners,
Inc.,
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<PAGE>
and Pegasus Cable Television, Inc. dated July 23, 1998, as the same
may be amended or modified by the parties thereto.
x) Service means any Cable Service or other transmission of Signals,
including any Basic Service or any other Service, whether originated by
the Franchisee or any other Person, which is offered to any Person in
conjunction with, or distributed over, the System.
y) Signal means any transmission of radio frequency energy or of optical
information.
z) Subscriber shall mean any Person who subscribes to a Service provided by
Franchisee by means of the System.
2. GRANT OF AUTHORITY
a) Grant of Authority:
1) Grantor hereby grants to Grantee a revocable authorization to make
reasonable and lawful use of the public streets and public easements
within the franchise area to construct, operate, maintain, reconstruct,
rebuild and upgrade a cable system for the purpose of providing cable
services and other services subject to the terms and conditions set
forth in this Agreement and in any prior utility or use agreements
entered into with regard to any individual property. This Franchise
shall constitute both a right and an obligation to provide the services
required by, and to fulfill the obligations set forth in, the provisions
of this Agreement.
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<PAGE>
2) Franchise Non Exclusive - The right to use and occupy the public
right-of-way is not exclusive and does not explicitly or implicitly
preclude the issuance of other Franchises to construct or operate within
the Municipalities; or affect the Board's right to authorize the use of
the public right-of-way or other property by other personas as it
determines appropriate.
3) Franchise Agreement Subject to Other Laws: (a) This Franchise Agreement
is subject to and shall be governed by all applicable provisions of
federal, state, and local law.
4) Approval, Acceptance, and Effective Date; This Franchise Agreement shall
become effective immediately (the "Effective Date"), following its
approval by the Board and its acceptance by the Franchisee, provided
that if the Franchisee fails to accept the Franchise before or within
thirty (30) days after approval by the Board, whichever is later, it
shall be deemed void.
5) Effect of Acceptance; By accepting the Franchise and executing this
Franchise Agreement, the Franchisee:
a) accepts and agrees to comply with each provision this Agreement;
acknowledges and accepts the legal right of the Board to grant the
Franchise, to enter this Franchise Agreement, and to enact and
enforce laws and regulations related to the Franchise;
b) Agrees that the Franchise was granted pursuant to processes and
procedures consistent with applicable law, and that it will not raise
any claim to the contrary, or allege in any proceeding by the
Franchisee against the Board
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<PAGE>
that any provision, condition or term of this Franchise Agreement at
the time of the acceptance of the Franchise was unreasonable or
arbitrary, or that at the time of the acceptance of the Franchise any
such provision, condition or term was void or that the Board had no
power or authority to make or enforce any such provision, condition
or term;
c) Agrees to reimburse the Board for all costs incurred in its review,
preparation, evaluation of proposals and qualifications, and
negotiations involving this Agreement costs up to $25,000. The Board
shall provide the Franchisee with an accounting of these expenses,
such as consultant fees, and shall supply the Franchisee with
invoices for said expenses. Franchisee shall deliver payment to the
Board within 30 days of receipt of said invoices. Such payments are
in addition to the Franchise Fee. Failure to make timely payment of
said expenses, except for any expenses that are the subject of
legitimate dispute, shall constitute a material violation of this
Agreement. Other than publication and advertisement posts, no such
costs shall be assessed in connection with this renewal.
6) No Waiver:
a) The failure of the Board on one or more occasions to exercise a
right or to require compliance or performance under this
Franchise Agreement, the Board Regulations or any other
applicable law shall not be deemed to constitute a waiver of such
right or a waiver of compliance or performance by the Board, nor
to excuse the Franchisee from complying or performing,
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<PAGE>
unless such right or such compliance or performance has been
specifically waived in writing.
b) The failure of the Franchisee on one or more occasions to
exercise a right under this Franchise Agreement or applicable
law, or to require performance under this Franchise Agreement,
shall not be deemed to constitute a waiver of such right or of
performance of this Agreement, nor shall it excuse the Board from
performance, unless such right or performance has been
specifically waived in writing.
7) No Recourse
a) The Franchisee shall have no recourse against the Board for any
loss, cost, expense, claim, liability or damage arising out of
any action undertaken or not undertaken by the Franchisee
pursuant to the Franchise, this Agreement or the Board
Regulations, whether or not such action or non-action was
required by the Franchise, the Agreement or the Board
Regulations, arising out of the enforcement or non-enforcement by
the Board of any provision or requirement of this Agreement or
Board Regulations, otherwise arising out of the Franchise, the
Agreement or Board Regulations. The preceding shall not preclude
declaratory or injunctive relief; provided, however, that this
section shall not afford the Board any greater rights than
provided in 47 U.S.C. Section 555a.
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<PAGE>
8) Construction of Franchise Agreement.
a) The provisions of this Franchise Agreement shall be
liberally construed to effectuate its objectives consistent
with the applicable Board Regulations and the public
interest. In the event of a future conflict between the
Board Regulations and this Agreement, the older provision or
term shall prevail. If a new regulation is promulgated by
the Board after it approves this Agreement, such regulation
shall only apply to the Franchisee if it benefits the
Franchisee. References to applicable law or applicable
requirements refer to applicable law or requirements as the
same may be amended from time to time.
9) Effect of Competition
a) The Board desires competition in cable services in the Municipalities
and believes competition will benefit the residents of the
Municipalities. Further, the Board believes that competition can
develop without substantial injury to Franchisee or Franchisee's
ability to perform on its promises in this Agreement. The Franchisee
has entered this Agreement with a full understanding that the Board
intends to encourage the development of competition.
b) Use of Public Streets and Ways - Grantee may erect, install,
construct, repair, replace, reconstruct, and retain in, upon, across,
and along the public streets, including rights-of-way and public
easements within the franchise area such wires, cable, conductors,
ducts,
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conduits, vaults, manholes, amplifiers, appliances, pedestals,
attachments and other property and equipment as are necessary and
appurtenant to the operation of a cable system for the provision of
cable service and other services within the franchise area. Grantee
shall comply with all applicable construction codes, laws,
ordinances, regulations and procedures, now in effect or enacted
hereafter. Grantee, through this Agreement, is granted extensive and
valuable rights to operate its cable system for profit using the
public rights-of-way and public utility easements within the
franchise area in compliance with all applicable construction codes
and procedures. As trustee for the public, the Grantor is entitled to
fair compensation to be paid for these valuable rights throughout the
term of the franchise.
c) Duration - The term of this franchise and all rights, privileges,
obligations and restrictions pertaining thereto shall be 10 years
from the effective date of this Agreement, unless terminated sooner
as hereinafter provided.
d) Relation to Prior Franchise - As of the effective date of this
Franchise, the Franchise previously held by the Franchisee are
superseded and of no further force and effect. Franchisee promises to
pay all amounts owed the Board and subscribers under its prior
franchises for which claims are made within three years of the
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effective date of this Franchise. Franchisee hereby indemnifies and
insures the Board against Franchisee's acts and omissions that
occurred when the prior Franchises were effective to the extent any
claims related to such acts and omissions are not barred by the
statute of limitations.
e) Franchisee Bears Its Own Costs - Unless otherwise expressly provided
in this Agreement, all acts that the Franchisee is required to
perform must be performed at the Franchisee's own expense.
f) External Costs - The Franchisee may itemize any external costs on
subscriber bills to the extent permitted by federal law. Franchisee
agrees that it was planning the upgrade and rebuild of the subscriber
system before entering this Franchise Agreement and therefore will
not claim the upgrade and rebuild costs attributable to the
subscriber system as an external cost for which recovery could be
sought through 47 CFR Sec. 76.922(d)(3). Notices of price changes
caused by external costs shall be in accordance with federal rules.
3. FRANCHISE RENEWAL AND TRANSFER
a) Transfer:
1. A Transfer of the Franchise, or a Transfer of an INTEREST IN THE
Franchise that results in a change in ownership interest of the
Franchise of 5 percent or more, must not occur without prior approval by
the Board.
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However, a Transfer of an Interest to a person who already holds an
ownership interest of 25 percent or more does not require such prior
approval if Transfer of the Franchise does not occur.
2. An application to Transfer the Franchise must provide complete
information on the proposed transaction, including the legal, moral
character, financial, technical and other pertinent qualifications of
the transferee, and on the potential impact of the transfer on
subscriber services or rates.
3. An application for Transfer of an Interest in the Franchise must
describe the proposed transaction in detail and identify the interest to
be transferred, the transferor, and transferee.
4. Before approving Transfer of the Franchise, the Board must consider the
legal, financial, technical and moral character qualifications of the
transferee to operate the System, and whether operation by the proposed
franchisee will adversely affect the cable services to Subscribers or
otherwise be contrary to the public interest. Before approving a
Transfer of an Interest in the Franchise, the Board must consider
whether the transferee's interest will have any effect on the
Franchisee's operation of the System, the Franchisee's qualifications,
or the public interest.
5. Approval by the Board of a Transfer of the Franchise does not constitute
a waiver or release of any of the rights of the Board under this
Agreement or applicable laws and regulations.
6. The Board may impose a grant fee to cover the costs in considering an
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application for Transfer of the Franchise. Other than publication and
advertisement costs, no such costs will be assessed in connection with
this transfer.
7. In seeking the Grantor's consent to any change in ownership or control,
the Grantee shall require the proposed transferee to indicate whether it
either:
a) Has ever been convicted or held liable for acts involving deceit
including any violation of federal, state or local law or
regulations, or is currently under an indictment, investigation or
complaint charging such acts; and
b) has ever had a judgment in an action for fraud, deceit, or
misrepresentation entered against the proposed transferee by any
court of competent jurisdiction; and
c) has pending any material legal claim, law suit, or administrative
proceeding arising out of or involving a cable system, except that
any such claims, suits or proceedings relating to insurance, claims,
theft of service, or employment matters need not be disclosed; and
d) is financially solvent, by submitting the financial data including
financial statements that are audited by a certified public
accountant who may also be an officer of the parent corporation along
with any other data that the Grantor may reasonably require; and
e) has the financial and technical capability to enable it to maintain
and operate the cable system for the remaining term of the Franchise.
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f) In seeking the Grantor's consent to any change in ownership or
control, the Grantee shall indicate whether the Grantee has failed to
materially comply with any provision of this Agreement or of any
applicable customer or consumer service standards promulgated or in
effect in Grantor's jurisdiction at any point during the term of this
Agreement.
g) A sale, transfer or assignment of the Franchise may not be approved
without the successor in interest becoming a signatory to this
Franchise Agreement.
8. No application for a Transfer of the Franchise shall be granted unless
the transferee agrees in writing that it will abide by and accept all
terms of this Agreement and the Board Regulations, and that it will
assume the obligations, liabilities, and responsibility for all acts and
omissions, known and unknown, of the previous Franchisee under this
Agreement for all purposes, including renewal, unless the Board, in its
sole discretion, expressly waives this requirement in whole or in part.
9. The Board shall have one hundred and twenty (120) days following the
submission of the application for transfer (using FCC Form 394) or
assignment to render a decision. If the Board does not render a decision
within this time, the transaction shall be deemed approved. The
Franchisee and the Board may agree to an extension of time.
b) Renewal
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1. This Franchise may be renewed, under the provisions of the Regulations
of the Board as they existed on the effective date of this agreement,
for an additional period not to exceed ten (10) years if:
a. The Franchisee has substantially complied with the material terms of
the existing Franchise and with applicable law;
b. the quality of the Franchisee's service, including signal quality,
response to consumer complaints, and billing practices, but without
regard to the mix or quality of cable services or other services
provided over the System has been reasonable in light of community
needs;
c. the Franchisee has the financial, legal, and technical ability to
provide the services, facilities, and equipment set forth in the
Franchisee's proposal; and
d. the Franchisee's proposal is reasonable to meet the future
cable-related community interests, taking into account the cost of
meeting such needs and interest.
2. Any denial of a proposal for renewal shall be based on one or more
adverse findings made with respect to the factors described in Section
3b(l)(a-d). The Board may not base a denial of renewal on a failure to
substantially comply with the material terms of the Franchise or the
factors described in Section 3(b) unless the Board has provided
Franchisee with notice and the reasonable opportunity to cure the same.
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3. The Board may not, upon the expiration of this Franchise, or otherwise,
acquire an ownership interest in the System, or require a sale of the
System to any other person, unless the Board or such other person
acquires the ownership interest at not less than fair market value for
the System as a going concern.
4. PROVISION OF SERVICE
a) Availability of Cable Service. The Franchisee shall make Cable Service
available to all persons, including residences, businesses, and other
legal entities, within the territory designated at Exhibit A, including
owners or occupants of multiple dwelling units that request Cable
Service, except for multiple dwelling unit buildings to which the
Franchisee cannot legally obtain access or cannot reach an agreement for
access after good faith negotiation with the building owner.
Notwithstanding the foregoing, the requirements contained in the
following sections of this Franchise shall not apply to service provided
by the Franchisee to business customers: Section 4(b) (Line Extensions.
Section 6(a)(8) (Consumer Equipment); Section 6(a)(l1) (Program
Security); Section 9(b) (Installations), Section 9(d) (Scheduling and
Completing Service), Section 9(f)(3) and Section 9(h) (Rebate Policy).
Except as otherwise required under this Franchise, terms and conditions
of services provided to businesses are subject to negotiation between the
Franchisee and the business requesting the service.
b) Line Extension Requirements.
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1. Requirements. The Franchisee shall extend its Cable System within a
reasonable time (but not to exceed ninety (90) days) to provide
service to any person or business upon request at no charge other
than any applicable installation fees for the individual subscriber's
drop, as long as the following conditions are satisfied:
A. the new subscriber requesting service is located 200 feet or less
from the termination of the Cable System; and
B. the number of dwelling units to be passed by the extension is a
cost based number and the dwelling unit is within the Franchise
Area.
The above requirements may be waived if the Franchisee demonstrates
to the Board's satisfaction, in its sole discretion, that a waiver is
justified due to extraordinary circumstances. In addition, the
Franchisee may obtain a waiver of the 90-day time period if it
demonstrates to the Board's reasonable satisfaction that additional
time is required to accommodate utilities providing the Franchisee
with access to poles, ducts, conduits or right-of-way. The operator
may at its option extend service to any other locations within the
Franchise Area.
2. Cost sharing.
A. If a person has requested Cable Service but the requirement in
paragraph (1)(A) above is not met, and the requirement in
paragraph (1)(B) is met, then the Franchisee shall extend its
System to serve the
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person requesting service, provided that the Franchisee may
require the person to pay the cost of any line extension in excess
of 200 feet.
B. If neither of the requirements in paragraph (1) is met, then the
Franchisee must extend its System based upon an equitable and
reasonable cost-sharing arrangement with affected potential
subscribers, such as the arrangement described below:
C. The Franchisee shall first determine the total construction costs
of the extension. The "total construction costs" are defined as
the actual turn key cost to construct the entire extension
including electronics, pole make-ready charges, labor and
reasonable associated overhead, but not profit or the cost of the
house drop.
D. The Franchisee shall then determine its share of the total
construction costs by multiplying the total construction costs by
a fraction, where the numerator equals the number of actual
potential subscribers per mile in the area to be served by the
extension at the time of the request, and the denominator equals
100.
E. Persons requesting service can be required to bear the remainder
of the total construction costs on a pro rata basis, and could be
required to pay the estimate of such costs before the beginning of
the construction.
F. If the Franchisee proposes to require a person requesting
extension to make a contribution in aid of extension, it must,
within 30 days of completion of the extension, furnish the Board
proof of the total cost of the extension.
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5. CONSTRUCTION AND MAINTENANCE.
a. Construction Standards.
1. The construction, operation, maintenance, and repair of the System
shall be in accordance with all applicable sections of the Occupational
Safety and Health Act of 1970, as amended; the most current edition of
the National Electrical Safety Code and National Electric Code;
Obstruction Marking and Lighting, AC 70/7460 i.e., Federal Aviation
Administration; Construction, Marking and Lighting of Antenna
Structures, Federal Communications Commission Rules Part 17;
Franchisee's Construction Procedures Manual, applicable local building
codes; and other applicable federal, state or local laws and
regulations that may apply to the operation, construction, maintenance,
or repair of a Cable System, including, without limitation, local
zoning and construction codes and laws and accepted industry practices,
all as hereafter may be amended or adopted. In the event of a conflict
among codes, the most stringent code shall apply (except insofar as
those codes, if followed, would result in a system that could not meet
requirements of
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federal, state, or local law, or is expressly preempted by other such
provisions).
2. All wires, cable lines, and other transmission lines, equipment, and
structures shall be installed and located to minimize interference with
the rights and convenience of property owners and the use of the Public
Right-of-Way.
3. All installation of electronic equipment shall be of a permanent
nature, using durable components, except where maintenance or emergency
repairs require the installation of temporary equipment. Temporary
equipment shall be replaced as soon as possible. If replacement cannot
occur within 60 days, Franchisee must provide notification to the
Board.
4. Without limiting the foregoing, antennae and their supporting
structures (towers) shall be designed in accordance with the Building
Officials and Code Administrator's National Building Code, as amended,
and shall be painted, lighted, erected, and maintained in accordance
with all applicable rules and regulations of the Federal Aviation
Administration and all other applicable state or local laws, codes, and
regulations, all as hereafter may be amended or adopted.
5. Without limiting the foregoing, all of the Franchisee's new plant and
equipment, including, but not limited to, the antenna site, headend and
distribution system, towers, house connections, structures, poles,
wires, cable, coaxial cable, fiber optic cable, fixtures, and
apparatuses shall be installed, located, erected, constructed,
reconstructed, maintained, and operated in
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accordance with good engineering practices, performed by experienced
and properly trained maintenance and construction personnel so as not
to endanger or interfere with improvements the Participating
Municipality shall deem appropriate to make or to interfere in any
manner with the Public Rights-of-Way or legal rights of any property
owner or to unnecessarily hinder or obstruct pedestrian or vehicular
traffic. All of the Franchisee's plant and equipment shall be
maintained and operated in accordance with good engineering practices,
performed by experienced and properly trained maintenance and
construction personnel so as not to endanger or interfere with
improvements the Participating Municipality shall deem appropriate to
make or to interfere in any manner with the Public Rights-of-Way or
legal rights of any property owner or to unnecessarily hinder or
obstruct pedestrian or vehicular traffic.
6. All safety practices required by law shall be used during construction,
maintenance, and repair of the Cable System. The Franchisee shall at
all times employ ordinary care and shall install and maintain in use
commonly accepted methods and devices preventing failures and accidents
that are likely to cause damage, injury, or nuisance to the public.
7. In the event of a failure by the Franchisee to complete any work
required for the protection or restoration of the Public Rights-of-Way,
or any other work required by the Municipality or local law or
ordinance, within the time specified by and to the reasonable
satisfaction of the Municipality, the
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affected Participating Municipality, following reasonable notice and a
reasonable opportunity to cure, may cause such work to be done, and
the Franchisee shall reimburse the Municipality the cost thereof
within thirty (30) days after receipt of an itemized list of such
costs.
8. The Franchisee shall place facilities, equipment, and fixtures where
they will minimize effects on any gas, electric, telephone, water,
sewer, or other utility facilities, and shall not obstruct or hinder
in any manner the various utilities serving the residents of the
Participating Municipalities or their use of any Public Rights-of-Way.
9. Any and all Public Rights-of-Way, public property, or private property
that is disturbed or damaged during the construction, repair,
replacement, relocation, operation, maintenance, or construction of a
System shall be promptly restored to the same condition as it was
prior to its disturbance by the Franchisee.
10. The Franchisee shall, if it does not materially interfere with the
cable system and it is not unduly expensive, by a time specified by
then affected Participating Municipality, and at no cost to the
affected Participating Municipality, protect, support, temporarily
disconnect, relocate, or remove any of its property when required by
the affected Participating Municipality by reason of traffic
conditions; public safety; Public Right-of-Way construction; Public
Right-of-Way maintenance or repair (including resurfacing or
widening); change of Public Right-of-Way grade; construction,
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installation or repair of sewers, drains, water pipes, power lines,
signal lines, tracks, or any other type of government-owned
communications system, public work or improvement or any
government-owned utility; Public Right-of-Way vacation; or for any
other purpose where the convenience of the affected Participating
Municipality would be served thereby; provided, however, that the
Franchisee shall, in all such cases, have the privilege of abandoning
any property in place
11. If any removal, relaying, or relocation is required to accommodate the
construction, operation, or repair of the facilities of another Person
that is authorized to use the Public Rights-of-Way, the Franchisee
shall, after thirty (30) days advance written notice, take action to
effect the necessary changes requested by the responsible entity. The
requesting party (other than the municipality) shall pay for any such
change, removal, relaying, or relocation.
12. Where a Cable System creates or is contributing to an imminent danger
to health or public safety, the affected Participating Municipality
and/or Civil Defense may remove, relay, or relocate any or all parts
of that Cable System without prior notice.
13. The Franchisee shall, on the request of any Person holding a building
moving permit issued by the Local government or a Participating
Municipality, temporarily raise or lower its wires to permit the
moving of buildings. The expense of such temporary removal or raising
or lowering of wires shall be paid by the Person requesting same, and
the Franchisee shall have the
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authority to require such payment in advance, except in the case where
the requesting Person is the Participating Municipality, in which case
no such payment shall be required.
14. Trimming or Pruning
A. The Franchisee may trim trees or other vegetation owned by the
Participating Municipality to prevent their branches or leaves from
touching or otherwise interfering with its wires, cables or other
structures.
1. All trimming or pruning shall be at the sole cost of the
Franchisee.
2. The Franchisee may contract for said trimming or pruning
services with any person approved by the affected Participating
Municipality prior to the rendering of said services.
B. The Franchisee shall make reasonable efforts to obtain written or
verbal permission of the owner of any privately owned tree or
other vegetation before it trims or prunes the same, unless
otherwise provided by the right-of-way agreement.
15. The Franchisee shall use, with the owner's permission, existing poles,
conduits and other facilities whenever technically feasible and
economically practical. The Franchisee may not erect poles, conduits,
or other facilities in Public Rights-of-Way without the express
permission of the Department of Transportation of Puerto Rico.
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16. System cable and facilities may be constructed overhead where poles
now exist and electric or telephone lines or both are now overhead,
but where no overhead poles exist all cables and facilities, excluding
system passive or active electronics that may be housed in
low-profile, above-ground pedestals, shall be constructed underground.
Whenever and wherever electric lines and telephone lines are moved
from overhead to underground placement, all Cable System cables shall
be similarly moved.
17. The Participating Municipality in which a pole is located shall have
the right to attach, for a charge to be paid to the Franchisee, upon
any poles owned by the Franchisee any wire and pole fixtures that do
not unreasonably interfere with the Cable System operations of the
Franchisee.
18. Any contractor or subcontractor used for work or construction,
installation, operation, maintenance, or repair of System equipment or
for the pruning or removal must be properly licensed under laws of
Puerto Rico and all applicable local ordinances, where applicable, and
each contractor or subcontractor shall have the same obligations with
respect to its work as the Franchisee would have if the work were
performed by the Franchisee. The Franchisee must ensure that
contractors, subcontractors and all employees who will perform work
for it are trained and experienced. The Franchisee shall be
responsible for ensuring that the work of contractors and
subcontractors is performed consistent with the franchise and
applicable law
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and shall implement a quality control program to ensure that the work
is properly performed.
19. The Franchisee shall be a member of the "One Call Notification System"
or the equivalent system established in Puerto Rico by the Public
Service Commission and shall comply with all of the requirements of
such system.
b. System Tests and Inspections
1. The Franchisee shall perform all tests necessary to demonstrate
compliance with the requirements of the Franchise and other
performance standards established by law or regulation, and to ensure
that the System components are operating as expected. All tests shall
be conducted in accordance with applicable federal law and rules.
2. The Franchisee shall conduct tests as follows:
A. acceptance tests on each new construction which requires the
addition of trunk or rebuilt segment prior to subscriber connection
or activation;
B. proof of performance tests on the System at least once every six
months or as required by FCC rules, whichever is more often, except
as federal law otherwise limits the Franchisee's obligation;
C. special tests at the Board's request, as reasonably necessary,
taking into consideration their cost, to insure there is no
substantial lapse in technical performance.
3. Tests shall be supervised by the Franchisee's chief technical
authority, who shall sign all records of tests provided to the Board.
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4. The Franchisee shall provide the Board with prior notice of, and
opportunity to observe, any tests performed on the System pursuant
to subsection 2 above. The Board may also conduct inspections of
construction areas and subscriber installations, including but not
limited to inspections to assess compliance with the Franchisee's
construction and installation requirements. Inspection does not
relieve the Franchisee of its obligation to build in compliance with
all provisions of the franchise.
5. Copies of the written report of test results shall be maintained by
the operator and made available to the Board upon request. In
addition, the Franchisee shall retain written reports of the results
of any tests required by the FCC, and such reports shall be
submitted to the Board upon the Board's request.
6. If any test indicates that any part or component of the System does
not materially satisfy applicable performance requirements, the
Franchisee, without requirement of additional notice or request from
the Board, shall take corrective action, retest the locations and
advise the Board of the action taken and results achieved.
c. Restoration:
In case of any disturbance of pavement, sidewalk, driveway or other
surfacing, due to the Franchisee's work, the Franchisee shall replace and
restore all paving, sidewalk, driveway, landscaping, or surface of any
street or alley disturbed, in substantially the same condition and in a
good workmanlike, timely manner in accordance with standards for such
work, wear and tear excepted. Such
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restoration shall be undertaken as quickly as possible, and within no more
than thirty (30) days after the damage is incurred, and shall be completed
as soon as reasonably possible thereafter, provided that the affected
Participating Municipality may extend the thirty-day period if weather
conditions make restoration within that time impractical. The Franchisee
shall guarantee and maintain such restoration for at least one year
against defective materials or workmanship.
d. Publicizing Proposed Construction Work
The Franchisee shall notify the public prior to commencing any proposed
construction that will significantly disturb or disrupt public property or
have the potential to present a danger or affect the safety of the public
generally, except when a delay in commencing such work would present a
danger or affect the safety of the public. The Franchisee shall publicize
the proposed major construction work at least one (1) week prior to
commencement of that work by causing written notice of such construction
work to be delivered to the affected Participating Municipality and by
notifying those Persons most likely to be affected by the work in at least
two (2) of the following ways: by telephone, in person, by mail, by
distribution of flyers to residences, by publication in local newspapers,
or in any other manner reasonably calculated to provide adequate notice.
In addition, before entering onto any Person's property, the Franchisee
shall provide prior notification and obtain the property owner's or, in
the case of residential property, the resident's permission. If the
Franchisee must enter
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premises, it must schedule an appointment at the convenience of the owner
or resident.
e. System Maintenance
1. Interruptions to be Minimized. The Franchisee shall schedule
maintenance on its System at times that will minimize the likelihood of
interruptions in service to Subscribers.
2. Maintenance Practices Subject to Regulation. Maintenance of the System
shall be performed in accordance with the technical performance and
operating standards established by FCC rules and regulations. The Board
may monitor the Franchisee's maintenance practices and, to the extent
permitted by applicable law, may waive requirements or adopt additional
requirements as reasonable to ensure the system remains capable of
providing high-quality service.
f. Failure Grounds for Termination. Failure on the part of the Franchisee to
commence and diligently pursue and complete each of the material
requirements set forth in this Section of the Agreement or in plans
submitted to the Board regarding System design and construction shall be
grounds for termination of its Franchise under and pursuant to the terms
of Section 14(h); provided, however, that the Board in its discretion may
extend the time for the completion of construction and installation for
additional periods in the event the Franchisee, acting in good faith,
experiences delays by reason of circumstances beyond its control.
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6. SYSTEM FACILITIES-EQUIPMENT AND SERVICES.
a. System Characteristics: The Franchisee's Cable System shall, at all times
during the Franchise term, meet or exceed the following requirements:
1. Compliance With FCC Rules. All maintenance performed on the Cable
System by the Franchisee shall be in accordance with the FCC rules and
regulations governing the technical performance and operating standards
for such System.
2. Continuous 24-Hour Operation. The System shall be capable of continuous
twenty-four (24) hour daily operation without severe material
degradation of signal except during extremely inclement weather or
immediately following extraordinary storms that adversely affect
utility services or damage major system components.
3. Temperature Specifications. The System shall be capable of operating
over an outdoor temperature range of 20 degrees F to + 120 degrees F
and over variation in supply voltages from 105 to 130 volts AC without
catastrophic failure or irreversible performance changes. The System
shall meet all applicable specifications over an outdoor temperature
range of 0 degrees F to 100 degrees F and over variation in supply
voltages from 105 to 130 volts AC.
4. No Interference. The Franchisee shall operate the System in such a
manner as to minimize interference with the reception of off-the-air
signals by a Subscriber. The Franchisee shall insure that signals
carried by the System, or originating outside the System wires, cables,
fibers, electronics and facilities, do not ingress or egress into or
out of the System in excess of FCC or other applicable standards. In
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particular, Franchisee shall not operate the System in such a manner as
to pose unwarranted interference with emergency radio services,
aeronautical navigational frequencies or any airborne navigational
reception in normal flight patterns, or any other type of wireless
communications, pursuant to FCC regulations.
5. No Deterioration to Access Signals. The System shall be so constructed
and operated that there is no significant deterioration in the quality
of PEG signals or leased access signals resulting from the
transportation of the video signal, either upstream or downstream, as
compared with any other channel on the System. Deterioration refers to
any signal problem, including but not limited to ghost images and other
interference and distortions.
6. Industry-accepted Equipment. The System shall use equipment generally
used in high-quality, reliable, modem systems of similar design.
7. Stand-by Power. Franchisee shall provide standby power generating
capacity at the headend. Franchisee shall maintain motorized standby
power generators capable of at least twenty four (24) hours duration at
the headend, and battery back-up power capability of at least four (4)
hours duration for all system nodes. The headend generator shall be
tested once per week. The Franchisee shall maintain portable motorized
generators to be deployed in the event that the duration of a power
disruption is expected to exceed four (4) hours.
8. Cable Ready Television Sets. The Franchisee shall comply with all FCC
regulations regarding scrambling or other encryption of signals.
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9. Consumer Equipment For Lease or Sale. Subject to applicable law or
regulation. as part of the System, the Franchisee shall, consistent
with 47 C.F.R. ss.76.984 and 47 U.S.C. ss.543(d), offer every
Subscriber, at uniform prices and regardless of the level of service
taken, the opportunity to lease from the Franchisee or to lease or buy
from others Converters (including digital converters), including any
associated software, that allow Subscribers to view a program on one
channel while taping a program on another channel. To the extent
permitted by federal law, Subscribers shall have the right to attach
devices to the Franchisee's System to allow them to transmit signals
or service to video cassette recorders, receivers and other terminal
equipment, and to use their own remote control devices and Converters,
and other similar equipment, as long as such devices do not interfere
with the operation of the Franchisee's System or the reception of any
cable Subscriber, do not serve to circumvent the Franchisee's security
procedures, or are not used in any manner to obtain services
illegally. The Franchisee, at no additional charge, shall provide
information regarding the cable system to Subscribers which will
assist them in adjusting such devices so that they may be used with
the Franchisee's System.
10. Parental Control. The Franchisee shall provide equipment to enable
Subscribers to block out audio and video on any undesired channels on
the System.
11. Program Security. The System shall include equipment so that any
pay-per-view programming can only be activated by the positive action
of a subscriber.
12. Service for the Disabled. All closed-caption programming retransmitted
by the System shall include the closed-caption signal. For hearing
impaired Subscribers,
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the Franchisee shall provide information concerning the cost and
availability of equipment to facilitate the reception of all basic
services for the hearing impaired. In addition, the Franchisee shall
comply with the FCC's TDD/TTY requirements. Upon request, the Franchisee
shall provide, for purchase or lease, a remote control device to those
Subscribers who are mobility limited, or where a member of the
Subscriber's household is mobility limited.
b. Current System: The Franchisee is authorized and required to operate its
existing System, and to provide service substantially equivalent to its
existing service, within each Participating Municipality as of the
Effective Date of this Agreement, until such time as the System is
rebuilt, as provided herein.
c. Integration of Advancements in Technology.
1. In addition to any upgrades required herein, the Franchisee will
periodically evaluate its Cable System to integrate advancements in
technology as may be required to meet the needs and interests of the
community, consistent with sound financial practices, during the term
of the franchise.
2. To ensure that the Franchisee is carrying out its responsibilities
hereunder, the Franchisee shall be required to submit a report on cable
technology to the Board in the third and sixth year of the Franchise
term. Each report shall describe developments in cable technology,
including digital technology, being pursued by other companies, and
whether, how, and by what date the Franchisee plans to incorporate
those technological developments into the System. In addition, the
report shall describe the effect of those developments on public,
educational, and
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governmental use of the Cable System, and the effect and compatibility
of those technological changes on consumer electronic equipment.
d. System Rebuild: Within four years after the effective date of this
Agreement, the Franchisee shall complete a System Rebuild providing at
least the following capabilities:
1. The rebuilt System shall have a minimum bandwidth capacity of 550 MHz
on all active components, at least 550 MHz for all existing passive
components, and at least 1 GHz for all new or replaced passive
components; an analog bandwidth of 550 MHz; and shall initially have a
minimum analog Channel capacity of at least 80 Channels downstream to
all Subscribers. If the Franchisee subsequently decides to change the
amount of capacity allocated to analog programming, the Franchisee
shall notify the Board in writing at least sixty (60) days prior to the
effective date of the proposed change.
2. The Franchisee shall design the system so that channel capacity may be
expanded without compromising signal or service quality.
3. The rebuilt System shall provide two-way capability. Except as provided
elsewhere in this Agreement, Franchisee, in its sole discretion, may
activate such capability based on economic and technical
considerations.
4. The Franchisee and the Board shall meet as reasonably requested to
discuss and coordinate the rebuild process and any of the following
issues:
a. System Architectural Design
b. System Physical Design
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c. Construction Manual and Cut-Over Plan
d. Post-Rebuild Design Modifications
e. System Rebuild Schedule
f. System Acceptance Schedule
g. Periodic Progress Reporting
h. Delays in the System Rebuild
5. The System Rebuild shall be completed within the boundaries of the
service area.
6. All construction shall be performed in accordance with generally
accepted construction standards and applicable provisions of this
Agreement, except where specifically waived in writing by the Board.
e. Periodic Progress Reporting. Following the commencement of construction
of the System Rebuild or any similar major construction, the Franchisee
shall provide the Board with written reports on the Franchisee's progress
in construction at least every four (4) months until the construction is
completed and, at the Board's request, will meet with the Board to discuss
the progress.
f. Delays in the System Rebuild. The Franchisee shall not be excused from the
timely performance of its obligation to begin and complete any System
Rebuild within the times specified herein, except for the following
occurrences:
1. Any Force Majeure situation, as described herein. Delays beyond the
control of the Franchisee that the Franchisee could not reasonably have
anticipated regarding the availability, shipment and arrival of
necessary equipment, cables, electronics or hardware, protracted
underground excavation, easement
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availability, third-party refusal to allow necessary access to poles or
other rights-of-way facilities, changes in contractors or contractor
personnel, the issuance of necessary governmental permits, or any other
valid factor agreed to by the Board as fully explained and reasonably
justified in writing to the Board or its designee.
2. Consequences of Delays: Absent a showing of excusable delay pursuant to
the immediately preceding subsection, should the Franchisee be unable
to demonstrate the commencement or timely completion of the System
Rebuild by the times specified herein, or be unable to reasonably
justify any delays, then the Franchisee shall be in violation of a
material provision of this Franchise Agreement and the Board may, in
its sole discretion, either grant the Franchisee an extension of time
to complete, such construction or implement any enforcement measures
specified in this Agreement. In the event of excusable delay, the time
for completion shall be extended by the period of such delay.
g. Technical Standards. The Cable System shall meet or exceed the technical
standards set forth in 47 C.F.R. ss. 76, subpart k and any other
applicable technical standards, including any such standards as hereafter
may be amended or adopted by the Board subject to applicable federal law.
h. Types of Service: Should the Franchisee desire to change the selection of
programs or services offered on any of its tiers, it shall maintain the
quality and level of services provided over the System. Any change in
programs or services offered shall comply with all lawful conditions and
procedures contained in this Agreement and in applicable law.
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The Franchisee shall provide thirty (30) days' advance written notice to
Subscribers and the Board of any change in channel assignment or in the
video programming service provided over any channel, unless this
requirement is waived by the Board or by operation of federal or state
law, or due to events beyond the reasonable control of the Franchisee.
i. Leased Access Channels: The Franchisee shall provide leased access
channels as required by federal law.
j. Customer Service Monitoring: The Franchisee shall keep such records and
maintain such monitoring equipment as are required to enable the Board to
determine whether the Franchisee is complying with all telephone answering
standards required by applicable customer service regulations, as amended
time to time.
k. Emergency Alert System.
1. The Franchisee shall install and thereafter maintain for use by the
Civil Defense an Emergency Alert System ("EAS"), as required by 47
C.F.R. Part 11.
2. To the extent permitted by 47 C.F.R. Part 11, the EAS shall be remotely
activated by telephone and shall allow a representative of the Civil
Defense to override the audio and video on all channels on the
Franchisee's System that may lawfully be overridden, without the
assistance of the Franchisee, for emergency broadcasts from a location
designated by the Civil Defense in the event of a civil emergency or
for reasonable tests.
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3. The Civil Defense will provide reasonable notice to the Franchisee
prior to any test use of the EAS. The Franchisee shall cooperate with
the Civil Defense in any such test.
l. Home Wiring: Franchisee will comply with FCC Regulations 47
C.F.R. ss.7.6801 ss.7.6802 governing the disposition of subscriber home
wiring and home run wiring.
m. Periodic Performance Evaluation: The Board may schedule periodic public
hearings to evaluate the performance of the Franchisee, or to discuss the
integration of future technologies, other plans or operations of the
Franchisee or any aspect of the Franchisee's Cable System. The Franchisee
shall cooperate with the Board in any such evaluation.
7. CHANNELS AND FACILITIES FOR PUBLIC, EDUCATIONAL AND GOVERNMENTAL USE
a. Access Channels:
1. The Franchisee shall provide at least one (1) analog video Channel for
non-commercial public, educational and governmental use. Once the
rebuild is completed and such initial channel is fully occupied with
non-repeated locally-originated programming, the Franchisee shall
provide an additional channel. "Fully occupied" shall mean that during
a six month period the access channel is used 80% of the time during
9 a.m. to 11 p.m., with non-repeated locally-originated programming.
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2. The Franchisee agrees that it will not take the cost of operating and
maintaining the access facility as an offset against its franchise
obligation, provided that the franchise fee is not greater than 3%.
3. The Franchisee's cost to operate and maintain the access facility shall
not be separately identified on the customer bill.
4. Access Channel assignments should not be changed unless there is good
cause. Such consent to a channel assignment change shall not be
unreasonably withheld. Access channel assignments should be the same
throughout the System. If the Franchisee decides to change the channel
designations for Access Channels, it must provide sixty (60) days
notice to the Board prior to doing so, and shall reimburse the Board
and/or PEG users for any costs incurred for purchasing or modifying any
equipment or for making logo changes necessitated by the channel
designation changes. Alternatively, the Franchisee may choose to supply
such equipment itself, provided such equipment is satisfactory to the
Board or PEG users.
5. Any reference to an upstream or downstream analog channel for PEG use
refers to a 6 MHz Channel.
b. Editorial Control: Except as expressly permitted by federal law, the
Franchisee shall not exercise any editorial control over the content of
programming on PEG Channels (except for such programming as the Franchisee
may produce and cablecast on such Channels).
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c. Indemnification By PEG Programming Producers and Users: All local
producers and users of any of the PEG facilities or channels shall agree
in writing to hold harmless the Franchisee, the Board and the
Participating Municipalities, from any and all liability or other injury
(including the reasonable cost of defending claims or litigation) arising
from or in connection with claims for failure to comply with applicable
federal laws, rules, regulations or other requirements of local, state or
federal authorities; for claims of libel, slander, invasion of privacy, or
the infringement of common law or statutory copyright; for unauthorized
use of any trademark, trade name or service mark; for breach of
contractual or other obligations owing to third parties by the producer or
user; and for any other injury or damage in law or equity, which claims
result from the use of a PEG facility or channel.
d. Additional Use: The Franchisee may use the access channel for any
consistent purpose when it is not being used for PEG access.
e. Cable Service to Certain Facilities:
1. Upon the request of the Board, the Franchisee shall without charge
install one activated first floor outlet at each public and non-profit
educational institution, which contains at least one hundred (100)
students, each town hall, each public non-profit major health care
institution with at least fifty (50) patient beds, and one major
multi-purpose Community Center per municipality, within the Franchise
Area, as shall be designated by the Board from time to time. The
Franchisee at its own cost shall provide the signal power level at the
outlet at 3 dBmV, so that zero (0) dBmV will be delivered to the back
of the set.
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2. The Franchisee shall provide the basic tier, and any equipment
necessary (excluding televisions, VCRs, recording devices or computers)
to receive such service, free of charge to those facilities specified
in subsection (1) herein. At its sole discretion, the Franchisee may
also provide higher levels of service to such facilities free of
charge.
8. FRANCHISE FEE
a. Payment to Board. Each year during the Franchise term, the Franchisee
shall pay to the Board, on a semiannual basis, a Franchise fee of three
(3) percent (%) of Gross Revenues, including any Franchise fee owed to the
Board. Such payments shall be made no later than forty five (45) days
following the end of each calendar semiannual period. Such payments may be
made subject to an annual adjustment for shortfalls or overpayments.
b. Increase in Franchise Fee. The Board may increase the amount of the
Franchise fee up to the maximum amount permitted under state and federal
law, but in no event to more than 5%. However, the Board shall increase
the fee only if
1) a sixty (60) days notice of the intention to increase the franchise fee
is provided to the Franchisee; and
2) a hearing is provided to the Franchisee to discuss the increase.
c. Supporting Information. Each Franchise fee payment shall be submitted with
supporting detail and a statement certified by the Franchisee's chief
financial or accounting officer or an independent certified public
accountant, reflecting the total amount of quarterly Gross Revenues for
the payment period and a breakdown by major revenue categories (such as
basic service, cable programming service, premium service, etc.). In the
information
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provided with each payment, the Franchisee shall also indicate the
number of subscribers within the corporate limits of each Participating
Municipality. The Board shall have the right to require further
supporting information.
d. Late Payments. In the event any Franchise fee payment or computation
amount is not made on or before the required date, the Franchisee shall
pay a late charge as established in the January 28, 1998, Cable Television
Regulation promulgated by the Board.
e. Audit
1. The Board shall have the right to inspect and copy records and the
rights to audit and to recompute any amounts determined to be payable
under this Agreement, whether the records are held by the Franchisee,
an Affiliate, or any other entity that collects or receives funds
related to the Franchisee's operation in the Franchise Area, including,
by way of illustration and not limitation, any entity that sells
advertising on the Franchisee's behalf.
2. The Franchisee shall be responsible for providing to the Board all
records necessary to confirm the accurate payment of Franchise fees.
Such records shall be made available pursuant to the requirements of
this Agreement. The Franchisee shall maintain such records for seven
years.
3. The Board's audit expenses shall be borne by the Franchisee as a cost
incidental to the enforcement of the Franchise, only if the audit
determines the annual payment to the Board for the preceding year is
increased by more than 5%. Any additional amounts due to the Board as a
result of the audit shall be paid within
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thirty (30) days following written notice to the Franchisee by the
Board of the underpayment, which notice shall include a copy of the
audit report. If recomputation results in additional revenue to be paid
to the Board, such amount shall be subject to the interest charge
described in subsection (d), above. If the audit determines that there
has been an overpayment by Franchisee, the Franchisee may credit any
overpayment against its next payment.
4. The Franchisee shall maintain its fiscal and financial records and have
all relevant fiscal and financial records maintained by others on its
behalf in such a manner as to enable the Board to determine the cost of
assets of the Franchisee which are used in providing services within
the Franchise Area and to determine Gross Revenues.
f. No Limitation on Taxing Authority:
1. Nothing in this Agreement shall be construed to limit any authority of
the Board to impose any tax, fee, or assessment of general
applicability. By way of illustration and not limitation, to the extent
permitted by applicable law, the Board may impose a tax, fee, or other
assessment on any Person (other than a cable operator) with respect to
Cable Service or other communications service provided by such Person
over a Cable System for which charges are assessed to subscribers but
not received by the cable operator.
2. The Franchise fee payments required by this section shall be in
addition to any and all taxes of a general nature (i.e., those which
are not applicable solely to cable television operations, within the
Municipality) or other fees or charges
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which the Franchisee shall be required to pay to the Municipality or to
any local, state or federal agency or authority, as required herein or
by law, all of which shall be separate and distinct obligations of the
Franchisee. The Franchisee shall not have or make any claim for any
deduction or other credit of all or any part of the amount of said
Franchise fee payments from or against any of said municipal taxes or
other fees or charges which the Franchisee is required to pay to the
Participating Municipality, except as expressly permitted by law. The
Franchisee shall not apply nor seek to apply all or any part of the
amount of said Franchise fee payments as a deduction or other credit
from or against any of said municipal taxes or other fees or charges,
except as expressly permitted by law. Nor shall the Franchisee apply or
seek to apply all or any part of the amount of any of said taxes or
other fees or charges as a deduction or other credit from or against
any of its Franchise fee obligations, except as expressly permitted by
law.
9. CUSTOMER SERVICE
a. General Provisions.
This Section 9 sets forth customer service standards that the Franchisee
must satisfy. In addition, the Franchisee shall at all times satisfy any
additional or stricter requirements established by FCC regulations, or
other applicable federal, state, or local law or regulation, as the same
may be amended from time to time. Nothing in this section in any way
relieves the Franchisee of its obligation to comply with other applicable
consumer protection laws.
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b. Installations, Connections, and Other Franchisee Services.
1. Standard Installations. Except as federal rate regulations may
otherwise require, the Franchisee shall not assess a Subscriber any
cost other than a standard installation charge for service drops of two
hundred (200) feet or less to the primary outlet, unless the Franchisee
demonstrates to the Board's satisfaction that extraordinary
circumstances justify a higher charge. Except as applicable law may
otherwise require, where a drop exceeds two hundred (200) feet in
length from the nearest cable distribution, the Franchisee may charge a
subscriber an additional charge, pursuant to the Franchisee's "long
drop" policy.
2. Location of Drops. The Subscriber's preference as to the point of entry
into the residence shall be observed whenever feasible. Runs in
building interiors shall be as unobtrusive as possible. The Franchisee
shall use due care in the process of installation and shall restore the
subscriber's property to its prior condition. Such restoration shall be
undertaken as soon as possible after the damage is incurred and shall
be completed within no more than thirty (30) days after the damage is
incurred.
3. Non-standard Installations. In locations where the Franchisee's System
must be underground, drops must be placed underground as well. Except
as federal law may otherwise require, in any area where the Franchisee
would be entitled to install a drop above-ground, the Franchisee will
provide the homeowner the option to have the drop installed underground
if requested, but may charge the homeowner the difference between the
Actual Cost of the above-ground installation and the Actual Cost of the
underground installation.
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4. Antennas and Antenna Switches. The Franchisee shall adhere to FCC
regulations regarding antenna switches. The Franchisee shall not, as a
condition to providing Cable Service, require any subscriber or
potential subscriber to remove any properly grounded existing antenna
structures for the receipt of over-the-air television signals.
5. Delinquent Accounts. The Franchisee shall use its best efforts to
collect on delinquent subscriber accounts before terminating service.
c. Telephone and Office Availability.
1. Franchisee shall maintain an office(s) at a convenient location in the
franchise area that shall be open during Normal Business Hours to allow
Subscribers to request service, pay bills, and conduct other business.
2. Franchisee will maintain at least one local, toll-free or collect call
telephone access line which will be available to subscribers 24 hours a
day, seven days a week. Trained representatives of the Franchisee shall
be available to respond to Subscriber telephone inquiries during Normal
Business Hours.
3. Under Normal Operating Conditions, the following standards shall be met
by the Franchisee at least ninety (90) percent of the time, measured
quarterly.
A. Telephone answering time shall not exceed thirty (30) seconds, and
the time to transfer the call to a customer service representative
(including hold time) shall not exceed an additional thirty (30)
seconds.
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B. A customer will receive a busy signal less than three percent (3%)
of the time.
C. When the business office is closed, an answering machine or service
capable of receiving and recording service complaints and inquiries
shall be employed. Inquiries received after hours must be responded
to by a trained representative of the Franchisee on the next
business day. To the extent possible, the after-hours answering
service shall comply with the same telephone answer time standard
set forth in this Section.
4. The Franchisee must hire sufficient staff so that it can adequately
respond to customer inquiries, complaints, and requests for service in
its office and by phone.
d. Interruptions of Service.
The Franchisee may intentionally interrupt service on the Cable System only for
good cause and for the shortest time possible and, except in emergency
situations or to the extent necessary to fix the affected Subscriber's service
problems, only after a minimum of forty-eight (48) hours prior notice to
Subscribers, the Board, and PEG channel operators of the anticipated service
interruption; provided, however, that planned maintenance that does not require
more than two (2) hours' interruption of service or that occurs between the
hours of 12:00 midnight and 6:00 a.m., shall not require such notice.
e. Notice to Subscribers.
1. The Franchisee shall provide the following materials to each Subscriber
at the time Cable Service is installed, at least annually thereafter,
and at any time upon request. Copies of all such materials provided to
Subscribers shall also be provided to the Board:
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A. a written description of products and services offered, including a
schedule of rates and charges, a list of channel positions, and a
description of programming services, options, and conditions;
B. a written description of the Franchisee's installation and service
maintenance policies, delinquent subscriber disconnect and reconnect
procedures, and any other of its policies applicable to its
subscribers,
C. written instructions on how to use the cable service;
D. written instructions for placing a service call;
E. a written description of the Franchisee's billing and complaint
procedures, including the address and telephone number of the
Franchisee's office(s) responsible for receiving Subscriber
complaints;
F. a copy of the service contract, any; notice regarding Subscribers'
privacy rights pursuant to 47 U.S.C. ss.551;
G. notice of the availability of universal remote controls and other
compatible equipment (a list of which, specifying brands and models,
shall be provided to any Subscriber upon request).
2. Subscribers and the Board will be notified of any changes in rates,
programming services or channel positions, and any significant changes
in any other information required to be provided by this section, as
soon as possible through announcements on the cable system and in
writing. Notice must be given to subscribers and the Board a minimum of
thirty (30) days in advance of such changes and other
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significant changes if the change is within the control of the cable
operator.
3. All Franchisee promotional materials, announcements, and advertising of
residential Cable Service to Subscribers and the general public, where
price information is listed in any manner, shall clearly and accurately
disclose price terms. In the case of pay-per-view or pay-per-event
programming, all promotional materials must clearly and accurately
disclose price terms and in the case of telephone orders, the
Franchisee shall take appropriate steps to ensure that price terms are
clearly and accurately disclosed to potential customers before the
order is accepted.
4. The Franchisee shall maintain a public file containing all notices
provided to Subscribers under these customer service standards, as well
as all promotional offers made to Subscribers. Copies of all notices,
promotional or special offers sent to Subscribers and any agreements
used with Subscribers shall be filed promptly with the Board.
f. Billing
1. Bills shall be clear, concise, and understandable. Bills must be fully
itemized including, but not limited to, basic and premium service
charges and equipment charges. Bills shall clearly delineate all
activity during the billing period, including optional charges,
rebates, and credits.
g. Rebate Policy.
In the event of a Service Interruption of one or more channels to any
subscriber, the Franchisee shall repair the Service Interruption as soon
as possible. This obligation is satisfied if the Franchisee offers the
Subscriber the next available repair appointment
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within the twenty-four hour period following the Service Interruption, or
at the request of the Subscriber, to a mutually convenient later time for
the repair call, and successfully repairs the Service Interruption during
the agreed appointment. If the Service Interruption is not repaired at the
time of the scheduled appointment, the Subscriber will receive a credit
equal to 1/30th of his normal monthly bill for each 24 hour period. The
Subscriber will receive a rebate if all, or substantially all, of the
relevant channels were lost, and only if the Subscriber requests the
rebate.
10. EMPLOYMENT, TRAINING, AND PROCUREMENT REQUIREMENTS
a. Employment:
1. The Franchisee shall, in accordance with Federal, State, and local
laws and regulations, afford equal opportunity and non-discrimination
in employment to all individuals, regardless of their race, color,
religion, age, sex, national origin, sexual orientation or handicap.
The Franchisee shall comply with all applicable requirements of the
Americans with Disabilities Act.
2. The Franchisee agrees that it shall give documentary evidence as to
the steps it took to ensure that a good faith effort was made by it to
comply with subsection (a)(1) above.
b. Training: The Franchisee shall provide training on an ongoing basis for
its employees to maintain and upgrade skills.
11. REPORTS AND RECORDS.
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a. Open Books and Records.
1. The Board shall have the right, upon reasonable notice, to inspect and
copy at any time during normal business hours at Franchisee's office or
at such location as the Board may designate, all books, receipts, maps,
plans, financial statements, contracts, service complaint logs,
performance, test results, records of requests for service, computer
records, codes, programs, and disks or other storage media and other
like material which the Board deems appropriate in order to monitor
compliance with the terms of the Cable Law, this Agreement, or
applicable law. This includes not only the books and records of the
Franchisee, but any books and records the Board deems relevant held by
an Affiliate, a cable operator of the Cable System, or any person
holding any form of management contract for the Cable System. With
respect to books and records held by contractors and subcontractors
other than entities described in the preceding sentence, the Franchisee
shall cooperate with the Board and exercise Franchisee's best efforts
to obtain access to the books and records. The Franchisee is
responsible for collecting the information and producing it at the
location specified above.
2. The Franchisee shall maintain financial records that allow analysis and
review of its operations in the Franchise Area.
3. Access to the Franchisee's records shall not be denied by the
Franchisee on the basis that said records contain "proprietary"
information. Refusal to provide information required herein to the
Board shall be grounds for revocation. All such information
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received by the Board shall remain confidential insofar as permitted
by applicable Puerto Rico and federal law.
4. The Franchisee shall maintain a file of records open to public
inspection in accordance with applicable FCC rules and regulations.
b. Communication with Regulatory Agencies.
1. The Franchisee shall have available for review by the Board, in a form
acceptable to the Board, all reports and materials submitted to or
received from the FCC, the Security and Exchange Commission, or any
other federal or state regulatory commission or agency having
jurisdiction over any matter affecting operation of the Franchisee's
System, including, but not limited to, any proof of performance tests
and results. Equal Employment Opportunity reports, and all petitions,
applications, and communications of all types regarding the Cable
System, or a group of Cable Systems of which the Franchisee's Cable
System is a part, including any such material submitted by or received
by the Franchisee, an Affiliate, or any other Person on the behalf of
the Franchisee.
c. Annual Report. Unless this requirement is waived in whole or in part by
the Board, no later than 90 days after the end of Franchisee's fiscal
year, the Franchisee shall submit a written report to the Board which
shall include:
1. a summary of the previous year's activities in development of the Cable
System, derived from the monthly reports.
2. An annual list of officers and members of the Board of Directors or
similar controlling body of the Franchisee and any Affiliates;
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3. An annual report and SEC 10(k) filing for the Franchisee;
4. Upon request by the Board, a detailed copy of updated maps depicting
the location of all cable plant, showing areas served and locations of
all trunk lines and feeder lines in the Franchise Area, and including
changes in all such items for the period covered by the report.
d. Special Reports. Unless this requirement is waived in whole or in part by
the Board, the Franchisee shall deliver the following special reports to
the Board:
1. The Franchisee must submit a copy and full explanation of any notice of
deficiency, forfeiture, or other document issued by any state or
federal agency instituting any investigation or civil or criminal
proceeding regarding the Cable System, the Franchisee, or any Affiliate
of the Franchisee, to the extent the same may affect or bear on
operations in the Franchise Area.
2. The Franchisee must submit a copy and brief explanation of any request
for protection under bankruptcy laws, or any judgment related to a
declaration of bankruptcy by the Franchisee or by any partnership or
corporation that owns or controls the Franchisee directly or
indirectly.
e. Additional Reports. Franchisee shall prepare and furnish to the Board, at
the times and in the form prescribed by the Board, (e.g. Board's
Regulations) such additional reports with respect to its operation,
affairs, transactions or property, as may be reasonably necessary to the
performance of any of the rights, functions or duties of the Board in
connection with this Agreement.
f. Records Required
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1. Consistent with FCC time requirements, the Franchisee shall maintain:
A. Records of all complaints by type received. The term "complaints" as
used herein and throughout this Agreement refers to complaints about
any aspect of the Cable System or the Franchisee's operations,
including, without limitation, complaints about employee courtesy.
Complaints recorded may not be limited to complaints requiring an
employee service call.
B. A full and complete set of plans, records, and "as built" maps
showing the exact location of all System equipment installed or in
use in the Franchise Area, exclusive of Subscriber service drops.
C. Records of outages, indicating date, duration, area, and the number
of Subscribers affected, type of outage, and cause.
D. Records of service calls for repair and maintenance indicating the
date and time service was required, the date of acknowledgment and
date and time service was scheduled (if it was scheduled), and the
date and time service was provided, and (if different) the date and
time the problem was solved.
E. Records of installation/reconnection and requests for service
extension, indicating date of request, date of acknowledgment, and
the date and time service was extended.
F. A public file showing its plan and timetable for the System Rebuild.
2. Copies of the foregoing shall be provided to the Board upon request,
and the Board may require additional information, records, and
documents from time to time.
g. Performance Evaluation.
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1. The Board may, at its discretion, hold performance evaluation sessions
on the third and sixth year of the franchise. The Franchisee may be
required by the Board to notify subscribers of a such evaluation
sessions by announcement on a designated local channel on the System in
a manner and with a frequency specified by the Board for five (5)
consecutive days preceding each session.
2. Topics that may be discussed at any evaluation session may include, but
are not limited to, system performance and construction, Franchisee
compliance with the Board Regulations and this Agreement, customer
service and complaint response, Subscriber privacy, services provided,
programming offered, service rate structures, Franchise fees,
penalties, free or discounted services, applications of new
technologies, judicial and FCC filings, and line extensions.
3. During the evaluation process, the Franchisee shall fully cooperate
with the Board and shall provide such information and documents, as the
Board may need to reasonably perform its review.
h. Voluminous Materials.
If any books, records, maps or plans, or other requested documents are too
voluminous, or for security reasons cannot be copied and moved, then the
Franchisee may request that the inspection take place at some other
location, provided that (1) the Franchisee must make necessary
arrangements for copying documents selected by the Board after review;
and (2) the Franchisee must pay all reasonable travel and additional
copying expenses incurred by the Board in inspecting those documents or
having those documents
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inspected by its designee. The parties agree that any payments made by the
Franchisee pursuant to this paragraph are not part of a Franchise fee.
i. Retention of Records; Relation to Privacy Rights.
The Franchisee shall take all steps that may be reasonably required to
ensure that it is able to provide the Board all information which must be
provided or may be requested under this Agreement, including by providing
appropriate Subscriber privacy notices. Nothing in this Section shall be
read to require the Franchisee to violate 47 U.S. C. ss. 551. Each
Franchisse shall be responsible for redacting any data that federal law
prevents it from providing to the Board. The Board retains the right to
question any such redaction and to challenge it in any forum having
jurisdiction over such a challenge. Records shall be kept for at least
five (5) years.
j. Waiver of Reporting Requirements. The Board may, at its discretion, waive
in writing the requirement of any particular report specified in this
Section 11.
12. RATE REGULATION
a. All Rights Reserved
The Board reserves all of its rights to regulate the Franchisee's rates
to the maximum extent permitted by law.
b. Geographical Uniformity.
To the extent consistent with the FCC regulations, the Franchisee's
residential rates throughout the Franchise Area shall be uniform.
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13. INSURANCE, SURETY, AND INDEMNIFICATION
a. Insurance Required
1. The Franchisee shall obtain, and by its acceptance of the Franchise
specifically agrees that it will maintain, throughout the entire length
of the Franchise period, at its own cost and expense and keep in force
and effect the following insurance covering the Franchisee and, by
additional insured provision, the Board. Coverage must be placed with an
insurance company/companies licensed to do business in the Commonwealth
of Puerto Rico evidenced by a certificate of insurance and/or copies of
the insurance policies. Franchisee's insurance shall be primary.
a. Commercial General Liability insurance with respect to the
construction, operation and maintenance of the Cable System, and the
conduct of the Franchisee's business in the Franchise Area, in the
minimum amount of two million dollars ($2,000,000) per occurrence,
combined single limit for property damage and bodily injury. The
policy must include coverage for Contractual Liability, Premises and
Operations, Broad Form Property Damage, Personal Injury, and Products
and Completed Operations. The policy must also include coverage for
the explosion, collapse and underground hazard.
b. Automobile Liability Coverage, with a minimum limit of liability of
one million dollars ($1,000,000), per occurrence, combined single
limit for bodily injury and property damage coverage. Policy must
include coverage
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for owned automobiles, leased or hired automobiles and non-owned
automobiles.
c. Workers' Compensation Coverage meeting all requirements of Puerto Rico
Law.
2. The Board may review these amounts no more than once a year and may
require reasonable adjustments to them consistent with the public
interest.
b. Endorsements:
All insurance policies and certificates maintained pursuant to this
Agreement shall contain the following endorsement:
It is hereby understood and agreed that this insurance coverage may not
be canceled by the insurance company nor the intention not to renew be
stated by the insurance company until sixty (60) days after receipt by
the Board, by registered mail, of a written notice of such intention to
cancel or not to renew.
c. Qualifications of Sureties. All insurance policies shall be with sureties
qualified to do business in the Commonwealth of Puerto Rico, with an A +9
or better rating for financial condition and financial performance by
Best's Key Rating Guide, Property/Casualty Edition, and in a form
approved by the Board
d. Policies Available for Review.
All insurance policies shall be available for review by the Board, and
the Franchisee shall deliver to the Board a copy of the required
certificates of insurance, evidencing that the required policies are in
effect, no later than thirty (30) days after such policy is required to
be effective.
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e. Additional Insureds: Prior Notice of Policy Cancellation.
All liability insurance policies shall name the Board and its employees
as additional insureds and shall further provide that any cancellation or
reduction in coverage shall not be effective unless sixty (60) days'
prior written notice thereof has been given to the Board. The Franchisee
shall not cancel any required insurance policy without submission of
proof that the Franchisee has obtained alternative insurance reasonably
satisfactory to the Board which complies with this Agreement, such
approval by the Board shall not be unreasonably withheld.
f. Failure Constitutes Material Violation. Failure to comply with the
insurance requirements set forth in this Section shall constitute a
material violation of the Franchise.
g. Indemnification.
1. The Franchisee shall, at its sole cost and expense, indemnify, hold
harmless, and defend the Board and its employees, from and against any
and all claims, suits, causes of action, proceedings, and judgments
for damages or equitable relief arising out of the construction,
maintenance, or operation of its Cable System; copyright infringements
or a failure by the Franchisee to secure consents from the owners,
authorized distributors, or Franchisees of programs to be delivered by
the Cable System, other than programs delivered on PEG channels, the
conduct of the Franchisee's business in the Municipalities; or in any
way arising out of the Franchisee's enjoyment or exercise of the
Franchise, regardless of whether the act or
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omission complained of is authorized, allowed, or prohibited by the
Board's Regulations or this Agreement.
2. Specifically, the Franchisee shall fully indemnify, defend, and hold
harmless the Board and its employees, from and against any and all
claims, suits, actions, liability, and judgments for damages or
otherwise subject to 47 U.S.C. ss. 558, arising out of or alleged to
arise out of the installation, construction, operation, or maintenance
of the System, including but not limited to any claim against the
Franchisee for invasion of the right of privacy, defamation of any
Person, firm or corporation, or the violation or infringement of any
copyright, trade mark, trade name, service mark, or patent, or of any
other right of any Person, firm, or corporation.
3. The Board shall give the Franchisee prompt notice of any claim or the
commencement of any action, suit or other proceeding covered by the
provisions of this Section. Franchisee will provide the defense of any
claims brought against the Board under this Section of the franchise
by selecting counsel of Franchisee's choice to defend the claim,
subject to the consent of the Board, which will not unreasonably be
withheld. Nothing herein shall be deemed to prevent the Board from
cooperating with the Franchisee and participating in the defense of
any litigation by its own counsel at its own cost and expense,
provided however, that after consultation with the Board, Franchisee
shall have the right to defend, settle or compromise any claim or
action arising hereunder, and Franchisee shall have the authority to
decide the appropriateness and the amount of any such settlement. In
the event that the Board does not consent to the terms of any such
settlement or compromise, the Franchisee
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shall not settle the claim or action but any obligation to indemnify
the Board shall in no event exceed the amount of such settlement.
4. Nothing in this Agreement shall be construed to waive the tort
immunity of the Board or any Participating Municipality.
h. No Limit of Liability.
Neither the provisions of this Section nor any damages recovered by the
Board shall be construed to limit the liability of the Franchisee for
damages under the Franchise.
14. PERFORMANCE GUARANTEES AND REMEDIES
a. Performance Bond:
1. Franchisee shall obtain and maintain during the entire term of the
Franchise, and any renewal or extensions thereof, except as provided
herein, a performance bond or an irrevocable letter of credit in favor
of the Board in the amount of $50,000, to ensure the Franchisee's
faithful performance of its obligations under the Cable Law and this
Agreement.
2. The performance bond shall provide the following conditions:
A. There shall be recoverable by the Board, from the principal and
surety, any and all fines and penalties due to the Board and any
and all damages, losses, costs, and expenses suffered or incurred
by the Board or resulting from the failure of the Franchisee after
notice and opportunity to cure to faithfully comply with (i) the
material provisions of this Agreement, the Board's Regulations and
other applicable law; (ii) all orders, permits and directives of
the Board; (iii) payment
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of fees due to the Board; or (iv) payment of any claims or liens
due the Board. Such losses, costs and expenses shall include but
not be limited to reasonable attorneys' fees and other associated
expenses.
B. The total amount of the performance bond shall be forfeited in
favor of the Board in the event:
i. the Franchisee abandons the System at any time during the term
of its Franchise or any extension thereto; or
ii. the Franchisee carries out a Transfer of the Franchise without
the express written consent of the Board as provided herein.
The Board shall apply any funds received under the performance bond
to defray any damages, fees, costs and expenses attributable to or
arising from the abandonment of the System or Transfer of the
Franchise. Any funds remaining upon final resolution of all claims
and payment of all damages, costs, fees, and expenses shall be
returned to the bonding company.
3. The performance bond shall be issued by a surety qualified to do
business in the Commonwealth of Puerto Rico and with an A+9 or better
rating for financial condition and financial performance in Best's Key
Rating Guide, Property/Casualty Edition; shall be in a form approved
by the Board; and shall contain the following endorsement:
"This bond may not be canceled, or allowed to lapse, until sixty (60) days after
receipt by the Board, by certified mail, return receipt requested, of a written
notice from the issuer of the bond of intent to cancel or not to renew."
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4. Reduction of Bond. Upon written application by the Franchisee, the
Board may, at its sole option, in writing, permit the amount of the
bond to be reduced or waive the requirements for a performance bond.
Reductions granted or denied upon application by the Franchisee shall
be without prejudice to the Franchisee's subsequent applications or to
the Board's right to require the full bond at any time thereafter.
However, no application shall be made by the Franchisee within one (1)
year of any prior application.
b. Security Fund.
1. The Franchisee shall provide a security fund in the amount of $10,000
to secure its performance of all its obligations under this Agreement.
Such requirement can be satisfied at Franchisee's option by a
performance bond or a letter of credit with a value of $10,000.
2. The Security Fund shall be released only upon expiration of the
Franchise and if there is no outstanding default or unpaid amounts by
the Franchisee.
c. Rights Cumulative. The rights reserved to the Board herein are in
addition to all other rights of the Board, whether reserved herein or
authorized by applicable law, and no action, proceeding, or exercise of a
right with respect to such Security Fund will affect any other right the
Board may have. The receipt of damages by the Board from the Security
Fund shall not be construed to excuse faithful performance by the
Franchisee or limit the liability of the Franchisee under the terms of
its Franchise for damages.
d. Security Fund Procedures. The following procedures shall apply to drawing
on the Security Fund:
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A. The Board may immediately withdraw an appropriate amount, including
interest and penalties, from the security if:
1. After ten (10) days notice the Franchisee fails to pay to the Board
any fees or taxes due and unpaid, liquidated damages, damages, or
costs or expenses that the Board is compelled to pay by reason of
any act of default of the Franchisee in connection with the
franchise; or
2. After 30 days notice to the Franchisee, the Franchisee fails to
comply with any provision of the Franchise that the Board
reasonably determines can be remedied by an expenditure of the
security deposit. The Board must promptly notify the Franchisee of
the amount and date of any withdrawal.
B. Within 30 days after the Board gives notice that an amount has been
withdrawn from the security deposit, the Franchisee must deposit a sum
of money equal to the amount withdrawn. If the Franchisee does not
deposit the required amount within 30 days, the entire security
deposit remaining may be forfeited. In addition, that failure is a
violation for which the Board may revoke the franchise or take any
other enforcement action.
C. The security deposit is the property of the Board if the Franchise is
revoked. The Board must return the security deposit to the Franchisee
after the Franchise is terminated if there is no outstanding default
or unpaid amounts owed to the Board by the Franchisee.
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D. The rights reserved to the Board with respect to the security deposit
are in addition to all other rights of the Board under this Chapter or
other law. An action, proceeding, or exercise of a right with respect
to the security deposit does not affect any other right the Board may
have.
e. Failure Constitutes Material Violation.
Failure to maintain or restore the Security Fund shall constitute a
material violation of this Agreement.
f. Remedies.
1. If the Franchisee violates any provision of the law or this Franchise
Agreement, the Board may have one or more of the following actions:
A. impose administrative fines in the amount, whether per day,
incident, or other measure of violation, as provided in the
franchise agreement. Payment of the fines by the Franchisee will
not relieve the Franchisee of its obligation to meet the Franchise
requirements; or
B. require the Franchisee to pay its subscribers or classes of
subscribers in an amount and on a basis the Board determines is
necessary to cure the breach or default, or equitably compensate
for the violation; or
C. revoke the Franchise.
2. In determining which remedy or remedies are appropriate, the Board
must consider the nature of the violation, the person or persons
bearing the impact of the violation, the nature of the remedy required
in order to prevent further violations, and any other
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matters the Board determines are appropriate. Provided, however, that
the remedy of franchise revocation shall be employed only for the most
outrageous violations.
3. In addition to or instead of these remedies, the Board may seek
legal or equitable relief from any court of competent jurisdiction.
4. Before initiating a remedy under this section other than revocation
of the Franchise, the Board must give the Franchisee written notice
of the violations claimed and at least 10 working days to correct
the violations.
g. Fines: Because the Franchisee's failure to comply with provisions of
the Franchise and this Franchise Agreement will result in injury to
the Board, the Board may impose the following fines (The Board may
draw on the Security Fund to recover any fine.):
1. For failure to submit any required plans indicating expected dates
of installation of various parts of the System: a fine for each day
the violation continues;
2. For failure to substantially complete the System Rebuild, including
the timeline of completion, in accordance with this Agreement: a
fine for each day the violation continues;
3. For a Transfer without approval: a fine for each day the violation
continues;
4. For failure to make PEG capacity available; failure to construct
required links to PEG facilities; or failure to make payments to
support PEG under this Agreement: a fine for each day the violation
continues, in addition to any monetary payment due under this
Agreement or the Board Regulations;
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5. For failure to supply information, reports, or filings lawfully
required Franchise Agreement or applicable law or by the Board: a
fine for each 0. violation continues;
6. For violation of customer service standards: a fine per violation;
7. For failure, unless such failure is beyond the Franchisee's
control, of the Emergency Alert System to perform in the event of
a public emergency or vital information situation: a fine per
occurrence;
8. For failure to render required payment for reimbursement of any
Franchise expenses, or liquidated damages: a fine per day, in
addition to any monetary payment under this Agreement or the Board
Regulations;
9. For failure to file, obtain or maintain any required Security Fund
in a timely fashion: a fine per day;
10. For failure to restore damaged property: a fine per day, in
addition to the cost of the restoration as required elsewhere
herein; and
11. For violation of technical standards established by the FCC: a
fine per day.
h. Termination of franchise.
1. Upon completion of the term of this Franchise, if a new, extended, or
renewed Franchise is not granted to the Franchisee by the Board, the
Franchisee's right to occupy the Public Rights-of-Way within the
Franchise Area shall terminate, subject to applicable federal law.
2. To invoke the provisions of this Section, the Board shall give the
Franchisee written notice of the default in its performance. If
within thirty (30) calendar days
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following such written notice from the Board to the Franchisee, or
such other period as the Franchise Agreement shall require or the
Franchisee and the Board shall agree, the Franchisee has not taken
corrective action to the satisfaction of the Board, or diligently
commenced corrective action if the nature of the default does not
permit completion of such action within 30 days, the Board may give
written notice to the Franchisee of its intent to revoke the
Franchise, stating its reasons; provided that no opportunity to cure
shall be provided where the Franchisee is shown to have defrauded or
attempted to defraud the Board or its Subscribers.
3. Prior to revoking the Franchise, the Board shall hold a public
hearing, on thirty (30) calendar days' notice, at which time the
Franchisee and the public shall be given an opportunity to be heard.
Following the public hearing, the Board may determine whether to
revoke the Franchise based on the information presented at the
hearing, and other information of record, or, where applicable, grant
additional time to the Franchisee to effect any cure. If the Board
determines to revoke the Franchise, it shall issue a written decision
setting forth the reasons for its decision. A copy of such decision
shall be transmitted to the Franchisee.
4. If the Board revokes the Franchise, or if for any other reason the
Franchisee abandons, terminates, or fails to operate or maintain
service to its Subscribers, the following procedures and rights are
effective:
A. The Board may require the former Franchisee to remove its
facilities and equipment at the former Franchisee's expense and
restore affected sites as
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required in Section 5(c), or permit the former Franchisee to
abandon such facilities in place. If the former Franchisee fails to
do so within a reasonable period of time, the Board may have the
removal done at the former Franchisee's and/or surety's expense.
B. The Board may require the former Franchisee to continue operating
the Cable System as specified in Section 4(a).
C. In the event of revocation, the Board, may assign or transfer the
ownership of the Cable System at its then-fair market value.
D. If a Cable System is abandoned by the Franchisee or the Franchisee
fails to operate or maintain service to its Subscribers or
otherwise terminates the Franchise, the ownership of all portions
of the Cable System in Public Rights-of-Way shall revert to the
Board which has jurisdiction over the Public Right-of-Way, and the
Board may sell, assign, or Transfer all or part of the assets of
the System.
15. TRANSFER TO PEGASUS
The Board hereby gives its consent to the Transfer of the Franchise to
Pegasus Cable Television of San German, Inc. once all the terms and conditions
included in the Purchase Agreement are complied with. Once this triggering event
occurs, the parties will file an informative motion before the Board, notifying
of the actual and final transfer of the Franchise to Pegasus Cable Television of
San German Inc. Once said motion is received,
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the Board will issue a resolution acknowledging the transfer from Franchisee to
Pegasus Cable Television of San German, Inc.
To the Board's best knowledge, at the day of this Agreement the Company is
in substantial compliance with the prior Franchise. This provision does not
liberate the Company from any actual, past, present or unknown obligation to the
Board.
16. MISCELLANEOUS PROVISIONS.
a. Binding Acceptance: This Agreement shall bind and benefit the parties
hereto and their respective heirs, beneficiaries, administrators,
executors, receivers, trustees, successors and assigns, and the promises
and obligations herein shall survive the expiration date hereof
b. Preemption: In the event that federal or state laws, rules or regulations
preempt a provision or limit the enforceability of a provision of this
Agreement, then, the provision shall be read to be preempted to the
extent and for the time, but only to the extent and for the time,
required by law. In the event such federal or state law, rule or
regulation is subsequently repealed, rescinded, amended or otherwise
changed so that the provision hereof that had been preempted is no longer
preempted, such provision shall thereupon return to full force and
effect, and shall thereafter be binding on the parties hereto, without
the requirement of further action on the part of the Board.
c. Compliance With Federal and State Laws: The Franchisee shall comply with
all applicable federal, state, and local laws and regulations.
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d. Force Majeure: The Franchisee shall not be deemed in default of
provisions of this Agreement or the Board Regulation where performance
was rendered impossible by war or riots, labor strikes or civil
disturbances, floods, earthquakes, fire, explosions, or epidemics, or
other causes beyond the Franchisee's control, and the Franchise shall not
be revoked or the Franchisee penalized for such noncompliance, provided
that the Franchisee takes immediate and diligent steps to bring itself
back into compliance and to comply as soon as possible under the
circumstances with the Franchise without unduly endangering the health,
safety, and integrity of the Franchisee's employees or property, or the
health, safety, and integrity of the public, Public Rights-of-Way, public
property, or private property.
e. Governing Law: This Franchise Agreement shall be governed in all
respects by the laws of the Commonwealth of Puerto Rico.
f. Notices: Unless otherwise expressly stated herein, notices required under
this Franchise Agreement shall be mailed first class, postage prepaid, to
the addressees below. Each party may change its designee by providing
written notice to the other party, but each party may only designate one
entity to receive notice
1. Notices to the Franchisee shall be mailed to:
(A) General Manager
Pegasus Cable TV
P.O. Box 7998
Mayaguez, Puerto Rico 00681
AND
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(B) Office of the General Counsel
Pegasus Cable TV
225 City Line Avenue
Suite 200
Bala Cynwyd, Pennsylvania 19004
2. Notices to the Board shall be mailed to:
Telecommunications Regulatory Board of Puerto Rico
235 Arterial Hostos Avenue
Capital Center Tower, North Tower, Suite 901
San Juan, Puerto Rico 00918-1453
3. The Franchisee shall at all times keep the Board advised as to which
individual(s) are authorized to act on behalf of the Franchisee and
whose acts will be considered to bind the Franchisee.
g. Time of Essence: In determining whether the Franchisee has substantially
complied with this Franchise Agreement, the parties agree that time is of
the essence. As a result, the Franchisee's repeated and substantial
failure to complete construction in a timely manner may constitute a
material breach.
h. Severability. If any law, ordinance, regulation or court decision shall
render any provision of this Franchise invalid, the remaining provisions
of the Franchise shall remain in full force and effect.
i. No Waiver. The failure of either party on one or more occasions to
exercise a right or to require compliance or performance under the
Franchise Agreement, or any other applicable law shall not be deemed to
constitute a waiver of such right or a waiver of compliance or
performance by such party, unless such right or such compliance or
performance has been specifically waived in writing.
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j. Entire Agreement. This Franchise represents the entire understanding and
agreement between the parties hereto with respect to the subject matter
hereof, supersedes all prior oral negotiations between the parties, and
can be amended, supplemented, modified or changed only by an agreement in
writing which makes specific reference to this Franchise or the
appropriate attachment and which is signed by the party against whom
enforcement of any such amendment, supplement, modification or change is
sought.
Agreed to in San Juan, Puerto Rico, on March 19, 1999, by:
TELECOMMUNICATIONS REGULATORY BOARD OF PUERTO RICO:
/s/ Phoebe Forsythe Isales
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Phoebe Forsythe Isales, President
/s/ Vicente Aguirre Iturrino
- -------------------------------------------------
Vicente Aguirre Iturrino, Associate Member
/s/ Casandra Lopez
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Cassandra Lopez, Associate Member
PETITIONERS:
/s/ Vivian J. Smith
- --------------------------------------------------
Representative of
CABLE SYSTEMS USA, PARTNERS
/s/ Ted S. Lodge
- --------------------------------------------------
Representative of:
PEGASUS CABLE TELEVISION OF SAN GERMAN, INC.
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<TABLE>
<CAPTION>
Name of Subsidiaries Jurisdiction of Incorporation
- -------------------- -----------------------------
<S> <C>
B.T. Satellite, Inc. Maine
Bride Communications, Inc. Delaware
Henry County MRTV, Inc. Ohio
HMW, Inc. Maine
MCT Cablevision, Ltd. Pennsylvania
MCT Cablevision, Limited Partnership Delaware
PCT SG, Inc. (formerly known as Pegasus Cable Television of San German, Inc.) Puerto Rico
Pegasus Anasco Holdings, Inc. Delaware
Pegasus Broadcast Associates, L.P. Pennsylvania
Pegasus Broadcast Television, Inc. Pennsylvania
Pegasus BTV Sub, LLC Arkansas
Pegasus Cable Television, Inc. Massachusetts
Pegasus Cable Television of Anasco, Inc. Puerto Rico
Pegasus Cable Television of Connecticut, Inc. Connecticut
Pegasus Cable Television of San German, Inc. Delaware
Pegasus Communications Management Company Pennsylvania
Pegasus Communications Corporation PAC Delaware
Pegasus Development Corporation Delaware
Pegasus GSS Merger Sub, Inc. Delaware
Pegasus Media & Communications, Inc. (formerly Pegasus Communications Holdings, Inc.) Delaware
Pegasus Real Estate Company Pennsylvania
Pegasus Satellite Development Corporation Delaware
Pegasus Satellite Finance Corporation Delaware
Pegasus Satellite Finance Corp. 1999-1 Delaware
Pegasus Satellite Finance Corp. 1999-2 Delaware
Pegasus Satellite Finance Corp. 1999-3 Delaware
Pegasus Satellite Finance Corp. 1999-4 Delaware
Pegasus Satellite Holdings, Inc. Delaware
Pegasus Satellite Television of Ohio, Inc. Delaware
Pegasus Satellite Television, Inc. Delaware
Pegasus Satellite Television of Virginia, Inc. Delaware
Pegasus Towers, Inc. Pennsylvania
Pegasus Travel, Inc. Delaware
Portland Broadcasting, Inc. Maine
PP Broadcast, Inc. (formerly Pegasus Portland Broadcast, Inc.) Delaware
PST Holdings, Inc. Delaware
Telecast of Florida, Inc. Florida
WDBD License Corp. Delaware
WDSI License Corp. Delaware
WILF, Inc. Delaware
WOLF License Corp. Delaware
WTLH, Inc. Delaware
WTLH License Corp. Delaware
Digital Television Services of Indiana, LLC Georgia
DTS Management, LLC Georgia
Pegasus Satellite Television of Illinois, Inc. Illinois
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 and S-8 (Nos. 333-20357, 333-22823, 333-52755 and
333-23595) of Pegasus Communications Corporation of our report dated February
11, 2000 relating to the financial statements and financial statement schedules,
which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Philadelphia, PA
March 9, 2000
