<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
PEGASUS COMMUNICATIONS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
_____
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
Class A common stock, par value $.01 per share
2) Aggregate number of securities to which transaction applies:
6,500,000 shares
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $150,000.00
2) Form, Schedule or Registration Statement No.: Schedule 14A
3) Filing Party: Pegasus Communications Corporation
4) Date Filed: February 3, 2000
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
c/o Pegasus Communications Management Company
225 City Line Avenue
Suite 200
Bala Cynwyd, Pennsylvania 19004
______________, 2000
Dear Fellow Stockholder:
You are cordially invited to attend the special meeting of stockholders of
Pegasus Communications Corporation on ______________, 2000, at _____ a.m.,
local time, at __________.
At the special meeting, you will be asked to consider and vote upon, among
other things, a proposal to approve and adopt the Agreement and Plan of Merger
dated January 10, 2000, among Pegasus, Golden Sky Holdings, Inc., Pegasus GSS
Merger Sub, Inc., a wholly-owned subsidiary of Pegasus, certain stockholders of
Pegasus and certain stockholders of Golden Sky.
The merger agreement provides for Golden Sky to become a wholly-owned
subsidiary of Pegasus. As a result of the merger and related transactions,
o with certain exceptions, the Golden Sky capital stock will be exchanged
for shares of Pegasus Class A common stock;
o all holders of Golden Sky options and warrants will have the right to
receive options and warrants to purchase Pegasus Class A common stock;
o Pegasus' board of directors will be increased to eleven members, two of
whom will be designated by certain stockholders of Golden Sky or their
affiliates; and
o certain stockholders of Golden Sky, certain former stockholders of
Digital Television Services, Inc., and I, together with certain of my
affiliates who hold all of the Pegasus Class B common stock, will enter
into a voting agreement with respect to the designation and election of
directors.
In addition, certain holders of Golden Sky's capital stock have sold shares to
Pegasus for $_______ in cash. Although the number of shares of Pegasus Class A
common stock to be issued in the merger after all required reductions cannot be
precisely determined until just before the closing of the merger, it is
anticipated that approximately ________ shares will be issued in the merger
together with options and warrants to purchase approximately __________ shares
of Pegasus Class A common stock. After giving effect to the merger, Golden Sky's
stockholders will own approximately ___% of the common equity of Pegasus. After
giving effect to the merger and the voting rights of Pegasus' Class B common
stock, Golden Sky's stockholders and I will have voting power with respect to
approximately ___% and ___%, respectively, of Pegasus' common stock.
The board of directors believes that the merger will provide significant
value to Pegasus and its stockholders by offering opportunities for continued
growth and economies of scale and has determined that the merger is, therefore,
in the best interests of Pegasus and its stockholders. The board of directors
has unanimously approved the merger proposal and recommends that you vote for
the merger proposal.
The special meeting will also consider amendments to Pegasus' restricted
stock plan and stock option plan, and amendments to Pegasus' certificate of
incorporation to increase the number of authorized shares of Class A common
stock, Class B common stock, non-voting common stock and preferred stock.
You should read carefully the accompanying notice of special meeting of
stockholders and the proxy statement/prospectus for details of the merger, the
other proposals to be voted upon at the special meeting, and additional related
information.
It is important that your shares be represented at the special meeting
whether or not you attend. I urge you to sign, date and return the enclosed
proxy at your earliest convenience.
Sincerely,
----------------------------------------
MARSHALL W. PAGON
President, Chief Executive Officer and
Chairman of the Board
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
c/o Pegasus Communications Management Company
225 City Line Avenue
Suite 200
Bala Cynwyd, Pennsylvania 19004
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on ______________, 2000
---------------------
To the Stockholders of Pegasus Communications Corporation:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Pegasus
Communications Corporation will be held on ____________, 2000, at ____ a.m., at
- ---------------.
The special meeting will be held for the following purposes:
I. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated January 10, 2000, among Pegasus,
Golden Sky Holdings, Inc., Pegasus GSS Merger Sub, Inc., a wholly-owned
subsidiary of Pegasus, certain stockholders of Pegasus and certain
stockholders of Golden Sky, and related transactions.
II. To amend the Pegasus Communications Restricted Stock Plan to increase
the number of shares of Class A common stock that may be issued
thereunder from 350,000 to 750,000.
III. To amend the Pegasus Communications 1996 Stock Option Plan to increase
the number of shares of Class A common stock that may be issued
thereunder from 1,300,000 to 3,000,000 and to increase the maximum
number of shares of Class A common stock that may be issued under
options granted to any executive officer from 550,000 to 1,000,000.
IV. To amend Pegasus' certificate of incorporation to increase the number
of authorized shares of Class A common stock from 50,000,000 to
250,000,000 shares.
V. To amend Pegasus' certificate of incorporation to increase the number
of authorized shares of Class B common stock from 15,000,000 to
50,000,000 shares.
VI. To amend Pegasus' certificate of incorporation to increase the number
of authorized shares of non-voting common stock from 20,000,000 to
200,000,000 shares.
VII. To amend Pegasus' certificate of incorporation to increase the number
of authorized shares of preferred stock from 5,000,000 to 20,000,000
shares.
VIII. To transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
Copies of the merger agreement, as amended, the voting agreement that will
be entered into in connection with the merger, and the proposed amendments to
the restricted stock plan, the stock option plan and the certificate of
incorporation are attached to the proxy statement/prospectus as Annexes I
through V, respectively, and are incorporated herein by reference.
The merger proposal will be voted upon as a single proposal. Failure of the
merger proposal to be approved by the stockholders will result in the
termination of the merger agreement and the other transactions contemplated by
the merger agreement and no right of Golden Sky's stockholders to receive
Pegasus securities.
The board of directors has fixed ___________, 2000 as the record date for
the determination of stockholders entitled to notice of and to vote at the
special meeting.
The special meeting is not being held in lieu of an annual meeting. Pegasus
intends to hold its annual meeting in June 2000 at which time an election of
directors will take place.
All stockholders are cordially invited to attend the special meeting in
person. However, to ensure your representation at the special meeting, you are
urged to complete, sign and date the enclosed proxy card and return it as
promptly as possible in the enclosed envelope. No postage is required if the
proxy is mailed in the United States.
BY ORDER OF THE BOARD OF DIRECTORS,
----------------------------------------
Ted S. Lodge
Dated: ____________, 2000 Secretary
<PAGE>
The information in this proxy statement/prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with Securities and Exchange Commission is effective. This proxy
statement/propspectus is not an offer to sell securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
PRELIMINARY COPY -- SUBJECT TO COMPLETION -- DATED FEBRUARY 3, 2000
PROXY STATEMENT
FOR SPECIAL MEETING OF
STOCKHOLDERS OF PEGASUS COMMUNICATIONS CORPORATION
TO BE HELD ____________, 2000
---------------------
PEGASUS COMMUNICATIONS CORPORATION
PROSPECTUS
6,500,000 Shares of Class A Common Stock
We are furnishing this proxy statement/prospectus to holders of our Class A
common stock and Class B common stock in connection with the solicitation of
proxies by Pegasus' board of directors for use at the special meeting of
stockholders of Pegasus to be held on ____________, 2000, or any adjournment or
postponement thereof.
The special meeting has been called to consider and vote upon the following
proposals:
o to approve and adopt the Agreement and Plan of Merger dated January 10,
2000, among Pegasus, Pegasus GSS Merger Sub, Inc., a wholly-owned
subsidiary of Pegasus, certain of Pegasus' stockholders, Golden Sky
Holdings, Inc., and certain stockholders of Golden Sky, which merger
agreement provides for Golden Sky to become a wholly-owned subsidiary of
Pegasus and for Pegasus to issue up to 6,500,000 shares of Class A common
stock to Golden Sky's stockholders;
o to amend Pegasus' restricted stock plan to increase the number of shares of
Class A common stock that may be issued thereunder from 350,000 to 750,000;
o to amend Pegasus' stock option plan to increase the number of shares that
may be issued thereunder from 1,300,000 to 3,000,000 and to increase the
maximum number of Shares of Class A common stock that may be issued under
options granted to any executive officer from 550,000 to 1,000,000;
o to amend Pegasus' certificate of incorporation to increase the number of
authorized shares of Class A common stock from 50,000,000 shares to
250,000,000 shares;
o to amend Pegasus' certificate of incorporation to increase the number of
authorized shares of Class B common stock from 15,000,000 to 50,000,000
shares;
o to amend Pegasus' certificate of incorporation to increase the number of
authorized shares of non-voting common stock from 20,000,000 to 200,000,000
shares; and
o to amend Pegasus' certificate of incorporation to increase the number of
authorized shares of preferred stock from 5,000,000 to 20,000,000.
The special meeting is not being held in lieu of an annual meeting.
<PAGE>
This proxy statement/prospectus also constitutes the prospectus of Pegasus
with respect to up to 6,500,000 shares of Class A common stock that will be
issued to holders of the outstanding Golden Sky capital stock upon consummation
of the merger.
The Class A common stock is traded on the Nasdaq National Market under the
symbol "PGTV." On ________ __, 2000, the last reported closing price of the
Class A common stock on the Nasdaq National Market was $___ per share.
These securities involve a high degree of risk. See Risk Factors, beginning
on page 10.
This proxy statement/prospectus and the accompanying form of proxy are
first being mailed to the stockholders of Pegasus on or about ________________,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
proxy statement/prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
The date of this proxy statement/prospectus is ________ __, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Page Page
---- ----
WHERE YOU CAN FIND MORE Our Inability To Control Licensees Under
INFORMATION ................................... iv Our Local Marketing Agreements Could
SUMMARY .......................................... 1 Adversely Affect Our Broadcast
RISK FACTORS ..................................... 10 Operations ................................ 14
Risks Associated With The Merger .............. 10 The Planned Industry Conversion to
Pegasus May Not Be Able to Arrange Digital Television Could Adversely
Financing In Order to Offer to Affect Our Broadcast Business ............ 14
Purchase Golden Sky Notes ............... 10 The New Federal Satellite Television
We May Not Be Able to Integrate Legislation Could Adversely Affect Our
Golden Sky's Operations Successfully..... 10 Broadcast Business ....................... 14
We Will Incur Significant Transaction Risks of Our Cable Business ................... 15
Expenses and Costs of Integration as a We Could Lose Revenues Because of
Result of the Merger .................... 11 Our Geographic Concentration in
The Merger Will Have a Dilutive Effect Puerto Rico ............................. 15
on Our Earnings Per Share ............... 11 The FCC's Digital Television
Risks of Our Direct Broadcast Satellite Requirements May Prevent Us from
Business ................................... 11 Expanding Our Cable Programming ......... 15
Satellite and Direct Broadcast Satellite We Could Become Subject to Rate
Technology Could Fail or Be Impaired..... 11 Regulation Which Could Reduce Our
Events at DIRECTV Could Adversely Cable Revenues .......................... 15
Affect Us ............................... 11 Other Risks of Our Business ................ 15
Programming Costs May Increase, Which We Face Certain Other Regulatory Risks...... 15
Could Adversely Affect Our Direct We Have a History of Substantial Losses;
Broadcast Satellite Business ............ 12 We Expect Them To Continue; Losses
We May Lose Our DIRECTV Rights Could Adversely Affect Our Stock
After the Initial Term of Our Price and Access to Capital Markets ..... 15
Agreements With the National Rural We Face Significant Competition; the
Telecommunications Cooperative .......... 12 Competitive Landscape Changes
The Effect of New Federal Satellite Constantly .............................. 16
Television Legislation on Our Business Our Acquisition Strategy May Become
Is Unclear .............................. 12 Too Expensive Which Could Adversely
We Could Lose Money Because of Affect Our Financial Performance ........ 16
Signal Theft ............................ 12 We May Not Be Able To Get the
We Could Lose Revenues if We Have Consents Necessary To Implement Our
Out-of-Territory Subscribers ............ 13 Acquisition Strategy .................... 16
Direct Broadcast Satellite Services Face We May Not Be Able To Integrate
Competition from Cable Operators ........ 13 Acquired Companies Successfully
Risks of Our Broadcast Television Which Could Affect Our Financial
Business ................................... 13 Performance ............................. 16
Our Broadcast Operations Could Be Our Credit Arrangements and Publicly
Adversely Affected if We Fail To Held Debt and Preferred Stock Limit
Negotiate Successfully Our Network Our Ability to Pay Dividends on Our
Affiliation Agreements .................. 13 Class A Common Stock .................... 16
Fox Could Cancel Our Affiliation Marshall W. Pagon Owns and Controls
Agreements if It Acquires a Significant Most of the Voting Power of Pegasus ..... 17
Ownership Interest in One of Our Our Stock Price Has Been Volatile .......... 17
Markets ................................. 13 Our Certificate of Incorporation and
Our Broadcast Operations Could Be Publicly Held Debt and Preferred
Adversely Affected if the FCC Stock Could Delay, Deter or Prevent a
Prevents Our Local Marketing Change of Control of Pegasus ............ 17
Agreement Strategy ...................... 13 The Year 2000 Problem Could Adversely
Antitrust Laws Could Limit Our Local Affect Us ............................... 18
Marketing Agreement Strategy ............ 14 We May Not Be Aware of All Risks ........... 18
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Risk Factors Relating to Golden Sky's MARKET PRICE INFORMATION AND
Business ..................................... 18 DIVIDENDS ................................. 26
Golden Sky Has A Limited Operating Pegasus ................................... 26
History and History of Negative Cash Golden Sky ................................ 26
Flow ..................................... 19 THE SPECIAL MEETING ......................... 27
Golden Sky May Not Be Able To Make Solicitation .............................. 27
Principal or Interest Payments on Its Voting; Record Date and Revocability of
Substantial Debt ......................... 19 Proxies ................................ 27
Golden Sky's Substantial Debt Could Quorum .................................... 28
Adversely Affect Its Ability to Execute Purpose of the Special Meeting ............ 28
Its Business Strategy .................... 19 PROPOSAL 1: APPROVAL OF MERGER .............. 29
If Golden Sky Fails to Comply With the Background of the Merger .................. 29
Restrictive Covenants of Its Debt Reasons for the Merger and
Instruments, Its Debt Could Be Recommendations of Pegasus' Board of
Accelerated and There May Be Directors .............................. 30
Insufficient Assets to Meet Its Opinion of CIBC World Markets Corp ........ 31
Obligations .............................. 19 Interests of Certain Persons in the Merger 38
Golden Sky May Not Have Enough Ownership of Pegasus After the Merger ..... 38
Capital to Execute Its Business Management of Pegasus After the Merger .... 39
Strategy ................................. 19 PROPOSAL 2: AMENDMENT TO
Any Change in Golden Sky's RESTRICTED STOCK PLAN ..................... 39
Relationship With the National Rural PROPOSAL 3: AMENDMENT TO STOCK
Telecommunications Cooperative or OPTION PLAN ............................... 42
the National Rural Telecommunications PROPOSAL 4: AMENDMENT TO
Cooperative's Relationship With CERTIFICATE OF INCORPORATION TO
DIRECTV Could Adversely Affect Its INCREASE THE NUMBER OF
Ability to Earn Revenues ................. 20 AUTHORIZED SHARES OF CLASS A
Golden Sky's Ability to Earn Revenues COMMON STOCK FROM 50,000,000 TO
and Its Operating Costs Could Be 250,000,000 SHARES ........................ 45
Adversely Affected If the National PROPOSAL 5: AMENDMENT TO
Rural Telecommunications Cooperative CERTIFICATE OF INCORPORATION TO
Is Unable to Provide It With Essential INCREASE THE NUMBER OF
Support Services and Accurate AUTHORIZED SHARES OF CLASS B
Subscriber Information ................... 20 COMMON STOCK FROM 15,000,000 TO
The National Rural Telecommunications 50,000,000 SHARES ......................... 46
Cooperative May Not Act in Golden PROPOSAL 6: AMENDMENT TO
Sky's Best Interests, Which Could CERTIFICATE OF INCORPORATION TO
Adversely Affect Its Rights and INCREASE THE NUMBER OF
Costs of Distributing DIRECTV AUTHORIZED SHARES OF
Programming in Its Markets ............... 20 NON-VOTING COMMON STOCK FROM
Changes in National Rural 20,000,000 TO 200,000,000 SHARES .......... 47
Telecommunications Cooperative PROPOSAL 7: AMENDMENT TO
Policies May Adversely Affect Golden CERTIFICATE OF INCORPORATION TO
Sky's Ability to Provide DIRECTV INCREASE THE NUMBER OF
Programming in Its Markets ............... 20 AUTHORIZED SHARES OF
Recent Consolidation Among Direct PREFERRED STOCK FROM 5,000,000
Broadcast Satellite Operators and TO 20,000,000 SHARES ...................... 48
Related Litigation Could Adversely PROPOSAL 8: OTHER MATTERS ................... 50
Affect Golden Sky's DIRECTV THE MERGER .................................. 51
Programming Rights, Costs of The Merger Agreement ...................... 51
Providing Programming to Termination ............................... 54
Subscribers and Capital Voting Agreement .......................... 55
Requirements ............................. 21 Registration Rights Agreement ............. 57
Risk That Forward-Looking Statements Consequences Under Debt Agreements and
May Prove Inaccurate ........................ 21 Preferred Stock Terms .................. 58
COMPARATIVE PER SHARE Certain Federal Income Tax Consequences.... 59
DATA ........................................... 23 Accounting Treatment ...................... 60
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Federal Securities Law Consequences ........... 61 Competition .................................. 105
PEGASUS' SELECTED HISTORICAL AND Regulation ................................... 107
PRO FORMA CONSOLIDATED Facilities ................................... 107
FINANCIAL DATA ............................... 62 Management and Employees ..................... 107
GOLDEN SKY'S SELECTED HISTORICAL Legal Proceedings ............................ 107
AND PRO FORMA CONSOLIDATED PEGASUS MANAGEMENT .............................. 108
FINANCIAL DATA ............................... 64 CERTAIN TRANSACTIONS ............................ 114
GOLDEN SKY MANAGEMENT'S OWNERSHIP AND CONTROL ........................... 118
DISCUSSION AND ANALYSIS OF DESCRIPTION OF CAPITAL STOCK .................... 123
FINANCIAL CONDITION AND COMPARISON OF STOCKHOLDERS'
RESULTS OF OPERATIONS ........................ 66 RIGHTS ....................................... 127
Overview ..................................... 66 State of Incorporation ....................... 127
Results of Operations ........................ 68 Authorized Capital ........................... 127
Liquidity and Capital Resources .............. 73 Voting, Liquidation, and Other Rights ........ 128
Year 2000 Readiness .......................... 76 Dividend Rights .............................. 129
Recent Accounting Developments ............... 76 Size and Make-up of the Board of
BUSINESS OF PEGASUS ............................. 78 Directors ................................. 130
General ...................................... 78 Preemptive Rights ............................ 130
Direct Broadcast Satellite Television ........ 78 Change of Control ............................ 130
DIRECTV ...................................... 78 Conversion Rights and Transfer
DIRECTV Rural Affiliates ..................... 79 Restrictions .............................. 131
Pegasus Rural Focus and Strategy ............. 79 Class Voting ................................. 131
Satellite Services in Rural Areas ............ 80 LEGAL MATTERS ................................... 132
Consolidation of DIRECTV Rural Affiliates..... 80 EXPERTS ......................................... 132
The Pegasus Retail Network ................... 81 ANNEX I -- AGREEMENT AND PLAN OF
Broadcast Television ......................... 81 MERGER, AS AMENDED ........................... I-1
Cable Television ............................. 82 ANNEX II -- FORM OF VOTING
Recent Completed and Pending AGREEMENT .................................... II-1
Transactions .............................. 83 ANNEX III -- AMENDMENT TO THE
Competition .................................. 84 PEGASUS COMMUNICATIONS
Employees .................................... 84 RESTRICTED STOCK PLAN ........................ III-1
Direct Broadcast Satellite Agreements, ANNEX IV -- AMENDMENT TO THE
Licenses, Local Marketing Agreements PEGASUS COMMUNICATIONS 1996
and Cable Franchises ...................... 84 STOCK OPTION PLAN ............................ IV-1
Legislation and Regulation ................... 89 ANNEX V -- PROPOSED AMENDMENT
Legal Proceedings ............................ 100 TO PEGASUS' CERTIFICATE OF
Properties ................................... 102 INCORPORATION TO INCREASE
BUSINESS OF GOLDEN SKY .......................... 103 AUTHORIZED CLASS A COMMON
General ...................................... 103 STOCK, CLASS B COMMON STOCK,
Sales and Distribution ....................... 104 NON-VOTING COMMON STOCK AND
Marketing .................................... 104 PREFERRED STOCK .............................. V-1
Customer Service ............................. 105 ANNEX VI -- OPINION OF CIBC WORLD
National Rural Telecommunications MARKETS CORP. ................................ VI-1
Cooperative and DIRECTV ................... 105 ANNEX VII -- FORM OF PROXY ...................... VII-1
</TABLE>
iii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Pegasus files annual, quarterly and special reports, as well as proxy
statements and other information with the SEC. You may read and copy any of the
documents we file with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549 or at its regional offices located at 7
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may
obtain further information about the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0300. These SEC filings are also available to the
public over the Internet at the SEC's web site at http://www.sec.gov, which
contains reports, proxy information statements and other information regarding
registrants like Pegasus that file electronically with the SEC. Pegasus' Class A
common stock is quoted on the Nasdaq National Market and reports and other
information about us may be inspected at the Nasdaq National Market at 1735 K
Street, N.W., Washington, D.C. 20007-1500.
The SEC allows us to incorporate by reference the information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus and information we file later with the SEC will
automatically update and supersede this information. We are incorporating by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
until we terminate this offering.
Pegasus is incorporating by reference the following documents that we have
filed with the SEC.
o Pegasus' Annual Report on Form 10-K filed with the SEC on March 10, 1999
for the fiscal year ended December 31, 1998;
o Pegasus' quarterly reports on Forms 10-Q filed with the SEC on May 14, 1999
for the quarter ended March 31, 1999, on August 13, 1999 for the quarter
ended June 30, 1999, and on November 12, 1999 for the quarter ended
September 30, 1999;
o Pegasus' current reports on Forms 8-K filed with the SEC on January 12,
2000, dated November 19, 1999 (as amended by the Form 8-K/A filed on
February 2, 2000) and January 11, 2000;
o The description of Class A common stock contained in Pegasus' registration
statement on Form 8-A (File No. 0-21389) filed with the SEC on September
18, 1996, including any amendments or reports filed for the purpose of
updating such description.
Copies of these filings may be obtained at no cost from: Pegasus
Communications Management Company, 225 City Line Avenue, Suite 200, Bala
Cynwyd, PA 19004; Telephone: (888) 438-7488; Attention: Vice President,
Corporate Communications.
Any statement or information contained in a document incorporated by
reference in this proxy statement/prospectus shall be deemed to be modified or
superseded for purposes of this proxy statement/prospectus to the extent that a
statement or information contained herein modifies or replaces such a statement
or such information or to the extent that any subsequently filed document which
is incorporated by reference herein contains statements or information so
modified or replaces such statements or such information. Any such statement or
information so modified or replaced shall not be deemed, except as so modified
or replaced, to constitute a part of this proxy statement/prospectus. Such
incorporation by reference shall not be deemd specifically to incorporate by
reference the information referred to in Item 402(a)(8) of Regulation S-K under
the Securities Act.
You should rely on the information provided in this proxy statement/prospectus
or incorporated by reference. Pegasus has not authorized anyone to provide you
with different information. You should not assume that the information in this
proxy statement/prospectus is accurate as of any date other than the date on the
cover page of this proxy statement/prospectus. Pegasus is not making this offer
of securities in any state or country in which the offer of sale is not
permitted.
iv
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this proxy
statement/prospectus. This summary is not complete and may not contain all of
the information that you should consider before deciding to vote on the
proposals or invest in Pegasus' Class A common stock. We urge you to read the
entire proxy statement/prospectus carefully, including the more detailed
information set forth elsewhere in this proxy statement/prospectus, the Risk
Factors section and the consolidated financial statements and the notes to those
statements included herein and incorporated by reference herein. Portions of
this proxy statement/prospectus contain certain forward-looking statements that
involve risks and uncertainties. Pegasus' and Golden Sky's actual results may
differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in Risk Factors. Although we believe with respect to
the statements about Pegasus, and Golden Sky believes with respect to the
statements about it, that the assumptions underlying the forward-looking
statements contained in this proxy statement/prospectus are reasonable, any of
the assumptions could prove inaccurate. Therefore, we cannot assure you that any
of the forward-looking statements included in this proxy statement/prospectus
will prove accurate.
Unless the context otherwise requires, all references to "we," "our", "us"
and "Pegasus" refer to Pegasus Communications Corporation, together with its
direct and indirect subsidiaries. When we describe the size of Pegasus' business
in this summary -- for example, the number of homes in our territories and how
many subscribers we have -- we are assuming that we will complete the pending
acquisitions and sale described in Business of Pegasus -- Recent Completed and
Pending Transactions, excluding the merger. We have also assumed, unless
otherwise noted, that 6.5 million shares of Class A common stock will be issued
in connection with the merger.
The Companies
Pegasus
Pegasus Communications Corporation is:
o The largest independent distributor of DIRECTV(R) with approximately
752,800 subscribers at December 31, 1999. Pegasus has the exclusive
right to distribute DIRECTV digital broadcast satellite services to
over 5.3 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.
o One of the fastest growing media companies in the United States. We
have increased our revenues at a compound growth rate of 100% per
annum since our inception in 1991.
We were incorporated in Delaware in May 1996. Our principal executive
office is c/o Pegasus Communications Management Company, 225 City Line Avenue,
Suite 200, Bala Cynwyd, PA 19004, and our telephone number is (888) 438-7488.
Golden Sky
Golden Sky is the second largest independent distributor of DIRECTV
satellite television programming in rural markets in the United States. Golden
Sky markets and provides DIRECTV programming on an exclusive basis to
residential customers in rural markets in the United States.
Golden Sky has the exclusive right to provide DIRECTV programming in 57
of the 250 rural DIRECTV markets served by members and affiliates of the
National Rural Telecommunications Cooperative, including markets Golden Sky
acquired during 1999. Golden Sky's rural DIRECTV markets, which are located in
24 states, contain approximately 1.9 million households. As of December 31,
1999, Golden Sky had approximately 345,200 subscribers.
Golden Sky's principal executive offices are located at 4700 Belleview
Avenue, Suite 300, Kansas City, Missouri 64112, and Golden Sky's telephone
number is (816) 753-5544.
1
<PAGE>
The Special Meeting
Date, Time and Place of the Special Meeting
The special meeting of holders of common stock will be held on
_______________, 2000, at ____ a.m., local time, at _______________.
Record Date; Shares Entitled to Vote
Holders of record of common stock at the close of business on
_______________, 2000, are entitled to notice of and to vote at the special
meeting.
Purpose of the Special Meeting
Holders of common stock will be asked to consider and vote on the
following proposals:
o to approve the proposed merger between our subsidiary and Golden Sky;
o to amend Pegasus' restricted stock plan to increase the number of
shares to be issued thereunder from 350,000 to 750,000;
o to amend Pegasus' stock option plan to increase the number of shares
to be issued thereunder from 1,300,000 to 3,000,000 and to increase
the maximum number of shares of Class A common stock that may be
issued under options granted to any executive officer from 550,000 to
1,000,000;
o to amend Pegasus' certificate of incorporation to increase the number
of authorized shares of Pegasus' Class A common stock from 50,000,000
shares to 250,000,000 shares;
o to amend Pegasus' certificate of incorporation to increase the number
of authorized shares of Pegasus' Class B common stock from 15,000,000
shares to 50,000,000 shares;
o to amend Pegasus' certificate of incorporation to increase the number
of authorized shares of Pegasus' non-voting common stock from
20,000,000 shares to 200,000,000 shares;
o to amend Pegasus' certificate of incorporation to increase the number
of authorized shares of Pegasus' preferred stock from 5,000,000 shares
to 20,000,000 shares; and
o to transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
Votes Required; Security Ownership of Marshall W. Pagon
The proposals to be acted on at the special meeting require the following
votes to be approved:
<TABLE>
<S> <C>
Merger with Golden Sky and amendments to the Majority of voting power of the Class A and
restricted stock plan and stock option plan. Class B common stock present at the
meeting in person or by proxy.
Amendments to certificate of incorporation Majority of voting power of all outstanding
increasing Class A common stock and Class A and Class B common stock, voting
non-voting common stock. together as a single class.
Amendment to certificate of incorporation Majority of all outstanding shares of Class A
increasing Class B common stock. common stock and Class B common stock,
voting as separate classes.
Amendment to certificate of incorporation Majority of voting power of all outstanding
increasing preferred stock. Class A and Class B common stock voting
together as a single class, and majority of all
outstanding preferred stock of all series, voting
together as a single class.
</TABLE>
2
<PAGE>
If a proxy is marked as "withhold authority" or "abstain" on any matter,
or if specific instructions are given that no vote be cast on any specific
matter, the shares represented by such proxy will not be voted on such matter.
Abstentions will be included within the number of shares present at the special
meeting and entitled to vote for the purposes of determining whether a matter
has been authorized, but other types of non-votes, including non-votes by broker
nominees, will not be so included.
As of the record date, there were outstanding ______ shares of Class A
common stock and 4,581,900 shares of Class B common stock. Each record holder of
Class A common stock will be entitled to one vote per share, and each record
holder of Class B common stock will be entitled to ten votes per share. All of
the shares of Class B common stock are owned beneficially by Marshall W. Pagon,
Pegasus' President, Chief Executive Officer and Chairman of the Board. Thus, Mr.
Pagon has voting power to approve the merger proposal and the other proposals to
be voted upon at the special meeting without the vote of any other stockholder,
except for the proposal to amend Pegasus' certificate of incorporation to
increase the number of authorized shares of Class B common stock and preferred
stock. Mr. Pagon has advised Pegasus that he intends to cause the record holders
of the Class B common stock to vote in favor of all such proposals.
The Merger Proposal
Under the terms of the merger agreement, and subject to the satisfaction
of the conditions set forth in the agreement:
o Pegasus GSS Merger Sub will merge with and into Golden Sky and Golden
Sky will become a wholly-owned subsidiary of Pegasus;
o with certain exceptions, the Golden Sky capital stock will be
exchanged for shares of Pegasus' Class A common stock, and holders of
outstanding Golden Sky options and warrants will receive options and
warrants to purchase shares of Pegasus' Class A common stock;
o Pegasus' board of directors will be increased to eleven members,
including two directors to be designated by certain stockholders of
Golden Sky; and
o certain stockholders of Golden Sky, Marshall W. Pagon, Pegasus'
President, Chief Executive Officer and Chairman of the Board, and
certain affiliates of Mr. Pagon who hold all of the Class B common
stock will amend and restate a voting agreement which provides for the
designation and election of directors.
In addition, certain holders of Golden Sky's capital stock have sold
shares to Pegasus for $_______ in cash.
In the merger, Golden Sky's stockholders will receive up to 6,500,000
shares of Pegasus' Class A common stock, subject to certain adjustments. After
giving effect to the merger, assuming that none of Golden Sky's stockholders
perfect rights of appraisal, Golden Sky's stockholders will own approximately
___% of the issued and outstanding Class A common stock. After giving effect to
the merger and the voting rights of the Class B common stock, the stockholders
of Golden Sky and Marshall W. Pagon will have voting power with respect to
approximately ___% and ___%, respectively, of the common stock.
Recommendations of Pegasus' Board of Directors
Pegasus' board of directors, by unanimous vote, has determined that the
merger is in the best interests of Pegasus and recommends that holders of the
common stock vote in favor of the merger proposal. The decision of Pegasus'
board of directors to enter into the merger agreement and to recommend that
Pegasus' stockholders vote in favor of the merger proposal is based upon its
evaluation of a number of factors described in this proxy statement/prospectus.
See Proposal 1: Approval of Merger -- Reasons for the Merger and Recommendations
of Pegasus' Board of Directors.
Pegasus' board of directors has determined by unanimous consent that the
amendment to increase the number of shares of Class A common stock that may be
issued under the restricted stock plan is advisable in light of the increased
number of employees who will be eligible to participate in that plan after the
merger is consummated. Pegasus' board of directors has also determined by
unanimous consent that the amendments to
3
<PAGE>
increase the number of options that may be granted under the stock option plan
are advisable because of the number of options that may need to be issued under
the plan to replace outstanding options to purchase Golden Sky common stock,
because of the increased number of directors who will be eligible to participate
in this plan and because Pegasus has already issued options covering all of the
shares of Class A common stock currently authorized to be issued under the stock
option plan. Pegasus' board of directors has also determined by unanimous
consent that the amendment to increase the number of authorized shares of Class
A common stock is advisable in light of the shares to be issued in the merger,
the increase in the number of shares that may be issued under Pegasus'
restricted stock plan and stock option plan. The increase in the authorized
number of shares of Class A common stock is also needed in order to permit
Pegasus to effect a stock split or pay stock dividends, if the board decides to
do so in the future, and in connection with possible future acquisitions and
financings. Each share of Class B common stock is convertible into one share of
Class A common stock. Therefore, Pegasus' board of directors has also determined
by unanimous consent that the amendment to increase the number of authorized
shares of Class B common stock is advisable in order to enable Pegasus to issue
additional shares of Class A common stock in connection with stock splits,
payment of dividends and similar transactions without affecting the current
voting percentages of Pegasus' respective shareholders. Pegasus' board of
directors has also determined that the increase in the authorized number of
shares of non-voting common stock is needed in order to permit Pegasus to pay a
stock dividend in shares of non-voting common stock on its Class A and Class B
common stock, if the board decides to do so in the future, as well as in
connection with possible future acquisitions and financings. Pegasus' board of
directors has further determined by unanimous consent that the amendment to
increase the number of authorized shares of preferred stock is advisable in
light of future financings, acquisitions and other possible transactions.
Opinion of CIBC World Markets Corp.
Pegasus' board of directors has received an opinion of CIBC World Markets
as to the fairness, from a financial point of view, to Pegasus of the exchange
ratio in the merger. For purposes of CIBC World Markets' opinion, the exchange
ratio was defined as the ratio of the aggregate number of shares of Pegasus'
Class A common stock -- that is, 6,500,000 shares of Pegasus' Class A common
stock -- into which the aggregate number of outstanding shares of Golden Sky's
capital stock will be converted in the merger. The full text of CIBC World
Markets' written opinion dated January 10, 2000 is included in this proxy
statement/prospectus as Annex VI. We encourage you to read this opinion
carefully in its entirety for a description of the assumptions made, matters
considered and limitations on the review undertaken. CIBC World Markets' opinion
is directed to Pegasus' board of directors and does not constitute a
recommendation to any stockholder as to any matters relating to the proposed
merger. This opinion also does not address the allocation of the Pegasus stock
to be issued in the merger among the various Golden Sky stockholders. See
Proposal 1: Approval of Merger -- Opinion of CIBC World Markets Corp.
Purchase of Certain Shares of Golden Sky
On __________, Pegasus purchased for cash the shares of certain
stockholders of Golden Sky's capital stock for aggregate consideration of
$_____________. This purchase has the effect of reducing the number of shares of
Pegasus' Class A common stock that will be issued in the merger. See The Merger.
Interests of Certain Persons in the Merger
At the effective time of the merger, Marshall W. Pagon and the holders of
the Class B common stock, certain stockholders of Golden Sky and certain former
stockholders of Digital Television Services, Inc. will amend and restate the
voting agreement that was entered into when Pegasus acquired Digital Television
Services in 1998. According to the terms of the amended and restated voting
agreement, the parties to the amended and restated voting agreement will each
have the right to designate one or more directors to Pegasus' board of
directors. See The Merger -- Voting Agreement.
In addition, certain stockholders of Golden Sky will have registration
rights with respect to the shares of Class A common stock issued to them in the
merger. See The Merger -- Registration Rights Agreement.
4
<PAGE>
Management of Pegasus After the Merger
At the effective time of the merger, Pegasus' board of directors will be
increased to eleven members, including two directors to be designated by certain
of Golden Sky's stockholders pursuant to the voting agreement. The relevant
Golden Sky stockholders have advised Pegasus that they intend to designate
Robert F. Benbow and William P. Collatos to Pegasus' board of directors. See The
Merger -- Voting Agreement.
Accounting Treatment
The merger will be accounted for under the purchase method of accounting
in accordance with generally accepted accounting principles. See The Merger --
Accounting Treatment.
Certain Federal Income Tax Consequences
Pegasus and Golden Sky intend the merger to be a tax-free reorganization
for federal income tax purposes so that no gain or loss will be recognized by
Pegasus' stockholders, Golden Sky's stockholders, Pegasus or Golden Sky, except
as a result of the cash received by certain holders of Golden Sky's capital
stock in connection with their sales of shares to Pegasus prior to the merger
and any cash received in lieu of fractional shares or upon a Golden Sky
stockholder's exercise of dissenters' or appraisal rights. See The Merger --
Certain Federal Income Tax Consequences.
Federal Securities Law Consequences
Golden Sky stockholders who are not affiliates of Golden Sky and who do
not become affiliates of Pegasus following the merger may freely transfer the
shares of Pegasus' Class A common stock that they receive in the merger.
However, pursuant to the terms of the registration rights agreement to be signed
at the closing of the merger, certain Golden Sky stockholders will agree not to
transfer their shares of Class A common stock before six months after the
closing of the merger. In the registration rights agreement, Pegasus will agree,
under certain circumstances, to register shares of Class A common stock held by
certain stockholders of Golden Sky. See The Merger -- Registration Rights
Agreement.
Dissenters' Rights
In connection with the merger, none of Pegasus' stockholders will have
dissenters' or appraisal rights; however, Golden Sky's stockholders will have
such rights under Delaware law. If Golden Sky's stockholders choose to exercise
such rights, the number of shares of Class A common stock to be issued in the
merger would be reduced. It is a condition to the merger that dissenters'
appraisal rights not be asserted by holders of Golden Sky capital stock entitled
to receive more than 10.0% of the Class A common stock to be issued in the
merger.
Conditions to the Merger; Termination of the Merger Agreement
Pegasus' and Golden Sky's obligations to consummate the merger are
subject to the fulfillment of various conditions, including approval by third
parties and the stockholders of both companies. See The Merger -- Conditions for
a description of these and other conditions.
The merger agreement is subject to termination if certain events should
occur. See The Merger -- Termination for a description of these events.
Comparison of Stockholder Rights
Both Pegasus and Golden Sky are incorporated under the laws of the State
of Delaware. For information comparing the rights of stockholders, see
Comparison of Stockholders' Rights.
Risk Factors
An investment in the Class A common stock involves a high degree of risk
and there are risks associated with the business of Golden Sky and with the
merger. Accordingly, you should consider the risk factors beginning on page 10
of this proxy statement/prospectus before voting or making an investment in
Pegasus' Class A common stock. See Risk Factors.
5
<PAGE>
Pegasus' Summary Historical and Pro Forma Consolidated Financial Data
The following table sets forth summary historical and pro forma
consolidated financial data for Pegasus. You should read this information in
conjunction with the consolidated financial statements and the notes to them and
other financial information included elsewhere in this proxy
statement/prospectus and incorporated herein by reference. You should also read
the paragraphs following this table, which explain certain portions of the
table.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------
Pro Forma
Statement of Operating Data: 1994 1995 1996 1997 1998 1998
(unaudited)
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
DBS ............................... $ 174 $ 1,469 $ 5,829 $ 38,254 $ 147,142 $ 311,150
Broadcast and cable ............... 28,017 30,679 42,100 48,564 48,079 34,311
-------- -------- ---------- ----------- ----------- ----------
Total net revenues ............... 28,191 32,148 47,929 86,818 195,221 345,461
Operating expenses:
DBS
Programming, technical, and
general and administrative ..... 161 1,379 4,312 26,042 102,420 226,155
Marketing and selling ............ 50 -- 646 5,973 45,706 96,075
Incentive compensation ........... -- 9 146 795 1,159 1,616
Depreciation and amortization..... -- 640 1,786 17,042 59,077 224,000
Broadcast and cable
Programming, technical, and
general and administrative ..... 14,856 15,823 21,006 24,099 25,613 18,056
Marketing and selling ............ 3,086 3,939 4,940 5,971 6,334 5,993
Incentive compensation ........... 432 519 839 479 292 177
Depreciation and amortization..... 6,536 7,619 9,287 9,397 9,550 4,557
Corporate expenses ................ 1,506 1,364 1,429 2,256 3,614 3,614
Corporate depreciation and
amortization ..................... 404 492 988 1,352 2,105 2,105
-------- -------- ---------- ----------- ----------- ----------
Income (loss) from operations..... 1,160 364 2,550 (6,588) (60,649) (236,887)
Other Data:
Pre-marketing cash flow:
DBS ............................... $ 13 $ 90 $ 1,517 $ 12,212 $ 44,722 $ 84,995
Broadcast and cable ............... 10,075 10,917 16,154 18,494 16,132 10,262
-------- -------- ---------- ----------- ----------- ----------
Total pre-marketing cash flow ..... $ 10,088 $ 11,007 $ 17,671 $ 30,706 $ 60,854 $ 95,257
======== ======== ========== =========== =========== ==========
Location cash flow ................. $ 10,038 $ 11,007 $ 17,025 $ 24,733 $ 15,148 ($ 818)
Operating cash flow ................ 8,100 9,287 15,596 22,477 11,534 (4,432)
Capital expenditures ............... 1,264 2,640 6,294 9,929 12,400 13,735
Net cash provided by (used for):
Operating activities .............. 4,103 5,783 3,059 8,478 (21,962) NA
Investing activities .............. (3,571) (6,047) (81,179) (142,109) (101,373) NA
Financing activities .............. (658) 10,859 74,727 169,098 133,791 NA
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
Pro Forma
Statement of Operating Data: 1999 1999
(unaudited) (unaudited)
(Dollars in thousands,
except per share
data)
<S> <C> <C>
Net revenues:
DBS ............................... $ 198,181 $ 320,585
Broadcast and cable ............... 41,382 26,512
--------- ---------
Total net revenues ............... 239,563 347,097
Operating expenses:
DBS
Programming, technical, and
general and administrative ..... 137,891 240,535
Marketing and selling ............ 88,720 149,606
Incentive compensation ........... 1,140 1,636
Depreciation and amortization..... 62,334 173,043
Broadcast and cable
Programming, technical, and
general and administrative ..... 23,516 15,920
Marketing and selling ............ 4,952 4,448
Incentive compensation ........... 397 202
Depreciation and amortization..... 8,827 3,801
Corporate expenses ................ 4,316 4,316
Corporate depreciation and
amortization ..................... 2,195 2,195
--------- ---------
Income (loss) from operations..... (94,725) (248,605)
Other Data:
Pre-marketing cash flow:
DBS ............................... $ 60,290 $ 80,050
Broadcast and cable ............... 12,914 6,144
--------- ---------
Total pre-marketing cash flow ..... $ 73,204 $ 86,194
========= =========
Location cash flow ................. ($ 15,516) ($ 63,412)
Operating cash flow ................ (19,832) (67,728)
Capital expenditures ............... 10,700 9,413
Net cash provided by (used for):
Operating activities .............. (67,257) NA
Investing activities .............. (120,409) NA
Financing activities .............. 155,917 NA
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .............. $ 1,380 $21,856 $ 8,582 $ 45,269 $ 75,985
Working capital (deficiency) ........... (23,074) 17,566 6,430 32,347 37,889
Total assets ........................... 75,394 95,770 173,680 380,862 886,310
Total debt (including current) ......... 61,629 82,896 115,575 208,355 559,029
Total liabilities ...................... 68,452 95,521 133,354 239,234 699,144
Redeemable preferred stock ............. -- -- -- 111,264 126,028
Convertible preferred stock ............ -- -- -- -- --
Minority interest ...................... -- -- -- 3,000 3,000
Total common stockholders' equity
(deficit) ............................. 6,942 249 40,326 27,364 58,138
</TABLE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
As of September 30,
----------------------------
Pro Forma
1999 1999
(unaudited) (unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .............. $ 24,736 $ 570,878
Working capital (deficiency) ........... (16,617) 511,931
Total assets ........................... 902,904 2,836,383
Total debt (including current) ......... 624,874 1,122,005
Total liabilities ...................... 775,134 1,647,580
Redeemable preferred stock ............. 138,428 138,428
Convertible preferred stock ............ -- 328,732
Minority interest ...................... 3,000 3,000
Total common stockholders' equity
(deficit) ............................. (13,658) 718,643
</TABLE>
6
<PAGE>
The pro forma income statement and other data for the year ended December
31, 1998 and the nine months ended September 30, 1999 include our completed and
pending acquisitions and sales, the exchange of Pegasus' notes, closing of the
new Pegasus Media & Communications credit facility, the convertible preferred
stock offering and the merger with Golden Sky as if they had all occurred in the
beginning of such periods. The pro forma balance sheet data as of September 30,
1999 includes the acquisitions completed after September 30, 1999, the
acquisitions pending as of the same date, the investment in Personalized Media,
the exchange of Pegasus' notes, closing of the new Pegasus Media &
Communications credit facility, the convertible preferred stock offering and the
merger with Golden Sky as if such events had occurred on such date.
The pro forma income statement and other data for the year ended December
31, 1998 do not include the $24.7 million gain from the completed sale of our
New England cable systems. The pro forma income statement data for the year
ended December 31, 1998 and the nine months ended September 30, 1999 do not
include the $88.3 million gain from the pending sale of our Puerto Rico cable
system. Additionally, the pro forma income statement data for the year ended
December 31, 1998 and the nine months ended September 30, 1999 do not include
the $13.4 million and $12.9 million extraordinary net loss from the
extinguishment of debt, respectively.
In this section we use the terms pre-marketing cash flow and location cash
flow. Pre-marketing cash flow is calculated by taking our earnings and adding
back the following expenses.
o interest 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; and
o direct broadcast satellite subscriber acquisition costs, which are sales
and marketing expenses incurred to acquire new direct broadcast satellite
subscribers.
Location cash flow is pre-marketing cash flow less direct broadcast
satellite subscriber acquisition costs.
Pre-marketing cash flow and location cash flow are not, and should not be
considered, alternatives to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under U.S. generally accepted
accounting principles. Pre-marketing cash flow and location cash flow also do
not necessary indicate whether our cash flow will be sufficient to fund working
capital, capital expenditures, or to react to changes in Pegasus' industry or
the economy generally. We believe that pre-marketing cash flow and location cash
flow are important, however, for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to monitor our
financial performance and debt leverage.
7
<PAGE>
Golden Sky's Summary Historical and Pro Forma Consolidated Financial Data
The following table presents Golden Sky's financial and operating
information for the periods indicated. The historical financial information
presented below as of and for the periods ended December 31, 1996, 1997 and 1998
was taken from Golden Sky's audited consolidated financial statements. The pro
forma income statement and other data for the year ended December 31, 1998 gives
effect to material direct broadcast satellite acquisitions Golden Sky completed
during 1998, the July 1998 offering of Golden Sky Systems' senior subordinated
notes due 2006, and the February 1999 offering of Golden Sky DBS's senior notes
due 2007 as if these events had occurred at the beginning of 1998. The pro forma
income statement and other data for the nine months ended September 30, 1999
give effect to the February 1999 offering of Golden Sky DBS's senior notes due
2007 as if it had occurred at the beginning of 1999.
Household and subscriber data presented below reflect 100% of the
households and subscribers comprising Golden Sky's rural DIRECTV markets,
including one rural DIRECTV market in which Golden Sky acquired less than 100%
ownership. In that market, Golden Sky acquired approximately 76% ownership.
Golden Sky received 100% of the revenue generated by all subscribers in Golden
Sky's rural DIRECTV markets.
The following should be read in conjunction with Golden Sky's consolidated
financial statements and the notes to these financial statements and other
financial information, which are incorporated herein by reference, and Golden
Sky Management's Discussion and Analysis of Financial Condition and Results of
Operation.
<TABLE>
<CAPTION>
Inception
Through Year Ended
December 31, December 31,
1996 1997
-------------- --------------
<S> <C> <C>
Statement of Operations Data
Revenue:
DBS services ............................. $ 219 $ 16,452
Lease and other .......................... 36 944
-------- ----------
Total revenue .......................... 255 17,396
Costs and Expenses:
Cost of DBS services ..................... 130 9,304
System operations ........................ 26 3,796
Sales and marketing ...................... 73 7,316
General and administrative ............... 1,035 2,331
Depreciation and amortization ............ 97 7,300
-------- ----------
Total costs and expenses ............... 1,361 30,047
-------- ----------
Operating loss ............................ (1,106) (12,651)
Net interest expense ...................... (61) (3,206)
Other non-operating expenses .............. -- --
-------- ----------
Loss before extraordinary charge .......... (1,167) (15,857)
Extraordinary charge on early
retirement of debt ....................... -- --
-------- ----------
Net loss .................................. (1,167) (15,857)
Preferred stock dividend requirements...... -- (7,888)
-------- ----------
Net loss attributable to common
stockholders .......................... $ (1,167) $ (23,745)
======== ==========
Other Financial Data
EBITDA .................................... $ (1,009) $ (5,351)
Net cash used in operating activities ..... (790) (3,111)
Net cash used in investing activities ..... (3,231) (120,729)
Net cash provided by financing
activities ............................... 4,500 136,997
Capital expenditures ...................... 105 998
Aggregate purchase price of
acquisitions ............................. 5,256 129,725
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
--------------------------- -----------------------------
Historical Pro Forma Historical Pro Forma
------------ ------------- ------------- --------------
(Unaudited) (Unaudited) (Unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data
Revenue:
DBS services ............................. $ 74,910 $ 86,786 $ 96,612 $ 96,612
Lease and other .......................... 1,014 1,140 545 545
---------- ---------- ---------- ----------
Total revenue .......................... 75,924 87,926 97,157 97,157
Costs and Expenses:
Cost of DBS services ..................... 45,291 52,861 61,205 61,205
System operations ........................ 11,021 12,843 14,321 14,321
Sales and marketing ...................... 32,201 32,600 49,903 49,903
General and administrative ............... 7,431 7,470 10,994 10,994
Depreciation and amortization ............ 23,166 29,475 26,564 26,564
---------- ---------- ---------- ----------
Total costs and expenses ............... 119,110 135,249 162,987 162,987
---------- ---------- ---------- ----------
Operating loss ............................ (43,186) (47,323) (65,830) (65,830)
Net interest expense ...................... (18,965) (44,506) (31,095) (32,843)
Other non-operating expenses .............. -- -- (138) (138)
---------- ---------- ---------- ----------
Loss before extraordinary charge .......... (62,151) (91,829) (97,063) (98,811)
Extraordinary charge on early
retirement of debt ....................... (2,577) -- (2,935) --
---------- ---------- ---------- ----------
Net loss .................................. (64,728) (91,829) (99,998) (98,811)
Preferred stock dividend requirements...... (14,855) (14,855) (13,203) (13,203)
---------- ---------- ---------- ----------
Net loss attributable to common
stockholders .......................... $ (79,583) $ (106,684) $ (113,201) $ (112,014)
========== ========== ========== ==========
Other Financial Data
EBITDA .................................... $ (20,020) $ (17,848) $ (39,266) $ (39,266)
Net cash used in operating activities ..... (36,589) NA (58,170) NA
Net cash used in investing activities ..... (159,921) NA (10,821) NA
Net cash provided by financing
activities ............................... 187,362 NA 70,411 NA
Capital expenditures ...................... 3,317 NA 3,075 NA
Aggregate purchase price of
acquisitions ............................. 124,844 124,844 38,703 38,703
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Inception Year Ended
Through Year Ended December 31, 1998
December 31, December 31, ------------------------------
1996 1997 Historical Pro Forma
-------------- -------------- -------------- --------------
(Unaudited)
Operating Data
<S> <C> <C> <C> <C>
Households at end of period ............ 22,000 1,135,000 1,727,000 1,727,000
Subscribers acquired in acquisitions.... 3,000 65,300 54,900 54,900
Subscribers added in existing rural
DIRECTV markets ....................... 100 21,500 77,200 77,200
Subscribers at end of period ........... 3,100 89,900 222,000 222,000
SAC per gross subscriber added ......... $ 290 $ 280 $ 320 NA
Penetration at end of period ........... 14.1% 7.9% 12.9% 12.9%
December 31,
------------------------------
1996 1997
------------- ---------
(in thousands)
Balance Sheet Data
Cash and cash equivalents .............. $ 479 $ 13,636
Restricted cash:
Current ............................... -- --
Long-term ............................. -- --
Working capital ....................... (1,948) 3,843
Total assets .......................... 6,383 156,240
Total debt ............................ 4,450 69,113
Stockholders' equity (deficit) ........ (1,166) (24,912)
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
--------------------------------
Historical Pro Forma
-------------- ----------------
(Unaudited) (Unaudited)
Operating Data
<S> <C> <C>
Households at end of period ............ 1,861,000 1,861,000
Subscribers acquired in acquisitions.... 18,200 18,200
Subscribers added in existing rural
DIRECTV markets ....................... 80,400 80,400
Subscribers at end of period ........... 320,600 320,600
SAC per gross subscriber added ......... $ 395 NA
Penetration at end of period ........... 17.2% 17.2%
December 31, September 30,
1998 1999
------------ ------------
(Unaudited)
Balance Sheet Data
Cash and cash equivalents .............. $ 4,488 $ 5,908
Restricted cash:
Current ............................... 28,083 23,612
Long-term ............................. 23,534 --
Working capital ....................... 15,244 15,142
Total assets .......................... 328,099 318,089
Total debt ............................ 278,204 365,856
Stockholders' equity (deficit) ........ (104,470) (217,587)
</TABLE>
Restricted cash represents the amount Golden Sky placed in escrow to fund
the first four scheduled interest payments on Golden Sky Systems' 12 3/8% senior
subordinated notes due 2006. It also includes $5.3 million as of December 31,
1998 that was deposited with the administrative agent under Golden Sky Systems'
credit facility to fund a contingent reduction of availability under the term
loan facility. This contingent reduction did not occur as a result of an
amendment to Golden Sky's credit facility.
EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges, extraordinary items and non-recurring charges.
EBITDA is not a measure of performance under generally accepted accounting
principles and should not be construed as a substitute for consolidated net
income or loss as a measure of performance, or as a substitute for cash flow as
a measure of liquidity. Nevertheless, Golden Sky believes that EBITDA is a
commonly recognized measure of performance in the communications industry and is
the basis for many of Golden Sky's financial covenants. As a result, investors
may use this data to analyze and compare other communications companies with
Golden Sky in terms of operating performance, leverage and liquidity. Further,
Golden Sky believes that EBITDA provides useful information regarding an
entity's ability to incur and service debt. Changes in Golden Sky's EBITDA may
indicate changes in its free cash flows available to incur and service debt and
cover fixed charges. However, EBITDA is not intended to represent cash flows for
the period and should not be considered in isolation or as a substitute for
measure of performance determined in accordance with generally accepted
accounting principles. EBITDA, as Golden Sky calculates it, is not necessarily
comparable to similarly captioned amounts of other companies.
Subscriber acquisition costs represent subscriber acquisition costs on a
per gross new subscriber activation basis. This excludes acquired subscribers
and does not net out disconnected subscribers.
9
<PAGE>
RISK FACTORS
The following factors should be considered carefully by the stockholders of
Pegasus in determining whether to vote in favor of the merger proposal. Golden
Sky's stockholders should be aware that ownership of Pegasus' Class A common
stock involves certain risks, including those described below, which could
adversely affect the value of their holdings of Class A common stock. Pegasus
does not make, nor has it authorized any other person to make, any
representation about the future market value of the Class A common stock. In
addition to the other information contained in this proxy statement/prospectus,
the following factors should be considered carefully in evaluating an investment
in the shares of Class A common stock offered hereby. After the effective time
of the merger, the risk factors described under Risk Factors Relating to Golden
Sky's Business will continue to relate to Golden Sky in its capacity as a
subsidiary of Pegasus.
Risks Associated With The Merger
Pegasus May Not Be Able to Arrange Financing In Order to Offer to Purchase
Golden Sky Notes
If Golden Sky is unable to purchase or arrange for the purchase of Golden
Sky's notes tendered in response to the offer to purchase, substantially all of
Golden Sky's indebtedness will be in default.
The merger will constitute a "change of control" of Golden Sky within the
meaning of the indentures governing Golden Sky's notes. This will require Golden
Sky to make an offer to the holders of Golden Sky's notes to purchase those
notes for 101% of their principal amount (approximately $306.5 million) plus
accrued interest. We have entered into a commitment letter with CIBC World
Markets Corp. under which CIBC World Markets agrees to purchase any and all
Golden Sky notes tendered in response to Golden Sky's offer to purchase. CIBC
World Markets' commitment is subject to the execution of definitive
documentation and customary closing conditions. If Golden Sky's offer for the
notes is accepted by any of its note holders, and if Golden Sky is unable to
purchase the notes, and if we are unable to agree on definitive documentation
with CIBC World Markets or make alternative arrangements, Golden Sky may be in
default under the terms of its indenture covering the tendered notes. Pegasus
does not intend to assume, guarantee or otherwise become liable under the Golden
Sky notes.
We May Not Be Able to Integrate Golden Sky's Operations Successfully
The anticipated benefits of the merger may not be achieved unless Golden
Sky's operations are combined successfully with ours in a coordinated, timely
and efficient manner. We cannot assure you that this will occur. Even if the two
companies' operations are integrated successfully, we cannot assure you that the
benefits anticipated by the merger will be achieved. The transition to a
combined company will require substantial attention from management. The
diversion of the attention of management and any difficulties encountered in the
transition process could have an adverse impact on the revenues and operating
results of the combined companies.
These difficulties will be increased by the fact that Pegasus and Golden
Sky will have separate and independent sources of debt financing and will be
subject to separate financial covenants and operating restrictions, each of
which limit transactions between Pegasus and Golden Sky. At a minimum such
transactions will have to be carried out on an arm's-length basis and with a
greater degree of formality than is normally the case for companies and their
wholly-owned subsidiaries. The Golden Sky credit facility prohibits all
transactions between Pegasus and Golden Sky except allocations of overhead and
other shared expenses. See The Merger -- Consequences Under Debt Agreements and
Preferred Stock Terms. These difficulties may also be increased by the necessity
of integrating personnel with disparate business backgrounds and combining two
different corporate cultures. In addition, the process of combining the two
organizations could cause the interruption of, or a loss of momentum in, the
activities of either or both of the companies' businesses, which could have an
adverse effect on their combined operations.
As a result of the uncertainties associated with such integration, we may
lose key management and other employees. Failure to achieve the anticipated
benefits of the merger or to integrate successfully the operations of the
companies could have a material adverse effect upon our business, operating
results and financial condition after the merger. Even if the benefits of the
merger are achieved and the two companies' operations
10
<PAGE>
are integrated successfully, we cannot assure you that our operating results and
financial condition after the merger will not be materially and adversely
affected by any number of economic, market or other factors that are not related
to the merger, including those described below.
We Will Incur Significant Transaction Expenses and Costs of Integration as
a Result of the Merger
Pegasus estimates that it will incur direct transaction costs, including
financial advisors, legal, accounting, registration and printing fees, of
approximately $1.9 million associated with the merger. In addition, following
the merger, Pegasus expects to incur additional expenses, which at this time are
not expected to exceed $2 million, relating to information systems integration,
promotional materials reflecting the merger, integration of benefit plans, and
travel and other costs relating to transitional planning and implementation.
These costs, except for any such costs which are capitalized, are expected to be
charged against our income in the fiscal period in which they are incurred. We
cannot assure you that we will not incur unforeseen costs, which could be
material, in subsequent periods to reflect additional costs associated with the
merger.
The Merger Will Have a Dilutive Effect on Our Earnings Per Share
The merger will be dilutive to our net income (loss) per share.
On a pro forma basis, the merger is dilutive to our net loss per share for
the year ended December 31, 1998 and the nine months ended September 30, 1999.
On a pro forma basis, giving effect to the transactions as if they had occurred
on the first day of each period, our net loss per share for such periods was
$11.94 and $9.77, respectively. On a pro forma basis, giving effect to the
merger and the transactions as if they had occurred on the first day of each
period, our net loss per share for such periods was $16.77 and $13.98,
respectively, representing dilution of $4.83 and $4.21, per share, respectively.
We cannot assure you that the merger will not similarly dilute our net loss per
share in the future.
Pegasus expects that as a result of the merger, Golden Sky's intangible
assets will increase by approximately $968.9 million, which will be amortized
over a ten-year period resulting in a charge to earnings of approximately $96.9
million for each of the years in the period. Additionally, Pegasus expects to
incur a one-time restructuring charge of approximately $3.0 million in
connection with the merger.
Risks of Our Direct Broadcast Satellite Business
Satellite and Direct Broadcast Satellite Technology Could Fail or Be
Impaired
If any of the DIRECTV satellites is damaged or stops working partially or
completely for any of a number of reasons, DIRECTV customers would lose
programming. We would in turn likely lose customers, which could materially and
adversely affect our operations, financial performance and the trading price of
our Class A common stock.
Direct broadcast satellite technology is highly complex and is still
evolving. As with any high-tech product or system, it might not function as
expected. In particular, the satellites at the 101(0) W orbital location may not
last for their expected lives. In July 1998, DIRECTV reported that the primary
spacecraft control processor failed on DBS-1. As it was designed to do, the
satellite automatically switched to its on-board spare processor with no
interruption of service to DIRECTV subscribers. We cannot guarantee that a more
substantial failure of DIRECTV's direct broadcast satellite system will not
occur in the future. See -- Risks of Our Direct Broadcast Satellite Business --
We May Lose Our DIRECTV Rights After the Initial Term of Our Agreements With the
National Rural Telecommunications Cooperative and Business of Pegasus -- Legal
Proceedings.
Events at DIRECTV Could Adversely Affect Us
Because we are an intermediary for DIRECTV, events at DIRECTV that we do
not control can adversely affect us. One of the most important of these is
DIRECTV's ability to provide programming that appeals to mass audiences. DIRECTV
generally does not produce its own programming; it purchases it from third
parties. DIRECTV's success -- and therefore ours -- depends in large part on
DIRECTV's ability to make good judgments about programming sources and obtain
programming on favorable terms. We have no control or influence over this.
11
<PAGE>
Programming Costs May Increase, Which Could Adversely Affect Our Direct
Broadcast Satellite Business
Programmers could increase our DIRECTV rates. As a result, our costs would
increase. This could cause us to increase our rates and lose either customers or
revenues.
The law requires programming suppliers that are affiliated with cable
companies to provide programming to all multi-channel distributors -- including
DIRECTV -- on nondiscriminatory terms. The rules implementing this law are
scheduled to expire in 2002. If they are not extended, these programmers could
increase DIRECTV's rates, and therefore ours. If we increase our rates, we may
lose customers. If we do not increase our rates, our costs, revenues and
financial performance could be adversely affected.
We May Lose Our DIRECTV Rights After the Initial Term of Our Agreements
With the National Rural Telecommunications Cooperative
We may or may not be able to continue in the DIRECTV business after the
current DIRECTV satellites are replaced. If we can continue, we cannot predict
what it will cost us to do so.
As part of a counterclaim in the litigation between the National Rural
Telecommunications Cooperative and DIRECTV, DIRECTV is seeking a declaratory
judgement that the term of the National Rural Telecommunications Cooperative's
agreement with DIRECTV is measured only by the orbital life of DBS-1, the first
DIRECTV satellite launched, and not the orbital lives of the other DIRECTV
satellites at the 101o W orbital location. According to DIRECTV, DBS-1 suffered
a failure of its primary control processor in July 1998 and since that time has
been operating normally using a spare control processor. If DIRECTV were to
prevail on its counterclaim, any failure of DBS-1 could have a material adverse
effect on our DIRECTV rights. While the National Rural Telecommunications
Cooperative has a right of first refusal to receive certain services from any
successor DIRECTV satellite, the scope and terms of this right of first refusal
are also being disputed in the litigation. This right is not expressly provided
for in our agreements with the National Rural Telecommunications Cooperative.
Our revenues and financial performance would be adversely affected if we are not
able to continue in the DIRECTV business for the reasons described above.
The Effect of New Federal Satellite Television Legislation on Our Business
Is Unclear
On November 29, 1999, the President signed the Satellite Home Viewer
Improvement Act of 1999. The Act contains provisions that will be phased in over
time. In addition, the FCC and other federal agencies have undertaken
rulemakings and studies in connection with this legislation. Therefore, we
cannot predict the effect of this new law on our business at this time.
The Act clarifies many of the issues involved in years of litigation
between the networks and the direct broadcast satellite industry regarding
retransmission of network programming to direct broadcast satellite subscribers.
Generally, it preserves the industry's right to retransmit distant network
programming to subscribers in "unserved" areas. It also extends through December
31, 2004 the statutory right, for a copyright royalty fee, of the industry to
retransmit independent programming -- so-called superstations -- to subscribers
as "distant" signals. Further, satellite carriers will be required to deliver
signals only to households that cannot clearly receive over-the-air network
signals with a rooftop antenna.
Before this legislation was enacted, we had cut-off network programming to
approximately 159,000 of our subscribers in connection with settlement of the
litigation referred to above. We are unsure at this time how many of these
subscribers will be eligible and will want to receive network programming
services under this legislation.
Among other things, the Act directs the FCC to take actions to prescribe
the picture quality standard that the FCC uses to predict what households do not
receive a strong enough network broadcast signal over-the-air and therefore are
eligible to receive distant network signals. The FCC has initiated a rulemaking
proceeding to consider this standard. The effect on our business of these FCC
actions and other studies and rulemakings that the FCC will undertake cannot be
predicted at this time.
We Could Lose Money Because of Signal Theft
If signal theft becomes widespread, our revenues would suffer. Signal theft
has long been a problem in the cable and direct broadcast satellite industries.
DIRECTV uses encryption technology to prevent people from receiving programming
without paying for it. The technology is not foolproof and there have been
published reports that it has been compromised.
12
<PAGE>
We Could Lose Revenues if We Have Out-of-Territory Subscribers
Just as we have exclusive DIRECTV distribution rights in our territories,
we are not allowed to have customers outside our territories. The problem is
that customers are not always truthful about where they live. If it turns out
that large numbers of our subscribers are not in our territories, we would lose
substantial revenues when we disconnect them. We could also face legal
consequences for having subscribers in Canada, where DIRECTV reception is
illegal.
Direct Broadcast Satellite Services Face Competition from Cable Operators
One of the competitive advantages of direct broadcast satellite systems is
their ability to provide customers with more channels and better-quality digital
signal than traditional analog cable television systems. Many cable television
operators are making significant investments to upgrade their systems from
analog to digital. This upgrade will significantly increase the number of
channels that cable television operators can provide to their customers and the
quality of the transmission. In addition, many cable television operators are
upgrading their systems to provide their customers with high-speed Internet
access. These upgrades could make cable television a more attractive alternative
for consumers, which could have an adverse effect on our direct broadcast
satellite business.
Risks of Our Broadcast Television Business
Our Broadcast Operations Could Be Adversely Affected if We Fail To
Negotiate Successfully Our Network Affiliation Agreements
Our network affiliation agreements with Fox formally expired on January 30,
1999 (other than the affiliation agreement for television station WTLH, which is
scheduled to expire on December 31, 2000). Except in the case of WTLH, we
currently broadcast Fox programming under arrangements between Pegasus and Fox
which have generally conformed in practice to such affiliation agreements, and
we are in the process of negotiating new affiliation agreements. If we are not
successful in these negotiations, our broadcast operations could suffer
materially.
Fox Could Cancel Our Affiliation Agreements if It Acquires a Significant
Ownership Interest in One of Our Markets
In addition, if Fox acquires a significant ownership interest in another
station in one of our markets, it can cancel our affiliation agreement or
arrangement for that market without penalty. Fox has done this in the past to
other broadcasters.
Our Broadcast Operations Could Be Adversely Affected if the FCC Prevents
Our Local Marketing Agreement Strategy
One of our important strategies in broadcast television is to achieve
economies of scale by programming two stations in each of our markets. Because
the FCC did not allow a broadcaster to own more than one television station in
the same market, we implemented our strategy -- like other broadcasters --
through arrangements known as local marketing agreements. Under these
arrangements, we contracted to provide programming and other services to the
licensee of a separate television station in the market. We currently have local
marketing agreements for second stations in three of our markets and our only
station in another market is programmed through a local marketing agreement. We
intend to program a second station under such an agreement in one more market in
2000 if permitted by the FCC.
In August 1999, the FCC revised its television ownership rules to permit,
in certain circumstances, the common ownership of two stations in a television
market. The FCC also decided to treat most television local marketing agreements
as if the station providing programming owned the programmed station. These
decisions would generally prohibit us from programming or acquiring additional
in-market stations in our current markets and could also require us to terminate
some of our existing local marketing agreements by August 2001. We will
vigorously seek to obtain favorable rulings from the FCC to preserve and expand
our broadcast television strategy through the grandfathering of our existing
arrangements or outright common ownership. Unfavorable decisions by the FCC,
however, could cost us significant revenues and could affect our broadcast
operations materially and adversely.
13
<PAGE>
Antitrust Laws Could Limit Our Local Marketing Agreement Strategy
Apart from the FCC, federal agencies that administer the antitrust laws
have said they intend to review market concentrations in television, including
through local marketing agreements that the FCC permits. These agencies could
limit partially or altogether our ability to program stations through local
marketing agreements. We cannot predict how this will affect us.
Our Inability To Control Licensees Under Our Local Marketing Agreements
Could Adversely Affect Our Broadcast Operations
Even if we can keep or expand our local marketing agreements, their use
carries the inherent risk that we do not control the other parties that actually
own the stations and hold the stations' FCC licenses. It is conceivable that the
licensee could pre-empt our programming. In an extreme case, the licensee could
cease to meet FCC qualifications and put its license in jeopardy, in which case,
we could lose the ability to program the station.
The Planned Industry Conversion to Digital Television Could Adversely
Affect Our Broadcast Business
All commercial television stations in the United States must start
broadcasting in digital format by May 2002 and must abandon the present analog
format by 2006, though the FCC may extend these dates.
o It will be expensive to convert from the current analog format to digital
format. We cannot now determine what that cost will be.
o The digital technology will allow us to broadcast multiple channels,
compared to only one today. We cannot predict whether or at what cost we
will be able to obtain programming for the additional channels. Increased
revenues from the additional channels may not make up for the conversion
cost and additional programming expenses. Also, multiple channels
programmed by other stations could increase competition in our markets.
o The FCC has generally made available much higher power allocations to
digital stations that will replace stations on existing channels 2
through 13 than digital stations that will replace existing channels 14
through 69. All of our existing stations are on channels 14 through 69.
This power disparity could put us at a disadvantage to our competitors
that now operate on channels 2 through 13.
o In some cases, when we convert a station to digital television, the
signal may not be received in as large a coverage area, or it may suffer
from additional interference. Also, because of the technical standards
adopted by the FCC, the digital signal may be subject to interference to
a greater degree than current analog transmissions. As a result, viewers
using antennas located inside their homes, as opposed to outdoor, rooftop
antennas, may not receive a reliable signal. If viewers do not receive a
high-quality, reliable signal from our stations, they may be encouraged
to seek service from our competitors.
o The FCC is considering whether to require cable companies to carry both
the analog and the digital signals of their local broadcasters when
television stations will be broadcasting both, during the transition
period between 2002, at the latest, and 2006. If the FCC does not require
this, cable customers in our broadcast markets may not receive our
digital signal, which could affect us unfavorably.
The New Federal Satellite Television Legislation Could Adversely Affect
Our Broadcast Business
The Satellite Home Viewer Improvement Act of 1999 could have an adverse
effect on our broadcast stations' audience share and advertising revenues.
This legislation may allow satellite carriers to provide the signal of
distant stations with the same network affiliation as our stations to more
television viewers in our markets than would have been permitted under previous
law. In addition, the legislation allows satellite carriers to provide local
television signals by satellite within a station market, but does not require
satellite carriers to carry all local stations in a market until 2002. Satellite
carriers could decide to carry other stations in our markets, but not our
stations, which could adversely affect our stations' audience share and
revenues.
14
<PAGE>
Risks of Our Cable Business
We Could Lose Revenues Because of Our Geographic Concentration in Puerto
Rico
All of our cable operations are in Puerto Rico. This geographic
concentration carries risks:
o Puerto Rico gets more hurricanes and other severe weather than many other
places. Because of Hurricane Georges, which struck Puerto Rico in
September 1998, we lost $1.4 million of revenue in the fourth quarter of
1998 alone, and we spent about $300,000 to repair the damage. Future
hurricanes can be expected and could be even worse for us.
o A local downturn in the Puerto Rico economy could cause us to lose
revenues from subscribers and advertisers. This would affect our cable
business more seriously than if we were more geographically diversified.
o A material adverse change in our Puerto Rice cable operations could
affect our ability to sell our cable systems at all or for the
consideration agreed upon in the letter of intent relating to the sale of
our cable business.
The FCC's Digital Television Requirements May Prevent Us from Expanding Our
Cable Programming
The FCC's digital television rules may cause us to lose customers and
revenues. We mentioned above that the FCC is considering whether to require
cable companies to carry both the analog and digital signals of local television
stations during the transition to digital broadcasting. See Risks of Our
Broadcast Television Business -- The Planned Industry Conversion to Digital
Television Could Adversely Affect Our Broadcast Business. Because we have only
so much channel capacity in our cable system, this requirement could hurt our
ability to expand our programming offerings. If we cannot expand programming
offerings, we may lose customers and revenues.
We Could Become Subject to Rate Regulation Which Could Reduce Our Cable
Revenues
We may lose revenues if we become subject to rate regulation. The
government can regulate the rates cable companies charge for the lowest level of
their service. The government does not now regulate our rates since the FCC has
found that our cable systems are subject to effective competition. This means
that less than 30% of the people that could subscribe to the systems do
subscribe. But if we are successful in significantly increasing the percentage
of people that subscribe to our service, the lowest level of cable service we
offer could become subject to rate regulation. If so, we might have to reduce
our cable rates, resulting in decreased revenues. If our cable systems become
subject to rate regulation, we may not be able to sell our cable systems at all
or for the consideration agreed upon in the letter of intent relating to the
sale of our cable business.
Other Risks of Our Business
We Face Certain Other Regulatory Risks
The direct broadcast satellite, television broadcast, and cable industries
are subject to regulation by the FCC under the Communications Act of 1934 and,
to a certain extent, by state and local authorities. Proceedings to implement
the Communications Act are on-going, and we cannot predict the outcomes of these
proceedings or their affect on our business. We depend on broadcast licenses
from the FCC to operate our broadcast station, and DIRECTV depends on FCC
licenses to operate its digital broadcast satellite service. If the FCC cancels,
revokes, suspends, or fails to renew any of these licenses, it could have a
harmful effect on us.
We Have a History of Substantial Losses; We Expect Them To Continue; Losses
Could Adversely Affect Our Stock Price and Access to Capital Markets
We have never made a profit, except in 1995, when we had a $10.2 million
extraordinary gain. Because of interest expense on our substantial debt and
because of high expense in amortizing goodwill from our
15
<PAGE>
acquisitions, we do not expect to have net income for the foreseeable future. To
the extent investors measure our performance by net income or loss, rather than
alternative measures based on cash flow, continuing losses could adversely
affect our access to capital markets and the trading price of our Class A common
stock.
We Face Significant Competition; the Competitive Landscape Changes
Constantly
Our direct broadcast satellite business faces competition from other
current or potential multi-channel programming distributors, including other
direct broadcast satellite operators, direct-to-home distributors, cable
operators, wireless cable operators, Internet and local and long-distance
telephone companies, which may be able to offer more competitive packages or
pricing than we or DIRECTV can provide. In addition, the direct broadcast
satellite industry is still evolving and recent or future competitive
developments could adversely affect us.
Our TV stations compete for audience share, programming and advertising
revenue with other television stations in their respective markets and with
direct broadcast satellite operators, cable operators and other advertising
media. Direct broadcast satellite and cable operators in particular are
competing more aggressively than in the past for advertising revenues in our TV
stations' markets. This competition could adversely affect our stations'
revenues and performance in the future.
Our cable systems face competition from television stations, satellite
master antennae television systems, wireless cable systems, direct-to-home
distributors, direct broadcast satellite systems and open video systems.
In addition, the markets in which we operate are in a constant state of
change due to technological, economic and regulatory developments. We are unable
to predict what forms of competition will develop in the future, the extent of
such competition or its possible effects on our businesses.
Our Acquisition Strategy May Become Too Expensive Which Could Adversely
Affect Our Financial Performance
We may not be able to keep making acquisitions on attractive terms. If we
cannot continue to make acquisitions on attractive terms, our financial
performance and stock price could suffer.
If we pay for an acquisition with our stock, the acquisition could dilute
existing stockholders, depending on its terms. If we finance an acquisition by
borrowing, this would increase our already high leverage and interest expense.
We May Not Be Able To Get the Consents Necessary To Implement Our
Acquisition Strategy
We have been able to get the necessary consents to make acquisitions in the
past, but this could change, or become more difficult, or require us to incur
additional costs, for reasons we cannot predict. Our acquisitions normally
require third-party consents that we do not control. These include the consents
of DIRECTV and the National Rural Telecommunications Cooperative for direct
broadcast satellite acquisitions, the FCC and the television networks for
broadcast TV acquisitions, and cable franchising authorities and programmers for
cable acquisitions. Some acquisitions also require the consent of our lenders.
We May Not Be Able To Integrate Acquired Companies Successfully Which Could
Affect Our Financial Performance
We could encounter difficulties integrating any given acquired business
into our operations. These difficulties can cost money and divert management's
attention from other important matters.
Our Credit Arrangements and Publicly Held Debt and Preferred Stock Limit
Our Ability to Pay Dividends on Our Class A Common Stock
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. In addition, our publicly held debt securities and preferred
stock restrict our ability to pay cash dividends on our common stock. Moreover,
we are a holding company, and our ability to pay dividends is dependent upon the
receipt of dividends from our direct and indirect subsidiaries. The Pegasus
Media & Communications credit facility imposes substantial restrictions on
Pegasus Media & Communications' ability to pay dividends to us. When the merger
closes, Golden Sky's credit facility and other publicly held debt will restrict
Golden Sky's ability to pay dividends to us.
16
<PAGE>
Marshall W. Pagon Owns and Controls Most of the Voting Power of Pegasus
Marshall W. Pagon, our President, Chief Executive Officer and Chairman of
the Board, through his beneficial ownership of all of our Class B common stock,
will have ____% of the combined voting power of the outstanding common stock
after giving effect to the merger.
Our voting common stock is divided into two classes with different voting
rights. 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. Both classes vote together
as a single class on all matters except in connection with certain amendments to
our Amended and Restated Certificate of Incorporation, the authorization or
issuance of additional shares of Class B common stock, and except where class
voting is required under the Delaware General Corporation Law. As a result of
Mr. Pagon's beneficial ownership of all the outstanding voting stock of the sole
general partner of a limited partnership that indirectly controls our parent
company and of his control of the other holders of Class B common stock, Mr.
Pagon beneficially owns all of our Class B common stock. After giving effect to
the greater voting rights attached to the Class B common stock and the shares of
Class A common stock to be issued in the merger, Mr. Pagon will have sufficient
power, without the consent of the holders of the Class A common stock, to elect
Pegasus' entire board of directors. Mr. Pagon will also have sufficient power to
determine the outcome of other matters submitted to the stockholders for
approval, including a merger, consolidation, tender offer, or other business
combination or change of control involving Pegasus that some or a majority of
our stockholders might consider to be in their best interests.
In connection with the merger, Mr. Pagon, certain of Golden Sky's
stockholders and certain former stockholders of Digital Television Services,
Inc. will enter into a voting agreement. See The Merger -- Voting Agreement.
Except as required under the Delaware General Corporation Law and the
applicable certificate of designation, holders of the Series A preferred stock,
Series B junior convertible participating preferred stock, the Series C
convertible preferred stock and the Series D junior convertible participating
preferred stock have no voting rights.
Our Stock Price Has Been Volatile
There may be significant volatility in the market price of our Class A
common stock due to factors that may or may not relate to Pegasus' performance.
The market price of the Class A common stock may be significantly affected by
various factors such as economic forecasts, financial market conditions,
acquisitions and quarterly variations in Pegasus' results of operations.
Our Certificate of Incorporation and Publicly Held Debt and Preferred Stock
Could Delay, Deter or Prevent a Change of Control of Pegasus
Provisions in our amended and restated certificate of incorporation and the
Delaware General Corporation Law could serve to delay, deter or prevent a
merger, consolidation, tender offer, or other business combination or change of
control involving Pegasus. However, some or a majority of our stockholders might
consider these actions to be in their best interests, including tender offers or
attempted takeovers that might otherwise result in our stockholders receiving a
premium over the market price for the Class A common stock.
Our amended and restated certificate of incorporation contains, among other
things, provisions authorizing the issuance of "blank check" preferred stock and
two classes of voting common stock with different voting rights. We are also
subject to the provisions of Section 203 of the Delaware General Corporation
Law. These provisions could delay, deter or prevent a merger, consolidation,
tender offer, or other business combination or change of control involving
Pegasus that some or a majority of our stockholders might consider to be in
their best interests.
In addition, restrictions associated with our publicly held debt
securities, Series A preferred stock and Series C convertible preferred stock
limit our ability to enter into a "change of control" transaction. If a change
of control occurs:
17
<PAGE>
o we would be required to offer to purchase all of our publicly held debt
securities then outstanding at 101% of the aggregate principal amount plus
accrued and unpaid interest, if any;
o we would be required to offer to purchase all of the shares of our Series A
preferred stock then outstanding at 101% of the liquidation preference
thereof plus, without duplication, accumulated and unpaid dividends to the
repurchase date; and
o if the market price per share of our Class A common stock at that time was
less than the conversion price of our Series C convertible preferred stock,
the holders of the Series C convertible preferred stock would have a
one-time option to convert their shares into shares of our Class A common
stock at a conversion price equal to the greater of the market price per
share of our Class A common stock as of the date of the change of control
or $68.00 per share. This could be dilutive to the holders of Class A
common stock.
The repurchase price for the publicly held debt securities and Series A
preferred stock is payable in cash. In the case of the Series C convertible
preferred stock, we may, at our option, make a cash payment equal to the market
value of the shares of our Class A common stock otherwise issuable. We cannot
assure you that, were a change of control to occur, we would have sufficient
funds to pay the cash repurchase price for those securities which we might be
required to purchase. We cannot assure you that our subsidiaries would be
permitted by the terms of their outstanding indebtedness, including pursuant to
the Pegasus Media & Communications credit facility, to pay dividends to us to
permit us to repurchase the publicly held debt securities and preferred stock,
as applicable. Any such dividends are currently prohibited. In addition, any
change of control transaction may also be a change of control under Pegasus
Media & Communications' credit facility, which would require Pegasus Media &
Communications to prepay all amounts owing under its credit facility and to
reduce the commitments thereunder to zero. If we do not have sufficient funds to
pay the repurchase price of our outstanding publicly held debt securities,
Series A preferred stock and Series C convertible preferred stock, as the case
may be, upon a change of control, we could be required to seek third party
financing to the extent we do not have sufficient funds available to meet our
repurchase obligations. We cannot assure you assure you that we would be able to
obtain such financing on favorable terms, if at all. In addition, any change of
control would be subject to the prior approval of the FCC.
The Year 2000 Problem Could Adversely Affect Us
Although we are not currently aware of any operational or technical
problems, we may be adversely affected by year 2000 computer-related
malfunctions. 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
system failures or miscalculations. We have completed an assessment to determine
the extent of any necessary remediation, and the anticipated costs thereof, to
make our material equipment, systems and applications year 2000 compliant. Costs
in connection with any modifications to make our systems compliant have not been
and are not expected to be material. However, if such modifications are not
completed successfully, the year 2000 issue may have a material adverse impact
on our operations. Exposure could arise also from the impact of non-compliance
by certain software and/or equipment vendors and others with whom we conduct
business. We cannot estimate the potential adverse impact that may result from
non-compliance with the year 2000 issue by the software and/or equipment vendors
and others with whom we conduct business.
We May Not Be Aware of All Risks
These risks and uncertainties are not the only ones we face. Others that we
do not know about now, or that we do not now think are important, may impair our
business or the trading price of our Class A common stock.
Risk Factors Relating to Golden Sky's Business
In addition to the risk factors described under Risks of Our Direct
Broadcast Satellite Business which relate to the direct broadcast satellite
business and, as a consequence, would be applicable to both Pegasus and Golden
Sky, the risk factors below also relate to Golden Sky.
18
<PAGE>
Golden Sky Has A Limited Operating History and History of Negative Cash
Flow
Golden Sky has operated for only a limited period of time. During that
time, it has generated both net losses and negative earnings before interest,
taxes, depreciation and amortization, non-cash charges, extraordinary items, and
non-recurring charges. Golden Sky had a net loss of approximately $64.7 million
for the year ended December 31, 1998 and a net loss of approximately $100.0
million for the nine months ended September 30, 1999. Golden Sky also reported
negative earnings before interest, taxes, depreciation and amortization,
non-cash charges, extraordinary items and non-recurring charges of approximately
$20.0 million for the year ended December 31, 1998 and approximately $39.3
million for the nine months ended September 30, 1999. The extent to which Golden
Sky generates net income or positive earnings before interest, taxes,
depreciation and amortization, non-cash charges, extraordinary items and
non-recurring charges in the future will depend upon a number of factors, many
of which are beyond its control.
There can be no assurance that Golden Sky will be able to generate or
sustain net income or positive earnings before interest, taxes, depreciation and
amortization, non-cash charges, extraordinary items and non-recurring charges in
the future, or if so, when. To the extent investors measure Golden Sky's
performance by net income or loss, rather than alternative measures based on
cash flow, continuing losses could adversely affect its ability to raise
additional capital to finance its business plan.
Golden Sky May Not Be Able To Make Principal or Interest Payments on Its
Substantial Debt
Golden Sky had debt of $365.9 million as of September 30, 1999. Golden
Sky's ability to make payments of principal and interest on its debt will be
largely dependent upon its future operating performance. Such operating
performance can be subject to many factors, some of which will be beyond Golden
Sky's control, such as prevailing economic conditions. There can be no assurance
that Golden Sky will be able to generate sufficient cash flow to service
required interest and principal payments. In addition, borrowings under Golden
Sky System's credit facility bear interest at variable rates. This makes Golden
Sky vulnerable to increases in interest rates generally. If Golden Sky does not
have sufficient available resources to repay its indebtedness, it may find it
necessary to refinance such indebtedness. There can be no assurance that such
refinancing would be available, or available on reasonable terms. See Golden Sky
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.
Golden Sky's Substantial Debt Could Adversely Affect Its Ability to Execute
Its Business Strategy
Golden Sky's debt instruments contain numerous restrictive covenants that
limit its discretion with respect to the operation of its business. Among other
things, these covenants limit Golden Sky's ability, and the ability of its
subsidiaries, to incur substantial indebtedness, make investments, loans or
advances, make capital expenditures or consolidate, merge or transfer all or
substantially all of Golden Sky's or its subsidiaries' assets. Golden Sky may be
unable to pursue attractive business opportunities due to these restrictive
covenants. Moreover, Golden Sky's financial flexibility may be limited by these
requirements.
If Golden Sky Fails to Comply With the Restrictive Covenants of Its Debt
Instruments, Its Debt Could Be Accelerated and There May Be Insufficient
Assets to Meet Its Obligations
Golden Sky's credit facility requires it to meet specified financial ratios
and financial conditions. Events beyond its control may affect its ability to
meet these covenants and conditions. In the past, Golden Sky has failed to meet
certain of these covenants and conditions. As a result, Golden Sky has had to
seek and obtain amendments to its credit facility in order to waive these
defaults. There is no assurance that Golden Sky will be able to obtain future
waivers in connection with future defaults, if any.
If Golden Sky fails to comply with its obligations under these instruments,
the holders of this debt could elect to declare all amounts outstanding under
the relevant instruments to be immediately due and payable. Golden Sky's assets
may not be sufficient to repay its debt if the holders elect to accelerate the
debt.
Golden Sky May Not Have Enough Capital to Execute Its Business Strategy
Golden Sky's operations require and will continue to require substantial
capital. Its actual cash requirements may materially exceed its estimated
capital requirements and available capital. The amount of capital Golden Sky
will require will depend upon a number of factors, including the necessity of
future capital
19
<PAGE>
expenditures and the extent of its future negative cash flow. If Golden Sky does
not comply with the financial and operating covenants under its credit facility
described above, it may be unable to borrow funds under the credit facility. In
addition, Golden Sky may require capital in excess of amounts available under
its credit facility. Under these circumstances, Golden Sky will be required to
obtain additional capital to continue to develop its operations. Golden Sky
might not be able to secure the additional capital on satisfactory terms, or at
all.
Any Change in Golden Sky's Relationship With the National Rural
Telecommunications Cooperative or the National Rural Telecommunications
Cooperative's Relationship With DIRECTV Could Adversely Affect Its Ability
to Earn Revenues
Golden Sky has the exclusive right to distribute DIRECTV programming in its
markets through agreements with the National Rural Telecommunications
Cooperative, which has agreements relating to such rights with Hughes
Electronics Corporation. Because Golden Sky does not have a direct contractual
relationship with Hughes, it relies upon the National Rural Telecommunications
Cooperative to provide Golden Sky with accurate information concerning the
relationship with DIRECTV and perform diligently all of its obligations under
its agreement with Hughes, as well as to pursue any rights and remedies,
including cure rights, that it may have against Hughes.
Golden Sky's Ability to Earn Revenues and Its Operating Costs Could Be
Adversely Affected If the National Rural Telecommunications Cooperative Is
Unable to Provide It With Essential Support Services and Accurate
Subscriber Information
Golden Sky's agreements with the National Rural Telecommunications
Cooperative require that it use the National Rural Telecommunications
Cooperative for certain support services, and that Golden Sky pay the National
Rural Telecommunications Cooperative specified fees for these support services.
These services are important to the operation and management of Golden Sky's
business. If the National Rural Telecommunications Cooperative is unable to
provide Golden Sky with support services for whatever reason, it would be
required to acquire these services from other sources or provide them for
itself. Golden Sky's cost of acquiring these services elsewhere or providing
them internally could exceed amounts payable under its agreements with the
National Rural Telecommunications Cooperative. Moreover, it is possible that
Golden Sky would be able to secure these services on a more economic basis from
other persons while it remains obligated to secure them from the National Rural
Telecommunications Cooperative.
The National Rural Telecommunications Cooperative May Not Act in Golden
Sky's Best Interests, Which Could Adversely Affect Its Rights and Costs of
Distributing DIRECTV Programming in Its Markets
The National Rural Telecommunications Cooperative is a cooperative whose
members are engaged in the distribution of telecommunications and other services
in predominantly rural areas of the United States. Because Golden Sky does not
qualify as a member of the National Rural Telecommunications Cooperative, it
acts as a non-voting affiliate. From time to time, the National Rural
Telecommunications Cooperative may act solely in the interests of its members
whose interests may conflict with Golden Sky's interests. There can be no
assurance that the National Rural Telecommunications Cooperative will act in a
manner that will preserve Golden Sky's ability to offer DIRECTV programming on a
basis consistent with past practice.
Changes in National Rural Telecommunications Cooperative Policies May
Adversely Affect Golden Sky's Ability to Provide DIRECTV Programming in Its
Markets
Golden Sky must comply with certain policies of the National Rural
Telecommunications Cooperative adopted from time to time. In the past, Golden
Sky and other National Rural Telecommunications Cooperative-affiliated DIRECTV
providers have disputed policies proposed by the National Rural
Telecommunications Cooperative that Golden Sky believed did not comply with its
agreements with the National Rural Telecommunications Cooperative and applicable
law. For example, Golden Sky has differed with the National Rural
Telecommunications Cooperative, as have other affiliates, over the nature of its
rights to the information and data regarding its subscribers. In the event that
Golden Sky's rights to offer DIRECTV programming through the National Rural
Telecommunications Cooperative are terminated or expire, its rights to
subscriber information will be critical to its ability to execute its business
strategy.
20
<PAGE>
Recent Consolidation Among Direct Broadcast Satellite Operators and Related
Litigation Could Adversely Affect Golden Sky's DIRECTV Programming Rights,
Costs of Providing Programming to Subscribers and Capital Requirements
Until recently, DIRECTV, United States Satellite Broadcasting Company,
Primestar, Inc. and EchoStar Communications Corporation were the principal
domestic satellite television operations, serving over 80% of satellite
television subscribers in the United States. Hughes, which owns DIRECTV,
recently acquired both Primestar and USSB. After completing its acquisition of
USSB, DIRECTV expanded its programming lineup through the addition of USSB's
premium channels, consisting of HBO, Showtime, Cinemax and The Movie Channel,
and has refused to make these channels available to National Rural
Telecommunications Cooperative members and affiliates for distribution in their
rural markets. The National Rural Telecommunications Cooperative has filed suit
against DIRECTV and Hughes alleging that they have breached the National Rural
Telecommunications Cooperative's agreement with Hughes by failing to provide the
National Rural Telecommunications Cooperative with the exclusive, or
alternatively the non-exclusive, right to distribute this premium programming.
It is possible that Hughes' acquisition of USSB and the related litigation will
adversely impact the business relationship between the National Rural
Telecommunications Cooperative and DIRECTV and therefore Golden Sky's ability to
continue to provide DIRECTV programming in its rural markets.
On January 10, 2000, Pegasus and Golden Sky filed a class action lawsuit in
federal court in Los Angeles against DIRECTV. In this new litigation, Pegasus
and Golden Sky are representatives of a proposed class that would include all
members and associates 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. 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 associates. The outcome of this litigation and
the litigation filed by the National Rural Telecommunications Cooperative could
have a material adverse effect on the scope and duration of Golden Sky's right
to provide DIRECTV programming in its rural markets, its capital requirements
and its costs of operations, because it is an associate of the National Rural
Telecommunications Cooperative with contract rights that are affected by the
contractual relationship between the National Rural Telecommunications
Cooperative and DIRECTV.
It is also possible that Hughes' acquisition of Primestar will increase
Golden Sky's costs of providing services and require that it seek additional
capital. As a result of Golden Sky's exclusive distribution rights, former
Primestar subscribers who are located in its rural markets and choose to receive
DIRECTV programming will become its subscribers. While Golden Sky cannot predict
the ultimate impact of this acquisition on its business, increased costs
associated with its efforts to convert former Primestar subscribers to its
DIRECTV service could adversely affect its results of operations in the near
term. Hughes' acquisitions of USSB and Primestar also could encourage EchoStar
to respond by lowering prices or increasing its marketing activities, which
could increase Golden Sky's marketing costs or cause it to lose revenues as a
result of increased competition for its subscribers.
Risk That Forward-Looking Statements May Prove Inaccurate
This proxy statement/prospectus contains or incorporates by reference
certain statements and information that are "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. We use words such as "anticipate," "believe," "estimate," "expect,"
"intend," "project," "should" and similar expressions to identify forward
looking statements. Those statements include, among other things, the
discussions of our business strategy and expectations concerning our market
position, future operations, margins, profitability, liquidity and capital
resources, as well as statements concerning the integration of our acquisitions
and related achievement of cost savings and other synergies. We caution you that
reliance on any forward-looking statement involves risks and uncertainties, and
that although we believe that the assumptions on which our forward-looking
statements are based are reasonable, any of those assumptions could prove to be
inaccurate, and, as a result, the forward-looking statements based on those
21
<PAGE>
assumptions also could be incorrect. The uncertainties in this regard include,
but are not limited to, those identified in the risk factors discussed above. In
light of these and other uncertainties, you should not conclude that we will
necessarily achieve any plans and objectives or projected financial results
referred to in any of the forward-looking statements. We do not undertake to
release the results of any revisions of these forward-looking statements to
reflect future events or circumstances.
22
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are unaudited losses before extraordinary items per common
share, cash dividends declared and book value per common share data of Pegasus
and Golden Sky on both historical and pro forma combined bases. Pegasus -- Pro
Forma -- Transactions loss before extraordinary items per share is derived from
the pro forma information presented elsewhere and incorporated by reference
herein, which gives effect to:
o the completed and pending direct broadcast satellite acquisitions;
o the completed sale of our New England cable systems;
o the pending sale of our Puerto Rico cable systems;
o the exchange of Pegasus' senior notes due 2007 for senior subordinated
notes of its subsidiaries;
o the closing of the new Pegasus Media & Communications credit facility;
and
o the Series C convertible preferred stock offering, all as if they had
occurred at the beginning of each period presented, with respect to
income from operations and cash dividends, and as of the date for which
book value data are presented.
Golden Sky -- Pro Forma -- Transactions loss before extraordinary items per
share is derived from the pro forma information presented elsewhere and
incorporated by reference herein, which gives effect to:
o the completed direct broadcast satellite acquisitions;
o the offering of Golden Sky Systems' senior subordinated notes due 2006;
and
o the offering of Golden Sky DBS' senior notes due 2007, all as if they had
occurred at the beginning of each period presented, with respect to
income from operations and cash dividends, and as of the date for which
book value data are presented.
Golden Sky -- Equivalent Pro Forma share information is based on an
estimate of 6,426,000 shares of Pegasus' Class A common stock to be issued in
connection with the merger, after giving effect to all required reductions under
the merger agreement, other than the reduction for the up to $25.0 million in
Golden Sky capital stock purchased by Pegasus before the merger. See The Merger
- -- The Merger Agreement -- Conversion Ratio.
Pegasus -- Pro Forma -- Transactions and Merger loss before extraordinary
items per share is derived from the pro forma information presented elsewhere
and incorporated by reference herein, which gives effect to the transactions
noted above and the merger as if they had occurred at the beginning of each
period presented, with respect to income from operations and cash dividends, and
as of the date for which book value data are presented. The information set
forth below should be read in conjunction with the respective audited and
unaudited financial statements of Pegasus and Golden Sky and the notes to these
financial statements, pro forma consolidated financial information and other
financial information included elsewhere in this proxy statement/prospectus or
incorporated herein by reference.
A substantial portion of the shares of Pegasus' Class A common stock to be
issued in the merger are in exchange for various convertible preferred shares,
warrants and options of Golden Sky. Accordingly, per share information of Golden
Sky below under Golden Sky -- Historical and Golden Sky -- Pro Forma --
Transactions gives effect to the conversion of these Golden Sky equity
securities into common stock of Golden Sky.
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
------------------- -------------------
(In thousands, except per share data)
<S> <C> <C>
Pegasus -- Historical:
Loss before extraordinary items ......................... $ (93,881) $ (151,029)
Weighted average common shares outstanding .............. 14,130 18,579
Loss per common share before extraordinary item ......... $ (6.64) $ (8.13)
Cash dividends .......................................... -- --
Golden Sky -- Historical:
Loss before extraordinary items ......................... $ (62,151) $ (97,063)
Weighted average common shares outstanding .............. 684 744
Loss per common share before extraordinary item ......... $ (90.80) $ (130.50)
Cash dividends .......................................... -- --
Pegasus -- Pro Forma -- Transactions:
Loss before extraordinary items ......................... $ (196,573) $ (187,345)
Weighted average common shares outstanding .............. 16,469 19,167
Loss per common share before extraordinary item ......... $ (11.94) $ (9.77)
Cash dividends .......................................... -- --
Golden Sky -- Pro Forma -- Transactions:
Loss before extraordinary items ......................... $ (91,829) $ (98,811)
Weighted average common shares outstanding .............. 723 744
Loss per common share before extraordinary item ......... $ (127.05) $ (132.85)
Cash dividends .......................................... -- --
Golden Sky -- Equivalent Pro Forma:
Loss per common share before extraordinary item ......... $ (14.29) $ (15.38)
Cash dividends .......................................... -- --
Pegasus -- Pro Forma -- Transactions and Merger:
Loss before extraordinary items ......................... $ (385,293) $ (358,824)
Weighted average common shares outstanding .............. 22,969 25,667
Loss per common share before extraordinary item ......... $ (16.77) $ (13.98)
Cash dividends .......................................... -- --
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999
--------------------------
(In thousands, except per
share data)
<S> <C>
Pegasus -- Historical:
Common shareholders' deficit ................. $ (13,658)
Common shares outstanding -- 9/30/99 ......... 19,736
Book value per common share .................. $ (0.69)
Golden Sky -- Historical:
Common shareholders' deficit ................. $ (217,587)
Common shares outstanding -- 9/30/99 ......... 785
Book value per common share .................. $ (277.05)
Pegasus -- Pro Forma -- Transactions:
Common shareholders' equity .................. $ 184,640
Common shares outstanding -- 9/30/99 ......... 20,324
Book value per common share .................. $ 9.08
Golden Sky -- Pro Forma -- Transactions:
Common shareholders' deficit ................. $ (217,587)
Common shares outstanding -- 9/30/99 ......... 785
Book value per common share .................. $ (277.05)
Golden Sky -- Equivalent Pro Forma:
Book value per common share .................. $ (33.86)
Pegasus -- Pro Forma -- Transactions and Merger:
Common shareholders' equity .................. $ 718,643
Common shares outstanding -- 9/30/99 ......... 26,824
Book value per common share .................. $ 26.79
</TABLE>
25
<PAGE>
MARKET PRICE INFORMATION AND DIVIDENDS
Pegasus
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.
<TABLE>
<CAPTION>
Price Range of Common Stock
---------------------------
High Low
---------- --------------
<S> <C> <C>
Year Ended December 31, 1998:
First Quarter .................................. 26 19 7/8
Second Quarter 255/8 ........................... 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
Year Ended December 31, 2000:
First Quarter through _______ __, 2000 .........
</TABLE>
The closing sale price of the Class A common stock was $_____ on ________
__, 2000. As of ____________, 2000, Pegasus had ____ 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 $57,070
per year on our Series B and $900,000 per year on our Series D 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.
Golden Sky
Price Range of Common Stock
Golden Sky is a privately-held company and its securities are not listed
for quotation on the Nasdaq National Market or on a stock exchange.
Dividend Policy
Golden Sky has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends in the foreseeable
future. Any declaration and payment of dividends would be subject to the
discretion of Golden Sky's board of directors. Any future determination to pay
dividends will depend on Golden Sky's results of operations, financial
condition, capital requirements, contractual restrictions and other factors
deemed relevant at the time by its board of directors.
26
<PAGE>
THE SPECIAL MEETING
Solicitation
The accompanying proxy is solicited on behalf of Pegasus' board of
directors. In addition to the use of the mails, proxies may be solicited by
Pegasus' directors, officers and employees, without additional compensation, by
personal interview, telephone, telegram, or otherwise. Arrangements also may be
made with brokerage houses and other custodians, nominees and for the forwarding
of solicitation material to the beneficial owners of stock held of record by
such persons, and Pegasus may reimburse them for their reasonable out-of-pocket
and clerical expenses.
Voting; Record Date and Revocability of Proxies
Only holders of common stock of record at the close of business on
_____________, 2000 will be entitled to vote at the special meeting. Each record
holder of Class A common stock will be entitled to one vote per share, and each
record holder of Class B common stock will be entitled to ten votes per share.
As of the record date, there were __________ shares of Class A common stock and
4,581,900 shares of Class B common stock issued and outstanding.
The proposals to be acted on at the special meeting require the following
votes to be approved:
<TABLE>
<S> <C>
Merger with Golden Sky and amendments to the Majority of voting power of the Class A and
restricted stock plan and stock option plan. Class B common stock present at the meeting
in person or by proxy.
Amendment to certificate of incorporation Majority of voting power of all outstanding
increasing Class A common stock and non-voting Class A and Class B common stock, voting
common stock. together as a single class.
Amendment to certificate of incorporation Majority of all outstanding shares of Class A
increasing Class B common stock. common stock and Class B common stock, voting
as separate classes.
Amendment to certificate of incorporation Majority of voting power of all outstanding
increasing preferred stock. Class A and Class B common stock voting
together as a single class, and majority of all
outstanding preferred stock of all series,
voting together as a single class.
</TABLE>
If a proxy is marked as "withhold authority" or "abstain" on any matter, or
if specific instructions are given that no vote be cast on any specific matter,
the shares represented by such proxy will not be voted on such matter.
Abstentions will be included within the number of shares present at the special
meeting and entitled to vote for the purposes of determining whether such matter
has been authorized, but other types of non-votes, including non-votes by broker
nominees, will not be so included.
Shares may be voted at the special meeting in person or by proxy. All valid
proxies received prior to the special meeting will be voted. Unless marked to
the contrary, such proxies will be voted "for" the merger proposal, "for" the
approval of the amendment to the restricted stock plan, "for" the approval of
the amendment to the stock option plan, "for" the approval of the amendment to
Pegasus' certificate of incorporation increasing the authorized number of shares
of Class A common stock, "for" the approval of the amendment to Pegasus'
certificate of incorporation increasing the authorized number of shares of Class
B common stock, "for" the approval of the amendment to Pegasus' certificate of
incorporation increasing the authorized number of shares of non-voting common
stock, and "for" the approval of the amendment to Pegasus' certificate of
incorporation increasing the authorized number of shares of preferred stock. If
any other business is properly brought before the special meeting, the proxies
will be voted, to the extent permitted by the rules and regulations of the SEC,
in accordance with the judgment of the persons voting the proxies. A stockholder
who has given a proxy may revoke it at any time prior to such proxy being voted
at the special meeting by filing with Pegasus' Secretary an instrument revoking
that proxy or a duly executed proxy bearing a later date, or by attending the
special meeting in person and giving notice of such revocation. Attendance at
the special meeting does not by itself constitute revocation of a proxy.
27
<PAGE>
As a result of his beneficial ownership of all outstanding shares of
Pegasus' Class B common stock, Marshall W. Pagon, Pegasus' President, Chief
Executive Officer and Chairman of the Board, controls ____% of the voting power
of Pegasus' common stock. Mr. Pagon therefore has sufficient voting power to
approve each of the proposals without the vote of any other stockholders, except
the proposals to amend Pegasus' certificate of incorporation to increase the
authorized number of shares of Class B common stock and preferred stock. Mr.
Pagon has advised Pegasus that he intends to cause the record holders of the
Class B common stock to vote in favor of all such proposals.
Quorum
Approval of each of the proposals to be voted upon at the special meeting
requires that a quorum be present. A majority of the total voting power of all
outstanding shares of Pegasus' common stock constitutes a quorum. The holders of
shares of common stock entitled to vote at the special meeting who attend the
special meeting in person or who validly complete a proxy will be counted for
purposes of determining whether a quorum is present, regardless of how those
stockholders vote with respect to any matter. Abstentions, but not other types
of non-votes, will be counted for purposes of determining whether a quorum is
present.
Purpose of the Special Meeting
At the special meeting, holders of Class A common stock and Class B common
stock, voting together as one class, will vote upon the proposed merger of
Golden Sky and Pegasus GSS Merger Sub pursuant to the merger agreement. See
Proposal 1: Approval of Merger. The merger agreement, as amended, has been
approved by Pegasus' board of directors by unanimous vote and is attached hereto
as Annex I. Under the terms of the merger agreement, and subject to the
satisfaction of the conditions set forth in the agreement:
o Golden Sky will merge with Pegasus GSS Merger Sub and become a wholly-owned
subsidiary of Pegasus;
o with certain exceptions and subject to certain adjustments, the remaining
holders of Golden Sky's capital stock will have the right to receive shares
of Class A common stock, and holders of outstanding Golden Sky options and
warrants will have the right to receive options and warrants to purchase
shares of Pegasus' Class A common stock;
o Pegasus' board of directors will be increased to eleven members, including
two directors to be designated by certain stockholders of Golden Sky; and
o certain stockholders of Golden Sky, Marshall W. Pagon, Pegasus' President,
Chief Executive Officer and Chairman of the Board, and certain affiliates
of Mr. Pagon that hold all of the Class B common stock will amend and
restate the voting agreement, which provides for the designation and
election of directors.
In addition, certain holders of Golden Sky's capital stock have sold shares
to Pegasus for cash.
At the special meeting, in addition to voting on the approval and adoption
of the merger agreement, holders of the common stock will also vote upon the
following proposals:
o to amend the restricted stock plan to increase the number of shares of
Class A common stock that may be issued thereunder from 350,000 to 750,000
(see Proposal 2: Amendment to Restricted Stock Plan);
o to amend the stock option plan to increase the number of shares of Class A
common stock that may be issued thereunder from 1,300,000 to 3,000,000 and
to increase the maximum number of shares of Class A common stock that may
be issued under options granted to any executive officer from 550,000 to
1,000,000 (see Proposal 3: Amendment to Stock Option Plan).
o to amend the certificate of incorporation to increase the authorized number
of shares of Class A common stock from 50,000,000 shares to 250,000,000
shares (see Proposal 4: Amendment to Certificate of Incorporation to
Increase the Number of Authorized Shares of Class A Common Stock from
50,000,000 to 250,000,000 Shares);
28
<PAGE>
o to amend the certificate of incorporation to increase the authorized number
of shares of Class B common stock from 15,000,000 shares to 50,000,000
shares (see Proposal 5: Amendment to Certificate of Incorporation to
Increase the Number of Authorized Shares of Class B Common Stock from
15,000,000 to 50,000,000 Shares);
o to amend the certificate of incorporation to increase the number of
authorized shares of non-voting common stock from 20,000,000 shares to
200,000,000 shares (see Proposal 6: Amendment to Certificate of
Incorporation to Increase the Number of Authorized Shares of Non-Voting
Common Stock from 20,000,000 to 200,000,000 shares); and
o to amend the certificate of incorporation to increase the number of
authorized shares of preferred stock from 5,000,000 shares to 20,000,000
shares (see Proposal 7: Amendment to Certificate of Incorporation to
Increase the Number of Authorized Shares of Preferred Stock from 5,000,000
to 20,000,000 Shares).
If any other business is brought before the special meeting, proxies will
be voted, to the extent permitted by the rules and regulations of the SEC, in
accordance with the judgment of the persons voting the proxies. We are unaware
at this time of any other matters which will come before the special meeting.
A form of proxy for use by the holders of the common stock at the special
meeting and a return envelope for each form of proxy are enclosed with this
proxy statement/prospectus. Stockholders may revoke the authority granted by
their execution of proxies at any time before the effective exercise thereof by
filing with the Secretary of Pegasus a written notice of revocation or a duly
executed proxy bearing a later date. They may also do so by voting in person at
the special meeting. A form of proxy is attached as Annex VII hereto. Unless
otherwise indicated on the form of proxy, shares represented by any proxy in the
appropriate enclosed form, if the proxy is properly executed and received by
Pegasus prior to the special meeting and not revoked, will be voted in favor of
all the matters to be presented to the special meeting, as described above.
PROPOSAL 1: APPROVAL OF MERGER
Background of the Merger
Following its October 1996 initial public offering, Pegasus has pursued its
acquisition strategy of acquiring DIRECTV service territories from other
independent providers of DIRECTV who are members or affiliate members of the
National Rural Telecommunications Cooperative. From 1997 through 1999, Pegasus
acquired direct broadcast satellite territories and related assets in rural
portions of 34 states from 84 independent providers of DIRECTV for total
consideration of approximately $736.7 million. In 1999, after giving effect to
pending Pegasus direct broadcast satellite acquisitions, but not to the merger
with Golden Sky, Pegasus will have the exclusive right to provide DIRECTV
services to over 5.3 million U.S. television households in rural areas of 36
states serving a subscriber base, as of December 31, 1999, of approximately
752,800 direct broadcast satellite customers. Pegasus believes that there is an
opportunity for additional growth through the acquisition of DIRECTV territories
held by the other approximately 100 National Rural Telecommunications
Cooperative members and affiliate members. We also believe that as the largest
independent provider of DIRECTV services that we are well positioned to achieve
economies of scale through the acquisition of DIRECTV territories held by other
National Rural Telecommunications Cooperative members and affiliate members.
Because Golden Sky is now the second largest independent provider of
DIRECTV services, we believe that a business combination with Golden Sky
represents a unique opportunity to further our growth objectives. Golden Sky has
the exclusive right to provide DIRECTV services within certain rural territories
in the U.S. encompassing approximately 1.9 million U.S. television households in
24 states. As of December 31, 1999, Golden Sky had approximately 345,200 direct
broadcast satellite customers.
Pegasus and Golden Sky had very preliminary communications about a possible
transaction through an investment banking firm in January and February of 1999.
There were no further communications between the companies until April 19, 1999,
when Pegasus sent to Golden Sky a proposal to acquire Golden Sky. After a
conversation between Mr. Pagon and Mr. William Collatos representing Golden Sky
and additional communications through an investment banking firm, Golden Sky
rejected Pegasus' proposal. At the April 23,
29
<PAGE>
1999 meeting of the Pegasus board of directors, management of Pegasus briefed
the board of these developments and the board constituted a special acquisition
committee consisting of Mr. Pagon and Messrs. Harry Hopper and William Phoenix
to monitor negotiations with Golden Sky and make recommendations to the board
concerning any transaction. The board also authorized Pegasus to engage an
investment banking firm to be selected by management, subject to the
recommendations of the special acquisition committee, and subsequently selected
CIBC World Markets Corp. with the approval of the special acquisition committee
with Mr. Phoenix abstaining. The special acquisition committee convened on a
periodic basis as warranted by the status of communications between the
companies, and the Pegasus board of directors was briefed about the status of
the discussions at its regular meetings.
There were no further communications between Pegasus and Golden Sky until
June 30, 1999, when Mr. Pagon responded to the confidential inquiries of a media
and communications broker about the structure of a possible acquisition
transaction between Pegasus and Golden Sky. On July 12, 1999, the board of
directors of Golden Sky appointed a special acquisition committee comprised of
Mr. Collatos and Messrs. Erik Torgerson, Robert Benbow and Rodney Weary. On July
13, 1999, Golden Sky, through an intermediary, responded to Mr. Pagon's
suggestions for a transaction structure by proposing requirements for the
essential terms of a transaction. On July 29, 1999, representatives of Pegasus
and Golden Sky met to discuss a possible transaction. Communications between the
companies did not resume again until the end of September 1999, when Mr. Pagon
and Mr. Collatos began a series of periodic telephone calls and meetings to
discuss a possible transaction. The calls and meetings occurred during
September, October and November 1999. Representatives of Pegasus and Golden Sky
met to formally negotiate a transaction on December 7, 1999, December 20 and 21,
1999 and January 4, 2000.
On January 6, 2000 Golden Sky's board of directors met with members of
Golden Sky's senior management and legal advisors to review the terms of the
merger agreement that resulted from the negotiations. At the January 6, 2000
meeting, Golden Sky's board of directors unanimously approved the merger
agreement and authorized the execution of the merger agreement on such terms
with such changes as the executive officers approved.
On January 9, 2000, Pegasus' board of directors met with members of
Pegasus' senior management and legal and financial advisors to review the terms
of the merger agreement that resulted from these negotiations. At this meeting,
CIBC World Markets reviewed with Pegasus' board of directors its financial
analysis of the exchange ratio in the proposed merger and delivered to Pegasus'
board of directors its oral opinion, which was confirmed by its written opinion
dated January 10, 2000, the date of execution of the merger agreement, to the
effect that, as of the date of the opinion and based on and subject to the
matters described in the opinion, the exchange ratio in the merger was fair,
from a financial point of view, to Pegasus. This opinion relates only to the
overall exchange ratio in the merger, and not to the separate conversion ratios
that apply to each of Golden Sky's separate classes of stock. Pegasus
understands that those separate ratios were determined by discussions among
Golden Sky's stockholders to which Pegasus was not a party. See The Merger --
The Merger Agreement -- Conversion Ratios.
At the January 9, 2000 meeting, Pegasus' board of directors unanimously
approved the merger agreement and authorized the execution of the merger
agreement on such terms with such changes as the executive officers approved. On
January 10, 2000, Pegasus, GSS Merger Sub, holders of Pegasus' Class B common
stock, Golden Sky and certain of Golden Sky's stockholders entered into the
merger agreement. On January 11, 2000, Pegasus and Golden Sky publicly announced
the merger. On January 25, 2000, the parties amended the merger agreement to
provide for the allocation of the total merger consideration among the Golden
Sky stockholders. This allocation did not affect the total merger consideration.
Reasons for the Merger and Recommendations of Pegasus' Board of Directors
At the meeting held on January 9, 2000, Pegasus' board of directors, by
unanimous vote, determined that the terms of the merger agreement and the merger
are in the best interests of Pegasus and approved the merger agreement and the
merger. At this meeting, Pegasus' board of directors also recommended that
Pegasus' stockholders approve the merger proposal. In reaching these conclusions
and recommendations, Pegasus' board of directors believed that the following
factors strongly weighed in favor of the merger:
o Golden Sky's territories complement Pegasus' existing territorial
footprint, both in terms of territories adjacent to existing Pegasus
territories and new states and regions.
30
<PAGE>
o The merger is expected to result in economies of scale, including cost
savings from consolidation of duplicative personnel and other
infrastructure, and the ability to improve operating performance by
spreading fixed costs over a larger base of subscribers.
o Other synergies could potentially result from the merger, such as the
trained field management of Golden Sky.
o The merger could provide Pegasus with other, less tangible benefits of
scale, including a greater degree of national prominence.
Pegasus' board of directors also concluded that the consideration to be paid in
the merger was appropriate, particularly in light of the financial analysis
presented by CIBC World Markets, which is described in the next section.
Pegasus' board of directors believes that the only potentially negative
factor in the merger is Golden Sky's indebtedness and high degree of leverage,
and related issues concerning integration of the two companies' operations
within the constraints of their respective debt and preferred stock covenants.
See Risk Factors -- Risk Factors Relating to Golden Sky's Business -- Golden Sky
May Not Be Able To Make Principal or Interest Payments on Its Substantial Debt,
Risk Factors -- Risk Factors Associated With the Merger -- We May Not Be Able To
Integrate Golden Sky's Operations Successfully and The Merger -- Consequences
under Debt Agreements and Preferred Stock Terms. Pegasus' board of directors
concluded that the potential benefits of the merger outweigh these possible
detriments.
The amendment requires the affirmative vote of holders of shares
representing a majority of the voting power of the outstanding shares of
Pegasus' common stock present, in person or by proxy, at the meeting and
entitled to vote.
ACCORDINGLY, PEGASUS' BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE MERGER PROPOSAL.
Opinion of CIBC World Markets Corp.
Pegasus engaged CIBC World Markets to render an opinion as to the fairness,
from a financial point of view, to Pegasus of the exchange ratio in the merger.
Pegasus selected CIBC World Markets based on CIBC World Markets' reputation,
expertise and familiarity with Pegasus and its business. CIBC World Markets is
an internationally recognized investment banking firm and, as a customary part
of its investment banking business, is regularly engaged in valuations of
businesses and securities in connection with acquisitions and mergers,
underwritings, secondary distributions of securities, private placements and
valuations for other purposes. CIBC World Markets has in the past provided and
is currently providing services to Pegasus unrelated to the proposed merger, for
which services CIBC World Markets has received and will receive compensation.
William P. Phoenix, a Managing Director of CIBC World Markets, is a director of
Pegasus and, in that capacity, holds options to purchase shares of Pegasus'
Class A common stock. In the ordinary course of business, CIBC World Markets and
its affiliates may actively trade the securities of Pegasus for their own
account and for the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
On January 9, 2000, at a meeting of Pegasus' board of directors held to
evaluate the proposed merger, CIBC World Markets rendered an oral opinion, which
opinion was confirmed by delivery of a written opinion dated January 10, 2000,
the date of the merger agreement. CIBC World Market's opinion was to the effect
that, as of the date of the opinion and based on and subject to the matters
described in its opinion, the exchange ratio provided for in the merger was fair
to Pegasus from a financial point of view.
The full text of CIBC World Markets' written opinion dated January 10,
2000, which describes the assumptions made, matters considered and limitations
on the review undertaken, is attached as Annex VI and is incorporated into this
proxy statement/prospectus by reference. CIBC World Markets' opinion is directed
to Pegasus' board of directors, addresses only the fairness of the exchange
ratio from a financial point of view to Pegasus and does not constitute a
recommendation to any stockholder as to any matters
31
<PAGE>
relating to the proposed merger. This opinion also does not address the
allocation of the Pegasus stock to be issued in the merger among the various
Golden Sky stockholders. The summary of CIBC World Markets' opinion described
below is qualified in its entirety by reference to the full text of its opinion.
In arriving at its opinion, CIBC World Markets:
o reviewed the merger agreement and related documents;
o reviewed audited financial statements of Pegasus and Golden Sky for the
fiscal years ended December 31, 1997 and December 31, 1998;
o reviewed unaudited financial statements of Pegasus and Golden Sky for the
nine months ended September 30, 1999;
o reviewed financial projections prepared by the managements of Pegasus and
Golden Sky;
o reviewed the historical market prices and trading volume for Pegasus
Class A common stock;
o held discussions with the senior managements of Pegasus and Golden Sky
with respect to the business and prospects for future growth of Pegasus
and Golden Sky;
o reviewed and analyzed publicly available financial data for companies
that CIBC World Markets deemed comparable to Pegasus and Golden Sky;
o reviewed and analyzed publicly available information for transactions
that CIBC World Markets deemed comparable to the merger;
o performed discounted cash flow analyses of Pegasus and Golden Sky using
assumptions of future performance provided to CIBC World Markets by the
managements of Pegasus and Golden Sky;
o reviewed public information concerning Pegasus and affiliates of Golden
Sky; and
o performed other analyses and reviewed other information as it deemed
appropriate.
In rendering its opinion, CIBC World Markets relied on and assumed, without
independent verification or investigation, the accuracy and completeness of all
of the financial and other information that Pegasus, Golden Sky and each of
their employees, representatives and affiliates provided to or discussed with
CIBC World Markets.
With respect to forecasts of future financial condition and operating
results of Pegasus and Golden Sky and the potential synergies and strategic
benefits anticipated to result from the merger, including the amount, timing and
achievability of those potential synergies and strategic benefits, CIBC World
Markets assumed, at the direction of the managements of Pegasus and Golden Sky,
without independent verification or investigation, that the forecasts were
reasonably prepared on bases reflecting the best available information,
estimates and judgments of the managements of Pegasus and Golden Sky.
CIBC World Markets also assumed, with Pegasus' consent, that the merger
would be treated as a tax-free reorganization for federal income tax purposes
and, to the extent material to its analysis, that the merger would be
consummated on the terms described in the merger agreement, without any waiver
or modification of the material terms or conditions of the merger. CIBC World
Markets further assumed, with Pegasus' consent, without independent verification
or investigation, that the outcome of the existing litigation and related
proceedings between the National Rural Telecommunications Cooperative and
DIRECTV would not have a material adverse effect on the financial condition or
results of operations of Pegasus or Golden Sky.
CIBC World Markets did not make or obtain any independent evaluations or
appraisals of the assets or liabilities of Pegasus, Golden Sky or affiliated
entities. CIBC World Markets expressed no opinion as to the underlying
valuation, future performance or long-term viability of Pegasus or Golden Sky,
or the price at which Pegasus' Class A common stock would trade after
announcement or consummation of the merger. CIBC World Markets was not requested
to, and it did not, participate in the negotiation or structuring of the merger.
CIBC World Markets' opinion was necessarily based on the information available
to CIBC World Markets and
32
<PAGE>
general economic, financial and stock market conditions and circumstances as
they existed and could be evaluated by CIBC World Markets as of the date of the
opinion. Although subsequent developments may affect the opinion of CIBC World
Markets, it does not have any obligation to update, revise or reaffirm its
opinion. No other instructions or limitations were imposed by Pegasus' board of
directors on CIBC World Markets with respect to the investigations made or the
procedures followed by it in rendering its opinion.
The following is a summary of the material financial analyses underlying
CIBC World Markets' opinion to Pegasus' board of directors in connection with
the merger. The financial analyses summarized below include information
presented in tabular format. In order to fully understand CIBC World Markets'
financial analyses, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial analyses. You should consider the data set forth in the tables below
together with the full narrative description of the financial analyses,
including the methodologies and assumptions underlying the analyses. If you fail
to consider both the tabular data and the narrative description together, you
could have a misleading or incomplete view of CIBC World Markets' financial
analyses.
Selected Companies Analyses. CIBC World Markets compared financial and
stock market information for Pegasus and Golden Sky and the following 19
selected publicly held companies in the direct broadcast satellite, broadcast
and cable industries:
<TABLE>
<CAPTION>
Direct Broadcast
Satellite Companies Broadcast Companies Cable Companies
- ---------------------------- ---------------------------------- -----------------------------------
<S> <C> <C>
o EchoStar Communications o ACME Communication, Inc. o Adelphia Communications Corp.
Corp.
o Hughes Electronics Corp. o BHC Communications, Inc. o Cablevision Systems Corp.
o Chris-Craft Industries, Inc. o Charter Communications, Inc.
o Granite Broadcasting Corp. o Comcast Corp.
o Hearst-Argyle Television, Inc. o Cox Communications, Inc.
o Paxson Communications Corp. o Insight Communications Co., Inc.
o Sinclair Broadcast Group, Inc. o MediaOne Group, Inc.
o United Television, Inc.
o Univision Communications Inc.
o Young Broadcasting Inc.
</TABLE>
CIBC World Markets reviewed, among other things, enterprise values,
calculated as equity market value, plus debt, less cash, as multiples of
estimated calendar years 1999, 2000 and 2001 revenues and subscribers and
estimated calendar years 1999 and 2000 earnings before interest, taxes,
depreciation and amortization, commonly referred to as EBITDA. All multiples
were based on closing stock prices on January 6, 2000. Estimated financial data
for the selected companies were based on publicly available research analysts'
estimates and estimated financial data for Pegasus and Golden Sky were based on
internal estimates of the managements of Pegasus and Golden Sky.
CIBC World Markets applied a range of selected multiples of estimated
calendar years 1999, 2000 and 2001 revenues and subscribers derived from the
selected companies to corresponding financial data of Golden Sky. In reviewing
Golden Sky, the selected companies and related multiples, CIBC World Markets
noted the lawsuit between the National Rural Telecommunications Cooperative and
DIRECTV and Golden Sky's lack of rights to interactive services, limited
local-to-local benefit, current lack of access to premium programming and lack
of critical mass as compared to other sector companies. This analysis indicated
the following implied equity reference range for Golden Sky, as compared to the
equity value for Golden Sky implied by the exchange ratio in the merger based on
the closing price of Pegasus' Class A common stock on January 6, 2000:
Implied Equity Reference Equity Value for Golden Sky
Range for Golden Sky Implied by Exchange Ratio
- ------------------------------------ ----------------------------
$550.0 million -- $900.0 million $572.8 million
33
<PAGE>
CIBC World Markets also applied a range of selected multiples of estimated
calendar years 1999, 2000 and 2001 revenues and subscribers derived from the
selected digital broadcast companies to corresponding financial data of Pegasus'
direct broadcast satellite business, a range of selected multiples of estimated
calendar years 1999 and 2000 revenues and EBITDA derived from the selected
broadcast companies to corresponding financial data of Pegasus' broadcast
business and a range of selected multiples of estimated calendar year 1999
subscribers and estimated calendar years 1999, 2000 and 2001 revenues and EBITDA
derived from the selected cable companies to corresponding financial data of
Pegasus' cable business. In reviewing Pegasus, the selected companies and
related multiples, CIBC World Markets noted the lawsuit between the National
Rural Telecommunications Cooperative and DIRECTV and Pegasus' lack of rights to
interactive services, limited local-to-local benefit and current lack of access
to premium programming as compared to other sector companies. After adjustment
for after-tax corporate expenses, this analysis indicated the following
aggregate implied equity reference range for Pegasus, as compared to the closing
price of Pegasus' Class A common stock on January 6, 2000:
Implied Aggregate Equity Closing Price of Pegasus' Class A
Reference Range for Pegasus Common Stock on January 6, 2000
- ------------------------------- ----------------------------------
$95.00 -- $149.00 per share $88.13 per share
Discounted Cash Flow Analyses. CIBC World Markets performed separate
discounted cash flow analyses to estimate the present value of the unlevered,
after-tax free cash flows that Pegasus and Golden Sky could generate for fiscal
years 2000 through 2004, based on internal estimates of the managements of
Pegasus and Golden Sky, both before and after taking into account potential
synergies expected by the managements of Pegasus and Golden Sky to result from
the merger. CIBC World Markets calculated the range of estimated terminal values
for Golden Sky by applying:
o terminal value multiples ranging from 11.0x to 13.0x to Golden Sky's
projected fiscal year 2004 EBITDA,
o terminal value multiples ranging from 4.0x to 6.0x to Golden Sky's
projected fiscal year 2004 revenues,
o terminal values ranging from $3,300 to $3,500 per subscriber to Golden
Sky's projected fiscal year 2004 subscribers, and
o terminal growth rates of 6.0% to 9.0% to Golden Sky's projected fiscal year
2004 revenues.
The present value of the cash flows and terminal values were calculated
using discount rates ranging from 12.0% to 16.0%. This analysis indicated the
following implied equity reference ranges for Golden Sky, as compared to the
equity value for Golden Sky implied by the exchange ratio in the merger based on
the closing price of Pegasus' Class A common stock on January 6, 2000:
<TABLE>
<CAPTION>
Implied Equity Reference Range for Golden Sky
- ------------------------------------------------------------------------- Equity Value for Golden Sky
Without Synergies With Synergies Implied by Exchange Ratio
- --------------------------------------- -------------------------------- ----------------------------
<S> <C> <C>
$300.0 million - $600.0 million $700.0 million -- $1.2 billion $572.8 million
</TABLE>
CIBC World Markets calculated the range of estimated terminal values for
Pegasus by applying:
o terminal value multiples ranging from 11.0x to 13.0x to Pegasus' projected
fiscal year 2004 EBITDA for its direct broadcast satellite business,
o terminal value multiples ranging from 4.0x to 6.0x to Pegasus' projected
fiscal year 2004 revenues for its direct broadcast satellite business,
o terminal values ranging from $3,300 to $3,500 per subscriber to Pegasus'
projected fiscal year 2004 subscribers for its direct broadcast satellite
business,
o terminal growth rates of 7.0% to 9.0% to Pegasus' projected fiscal year
2004 revenues for its direct broadcast satellite business, and
34
<PAGE>
o terminal value multiples ranging from 12.0x to 14.0x to Pegasus' projected
2004 EBITDA for its cable and broadcast businesses.
The present value of the cash flows and terminal values were calculated using
discount rates ranging from 12.0% to 16.0% for Pegasus' direct broadcast
business, 11.0% to 13.0% for its cable business and 10.0% to 12.0% for its
broadcast business. After adjustment for after-tax corporate expenses, this
analysis indicated the following implied aggregate equity reference range for
Pegasus, as compared to the closing price of Pegasus' Class A common stock per
share on January 6, 2000:
Implied Aggregate Equity Closing Price of Pegasus' Class A
Reference Range for Pegasus Common Stock on January 6, 2000
- -------------------------------- ----------------------------------
$82.00 - $135.00 per share $88.13 per share
Exchange Ratio Analysis. CIBC World Markets calculated the aggregate
exchange ratio reference ranges implied by the results derived from the Selected
Companies Analyses and Discounted Cash Flow Analyses described above and
compared these ranges to the implied exchange ratio in the merger. This analysis
indicated the following implied approximate exchange ratio reference ranges, as
compared to the exchange ratio in the merger:
<TABLE>
<CAPTION>
Selected Discounted Cash
Companies Analysis Flow Analysis Proposed Merger
-------------------- ------------------- ----------------
<S> <C> <C> <C>
Implied Exchange Ratio Range 41.95x -- 96.32x 20.00x -- 69.51x 69.57x
Implied Exchange Ratio Range (With Synergies) N/A 60.74x -- 146.34x N/A
</TABLE>
Precedent Transactions Analysis. CIBC World Markets reviewed the purchase
prices and implied transaction multiples in the following 35 selected
transactions in the direct broadcast satellite and cable industries, which are
presented in reverse chronological order:
<TABLE>
<CAPTION>
Acquiror Target
-------- ------
<S> <C>
Direct Broadcast Satellite Companies:
o Hughes Electronics Corp. (DIRECTV) Primestar, Inc. (direct broadcast satellite business and Tempo
Satellite, Inc.)
o Hughes Electronics Corp. (DIRECTV) US Satellite Broadcasting Co., Inc.
o EchoStar Communications Corp. News Corp./MCI Worldcom, Inc. (satellite television assets)
o Pegasus Communications Corporation Digital Television Services, Inc.
Cable Companies:
o Comcast Corp. Comcast MHCP Holdings, L.L.C.
o Comcast Corp. Jones Intercable, Inc. (resulting in 100% ownership)
o Adelphia Communications Corp. Cablevision Systems Corp. (Ohio units)
o Comcast Corp. Lenfest Communications, Inc.
o Comcast Corp. Jones Intercable, Inc. (resulting in 79% ownership)
o Cox Communications, Inc. Gannett Co., Inc. (cable operations)
o Cox Communications, Inc. AT&T Corp. (selected cable systems)
o Charter Communications, Inc. Bresnan Communications Co.
o Charter Communications, Inc. Falcon Communications, L.P.
o Charter Communications, Inc. Fanch Cablevision L.P. (cable systems)
o Charter Communications, Inc. Avalon Cable LLC
o Cox Communications, Inc. TCA Cable TV, Inc.
o Mediacom LLC Triax Midwest Associates, L.P.
o Adelphia Communications Corp. Harron Communications Corp.
o Cox Communications, Inc. Media General, Inc. (cable systems)
o Adelphia Communications Corp. Century Communications Corp.
o Adelphia Communications Corp. FrontierVision Partners, L.P.
o Charter Communications, Inc. Rifkin Acquisition Partners, L.L.P.
o Charter Communications, Inc. Intermedia Capital Partners IV, L.P. (cable systems)
o Charter Communications, Inc. Helicon Partners I, L.P.
o Charter Communications, Inc. Greater Media Cablevision, Inc. (cable systems)
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Acquiror Target
-------- ------
<S> <C>
o Charter Communications, Inc. Renaissance Media Group LLC
o Charter Communications, Inc. American Cable Entertainment, LLC
o Adelphia Communications Corp. Verto Communications, Inc.
o Insight Communications Co., Inc. Coaxial Communications of Central Ohio (cable systems)
o Marcus Cable Company L.L.C Charter Communications, Inc.
o AT&T Corp. Tele-Communications, Inc.
o Avalon Cable LLC Cable Michigan, Inc.
o Comcast Corp. Jones Intercable, Inc. (resulting in 37% ownership)
o Cox Communications, Inc. Prime South Diversified, Inc.
o Charter Communications, Inc. Affiliated Investors
</TABLE>
CIBC World Markets reviewed, among other things, enterprise values in the
selected transactions as multiples of estimated calendar year 1999 subscribers
and estimated calendar years 1999, 2000 and 2001 revenues. All multiples were
based on publicly available information at the time of announcement of the
relevant transaction. CIBC World Markets then applied a range of selected
multiples of estimated calendar year 1999 subscribers and estimated calendar
years 1999, 2000 and 2001 revenues derived from the selected transactions to
corresponding financial statistics of Golden Sky. This analysis indicated the
following implied equity reference range for Golden Sky, as compared to the
equity value for Golden Sky implied by the exchange ratio in the merger based on
the closing price of Pegasus' Class A common stock on January 6, 2000:
Implied Equity Reference Equity Value for Golden Sky
Range for Golden Sky Implied by Exchange Ratio
-------------------- -------------------------
$350.0 million -- $600.0 million $572.8 million
Pro Forma Merger Analysis. CIBC World Markets analyzed the potential pro
forma effect of the merger, for estimated calendar years 2000, 2001 and 2002,
on:
o Pegasus' EBITDA, excluding subscriber acquisition costs, per subscriber,
and
o cash earnings per share.
CIBC World Markets performed this analysis based on internal estimates of the
managements of Pegasus and Golden Sky after taking into account the potential
synergies expected by the managements of Pegasus and Golden Sky to result from
the merger. This analysis indicated that the merger could be dilutive to, or
result in a decrease in, Pegasus' EBITDA, excluding subscriber acquisition
costs, per subscriber in estimated calendar years 2000 and 2001 and neutral to
Pegasus' EBITDA, excluding subscriber acquisition costs, per subscriber in
estimated calendar year 2002. This analysis also indicated that the merger could
be dilutive to Pegasus' cash earnings per share in estimated calendar year 2000
and accretive to, or result in an increase in, Pegasus' cash earnings per share
in estimated calendar years 2001 and 2002. The actual results achieved by the
combined company may vary from projected results and the variations may be
material.
Contribution Analysis. CIBC World Markets analyzed the respective
contributions of Pegasus and Golden Sky to various operational metrics of the
combined entity, based on internal estimates of the managements of Pegasus and
Golden Sky. In particular, CIBC World Markets reviewed the contributions of
Pegasus and Golden Sky to the combined company's estimated calendar years 2000,
2001 and 2002 revenues, EBITDA excluding subscriber acquisition costs, and
average subscribers, both before and after taking into account potential
synergies expected by the managements of Pegasus and Golden Sky to result from
the merger. This analysis indicated the following implied percentage
contributions for Pegasus and Golden Sky, as compared to the pro forma equity
ownership of the stockholders of Pegasus and Golden Sky immediately upon the
closing of the merger:
36
<PAGE>
<TABLE>
<CAPTION>
Pegasus Golden Sky
Percentage Contribution Percentage Contribution Synergies
------------------------- ------------------------- ----------
<S> <C> <C> <C>
Revenues:
2000 ....................... 73.5% 24.8% 1.7%
2001 ....................... 75.0% 22.3% 2.7%
2002 ....................... 74.0% 21.2% 4.8%
EBITDA (excluding subscriber
acquisition costs):
2000 ....................... 76.7% 17.1% 6.2%
2001 ....................... 76.0% 16.3% 7.7%
2002 ....................... 77.3% 16.3% 6.4%
Average Subscribers:
2000 ....................... 68.9% 29.0% 2.1%
2001 ....................... 71.2% 25.9% 2.9%
2002 ....................... 71.8% 25.1% 3.1%
</TABLE>
Pro Forma Equity Ownership in Combined Company
----------------------------------------------
Pegasus Golden Sky
------- ----------
77.4% 22.6%
Other Factors. In rendering its opinion, CIBC World Markets also reviewed
and considered other factors, including:
o selected research analysts' reports for Pegasus, including stock price
estimates of those analysts;
o historical market prices and trading volumes for Pegasus' Class A common
stock; and
o the relationship between movements in Pegasus' Class A common stock,
movements in the common stock of the selected direct broadcast satellite
companies and movements in the Nasdaq market.
The above summary is not a complete description of CIBC World Markets'
opinion to Pegasus' board of directors or the financial analyses performed and
factors considered by CIBC World Markets in connection with its opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, a fairness opinion is not readily susceptible to
summary description. CIBC World Markets believes that its analyses and the
summary above must be considered as a whole and that selecting portions of its
analyses and factors, without considering all analyses and factors, could create
a misleading or incomplete view of the processes underlying CIBC World Markets'
analyses and opinion.
In performing its analyses, CIBC World Markets considered industry
performance, general business, economic, market and financial conditions and
other matters existing as of the date of its opinion, many of which are beyond
the control of Pegasus and Golden Sky. No company, transaction or business used
in the analyses as a comparison is identical to Pegasus, Golden Sky or the
merger, and an evaluation of the results of those analyses is not entirely
mathematical. Rather, the analyses involve complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies,
business segments or transactions analyzed.
The estimates contained in CIBC World Markets' analyses and the ranges of
valuations resulting from any particular analysis are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than those suggested by its analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, CIBC World Markets' analyses and estimates are inherently subject
to substantial uncertainty.
The type and amount of the consideration payable in the merger was
determined through negotiation between Pegasus and Golden Sky and the decision
to enter into the merger was solely that of Pegasus' board
37
<PAGE>
of directors. CIBC World Markets' opinion and financial analyses were only one
of many factors considered by Pegasus' board of directors in its evaluation of
the merger and should not be viewed as determinative of the views of Pegasus'
board of directors or management with respect to the merger or the exchange
ratio provided for in the merger.
Under the terms of its engagement, Pegasus agreed to pay CIBC World Markets
upon delivery of its opinion an aggregate fee of $750,000. In addition, Pegasus
agreed to reimburse CIBC World Markets for its reasonable out-of-pocket
expenses, including reasonable fees and expenses of its legal counsel. Pegasus
also agreed to indemnify CIBC World Markets and related parties against
liabilities, including liabilities under the federal securities laws, relating
to, or arising out of, its engagement.
Interests of Certain Persons in the Merger
At the time of the closing of the sale of Golden Sky capital stock to
Pegasus for cash, Marshall W. Pagon became entitled to a seat on Golden Sky's
board of directors. When the merger becomes effective, Mr. Pagon and the holders
of the Class B common stock, certain stockholders of Golden Sky, and certain
former stockholders of Digital Television Services, Inc. will amend and restate
the voting agreement that was entered into when Pegasus acquired Digital
Television Services in 1998. According to the terms of the voting agreement, the
parties to the voting agreement will each have the right to designate one or
more directors to Pegasus' board of directors. A copy of the voting agreement to
be entered into is attached as Annex II to this proxy statement/prospectus. See
The Merger -- Voting Agreement.
When the merger becomes effective, a registration rights agreement will
also be entered into by, among others, Pegasus, certain of Golden Sky's
stockholders, and members of Golden Sky's senior management who elect to do so.
The registration rights agreement will provide certain underwritten demand,
shelf and piggyback registration rights to holders of Class A common stock
received in the merger who are parties to the agreement. See The Merger --
Registration Rights Agreement.
Ownership of Pegasus After the Merger
Upon completion of the merger, there will be outstanding ____________
shares of Pegasus' Class A common stock, assuming no additional shares are
issued before the effective time, of which approximately ____ million, or
______%, will be owned by the Golden Sky stockholders, and 4,581,900 shares of
Class B common stock, all of which will be beneficially owned by Mr. Pagon.
Giving effect to the voting rights of the Class B common stock, the Golden Sky
stockholders and Mr. Pagon will have voting power with respect to approximately
_____% and _____%, respectively, of the common stock.
38
<PAGE>
Management of Pegasus After the Merger
It is not expected that there will be any change in the executive officers
of Pegasus as a result of the merger. For information concerning the composition
of Pegasus' board of directors following the merger, see The Merger -- Voting
Agreement.
PROPOSAL 2: AMENDMENT TO RESTRICTED STOCK PLAN
Our restricted stock plan provides for the issuance of up to 350,000 shares
of Class A common stock pursuant to restricted stock awards. Awards for an
aggregate of 183,626 shares of Class A common stock have been granted thus far
under the plan.
We adopted the restricted stock plan to further our growth and success by
providing an incentive to eligible employees which increases their direct
involvement in our future success and which generally rewards these employees in
proportion to increases in location cash flows. Location cash flow means
pre-marketing cash flow less direct broadcast satellite subscriber acquisition
costs. Pre-marketing cash flow is calculated by taking on earnings and adding
back the following expenses:
o interest;
o income taxes;
o depreciation and amortization;
o non-cash charges, such as incentive compensation under restricted stock
plan and 401(k) plans;
o corporate overhead; and
o direct broadcast satellite subscriber acquisition costs, which are sales
and marketing expenses incurred to acquire new direct broadcast satellite
subscribers.
Pegasus' board of directors is proposing that the restricted stock plan be
amended to provide for an increase in the maximum number of shares of Class A
common stock which may be issued under the Plan from 350,000 to 750,000. In
proposing this amendment, Pegasus' board of directors took into consideration
the number of awards made under the plan and the substantially larger employee
base that will result upon consummation of the merger. The text of the proposed
amendment is attached as Annex III to this proxy statement/prospectus.
The amendment requires the affirmative vote of holders of shares
representing a majority of the voting power of the outstanding shares of
Pegasus' common stock present, in person or by proxy, at the meeting and
entitled to vote.
Pegasus' Board of Directors Recommends Voting "For" The Proposal To Amend
the Restricted Stock Plan To Increase the Number of Shares of Class A Common
Stock For Which Awards May Be Granted From 350,000 To 750,000.
Restricted Stock Plan
The restricted stock plan provides for four types of restricted stock
awards that are made in the form of Class A common stock:
o profit sharing awards to general managers, department managers and
corporate managers, other than executive officers;
o special recognition awards for consistency (team award), initiative (a
team or individual award), problem solving (a team or individual award)
and individual excellence;
o excess awards that are made to the extent that an employee does not
receive a matching contribution under our U.S. 401(k) Plan or Puerto Rico
401(k) Plan because of restrictions of the Internal Revenue Code of 1986,
as amended, or the Puerto Rico Internal Revenue Code, respectively; and
o discretionary restricted stock awards.
39
<PAGE>
An employee may elect to receive all or any portion of a profit sharing
award or discretionary award made after December 31, 1998 in the form of an
option in lieu of restricted stock. The number of shares of Class A common stock
subject to such an option is based on the number of shares that would have been
payable in the form of restricted stock. An executive officer may elect to
receive a discretionary award made on or after April 23, 1999 in the form of
restricted stock, an option, cash or any combination of the foregoing. However,
the cash component of a discretionary award may not exceed 331/3% of the
executive officer's base salary for the year in which the award is made, and is
paid as soon as practicable after the award is made.
Awards under the restricted stock plan, other than excess and discretionary
awards, are in proportion to annual increases in location cash flow. For this
purpose location cash flow is automatically adjusted for acquisitions such that,
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 our financial results for the comparable period of the prior year.
We believe that the restricted stock plan results in greater increases in
stockholder value than results from a conventional stock option program because
it creates a clear cause and effect relationship between initiatives taken to
increase location cash flow and the amount of incentive compensation that
results therefrom.
Although the restricted stock plan, like conventional stock option
programs, provides compensation to employees as a function of growth in
stockholder value, the tax and accounting treatments of this program are
different. For tax purposes, incentive compensation awarded under the restricted
stock plan, upon vesting, 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 does result in a charge to earnings. We believe that these
differences result in a lack of comparability between the operating cash flow of
companies that utilize conventional stock option programs and our operating cash
flow.
The table below lists the specific maximum components of the restricted
stock plan, other than excess and discretionary awards, in terms of a $1
increase in annual location cash flow.
Component Amount
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
Restricted stock grants to corporate managers
(other than executive officers) based on
the company-wide increase in annual location
cash flow ...................................... 3
Restricted stock grants to employees selected
for special recognition ........................ 5
--------
Total ........................................... 20 Cents
========
As of December 31, 1999, we had 8 general managers, 48 department managers
and 12 corporate managers. All of these employees are currently eligible to
receive profit-sharing awards under the restricted stock plan.
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;
40
<PAGE>
o excess awards made to the extent that an employee does not receive a
matching contribution under either of our 401(k) plans because of
restrictions of the Internal Revenue Code; and
o discretionary awards determined by a committee of not fewer than two
non-employee directors of Pegasus or Pegasus' entire board of directors.
Administration. The restricted stock plan is administered by committees
that are authorized by our board of directors. With respect to awards made to
executive officers, the restricted stock plan is administered by a committee of
not fewer than two directors of Pegasus. With respect to awards made to
employees who are not executive officers, the restricted stock plan is
administered by a management committee.
Class A Common Stock Available. Under the restricted stock plan, 350,000
shares of Class A common stock are available for the granting of awards,
including options granted in lieu of restricted stock. This limit is subject to
adjustment for certain changes in Pegasus' structure or capitalization, such as
stock splits, combinations, etc. As of ___________, 2000, the closing sale price
of the Class A common stock on the Nasdaq National Market was $______.
Vesting. Awards of restricted stock vest on the following schedule:
o 34% after two years of service with Pegasus, including years before the
restricted stock plan was established;
o 67% after three years of service; and
o 100% after four years of service.
However, the Committee has the authorization to accelerate the vesting of any
award when granted and at any time thereafter. A grantee also becomes fully
vested in his outstanding restricted stock award(s) upon death or disability. If
a grantee's employment is terminated for a reason other than death or disability
before completing four years of service, his unvested restricted stock awards
will be forfeited. Restricted stock is held by Pegasus prior to becoming vested.
The grantee will, however, be entitled to vote the restricted stock and receive
any dividends of record prior to vesting.
Terms and Conditions of Options Granted in Lieu of Restricted Stock. Any
option granted in lieu of restricted stock generally will be an incentive stock
option. The number of shares covered by an option granted in lieu of restricted
stock will be determined by multiplying the number of shares which would have
been subject to the restricted stock award -- had no election to receive other
than stock been made -- by the percentage of the award to be paid in the form of
an option and a conversion factor determined under a valuation formula
established by the committee, or its delegate. However, no employee may be
granted options under the restricted stock plan covering more than 50,000 shares
of Class A common stock in any calendar year, subject to adjustment for certain
changes in Pegasus' structure or capitalization.
All options granted under the restricted stock plan have a per share
exercise price of 100% of the fair market value of a share of Class A common
stock on the date of grant -- 110% in the case of an incentive stock option
granted to a more-than-10% stockholder. Options granted under the restricted
stock plan have a term of up to 10 years from the date of grant -- up to five
years in the case of an incentive stock option granted to a more-than-10%
stockholder. However, an option granted under the restricted stock plan will
terminate no later than one year after the optionee's termination of employment
on account of death or disability, or three months after the optionee's
termination of employment for a reason other than death or disability. Each
option granted under the restricted stock plan vests on the same schedule as the
restricted stock award to which the option relates, which may be accelerated by
the committee at the time of grant and at any time thereafter. The exercise
price and tax withholding obligations may be paid in various methods, including
surrendering previously acquired shares of Class A common stock.
Duration and Amendment of Restricted Stock Plan. The restricted stock plan
will terminate in September 2006. Pegasus' board of directors may amend, suspend
or terminate the restricted stock plan, and the restricted stock plan
administrator may amend any outstanding restricted stock awards, at any time,
subject to stockholder approval under certain circumstances, including increases
in the number of shares authorized under the plan. Nevertheless, certain
amendments listed in the restricted stock plan require stockholder
41
<PAGE>
approval. Examples of amendments which require stockholder approval include an
increase in the number of shares authorized under the restricted stock plan, and
a change in the class of employees eligible to receive incentive stock options
under the restricted stock plan. A grantee must approve any suspension,
discontinuance or amendment, if such action would materially impair the rights
of the grantee under any restricted stock award previously granted to him.
Restricted Stock Awards. The following special recognition awards and
discretionary awards were made under the restricted stock plan in 1999:
<TABLE>
<CAPTION>
Name and Position Amount of Award
- ----------------- ---------------
<S> <C>
Marshall W. Pagon, President and Chief Executive Officer ................................ $124,978
Ted S. Lodge, Senior Vice President, Chief Administrative Officer, General Counsel, and
Secretary .............................................................................. 104,068
Robert N. Verdecchio, Senior Vice President, Chief Financial Officer and Assistant
Secretary ............................................................................. 99,967
Howard E. Verlin, Vice President, Cable and Satellite Television and Assistant Secretary 144,974
Nicholas A. Pagon, Vice President ....................................................... --
Executive Group ......................................................................... 473,987
Non-Executive Director Group ............................................................ N/A(1)
Non-Executive Officer Employee Group .................................................... --
--------
Total ................................................................................ $473,987
========
</TABLE>
- ------------
(1) Non-executive directors are not eligible to receive awards under the
restricted stock plan.
The following profit sharing awards were made under the restricted stock
plan in 1999 on the basis of 1998 results.
<TABLE>
<CAPTION>
Name and Position Amount of Award
- ----------------- ---------------
<S> <C>
Marshall W. Pagon, President and Chief Executive Officer ................................ N/A(1)
Ted S. Lodge, Senior Vice President, Chief Administrative Officer, General Counsel, and
Secretary .............................................................................. N/A(1)
Robert N. Verdecchio, Senior Vice President, Chief Financial Officer and Assistant
Secretary ............................................................................. N/A(1)
Howard E. Verlin, Vice President, Cable and Satellite Television and Assistant Secretary N/A(1)
Nicholas A. Pagon, Vice President ....................................................... N/A(1)
Executive Group ......................................................................... N/A(1)
Non-Executive Director Group ............................................................ N/A(1)
Non-Executive Officer Employee Group .................................................... $585,760
--------
Total ................................................................................ $585,760
</TABLE>
- ------------
(1) Pegasus' executive officers and non-executive directors are not eligible to
receive profit sharing awards under the restricted stock plan.
Registration Statement on Form S-8. The 350,000 shares of Class A common
stock that may be currently granted under the restricted stock plan have been
registered for sale under the Securities Act, pursuant to a registration
statement on Form S-8. If the proposal to increase the number of shares covered
by the restricted stock plan is approved, we intend to file with the SEC an
amendment to the registration statement on Form S-8 to register the additional
shares of Class A common stock that may be granted under the plan.
PROPOSAL 3: AMENDMENT TO STOCK OPTION PLAN
The stock option plan provides for the issuance of up to 1,300,000 shares
of Class A common stock pursuant to options granted under the plan. Options to
acquire an aggregate of approximately 1,300,000 shares of Class A common stock
are currently outstanding.
We adopted the stock option plan to further our growth and success by
providing an incentive to eligible employees and directors which increases their
direct involvement in our future success.
42
<PAGE>
Pegasus' board of directors is proposing that the stock option plan be
amended to provide for an increase in the maximum number of shares of Class A
common stock which may be granted under the stock option plan from 1,300,000 to
3,000,000 and to increase the maximum number of shares of Class A common stock
that may be issued under options granted to any executive officer from 550,000
to 1,000,000. In proposing this amendment, Pegasus' board of directors took into
consideration the number of options that will need to be issued under the stock
option plan to replace outstanding options to purchase Golden Sky common stock
and the number of additional non-employee directors that will result upon
consummation of the merger. The increase is also needed because Pegasus has
already issued options covering all of the shares of Class A common stock
authorized under the plan. The text of the proposed amendment is attached as
Annex IV to this proxy statement/prospectus.
The amendment requires the affirmative vote of holders of a majority of
shares representing a majority of the voting power of the outstanding shares of
Pegasus' common stock present, in person or by proxy, at the meeting.
Pegasus' Board of Directors Recommends Voting "For" the Proposal To Amend
the Stock Option Plan To Increase the Number of Shares of Class A Common Stock
For Which Options May Be Issued From 1,300,000 To 3,000,000 And To Increase the
Maximum Number of Shares of Class A Common Stock That May Be Issued Under
Options Granted To Any Executive Officer From 550,000 To 1,000,000.
Stock Option Plan
Employees of Pegasus are eligible to receive incentive stock options, as
described in Section 422 of the Internal Revenue Code and nonqualified stock
options under the stock option plan. Incentive stock options offer employees
certain tax advantages, discussed below, which are not available under
nonqualified stock options. Employees are eligible to receive discretionary
option grants, determined at the discretion of a committee, and 100-share
formula options under the stock option plan. Non-employee directors are eligible
to receive discretionary nonqualified stock options under the stock option plan.
All of our non-employee directors and employees are eligible to receive options
under the stock option plan. After the merger, nine non-employee directors will
be eligible to receive options under the stock option plan.
Class A Common Stock Available. Options may be granted under the stock
option plan to purchase up to 1,300,000 shares of Class A common stock. However,
no employee may be granted options covering more than 3,000,000 shares of Class
A common stock under the stock option plan. Both of these limits are subject to
adjustment for certain changes in Pegasus' structure or capitalization such as
stock splits, combinations, etc.
Administration. The stock option plan is administered by a committee of not
fewer than two directors of Pegasus, if the grantee is an executive officer or a
non-employee director if the grantee is an executive officer or a non-employee
director. For an employee who is not an executive officer, the committee
consists of members of management who are appointed by Pegasus' board. Employees
and non-employee directors selected by the committee administering the stock
option plan are eligible to receive discretionary options based on an employees'
or non-employee director's contribution to the achievement of our objectives and
other relevant matters.
Terms and Conditions of Options. When an option is granted at the
discretion of the committee administering the stock option plan, the committee
determines the terms of the option, including the number of shares of Class A
common stock subject to the option and the exercise price. However, the option
term may not exceed ten years, and the per share exercise price may not be less
than the fair market value of a share of Class A common stock on the date the
option is granted. Options automatically become exercisable upon a "change of
control," as defined in the stock option plan.
The committee administering the stock option plan may also provide that the
term of an option will be shorter than it otherwise would have been if an
optionee terminates employment or board of directors membership, for any reason,
including death or disability. However, an incentive stock option will expire no
later than:
43
<PAGE>
o three months after termination of employment for a reason other than
death or disability; or
o one year after termination of employment on account of disability.
Also, no option may be exercised more than three years after an optionee's
death.
The exercise price and tax withholding obligations on exercise may be paid
in various methods, including a cash payment and/or surrendering shares subject
to the option or previously acquired shares of Class A common stock.
Terms and Conditions of Formula Options. Each full-time employee who is not
an executive officer automatically receives an option to purchase 100 shares of
Class A common stock on the later of December 18, 1998, or the date he or she
first becomes a full-time employee. Each 100-share option granted prior to June
10, 1999 is a nonqualified stock option, and each 100-share option granted after
such date generally will be an incentive stock option.
Each 100-share option has a per share exercise price of 100% of the fair
market value of a share of Class A common stock on the date of grant -- 110% in
the case of an incentive stock option granted to a more-than-10% stockholder --
and a term of ten years from the date of grant -- five years in the case of an
incentive stock option granted to a more-than 10% stockholder. However, each
100-share option will terminate no later than one year after the optionee's
termination of employment on account of death or disability, or three months
after the optionee's termination of employment for a reason other than death or
disability.
Effective April 23, 1999, each 100-share option, if not already vested,
becomes fully vested on the earlier of the date the optionee completes one year
of service, or the first anniversary of the date the option is granted. A
100-share option will also become fully vested upon a change of control, as
defined in the stock option plan, or upon the optionee's death or disability
while employed by Pegasus.
The exercise price and tax withholding obligations may be paid in various
methods, including a cash payment and/or surrender previously acquired shares of
Class A common stock.
Golden Sky Option and Warrants. Subject to the effectiveness of the merger,
certain outstanding Golden Sky options and warrants will be exercisable under
the stock option plan in accordance with their terms, and will not be subject to
any inconsistent provisions of the stock option plan.
Duration and Amendment of Stock Option Plan. The stock option plan will
terminate in September 2006 -- ten years after it was adopted by Pegasus' board
of directors. Pegasus' board of directors may amend, suspend or terminate the
stock option plan, and the committee administering the stock option plan may
amend any outstanding options, at any time. Nevertheless, certain amendments
listed in the stock option plan require stockholder approval. Examples of
amendments which require stockholder approval include an amendment increasing
the number of shares which may be subject to options, an amendment increasing
the limit on shares subject to options granted to executive officers and an
amendment increasing the duration of the stock option plan with respect to
incentive stock options. Further, an optionee must approve any suspension,
discontinuance or amendment, if such action would materially impair the rights
of the optionee under any option previously granted to him or her.
Transferability. Options granted under the stock option plan generally are
not transferable, except by will or under the laws of descent and distribution.
However, the committee has the authority to permit an optionee to transfer his
or her discretionary nonqualified stock option, for no consideration, to his or
her immediate family members or a trust or partnership for the benefit of
immediate family members.
Market Value. As of __________, 2000, the closing sale price of the Class
A common stock on the Nasdaq National Market was $________.
Federal Income Tax Treatment of Options.
Incentive Stock Options. If the requirements of Section 422 of the
Internal Revenue Code are met, an optionee recognizes no income upon the
grant or exercise of an incentive stock option, unless the alternative
minimum tax rules apply, and Pegasus is not entitled to a deduction.
44
<PAGE>
Nonqualified stock options. An optionee recognizes no income at the
time a nonqualified stock option is granted. Upon exercise of a
nonqualified stock option, the optionee recognizes ordinary income for
federal income tax purposes in an amount generally measured as the excess
of the then fair market value of Class A common stock over the exercise
price. Subject to Section 162(m) of the Internal Revenue Code, Pegasus will
be entitled to a tax deduction in the amount and at the time that an
optionee recognizes ordinary income with respect to a nonqualified stock
option.
Option Grants. As of December 31, 1999, the following options have been
granted under the stock option plan:
<TABLE>
<CAPTION>
Name and Position Number of Units(1)
- ----------------- ------------------
<S> <C>
Marshall W. Pagon, President and Chief Executive Officer ................................ 360,000
Ted S. Lodge, Senior Vice President, Chief Administrative Officer, General Counsel, and
Secretary .............................................................................. 185,000
Robert N. Verdecchio, Senior Vice President, Chief Financial Officer and Assistant
Secretary ............................................................................. 150,000
Howard E. Verlin, Vice President, Cable and Satellite Television and Assistant Secretary 175,000
Nicholas A. Pagon, Vice President ....................................................... 85,000
Executive Group ......................................................................... 955,000
Non-Executive Director Group ............................................................ 70,000
Non-Executive Officer Employee Group .................................................... N/A(2)
---------
Total ................................................................................. 1,025,000
</TABLE>
- ------------
(1) Reflects the number of shares issuable upon exercise of the option grants.
(2) Pegasus' employees who are not executive officers are not eligible to
receive options under the stock option plan.
Registration Statement on Form S-8. The 1,300,000 shares of Class A common
stock that may be currently issued under the stock option plan have been
registered for sale under the Securities Act, pursuant to a registration
statement on Form S-8. If the proposal to increase the number of shares covered
by the stock option plan is approved, we intend to file with the SEC an
amendment to the registration statement on Form S-8 to register the additional
shares of Class A common stock that may be issued pursuant to the plan.
PROPOSAL 4: AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF CLASS A COMMON STOCK FROM 50,000,000 TO 250,000,000 SHARES
Pegasus' board of directors is proposing an amendment to Article Fourth of
Pegasus' certificate of incorporation, as amended, increasing the number of
authorized shares of Class A common stock, par value $0.01 per share, from
50,000,000 to 250,000,000 shares. The text of the proposed amendment is attached
as Annex V to this proxy statement/prospectus. For convenience, Annex V reflects
the amendments proposed in Proposals 4, 5, 6 and 7, although those proposals are
not contingent on one another.
The affirmative vote of holders of a majority of the total voting power of
the outstanding shares of Class A common stock and Class B common stock voting
together as a single class, is required to approve the amendment to the
certificate of incorporation.
As of ___________, 2000, __________ shares of Class A common stock were
outstanding. After giving effect to the proposed amendments to Pegasus'
restricted stock plan and stock option plan, the approximately ____________
shares available for issuance, over ___________ shares have been reserved for
issuance, including shares to be issued in connection with Pegasus' employee
benefit plans, upon conversion of the outstanding shares of Class B common stock
and upon exercise of outstanding warrants and options issued in acquisitions.
The board of directors believes that the proposed additional 200,000,000
shares of authorized Class A common stock will provide Pegasus with needed
flexibility to issue Class A common stock for proper
45
<PAGE>
corporate purposes which may be identified in the future, such as to raise
equity capital or issue convertible debt, to make acquisitions through the
issuance of Class A common stock, to adopt additional employee benefit plans or
reserve additional shares for issuance under such plans or to effect a stock
split or stock dividend of Class A common stock. Although Pegasus continually
evaluates alternatives for raising capital and acquisition opportunities and
conducts preliminary discussions in connection with acquisitions, Pegasus has no
present agreements, arrangements or commitments with respect to any financing or
acquisition that are dependent on increasing the currently authorized number of
shares of Class A common stock. The authorization of the additional shares will
enable Pegasus to continue to consider such alternatives and opportunities and
to act promptly if appropriate circumstances arise which require the issuance of
such shares.
The authorization of additional shares of Class A common stock of Pegasus
will not, by itself, have any effect on the rights of holders of existing stock.
Depending on the circumstances, any issuance of additional shares of Class A
common stock could affect the existing holders of shares of Class A common stock
by diluting the per share earnings, book value per share and the voting power of
the outstanding shares of Class A common stock. Under Pegasus' certificate of
incorporation, Pegasus' stockholders do not have preemptive rights to acquire
capital stock which may be issued by Pegasus.
Although Pegasus' certificate of incorporation and by-laws do not have
specific provisions designed to discourage certain transactions involving a
change in control of Pegasus, its capital structure could prevent a change of
control of Pegasus. Under Pegasus' current capital structure, Mr. Pagon
beneficially owns all of the Class B common stock. The Class B common stock is
entitled to 10 votes per share. Therefore, Mr. Pagon controls the majority of
Pegasus' voting power and has the ability to prevent any reasonably foreseeable
attempt to acquire Pegasus through a merger, consolidation, sale of assets or
successful tender offer.
Although Pegasus' board of directors is not proposing the authorization of
the additional shares of Class A common stock as an "anti-takeover" device, it
is possible that such additional shares could be used to discourage or impede a
tender offer or other attempt to gain control of Pegasus. For example, in the
event of a hostile attempt to take over control of Pegasus, it may be possible
for Pegasus to impede the attempt by issuing shares of the Class A common stock,
thereby diluting the voting power of the other outstanding shares and increasing
the potential cost to acquire control of Pegasus. Alternatively, the stock could
be privately placed with purchasers who would support the board in opposing a
hostile takeover attempt. Such devices could deter certain types of transactions
that might be proposed, whether or not such transactions were favored by the
majority of the stockholders, and could enhance the ability of Pegasus' officers
and directors to retain their positions.
If the 200,000,000 additional shares of Class A common stock are
authorized, no further action or authorization by Pegasus' stockholders will be
necessary prior to the issuance of such shares of Class A common stock, except
as might be required for a particular transaction by applicable law or by
agreements with or policies of any exchange or market on which Pegasus'
securities are listed or traded. The board of directors has no present plans
with respect to the issuance of any of the additional shares of Class A common
stock proposed to be authorized.
The Board of Directors Recommends a Vote "For" Approval of the Amendment To
the Certificate of Incorporation To Increase the Number of Authorized Shares of
Class A Common Stock From 50,000,000 To 250,000,000 Shares.
PROPOSAL 5: AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF CLASS B COMMON STOCK FROM 15,000,000 TO
50,000,000 SHARES
Pegasus' board of directors is proposing an amendment to Article Fourth of
Pegasus' certificate of incorporation, as amended, increasing the number of
authorized shares of Class B common stock, par value $0.01 per share, from
15,000,000 to 50,000,000 shares. The text of the proposed amendment is attached
as Annex V to this proxy statement/prospectus. For convenience, Annex V reflects
the amendments proposed in Proposals 4, 5, 6 and 7, although those proposals are
not contingent on one another.
46
<PAGE>
The affirmative vote of holders of a majority of the total voting power of
the outstanding shares of Class A common stock and Class B common stock, voting
separately and not as a single class, is required to approve the amendment to
the certificate of incorporation.
If the 35,000,000 additional shares of Class B common stock are authorized,
no further action or authorization by Pegasus' stockholders will be necessary
prior to the issuance of such shares of Class B common stock in connection with
a stock split or dividend or similar transaction. However, any other issuance of
Class B common stock would require the approval of the holders of Class A common
stock and Class B common stock voting separately and not as a single class.
As of ___________, 2000, 4,581,900 shares of Class B common stock were
outstanding. If the board of directors decides to issue additional shares of
Class A common stock in connection with a stock split, stock dividend or similar
transaction, Pegasus' certificate of incorporation contemplates that parallel
action would be simultaneously taken with respect to the Class B common stock so
as not to affect the relative voting percentages of the holders of Class A and
Class B common stock. The purpose of the amendment is to have enough Class B
common stock available for this purpose. The board of directors has not
definitely decided to do any such transaction.
The authorization of additional shares of Class B common stock of Pegasus
will not, by itself, have any effect on the rights of holders of existing stock,
provided the issuance does not require the vote of class A common stock.
Depending on the circumstances, any issuance of additional shares of Class B
common stock could affect the existing holders of shares of Class A common stock
by diluting the per share earnings, book value per share and the voting power of
the outstanding shares of Class A common stock. Under Pegasus' certificate of
incorporation, Pegasus' stockholders do not have preemptive rights to acquire
capital stock which may be issued by Pegasus.
Although Pegasus' certificate of incorporation and by-laws do not have
specific provisions designed to discourage certain transactions involving a
change in control of Pegasus, its capital structure could prevent a change of
control of Pegasus. Under Pegasus' current capital structure, Mr. Pagon
beneficially owns all of the Class B common stock. The Class B common stock is
entitled to 10 votes per share. Therefore, Mr. Pagon controls the majority of
Pegasus' voting power and has the ability to prevent any reasonably foreseeable
attempt to acquire Pegasus through a merger, consolidation, sale of assets or
successful tender offer.
Although Pegasus' board of directors is not proposing the authorization of
the additional shares of Class B common stock as an "anti-takeover" device, it
is possible that such additional shares could be used to discourage or impede a
tender offer or other attempt to gain control of Pegasus. For example, in the
event of a hostile attempt to take over control of Pegasus, it may be possible
for Pegasus to impede the attempt by issuing shares of the Class B common stock,
thereby diluting the voting power of the other outstanding shares and increasing
the potential cost to acquire control of Pegasus. Such a device could deter
certain types of transactions that might be proposed, whether or not such
transactions were favored by the majority of the stockholders, and could enhance
the ability of Pegasus' officers and directors to retain their positions.
The Board of Directors Recommends a Vote "For" Approval of the Amendment To
the Certificate of Incorporation To Increase the Number of Authorized Shares of
Class B Common Stock From 15,000,000 To 50,000,000 Shares.
PROPOSAL 6: AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF NON-VOTING COMMON STOCK FROM 20,000,000 TO
200,000,000 SHARES
Pegasus' board of directors is proposing an amendment to Article Fourth of
Pegasus' certificate of incorporation, as amended, increasing the number of
authorized shares of non-voting common stock, par value $0.01 per share, from
20,000,000 to 200,000,000 shares. The text of the proposed amendment is attached
as Annex V to this proxy statement/prospectus. For convenience, Annex V reflects
the amendments proposed in Proposals 4, 5, 6 and 7 although those proposals are
not contingent on one another.
47
<PAGE>
The affirmative vote of holders of a majority of the total voting power of
the outstanding shares of Class A common stock and Class B common stock voting
together as a single class, is required to approve the amendment to the
certificate of incorporation.
As of ________ __, 2000, no shares of non-voting common stock were
outstanding.
The board of directors believes that the proposed additional 180,000,000
shares of authorized non-voting common stock will provide Pegasus with needed
flexibility to issue non-voting common stock for proper corporate purposes which
may be identified in the future, such as to raise equity capital or issue
convertible debt, to make acquisitions through the issuance of non-voting common
stock, to adopt additional employee benefit plans or reserve additional shares
for issuance under such plans or to pay a stock dividend of non-voting common
stock or Class A common stock. Although Pegasus continually evaluates
alternatives for raising capital and acquisition opportunities and conducts
preliminary discussions in connection with acquisitions, Pegasus has no present
agreements, arrangements or commitments with respect to any financing or
acquisition that are dependent on increasing the currently authorized number of
shares of non-voting common stock. The authorization of the additional shares
will enable Pegasus to continue to consider such alternatives and opportunities
and to act promptly if appropriate circumstances arise which require the
issuance of such shares.
The authorization of additional shares of non-voting common stock of
Pegasus will not, by itself, have any effect on the rights of holders of
existing stock. Depending on the circumstances, any issuance of shares of
non-voting common stock could affect the existing holders of shares of Class A
common stock by diluting the per share earnings, book value per share and the
voting power of the outstanding shares of Class A common stock. Under Pegasus'
certificate of incorporation, Pegasus' stockholders do not have preemptive
rights to acquire capital stock which may be issued by Pegasus.
Although Pegasus' certificate of incorporation and by-laws do not have
specific provisions designed to discourage certain transactions involving a
change in control of Pegasus, its capital structure could prevent a change of
control of Pegasus. Under Pegasus' current capital structure, Mr. Pagon
beneficially owns all of the Class B common stock. The Class B common stock is
entitled to 10 votes per share. Therefore, Mr. Pagon controls the majority of
Pegasus' voting power and has the ability to prevent any reasonably foreseeable
attempt to acquire Pegasus through a merger, consolidation, sale of assets or
successful tender offer.
If the 180,000,000 additional shares of non-voting common stock are
authorized, no further action or authorization by Pegasus' stockholders will be
necessary prior to the issuance of such shares of non-voting common stock,
except as might be required for a particular transaction by applicable law or by
agreements with or policies of any exchange or market on which Pegasus'
securities are listed or traded. The board of directors has no present plans
with respect to the issuance of any of the additional shares of non-voting
common stock proposed to be authorized.
The Board of Directors Recommends a Vote "For" Approval of the Amendment To
the Certificate of Incorporation To Increase the Number of Authorized Shares of
Non-Voting Common Stock From 20,000,000 To 200,000,000 Shares.
PROPOSAL 7: AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF PREFERRED STOCK FROM 5,000,000 TO 20,000,000 SHARES
Pegasus' board of directors is proposing an amendment to Article Fourth of
Pegasus' certificate of incorporation, as amended, increasing the number of
authorized shares of preferred stock, par value $0.01 per share, from 5,000,000
to 20,000,000 shares. The text of the proposed amendment is attached as Annex V
to this proxy statement/prospectus. For convenience, Annex V reflects the
amendments proposed in Proposals 4, 5, 6 and 7, although those proposals are not
contingent on one another.
The affirmative vote of holders of a majority of the total voting power of
the outstanding shares of Class A common stock and Class B common stock voting
together as a single class and the approval of the Series A preferred stock,
Series B junior convertible participating preferred stock, Series C convertible
preferred
48
<PAGE>
stock and Series D junior convertible participating preferred stock voting
together as a single class is required to approve this amendment to the
certificate of incorporation. Pegasus intends to solicit written consents to the
amendment directly from holders of its preferred stock. It is possible that
Pegasus will pay a consent fee in an amount to be determined to consenting
holders. No consent fee will be paid to any holder of common stock.
As of ___________, 2000, of the 5,000,000 shares of preferred stock that we
are authorized to issue, approximately 143,684 shares have been designated as
Series A preferred stock, 5,707 shares have been designated as Series B junior
convertible participating preferred stock, 3,000,000 shares have been designated
as Series C convertible preferred stock and 22,500 shares have been designated
as class D junior convertible participating preferred stock. For more
information regarding the rights, privileges and preferences of these different
series of preferred stock, see Description of Capital Stock.
Arrangements or Acquisitions. Pegasus' board of directors believes that the
proposed additional 15,000,000 shares of authorized preferred stock will provide
Pegasus with needed flexibility in pursuing future financing opportunities or
acquisitions or for such other proper corporate purposes as may be identified in
the future. Pegasus could enter into financing arrangements that involve the
issuance of depository shares representing interests in Pegasus' preferred
stock. This would serve to reduce the number of shares of preferred stock needed
for such financings. However, the issuance of depository shares is more
cumbersome and expensive to Pegasus than the issuance of preferred stock.
Pegasus has no present agreements, arrangements or commitments with respect to
any financing arrangements or acquisitions that are dependent on increasing the
currently authorized number of shares of preferred stock other than those
disclosed in Business of Pegasus -- Recent Completed and Pending Transactions.
The authorization of the additional shares will enable Pegasus to continue to
consider such alternatives and opportunities and to act promptly if appropriate
circumstances arise which require the issuance of such shares.
The authorization of additional shares of preferred stock will not, by
itself, have any effect on the rights of holders of existing stock. Depending on
the circumstances, any issuance of additional shares of preferred stock, in one
or more series, could affect the existing holders of shares of Class A common
stock, Class B common stock, Series B junior convertible participating preferred
stock and Series D junior convertible participating preferred stock by
designating preferred stock which has voting, dividend, liquidation and other
rights, privileges and preferences over the Class A common stock, the Class B
common stock, the Series B junior convertible participating preferred stock and
the Series D junior convertible participating preferred stock.
Although Pegasus' certificate of incorporation and by-laws do not have
specific provisions designed to discourage certain transactions involving a
change in control of Pegasus, its capital structure could prevent a change of
control of Pegasus. The certificate of designation for the Series A preferred
stock and Series C convertible preferred stock place certain restrictions on
Pegasus' ability to enter into a change of control transaction. See Description
of Capital Stock -- Description of Series A Preferred Stock and -- Series C
Convertible Preferred Stock. Future designations and issuances of additional
series of preferred stock could place similar or other restrictions on Pegasus'
ability to enter into change of control transactions.
Although the board of directors is not proposing the authorization of the
additional shares of preferred stock as an "anti-takeover" device, it is
possible that such preferred stock could be used to discourage or impede a
tender offer or other attempt to gain control of Pegasus, whether or not such
transactions were favored by the majority of the stockholders, and could enhance
the ability of Pegasus' officers and directors to retain their positions.
If the 15,000,000 additional shares of preferred stock authorized, no
further action or authorization by Pegasus's stockholders will be necessary
prior to the designation and issuance of such shares of preferred stock, except
as might be required for a particular transaction by applicable law or by
agreements with or policies of any exchange or market on which Pegasus'
securities are listed or traded. Pegasus' board of directors has no present
plans with respect to the designation and issuance of any of the additional
shares of preferred stock proposed to be authorized other than those disclosed
elsewhere in this proxy statement/prospectus.
Pegasus' Board of Directors Recommends a Vote "For" Approval of the
Amendment To the Certificate of Incorporation To Increase the Number of
Authorized Shares of Preferred Stock From 5,000,000 To 20,000,000 Shares.
49
<PAGE>
PROPOSAL 8: OTHER MATTERS
Pegasus' board of directors knows of no matters to be presented for action
at the special meeting other than those set forth in the attached notice and
customary procedural matters. However, if any other matters should properly come
before the meeting or any adjournments or postponements thereof, the proxies
solicited hereby will be voted on such matters, to the extent permitted by the
rules and regulations of the SEC, in accordance with the judgment of the persons
voting such proxies.
50
<PAGE>
THE MERGER
The following is a brief summary of the material provisions of the merger
agreement and related transactions and agreements, including the voting
agreement and registration rights agreement. This summary is qualified in its
entirety by reference to the full and complete text of the merger agreement, the
voting agreement and the registration rights agreement. A copy of the merger
agreement, as amended, and the form of voting agreement are attached as Annexes
I and II to this proxy statement/prospectus. All of these documents are
incorporated herein by reference.
The Merger Agreement
When the merger becomes effective, Golden Sky will become a wholly-owned
subsidiary of Pegasus.
Conversion of Golden Sky Capital Stock
When the merger becomes effective, stockholders of Golden Sky will receive
the following amount of Pegasus' Class A common stock in total:
o 6,500,000 shares, minus;
o ______ shares, based on Pegasus' cash purchase of Golden Sky stock from
Golden Sky stockholders as described below, minus;
o the number of shares covered by stock options that Pegasus will issue to
replace existing Golden Sky stock options and warrants, currently estimated
at 414,667 shares, minus;
o shares that would otherwise be issued to Golden Sky stockholders who
exercise their dissenters' appraisal rights.
The Golden Sky stockholders have also agreed to bear the costs of
investment banking, brokerage and financial advisory services to Golden Sky and
its stockholders in connection with the merger. If they do not pay these costs
before the merger becomes effective, the amount of the costs will be deducted
from the Pegasus stock received by the Golden Sky stockholders. The deduction
will be based on the average closing price of the Pegasus Class A common stock
for the last five trading days before the merger is completed.
No Pegasus stock will be issued on account of any Golden Sky stock owned by
Pegasus or held in treasury. This will not further reduce the total shares
Pegasus will issue. No Pegasus stock will be issued on account of dissenting
Golden Sky shares; this will reduce the total shares Pegasus will issue.
Pegasus may deduct, withhold, and be credited for such amounts as required
under the Internal Revenue Code or any other provision of tax law. When the
merger becomes effective, Golden Sky's stock transfer books will be closed
without any further registration of Golden Sky's capital stock on the records of
Golden Sky.
Cash Purchases of Golden Sky Stock by Pegasus
As required by the merger agreement, Pegasus purchased ________ shares of
Golden Sky's capital stock for $____ million in cash from stockholders that
Golden Sky designated to Pegasus. The purchase occurred on _______, 2000. The
amount that Pegasus paid for Golden Sky stock reduced the number of shares
Pegasus will issue to the remaining Golden Sky stockholders by _____ shares of
Pegasus Class A common stock. The reduction was based on a Pegasus per-share
price of $89.05, which was the average closing price for the five trading days
before the parties signed the merger agreement.
Conversion Ratios
The total number of shares of Pegasus' Class A common stock to be received
by each stockholder of Golden Sky will depend upon the class and series of
Golden Sky stock held, as described below.
In determining the conversion ratio for Golden Sky's Series A and Series B
convertible participating preferred stock, each share will be treated as if it
had been converted, on the closing date of the merger, into:
51
<PAGE>
o the number of shares of Golden Sky common stock into which it could be
converted in accordance with the conversion provisions of Golden Sky's
certificate of incorporation; and
o one share of Golden Sky's Series A or B redeemable preferred stock,
respectively, with a base liquidation amount equal to $100 or $200,
respectively.
For the Series A and Series B redeemable preferred stock deemed to be held
as a result of this hypothetical conversion, the stockholders will receive
shares of Pegasus' Class A common stock having a value, based upon its market
price on the closing date, equal to the liquidation preference amount of the
redeemable preferred stock as defined in Golden Sky's certificate of
incorporation. The liquidation preference amount of the Series A and B
redeemable preferred stock will consist of the base liquidation amount plus
accrued dividends.
Although there are currently no outstanding shares of Golden Sky's Series
A, B or D redeemable preferred stock, Golden Sky may be required under its
certificate of incorporation to issue shares of these series on or before the
closing date. Any shares of Series A and B redeemable preferred stock which
actually are outstanding as of the closing date, if any, will be converted into
the number of shares of Pegasus' Class A common stock having a value equal to
the redemption price of the Series A or B redeemable preferred stock,
respectively. Any outstanding shares of Series D redeemable preferred stock as
of the closing date will be converted into the number of shares of Pegasus'
Class A common stock having a value equal to the preferred liquidation
preference amount of the Series D redeemable preferred stock.
The shares of Pegasus' Class A common stock allocated as described above
will be subtracted from the total number of Pegasus' shares to be issued in the
merger transaction. The remaining shares of Pegasus' Class A common stock will
be allocated, pro rata, among:
o the outstanding shares of Golden Sky common stock;
o the shares of common stock that would be issuable upon conversion on the
closing date of the outstanding shares of Series A and B convertible
participating preferred stock and the outstanding shares of Series C senior
convertible preferred stock; and
o Golden Sky's outstanding options and warrants as if fully exercised on the
closing date.
As an example of this conversion mechanism, the table below shows how the
merger consideration would be allocated if:
o the closing date were January 10, 2000;
o approximately 6,426,000 shares of Pegasus' Class A common stock were issued
to Golden Sky's stockholders as the aggregate amount of merger
consideration, after giving effect to Golden Sky's estimated transaction
costs;
o Golden Sky's stockholders elect not to sell any shares to Pegasus prior to
the closing of the merger;
o no Series D redeemable preferred stock were issued on or before the closing
date; and
o no shares, warrants or options were converted or exercised on or before the
closing date.
This illustration is provided simply to demonstrate how the conversion process
works, and the actual amounts to be received could vary depending on the closing
date, any future issuances or conversions of Golden Sky securities, adjustments
to the merger consideration pursuant to the terms of the merger agreement and
other factors.
<TABLE>
<CAPTION>
Number of Converted Into
Golden Sky Securities Pegasus Class A Common Stock
--------------------- ----------------------------
<S> <C>
1 share of Series A convertible participating preferred stock .. 8.036 shares
1 share of Series B convertible participating preferred stock .. 9.323 shares
1 share of Series C senior convertible preferred stock ......... 7.124 shares
1 share of common stock ........................................ 6.279 shares
Options exercisable for 1 share of common stock ................ Options exercisable for 6.279 shares
Warrants exercisable for 1 share of common stock ............... Warrants exercisable for 6.279 shares
</TABLE>
52
<PAGE>
Fractional Shares
Pegasus will not issue fractional shares in the merger. Instead, Pegasus
will pay cash for the fractional amount based on the average closing price of
the Class A common stock for the last five trading days before the merger is
completed. This calculation will be based on all shares held of record by the
particular holder.
Representations and Warranties
The merger agreement contains representations and warranties relating to
the parties' business and properties and other customary matters.
Certain Covenants
The merger agreement contains certain covenants by the parties between the
date of the merger agreement and the closing of the merger. Among other things,
these covenants limit Golden Sky's ability to engage in acquisitions, amend the
Golden Sky indentures, amend the Golden Sky credit facility, declare or pay
dividends or make other distributions to its stockholders, redeem or repurchase
any stock, issue additional warrants or options to acquire stock, incur material
debt, or make any loans other than in the ordinary course.
For the period following closing, Pegasus has agreed that it will not amend
Golden Sky's certificate of incorporation or bylaws to adversely affect
indemnification rights of directors and officers of Golden Sky relating to
matters before the closing and will maintain insurance coverage for such matters
for a period of six years after the closing date of the merger.
Conditions
All obligations of the parties to the merger agreement will be subject to
the fulfillment by the other party at or prior to closing of, among other
things, each of the following conditions, any of which may be waived by the
respective party in its sole discretion, except as not permitted by law:
o the accuracy of the representations and warranties made by the other
party and the compliance by the other party with applicable covenants;
o the obtaining of all requisite consents or approval by any governmental
authority or other persons, and the expiration or termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976;
o the approval of the merger proposal by Pegasus' and Golden Sky's
stockholders;
o the absence of a material adverse change with respect to the other party;
o the absence of certain litigation or related actions affecting the other
party; and
o the delivery of certain documents by the parties.
Pegasus' obligation to effect the merger is also subject to, among other
things, the following conditions, any of which Pegasus may waive in its sole
discretion, except as prohibited by law:
o the period for the assertion of dissenters' rights pursuant to Section 262
of the Delaware General Corporation Law shall have expired and the holders
of the Golden Sky capital stock entitled to receive no more than 10.0% of
Class A common stock to be issued in the merger shall have perfected their
dissenters' appraisal rights under Section 262 of the Delaware General
Corporation Law in connection with the merger; and
o all required third party and shareholder consents having been obtained.
Golden Sky's obligation to effect the merger is also subject to, among
other things, the following conditions, any of which Golden Sky may waive in its
sole discretion, except as prohibited by law:
o The shares of Pegasus Class A common stock issuable in the merger and those
to be reserved for issuance upon exercise of the options and warrants
issued in the replacement of Golden Sky options and warrants shall have
been approved for listing on the Nasdaq National Market upon official
notice of issuance; and
53
<PAGE>
o The registration statement, of which this proxy statement/prospectus is a
part, shall have become effective and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding
for that purpose shall have been instituted.
Termination
The merger agreement may be terminated at any time prior to closing as
provided below.
o By mutual consent of Pegasus and Golden Sky.
o By either party, if any of the other parties have materially breached any
representation, warranty, or covenant contained in the merger agreement,
such other party was notified of the breach and the breach continued
without cure for 30 days after such notice.
o By Golden Sky if:
o Pegasus makes acquisitions outside the DIRECTV distribution business
that reduce its DIRECTV distribution revenues to less than 75.0% of its
total revenues,
o Pegasus disposes of any of its DIRECTV distribution business, except in
connection with the acquisition of other DIRECTV distribution businesses
if the transactions do not result in a net decrease in its total DIRECTV
distribution revenues of greater than 10.0%,
o Pegasus incurs over $50.0 million of additional debt, except in
connection with acquisitions or under its credit facility,
o Pegasus declares or pays dividends or redeems or repurchases its stock,
with certain exceptions, or
o Pegasus enters into certain other transactions involving more than $50.0
million.
o By either party, if the closing shall not have occurred on or before June
30, 2000, otherwise than because of a breach by the terminating party of
any of its representations, warranties or covenants under the merger
agreement. However, this date can be extended by Golden Sky to as late as
September 30, 2000 under certain limited circumstances.
Survival of Representations and Warranties and Covenants
The representations and warranties of the parties contained in the merger
agreement will not survive closing other than those relating to Golden Sky's
expenses, calculation of Pegasus Class A common stock to be received by Golden
Sky's shareholders and outstanding warrants and options, the validity of the
shares of Pegasus Class A common stock issued to Golden Sky and the parties'
liabilities and financial statements. All of these representations and
warranties will expire six months after the closing unless a breach is asserted
before that date. Some covenants and agreements in the merger agreement will
expire upon closing or termination of the merger agreement, and others survive
indefinitely.
Indemnification Provisions
The Golden Sky stockholders, solely out of the escrow described below, will
be required to indemnify Pegasus and its related parties from certain matters,
including the following:
o breaches of representations and warranties that survive the closing (see
-- Survival of Representations and Warranties and Covenants);
o material misstatements in and omissions from Golden Sky's 1999 annual
report on SEC Form 10-K when filed; and
o Golden Sky's liability for investment banking, brokerage and financial
advisory fees relating to the merger.
Indemnification is available to Pegasus and its related parties only for
claims asserted within six months after the closing of the merger, and is
subject to the limitations described below.
54
<PAGE>
Pegasus will be required to indemnify the Golden Sky stockholders and their
related parties from breaches of Pegasus' representations and warranties that
survive the closing (see -- Survival of Representations and Warranties and
Covenants) and from certain material misstatements in and omissions from the
registration statement of which this proxy statement/ prospectus is a part.
Indemnification is available to the Golden Sky indemnitees only for claims
asserted within six months after the closing of the merger, and is subject to
the limitations described below.
The Pegasus indemnitees and the Golden Sky indemnitees will be entitled to
indemnification only if the total of all claims exceed $25.0 million in the
aggregate, in which case indemnification will cover the first $25.0 million as
well as the excess. These limitations do not apply to breaches of
representations and warranties concerning the validity of the shares of Pegasus'
Class A common stock issued to Golden Sky or Golden Sky's outstanding warrants
and options or its liability for investment banking, brokerage and financial
advisory services relating to the merger.
In general, the indemnity obligation of the Golden Sky stockholders is
limited to 975,000 of the shares of Class A common stock issued and received in
the merger. Those shares will be deposited into escrow. Indemnity claims
established in favor of the Pegasus indemnitees will be satisfied only by
delivery of escrowed shares, valued at the average closing price for the five
trading days before the closing date of the merger. The indemnity obligation of
the Golden Sky stockholders is limited to the escrowed shares. These limitations
do not apply to breaches and representations and warranties concerning
outstanding Golden Sky warrants and options or to Golden Sky's liability for
investment banking, brokerage financial advisory services relating to the
merger. If shares of Class A common stock are required to be transferred, any
dividends and other distributions previously made on such shares are required to
be transferred as well.
Indemnity claims established in favor of the Golden Sky indemnitees will be
satisfied only by the delivery by Pegasus of additional shares of Class A common
stock, valued at the average closing price for the five trading days before the
closing date of the merger, and are limited to 975,000 shares of Class A common
stock. If Pegasus pays any dividend or makes any other distribution on its Class
A common stock before delivering additional shares in satisfaction of an
indemnity claim, it will also be required to deliver the amount of cash,
securities or other property that the Golden Sky indemnitees would have received
if they had owned the additional shares on the date of the dividend or
distribution.
Voting Agreement
In 1998, when Pegasus acquired Digital Television Services, it entered into
a voting agreement with Digital Television Services' principal stockholders.
That voting agreement will be amended at the closing of the merger to include
two of the principal Golden Sky stockholder groups, Alta Communications VI, L.P.
and two of its affiliates, and Spectrum Equity Investors L.P. and one of its
affiliates.
The amended voting agreement will cover:
o all shares of Pegasus common stock held by Mr. Pagon and entities he
controls;
o all shares of Pegasus' Class A common stock received in the merger by Alta
and Spectrum; and
o all shares of Pegasus' Class A common stock received in the 1998
acquisition of Digital Television Services, and still held, by Fleet Equity
Partners and its affiliates.
The original voting agreement also covered Pegasus Class A common stock acquired
by an affiliate of J.H. Whitney & Co. in the acquisition of Digital Television
Services. That affiliate of Whitney disposed of those shares, however, and no
longer has rights under the voting agreement. The original voting agreement also
covered Pegasus Class A common stock acquired by Columbia Capital Corporation
and one of its subsidiaries in the acquisition of Digital Television Services.
Although Columbia has disposed of those shares and has no further obligation to
vote them, Columbia still has the right to designate a member to Pegasus' board
of directors as long as certain owners of Columbia continue to own a certain
number of shares.
55
<PAGE>
Voting; Size of Pegasus' Board of Directors; Committees
During the term of the amended voting agreement, Pegasus' board of
directors will consist of at least eleven members, unless the size of the board
is reduced as provided below. Of those eleven directors:
o Mr. Pagon will designate four;
o Alta will designate one;
o Spectrum will designate one;
o Columbia will designate one;
o Fleet will designate one; and
o Three will be independent directors, as defined in the voting agreement.
Each party to the voting agreement will be required to vote all of its covered
shares for such persons' election as directors.
Mr. Pagon has advised Pegasus that he intends to designate initially
himself and Robert N. Verdecchio, both of whom are now directors, and two other
persons that he has not yet decided upon. Alta has advised Pegasus that it
intends to designate initially Robert F. Benbow. Spectrum has advised Pegasus
that it intends to designate initially William P. Collatos. Columbia's current
designee is Harry F. Hopper III. Fleet's current designee is Riordon B. Smith.
In addition, four independent directors currently serve on Pegasus' board:
James J. McEntee, III, Mary C. Metzger, Donald W. Weber and William P. Phoenix.
Finally, Michael C. Brooks, who was designated by Whitney under the original
voting agreement, continues to serve. The status of these persons under the
amended voting agreement will be determined at or before the closing of the
merger.
If any of Alta, Spectrum, Fleet or Columbia ceases to be entitled to
designate a director, such person's designee will be required to resign at Mr.
Pagon's request, and Pegasus' board of directors, excluding such person's
designee, will determine whether or not to eliminate the directorship held by
such person's designee. See -- Termination. In the event Pegasus' board of
directors determines not to so reduce its size, the nominating committee will
nominate an independent director to fill the vacancy. The parties to the voting
agreement will have no obligation to vote for any such nominee, but will be
obligated to vote for a person who satisfies the voting agreement's definition
of independent director. In the event of an increase in the size of Pegasus'
board of directors, the position so created must be filled by an independent
director, but no party to the voting agreement will have of any obligation to
vote for the nominating committee's nominee to fill such position.
The voting agreement also specifies that committees of Pegasus' board of
directors will consist of an audit committee, a compensation committee, and a
nominating committee. Each committee will consist of one director designated by
a majority of the designees of Alta, Spectrum, Fleet and Columbia, one of the
independent directors, and one director designated by Mr. Pagon.
Termination
The obligation to vote covered shares as specified in the voting agreement
will terminate as to any covered shares transferred other than to related
persons specified in the voting agreement. In addition, the right of the Alta,
Spectrum, Fleet and Columbia entities to designate a director terminates when
that entity or various persons related to such entity cease owning one-half of
the shares originally received by each of them in the Digital Television
Services merger or Golden Sky merger, as the case may be.
Alta, Spectrum, Fleet or Columbia will lose its right to designate its
director if a majority of the independent directors determine:
o that its designee commits a breach of fiduciary duty to Pegasus or a
material violation of any federal or state securities law in connection
with the purchase or sale of any of Pegasus' securities;
o that it commits a material violation of any federal or state securities law
in connection with the purchase or sale of any of Pegasus' securities;
o that it violates any noncompetition or confidentiality agreement with
Pegasus;
56
<PAGE>
o that it owns, controls, manages or is financially interested, directly or
indirectly, in any business (other than a less than 5% interest in a
publicly held company) that competes with Pegasus in any geographic area in
which it does business; but this clause will not apply to investments held
on November 8, 1997 (in the case of Fleet or Columbia) or January 10, 2000
(in the case of Alta or Spectrum), to any investment in a business that
comes into competition with Pegasus as a result of Pegasus' expansion of
its business by acquisition or otherwise, or to certain investments in
investment funds or pools that may make or hold an investment in a
competitive business, and unless prior to the exercise by a majority of the
independent directors of the right to terminate the stockholder's right to
designate a director, such stockholder is given notice of the potential
applicability of this clause, and fails to cure or modify the relationship
to the satisfaction of a majority of the independent directors;
o such stockholder violates its voting obligations under the voting
agreement; or
o such person's designee shall take or omit to take any action in his
capacity as a director of Pegasus or member of any committee of Pegasus'
board of directors in a manner materially inconsistent with the voting
agreement, and the person who has the right to designate such director has
not obtained his resignation within 30 days after being requested to do so
by Pegasus' board of directors.
In the event that the Alta and Spectrum stockholders, or the Fleet and
Columbia stockholders, lose their right to designate a director as provided
above, the voting agreement will terminate and its voting provisions and
requirements concerning the nominating committee will not apply to the next
election of directors.
Golden Sky Designees
Alta has advised Pegasus that it proposes to designate Robert F. Benbow to
Pegasus' board of directors. Spectrum has advised Pegasus that it intends to
designate William P. Collatos to Pegasus' board of directors.
Robert F. 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 general partner of Alta Communications VI,
L.P., 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. He serves as a director of
Teletrac, Inc., a major metropolitan wireless provider of location and two-way
messaging services for fleets of commercial vehicles.
William P. 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 a director of Galaxy Telecom, GP, the general
partner of Galaxy Telecom, L.P., which owns, operates and develops cable
television systems, and ITXC Corp., a global provider of Internet-based voice,
fax and voice-enabled services.
Registration Rights Agreement
On the closing date, a registration rights agreement will be entered into
which will provide certain of Golden Sky's stockholders and possibly certain
members of Golden Sky's senior management with certain registration rights,
including underwritten demand, shelf and piggyback registration rights.
Transfer Restrictions
Each person signing the registration rights agreement will agree in the
registration rights agreement not to sell, transfer or otherwise dispose of any
of the shares covered by the registration rights agreement before six months
after the closing of the merger, other than transfers to permitted transferees
or in connection with certain registered public sales.
Underwritten Demand Registrations
The holders of registration rights will be entitled to two demand
registrations, each covering sales of Class A common stock in an underwritten
public offering. Each demand registration right may be exercised between six
months after the closing of the merger and the fifth anniversary of the closing.
The holders'
57
<PAGE>
request must include at least 10% of the Class A common stock issued in the
merger. With certain exceptions, holders will not be entitled to a demand
registration for 360 days after the effective date of a registration statement
filed by Pegasus for an underwritten public offering of common stock if Pegasus
offered to include the holders' shares of Class A common stock in such
registration statement. The holders' underwritten demand registration rights are
subject to certain suspension rights by Pegasus in case of material
developments.
S-3 Shelf Registrations
Each request for a shelf registration may be exercised between six months
after the closing of the merger and the fifth anniversary of the closing date by
holders requesting to include not fewer than 100,000 shares of Class A common
stock. Any shelf registration statement will not be required to remain effective
for more than 180 days and may not be requested earlier than 180 days after the
expiration of the immediately preceding shelf registration. The holders' right
to sell under any shelf registration statement is subject to certain suspension
rights by Pegasus in case of material developments.
Piggyback Registrations
Holders will be entitled to piggyback registration rights, subject to
certain "cut-back" and similar provisions.
Expenses
Pegasus will generally bear registration expenses incurred under the
registration rights agreement with the exception of underwriting, broker and
other similar selling expenses.
Control of Registration Rights
Alta and Spectrum will have complete and absolute discretion to decide when
registration rights are to be exercised, what holders will be included or
excluded, from any registration, how many shares will be included, and how those
shares will be allocated among holders.
Consequences Under Debt Agreements and Preferred Stock Terms
Pegasus intends to designate Golden Sky and its subsidiaries as
unrestricted subsidiaries under the indentures relating to its senior notes and
under the certificate of designation relating to its Series A preferred stock.
The consequences of this are, among other things:
o that Golden Sky will not be subject to compliance with many of the
covenants and operating restrictions imposed by Pegasus' senior notes
indentures and certificate of designation;
o that neither Golden Sky's indebtedness nor the results of its operations
will enter into the determination of Pegasus' ability to incur
indebtedness, pay dividends, or make investments and other restricted
payments;
o that Pegasus and its restricted subsidiaries may not make loans to or
guarantee indebtedness of Golden Sky;
o that Golden Sky may not make loans to or guarantee indebtedness of
Pegasus or any of its restricted subsidiaries; and
o that all transactions between Pegasus and its restricted subsidiaries, on
the one hand, and Golden Sky, on the other hand, must be carried out on
arm's-length terms and, in certain cases, must be supported by a fairness
opinion from an investment banking firm of national standing.
Pegasus' existing direct broadcast satellite business is conducted by
restricted subsidiaries of Pegasus Media & Communications, Inc., a first-tier
subsidiary of Pegasus. The Pegasus Media & Communications notes indenture
requires that transactions between Pegasus Media & Communications and its
subsidiaries, on the one hand, and affiliates of Pegasus Media &
Communications, such as Golden Sky will be after the closing of the merger, on
the other hand, must be carried out on arm's length terms and, in certain
cases, must be supported by a fairness opinion from an investment banking firm
of national standing. The Golden Sky
58
<PAGE>
indentures contain similar provisions that will affect transactions between
Golden Sky and Pegasus, Pegasus Media & Communications and their subsidiaries.
Pegasus' credit facility contains similar requirements regarding arm's-length
treatment. The Golden Sky credit facility prohibits all transactions with
Pegasus except allocations of overhead and other shared expenses.
Because of these provisions, dealings between Golden Sky's direct broadcast
satellite business and Pegasus' other direct broadcast satellite businesses will
need to be carried out with a greater degree of formality than is normally the
case among wholly-owned subsidiaries of a common parent, and Pegasus will not
have the same degree of flexibility to finance Golden Sky's continuing
operations as a parent company not subject to these provisions would have. This
may adversely affect the ability of Pegasus to fully integrate Golden Sky's
business with Pegasus' other direct broadcast satellite business and may limit
the advantages of the merger.
Certain Federal Income Tax Consequences
The following summary of material federal income tax consequences is not
intended to constitute advice regarding the federal income tax consequences of
the merger. This summary does not discuss tax consequences under the laws of
states or local governments or of any other jurisdiction or tax consequences to
categories of stockholders that may be subject to special rules, such as foreign
persons, tax-exempt entities, insurance companies, financial institutions and
dealers in stocks and securities. Each holder of Pegasus' common stock and/or
Golden Sky's capital stock is urged to obtain, and should rely only upon, his or
her own tax advice.
The merger is intended to be a tax-free reorganization for federal income
tax purposes so that no gain or loss will be recognized by Golden Sky's
stockholders, Pegasus' stockholders, Golden Sky or Pegasus, except as a result
of the cash received by certain holders of Golden Sky's capital stock in
connection with the cash proceeds from their sale to Pegasus of shares of Golden
Sky's capital stock prior to the merger and any cash received in lieu of
fractional shares or a Golden Sky stockholder's exercise of appraisal rights.
Pegasus has received a tax opinion from its counsel to the effect that, for
federal income tax purposes, the merger will constitute a "reorganization"
within the meaning of Section 368(a)(2)(E) of the Internal Revenue Code of 1986,
as amended, and that the federal income tax consequences of the merger to the
Golden Sky stockholders, the Pegasus stockholders, Golden Sky and Pegasus will
be as follows:
o No gain or loss will be recognized to the stockholders of Golden Sky upon
their receipt of shares of Class A common stock in exchange for their
Golden Sky capital stock;
o The basis in the shares of Class A common stock to be received by the
stockholders of Golden Sky in the merger will be the same as their basis in
the Golden Sky capital stock exchanged therefor, reduced by the basis
allocable to fractional shares;
o The holding period of the shares of Class A common stock to be received by
the stockholders of Golden Sky will include the period during which they
held their Golden Sky capital stock exchanged therefor, provided such
Golden Sky capital stock was held as a capital asset at the time of the
merger;
o Neither Golden Sky nor Pegasus will recognize gain or loss as a result of
the merger;
o Cash payments received by holders of the Golden Sky capital stock in lieu
of a fractional share will be treated as if a fractional share of Class A
common stock had been issued in the merger and then redeemed by Pegasus for
cash. A holder of Golden Sky capital stock will generally recognize gain or
loss upon such payment, equal to the difference, if any, between such
holder's basis in the fractional share and the amount of cash received; and
o A holder of Golden Sky capital stock who exercises appraisal rights in
respect to all of such holder's shares will generally recognize gain or
loss for federal income tax purposes, measured by the difference between
the holder's basis in such shares and the amount of cash received, provided
that the payment is not essentially equivalent to a dividend within the
meaning of Section 302 of the Internal Revenue Code, which will be the case
if the dissenting stockholder does not directly or constructively own any
59
<PAGE>
shares of Class A common stock or Golden Sky capital stock after the
merger. Such gain or loss will be a capital gain or loss, provided that
such shares are held as a capital asset at the time of the merger. If the
payment is essentially equivalent to a dividend, it will be treated as
ordinary income to the extent of Golden Sky's current and accumulated
earnings and profits, and any remaining amount will first be applied
against the holder's basis in his, her, or its shares and will then be
treated as gain from the exchange of property, as described above.
The parties are not requesting a ruling from the Internal Revenue Service
in connection with the merger. The tax opinion delivered by Drinker Biddle &
Reath LLP neither binds the Internal Revenue Service or the courts nor precludes
the Internal Revenue Service from adopting a contrary position. In addition, the
tax opinion is subject to certain assumptions and qualifications and is based on
the truth and accuracy of certain representations made by Golden Sky and
Pegasus. Of particular importance are those assumptions and representations
relating to the "continuity of interest," "control" and "continuity of business
enterprise" requirements.
To satisfy the "continuity of interest" requirement, Golden Sky's
stockholders must not, pursuant to a plan or intent existing at or prior to the
merger, sell or otherwise transfer to Pegasus or a party related to Pegasus so
much of either their Golden Sky capital stock prior to the merger or their
shares of Class A common stock to be received in the merger, such that the
Golden Sky stockholders, as a group, would no longer have a substantial
proprietary interest in the Golden Sky business being conducted by Pegasus after
the merger. This includes, among other things, shares sold to Pegasus before the
merger and shares disposed of pursuant to the exercise of dissenters' or
appraisal rights, but will not include sales on the Nasdaq National Market.
Golden Sky's stockholders will generally be regarded as having retained a
substantial proprietary interest as long as the shares of Class A common stock
received in the merger, after reduction for any dispositions described above, in
the aggregate, represent at least 50% of the entire consideration received by
the Golden Sky stockholders in the merger and in sales to Pegasus in advance of
the merger. To satisfy the "continuity of business enterprise" requirement,
Pegasus must continue the historic business conducted by Golden Sky or use a
significant portion of the historic business assets of Golden Sky in a business.
To satisfy the "control" requirement, Golden Sky stockholders owning at least
80% of the total voting power of all classes of Golden Sky capital stock
entitled to vote and at least 80% of the total number of shares of all other
classes of Golden Sky capital stock, must exchange their shares of Golden Sky
capital stock for shares of Class A common stock. For purposes of the "control"
requirement, the amount of stock constituting control is measured immediately
before the transaction, and therefore, is affected by the number of shares of
Golden Sky capital stock voted against the merger by stockholders who thereafter
exercise their appraisal rights as dissenting stockholders and receive cash
provided by Pegasus.
A successful Internal Revenue Service challenge to the "reorganization"
status of the merger as a result of a failure to satisfy the "continuity of
interest," "control" or "continuity of business enterprise" requirements or
otherwise would result in a Golden Sky stockholder recognizing gain or loss with
respect to each share of Golden Sky capital stock surrendered equal to the
difference between the stockholder's basis in such share and the fair market
value, as of the effective time of the merger, of the shares of Class A common
stock received in exchange therefor. In such event, a stockholder's aggregate
basis in the shares of Class A common stock so received would equal their fair
market value and the holding period for such shares would begin the day after
the merger.
Provided that the merger qualifies as a "reorganization," holders of
warrants and options to acquire shares of Golden Sky capital stock will not
recognize income upon the conversion of the warrants and options into warrants
and options to purchase Class A common stock.
Accounting Treatment
Upon consummation of the merger, Pegasus will account for the acquisition
of Golden Sky using the purchase method of accounting. Accordingly, the
consideration to be paid in the merger will be allocated to assets acquired and
liabilities assumed based on their estimated fair values at the effective time
of the merger. Income (or loss) of Golden Sky prior to the effective time will
not be included in income of the combined company.
60
<PAGE>
Pegasus expects that as a result of the merger, Golden Sky's intangible
assets will increase by approximately $968.9 million, which will be amortized
over a ten-year period resulting in a charge to earnings of approximately $96.9
million for each of the years in the period. Additionally, Pegasus expects to
incur a one-time restructuring charge of approximately $3.0 million in
connection with the merger.
Federal Securities Law Consequences
All shares of Class A common stock received by the Golden Sky stockholders
in the merger will be freely transferable -- subject to the agreement of certain
Golden Sky stockholders, contained in the registration rights agreement, not to
sell their shares of Class A common stock before six months after the closing of
the merger. However, shares of Class A common stock received by any person who
is deemed to be an "affiliate," as such term is defined under the Securities Act
of 1933, of Golden Sky prior to the merger or of Pegasus after the merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 under the Securities Act, or Rule 144 in the case of a person who becomes an
affiliate of Pegasus, or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of Golden Sky or Pegasus generally
include individuals or entities that control, are controlled by, or are under
common control with, such party and may include certain officers and directors
of such party as well as principal stockholders of such party.
61
<PAGE>
PEGASUS' SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements, related notes thereto, pro forma
consolidated financial information and other financial information included
elsewhere in this proxy statement/prospectus and incorporated herein by
reference. The consolidated statement of operating data for the fiscal years
ended December 31, 1994, 1995, 1996, 1997 and 1998 and the consolidated balance
sheet data as of December 31, 1994, 1995, 1996, 1997 and 1998 are derived from
the audited consolidated financial statements previously filed with the SEC. The
consolidated financial data for the nine months ended September 30, 1999 have
been derived from unaudited consolidated financial information, which, in the
opinion of our management, contains all adjustments necessary for a fair
presentation of this information. The selected historical consolidated financial
data for the nine months ended September 30, 1999 should not be regarded as
indicative of the results that may be expected for the entire year. You should
also read the paragraphs that follow this table, which explain certain portions
of the table.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------
Pro Forma
Statement of Operating Data: 1994 1995 1996 1997 1998 1998
(unaudited)
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
DBS .................................... $ 174 $ 1,469 $ 5,829 $ 38,254 $ 147,142 $ 311,150
Broadcast and cable .................... 28,017 30,679 42,100 48,564 48,079 34,311
------- -------- -------- --------- --------- ---------
Total net revenues .................... 28,191 32,148 47,929 86,818 195,221 345,461
Operating expenses:
DBS
Programming, technical, and
general and administrative ........... 161 1,379 4,312 26,042 102,420 226,155
Marketing and selling ................. 50 -- 646 5,973 45,706 96,075
Incentive compensation ................ -- 9 146 795 1,159 1,616
Depreciation and amortization.......... -- 640 1,786 17,042 59,077 224,000
Broadcast and cable
Programming, technical, and
general and administrative ........... 14,856 15,823 21,006 24,099 25,613 18,056
Marketing and selling ................. 3,086 3,939 4,940 5,971 6,334 5,993
Incentive compensation ................ 432 519 839 479 292 177
Depreciation and amortization.......... 6,536 7,619 9,287 9,397 9,550 4,557
Corporate expenses ..................... 1,506 1,364 1,429 2,256 3,614 3,614
Corporate depreciation and
amortization .......................... 404 492 988 1,352 2,105 2,105
------- -------- -------- --------- --------- ---------
Income (loss) from operations.......... 1,160 364 2,550 (6,588) (60,649) (236,887)
Interest expense ........................ (5,973) (8,817) (12,455) (16,094) (44,604) (116,146)
Interest income ......................... -- 370 232 1,539 2,036 3,579
Other expenses, net ..................... (65) (44) (171) (724) (1,523) (1,115)
Gain on sale of cable systems ........... -- -- -- 4,451 24,726 --
------- -------- -------- --------- --------- ---------
Loss before income taxes .............. (4,878) (8,127) (9,844) (17,416) (80,014) (350,569)
Provision (benefit) for income taxes..... 140 30 (120) 200 (896) (896)
------- -------- -------- --------- --------- ---------
Loss before extraordinary items ........ (5,018) (8,157) (9,724) (17,616) (79,118) (349,673)
Extraordinary gain (loss) from
extinguishment of debt, net ............ (633) 10,211 (250) (1,656) -- --
------- -------- -------- --------- --------- ---------
Net income (loss) ..................... (5,651) 2,054 (9,974) (19,272) (79,118) (349,673)
Preferred stock dividends ............. -- -- -- 12,215 14,763 35,620
------- -------- -------- --------- --------- ---------
Net income (loss) applicable to
common shares ........................ ($ 5,651) $ 2,054 ($ 9,974) ($ 31,487) ($ 93,881) ($ 385,293)
======= ======== ======== ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Loss per common share:
Loss before extraordinary
items ................................ $ 1.56) $ 3.02) $ 6.64) $ 16.77)
Extraordinary item .................... ( 0.04) ( 0.17) -- --
-------- --------- --------- ---------
Loss per common share ................. $ 1.60) $ 3.19) $ 6.64) $ 16.77)
======== ========= ========= =========
Weighted average shares
outstanding (000's) .................. 6,240 9,858 14,130 22,969
======== ========= ========= =========
Other Data:
Pre-marketing cash flow:
DBS .................................... $ 13 $ 90 $ 1,517 $ 12,212 $ 44,722 $ 84,995
Broadcast and cable .................... 10,075 10,917 16,154 18,494 16,132 10,262
------- -------- -------- --------- --------- ---------
Total pre-marketing cash flow .......... $10,088 $ 11,007 $ 17,671 $ 30,706 $ 60,854 $ 95,257
======= ======== ======== ========= ========= =========
Location cash flow ...................... $10,038 $ 11,007 $ 17,025 $ 24,733 $ 15,148 ($ 818)
Operating cash flow ..................... 8,100 9,287 15,596 22,477 11,534 (4,432)
Capital expenditures .................... 1,264 2,640 6,294 9,929 12,400 13,735
Net cash provided by (used for):
Operating activities ................... 4,103 5,783 3,059 8,478 (21,962) NA
Investing activities ................... (3,571) (6,047) (81,179) (142,109) (101,373) NA
Financing activities ................... (658) 10,859 74,727 169,098 133,791 NA
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September
30,
-----------------------------
Pro Forma
Statement of Operating Data: 1999 1999
(unaudited) (unaudited)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Net revenues:
DBS .................................... $ 198,181 $ 320,585
Broadcast and cable .................... 41,382 26,512
--------- ---------
Total net revenues .................... 239,563 347,097
Operating expenses:
DBS
Programming, technical, and
general and administrative ........... 137,891 240,535
Marketing and selling ................. 88,720 149,606
Incentive compensation ................ 1,140 1,636
Depreciation and amortization.......... 62,334 173,043
Broadcast and cable
Programming, technical, and
general and administrative ........... 23,516 15,920
Marketing and selling ................. 4,952 4,448
Incentive compensation ................ 397 202
Depreciation and amortization.......... 8,827 3,801
Corporate expenses ..................... 4,316 4,316
Corporate depreciation and
amortization .......................... 2,195 2,195
--------- ---------
Income (loss) from operations.......... (94,725) (248,605)
Interest expense ........................ (47,541) (87,810)
Interest income ......................... 1,055 3,187
Other expenses, net ..................... (1,449) (1,584)
Gain on sale of cable systems ........... -- --
--------- ---------
Loss before income taxes .............. (142,660) (334,812)
Provision (benefit) for income taxes..... (4,031) (4,031)
--------- ---------
Loss before extraordinary items ........ (138,629) (330,781)
Extraordinary gain (loss) from
extinguishment of debt, net ............ -- --
--------- ---------
Net income (loss) ..................... (138,629) (330,781)
Preferred stock dividends ............. 12,400 28,043
--------- ---------
Net income (loss) applicable to
common shares ........................ ($ 151,029) ($ 358,824)
========= =========
Loss per common share:
Loss before extraordinary
items ................................ $ 8.13) $ 13.98)
Extraordinary item .................... -- --
--------- ---------
Loss per common share ................. $ 8.13) $ 13.98)
========= =========
Weighted average shares
outstanding (000's) .................. 18,579 25,667
========= =========
Other Data:
Pre-marketing cash flow:
DBS .................................... $ 60,290 $ 80,050
Broadcast and cable .................... 12,914 6,144
--------- ---------
Total pre-marketing cash flow .......... $ 73,204 $ 86,194
========= =========
Location cash flow ...................... ($ 15,516) ($ 63,412)
Operating cash flow ..................... (19,832) (67,728)
Capital expenditures .................... 10,700 9,413
Net cash provided by (used for):
Operating activities ................... (67,257) NA
Investing activities ................... (120,409) NA
Financing activities ................... 155,917 NA
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of September 30,
------------------------------------------------------------- ----------------------------
Pro Forma
1994 1995 1996 1997 1998 1999 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data: (unaudited) (unaudited)
Cash and cash equivalents .............. $ 1,380 $21,856 $ 8,582 $ 45,269 $ 75,985 $ 24,736 $ 570,878
Working capital (deficiency) ........... (23,074) 17,566 6,430 32,347 37,889 (16,617) 511,931
Total assets ........................... 75,394 95,770 173,680 380,862 886,310 902,904 2,836,383
Total debt (including current) ......... 61,629 82,896 115,575 208,355 559,029 624,874 1,122,005
Total liabilities ...................... 68,452 95,521 133,354 239,234 699,144 775,134 1,647,580
Redeemable preferred stock ............. -- -- -- 111,264 126,028 138,428 138,428
Convertible preferred stock ............ -- -- -- -- -- -- 328,732
Minority interest ...................... -- -- -- 3,000 3,000 3,000 3,000
Total common stockholders' equity
(deficit) ............................. 6,942 249 40,326 27,364 58,138 (13,658) 718,643
</TABLE>
The pro forma income statement and other data for the year ended December
31, 1998 and the nine months ended September 30, 1999 include our completed and
pending acquisitions and sales, the exchange of Pegasus' notes, closing of the
new Pegasus Media & Communications credit facility, the convertible preferred
stock offering and the merger with Golden Sky as if they had all occurred in the
beginning of such periods. The pro forma balance sheet data as of September 30,
1999 includes the acquisitions completed after September 30, 1999, the
acquisitions pending as of the same date, the investment in Personalized Media,
the exchange of Pegasus' notes, closing of the new Pegasus Media &
Communications credit facility, the convertible preferred stock offering and the
merger with Golden Sky as if such events had occurred on such date.
The pro forma income statement and other data for the year ended December
31, 1998 do not include the $24.7 million gain from the completed sale of our
New England cable systems. The pro forma income statement data for the year
ended December 31, 1998 and the nine months ended September 30, 1999 does not
include the $88.3 million gain from the pending sale of our Puerto Rico cable
system. Additionally, the pro forma income statement data for the year ended
December 31, 1998 and the nine months ended September 30, 1999 do not include
the $13.4 million and $12.9 million extraordinary net loss from the
extinguishment of debt, respectively.
In this section we use the terms pre-marketing cash flow and location cash
flow. Pre-marketing cash flow is calculated by taking our earnings and adding
back the following expenses:
o interest 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; and
o direct broadcast satellite subscriber acquisition costs, which are sales
and marketing expenses incurred to acquire new direct broadcast satellite
subscribers.
Location cash flow is pre-marketing cash flow less direct broadcast
satellite subscriber acquisition costs.
Pre-marketing cash flow and location cash flow are not, and should not be
considered, alternatives to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under U.S. generally accepted
accounting principles. Pre-marketing cash flow and location cash flow also do
not necessarily indicate whether our cash flow will be sufficient to fund
working capital, capital expenditures, or to react to changes in Pegasus'
industry or the economy generally. We believe that pre-marketing cash flow and
location cash flow are important, however, for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to monitor our
financial performance and debt leverage.
63
<PAGE>
GOLDEN SKY'S SELECTED HISTORICAL AND
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table presents Golden Sky's financial and operating
information for the periods indicated. The historical financial information
presented below as of and for the periods ended December 31, 1996, 1997 and 1998
was taken from Golden Sky's audited consolidated financial statements. The pro
forma income statement and other data for the year ended December 31, 1998 give
effect to material direct broadcast satellite acquisitions Golden Sky completed
during 1998, the July 1998 offering of Golden Sky Systems' senior subordinated
notes due 2006, and the February 1999 offering of Golden Sky DBS's senior notes
due 2007, as if these events had occurred at the beginning of 1998. The pro
forma income statement and the other data for the nine months ended September
30, 1999 give effect to the February 1999 offering of Golden Sky DBS's senior
notes due 2007 as if it had occurred at the beginning of 1999.
Household and subscriber data presented below reflect 100% of the
households and subscribers comprising Golden Sky's rural DIRECTV markets,
including one rural DIRECTV market in which Golden Sky acquired less than 100%
ownership. In that market, Golden Sky acquired approximately 76% ownership.
Golden Sky received 100% of the revenue generated by all subscribers in Golden
Sky's rural DIRECTV markets.
The following should be read in conjunction with Golden Sky's consolidated
financial statements and the notes to these financial statements and other
financial information, which are incorporated herein by reference, and Golden
Sky Management's Discussion and Analysis of Financial Condition and Results of
Operation.
<TABLE>
<CAPTION>
Inception Year Ended Nine Months Ended
Through Year Ended December 31, 1998 September 30, 1999
December 31, December 31, --------------------------- --------------------------
1996 1997 Historical Pro Forma Historical Pro Forma
-------------- -------------- ------------ ------------- ------------- -----------
(Unaudited) (Unaudited) (Unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenue:
DBS services ............................. $ 219 $ 16,452 $ 74,910 $ 86,786 $ 96,612 $ 96,612
Lease and other .......................... 36 944 1,014 1,140 545 545
----------- ---------- ---------- ---------- ---------- ----------
Total revenue .......................... 255 17,396 75,924 87,926 97,157 97,157
Costs and Expenses: .......................
Cost of DBS services ..................... 130 9,304 45,291 52,861 61,205 61,205
System operations ........................ 26 3,796 11,021 12,843 14,321 14,321
Sales and marketing ...................... 73 7,316 32,201 32,600 49,903 49,903
General and administrative ............... 1,035 2,331 7,431 7,470 10,994 10,994
Depreciation and amortization ............ 97 7,300 23,166 29,475 26,564 26,564
----------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses ............... 1,361 30,047 119,110 135,249 162,987 162,987
----------- ---------- ---------- ---------- ---------- ----------
Operating loss ............................ (1,106) (12,651) (43,186) (47,323) (65,830) (65,830)
Net interest expense ...................... (61) (3,206) (18,965) (44,506) (31,095) (32,843)
Other non-operating expenses .............. -- -- -- -- (138) (138)
----------- ---------- ---------- ---------- ---------- ----------
Loss before extraordinary charge .......... (1,167) (15,857) (62,151) (91,829) (97,063) (98,811)
Extraordinary charge on early
retirement of debt ....................... -- -- (2,577) -- (2,935) --
----------- ---------- ---------- ---------- ---------- ----------
Net loss .................................. (1,167) (15,857) (64,728) (91,829) (99,998) (98,811)
Preferred stock dividend requirements...... -- (7,888) (14,855) (14,855) (13,203) (13,203)
----------- ---------- ---------- ---------- ---------- ----------
Net loss attributable to common
stockholders .......................... $ (1,167) $ (23,745) $ (79,583) $ (106,684) $ (113,201) $ (112,014)
=========== ========== ========== ========== ========== ==========
Other Financial Data
EBITDA .................................... $ (1,009) $ (5,351) $ (20,020) $ (17,848) $ (39,266) $ (39,266)
Net cash used in operating activities ..... (790) (3,111) (36,589) NA (58,170) NA
Net cash used in investing activities ..... (3,231) (120,729) (159,921) NA (10,821) NA
Net cash provided by financing
activities ............................... 4,500 136,997 187,362 NA 70,411 NA
Capital expenditures ...................... 105 998 3,317 NA 3,075 NA
Aggregate purchase price of
acquisitions ............................. 5,256 129,725 124,844 124,844 38,703 38,703
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Inception Year Ended Nine Months Ended
Through Year Ended December 31, 1998 September 30, 1999
December 31, December 31, ----------------------------- ---------------------------
1996 1997 Historical Pro Forma Historical Pro Forma
-------------- -------------- -------------- ------------- -------------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating Data
Households at end of period ............. 22,000 1,135,000
Subscribers acquired in acquisitions .... 3,000 65,300 1,727,000 1,727,000 1,861,000 1,861,000
Subscribers added in existing rural 54,900 54,900 18,200 18,200
DIRECTV markets ........................ 100 21,500
Subscribers at end of period ............ 3,100 89,900 77,200 77,200 80,400 80,400
SAC per gross subscriber added .......... $ 290 $ 280 222,000 222,000 320,600 320,600
Penetration at end of period ............ 14.1% 7.9% $ 320 NA $ 395 NA
12.9% 12.9% 17.2% 17.2%
</TABLE>
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
----------------------------------------- ------------------
1996 1997 1998 1999
----------- ----------- ------------- ------------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents .............. $ 479 $ 13,636 $ 4,488 $ 5,908
Restricted cash:
Current ............................... -- -- 28,083 23,612
Long-term ............................. -- -- 23,534 --
Working capital ........................ (1,948) 3,843 15,244 15,142
Total assets ........................... 6,383 156,240 328,099 318,089
Total debt ............................. 4,450 69,113 278,204 365,856
Stockholders' equity (deficit) ......... (1,166) (24,912) (104,470) (217,587)
</TABLE>
Restricted cash represents the amount Golden Sky placed in escrow to fund
the first four scheduled interest payments on Golden Sky Systems' 12 3/8% senior
subordinated notes due 2006. It also includes $5.3 million as of December 31,
1998 that was deposited with the administrative agent under Golden Sky Systems'
credit facility to fund a contingent reduction of availability under the term
loan facility. This contingent reduction did not occur as a result of an
amendment to Golden Sky's credit facility.
EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges, extraordinary items and non-recurring charges.
EBITDA is not a measure of performance under generally accepted accounting
principles and should not be construed as a substitute for consolidated net
income or loss as a measure of performance, or as a substitute for cash flow as
a measure of liquidity. Nevertheless, Golden Sky believes that EBITDA is a
commonly recognized measure of performance in the communications industry and is
the basis for many of Golden Sky's financial covenants. As a result, investors
may use this data to analyze and compare other communications companies with
Golden Sky in terms of operating performance, leverage and liquidity. Further,
Golden Sky believes that EBITDA provides useful information regarding an
entity's ability to incur and service debt. Changes in Golden Sky's EBITDA may
indicate changes in its free cash flows available to incur and service debt and
cover fixed charges. However, EBITDA is not intended to represent cash flows for
the period and should not be considered in isolation or as a substitute for
measure of performance determined in accordance with generally accepted
accounting principles. EBITDA, as Golden Sky calculates it, is not necessarily
comparable to similarly captioned amounts of other companies.
Subscriber acquisition costs represent subscriber acquisition costs on a
per gross new subscriber activation basis. This excludes acquired subscribers
and does not net out disconnected subscribers.
65
<PAGE>
GOLDEN SKY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of Golden Sky's historical consolidated
results of operations, liquidity and capital resources without giving effect to
the merger. This discussion should be read in conjunction with Golden Sky's
consolidated financial statements and the related notes to those financial
statements, which are incorporated in this proxy statement/prospectus by
reference.
Overview
Company History
Golden Sky is the second largest independent provider of DIRECTV
programming in rural markets in the United States. As of December 31, 1999,
Golden Sky was the exclusive provider of DIRECTV programming services to
approximately 345,200 subscribers in its rural markets.
DIRECTV, a division of Hughes Electronics Corporation, is one of two direct
broadcast satellite companies in the United States. Direct broadcast satellite
providers deliver digital television programming and related services to
subscribers via satellite. Golden Sky provides DIRECTV programming services in
rural markets in the United States as a non-voting affiliate of the National
Rural Telecommunications Cooperative. The National Rural Telecommunications
Cooperative is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in rural America. Under a
1992 agreement with DIRECTV, the National Rural Telecommunications Cooperative
acquired exclusive rights for its members and affiliates to distribute DIRECTV
programming services in approximately 250 rural markets in the United States,
representing approximately 9.0 million households, or about 9% of total U.S.
television households. Since Golden Sky's formation in June 1996, it has
acquired the exclusive right to provide DIRECTV programming in 57 rural markets
in 24 states serving approximately 1.9 million households and 141,400
subscribers. The aggregate purchase price for these acquisitions totaled
approximately $298.5 million, or about $160 per household.
Golden Sky has sought to create a strong local presence in each of its
markets and attempts to increase its subscriber base through increased
penetration of its rural DIRECTV markets. Golden Sky has established
approximately 70 offices in its territories and dealer relationships with
approximately 450 local retailers of direct broadcast satellite equipment.
During the nine months ended September 30, 1999, Golden Sky acquired nine
rural DIRECTV markets. These markets included approximately 134,000 households
and served approximately 18,200 subscribers as of the dates of acquisition. The
aggregate purchase price for these recent acquisitions, including direct
acquisition costs, approximated $38.7 million. While Golden Sky continues to
evaluate acquisition opportunities and expects to enter into future agreements
to purchase additional rural DIRECTV markets consistent with its growth
strategy, Golden Sky's pace of future acquisitions may decrease in the near
term. Golden Sky expects that its pace of acquisitions will be slower due to,
among other factors, a reduction in the number of attractive acquisition
opportunities, increases in sellers' price expectations and capital constraints.
EBITDA
EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges, extraordinary items and non-recurring charges.
EBITDA is not a measure of performance under generally accepted accounting
principles and should not be construed as a substitute for consolidated net
income or loss as a measure of performance, or as a substitute for cash flow as
a measure of liquidity. Nevertheless, Golden Sky believes that EBITDA is a
commonly recognized measure of performance in the communications industry. Many
of Golden Sky's financial covenants are also based upon EBITDA. As a result,
investors may use this data to analyze and compare other communications
companies with Golden Sky in terms of operating performance, leverage and
liquidity. Further, Golden Sky believes that EBITDA provides useful information
regarding an entity's ability to incur and service debt. Changes in Golden Sky's
EBITDA may indicate changes in its free cash flows available to incur and
service debt and cover fixed charges. However, EBITDA
66
<PAGE>
is not intended to represent cash flows for the period and should not be
considered in isolation or as a substitute for measures of performance
determined in accordance with generally accepted accounting principles. EBITDA,
as Golden Sky calculates it, is not necessarily comparable to similarly
captioned amounts of other companies.
During the nine months ended September 30, 1999 Golden Sky:
o used net cash of $58.2 million in operating activities;
o used net cash of $10.8 million in investing activities; and
o provided net cash of $70.4 million from financing activities.
During the nine months ended September 30, 1998 Golden Sky:
o used net cash of $25.7 million in operating activities;
o used net cash of $113.8 million in investing activities; and
o provided net cash of $156.8 million from financing activities.
Churn
Golden Sky's rate of subscriber disconnect, or churn, has increased in
recent periods on both an average monthly and last twelve months basis. During
the nine months ended September 30, 1999, Golden Sky's average monthly churn
approximated 1.8%, compared to 0.8% during the same period of 1998. For the
twelve-month periods ended September 30, 1999 and 1998, Golden Sky's churn rate
approximated 13.9% and 7.6%, respectively. Golden Sky's increased churn rate has
resulted from several factors, many of which are non-recurring and external in
nature. Those factors have included, but are not limited to, the following:
o involuntary disconnects for non-payment of subscribers attracted to Golden
Sky's service during the first half of 1999 by DIRECTV's free-programming
promotions;
o voluntary disconnects by disenchanted subscribers who were adversely
affected by the termination of delivery of certain distant broadcast
network services in January and July 1999 as a result of an agreement
between DIRECTV and the National Association of Broadcasters;
o higher subscriber turnover among former Primestar subscribers; and
o decreases in up-front equipment and installation costs to new subscribers,
which has had the effect of making Golden Sky's service more affordable for
potentially less credit-worthy customers.
As a result of the factors described above, Golden Sky anticipates that it
may experience higher churn rates for at least the next six months. However, as
previously described, many of the factors that have contributed to Golden Sky's
recent higher churn are not expected to recur. Consequently, while there can be
no assurance, Golden Sky expects that its rate of subscriber churn will approach
historical levels during the latter half of 2000.
As a result of Golden Sky's historical and anticipated significant growth
rate, its historical operating results may not be comparable from period to
period.
67
<PAGE>
Results of Operations
The following table presents some of the items from Golden Sky's
consolidated statements of operations as a percentage of total revenue for the
periods noted.
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
Inception To December 31, September 30,
December 31, --------------------------- ---------------------------
1996 1997 1998 1998 1999
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
DBS services ............................. 85.9% 94.6% 98.7% 98.5% 99.4%
Lease and other .......................... 14.1 5.4 1.3 1.5 0.6
------- ------ ------ ----- -----
Total revenue ............................ 100.0 100.0 100.0 100.0 100.0
Costs and Expenses:
Costs of DBS services .................... 51.0 53.5 59.7 58.5 63.0
System operations ........................ 10.2 21.8 14.5 14.4 14.7
Sales and marketing ...................... 28.6 42.0 42.4 38.4 51.4
General and administrative ............... 405.9 13.4 9.8 9.3 11.3
Depreciation and amortization ............ 38.0 42.0 30.5 31.1 27.4
------- ------ ------ ----- -----
Total costs and expenses ................. 533.7 172.7 156.9 151.7 167.8
------- ------ ------ ----- -----
Operating loss ........................... (433.7) (72.7) (56.9) (51.7) (67.8)
Net interest expense and other ........... ( 23.9) (18.4) (25.0) (21.8) (32.1)
------- ------ ------ ----- -----
Loss before extraordinary charge ......... (457.6)% (91.1)% (81.9)% (73.5)% (99.9)%
======= ====== ====== ===== =====
</TABLE>
Revenue. Golden Sky earns revenue by providing DIRECTV programming services
to subscribers within its rural DIRECTV markets. DBS services revenue includes
any combination of various monthly program service plans, additional monthly
premium channel program upgrades, seasonal sports programming packages, one-time
event programming on a pay-per-view basis and miscellaneous fee revenue related
to providing programming to subscribers. Lease and other revenue principally is
comprised of revenue from the rental of direct broadcast satellite equipment to
subscribers.
Costs of DBS Services. Golden Sky's largest cost of providing service to
its subscribers is the wholesale cost of DIRECTV programming and related
services. The principal components of programming costs include miscellaneous
service fees and programming costs paid to the National Rural Telecommunications
Cooperative and a 5% royalty based on programming revenue paid to DIRECTV.
System Operations. System operations expenses include costs of Golden Sky's
national call center operations, field office operations and other subscriber
service expenses. Golden Sky expects that these expenses will increase to the
extent it continues to make acquisitions and open additional, or expand
existing, field offices. However, many of these costs are fixed in nature and
Golden Sky does not expect that these expenses will increase in direct
proportion to revenue.
Sales and Marketing. Sales and marketing expenses include advertising,
promotional expenses, marketing personnel expenses, commissions paid to Golden
Sky's employees and outside sales agents, net equipment and installation costs
and other marketing overhead costs. Golden Sky subsidizes the cost to the
consumer of direct broadcast satellite equipment and the cost of installation of
direct broadcast satellite equipment. Equipment and installation revenues and
related expenses are recognized upon the delivery and installation of direct
broadcast satellite equipment. Net transaction costs associated with the sale
and installation of direct broadcast satellite equipment are reported as a
component of sales and marketing expenses in Golden Sky's statement of
operations. Golden Sky invests significantly to develop its sales and
distribution systems and to acquire new subscribers. A large part of Golden
Sky's sales and marketing expense is comprised of costs related to the addition
of new subscribers. Although Golden Sky anticipates continuing to incur these
costs as it builds its subscriber base, these costs are not expected to increase
in direct proportion to revenue.
General and Administrative. General and administrative expenses include
corporate general office and administration expenses incurred primarily at
Golden Sky's Kansas City corporate office. Golden Sky expects
68
<PAGE>
that these expenses will increase as it grows and continues to expand its
infrastructure. However, since many of these expenses are fixed in nature,
general and administrative expenses are not expected to increase in direct
proportion to increases in subscribers and revenue.
Depreciation and Amortization. Depreciation and amortization includes
amortization of intangible assets associated with acquisitions and depreciation
of property and equipment.
Income Taxes. Golden Sky is subject to income taxation under Subchapter C
of the Internal Revenue Code. To date, Golden Sky has not recognized any income
tax benefits for financial reporting purposes because it has incurred operating
losses in all periods, and realization of future tax benefits is uncertain. As
of December 31, 1998, Golden Sky had net operating loss carryforwards for
federal income tax purposes of approximately $63.4 million. These net operating
loss carryforwards expire beginning in the year 2011.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Revenue. DBS services revenue for the nine months ended September 30, 1999
totaled $96.6 million, which represented a 93% increase as compared to the same
period during the prior year. These higher revenues resulted from the increase
in the number of subscribers to Golden Sky's DIRECTV service, offset somewhat by
lower revenues per subscriber. The average number of subscribers in Golden Sky's
rural DIRECTV markets during the nine-month period ended September 30, 1999
increased to approximately 270,100, compared to approximately 133,500 during the
comparable 1998 period. Average monthly revenue per subscriber approximated
$40.00 and $42.25 during those same periods. The decrease in revenue per
subscriber resulted primarily from lower distant broadcast network services
revenues, as described further below, lower sports programming revenues and a
change in sales mix toward lower priced services. As a result of an agreement
between DIRECTV and the National Association of Broadcasters, provision of
certain distant broadcast network services to a number of Golden Sky's
subscribers was terminated during January and July 1999. The termination of
these distant broadcast network services has adversely impacted Golden Sky's
revenues and increased its subscriber turnover. Golden Sky does not anticipate
any further termination of these services to its existing subscribers as a
result of federal legislation that was enacted in November 1999.
Costs of DBS Services. Costs of DBS services increased $31.4 million, or
106%, during the nine-month period ended September 30, 1999, to $61.2 million.
This increase resulted from the 104% increase in the average number of
subscribers previously described and from higher fees charged by DIRECTV for
satellite and ground service operations. As a percentage of DBS services
revenue, the costs of DBS services increased to 63.4% during the nine-month
period ended September 30, 1999, compared to 59.4% during the same period of
1998. This increase resulted from the higher fees charged by DIRECTV previously
described.
System Operations. System operations expenses totaled $14.3 million for the
nine-month period ended September 30, 1999, a $7.0 million increase, or 96%,
over the comparable 1998 period. These costs rose as a result of the increased
number of field offices and related activity resulting from Golden Sky's
acquisitions of rural DIRECTV markets, as well as from subscriber growth. As a
percentage of total revenue, system operations expenses increased to 14.7%
during the nine-month period ended September 30, 1999, from 14.4% during the
same 1998 period. The increase in system operations expenses as a percentage of
total revenues resulted primarily from the expansion of Golden Sky's national
customer service center in Kansas City.
Sales and Marketing. Sales and marketing expenses totaled $49.9 million
during the nine-month period ended September 30, 1999, an increase of $30.3
million compared to the same 1998 period. Sales and marketing costs per new
subscriber activation approximated $395 and $325 during the nine-month periods
ended September 30, 1999 and 1998, respectively. The increase in sales and
marketing expenses resulted from:
o a 117% increase in the number of new subscriber activations during the nine
months ended September 30, 1999, as compared to the same period of 1998;
o higher subscriber acquisition costs associated with Golden Sky's
conversions of Primestar subscribers to its DIRECTV service;
69
<PAGE>
o increased equipment and installation subsidies provided by Golden Sky to
its subscribers; and
o increased costs associated with free programming provided to new
subscribers under certain DIRECTV national sales promotions.
In May and June of 1999, Hughes acquired Primestar's medium-power broadcast
satellite business and high-powered direct broadcast satellite assets.
Subsequent to Hughes' announcement of its proposed acquisition of Primestar,
EchoStar Communications Corporation began to offer increased promotional and
other incentives to Primestar customers, as well as to EchoStar retailers, to
entice the conversion of Primestar subscribers to EchoStar's competing direct
broadcast satellite service, the DISH Network. EchoStar is the second largest
provider of direct broadcast satellite service in the United States.
Consequently, beginning in February 1999 Golden Sky increased its marketing
efforts with respect to Primestar subscribers. Golden Sky's increased Primestar
conversion efforts include, among other things, an offer of free equipment and
installation to current Primestar subscribers, as well as higher sales
commission incentives to both its internal and external sales forces.
Approximately 35% of Golden Sky's gross subscriber additions during the
nine-month period ended September 30, 1999 were conversions of former Primestar
subscribers. While Golden Sky believes that opportunities continue to exist to
convert additional Primestar subscribers to its DIRECTV programming service, it
expects to accomplish such conversions at a slower rate in future periods.
Consequently, while there can be no assurance, Golden Sky anticipates that its
subscriber acquisition costs per new subscriber activation will decrease in
future periods.
General and Administrative. During the nine-month period ended September
30, 1999, general and administrative expenses totaled $11.0 million, compared to
$4.7 million during the comparable 1998 period. As a percentage of total
revenue, general and administrative expenses increased to 11.3% during the
nine-month period ended September 30, 1999, from 9.3% during 1998. These
increases in general and administrative expenses resulted from the addition of
administrative resources necessary to support Golden Sky's growth to date and
increased bad debts expenses. Golden Sky's bad debts expenses increased from
$1.2 million during the nine-month period ended September 30, 1998 to $2.7
million during the nine-month period ended September 30, 1999. This increase in
bad debts expense resulted from the increases in subscribers and revenues
previously described, as well as from higher bad debts associated with former
Primestar subscribers and subscribers attracted to Golden Sky's service during
the first half of 1999 by DIRECTV's free programming promotions.
EBITDA. EBITDA for the nine months ended September 30, 1999 totaled
negative $39.3 million, compared to EBITDA of negative $10.5 million during the
nine months ended September 30, 1998. This increase in negative EBITDA primarily
resulted from the higher sales and marketing expenses and related new subscriber
activations previously described.
Depreciation and Amortization. Depreciation and amortization expenses
increased $10.8 million to $26.6 million during the nine months ended September
30, 1999, compared to $15.8 million during the nine months ended September 30,
1998. This increase reflects the amortization of higher intangible asset
balances resulting from Golden Sky's acquisitions of rural DIRECTV markets.
Interest Expense. Interest expense totaled $33.2 million during the nine
months ended September 30, 1999 and $12.0 million during the same 1998 period.
This increase of $21.2 million resulted from higher outstanding debt balances
and an increase in Golden Sky's weighted-average interest rate. Golden Sky's
weighted-average interest rate increased due to the issuance of Golden Sky
Systems' 123/8% senior subordinated notes due 2006 in July 1998 and Golden Sky
DBS, Inc.'s 131/2% senior discount notes due 2007 in February 1999.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenue. DBS services revenue for the year ended December 31, 1998 totaled
$74.9 million, which represented a 355% increase as compared to the prior year.
This increase was principally attributable to the increase in the number of
subscribers. The average number of subscribers during 1998 increased to
approximately 151,100, compared to approximately 33,200 during 1997. Average
monthly revenue per subscriber approximated $41.75 and $43.75 during these same
periods. The decrease in average monthly revenue per subscriber principally
resulted from lower lease and other revenues during 1998.
70
<PAGE>
Costs of DBS Services. Costs of DBS services increased $36.0 million, or
387%, during 1998, to $45.3 million. This increase is consistent with the
increase in the average number of subscribers. As a percentage of DBS services
revenue, the costs of DBS services increased to 60% during 1998, compared to 57%
in 1997. This increase resulted largely from increased programming costs.
System Operations. System operations costs totaled $11.0 million for the
year ended December 31, 1998, a $7.2 million increase, or 190%, over 1997. These
costs rose as a result of the increased number of field offices and related
activity resulting from Golden Sky's continued acquisition of rural DIRECTV
markets, as well as from subscriber growth. As a percentage of total revenue,
system operations expenses declined to 14.5% for the year ended December 31,
1998, from 21.8% during the year ended December 31, 1997. The decrease in system
operations expenses as a percentage of total revenues resulted from the
increases in subscribers and revenues as previously described.
Sales and Marketing. Sales and marketing expenses totaled $32.2 million
during the year ended December 31, 1998, an increase of $24.9 million compared
to the previous year. This increase principally resulted from the 265% increase
in new subscriber activations during 1998, as compared to 1997. Sales and
marketing costs per new subscriber activation approximated $320 during the year
ended December 31, 1998 and $280 during the year ended December 31, 1997.
General and Administrative. During the year ended December 31, 1998,
general and administrative expenses totaled $7.4 million, compared to $2.3
million during 1997. The increase in general and administrative expenses
resulted from the addition of administrative resources necessary to support
Golden Sky's growth. As a percentage of total revenue, general and
administrative expenses decreased to 9.8% during the year ended December 31,
1998, from 13.4% during 1997. This decrease reflects the continued leveraging of
these costs, which are partially fixed in nature, over increased subscribers and
revenues.
EBITDA. EBITDA for the year ended December 31, 1998 totaled negative $20.0
million, compared to EBITDA of negative $5.4 million during the same period in
1997. This increase in negative EBITDA principally resulted from the increases
in sales and marketing activities and related new subscriber activations
previously described.
During the year ended December 31, 1998 Golden Sky:
o used net cash of $36.6 million in operating activities;
o used net cash of $159.9 million in investing activities; and
o provided net cash of $187.4 million from financing activities.
During the year ended December 31, 1997 Golden Sky:
o used net cash of $3.1 million in operating activities;
o used net cash of $120.7 million in investing activities; and
o provided net cash of $137.0 million from financing activities.
Depreciation and Amortization. Depreciation and amortization expenses
increased $15.9 million to $23.2 million during the year ended December 31,
1998, compared to $7.3 million during the year ended December 31, 1997. This
increase resulted from higher intangible assets balances, which resulted from
Golden Sky's acquisition of additional rural DIRECTV markets.
Interest Expense. Interest expense totaled $20.5 million during the year
ended December 31, 1998, as compared to $3.2 million during 1997. This increase
of $17.3 million primarily resulted from higher outstanding debt balances and,
to a lesser degree, from an increase in weighted-average interest costs.
Year Ended December 31, 1997 Compared to Period from Inception to December 31,
1996
Revenue. DBS services revenue for the year ended December 31, 1997
increased to $16.5 million from $219,000 for the period from Golden Sky's
inception as of June 25, 1996 to December 31, 1996. Equipment lease revenue was
$944,000 for the year ended December 31, 1997, compared to $36,000 for the
period from
71
<PAGE>
inception to December 31, 1996. These increases principally resulted from the
fact that Golden Sky conducted operations for all of 1997 as opposed to only a
portion of 1996, and from an increase in subscribers. The average number of
subscribers during 1997 increased to approximately 33,200, compared to
approximately 3,000 during the period from inception to December 31, 1996.
Costs of DBS Services. Costs of DBS services totaled $9.3 million for the
year ended December 31, 1997, compared to $130,000 for the period from inception
to December 31, 1996. The increase in the costs of DBS services resulted from
the fact that Golden Sky conducted operations for all of 1997 as opposed to only
a portion of 1996 and corresponds to the large number of subscribers it added in
1997. As a percentage of DBS services revenue, the costs of DBS services
decreased to 57% for the year ended December 31, 1997, compared to 59% for the
period from inception to December 31, 1996. This decrease was primarily due to a
change in subscriber revenue mix toward packages with higher margins.
System Operations. System operations expenses totaled $3.8 million for the
year ended December 31, 1997, as compared to $26,000 for the period from
inception to December 31, 1996. These expenses rose as a result of the fact that
Golden Sky conducted operations for all of 1997 as opposed to only a portion of
1996 and from the increase in the number of field offices and related activity
during 1997. Golden Sky opened its first two field offices in November 1996 and
had a total of 36 field offices as of December 31, 1997.
Sales and Marketing. Sales and marketing expenses totaled $7.3 million for
the year ended December 31, 1997, as compared to $73,000 for the period from
inception to December 31, 1996. The increase of $7.2 million in sales and
marketing expenses resulted from the fact that Golden Sky conducted operations
for all of 1997 as opposed to only a portion of 1996 and from the increase in
the size and scope of Golden Sky's operations. Advertising expenses were $1.4
million for the year ended December 31, 1997, compared to $33,000 during the
period from inception to December 31, 1996.
General and Administrative. General and administrative expenses
approximated $2.3 million for the year ended December 31, 1997, as compared to
$1.0 million for the period from inception to December 31, 1996. The increase of
$1.3 million in general and administrative expenses resulted from the fact that
Golden Sky conducted operations for all of 1997 as opposed to only a portion of
1996 and from its growth.
EBITDA. EBITDA for the year ended December 31, 1997 totaled negative $5.4
million, compared to EBITDA of negative $1.0 million for the period from
inception to December 31, 1996. This increase in negative EBITDA principally
resulted from the fact that Golden Sky conducted operations for all of 1997 as
opposed to only a portion of 1996 and from the increases in sales and marketing
activities and related new subscriber activations previously described.
During the year ended December 31, 1997 Golden Sky:
o used net cash of $3.1 million in operating activities;
o used net cash of $120.7 million in investing activities; and
o provided net cash of $137.0 million from financing activities.
During the period from inception to December 31, 1996:
o used net cash of $790,000 in operating activities;
o used net cash of $3.2 million in investing activities; and
o provided net cash of $4.5 million from financing activities.
Depreciation and Amortization. Depreciation and amortization totaled $7.3
million for the year ended December 31, 1997, compared to $97,000 during the
period from inception to December 31, 1996. The increase in depreciation and
amortization expense of $7.2 million primarily reflects increased amortization
of intangible assets resulting from Golden Sky's acquisition activity during
1997, as well as the fact that it conducted operations for all of 1997 as
opposed to only a portion of 1996.
Interest Expense. Interest expense amounted to $3.2 million for the year
ended December 31, 1997, compared to $62,000 for the period from inception to
December 31, 1996. The increase in interest expense of
72
<PAGE>
$3.1 million resulted primarily from the fact that Golden Sky conducted
operations for all of 1997 as opposed to only a portion of 1996 and from
increased borrowings. Bank borrowings at December 31, 1997 totaled approximately
$60.0 million and were incurred to fund acquisitions and, to a lesser extent,
working capital needs resulting from Golden Sky's growth during the year.
Liquidity and Capital Resources
Golden Sky has experienced net losses as well as negative EBITDA and cash
flows from operations since its inception. These shortfalls are primarily the
result of Golden Sky's rapid subscriber growth and acquisitions of rural DIRECTV
markets. In particular, Golden Sky has incurred significant sales and marketing
expenses in its effort to rapidly build its subscriber base. Many of these
expenses, which are expensed as incurred and include advertising and promotional
expenses, sales commissions and direct broadcast satellite equipment and
installation subsidies, are incurred at or before the time a new subscriber is
activated. As a result, revenue attributable to new subscribers lags behind the
expense incurred in acquiring them. The impact of this lag generally increases
with the rate at which Golden Sky adds subscribers. Golden Sky's rapid
subscriber growth and related subscriber acquisition costs have been significant
contributors to its net losses and negative EBITDA experienced to date. Golden
Sky believes that its subscriber acquisition costs will continue to negatively
affect its operating results for at least the next year as it continues to add
new subscribers. However, as long as a subscriber remains in service, future
operating results benefit from a recurring monthly revenue stream with minimal
additional sales and marketing expense. As long as churn remains relatively low,
Golden Sky believes that its investment in building its subscriber base rapidly
will enhance its cash flow and operating results in the longer term.
Golden Sky's operations require substantial capital for:
o financing subscriber growth (including direct broadcast satellite
equipment and installation subsidies and marketing and selling expenses);
o investments in, and maintenance of, field offices in Golden Sky's rural
DIRECTV markets;
o financing infrastructure development costs necessary to support the
growth of Golden Sky's business; and
o funding of start-up losses and other working capital requirements.
Historically, Golden Sky also has utilized substantial capital to acquire
rural DIRECTV markets. Golden Sky's capital expenditures, inclusive of
acquisitions of rural DIRECTV markets, totaled $38.9 million and $61.9 million
during the nine-month periods ended September 30, 1999 and 1998, respectively.
During those same periods, Golden Sky's net cash used in operations totaled
$58.2 million and $25.7 million, respectively. Golden Sky's capital
expenditures, inclusive of acquisitions of rural DIRECTV markets, totaled $107.8
million during 1998, $121.0 million during 1997 and $2.9 million during the
period from inception to December 31, 1996. Net cash used in operations totaled
$36.6 million in 1998, $3.1 million in 1997 and $790,000 in the period from
inception to December 31, 1996.
To date, Golden Sky's acquisitions, subscriber growth and operations have
been financed from borrowings under its bank credit facility, proceeds from the
offering of Golden Sky Systems' 123/8% notes, proceeds from the offering of
Golden Sky DBS, Inc.'s 131/2% notes, proceeds from the issuance of capital
stock, and to a lesser extent, the issuance of promissory notes to sellers of
rural DIRECTV markets.
During the nine months ended September 30, 1999, Golden Sky's net cash
flows from financing activities totaled $70.4 million. This was comprised of:
o gross proceeds of $100.0 million from the offering of Golden Sky DBS,
Inc.'s 131/2% notes, which it completed in February 1999;
o net repayments of $15.0 million under Golden Sky Systems' bank credit
facility;
o increased deferred financing costs of $5.9 million resulting from the
amendment of Golden Sky Systems' bank credit facility and the offering of
Golden Sky DBS, Inc.'s 131/2% notes; and
73
<PAGE>
o repayments of other debt totaling $8.7 million.
In 1998, Golden Sky's net cash from financing activities of $187.4 million
was compromised of:
o net proceeds of $189.2 million from the offering of Golden Sky Systems'
12 3/8% notes;
o net borrowings of $7.0 million under Golden Sky Systems' bank credit
facility;
o deferred financing costs of $5.1 million; and
o $3.7 million of repayments on other debt.
In 1997, Golden Sky's net cash flows from financing activities of $137.0
million was comprised of:
o $71.1 million from the issuance of preferred stock;
o deferred financing costs of $3.3 million; and
o $69.2 million of net borrowings under Golden Sky Systems' bank credit
facility and other indebtedness.
Credit Facility
Golden Sky Systems has a credit facility with a group of banks that
provides for a $150.0 million line of credit to fund acquisitions and working
capital requirements. Of this amount, $35.0 million is in the form of a term
loan facility and $115.0 million is in the form of a revolving credit facility,
including a letter of credit sub-limit of $40.0 million. As of September 30,
1999, Golden Sky Systems:
o had fully utilized the entire $35.0 million of term loan availability;
o had borrowed $17.0 million under the revolving credit line; and
o had utilized approximately $20.6 million of the letter of credit
sub-facility.
Availability under the revolving credit line depends upon satisfaction of
various financial and operating covenants as well as minimum subscriber base
requirements.
The term loan amortizes in specified quarterly installments from March 31,
2002 through maturity on December 31, 2005. Availability of revolving loan
borrowings decreases by specified amounts over the period from March 31, 2001
through maturity on September 30, 2005. Borrowings under the credit facility
bear interest at variable rates calculated on a base rate, which is either the
prime rate or LIBOR, plus an applicable margin, with reductions under some
circumstances, based on leverage.
As of September 30, 1999, Golden Sky Systems was not in compliance with
certain of the restrictive covenants prescribed by its credit facility. During
January 2000, Golden Sky Systems completed an amendment to the credit facility.
The amendment, which was effective as of December 31, 1999, waived Golden Sky
Systems' third quarter 1999 covenant violations and amended certain future
covenant requirements. Pursuant to the amendment, Golden Sky Systems may borrow
up to an additional $20.0 million under the credit facility prior to March 31,
2000. Any such incremental borrowings, which are secured by letters of credit
provided by certain of Golden Sky's shareholders, must be repaid by March 31,
2000 from the proceeds of either a private or public equity offering. The
required repayment date relative to these year 2000 incremental borrowings may
be deferred until May 31, 2000 under certain conditions. Upon repayment of the
incremental borrowings in March, or prior to May 31 if the repayment date is
extended, Golden Sky Systems will have potential incremental borrowing capacity
during the year ending December 31, 2000 equal to the lesser of the proceeds
received from either a public or private equity offering or $20.0 million.
Coincident with the amendment of the credit facility, Golden Sky entered into
stock subscription agreements with certain of its shareholders for an aggregate
of $20.0 million of its preferred stock. Also in January 2000, the credit
facility was further amended to approve the changes in ownership of Golden Sky
that would result from the merger with Pegasus.
12 3/8% Notes
On July 31, 1998, Golden Sky Systems completed the sale of $195.0 million
aggregate principal amount at maturity of its 123/8% notes. Interest on the
123/8% notes is payable in cash semi-annually on February 1 and August 1 of each
year. The 123/8% notes mature on August 1, 2006. The offering of these notes
resulted in net proceeds of approximately $189.2 million after payment of
underwriting discounts and other issuance costs.
74
<PAGE>
13 1/2% Notes
On February 19, 1999, Golden Sky completed the sale of $193.1 million
aggregate principal amount at maturity of its 131/2% Notes. Interest on these
notes is payable in cash semi-annually on March 1 and September 1 of each year,
with the first cash interest payment due on September 1, 2004. The 131/2% Notes
mature on March 1, 2007. These notes were offered at a substantial discount and
resulted in net proceeds of approximately $95.4 million, after the payment of
underwriting discounts and other issuance costs aggregating approximately $4.7
million.
Future Capital Requirements
Golden Sky's future capital requirements will depend upon a number of
factors, including the rate of its internal subscriber growth, the extent to
which it completes additional acquisitions, if any, and the working capital
needs necessary to accommodate such growth. Golden Sky expects to continue to
expand its marketing efforts in order to increase its subscriber penetration. As
previously described, Golden Sky subsidizes a portion of the cost of direct
broadcast satellite equipment and subscriber installations. The extent of Golden
Sky's future subsidies of direct broadcast satellite equipment and installations
may materially affect its liquidity and capital requirements. Golden Sky also
expects that continued investment in its administrative and computer systems
will be necessary to support its increased size and continued internal growth.
Excluding any costs associated with the acquisition of additional rural DIRECTV
markets, Golden Sky anticipates that its total capital expenditures, primarily
related to expanding facilities and information systems for its corporate
office, customer service operations and field offices, will not exceed $5.0
million during the year ending December 31, 2000.
Golden Sky's operating costs and working capital requirements are partly a
function of its rights and obligations under its agreements with the National
Rural Telecommunications Cooperative and the National Rural Telecommunications
Cooperative's agreement with Hughes. The National Rural Telecommunications
Cooperative is currently in litigation with Hughes and its subsidiary DIRECTV
over the scope and extent of certain of these rights. On January 10, 2000,
Golden Sky and Pegasus filed a class action lawsuit against DIRECTV and Hughes.
The lawsuit was filed in the United States District Court, Central District of
California. Golden Sky and Pegasus filed on behalf of themselves and as
representatives of a class of those similarly situated within the National Rural
Telecommunications Cooperative affiliate and member universe. The action asserts
various claims, including intentional interference with contractual relations
and interference with prospective economic advantage, and seeks declaratory
relief. The claims are based on DIRECTV's failure to provide the National Rural
Telecommunications Cooperative with certain premium programming, thereby
preventing the National Rural Telecommunications Cooperative from providing said
premium programming to the class action members. The claims are also based on
DIRECTV's position with respect to launch fees and other benefits it has
received, contract term and rights of refusal. See Business of Pegasus -- Legal
Proceedings. The outcome of this matter could have a material adverse effect on
the scope and duration of Golden Sky's right to provide DIRECTV programming in
its rural markets, its capital requirements and its costs of operations. If
determined adversely, this matter could have a material adverse effect upon
Golden Sky's business, financial condition and results of operations.
During the nine months ended September 30, 1999, Golden Sky acquired nine
rural DIRECTV markets. These markets included approximately 134,000 households
and served approximately 18,200 subscribers as of the dates of acquisition. The
aggregate purchase price for these recent acquisitions, including direct
acquisition costs, approximated $38.7 million. As noted above under -- Overview
- -- Company History, while Golden Sky continues to evaluate acquisition
opportunities and expects to purchase additional rural DIRECTV markets in the
future consistent with its growth strategy, its pace of future acquisitions may
decrease in the near term. To the extent Golden Sky identifies attractive
acquisition candidates in the future, it may require additional capital to
complete such acquisitions.
Golden Sky is highly leveraged and, to the extent it is able to borrow
additional funds under its credit facility or otherwise, its leverage will
continue to increase. The approximately $9.8 million of seller notes payable
outstanding at September 30, 1999 mature as follows: $2.9 million in 2000, $3.0
million in 2001, $2.9 million in 2002, and $1.0 million in 2003.
75
<PAGE>
The ability of Golden Sky's subsidiaries to pay dividends and make other
distributions and advances is subject to, among other things, the terms of their
debt instruments and applicable law. Golden Sky Systems' credit facility and the
indenture governing Golden Sky Systems' 123/8% notes contain restrictive
covenants that limit its ability to pay dividends or make distributions to
Golden Sky DBS, its direct parent company. Golden Sky cannot assure you that it
will be in compliance with these covenants at the time of a required interest
payment on its debt instruments. Golden Sky currently expects that it may be
difficult for Golden Sky Systems to generate the requisite dividend capacity to
enable Golden Sky DBS to make the initial cash interest payments on its 131/2%
notes. Golden Sky Systems' ability to generate sufficient dividend capacity
under the indenture governing the 123/8% notes to service Golden Sky DBS's
131/2% notes and to comply with the financial and other covenants in Golden Sky
Systems' credit facility will depend upon the extent to which Golden Sky pursues
acquisitions, incurs additional indebtedness, incurs operating expenses, makes
capital expenditures and generates adequate subscriber revenue, among other
things. To the extent these vary significantly from Golden Sky's current
expectations, it is likely that Golden Sky will not be able to make Golden Sky
DBS's initial interest payments absent consents from its lenders and existing
bondholders. Moreover, any significant adverse developments would likely
preclude Golden Sky DBS from being able to access Golden Sky Systems' cash flow
for these initial interest payments.
As of September 30, 1999, Golden Sky had unrestricted cash on hand of
approximately $5.9 million. While there can be no assurance, Golden Sky believes
it has sufficient cash and availability under its amended bank credit facility
to finance its expected internal growth through at least December 31, 2000.
There may be a number of factors, some of which may be beyond Golden Sky's
control or ability to predict, that could require it to raise additional
capital. These factors include unexpected increases in operating costs and
expenses, subscriber growth in excess of that currently expected, an increase in
the cost of acquiring subscribers or possible acquisitions of additional rural
DIRECTV markets. Additional financing also may be required to meet Golden Sky's
debt service requirements. There can be no assurance that additional financing
will be available on terms acceptable to Golden Sky, or at all, and if
available, that the proceeds of this financing would be sufficient to enable
Golden Sky to meet its debt service requirements or completely execute its
business plan.
On July 9, 1999, Golden Sky DBS filed a registration statement with the
Securities and Exchange Commission for an initial public offering of Golden Sky
DBS's common stock. There can be no assurance that this offering will be
consummated during 2000 or at all. In the event Golden Sky's merger with Pegasus
is consummated, Golden Sky will withdraw the registration statement. Costs
totaling approximately $470,000 associated with this offering had been incurred
as of December 31, 1999. As of September 30, 1999, these offering costs were
included in deferred financing costs pending completion of the offering. In the
event Golden Sky DBS's initial public offering is not consummated, Golden Sky
will be required to expense such costs in the period in which a determination
not to proceed with the offering is made.
Year 2000 Readiness
Many existing computer systems and applications currently use two-digit
date fields to designate a particular year. Date sensitive systems and
applications may recognize the year 2000 as 1900 or not at all. The inability to
recognize or properly treat the year 2000 may cause computer systems and
applications to incorrectly process critical financial and operational
information. During 1999, Golden Sky undertook an effort to identify and correct
any potential year 2000 issues that may have existed with its information
systems, suppliers and facilities. As of late January 2000, Golden Sky's
business has not been affected by the year 2000 issue. Golden Sky will continue
to monitor the impact of the year 2000 issue on its business throughout the year
ending December 31, 2000. There can be no assurance that the year 2000 issue
will not adversely affect Golden Sky's business, financial condition or results
of operations in future periods.
The foregoing constitutes a year 2000 statement and readiness disclosure
subject to the protections afforded it by the Year 2000 Information and
Readiness Disclosure Act of 1998.
Recent Accounting Developments
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." As a result of the subsequent issuance of
FAS No. 137, FAS No. 133 is now effective for fiscal
76
<PAGE>
years beginning after June 15, 2000. FAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
Currently, Golden Sky has no derivative instruments or hedging arrangements.
Accordingly, adoption of FAS No. 133 is not expected to have a material effect
on Golden Sky's business, financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." Statement of Position 98-5, which is effective for fiscal years
beginning after December 15, 1998, defines costs related to start-up activities
and requires that these costs be expensed as incurred. As Golden Sky has
previously expensed all of these costs, the adoption of SOP 98-5 is not expected
to have a material effect on Golden Sky's business, financial position and
results of operations.
77
<PAGE>
BUSINESS OF PEGASUS
General
Pegasus is:
o The largest independent distributor of DIRECTV(R) with 752,800
subscribers at December 31, 1999. We have the exclusive right to
distribute DIRECTV digital broadcast satellite services to over 5.3
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.
o One of the fastest growing media companies in the United States. We have
increased our revenues at a compound growth rate of 100% per annum since
our inception in 1991.
Direct Broadcast Satellite Television
The introduction of direct broadcast satellite receivers is widely regarded
as the most successful introduction of a consumer electronics product in U.S.
history, surpassing the rollout of color televisions, videocassette recorders
and compact disc players. According to a recent Paul Kagan study, in 1998 direct
broadcast satellite was the fastest growing multichannel television service in
the country, capturing almost two out of every three new subscribers to those
services. There are currently three nationally branded direct broadcast
satellite programming services: DIRECTV, Primestar and EchoStar. At December 31,
1999, there were 11.5 million direct broadcast satellite subscribers in the
United States:
o 6.7 million DIRECTV subscribers, including approximately 5.2 million
subscribers served by DIRECTV itself, 1.1 million subscribers served by
Pegasus and Golden Sky and 400,000 subscribers served by the
approximately 100 other DIRECTV rural affiliates;
o 1.4 million Primestar subscribers; and
o 3.4 million EchoStar subscribers.
All three direct broadcast satellite programming services are digital satellite
services, and therefore require that a subscriber install a satellite receiving
antenna or dish and a digital receiver. DIRECTV and EchoStar require a satellite
dish of approximately 18 inches in diameter that may be installed by the
consumer without professional assistance. Primestar requires a dish of
approximately 36 inches in diameter that generally must be professionally
installed. The market shares of DIRECTV, Primestar and EchoStar among all direct
broadcast satellite subscribers nationally are currently 58%, 12% and 30%,
respectively. The Carmel Group has estimated that the number of direct broadcast
satellite subscribers will grow to 21.1 million by 2003.
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.
In 1999, MCI WorldCom transferred a license to EchoStar to operate another
direct broadcast satellite business in a different orbital location. We believe
this will help increase the overall competitive position of direct broadcast
satellite relative to cable. However, the transaction could also increase
EchoStar's competitive position relative to DIRECTV.
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
78
<PAGE>
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 associates 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
associates 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 associates acquired
such exclusive rights, thereby becoming DIRECTV rural affiliates. The DIRECTV
exclusive territories acquired by DIRECTV's rural affiliates include
approximately 9.0 million rural households. Pegasus was the largest of the
original DIRECTV rural affiliates, acquiring a DIRECTV exclusive territory of
approximately 500,000 homes in four New England states. Since 1996 we have
increased our DIRECTV exclusive territories to more than 5.3 million homes
through the completed or pending acquisitions of 95 other DIRECTV rural
affiliates, including the acquisition of Digital Television Services, Inc., with
which we merged in 1998.
Pegasus Rural Focus and Strategy
We believe that direct broadcast satellite and other digital satellite
services will achieve disproportionately greater consumer acceptance in rural
areas than in metropolitan areas. Direct broadcast satellite services have
already achieved a penetration of more than 17% in rural areas of the United
States, as compared to approximately 5% in metropolitan areas.
Our long-term goal is to become an integrated provider of direct broadcast
satellite and other digital satellite services for the 76.0 million people, 30.0
million homes and 3.0 million businesses located in rural areas of the United
States. To accomplish our goal, we are pursuing the following strategy:
o Continue to Grow Our Rural Subscriber Base by Aggressively Marketing
DIRECTV. Pegasus currently serves in excess of 750,000 DIRECTV
subscribers, which represents a penetration of approximately 14.1%. Our
rate of growth has accelerated as we have increased our scale and
expanded the Pegasus network of independent retailers.
o Continue to Acquire Other DIRECTV Rural Affiliates. We currently own
approximately 59% 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 36 states. We believe that the
Pegasus retail network is one of the few sales and distribution channels
for digital satellite services with broad and effective reach in rural
areas of the U.S. We intend to further expand the Pegasus retail network
in order to increase the penetration of DIRECTV in rural areas and to
enable us to distribute additional digital satellite services that will
complement our distribution of DIRECTV.
79
<PAGE>
o Generate Future Growth By Bundling Additional Digital Satellite Services
with DIRECTV. We believe that new digital satellite services, such as
digital audio services, broadband multimedia services and mobile
satellite services, will be introduced to consumers and businesses in the
next five years.
These services, like direct broadcast satellite, should achieve
disproportionate success in rural areas. However, because there are limited
sales and distribution channels in rural areas, new digital satellite service
providers will confront the same difficulties that direct broadcast satellite
service providers have encountered in establishing broad distribution in rural
areas, as compared to metropolitan areas. We believe that the Pegasus retail
network will enable us to establish relationships with digital satellite service
providers that will position us to capitalize on these new opportunities.
Satellite Services in Rural Areas
Rural areas include approximately 85% of the total landmass of the
continental United States and have an average home density of less than 12 homes
per square mile. Because the cost of reaching a household by a cable or other
wireline distribution system is generally inversely proportional to home density
and the cost of providing satellite service is not, satellite services have
strong cost advantages over cable in rural areas.
There are approximately 76.0 million people, 30.0 million households and
3.0 million businesses located in rural areas of the United States. Annual
household income in rural areas totaled over $1.1 trillion in 1997, an average
of approximately $38,000 per household. Rural areas therefore represent a large
and attractive market for direct broadcast satellite and other digital satellite
services. Approximately 65% of all U.S. direct broadcast satellite subscribers
reside in rural areas. It is likely that future digital satellite services, such
as soon to be launched digital audio services and satellite broadband multimedia
services, will also achieve disproportionate success in rural areas as compared
to metropolitan areas.
It is difficult, however, for satellite and other service providers to
establish sales and distribution channels in rural areas. In contrast to
metropolitan areas, where there are many strong national retail chains, few
national retailers have a presence in rural areas. Most retailers in rural areas
are independently owned and have only one or two store locations. For these
reasons, satellite providers seeking to establish broad and effective rural
distribution have limited alternatives:
o They may seek to distribute their services through one of the few
national retailers, such as Radio Shack or Wal-Mart, that have a strong
retail presence in rural areas.
o They may seek to establish direct sales channels in rural areas, as
Primestar initially sought to do through its cable partners.
o They may seek to distribute through national networks of independent
retailers serving rural areas, such as have been established by EchoStar
and by Pegasus.
Consolidation of DIRECTV Rural Affiliates
When DIRECTV was launched in 1994, small DIRECTV rural affiliates held
approximately 95% of the DIRECTV rural affiliate exclusive territories. In 1996,
Pegasus first acquired another DIRECTV rural affiliate, thereby beginning a
process of consolidation that has significantly changed the composition of
DIRECTV's rural affiliates. Since 1996, Pegasus, its subsidiary, Digital
Television Services, Inc., and Golden Sky Systems have acquired approximately
150 DIRECTV rural affiliates. Today, Pegasus represents 59% of the DIRECTV
exclusive territories held by DIRECTV's rural affiliates, Golden Sky holds 21%,
and the approximately 100 remaining rural affiliates total 20%. Pegasus believes
that consolidation among DIRECTV's rural affiliates will continue.
80
<PAGE>
As of December 31, 1999, we distributed DIRECTV in the following DIRECTV
exclusive territories:
<TABLE>
<CAPTION>
Exclusive Total Homes Not Homes
DIRECTV Homes in Passed By Passed By Total
Territories Territory Cable Cable Subscribers Penetration
- ------------------------ ----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Northeast .............. 751,745 182,245 569,500 83,928 11.2%
Central ................ 1,138,651 301,052 837,599 163,272 14.3%
Southeast .............. 1,010,979 352,622 658,357 156,931 15.5%
Midwest ................ 882,924 248,222 634,702 124,203 14.1%
Central Plains ......... 411,666 88,168 323,498 46,195 11.2%
Texas .................. 465,835 150,987 314,848 84,942 18.2%
Southwest .............. 322,438 48,459 273,979 45,483 14.1%
Northwest .............. 347,710 99,896 247,814 47,862 13.8%
--------- ------- ------- ------- ----
Total ............... 5,331,948 1,471,651 3,860,297 752,816 14.1%
========= ========= ========= ======= ====
</TABLE>
- ------------
Total homes in territory, homes not passed by cable, and homes passed by cable
are based on estimates of primary residences by Claritas, Inc.
The Pegasus Retail Network
The Pegasus retail network is a network of 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 36 states as a result of our acquisitions of
DIRECTV rural affiliates since 1996. Today, the Pegasus retail network is one of
the few sales and distribution channels available to digital satellite service
providers seeking broad and effective distribution in rural areas throughout the
continental United States.
We believe that the national reach of the Pegasus retail network has
positioned us to:
o improve the penetration of DIRECTV in DIRECTV exclusive territories that
we now own or that we may acquire from other DIRECTV rural affiliates;
o assist DIRECTV in improving DIRECTV's direct broadcast satellite market
share in rural areas outside of the DIRECTV exclusive territories held by
DIRECTV rural affiliates; and
o offer providers of new digital satellite services, such as the soon to be
launched digital audio and broadband multimedia satellite services, an
effective and convenient means for reaching the approximately 30% of
America's population that live and work in rural areas.
Broadcast Television
Our operating strategy in broadcast television is focused on:
o developing strong local sales forces and sales management to maximize the
value of our stations' inventory of advertising spots;
o improving the stations' programming, promotion and technical facilities
in order to maximize their ratings in a cost-effective manner; and
o maintaining strict control over operating costs while motivating
employees through the use of incentive plans, which reward our employees
in proportion to annual increases in location cash flow.
We have purchased or launched TV stations affiliated with the "emerging
networks" of Fox, the WB and UPN, because, while affiliates of these networks
generally have lower revenue shares than stations affiliated with ABC, CBS and
NBC, we believe that they will experience growing audience ratings and therefore
afford us greater opportunities for increasing their revenue share. We have
entered into local marketing agreements in three of our existing markets 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
81
<PAGE>
would prohibit us from expanding in our existing markets through local marketing
agreements and may require us to modify or terminate our existing agreements. We
have entered into local marketing agreements to program one station as an
affiliate of Fox, two stations as affiliates of the WB network and one station
as an affiliate of UPN. We plan to program an additional station pursuant to a
local marketing agreement in 2000, if permitted by the FCC.
The following table sets forth general information for each of Pegasus'
stations.
<TABLE>
<CAPTION>
Station
Station Acquisition Date Affiliation Market Area DMA (1) Households (2)
- ----------------------------- ------------------ ------------- ----------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
WDBD-40 ..................... May 1993 Fox Jackson, MS 91 298,000
WDSI-61 ..................... May 1993 Fox Chattanooga, TN 82 332,000
WGFL-53 (3) ................. (3) WB Gainesville, FL 167 101,000
WOLF-56/WILF-53 (4) ......... May 1993 Fox Northeastern PA 47 566,000
WSWB-38 (4) ................. (4) WB Northeastern PA 47 566,000
WPXT-51 ..................... January 1996 Fox Portland, ME 79 353,000
WPME-35 (5) ................. (5) UPN Portland, ME 79 353,000
WTLH-49/WFXU (6) ............ March 1996 Fox Tallahassee, FL 116 221,000
</TABLE>
- ------------
(1) There are 211 designated market areas or 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 an 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 an 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 an local marketing
agreement as an affiliate of UPN.
(6) Pegasus programs WFXU pursuant to an local marketing agreement. WFXU has
simulcast the programming of WTLH since July 1998.
Cable Television
We own and operate a cable system serving areas of western, southwestern
and northwestern Puerto Rico. Our Puerto Rico cable system serves franchised
areas of approximately 170,000 households and serves approximately 55,000
subscribers.
We have entered into a letter of intent to sell the assets of our cable
system business in Puerto Rico to a subsidiary of Centennial Cellular
Corporation for $170.0 million in cash, subject to certain adjustments. The sale
of this cable system is subject to the negotiation of a definitive agreement,
third-party approvals, including regulatory approvals, and other customary
conditions. The sale is also subject to approval by our board of directors. We
cannot assure you that these conditions will be satisfied and that the sale will
be consummated.
82
<PAGE>
Recent Completed and Pending Transactions
Completed Transactions
Completed Direct Broadcast Satellite Acquisitions. From October 1, 1999
through January 31, 2000, we completed four acquisitions for DIRECTV
distribution rights in rural areas of Indiana, Minnesota and Michigan. In the
aggregate, the consideration for the completed direct broadcast satellite
acquisitions was $13.2 million in cash, $5.7 million in Series B junior
convertible participating preferred stock and $2.3 million in promissory notes.
The territories covered by these transactions include approximately 80,300
households, including approximately 4,000 seasonal residences and 8,000 business
locations and 11,300 subscribers.
Note Offering. On November 19, 1999, we completed an offer to exchange
$155.0 million in principal amount of our 121/2% senior notes due 2007 for
$155.0 million in principal amount of outstanding senior subordinated notes due
2007 of our subsidiaries, Digital Television Services, Inc. and DTS Capital,
Inc. The effect of the exchange offer was to simplify our capital structure and
provide us with greater flexibility under debt covenants of our existing
indebtedness.
Convertible Preferred Stock Offering. On January 25, 2000, Pegasus
completed an offering of $300.0 million in liquidation amount of its 6 1/2%
Series C convertible preferred stock. Each share of Series C convertible
preferred stock is convertible at any time into the number of whole shares of
our Class A common stock equal to the stated liquidation preference of $100 per
share divided by an initial conversion price of $127.50 per share, subject to
adjustment if certain events should occur. Pegasus may redeem the Series C
convertible preferred stock at any time beginning on February 1, 2003 at
redemption prices set forth in the certificate of designation. In addition, from
August 1, 2001 to February 1, 2003, Pegasus may redeem the Series C convertible
preferred stock at a redemption premium of 105.525% of the stated liquidation
preference, plus accumulated and unpaid dividends, if any, if the trading price
of Pegasus' Class A common stock equals or exceeds $191.25 for a specified
trading period. In the event of a change of control of Pegasus, holders of
Series C convertible preferred stock will have a one-time option to convert such
holder's shares into Class A common stock at a conversion price equal to the
greater of (1) the market price of our Class A common stock at the change of
control date or (2) $68.00 per share. In lieu of issuing Class A common stock,
we may, at our option, make a cash payment equal to the market value of the
shares. Pegasus plans to use the net proceeds of the offering for working
capital and general corporate purposes.
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 Certain
Transactions.
Pegasus Media & Communications Credit Facility. On January 14, 2000,
Pegasus Media & Communications, Inc., a wholly-owned subsidiary of Pegasus,
entered into a $500.0 million credit facility. The new Pegasus Media &
Communications credit facility replaced the previous Pegasus Media &
Communications and Digital Television Services credit facilities. Pegasus Media
& Communications can use borrowings under the credit facility for acquisitions
and general corporate purposes. In connection with the closing of the new
Pegasus Media & Communications credit facility, Digital Television Services was
merged with and into a subsidiary of Pegasus Media & Communications.
Pending Transactions
Pending Direct Broadcast Satellite Acquisitions. As of January 31, 2000,
we have entered into letters of intent or definitive agreements to acquire
DIRECTV distribution rights in rural areas of six states. In the
83
<PAGE>
aggregate, the consideration for the pending direct broadcast satellite
acquisitions is $29.9 million in cash, $32.5 million in preferred stock, $38.0
million in Class A common stock and $2.0 million in assumed liabilities. 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. The territories covered by
the letters of intent or definitive agreements include approximately 404,700
television households, including approximately 20,300 seasonal residences and
40,400 business locations and approximately 45,700 subscribers.
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. For example, EchoStar, which competes with us in the sale of direct
broadcast satellite programming, has recently increased its channel capacity
such that EchoStar could now offer in excess of 500 channels, which channel
capacity exceeds the channel capacity DIRECTV currently offers. See Business of
Golden Sky -- Competition.
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.
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.
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 associates of the National Rural
Telecommunications Cooperative the opportunity to become the exclusive providers
of certain direct broadcast satellite services using the DIRECTV satellite of
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 associates are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the U.S.
National Rural Telecommunications Cooperative members and associates that
participated in its direct broadcast satellite program acquired the rights to
provide the direct broadcast
84
<PAGE>
satellite services described above in their service areas. The service areas
purchased by participating National Rural Telecommunications Cooperative members
and associates comprise approximately 9.0 million television households and were
initially acquired for aggregate commitment payments exceeding $100 million.
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
associates, provide those members and associates 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 associates made substantial
commitment payments to DIRECTV. In addition, the participating members and
associates 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 associates. See --
Legal Proceedings. Those disputes include the rights asserted by participating
members and associates:
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 101o 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
associates 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 be terminated prior to the expiration of its term as follows:
o If the agreement between DIRECTV and the National Rural
Telecommunications Cooperative is terminated because of a breach by
DIRECTV, the National Rural Telecommunications Cooperative may terminate
its agreements with us, but the National Rural Telecommunications
Cooperative will be responsible for paying to us our pro rata portion of
any refunds that the National Rural Telecommunications Cooperative
receives from DIRECTV.
o If we fail to make any payment due to the National Rural
Telecommunications Cooperative or otherwise breach a material obligation
of our agreements with the National Rural Telecommunications Cooperative,
the National Rural Telecommunications Cooperative may terminate our
agreement with the National Rural Telecommunications Cooperative in
addition to exercising other rights and remedies against us.
o If the National Rural Telecommunications Cooperative's agreement with
DIRECTV is terminated because of a breach by the National Rural
Telecommunications Cooperative, DIRECTV is obligated to continue to
provide DIRECTV services to Pegasus by assuming the National Rural
Telecommunications Cooperative's rights and obligations under the
National Rural Telecommunications Cooperative's agreement with DIRECTV or
under a new agreement containing substantially the same terms and
conditions as National Rural Telecommunications Cooperative's agreement
with DIRECTV.
85
<PAGE>
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 associate 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 $21.2 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
and WGFL, stations we program pursuant to local marketing agreements, expire on
August 1, 2007, February 1, 2005 and February 1, 2005, respectively. The other
TV station we program, WPME, has a license application pending at the FCC. There
can be no assurance this license application will be granted.
Fox Affiliation Agreement. Our network affiliation agreements with the Fox
Broadcasting Company formally expired on January 30, 1999, except for the
affiliation agreement for television station WTLH, which is scheduled to expire
on December 31, 2000. Except in the case of WTLH, we currently broadcast Fox
programming under arrangements between Pegasus and Fox which have generally
conformed in practice to such affiliation agreements. Negotiations with Fox are
continuing, and we believe that we will enter into new affiliation agreements on
satisfactory terms with no disruption in programming. If we are mistaken in this
belief, the loss of the ability to carry Fox programming could have a material
and adverse effect on our broadcast television operations.
The station affiliation agreement with Fox for WTLH provides WTLH with the
right to broadcast programming which Fox and Fox Children's Network, Inc. make
available for broadcasting in Tallahassee, Florida, the community to which WTLH
is licensed by the FCC. Fox has committed to supply approximately six hours of
programming each weekday, although, from time to time, some 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
86
<PAGE>
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 receiving NFL programming, Fox may have a claim for
amounts under the terms of the station affiliation agreement.
WTLH's station affiliation agreement with Fox expires December 31, 2000,
but is renewable for two successive two-year periods, at the discretion of Fox
and upon acceptance by Pegasus. Fox may terminate the station affiliation
agreement upon:
o a change in any material aspect of the station's operation, including its
transmitter location, power, frequency, programming format or hours of
operation, with 30 days written notice;
o acquisition by Fox, directly or indirectly, of a significant ownership
and/or controlling interest in any television station in the same market,
with 60 days written notice;
o assignment or attempted assignment by Pegasus of the station affiliation
agreement, with 30 days written notice;
o three or more unauthorized preemptions of Fox programming within a
12-month period, with 30 days written notice; or
o WTLH deciding not to accept a change in Fox operations applicable to Fox
affiliates generally.
Either Fox or WTLH may terminate the station affiliation agreement upon
occurrence of a force majeure event which substantially interrupts Fox's ability
to provide programming or the station's ability to broadcast the programming.
UPN Affiliation Agreement. The Portland TV station programmed by Pegasus
pursuant to a local marketing agreement, WPME, is affiliated with UPN pursuant
to a station affiliation agreement. Under the station affiliation agreement with
UPN, UPN grants Pegasus an exclusive license to broadcast all programming,
including commercial announcements, network identifications, promotions and
credits, which UPN makes available to serve the community of Lewiston, Maine.
UPN has committed to supply approximately four hours of programming during
specified time periods. The station affiliation agreement with UPN allots to
each party a specified amount of advertising time during each hour of
programming, and each party is entitled to the revenue realized from its sale of
advertising time.
The term of the station affiliation agreement with UPN expires January 15,
2001, and automatically renews for a three-year period unless either party has
given written notice to the other party of its election not to renew. UPN may
terminate the station affiliation agreement upon prior written notice in the
event of:
o a material reduction or modification of WPME's transmitter location,
power, frequency, programming format or hours of operation;
o any assignment or transfer of control of the station's license; or
o three or more unauthorized preemptions of UPN programming by the station
during any 12-month period, which have actually occurred or which UPN
reasonably believes will occur.
Either UPN or Pegasus may terminate the station affiliation agreement upon the
occurrence of a force majeure event that causes UPN substantially to fail to
provide programming or Pegasus substantially to fail to broadcast UPN's
programming, for either four consecutive weeks or an aggregate of six weeks in
any 12-month period.
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
87
<PAGE>
the bulk of the broadcast programming on stations owned by other licensees, and
to retain the advertising revenues generated from such programming. Such
agreements are commonly referred to as local marketing agreements. Local
marketing agreements were not considered attributable interests under the FCC's
old multiple ownership rules.
In August 1999, the FCC revised its attribution and multiple ownership
rules. The new rules generally provide that television local marketing
agreements are attributable if the programmer owns a station in the same market
as the station it is programming pursuant to a local marketing agreement. Local
marketing agreements entered into on or after November 5, 1996 must comply with
the new ownership rules by August 5, 2001 or such local marketing agreements
will terminate. Local marketing agreements entered into before November 5, 1996,
will be grandfathered until the conclusion of the FCC's 2004 biennial review.
The new rules also generally allow one entity to own two television stations in
the same market if there would be eight full-power commercial and non-commercial
television stations in the market after the combination, or if the acquired
station is economically distressed and could not be built or operated without
combining with another station in the market. In certain cases, parties with
grandfathered local marketing agreements may rely on the circumstances at the
time the local marketing agreement was entered into in advancing any proposal
for co-ownership of the stations. The markets in which Pegasus programs a second
station pursuant to a local marketing agreement do not have eight full-power
commercial and non-commercial television stations. Pegasus has not yet filed any
application to acquire any of the stations with which it has local marketing
agreements based on a showing of economic distress, and cannot predict the
outcome of such a filing should one be made. Pegasus' local marketing agreements
with WSWB and WFXU were entered into after November 5, 1996. The local marketing
agreement with WPME was entered into prior to November 5, 1996. The local
marketing agreement with WGFL was entered into after November 5, 1996. However,
Pegasus does not own other stations in the WGFL market, and thus the WGFL local
marketing agreement is not currently affected by these changes. Petitions for
reconsideration of the new rules, including a petition submitted by Pegasus, are
currently pending before the FCC. We cannot predict the outcome of these
petitions.
When operating pursuant to a local marketing agreement, while the bulk of
the programming is provided by someone other than the licensee of the station,
the station licensee must retain control of the station for FCC purposes. Thus,
the licensee has the ultimate responsibility for the programming broadcast on
the station and for the station's compliance with all FCC rules, regulations,
and policies. The licensee must retain the right to preempt programming supplied
pursuant to the local marketing agreement where the licensee determines, in its
sole discretion, that the programming does not promote the public interest or
where the licensee believes that the substitution of other programming would
better serve the public interest. The licensee must also have the primary
operational control over the transmission facilities of the station.
Pegasus programs WPME (Portland, Maine), WGFL (Gainesville, Florida), WSWB
(Northeastern Pennsylvania), and WFXU (Tallahassee, Florida) through the use of
local marketing agreements, but there can be no assurance that the licensees of
such stations will not unreasonably exercise their right to preempt the
programming of Pegasus, or that the licensees of such stations will continue to
maintain the transmission facilities of the stations in a manner sufficient to
broadcast a high quality signal over the station. As the licensee must also
maintain all of the qualifications necessary to be a licensee of the FCC, and as
the principals of the licensee are not under the control of Pegasus, there can
be no assurances that these licenses will be maintained by the entities which
currently hold them.
Cable Franchises
Cable systems are generally constructed and operated under non-exclusive
franchises granted by state or local governmental authorities. The franchise
agreements may contain many conditions, such as the payment of franchise fees;
time limitations on commencement and completion of construction; conditions of
service, including the number of channels, the carriage of public, educational
and governmental access channels, the carriage of broad categories of
programming agreed to by the cable operator, and the provision of free service
to schools and certain other public institutions; and the maintenance of
insurance and indemnity bonds. Certain provisions of local franchises are
subject to limitations under the Cable Television Consumer Protection and
Competition Act of 1992.
88
<PAGE>
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.
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
89
<PAGE>
patios. The Telecommunications Act also preempted local (but not state)
governments from imposing taxes or fees on direct-to-home services, including
direct broadcast satellite. Finally, the Telecommunications Act required that
multichannel video programming distributors such as direct-to-home operators
fully scramble or block channels providing indecent or sexually explicit adult
programming. If a multichannel video programming distributor could not fully
scramble or block such programming, it was required to restrict transmission to
those hours of the day when children are unlikely to view the programming (as
determined by the FCC). On March 24, 1997, the U.S. Supreme Court let stand a
lower court ruling that allowed enforcement of this provision pending a
constitutional challenge. In response to this ruling, the FCC declared that its
rules implementing the scrambling provision would become effective on May 18,
1997. On December 28, 1998, the requirement to scramble sexually explicit
programming was ruled unconstitutional by the U.S. District Court in Wilmington,
Delaware, and the decision was appealed to the U.S. Supreme Court.
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 completed a rulemaking 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.
The Satellite Home Viewer Act, as modified by the Satellite Home Viewer
Improvement Act of 1999 establishes a "statutory" copyright license that allows
a direct-to-home satellite operator to retransmit three types of television
broadcast programming to subscribers for private home viewing:
o network programming so long as any such retransmission is limited to
those persons in "unserved households;"
o independent station ("superstation") programming, regardless of whether
households are "served or "unserved," as long as any such retransmission
qualifies as a "distant" signal; and
o any local broadcast signal so long as it is retransmitted locally ("local
to local").
Retransmission of the first two types of signals is subjected to a statutory
established mechanism for the calculation and payment of copyright royalty fees;
these provisions will remain in effect until December 31, 2004. The third type
of signal is royalty-free; this statutory provision is permanent.
In addition to explicit statutory requirements, and administrative
responsibilities in the U.S. Copyright Office, the Satellite Home Viewer
Improvement Act requires the FCC to engage in numerous regulatory activities,
all to be completed on or before November 29, 2000.
The first inquiry which is made by the FCC, a notice of proposed
rulemaking, concerns retransmission consent issues. Among other things, the
Satellite Home Viewer Improvement Act requires broadcasters, until 2006, to
negotiate in "good faith," with satellite carriers and other multi-channel video
program distributors regarding the carriers' retransmission of the broadcasters'
signals. The FCC has sought comments on the "good faith" negotiation requirement
and other key aspects of retransmission consent, including aspects already
promulgated pursuant to the Communications Act.
90
<PAGE>
Second, the FCC has issued a notice of proposed rulemaking seeking comments
on the implementation of regulations that would apply current cable rules for
network non-duplication, syndicated program exclusivity and sports blackout to
satellite carriers. These three rules have been in existence for many years and
involve television broadcast programs that are retransmitted by cable operators.
The Satellite Home Viewer Improvement Act directs the FCC to apply these rules
to satellite carriers' retransmission of superstations. In addition, the FCC is
directed to apply the sports blackout rule to carriers' retransmission of
network stations as well, but only "to the extent technically feasible and not
economically prohibitive."
The FCC is also seeking public comments on rules to improve the computer
model that predicts signal intensity at a household for the purpose of
determining eligibility for receiving distant television broadcast signals via
satellite. The determination about whether a household is "unserved" -- that is,
cannot receive a signal of Grade B intensity using a conventional outdoor TV
antenna -- is an important one because only these households may receive distant
network to distant network television signals.
The Satellite Home Viewer Improvement Act requires direct-to-home satellite
carriers by January 1, 2002, to carry upon request all local broadcast stations'
signals in local markets in which the carriers carry at least one signal
pursuant to the "local to local" statutory license. 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.
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. See Risk Factors -- Risks of Our Direct Broadcast Satellite
Business -- The Effect of New Federal Satellite Television Legislation on Our
Business is Unclear.
The foregoing does not purport to describe all present and proposed federal
regulations and legislation relating to the direct broadcast satellite industry.
Broadcast Television
The ownership, operation and sale of television stations, including those
licensed to our subsidiaries, are subject to the jurisdiction of the FCC under
authority granted it pursuant to the Communications Act. Matters subject to FCC
oversight include, but are not limited to,
o the assignment of frequency bands for broadcast television;
o the approval of a television station's frequency, location and operating
power;
o the issuance, renewal, revocation or modification of a television
station's FCC license;
o the approval of changes in the ownership or control of a television
station's licensee;
o the regulation of equipment used by television stations; and
o the adoption and implementation of regulations and policies concerning
the ownership, operation and employment practices of television stations.
The FCC has the power to impose penalties, including fines or license
revocations, upon a licensee of a television station for violations of the FCC's
rules and regulations. The following is a brief summary of certain provisions of
the Communications Act and of specific FCC regulations and policies affecting
broadcast television. Reference should be made to the Communications Act, FCC
rules and the public notices and rulings of the FCC for further information
concerning the nature and extent of FCC regulation of broadcast television
stations.
License Renewal. Television station licenses are granted for a maximum
allowable period of eight years and are renewable thereafter for additional
eight year periods. The FCC may revoke or deny licenses, after a hearing, for
serious violations of its regulations, and it may impose fines on licensees for
less serious infractions. Petitions to deny renewal of a license may be filed on
or before the first day of the last month of a license term. Generally, however,
in the absence of serious violations of FCC rules or policies, license
91
<PAGE>
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 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:
92
<PAGE>
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 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
93
<PAGE>
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 which could impact proposed digital television stations. This may
preclude the improvement of the facilities of certain stations owned or
programmed by Pegasus. The order also allotted digital television stations at
the current analog transmitter sites. Changes in the location of digital
stations are dependent on the lack of interference to other digital and analog
stations. Pegasus has filed applications with the FCC for digital television
construction permits for all of its stations.
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
94
<PAGE>
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 Cable Communications Policy Act of 1984, Cable Television Consumer
Protection and Competition Act of 1992, and the Telecommunications Act of 1996.
The amendments to the Communications Act created uniform national standards and
guidelines for the regulation of cable systems. Among other things, these
amendments generally preempted local control over cable rates in most areas. In
addition, the Communications Act affirms the right of franchising authorities
(state or local, depending on the practice in individual states) to award one or
more franchises within their jurisdictions. It also prohibited 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 both basic and certain nonbasic 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;
95
<PAGE>
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.
On February 8, 1996, the President signed into law substantial amendments
to the Communications Act, which amendments are referred to as the
Telecommunications Act. These amendments alter the regulatory structure
governing the nation's telecommunications providers. It removes barriers to
competition in both the cable television market and the local telephone market.
Among other things, it reduces the scope of cable rate regulation.
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.
FCC regulation of cable program service tier rates for all systems,
regardless of size, expired on March 31, 1999. However, if rates for cable
program service tiers substantially increase as a result of the expiration of
tier rate regulation, Congress could act to re-impose regulation of those rates.
Cable Rate Regulation. In June 1995, the FCC adopted rules which provide
significant rate relief for small cable operators, which include operators the
size of Pegasus. Pegasus' current rates are below the maximum presumed
reasonable under the FCC's rules for small operators, and Pegasus may use this
rate relief to justify current rates, rates already subject to pending rate
proceedings and new rates. The Communications Act does not disturb existing rate
determinations of the FCC. Pegasus' basic tier of cable service rates are not
currently subject to local franchising authorities' regulation under the
Communications Act.
Under the Communications Act, rate regulation is precluded wherever a cable
operator faces "effective competition." The Communications Act further expanded
the definition of effective competition to include any franchise area where a
local exchange carrier provides video programming services to subscribers by any
means other than through direct broadcast satellite. There is no penetration
minimum for the local exchange carrier to qualify as an effective competitor,
but it must provide "comparable" programming services in the franchise area. The
FCC has found that all of the Pegasus' cable television systems are subject to
effective competition and therefore are not subject to rate regulation.
Anti-Buy Through Provisions. In March 1993, the FCC adopted regulations
pursuant to the Communications Act which require cable systems to permit
customers to purchase video programming on a per channel or a per program basis
without the necessity of subscribing to any tier of service, other than the
basic service tier, unless the cable system is technically incapable of doing
so. Generally, this exemption from
96
<PAGE>
compliance with the statute for cable systems that do not have such technical
capability is available until a cable system obtains the capability, but not
later than December 2002. Pegasus' systems have the necessary technical
capability and have complied with this 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.
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
97
<PAGE>
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, consumer service provisions, leased access and equipment
compatibility will not apply. Cable copyright provisions will apply to
programmers using an open video system. 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 carriage by cable systems of all
local full powered 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 recently 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 Communications 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.
98
<PAGE>
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 blanket license to certain
retransmit broadcast signals. Bills have been introduced in Congress over the
past several years that would eliminate or modify the cable compulsory license.
The Communications Act's retransmission consent provisions expressly provide
that retransmission consent agreements between television stations and cable
operators do not obviate the need for cable operators to obtain a copyright
license for the programming carried on each broadcaster's signal.
Electric Utility Entry Into Telecommunications. The Telecommunications Act
provides that registered utility holding companies and subsidiaries may provide
telecommunications services, including cable, notwithstanding the Public Utility
Holding Company Act. Electric utilities must establish separate subsidiaries,
known as "exempt telecommunications companies" and must apply to the FCC for
operating authority. It is anticipated that large utility holding companies will
become significant competitors to both cable television and other
telecommunications providers.
State and Local Regulation. Because a cable system uses streets and
rights-of-way, cable systems are subject to state and local regulation,
typically imposed through the franchising process. State and/or local officials
are usually involved in franchisee selection, system design and construction,
safety, consumer relations, billing practices and community-related programming
and services among other matters. Cable systems generally are operated pursuant
to nonexclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Franchises generally are granted for
fixed terms and in many cases are terminable if the franchise operator fails to
comply with material provisions. The Communications Act prohibits the award of
exclusive franchises and allows franchising authorities to exercise greater
control over the operation of franchised cable systems, especially in the area
of customer service and rate regulation. The Communications Act also allows
franchising authorities to operate their own multichannel video distribution
system without having to obtain a franchise and permits states or local
franchising authorities to adopt certain restrictions on the ownership of cable
systems. Moreover, franchising authorities are immunized from monetary damage
awards arising from regulation of cable systems or decisions made on franchise
grants, renewals, transfers and amendments. Under certain circumstances, local
franchising authorities may become certified to regulate basic cable service
rates.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of the
cable system. Cable franchises generally contain provisions governing fees to be
paid to the franchising authority, length of the franchise term, renewal, sale
or transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public streets and number and
types of cable services provided.
Although federal law has established certain procedural safeguards to
protect incumbent cable television franchisees against arbitrary denials of
renewal, the renewal of a franchise cannot be assured unless the franchisee has
met certain statutory standards. Moreover, even if a franchise is renewed, a
franchising authority may impose new and stricter requirements, such as the
upgrading of facilities and equipment or higher franchise fees, subject,
however, to limits set by federal law. To date, however, no request of Pegasus
for franchise renewals or extensions has been denied. Despite favorable
legislation and good relationships with its franchising authorities, there can
be no assurance that franchises will be renewed or extended.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable systems, and several states have adopted
legislation subjecting cable systems to the jurisdiction of centralized state
governmental agencies, some that impose regulation similar to that of a public
utility. Attempts in other states to regulate cable systems are continuing and
can be expected to increase. Such proposals and legislation may be preempted by
federal statute and/or FCC regulation. Puerto Rico has recently adopted new
state level regulations.
99
<PAGE>
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 recently issued a report to Congress 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 are considering the
imposition of mandatory Internet access requirements as part of cable franchise
renewals or transfer approvals.
Other FCC Regulations. In addition to the FCC regulations noted above,
there are other FCC regulations covering such areas as:
o equal employment opportunity;
o customer privacy;
o programming practices -- including, among other things, syndicated
program exclusivity, network program nonduplication, local sports
blackouts, indecent programming, lottery programming, political
programming, sponsorship identification, and children's programming
advertisements;
o registration of cable systems and facilities licensing;
o maintenance of various records and public inspection files;
o frequency usage;
o lockbox availability;
o antenna structure notification;
o tower marking and lighting;
o consumer protection and customer service standards;
o technical standards; and
o consumer electronics equipment compatibility.
Legal Proceedings
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
100
<PAGE>
Telecommunications Cooperative also sought a temporary restraining order
preventing DIRECTV from marketing the premium programming in such markets and
requiring DIRECTV to provide the National Rural Telecommunications Cooperative
with the premium programming for exclusive distribution in those areas. The
court, in an order dated June 17, 1999, denied the National Rural
Telecommunications Cooperative a preliminary injunction on such matters, without
deciding the underlying claims. On July 22, 1999, DIRECTV responded to the
National Rural Telecommunications Cooperative's continuing lawsuit by rejecting
the National Rural Telecommunications Cooperative's claims to exclusive
distribution rights and by filing a counterclaim seeking judicial clarification
of certain provisions of DIRECTV's contract with the National Rural
Telecommunications Cooperative. In particular, DIRECTV contends in its
counterclaim that the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative is measured solely by the orbital life of DBS-1,
the first DIRECTV satellite launched into orbit at the 101o W orbital location,
without regard to the orbital lives of the other DIRECTV satellites at the 101o
W orbital location. DIRECTV also alleges in its counterclaim that the National
Rural Telecommunications Cooperative's right of first refusal, which is
effective at the end of the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative, does not provide for certain programming and
other rights comparable to those now provided under the contract. On September
8, 1999, the court denied a motion by DIRECTV to dismiss certain of the National
Rural Telecommunications Cooperative's claims, leaving all of the causes of
action asserted by the National Rural Telecommunications Cooperative at issue.
On September 9, 1999, the National Rural Telecommunications Cooperative
filed a response to DIRECTV's counterclaim contesting DIRECTV's interpretations
of the end of term and right of first refusal provisions. On August 26, 1999,
the National Rural Telecommunications Cooperative filed a separate lawsuit in
federal court against DIRECTV claiming that DIRECTV had failed to provide to the
National Rural Telecommunications Cooperative its share of launch fees and other
benefits that DIRECTV and its affiliates have received relating to programming
and other services. On November 15, 1999, the court granted a motion by DIRECTV
and dismissed a portion of the National Rural Telecommunications Cooperative's
lawsuit regarding launch fees and other benefits. In particular, the court
dismissed the tort claim asserted by the National Rural Telecommunications
Cooperative, but left in place the remaining claims asserted by the National
Rural Telecommunications Cooperative. The court also consolidated that lawsuit
with the other pending National Rural Telecommunications Cooperative/DIRECTV
lawsuit. The court set various discovery and motion deadlines for the Spring and
Summer of 2000 but did not set a trial date.
On December 29, 1999, DIRECTV filed a motion for partial summary judgment.
The motion seeks a court order that the National Rural Telecommunications
Cooperative's right of first refusal, effective at the termination of DIRECTV's
contract with the National Rural Communications 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 claims.
On January 10, 2000, we and Golden Sky filed a class action lawsuit in
federal court in Los Angeles against DIRECTV. In this new litigation, we and
Golden Sky are representatives of a proposed class that would include all
members and associates 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. 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 associates. 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
because we are an associate of the National Rural Telecommunications Cooperative
with contract rights that are affected by the contractual relationship between
the National Rural Telecommunications Cooperative and DIRECTV.
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
101
<PAGE>
Indiana, seek unspecified damages for the purported class and modification of
our late-fee policy. We are in the process of evaluating our response and are
unable to estimate the amount involved or to determine whether this suit is
material to us. Similar suits have been brought against DIRECTV and various
cable operators in other parts of the United States.
In addition to the matters discussed above and other matters discussed in
the documents incorporated by reference herein, 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.
Properties
Our corporate headquarters are located in Bala Cynwyd, Pennsylvania. Our
office lease will expire in 2004 and should be adequate for our needs in the
foreseeable future. However, we have entered into a definitive agreement to
purchase the building for $12.5 million. The purchase will be subject to a
mortgage of approximately $9.4 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.
102
<PAGE>
BUSINESS OF GOLDEN SKY
General
Golden Sky Holdings, Inc. is the parent company of Golden Sky DBS, Inc.,
which is the parent company of Golden Sky Systems, Inc. Golden Sky Systems,
Inc. is the primary operating subsidiary of Golden Sky. References in this
section to Golden Sky therefore refer to Golden Sky Holdings, Inc., acting
through its subsidiaries Golden Sky DBS, Inc. and Golden Sky Systems, Inc.
Golden Sky is the second largest independent provider of DIRECTV satellite
television programming in rural markets in the United States. Under its
agreements with the National Rural Telecommunications Cooperative, it has the
exclusive right to provide DIRECTV programming in the following rural DIRECTV
markets and to receive the monthly service revenue from all DIRECTV subscribers
in these markets regardless of the subscribers' original point of purchase.
<TABLE>
<CAPTION>
Number of Rural
Geographical Area DIRECTV Markets Total Households States Represented
- ------------------------ ----------------- ------------------ --------------------
<S> <C> <C> <C>
Southeast .............. 5 210,000 AL, FL, GA, NC, TN
Southwest .............. 14 520,000 AR, OK, TX
Midwest ................ 21 547,000 IA, KS, MI, MN, MO,
ND, NE, WI
Rocky Mountain ......... 10 227,000 CO, ID, MT, UT, WY
Pacific ................ 7 357,000 CA, NV, OR
-- -------
Total .................. 57 1,861,000
== =========
</TABLE>
- ------------
Total households are based on estimates of primary residences by Claritas, Inc.
Golden Sky's subscriber base has increased rapidly due to acquisitions,
internal growth and a low churn rate. The annual churn rate approximated 13.9%
during the twelve-month period ended September 30, 1999.
Golden Sky believes that its exclusive right to provide DIRECTV programming
in direct broadcast satellite's rural DIRECTV markets is attractive for the
following reasons:
o DIRECTV Programming. Golden Sky believes that marketing DIRECTV, the
country's leading direct broadcast satellite provider, gives it a
competitive advantage over providers of other subscription television
services. DIRECTV offers a wide variety of programming, exclusive sports
packages like NFL SUNDAY TICKET and a large selection of pay-per-view
movies and events. Golden Sky capitalizes on the recognition of DIRECTV's
brand name and on DIRECTV's programming advantages to broaden its
subscriber base in its rural DIRECTV markets;
o Limited Competition in Rural Markets. Competition from cable television
providers in Golden Sky's markets is often limited. Many households in
rural markets are not passed by traditional cable systems or are served
by analog systems with less than 40 channels and inferior signal quality
compared to direct broadcast satellite service. Rural households also
often receive poor reception of off-air channels. Given the relatively
low housing density in these markets, the build-out of new cable systems
or upgrade of existing cable systems may not be cost-effective. Other
entertainment options, like theaters, movies and sporting events, may
also be limited; and
o National Marketing, Distribution and Manufacturing Support. Golden Sky's
local marketing efforts are supported by DIRECTV's national marketing
campaign, which includes television and print advertising, and through
its alliances with strategic partners like Bell Atlantic and GTE. DIRECTV
also supports its local providers with an extensive retail distribution
network, offering more channels of distribution and more retail
distribution points than competing services. Three major consumer
electronics manufacturers currently compete to provide customers with
direct broadcast satellite equipment. Golden Sky believes that
competition among direct broadcast satellite equipment providers results
in greater availability, continued product innovation and lower equipment
costs compared to single-source direct broadcast satellite equipment
required for some competing services.
103
<PAGE>
Sales and Distribution
Golden Sky offers DIRECTV programming to consumer and business segments in
its rural DIRECTV markets through two separate but complementary sales and
distribution channels.
Direct Sales Force and Dealer Network. Golden Sky has established direct
sales forces in all of its rural markets to market DIRECTV programming services.
Its direct sales force currently consists of approximately 225 direct
salespeople who are compensated on a commission basis. Since inception Golden
Sky has opened approximately 70 full service retail stores in its rural DIRECTV
markets. Golden Sky supports its direct sales staff and local offices with an
advertising campaign that it believes is both creative and consistent. Golden
Sky also has close relationships with approximately 450 independent dealers of
direct broadcast satellite equipment to whom it provides marketing, subscriber
authorization, installation and customer service support in order to enhance its
subscriber additions. Wherever possible, Golden Sky's arrangements with dealers
are exclusive. In connection with the sale of a direct broadcast satellite unit
and a subscription to DIRECTV programming, a dealer retains the proceeds from
the sale of the equipment and earns a one-time commission paid by Golden Sky.
Golden Sky retains the ongoing monthly subscription revenue from the subscriber.
For equipment sold through the indirect dealer network, Golden Sky generally
provides a subsidy, thus lowering the price of the equipment for the consumer.
Other Distribution Channels. In addition to its direct sales force, Golden
Sky utilizes other distribution channels to offer DIRECTV programming to
potential subscribers in its rural DIRECTV markets, including:
o national retailers selected by DIRECTV;
o consumer electronics dealers authorized by DIRECTV to sell DIRECTV
programming; and
o satellite dealers and consumer electronics dealers authorized by five
regional sales management agents selected by DIRECTV.
In a similar fashion to its indirect dealer network, Golden Sky pays a one-time
commission to these distribution channels for the sale of DIRECTV programming to
a subscriber located in its rural DIRECTV markets and Golden Sky receives all
associated monthly programming revenue associated therewith, regardless of what
outlet originally sold DIRECTV programming to the subscriber.
Marketing
Golden Sky believes that direct broadcast satellite services compete
favorably with medium and low-power direct-to-home, cable and other subscription
television services on the basis of superior signal quality, channel capacity,
programming choice and price. Golden Sky complements the extensive existing
marketing effort of DIRECTV and its other national distribution partners through
focused local marketing and sales, including local print and radio advertising
to promote general market acceptance of DIRECTV programming. Golden Sky believes
that, prior to acquisition, there was no significant local presence in its
acquired markets to drive these local marketing and sales efforts.
Golden Sky also implements support-advertising programs for its indirect
distribution channels. Its marketing efforts emphasize the value of premium
subscription plan offerings in order to maximize revenue per customer. Golden
Sky has implemented specific promotions, like offering new subscribers an
initial month's service at no charge, to motivate customers to purchase these
plans. Golden Sky also has incentive-based sales compensation for both its
direct and dealer sales forces to promote and sell premium subscription plans.
A key element of its marketing strategy is to offer value-priced direct
broadcast satellite equipment and installation through the use of subsidies on
direct sales of direct broadcast satellite equipment and installations to lower
the up-front costs to consumers of becoming Golden Sky subscribers. Golden Sky
offers various types of direct broadcast satellite equipment and accessories
through its direct sales force and retail locations. Golden Sky is able to take
advantage of volume discounts in purchasing this equipment from the National
Rural Telecommunications Cooperative and other vendors. In addition, dealers are
motivated to lower the prices at which they offer direct broadcast satellite
equipment and installation by Golden Sky's volume-based commission structure.
104
<PAGE>
Customer Service
Golden Sky provides customer service from each of its local offices.
Generally, its offices are staffed from 9 a.m. to 7 p.m., six days a week. Local
managers are responsible for managing customer accounts receivable and churn.
Golden Sky believes it can control its churn rate by providing local customer
service and aggressively managing collections. Overflow and after hours
assistance is provided 24 hours a day, seven days a week, by its national call
center located in Kansas City, Missouri. Golden Sky also provides professional
installation services and technical assistance in each of its offices.
National Rural Telecommunications Cooperative and DIRECTV
For a description of the National Rural Telecommunications Cooperative and
DIRECTV and rights granted to Golden Sky under the National Rural
Telecommunications Cooperative member agreements, see Business of Pegasus --
Direct Broadcast Satellite Agreements, Licenses, Local Marketing Agreements and
Cable Franchises -- Direct Broadcast Satellite Agreements.
Competition
Golden Sky faces competition for subscribers within its exclusive rural
DIRECTV markets from a broad range of companies offering communications and
entertainment services, including cable operators, other satellite service
providers, wireless cable operators, telephone companies, television networks
and home video product companies. Many of Golden Sky's competitors have greater
financial and marketing resources than it does and the business of providing
subscription and pay television programming is highly competitive. Golden Sky
believes that quality and variety of programming, signal quality, service and
cost are the key bases of competition.
Competing Subscription Television Providers
Cable Television Providers. Cable operators in the United States serve
approximately 65 million subscribers, representing over 65% penetration of
television households passed by cable systems. Cable operators typically offer
30 to 80 channels of programming at an average monthly subscription price of
approximately $36. While cable companies currently serve a majority of the U.S.
television market, Golden Sky believes many may not be able to provide the
quality and variety of programming offered by DIRECTV until they significantly
upgrade their coaxial systems. Many cable television providers are in the
process of upgrading their systems and other cable operators have announced
their intentions to make significant upgrades. Many proposed upgrades, like
conversion to digital format, fiber optic cabling, advanced compression
technology and other technological improvements, when fully completed, will
permit cable companies to increase channel capacity, thereby increasing
programming alternatives, and to deliver a better quality signal. Although cable
systems with adequate channel capacity may offer digital service without major
rebuilds, Golden Sky believes that other cable systems that have limited channel
capacity, like those in most of the rural DIRECTV markets, will have to be
upgraded to add bandwidth in order to provide digital service. Golden Sky
believes that these upgrades will require substantial investments of capital and
time to complete industry-wide. As a result, Golden Sky believes that there will
be a substantial delay before cable systems in the rural DIRECTV markets can
offer programming services equivalent to direct broadcast satellite providers
and that some cable systems in those markets may never be upgraded, subject to
advances in digital compression technology currently under development.
Golden Sky expects to encounter a number of challenges in competing with
cable television providers. First, cable operators have an entrenched position
in the marketplace. However, Golden Sky believes that its current strategy of
targeting rural DIRECTV markets that are not served by cable or are underserved
by cable partially offsets the cable industry's position in the consumer
marketplace. Second, the up-front costs to the consumer associated with
purchasing and installing direct broadcast satellite equipment are higher than
the up-front costs for installation of cable television. However, prices for
direct broadcast satellite equipment have declined consistently since
introduction and Golden Sky believes that competition among direct broadcast
satellite equipment vendors and technological improvements will create
continuing downward pressure on prices. Third, direct broadcast satellite
systems, unlike cable, do not currently provide local broadcast
105
<PAGE>
programming via satellite, except with respect to certain large metropolitan
markets in the United States. Both DIRECTV and EchoStar have announced their
intentions to provide local broadcast service in additional large metropolitan
areas of the country in the near future. Seamless switching between satellite
and broadcast programming from other sources is possible with all direct
broadcast satellite units. In addition, DIRECTV provides programming from
affiliates of the national broadcast networks to subscribers who are unable to
receive networks over the air and do not subscribe to cable. See -- Regulation.
Golden Sky believes that the significant capital costs of upgrading cable
systems to provide similar services, combined with the marketing strength of
direct broadcast satellite providers like DIRECTV, presents direct broadcast
satellite providers with an opportunity to take substantial market share for pay
television services from cable in the rural DIRECTV markets.
Other Direct-To-Home Television Providers. EchoStar, the only other
remaining direct broadcast satellite provider in the United States, began
national broadcasting of programming in March 1996 and currently broadcasts
approximately 500 channels of digital television programming and CD quality
audio programming services to the entire continental United States. EchoStar has
21 licensed channel frequencies at the 119 degrees W.L. orbital position and 28
licensed channel frequencies at the 110 degrees W.L. orbital position. The 110
degrees and 119 degrees W.L. orbital positions are two of the three direct
broadcast satellite orbital locations that can serve the entire continental
United States. These three orbital locations are sometimes referred to as full
"CONUS." EchoStar also has 69 frequencies in other partial CONUS orbital
locations. EchoStar reported approximately 3.4 million subscribers as of
December 31, 1999. In June 1999, EchoStar acquired its license for 28 direct
broadcast satellite frequencies at 110 degrees W.L., two satellites to be
delivered in orbit and a direct broadcast operations facility from The News
Corporation Limited and MCI WorldCom Inc. EchoStar expects to significantly
expand its direct broadcast satellite and other programming offerings as a
result of this acquisition, which will potentially strengthen its competitive
strength relative to DIRECTV and Golden Sky. Golden Sky believes that it can
successfully compete with EchoStar in the direct broadcast satellite market
because of its local strategy and because of DIRECTV's brand name and its
significantly larger distribution networks.
Primestar, a medium-power direct-to-home provider, launched the first
digital direct-to-home satellite television service in 1994. On April 28, 1999,
Hughes acquired Primestar's medium-power direct-to-home business, which
consisted of its subscribers and related high-power satellite assets, for
approximately $1.8 billion. Prior to its acquisition by Hughes, Primestar
offered a full range of programming to approximately 2.3 million subscribers
nationwide, approximately 100,000 of which Golden Sky believes were located
within Golden Sky's rural DIRECTV markets. Former Primestar subscribers that
choose to receive DIRECTV programming in Golden Sky's rural markets will become
its subscribers.
Low-power C-band direct-to-home operators reported approximately 1.6
million subscribers as of December 31, 1999. C-band direct-to-home operators
provide subscription television services primarily to subscribers who live in
markets not served by cable television. C-band equipment, including the
six-to-eight-foot dish necessary to receive the low-power signal, currently
costs approximately $2,000 and is distributed by local TVRO satellite dealers.
Golden Sky believes that direct broadcast satellite has significant advantages
over low-power C-band service in equipment cost, dish size and range of
programming packages. During 1998 and 1999, the number of C-band customers
decreased by 465,000 subscribers.
Other Competitors
Regional telephone companies and other long distance companies could become
significant competitors in the future, as they have expressed an interest in
becoming subscription multi-channel video programming distributors. Furthermore,
the Telecommunications Act of 1996 removes barriers to entry that previously
inhibited local telephone companies from competing, or made it more difficult
for telephone companies to compete, in the provision of video programming and
information services. Several telephone companies have received authorization to
test market video and other services in specified geographic areas using fiber
optic cable and digital compression over existing telephone lines. Estimates for
the timing of wide-scale deployment of these multi-channel video services vary,
as several telephone companies have pushed back or cancelled originally
announced deployment schedules. In addition, mergers, joint ventures and
alliances among franchise, wireless or private cable television operators and
regional telephone companies may result in
106
<PAGE>
competitors capable of offering bundled cable television and telecommunications
services. For example, the merger of AT&T and Tele-Communications, Inc. resulted
in a large, integrated communications provider with significantly greater
technical, financial and marketing resources than Golden Sky has.
As more telephone companies begin to provide multi-channel video
programming and other information and communications services to their
customers, additional significant competition for subscribers will develop.
Among other things, telephone companies have an existing relationship with
substantially every household in their service area, substantial financial
resources and an existing infrastructure. Further, telephone companies may be
able to subsidize the delivery of programming through their position as the sole
source of local wireline telephone service to the home.
Most areas of the United States are covered by traditional terrestrial
over-the-air VHF/UHF television broadcasters. Consumers can receive from three
to ten channels of over-the-air programming in most markets. These stations
provide local, network and syndicated programming free of charge, but each major
market is generally limited in the number of programming channels. On August 5,
1997, Congress approved the release of additional digital spectrum for use by
VHF/UHF broadcasters.
Regulation
For a description of certain statutes and regulations applicable to Golden
Sky's business, see Business of Pegasus -- Legislation and Regulation.
Facilities
On January 27, 1999, Golden Sky entered into a lease with respect to
approximately 35,000 square feet of office space in Kansas City, Missouri.
Annual rent under this lease approximates $570,000 and the lease will terminate
in August 2002. Golden Sky moved its principal executive offices to this
location in April 1999. Golden Sky also has more than 60 offices and operations
in 24 states.
Management and Employees
As of December 31, 1999, Golden Sky had approximately 700 full-time and 200
part-time employees. Golden Sky is not a party to any collective bargaining
agreement and considers its relations with its employees to be good.
Legal Proceedings
For a description of certain legal proceedings to which Golden Sky is a
party or in which it has an interest as a result of its status as a non-voting
affiliate of the National Rural Telecommunications Cooperative, see Business of
Pegasus -- Legal Proceedings. Golden Sky is not currently a party to any other
material legal proceedings.
107
<PAGE>
PEGASUS MANAGEMENT
Executive Officers, Directors, and Designees for Director
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 and Secretary
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 ............... 38 Director
Donald W. Weber ................ 63 Director
Robert F. Benbow ............... 63 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.
108
<PAGE>
Howard E. Verlin is a Vice President and Assistant Secretary of Pegasus and
is responsible for operating activities of Pegasus' DBS 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 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.
Harry F. Hopper, III has been a director of Pegasus since April 27, 1998.
From June 1996 until April 27, 1998, Mr. Hopper had been a director of Digital
Television Services, Inc., or a manager of its predecessor, Digital Television
Services, LLC. Mr. Hopper is a Managing Director of Columbia Capital
Corporation, which he joined in January 1994. Columbia Capital is a venture
capital firm with an investment focus on communications services, and
information and communication technologies. Mr. Hopper is serving as a director
of Pegasus as Columbia's designee to the board of directors.
James J. McEntee, III has been a director of Pegasus since October 8,
1996. Mr. McEntee has been a member of the law firm of Lamb, Windle & McErlane,
P.C. for the past six years and a principal of that law firm for the past five
years. 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.
William P. Phoenix has been a director of Pegasus since June 17, 1998. He
is a Managing Director of CIBC World Markets Corp. and co-head of its Credit
Capital Markets Group. Mr. Phoenix is also a member of CIBC World Markets
Corp.'s credit investment and risk committees. Prior to joining CIBC World
Markets Corp. in 1995, Mr. Phoenix had been a Managing Director of Canadian
Imperial Bank of Commerce with management responsibilities for the bank's
acquisition finance, mezzanine finance and loan workout and restructuring
businesses. Mr. Phoenix joined Canadian Imperial Bank of Commerce in 1982. Mr.
Phoenix is one of the directors designated as an independent director under the
voting agreement.
Riordon B. Smith has been a director of Pegasus since April 27, 1998. From
February 1997 until April 27, 1998, Mr. Smith had been a director of Digital
Television Services, Inc., or a manager of its predecessor, Digital Television
Services, LLC. Mr. Smith is a Senior Vice President of Fleet Private Equity
Co., Inc.,
109
<PAGE>
which he joined in 1990. Fleet Private Equity Co., Inc. is a private equity
fund with an investment focus in media and information, telecommunications
services, healthcare services, industrial manufacturing business services and
consumer products and services. Mr. Smith is serving as a director of Pegasus
as Chisholm Partners, III, L.P.'s designee to the board of directors.
Donald W. Weber has been a director of Pegasus since its incorporation and
a director of Pegasus Media & Communications since November 1995. Until its
acquisition by Pegasus in November 1997, Mr. Weber had been the President and
Chief Executive Officer of ViewStar Entertainment Services, Inc., a National
Rural Telecommunications Cooperative associate 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. and Healthdyne
Information Enterprises, Inc., 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. See The Merger -- 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 general partner of Alta Communications VI,
L.P., 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. He serves as a director of
Teletrac, Inc., a major metropolitan wireless provider of location and two way
messaging services for fleets of commercial vehicles.
William P. Collatos will be designated as a director by Spectrum Equity
Investors under the amended and restated voting agreement. See The Merger --
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, and ITXC Corp., a global provider of Internet-based voice,
fax and voice-enabled services.
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.
<PAGE>
<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) --
<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.
110
<PAGE>
(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 for 1999, 1998 and 1997,
$53,728, $53,728 and $53,728, respectively, represent the actuarial benefit
to Mr. Pagon of premiums paid by Pegasus in connection with the split
dollar agreement entered into by Pegasus with the trustees of insurance
trust established by Mr. Pagon. See Certain Transactions -- Split Dollar
Agreement. The remainder represents Pegasus' contributions under its 401(k)
plans.
(5) Nicholas A. Pagon became an employee of Pegasus on November 5, 1998.
Pegasus granted options to employees to purchase a total of 727,346 shares
during 1999. The amounts set forth below in the columns entitled "5%" and "10%"
represent hypothetical gains that could be achieved for the respective options
if exercised at the end of the option term. The gains are based on assumed rates
of stock appreciation of 5% and 10% compounded annually from the date the
respective options were granted to their expiration date.
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.
111
<PAGE>
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 Riordan B.
Smith, who were then all of Pegasus' nonemployee directors, each received
options to purchase 5,000 shares of Class A common stock under Pegasus' stock
option plan. Each option vests in annual installments of 2,500 shares, was
issued at an exercise price of $39.50 per share -- the closing price of the
Class A common stock at the time of the grant -- and is exercisable until the
tenth anniversary from the date of grants. On December 17, 1999, James J.
McEntee, III, Mary C. Metzger, Donald W. Weber, William P. Phoenix, Harry F.
Hopper, III, Michael C. Brooks, and Riordan 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 grants.
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
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.
Restricted Stock Plan
For information with respect to the restricted stock option plan, see
Proposal 2: Amendment to Restricted Stock Plan.
112
<PAGE>
Stock Option Plan
For information with respect to the stock option plan, see Proposal 3:
Amendment to Stock Option Plan.
401(k) Plans
Effective January 1, 1996, Pegasus Media & Communications, Inc. adopted the
Pegasus Communications Savings Plan for eligible employees of that company and
its domestic subsidiaries. Effective October 1, 1996, the Pegasus' Puerto Rico
subsidiary adopted the Pegasus Communications Puerto Rico Savings Plan for
eligible employees of the Pegasus' Puerto Rico subsidiaries. Substantially all
Pegasus employees who, as of the enrollment date under the 401(k) plans, have
completed at least one year of service with Pegasus are eligible to participate
in one of the 401(k) plans. Participants may make salary deferral contributions
of 2% to 6% of salary to the 401(k) plans.
Pegasus may make three types of contributions to the 401(k) plans, each
allocable to a participant's account if the participant completes at least 1,000
hours of service in the applicable plan year, and is employed on the last day of
the applicable plan year:
o Pegasus matches 100% of a participant's salary deferral contributions to
the extent the participant invested his or her salary deferral
contributions in Class A common stock at the time of his or her initial
contribution to the 401(k) plans.
o Pegasus, in its discretion, may contribute an amount that equals up to
10% of the annual increase in company-wide location cash flow. These
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.
113
<PAGE>
CERTAIN 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 1997, $53,728 in 1998 and $53,728 in 1999.
Relationship with W.W. Keen Butcher and Affiliated Entities
Pegasus entered into an arrangement in 1998 with W.W. Keen Butcher, the
stepfather of Marshall W. Pagon and Nicholas A. Pagon, certain entities
controlled by him and the owner of a minority interest in one of the entities.
Under this agreement, Pegasus agreed to provide and maintain collateral for up
to $4.0 million in principal amount of bank loans to Mr. Butcher and the
minority owner. Mr. Butcher and the minority owner must lend or contribute the
proceeds of those bank loans to one or more of the entities owned by Mr. Butcher
for the acquisition of television broadcast stations to be programmed by Pegasus
pursuant to local marketing agreements.
Pegasus amended its agreement with W.W. Keen Butcher and his affiliated
entities in the fourth quarter of 1999 to increase the amount of collateral that
Pegasus will maintain for bank loans to Mr. Butcher and the affiliated entities.
Pursuant to the amendment, Pegasus will now 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 agreement.
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 believes that
the WOLF and WFXU transactions were done at fair value and that any future
transactions that may be entered into with the Butcher companies or similar
entities will also be done at fair value.
Acquisition of Digital Television Services, Inc.
On April 27, 1998, Pegasus acquired Digital Television Services, Inc.
through the merger of a subsidiary of Pegasus into Digital Television Services.
Prior to the merger, Digital Television Services was the second largest
independent distributor of DIRECTV services serving 140,000 subscribers in 11
states.
114
<PAGE>
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.
Voting Agreement
On April 27, 1998, in connection with the Digital Television Services
merger, Pegasus, Marshall W. Pagon and a number of partnerships and corporations
controlled by him, and Fleet Venture Resources, Fleet Equity Partners, Chisholm
Partners III, L.P., Kennedy Plaza Partners, Whitney Equity Partners, Columbia
Capital Corporation and Columbia DBS, Inc. entered into a voting agreement. The
voting agreement covers all shares of Class B common stock and other voting
securities of Pegasus held at any time by Mr. Pagon and his controlled entities
and shares of Class A common stock received in the Digital Television Services
merger by Chisholm, Columbia, Whitney and the other former stockholders of
Digital Television Services. It provides that holders of such shares vote their
respective shares in the manner specified in the voting agreement. In
particular, the voting agreement establishes that 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 and Donald W. Weber are serving as independent
directors of Pegasus. Marshall W. Pagon, Robert N. Verdecchio and William P.
Phoenix are serving as directors of Pegasus as designees of Mr. Pagon. Harry F.
Hopper, III is serving as a director of Pegasus as a designee of Columbia
Capital Corporation; Michael C. Brooks is serving as a director of Pegasus as a
designee of Whitney Equity Partners; and Riordon B. Smith is serving as a
director of Pegasus as a designee of Chisholm Partners III, L.P.
The voting agreement terminates with respect to any covered share upon the
sale or transfer of any such share to any person other than a permitted
transferee. In addition, the right of Chisholm Partners III, L.P., Columbia
Capital Corporation and Whitney Equity Partners to designate a director
terminates when the Fleet entities, Columbia Capital Corporation and Whitney
Equity Partners cease owning one-half of the shares originally received by each
of them in the Digital Television Services merger or in certain other
circumstances. Whitney distributed shares it owned to its partners in 1999 and,
thus, has lost its right to designate a director under the voting agreement. The
voting agreement described above will be amended and restated in connection with
the merger, as described in The Merger -- Voting Agreement.
Communications License Re-Auction
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 PCS Partners. Pegasus itself did not
meet the qualification criteria for the FCC's re-auction in which 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
115
<PAGE>
World Markets has historically performed a number of services for Pegasus,
including serving as one of the initial purchasers in Pegasus' January 2000 Rule
144A offering of $300.0 million in aggregate liquidation preference of Series C
convertible preferred stock. In this capacity, CIBC World Markets received
customary underwriting discounts and commissions.
CIBC World Markets has also performed the following services for Pegasus:
o provided a fair market value appraisal in connection with the merger of
Digital Television Services, Inc. into a wholly-owned subsidiary of
Pegasus and the designation of Digital Television Services as a
restricted subsidiary;
o acted as a dealer manager in connection with an offer by Pegasus to
exchange its 12 1/2% Series A senior notes due 2007 for senior
subordinated notes of Digital Television Services and DTS Capital, Inc.
and a related consent solicitation;
o issued letters of credit in connection with bridge financing obtained by
Pegasus;
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 the Digital Television
Services credit facility; 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
customary fees under this arrangement.
In 2000 and 1999, for services rendered, Pegasus or its subsidiaries paid
to CIBC World Markets an aggregate of $2.4 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 is granting Pegasus an exclusive license
for the distribution of satellite based services using Ku band BSS frequencies
at the 101, 110 and 119o West Longitude orbital locations and Ka band FSS
frequencies at the 99, 101, 103 and 125o West Longitude orbital locations, which
frequencies have been licensed by the FCC to affiliates of Hughes Electronics
Corporation. In addition, Personalized Media is granting 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
116
<PAGE>
assembly of records of product and service selections made by viewers including
the communication of this information to billing and fulfillment operations, the
customizing of interactive program guide features and functions made by viewers
and the downloading of software to receivers by broadcasters. Pegasus will pay
license fees to Personalized Media of $100,000 per year for three years.
Pegasus acquired preferred interests of Personalized Media for
approximately $14.3 million in cash, 200,000 shares of Pegasus' Class A common
stock and Pegasus' agreement, subject to certain conditions, to issue warrants
to purchase 1.0 million shares of Pegasus' Class A common stock at an exercise
price of $90.00 per share and with a term of ten years. After certain periods of
time, Personalized Media may redeem the preferred interests, and Pegasus may
require the redemption of preferred interests, in consideration for Personalized
Media's transfer to Pegasus of Personalized Media's ownership interest in its
wholly-owned subsidiary that holds the exclusive license from Personalized Media
for the rights that are licensed to Pegasus. Pegasus may also be required to
make an additional payment to Personalized Media if certain contingencies occur
that Pegasus believes are unlikely to occur. Because of the speculative nature
of the contingencies, it is not possible to estimate the amount of any such
additional payments, but in some cases it could be material. As part of the
transaction, Personalized Media will be entitled to designate one nominee to
serve on Pegasus' board of directors.
Other Transactions
In December 1998, Pegasus agreed to lend $199,999 to Nicholas A. Pagon,
Pegasus' Vice President of Broadcast Operations, bearing interest at the rate of
6% per annum, with the principal amount due on the fifth anniversary of the date
of the promissory note. Mr. Pagon is required to use half of the proceeds of the
loan to purchase shares of Class A common stock, and the loan will be
collateralized by those shares. The balance of the loan proceeds may be used at
Mr. Pagon's discretion.
117
<PAGE>
OWNERSHIP AND CONTROL
The following table sets forth share information as of December 31, 1999,
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 Golden Sky stockholder who is anticipated to be the beneficial owner
of more than 5% of Pegasus' Class A common stock or Class B common stock
upon consummation of the merger;
o each director of Pegasus;
o each person who will be elected to Pegasus' board of directors upon
consummation of the merger;
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.
The information set forth below in the table and the footnotes thereto which
give effect to the consummation of the merger assumes that 6,500,000 shares of
Pegasus' Class A common stock in the aggregate will be issued to Golden Sky's
stockholders. The actual number of shares to be issued to Golden Sky's
stockholders upon consummation of the merger may differ, but not materially,
from those presented below. For information concerning the calculation of the
number of shares to be issued in the merger, see The Merger -- The Merger
Agreement -- Conversion of Golden Sky Capital Stock and The Merger -- The Merger
Agreement -- Conversion Ratios. The information set forth below does not give
effect to any options that may be issued by Pegasus to replace Golden Sky's
outstanding options and warrants upon consummation of the merger.
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 ___% and ___% of the
common stock before and after the merger, respectively, and without giving
effect to the voting agreement, ____ % and ___% of the combined voting power of
all voting stock before and after the consummation of the merger, respectively.
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.
118
<PAGE>
<TABLE>
<CAPTION>
Before Merger
------------------------------------------------------------------------------
Pegasus Class A Pegasus Class B
Common Stock Common Stock
Name and address of Beneficially Beneficially Voting
Beneficial Owner Owned Owned Power
- ------------------------------------ ----------------------------------------- ------------------------- --------
Shares % Shares % %
------------------------------ --------- ------------------ ----- --------
<S> <C> <C> <C> <C> <C>
Marshall W. Pagon(1) ............... 6,114,190(2)(3)(5) 39.6 4,581,900(3) 100 77.3
Robert N. Verdecchio ............... 322,552(5)(6)(7) 2.1 -- -- *
Howard E. Verlin ................... 100,698(6)(8) * -- -- *
Ted S. Lodge ....................... 94,199(9) * -- -- *
Nicholas A. Pagon .................. 13,941(10) * -- -- *
James J. McEntee, III .............. 16,170(11) * -- -- *
Mary C. Metzger .................... 210,500(12) 1.4 -- -- *
Donald W. Weber .................... 173,420(13) 1.1 -- -- *
William P. Phoenix ................. 170(14) * -- -- *
Harry F. Hopper, III ............... 196,168(15) 1.3 -- -- *
Michael C. Brooks .................. 31,216(16) * -- -- *
Riordan B. Smith ................... 6,114,190(3)(17) 39.6 4,581,900(3) 100 77.3
Harron Communications
Corp.(18) ......................... 852,110 5.5 -- -- 1.4
T. Rowe Price Associates, Inc.
and related entities(19) .......... 1,400,000 9.1 -- -- 2.3
Wellington Management
Company, LLP(20) .................. 1,600,000 10.4 -- -- 2.6
PAR Capital Management,
Inc.(21) .......................... 950,000 6.2 -- -- 1.6
Columbia Capital Corporation
and Columbia DBS, Inc.(22)......... 6,114,190(3) 39.6 4,581,900(3) 100 77.3
Fleet Venture Resources, Inc.
and related entities(23) .......... 6,114,190(3) 39.6 4,581,900(3) 100 77.3
Alta Communications VI, L.P.
and related entities(24) .......... -- -- -- -- --
Spectrum Equity Investors L.P.
and related entities(25) .......... -- -- -- -- --
Robert F. Benbow(26) ............... -- -- -- -- --
William P. Collatos(27) ............ -- -- -- -- --
Directors and executive officers
as a group(28) (consists of 13
persons before the merger and
15 persons after the merger) ...... 7,153,315 46.3 4,581,900 100 79.0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
After Merger
----------------------------------------------------------------------
Pegasus Class A Pegasus Class B
Common Stock Common Stock
Name and address of Beneficially Beneficially Voting
Beneficial Owner Owned Owned Power
- ------------------------------------ --------------------------------- -------------------------- -------
Shares % Shares % %
---------------------------- --- ------------------ ------ -------
<S> <C> <C> <C> <C> <C>
Marshall W. Pagon(1) ............... (2)(4)(5) 4,581,900(4) 100
Robert N. Verdecchio ............... 322,552(5)(6)(7) -- -- *
Howard E. Verlin ................... 100,698(6)(8) * -- -- *
Ted S. Lodge ....................... 94,199(9) * -- -- *
Nicholas A. Pagon .................. 13,941(10) * -- -- *
James J. McEntee, III .............. 16,170(11) * -- -- *
Mary C. Metzger .................... 210,500(12) -- -- *
Donald W. Weber .................... 173,420(13) -- -- *
William P. Phoenix ................. 170(14) * -- -- *
Harry F. Hopper, III ............... 196,168(15) -- -- *
Michael C. Brooks .................. 31,216(16) * -- -- *
Riordan B. Smith ................... (4)(17) 4,581,900(4) 100
Harron Communications
Corp.(18) ......................... 852,110 -- --
T. Rowe Price Associates, Inc.
and related entities(19) .......... 1,400,000 -- --
Wellington Management
Company, LLP(20) .................. 1,600,000 -- --
PAR Capital Management,
Inc.(21) .......................... 950,000 -- --
Columbia Capital Corporation
and Columbia DBS, Inc.(22)......... (4) 4,581,900(4) 100
Fleet Venture Resources, Inc.
and related entities(23) .......... (4) 4,581,900(4) 100
Alta Communications VI, L.P.
and related entities(24) .......... (4) 4,581,900(4) 100
Spectrum Equity Investors L.P.
and related entities(25) .......... (4) 4,581,900(4) 100
Robert F. Benbow(26) ............... (4) 4,581,900(4) 100
William P. Collatos(27) ............ (4) 4,581,900(4) 100
Directors and executive officers
as a group(28) (consists of 13
persons before the merger and
15 persons after the merger) ...... 4,581,900 100
</TABLE>
119
<PAGE>
- ------------
* 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, and the voting agreement as it will
be amended and restated described in note 4 below, Mr. Pagon is the
beneficial owner of 100% of Class B common stock with sole voting and
investment power over all such shares.
(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 139,411
shares of Class A common stock which are issuable upon the exercise of the
vested portion of outstanding stock options.
(3) Prior to the closing of the merger, 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 Columbia Capital Corporation and Columbia DBS, Inc. which are
discussed in note 22 below;
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 23 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 6,114,190 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) Upon the closing of the merger, the following parties will have entered
into the amended and restated 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 Columbia Capital Corporation and Columbia DBS, Inc.;
o Fleet Venture Resources, Inc., Fleet Equity Partners VI, L.P.,
Chisholm Partners III, L.P. and Kennedy Plaza Partners;
o Alta Communications VI, L.P., Alta Subordinated Debt Partners III,
L.P., and Alta-Comm S By S, LLC (which are discussed in note 24
below); and
o Spectrum Equity Investors, L.P. and Spectrum Equity Investors II,
L.P. (which are discussed in note 25 below).
As amended and restated, the voting agreement will provide 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 will be 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 will each be deemed to be the beneficial owner with respect to
4,581,900 shares of Class B common stock and _________ 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. See
The Merger -- Voting Agreement.
(5) 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.
120
<PAGE>
(6) 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.
(7) This includes 67,270 shares of Class A common stock which are issuable upon
the exercises of the vested portion of outstanding stock options.
(8) This includes 49,090 shares of Class A common stock which are issuable upon
the exercises of the vested portion of outstanding stock options.
(9) This includes 1,500 shares of Class A common stock owned by Mr. Lodge's
wife, for which Mr. Lodge disclaims beneficial ownership, and 87,270 shares
of Class A common stock which are issuable upon the exercise of the vested
portion of outstanding stock options.
(10) This includes 8,000 shares of Class A common stock which are issuable upon
the exercise of the vested portion of outstanding stock options.
(11) This includes 10,170 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.
(12) This includes 200,000 shares of Class A common stock received in the
investment of Pegasus in Personalized Media & Communications, LLC. See
Business of Pegasus -- Completed Transactions. Also includes 7,000 shares
of Class A common stock, which are issuable upon the exercise of the vested
portion of the outstanding stock options.
(13) This includes 13,385 shares of Class A common stock issuable upon the
exercise of the vested portion of outstanding stock options.
(14) This consists of 170 shares of Class A common stock issuable upon the
exercise of the vested portion of outstanding stock options.
(15) This includes 170 shares of Class A common stock issuable upon the exercise
of the vested portion of outstanding stock options. The address of this
person is c/o Columbia Capital Corporation, 201 N. Union Street, Suite 300,
Alexandria, Virginia 22314-2642.
(16) This includes 170 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.
(17) 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 23. Mr. Smith is a Senior Vice President of each of
the managing general partners of Fleet Equity Partners VI, a Senior Vice
President of Fleet Venture Resources, a Senior Vice President of the
corporation that is the general partner of the partnership that is the
general partner of Chisholm Partners III, and a partner of Kennedy Plaza
Partners. As a Senior Vice President of Fleet Growth Resources II, Inc. and
Silverado IV Corp., the two general partners of Fleet Equity Partners, and
as a Senior Vice President of Fleet Venture Resources and Silverado III
Corp., the general partner of the partnership Silverado III, L.P., which is
the general partner of Chisholm Partners III, and as a partner of Kennedy
Plaza Partners, Mr. Smith disclaims beneficial ownership for all shares
held directly by those entities, except for his pecuniary interest therein.
The address of this person is 50 Kennedy Plaza, RI MO F12C, Providence,
Rhode Island 02903.
(18) The address of Harron Communications Corp, is 70 East Lancaster Avenue,
Frazer, Pennsylvania 19355.
(19) The address of T. Rowe Price Associates is 100 East Pratt St., Baltimore,
Maryland 21202.
(20) The address of Wellington Management Company is 75 State Street, Boston,
Massachusetts 02109.
(21) The address of this entity is Suite 1600, One Financial Center, Boston,
Massachusetts 02111.
(22) Columbia Capital Corporation has certain rights under the voting agreement
described in notes 3 and 4. The address of each of the Columbia entities is
201 N. Union Street, Suite 300, Alexandria, Virginia 22314-2642.
(23) This includes the following number of shares of Class A common stock held
by the designated entity: Fleet Venture Resources, Inc. (406,186); Fleet
Equity Partners VI, L.P. (174,079); Chisholm Partners III, L.P. (147,611);
and Kennedy Plaza Partners (10,179). The address of each of these entities
is 50 Kennedy Plaza, RI MO F12C, Providence, Rhode Island 02903.
121
<PAGE>
(24) The address of each of these entities is c/o Alta Communications, Inc., One
Embarcadero Center, Suite 4050, San Francisco, California 94111, Attn:
Robert Benbow. Alta Subordinated Debt Partners III, L.P. is managed by
Burr, Egan, Deleage & Co. Alta Communications VI, L.P. and Alta-Comm S by
S, LLC are managed by Alta Communications, Inc. The general partner of Alta
Subordinated Debt Partners III and the general partner of Alta
Communications VI exercise sole voting and investment power with respect to
the securities held by their respective funds. The general partners of Alta
Subordinated Debt Management III, L.P., which is the general partner of
Alta Subordinated Debt Partners III, include Messrs. Craig Burr, William P.
Egan, Brian McNeill, Robert Benbow, Timothy Dibble, Jean Deleage, Jonathan
Flint and Eileen McCarthy. These general partners may be deemed to share
voting and investment power for the shares held by Alta Subordinated Debt
Partners III. The general partners of Alta Communications VI Management
Partners, L.P., which is the general partner of Alta Communications VI,
include Messrs. William P. Egan, Brian McNeill, Robert Benbow, Timothy
Dibble, David Retik and Eileen McCarthy. These general partners may be
deemed to share voting and investment powers for the shares held by Alta
Communications VI. These general partners disclaim beneficial ownership of
all securities held by the funds except to the extent of their
proportionate pecuniary interests in the share. Some of the principals of
Burr, Egan, Deleage & Co. and Alta Communications, Inc., including some of
the individuals identified above, are members of Alta-Comm S by S, which
invests alongside Alta Communications VI. As members of Alta-Comm S by S,
they may be deemed to share voting and investment power for the shares held
by Alta-Comm S by S. These principals disclaim beneficial ownership of all
of these shares except to the extent of their proportionate pecuniary
interest in the shares.
(25) The address of each of these entities is 125 High Street, Suite 2600,
Boston, Massachusetts 02110, Attn: William P. Collatos. The sole general
partner of Spectrum Equity Investors, L.P. is Spectrum Equity Associates,
L.P., a limited partnership whose partners are Messrs. Brion B. Applegate
and William P. Collatos. The sole general partner of Spectrum Equity
Investors II, L.P. is Spectrum Equity Associates II, L.P., a limited
partnership whose partners are Messrs. Brion B. Applegate, William P.
Collatos and Kevin J. Maroni. Messrs. Applegate and Collatos may be deemed
to share beneficial ownership of the shares owned by Spectrum Equity
Investors, L.P., and Messrs. Applegate, Collatos and Maroni may be deemed
to share beneficial ownership of the shares owned by Spectrum Equity
Investors II, L.P. These individuals disclaim beneficial ownership of all
of these shares except to the extent of their respective pecuniary
interests in its shares.
(26) The address of this person is c/o Alta Communications, Inc., One
Embarcadero Center, Suite 4050, San Francisco, California 94111. The
shares are held of record by Alta Subordinated Debt Partners III, L.P.,
Alta Communications VI, L.P. and Alta-Comm S by S, LLC. Mr. Benbow is a
general partner of the respective general partners of Alta Subordinated
Debt Partners III and Alta Communications VI. As a general partner, he may
be deemed to share voting and investment power with respect to the shares
held by the funds. Mr. Benbow disclaims beneficial ownership of the shares
held by these funds except to the extent of his proportionate pecuniary
interest in the shares. Mr. Benbow also disclaims beneficial ownership of
all shares held by Alta-Comm S by S of which he is not a member.
(27) The address of this person is c/o Spectrum Equity Investors, 125 High
Street, Suite 2600, Boston, Massachusetts 02110. The shares are held of
record by Spectrum Equity Investors L.P. and Spectrum Equity Investors II
L.P., which may be deemed to be beneficially owned by Mr. Collatos.
(28) For information relating to the period before the merger, see notes 1, 2
and 5 with respect to Mr. Marshall W. Pagon, notes 5, 6, 7, 8, 9, and 10
with respect to Messrs. Verdecchio, Verlin, Lodge and Nicholas A. Pagon,
notes 11, 12, 13, 14, 15, 16 and 17 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. For information relating to after the
merger, also see notes 26 and 27 with respect to Messrs. Benbow and
Collatos, and note 4 with respect to the voting agreement as amended and
restated in connection with the merger. Also includes 100 shares of Class A
common stock which are issuable upon the vested portion of outstanding
stock options.
122
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of:
o 50,000,000 shares of Class A common stock, par value $.01 per share;
o 15,000,000 shares of Class B common stock, par value $.01 per share;
o 20,000,000 shares of non-voting common stock, par value $.01 per share;
and
o 5,000,000 shares of preferred stock, par value $.01 per share.
Of the 5,000,000 shares of preferred stock that we are authorized to issue,
approximately 143,684 shares have been designated as Series A preferred stock,
5,707 shares have been designated as Series B junior convertible participating
preferred stock, 3,000,000 shares have been designated as Series C convertible
preferred stock and 22,500 shares have been designated as Series D junior
convertible participating preferred stock. As of ________ __, 2000, we had
outstanding _______ shares of Class A common stock and 4,581,900 shares of Class
B common stock. None of our non-voting common stock is issued and outstanding.
The following summary description relating to our capital stock sets forth
the material terms of our capital stock. This summary is not intended to be
complete. It is subject to, and qualified in its entirety by reference to, our
amended and restated certificate of incorporation and the certificates of
designation for the different series of preferred stock.
Description of Common Stock
For more information with respect to our common stock, see Comparison of
Stockholders' Rights.
Description of Series A Preferred Stock
General. Pursuant to the certificate of designation, we have issued
approximately 143,684 shares of Series A preferred stock with a liquidation
preference of $1,000 per share. This includes shares issued to pay in-kind
dividends on the Series A preferred stock. On January 1, 2007, we must redeem,
subject to the legal availability of funds, all outstanding shares of Series A
preferred stock at a price in cash equal to the liquidation preference, plus
accrued and unpaid dividends, if any, to the date of redemption.
Dividends. The holders of shares of the Series A preferred stock are
entitled to receive, as dividends are declared by the board of directors out of
funds legally available, cumulative preferential dividends from the issue date
of the Series A preferred stock accruing at the rate per share of 12 3/4% per
annum, payable semi-annually in arrears on January 1 and July 1 of each year.
Accumulated unpaid dividends bear interest at a per annum rate 200 basis points
in excess of the annual dividend rate on the Series A preferred stock. Dividends
are payable in cash, except that on or prior to January 1, 2002, dividends may
be paid, at our option, by the issuance of additional shares of Series A
preferred stock having an aggregate liquidation preference equal to the amount
of such dividends.
Optional Redemption. We do not have the option to redeem Series A preferred
stock until after January 1, 2002. We may redeem the Series A preferred stock
after that date, starting at 106.375% of the liquidation preference during the
12-month period beginning January 1, 2002 and declining annually to 100.000% of
the liquidation preference on January 1, 2005 and thereafter.
Change of Control. Upon the occurrence of a change of control of Pegasus,
each holder of shares of Series A preferred stock will have the right to require
us to repurchase all or any part of such holder's Series A preferred stock at an
offer price in cash equal to 101% of the aggregate liquidation preference of the
preferred stock the holder wishes to sell, plus accrued and unpaid dividends, if
any, to the date of purchase. Generally, a change of control means the
occurrence of any of the following:
o the sale of all or substantially all of our assets to any person other
than Marshall W. Pagon or his related parties as described in the
certificate of designation;
o the adoption of a plan relating to the liquidation or dissolution of
Pegasus;
123
<PAGE>
o the consummation of any transaction in which a person becomes a
beneficial owner of more of our Class A common stock than is beneficially
owned at such time by Mr. Pagon and his related parties;
o the consummation of any transaction in which Mr. Pagon and his related
parties cease to have at least 30% of the combined voting power of all
our voting stock or Mr. Pagon and his affiliates acquire beneficial
ownership of more than 66 2/3% of our Class A common stock; or
o the first day on which a majority of the members of our board of
directors are not continuing directors -- essentially, directors elected
or recommended by the current board of directors or their designated
replacements.
Certain Covenants. The certificate of designation contains a number of
covenants restricting our operations and those of our subsidiaries. For example,
the covenants limit Pegasus' ability to issue capital stock ranking on parity
with or senior to the Series A preferred stock, and the ability of Pegasus and
its subsidiaries to incur additional indebtedness, pay dividends or make
distributions, make certain investments, issue subsidiary stock, enter into
certain consolidations or mergers and enter into certain transactions with
affiliates.
Description of Series B Junior Convertible Participating Preferred Stock
General. The following is a summary of certain terms of the Series B junior
convertible participating preferred stock. The terms of the Series B junior
convertible participating preferred stock are set forth in the certificate of
designation. This summary is not intended to be complete and is subject to, and
qualified in its entirety by reference to, Pegasus' amended and restated
certificate of incorporation and the certificate of designation. Pegasus'
amended certification of incorporation and certificate of designation are filed
with the SEC as exhibits to the registration statement of which this proxy
statement/prospectus is a part.
Under the certificate of designation, 5,707 shares of Series B junior
convertible participating preferred stock, with a liquidation preference of
$1,000 per share plus any accrued but unpaid dividends, have been issued. With
respect to dividend distributions and distributions upon liquidation, winding-up
and dissolution, the Series B junior convertible participating preferred stock
ranks senior to all classes of our common stock to the extent of its liquidation
and dividend preferences. In the event of a liquidation, the Series B junior
convertible participating preferred stock will also share pro rata with the
common stock and all other series of participating preferred stock after the
common stock has received an amount equal to the sum of the liquidation
preferences of all outstanding series of participating preferred stock.
Voting Rights. Holders of Series B junior convertible participating
preferred stock will have no voting rights with respect to general corporate
matters except as provided by Delaware law. They will also have voting rights in
limited circumstances, as provided in the certificate of designation relating to
the Series B junior convertible participating preferred stock.
Dividends. The holders of shares of the Series B junior convertible
participating preferred stock are entitled to receive, when, as and if declared
by our board of directors out of funds legally available, cumulative
preferential cash dividends. Dividends accrue from the issue date of the Series
B junior convertible participating preferred stock at the rate of $10.00 per
share per annum, and are payable semiannually on January 1 and July 1 of each
year, commencing on July 1, 2000.
Conversion Rights. Each share of Series B junior convertible participating
preferred stock will be convertible at any time at the option of the holder into
that number of whole shares of our Class A common stock as is equal to the
stated liquidation preference of $1,000 per share, divided by an initial
conversion price, subject to adjustment upon the occurrence of specified events.
As a result, each share of Series B junior convertible participating preferred
stock will initially be convertible into 16.24 shares of Class A common stock.
Redemption. At our option, we may redeem all, but not less than all, of the
outstanding shares of Series B junior convertible participating preferred stock
at any time after January 4, 2005 at a price per share equal to $1,000 plus any
accrued but unpaid dividends, if any, whether or not declared.
124
<PAGE>
At the option of the holders of all of the Series B junior convertible
participating preferred stock, they may require us to redeem all, but not less
than all, of the outstanding shares of Series B junior convertible participating
preferred stock at any time after January 4, 2002. The redemption will be at a
price per share equal to $1,000 plus any accrued but unpaid dividends, if any,
whether or not declared. However, we will not be obligated to redeem any of the
Series B junior convertible participating preferred stock unless at the time we
are able to do so in compliance with the certificates of designation for our
Series A preferred stock and Series C convertible preferred stock, our
indentures and any subsequent certificate of designation, indenture or similar
agreement which limits our ability to redeem the Series B junior convertible
participating preferred stock.
Description of Series C Convertible Preferred Stock
General. The following is a summary of certain terms of the Series C
convertible preferred stock. The terms of the Series C convertible preferred
stock are set forth in the certificate of designation. This summary is not
intended to be complete and is subject to, and qualified in its entirety by
reference to, Pegasus' amended and restated certificate of incorporation and the
certificate of designation, which are filed with the SEC as exhibits to the
registration statement of which this proxy statement/prospectus is a part.
Pursuant to the certificate of designation, 3,000,000 shares of Series C
convertible preferred stock, with a liquidation preference of $100 per share
plus any accrued but unpaid dividends, have been issued. With respect to
dividend distributions and distributions upon liquidation, winding-up and
dissolution, the Series C convertible preferred stock ranks senior to all
classes of our common stock.
Voting Rights. Holders of Series C convertible preferred stock will have no
voting rights with respect to general corporate matters except as provided by
Delaware law or, in limited circumstances, as provided in the certificate of
designation relating to the Series C convertible preferred stock.
Dividends. The holders of shares of the Series C convertible preferred
stock are entitled to receive, when, as and if declared by our board of
directors out of funds legally available, cumulative preferential dividends from
the issue date of the Series C convertible preferred stock. These dividends will
accrue at an annual rate of 6 1/2% of the liquidation preference of $100 per
share, payable quarterly in arrears. Dividends are payable in cash or, at our
option, in shares of our Class A common stock or a combination thereof.
Conversion Rights. Each share of Series C convertible preferred stock will
be convertible at any time at the option of the holder into that number of whole
shares of our Class A common stock as is equal to the stated liquidation
preference of $100 per share, divided by an initial conversion price of $127.50
subject to adjustment upon the occurrence of specified events. As a result, each
share of Series C convertible preferred stock will initially be convertible into
0.7843 shares of Class A common stock.
Optional Redemption. Beginning February 1, 2003, we may redeem the Series C
convertible preferred stock at redemption premiums set forth in the certificate
of designation plus accumulated and unpaid dividends, if any.
Special Redemption. On of after August 1, 2000 but prior to February 1,
2003, we may redeem the Series C convertible preferred stock at a redemption
premium of 105.525% plus accumulated and unpaid dividends. We may only do this
if the trading price of the Series C convertible preferred stock equals or
exceeds $191.25 for a specified trading period.
Change of Control. In the event of a "change of control" of Pegasus, as
that term is defined in the certificate of designation, holders of the Series C
convertible preferred stock will, in the event that the market price per share
of our Class A common stock at such time is less than the conversion price of
the Series C convertible preferred stock, have a one-time option to convert such
holder's shares of Series C convertible preferred stock into shares of our Class
A common stock at a conversion price equal to the greater of:
o the market price per share of our Class A common stock as of the date of
the change of control; or
o $68.00 per share of the market price of our Class A common stock at the
close of trading on the issue date of the Series C convertible preferred
stock.
125
<PAGE>
In lieu of issuing the shares of our Class A common stock issuable upon
conversion in the event of a change of control, we may, at our option, make a
cash payment equal to the market value of the shares of our Class A common stock
otherwise issuable.
Description of Series D Junior Convertible Participating Preferred Stock
General. The following is a summary of certain terms of the Series D junior
convertible participating preferred stock. The terms of the Series D junior
convertible participating preferred stock are set forth in the certificate of
designation. This summary is not intended to be complete and is subject to, and
qualified in its entirety by reference to, Pegasus' amended and restated
certificate of incorporation and the certificate of designation. Pegasus'
amended certification of incorporation and certificate of designation are filed
with the SEC as exhibits to the registration statement of which this proxy
statement/prospectus is a part.
Under the certificate of designation, approximately 22,500 shares of Series
D junior convertible participating preferred stock, with a liquidation
preference of $1,000 per share plus any accrued but unpaid dividends, have been
issued. With respect to dividend distributions and distributions upon
liquidation, winding-up and dissolution, the Series D junior convertible
participating preferred stock ranks senior to all classes of our common stock to
the extent of its liquidation and dividend preferences. In the event of a
liquidation, the Series D junior convertible participating preferred stock will
also share pro rata with the common stock and all other series of participating
preferred stock after the common stock has received an amount equal to the sum
of the liquidation preferences of all outstanding series of participating
preferred stock.
Voting Rights. Holders of Series D junior convertible participating
preferred stock will have no voting rights with respect to general corporate
matters except as provided by Delaware law. They will also have voting rights in
limited circumstances, as provided in the certificate of designation relating to
the Series D junior convertible participating preferred stock.
Dividends. The holders of shares of the Series D junior convertible
participating preferred stock are entitled to receive, when, as and if declared
by our board of directors out of funds legally available, cumulative
preferential cash dividends. Dividends accrue from the issue date of the Series
D junior convertible participating preferred stock at an annual rate of 4% of
the liquidation preference of $1,000 per share, and are payable semiannually on
January 1 and July 1 of each year, commencing on July 1, 2000. Dividends are
payable in cash or, at our option, in shares of our Class A common stock or a
combination thereof.
Conversion Rights. Each share of Series D junior convertible participating
preferred stock will be convertible at any time at the option of the holder into
that number of whole shares of our Class A common stock as is equal to the
stated liquidation preference of $1,000 per share, divided by an initial
conversion price, subject to adjustment upon the occurrence of specified events.
As a result, each share of Series D junior convertible participating preferred
stock will initially be convertible into 9.77 shares of Class A common stock.
Redemption. At our option, we may redeem all, but not less than all, of the
outstanding shares of Series D junior convertible participating preferred stock
at any time at a price per share equal to $1,000 plus any accrued but unpaid
dividends, if any, whether or not declared.
At the option of the holders of all outstanding shares of Series D junior
convertible participating preferred stock, they may require us to redeem 10,000
of the outstanding shares of Series D junior convertible participating preferred
stock at any time after March 1, 2000, an additional 6,125 of the outstanding
shares of Series D junior convertible participating preferred stock at any time
after February 1, 2002, and the remainder of the outstanding shares of Series D
junior convertible participating preferred stock at any time after February 1,
2003. The redemption will be at a price per share equal to $1,000 plus any
accrued but unpaid dividends, if any, whether or not declared. However, we will
not be obligated to redeem any of the Series D junior convertible participating
preferred stock unless at the time we are able to do so in compliance with the
certificates of designation for our Series A preferred stock and Series C
convertible preferred stock, our indentures and any subsequent certificate of
designation, indenture or similar agreement which limits our ability to redeem
the Series D junior convertible participating preferred stock.
126
<PAGE>
COMPARISON OF STOCKHOLDER'S RIGHTS
If the merger is consummated, holders of Golden Sky's capital stock will
become holders of Pegasus' Class A common stock. Thereafter, the rights of such
holders will be governed by Pegasus' amended and restated certificate of
incorporation, the certificates of designation of Pegasus' Series A preferred
stock, Series B junior convertible participating preferred stock, Series C
convertible preferred stock, Series D junior convertible participating preferred
stock and Pegasus' by-laws.
The rights of holders of Pegasus' Class A common stock differ in certain
respects from the rights of Golden Sky's stockholders. Without accounting for
the merger, certain of the material differences are summarized below. This
summary is qualified in its entirety by reference to the full text of
o Pegasus's amended and restated certificate of incorporation,
o Pegasus' bylaws,
o the voting agreement,
o Golden Sky's amended and restated certificate of incorporation, including
the certificates of designation of Golden Sky's Series A convertible
participating preferred stock, Series A redeemable preferred stock,
Series B convertible participating preferred stock, Series B redeemable
preferred stock, Series C senior convertible preferred stock and Series D
redeemable preferred stock,
o Golden Sky's bylaws, and
o Golden Sky's stockholder agreement, dated as of November 24, 1997, among
certain holders of common stock and the holders of Series A convertible
participating preferred stock and Series B convertible participating
preferred stock.
State of Incorporation
Both Pegasus and Golden Sky are incorporated in the State of Delaware and
are subject to the provisions of the Delaware General Corporation Law.
Authorized Capital
Pegasus' authorized capital stock consists of:
o 50,000,000 shares of Class A common stock, par value $.01 per share;
o 15,000,000 shares of Class B common stock, par value $.01 per share;
o 20,000,000 shares of non-voting common stock, par value $.01 per share;
and
o 5,000,000 shares of preferred stock, par value $.01 per share.
Of the 5,000,000 shares of preferred stock that we are authorized to issue,
approximately 143,684 shares have been designated as Series A preferred stock,
5,707 shares have been designated as Series B junior convertible preferred
stock, 3,000,000 shares have been designated Series C convertible preferred
stock and 22,500 shares have been designated as Series D junior convertible
participating preferred stock. As of _________ __, 2000, Pegasus had outstanding
_____ shares of Class A common stock and 4,581,900 shares of Class B common
stock. None of our non-voting common stock is issued and outstanding.
Golden Sky's authorized capital stock consists of:
o 1,000,000 shares of common stock, par value $.01 per share; and
o 1,593,000 shares of preferred stock, par value $.01 per share.
Of the 1,593,000 shares of preferred stock that Golden Sky is authorized to
issue:
o 418,000 shares have been designated as Series A convertible participating
preferred stock, all of which are issued and outstanding;
o 418,000 shares have been designated as Series A redeemable preferred
stock, none of which are issued and outstanding;
127
<PAGE>
o 228,500 shares have been designated as Series B convertible participating
preferred stock, 228,442 shares of which are issued and outstanding;
o 228,500 shares have been designated as Series B redeemable preferred
stock, none of which are issued and outstanding;
o 51,000 shares have been designated as Series C senior convertible
preferred stock, all of which are issued and outstanding; and
o 100,000 shares have been designated as Series D redeemable preferred
stock, none of which are issued and outstanding.
As of January 25, 2000, Golden Sky had outstanding 25,399 shares of its
common stock.
Voting, Liquidation, and Other Rights
With regard to Pegasus, the voting powers, preferences and relative rights
of the Class A common stock and the Class B common stock are identical in all
respects, except that:
o the holders of Class A common stock are entitled to one vote per share
and holders of Class B common stock are entitled to ten votes per share;
o stock dividends on each class of common stock may be paid only in shares
of that class (see -- Dividend Rights); and
o shares of Class B common stock have certain conversion rights and are
subject to certain restrictions on ownership and transfer. See --
Conversion Rights and Transfer Restrictions.
Except as described below or as required by law, holders of Class A common
stock and Class B common stock vote together on all matters presented to the
stockholders for their vote or approval, including the election of directors.
See -- Class Voting. For a description of the voting rights accorded holders of
Pegasus' preferred stock, see Description of Capital Stock.
In the event of a merger or consolidation to which Pegasus is a party, each
share of Class A common stock and Class B common stock will be entitled to
receive the same consideration, except that holders of Class B common stock may
receive stock with greater voting power in lieu of stock with lesser voting
power received by holders of the Class A common stock in a merger in which
Pegasus is not the surviving corporation.
Subject to any rights of holders of Pegasus' preferred stock, all holders
of common stock, regardless of class, are entitled to share equally on a share
for share basis in any assets available for distribution to stockholders on
liquidation, dissolution or winding up of Pegasus. No shares of common stock are
subject to redemption or a sinking fund. In the event of any increase or
decrease in the number of outstanding shares of either Class A common stock or
Class B common stock from a stock split, combination or consolidation of shares
or other capital reclassification, Pegasus is required to take parallel action
with respect to the other class so that the number of shares of each class
outstanding immediately following the stock split, combination, consolidation or
capital reclassification bears the same relationship to each other as the number
of shares of each class outstanding before such event.
With regard to Golden Sky, the holders of Series A convertible
participating preferred stock, Series B convertible participating preferred
stock and Series C senior convertible preferred stock are entitled to vote on
all matters generally submitted to the holders of the common stock, voting
together with the common stockholders as a single class, based upon the number
of shares of common stock into which their shares of preferred stock are
convertible. See -- Conversion Rights and Transfer Restrictions. The Series A
and B convertible participating preferred stock are entitled to vote as a
separate class with respect to certain matters relating to a change in control
of Golden Sky. Each series of Golden Sky's preferred stock is entitled to vote
as a separate class with respect to certain corporate actions. Each series of
Golden Sky's preferred stock, other than the Series C senior convertible
preferred stock, is entitled to vote as a separate class in connection with the
redemption of the series. The holders of Series A redeemable preferred stock or
Series B redeemable
128
<PAGE>
preferred stock are entitled to elect one director, respectively, in the event
that all shares of Series A convertible participating preferred stock or all
shares of Series B convertible participating preferred stock have been converted
into common stock and the respective series of redeemable preferred stock.
Except as described above or as required by law, the holders of Series D
redeemable preferred stock are not entitled to vote.
In the event of any voluntary or involuntary dissolution, winding up or
liquidation of Golden Sky, including a merger or consolidation which results in
a change of control of Golden Sky, except if an election is made not to treat
the change of capital as a liquidation event as described below under -- Change
of Control, after payment or provision for payment of all of Golden Sky's debts
and other liabilities, the common stockholders' right to receive distributions
out of the remaining assets will be subject to the rights of the preferred
stockholders to receive such distributions. In order of preference:
o the holders of Series D redeemable preferred stock are entitled to
receive, out of the remaining assets, $200 per share, subject to
adjustment;
o the holders of Series C senior convertible preferred stock are entitled
to receive, out of the remaining assets, $200 per share, subject to
adjustment; and
o the holders of Series A convertible participating preferred stock and
Series A redeemable preferred stock, on the one hand, and Series B
convertible participating preferred stock and Series B redeemable
preferred stock, on the other hand, are entitled to receive, out of the
remaining assets, $100 per share and $200 per share, respectively,
subject to adjustment.
Each of the foregoing holders is also entitled to accrued but unpaid dividends
up to the date of distribution, whether or not declared, plus any accrued
interest as provided in the certificate of designation.
Following distribution of the assets of Golden Sky to the preferred
stockholders according to the above preferences, any remaining assets of Golden
Sky shall be distributed ratably among the holders of common stock and Series A
and B convertible participating preferred stock. If, upon any liquidation of
Golden Sky, the assets distributable among the holders of the common and
preferred stock are insufficient to permit the payment in full to the holders or
one or more series of preferred stock, then the entire assets of Golden Sky thus
distributable will be distributed among the holders of the preferred stock in
order of their preferences, and the holders of common stock will not be entitled
to receive any distributions.
Dividend Rights
Stock dividends on Pegasus' Class A common stock may be paid only in shares
of Class A common stock and stock dividends on Class B common stock may be paid
only in shares of Class B common stock. Each share of Class A common stock and
Class B common stock is entitled to receive dividends if, as and when declared
by Pegasus' board of directors out of funds legally available. The Class A
common stock and Class B common stock share equally, on a share-for-share basis,
in any cash dividends declared by Pegasus' board of directors.
The holders of shares of Pegasus' Series A preferred stock, Series B junior
convertible participating preferred stock and Series C convertible participating
preferred stock are entitled to receive, when, as and if dividends are declared
by Pegasus' board of directors out of funds legally available. See Description
of Capital Stock -- Description of Series A Preferred Stock, Description of
Series B Junior Convertible Participating Preferred Stock, Description of Series
C Convertible Preferred Stock and Description of Series D Junior Convertible
Participating Preferred Stock.
The holders of Golden Sky's common stock are entitled to receive dividends
if, as and when declared by Golden Sky's board of directors out of fund legally
available therefor, subject to the rights of the holders of preferred stock to
receive dividends. In order of preference, the holders of preferred stock are
entitled to receive the following dividends:
o the holders of Series D redeemable preferred stock are entitled to
receive cumulative, compounding dividends at the rate of 10% per annum of
the Series D redeemable preferred stock's liquidation preference, which
is $200 per share, subject to adjustment;
129
<PAGE>
o the holders of Series C senior convertible preferred stock are entitled
to receive cumulative, compounding dividends at the rate of 10% per annum
of the Series C senior convertible preferred stock's liquidation
preference, which is $200 per share, subject to adjustment; and
o the holders of Series A convertible participating preferred stock and
Series A redeemable preferred stock, on the one hand, and Series B
convertible participating preferred stock and Series B redeemable
preferred stock, on the other hand, are entitled to receive cumulative,
compounding dividends at the rate of 14.5% per annum of each series'
liquidation preference, which is $100 per share for the Series A and $200
per share for the Series B, each subject to adjustment.
Following the payment of dividends according to the above preferences, the
holders of the Series A and B convertible participating preferred stock will
share any dividends if, as and when declared by Golden Sky's board of directors
equally with the holders of the common stock.
Size and Make-up of the Board of Directors
When the merger closes, Pegasus' board of directors will be increased to
eleven members with directors to be designated by certain entities or
individuals. See The Merger -- Voting Agreement.
Golden Sky's board of directors consists of seven members. Under the
stockholders' agreement, dated as of November 24, 1997, among certain holders of
Golden Sky's common stock and the holders of its Series A convertible
participating preferred stock and Series B convertible participating preferred
stock, the parties to the agreement are obligated to vote their shares for two
directors designated by certain holders of the common stock covered by the
agreement and five directors designated by certain holders of the Series A
convertible participating preferred stock and Series B convertible participating
preferred stock. Although the holders of Series C senior convertible preferred
stock have the right to vote for the election of directors, they are not parties
to the stockholders' agreement and are not entitled to designate any directors.
The holders of Series D redeemable preferred stock are not entitled to vote for
the election of directors.
Preemptive Rights
Pegasus' stockholders have no preemptive or other rights to subscribe for
additional shares. With regard to Golden Sky, the holders of Series D redeemable
preferred stock are entitled to purchase up to their proportionate share of all
issuances of Golden Sky's capital stock or options or warrants therefor, other
than certain excluded issuances.
Change of Control
If a "change of control" occurs, as defined in Pegasus's Series A preferred
stock certificate of designation, each holder of Pegasus' Series A preferred
stock shall have the right to require Pegasus to repurchase all or any part of
such holder's Series A preferred stock at an offer price in cash equal to 101%
of the aggregate liquidation preference thereof plus accrued and unpaid
dividends, if any, thereon to the date of purchase.
If a change of control occurs, holders of Pegasus' Series C convertible
preferred stock will have a one-time option to convert the holder's Series C
convertible preferred stock into Class A common stock. However, they can only do
this if the market price of the Class A common stock is less than the conversion
price of the Series C convertible preferred stock. See Description of Stock --
Description of Series C Convertible Preferred Stock.
With regard to Golden Sky, a merger, consolidation or sale of all or
substantially all of its assets would be a liquidation event, entitling the
holders of each series of preferred stock to their respective liquidation
preferences described above. However, the holders of the Series A and B
convertible participating preferred stock may elect to receive shares of the
capital stock of the surviving entity rather than treat such event as a
liquidation event. In such case, the Series C senior convertible preferred stock
will also be required to accept shares of the capital stock of the surviving
entity.
130
<PAGE>
Conversion Rights and Transfer Restrictions
Pegasus' Class A common stock has no conversion rights. Each share of
Pegasus' Class B common stock is convertible at the option of the holder at any
time and from time to time into one share of Class A common stock. Pegasus'
amended and restated certificate of incorporation provides that any holder of
shares of Class B common stock desiring to transfer such shares to a person
other than a transferee permitted under Pegasus' amended and restated
certificate of incorporation must present those shares to Pegasus for conversion
into an equal number of shares of Class A common stock upon such transfer.
Thereafter, those shares of Class A common stock may be freely transferred to
persons other than transferees permitted under Pegasus' amended and restated
certificate of incorporation, subject to applicable securities laws.
See Description of Capital Stock -- Description of Series B Junior
Convertible Participating Preferred Stock, Description of Series C Convertible
Preferred Stock and Description of Series D Junior Convertible Participating
Preferred Stock for a description of conversion rights of these series of
Pegasus' preferred stock.
Golden Sky's common stock has no conversion rights. Each share of Series A
convertible participating preferred stock is convertible into one share of
Series A redeemable preferred stock and one share of common stock, subject to
adjustment for certain events. Each share of Series B convertible participating
preferred stock is convertible into one share of Series B redeemable preferred
stock and one share of common stock, subject to adjustment for certain events.
Each share of Series C senior convertible preferred stock is convertible into
one share of common stock, subject to adjustment for certain events. The Series
A redeemable preferred stock, the Series B redeemable preferred stock and the
Series D redeemable preferred stock are not convertible.
The Golden Sky stockholders' agreement discussed above also places
restrictions on the transferability of the shares covered by the agreement. See
- -- Size and Make-up of the Board of Directors. Under the agreement, the covered
shares cannot be transferred prior to the third anniversary of the agreement
without the written consent of 58% in interest of the Series A convertible
participating preferred stockholders and the Series B convertible participating
preferred stockholders, subject to certain exceptions. In addition, the
agreement provides that Golden Sky and the holders of Series A convertible
participating preferred stock and Series B convertible participating preferred
stock are entitled to a right of first offer to purchase shares of Golden Sky's
capital stock to be sold by any of the stockholders that are a party to the
agreement, and a co-sale right to include their shares in the proposed sale.
Also, if 58% in interest of the Series A convertible participating preferred
stockholders and the Series B convertible participating preferred stockholders
decide to dispose of all or substantially all of their shares or the assets of
Golden Sky, or cause Golden Sky to merge or consolidate into a third party, they
have the right to require the other stockholders that are parties to the
agreement to participate in the transaction.
Class Voting
Any amendment to Pegasus' amended and restated certificate of incorporation
that has any of the following effects will require the approval of the holders
of a majority of the outstanding shares of each of the Class A common stock and
Class B common stock, voting as separate classes:
o any decrease in the voting rights per share of Class A common stock or
any increase in the voting rights of Class B common stock;
o any increase in the number of shares of Class A common stock into which
shares of Class B common stock are convertible;
o any relaxation on the restrictions on transfer of the Class B common
stock; or
o any change in the powers, preferences or special rights of the Class A
common stock or Class B common stock adversely affecting the holders of
the Class A common stock.
The approval of the holders of a majority of the outstanding shares of each
of the Class A common stock and Class B common stock, voting as separate
classes, is also required to authorize or issue additional shares of Class B
common stock, except for parallel action with respect to Class A common stock in
connection with stock dividends, stock splits, recapitalizations and similar
changes in Pegasus' capitalization.
131
<PAGE>
Other than the various voting rights and obligations discussed above or as
required by law, Golden Sky does not have any provisions for class voting. See
- -- Voting, Liquidation and Other Rights and -- Size and Make-up of the Board of
Directors.
LEGAL MATTERS
The validity of the shares of Class A common stock to be issued in
connection with the merger will be passed upon by Drinker Biddle & Reath LLP,
counsel for Pegasus. Michael B. Jordan, a partner of Drinker Biddle & Reath LLP,
is an Assistant Secretary of Pegasus.
Drinker Biddle & Reath LLP has delivered an opinion to the effect that the
description of the federal income tax consequences of the merger under the
heading The Merger -- Certain Federal Income Tax Consequences correctly sets
forth the material federal income tax consequences of the merger to Pegasus,
Golden Sky and their respective stockholders. Pegasus' obligation to complete
the merger is conditioned upon the Golden Sky's stockholders' receipt of an
opinion from McDermott, Will & Emery in form and substance reasonably
satisfactory to Pegasus.
EXPERTS
Pegasus' consolidated balance sheets as of December 31, 1997 and 1998 and
the related consolidated statements of operations, statements of changes in
total equity and statements of cash flows for each of the three years in the
period ended December 31, 1998 incorporated by reference in this proxy
statement/prospectus, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Golden Sky's consolidated balance sheets as of December 31, 1997 and 1998
and the related consolidated statements of operations, stockholders' equity and
cash flows for the period from inception (June 25, 1996) to December 31, 1996
and for the years ended December 31, 1997 and 1998 incorporated by reference in
this proxy statement/prospectus, have been incorporated herein in reliance on
the report of KPMG LLP, independent accountants, given and on the authority of
that firm as experts in accounting and auditing.
132
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER
among
PEGASUS COMMUNICATIONS CORPORATION
and certain of its shareholders,
PEGASUS GSS MERGER SUB, INC.
and
GOLDEN SKY HOLDINGS, INC.
and certain of its shareholders
-------------------------
January 10, 2000
as amended January 25, 2000
-------------------------
I-1
<PAGE>
TABLE OF CONTENTS
Page
-----
Article I DEFINITIONS .................................................... I-6
1.1 Certain Definitions ................................................ I-12
1.2 Other Definitions .................................................. I-12
Article II BASIC TRANSACTION ............................................. I-12
2.1 Merger; Surviving Corporation ...................................... I-13
2.2 Certificate of Incorporation ....................................... I-13
2.3 By-Laws ............................................................ I-13
2.4 Directors and Officers ............................................. I-13
2.5 Effective Time ..................................................... I-13
2.6 Exchange of Certificates ........................................... I-13
2.7 Merger Consideration; Conversion and Cancellation of Securities I-13
2.8 Stock Transfer Books ............................................... I-15
2.9 Dissenting Shares .................................................. I-15
2.10 Failure to Surrender Share Certificates ............................ I-15
2.11 Closing ............................................................ I-15
2.12 Treatment of Certain Outstanding Options and Warrants .............. I-15
2.13 Certain Expenses ................................................... I-15
Article III REPRESENTATIONS AND WARRANTIES OF THE COMPANY ................ I-16
3.1 Organization and Qualification ..................................... I-16
3.2 Capitalization ..................................................... I-16
3.3 Authority and Validity ............................................. I-17
3.4 No Breach or Violation ............................................. I-17
3.5 Consents and Approvals ............................................. I-18
3.6 Title to Assets .................................................... I-18
3.7 Intellectual Property .............................................. I-19
3.8 Compliance with Legal Requirements ................................. I-19
3.9 Financial and Other Information .................................... I-19
3.10 Subsequent Events .................................................. I-19
3.11 Undisclosed Liabilities ............................................ I-20
3.12 Legal Proceedings .................................................. I-20
3.13 Taxes .............................................................. I-20
3.14 Employee Benefits; Employees ....................................... I-21
3.15 Contracts .......................................................... I-23
3.16 Books and Records .................................................. I-24
3.17 Business Information ............................................... I-24
3.18 Insurance .......................................................... I-24
3.19 Environmental Matters .............................................. I-25
3.20 Disclosure ......................................................... I-25
3.21 Brokers or Finders ................................................. I-25
3.22 Certain Payments ................................................... I-25
3.23 Subscribers ........................................................ I-26
3.24 Billing and Authorization System ................................... I-26
Article IV REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL COMPANY
SHAREHOLDERS .................................................. I-26
4.1 Authority and Validity ............................................. I-26
4.2 Ownership .......................................................... I-26
4.3 Consents and Approvals ............................................. I-27
4.4 Certain Information ................................................ I-27
4.5 Compliance with Legal Requirements ................................. I-27
I-2
<PAGE>
Page
-----
Article V REPRESENTATIONS AND WARRANTIES OF PEGASUS ...................... I-27
5.1 Organization and Qualification ..................................... I-27
5.2 Capitalization ..................................................... I-27
5.3 Authority and Validity ............................................. I-28
5.4 No Breach or Violation ............................................. I-28
5.5 Consents and Approvals ............................................. I-28
5.6 Title to Assets .................................................... I-29
5.7 Intellectual Property .............................................. I-29
5.8 Compliance with Legal Requirements ................................. I-29
5.9 Legal Proceedings .................................................. I-29
5.10 Subsequent Events .................................................. I-29
5.11 Financial and Other Information .................................... I-30
5.12 Undisclosed Liabilities ............................................ I-30
5.13 Taxes .............................................................. I-31
5.14 Employee Benefits; Employees ....................................... I-31
5.15 Contracts .......................................................... I-32
5.16 Business Information ............................................... I-32
5.17 Disclosure ......................................................... I-33
5.18 Brokers or Finders ................................................. I-33
5.19 Certain Payments ................................................... I-33
5.20 Subscribers ........................................................ I-33
5.21 Favorable Business Relationships ................................... I-33
5.22 Securities Matters ................................................. I-33
5.23 FCC Matters ........................................................ I-33
5.24 Environmental Matters .............................................. I-34
5.25 Billing and Authorization System ................................... I-34
Article VI REPRESENTATIONS AND WARRANTIES OF MERGER SUB .................. I-34
6.1 Organization and Qualification ..................................... I-35
6.2 Certificate of Incorporation and Bylaws ............................ I-35
6.3 Authority .......................................................... I-35
6.4 No Conflict; Required Filings and Consents ......................... I-36
6.5 Vote Required ...................................................... I-36
Article VII PRE-CLOSING COVENANTS OF THE SELLERS ......................... I-36
7.1 Additional Information ............................................. I-36
7.2 Exclusivity ........................................................ I-36
7.3 Continuity and Maintenance of Operations ........................... I-37
7.4 Consents and Approvals ............................................. I-38
7.5 Adoption by Shareholders ........................................... I-39
7.6 Securities Filings; Financial Information .......................... I-39
7.7 Notification of Certain Matters .................................... I-39
7.8 Supplements to Company Disclosure Statement ........................ I-39
7.9 Employee Matters ................................................... I-39
7.10 1999 Company Financial Statements .................................. I-40
7.11 1999 Tax Returns ................................................... I-40
7.12 Indemnity under Prior Company Acquisitions ......................... I-40
7.13 Tax Certificate .................................................... I-40
7.14 NRTC Litigation Expenses ........................................... I-40
Article VIII PRE-CLOSING COVENANTS OF THE PEGASUS PARTIES ................ I-40
8.1 Additional Information ............................................. I-40
8.3 Conduct of Business ................................................ I-41
8.4 Consents and Approvals ............................................. I-41
8.5 Adoption by Pegasus Shareholders ................................... I-42
I-3
<PAGE>
Page
-----
8.6 Merger Registration Statement ...................................... I-42
8.7 Notification of Certain Matters .................................... I-42
8.8 Tax Certificate .................................................... I-43
8.9 Supplements to Pegasus Disclosure Statement ........................ I-43
8.10 Purchase of Certain Shares of Company Capital Stock ................ I-43
Article IX CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PEGASUS PARTIES .... I-44
9.1 Accuracy of Representations ........................................ I-44
9.2 Covenants .......................................................... I-44
9.3 Consents and Approvals ............................................. I-44
9.4 Dissenters' Rights ................................................. I-45
9.5 Delivery of Documents .............................................. I-45
9.6 No Material Adverse Change ......................................... I-46
9.7 No Litigation ...................................................... I-46
9.8 NRTC Compliance Certificate ........................................ I-46
9.9 South Plains ....................................................... I-46
Article X CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS ............. I-46
10.1 Accuracy of Representations ....................................... I-46
10.2 Covenants ......................................................... I-47
10.3 Consents and Approvals ............................................ I-47
10.4 Delivery of Documents ............................................. I-47
10.5 No Material Adverse Change ........................................ I-48
10.6 Litigation ........................................................ I-48
10.7 Nasdaq Listing .................................................... I-48
10.8 Pegasus Merger Registration Statement ............................. I-48
Article XI POST-CLOSING COVENANTS ........................................ I-48
11.1 Transition ........................................................ I-48
11.2 Indemnification of Directors, Officers and Managers of the
Company and its Predecessors; Directors' and Officers' Insurance.. I-48
11.3 Offers to Purchase ................................................ I-49
11.4 Confidentiality ................................................... I-49
Article XII TERMINATION .................................................. I-51
12.1 Events of Termination ............................................. I-51
12.2 Effect of Termination ............................................. I-52
12.3 Procedure Upon Termination ........................................ I-52
Article XIII INDEMNIFICATION ............................................. I-52
13.1 Survival of Representations and Warranties ........................ I-52
13.2 Indemnification Provisions for Benefit of the Pegasus Parties ..... I-52
13.3 Indemnification Provisions for Benefit of the Shareholders ........ I-54
13.4 Matters Involving Third Parties ................................... I-54
13.5 Determination of Adverse Consequences ............................. I-55
13.6 Payment in Shares ................................................. I-55
13.7 No Indemnification for Certain Disclosed Matters .................. I-55
Article XIV MISCELLANEOUS ................................................ I-56
14.1 Parties Obligated and Benefited ................................... I-56
14.2 Notices ........................................................... I-56
14.3 Attorneys' Fees ................................................... I-57
14.4 Headings .......................................................... I-57
14.5 Choice of Law ..................................................... I-57
14.6 Rights Cumulative ................................................. I-57
14.7 Further Actions ................................................... I-57
14.8 Time of the Essence ............................................... I-57
14.9 Late Payments ..................................................... I-57
14.10 Counterparts ...................................................... I-57
I-4
<PAGE>
Page
-----
14.11 Entire Agreement .................................................. I-57
14.12 Amendments and Waivers ............................................ I-58
14.13 Construction ...................................................... I-58
14.14 Expenses .......................................................... I-58
14.15 Disclosure ........................................................ I-58
14.16 Shareholder Representative ........................................ I-58
Exhibits
- --------
Exhibit 1 Form of Escrow Agreement
Exhibit 2 [There is no Exhibit 2]
Exhibit 3 [There is no Exhibit 3]
Exhibit 4 Registration Rights Agreement
Exhibit 5 Voting Agreement
Exhibit 6 Certificate of Merger
Exhibit 7 Company Tax Certificate
Exhibit 8 Pegasus Tax Certificate
Exhibit 9 Purchase Agreement for Section 8.10 Purchases
Exhibit 10 Conversion Ratios
Exhibit 11 [There is no Exhibit 11]
Exhibit 12 Amendments to DTS Registration Rights Agreement
I-5
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated January 10, 2000 (the "Agreement"),
among PEGASUS COMMUNICATIONS CORPORATION, a Delaware corporation ("Pegasus"),
PEGASUS GSS MERGER SUB, INC., a Delaware corporation ("Merger Sub"), GOLDEN SKY
HOLDINGS, INC., a Delaware corporation (the "Company"), the shareholders of
Pegasus that have executed this Agreement (the "Principal Pegasus
Shareholders"), and the shareholders of the Company that have executed this
Agreement (the "Principal Company Shareholders"). Pegasus, Merger Sub, the
Company, the Principal Pegasus Shareholders and the Principal Company
Shareholders are collectively referred to herein as the "Parties." The Company
and the Principal Company Shareholders are sometimes referred to herein
collectively as the "Sellers." Pegasus, Merger Sub and the Principal Pegasus
Shareholders are sometimes referred to herein collectively as the "Pegasus
Parties."
RECITALS:
Subsidiaries (this and certain other terms are defined in Article I) of the
Company are party to certain NRTC Distribution Agreements with the National
Rural Telecommunications Cooperative ("NRTC"), pursuant to which Subsidiaries of
the Company hold certain rights to distribute DIRECTV(R) ("DIRECTV") programming
offered by DirecTV, Inc. in the Service Areas.
The Parties intend for Pegasus to acquire the Company and its Subsidiaries
by means of the merger of Merger Sub with and into the Company, upon the terms
and subject to the conditions set forth herein.
For federal income tax purposes, it is intended that the Merger will
qualify as a reorganization under Section 368(a) of the Code.
NOW, THEREFORE, in consideration of the premises and mutual promises herein
made, and in consideration of the representations, warranties, covenants and
agreements herein contained, and intending to be legally bound hereby, the
Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. The following terms shall, when used in this
Agreement, have the following meanings:
"Accounts Receivable" means the accounts receivable reported on NRTC Report
19A/AR012FS.
"Acquisition" means the acquisition by a Person of any DIRECTV Distribution
Business, including related assets or property, whether or not in the Ordinary
Course, and the acquisition by a Person of any other businesses, assets or
property other than in the Ordinary Course, whether by way of the purchase of
assets or stock, by merger, consolidation or otherwise.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, assessments, dues, penalties, fines,
interest, costs, amounts paid in settlement, Liabilities, obligations, Taxes,
liens, losses, expenses and fees (including court costs, settlement costs,
legal, accounting, experts' and other fees, costs and expenses).
"Affiliate" means, with respect to any Person: (i) any Person directly or
indirectly owning, controlling, or holding with power to vote 10% or more of the
outstanding voting securities of such other Person; (ii) any Person 10% or more
of whose outstanding voting securities are directly or indirectly owned,
controlled, or held with power to vote, by such other Person; (iii) any Person
directly or indirectly controlling, controlled by, or under common control with
such other Person; and (iv) any officer, director or partner of such other
Person. "Control" for the foregoing purposes shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of voting securities or
voting interests, by contract or otherwise.
"Applicable Rate" means the prime rate reported in The Wall Street Journal
from time to time, plus 3%.
I-6
<PAGE>
"Assets" mean all properties, assets, privileges, powers, rights, interests
and claims of every type and description that are owned, leased, held, used or
useful in the Business and in which the Company or any of its Subsidiaries has
any right, title or interest or in which the Company or any of its Subsidiaries
acquires any right, title or interest on or before the Closing Date, wherever
located, whether known or unknown, and whether or not now or on the Closing Date
on the books and records of the Company or any of its Subsidiaries, including
Accounts Receivable, books and records, Consumer Contracts, Contracts,
Intangibles, Intellectual Property, Inventory, NRTC Patronage Capital, other
obligations of NRTC to the Company, Personal Property, Real Property and
subscribers.
"Business" means the DIRECTV distribution business conducted by the Company
and its Subsidiaries pursuant to rights granted under the NRTC Distribution
Agreements.
"Business Day" means any day other than Saturday, Sunday or a day on which
banking institutions in New York, New York, are required or authorized to be
closed.
"Change of Control Offer" means a Change of Control Offer (as defined in
each of the Company Indentures) required by Section 10.10 of each of the Company
Indentures to be made as a result of the Merger.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral Documents" mean the Exhibits and any other documents,
instruments and certificates to be executed and delivered by the Parties
hereunder or thereunder.
"Commercial Account" means any bar, restaurant, business or similar
establishment that provides DIRECTV services to its patrons using a single
DIRECTV System for all channels and is required to execute a DIRECTV Commercial
Viewing Agreement.
"Commercial Agreement" means DIRECTV Commercial Viewing Agreements and 1999
NFL Sunday Ticket Commercial Establishment License Agreements relating to
Commercial Accounts.
"Commission" means the Securities and Exchange Commission or any
Governmental Authority that succeeds to its functions.
"Committed Member Residence" has the meaning assigned to it in the NRTC
Distribution Agreements.
"Company 1999 Forms 10-K" means the Annual Reports on Form 10-K for the
year ended December 31, 1999, of Golden Sky Systems, Inc. and Golden Sky DBS,
Inc., as and when filed with the Commission.
"Company Credit Agreement" means the Amended and Restated Credit Agreement,
dated as of July 7, 1997, amended and restated as of May 8, 1998 and as further
amended by a First Amendment to Amended and Restated Credit Agreement dated as
of February 10, 1999, by an Amendment and Waiver dated as of June 14, 1999, and
by a Second Amendment, Consent and Waiver dated as of January 4, 2000, among
Golden Sky Holdings, Inc., Golden Sky Systems, Inc., and the various banks and
agents identified therein, as amended, restated, supplemented or otherwise
modified from time to time.
"Company Disclosure Statement" means the disclosure statement delivered by
the Company to Pegasus concurrently with the execution of this Agreement, as
supplemented pursuant to Section 7.8.
"Company Financial Model" means the Company's financial projections
attached as Exhibit A to the Company Disclosure Statement, as updated from time
to time pursuant to Section 7.3(c)(i).
"Company Indentures" means (1) the indenture dated as of July 31, 1998 by
and among Golden Sky Systems, Inc., as issuer, Argos Support Services Company,
as guarantor, Prime Watch, Inc., as guarantor, and State Street Bank and Trust
Company of Missouri, N.A., as trustee, relating to the 123/8% Senior
Subordinated Notes due 2006, Series B, of Golden Sky Systems, Inc., and (2) the
indenture, dated as of February 19, 1999, between Golden Sky DBS, Inc., as
issuer, and United States Trust Company of New York, as trustee, relating to the
131/2% Senior Discount Notes due 2007, Series A, and 131/2% Senior Discount
Notes due 2007, Series B, of Golden Sky DBS, Inc.
I-7
<PAGE>
"Company SEC Filings" means Golden Sky Systems, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998, and its quarterly reports on
Form 10-Q for each of the quarters ended March 31, June 30 and September 30,
1999, and the quarterly reports on Form 10-Q of Golden Sky DBS, Inc. for each of
the quarters ended June 30 and September 30, 1999, each as filed with the
Commission.
"Confidentiality Agreement" means the existing Confidentiality Agreement
among Pegasus, the Company and certain of its Subsidiaries.
"Consumer Contract" means any rental agreement, lease agreement,
installment sale agreement or other agreement or arrangement under which the
Company or any of its Subsidiaries (or predecessors in interest) has rented,
leased or sold any DIRECTV System or other Inventory to a subscriber or has
otherwise financed the acquisition or use of any DIRECTV System or other
Inventory by a subscriber.
"DIRECTV Distribution Business" means the distribution of any service
transmitted using the frequencies licensed to Hughes Communications Galaxy or
its successors at the 101, 110 and 119 degree West orbital locations.
"DIRECTV System" means the satellite receiving system for DIRECTV
consisting of a satellite antenna dish, an integrated receiver decoder and a
remote control.
"Employee Benefit Plan" means any: (a) nonqualified deferred compensation
or retirement plan or arrangement that is an Employee Pension Benefit Plan; (b)
qualified defined contribution retirement plan or arrangement that is an
Employee Pension Benefit Plan; (c) qualified defined benefit retirement plan or
arrangement that is an Employee Pension Benefit Plan (including any
Multiemployer Plan); (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program; or (e) other employee benefit arrangement or payroll
practice.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Section
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section
3(l).
"Encumbrance" means any mortgage, pledge, lien, encumbrance, charge,
security interest, security agreement, conditional sale or other title retention
agreement, limitation, option, assessment, restrictive agreement, restriction,
adverse interest, restriction on transfer or any exception to or defect in title
or other ownership interest (including restrictive covenants, leases and
licenses).
"Environmental Law" means any Legal Requirement (including, without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Resource Conservation and Recovery Act of 1976 and the
Occupational Safety and Health Act of 1970, as amended), relating to or
concerning pollution or protection of public health, safety or welfare or the
environment, including those relating to emissions, discharges, releases or
threatened releases of Hazardous Substances into the environment (including
ambient air, surface water, ground water or land), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Substances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agent" means First Union National Bank.
"Escrow Agreement" means an escrow agreement in the form set forth as
Exhibit 1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Governmental Authority" means: (i) the United States of America; (ii) any
state, commonwealth, territory or possession of the United States of America and
any political subdivision thereof (including counties, municipalities and the
like); (iii) any foreign (as to the United States of America) sovereign entity
and any political subdivision thereof; or (iv) any agency, authority or
instrumentality of any of the foregoing, including any court, tribunal,
department, bureau, commission or board.
I-8
<PAGE>
"Hazardous Substances" means any pollutant, contaminant, chemical,
industrial, toxic, hazardous or noxious substance or waste that is regulated by
any Governmental Authority, including: (a) any petroleum or petroleum compounds
(refined or crude), flammable substances, explosives, radioactive materials or
any other materials or pollutants that pose a hazard or potential hazard to the
Real Property or to Persons in or about the Real Property; (b) asbestos or any
asbestos-containing material of any kind or character; (c) polychlorinated
biphenyls ("PCBs"), as regulated by the Toxic Substances Control Act, 15 U.S.C.
Section 2601 et seq.; (d) any materials or substances designated as "hazardous
substances" pursuant to the Clean Water Act, 33 U.S.C. Section 1251 et seq.; (e)
any "economic poison," as defined in the Federal Insecticide, Fungicide and
Rodenticide Act, 7 U.S.C. Section 135 et seq.; (f) any "chemical substance,"
"new chemical substance" or "hazardous chemical substance or mixture" pursuant
to the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; (g) any
"hazardous substances" pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq.; (h) any
"hazardous waste" pursuant to the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901 et seq.; and (i) any "extremely hazardous substance"
pursuant to Section 202 of the Emergency Planning and Community Right-to-Know
Act of 1986, as amended.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Intangibles" mean all accounts, notes and other receivables, claims,
deposits, prepayments, refunds, causes of action, choses in action, rights of
recovery, rights of set-off, rights of recoupment and other intangible assets
owned, used or held for use in the Business.
"Inventory" means the DIRECTV Systems and other equipment owned by the
Company or any of its Subsidiaries for sale, lease or rent to subscribers or
that has been rented or leased to subscribers or sold to subscribers on an
installment basis.
"Judgment" means any judgment, writ, order, injunction, award or decree of
any court, judge, justice, magistrate or any other Governmental Authority.
"Knowledge" of a Principal Company Shareholder means its actual knowledge.
"Legal Requirement" means any statute, ordinance, law, rule, regulation,
code, injunction, judgment, order, decree, ruling, or other requirement enacted,
adopted or applied by any Governmental Authority, including judicial decisions
applying common law or interpreting any other Legal Requirement.
"Liability" means any liability or obligation (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Market Price" per share of Pegasus Class A Common Stock on any day means
the average of the Quoted Prices of the Pegasus Class A Common Stock for the
five consecutive trading days immediately preceding such day.
"Material Adverse Effect on the Company" means a material adverse effect on
the Company, its Subsidiaries, the Assets and the Business, taken as a whole.
"Material Adverse Effect on Pegasus" means a material adverse effect on
Pegasus, its Subsidiaries and their assets and business, taken as a whole.
"Merger Consideration" means the shares of Pegasus Class A Common Stock and
the cash in lieu of fractional shares of Pegasus Class A Common Stock
deliverable by Pegasus in exchange for Company Capital Stock pursuant to Section
2.7.
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"NRTC Distribution Agreement" means any contract or agreement pursuant to
which NRTC and/or DirecTV, Inc. and/or any of their Affiliates has granted the
Company or any of its Subsidiaries or Pegasus or any of its Subsidiaries, as the
case may be, rights relating to the marketing and distribution of DIRECTV in
I-9
<PAGE>
the Service Areas, including those certain NRTC/Member Agreements for Marketing
and Distribution of DBS Services, as amended and supplemented, identified in
Section 3.15 of the Company Disclosure Statement or Section 5.15 of the Pegasus
Disclosure Statement, as the case may be.
"NRTC Patronage Capital" means any equity interest in NRTC allocated to the
Company or any of its Subsidiaries or if such equity interest is not
transferable the right of the Company or any of its Subsidiaries to receive any
distributions on account of such equity interest.
"Ordinary Course" with reference to a Person means the ordinary course of
business consistent with past practice of that Person and its Subsidiaries
(including with respect to quantity and frequency).
"Pegasus 1999 Form 10-K" means Pegasus's Annual Report on Form 10-K for the
year ended December 31, 1999, as and when filed with the Commission.
"Pegasus Class A Common Stock" means the Class A Common Stock, par value
$0.01 per share, of Pegasus.
"Pegasus Credit Agreement" means collectively (1) the credit agreement
dated as of December 10, 1997, among Pegasus Media & Communications, Inc., the
lenders party thereto, and Bankers Trust Company, as agent for such lenders, (2)
the Second Amended and Restated Credit Agreement dated as of July 30, 1997,
among Digital Television Services, Inc., the lenders identified therein, and
Canadian Imperial Bank of commerce, New York Agency, as agent, and (3) any
amendment, modification, restatement, replacement or refinancing of either or
both such credit agreements.
"Pegasus Disclosure Statement" means the disclosure statement delivered by
the Pegasus Parties to the Company concurrently with the execution of this
Agreement, as supplemented pursuant to Section 8.8.
"Pegasus SEC Filings" means Pegasus's annual report on form 10-K for the
year ended December 31, 1998, and Pegasus's quarterly reports on form 10-Q for
each of the quarters ended March 31, June 30 and September 30, 1999, each as
filed with the Commission.
"Permit" means any license, permit, consent, approval, registration,
authorization, qualification or similar right granted by a Governmental
Authority.
"Permitted Liens" means (i) liens for Taxes not yet due and payable or
being contested in good faith by appropriate proceedings; (ii) rights reserved
to any Governmental Authority to regulate the affected property; (iii) statutory
liens of banks and rights of set-off; (iv) as to leased Assets, interests of the
lessors and sublessors thereof and liens affecting the interests of the lessors
and sublessors thereof; (v) inchoate materialmen's, mechanics', workmen's,
repairmen's or other like liens arising in the ordinary course of business; (vi)
liens incurred or deposits made in the ordinary course of business in connection
with workers' compensation and other types of social security; (vii) earnest
money deposits made to secure the performance of contracts to acquire DIRECTV
Distribution Businesses, so long as no foreclosure or similar proceedings have
been commenced; (viii) licenses of trademarks or other intellectual property
rights granted by the Company in the ordinary course and not interfering in any
material respect with the ordinary conduct of the business of the Company; and
(ix) as to real property, any encumbrance, adverse interest, constructive or
other trust, claim, attachment, exception to or defect in title or other
ownership interest (including, but not limited to, reservations, rights of
entry, rights of first refusal, possibilities of reverter, encroachments,
easement, rights-of-way, restrictive covenants, leases, and licenses) of any
kind, which otherwise constitutes an interest in or claim against property,
whether arising pursuant to any Legal Requirement, under any Contract or
otherwise, that do not, individually or in the aggregate, materially and
adversely affect or impair the value or use thereof as it is currently being
used in the Ordinary Course.
"Person" means any natural person, corporation, partnership, trust,
unincorporated organization, association, limited liability company,
Governmental Authority or other entity.
"Personal Property" means all tangible personal property of the Company and
its Subsidiaries, whether or not identified in Section 3.6 of the Company
Disclosure Statement.
I-10
<PAGE>
The "Quoted Price" of the Pegasus Class A Common Stock on any day means the
last reported sale price on such day of the Pegasus Class A Common Stock as
reported by the Nasdaq National Market or, if the Pegasus Class A Common Stock
is listed on a securities exchange, the last reported sale price of the Pegasus
Class A Common Stock on such exchange, which shall be for consolidated trading
if applicable to such exchange, or, if not so reported or listed, the last
reported bid price of the Pegasus Class A Common Stock.
"Real Property" means all owned or leased real property used or held for
use in connection with the operation of the Business.
"Registration Rights Agreement" means the form of registration rights
agreement attached hereto as Exhibit 4, except that the provisions contained in
Section 5(a) of Exhibit 4 shall not be included in the Registration Rights
Agreement when executed unless the Registration Rights Agreement dated April 27,
1998 (the "DTS Registration Rights Agreement"), among the Company and certain
former owners of Digital Television Services, Inc. (the "DTS Holders") is
amended prior to Closing in substance as set forth in Exhibit 12.
"Representative" means any director, officer, employee, agent, consultant,
adviser or other representative of a Person, including legal counsel,
accountants and financial advisors.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Service Areas" means the areas identified on Exhibits "C" of the NRTC
Distribution Agreements identified in Section 3.15 of the Company Disclosure
Statement or Section 5.15 of the Pegasus Disclosure Statement, as the case may
be.
"SMATV Account" means any hotel, motel, dormitory, hospital or similar
establishment in the Service Areas that provides DIRECTV services to its patrons
using a single DIRECTV System for each channel and is required to execute a
SMATV Agreement.
"SMATV Agreement" means a DIRECTV SMATV Service Private Viewing Agreement
relating to subscribers in the Service Areas.
"Subsidiary" of a specified Person means (a) any Person if securities
having ordinary voting power (at the time in question and without regard to the
happening of any contingency) to elect a majority of the directors, trustees,
managers or other governing body of such Person are held or controlled by the
specified Person or a Subsidiary of the specified Person; (b) any Person in
which the specified Person and its Subsidiaries collectively hold a 50% or
greater equity interest; (c) any partnership or similar organization in which
the specified Person or Subsidiary of the specified Person is a general partner;
or (d) any Person the management of which is directly or indirectly controlled
by the specified Person and its Subsidiaries through the exercise of voting
power, by contract or otherwise.
"Tax" means any federal, state, local or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental, customs duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated or other tax of any kind
whatsoever, including any interest, penalties, fees, deficiencies, assessments,
additions or other charges of any nature with respect thereto, whether disputed
or not.
"Tax Return" means any return, declaration, report, claim for refund or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Voting Agreement" means the form of voting agreement attached hereto as
Exhibit 5.
I-11
<PAGE>
1.2 Other Definitions. The following terms shall, when used in this
Agreement, have the meanings assigned to such terms in the Sections indicated.
Term Section
- ---- -------
"Agreement" ........................................................... Preamble
"Certificate of Merger" .................................................... 2.5
"Claim" ................................................................... 11.2
"Closing" ................................................................. 2.11
"Closing Date" ............................................................ 2.11
"Company Alternative Transaction" .......................................... 7.2
"Company Capital Stock" .................................................... 2.7
"Company Financial Statements" ............................................ 3.19
"Company Indemnities" ..................................................... 13.3
"Company Intellectual Property Rights" ..................................... 3.7
"Contracts". .............................................................. 3.15
"Conversion Ratio" ...................................................... 2.7(b)
"DGCL" ..................................................................... 2.1
"DIRECTV" ............................................................. Recitals
"Dissenting Shares" ........................................................ 2.9
"Effective Time" ........................................................... 2.5
"Escrowed Shares" ....................................................... 2.7(c)
"FCC" ..................................................................... 5.23
"FCC Licenses" ............................................................ 5.23
"GSS Indemnified Parties" ................................................. 11.2
"GSS Parties" .............................................................. 3.3
"Indemnification Period" .................................................. 13.2
"Indemnified Party" ....................................................... 13.4
"Indemnifying Party" ...................................................... 13.4
"Information Systems" ..................................................... 3.24
"Merger" ................................................................... 2.1
"NRTC" ................................................................ Recitals
"Options" ............................................................... 3.2(d)
"Parties" ............................................................. Preamble
"Pegasus Alternative Transaction" .......................................... 8.2
"Pegasus Financial Statements" ............................................ 5.11
"Pegasus Indemnitees" ..................................................... 13.2
"Pegasus Merger Registration Statement" .................................... 8.6
"Pegasus Parties" ..................................................... Preamble
"Proxy Statement/Prospectus" ............................................... 8.6
"Sellers" ............................................................. Preamble
"Shareholders" ............................................................. 2.6
"Surviving Corporation" .................................................... 2.1
"Third Party Claim" ....................................................... 13.4
Article II
BASIC TRANSACTION
2.1 Merger; Surviving Corporation. In accordance with and subject to the
provisions of this Agreement and the General Corporation Law of the State of
Delaware ("DGCL"), at the Effective Time, Merger Sub shall be merged with and
into the Company (the "Merger"), and the Company shall be the surviving
corporation in the Merger (hereinafter sometimes called the "Surviving
Corporation") and shall continue its corporate existence under the laws of the
State of Delaware. At the Effective Time, the separate existence of Merger Sub
shall cease. All properties, franchises and rights belonging to the Company and
Merger Sub, by virtue of the Merger and without further act or deed, shall be
vested in the Surviving Corporation, which shall thenceforth be responsible for
all the liabilities and obligations of each of Merger Sub and the Company.
I-12
<PAGE>
2.2 Certificate of Incorporation. The Company's certificate of
incorporation shall be amended and restated effective at the Effective Time to
be as set forth in the Certificate of Merger, and, as so amended and restated,
shall thereafter continue in full force and effect as the certificate of
incorporation of the Surviving Corporation until altered or amended as provided
therein or by law, to the extent permitted by Section 11.2.
2.3 By-Laws. The Company's by-laws, as in effect at the Effective Time,
shall be the by-laws of the Surviving Corporation until altered, amended or
repealed as provided therein or by law, to the extent permitted by Section 11.2.
2.4 Directors and Officers. The directors of the Surviving Corporation
following the Effective Time shall be the persons serving as directors of Merger
Sub immediately before the Effective Time and shall serve thereafter in
accordance with the certificate of incorporation and by-laws of the Surviving
Corporation and the DGCL. The officers of Merger Sub immediately before the
Effective Time shall serve in the same capacities as officers of the Surviving
Corporation at the pleasure of the board of directors of the Surviving
Corporation following the Effective Time in accordance with the certificate of
incorporation and by-laws of the Surviving Corporation and the DGCL.
2.5 Effective Time. The Merger shall become effective at the time and date
that the certificate of merger (the "Certificate of Merger"), in the form
attached hereto as Exhibit 6, is accepted for filing by the Secretary of State
of the State of Delaware in accordance with the provisions of Section 251 of the
DGCL. The Certificate of Merger shall be executed by the Surviving Corporation
and delivered to the Secretary of State of the State of Delaware for filing on
the Closing Date. The date and time when the Merger becomes effective are
referred to herein as the "Effective Time."
2.6 Exchange of Certificates. At the Closing, immediately after the
Effective Time, all of the shareholders of the Company (the "Shareholders"),
other than the holders of Dissenting Shares, shall surrender to the Surviving
Corporation all of the outstanding certificates theretofore representing shares
of Company Capital Stock in exchange for the Merger Consideration deliverable to
the Shareholders as provided in Section 2.7. Until such certificates are
surrendered, outstanding certificates formerly representing shares of Company
Capital Stock shall be deemed for all purposes as evidencing the right to
receive the Merger Consideration into which such shares are converted as though
said surrender and exchange had taken place. In no event will a holder of shares
of Company Capital Stock be entitled to interest on the Merger Consideration
issuable in respect of such shares.
2.7 Merger Consideration; Conversion and Cancellation of Securities.
(a) Conversion of Company Capital Stock. At the Effective Time of the
Merger all of the issued and outstanding shares of the common stock, par
value of $0.01 per share (the "Company Common Stock"), and all of the
issued and outstanding shares of the Series A Convertible Participating
Preferred Stock, the Series B Convertible Participating Preferred Stock,
the Series A Redeemable Preferred Stock, the Series B Redeemable Preferred
Stock, the Series C Senior Convertible Preferred Stock and the Series D
Redeemable Preferred Stock, each with a par value of $0.01 per share, of
the Company (the "Company Preferred Stock" and, together with the Company
Common Stock, the "Company Capital Stock") outstanding immediately before
the Effective Time, other than shares described in Section 2.7(d) and other
than Dissenting Shares, shall be converted, by virtue of the Merger and
without any further action on the part of the holders thereof, into the
number of shares of Pegasus Class A Common Stock determined as follows:
(i) 6,500,000 shares of Pegasus Class A Common Stock, minus
(ii) the number of shares of Pegasus Class A Common Stock
determined by dividing the amount paid by Pegasus pursuant to Section
8.10 by the Market Price per share of the Pegasus Class A Common Stock
on the date of this Agreement; minus
(iii) the number of shares of Pegasus Class A Common Stock issuable
upon exercise of the warrants and options to purchase Pegasus Class A
Common Stock that replace the Options pursuant to Section 2.12; minus
I-13
<PAGE>
(iv) any adjustment under Section 2.13; minus
(v) the number of shares of Pegasus Class A Common Stock that would
otherwise be issuable in respect of Dissenting Shares.
If between the date of this Agreement and the Closing Date, Pegasus shall
subdivide or combine the outstanding Pegasus Class A Common Stock or shall
declare a dividend on Pegasus Class A Common Stock payable in Pegasus Class A
Common Stock, the number of shares of Pegasus Class A Common Stock determined
above shall be adjusted by multiplying the number of shares so determined by a
fraction of which the numerator is the number of shares of Pegasus Class A
Common Stock outstanding immediately after such event and the denominator is the
number of shares of Pegasus Class A Common Stock immediately before such event.
(b) Conversion Ratio; Escrowed Shares; Delivery of Shares at Closing.
The ratio of the number of shares of Pegasus Class A Common Stock into
which each share of each series of the Company Preferred Stock and each
share of Company Common Stock, respectively, shall be converted (the
"Conversion Ratio" of each such series and of the Company Common Stock)
shall be set forth on Exhibit 10, which Exhibit shall be agreed upon and
signed by all the Parties within seven Business Days after the date of this
Agreement.
(c) Not later than 48 hours before the Closing, the Company shall
provide to Pegasus (i) a list of the Shareholders specifying the number of
shares of Pegasus Class A Common Stock to be issued to each such
Shareholder based upon the applicable Conversion Ratios, and (ii) a
calculation based on the Conversion Ratios supporting such list. Both the
list and the calculation shall be certified as correct by the Company, and
Pegasus shall be protected in conclusively relying on the accuracy thereof.
At the Closing, Pegasus shall (subject to Section 2.10) deliver (A) to the
Escrow Agent (subject to the provisions of Section 13.6 and the Escrow
Agreement) share certificates registered in the names of the Shareholders
evidencing 975,000 shares of Pegasus Class A Common Stock (adjusted as
provided in the last sentence of subsection (a)) (the "Escrowed Shares,"
which shares shall be deemed to be owned by the Shareholders (other than
holders of Dissenting Shares) in proportion to their entitlement to the
Merger Consideration, subject to the Escrow Agreement), and (B) to such
Shareholders (other than holders of Dissenting Shares), or a person
designated in writing by the Company to serve as agent for the
Shareholders, share certificates registered in the names of the applicable
Shareholders evidencing the balance of the shares of Pegasus Class A Common
Stock to be received by each such Shareholder (other than holders of
Dissenting Shares), rounded down to the nearest whole share and accompanied
by any payment in lieu of fractional shares required by Section 2.7(f).
(d) Treasury Shares, Etc. Each share of Company Capital Stock held in
the treasury of the Company and each share of Company Capital Stock, if
any, held by Pegasus or any Subsidiary of Pegasus or of the Company
immediately before the Effective Time shall be cancelled and extinguished,
and nothing shall be issued or paid in respect thereof.
(e) Conversion of Merger Sub Shares. Each share of common stock, par
value $1.00 per share, of Merger Sub issued and outstanding immediately
before the Effective Time shall be converted into one share of common
stock, par value $0.01 per share, of the Surviving Corporation.
(f) Fractional Shares. No certificates or scrip evidencing fractional
shares of Pegasus Class A Common Stock shall be issued in exchange for
Company Capital Stock. In lieu of any such fractional shares, each holder
of Company Capital Stock shall be paid an amount in cash (without
interest), rounded to the nearest cent, determined by multiplying (i) the
Market Price on the Closing Date of the Pegasus Class A Common Stock by
(ii) the fractional share of Pegasus Class A Common Stock to which such
holder would otherwise be entitled (taking into account all shares held of
record by such holder at the Effective Time).
(g) Withholding. Pegasus (or any Affiliate thereof) shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to
this Agreement to any former holder of Company Capital Stock such amounts,
if any, as Pegasus (or any Affiliate thereof) is required to deduct and
withhold with
I-14
<PAGE>
respect to the making of such payment under the Code, or any other
provision of federal, state, local or foreign tax law. To the extent that
amounts are so withheld by Pegasus, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the former holder
of the Company Capital Stock in respect of which such deduction and
withholding was made by Pegasus (or such Affiliate).
2.8 Stock Transfer Books. At the Effective Time, the stock transfer books
of the Company shall be closed, and there shall be no further registration of
transfers of shares of Company Capital Stock thereafter on the records of the
Company.
2.9 Dissenting Shares. Shares of Company Capital Stock which are issued and
outstanding immediately prior to the Effective Time and which are held by
persons who have properly exercised, and not withdrawn or waived, appraisal
rights with respect thereto in accordance with Section 262 of the DGCL (the
"Dissenting Shares") will not be converted into the right to receive the Merger
Consideration, and holders of such shares of Company Capital Stock will be
entitled, in lieu thereof, to receive payment of the appraised value of such
shares of Company Capital Stock in accordance with the provisions of such
Section 262 unless and until such holders fail to perfect or effectively
withdraw or lose their rights to appraisal and payment under the DGCL. If, after
the Effective Time, any such holder fails to perfect or effectively withdraws or
loses such right, such shares of Company Capital Stock will thereupon be treated
as if they had been converted at the Effective Time into the right to receive
the Merger Consideration, without any interest thereon. The Company will give
Pegasus prompt notice of any demands received by the Company for appraisal of
shares of Company Capital Stock. Prior to the Effective Time, the Company will
not, except with the prior written consent of Pegasus make any payment with
respect to, or settle or offer to settle, any such demands.
2.10 Failure to Surrender Share Certificates. Pegasus shall be obligated to
deliver certificates evidencing the Merger Consideration and cash in lieu of
fractional shares only upon receipt of certificates representing the Company
Capital Stock converted by reason of the Merger into the Merger Consideration.
If any Shareholder fails to deliver any of its certificates representing Company
Capital Stock at the Closing, Pegasus may withhold from its delivery to the
applicable Shareholder and the Escrow Agent the corresponding portion of the
Merger Consideration until such time as the applicable share certificates (or,
in case of lost, stolen or missing share certificates, an affidavit of loss and
unsecured indemnity agreement reasonably satisfactory to Pegasus) shall be
delivered.
2.11 Closing. The closing of the transactions contemplated by this
Agreement and the Collateral Documents ("Closing") shall take place at the
offices of Drinker Biddle & Reath LLP, One Logan Square, 18th and Cherry
Streets, Philadelphia, Pennsylvania 19103, or at such other location as the
parties may agree, at 10:00 a.m., Eastern Time, on a Business Day specified by
Pegasus that may be on, but shall not be more than five Business Days after, all
conditions precedent to the Closing set forth in Articles IX and X have been
satisfied or waived, or on such other date and at such other time as the Parties
may agree, provided that all such conditions precedent have been satisfied or
waived. The date on which the Closing actually occurs is referred to herein as
the "Closing Date."
2.12 Treatment of Certain Outstanding Options and Warrants. At the
Effective Time, Pegasus will assume the Company's obligations under the Options
described in Section 3.2(d)(i) of the Company Disclosure Statement and will
replace them (upon surrender thereof by the Persons who hold them) with warrants
or options, as the case may be, to purchase (on the same terms and conditions
that are applicable to the Options) the number of shares of Pegasus Class A
Common Stock equal to the Conversion Ratio applicable to the class of Company
Capital Stock for which such Options are exercisable times the number of shares
of the relevant class of Company Capital Stock issuable upon exercise of such
Options, for an exercise price equal to the exercise price applicable to such
Options divided by the Conversion Ratio applicable to the relevant class of
Company Capital Stock. For purposes of this Section, Options consisting of
employee stock options will be replaced with options issued under Pegasus's
employee stock option plan, and other Options will be replaced with other
options or warrants to purchase Pegasus Class A Common Stock, all on the terms
provided herein.
2.13 Certain Expenses. The Shareholders shall bear the cost and expense of
all investment banking, brokerage and financial advisory services rendered to
any of the Sellers relating to the transactions
I-15
<PAGE>
contemplated by this Agreement. To that end, at the Company's option, (a) some
or all of the Shareholders shall pay all such expenses before the Closing with
funds not provided by the Company and provide Pegasus satisfactory evidence of
such payment, or (b) the number of shares of Pegasus Class A Common Stock
included in the Merger Consideration shall be reduced by the amount of such
costs and expense divided by the Market Price on the Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Pegasus that the statements
contained in Article III are correct and complete as of the date of this
Agreement and, except as provided in Section 9.1, will be correct and complete
as of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout Article III, except in the
case of representations and warranties stated to be made as of the date of this
Agreement or as of another date).
3.1 Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and each Subsidiary of the Company is a business organization of the
type described in Section 3.1 of the Company Disclosure Statement and is duly
organized, validly existing and in good standing under the laws of the state
identified in Section 3.1 of the Company Disclosure Statement. All of the
Company's Subsidiaries are identified in Section 3.1 of the Company Disclosure
Statement. The Company has, and each of its Subsidiaries has, all requisite
power and authority to own, lease and use its assets as they are currently
owned, leased and used and to conduct its business as it is currently conducted.
The Company is, and each of its Subsidiaries is, duly qualified or licensed to
do business in and is in good standing in each jurisdiction in which the
character of the properties owned, leased or used by it or the nature of the
activities conducted by it make such qualification necessary, all of which are
identified in Section 3.1 of the Company Disclosure Statement, except any such
jurisdiction where the failure to be so qualified or licensed would not have a
Material Adverse Effect on the Company or a material adverse effect on the
validity, binding effect or enforceability of this Agreement or the Collateral
Documents or the ability of the Company or any of the GSS Parties to perform its
obligations under this Agreement or any of the Collateral Documents.
3.2 Capitalization.
(a) The authorized, issued and outstanding capital stock and other
ownership interests of the Company and each of its Subsidiaries (including
all options and warrants to acquire capital stock of the Company and any
Subsidiary) are fully and accurately described in Section 3.2(a) of the
Company Disclosure Statement.
(b) All of the issued and outstanding shares of Company Capital Stock,
are owned of record, and to the knowledge of the Company beneficially, by
the Persons set forth in Section 3.2(b) of the Company Disclosure
Statement, in the numbers and percentages set forth therein, and, to the
knowledge of the Company, except as set forth in Section 3.2(b) of the
Company Disclosure Statement, no other Person has any right, title or
interest, whether legal or equitable, in said shares other than equitable
distribution rights and other similar rights. The representations and
warranties in this subsection (b) will not apply at any time after the
purchase by Pegasus of Company Capital Stock pursuant to Section 8.10
insofar as such representations and warranties relate to Company Capital
Stock purchased by Pegasus pursuant to Section 8.10.
(c) All of the issued and outstanding ownership interests in each
Subsidiary of the Company are owned, beneficially and of record, by the
Persons set forth in Section 3.2(c) of the Company Disclosure Statement, in
the numbers and percentages set forth therein, and no other Person has any
right, title or interest, whether legal or equitable, in said ownership
interests (except to the extent the Shareholders' ownership of the Company
could be deemed to constitute beneficial ownership of the Company's
Subsidiaries).
(d) Section 3.2(d)(i) of the Company Disclosure Statement lists all
outstanding or authorized options, warrants, purchase rights, preemptive
rights or other contracts or commitments that could require
I-16
<PAGE>
the Company or any of its Subsidiaries to issue, sell, or otherwise cause
to become outstanding any of its capital stock or other ownership interests
(collectively "Options"). Except as described in Section 3.2(d)(ii) of the
Company Disclosure Statement, there are no authorized or outstanding stock
appreciation, phantom stock, profit participation, or similar rights with
respect to the Company or any of its Subsidiaries, and no rights described
in Section 3.2(d)(ii) of the Company Disclosure Statement will be
outstanding at the time of the Closing.
(e) All of the issued and outstanding shares of Company Capital Stock,
and all outstanding ownership interests of each of the Company's
Subsidiaries, (i) have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable (with respect to Subsidiaries
that are corporations) and have been issued in compliance with applicable
securities laws and other applicable Legal Requirements, and (ii) are
subject to no Encumbrances other than under the Company Credit Agreement,
transfer restrictions under applicable securities laws or the NRTC
Distribution Agreements, transfer restrictions under agreements among
Shareholders described in Section 3.15 of the Company Disclosure Statement,
or as described in Section 3.2(e) of the Company Disclosure Statement (all
of which Encumbrances (other than Encumbrances on the ownership interests
in subsidiaries of the Company granted pursuant to the Company Credit
Agreement and other than transfer restrictions under the NRTC Distribution
Agreements and applicable securities laws) will be released at or before
the Closing). The representations and warranties in clause (ii) of the
preceding sentence will not apply at any time after the purchase by Pegasus
of Company Capital Stock pursuant to Section 8.10 insofar as such
representations and warranties relate to Company Capital Stock purchased by
Pegasus pursuant to Section 8.10.
(f) This Section 3.2 does not prohibit the transfer of Company Capital
Stock, consistent with applicable law, between the date of this Agreement
and the Closing Date, provided that any Principal Company Shareholder so
transferring shares of Company Capital Stock requires its transferee to
agree in writing to be bound by this Agreement (including the covenant in
Section 7.5 to vote for the Merger). All such transfers will be reflected
in the Company's notification delivered pursuant to Section 2.7(c). If any
shares of Company Capital Stock shall be transferred before the Closing
Date by signatories to the Voting Agreement, shares of Pegasus Class A
Common Stock issued in exchange for the transferred shares shall be treated
for purposes of Section 4.1 of the Voting Agreement as Covered Shares
received by the transferor at the Closing and transferred to the transferee
thereafter, and the form of Voting Agreement executed at the Closing shall
be appropriately modified.
3.3 Authority and Validity. The Company has all requisite corporate power
to execute and deliver, to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement (subject to the approval of the
Shareholders as contemplated by Section 7.5 and to receipt of any consents,
approvals, authorizations or other matters referred to in Section 7.4 hereof).
The execution and delivery by the Company of, the performance by the Company of
its obligations under, and the consummation by the Company of the transactions
contemplated by, this Agreement have been duly authorized by all requisite
action of the Company (subject to the approval of the Shareholders as
contemplated by Section 7.5). This Agreement has been duly executed and
delivered by the Company and (assuming due execution and delivery by the Pegasus
Parties) is the legal, valid, and binding obligation of the Company, enforceable
against it in accordance with its terms, except that such enforcement may be
subject to (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting or relating to enforcement of creditors' rights generally
and (ii) general equitable principles. Upon the execution and delivery of the
Collateral Documents by each Person (other than Pegasus and its Affiliates and
the Escrow Agent) that is required by this Agreement to execute, or that does
execute, this Agreement or any of the Collateral Documents (collectively, the
"GSS Parties"), and assuming due execution and delivery thereof by the Pegasus
Parties and the Escrow Agent, the Collateral Documents will be the legal, valid
and binding obligations of each of the GSS Parties, enforceable against each in
accordance with their respective terms, except that such enforcement may be
subject to (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting or relating to enforcement of creditors' rights generally
and (ii) general equitable principles.
3.4 No Breach or Violation. Subject to obtaining the consents, approvals,
authorizations, and orders of and making the registrations or filings with or
giving notices to Governmental Authorities and Persons
I-17
<PAGE>
identified in the exceptions to Section 3.5, the execution, delivery and
performance by the Company of this Agreement and the Collateral Documents to
which it is a party, and the consummation of the transactions contemplated
hereby and thereby in accordance with the terms and conditions hereof and
thereof, do not and will not conflict with, constitute a violation or breach of,
constitute a default or give rise to any right of termination or acceleration of
any right or obligation of the Company under, or result in the creation or
imposition of any Encumbrance upon the Company, any of its Subsidiaries, the
Assets, the Business or the Company Capital Stock by reason of the terms of (i)
the certificate of incorporation, by-laws or other charter or organizational
document of the Company or any Subsidiary of the Company, (ii) any material
contract, agreement, lease, indenture or other instrument to which the Company
or any Subsidiary of the Company is a party or by or to which the Company, any
Subsidiary of the Company or the Assets may be bound or subject, (iii) any
order, judgment, injunction, award or decree of any arbitrator or Governmental
Authority or any statute, law, rule or regulation applicable to the Company or
any Subsidiary of the Company or (iv) any Permit of the Company or any
Subsidiary of the Company, which in the case of (ii), (iii) or (iv) above would
have a Material Adverse Effect on the Company or a material adverse effect on
the validity, binding effect or enforceability of this Agreement or the
Collateral Documents or the ability of the Company or any of the GSS Parties to
perform its obligations under this Agreement or any of the Collateral Documents.
3.5 Consents and Approvals. Except for (i) requirements under the NRTC
Distribution Agreements, the Securities Act, the Exchange Act, the HSR Act, and
the Company Credit Agreement, (ii) the requirement to make the Change of Control
Offers following the Closing, and (iii) requirements described in Section 3.5 of
the Company Disclosure Statement, no consent, approval, authorization or order
of, registration or filing with, or notice to, any Governmental Authority or any
other Person is necessary to be obtained, made or given by the Company or any of
its Subsidiaries in connection with the execution, delivery and performance by
them of this Agreement or any Collateral Document or for the consummation by
them of the transactions contemplated hereby or thereby, except to the extent
the failure to obtain any such consent, approval, authorization or order or to
make any such registration or filing would not have a Material Adverse Effect on
the Company or a material adverse effect on the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or the ability of
the Company or any of the GSS Parties to perform its obligations under this
Agreement or any of the Collateral Documents.
3.6 Title to Assets.
(a) The Company does not own any real property. Section 3.6 of the
Company Disclosure Statement includes a materially accurate and complete
description of (i) all real property leased by the Company or any of its
Subsidiaries (identifying the lessee and the lessor and describing the term
and the payment terms) and (ii) each place of business of the Company or
any of its Subsidiaries. The Company and its Subsidiaries have exclusive,
good and marketable title to the NRTC Distribution Agreements and good and
marketable title to the other material Assets, free and clear of any and
all Encumbrances, except (A) such Encumbrances on the NRTC Distribution
Agreements that will be released prior to Closing, (B) Encumbrances arising
under the Company Credit Agreement, (C) the security interest in the
interest escrow established by one of the Company Indentures and the
related escrow agreement, (D) the matters described in Section 3.6 of the
Company Disclosure Statement (all of which will have been discharged at or
before the Closing unless otherwise indicated in Section 3.6 of the Company
Disclosure Statement), (E) Permitted Liens, (F) transfer restrictions
imposed by the NRTC Distribution Agreements and other Encumbrances on the
NRTC Distribution Agreements that are not material individually or in the
aggregate, and (G) Encumbrances on property other than the NRTC
Distribution Agreements that would not have a Material Adverse Effect on
the Company or a material adverse effect on the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or the ability
of the Company or any of the GSS Parties to perform its obligations under
this Agreement or any of the Collateral Documents.
(b) Except as provided by this Agreement, and except as described in
Section 3.2 or 3.6 of the Company Disclosure Statement, no Person has any
right to acquire, directly or indirectly, any interest in any of the
Company's Subsidiaries or any material Assets, and there is no agreement to
which any Seller,
I-18
<PAGE>
any Subsidiary of the Company or any of their Affiliates is a party or is
otherwise bound relating to the direct or indirect sale of any of the NRTC
Distribution Agreements or the capital stock, other ownership interests or
any material Assets of the Company or any of its Subsidiaries.
3.7 Intellectual Property.
(a) Section 3.7 of the Company Disclosure Statement sets forth a true
and complete list of all registered patents, trademarks, copyrights and
applications therefor owned by or registered in the name of the Company or
any of its Subsidiaries, or in which the Company or any of its Subsidiaries
has any right, license or interest (the "Company Intellectual Property
Rights"). Except as set forth in Section 3.7 of the Company Disclosure
Statement, the Company is not a party to any license agreement, either as
licensor or licensee, with respect to any Company Intellectual Property
Rights. To the knowledge of the Company, the Company or one of its
subsidiaries has good and marketable title to or the right to use all
Company Intellectual Property Rights and all inventions, processes,
designs, formulae, trade secrets and know-how necessary for the operation
of the Business without the payment of any royalty or similar payment.
(b) To the knowledge of the Company, neither the Company nor any of its
Subsidiaries has in its operation of the Business infringed upon, and the
operation of the Business as currently conducted does not infringe upon,
any patents, copyrights, trade names, trademarks or service marks of third
parties, and neither the Company nor any of its Subsidiaries has received
any charge, complaint, claim, demand or notice alleging such infringement.
To the knowledge of the Company, no third party has infringed upon any
Company Intellectual Property Rights.
3.8 Compliance with Legal Requirements. Except as described in Section 3.8
of the Company Disclosure Statement, the Company and its Subsidiaries have
operated the Business in material compliance with all material Legal
Requirements and in material compliance with the NRTC Distribution Agreements
applicable to the Company and its Subsidiaries. Except as described in Section
3.8 of the Company Disclosure Statement, no action, suit, proceeding, hearing or
investigation has been commenced or, to the Sellers' knowledge, threatened, and
no charge, complaint, claim, demand or notice has been filed, against the
Company or any of its Subsidiaries alleging any failure to so comply.
3.9 Financial and Other Information.
(a) The historical financial statements (including the notes thereto)
("Company Financial Statements") contained in the Company SEC Filings or to
be contained in the Company 1999 Forms 10-K have been or will be prepared
in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby and present or will present fairly the financial
condition of the Persons reported on and their results of operations as of
the dates and for the periods indicated, subject in the case of the
unaudited financial statements only to normal year-end adjustments (none of
which will be material in amount) and the omission of footnotes.
(b) The Company SEC Filings did not, as of their filing dates, and the
Company 1999 Forms 10-K, as of their filing dates, will not, contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were or will be made, not
misleading.
(c) No written information concerning the Company, its Subsidiaries or
its Shareholders furnished to Pegasus by the Company specifically for
inclusion in the Pegasus Merger Registration Statement will at the time
provided, or as of any later time confirmed in writing by any such Person,
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were or will be
made, not misleading.
(d) The Company Financial Model has been prepared in good faith and on
the basis of assumptions believed to be reasonable by the Company's
management.
3.10 Subsequent Events. Except as set forth in Section 3.10 of the
Company Disclosure Statement, or to the extent consented to in writing by
Pegasus, since September 30, 1999: (i) neither the Company nor any
I-19
<PAGE>
of its Subsidiaries has sold, leased, transferred or assigned any of its rights
under the NRTC Distribution Agreements, or, except in the Ordinary Course and in
compliance with the NRTC Distribution Agreements, any other material Assets;
(ii) no third party has accelerated, terminated, modified or canceled any
material agreement, contract, lease or license (or series of related agreements,
contracts, leases and licenses) relating to the Company, any of its Subsidiaries
or the Business; (iii) neither the Company nor any of its Subsidiaries has
imposed or permitted the imposition of any Encumbrance (other than Permitted
Liens) upon any of the rights of the Company or its Subsidiaries under any of
the NRTC Distribution Agreements or any material Encumbrance (other than
Permitted Liens) upon any of the other material Assets; (iv) neither the Company
nor any of its Subsidiaries has made any capital investment in, any loan to, or
any Acquisition of the securities or assets of, any other Person (or series of
related capital investments, loans or Acquisitions) other than loans to or
investments in Subsidiaries of the Company; (v) neither the Company nor any of
its Subsidiaries has delayed or postponed the payment of accounts payable and
other Liabilities outside the Ordinary Course in excess of $100,000 (exclusive
of matters being contested in good faith); (vi) neither the Company nor any of
its Subsidiaries has canceled, compromised, waived or released any rights or
claims outside the Ordinary Course involving more than $100,000 in the
aggregate; and (vii) neither the Company nor any of its Subsidiaries have
committed to any of the foregoing. Since September 30, 1999, there has not been
any other occurrence, event, incident, action, failure to act or transaction
involving the Company or any of its Subsidiaries (except matters generally known
to, and that generally affect, other NRTC members and affiliates providing
DIRECTV services) which is reasonably likely, individually or in the aggregate,
to have a Material Adverse Effect on the Company or a material adverse effect on
the validity, binding effect or enforceability of this Agreement or the
Collateral Documents or the ability of the Company or any of the GSS Parties to
perform its obligations under this Agreement or any of the Collateral Documents.
3.11 Undisclosed Liabilities.
(a) As of the date of this Agreement, neither the Company nor any of
its Subsidiaries has any Liability, except for (i) Liabilities reflected,
accrued or reserved against in the Company Financial Statements as of
September 30, 1999 or the notes thereto or disclosed in the Company SEC
Filings, (ii) current Liabilities incurred after September 30, 1999, in the
Ordinary Course, (iii) Liabilities incurred after September 30, 1999, under
the Company Credit Agreement to finance expenditures not prohibited by this
Agreement, (iv) Liabilities incurred after September 30, 1999, in
connection with Acquisitions permitted by Section 7.3(c)(i), (v)
Liabilities disclosed in Section 3.11 of the Company Disclosure Statement
or in the Company Financial Model, and (vi) Liabilities in an aggregate
amount not exceeding $5,000,000.
(b) As of the Closing Date, neither the Company nor any of its
Subsidiaries will have any Liability, except for (i) Liabilities reflected,
accrued or reserved against in the Company Financial Statements as of
December 31, 1999, or the notes thereto or disclosed in the Company 1999
Forms 10-K, (ii) current Liabilities incurred after December 31, 1999, in
the Ordinary Course, (iii) Liabilities incurred after December 31, 1999,
under the Company Credit Agreement to finance expenditures not prohibited
by this Agreement, (iv) Liabilities incurred after December 31, 1999, in
connection with Acquisitions permitted by Section 7.3(c)(i), (v)
Liabilities disclosed in Section 3.11 of the Company Disclosure Statement
or in the Company Financial Model, and (vi) Liabilities in an aggregate
amount not exceeding $5,000,000.
3.12 Legal Proceedings. Other than any proceedings affecting generally the
NRTC and its members and affiliates providing DIRECTV services, and except as
set forth in Section 3.12 of the Company Disclosure Statement, (i) there are no
outstanding judgments or orders against or otherwise affecting or related to the
Company, any of its Subsidiaries, the Business or the Assets; (ii) there is no
action, suit, complaint, proceeding or investigation, judicial, administrative
or otherwise, that is pending or, to any Seller's knowledge, threatened that, if
adversely determined, would result in Liabilities in an amount exceeding
$1,000,000, or that challenges the ability of the Sellers to consummate the
transactions contemplated by this Agreement or the Collateral Documents.
3.13 Taxes. The Company has, and each of its Subsidiaries has, duly and
timely filed in proper form all Tax Returns for all Taxes required to be filed
with the appropriate Governmental Authority, except where the Liabilities of all
such failures to file could not reasonably be expected to exceed $1,000,000 in
the aggregate.
I-20
<PAGE>
All Taxes due and payable by the Company and its Subsidiaries (or claimed to be
due and payable) have been paid (regardless whether Tax Returns relating to such
Taxes have been duly and timely filed or, if filed, regardless whether such Tax
Returns are deficient), except such amounts as (i) are not in the aggregate
material or (ii) are being contested diligently and in good faith and for which
there are adequate reserves in the Company Financial Statements. The Company has
furnished to Pegasus true and correct copies of all federal and state income Tax
Returns filed by it or any of its Subsidiaries in the past five years, all of
which are accurate and complete in all material respects. Except as set forth in
Section 3.13 of the Company Disclosure Statement, there are no pending tax
audits, claims or proceedings relating to the Company any of its Subsidiaries,
the Assets or the Business and income therefrom. Neither the Company nor any of
its Subsidiaries has agreed to any waiver or extension of any statute of
limitations relating to any Tax.
3.14 Employee Benefits; Employees. All Employee Benefit Plans maintained or
contributed to by the Company are set forth in Section 3.14 of the Company
Disclosure Statement. Except as set forth in Section 3.14 of the Company
Disclosure Statement and except for matters that individually and in the
aggregate would not have Liabilities in excess of $1,000,000:
(a) All such Employee Pension Benefit Plans are, and have been at all
times since their establishment, qualified for federal income tax purposes
under Code Section 401(a) and the related trusts are, and have been at all
times since their establishment, exempt from federal income tax under Code
Section 501(a). All such Employee Benefit Plans are in compliance with all
applicable provisions of ERISA, including, but not limited to, the
applicable reporting and disclosure requirements, as they relate to such
plans, and the Company is not subject to any liabilities based on past
non-compliance, if any. Pegasus and Merger Sub are not required under
ERISA, the Code, any collective bargaining agreement or any other agreement
to maintain or to continue to contribute to any Employee Benefit Plan
maintained or contributed to by the Company.
(b) The Company has made all required contributions under each Employee
Benefit Plan listed in Section 3.14 of the Company Disclosure Statement for
all periods through and including the fiscal year ended December 31, 1998,
and has made all required contributions for subsequent periods or has
provided adequate accruals therefor in the Company Financial Statements.
(c) There is not now, and has not been, any violation of the Code or
ERISA with respect to the filing of applicable reports, documents, and
notices regarding the Employee Benefit Plans maintained or contributed to
by the Company with the Secretary of Labor and the Secretary of the
Treasury or the furnishing of such documents to the participants or
beneficiaries of the Employee Benefit Plans.
I-21
<PAGE>
(d) No fiduciary or other party in interest with respect to any of the
Employee Benefit Plans maintained or contributed to by the Company has
caused any of such plans to engage in a "prohibited transaction," as
defined in ERISA Section 406.
(e) The Company has never been obligated to contribute to any
Multiemployer Plan.
(f) There has been no violation of the "continuation coverage
requirements" of "group health plans" as set forth in Code Section 4980B
and Part 6 of Subtitle B of Title I of ERISA or the "HIPAA" requirements as
set forth in Code Sections 9801 and 9802 and Part 7 of Subtitle B of ERISA
with respect to any Employee Benefit Plan maintained by the Company to
which such requirements apply.
(g) The Company does not maintain retiree life and retiree health
insurance plans which are Employee Welfare Benefit Plans providing for
continuing benefits or coverage for any employee or any beneficiary of any
employee after such employee's termination of employment (except to the
extent such continued coverage is required by Code Section 4980B and Part 6
of Subtitle B of Title I of ERISA).
(h) Prior to the Closing, the Company will not establish or create any
new Employee Benefit Plan, except with the consent of Pegasus, nor will the
Company amend or modify as to any benefit or in any other way any existing
Employee Benefit Plan, except with the consent of Pegasus.
(i) The Company does not maintain and is not obligated to contribute to
any Employee Pension Benefit Plan that is a defined benefit plan, and has
not maintained and has not been obligated to contribute to such a plan
within the last six years.
(j) "Company," as used in subsections (a) through (i) of this Section
3.14 shall include any other entity required to be aggregated with the
Company under Sections 414(b), 414(c), 414(m), or 414(o) of the Code and
the regulations thereunder.
(k) There are no collective bargaining agreements applicable to any
Persons employed by the Company or any of its Subsidiaries, and the Company
and its Subsidiaries have no duty to bargain with any labor organization
with respect to any such Person. There are not pending any unfair labor
practice charges against the Company or any of its Subsidiaries, nor is
there any demand for recognition, or any other request or demand from a
labor organization for representative status with respect to any Person
employed by the Company or any of its Subsidiaries.
(l) The Company and its Subsidiaries are in substantial compliance with
all applicable Legal Requirements respecting employment conditions and
practices, have withheld all amounts required by any applicable Legal
Requirements or Contracts to be withheld from the wages or salaries of
their employees, and are not liable for any arrears of wages or any Taxes
or penalties for failure to comply with any of the foregoing.
(m) The Company and its Subsidiaries have not engaged in any unfair
labor practice within the meaning of the National Labor Relations Act and
have not violated any Legal Requirement prohibiting discrimination on the
basis of race, color, national origin, sex, religion, age, marital status,
or handicap in their employment conditions or practices, except where such
violations would not have a Material Adverse Effect on the Company. There
is not pending or, to the best of the Company's knowledge, threatened any
discrimination complaint relating to race, color, national origin, sex,
religion, age, marital status, or handicap against the Company or any of
its Subsidiaries before any Governmental Authority.
(n) There is no existing or, to the best of the Company's knowledge,
threatened, labor strike, dispute, grievance or other labor controversy
affecting the Company or any of its Subsidiaries. There is no pending or,
to the best of the Company's knowledge, threatened representation question
respecting the employees of the Company or any of its Subsidiaries. There
is no pending or, to the best of the Company's knowledge, threatened
arbitration proceeding under any Contract.
(o) Section 3.14 of the Company Disclosure Statement identifies all
employees other than customer service representatives that have been
terminated for cause, the reasons for termination, any agreements relating
to such terminations and any litigation or proceedings relating to such
terminations.
I-22
<PAGE>
(p) Section 3.14 of the Company Disclosure Statement sets forth a true
and complete list of the names, titles and rates of compensation of all of
the Company's employees.
3.15 Contracts.
(a) Section 3.15 of the Company Disclosure Statement contains a true,
correct and complete list of (or a specific cross-reference to one or more
other sections of the Company Disclosure Statement where there is described)
the following contracts, agreements and commitments, whether written or
oral, to which the Company or any its Subsidiaries is a party ("Contracts"):
(i) each NRTC Distribution Agreement (together with the Service Area
covered by each) and any other agreement with NRTC or DirecTV, Inc. or
any of their Affiliates;
(ii) each agreement to which the Company or any of its Subsidiaries
is a party relating to the Acquisition of a DIRECTV Distribution
Business;
(iii) any agreement (or group of related agreements) relating to the
financing, lease or rental of Personal Property to the Company or any of
its Subsidiaries by any Person requiring payments in excess of $100,000
per year;
(iv) each lease of real property to which the Company or any of its
Subsidiaries is a party, and each management, maintenance and service
agreement relating to real estate owned or leased by the Company or any
of its Subsidiaries requiring payments in excess of $50,000 per year;
(v) each form of agreement currently in effect used by the Company or
any of its Subsidiaries to provide for the maintenance or installation
of DIRECTV Systems;
(vi) any agreement (or group of related agreements) for the purchase
or sale of supplies, products or other personal property, or for the
furnishing or receipt of services (including any forms of agreement or
purchase order relating to the sale of DIRECTV Systems or the sale of
DIRECTV services) requiring payments in excess of $100,000 per year;
(vii) each form of Consumer Contract currently in effect used by the
Company and its Subsidiaries (as distinguished from their predecessors);
(viii) any written agreement concerning a partnership or joint
venture;
(ix) any written agreement with the Shareholders (or any of them),
including agreements related to registration rights;
(x) any agreement (or group of related agreements) under which the
Company or any of its Subsidiaries has created, incurred, assumed or
guaranteed any indebtedness for borrowed money, or any capitalized lease
obligation, or under which the Company or any of its Subsidiaries has
imposed an Encumbrance (other than a Permitted Lien), the liability on
which, determined in accordance with GAAP, exceeds $200,000;
(xi) any agreement concerning confidentiality or noncompetition;
(xii) any material agreement involving any officer, director or
shareholder of the Company or any of its Subsidiaries;
(xiii) any agreement for the employment or hire of any individual on a
full-time, part-time, consulting or other basis requiring payments of
$50,000 or more per year;
(xiv) any written agreement relating to the severance or termination
of an employee that could reasonably be expected to require payment by
the Company or any Subsidiary of $50,000 or more;
(xv) each form of agreement currently in effect used by the Company or
any of its Subsidiaries relating to the services of sales
representatives, agents and other independent contractors (including
agreements relating to the maintenance or installation of DIRECTV
Systems);
I-23
<PAGE>
(xvi) any material agreement under which the Company or any of its
Subsidiaries has advanced or lent any amount to any employee or any of
the current or former directors, officers or shareholders of the Company
or any of its Affiliates (other than advances against properly
documented and properly reimbursable business expenses in the Ordinary
Course);
(xvii) any agreement relating to the sale or use of subscriber lists;
(xviii) all agreements relating to multiple dwelling units;
(xix) any agreement under which the consequences of a default or
termination could have a Material Adverse Effect on the Company or a
material adverse effect on the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or the
ability of the Company or any of the GSS Parties to perform its
obligations under this Agreement or any of the Collateral Documents; and
(xx) any other agreement (or group of related agreements) entered into
other than in the Ordinary Course the performance of which involves
payments in excess of $200,000.
(b) The Company has delivered or made available to Pegasus a correct and
complete copy of each written agreement listed in Section 3.15 of the
Company Disclosure Statement and a written summary setting forth the
material terms and conditions of each oral agreement listed therein. With
respect to each Contract, except as described in Section 3.15 of the Company
Disclosure Statement: (A) the Contract is legal, valid, binding, enforceable
and in full force and effect; (B) subject to obtaining any consent referred
to in Section 3.5 or disclosed in Section 3.5 of the Company Disclosure
Statement, the transactions contemplated by this Agreement will not prevent
the Contract from continuing to be legal, valid, binding, enforceable and in
full force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Company nor any of its
Subsidiaries, nor, to the knowledge of the Company, any other party thereto,
is in breach or default, and no event has occurred which with notice or
lapse of time would constitute a breach or default, or permit termination,
modification or acceleration, under the Contract; and (D) neither the
Company nor any of its Subsidiaries, nor, to the knowledge of the Company,
any other party thereto, has repudiated any provision of the Contract.
3.16 Books and Records. The books and records of the Company and its
Subsidiaries accurately and fairly represent the Business and its results of
operations in all material respects. All Accounts Receivable and Inventory of
the Business are reflected properly on such books and records in all material
respects.
3.17 Business Information. The Company has delivered to Pegasus copies,
certified by an officer of the Company to be current and to conform to the
originals of such documents, of all Exhibits C to the NRTC Distribution
Agreements to which the Company's Subsidiaries are parties.
3.18 Insurance. Section 3.18 of the Company Disclosure Statement sets forth
the following information with respect to each insurance policy relating to the
Business (including policies providing property, casualty, liability, directors'
and officers' liability and workers' compensation coverage and bond and surety
arrangements) to which the Company or any of its Subsidiaries has been a party,
a named insured, or otherwise the beneficiary of coverage at any time during the
past three years:
(i) the name, address, and telephone number of the agent;
(ii) the name of the insurer, the name of the policyholder and the
name of each covered insured; and
(iii) the scope (including an indication of whether the coverage was
on a claims made, occurrence or other basis) and amount of coverage.
With respect to each such insurance policy: (A) the policy is in full force
and effect; (B) neither the Company, nor, to the Company's knowledge, any other
party to the policy is in breach or default (including with respect to the
payment of premiums or the giving of notices), and, to the Company's knowledge,
no event has occurred which, with notice or the lapse of time, would constitute
such a breach or default, or
I-24
<PAGE>
permit termination, modification or acceleration, under the policy; and (C) to
the Company's knowledge, no party to the policy has repudiated any provision
thereof. The Business and the Assets have been covered since the beginning of
Business operations in scope and amount customary and reasonable for such a
business and in the case of workers' compensation coverage, in scope and amount
required by applicable Legal Requirements. Section 3.18 of the Company
Disclosure Statement describes any self-insurance arrangements affecting the
Assets or the Business. Section 3.18 of the Company Disclosure Statement also
sets forth each insurance claim (other than medical claims) in excess of
$1,000,000 made or loss incurred relating to the Business pursuant to property,
casualty, liability, workers' compensation and bond and surety policies and,
except as indicated therein, no such claim is outstanding.
3.19 Environmental Matters. Except as set forth in Section 3.19 of the
Company Disclosure Statement:
(a) The Company and its Subsidiaries have incurred no material
liabilities under any applicable Environmental Law and have not generated,
released, stored, used, treated, handled, discharged or disposed of any
Hazardous Substances at, on, under, in or about, or in any other manner
affecting, the Real Property, transported any Hazardous Substances to or
from the Real Property or discharged any Hazardous Substances from the Real
Property into any body of water, directly or indirectly, except in material
compliance with applicable Environmental Laws or except as would not
reasonably be expected to result in any material Liability. To the knowledge
of the Sellers, no other present or previous owner, tenant, occupant or user
of the Real Property or any other Person has released, discharged or
disposed of any Hazardous Substances at, on, under, in or about the Real
Property. To the knowledge of the Sellers, no release of Hazardous
Substances outside the Real Property has entered or threatens to enter the
Real Property, nor, to the knowledge of Sellers, is there any pending or
threatened claim based on Environmental Laws that arises from any condition
of the land surrounding the Real Property. No claim or investigation based
on Environmental Laws that relates to the condition of the Real Property or
any operations by the Company or any of its Subsidiaries on it (i) has been
asserted or conducted in the past or is currently pending against or with
respect to the Company and its Subsidiaries or, to the knowledge of the
Sellers, any other Person; or (ii) to the knowledge of the Sellers, is
threatened or contemplated.
(b) The Company has provided Pegasus with complete and correct copies of
(i) all studies, reports, surveys or other materials in the Company's or any
of its Subsidiary's possession relating to the presence or alleged presence
of Hazardous Substances at, on or affecting the Real Property; (ii) all
notices or other materials in the possession of the Company or any
Subsidiary of the Company that were received from any Governmental Authority
having the power to administer or enforce any Environmental Laws relating to
current or past ownership, use or operation of the Real Property or
activities at the Real Property; and (iii) all materials in the possession
of the Company or any Subsidiary of the Company relating to any claim,
allegation or action by any private third party under any Environmental Law.
3.20 Disclosure. No representation or warranty of any Seller in this
Agreement or in the Collateral Documents and no statement in any certificate
furnished or to be furnished by any Seller pursuant to this Agreement contained,
contains or will contain on the date such agreement or certificate was or is
delivered, or on the Closing Date, any untrue statement of a material fact, or
omitted, omits or will omit on such date to state any material fact necessary in
order to make the statements made, in light of the circumstances under which
they were made, not misleading. There is no fact known to any Seller and not
disclosed in this Agreement or the Company Disclosure Statement (other than
facts generally known to, and that generally affect, other NRTC members and
affiliates providing DIRECTV services) that could be reasonably likely to have a
Material Adverse Effect on the Company or a material adverse effect on the
validity, binding effect or enforceability of this Agreement or the Collateral
Documents or the ability of the Company or any of the GSS Parties to perform its
obligations under this Agreement or any of the Collateral Documents.
3.21 Brokers or Finders. Except as disclosed in Section 3.21 of the Company
Disclosure Statement, no broker or finder has acted directly or indirectly for
the Company, any Seller or any of their Affiliates in connection with the
transactions contemplated by this Agreement, and neither the Company, any Seller
nor any of their Affiliates has incurred any obligation to pay any brokerage or
finder's fee or other commission in connection with the transaction contemplated
by this Agreement.
3.22 Certain Payments. Neither the Company, any of its Subsidiaries, any
of the Sellers, any of their respective directors or officers, nor, to the
Sellers' knowledge, any other Representative or any Affiliate of any
I-25
<PAGE>
of them has directly or indirectly, on behalf of or for the purpose of assisting
the Business, made any contribution, gift, bribe, rebate, payoff, influence
payment, kickback, or other similar payments to any Person, private or public,
regardless of form, whether in money, property or services, to obtain favorable
treatment in securing business, to pay for favorable treatment for business
secured, to obtain special concessions or for special concessions already
obtained, in violation of any Legal Requirement. The Company has not established
or maintained any material fund or asset that has not been recorded in the Books
and Records.
3.23 Subscribers. The Company has not employed any scheme or device for the
purpose of encouraging Persons residing outside the Service Areas or Persons who
would not be deemed Committed Member Residences to become subscribers of the
DIRECTV service offered by the Business.
3.24 Billing and Authorization System. The Company has not altered, modified
or manipulated the reporting system and/or the billing and authorization system
used by the NRTC (together, the "Information Systems") in any way out of the
Ordinary Course for NRTC members and affiliates generally (or Pegasus in
particular) or in violation of the NRTC Distribution Agreements, including,
without limitation, alteration, modification or manipulation of the NRTC's and
DIRECTV's collection or processing of data by the Information Systems, the
standard parameters set by the Information Systems with respect to subscriber
authorization, billing and cut-off and the standard reports generated by the
Information Systems.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
THE PRINCIPAL COMPANY SHAREHOLDERS
Each of the Principal Company Shareholders, severally and not jointly,
represents and warrants to Pegasus that with respect to itself the statements
contained in Article IV are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout Article IV, except in the case of representations and
warranties stated to be made as of the date of this Agreement or as of another
date).
4.1 Authority and Validity. Each Principal Company Shareholder has all
requisite power to execute and deliver, to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement and the Collateral
Documents to which it is or is to be a party (subject to the approval of the
Shareholders as contemplated by Section 7.5 and to the receipt of any consents,
approvals, authorizations or other matters referred to in Section 7.4). The
execution and delivery by each Principal Company Shareholder of, the performance
by each Principal Company Shareholder of its obligations under, and the
consummation by each Principal Company Shareholder of the transactions
contemplated by, this Agreement and the Collateral Documents to which it is or
is to be a party have been duly authorized by all requisite action of such
Principal Company Shareholder. This Agreement has been duly executed and
delivered by each Principal Company Shareholder and, assuming due execution and
delivery thereof by all other parties thereto, is the legal, valid, and binding
obligation of such Principal Company Shareholder, enforceable against it in
accordance with its terms, except that such enforcement may be subject to (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and (ii) general equitable principles.
Upon the execution and delivery by such Principal Company Shareholder of the
Collateral Documents to which it is or is to be a party, and, assuming due
execution and delivery thereof by all other parties thereto, such Collateral
Documents will be the legal, valid and binding obligations of such Principal
Company Shareholder, enforceable against it in accordance with its terms, except
that such enforcement may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and (ii) general equitable principles.
4.2 Ownership. Each Principal Company Shareholder owns, beneficially and of
record, the number of shares of Company Capital Stock shown as owned by it on
Schedule 3.2(b) of the Company Disclosure Statement. Except as described in
Section 3.2(d) or 4.2 of the Company Disclosure Statement, no Person has any
right to acquire, and there are no Encumbrances on, the shares of Company
Capital Stock owned by such Principal Company Shareholder, other than transfer
restrictions under applicable securities laws or the NRTC Distribution
Agreements or under agreements or documents described in Section 3.15 or 4.2 of
the Company
I-26
<PAGE>
Disclosure Statement. All Encumbrances described in Section 4.2 of the Company
Disclosure Statement and all transfer restrictions under agreements among
Shareholders will be released at or before the Closing. The representations and
warranties in this Section 4.2 will not apply at any time after the purchase by
Pegasus of Company Capital Stock pursuant to Section 8.10 insofar as such
representations and warranties relate to Company Capital Stock purchased
pursuant to Section 8.10.
4.3 Consents and Approvals. Except for (i) requirements under the NRTC
Distribution Agreements, the Securities Act, the Exchange Act, the HSR Act, and
the Company Credit Agreement, (ii) the requirement to make the Change of Control
Offers following the Closing, and (iii) requirements described in Section 3.5,
3.15 or 4.2 of the Company Disclosure Statement, no consent, approval,
authorization or order of, registration or filing with, or notice to, any
Governmental Authority or any other Person is necessary to be obtained, made or
given by any Principal Company Shareholder in connection with the execution,
delivery and performance by them of this Agreement or any Collateral Document or
for the consummation by them of the transactions contemplated hereby or thereby.
4.4 Certain Information. No written information concerning any Principal
Company Shareholder or its interest in the Company furnished to Pegasus by any
Principal Company Shareholder specifically for inclusion in the Pegasus Merger
Registration Statement will at the time provided, or as of any later time
confirmed in writing by any such Person, contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
4.5 Compliance with Legal Requirements. Except as described in Section 4.5
of the Company Disclosure Statement, no action, suit, proceeding, hearing or
investigation has been commenced or overtly threatened in writing, and no
charge, complaint, demand or notice has been filed, against any Principal
Company Shareholder alleging any failure of the Company or its Subsidiaries to
comply in any material respect with any material legal requirement or to comply
in any material respect with any NRTC Distribution Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PEGASUS
Pegasus represents and warrants to the Company and the Principal Company
Shareholders that the statements contained in this Article V are correct and
complete as of the date of this Agreement and, except as provided in Section
10.1, will be correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the date of this Agreement
throughout this Article V, except in the case of representations and warranties
stated to be made as of the date of this Agreement or as of another date).
5.1 Organization and Qualification. Each of Pegasus and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and each Subsidiary of Pegasus is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation or formation. Pegasus has, and each Subsidiary of Pegasus
(including Merger Sub) has all requisite power and authority to own, lease and
use its assets as they are currently owned, leased and used and to conduct its
business as it is currently conducted. Pegasus is, and each of its Subsidiaries
(including Merger Sub) is, duly qualified or licensed to do business in and is
in good standing in each jurisdiction in which the character of the properties
owned, leased or used by it or the nature of the activities conducted by it
makes such qualification necessary, except any such jurisdiction where the
failure to be so qualified or licensed and in good standing would not have a
Material Adverse Effect on Pegasus or a material adverse effect on the validity,
binding effect or enforceability of this Agreement or the Collateral Documents
or the ability of the Company or any of the Pegasus Parties to perform its
obligations under this Agreement or any of the Collateral Documents.
5.2 Capitalization. Pegasus's authorized capital stock consists of (i)
50,000,000 shares of Class A Common Stock, par value $.01 per share, of which
15,216,305 as of 12/29 shares are outstanding, (ii) 15,000,000 shares of Class B
Common Stock, par value $.01 per share, of which 4,581,900 shares are
I-27
<PAGE>
outstanding, (iii) 30,000,000 shares of Non-Voting Common Stock, par value $.01
per share, of which no shares are outstanding, and (iv) 5,000,000 shares of
preferred stock, par value $.01 per share, 143,684.2476 of which have been
designated as 12.75% Series A Cumulative Exchangeable Preferred Stock, all of
which is outstanding, and 5,707 of which have been designated as Series B Junior
Convertible Participating Preferred Stock, all of which is outstanding. Except
as described in Section 5.2 of the Pegasus Disclosure Statement, there are no
outstanding or authorized options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights, preemptive rights or other contracts
or commitments that could require Pegasus to issue, sell, or otherwise cause to
become outstanding any of its capital stock. There are no outstanding or
authorized stock appreciation, phantom stock, profit participation, or similar
rights with respect to Pegasus. The issuance by Pegasus of additional capital
stock or other securities between the date of this Agreement and the Closing
Date shall not be deemed to cause the representations and warranties in this
Section to be untrue or breached as of the Closing Date. The shares of Pegasus
Class A Common Stock included in the Merger Consideration, when issued in
accordance with this Agreement, will have been duly authorized, validly issued
and outstanding and will be fully paid and nonassessable.
5.3 Authority and Validity. Each Pegasus Party has all requisite power to
execute and deliver, to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement and the Collateral Documents. The
execution and delivery by each Pegasus Party of, the performance by each Pegasus
Party of its respective obligations under, and the consummation by the Pegasus
Parties of the transactions contemplated by, this Agreement and the Collateral
Documents have been duly authorized by all requisite action of each Pegasus
Party (subject to the approval of Pegasus's shareholders as contemplated by
Section 8.5). This Agreement has been duly executed and delivered by each of the
Pegasus Parties and (assuming due execution and delivery by the Sellers) is the
legal, valid and binding obligation of each Pegasus Party, enforceable against
each of them in accordance with its terms. Upon the execution and delivery by
each of the Pegasus Parties and Marshall W. Pagon of the Collateral Documents to
which each of them is a party, and assuming due execution and delivery thereof
by the other parties thereto, the Collateral Documents will be the legal, valid
and binding obligations of each such Person, as the case may be, enforceable
against each of them in accordance with their respective terms.
5.4 No Breach or Violation. Subject to obtaining the consents, approvals,
authorizations, and orders of and making the registrations or filings with or
giving notices to Governmental Authorities and Persons identified in the
exceptions to Section 5.5, the execution, delivery and performance by the
Pegasus Parties of this Agreement and the Collateral Documents to which each is
a party and the consummation of the transactions contemplated hereby and thereby
in accordance with the terms and conditions hereof and thereof, do not and will
not conflict with, constitute a violation or breach of, constitute a default or
give rise to any right of termination or acceleration of any right or obligation
of any Pegasus Party under, or result in the creation or imposition of any
Encumbrance upon the property of Pegasus or Merger Sub by reason of the terms of
(i) the certificate of incorporation, by-laws or other charter or organizational
document of any Pegasus Party, (ii) any material contract, agreement, lease,
indenture or other instrument to which any Pegasus Party is a party or by or to
which any Pegasus Party or its property may be bound or subject, (iii) any
order, judgment, injunction, award or decree of any arbitrator or Governmental
Authority or any statute, law, rule or regulation applicable to any Pegasus
Party or (iv) any Permit of Pegasus or Merger Sub, which in the case of (ii),
(iii) or (iv) above would have a Material Adverse Effect on Pegasus or a
material adverse effect on the validity, binding effect or enforceability of
this Agreement or the Collateral Documents or the ability of any Pegasus Party
to perform its obligations hereunder or thereunder.
5.5 Consents and Approvals. Except for requirements under the NRTC
Distribution Agreements, the Securities Act, the Exchange Act and the HSR Act,
no consent, approval, authorization or order of, registration or filing with, or
notice to, any Governmental Authority or any other Person is necessary to be
obtained, made or given by any Pegasus Party in connection with the execution,
delivery and performance by them of this Agreement or any Collateral Documents
or for the consummation by them of the transactions contemplated hereby or
thereby, except to the extent the failure to obtain such consent, approval,
authorization or order or to make such registration or filings or to give such
notice would not have a Material Adverse Effect on Pegasus or a material adverse
effect on the validity, binding effect or enforceability of this Agreement or
the Collateral Documents or the ability of the Company or any of the Pegasus
Parties to perform its obligations under this Agreement or any of the Collateral
Documents.
I-28
<PAGE>
5.6 Title to Assets. Pegasus and its Subsidiaries have exclusive, good and
marketable title to their material property and assets, free and clear of any
and all Encumbrances, except (i) Encumbrances arising under the Pegasus Credit
Agreement, (ii) Permitted Liens, (iii) the matters described in Section 5.6 of
the Pegasus Disclosure Statement and (iv) Encumbrances (other than in the nature
of liens and security interests) that would not have a Material Adverse Effect
on Pegasus or a material adverse effect on the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or the ability of
the Company or any of the Pegasus Parties to perform its obligations under this
Agreement or any of the Collateral Documents. Except as provided by this
Agreement, and except as described in Section 5.2 or 5.6 of the Pegasus
Disclosure Statement, no Person has any right to acquire, directly or
indirectly, any interest in any of Pegasus's Subsidiaries or any substantial
portion of their respective properties or assets, and there is no agreement to
which Pegasus or any of its Subsidiaries is a party relating to the direct or
indirect sale of any substantial portion of such properties or assets or the
capital stock or other ownership interests of Pegasus or any of its Subsidiaries
or a material adverse effect on the validity, binding effect or enforceability
of this Agreement or the Collateral Documents or the ability of the Company or
any of the Pegasus Parties to perform its obligations under this Agreement or
any of the Collateral Documents.
5.7 Intellectual Property. To the best knowledge of Pegasus, neither Pegasus
nor any of its Subsidiaries has in the operation of their respective businesses
infringed upon, and the operation of such businesses as currently conducted does
not violate or infringe upon, any patents, copyrights, trade names, trademarks
or service marks of third parties, and neither Pegasus nor any of its
Subsidiaries has received any charge, complaint, claim, demand or notice
alleging any such infringement. To the knowledge of the Pegasus Parties, no
third party has infringed upon any Intellectual Property rights of Pegasus or
any of its Subsidiaries.
5.8 Compliance with Legal Requirements. Pegasus and its Subsidiaries have
operated their respective businesses in material compliance with all material
Legal Requirements and requirements of the NRTC (including NRTC's by-laws,
policies, procedures and guidelines) applicable to Pegasus and its Subsidiaries.
No action, suit, proceeding, hearing or investigation has been commenced or, to
the knowledge of the Pegasus Parties, threatened, and no charge, complaint,
claim, demand or notice has been filed, against Pegasus, any of its Subsidiaries
or any of the Principal Pegasus Shareholders alleging any failure to so comply.
5.9 Legal Proceedings. Other than proceedings affecting the broadcast
television industry generally, the cable television industry generally or the
direct broadcast satellite industry and NRTC generally, and except as set forth
in Section 5.9 of the Pegasus Disclosure Statement, (i) there are no outstanding
judgments or orders against or otherwise affecting or related to Pegasus, any of
its Subsidiaries, or their business or assets; and (ii) there is no action,
suit, complaint, proceeding or investigation, judicial, administrative or
otherwise, that is pending or, to the best knowledge of any Pegasus Party,
threatened that, if adversely determined, could have a Material Adverse Effect
on Pegasus or a material adverse effect on the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or the ability of
the Company or any of the Pegasus Parties to perform its obligations under this
Agreement or any of the Collateral Documents.
5.10 Subsequent Events. Except as set forth in Section 5.10 of the Pegasus
Disclosure Statement or to the extent consented to in writing by the Company,
since September 30, 1999: (i) neither Pegasus nor any of its Subsidiaries has
sold, leased, transferred or assigned any substantial portion of its properties
or assets except in the Ordinary Course and in compliance with the NRTC
Distribution Agreements; (ii) no third party has accelerated, terminated,
modified or canceled any material agreement, contract, lease or license (or
series of related agreements, contracts, leases and licenses) relating to
Pegasus or any of its Subsidiaries; (iii) neither Pegasus nor any of its
Subsidiaries has imposed or permitted the imposition of any Encumbrance upon any
substantial portion of its properties or assets except under the Pegasus Credit
Agreement; (iv) neither Pegasus nor any of its Subsidiaries has made any capital
investment in, any loan to, or any Acquisition of the securities or assets of,
any other Person (or series of related capital investments, loans or
Acquisitions) in excess of $25,000,000, other than in Subsidiaries of the
Company and other than Acquisitions of DIRECTV Distribution Businesses; (v)
neither Pegasus nor any of its Subsidiaries has issued any note, bond or other
debt security or created, incurred, assumed or guaranteed any indebtedness for
borrowed money or capitalized lease obligations except under the Pegasus Credit
Agreement, in connection with Acquisitions, and in connection with Pegasus's
offer to exchange its 121/2% Senior Notes for a like principal amount of 12 1/2%
I-29
<PAGE>
Series B Senior Notes of Digital Television Services, Inc. and DTS Capital,
Inc.; (vi) neither Pegasus nor any of its Subsidiaries has delayed or postponed
the payment of accounts payable and other Liabilities outside the Ordinary
Course in excess of $100,000 (exclusive of matters being contested in good
faith); (vii) neither Pegasus nor any of its Subsidiaries has canceled,
compromised, waived or released any rights or claims outside the Ordinary Course
involving more than $100,000 in the aggregate; and (viii) neither Pegasus nor
any of its Subsidiaries has committed to any of the foregoing. Since September
30, 1999, there has not been any other occurrence, event, incident, action,
failure to act or transaction involving Pegasus or any of its Subsidiaries
(except matters generally known to, and that generally affect, other NRTC
members and affiliates providing DIRECTV services or that generally affect the
broadcast television or cable television industries) which is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on Pegasus
or a material adverse effect on the validity, binding effect or enforceability
of this Agreement or the Collateral Documents or the ability of the Company or
any of the Pegasus Parties to perform its obligations under this Agreement or
any of the Collateral Documents.
5.11 Financial and Other Information.
(a) The historical financial statements (including the notes thereto)
("Pegasus Financial Statements") contained (or incorporated by reference) in
the Pegasus SEC Filings or to be contained in the Pegasus 1999 Form 10-K
have been or will be prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby, and present or will
present fairly the financial condition of the Persons reported on and their
results of operations as of the dates and for the periods indicated, subject
in the case of the unaudited financial statements only to normal year-end
adjustments (none of which will be material in amount) and the omission of
footnotes.
(b) The Pegasus SEC Filings did not, as of their filing dates, and the
Pegasus 1999 Form 10-K will not, as of its filing date, contain (directly or
by incorporation by reference) any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein (or incorporated therein by reference), in light
of the circumstances under which they were or will be made, not misleading.
(c) Except as provided in subsection (d), the Pegasus Merger Registration
Statement will not, as of its effective date, at the date it is first mailed
to the shareholders of Pegasus, at the time of the meeting of shareholders
of Pegasus contemplated by Section 8.5, or as of the Closing Date, contain
(directly or by incorporation by reference) any untrue statement of a
material fact or omit to state (directly or by incorporation by reference) a
material fact required to or stated therein (or incorporated therein by
reference) or necessary to make the statements therein (or incorporated
therein by reference), in light of the circumstances under which they were
made, not misleading.
(d) The representation and warranties in subsection (c) do not extend to
any information concerning the Company, any of its Subsidiaries or any of
the Principal Company Shareholders furnished by the Company or any of the
Principal Company Shareholders and contained or incorporated by reference in
the Pegasus Merger Registration Statement.
5.12 Undisclosed Liabilities.
(a) As of the date of this Agreement, neither Pegasus nor any of its
Subsidiaries has any Liability except for (i) Liabilities reflected, accrued
or reserved against in the Pegasus Financial Statements, as of September 30,
1999, or the notes thereto, (ii) current Liabilities incurred after
September 30, 1999, in the Ordinary Course, (iii) Liabilities incurred after
September 30, 1999, under the Pegasus Credit Agreement, (iv) Liabilities
incurred after September 30, 1999, in connection with Acquisitions, (v)
Liabilities relating to Pegasus's 12 1/2% Senior Notes referred to in
Section 5.10(v), (vi) Liabilities disclosed in Section 5.12 of the Pegasus
Disclosure Statement, and (vii) Liabilities in an aggregate amount of up to
$5,000,000.
(b) As of the Closing Date, neither Pegasus nor any of its Subsidiaries
will have any Liability, except for (i) Liabilities reflected, accrued or
reserved against in the Pegasus Financial Statements as of December 31,
1999, or the notes thereto, (ii) current Liabilities incurred after December
31, 1999 in the
I-30
<PAGE>
Ordinary Course, (iii) Liabilities incurred after December 31, 1999, under
the Pegasus Credit Agreement, (iv) Liabilities incurred after December 31,
1999, in connection with Acquisitions, (v) Liabilities disclosed in Section
5.12 of the Pegasus Disclosure Statement, and (vi) Liabilities in an
aggregate amount of up to $5,000,000.
5.13 Taxes. Pegasus has, and each of its Subsidiaries has, duly and timely
filed in proper form all Tax Returns for all Taxes required to be filed with the
appropriate Governmental Authority, except where the Adverse Consequences of all
such failures to file do not exceed $2,500,000 in the aggregate. All Taxes due
and payable by Pegasus and its Subsidiaries (or claimed to be due and payable)
have been paid (regardless whether Tax Returns relating to such Taxes have been
duly and timely filed or, if filed, regardless whether such Tax Returns are
deficient), except such amounts as (i) are not in the aggregate material or (ii)
are being contested diligently and in good faith and for which Pegasus has
adequately reserved in the Pegasus Financial Statements. All copies of federal
and state income Tax Returns furnished or to be furnished by Pegasus to the
Company are accurate and complete in all material respects. There are no pending
tax audits, claims or proceedings relating to Pegasus, any of its Subsidiaries,
their assets or their business and income therefrom. Neither Pegasus nor any of
its Subsidiaries has agreed to any waiver or extension of any statute of
limitations relating to any Tax.
5.14 Employee Benefits; Employees. All Employee Benefit Plans maintained or
contributed to by Pegasus as of the date of this Agreement are set forth in
Section 5.14 of the Pegasus Disclosure Statement. Except as set forth in Section
5.14 of the Pegasus Disclosure Statement, and except for matters that
individually or in the aggregate would not have Adverse Consequences in excess
of $2,500,000:
(a) All such Employee Pension Benefit Plans are, and have been at all
times since their establishment, qualified for federal income tax purposes
under Code Section 401(a) and the related trusts are, and have been at all
times since their establishment, exempt from federal income tax under Code
Section 501(a). All such Employee Benefit Plans are in compliance with all
applicable provisions of ERISA, including, but not limited to, the
applicable reporting and disclosure requirements, as they relate to such
plans, and Pegasus is not subject to any liabilities based on past
non-compliance, if any.
(b) Pegasus has made all required contributions under each Employee
Benefit Plan listed in Section 5.14 of the Pegasus Disclosure Statement for
all periods through and including the fiscal year ended December 31, 1998,
and has made all required contributions for subsequent periods or has
provided adequate accruals therefor in the Company Financial Statements.
(c) There is not now, and has not been, any violation of the Code or
ERISA with respect to the filing of applicable reports, documents, and
notices regarding the Employee Benefit Plans maintained or contributed to by
Pegasus with the Secretary of Labor and the Secretary of the Treasury or the
furnishing of such documents to the participants or beneficiaries of the
Employee Benefit Plans.
(d) No fiduciary or other party in interest with respect to any of the
Employee Benefit Plans maintained or contributed to by Pegasus has caused
any of such plans to engage in a "prohibited transaction," as defined in
ERISA Section 406.
(e) Pegasus has never been obligated to contribute to any Multiemployer
Plan.
(f) There has been no violation of the "continuation coverage
requirements" of "group health plans" as set forth in Code Section 4980B and
Part 6 of Subtitle B of Title I of ERISA or the "HIPAA" requirements as set
forth in Code Section 9801 and 9802 and Part 7 of Subtitle B of ERISA with
respect to any Employee Benefit Plan maintained by Pegasus to which such
requirements apply.
(g) Pegasus does not maintain retiree life and retiree health insurance
plans which are Employee Welfare Benefit Plans providing for continuing
benefits or coverage for any employee or any beneficiary of any employee
after such employee's termination of employment (except to the extent such
continued coverage is required by Code Section 4980B and Part 6 of Subtitle
B of Title I of ERISA).
(h) Pegasus does not maintain and is not obligated to contribute to any
Employee Pension Benefit Plan that is a defined benefit plan, and has not
maintained and has not been obligated to contribute to such a plan within
the last six years.
I-31
<PAGE>
(i) "Pegasus," as used in subsections (a) through (h) of this Section
5.14 shall include any other entity required to be aggregated with Pegasus
under Sections 414(b), 414(c), 414(m), or 414(o) of the Code and the
regulations thereunder.
(j) There are no collective bargaining agreements applicable to any
Persons employed by Pegasus or any of its Subsidiaries, and Pegasus and its
Subsidiaries have no duty to bargain with any labor organization with
respect to any such Person. There are not pending any unfair labor practice
charges against Pegasus or any of its Subsidiaries, nor is there any demand
for recognition, or any other request or demand from a labor organization
for representative status with respect to any Person employed by Pegasus or
any of its Subsidiaries.
(k) Pegasus and its Subsidiaries are in substantial compliance with all
applicable Legal Requirements respecting employment conditions and
practices, have withheld all amounts required by any applicable Legal
Requirements or Contracts to be withheld from the wages or salaries of their
employees, and are not liable for any arrears of wages or any Taxes or
penalties for failure to comply with any of the foregoing.
(l) Pegasus and its Subsidiaries have not engaged in any unfair labor
practice within the meaning of the National Labor Relations Act and have not
violated any Legal Requirement prohibiting discrimination on the basis of
race, color, national origin, sex, religion, age, marital status, or
handicap in their employment conditions or practices, except where such
violations would not have a Material Adverse Effect on Pegasus. There is not
pending or, to the best knowledge of Pegasus, threatened any discrimination
complaint relating to race, color, national origin, sex, religion, age,
marital status, or handicap against Pegasus or any of its Subsidiaries
before any Governmental Authority.
(m) There is no existing or, to the best knowledge of Pegasus,
threatened, labor strike, dispute, grievance or other labor controversy
affecting Pegasus or any of its Subsidiaries. There is no pending or, to the
best knowledge of Pegasus, threatened representation question respecting the
employees of Pegasus or any of its Subsidiaries. There is no pending or, to
the best knowledge of Pegasus, threatened arbitration proceeding under any
Contract.
5.15 Contracts. Section 5.15 of the Pegasus Disclosure Statement contains a
true, correct and complete list as of the date hereof of (or a specific
cross-reference to one or more other sections of the Pegasus Disclosure
Statement where there is described) (i) each NRTC Distribution Agreement
(together with the Service Area covered by each) and any other agreement with
NRTC or DirecTV, Inc. or any of their Affiliates to which Pegasus or any of its
Subsidiaries is a party, (ii) a description of any agreement pursuant to which
Pegasus or any of its Subsidiaries acquired any portion of their DIRECTV
Distribution Business (other than rights acquired directly from the NRTC), and
(iii) any other agreement entered into other than in the Ordinary Course the
performance of which involves consideration in excess of $1,000,000.
Pegasus has made available to the Company the opportunity to inspect and
copy a correct and complete copy of each agreement referred to in this Section
5.15. With respect to each such agreement: except as included in Section 5.15 of
the Pegasus Disclosure Statement (A) the agreement is legal, valid, binding,
enforceable and in full force and effect; (B) subject to obtaining any consent
referred to in Section 5.5 or disclosed in Section 5.5 of the Pegasus Disclosure
Statement, the agreement will continue to be legal, valid, binding, enforceable
and in full force and effect on identical terms following the consummation of
the transactions contemplated hereby; (C) neither Pegasus nor any of its
Subsidiaries, nor to the best knowledge of Pegasus, any other party thereto, is
in breach or default, and no event has occurred which with notice or lapse of
time would constitute a breach or default, or permit termination, modification
or acceleration, under the agreement; and (D) neither Pegasus nor any of its
Subsidiaries, nor to the best knowledge of Pegasus, any other party thereto, has
repudiated any provision of the agreement.
5.16 Business Information. Section 5.16 of the Pegasus Disclosure Statement
sets forth a materially true and accurate description of the following
information as of the date set forth therein (based on Exhibits C to the NRTC
Distribution Agreements to which Pegasus's Subsidiaries are parties): (i) the
approximate number of Committed Member Residences in each Service Area; (ii) the
approximate number of Committed Member Residences in each Service Area that is
cabled; and (iii) the approximate number of Committed Member Residences in each
Service Area that is uncabled.
I-32
<PAGE>
5.17 Disclosure. No representation or warranty of any Pegasus Party in this
Agreement or in the Collateral Documents and no statement in any certificate
furnished or to be furnished by any Pegasus Party pursuant to this Agreement or
the Collateral Documents, contained, contains or will contain on the date such
agreement or certificate was or is delivered, any untrue statement of a material
fact, or omitted, omits or will omit on such date to state any material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading; nor will any such representation or
warranty or statement (to the extent it is required by Section 10.1 to be
accurate at the Closing Date) contain on the Closing Date any untrue statement
of a material fact or omit on the Closing Date to state any material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading. There is no fact known to any
Pegasus Party and not disclosed in this Agreement or the Pegasus Disclosure
Statement (other than facts generally known to, and that generally affect, NRTC
members and affiliates providing DIRECTV services or Persons in the broadcast
television or cable television industry) that could reasonably be expected to
have a Material Adverse Effect on Pegasus or a material adverse effect on the
validity, binding effect or enforceability of this Agreement or the Collateral
Documents or the ability of the Company or any of the Pegasus Parties to perform
its obligations under this Agreement or any of the Collateral Documents.
5.18 Brokers or Finders. Except as disclosed in Section 5.18 of the Pegasus
Disclosure Statement, no broker or finder has acted directly or indirectly for
any of the Pegasus Parties in connection with the transactions contemplated by
this Agreement, and none of the Pegasus Parties has incurred any obligation to
pay any brokerage or finder's fee or other commission in connection therewith.
5.19 Certain Payments. Neither Pegasus, any of its Subsidiaries, any of
their Affiliates nor the Representatives of any of them has directly or
indirectly, on behalf of or for the purpose of assisting their business, made
any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or
other similar payments to any Person, private or public, regardless of form,
whether in money, property or services, to obtain favorable treatment in
securing business, to pay for favorable treatment for business secured, to
obtain special concessions or for special concessions already obtained, in
violation of any Legal Requirement, nor has any such Person established or
maintained any fund or asset that has not been recorded in its books and
records.
5.20 Subscribers. Pegasus has not employed any scheme or device for the
purpose of encouraging Persons residing outside the Service Areas or Persons who
would not be deemed Committed Member Residences to become subscribers of the
DIRECTV service offered by Pegasus and its Subsidiaries.
5.21 Favorable Business Relationships. To the best knowledge of Pegasus,
there are no favorable business relationships relating to the business of
Pegasus and its Subsidiaries with lessors, licensors, subscribers, suppliers or
other business associates of Pegasus or any of its Subsidiaries which will
terminate after Closing.
5.22 Securities Matters. Pegasus has filed all forms, reports, statements
and other documents required to be filed with the Commission, and has heretofore
made the Pegasus SEC Filings available to the Company, in the form filed with
the Commission, together with any amendments thereto. As of their respective
filing dates the Pegasus SEC Filings (i) complied as to form in all material
respects with the requirements of the Exchange Act and (ii) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
5.23 FCC Matters. Pegasus and its Subsidiaries hold all licenses,
authorizations and permits (the "FCC Licenses") from the Federal Communications
Commission (the "FCC") necessary for the operation of the broadcast television
stations (the "Stations") operated by Pegasus and its Subsidiaries, except to
the extent the absence thereof would not have a Material Adverse Effect on
Pegasus, and except as disclosed in Section 5.23 of the Pegasus Disclosure
Statement. Each of the FCC Licenses is in full force and effect, and no material
default by Pegasus or any of its Subsidiaries has occurred and is continuing
thereunder. As of the date hereof, except as limited by the provisions of the
Communications Act of 1934, as amended, and the FCC's rules and regulations and
as otherwise specified on the face of any FCC License, none of the FCC Licenses
is subject to
I-33
<PAGE>
any restriction or condition that would limit in any material respect the
operation of the business of Pegasus and its Subsidiaries as it is now
conducted. There is not, as of the date hereof, pending or, to the knowledge of
Pegasus, threatened any action by or before the FCC to revoke, cancel, rescind
or modify (including a reduction in coverage area) any of the FCC Licenses
(other than proceedings to amend FCC rules of general applicability) or refuse
to renew the FCC Licenses, and there is not now issued or outstanding, pending
or, to the knowledge of Pegasus threatened by or before the FCC, any order to
show cause, notice of violation, notice of apparent liability, or notice of
forfeiture or complaint against Pegasus or any of its Subsidiaries with respect
to any of the FCC Licenses. Pegasus has no reason to believe that any of the FCC
licenses will be revoked or will not be renewed in the ordinary course.
5.24 Environmental Matters. Except as set forth in Section 5.24 of the
Pegasus Disclosure Statement:
(a) Pegasus and its Subsidiaries have incurred no material liabilities
under any applicable Environmental Law and have not generated, released,
stored, used, treated, handled, discharged or disposed of any Hazardous
Substances at, on, under, in or about, or in any other manner affecting, the
Pegasus Real Property, transported any Hazardous Substances to or from any
real property owned or leased by Pegasus (the "Pegasus Real Property") or
discharged any Hazardous Substances from the Pegasus Real Property into any
body of water, directly or indirectly, except in material compliance with
applicable Environmental Laws or except as would not reasonably be expected
to result in any material Liability. To the knowledge of the Pegasus
Parties, no other present or previous owner, tenant, occupant or user of the
Pegasus Real Property or any other Person has released, discharged or
disposed of any Hazardous Substances at, on, under, in or about the Pegasus
Real Property. To the knowledge of the Pegasus Parties, no release of
Hazardous Substances outside the Pegasus Real Property has entered or
threatens to enter the Pegasus Real Property, nor is there any pending or
threatened claim based on Environmental Laws that arises from any condition
of the land surrounding the Pegasus Real Property. No claim or investigation
based on Environmental Laws that relates to the condition of the Pegasus
Real Property or any operations by Pegasus or any of its Subsidiaries on it
(i) has been asserted or conducted in the past or is currently pending
against or with respect to Pegasus and its Subsidiaries or, to the best
knowledge of the Sellers, any other Person; or (ii) to the knowledge of the
Pegasus Parties, is threatened or contemplated.
(b) Pegasus has provided the Company with complete and correct copies of
(i) all studies, reports, surveys or other materials in the Pegasus's or any
of its Subsidiary's possession relating to the presence or alleged presence
of Hazardous Substances at, on or affecting the Pegasus Real Property; (ii)
all notices or other materials in the possession of Pegasus or any
Subsidiary of Pegasus that were received from any Governmental Authority
having the power to administer or enforce any Environmental Laws relating to
current or past ownership, use or operation of the Pegasus Real Property or
activities at the Pegasus Real Property; and (iii) all materials in the
possession of Pegasus or any Subsidiary of Pegasus relating to any claim,
allegation or action by any private third party under any Environmental Law.
5.25 Billing and Authorization System. Pegasus has not altered, modified or
the Information Systems in any way out of the Ordinary Course for NRTC members
and affiliates generally (or the Company in particular) or in violation of the
NRTC Distribution Agreements, including, without limitation, alteration,
modification or manipulation of the NRTC's and DIRECTV's collection or
processing of data by the Information Systems, the standard parameters set by
the Information Systems with respect to subscriber authorization, billing and
cut-off and the standard reports generated by the Information Systems.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF MERGER SUB
Each of Pegasus and Merger Sub, severally and jointly, represents and
warrants to the Company that the statements contained in Article VI are correct
and complete as of the date of this Agreement and, except as provided in Section
10.1, will be correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the date of this Agreement
throughout Article VI), except in the case of representations and warranties
stated to be made as of the date of this Agreement or as of another date.
I-34
<PAGE>
6.1 Organization and Qualification. Merger Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Merger Sub was formed solely for the purpose
of engaging in the transactions contemplated by this Agreement. As of the date
of this Agreement, except for obligations or liabilities incurred in connection
with its incorporation or organization and the transactions contemplated by this
Agreement, Merger Sub has no assets (other than not more than $1,000 in cash)
and has not incurred, directly or indirectly, any obligations or liabilities or
engaged in any business activities of any type or kind whatsoever or entered
into any agreements or arrangements with any person.
6.2 Certificate of Incorporation and Bylaws. Merger Sub has heretofore made
available to the Company a complete and correct copy of the certificate of
incorporation and the bylaws of Merger Sub, each as amended to date. Such
certificate of incorporation and bylaws are in full force and effect. Merger Sub
is not in violation of any of the provisions of its certificate of incorporation
or bylaws.
6.3 Authority. Merger Sub has the necessary corporate power and authority to
enter into this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by Merger Sub and the consummation by Merger Sub of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of
Merger Sub are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Merger Sub and, assuming the due authorization, execution and
delivery by the Company and the Principal Company Shareholders, constitutes a
legal, valid and binding obligation of Merger Sub, enforceable in accordance
with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws of general
applicability relating to or affecting creditors' rights generally and by the
application of general principles of equity.
I-35
<PAGE>
6.4 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Merger Sub do not,
and the performance by Merger Sub of its obligations under this Agreement
will not (i) conflict with or violate the certificate of incorporation or
bylaws of Merger Sub, (ii) conflict with or violate any law, statute
ordinance, rule, regulation, order, judgment or decree applicable to Merger
Sub or by which any of its properties is bound or affected, or (iii) result
in any breach of or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or result
in the creation of any Encumbrance on any of the properties or assets of
Merger Sub pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or
obligation to which Merger Sub is a party or by which Merger Sub or any of
its properties or assets is bound or affected, except, in the case of
clauses (ii) and (iii) above for any such conflicts, violations, breaches,
defaults or other alterations or occurrences that would not prevent or delay
consummation of the Merger in any material respect, or otherwise prevent
Merger Sub from performing its obligations under this Agreement in any
material respect.
(b) The execution and delivery of this Agreement by Merger Sub does not,
and the performance of this Agreement by Merger Sub will not, require any
consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity, except (i) for (A) applicable
requirements, if any, of the Securities Act, the Exchange Act, state
takeover laws, exchanges on which Pegasus's securities are traded, the HSR
Act and the Communications Act, (B) filings and recordation of appropriate
merger documents as required by Delaware Law and (ii) where failure to
obtain such consents, approvals, authorizations or permits, or to make such
filings or notifications, would not prevent or delay consummation of the
Merger in any material respect.
6.5 Vote Required. The affirmative vote of Pegasus, the sole stockholder of
Merger Sub, is the only vote of the holder of any class or series of Merger Sub
capital stock necessary to approve any of the transactions contemplated hereby.
ARTICLE VII
PRE-CLOSING COVENANTS OF THE SELLERS
Between the date of this Agreement and the Closing Date:
7.1 Additional Information. The Company shall provide to Pegasus and its
Representatives such financial, operating and other documents, data and
information relating to the Company and its Subsidiaries, the Business and the
Assets and Liabilities of the Company and its Subsidiaries, including pending
and completed Acquisitions of DIRECTV Distribution Businesses, as Pegasus or its
Representatives may reasonably request. Such access shall include the right of
Pegasus and its Representatives to inspect any records, reports and material
correspondence of NRTC and DIRECTV in the possession of the Company or any
Subsidiary and, provided that a Company Representative is present and does not
reasonably object to such discussion, to discuss such records, reports and
correspondence with NRTC and DIRECTV, and the Company shall take all action
necessary to facilitate the foregoing. In addition, the Company shall take all
action necessary to enable Pegasus and its Representatives (including
PricewaterhouseCoopers LLP) to review, inspect and audit the Assets, Business
and Liabilities of the Company and its Subsidiaries and discuss them with the
Company's officers, employees, independent accountants, and counsel.
Notwithstanding any investigation that Pegasus may conduct of the Company and
its Subsidiaries, the Business, the Assets and Liabilities, subject to Section
13.7, the Pegasus Parties may fully rely on the Sellers' warranties, covenants
and indemnities set forth in this Agreement, the Collateral Documents and any
documents or certificates delivered hereunder and thereunder, which will not be
waived or affected by or as a result of such investigation.
7.2 Exclusivity. Neither any Seller, nor any Affiliate or Representative of
any Seller shall directly or indirectly, solicit or initiate any discussions,
submissions of proposals or offers or negotiations with, or, subject to any
fiduciary obligations under applicable law after taking into account the advice
of counsel with respect thereto, participate in any negotiations or discussions
with, or provide any information or data of any nature
I-36
<PAGE>
whatsoever, to, or otherwise cooperate in any other way with, or assist or
participate in, facilitate or encourage any effort or attempt by, any Person,
other than Pegasus and its shareholders, employees, Representatives, agents and
Affiliates, concerning any merger, consolidation, sale of substantial assets,
sale of shares of capital stock or other equity securities or similar
transaction involving the Company or any of its Subsidiaries (all such
transactions being referred to herein as "Company Alternative Transactions"
provided, however, that the term "Company Alternative Transactions" shall not be
deemed to include, and the foregoing shall not prohibit acquisitions permitted
under Section 7.3(c)(i). The Sellers shall immediately notify Pegasus if any
proposal, offer, inquiry or other contact is received by, any information is
requested from, or any discussions or negotiations are sought to be initiated or
continued with, any Seller in respect of a Company Alternative Transaction, and
shall, in any such notice to Pegasus, indicate the identity of the offeror.
7.3 Continuity and Maintenance of Operations.
(a) The Company shall, and shall cause its Subsidiaries to: (i) comply in
all material respects with all Legal Requirements and requirements of the
NRTC Distribution Agreements applicable to the Company and its Subsidiaries
relating to the Business; (ii) fulfill in all material respects all of its
obligations under and use commercially reasonable efforts to maintain in
full force and effect all Contracts (other than those that expire by their
terms or as otherwise consented to by Pegasus), including the NRTC
Distribution Agreements, and shall not, without the prior written consent of
Pegasus, seek to materially alter, modify or amend any of the foregoing in a
manner adverse to the Company or its Subsidiaries (other than those
Contracts that expressly provide that they will be amended or modified upon
the happening of specified contingencies, and other than amendments or
modifications that are consented to by Pegasus); (iii) use its commercially
reasonable efforts to promote the financial success of the Business and
promptly notify Pegasus of any material adverse change in the condition
(financial or otherwise) of the Business; and (iv) use its commercially
reasonable efforts to promote, develop and preserve its relationships with
its present employees as well as the goodwill of its customers and promptly
notify Pegasus of any material adverse change in such relationships. Without
limiting the generality of the foregoing, the Company shall, and shall cause
its Subsidiaries to maintain the Assets in materially good order, condition
and repair (except as otherwise contemplated by the Company Financial
Model), maintain insurance relating to the Business in all material respects
as in effect on the date of this Agreement, operate the Business (including,
without limitation, billing, collection and subscriber matters) in the
Ordinary Course (except as otherwise contemplated by the Company Financial
Model) and in material compliance with the NRTC Distribution Agreements, use
its commercially reasonable efforts to maintain inventories of DIRECTV
Systems and supplies at reasonable levels, and keep and maintain all of the
books and records in the Ordinary Course. Other than in the Ordinary Course,
the Company and its Subsidiaries shall not pay or credit in any way any
Accounts Receivable prior to the Closing Date, and shall not permit any of
its Representatives to do so either. The Company shall, and shall cause its
Subsidiaries to, enforce procedures for disconnection and/or discontinuance
of service to subscribers (i) whose accounts are delinquent, (ii) who do not
pay for core DIRECTV programming packages, or (iii) who are not Committed
Member Residences, all in the Ordinary Course and in accordance with the
NRTC Distribution Agreements.
(b) The Company shall not, and shall cause its Subsidiaries not to,
without the prior written consent of Pegasus: (i) deviate in any material
respect from DIRECTV national programming packages or rates except as
described in Section 7.3 of the Company Disclosure Statement; (ii) engage in
marketing promotions other than in the Ordinary Course and in accordance
with the NRTC Distribution Agreements; or (iii) sell, lease, transfer,
convey or assign any material Assets other than in the Ordinary Course and
in accordance with the NRTC Distribution Agreements (or enter into any
contract to do any of the foregoing) or permit the creation of any
Encumbrance on any of the rights of the Company and its Subsidiaries under
the NRTC Distribution Agreements, or any material Encumbrance on any of the
other Assets except Permitted Liens or Liens under the Company Credit
Agreement, the interest escrow established under one of the Company
Indentures and the related escrow agreement, as disclosed in Section 3.6 of
the Company Disclosure Statement, or as otherwise contemplated by this
Agreement.
(c) Unless the Company shall have obtained the prior written consent of
Pegasus, the Company shall not, and shall cause its Subsidiaries not to:
I-37
<PAGE>
(i) engage in any Acquisition unless (A) the Acquisition is of a
DIRECTV Distribution Business; (B) the Acquisition is funded solely out
of the Company's cash on hand as of the date hereof, borrowings under
the Company Credit Agreement, debt incurred to the Sellers, and equity
contributions from the Company's shareholders; (C) on a pro forma basis,
after giving effect to the Acquisition and any debt incurred in
connection therewith, the Company would be in compliance with the
Company Credit Agreement (including any amendments thereto permitted
hereby) and the Company Indentures, and the Company shall have furnished
Pegasus with satisfactory evidence to that effect; (D) on a projected
basis, after giving effect to the Acquisition and any debt incurred in
connection therewith, the Company's cash resources (including available
credit under the Company Credit Agreement) will be sufficient to satisfy
its future cash requirements as reflected in the Company Financial
Model, as updated to reflect such proposed Acquisition, including,
without limitation, to fund Acquisitions of DIRECTV Distribution
Businesses that have been completed or are pending at the time of the
Acquisition and to fund operating expenses, working capital, debt
service and capital expenditures (other than the Change of Control
Offers);
(ii) amend either of the Company Indentures;
(iii) amend the Company Credit Agreement so as to (A) require any
payment of principal before it is payable under the Company Credit
Agreement as now in effect, (B) decrease the lenders' aggregate
commitments under the Company Credit Agreement as now in effect or (C)
prevent the Company and its Subsidiaries to continue business operations
as reflected in the Company Financial Model.
(iv) declare or pay any dividends or make any other distributions to
the Shareholders;
(v) redeem or repurchase any stock (other than stock of employees in
connection with termination of their employment on terms consistent with
the terms of any employment agreement described in Section 3.15 of the
Company Disclosure Statement);
(vi) issue additional Options or any stock appreciation, phantom
stock, profit participation or similar rights;
(vii) incur any material debt (except in connection with Acquisitions
permitted by paragraph (i), borrowings under the Company Credit
Agreement to finance expenditures not prohibited by this Agreement, and
other obligations incurred in the Ordinary Course); or
(viii) make any loans other than in the Ordinary Course.
(d) No Seller shall take or omit to take any action that would cause any
of them to be in breach of any representations, warranties or covenants made
by them in this Agreement or the Collateral Documents or that would, if such
action had been taken or omitted on or before the date of this Agreement,
have been required to be disclosed in Section 3.11 of the Company Disclosure
Statement.
7.4 Consents and Approvals.
(a) As soon as practicable after execution of this Agreement, each Seller
shall use commercially reasonable efforts to obtain any necessary consent,
approval, authorization or order of, make any registration or filing with or
give any notice to, any Governmental Authority or Person as is required to
be obtained, made or given by such Seller to consummate the transactions
contemplated by this Agreement and the Collateral Documents, including
without limitation any authorizations, consents, approvals, actions, filings
or notices set forth in Section 3.5 of this Agreement or Section 3.5 of the
Company Disclosure Statement (other than consents required pursuant to
indebtedness of the Company incurred in the Acquisition of a DIRECTV
Distribution Business where such indebtedness is secured in full by a letter
of credit issued pursuant to the Company Credit Agreement, provided that the
completion of the Merger in the absence of such consents will not result in
a Default or Event of Default under and as defined in the Company Credit
Agreement).
(b) The Sellers shall cooperate with Pegasus in providing such
information and reasonable assistance as may be required in connection with
the obligations of the Pegasus Parties under Section 8.4(a).
I-38
<PAGE>
7.5 Adoption by Shareholders. The Company shall use its best efforts to
secure the vote or consent of the Shareholders required by the DGCL and the
Company's certificate of incorporation and bylaws to approve and adopt this
Agreement and the Merger, and the board of directors of the Company shall
recommend to the Shareholders such approval and adoption. Unless the Company is
permitted to and elects to obtain shareholder approval by written consent, the
Company shall take all steps necessary to duly call, give notice of, convene and
hold a meeting of the Shareholders to be held as soon as is reasonably
practicable after the effectiveness and mailing of the Pegasus Merger
Registration Statement for the purpose of voting upon the approval of this
Agreement and the Merger. The Company will furnish to each Shareholder a notice
of its rights to dissent from the Merger under Section 262 of the DGCL and to
demand an appraisal of its shares of Company Capital Stock and shall provide
Pegasus with a copy of such notice prior to the Closing Date. Each of the
Principal Company Shareholders (i) hereby waives its dissenters' appraisal
rights under Section 262 of the DGCL and (ii) shall vote all of its shares of
Company Capital Stock, or otherwise give its consent, to approve this Agreement
and the Merger.
7.6 Securities Filings; Financial Information. The Company shall file the
Company 1999 Forms 10-K with the Commission at or before the date they are due
and shall simultaneously furnish Pegasus with a copy thereof. The Sellers shall,
promptly after execution of this Agreement and from time to time thereafter,
provide such information and documents to Pegasus and its Affiliates concerning
the Company, its Subsidiaries and the Principal Company Shareholders as may be
required or appropriate for inclusion in the Pegasus Merger Registration
Statement and any other filing, notification or report made by Pegasus or any
Affiliate of Pegasus under the Securities Act, the Exchange Act or any state
securities law; shall cause their respective counsel and independent accountants
to cooperate with Pegasus, its Affiliates and their investment bankers, counsel
and independent accountants in the preparation of such filings, notifications
and reports; and shall use their best efforts to obtain consents and "comfort
letters" from such accountants as required in connection with such filings,
notifications and reports. The Sellers represent and warrant to Pegasus that no
information or document provided by any Seller for inclusion in any filing,
notification or report made by Pegasus or any Affiliate under the Securities Act
or the Exchange Act will contain any untrue statement of material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they are made, not
misleading.
7.7 Notification of Certain Matters. The Company shall promptly provide to
Pegasus copies of any material notices from or correspondence from and to the
NRTC or DIRECTV or any Affiliates of DIRECTV, to the extent such materials are
in the Company's possession. The Company shall promptly notify Pegasus of any
fact, event, circumstance or action known to it that is reasonably likely to
cause any Seller to be unable to perform any of its covenants contained herein
or any condition precedent in Article IX not to be satisfied, or that, if known
on the date of this Agreement, would have been required to be disclosed to
Pegasus pursuant to this Agreement or the existence or occurrence of which would
cause any of the Sellers' representations or warranties under this Agreement not
to be correct and/or complete. The Sellers shall give prompt written notice to
Pegasus of any adverse development causing a breach of any of the
representations and warranties in Article III or IV. However, except as provided
in Section 7.8 or waived pursuant to Section 13.7, no disclosure pursuant to
this Section, shall be deemed to amend or supplement this Agreement or to
prevent or cure any misrepresentation, breach of warranty, or breach of covenant
by the Sellers.
7.8 Supplements to Company Disclosure Statement. The Company shall, from
time to time prior to Closing, supplement the Company Disclosure Statement with
additional information that, if existing or known to it on the date of this
Agreement, would have been required to be included therein. For purposes of
determining the satisfaction of any of the conditions to the obligations of the
Pegasus Parties in Article IX, the Company Disclosure Statement shall be deemed
to include only (a) the information contained therein on the date of this
Agreement and (b) information added to the Company Disclosure Statement by
written supplements delivered prior to Closing by the Sellers that (i) are
accepted in writing by Pegasus, or (ii) reflect actions expressly permitted by
this Agreement to be taken prior to Closing.
7.9 Employee Matters. Not later than ten Business Days prior to the Closing
Date, the Company shall, or shall cause the sponsor of the 401(k) Qualified
Retirement Plan Sponsored by Golden Sky Systems, Inc. and Administered through
Principal Life Insurance Company (the "401(k) Plan") to, take the following
I-39
<PAGE>
actions: (i) adopt resolutions, or take such other action as required by the
401(k) Plan, to (A) terminate the 401(k) Plan effective as of the Closing Date,
subject to receipt of a ruling from the District Director of Internal Revenue
that the termination of the 401(k) Plan does not adversely affect the tax
qualified status of the 401(k) Plan, and (B) cease contributions under the
401(k) Plan effective as of the Closing Date; and (ii) file Internal Revenue
Service Form 5310 (Application for Determination for Terminating Plan) with
respect to the 401(k) Plan termination with the District Director of Internal
Revenue, such Form fully disclosing the corporate transaction contemplated by
this Agreement and the status of 401(k) Plan participants after the transaction.
Such resolutions (or other action required by the 401(k) Plan) and Form 5310
shall be in a form satisfactory to Pegasus. To the extent a distribution from
the 401(k) Plan is an eligible rollover distribution (as defined in Section
402(c)(4) of the Code), Pegasus shall permit the direct rollover of such
distribution to the Pegasus Communications Savings Plan provided that the
individual requesting the rollover contribution is a participant in the Pegasus
Communications Savings Plan at the time of such rollover, and further provided
that the rollover contribution is in cash and/or other property acceptable to
the trustee of the Pegasus Communications Savings Plan.
7.10 1999 Company Financial Statements. The Company will use its
commercially reasonable efforts to deliver to Pegasus not later than February
14, 2000, its audited financial statements as of and for the year ended December
31, 1999, accompanied by the report thereon of KPMG LLP. The delivery of such
audited financial statements shall constitute a representation and warranty that
such financial statements (including the notes thereto) have been prepared in
accordance with GAAP on a consistent basis with past practice and that such
financial statements present fairly the financial condition of the Company and
its Subsidiaries and the results of their operations as of December 31, 1999,
and for the year then ended.
7.11 1999 Tax Returns. The Company will deliver to Pegasus at or before the
Closing Date drafts of Tax Returns for the Company and its Subsidiaries for the
period ended December 31, 1999. Such draft Tax Returns will be accurate and
complete in all material respects.
7.12 Indemnity under Prior Company Acquisitions. If reasonably requested by
Pegasus, the Company will assert claims for indemnification (that would expire
if not asserted before the Closing Date) under, and in accordance with,
agreements under which it has made Acquisitions of DIRECTV Distribution
Businesses, provided that in the Company's judgment a reasonable basis for such
claim exists.
7.13 Tax Certificate. The Sellers shall take no action that would preclude
the Company from delivering at the Closing a tax certificate in the form of
Exhibit 7.
7.14 NRTC Litigation Expenses. After the completion of Pegasus's purchase
of Company Capital Stock pursuant to Section 8.10, the Company will establish a
committee of the board of directors of the Company consisting of William
Collatos, Eric Torgerson, Robert Benbow and Marshall W. Pagon, which shall
approve an expense budget for the existing litigation between NRTC and DIRECTV
and any related proceedings now or hereafter commenced (the "Litigation Expense
Budget"). Such committee will monitor expenses incurred by the Company and its
Subsidiaries in connection with such litigation. Any such expenses materially in
excess of those reflected in the Litigation Expense Budget shall be subject to
prior approval by such committee.
ARTICLE VIII
PRE-CLOSING COVENANTS OF THE PEGASUS PARTIES
Between the date of this Agreement and the Closing Date,
8.1 Additional Information. Pegasus shall provide to the Sellers and their
Representatives such financial, operating and other documents, data and
information relating to Pegasus and its Subsidiaries, including pending and
completed Acquisitions, as the Sellers or their Representatives may reasonably
request. Such access shall include the right of the Sellers and their
Representatives to inspect the records, reports and material correspondence of
NRTC and DIRECTV and discuss such records, reports and correspondence with NRTC
and DIRECTV, and Pegasus shall take all action necessary to facilitate the
foregoing. In addition, the Pegasus Parties shall take all action necessary to
enable the Sellers and their Representatives (including KPMG LLP) to review and
inspect books and records of Pegasus and its Subsidiaries and discuss them with
I-40
<PAGE>
the officers, employees, independent accountants, and counsel of the Pegasus
Parties. Notwithstanding any investigation that the Sellers may conduct of
Pegasus and its Subsidiaries, the Sellers may fully rely on the Pegasus Parties'
warranties, covenants and indemnities set forth in this Agreement, the
Collateral Documents and any documents, instruments or certificates delivered
hereunder and thereunder, which will not be waived or affected by or as a result
of such investigation.
8.2 Exclusivity. Neither any Pegasus Party, nor any of their Affiliates,
nor any of their respective Representatives shall directly or indirectly,
solicit or initiate any discussions, submissions of proposals or offers or
negotiations with, or, subject to any fiduciary obligations under applicable law
after taking into account the advice of counsel with respect thereto,
participate in any negotiations or discussions with, or provide any information
or data of any nature whatsoever to, or otherwise cooperate in any other way
with, or assist or participate in, facilitate or encourage any effort or attempt
by, any Person, other than the Company and its shareholders, employees,
Representatives, agents and Affiliates, concerning any merger, consolidation,
sale of substantial assets, sale of shares of capital stock or other equity
securities or similar transaction involving Pegasus or any of its Subsidiaries
(all such transactions being referred to as "Pegasus Alternative Transactions");
provided, however, that the term "Pegasus Alternative Transactions" shall not be
deemed to include, and the foregoing shall not prohibit (i) acquisitions of
media and communications businesses (including issuances of securities in
connection therewith); (ii) sales or other extraordinary transactions relating
to Pegasus's broadcast television stations or cable systems, or both; (iii) a
public offering (or private placement in the Rule 144A market) of equity or debt
securities; or (iv) any transaction described in Section 12.1(d). Pegasus shall
immediately notify the Company if any proposal, offer, inquiry or other contact
is received by, any information is requested from, or any discussions or
negotiations are sought to be initiated or continued with, Pegasus in respect of
a Pegasus Alternative Transaction, and shall, in any such notice to the Company,
indicate the identity of the offeror.
8.3 Conduct of Business. Unless Pegasus shall have obtained the prior
written consent of the Company, Pegasus shall, and shall cause each of its
Subsidiaries to, and the Principal Pegasus Shareholders shall cause Pegasus and
each of its Subsidiaries to:
(a) conduct its business in the Ordinary Course, including compliance
with its NRTC Distribution Agreements (for purposes hereof, Acquisitions of
media and communications businesses, including issuances of securities in
connection therewith, licensing transactions and distribution arrangements
involving media and communications businesses, sales or extraordinary
transactions involving cable systems or broadcast television stations,
public offerings and private placements in the Rule 144A market of equity
and debt securities and transactions described in Section 12.1(d) will be
deemed conduct of business in the Ordinary Course);
(b) use its commercially reasonable efforts to maintain its business,
assets and operations, and its relationships with employees, subscribers,
and others with whom it has significant business relationships, as an
ongoing business in accordance with past practice and custom;
(c) not take or omit to take any action that would cause any of the
Pegasus Parties to be in breach of any representation or warranty in this
Agreement or the Collateral Documents the accuracy of which on the Closing
Date is a condition precedent to the Sellers' obligations under Section
12.1, or in breach of any covenant in this Agreement or the Collateral
Documents.
8.4 Consents and Approvals.
(a) As soon as practicable after execution of this Agreement, the Pegasus
Parties shall use their best efforts to obtain any necessary consent,
approval, authorization or order of, make any registration or filing with or
give notice to, any Governmental Authority or Person as is required to be
obtained, made or given by any of the Pegasus Parties to consummate the
transactions contemplated by this Agreement and the Collateral Documents,
including without limitation any authorizations, consents, approvals,
actions, filings or notices set forth in Section 4.5 of this Agreement or
Section 4.5 of the Pegasus Disclosure Statement. Notwithstanding anything in
this Section to the contrary, the Pegasus Parties shall
I-41
<PAGE>
not be required to agree to any amendment or modification in, the waiver of
any term or condition of, or the imposition of any condition to the transfer
to Pegasus of, any NRTC Distribution Agreement in order to obtain the
consents required under the NRTC Distribution Agreements.
(b) The Pegasus Parties shall cooperate with the Sellers in providing
such information and reasonable assistance as may be required in connection
with the Sellers' obligations under Section 5.4(a).
8.5 Adoption by Pegasus Shareholders. Pegasus shall, promptly after the
effective date of the Pegasus Merger Registration Statement, take all actions
necessary in accordance with the DGCL and its certificate of incorporation and
by-laws to convene a special meeting of Pegasus's shareholders to act on this
Agreement, to be held as soon as practicable following the effectiveness of the
Pegasus Merger Registration Statement. Pegasus shall use all reasonable efforts
to secure the vote of its shareholders required by the DGCL and its certificate
of incorporation and by-laws to approve and adopt this Agreement, and the board
of directors of Pegasus shall recommend to the shareholders of Pegasus such
approval and adoption. Each of the Principal Pegasus Shareholders shall vote all
of its shares of Pegasus's common stock to approve this Agreement and the
Merger.
8.6 Merger Registration Statement. As soon as practicable, and in any event
within ten Business Days after the date of this Agreement (assuming Pegasus
receives the required information from the Company its Representatives and the
Sellers on a timely basis), Pegasus shall prepare and file with the Commission a
registration statement on Form S-4 (such registration statement, together with
any amendments thereof or supplements thereto, being the "Pegasus Merger
Registration Statement") registering under the Securities Act the Pegasus Class
A Common Stock to be issued in the Merger. In addition to registering such Class
A Common Stock, the Pegasus Merger Registration Statement will contain a
combined proxy statement and prospectus (the "Proxy Statement/Prospectus") that
will constitute (i) a prospectus to be delivered to the Shareholders in
connection with the meeting or solicitation of consents referred to in Section
7.5 and (ii) a proxy statement to be delivered to Pegasus's shareholders in
connection with the meeting of Pegasus's shareholders referred to in Section
8.5. Pegasus shall provide the Sellers and their counsel reasonable opportunity
to review and comment upon the contents of the Pegasus Merger Registration
Statement prior to any filing, mailing or amendment thereof. Pegasus will use
commercially reasonable efforts to cause the Pegasus Merger Registration
Statement to become effective as promptly as practicable. As promptly as
practicable after the Pegasus Merger Registration Statement shall have become
effective, Pegasus shall mail or deliver the Proxy Statement/Prospectus to the
Shareholders and to the shareholders of Pegasus entitled to notice of and to
vote at the Pegasus shareholders' meeting referred to in Section 8.5. As of
their respective filing dates, all documents that Pegasus is responsible for
filing with the Commission in connection with the transactions contemplated
herein will comply as to form in all material respects with the applicable
requirements of the Securities Act, the Exchange Act and the rules and
regulations thereunder; and as of their effective dates, their mailing dates and
the dates of the meeting of Pegasus Shareholders to vote on the Merger, no such
filings will contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Pegasus will use best efforts to cause the Pegasus Class A Common
Stock to be issued in the Merger or to be reserved for issuance upon the
exercise of the replacement options and warrants described in Section 2.12 to be
approved for listing on the Nasdaq National Market, subject to notice of
issuance prior to the Effective Time.
8.7 Notification of Certain Matters. Pegasus shall promptly provide to the
Sellers copies of any material notices from or correspondence from and to the
NRTC or DIRECTV or any Affiliates of DIRECTV to the extent such materials are in
Pegasus's possession. Pegasus shall promptly notify the Sellers of any fact,
event, circumstance or action known to it that is reasonably likely to cause any
Pegasus Party to be unable to perform any of its covenants contained herein or
any condition precedent in Article X not to be satisfied, or that, if known on
the date of this Agreement, would have been required to be disclosed to the
Sellers pursuant to this Agreement or the existence or occurrence of which would
cause any of the Pegasus Parties' representations or warranties under this
Agreement not to be correct and/or complete. The Pegasus Parties shall give
prompt written notice to the Sellers of any adverse development causing a breach
of any of the
I-42
<PAGE>
representations and warranties in Article V or VI as of the date made. However,
except as provided in Section 8.9 or waived pursuant to Section 13.7, no
disclosure by the Pegasus Parties pursuant to this Section shall be deemed to
amend or supplement this Agreement or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant by the Pegasus Parties.
8.8 Tax Certificate. Pegasus and Merger Sub shall take no action that
would preclude them from delivering at Closing a tax certificate in the form of
Exhibit 8.
8.9 Supplements to Pegasus Disclosure Statement. The Pegasus Parties shall,
from time to time prior to Closing, supplement the Pegasus Disclosure Statement
with additional information that, if existing or known to it on the date of this
Agreement, would have been required to be included therein. For purposes of
determining the satisfaction of any of the conditions to the obligations of the
Sellers in Article X, the Pegasus Disclosure Statement shall be deemed to
include only (a) the information contained therein on the date of this Agreement
and (b) information added to the Pegasus Disclosure Statement by written
supplements delivered prior to Closing by the Pegasus Parties that (i) are
accepted in writing by the Company or (ii) reflect actions taken or events
occurring after the date hereof and prior to Closing that (A) do not breach any
covenant in this Agreement so as to cause the condition precedent stated in
Section 10.2 not to be fulfilled at or prior to the Closing, and (B) do not in
the aggregate have a Material Adverse Effect on Pegasus or a material adverse
effect on the validity, binding effect or enforceability of this Agreement or
the Collateral Documents or the ability of the Company or any of the Pegasus
Parties to perform its obligations under this Agreement or any of the Collateral
Documents.
8.10 Purchase of Certain Shares of Company Capital Stock.
(a) Within two Business Days after the expiration or early termination of
the notification period under the HSR Act described below, the Company will
(i) designate to Pegasus (A) the names of not more than twenty existing
holders of the Company's Series A, Series B, or Series C Preferred Stock,
and/or holders of Options to purchase Company Capital Stock (subject, in the
case of Options to purchase Company Capital Stock held by members of the
Company's management, to Pegasus's consent, as provided below) (the "Selling
Holders") who wish to sell shares of Company Capital Stock or Options to
purchase Company Capital Stock to Pegasus, (B) the number and classes of
shares of Company Capital Stock or Options to purchase Company Capital Stock
that the Selling Holders wish to sell to Pegasus (the "Offered Shares"),
which shall not be less than the Required Percentage (as defined below) of
the Company Common Stock (on a fully converted basis) on the date of the
designation provided herein, and (C) the purchase price for which such
Selling Holders wish to sell the Offered Shares, which shall not exceed
$25,000,000 in the aggregate; and (ii) deliver to Pegasus a purchase
agreement in the form attached hereto as Exhibit 9, appropriately completed
and executed by each Selling Holder. "Required Percentage" means the
percentage determined by (1) dividing the dollar amount of the aggregate
purchase price specified in the purchase agreements delivered pursuant to
this Section by the Market Price on the date of this Agreement and (2)
dividing the result by 6,500,000. Notwithstanding anything herein to the
contrary, Pegasus shall not be required to purchase Options to purchase
Company Capital Stock or Company Capital Stock acquired by a member of the
Company's management upon exercise of Options after the date hereof unless
Pegasus shall otherwise consent. Promptly after execution of this Agreement,
Pegasus, the Company and, if required, the Selling Holders will make such
filings as are required under the HSR Act.
(b) Within two Business Days after receipt of the material described in
Section 8.10(a), Pegasus will (i) execute each of the purchase agreements so
received and return one copy of each to the Company and the Selling Holders.
Within two Business Days after expiration or early termination of the
waiting period under the HSR Act, Pegasus will pay to each Selling Holder
(in accordance with the instructions contained in such Selling Holder's
purchase agreement) the amount, in cash, specified in such Selling Holder's
purchase agreement against receipt by Pegasus of one or more certificates
evidencing the Offered Shares, duly endorsed (or accompanied by a stock
power duly executed) in blank.
(c) The Company will register on its transfer books the transfer to
Pegasus of all Offered Shares purchased by Pegasus under this Section 8.10.
The Company waives any requirement for a signature guarantee in connection
with such registration.
I-43
<PAGE>
(d) Upon the completion of all such purchases, the Sellers shall take all
action necessary to increase the size of the Company's board of directors by
one member and elect Marshall W. Pagon to fill the vacancy so created.
Marshall W. Pagon shall continue to be a director of the Company until the
earlier of the Effective Time or the termination of this Agreement pursuant
to Article XII.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PEGASUS PARTIES
All obligations of the Pegasus Parties under this Agreement shall be
subject to the fulfillment at or prior to Closing of each of the following
conditions, it being understood that the Pegasus Parties may, in their sole
discretion, to the extent permitted by applicable Legal Requirements, waive any
or all of such conditions in whole or in part.
9.1 Accuracy of Representations. All representations and warranties of the
Company contained in sections 3.11(b), 3.15 and 3.20 (giving effect to Section
7.8) shall be true and correct on and as of the Closing Date with the same
effect as if made on the Closing Date, except to the extent that any
inaccuracies or breaches thereof would not have Adverse Consequences in excess
of $5,000,000 in the aggregate (the existence of any such breach or inaccuracy
and the amount of any such Adverse Consequences to be determined by giving
effect to the dollar thresholds contained in Section 3.15 but without regard to
any other "materiality" standard in any such Section and without regard to
clause (vi) of Section 3.11(b)). All representations and warranties of the
Company contained in Sections 3.12, 3.13 and 3.14 (giving effect to Section 7.8)
shall be true and correct on and as of the Closing Date with the same effect as
if made on the Closing Date, except to the extent that any inaccuracies or
breaches thereof would not have Adverse Consequences in excess of $2,500,000 in
the aggregate (the existence of any such breach or inaccuracy and the amount of
any such Adverse Consequences to be determined by giving effect to any
"materiality" standard in any such Section, but without regard to any dollar
thresholds contained in such sections). All representations and warranties of
the Sellers contained in this Agreement, other than those referred to in the two
preceding sentences (giving effect to Section 7.8), the Collateral Documents and
any certificate delivered by any of the Sellers at or prior to Closing shall be,
if specifically qualified by materiality, true in all respects and, if not so
qualified, shall be true in all material respects, in each case on and as of the
Closing Date with the same effect as if made on and as of the Closing Date,
other than representations and warranties expressly stated to be made as of the
date of this Agreement or as of another date other than the Closing Date. The
Company shall have delivered to Pegasus and Merger Sub a certificate dated the
Closing Date to the foregoing effect.
9.2 Covenants. The Sellers shall, in all material respects, have performed
and complied with each of the covenants, obligations and agreements contained in
this Agreement that are to be performed or complied with by them at or prior to
Closing. The Company shall have delivered to Pegasus and Merger Sub a
certificate dated the Closing Date to the foregoing effect.
9.3 Consents and Approvals.
(a) All consents, approvals, authorizations and orders required to be
obtained from, and all registrations, filings and notices required to be
made with or given to, any Governmental Authority or Person as provided in
Sections 7.4(a) and 8.4(a) shall have been duly obtained, made or given, as
the case may be, and shall be in full force and effect, and any waiting
period required by applicable law, including the HSR Act, or any
Governmental Authority in connection with such transactions shall have
expired or have been earlier terminated, unless the failure to obtain, make
or give any such consent, approval, authorization, order, registration,
filing or notice, or to allow any such waiting period to expire or terminate
would not have a Material Adverse Effect on the Company or a material
adverse effect on the validity, binding effect or enforceability of this
Agreement or the Collateral Documents or the ability of the Company or any
of the GSS Parties to perform its obligations under this Agreement or any of
the Collateral Documents.
(b) Notwithstanding the foregoing, the condition precedent stated in
subsection (a) shall not have been satisfied if (i) any consent, approval,
authorization or order obtained in connection with the
I-44
<PAGE>
transactions contemplated by this Agreement and the Collateral Documents is
conditioned upon or related to the amendment, modification, cancellation or
termination of, or waiver of any term or condition of, any contract,
commitment or agreement, or imposes upon Pegasus, any of its Subsidiaries,
the Surviving Corporation or any of its Subsidiaries any condition or
requirement or change in policy not now imposed upon Pegasus, the Company,
the Business or the DIRECTV Distribution Business of Pegasus (regardless of
whether such imposition is specifically related to or predicated upon or
precedes or follows such consent, approval, authorization or order) and (ii)
in the case of consents, approvals, authorizations and orders other than
those required from NRTC and DIRECTV, any such amendment, modification,
cancellation, termination, waiver or imposition would have a Material Adverse
Effect on the Company or the DIRECTV Distribution Business of Pegasus.
(c) This Agreement and the Merger shall have been approved by the
requisite vote of Pegasus's shareholders in accordance with the DGCL and the
rules of the Nasdaq Stock Market.
(d) This Agreement and the Merger shall have been approved by the
requisite vote of the Company's Shareholders in accordance with the DGCL and
the Company's Certificate of Incorporation and by-laws.
(e) Pegasus and Merger Sub shall have been furnished with appropriate
evidence, reasonably satisfactory to it and its counsel, of the granting of
such consents, approvals, authorizations and orders, the making of such
registrations and filings and the giving of such notices referred to in
subsections (a), (c) and (d).
9.4 Dissenters' Rights. The period for assertion of dissenters' rights
pursuant to Section 262 of the DGCL shall have expired, and the holders of
Company Capital Stock entitled to receive not more than ten percent of the
Pegasus Class A Common Stock included in the Merger Consideration shall have
perfected their dissenters' appraisal rights under Section 262 of the DGCL in
connection with the Merger.
9.5 Delivery of Documents. The Company shall have delivered, or caused to
be delivered, to Pegasus and Merger Sub the following documents:
(i) Registration Rights Agreement, executed by each Principal Company
Shareholder and by each other Shareholder and each member of Company Senior
Management who elects to do so.
(ii) Escrow Agreement, executed by the Escrow Agent and the Company, and
delivery to the Escrow Agent of the shares of Pegasus Class A Common Stock
required by Section 2.7 to be delivered to the Escrow Agent.
(iii) Voting Agreement, executed by the Principal Company Shareholders
who are required to execute the Voting Agreement.
(iv) Certified copies of the Company's certificate or incorporation and
by-laws and certified resolutions of the board of directors and
Shareholders of the Company authorizing the execution of this Agreement and
the Collateral Documents to which it is a party and the consummation of the
transactions contemplated hereby and thereby.
(v) Opinion of McDermott, Will & Emery, counsel to the Sellers, dated the
Closing Date, in form and substance reasonably satisfactory to Pegasus.
(vi) All books and records of the Company and its Subsidiaries.
(vii) All originally executed NRTC Distribution Agreements, and all
originally executed amendments thereto, that are in the Company's
possession, and copies of all such documents the originals of which are
not in the Company's possession.
(viii) To the extent in the Company's possession, all original Consumer
Contracts and all original files relating thereto.
(ix) Resignations of all members of the board of directors or similar
body of the Company and each of its Subsidiaries effective as of the
Effective Time.
I-45
<PAGE>
(x) A tax certificate in the form of Exhibit 7, executed by the Company.
(xi) Such other documents and instruments as Pegasus may reasonably
request: (A) to evidence the accuracy of the Seller's representations and
warranties under this Agreement, the Collateral Documents and any
documents, instruments or certificates required to be delivered thereunder;
(B) to evidence the performance by the Company and the GSS Parties of, or
the compliance by the Company and the GSS Parties with, any covenant,
obligation, condition and agreement to be performed or complied with by the
Company or any of the GSS Parties under this Agreement and the Collateral
Documents; or (C) to otherwise facilitate the consummation or performance
of any of the transactions contemplated by this Agreement and the
Collateral Documents.
9.6 No Material Adverse Change. Since the date hereof, there shall have
been no material adverse change in the Assets or in the business, financial
condition or operations of the Company and its Subsidiaries, taken as a whole,
other than changes affecting generally the NRTC and its members and affiliates
who provide DIRECTV services.
9.7 No Litigation. No action, suit or proceeding shall be pending or
threatened by or before any Governmental Authority, and no Legal Requirement or
policy (other than proceedings and Legal Requirements affecting generally the
NRTC and its members and affiliates who provide DIRECTV services) of the NRTC,
DirecTV, Inc. or any of their affiliates, or any applicable regulatory
authority, shall have been enacted, promulgated or issued that would: (i)
prohibit or adversely affect in any material respect Pegasus's or the Surviving
Corporation's and its Subsidiaries' ownership or operation of all or a material
portion of the Business or the Assets or materially and adversely affect the
value of the Assets; (ii) materially restrict or limit or otherwise condition
Pegasus's or the Surviving Corporation's and its Subsidiaries' right to transfer
and/or assign the Business or the Assets in the future; (iii) compel Pegasus or
the Surviving Corporation or any of its Subsidiaries to dispose of or hold
separate all or a material portion of the Business or the Assets as a result of
any of the transactions contemplated by this Agreement and the Collateral
Documents; (iv) prevent or make illegal the consummation of any transactions
contemplated by this Agreement and the Collateral Documents; or (v) cause any of
the transactions contemplated by this Agreement and the Collateral Documents to
be rescinded following consummation.
9.8 NRTC Compliance Certificate. The Company shall have delivered to
Pegasus a certificate or letter from NRTC dated as of the Closing Date to the
effect that the Company and its Subsidiaries are in material compliance with the
NRTC Distribution Agreements and there are no payments due by the Company under
the NRTC Distribution Agreements other than payments for fees due in the
Ordinary Course and not yet payable.
9.9 South Plains. The Company or one of its Subsidiaries shall have
acquired all the partnership interest in South Plains DBS, L.P. not currently
owned by the Company and its Subsidiaries. Nothing contained elsewhere in this
Agreement shall prohibit the Company and its Subsidiaries from doing so.
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS
All obligations of the Sellers under this Agreement shall be subject to the
fulfillment at or prior to Closing of the following conditions, it being
understood that the Sellers may, in their sole discretion, to the extent
permitted by applicable Legal Requirements, waive any or all of such conditions
in whole or in part.
10.1 Accuracy of Representations. All representations and warranties of the
Pegasus Parties contained in this Agreement (giving effect to Section 8.9) and
the Collateral Documents and any other document, instrument or certificate
delivered by any of the Pegasus Parties at or prior to the Closing shall be, if
specifically qualified by materiality, true and correct in all respects and, if
not so qualified, shall be true and correct in all material respects, in each
case on and as of the Closing Date with the same effect as if made on and as of
the Closing Date, other than representations and warranties expressly stated to
be made as of the date of this Agreement or as of another date other than the
Closing Date. The Pegasus Parties shall have delivered to the Sellers a
certificate dated the Closing Date to the foregoing effect.
I-46
<PAGE>
10.2 Covenants. The Pegasus Parties shall, in all material respects, have
performed and complied with each obligation, agreement, covenant and condition
contained in this Agreement and the Collateral Documents and required by this
Agreement and the Collateral Documents to be performed or complied with by the
Pegasus Parties at or prior to Closing. The Pegasus Parties shall have delivered
to the Company a certificate dated the Closing Date to the foregoing effect.
10.3 Consents and Approvals.
(a) All consents, approvals, authorizations and orders required to be
obtained from, and all registrations, filings and notices required to be
made with or given to, any Governmental Authority or Person as provided in
Section 8.4(a) and by NRTC and DIRECTV shall have been duly obtained, made
or given, as the case may be, and shall be in full force and effect, and any
waiting period required by applicable law, including the HSR Act, or any
Governmental Authority in connection with such transactions shall have
expired or have been earlier terminated, unless the failure to obtain, make
or give any such consent, approval, authorization, order, registration,
filing or notice, or to allow any such waiting period to expire or terminate
would not have a Material Adverse Effect on Pegasus or a material adverse
effect on the validity, binding effect or enforceability of this Agreement
or the Collateral Documents or the ability of the Company or any of the
Pegasus Parties to perform its obligations under this Agreement or any of
the Collateral Documents.
(b) This Agreement and the Merger shall have been approved by the
requisite vote of Pegasus's shareholders in accordance with the DGCL,
Pegasus's Certificate of Incorporation and by-laws and the rules of the
Nasdaq Stock Market.
(c) This Agreement and the Merger shall have been approved by the
requisite vote of the Company's Shareholders in accordance with the DGCL and
the Company's Certificate of Incorporation and by-laws.
(d) The Sellers shall have been furnished with the appropriate evidence,
reasonably satisfactory to them and their counsel, of the granting of such
consents, approvals, authorizations and orders, the making of such
registrations and filings and the giving of such notices referred to in
subsections (a), (b) and (c).
10.4 Delivery of Documents. The Pegasus Parties, as applicable, shall have
executed and delivered, or caused to be executed and delivered, to the Company
and the Principal Company Shareholders the following documents:
(i) Registration Rights Agreement, executed by Pegasus.
(ii) Escrow Agreement, executed by Pegasus and the Escrow Agent.
(iii) Voting Agreement, executed by the Principal Pegasus Shareholders
and by Marshall W. Pagon.
(iv) Certified copies of the certificate of incorporation and by-laws of
Pegasus and certified resolutions by the board of directors and
Shareholders of Pegasus authorizing the execution of this Agreement and the
Collateral Documents and the consummation of the transactions contemplated
hereby.
(v) Such other documents and instruments as the Sellers may reasonably
request: (A) to evidence the accuracy of the representations and warranties
of the Pegasus Parties under this Agreement and the Collateral Documents and
any documents, instruments or certificates required to be delivered
thereunder; (B) to evidence the performance by the Pegasus Parties of, or
the compliance by the Pegasus Parties with, any covenant, obligation,
condition and agreement to be performed or complied with by the Pegasus
Parties under this Agreement and the Collateral Documents; or (C) to
otherwise facilitate the consummation or performance of any of the
transactions contemplated by this Agreement and the Collateral Documents.
(vi) Opinion of Drinker Biddle & Reath LLP, counsel to the Pegasus
Parties, dated the Closing Date, in form and substance reasonably
satisfactory to the Company.
I-47
<PAGE>
(vii) Opinion of Drinker Biddle & Reath LLP, counsel to Pegasus, in form
reasonably satisfactory to the Principal Company Shareholders, to the
effect that the Merger qualifies as a tax-free reorganization under
Section 368(a) of the Code.
10.5 No Material Adverse Change. There shall have been no material adverse
change in the business, financial condition or operations of Pegasus and its
Subsidiaries taken as a whole, other than changes affecting generally the NRTC
and its members and affiliates who provide DIRECTV services.
10.6 Litigation. No action, suit or proceeding shall be pending or
threatened by or before any Governmental Authority and no Legal Requirement
shall have been enacted, promulgated or issued or deemed applicable to any of
the transactions contemplated by this Agreement and the Collateral Documents
that would: (i) prevent consummation of any of the transactions contemplated by
this Agreement and the Collateral Documents; (ii) cause any of the transactions
contemplated by this Agreement and the Collateral Documents to be rescinded
following consummation; (iii) result in the Class A Common Stock being
ineligible for trading on the Nasdaq Stock Market or a national securities
exchange in the United States; or (iv) have a Material Adverse Effect on Pegasus
(other than proceedings and Legal Requirements affecting generally the NRTC and
its members and affiliates who provide DIRECTV services).
10.7 Nasdaq Listing. The shares of Pegasus Class A Common Stock issuable in
the Merger and those to be reserved for issuance upon exercise of the
replacement options and warrants described in Section 2.12 shall have been
approved for listing on the Nasdaq Stock Market upon official notice of
issuance.
10.8 Pegasus Merger Registration Statement. The Pegasus Merger Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order suspending such effectiveness shall have been
issued and remain in effect and no proceeding for that purpose shall have been
instituted by the Commission or any state regulatory authorities.
ARTICLE XI
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following Closing:
11.1 Transition. None of the Principal Company Shareholders shall take any
action that is designed or intended to have the effect of discouraging any
lessor, licensor, subscriber, supplier or other business associate of the
Company, its Subsidiaries or the Business from maintaining the same business
relationships with Pegasus, the Surviving Corporation and its Subsidiaries after
Closing as it maintained with the Company and its Subsidiaries prior to Closing.
11.2 Indemnification of Directors, Officers and Managers of the Company
and its Predecessors; Directors' and Officers' Insurance.
(a) The certificate of incorporation and by-laws of the Surviving
Corporation (and of any corporation that shall succeed to it by merger,
consolidation or otherwise) shall contain the provisions with respect to
indemnification set forth in the certificate of incorporation and bylaws of
the Company on the date of this Agreement, which provisions shall not be
amended, repealed or otherwise modified for a period of six (6) years after
the Effective Time in any manner that would adversely affect the rights
thereunder of persons who at any time prior to the Effective Time were
identified as prospective indemnitees under the certificate of incorporation
or bylaws of the Company in respect of actions or omissions occurring at or
prior to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement), unless such modification is required by
applicable law.
(b) From and after the Effective Time, the Surviving Corporation shall
indemnify, defend and hold harmless the present and former officers,
directors and employees of the Company (and its predecessors) and its
Subsidiaries (collectively, the "GSS Indemnified Parties") against all
Adverse Consequences (including amounts that are paid in settlement of, with
the approval of Pegasus and the Surviving Corporation (which approval shall
not be unreasonably withheld)), or otherwise in connection with, any claim,
action, suit, proceeding or investigation (a "Claim"), based in whole or in
part on the fact that such person is or was such a director, manager,
officer or employee and arising out of actions or
I-48
<PAGE>
omissions occurring at or prior to the Effective Time (including, without
limitation, the transactions contemplated by this Agreement), in each case to
the fullest extent permitted under the DGCL (and shall pay expenses in
advance of the final disposition of any such action or proceeding to each GSS
Indemnified Party to the fullest extent permitted under the DGCL, upon
receipt from the Indemnified Party to whom expenses are advanced of the
undertaking to repay such advances contemplated by Section 145(e) of DGCL).
(c) Without limiting the foregoing, in the event any Claim is brought
against any GSS Indemnified Party (whether arising before or after the
Effective Time) after the Effective Time, (i) subject to the last sentence
of this subsection (c), the Surviving Corporation may retain counsel
reasonably acceptable to the GSS Indemnified Parties to represent them in
connection with the claim, and if it shall fail to do so the GSS Indemnified
Parties may retain their regularly engaged independent legal counsel as of
the date of this Agreement, or other independent legal counsel satisfactory
to them provided that such other counsel shall be reasonably acceptable to
Pegasus and the Surviving Corporation, (ii) the Surviving Corporation shall
pay all reasonable fees and expenses of such counsel for the GSS Indemnified
Parties promptly as statements therefor are received, and (iii) the
Surviving Corporation will use its reasonable efforts to assist in the
vigorous defense of any such matter, provided that the Surviving Corporation
shall not be liable for any settlement of any Claim effected without its
written consent, which consent shall not be unreasonably withheld. Any GSS
Indemnified Party wishing to claim indemnification under this Section 11.2,
promptly upon learning of any such Claim, shall notify the Surviving
Corporation (although the failure so to notify the Surviving Corporation
shall not relieve the Surviving Corporation from any liability which the
Surviving Corporation may have under this Section 11.2, except to the extent
such failure prejudices the Surviving Corporation), and shall deliver to the
Surviving Corporation the undertaking contemplated by Section 145(e) of
DGCL. The GSS Indemnified Parties and the Surviving Corporation and its
Affiliates as a group shall be represented by one law firm (in addition to
local counsel) with respect to each such matter unless there is, under
applicable standards of professional conduct (as reasonably determined by
counsel to such GSS Indemnified Parties) a conflict on any significant issue
between the position of the Surviving Corporation and its Affiliates, on the
one hand, and one or more GSS Indemnified Parties, on the other hand, or
between the position of any two or more of such GSS Indemnified Parties, as
the case may be, in which event additional counsel as may be required may be
retained by such GSS Indemnified Parties, and the reasonable fees and
expenses of such additional counsel shall be paid by the Surviving
Corporation.
(d) Pegasus shall cause to be maintained in effect for not less than six
(6) years after the Effective Time the current policies of directors' and
officers' liability insurance and fiduciary liability insurance maintained
by the Company with respect to matters occurring prior to the Effective
Time; provided, however, that Pegasus may substitute therefor policies of
substantially the same coverage containing terms and conditions that are
substantially the same for the GSS Indemnified Parties to the extent
reasonably available.
(e) This Section 11.2 is intended to be for the benefit of, and shall be
enforceable by, the GSS Indemnified Parties referred to herein, their heirs
and personal representatives and shall be binding on Pegasus and Merger Sub
and the Surviving Corporation and their respective successors and assigns.
(f) Notwithstanding anything else in this Section 11.2, no GSS
Indemnified Party shall be entitled to indemnification under this Section
11.2 or under any provision of the Company's certificate of incorporation or
by-laws as to any matter as to which Pegasus is entitled to be indemnified
pursuant to Article XIII.
11.3 Offers to Purchase. Pegasus shall cause the Surviving Corporation to
make the Offers to Purchase within the time required by the Company Indentures.
11.4 Confidentiality. Each Principal Company Shareholder shall maintain as
confidential any information and documentation related to the business of
Pegasus or its Subsidiaries that is or has been disclosed to such Principal
Company Shareholder by Pegasus, its Subsidiaries, or their respective
Representatives in connection with the negotiation, execution and delivery of
this Agreement and the
I-49
<PAGE>
transactions contemplated hereby or that such Principal Company Shareholder has
obtained about the Company as a result of its ownership of Company Capital Stock
(the "Confidential Information"). Notwithstanding the foregoing, no Principal
Company Shareholder shall be required to maintain the confidentiality of those
portions of the Confidential Information that (i) become generally available to
the public other than as a result of a disclosure by the Principal Company
Shareholder, (ii) were known by the Principal Company Shareholder or were
available to the Principal Company Shareholder on a non-confidential basis prior
to the disclosure of such Confidential Information in connection with the
transactions contemplated hereby or as a result of its ownership of Company
Capital Stock; provided that the source of such information was not known by the
Principal Company Shareholder to be bound by a confidentiality agreement with or
other contractual, legal or fiduciary obligation of confidentiality to Pegasus
or its Subsidiaries with respect to such material, or (iii) become available to
the Principal Company Shareholder on a non-confidential basis, at any time after
the disclosure of such Confidential Information in connection with the
transactions contemplated hereby or other than as a result of its ownership of
Company Capital Stock, from a source other than Pegasus, its Subsidiaries or
their respective Representatives; provided that the source of such information
was not known by the Principal Company Shareholder to be bound by a
confidentiality agreement with or other contractual, legal or fiduciary
obligation of confidentiality to Pegasus or its Subsidiaries with respect to
such material. No Principal Company Shareholder shall use the Confidential
Information for any purpose other than in connection with the negotiation,
execution and delivery of this Agreement and the transactions contemplated
hereby, including but not limited to, enforcement of remedies pursuant to
Sections 13.2 and 13.3 hereof and any continuing obligations of Pegasus, the
Company or the Principal Company Shareholders under this Agreement.
I-50
<PAGE>
ARTICLE XII
TERMINATION
12.1 Events of Termination. This Agreement may be terminated and the
transactions contemplated by this Agreement may be abandoned at any time prior
to Closing as provided below:
(a) This Agreement may be terminated by the mutual written consent of
both Pegasus and the Company at any time prior to Closing.
(b) The Pegasus Parties may terminate this Agreement by giving written
notice to the Sellers at any time prior to Closing if the Company or any of
the Sellers breaches any representation, warranty or covenant contained in
this Agreement, which breach if unremedied would cause any condition
precedent stated in Article IX not to be satisfied, Pegasus notifies the
Sellers of the breach, and the breach continues without cure for a period of
30 days after the notice of breach.
(c) The Company may terminate this Agreement by giving written notice to
Pegasus at any time prior to Closing if any Pegasus Party breaches any
representation, warranty or covenant contained in this Agreement, which
breach if unremedied would cause any condition precedent stated in Article X
not to be satisfied, the Sellers notify Pegasus of the breach, and the
breach continues without cure for a period of 30 days after the notice of
breach.
(d) The Company may terminate this Agreement if any of the following
occurs after the date hereof and before the Closing (it being understood
that the occurrence of any of the following will not constitute a breach of
this Agreement by any of the Pegasus Parties):
(i) Pegasus or any of its Subsidiaries makes any Acquisition or an
investment in any business in any single transaction or series of
related transactions if the consolidated gross revenue of the DIRECTV
Distribution Business of Pegasus and its consolidated Subsidiaries for
the period of four fiscal quarters ending on the last day of the most
recent fiscal quarter for which financial statements are available would
be 75 percent or less of the consolidated gross revenues of Pegasus and
its Subsidiaries for such period, in each case on a pro forma basis on
the assumption that the Acquisition or investment had occurred at the
beginning of such period;
(ii) Pegasus or any of its Subsidiaries disposes of any portion of its
DIRECTV Distribution Business unless (A) such disposition is made in
connection with the acquisition of one or more other DIRECTV
Distribution Businesses, and (B) the net decrease in the consolidated
gross revenues of the DIRECTV Distribution Business of Pegasus and its
consolidated Subsidiaries for the period of four fiscal quarters ending
on the last day of the most recent fiscal quarter for which financial
statements are available, on a pro forma basis, on the assumption that
such disposition and the related acquisitions had occurred at the
beginning of such period, would not exceed ten percent of the actual
consolidated gross revenues of the DIRECTV Distribution Business of
Pegasus and its consolidated Subsidiaries for such period;
(iii) Pegasus or any of its Subsidiaries incurs indebtedness in excess
of $50,000,000 in the aggregate other than in connection with
acquisitions (including increases in the letter of credit posted in
favor of NRTC) and other than under the Pegasus Credit Agreement;
(iv) Pegasus declares or pays any dividend or other distribution on
its capital stock or redeems or repurchases any of its capital stock,
other than (A) regularly scheduled dividend payments on Pegasus's Series
A Preferred Stock, (B) redemptions or repurchase of shares of employees
in connection with the termination of their employment, or (C) dividends
payable in common stock or stock splits; or
(v) Pegasus or any of its Subsidiaries enters into any transaction (or
series of related transactions), other than (A) transactions in the
Ordinary Course (B) transactions of the nature described in any of
paragraphs (i) through (v), and (C) transactions described in Section
5.10 of the Company Disclosure Statement, but exclusive of transactions
described in Section 8.10, resulting in an expenditure or commitment in
excess of $50,000,000.
I-51
<PAGE>
(e) Either Pegasus or the Company may terminate this Agreement if the
Closing shall not have occurred on or before June 30, 2000 (the "Outside
Closing Date"), otherwise than because of a breach by the terminating Party
of any of its representations, warranties or covenants in this Agreement,
except that the Outside Closing Date shall be subject to extension as
follows:
(i) If the condition precedent in Section 9.9 (relating to South
Plains DBS, L.P.) is not satisfied by June 30, 1999, then, subject to
paragraph (iii), the Company may, by written notice to Pegasus, extend
the Outside Closing Date until September 30, 1999.
(ii) If the Outside Closing Date is extended pursuant to paragraph (i)
and the condition precedent in Section 9.9 is not satisfied by September
30, 1999, the Company may, by written notice to Pegasus, require Pegasus
to waive such condition precedent.
(iii) If all conditions precedent other than the one stated in Section
9.9 are satisfied or waived at any time, Pegasus may waive such
condition precedent and the parties shall proceed to complete the
Closing, in which case paragraph (i) will cease to apply.
12.2 Effect of Termination. Upon any termination of this Agreement, all
obligations under this Agreement shall cease, and there shall be no liability or
further obligation under this Agreement on the part of the Company, any
subsidiary of the Company, any other GSS Party, Pegasus, or any other Pegasus
Party or their respective officers and directors, except for any obligation or
liability of any Party based on or arising from a breach or default by such
Party with respect to any of the covenants contained in Sections 7.2 and 8.2. No
termination of this Agreement shall affect any Party's obligation under the
Confidentiality Agreement.
12.3 Procedure Upon Termination. If this Agreement is terminated by any
Party pursuant to this Article, notice of such termination shall promptly be
given by the terminating Party to the other Party.
ARTICLE XIII
INDEMNIFICATION
13.1 Survival of Representations and Warranties.
(a) Except to the extent waived pursuant to Section 13.7, the
representations and warranties contained in Sections 2.13, 3.2(d), 3.11(b),
5.11(a), 5.12(b) and 7.10 and the last sentence of Section 5.2 and in the
information contained in the list and calculation furnished to Pegasus
pursuant to Section 2.7(c) shall survive Closing and shall expire six months
after the Closing Date; provided, however, that such survival shall be for
the sole purpose of supporting indemnification claims under Section 13.2 and
13.3; and provided further that such expiration will not include, extend or
apply to any claim for indemnification made pursuant to Section 13.2 or 13.3
prior to such date.
(b) Except as provided in Section 13.1(a), all of the representations and
warranties contained in this Agreement shall be deemed conditions to the
Merger, to the extent stated in Sections 9.1 and 10.1, and shall not survive
the Closing or the termination of this Agreement.
(c) If the Closing occurs (i) all covenants of the Sellers and the
Pegasus Parties contained in Articles VII and VIII shall expire at the
Closing (including any claim based on a breach of any such covenant or
agreement occurring before the Closing), and (ii) the other covenants and
agreements of the Pegasus Parties and the Sellers in this Agreement shall
survive indefinitely.
13.2 Indemnification Provisions for Benefit of the Pegasus Parties.
(a) If the Company breaches (or if any third party alleges facts that, if
true, would mean the Company has breached) any representation or warranty of
the Company that survives the Closing pursuant to Section 13.1, or if the
Company 1999 Forms 10-K (or if any third party alleges facts that, if true,
would mean the Company 1999 Forms 10-K), contained, as of their filing
dates, an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they are made, not
misleading, and if in any such case Pegasus makes a written claim for
indemnification no later than six months after the Closing Date (the
"Indemnification Period"), then, subject to the limitations contained
elsewhere in this Article
I-52
<PAGE>
XIII, the Shareholders shall, severally and in proportion to the amount of
the Merger Consideration received by each, indemnify Pegasus, the Surviving
Corporation and their Affiliates and the shareholders, directors, officers,
employees, agents, successors and assigns of any of such Persons (the
"Pegasus Indemnitees") from and against any Adverse Consequences that any
such Person may suffer through and after the date of the claim for
indemnification (including any Adverse Consequences that any such Person may
suffer after the end of the Indemnification Period) resulting from, arising
out of, relating to or caused by the breach, untrue statement or omission. In
addition, if Pegasus makes a written claim for indemnification within the
Indemnification Period, then subject to the limitations contained elsewhere
in this Article XIII, the Shareholders shall, severally and in proportion to
the amount of the Merger Consideration received by each, indemnify the
Pegasus Indemnitees from and against any Adverse Consequences that any of the
Pegasus Indemnitees may suffer through and after the date of the claim for
indemnification (including any Adverse Consequences that any such Person may
suffer after the end of the Indemnification Period) resulting from, arising
out of relating to or caused by any of the following:
(i) any failure on the part of the Company or any of its Subsidiaries
to comply with the Satellite Home Viewer Act and the Satellite Home
Viewer Improvement Act of 1999 with respect to Grade A and Grade B
subscribers receiving over-the-air signals from the primary network
stations affiliated with a network; or
(ii) any claim that the Company failed to consummate any Acquisition
of a DIRECTV Distribution Business in violation of a legal obligation to
do so, whether or not any such matter is disclosed in the Company
Disclosure Statement or is otherwise known to Pegasus.
In addition, provided that Pegasus makes a written claim for indemnification
within the Indemnification Period, then, subject to the limitations contained
elsewhere in this Article XIII, the Shareholders shall, severally and in
proportion to the amount of the Merger Consideration received by each, indemnify
the Pegasus Indemnitees as follows:
(A) if the partnership interest in South Plains DBS, L.P. not
currently owned by the Company and its Subsidiaries (the "Minority
Interest") is acquired by the Company or its Subsidiaries before the
Closing, or by Pegasus or its Subsidiaries after the Closing but before
the expiration of the Indemnification Period, the Pegasus Parties shall
be indemnified for the excess of the cost to purchase the Minority
Interest over $13,075,000; or
(B) if the Minority Interest is not acquired by the Company, Pegasus
or any of their respective subsidiaries before the expiration of the
Indemnification Period, the Pegasus Parties shall be indemnified for the
sum of $13,075,000.
Between the Closing Date and the expiration of the Indemnification Period,
Pegasus shall be required to accept (or cause one of its Subsidiaries to accept)
any all-cash offer approved by the Principal Company Shareholders to acquire the
Minority Interest pursuant to commercially reasonable documentation for not more
than $13,075,000.
(b) Notwithstanding the foregoing, the Shareholders shall not have any
obligation to indemnify any Pegasus Indemnitee under Section 13.2(a) unless
the Adverse Consequences with respect thereto shall exceed $25,000,000 in
the aggregate, in which case they shall be required to indemnify the Pegasus
Indemnitees for all Adverse Consequences, including the first $25,000,000.
This limitation shall not apply to obligations arising out of the breach of
any representation, warranty or covenant contained in Section 2.13 or 3.2(d)
or the list or calculation furnished to Pegasus pursuant to Section 2.7(c).
(c) Notwithstanding the foregoing, the liability of any Shareholder under
Section 13.2(a) shall be satisfied only by the delivery pursuant to Section
13.6 of Escrowed Shares held for such Shareholder's account by the Escrow
Agent, valued in accordance with Section 13.6. This limitation shall not
apply to obligations arising out of the breach of any representation,
warranty or covenant contained in Section 2.13 or 3.2(d) or the list or
calculation furnished to Pegasus pursuant to Section 2.7(c).
I-53
<PAGE>
13.3 Indemnification Provisions for Benefit of the Shareholders.
(a) If Pegasus breaches (or if any third party alleges facts that, if
true, would mean that Pegasus has breached) any representation or warranty
of Pegasus that survives the Closing pursuant to Section 13.1 or if the
Pegasus Merger Registration Statement (or if any third party alleges facts
that, if true, would mean that the Pegasus Merger Registration Statement),
as of the Closing Date, contained an untrue statement of material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they are made, not misleading (except for statements made or facts omitted
in reliance on and in conformity with information furnished in writing by
the Company or any Principal Company Shareholder specifically for inclusion
therein), and if, in any such case, any Shareholder makes a written claim
for indemnification against Pegasus and the Surviving Corporation within the
Indemnification Period, then subject to the limitations contained elsewhere
in this Article XIII, Pegasus and the Surviving Corporation shall jointly
and severally indemnify, defend and hold harmless the Shareholders, the
former directors, officers, employees and agents of the Company and its
Affiliates and the successors and assigns of any of such Persons (the
"Company Indemnitees"), from and against any Adverse Consequences that any
such Person may suffer through and after the date of the claim for
indemnification (including any Adverse Consequences that any such Person may
suffer after the end of the Indemnification Period) resulting from, arising
out of, relating to or caused by the breach, untrue statement or omission.
(b) Notwithstanding the foregoing, Pegasus and the Surviving Corporation
shall not have any obligation to indemnify any Company Indemnitee under
Section 13.3(a) unless the Adverse Consequences described therein shall
exceed $25,000,000 in the aggregate, in which case they shall be required to
indemnify the Company Indemnitees for all Adverse Consequences, including
the first $25,000,000. This limitation shall not apply to obligations
arising out of the breach of any representation or warranty contained in the
last sentence of Section 5.2.
(c) Notwithstanding the foregoing, the liability of Pegasus and the
Surviving Corporation under Section 13.3(a) shall be satisfied only by the
delivery pursuant to Section 13.6 of additional shares of Pegasus Class A
Common Stock, valued in accordance with Section 13.6, and shall be limited
in the aggregate to 975,000 shares of Pegasus Class A Common Stock (adjusted
as provided in the last sentence of Section 2.7(a)) valued in accordance
with Section 13.6. This limitation shall not apply to obligations arising
out of the breach of any representation or warranty contained in the last
sentence of Section 5.2.
13.4 Matters Involving Third Parties.
(a) If any third party shall notify either Pegasus, the Surviving
Corporation or any Principal Company Shareholder (the "Indemnified Party")
prior to the expiration of the Indemnification Period with respect to any
matter (a "Third Party Claim") that may give rise to a claim for
indemnification against the other (the "Indemnifying Party") under this
Article, then the Indemnified Party shall promptly notify the Indemnifying
Party thereof in writing; provided, however, that no delay on the part of
the Indemnified Party in notifying any Indemnifying Party (but not beyond
the expiration of the Indemnification Period, or, in the case of notice of a
Third Party Claim received by the Indemnified Party on the last day of the
Indemnification Period, the next Business Day) shall relieve the
Indemnifying Party from any obligation hereunder unless (and then solely to
the extent) the Indemnifying Party thereby is prejudiced.
(b) Any Indemnifying Party shall have the right to defend the Indemnified
Party against the Third Party Claim with counsel of its choice reasonably
satisfactory to the Indemnified Party so long as: (i) the Indemnifying Party
notifies the Indemnified Party in writing within 15 days after the
Indemnified Party has given notice of the Third Party Claim that the
Indemnifying Party will indemnify the Indemnified Party from and against the
entirety of any Adverse Consequences the Indemnified Party may suffer
(limited as provided in this Article XIII) resulting from, arising out of,
relating to, in the nature of or caused by the Third Party Claim; (ii) the
Indemnifying Party provides the Indemnified Party with evidence acceptable
to the Indemnified Party that the Indemnifying Party will have the financial
resources to defend against the Third Party Claim and fulfill its
indemnification obligations hereunder (subject to
I-54
<PAGE>
the aggregate limitations contained herein); (iii) the Third Party Claim
involves only money damages and does not seek an injunction or other
equitable relief; (iv) settlement of, or an adverse judgment with respect
to, the Third Party Claim is not, in the good faith judgment of the
Indemnified Party, likely to (A) exceed the limit of the Indemnifying Party
hereunder or (B) establish a precedent, custom or practice materially
adverse to the continuing business interests of the Indemnified Party; and
(v) the Indemnifying Party conducts the defense of the Third Party Claim
actively and diligently.
(c) So long as the Indemnifying Party is conducting the defense of the
Third Party Claim in accordance with subsection (b): (i) the Indemnified
Party may retain separate co-counsel at its sole cost and expense and
participate in the defense of the Third Party Claim; (ii) the Indemnified
Party shall not consent to the entry of any judgment or enter into any
settlement with respect to the Third Party Claim without the prior written
consent of the Indemnifying Party (not to be withheld unreasonably); and
(iii) the Indemnifying Party shall not consent to the entry of any judgment
or enter into any settlement with respect to the Third Party Claim without
the prior written consent of the Indemnified Party (not to be withheld
unreasonably).
(d) If any of the conditions in Section 13.4(b) is not or no longer
satisfied, however: (i) the Indemnified Party may defend against, and
consent to the entry of any judgment or enter into any settlement with
respect to, the Third Party Claim in any manner it reasonably may deem
appropriate (and the Indemnified Party need not consult with, or obtain any
consent from, any Indemnifying Party in connection therewith); (ii) the
Indemnifying Party shall reimburse the Indemnified Party promptly and
periodically for the costs of defending against the Third Party Claim
(including attorneys' fees and expenses) by delivery of shares of Pegasus
Class A Common Stock, from the Escrowed Shares or otherwise, valued as set
forth in Section 13.6; and (iii) the Indemnifying Party shall remain
responsible for any Adverse Consequences the Indemnified Party may suffer
resulting from, arising out of, relating to, in the nature of or caused by
the Third Party Claim to the fullest extent, but subject to the limitations,
provided in this Article XIII.
13.5 Determination of Adverse Consequences. Pegasus, the Surviving
Corporation and the Shareholders shall take into account the time cost of money
(using the Applicable Rate as the discount rate) in determining Adverse
Consequences for purposes of this Article XIII. Adverse Consequences arising
from a breach or alleged breach of any representation or warranty referred to in
Section 13.2 or 13.3 shall be calculated, and whether there is a breach of any
such representation or warranty for purposes of Section 13.2 or 13.3 shall be
determined, without reference to any dollar threshold or materiality threshold
contained in any such representation or warranty (it being understood that any
such threshold shall be given effect for determining whether any condition
precedent stated in Section 9.1 or 10.1 shall have been satisfied as of the
Closing Date). All indemnification obligations under this Article shall be net
of any insurance proceeds received by the Indemnified Party in respect of the
event or circumstance giving rise to the claim for indemnification and shall be
deemed adjustments to the Merger Consideration.
13.6 Payment in Shares. All shares of Pegasus Class A Common Stock
delivered in satisfaction of any indemnity claim under this Article XIII shall
be delivered free and clear of all Encumbrances other than transfer restrictions
under applicable securities laws. Each share of Pegasus Class A Common Stock
(whether included in the Escrowed Shares or otherwise) delivered in satisfaction
of any such indemnity claim shall be valued at the Market Price on the Closing
Date (adjusted for stock splits and reclassifications). Any dividends previously
paid and any other distributions made after the Closing Date in respect of
shares of Pegasus Class A Common Stock delivered to Pegasus in settlement of any
indemnity claim (whether paid in cash, securities or other property) shall also
be transferred, free and clear of all Encumbrances other than transfer
restrictions under applicable Securities laws, to Pegasus; and in the case of
Pegasus Class A Common Stock delivered to any Company Indemnitee in settlement
or any indemnity claim, Pegasus shall be required to deliver to such Company
Indemnitee the amount of any cash, securities or other property, valued at the
date of such settlement, that such Company Indemnitee would have received had
such Company Indemnitee owned such shares on the date of such dividend or
distribution.
13.7 No Indemnification for Certain Disclosed Matters.
(a) If any of the Sellers shall disclose in writing to Pegasus on or
before the Closing Date pursuant to Section 7.7 or 7.8 (but not otherwise)
any fact that would cause any condition precedent stated in
I-55
<PAGE>
Article IX not to be satisfied or would give rise to a right on the part of
the Pegasus Parties to terminate this Agreement pursuant to Section 12.1,
if the Pegasus Parties do not terminate this Agreement pursuant to Section
12.1, then, except for matters described in Section 13.2(a)(i), (ii), (A)
or (B), the Pegasus Indemnitees shall be deemed to have waived any claim to
indemnification based on such fact upon completion of the Closing.
(b) If Pegasus shall disclose in writing to the Company on or before the
Closing Date pursuant to Section 8.7 or 8.8 (but not otherwise) any fact
that would cause any condition precedent stated in Article X not to be
satisfied or would give rise to a right on the part of the Company to
terminate this Agreement pursuant to Section 12.1, if the Company does not
terminate this Agreement pursuant to Section 12.1, then the Company
Indemnitees shall be deemed to have waived any claim to indemnification
based on such fact upon completion of the Closing.
ARTICLE XIV
MISCELLANEOUS
14.1 Parties Obligated and Benefited. This Agreement shall be binding upon
the Parties and their respective successors by operation of law and shall inure
solely to the benefit of the Parties and their respective successors by
operation of law, and no other Person shall be entitled to any of the benefits
conferred by this Agreement, except that the Shareholders shall be third party
beneficiaries of this Agreement. Without the prior written consent of the other
Party, no Party may assign this Agreement or the Collateral Documents or any of
its rights or interests or delegate any of its duties under this Agreement or
the Collateral Documents; provided, however, that Pegasus may collaterally
assign its rights under this Agreement and the Collateral Documents to any
Persons providing debt financing to Pegasus or its Affiliates.
14.2 Notices. Any notices and other communications required or permitted
hereunder shall be in writing and shall be effective upon delivery by hand or
upon receipt if sent by certified or registered mail (postage prepaid and return
receipt requested) or by a nationally recognized overnight courier service
(appropriately marked for overnight delivery) or upon transmission if sent by
telex or facsimile (with request for immediate confirmation of receipt in a
manner customary for communications of such respective type and with physical
delivery of the communication being made by one or the other means specified in
this Section as promptly as practicable thereafter). Notices shall be addressed
as follows:
(a) If to Pegasus, Merger Sub or the Surviving Corporation, to:
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
225 City Line Avenue, Suite 200
Bala Cynwyd, PA 19004
Attn: Mr. Ted S. Lodge
Telecopier: 610-934-7072
(b) If to the Company before the Closing Date to:
Golden Sky Holdings, Inc.
4700 Belleview, Suite 300
Kansas City, MO 64112
Attn: Jo Ellen Linn, Esq.
Telecopier: 816-753-5595
with a copy to:
Karen A. Dewis, Esq.
McDermott, Will & Emery
600 13th Street, NW
Washington, DC 20005
Telecopier: 202-756-8087
I-56
<PAGE>
(c) If to the Principal Company Shareholders, before or after the
Closing Date, to:
William P. Collatos
c/o Spectrum Equity Investors
1 International Place, 29th Floor
Boston, MA 02110
Telecopier: 617-464-4601
with a copy to:
Karen A. Dewis, Esq.
McDermott, Will & Emery
600 13th Street, NW
Washington, DC 20005
Telecopier: 202-756-8087
(d) If to any Shareholder after the Closing Date, by notice to the
Shareholder Representative at: 12748 Delmar Drive, Leawood, KS 66209.
Any Party may change the address to which notices are required to be sent by
giving notice of such change in the manner provided in this Section.
14.3 Attorneys' Fees. In the event of any action or suit based upon or
arising out of any alleged breach by any Party of any representation, warranty,
covenant or agreement contained in this Agreement or the Collateral Documents,
the prevailing Party shall be entitled to recover reasonable attorneys' fees and
other costs of such action or suit from the other Party.
14.4 Headings. The Article and Section headings of this Agreement are for
convenience only and shall not constitute a part of this Agreement or in any way
affect the meaning or interpretation thereof.
14.5 Choice of Law. This Agreement and the rights of the Parties under it
shall be governed by and construed in all respects in accordance with the laws
of the State of Delaware, without giving effect to any choice of law provision
or rule (whether of the State of Delaware or any other jurisdiction that would
cause the application of the laws of any jurisdiction other than the State of
Delaware).
14.6 Rights Cumulative. All rights and remedies of each of the Parties
under this Agreement shall be cumulative, and the exercise of one or more rights
or remedies shall not preclude the exercise of any other right or remedy
available under this Agreement or applicable law.
14.7 Further Actions. The Parties shall execute and deliver to each other,
from time to time at or after Closing, for no additional consideration and at no
additional cost to the requesting party, such further assignments, certificates,
instruments, records, or other documents, assurances or things as may be
reasonably necessary to give full effect to this Agreement and to allow each
party fully to enjoy and exercise the rights accorded and acquired by it under
this Agreement.
14.8 Time of the Essence. Time is of the essence under this Agreement. If
the last day permitted for the giving of any notice or the performance of any
act required or permitted under this Agreement falls on a day which is not a
Business Day, the time for the giving of such notice or the performance of such
act shall be extended to the next succeeding Business Day.
14.9 Late Payments. If either Party fails to pay the other any amounts when
due under this Agreement, the amounts due will bear interest from the due date
to the date of payment at the Applicable Rate.
14.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.11 Entire Agreement. This Agreement (including the Exhibits, the Company
Disclosure Statement, the Pegasus Disclosure Statement and any other documents,
instruments and certificates referred to herein, which are incorporated in and
constitute a part of this Agreement) contains the entire agreement of the
Parties
I-57
<PAGE>
and supersedes all prior oral or written agreements, understandings and
representations to the extent that they relate in any way to the subject matter
hereof, excluding the Confidentiality Agreement, which shall survive the
execution and delivery of, and any termination of, this Agreement.
14.12 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Parties. No waiver by any party of any default, misrepresentation or breach of
warranty or covenant hereunder shall be valid unless the same shall be in
writing and signed by the Person against whom its enforcement is sought, and no
such waiver whether intentional or not, shall be deemed to extend to any prior
or subsequent default, misrepresentation or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.13 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. If an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean "including without limitation." If any Party has
breached any representation, warranty or covenant contained herein in any
respect, the fact that there exists another representation, warranty or covenant
relating to the same subject matter (regardless of the relative levels of
specificity) which the Party has not breached shall not detract from or mitigate
the fact that the party is in breach of the first representation, warranty or
covenant.
14.14 Expenses. Except as otherwise provided in this Agreement, each Party
shall bear its own costs and expenses (including legal fees and expenses and
accountants' fees and expenses) incurred in connection with the negotiation of
this Agreement, the performance of its obligations and the consummation of the
transactions contemplated hereby.
14.15 Disclosure. The terms of this Agreement are confidential and no Party
shall disclose to any individual or entity such terms, except that (i) any Party
may make such disclosure about this Agreement and information related thereto as
is required (in the opinion of its counsel) by law (including filings and other
disclosure required under the Securities Act or the Exchange Act); (ii) any
Party may make such disclosure to its Representatives and lenders who agree to
keep the terms of this Agreement confidential; (iii) the Parties may disclose
the terms of this Agreement to the NRTC and DirecTV, Inc.; (iv) the Sellers may
disclose the terms of this Agreement to the Shareholders; (v) Pegasus may
disclose the terms of this Agreement to its shareholders; and (vi) no Party
shall have any obligation to refrain from disclosing any matter that shall have
become a matter of public knowledge other than by a breach of such Party's
obligations hereunder. Each of the Parties will be responsible for any damages
resulting from the unauthorized disclosure of the terms of this Agreement by it
or its Representatives.
14.16 Shareholder Representative. Each Shareholder irrevocably makes,
constitutes and appoints John R. Hager as its sole and exclusive agent (the
"Shareholder Representative") and authorizes and empowers it to fulfill the role
of Shareholder Representative under this Merger Agreement. If a successor
Shareholder Representative is needed, such successor shall be appointed by
William P. Collatos. Each Shareholder hereby makes, constitutes and appoints the
Shareholder Representative as such Shareholder's true and lawful attorney in
fact and agent, for such Shareholder and in such Shareholder's name, (i) to
participate in the closing on such Shareholder's behalf, to take all actions
which might be taken in connection therewith and with the transactions
contemplated thereby, (ii) to receive all notices to the Shareholders, (iii) to
make and settle claims against the Pegasus Parties relating to or arising from
the Merger Agreement or the transactions contemplated hereby, and to respond to
and settle all claims made by the Pegasus Parties related to or arising from the
Merger Agreement or the transactions contemplated hereby, (iv) to execute and
deliver the Escrow Agreement and all notices and instructions contemplated
thereunder, and (v) to execute and deliver all other instruments and documents
of every kind incident to any of the foregoing and to consent or approve or
refrain from consenting or approving with respect to all matters incident to the
foregoing, for all intents and purposes and with the same effect as such
Shareholder could do personally, and each Shareholder hereby ratifies and
I-58
<PAGE>
confirms as its own act all that the Shareholder Representative shall do or
cause to be done pursuant to the provisions hereof. The Pegasus Parties may
conclusively rely on the actions taken by the Shareholder Representative
pursuant to the authorization granted by this Section to be binding on all the
Shareholders hereunder for all purposes.
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement as
of the day and year first above written.
PEGASUS COMMUNICATIONS CORPORATION
By: /s/ Ted S. Lodge
----------------------------------
Ted S. Lodge,
Senior Vice President
PEGASUS GSS MERGER SUB, INC.
By: /s/ Ted S. Lodge
-----------------------------------
Ted S. Lodge,
Senior Vice President
Principal Pegasus Shareholders:
PEGASUS CAPITAL, L.P.
By: Pegasus Capital, Ltd., General Partner
By: /s/ Ted S. Lodge
-----------------------------------
Ted S. Lodge,
Senior Vice President
PEGASUS COMMUNICATIONS HOLDINGS, INC.
By: /s/ Ted S. Lodge
-----------------------------------
Ted S. Lodge,
Senior Vice President
I-59
<PAGE>
GOLDEN SKY HOLDINGS, INC.
By: /s/ Rodney A. Weary
-----------------------------------
Rodney A. Weary
President
Principal Company Shareholders:
ALTA SUBORDINATED DEBT PARTNERS III, L.P.
By: Alta Subordinated Debt Management III, L.P.
By: /s/ Eileen McCarthy
-----------------------------------
Eileen McCarthy
General Partner
ALTA COMMUNICATIONS VI, L.P.
By: Alta Communications VI Management Partners, L.P.
By: /s/ Eileen McCarthy
-----------------------------------
Eileen McCarthy
General Partner
ALTA-COMM S BY S, LLC
By: /s/ Eileen McCarthy
-----------------------------------
Eileen McCarthy
Member
HARBOURVEST PARTNERS V-DIRECT FUND L.P.
By: HVP V-Direct Associates, LLC,
Its General Partner
By: HarbourVest Partners, LLC,
Its Managing Member
By: /s/ William A. Johnston
--------------------------------
William A. Johnston
Partner
I-60
<PAGE>
SPECTRUM EQUITY INVESTORS L.P.
By: Spectrum Equity Associates, L.P.,
General Partner
By: /s/ William P. Collatos
------------------------------------
William P. Collatos
General Partner
SPECTRUM EQUITY INVESTORS II, L.P.
By: Spectrum Equity Associates II, L.P.,
General Partner
By: /s/ William P. Collatos
------------------------------------
William P. Collatos
General Partner
NORWEST EQUITY PARTNERS VI,
A MINNESOTA LIMITED PARTNERSHIP
By: Itasca Partners V, L.L.P.,
General Partner
By: /s/ Erik Torgerson
------------------------------------
Erik Torgerson
Partner
BANCBOSTON VENTURES INC.
By: /s/ William O. Charman
------------------------------------
William O. Charman
Vice President
I-61
<PAGE>
ANNEX II
FORM OF VOTING AGREEMENT
AMENDED AND RESTATED VOTING AGREEMENT, dated _________________, 2000,
among PEGASUS COMMUNICATIONS CORPORATION, a Delaware corporation (the
"Company"); COLUMBIA CAPITAL CORPORATION, a Virginia corporation, and COLUMBIA
DBS, INC., a Virginia corporation; FLEET VENTURE RESOURCES, INC., a Rhode
Island corporation, FLEET EQUITY PARTNERS VI, L.P., a Delaware limited
partnership, CHISHOLM PARTNERS III, L.P., a Delaware limited partnership, and
KENNEDY PLAZA PARTNERS, a Rhode Island general partnership; SPECTRUM EQUITY
INVESTORS, L.P. and SPECTRUM EQUITY INVESTORS II, L.P. (each a Delaware limited
partnership and together referred to herein as "Spectrum"), ALTA COMMUNICATIONS
VI, L.P., a Delaware limited partnership, ALTA SUBORDINATED DEBT PARTNERS III,
L.P., a Delaware limited partnership and ALTA-COMM S BY S, LLC, a Massachusetts
limited liability company (together referred to herein as "Alta"); and PEGASUS
COMMUNICATIONS HOLDINGS, INC., a Delaware corporation, PEGASUS CAPITAL, L.P., a
Pennsylvania limited partnership, PEGASUS SCRANTON OFFER CORP, a Delaware
corporation, PEGASUS NORTHWEST OFFER CORP, a Delaware corporation, and MARSHALL
W. PAGON, an individual.
The Company, Pegasus DTS Merger Sub, Inc., a Delaware corporation ("DTS
Merger Sub"), Digital Television Services, Inc., a Delaware corporation ("DTS"),
and certain shareholders of the Company and of DTS are parties to an Agreement
and Plan of Merger dated January 8, 1998 (the "DTS Merger Agreement"). Certain
of the DTS Parties (this and certain other terms are defined in Section 1) or
certain of their equity holders were shareholders of DTS. At the closing held on
April 28, 1998, under the DTS Merger Agreement, (1) DTS Merger Sub was merged
with and into DTS, (2) DTS thereby became a wholly-owned subsidiary of the
Company, (3) certain of the DTS Parties or certain of their equity holders
received shares of Class A Common Stock as the DTS Merger Consideration, and (4)
the Company, the Pegasus Parties, the DTS Parties, and Whitney Equity Partners,
L.P., a Delaware limited partnership ("Whitney"), entered into a Voting
Agreement dated April 27, 1998 (the "Original Voting Agreement"). Whitney no
longer has the right to designate a director of the Company, pursuant to Section
4.1(b)(1) to the Original Voting Agreement.
The Company, Pegasus GSS Merger Sub, Inc., a Delaware corporation ("GSS
Merger Sub"), Golden Sky Holdings, Inc., a Delaware corporation ("GSS"), and
certain shareholders of the Company and GSS (including Spectrum and Alta) are
parties to an Agreement and Plan of Merger dated January 10, 2000 (the "GSS
Merger Agreement").
At the Closing held today under the GSS Merger Agreement, (1) GSS Merger
Sub is being merged with and into GSS, (2) GSS is thereby becoming a
wholly-owned subsidiary of the Company, and (3) Spectrum and Alta are receiving
shares of Class A Common Stock. It is a condition precedent to the Closing that
the parties hereto execute and deliver this Agreement.
PCH, PCLP, PSOC and PNOC hold all the issued and outstanding shares of
Class B Common Stock. Pagon controls PCH, PCLP, PSOC and PNOC.
NOW, THEREFORE, in consideration of the completion of the transactions
contemplated by the DTS Merger Agreement and the GSS Merger Agreement and of the
mutual covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound, the parties amend and restate the Original Voting
Agreement, effective the date first written above, to read as follows.
SECTION 1
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following terms have the
following terms have the following meanings:
"Alta": as defined in the recitals.
"Alta Designee": a person designated by Alta to serve as a director in
accordance with this Agreement.
II-1
<PAGE>
"Audit Committee": the audit committee of the Board of Directors referred
to in Section 3.4.
"Board of Directors": the board of directors of the Company.
"Chisholm": Chisholm Partners III, L.P., a Delaware limited partnership.
"Chisholm Designee": a person designated by Chisholm to serve as a
director in accordance with this Agreement.
"Class A Common Stock": the Company's Class A Common Stock, par value
$0.01 per share.
"Class B Common Stock": the Company's Class B Common Stock, par value
$0.01 per share.
"Columbia Capital": Columbia Capital Corporation, a Virginia corporation.
"Columbia Designee": a person designated by Columbia Capital to serve as a
director in accordance with this Agreement.
"Columbia Parties": Columbia Capital and Columbia DBS, Inc., a Virginia
corporation.
"Columbia Principal": each of James B. Murray, Jr., David P. Mixer, Mark
R. Warner, Robert B. Blow, Mark J. Kington, Harry F. Hopper, III, R. Philip
Herget, III, Neil P. Byrne, Barton Schneider and James Fleming.
"Committee": the Audit Committee, the Compensation Committee or the
Nominating Committee.
"Compensation Committee": the compensation committee of the Board of
Directors referred to in Section 3.4.
"Covered Shares": (a) the shares of Class A Common Stock received as the
DTS Merger Consideration by the shareholders of DTS that are parties to this
Agreement; (b) the shares of Class A Common Stock received as the GSS Merger
Consideration by Spectrum and Alta; and (c) all shares of voting securities of
the Company now or hereafter beneficially owned (within the meaning of the
Securities Exchange Act of 1934) by PCH, PCLP, PSOC, PNOC or Pagon.
"Designation Right Loss Event": With respect to any person, any of the
following, as determined by a majority of the Independent Directors (whose
determination shall be conclusive):
(a) such person's designee as a director commits a breach of fiduciary
duty to the Company or a material violation of any federal or state
securities law in connection with the purchase or sale of any of the
Company's securities;
(b) such person (or, in the case of Columbia Capital, any Columbia
Principal who owns at the time 100,000 or more shares of Class A Common
Stock) commits a material violation of any federal or state securities law
in connection with the purchase or sale of any of the Company's securities;
(c) such person materially breaches its or his noncompetition or
confidentiality agreement with the Company, if any;
(d) such person shall own, control, manage or be financially
interested, directly or indirectly, in any business (other than a less than
5% interest in a publicly held company) that competes with the Company or
any of its Subsidiaries in any geographic area in which the Company does
business; but this paragraph (d) shall not apply (1) to any investment held
on November 5, 1997, by any of the DTS Parties or their Affiliates or any
investment held on January 10, 2000, by any of the GSS Parties or their
respective Affiliates, (2) to any investment in a business that comes into
competition with the Company or any of its Subsidiaries as a result of the
Company's acquisition or establishment of a new business or its expansion
into a geographic area in which it did not previously operate if such
person shall have held such investment before the Company's management
proposes to the Board of Directors such acquisition, establishment or
expansion, (3) to any investment in an investment fund or pool that itself
makes or holds an investment in a competitive business if such person (A)
is regularly engaged in making investment of that kind and (B) does not
have the power to, and does not in fact, exercise an influence on the
decision of the fund or pool in making the investment in the competitive
business, and (4) unless
II-2
<PAGE>
prior to the exercise by a majority of the Independent Directors of the
right to terminate the relevant person's right to designate a director,
such person is given notice of the potential applicability of this
paragraph (d) and fails to cure or modify the relationship to the
satisfaction of a majority of the Independent Directors within 30 days
after the notice is given; provided, however, that in no event shall this
subsection (d) apply to any Person associated with, related to, affiliated
with, controlled by, controlling or under common control with, Alta or
Spectrum other than Spectrum Equity Investors II, L.P., Spectrum Equity
Investors, L.P., Alta Communications VI, L.P., Alta Subordinated Debt
Partners III, L.P. and Alta-Comm S by S, LLC.
(e) such person shall violate Section 2; or
(f) any director designated by such person shall take or omit to take
any action in his capacity as a director or Committee member in a manner
materially inconsistent with this Agreement, and the Person who has the
right to designate such director has not obtained such director's
resignation as a director within 30 days after being requested to do so by
the Board of Directors.
"Director" or "director": a member of the Board of Directors.
"DTS": as defined in the recitals.
"DTS Designee": a Columbia Designee or a Chisholm Designee.
"DTS Merger Agreement": as defined in the recitals.
"DTS Merger Consideration": the "Merger Consideration" as defined in the
DTS Merger Agreement.
"DTS Parties": the Columbia Parties and the Fleet Parties.
"Fleet Parties": Chisholm, Fleet Venture Resources, Inc., a Rhode Island
corporation, Fleet Equity Partners VI, L.P., a Delaware limited partnership,
and Kennedy Plaza Partners, a Rhode Island general partnership.
"GSS": as defined in the recitals.
"GSS Designee": a Spectrum Designee or an Alta Designee.
"GSS Merger Agreement": as defined in the recitals.
"GSS Merger Consideration": the "Merger Consideration" as defined in the
GSS Merger Agreement.
"GSS Parties": Spectrum and Alta.
"Independent Director": a natural person who (a) is not Marshall W. Pagon
or a Columbia Principal or an officer, employee or principal of the Company,
PCH, PCLP, PSOC, PNOC, any of the Columbia Parties, any of the Fleet Parties,
DTS, Spectrum, Alta, GSS, or any of their subsidiaries or affiliates, or any
spouse or sibling, or any ancestor or lineal descendant of any such person,
spouse or sibling ("immediate family"), (b) is not a former officer or employee
of any such person, (c) does not in addition to such person's role as a
director, act on a regular basis, either individually or as a member or
representative of an organization, serving as a professional adviser, legal
counsel or consultant to any such person, if, in the reasonable discretion of
the Nominating Committee, such relationship is material to any such person, and
(d) does not represent, and is not a member of the immediate family of, a person
who would not satisfy the requirements of the preceding clauses (a), (b) and (c)
of this sentence. A person who has been or is a partner, officer or director of
an organization that has customary commercial, industrial, banking or
underwriting relationships with any of the persons named in clause (a) of the
preceding sentence that are carried on in the ordinary course of business and on
an arms-length basis and who otherwise satisfies the requirements set forth in
clauses (a), (b), (c) and (d) of the first sentence of this definition, may
qualify as a Independent Director unless, in the reasonable discretion of the
Nominating Committee, such person is not independent or may not be independent
with respect to the management of the business and affairs of the Company. A
person shall not be disqualified as an Independent Director under clause (b),
(c) or (d) above solely because of such person's (or a member of
II-3
<PAGE>
such person's immediate family's) having served in any capacity with a business
(other than DTS or GSS) acquired by the Company, or solely because such person
is a representative or designee of any such business (whether or not the Company
shall enter into a consulting agreement with such person in connection with such
acquisition).
"Pagon": Marshall W. Pagon, an individual.
"Pagon Designee": a person designated by Pagon (or, in the event of his
death or incapacity, by PCLP or another person appointed by Pagon for this
purpose) to serve as a director in accordance with this Agreement.
"PCH": Pegasus Communications Holdings, Inc., a Delaware corporation.
"PCLP": Pegasus Capital, L.P., a Pennsylvania limited partnership.
"PNOC": Pegasus Northwest Offer Corp, a Delaware corporation.
"PSOC": Pegasus Scranton Offer Corp, a Delaware corporation.
"Permitted Transferee": as defined in the Company's certificate of
incorporation on the date hereof.
"Person" or "person": an individual, a partnership (general or limited),
corporation, limited liability company, joint venture, business trust,
cooperative, association or other form of business organization, whether or not
regarded as a legal entity under applicable law, a trust (inter vivos or
testamentary), an estate of a deceased, insane or incompetent person, a
quasi-governmental entity, a government or any agency, authority, political
subdivision or other instrumentality thereof, or any other entity.
"Spectrum": as defined in the recitals.
"Spectrum Designee": a person designated by Spectrum to serve as a
director in accordance with this Agreement.
SECTION 2
VOTING
Section 2.1 Each party warrants to the others that, as of the date of this
Agreement, it has voting control over the number of Covered Shares set forth
opposite its name on Exhibit A. Each party shall vote all Covered Shares held by
it, or over which it has the power to direct the voting, as specified in this
Agreement and shall take any and all other action necessary or appropriate to
implement the provisions of this Agreement, including without limitation
proposing and voting on amendments to the Company's certificate of incorporation
and by-laws as may be necessary to fully implement the provisions hereof. No
party shall permit any Covered Shares held by it, or over which it has the power
to direct the voting, to be voted in any manner inconsistent with this
Agreement. "Voting" includes the execution of written consents.
SECTION 3
COMPOSITION OF BOARD OF DIRECTORS AND COMMITTEES
Section 3.1 Board of Directors. Except as otherwise provided in Section
3.3, the Board of Directors shall consist of eleven members, of whom:
(a) four will be Pagon Designees;
(b) one will be a Columbia Designee until Columbia Capital ceases to
have the right to designate a director under Section 4.1(a);
(c) one will be a Chisholm Designee until Chisholm ceases to have the
right to designate a director under Section 4.1(b);
(d) one will be a Spectrum Designee until Spectrum ceases to have the
right to designate a director under Section 4.1(c);
(e) one will be an Alta Designee until Alta ceases to have the right to
designate a director under Section 4.1(d); and
II-4
<PAGE>
(f) three will be Independent Directors, who shall be the persons
identified in Section 3.5(f) (so long as they continue to satisfy the
definition of "Independent Director") or their successors (who satisfy the
definition of "Independent Director") nominated by the Nominating
Committee.
Section 2.1 shall apply to the election of directors specified in this Section
3.1.
Section 3.2 Vacancies Caused by Resignation, etc. of Designated Directors. Any
vacancy in the Board of Directors or a Committee caused by the resignation,
removal, incapacity or death of a Pagon Designee, a DTS Designee or a GSS
Designee shall be filled by a person designated by the party that had the right
to designate the resigned, removed, incapacitated or dead director or Committee
member, except as provided in Section 3.3. Section 2.1 shall apply to the
election of directors and Committee members specified in this Section 3.2.
Section 3.3 Other Vacancies.
(a) If Columbia Capital, Chisholm, Spectrum or Alta ceases to have the
right to designate a director pursuant to Section 4.1, such party shall
promptly cause the director designated by it to resign if so requested by
Pagon (or, in the event of his death or incapacity, by PCLP or another
person appointed for Pagon for this purpose), except that in case of the
loss pursuant to Section 4.1(a)(1) or (b)(1) or of the right of Columbia
Capital or Chisholm to designate a director, as the case may be, which also
results in the termination of this Agreement pursuant to Section 4.3, such
party shall cause the director designated by it to resign not later than
the date on which this Agreement terminates.
(b) Failing any resignation required by subsection (a), the affected
director or directors may be removed in the manner provided by law.
(c) If a vacancy occurs in the Board of Directors by reason of any
required resignation or permitted removal described in subsection (a) or
(b), the Board of Directors (as constituted after giving effect to such
vacancy) shall either (1) reduce the number of directors to eliminate the
vacancy or (2) instruct the Nominating Committee to nominate an Independent
Director to fill the vacancy.
(d) The size of the Board of Directors may be increased as provided by
law. Each director elected to fill any position created by an increase in
the size of the Board of Directors shall be an Independent Director.
(e) No party to this Agreement will take any action to fill a vacancy
created under this Section 3.3 by a person who is not an Independent
Director. Otherwise, Section 2.1 shall not apply to the election of
directors to fill vacancies created under this Section 3.3.
Section 3.4 Committees. The existence of the Audit Committee, the
Nominating Committee and the Compensation Committee shall continue. Each
Committee shall consist of three directors who shall be (1) a director
designated by Pagon, (2) a director designated by a majority of the DTS
Designees and GSS Designees then serving as directors; and (3) one of the
Independent Directors specified in Section 3.1(f) designated by the Board of
Directors in the manner provided by law. The Audit Committee and the
Compensation Committee shall have the powers and functions of the present audit
committee and compensation committee of the Board of Directors. The Nominating
Committee shall nominate all persons (other than the Pagon Designees, the DTS
Designees and the GSS Designees) to serve as directors, which nominee shall be
subject to election by the shareholders of the Company or subject to appointment
by the Board of Directors to fill vacancies. The Company shall not establish a
committee with the authority to act on all or substantially all matters on which
the Board of Directors may act (commonly known as an "executive committee")
without the consent of a majority of the DTS Designees and the GSS Designees as
a single group.
Section 3.5 Initial Designations. The parties make the following
designations pursuant to this Section 3:
(a) The Pagon Designees are Pagon, Robert N. Verdecchio,
_______________ and ____________.
(b) The Columbia Designee is Harry F. Hopper III.
(c) The Chisholm Designee is Riordon B. Smith.
II-5
<PAGE>
(d) The Spectrum Designee is William P. Collatos.
(e) The Alta Designee is Robert Benbow.
(f) The Independent Directors specified in Section 3.1(f) are
_____________________, _______________ and _______________, each of whom is
currently a director of the Company.
Immediately following the execution of this Agreement, the Board of Directors
shall take such action as shall be required to create vacancies on the Board of
Directors and to elect persons to the Board of Directors as specified in this
Section 3.5. The parties will make their designations to the Committees at a
later date.
Section 3.6 Subsequent Designations. Except as provided in Section 3.5,
each party to this Agreement that is entitled to designate one or more directors
or Committee members shall do so by written notice to each of the other parties
to this Agreement and to the Secretary of the Company, signed by the Person
making such designation.
Section 3.7 Removal. Any director may be removed by the shareholders of the
Company in the manner provided by law, except that no DTS Designee or GSS
Designee may be removed without the written consent of the party that designated
him unless such party shall have ceased to have the right to designate a
director pursuant to Section 4.1. Section 2.1 shall apply to this Section 3.7.
Section 3.8 Chairman, President and Chief Executive Officer. For so long as
this Agreement is in effect, Pagon will be elected by the Board of Directors as
Chairman, President and Chief Executive Officer of the Company, except in case
of incapacity.
Section 3.9 Separate Voting Rights of Other Classes of Stock. If the
holders of any class of the Company's preferred stock shall become entitled to
elect directors in accordance with the terms of such preferred stock, this
Agreement shall not apply to any additional directorships to which their rights
apply.
Section 3.10 Failure or Delay in Making Designations. No failure or delay
by any party in making any designation of a director or Committee member
[including the fact that Pagon has made only [_____] of his four designations in
Section 3.5(a))]shall constitute a waiver of such party's right to make
designations in the future.
SECTION 4
TERMINATION
Section 4.1 Termination of Designation Rights.
(a) Columbia Capital shall cease to have the right to designate a
director if at any time (1) the Columbia Parties and the Columbia
Principals collectively own less than half the shares of Class A Common
Stock received by the Columbia Parties and the Columbia Principals pursuant
to the DTS Merger Agreement, or (2) a Designation Right Loss Event occurs
with respect to any Columbia Party or any Columbia Principal.
(b) Chisholm shall cease to have the right to designate a director if
at any time (1) the Fleet Parties collectively own less than half the
Covered Shares received by them pursuant to the DTS Merger Agreement, or
(2) a Designation Right Loss Event occurs with respect to any Fleet Party.
(c) Spectrum shall cease to have the right to designate a director if
at any time Spectrum owns less than half the Covered Shares received by
Spectrum pursuant to the GSS Merger Agreement, or (2) a Designation Right
Loss Event occurs with respect to Spectrum.
(d) Alta shall cease to have the right to designate a director if at
any time Alta owns less than half the Covered Shares received by Alta
pursuant to the GSS Merger Agreement, or (2) a Designation Right Loss Event
occurs with respect to Alta.
(e) For purposes of this Section 4.1, a party no longer owns shares of
Class A Common Stock distributed to its equity holders unless the
distributee is also a party to this Agreement on the date hereof or, in the
case of the Columbia Parties, is a Columbia Principal. Continuing ownership
of Covered Shares shall be determined by the specific identification
method.
II-6
<PAGE>
(f) At the Company's request from time to time, Columbia Capital,
Chisholm, Spectrum and Alta shall certify (and Columbia Capital and
Chisholm shall cause the Columbia Principals and the Fleet Parties,
respectively, to certify) to the Company in writing, the number of shares
of Class A Common Stock received as part of the DTS Merger Consideration or
the GSS Merger Consideration, as the case may be, that each such person
continues to own. If requested by the Company, each such person will
provide the Company with evidence reasonably substantiating such person's
continuing ownership of such shares. If any such person fails to deliver
such certification or evidence to the Company within ten days after the
Company delivers its written request therefor to Columbia Capital,
Chisholm, Spectrum or Alta, such person shall be deemed for all purposes of
this Agreement not to own any such shares of Class A Common Stock.
Section 4.2 Termination of Voting Obligations.
(a) The obligations of any party under Section 2.1 shall terminate with
respect to any Covered Share upon the sale or other transfer of such
Covered Share to any person who is not a party to this Agreement and is not
required by subsection (b) to become a party to this Agreement.
(b) PCH, PCLP, PSOC or PNOC shall not sell or otherwise transfer any
Covered Shares to a Permitted Transferee unless the Permitted Transferee
agrees in writing to be bound by, and to become a party to, this Agreement
(including the requirements of this subsection) to the same extent as its
transferor, as it relates to the Covered Shares so transferred.
(c) The obligations of Spectrum and Alta under Section 2.1 shall
terminate upon the resignation of the Spectrum Designee or the Alta
Designee, as the case may be, from the Board of Directors, provided that
the vacancy caused thereby is not filled by Spectrum or Alta, as the case
may be, pursuant to Section 3.2 within five days of such resignation.
Section 4.3 Termination of Agreement. This Agreement shall terminate as to
each of Columbia Capital, Chisholm, Spectrum and Alta as of the date that such
party ceases to have the right to designate a Director pursuant to Section 4.1.
This Agreement shall terminate in its entirety on the later of (1) the date of
the meeting of the Company's shareholders at which directors are scheduled to be
elected next following the date on which both of Columbia Capital and Chisholm
shall cease to have the right to designate a director pursuant to Section 4.1,
or (2) the last date on which either Spectrum or Alta has the right to designate
a director pursuant to Section 4.1. Neither Section 2 nor the requirements of
this Agreement relating to actions by the Nominating Committee shall apply to
the election of directors to occur at such meeting.
SECTION 5
MISCELLANEOUS
Section 5.1 Notices. Except as otherwise provided below, whenever it is
provided in this Agreement that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties hereto, or whenever any of the parties hereto, wishes to provide
to or serve upon the other party any other communication with respect to this
Agreement, each such notice, demand, request, consent, approval, declaration or
other communication shall be in writing and shall be delivered in person or sent
by telecopy, as specified in the DTS Merger Agreement or the GSS Merger
Agreement, as the case may be.
Section 5.2 Entire Agreement. This Agreement represents the entire
agreement and understanding among the parties hereto with respect to the subject
matter hereof and supersedes any and all prior oral and written agreements,
arrangements and understandings among the parties hereto with respect to such
subject matter; and this Agreement can be amended, supplemented or changed, and
any provision hereof can be waived or a departure from any provision hereof can
be consented to, only by a written instrument making specific reference to this
Agreement signed by all parties to this Agreement other than (a) the Columbia
Parties if Columbia Capital shall no longer have the right to designate a
director pursuant to Section 4.1, (b) the Fleet Parties if Chisholm shall no
longer have the right to designate a director pursuant to Section 4.1, (c)
Spectrum if Spectrum shall no longer have the right to designate any director
pursuant to Section 4.1, or (d) Alta if Alta shall no longer have the right to
designate any director pursuant to Section 4.1.
II-7
<PAGE>
Section 5.3 Paragraph Headings. The paragraph headings contained in this
Agreement are for general reference purposes only and shall not affect in any
manner the meaning, interpretation or construction of the terms or other
provisions of this Agreement.
Section 5.4 Applicable Law. This Agreement shall be governed by, construed
and enforced in accordance with the laws of Delaware applicable to contracts to
be made, executed, delivered and performed wholly within such state and, in any
case, without regard to the conflicts of law principles of such state.
Section 5.5 Severability. If any provision of this Agreement shall be held
by any court of competent jurisdiction to be illegal, void or unenforceable,
such provision shall be of no force and effect, but the illegality or
unenforceability of such provision shall have no effect upon and shall not
impair the enforceability of any other provision of this Agreement.
Section 5.6 No Waiver. The failure of any party at any time or times to
require performance of any provision hereof shall not affect the right at a
later time to enforce the same. No waiver by any party of any condition, and no
breach of any provision, term, covenant, representation or warranty contained in
this Agreement, whether by conduct or otherwise, in any one or more instances,
shall be deemed to be construed as a further or continuing waiver of any such
condition or of the breach of any other provision, term, covenant,
representation or warranty of this Agreement.
Section 5.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same original instrument. Not all
parties need sign the same counterpart. Delivery by facsimile of a signature
page to this Agreement shall have the same effect as delivery of an original
executed counterpart.
Section 5.8 Successors and Assigns. Subject to Section 4.1(d), this
Agreement shall inure to the benefit of and be binding upon the successors,
assigns and transferees of each of the parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
the date first written above.
PEGASUS COMMUNICATIONS CORPORATION
By:____________________________________________
[Name]
[Title]
PEGASUS CAPITAL, L.P.
By: Pegasus Capital, Ltd., General Partner
By:____________________________________________
[Name]
[Title]
PEGASUS COMMUNICATIONS HOLDINGS, INC.
By:____________________________________________
[Name]
[Title]
PEGASUS SCRANTON OFFER CORP
By:____________________________________________
[Name]
[Title]
II-8
<PAGE>
PEGASUS NORTHWEST OFFER CORP
By:____________________________________________
[Name]
[Title]
_______________________________________________
Marshall W. Pagon
FLEET VENTURE RESOURCES, INC.
By:____________________________________________
Riordon B. Smith
Senior Vice President
FLEET EQUITY PARTNERS VI, L.P.
By: Fleet Growth Resources II, Inc.
Its General Partner
By:____________________________________________
Riordon B. Smith
Senior Vice President
CHISHOLM PARTNERS III, L.P.
By: Silverado III L.P., its general partner
By: Silverado III Corp., its general partner
By:____________________________________________
Riordon B. Smith
Senior Vice President
KENNEDY PLAZA PARTNERS
By:____________________________________________
Riordon B. Smith
Senior Vice President
COLUMBIA CAPITAL CORPORATION
By:____________________________________________
Neil P. Byrne
Vice President
COLUMBIA DBS, INC.
By:____________________________________________
Neil P. Byrne
Vice President
SPECTRUM EQUITY INVESTORS, L.P.
By: Spectrum Equity Associates, L.P., its
general partner
By:____________________________________________
William P. Collatos
General Partner
II-9
<PAGE>
SPECTRUM EQUITY INVESTORS II, L.P.
By: Spectrum Equity Associates II, L.P., its
general partner
By:____________________________________________
William P. Collatos
General Partner
ALTA COMMUNICATIONS VI, L.P.
By: Alta Communications VI Management
Partners, L.P., its general partner
By:____________________________________________
Eileen McCarthy
General Partner
ALTA SUBORDINATED DEBT PARTNERS III, L.P.
By: Alta Subordinated Debt Management
Partners, L.P., its general partner
By:____________________________________________
Eileen McCarthy
General Partner
ALTA-COMM S BY S, LLC
By:____________________________________________
Eileen McCarthy
Member
II-10
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Covered Shares
---------------------------------------------
Shareholder Class A Common Stock Class B Common Stock
- ------------------------------------------- ---------------------- ---------------------
<S> <C> <C>
Fleet Venture Resources, Inc. 406,186
Fleet Equity Partners VI, L.P. 174,079
Chisholm Partners III, L.P. 147,611
Kennedy Plaza Partners 10,179
Columbia Capital Corporation 0
Columbia DBS, Inc. 0
Spectrum Equity Partners, L.P. [TBD]
Spectrum Equity Partners II, L.P. [TBD]
Alta Communications VI, L.P. [TBD]
Alta Subordinated Debt Partners III, L.P. [TBD]
Alta-Comm S By S LLC [TBD]
Pegasus Capital, L.P. 1,217,348
Pegasus Communications Holdings, Inc. 3,123,856
Pegasus Northwest Offer Corp. 122,338
Pegasus Scranton Offer Corp. 118,358
Marshall W. Pagon [TBD]
</TABLE>
II-11
<PAGE>
ANNEX III
AMENDMENT TO THE PEGASUS COMMUNICATIONS RESTRICTED STOCK PLAN
WHEREAS, Pegasus Communications Corporation (the "Company") amended and
restated the Pegasus Communications Restricted stock Plan (the "Plan")
effective as of December 18, 1998;
WHEREAS, Section 9 of the Plan provides that the Company may amend the
Plan;
WHEREAS, the Company desires to amend the Plan to increase the number of
shares of Class A common stock of the Company available for awards under the
Plan;
NOW, THEREFORE, subject to the requisite shareholder approval, the first
sentence of Section 5 of the Plan is amended to read as follows:
SECTION 5
Stock
The number of shares of Common Stock that may be subject to Awards under
the Plan shall be 750,000 shares, subject to adjustment as hereinafter provided.
III-1
<PAGE>
ANNEX IV
AMENDMENT TO THE PEGASUS COMMUNICATIONS 1996 STOCK OPTION PLAN
WHEREAS, Pegasus Communications Corporation (the "Company") amended and
restated the Pegasus Communications 1996 Stock Option Plan (the "Plan")
effective April 23, 1999;
WHEREAS, Section 12 of the Plan provides that the Company may amend the
Plan;
WHEREAS, the Company desires to amend the Plan (i) to increase the number
of shares of Class A common stock of the Company ("Common Stock") that may be
subject to options under the Plan, (ii) to increase the number of shares of
Common Stock that may be subject to options granted to any key employee over the
life of the Plan; and (iii) to provide for the assumption of certain outstanding
Golden Sky Holdings, Inc. ("Golden Sky") options;
NOW, THEREFORE, the Plan is amended as follows:
1. The first sentence of Section 4 is amended to read as follows,
effective on the date requisite shareholder approval of this Amendment is
obtained;
4. Stock. Options may be granted under the Plan to purchase up to a
maximum of 3,000,000 shares of Class A common stock of the Company ("Common
Stock"); provided, however, that no Key Employee shall receive Options for
more than [1,000,000] shares of the Company's Common Stock over the life of
the Plan. * * *
2. A new Section 23 is added following Section 22 to read as follows,
effective at the Effective Time (as defined in the Merger Agreement hereinafter
mentioned):
20. Special Provisions Regarding Golden Sky Holdings, Inc. Golden Sky
Holdings, Inc. ("Golden Sky") became a wholly-owned subsidiary of the
Company by means of the merger (the "Merger") of a wholly-owned subsidiary
of the Company into Golden Sky pursuant to the Agreement and Plan of Merger
dated January 10, 2000 (the "Merger Agreement") among the Company, Golden
Sky, Pegasus GSS Merger Sub, Inc. and certain stockholders of the Company
and Golden Sky. Section 2.12 of the Merger Agreement provides that the
Company will assume certain outstanding Golden Sky options specified
therein. Section 2.12 of the Merger Agreement also provides that such
Golden Sky options will be replaced with options (the "Replacement
Options") to purchase the number of shares of Common Stock equal to the
"conversion ratio" (as defined in the Merger Agreement) times the number of
shares of Golden Sky common stock issuable upon the exercise of such
options, for an exercise price equal to the exercise price applicable to
such options divided by the "conversion ratio."
Each Replacement Option shall be exercisable under the Plan in
accordance with the terms of the agreement entered into between the Company
and the holder of the Replacement Option (the "Replacement Agreement"), the
terms of which shall govern in the event of any conflict with the
provisions of the Plan.
The following provisions of the Plan shall not apply to the Replacement
Options:
(a) Section 11 ("Change in Control");
(b) Section 7(d)(2)(D) (regarding payment of exercise price with the
proceeds of a loan from the Company); and
(c) Section 7(m) (regarding payment of income tax obligations with the
proceeds of a loan from the Company).
In addition, any provision of the Plan that would provide an additional
benefit (within the meaning of Section 424(a)(2) of the Code and Treasury
Regulations thereunder) shall not apply to the Replacement Options.
IV-1
<PAGE>
ANNEX V
PROPOSED AMENDMENT TO PEGASUS' CERTIFICATE OF INCORPORATION TO
INCREASE AUTHORIZED CLASS A COMMON STOCK, CLASS B COMMON STOCK,
NON-VOTING COMMON STOCK AND PREFERRED STOCK
RESOLVED, that the amendment of the first paragraph of Article FOURTH of
Pegasus's Certificate of Incorporation to read in its entirety as follows (the
"Amendment") is hereby proposed and declared to be advisable and in the best
interests of Pegasus:
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is 520,000,000 shares, divided into 250,000,000
shares of Class A Common Stock, par value $0.01 per share, 50,000,000
shares of Class B Common Stock, par value $0.01 per share, 200,000,000
shares of Non-Voting Common Stock, par value $0.01 per share, and
20,000,000 shares of Preferred Stock, par value $0.01 per share.
FURTHER RESOLVED, that the Amendment be submitted for action to the
stockholders of Pegasus entitled to vote thereon.
FURTHER RESOLVED, that upon stockholder approval of the Amendment, each of
the President, any Vice President, the Chief Financial Officer, the Secretary
and any Assistant Secretary or any of them (herein the "Designated Officers,"
which shall refer to any or all of them) is hereby severally authorized to
execute and file on behalf of Pegasus such certificate or certificates as are
required to effectuate the Amendment under Delaware law and to take such other
actions as such Designated Officer deems necessary or appropriate to carry out
the foregoing resolutions; and the execution by any Designated Officer of any
such documents or the performance of any Designated Officer of any such act in
connection with the foregoing resolutions shall conclusively establish the
Designated Officer's authority therefor from Pegasus and approval and
ratification by Pegasus of the documents so executed and the actions so taken.
* * *
The proposed amendment reflects changes to the authorized number of shares
of Class A common stock, Class B common stock and preferred stock. These changes
reflect separate proposals (Proposals 4, 5, 6 and 7 on the Form of Proxy), and
shall be voted upon separately. Neither change is dependent upon the other.
V-1
<PAGE>
ANNEX VI
[LETTERHEAD OF CIBC WORLD MARKETS CORP.]
January 10, 2000
The Board of Directors
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
225 City Line Avenue, Suite 200
Bala Cynwyd, Pennsylvania 19004
Members of the Board:
You have asked CIBC World Markets Corp. ("CIBC World Markets") to render a
written opinion ("Opinion") to the Board of Directors as to the fairness to
Pegasus Communications Corporation ("Pegasus"), from a financial point of view,
of the Exchange Ratio (defined below) provided for in the Agreement and Plan of
Merger, dated as of January 10, 2000 (the "Merger Agreement"), by and among
Pegasus, Pegasus GSS Merger Sub, Inc. ("Sub"), Golden Sky Holdings, Inc.
("Golden Sky"), certain principal shareholders of Pegasus and certain principal
shareholders of Golden Sky. The Merger Agreement provides for, among other
things, the merger of Sub with and into Golden Sky (the "Merger") pursuant to
which all outstanding shares of the common stock, par value $0.01 per share, of
Golden Sky ("Golden Sky Common Stock") and all outstanding series of shares of
the preferred stock, each with a par value of $0.01 per share, of Golden Sky
(collectively, "Golden Sky Preferred Stock" and, together with the Golden Sky
Common Stock, the "Golden Sky Capital Stock") will be converted into the right
to receive an aggregate of 6,500,000 shares of the Class A common stock, par
value $0.01 per share, of Pegasus ("Pegasus Class A Common Stock" and, the
aggregate number of shares of Pegasus Class A Stock into which the aggregate
number of shares of Golden Sky Capital Stock will be so converted in the Merger,
the "Exchange Ratio"), subject to downward adjustment as more fully described in
the Merger Agreement. The Merger Agreement further provides that a portion of
the shares of Pegasus Class A Common Stock issuable in the Merger will be
subject to an escrow arrangement, as more fully described in the Merger
Agreement and related escrow agreement.
In arriving at our Opinion, we:
(a) reviewed the Merger Agreement and certain related documents;
(b) reviewed audited financial statements of Pegasus and Golden Sky for
the fiscal years ended December 31, 1997 and December 31, 1998;
(c) reviewed unaudited financial statements of Pegasus and Golden Sky
for the nine months ended September 30, 1999;
(d) reviewed financial projections prepared by the managements of
Pegasus and Golden Sky;
(e) reviewed the historical market prices and trading volume for Pegasus
Class A Common Stock;
(f) held discussions with the senior managements of Pegasus and Golden
Sky with respect to the businesses and prospects for future growth of
Pegasus and Golden Sky;
(g) reviewed and analyzed certain publicly available financial data for
certain companies we deemed comparable to Pegasus and Golden Sky;
(h) reviewed and analyzed certain publicly available information for
transactions that we deemed comparable to the Merger;
(i) performed discounted cash flow analyses of Pegasus and Golden Sky
using certain assumptions of future performance provided to us by the
managements of Pegasus and Golden Sky;
VI-1
<PAGE>
The Board of Directors
Pegasus Communications Corporation
January 10, 2000
Page 2
(j) reviewed public information concerning Pegasus and affiliates of
Golden Sky; and
(k) performed such other analyses and reviewed such other information as
we deemed appropriate.
In rendering our Opinion, we relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information provided to or discussed with us by Pegasus,
Golden Sky and their respective employees, representatives and affiliates. With
respect to forecasts of future financial condition and operating results of
Pegasus and Golden Sky and the potential synergies and strategic benefits
(including the amount, timing and achievability thereof) anticipated to result
from the Merger provided to or discussed with us, we assumed, at the direction
of the managements of Pegasus and Golden Sky, without independent verification
or investigation, that such forecasts were reasonably prepared on bases
reflecting the best available information, estimates and judgments of the
managements of Pegasus and Golden Sky. We also have assumed, with the consent of
Pegasus, that the Merger will be treated as a tax-free reorganization for
federal income tax purposes and, to the extent material to our analysis, that
the Merger will be consummated on the terms described in the Merger Agreement,
without any waiver or modification of the material terms or conditions thereof.
We further have assumed, with your consent, without independent verification or
investigation, that the outcome of the existing litigation and related
proceedings between the National Rural Telecommunications Cooperative and
DirecTV, Inc. will not have a material adverse effect on the financial condition
or results of operations of Pegasus or Golden Sky. We have neither made nor
obtained any independent evaluations or appraisals of the assets or the
liabilities of Pegasus, Golden Sky or affiliated entities. We are not expressing
any opinion as to the underlying valuation, future performance or long-term
viability of Pegasus or Golden Sky, or the price at which the Pegasus Class A
Common Stock will trade subsequent to announcement or consummation of the
Merger. We were not requested to, and we did not, participate in the negotiation
or structuring of the Merger. Our Opinion is necessarily based on the
information available to us and general economic, financial and stock market
conditions and circumstances as they exist and can be evaluated by us on the
date hereof. It should be understood that, although subsequent developments may
affect this Opinion, we do not have any obligation to update, revise or reaffirm
the Opinion.
As part of our investment banking business, we are regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes.
We have acted as financial advisor to the Board of Directors of Pegasus in
rendering this Opinion and will receive a fee upon the delivery of this Opinion.
We have in the past provided and are currently providing services to Pegasus
unrelated to the proposed Merger, for which services we have received and will
receive compensation. As you are aware, a managing director of CIBC World
Markets is a director of Pegasus and, in his capacity as such, holds options to
purchase shares of Pegasus Class A Common Stock. In the ordinary course of
business, CIBC World Markets and its affiliates may actively trade securities of
Pegasus and affiliates of Golden Sky for their own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
such securities.
Based upon and subject to the foregoing, and such other factors as we
deemed relevant, it is our opinion that, as of the date hereof, the Exchange
Ratio is fair to Pegasus from a financial point of view. This Opinion is for the
use of the Board of Directors of Pegasus in its evaluation of the Merger and
does not constitute a recommendation as to how any stockholder should vote with
respect to any matters relating to the Merger.
Very truly yours,
/S/ CIBC WORLD MARKETS CORP.
CIBC WORLD MARKETS CORP.
VI-2
<PAGE>
ANNEX VII
FORM OF PROXY
PEGASUS COMMUNICATIONS CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE
The undersigned, revoking all prior proxies, hereby appoints Marshall W. Pagon,
M. Kasin Smith and Ted S. Lodge, or any of them, with full power of
substitution, as the undersigned's proxies to vote all the shares of Class A
common stock and Class B common stock of Pegasus Communications Corporation held
of record by the undersigned on ____________ __, 2000, at the Special Meeting of
Stockholders of Pegasus to be held on __________, 2000 and at any adjournment or
postponement thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 2, 3, 4, 5, 6, 7 AND 8.
Proposal 1: Approval of the Merger Agreement and the transactions contemplated
thereby, including the issuance of approximately 6.5 million shares
of Class A common stock.
FOR AGAINST ABSTAIN
Proposal 2: Approval of the proposal to amend Pegasus' Restricted Stock Plan to
increase the number of shares of Class A common stock that may be
issued thereunder from 350,000 to 750,000.
FOR AGAINST ABSTAIN
Proposal 3: Approval of the proposal to amend Pegasus' 1996 Stock Option Plan
to increase the number of shares of Class A common stock that may be
issued thereunder from 1,300,000 to 3,000,000 and to increase the
maximum number of shares of Class A common stock that may be issued
under options granted to any executive officer from 550,000 to
1,000,000.
FOR AGAINST ABSTAIN
Proposal 4: Approval of the proposal to amend Pegasus' certificate of
incorporation to increase the number of authorized shares of Class A
common stock from 50,000,000 to 250,000,000 shares.
FOR AGAINST ABSTAIN
Proposal 5: Approval of the proposal to amend Pegasus' certificate of
incorporation to increase the number of authorized shares of Class B
common stock from 15,000,000 to 50,000,000 shares.
FOR AGAINST ABSTAIN
Proposal 6: Approval of the proposal to amend Pegasus' certificate of
incorporation to increase the number of authorized shares of
non-voting common stock from 20,000,000 to 200,000,000 shares.
FOR AGAINST ABSTAIN
Proposal 7: Approval of the proposal to amend Pegasus' certificate of
incorporation to increase the number of authorized shares of
preferred stock from 5,000,000 to 20,000,000 shares.
FOR AGAINST ABSTAIN
Proposal 8: IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
VII-1
<PAGE>
You are urged to sign and return this proxy so that you may be sure that your
shares will be voted.
Dated: _____________________, 2000
__________________________________
Signature of Stockholder
__________________________________
Signature of Stockholder
Please sign exactly as your name appears hereon, date and return promptly. When
shares are held by joint tenants, both should sign. Executors, administrators,
trustees and other fiduciaries should indicate their capacity when signing.
VII-2
