-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VAKG5CwQY4FrLA3+sSa7rCV5Z3RYduvmvBXUJl3WJZh83dDeoQLrrNG8WTojkzfs kF0a7gGDWWC069JMNJcJFA== 0000950116-00-000351.txt : 20000228 0000950116-00-000351.hdr.sgml : 20000228 ACCESSION NUMBER: 0000950116-00-000351 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 20000225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEGASUS COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001015629 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 510374669 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-31080 FILM NUMBER: 552843 BUSINESS ADDRESS: STREET 1: C/O PEGASUS COMMUNICATIONS MANAGEMENT STREET 2: 225 CITY LINE AVENUE SUITE 200 CITY: BALA CYNWYD STATE: PA ZIP: 19087 BUSINESS PHONE: 6103411801 MAIL ADDRESS: STREET 1: 1345 CHESTNUT ST STREET 2: 1345 CHESTNUT ST CITY: PHILADELPHIA STATE: PA ZIP: 19107-3496 FORMER COMPANY: FORMER CONFORMED NAME: PEGASUS COMMUNICATIONS & MEDIA CORP DATE OF NAME CHANGE: 19960530 S-4 1 As filed with the Securities and Exchange Commission on February 25, 2000 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- PEGASUS COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) 4833 (Primary Standard Industrial Classification Code Number) Delaware 51-0374669 (State or Other Jurisdiction of (I.R.S. Employer Incorporation of Organization) Identification Number) ---------------- c/o Pegasus Communications Management Company 225 City Line Avenue Suite 200 Bala Cynwyd, Pennsylvania 19004 (888) 438-7488 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------- Marshall W. Pagon, President and Chief Executive Officer c/o Pegasus Communications Management Company 225 City Line Avenue Suite 200 Bala Cynwyd, Pennsylvania 19004 (888) 438-7488 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- Copies to:
Ted S. Lodge, Esq. Michael B. Jordan, Esq. Karen A. Dewis, Esq. Scott A. Blank, Esq. Diana E. McCarthy, Esq. McDermott, Will & Emery Pegasus Communications Corporation Drinker Biddle & Reath LLP 600 Thirteenth Street, N.W. c/o Pegasus Communications One Logan Square Washington, D.C. 20005-3096 Management Company 18th and Cherry Streets (202) 756-8000 225 City Line Avenue, Suite 200 Philadelphia, PA 19103 Bala Cynwyd, Pennsylvania 19004 (215) 988-2700 (888) 438-7488
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is ordered effective and all other conditions to the merger of a subsidiary of the Registrant with Golden Sky Holdings, Inc. ("Golden Sky") pursuant to the Agreement and Plan of Merger described in the enclosed proxy statement/prospectus have been satisfied or waived. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. _________ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. _________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ___________ CALCULATION OF REGISTRATION FEE
==================================================================================================== Title of Proposed Proposed Securities Amount Maximum Maximum Amount of to be To be Offering Price Aggregate Registration Registered Registered Per Share(1) Offering Price(1) Fee(2) - ----------------------------------------------------------------------------------------------------- Class A common stock, par value $0.01 per share .............. 6,500,000 $ .00037 $ 2,409.47 $ .64 ====================================================================================================
(1) Calculated in accordance with Rule 457(f) based upon the par value of the capital stock of the company to be acquired as of January 25, 2000. (2) $146,087.50 was paid by wire transfer in connection with the filing of the Preliminary Proxy Statement/Prospectus with the Commission on February 3, 2000. The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ PEGASUS COMMUNICATIONS CORPORATION c/o Pegasus Communications Management Company 225 City Line Avenue Suite 200 Bala Cynwyd, Pennsylvania 19004 February 25, 2000 Dear Fellow Stockholder: You are cordially invited to attend the special meeting of stockholders of Pegasus Communications Corporation on March 22, 2000, at 10 a.m., local time, at CIBC World Markets Corp., 3rd Floor, 425 Lexington Avenue, New York, New York. 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; 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. A maximum of 6,500,000 shares of Pegasus Class A common stock will be issued to the Golden Sky stockholders. This is subject to reduction for a number of items, including outstanding warrants and options. In addition, certain holders of Golden Sky's capital stock will have the right to sell shares to Pegasus for up to $25.0 million in cash, which will reduce the number of shares of Class A common stock to be issued to the Golden Sky stockholders in the merger. 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 6,085,000 shares will be issued in the merger together with options and warrants to purchase approximately 415,000 shares of Pegasus Class A common stock. After giving effect to the merger, Golden Sky's stockholders (other than option and warrant holders) will own approximately 22.9% 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 9.0% and 67.7%, 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 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 March 22, 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 March 22, 2000, at 10 a.m., at CIBC World Markets Corp., 3rd Floor, 425 Lexington Avenue, New York, New York. 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, as amended, 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 30,000,000 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 February 25, 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: February 29, 2000 Secretary PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS OF PEGASUS COMMUNICATIONS CORPORATION TO BE HELD MARCH 22, 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 March 22, 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, as amended, 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 subject to certain reductions; 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 30,000,000 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. 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 February 24, 2000, the last reported closing price of the Class A common stock on the Nasdaq National Market was $118 5/8 per share. These securities involve a high degree of risk. See Risk Factors, beginning on page 11. This proxy statement/prospectus and the accompanying form of proxy are first being mailed to the stockholders of Pegasus on or about February 29, 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 February 25, 2000. TABLE OF CONTENTS Page ---------- WHERE YOU CAN FIND MORE INFORMATION ................................... iv SUMMARY .......................................... 1 RISK FACTORS ..................................... 11 Risks Associated With The Merger .............. 11 Pegasus May Not Be Able to Arrange Financing In Order to Offer to Purchase Golden Sky Notes ............... 11 We May Not Be Able to Integrate Golden Sky's Operations Successfully..... 11 We Will Incur Significant Transaction Expenses and Costs of Integration as a Result of the Merger .................... 12 The Merger Will Have a Dilutive Effect on Our Earnings Per Share ............... 12 Risks of Our Direct Broadcast Satellite Business ................................... 12 Satellite and Direct Broadcast Satellite Technology Could Fail or Be Impaired..... 12 Events at DIRECTV Could Adversely Affect Us ............................... 12 Programming Costs May Increase, Which Could Adversely Affect Our Direct Broadcast Satellite Business ............ 13 We May Lose Our DIRECTV Rights After the Initial Term of Our Agreements With the National Rural Telecommunications Cooperative .......... 13 The Effect of New Federal Satellite Television Legislation on Our Business Is Unclear .............................. 13 We Could Lose Money Because of Signal Theft ............................ 13 We Could Lose Revenues if We Have Out-of-Territory Subscribers ............ 14 Direct Broadcast Satellite Services Face Competition from Cable Operators ........ 14 Direct Broadcast Satellite Equipment Shortages Could Adversely Affect Our Direct Broadcast Business ............... 14 Risks of Our Broadcast Television Business ................................... 14 Our Broadcast Operations Could Be Adversely Affected if We Fail To Negotiate Successfully Our Network Affiliation Agreements .................. 14 Fox Could Cancel Our Affiliation Agreements if It Acquires a Significant Ownership Interest in One of Our Markets ................................. 14 Our Broadcast Operations Could Be Adversely Affected if the FCC Prevents Our Local Marketing Agreement Strategy ...................... 14 Page ---- Antitrust Laws Could Limit Our Local Marketing Agreement Strategy ............. 15 Our Inability To Control Licensees Under Our Local Marketing Agreements Could Adversely Affect Our Broadcast Operations .............................. 15 The Planned Industry Conversion to Digital Television Could Adversely Affect Our Broadcast Business ........... 15 The New Federal Satellite Television Legislation Could Adversely Affect Our Broadcast Business .................. 16 Risks of Our Cable Business ................... 16 We Could Lose Revenues Because of Our Geographic Concentration in Puerto Rico ............................. 16 The FCC's Digital Television Requirements May Prevent Us from Expanding Our Cable Programming ......... 16 We Could Become Subject to Rate Regulation Which Could Reduce Our Cable Revenues .......................... 16 Other Risks of Our Business ................... 16 We Face Certain Other Regulatory Risks...... 16 We Have a History of Substantial Losses; We Expect Them To Continue; Losses Could Adversely Affect Our Stock Price and Access to Capital Markets ..... 17 We Face Significant Competition; the Competitive Landscape Changes Constantly .............................. 17 Our Acquisition Strategy May Become Too Expensive Which Could Adversely Affect Our Financial Performance ........ 17 We May Not Be Able To Get the Consents Necessary To Implement Our Acquisition Strategy .................... 17 We May Not Be Able To Integrate Acquired Companies Successfully Which Could Affect Our Financial Performance ............................. 17 Our Credit Arrangements and Publicly Held Debt and Preferred Stock Limit Our Ability to Pay Dividends on Our Class A Common Stock .................... 18 Marshall W. Pagon Owns and Controls Most of the Voting Power of Pegasus ..... 18 Our Stock Price Has Been Volatile .......... 18 Our Certificate of Incorporation and Publicly Held Debt and Preferred Stock Could Delay, Deter or Prevent a Change of Control of Pegasus ............ 18 The Year 2000 Problem Could Adversely Affect Us ............................... 19 We May Not Be Aware of All Risks ........... 19 i Page ----- Risk Factors Relating to Golden Sky's Business ..................................... 19 Golden Sky Has A Limited Operating History and History of Negative Cash Flow ..................................... 20 Golden Sky May Not Be Able To Make Principal or Interest Payments on Its Substantial Debt ......................... 20 Golden Sky's Substantial Debt Could Adversely Affect Its Ability to Execute Its Business Strategy .................... 20 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 .............................. 20 Golden Sky May Not Have Enough Capital to Execute Its Business Strategy ................................. 20 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 ................. 21 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 ................... 21 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 ............... 21 Changes in National Rural Telecommunications Cooperative Policies May Adversely Affect Golden Sky's Ability to Provide DIRECTV Programming in Its Markets ............... 21 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 ............................. 22 Risk That Forward-Looking Statements May Prove Inaccurate ........................ 22 COMPARATIVE PER SHARE DATA ........................................... 24 Page -- MARKET PRICE INFORMATION AND DIVIDENDS ....................................... 26 Pegasus ........................................ 26 Golden Sky ..................................... 26 THE SPECIAL MEETING ............................... 27 Solicitation ................................... 27 Voting; Record Date and Revocability of Proxies ..................................... 27 Quorum ......................................... 28 Purpose of the Special Meeting ................. 28 PROPOSAL 1: APPROVAL OF MERGER .................... 29 Background of the Merger ....................... 29 Reasons for the Merger and Recommendations of Pegasus' Board of Directors ................................... 30 Opinion of CIBC World Markets Corp ............. 31 Interests of Certain Persons in the Merger ..... 38 Ownership of Pegasus After the Merger .......... 38 Management of Pegasus After the Merger ......... 38 PROPOSAL 2: AMENDMENT TO RESTRICTED STOCK PLAN .......................... 39 PROPOSAL 3: AMENDMENT TO STOCK OPTION PLAN .................................... 42 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 ............................. 45 PROPOSAL 5: AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF CLASS B COMMON STOCK FROM 15,000,000 TO 30,000,000 SHARES .............................. 46 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 ............... 47 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 ........................... 48 PROPOSAL 8: OTHER MATTERS ......................... 49 THE MERGER ........................................ 50 The Merger Agreement ........................... 50 Termination .................................... 53 Voting Agreement ............................... 54 Registration Rights Agreement .................. 56 Consequences Under Debt Agreements and Preferred Stock Terms ....................... 57 Certain Federal Income Tax Consequences......... 58 Accounting Treatment ........................... 60 ii Page ------ Federal Securities Law Consequences ........... 60 PEGASUS' SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA ............................... 61 GOLDEN SKY'S SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA .................. 63 PEGASUS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................... 65 General ...................................... 65 Results of Operations ........................ 66 Liquidity and Capital Resources .............. 70 New Accounting Pronouncements ................ 75 Other ........................................ 75 GOLDEN SKY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................ 76 Overview ..................................... 76 Results of Operations ........................ 78 Liquidity and Capital Resources .............. 81 Recent Accounting Developments ............... 85 BUSINESS OF PEGASUS ............................. 86 General ...................................... 86 Direct Broadcast Satellite Television ........ 86 DIRECTV ...................................... 86 DIRECTV Rural Affiliates ..................... 87 Pegasus Rural Focus and Strategy ............. 87 Satellite Services in Rural Areas ............ 88 Consolidation of DIRECTV Rural Affiliates..... 88 The Pegasus Retail Network ................... 89 Broadcast Television ......................... 89 Cable Television ............................. 90 Recent Completed and Pending Transactions .............................. 91 Competition .................................. 92 Employees .................................... 92 Direct Broadcast Satellite Agreements, Licenses, Local Marketing Agreements and Cable Franchises ...................... 92 Legislation and Regulation ................... 97 Legal Proceedings ............................ 108 Properties ................................... 110 BUSINESS OF GOLDEN SKY .......................... 111 General ...................................... 111 Sales and Distribution ....................... 111 Marketing .................................... 112 Page ---- Customer Service ............................. 112 National Rural Telecommunications Cooperative and DIRECTV ................... 112 Competition .................................. 112 Regulation ................................... 114 Facilities ................................... 114 Management and Employees ..................... 114 Legal Proceedings ............................ 114 PEGASUS MANAGEMENT .............................. 115 CERTAIN TRANSACTIONS ............................ 121 OWNERSHIP AND CONTROL ........................... 125 DESCRIPTION OF CAPITAL STOCK .................... 130 COMPARISON OF STOCKHOLDERS' RIGHTS ....................................... 134 State of Incorporation ....................... 134 Authorized Capital ........................... 134 Voting, Liquidation, and Other Rights ........ 135 Dividend Rights .............................. 136 Size and Make-up of the Board of Directors ................................. 137 Preemptive Rights ............................ 137 Change of Control ............................ 137 Conversion Rights and Transfer Restrictions .............................. 138 Class Voting ................................. 138 LEGAL MATTERS ................................... 139 EXPERTS ......................................... 139 FINANCIAL STATEMENT INDEX ....................... F-1 ANNEX I -- AGREEMENT AND PLAN OF MERGER, AS AMENDED ........................... I-1 ANNEX II -- FORM OF VOTING AGREEMENT .................................... II-1 ANNEX III -- AMENDMENT TO THE PEGASUS COMMUNICATIONS RESTRICTED STOCK PLAN ........................ III-1 ANNEX IV -- AMENDMENT TO THE PEGASUS COMMUNICATIONS 1996 STOCK OPTION PLAN ............................ IV-1 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 .............................. V-1 ANNEX VI -- OPINION OF CIBC WORLD MARKETS CORP. ................................ VI-1 ANNEX VII -- FORM OF PROXY ...................... VII-1 iii 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. Copies of these filings may also 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. You should rely only on the information provided in this proxy statement/ prospectus. 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 or sale is not permitted. iv 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. 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, and "Golden Sky" refers to Golden Sky Holdings, Inc., together with its direct and indirect subsidiaries which include Golden Sky DBS, Inc. and Golden Sky Systems, Inc. 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 6.1 million shares of Class A common stock will be issued in connection with the merger and that 10,000 shares of Series E junior convertible participating preferred stock have been issued in connection with another one of our pending acquisitions. 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 89% 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 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 The Special Meeting Date, Time and Place of the Special Meeting The special meeting of holders of common stock will be held on March 22, 2000, at 10 a.m., local time, at CIBC World Markets Corp., 3rd Floor, 425 Lexington Avenue, New York, New York. Record Date; Shares Entitled to Vote Holders of record of common stock at the close of business on February 25, 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 30,000,000 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: 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, voting together as a single class. 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 Series A preferred stock and Series C convertible preferred stock, voting together as a single class.
2 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 15,895,968 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 proposals 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, certain other Pegasus shareholders 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. A maximum of 6,500,000 shares of Pegasus Class A common stock will be issued to the Golden Sky stockholders. This is subject to reduction for a number of items, including outstanding warrants and options. In addition, certain holders of Golden Sky's capital stock will have the right to sell shares to Pegasus for up to $25.0 million in cash, which will reduce the number of shares of Pegasus Class A common stock to be issued to the Golden Sky stockholders in the merger. Although the number of shares of Pegasus Class A common stock to be issued in the merger cannot be precisely determined until just before the closing of the merger, it is anticipated that approximately 6,085,000 shares will be issued, together with options to purchase approximately 415,000 shares of Pegasus Class A common stock. After giving effect to the merger, assuming that none of Golden Sky's stockholders perfect rights of appraisal, Golden Sky's stockholders, other than option and warrant holders, will own approximately 22.9% 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 9.0% and 67.7%, respectively, of Pegasus' common stock. Recommendations of Pegasus' Board of Directors Pegasus' board of directors has unanimously 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 3 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 unanimously determined 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 unanimously determined that the amendments to 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 unanimously also determined 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 and 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. In addition, the certificate of incorporation requires that any stock split or stock dividend on the Class A common stock be accompanied by parallel action on the Class B common stock. Therefore, Pegasus' board of directors has also unanimously determined 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, if the board decides to do so in the future, without affecting the current voting percentages of Pegasus' respective shareholders. Pegasus' board of directors has also unanimously 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 unanimously determined 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, up to 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 Prior to the merger, Pegasus is obligated to purchase for cash the shares of certain 4 stockholders of Golden Sky's capital stock who wish to sell their stock to Pegasus for aggregate consideration of up to $25.0 million in cash. If consummated, these purchases will have 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. 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 to the extent of any 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' 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, if certain conditions are met, the principal 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' 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. 5 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. 6 Pegasus' Summary Historical and Pro Forma Consolidated Financial Data The following table sets forth summary historical and pro forma consolidated financial data for Pegasus. The statement of operating data reflect net revenues and operating expenses from our continuing operations. The results of operations from the entire cable segment have been classified as discontinued and certain amounts for 1995 through 1998 have been restated. You should read this information in conjunction with the consolidated financial statements and the notes to them and other financial information, and Pegasus Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this proxy statement/ prospectus. You should also read the paragraphs following this table, which explain certain portions of the table.
Years Ended December 31, ---------------------------------------- Statement of Operating Data: 1995 1996 1997 (Dollars in thousands) Net revenues: DBS ................................................... $ 1,469 $ 5,829 $ 38,254 Broadcast ............................................. 20,073 28,604 31,876 --------- ---------- ----------- Total net revenues ................................... 21,542 34,433 70,130 Operating expenses: DBS Programming, technical and general and administrative ..................................... 1,379 4,312 26,042 Marketing and selling ................................ -- 646 5,973 Incentive compensation ............................... 9 146 795 Depreciation and amortization ........................ 640 1,786 17,042 Broadcast Programming, technical and general and administrative ..................................... 10,181 13,903 15,672 Marketing and selling ................................ 3,789 4,851 5,704 Incentive compensation ............................... 415 691 298 Depreciation and amortization ........................ 2,934 4,041 3,754 Corporate expenses .................................... 1,364 1,429 2,256 Corporate depreciation and amortization ............... 492 988 1,353 Other expense, net .................................... 15 139 630 --------- ---------- ----------- Income (loss) from operations ........................ 324 1,501 (9,389) Other Data: Pre-marketing cash flow from continuing operations: DBS ................................................... $ 90 $ 1,517 $ 12,212 Broadcast ............................................. 6,103 9,850 10,500 --------- ---------- ----------- Total pre-marketing cash flow from continuing operations ........................................... $ 6,193 $ 11,367 $ 22,712 ========= ========== =========== Location cash flow from continuing operations .......... $ 6,193 $ 10,721 $ 16,739 Operating cash flow from continuing operations ......... 4,829 9,292 14,483 Capital expenditures ................................... 2,640 6,294 9,929 Net cash provided by (used for): Operating activities .................................. 5,783 3,059 8,478 Investing activities .................................. (6,047) (81,179) (142,109) Financing activities .................................. 10,859 74,727 169,098
Years Ended December 31, ------------------------------------------- Pro Forma Statement of Operating Data: 1998 1999 1999 (Dollars in thousands) Net revenues: DBS ................................................... $ 147,142 $ 286,353 $ 426,926 Broadcast ............................................. 34,311 36,415 36,415 ----------- --------- --------- Total net revenues ................................... 181,453 322,768 463,341 Operating expenses: DBS Programming, technical and general and administrative ..................................... 102,419 201,158 324,507 Marketing and selling ................................ 45,706 117,774 182,707 Incentive compensation ............................... 1,159 1,592 2,374 Depreciation and amortization ........................ 59,077 82,744 215,598 Broadcast Programming, technical and general and administrative ..................................... 18,056 22,812 22,812 Marketing and selling ................................ 5,993 6,304 6,304 Incentive compensation ............................... 177 57 57 Depreciation and amortization ........................ 4,557 5,144 5,144 Corporate expenses .................................... 3,614 5,975 5,975 Corporate depreciation and amortization ............... 2,105 3,119 3,119 Other expense, net .................................... 1,409 1,995 1,995 ----------- --------- --------- Income (loss) from operations ........................ (62,819) (125,906) (307,251) Other Data: Pre-marketing cash flow from continuing operations: DBS ................................................... $ 44,723 $ 85,195 $ 102,419 Broadcast ............................................. 10,262 7,299 7,299 ----------- --------- --------- Total pre-marketing cash flow from continuing operations ........................................... $ 54,985 $ 92,494 $ 109,718 =========== ========= ========= Location cash flow from continuing operations .......... $ 9,279 ($ 25,280) ($ 72,989) Operating cash flow from continuing operations ......... 5,665 (31,255) (78,964) Capital expenditures ................................... 12,400 14,784 12,839 Net cash provided by (used for): Operating activities .................................. (21,962) (88,879) NA Investing activities .................................. (101,373) (133,981) NA Financing activities .................................. 133,791 208,808 NA
As of December 31, As of December 31, ----------------------------------- --------------------------------------- Pro Forma 1995 1996 1997 1998 1999 1999 (Dollars in thousands) (Dollars in thousands) Balance Sheet Data: Cash and cash equivalents ........................... $21,856 $ 8,582 $ 45,269 $ 75,985 $ 42,832 $ 574,020 Working capital (deficiency) ........................ 17,566 6,430 32,347 37,889 (4,936) 496,137 Total assets ........................................ 95,770 173,680 380,862 886,310 945,332 2,742,170 Total debt (including current) ...................... 82,896 115,575 208,355 559,029 684,414 1,124,592 Total liabilities ................................... 95,521 133,354 239,234 699,144 862,725 1,684,463 Redeemable preferred stock .......................... -- -- 111,264 126,028 142,734 142,734 Convertible preferred stock ......................... -- -- -- -- -- 290,525 Minority interest ................................... -- -- 3,000 3,000 3,000 3,936 Total common stockholders' equity (deficit) ......... 249 40,326 27,364 58,138 (63,127) 620,512
7 The pro forma income statement and other data for the year ended December 31, 1999 include our pending cable sale, the 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 at the beginning of 1999. The pro forma balance sheet data as of December 31, 1999 includes the pending cable sale, the investment in Personalized Media, the 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 data for the year ended December 31, 1999 do not include the $89.4 million gain from the pending sale of our Puerto Rico cable system or the $15.2 million extraordinary net loss from the extinguishment of debt. In this section we use the terms pre-marketing cash flow from continuing operations and location cash flow from continuing operations. Pre-marketing cash flow from continuing operations is calculated by taking our earnings and adding back the following expenses. o interest and income taxes; o depreciation and amortization and corporate overhead; o extraordinary and non-recurring items; o non-cash charges, such as incentive compensation under our restricted stock plan and 401(k) plans; o results of discontinued operations; and o direct broadcast satellite subscriber acquisition costs, which are sales and marketing expenses incurred to acquire new direct broadcast satellite subscribers. Location cash flow from continuing operations is pre-marketing cash flow from continuing operations less direct broadcast satellite subscriber acquisition costs. Pre-marketing cash flow from continuing operations and location cash flow from continuing operations are not, and should not be considered, alternatives to income from operations, net income, net cash provided by operating activities or any other measure for determining our operating performance or liquidity, as determined under U.S. generally accepted accounting principles. Pre-marketing cash flow from continuing operations and location cash flow from continuing operations also do not 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 from continuing operations and location cash flow from continuing operations are important, however, for the following reasons: o people who follow our industry frequently use them as measures of financial performance and ability to pay debt service; and o they are measures that we, our lenders and investors use to monitor our financial performance and debt leverage. 8 GOLDEN SKY'S SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA The following table presents Golden Sky's financial and operating information for the periods indicated. The historical financial information presented below was taken from Golden Sky's audited consolidated financial statements. 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 receives 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 those financial statements and other financial information, and Golden Sky Management's Discussion and Analysis of Financial Condition and Results of Operations, appearing elsewhere herein.
Inception Through Years Ended December 31, December 31, ---------------------------------------------- 1996 1997 1998 1999 -------------- ------------- ------------- -------------- (in thousands) Statement of Operations Data Revenue: DBS services .................................... $ 219 $ 16,452 $ 74,910 $ 139,933 Lease and other ................................. 36 944 1,014 640 -------- ---------- ---------- ---------- Total revenue ..................................... 255 17,396 75,924 140,573 Costs and Expenses: Costs of DBS services ........................... 130 9,304 45,291 88,690 System operations ............................... 26 3,796 11,021 19,733 Sales and marketing ............................. 73 7,316 32,201 64,933 General and administrative ...................... 1,035 2,331 7,431 15,708 Depreciation and amortization ................... 97 7,300 23,166 35,963 -------- ---------- ---------- ---------- Total costs and expenses .......................... 1,361 30,047 119,110 225,027 -------- ---------- ---------- ---------- Operating loss .................................... (1,106) (12,651) (43,186) (84,454) Net interest expense .............................. (61) (3,206) (18,965) (42,619) Other non-operating expenses ...................... -- -- -- (1,259) -------- ---------- ---------- ---------- Loss before extraordinary charge .................. (1,167) (15,857) (62,151) (128,332) Extraordinary charge on early retirement of debt ............................................ -- -- (2,577) (2,935) -------- ---------- ---------- ---------- Net loss .......................................... (1,167) (15,857) (64,728) (131,267) Preferred stock dividend requirements ............. -- (7,888) (14,855) (17,920) -------- ---------- ---------- ---------- Net loss attributable to common stockholders ................................... $ (1,167) $ (23,745) $ (79,583) $ (149,187) ======== ========== ========== ========== Other Financial Data EBITDA ............................................ $ (1,009) $ (5,351) $ (20,020) $ (48,337) Net cash used in operating activities ............. (790) (3,111) (36,589) (61,101) Net cash used in investing activities ............. (3,231) (120,729) (159,921) (12,232) Net cash provided by financing activities ......... 4,500 136,997 187,362 72,115 Capital expenditures .............................. 105 998 3,317 3,452 Aggregate purchase price of acquisitions .......... 5,256 129,725 124,844 35,339
9
Inception Through Years Ended December 31, December 31, ------------------------------------------------ 1996 1997 1998 1999 -------------- -------------- -------------- -------------- Operating Data Households at end of period .................. 22,000 1,135,000 1,727,000 1,861,000 Subscribers acquired in acquisitions ......... 3,000 65,300 54,900 18,300 Subscribers added in existing rural DIRECTV markets ............................ 100 21,500 77,200 104,900 Subscribers at end of period ................. 3,100 89,900 222,000 345,200 SAC per gross subscriber added ............... $ 290 $ 280 $ 320 $ 380 Penetration at end of period ................. 14.1% 7.9% 12.9% 18.5%
December 31, --------------------------------------------------------- 1996 1997 1998 1999 ----------- ----------- ------------- ------------- (in thousands) Balance Sheet Data Cash and cash equivalents .............. $ 479 $ 13,636 $ 4,488 $ 3,270 Restricted cash: Current .............................. -- -- 28,083 23,731 Long-term ............................ -- -- 23,534 -- Working capital (deficit) .............. (1,948) 3,843 15,244 (2,586) Total assets ........................... 6,383 156,240 328,099 299,337 Total debt ............................. 4,450 69,113 278,204 369,378 Stockholders' equity (deficit) ......... (1,166) (24,912) (104,470) (253,503)
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 Systems' 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 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. 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. 10 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. The risk factors relating to Golden Sky's direct broadcast satellite business are also applicable to Pegasus. 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 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 $310.2 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 (i) Golden Sky's offer for the notes is accepted by any of its noteholders, (ii) Golden Sky is unable to purchase the notes, and (iii) we are unable to agree on definitive documentation with CIBC World Markets or make alternative arrangements, then Golden Sky may be in default under the terms of its indentures. Pegasus does not intend to assume, guarantee or otherwise become liable under the 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. 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 11 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 advisory, 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 $2.0 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, 1999. On a pro forma basis, giving effect to the transactions described in the first paragraph of "Comparative Per Share Data" as if they had occurred on the first day of 1999, our net loss per share for such period was $11.84. On a pro forma basis, giving effect to the merger and the transactions described in the first paragraph of "Comparative Per Share Data" as if they had occurred on the first day of 1999, our net loss per share for such period was $17.68, representing dilution of $5.84 per share as a result of the merger. See Comparative Per Share Data. 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 101o W orbital location may not last for their expected lives. In July 1998, DIRECTV reported that the primary spacecraft control processor failed on DBS-1. As it was designed to do, the satellite automatically switched to its on-board spare processor with no interruption of service to DIRECTV subscribers. 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. 12 Programming Costs May Increase, Which Could Adversely Affect Our Direct Broadcast Satellite Business Programmers could increase the rates that DIRECTV pays for programming. As a result, our costs would increase. This could cause us to increase our rates and lose either customers or revenues. The law requires programming suppliers that are affiliated with cable companies to provide programming to all multi-channel distributors -- including DIRECTV -- on nondiscriminatory terms. The rules implementing this law are scheduled to expire in 2002. If they are not extended, these programmers could increase DIRECTV's rates, and therefore ours. If we increase our rates, we may lose customers. If we do not increase our rates, our 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 permitted 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. 13 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 a better-quality digital signal than traditional analog cable television systems. Many cable television operators are making significant investments to upgrade their systems from analog to digital. This upgrade will significantly increase the number of channels that cable television operators can provide to their customers and the quality of the transmission. In addition, many cable television operators are upgrading their systems to provide their customers with high-speed Internet access. These upgrades could make cable television a more attractive alternative for consumers, which could have an adverse effect on our direct broadcast satellite business. Direct Broadcast Satellite Equipment Shortages Could Adversely Affect Our Direct Broadcast Business There have been periodic shortages of direct broadcast satellite equipment and there may be such shortages in the future. During such periods, we may be unable to accept new subscribers and, as a result, potential revenue could be lost. If we are unable to obtain direct broadcast satellite equipment in the future, or if we cannot obtain such equipment on favorable terms, our subscriber base and revenues could be adversely affected. Risks of Our Broadcast Television Business Our Broadcast Operations Could Be Adversely Affected if We Fail To Negotiate Successfully Our Network Affiliation Agreements Our network affiliation agreements with Fox formally expired on January 30, 1999 (other than the affiliation agreement for television station WTLH, which is scheduled to expire on December 31, 2000). Except in the case of WTLH, we currently broadcast Fox programming under arrangements between Pegasus 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. 14 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. 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. 15 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. 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 16 proceedings or their effect 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 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. 17 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. 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 Class A common stock and all of our Class B common stock, will have 67.7% 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 providing for the designation and election of directors. See The Merger -- Voting Agreement. Except as required under the Delaware General Corporation Law and the applicable certificate of designation, holders of the non-voting common stock and 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. 18 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: 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 our 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 For a description of year 2000 risks applicable to Pegasus see Pegasus Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000. 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 and certain portions of the risk factors entitled Other Risks of Our Business -- We Face Certain Other Regulatory Risks, and -- We Face Significant Competition; the Competitive Landscape Changes Constantly which relate to the direct broadcast satellite business and, as a consequence, would be applicable to both Pegasus and Golden Sky, the following risk factors relate to Golden Sky. 19 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 $131.3 million for the year ended December 31, 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 $48.3 million for the year ended December 31, 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 $369.4 million as of December 31, 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 will be affected by many factors, some of which may 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 on its debt. In addition, borrowings under Golden Sky Systems' 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, pay dividends or distributions, make capital expenditures or consolidate, merge or transfer all or substantially all of their 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 Systems' 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 Systems has failed to meet certain of these covenants and conditions. As a result, Golden Sky Systems has had to seek and obtain amendments to its credit facility in order to waive these defaults. There is no assurance that Golden Sky Systems will be able to obtain future waivers in connection with future defaults, if any. If Golden Sky fails to comply with its obligations under its debt instruments, the holders of the debt could elect to declare all amounts outstanding under the relevant instruments to be immediately due and payable. The assets of the relevant Golden Sky entity 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 20 expenditures and the extent of its future negative cash flow. If Golden Sky Systems 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 Systems 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. 21 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 as representatives of a proposed class that would include all members and affiliates of the National Rural Telecommunications Cooperative that are distributors of DIRECTV. The complaint contains causes of action for various torts, common counts and declaratory relief based on DIRECTV's failure to provide the National Rural Telecommunications Cooperative with premium programming, thereby preventing the National Rural Telecommunications Cooperative from providing this programming to the class members and affiliates. The claims are also based on DIRECTV's position with respect to launch fees and other benefits, term and rights of first refusal. The complaint seeks monetary damages and a court order regarding the rights of the National Rural Telecommunications Cooperative and its members and affiliates. On February 10, 2000, Pegasus and Golden Sky filed an amended complaint, which added new tort claims against DIRECTV for interference with plaintiffs' relationships with manufacturers, distributors and dealers of direct broadcast satellite equipment. Pegasus and Golden Sky also withdrew the class action allegations to allow a new class action to be filed on behalf of the members and affiliates of the National Rural Telecommunications Cooperative. The outcome of this litigation and the litigation filed by the National Rural Telecommunications Cooperative could have a material adverse effect on 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. 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 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 and Golden Sky 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 respective business strategies and expectations concerning our respective market positions, future operations, margins, profitability, liquidity and capital resources, as well as statements 22 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 and Golden Sky believes 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 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 or Golden Sky will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. Neither we nor Golden Sky undertakes to release the results of any revisions of these forward-looking statements to reflect future events or circumstances. 23 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 in this proxy statement/prospectus, which gives effect to: o the pending sale of our Puerto Rico cable systems; 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 1999, with respect to income from operations and cash dividends, and as of December 31, 1999 for book value data. 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, including options and warrants to purchase Pegasus' common stock, 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 that may be purchased by Pegasus for cash 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 in this proxy statement/prospectus, which gives effect to the transactions noted above and the merger as if they had occurred at the beginning of 1999, with respect to income from operations and cash dividends, and as of December 31, 1999 for book value data. The information set forth below should be read in conjunction with the respective audited 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. 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 gives effect to the conversion of these Golden Sky equity securities into common stock of Golden Sky. 24
Year Ended December 31, 1999 -------------------------------------- (In thousands, except per share data) Pegasus -- Historical: Loss before extraordinary items .......................... $ (195,341) Weighted average common shares outstanding ............... 18,875 Loss per common share before extraordinary items ......... $ (10.35) Cash dividends ........................................... -- Golden Sky -- Historical: Loss before extraordinary items .......................... $ (128,332) Weighted average common shares outstanding ............... 733 Loss per common share before extraordinary items ......... $ (175.15) Cash dividends ........................................... -- Pegasus -- Pro Forma -- Transactions: Loss before extraordinary items .......................... $ (226,951) Weighted average common shares outstanding ............... 19,075 Loss per common share before extraordinary items ......... $ (11.90) Cash dividends ........................................... -- Golden Sky -- Equivalent Pro Forma: Loss per common share before extraordinary items ......... $ (19.97) Cash dividends ........................................... -- Pegasus -- Pro Forma -- Transactions and Merger: Loss before extraordinary items .......................... $ (452,174) Weighted average common shares outstanding ............... 25,575 Loss per common share before extraordinary items ......... $ (17.68) Cash dividends ........................................... -- Pegasus -- Historical: Common shareholders' deficit ............................. $ (63,127) Common shares outstanding ................................ 19,798 Book value per common share .............................. $ (3.19) Golden Sky -- Historical: Common shareholders' deficit ............................. $ (253,503) Common shares outstanding ................................ 794 Book value per common share .............................. $ (319.24) Pegasus -- Pro Forma -- Transactions: Common shareholders' equity .............................. $ 117,708 Common shares outstanding ................................ 19,998 Book value per common share .............................. $ 5.89 Golden Sky -- Equivalent Pro Forma: Book value per common share .............................. $ (39.45) Pegasus -- Pro Forma -- Transactions and Merger: Common shareholders' equity .............................. $ 620,512 Common shares outstanding ................................ 26,498 Book value per common share .............................. $ 23.42
25 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.
Price Range of Common Stock --------------------- High Low -------- ---------- Year Ended December 31, 1998: First Quarter ................................... 26 19 7/8 Second Quarter .................................. 25 5/8 20 7/8 Third Quarter ................................... 25 15 7/8 Fourth Quarter .................................. 25 1/2 10 5/8 Year Ended December 31, 1999: First Quarter ................................... 28 7/8 21 3/16 Second Quarter .................................. 50 1/2 27 7/8 Third Quarter ................................... 46 37 Fourth Quarter .................................. 102 3/4 42 1/2 Year Ended December 31, 2000: First Quarter through February 24, 2000 ......... 141 7/8 83 15/16
The closing sale price of the Class A common stock was $1185/8 on February 24, 2000. As of February 25, 2000, Pegasus had 152 shareholders of record. Dividend Policy Common Stock: Pegasus has not paid any cash dividends on its Class A common stock and does not anticipate paying cash dividends on its common stock in the foreseeable future. Our policy is to retain cash for operations and expansion. Payment of cash dividends on the common stock is restricted by Pegasus' publicly held debt securities and preferred stock. Our ability to obtain cash from our subsidiaries with which to pay cash dividends is also restricted by the subsidiaries' publicly held debt securities and bank agreements. Preferred Stock: We are allowed to pay dividends on our Series C convertible preferred stock by issuing shares of our Class A common stock instead of paying cash, and until July 1, 2002, we are allowed to pay dividends on our Series A preferred stock by issuing more shares of that stock instead of paying cash. We expect to issue shares of our Class A common stock and Series A preferred stock to pay these dividends, and in any event our publicly held debt securities do not permit us to pay cash dividends on our series A preferred stock until July 1, 2002. We are also obligated to pay cash dividends of $1.4 million per year in the aggregate on our Series B, Series D and Series E junior convertible participating preferred stock. These payments are subject to compliance with outstanding indentures and the certificate of designation with respect to the Series A preferred stock. 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 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 February 25, 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 15,895,968 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: 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 voting together as a single class. 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 Series A preferred stock and Series C convertible preferred stock, voting together as a single class.
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" all proposals. 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. As a result of his beneficial ownership of Class A common stock and all outstanding shares of Pegasus' Class B common stock, Marshall W. Pagon, Pegasus' President, Chief Executive Officer and Chairman of the Board, controls 74.5% 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 27 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 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, certain other Pegasus shareholders 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, prior to the closing of the merger, certain holders of Golden Sky's capital stock will have the right to sell shares to Pegasus for up to $25.0 million in cash, which will reduce the number of shares of Pegasus Class A Common Stock to be issued to the Golden Sky stockholders in the merger. 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); 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 30,000,000 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 30,000,000 Shares); 28 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. 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, 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 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 further conversations between the parties, Golden Sky rejected Pegasus' proposal. At the April 23, 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 management subsequently selected CIBC World 29 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 confidential inquiries 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 consisting 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 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 proposal requires the affirmative vote of holders of shares representing a majority of the voting power of the outstanding shares of Pegasus' Class A and Class B common stock present, in person or by proxy, at the meeting. The Class A and Class B common stock will vote together as a single class. Pegasus' Board of Directors unanimously recommmends 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 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 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:
Direct Broadcast Satellite Companies Broadcast Companies Cable Companies - ---------------------------- ---------------------------------- ----------------------------------- o EchoStar Communications o ACME Communication, Inc. o Adelphia Communications Corp. Corp. o BHC Communications, Inc. o Cablevision Systems Corp. o Hughes Electronics 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.
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 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:
Implied Equity Reference Range for Golden Sky - ------------------------------------------------------------------------- Equity Value for Golden Sky Without Synergies With Synergies Implied by Exchange Ratio - --------------------------------------- -------------------------------- ---------------------------- $300.0 million -- $600.0 million $700.0 million -- $1.2 billion $572.8 million
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 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:
Selected Discounted Cash Companies Analysis Flow Analysis Proposed Merger -------------------- ------------------- ---------------- 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
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:
Acquiror Target - -------------------------------------- --------------------------------------------------------------- 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)
35
Acquiror Target - ------------------------------------ ------------------------------------------------------- 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
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
Pegasus Golden Sky Percentage Contribution Percentage Contribution Synergies ------------------------- ------------------------- ---------- 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%
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 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, if any, Marshall W. Pagon will become 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 21,980,968 shares of Pegasus' Class A common stock, assuming no additional shares are issued before the effective time and excluding shares issued to Golden Sky option and warrant holders, of which approximately 6,085,000, or 27.7%, 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 9.0% and 67.7%, respectively, of the common stock. 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. 38 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 approximately 183,626 shares of Class A common stock have been granted as of February 17, 2000 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' Class A and Class B common stock present, in person or by proxy, at the meeting. The Class A and Class B common stock will vote together as a single class. Pegasus' board of directors unaminously recommends voting "for" proposal 2. 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. An employee may elect to receive all or any portion of a profit sharing award or discretionary award 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 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. 39 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. As of December 31, 1999, we had approximately 1,006 full time and 347 part time employees eligible to receive 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; 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. 40 Class A Common Stock Available. Under the restricted stock plan, 350,000 shares of Class A common stock (increased to 750,000 upon approval of proposal 2) 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 February 24, 2000, the closing sale price of the Class A common stock on the Nasdaq National Market was $1185/8. Vesting. Special recognition awards are fully vested on the date of the grant. All other 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. Nevertheless, certain amendments listed in the restricted stock plan require stockholder 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. Federal Income Tax Treatment of Options. Please refer to the federal tax consequences described in Proposal 3. Restricted Stock Awards. The following special recognition awards and discretionary awards were made under the restricted stock plan in 1999: 41
Name and Position Amount of Award - ----------------- ----------------- 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 99,967 Secretary 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 ========
- ------------ (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.
Name and Position Amount of Award - ----------------- ---------------- 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 ============
- ------------ (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 1,363,575 shares of Class A common stock are currently outstanding, including options to acquire 63,575 shares which are subject to the approval of this proposal. 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. 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 employee from 550,000 to 1,000,000. In proposing this amendment, Pegasus' board of directors took into consideration the number of options already granted under 42 the plan, 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 nearly all of the shares of Class A common stock authorized under the plan. The amendment makes other changes to the stock option plan for which stockholder approval is not required and is not being sought. The text of the proposed amendment is attached as Annex IV to this proxy statement/prospectus. The proposal 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. The Class A and Class B common stock will vote together as a single class. Pegasus' board of directors unanimously recommends voting "for" proposal 3. 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 approximately 1,006 full time and 347 part time 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 (proposed to be increased to 3,000,000). However, no employee may be granted options covering more than 550,000 shares of Class A common stock under the stock option plan (proposed to be increased to 1,000,000). 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. 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 Discretionary 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: 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. 43 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. Options currently granted under the plan are granted as incentive stock options. 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 of previously acquired shares of Class A common stock. Golden Sky Options 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 any employee 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 February 24, 2000, the closing sale price of the Class A common stock on the Nasdaq National Market was $1185/8. 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. 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: 44
Name and Position Number of Options(1) - ----------------- ---------------------- 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(2) Non-Executive Director Group ............................................................ 100,000 Non-Executive Officer Employee Group .................................................... 308,575(3) --------- Total ................................................................................. 1,363,575 ===========
- ------------ (1) Reflects the number of shares issuable upon exercise of the option grants. (2) Includes an option to purchase 38,575 shares, which is subject to the approval of this proposal. (3) Includes an option to purchase 25,000 shares, which is subject to the approval of this proposal. 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 all 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. As of February 25, 2000, 15,895,968 shares of Class A common stock were outstanding. Of the approximately 34.1 million shares available for issuance, over approximately 18.7 million shares have been either reserved for issuance or are expected to be issued, after giving effect to Pegasus' employee benefit plans, conversion of the outstanding shares of Class B common stock and outstanding shares of convertible preferred stock, exercise of outstanding warrants and options, and shares issued in connection with the Golden Sky merger. 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 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. If the proposal is not approved to increase the authorized shares of Class B common stock, Pegasus will be limited in effecting any stock splits or stock dividends on the Class A common stock since stock splits or dividends on Class A common stock can only be made in connection with similar splits or dividends of Class B common stock on shares of Class B common stock. 45 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 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. The board of directors recommends voting "for" proposal 4. PROPOSAL 5: AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF CLASS B COMMON STOCK FROM 15,000,000 TO 30,000,000 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 30,000,000 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. If the 15,000,000 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 February 25, 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 requires that parallel action be 46 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. In fact, Pegasus will be limited in its ability to effect a stock split of its Class A common stock unless the authorized shares of Class B common stock are increased. To date, the board of directors has not 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. Any issuance of additional Class B Common Stock requires the vote of Class A common stock unless the issuance is in connection with a stock dividend or stock split (which would not affect the relative economic and voting rights of the two classes). 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 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. Pegasus' board of directors recommends voting "for" proposal 5. 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. As of February 25, 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 on its 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 47 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 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. Pegasus' board of directors recommends voting "for" proposal 6. 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. As of February 25, 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, 22,500 shares have been designated as Series D junior convertible participating preferred stock and 10,000 shares have been designated as Series E 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. 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 48 respect to any financing arrangements or acquisitions that are dependent on increasing the currently authorized number of shares of preferred 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 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 and Series B, Series D and Series E 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 and the Series B, Series D and Series E 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 certificates 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 are 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. 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 and Series C convertible 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. Pegasus' board of directors recommends voting "for" proposal 7. 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. 49 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 up to 280,741 shares, depending on how many shares of Golden Sky stock Pegasus is required to purchase 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 in connection with the shares of Pegasus stock to be issued in the merger. 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 Pegasus has agreed in the merger agreement to purchase for cash Golden Sky stock from stockholders that Golden Sky designates to Pegasus. The purchase is to occur shortly after the Hart-Scott-Rodino waiting period for the merger expires or is terminated early. The purchase price will be up to $25.0 million, depending on how many shares of Golden Sky the selling stockholders want to sell. The minimum percentage of Golden Sky stock that Pegasus will own on a fully diluted basis as a result of the purchase will be approximately 4.3% if Pegasus is required to pay the full $25.0 million, and proportionately less if Golden Sky stockholders want to sell less. Any amount that Pegasus pays for Golden Sky stock under this agreement will reduce the number of shares Pegasus will issue to the remaining Golden Sky stockholders at the closing of the merger. The reduction will be 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. If Pegasus pays the full $25.0 million, the reduction will be 280,471 shares of Pegasus Class A common stock. 50 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. This description has been furnished by Golden Sky. In determining the conversion ratio for Golden Sky's Series A and Series B convertible participating preferred stock, each share is effectively treated as if it had been converted, on the closing date of the merger, into: 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. To provide the redeemable preferred stock component, the stockholders will receive, for each share of convertible participating preferred stock, 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 convertible participating preferred stock as defined in Golden Sky's certificate of incorporation. The liquidation preference amount for each share of the Series A and B convertible participating preferred stock will be $100 for Series A and $200 for Series B, plus accrued dividends. Although there are currently no outstanding shares of Golden Sky's Series A, B or D redeemable preferred stock, Golden Sky could be required to issue shares of these series on or before the closing date. 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. 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. After the allocation describd above, the remaining shares of Pegasus' Class A common stock to be issued in the merger transaction 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 and option and warrant holders 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. 51
Number of Converted Into Golden Sky Securities Pegasus Class A Common Stock - ---------------------------------------------------------------- -------------------------------------- 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
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 52 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 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); 53 o material misstatements in and omissions from Golden Sky's 1999 annual report on SEC Form 10-K when filed; o any failure by Golden Sky to comply with certain satellite legislation; o any claim that Golden Sky failed to consummate any acquisition in violation of a legal obligation to do so; and o specified amounts related to the purchase of certain minority interests. 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. 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 of representations and warranties concerning outstanding Golden Sky warrants and options or to Golden Sky's liability for investment banking, brokerage and 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 additional 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. 54 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. Columbia Capital Corporation and its subsidiaries and their respective owners have sold more than one-half of the shares originally received by them. Columbia Capital Corporation has therefore lost its right to designate a director under the voting agreement. 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 be entitled to designate four; o Alta will be entitled to designate one; o Spectrum will designate one; o Fleet will be entitled to 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. 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. Fleet's current designee is Riordon B. Smith. Four independent directors currently serve on Pegasus' board: James J. McEntee, III, Mary C. Metzger, Donald W. Weber and William P. Phoenix. Michael C. Brooks, who was designated by Whitney under the original voting agreement, has advised Pegasus that he intends to resign from the board at the time of the special meeting. Harry F. Hopper III, who was designated by Columbia, will continue to serve following the special meeting. Mr. Pagon's current designees are himself and Robert N. Verdecchio, and both will continue to serve as such. Mr. Pagon has advised Pegasus that he intends to designate Ted S. Lodge, an officer of the Company, as his third designee to the board, to be elected upon Mr. Brooks's resignation at the time of the special meeting. Mr. Pagon has not yet decided on his fourth designee. If any of Alta, Spectrum or Fleet 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 and Fleet, 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 and Fleet 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. Columbia's designation right has terminated. 55 Alta, Spectrum or Fleet 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; 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 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 Alta, Spectrum and Fleet lose their right to designate a director as provided above, the voting agreement will terminate as to such stockholders and its voting provisions and requirements concerning the nominating committee will not apply to such stockholders at 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 managing general partner of Alta Communications, Inc., a private venture capital firm. Prior to joining Burr, Egan, Deleage & Co. in 1990, Mr. Benbow spent 22 years with the Bank of New England N.A., where he was a Senior Vice President responsible for special industries lending in the areas of media, project finance and energy. Additionally, he serves as a director of Diginet Americas, Inc., a fixed wireless local loop service provider throughout South America, of Advanced Telcom Group, Inc., a competitive local exchange carrier, and of Preferred Networks, Inc., a public paging company. William P. Collatos 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, ITXC Corp., a global provider of Internet-based voice, fax and voice-enabled services, and JazzTel, a competitive local exchange provider based in Madrid, Spain. 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. 56 Transfer Restrictions If the existing registration rights agreement among Pegasus and certain former stockholders of Digital Television Services is amended as provided in the merger areement, each person signing the Golden Sky 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' 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 effective date of any earlier 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 commissions 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 in 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 57 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 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 any cash received by certain holders of Golden Sky's capital stock in connection with 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; 58 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 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. 59 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. 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. 60 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, and Pegasus Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this proxy statement/prospectus. The consolidated statement of operating data for the fiscal years ended December 31, 1995, 1996, 1997, 1998 and 1999 and the consolidated balance sheet data as of December 31, 1995, 1996, 1997, 1998 and 1999 are derived from the audited consolidated financial statements previously filed with the SEC. The statement of operating data reflect net revenues and operating expenses from our continuing operations. The results of operations from the entire cable segment have been classified as discontinued and certain amounts for 1995 through 1998 have been restated. You should also read the paragraphs that follow this table, which explain certain portions of the table.
Years Ended December 31, -------------------------------------- Statement of Operating Data: 1995 1996 1997 (Dollars in thousands, except per share data) Net revenues: DBS ......................................................... $ 1,469 $ 5,829 $ 38,254 Broadcast ................................................... 20,073 28,604 31,876 --------- -------- --------- Total net revenues ......................................... 21,542 34,433 70,130 Operating expenses: DBS Programming, technical and general and administrative ...... 1,379 4,312 26,042 Marketing and selling ...................................... -- 646 5,973 Incentive compensation ..................................... 9 146 795 Depreciation and amortization .............................. 640 1,786 17,042 Broadcast Programming, technical and general and administrative ...... 10,181 13,903 15,672 Marketing and selling ...................................... 3,789 4,851 5,704 Incentive compensation ..................................... 415 691 298 Depreciation and amortization .............................. 2,934 4,041 3,754 Corporate expenses .......................................... 1,364 1,429 2,256 Corporate depreciation and amortization ..................... 492 988 1,353 Other expense, net .......................................... 15 139 630 --------- -------- --------- Income (loss) from operations .............................. 324 1,501 (9,389) Interest expense ............................................. (4,135) (8,885) (14,275) Interest income .............................................. 362 218 1,508 Other non-operating expenses ................................. -- -- -- --------- -------- --------- Loss from continiuing operations before income taxes, equity loss and extraordinary items ........................ (3,449) (7,166) (22,156) Provision (benefit) for income taxes ......................... 10 (145) 168 Equity in net loss of unconsolidated affiliate ............... -- -- -- --------- -------- --------- Loss from continuing operations before extraordinary items... (3,459) (7,021) (22,324) Discontinued operations: Income (loss) from discontinued operations of cable segment, net of income taxes ............................... (4,698) (2,703) 257 Gain on sale of discontinued operations, net of income taxes ...................................................... -- -- 4,451 --------- -------- --------- Loss before extraordinary items ............................. (8,157) (9,724) (17,616) Extraordinary gain (loss) from extinguishment of debt, net ... 10,211 (250) (1,656) --------- -------- --------- Net income (loss) ........................................... 2,054 (9,974) (19,272) Preferred stock dividends ................................... -- -- 12,215 --------- -------- --------- Net income (loss) applicable to common shares ............... $ 2,054 ($ 9,974) ($ 31,487) ========= ======== ========= Loss per common share: Loss from continuing operations ............................ $ (1.13) $ (3.50) Income (loss) from discontinued operations ................. (0.43) 0.03 Gain on sale of discontinued operations .................... -- 0.45 -------- --------- Loss before extraordinary items ............................ (1.56) (3.02) Extraordinary item ......................................... (0.04) (0.17) -------- --------- Loss per common share ...................................... $ (1.60) $ (3.19) ======== ========= Weighted average shares outstanding (000's) ................ 6,240 9,858 ======== ========= Other Data: Pre-marketing cash flow from continuing operations: DBS ......................................................... $ 90 $ 1,517 $ 12,212 Broadcast ................................................... 6,103 9,850 10,500 --------- -------- --------- Total pre-marketing cash flow from continuing operations .... $ 6,193 $ 11,367 $ 22,712 ========= ======== ========= Location cash flow from continuing operations ................ $ 6,193 $ 10,721 $ 16,739 Operating cash flow from continuing operations ............... 4,829 9,292 14,483 Capital expenditures ......................................... 2,640 6,294 9,929 Net cash provided by (used for): Operating activities ........................................ 5,783 3,059 8,478 Investing activities ........................................ (6,047) (81,179) (142,109) Financing activities ........................................ 10,859 74,727 169,098
Years Ended December 31, ------------------------------------------- Pro Forma Statement of Operating Data: 1998 1999 1999 (Dollars in thousands, except per share data) Net revenues: DBS ......................................................... $ 147,142 $ 286,353 $ 426,926 Broadcast ................................................... 34,311 36,415 36,415 --------- --------- --------- Total net revenues ......................................... 181,453 322,768 463,341 Operating expenses: DBS Programming, technical and general and administrative ...... 102,419 201,158 324,507 Marketing and selling ...................................... 45,706 117,774 182,707 Incentive compensation ..................................... 1,159 1,592 2,374 Depreciation and amortization .............................. 59,077 82,744 215,598 Broadcast Programming, technical and general and administrative ...... 18,056 22,812 22,812 Marketing and selling ...................................... 5,993 6,304 6,304 Incentive compensation ..................................... 177 57 57 Depreciation and amortization .............................. 4,557 5,144 5,144 Corporate expenses .......................................... 3,614 5,975 5,975 Corporate depreciation and amortization ..................... 2,105 3,119 3,119 Other expense, net .......................................... 1,409 1,995 1,995 --------- --------- --------- Income (loss) from operations .............................. (62,819) (125,906) (307,251) Interest expense ............................................. (44,559) (64,904) (119,898) Interest income .............................................. 1,586 1,356 3,749 Other non-operating expenses ................................. -- -- (1,259) --------- --------- --------- Loss from continiuing operations before income taxes, equity loss and extraordinary items ........................ (105,792) (189,454) (424,659) Provision (benefit) for income taxes ......................... (901) (8,892) (8,892) Equity in net loss of unconsolidated affiliate ............... -- (201) (201) --------- --------- --------- Loss from continuing operations before extraordinary items... (104,891) (180,763) (415,968) Discontinued operations: Income (loss) from discontinued operations of cable segment, net of income taxes ............................... 1,047 2,128 -- Gain on sale of discontinued operations, net of income taxes ...................................................... 24,727 -- -- --------- --------- --------- Loss before extraordinary items ............................. (79,117) (178,635) (415,968) Extraordinary gain (loss) from extinguishment of debt, net ... -- (6,178) -- --------- --------- --------- Net income (loss) ........................................... (79,117) (184,813) (415,968) Preferred stock dividends ................................... 14,764 16,706 36,206 --------- --------- --------- Net income (loss) applicable to common shares ............... ($ 93,881) ($ 201,519) ($ 452,174) ========= ========= ========= Loss per common share: Loss from continuing operations ............................ $ 8.46) $ 10.46) $ 17.68) Income (loss) from discontinued operations ................. 0.07 0.11 -- Gain on sale of discontinued operations .................... 1.75 -- -- --------- --------- --------- Loss before extraordinary items ............................ ( 6.64) ( 10.35) ( 17.68) Extraordinary item ......................................... -- ( 0.33) -- --------- --------- --------- Loss per common share ...................................... $ 6.64) $ 10.68) $ 17.68) ========= ========= ========= Weighted average shares outstanding (000's) ................ 14,130 18,875 25,575 ========= ========= ========= Other Data: Pre-marketing cash flow from continuing operations: DBS ......................................................... $ 44,723 $ 85,195 $ 102,419 Broadcast ................................................... 10,262 7,299 7,299 --------- --------- --------- Total pre-marketing cash flow from continuing operations .... $ 54,985 $ 92,494 $ 109,718 ========= ========= ========= Location cash flow from continuing operations ................ $ 9,279 ($ 25,280) ($ 72,989) Operating cash flow from continuing operations ............... 5,665 (31,255) (78,964) Capital expenditures ......................................... 12,400 14,784 12,839 Net cash provided by (used for): Operating activities ........................................ (21,962) (88,879) NA Investing activities ........................................ (101,373) (133,981) NA Financing activities ........................................ 133,791 208,808 NA
61 Pegasus' Selected Historical and Pro Forma Consolidated Financial Data
As of December 31, -------------------------------------------------------------------------- Pro Forma 1995 1996 1997 1998 1999 1999 (Dollars in thousands) Balance Sheet Data: Cash and cash equivalents ......................... $21,856 $ 8,582 $ 45,269 $ 75,985 $ 42,832 $ 574,020 Working capital (deficiency) ...................... 17,566 6,430 32,347 37,889 (4,936) 496,137 Total assets ...................................... 95,770 173,680 380,862 886,310 945,332 2,742,170 Total debt (including current) .................... 82,896 115,575 208,355 559,029 684,414 1,124,592 Total liabilities ................................. 95,521 133,354 239,234 699,144 862,725 1,684,463 Redeemable preferred stock ........................ -- -- 111,264 126,028 142,734 142,734 Convertible preferred stock ....................... -- -- -- -- -- 290,525 Minority interest ................................. -- -- 3,000 3,000 3,000 3,936 Total common stockholders' equity (deficit) ....... 249 40,326 27,364 58,138 (63,127) 620,512
The pro forma income statement and other data for the year ended December 31, 1999 include our pending cable sale, the 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 at the beginning of 1999. The pro forma balance sheet data as of December 31, 1999 includes the pending cable sale, the investment in Personalized Media, the 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 data for the year ended December 31, 1999 do not include the $89.4 million gain from the pending sale of our Puerto Rico cable system or the $15.2 million extraordinary net loss from the extinguishment of debt. In this section we use the terms pre-marketing cash flow from continuing operations and location cash flow from continuing operations. Pre-marketing cash flow from continuing operations is calculated by taking our earnings and adding back the following expenses: o interest and income taxes; o depreciation and amortization and corporate overhead; o extraordinary and non-recurring items; o non-cash charges, such as incentive compensation under our restricted stock plan and 401(k) plans; o results of discontinued operations; and o direct broadcast satellite subscriber acquisition costs, which are sales and marketing expenses incurred to acquire new direct broadcast satellite subscribers. Location cash flow from continuing operations is pre-marketing cash flow from continuing operations less direct broadcast satellite subscriber acquisition costs. Pre-marketing cash flow from continuing operations and location cash flow from continuing operations are not, and should not be considered, alternatives to income from operations, net income, net cash provided by operating activities or any other measure for determining our operating performance or liquidity, as determined under U.S. generally accepted accounting principles. Pre-marketing cash flow from continuing operations and location cash flow from continuing operations also do not necessarily indicate whether our cash flow will be sufficient to fund working capital, capital expenditures, or to react to changes in Pegasus' industry or the economy generally. We believe that pre-marketing cash flow from continuing operations and location cash flow from continuing operations are important, however, for the following reasons: o people who follow our industry frequently use them as measures of financial performance and ability to pay debt service; and o they are measures that we, our lenders and investors use to monitor our financial performance and debt leverage. 62 GOLDEN SKY'S SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table presents Golden Sky's financial and operating information for the periods indicated. The historical financial information presented below was taken from Golden Sky's audited consolidated financial statements. 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 receives 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 those financial statements and other financial information, and Golden Sky Management's Discussion and Analysis of Financial Condition and Results of Operations, appearing elsewhere herein.
Inception Through Years Ended December 31, December 31, ---------------------------------------------- 1996 1997 1998 1999 -------------- ------------- ------------- -------------- (in thousands) Statement of Operations Data Revenue: DBS services ..................................... $ 219 $ 16,452 $ 74,910 $ 139,933 Lease and other .................................. 36 944 1,014 640 -------- ---------- ---------- ---------- Total revenue ..................................... 255 17,396 75,924 140,573 Costs and Expenses: Costs of DBS services ............................ 130 9,304 45,291 88,690 System operations ................................ 26 3,796 11,021 19,733 Sales and marketing .............................. 73 7,316 32,201 64,933 General and administrative ....................... 1,035 2,331 7,431 15,708 Depreciation and amortization .................... 97 7,300 23,166 35,963 -------- ---------- ---------- ---------- Total costs and expenses .......................... 1,361 30,047 119,110 225,027 -------- ---------- ---------- ---------- Operating loss .................................... (1,106) (12,651) (43,186) (84,454) Net interest expense .............................. (61) (3,206) (18,965) (42,619) Other non-operating expenses ...................... -- -- -- (1,259) -------- ---------- ---------- ---------- Loss before extraordinary charge .................. (1,167) (15,857) (62,151) (128,332) Extraordinary charge on early retirement of debt ............................... -- -- (2,577) (2,935) -------- ---------- ---------- ---------- Net loss .......................................... (1,167) (15,857) (64,728) (131,267) Preferred stock dividend requirements ............. -- (7,888) (14,855) (17,920) -------- ---------- ---------- ---------- Net loss attributable to common stock- holders ........................................ $ (1,167) $ (23,745) $ (79,583) $ (149,187) ======== ========== ========== ========== Other Financial Data EBITDA ............................................ $ (1,009) $ (5,351) $ (20,020) $ (48,337) Net cash used in operating activities ............. (790) (3,111) (36,589) (61,101) Net cash used in investing activities ............. (3,231) (120,729) (159,921) (12,232) Net cash provided by financing activities ......... 4,500 136,997 187,362 72,115 Capital expenditures .............................. 105 998 3,317 3,452 Aggregate purchase price of acquisitions .......... 5,256 129,725 124,844 35,339
63
Inception Through Years Ended December 31, December 31, ------------------------------------------------ 1996 1997 1998 1999 -------------- -------------- -------------- -------------- Operating Data Households at end of period ............ 22,000 1,135,000 1,727,000 1,861,000 Subscribers acquired in acquisitions .......................... 3,000 65,300 54,900 18,300 Subscribers added in existing rural DIRECTV markets ....................... 100 21,500 77,200 104,900 Subscribers at end of period ........... 3,100 89,900 222,000 345,200 SAC per gross subscriber added ......... $ 290 $ 280 $ 320 $ 380 Penetration at end of period ........... 14.1% 7.9% 12.9% 18.5%
December 31, --------------------------------------------------------- 1996 1997 1998 1999 ----------- ----------- ------------- ------------- (in thousands) Balance Sheet Data Cash and cash equivalents .............. $ 479 $ 13,636 $ 4,488 $ 3,270 Restricted cash: Current ............................... -- -- 28,083 23,731 Long-term ............................. -- -- 23,534 -- Working capital (deficit) .............. (1,948) 3,843 15,244 (2,586) Total assets ........................... 6,383 156,240 328,099 299,337 Total debt ............................. 4,450 69,113 278,204 369,378 Stockholders' equity (deficit) ......... (1,166) (24,912) (104,470) (253,503)
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 Systems' 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 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. 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. 64 PEGASUS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of Pegasus should be read in conjunction with the consolidated financial statements and related notes which are included elsewhere in this proxy statement/prospectus. GENERAL Pegasus Communications Corporation is: o The largest independent provider of DIRECTV with 727,000 subscribers at January 31, 2000, on an actual basis. We have the exclusive right to distribute DIRECTV digital broadcast satellite services to 5.0 million rural households in 36 states. We distribute DIRECTV through the Pegasus retail network, a network in excess of 2,500 independent retailers. o The owner or programmer of ten TV stations affiliated with either Fox, UPN or the WB and the owner of a large cable system in Puerto Rico serving approximately 55,000 subscribers. o We have increased our revenues at a compound growth rate of 89% per annum since our inception in 1991. DBS revenues are principally derived from monthly customer subscriptions and pay-per-view services. Broadcast revenues are derived from the sale of broadcast airtime to local and national advertisers. In January 2000, we entered into a letter of intent to sell the assets of our entire cable system business in Puerto Rico to a subsidiary of Centennial Cellular Corporation for $170.0 million in cash, subject to certain adjustments. The closing of this sale is anticipated to occur during the third quarter of 2000 and is subject to the negotiation of a definitive agreement, third-party approvals, including regulatory approvals, and other customary conditions. The sale is also subject to approval by Pegasus' board of directors. Accordingly, the results of our cable segment have been presented as discontinued operations in our consolidated statements of operations. In this section we use the terms pre-marketing cash flow from continuing operations and location cash flow from continuing operations. Pre-marketing cash flow from continuing operations is calculated by taking our earnings and adding back the following expenses: o interest; o income taxes; o depreciation and amortization; o non-cash charges; o corporate overhead; o extraordinary and non-recurring items; o results of discontinued operations; and o DBS subscriber acquisition costs, which are sales and marketing expenses incurred to acquire new DBS subscribers. Location cash flow from continuing operations is pre-marketing cash flow from continuing operations less DBS subscriber acquisition costs. Pre-marketing cash flow from continuing operations and location cash flow from continuing operations are not, and should not be considered, alternatives to income from operations, net income, net cash provided by operating activities or any other measure for determining our operating performance or liquidity, as determined under generally accepted accounting principles. Pre-marketing cash flow from continuing operations and location cash flow from continuing operations also do not necessarily indicate whether our cash 65 flow will be sufficient to fund working capital, capital expenditures, or to react to changes in Pegasus' industry or the economy generally. We believe that pre-marketing cash flow from continuing operations and location cash flow from continuing operations are important, however, for the following reasons: o people who follow our industry frequently use them as measures of financial performance and ability to pay debt service; and o they are measures that we, our lenders and investors use to monitor our financial performance and debt leverage. Pegasus generally does not require new DBS customers to sign programming contracts and, as a result, subscriber acquisition costs are currently being charged to operations in the period incurred. RESULTS OF OPERATIONS Year ended December 31, 1999 compared to the year ended December 31, 1998 Total net revenues from continuing operations in 1999 were $322.8 million, an increase of $141.3 million, or 78%, compared to total net revenues of $181.5 million in 1998. The increase in total net revenues in 1999 was primarily due to an increase in DBS revenues of $139.2 million attributable to acquisitions and to internal growth in Pegasus' DBS subscriber base. Total operating expenses from continuing operations in 1999 were $448.7 million, an increase of $204.4 million, or 84%, compared to total operating expenses of $244.3 million in 1998. The increase was primarily due to an increase of $194.9 million in operating expenses attributable to the growth in Pegasus' DBS business. Total corporate expenses from continuing operations, including corporate depreciation and amortization, were $9.1 million in 1999, an increase of $3.4 million, or 59%, compared to $5.7 million in 1998. The increase in corporate expenses is primarily attributable to the growth in Pegasus' business. The increase in corporate depreciation and amortization is primarily due to amortization of deferred financing costs associated with the issuance of $100.0 million of senior notes in November 1998. Other expenses from continuing operations were $2.0 million in 1999, an increase of $586,000, or 42%, compared to other expenses of $1.4 million in 1998. The increase is primarily due to increased investor relations activities, board related costs and development costs. Interest expense from continuing operations was $64.9 million in 1999, an increase of $20.3 million, or 46%, compared to interest expense of $44.6 million in 1998. The increase in interest expense is primarily due to interest on Pegasus' $100.0 million senior notes issued in November 1998 and an increase in bank borrowings and seller notes associated with Pegasus' DBS acquisitions. Interest income from continuing operations was $1.4 million in 1999, a decrease of $229,000, or 14%, compared to interest income of $1.6 million in 1998. The decrease in interest income is due to lower average cash balances in 1999 compared to 1998. The benefit for income taxes from continuing operations amounted to $8.9 million in 1999, an increase of $8.0 million, compared to a benefit of $901,000 in 1998. The increase is primarily attributable to the amortization of the deferred tax liability that originated from the acquisition of Digital Television Services, Inc. in April 1998. Equity in the net loss of an unconsolidated affiliate, resulting from an investment in Pegasus PCS Partners, LP in August 1999, amounted to $201,000 for the year ended December 31, 1999. Income from discontinued operations of the cable segment, net of income taxes, was $2.1 million in 1999, an increase of $1.1 million, or 103%, compared to $1.0 million in 1998. The increase is primarily attributable to the acquisition of the Aguadilla, Puerto Rico cable system effective March 31, 1999. Pegasus had approximately 55,000 cable subscribers at December 31, 1999 compared to 28,800 at December 31, 1998. Pegasus sold its remaining New England cable systems in 1998 for $30.1 million resulting in a gain on the sale of discontinued operations, net of income taxes, of $24.7 million. 66 Extraordinary loss from the extinguishment of debt was $6.2 million in 1999. In November 1999, Pegasus exchanged $155.0 million in principal amount of its' senior notes due 2007 for $155.0 million in principal amount of outstanding senior subordinated notes due 2007 of its subsidiaries, Digital Television Services, Inc. and DTS Capital, Inc. Accordingly, the deferred financing costs related to the senior subordinated notes due 2007 of its subsidiaries were written off. No such refinancings occurred in 1998. Preferred stock dividends were $16.7 million in 1999, an increase of $1.9 million, or 13%, compared to $14.8 million in preferred stock dividends in 1998. The increase is attributable to a greater number of shares of Pegasus' preferred stock outstanding in 1999 compared to 1998 as the result of payment of dividends in kind. DBS During 1999, Pegasus acquired, through acquisitions, approximately 39,000 subscribers and the exclusive DIRECTV distribution rights to approximately 336,000 households in rural areas of the United States. At December 31, 1999, Pegasus had exclusive DIRECTV distribution rights to 4.9 million households and 702,000 subscribers as compared to 4.6 million households and 435,000 subscribers at December 31, 1998. Pegasus had 7.2 million households and 1.1 million subscribers at December 31, 1999, including pending acquisitions (which include the merger with Golden Sky). At December 31, 1998, subscribers would have been 733,000, including pending and completed acquisitions. Subscriber penetration increased from 10.3% at December 31, 1998 to 15.3% at December 31, 1999, including pending and completed acquisitions. Total DBS net revenues were $286.4 million in 1999, an increase of $139.2 million, or 95%, compared to DBS net revenues of $147.1 million in 1998. The increase is primarily due to an increase in the average number of subscribers in 1999 compared to 1998. The average monthly revenue per subscriber was $43.94 in 1999 compared to $41.63 in 1998. Pro forma DBS net revenues, including pending acquisitions at December 31, 1999 (which include the merger with Golden Sky), were $434.8 million, an increase of $134.3 million, or 45%, compared to pro forma DBS net revenues of $300.5 million in 1998. Programming, technical, and general and administrative expenses were $201.2 million in 1999, an increase of $98.7 million, or 96%, compared to $102.4 million in 1998. The increase is attributable to significant growth in subscribers and territory in 1999. As a percentage of revenue, programming, technical, and general and administrative expenses were 70.2% in 1999 compared to 69.6% in 1998. Subscriber acquisition costs were $117.8 million, an increase of $72.1 million compared to $45.7 million in 1998. Gross subscriber additions were 337,300 in 1999 compared to 132,700 in 1998. The total subscriber acquisition costs per gross subscriber addition were $349 in 1999 compared to $344 in 1998. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $1.6 million in 1999, an increase of $433,000, or 37%, compared to $1.2 million in 1998. The increase resulted from a larger gain in pro forma location cash flow during 1999 as compared to 1998. Depreciation and amortization was $82.7 million in 1999, an increase of $23.7 million, or 40%, compared to $59.1 million in 1998. The increase in depreciation and amortization is primarily due to an increase in the fixed and intangible asset base as the result of DBS acquisitions that occurred in 1998 and 1999. Broadcast In 1999, Pegasus owned or programmed ten broadcast television stations in six markets. Two new stations were launched during the second half of 1998 and one new station was launched in December 1999. Total net broadcast revenues in 1999 were $36.4 million, an increase of $2.1 million, or 6%, compared to net broadcast revenues of $34.3 million in 1998. The increase was primarily attributable to an increase of $1.6 million in net broadcast revenues from the four stations that began operations in 1997 and 1998. 67 Programming, technical, and general and administrative expenses were $22.8 million in 1999, an increase of $4.8 million, or 26%, compared to $18.1 million in 1998. The increase is primarily due to higher programming costs in 1999 and an increase in news related expenses associated with the launch of self-produced news in our Portland, Maine and Chattanooga, Tennessee markets. Marketing and selling expenses were $6.3 million in 1999, an increase of $311,000, or 5%, compared to $6.0 million in 1998. The increase in marketing and selling expenses was due to an increase in promotional costs associated with the launch of the new stations and news programs. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $57,000 in 1999, a decrease of $120,000, or 68%, compared to $177,000 in 1998. The decrease resulted from a lower gain in pro forma location cash flow during 1999 as compared to 1998. Depreciation and amortization was $5.1 million in 1999, an increase of $587,000, or 13%, compared to $4.6 million in 1998. The increase is due to capital expenditures associated with the launch of the new stations and our news initiative. Year ended December 31, 1998 compared to the year ended December 31, 1997 Total net revenues from continuing operations in 1998 were $181.5 million, an increase of $111.3 million, or 159%, compared to total net revenues of $70.1 million in 1997. The increase in total net revenues in 1998 was primarily due to an increase in DBS revenues of $108.9 million attributable to acquisitions and to internal growth in Pegasus' DBS subscriber base. Total operating expenses from continuing operations in 1998 were $244.3 million, an increase of $164.8 million, or 207%, compared to total operating expenses of $79.5 million in 1997. The increase was primarily due to an increase of $158.5 million in operating expenses attributable to the growth in Pegasus' DBS business. Total corporate expenses from continuing operations, including corporate depreciation and amortization, were $5.7 million in 1998, an increase of $2.1 million, or 58%, compared to $3.6 million in 1997. The increase in corporate expenses is primarily attributable to the growth in Pegasus' business. The increase in corporate depreciation and amortization is due to amortization of deferred financing costs associated with the issuance of $100.0 million of preferred stock in January 1997, $115.0 million of senior notes in October 1997 and $100.0 million of senior notes in November 1998. Other expenses from continuing operations were $1.4 million in 1998, an increase of $779,000, or 124%, compared to other expenses of $630,000 in 1997. The increase is primarily due to increased investor relations activities and other board related costs. Interest expense from continuing operations was $44.6 million in 1998, an increase of $30.3 million, or 212%, compared to interest expense of $14.3 million in 1997. The increase in interest expense is primarily due to a full year's interest on Pegasus' $115.0 million senior notes and an increase in bank borrowings and seller notes associated with Pegasus' DBS acquisitions. Interest income from continuing operations was $1.6 million in 1998, an increase of $77,000, or 5%, compared to interest income of $1.5 million in 1997. The increase in interest income is due to greater average cash balances in 1998 compared to 1997. The provision for income taxes from continuing operations declined by approximately $1.1 million primarily as a result of the amortization of the deferred tax liability that originated from the acquisition of Digital Television Services, Inc. Income from discontinued operations of the cable segment, net of income taxes, was $1.0 million in 1998, an increase of $791,000, or 308%, compared to $257,000 in 1997. The increase is primarily attributable to a decrease in interest expense in 1998 compared to 1997 as a result of the sale of Pegasus' existing New England cable systems effective July 1, 1998. In September 1998, Hurricane Georges swept through Puerto Rico damaging Pegasus' cable system. Prior to the hurricane, Pegasus had approximately 29,000 subscribers. At December 31, 1998, Pegasus had approximately 28,800 subscribers compared to 27,300 subscribers in 1997. The gain on sale of discontinued operations, net of income taxes, was $24.7 million in 1998 compared to $4.5 million in 1997. In 1997, Pegasus sold its New Hampshire cable system for $6.9 million resulting in a gain of $4.5 million. In 1998, Pegasus sold its remaining New England cable systems for $30.1 million resulting in a gain of $24.7 million. 68 Extraordinary loss from the extinguishment of debt decreased $1.7 million in 1998. In 1997, Pegasus refinanced its existing $130.0 million credit facility with a new $180.0 million credit facility and accordingly, the deferred financing costs associated with the $130.0 million credit facility were written off. No such refinancings occurred in 1998. Preferred stock dividends were $14.8 million in 1998, an increase of $2.6 million, or 21%, compared to $12.2 million in preferred stock dividends in 1997. The increase is attributable to a greater number of shares of Pegasus' preferred stock outstanding in 1998 compared to 1997 as the result of payment of dividends in preferred stock and to the preferred stock being outstanding for a full year. DBS Pegasus' DBS business experienced significant growth in 1998. During 1998, Pegasus acquired approximately 217,000 subscribers and the exclusive DIRECTV distribution rights to approximately 2.4 million households in rural areas of the United States. At December 31, 1998, Pegasus had exclusive DIRECTV distribution rights to 4.6 million households and 435,000 subscribers as compared to 2.2 million households and 132,000 subscribers at December 31, 1997. Subscriber penetration increased from 6.7% at December 31, 1997 to 10.3% at December 31, 1998, including pending and completed acquisitions. Total DBS net revenues were $147.1 million in 1998, an increase of $109.0 million, or 285%, compared to DBS net revenues of $38.3 million in 1997. The increase is primarily due to an increase in the average number of subscribers in 1998 compared to 1997. Pegasus' 1998 DBS acquisitions represented $70.4 million, or 65%, of the $109.0 million increase in DBS net revenues. The average monthly revenue per subscriber was $41.63 in 1998 compared to $40.72 in 1997. Programming, technical, and general and administrative expenses were $102.4 million in 1998, an increase of $76.4 million, or 293%, compared to $26.0 million in 1997. The increase is attributable to significant growth in subscribers and territory in 1998. Pegasus' 1998 DBS acquisitions represented $45.7 million, or 60%, of the $76.4 million increase in programming, technical, and general and administrative expenses. As a percentage of revenue, programming, technical, and general and administrative expenses were 69.6% in 1998 compared to 68.1% in 1997. Subscriber acquisition costs were $45.7 million, an increase of $35.2 million compared to $10.5 million in 1997. In 1997, $4.5 million in subscriber acquisition costs were capitalized as a significant number of subscribers entered into extended programming contracts. Pegasus generally did not require new subscribers to sign programming contracts in 1998. The total subscriber acquisition costs per gross subscriber addition were $344 in 1998 compared to $281 in 1997. The increase is attributable to increases in sales commissions paid to Pegasus' dealers, promotional programming and advertising. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $1.2 million in 1998, an increase of $364,000, or 46%, compared to $795,000 in 1997. The increase resulted from a larger gain in pro forma location cash flow during 1998 as compared to 1997. Depreciation and amortization was $59.1 million in 1998, an increase of $42.0 million, or 247%, compared to $17.0 million in 1997. The increase in depreciation and amortization is primarily due to an increase in the fixed and intangible asset base as the result of DBS acquisitions that occurred in 1997 and 1998. Broadcast In 1998, Pegasus owned or programmed nine broadcast television stations in six markets. Two new stations were launched during the second half of 1998. Total net broadcast revenues in 1998 were $34.3 million, an increase of $2.4 million, or 8%, compared to net broadcast revenues of $31.9 million in 1997. The increase was primarily attributable to an increase of $1.3 million in net broadcast revenues from stations that began operations in 1997 and a $558,000 increase in barter revenue. Net broadcast revenues from the two stations launched in 1998 were minimal. Programming, technical, and general and administrative expenses were $18.1 million in 1998, an increase of $2.4 million, or 15%, compared to $15.7 million in 1997. The increase is primarily due to a full year's expenses from the two stations launched in 1997 and higher programming costs in 1998. 69 Marketing and selling expenses were $6.0 million in 1998, an increase of $289,000, or 5%, compared to $5.7 million in 1997. The increase in marketing and selling expenses was due to an increase in promotional costs associated with the launch of the new stations and news programs. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $177,000 in 1998, a decrease of $120,000, or 40%, compared to $298,000 in 1997. The decrease resulted from a lower gain in pro forma location cash flow during 1998 as compared to 1997. Depreciation and amortization was $4.6 million in 1998, an increase of $802,000, or 21%, compared to $3.8 million in 1997. The increase in depreciation and amortization is due to an increase in fixed assets associated with the construction of the new stations in 1997 and 1998. LIQUIDITY AND CAPITAL RESOURCES Pegasus' primary sources of liquidity have been the net cash provided by its DBS, broadcast and cable operations, credit available under its credit facilities and proceeds from public and private offerings. Pegasus' principal uses of its cash has been to fund acquisitions, to meet debt service obligations, to fund DBS subscriber acquisition costs, to fund DBS programming costs and dealer commissions and to fund investments in its broadcast and cable technical facilities. Pre-marketing cash flow from continuing operations increased by approximately $37.5 million, or 68%, for the year ended December 31, 1999 as compared to the same period in 1998. Pre-marketing cash flow from continuing operations increased as a result of: o a $40.5 million, or 90%, increase in DBS pre-marketing cash flow of which $13.3 million, or 33%, was due to an increase in same territory pre-marketing cash flow and $27.2 million or 67% was attributable to territories acquired in 1998 and 1999; and o a $3.0 million, or 29%, decrease in broadcast location cash flow as the result of a $2.6 million, or 25%, decrease in same station location cash flow and a $406,000 decrease attributable to the three new stations launched in July 1998, November 1998 and December 1999. During the year ended December 31, 1999, $54.5 million of cash on hand at the beginning of the year, together with $208.8 million of net cash provided by Pegasus' financing activities, was used to fund operating activities of approximately $88.9 million and other investing activities of $134.0 million. Investing activities consisted of: o the purchase of a cable system serving Aguadilla, Puerto Rico and neighboring communities for approximately $42.1 million; o the acquisition of DBS assets from fifteen independent DIRECTV providers during 1999 for approximately $64.6 million; o the purchase of a building for broadcast operations in our Northeastern Pennsylvania market for approximately $1.8 million; o broadcast expenditures associated with the launch of self-produced news in our Portland, Maine and Chattanooga, Tennessee markets totaling approximately $1.0 million; o broadcast expenditures in connection with our new station in Jackson, Mississippi and other construction costs for $708,000; o DBS facility upgrades of approximately $4.5 million; o the expansion, enhancements and capitalized costs of the Puerto Rico cable system amounting to approximately $6.1 million, including $213,000 related to hurricane damage; o payments of programming rights amounting to $3.5 million; o proceeds from the sale of DBS assets to an independent DIRECTV provider of $509,000; 70 o new business development costs of $373,000; o investment in affiliate of $4.8 million; and o other capital expenditures and intangibles totaling $5.0 million. Financing activities consisted of: o the issuance of approximately 3.8 million shares of Class A common stock resulting in net proceeds to Pegasus of approximately $77.7 million; o net borrowings on bank credit facilities totaling $130.3 million; o the repayment of approximately $14.5 million of long-term debt, primarily sellers' notes and capital leases; o net restricted cash draws of approximately $18.1 million for interest payments and $1.0 million in connection with the acquisition of the Aguadilla, Puerto Rico cable system; o capitalized costs relating to Pegasus' financings of approximately $3.6 million; and o the repurchase of Class A common stock in treasury of $187,000. As of December 31, 1999, cash on hand amounted to $40.5 million plus restricted cash of $2.4 million. Pre-marketing cash flow from continuing operations increased by approximately $32.3 million, or 142%, for the year ended December 31, 1998 as compared to the same period in 1997. Pre-marketing cash flow from continuing operations increased as a result of: o a $32.5 million, or 266%, increase in DBS pre-marketing cash flow of which $3.8 million, or 12%, was due to an increase in same territory pre-marketing cash flow and $28.7 million or 88% was attributable to territories acquired in 1997 and 1998; and o a $238,000, or 2%, decrease in broadcast location cash flow as the result of a $110,000, or 1%, decrease in same station location cash flow and a $128,000 decrease attributable to the four new stations launched in August 1997, October 1997, July 1998 and November 1998. During the year ended December 31, 1998, proceeds from the sale of Pegasus' remaining New England cable systems amounted to $30.1 million, which together with $44.0 million of cash on hand at the beginning of the year, $3.3 million of cash acquired from acquisitions and $133.8 million of net cash provided by Pegasus' financing activities, was used to fund operating activities of approximately $22.0 million and other investing activities of $134.8 million. Investing activities, net of cash acquired from acquisitions and proceeds from the sale of the New England cable systems, consisted of: o the acquisition of DBS assets, excluding Digital Television Services, Inc., from twenty-six independent DIRECTV providers during 1998 for approximately $109.3 million; o approximately $6.8 million of broadcast expenditures for broadcast television transmitter, tower and facility constructions and upgrades. Pegasus commenced the programming of four new broadcast stations over the last two years, WPME in August 1997, WGFL in October 1997, WFXU in July 1998 and WSWB in November 1998; o DBS facility upgrades of approximately $1.2 million; o the expansion and enhancements of the Puerto Rico cable system amounting to approximately $2.0 million; o payments of programming rights amounting to $2.6 million; o capitalized costs relating to Pegasus' financing of approximately $4.4 million; o capitalized costs relating to the acquisition of Digital Television Services, Inc. of approximately $4.3 million; and o maintenance and other capital expenditures and intangibles totaling approximately $4.2 million. 71 Financing activities consisted of: o the $100.0 million 9 3/4% senior notes offering resulting in proceeds to Pegasus of approximately $96.8 million; o net borrowings on bank credit facilities totaling $44.4 million; o the repayment of approximately $15.0 million of long-term debt, primarily sellers' notes and capital leases; and o net restricted cash draws of approximately $7.5 million for interest payments. As of December 31, 1998, cash on hand amounted to $54.5 million plus restricted cash of $21.5 million. Pegasus had $27.5 million drawn and standby letters of credit amounting to $49.6 million under the $180.0 million Pegasus Media & Communications credit facility. Additionally, there was $46.4 million drawn and standby letters of credit of $18.5 million outstanding under the $90.0 million Digital Television Services credit facility. During the year ended December 31, 1997, net cash provided by operating activities was approximately $8.5 million. This amount, together with $8.6 million of cash on hand, $6.9 million of net proceeds from the sale of the New Hampshire cable system and $169.1 million of net cash provided by Pegasus' financing activities was used to fund other investing activities totaling $149.1 million. Financing activities consisted of: o raising $95.8 million in net proceeds from Pegasus' preferred stock offering in January 1997 and $111.0 million in net proceeds from Pegasus' offering of senior notes in October 1997; o borrowing $94.2 million under a former bank credit facility; o repayment of all $94.2 million of that indebtedness and $29.6 million of indebtedness under a still earlier credit facility; o net repayment of approximately $657,000 of other long-term debt; o designating $1.2 million as restricted cash to collateralize a letter of credit; and o the incurrence of approximately $6.2 million in debt issuance costs associated with various credit facilities. Investing activities, net of the proceeds from the sale of the New Hampshire cable system, consisted of: o the acquisition of DBS assets from twenty-five independent DIRECTV providers during 1997, for approximately $133.9 million; o broadcast television transmitter, tower and facility constructions and upgrades totaling approximately $5.8 million; o the interconnection and expansion of the Puerto Rico cable systems amounting to approximately $1.8 million; o payments of programming rights amounting to $2.6 million; and o maintenance and other capital expenditures and intangibles totaling approximately $5.4 million. As defined in the certificate of designation governing Pegasus' Series A preferred stock and the indentures governing Pegasus' senior notes, Pegasus is required to provide adjusted operating cash flow data for Pegasus and its restricted subsidiaries on a consolidated basis where adjusted operating cash flow is defined as "for the four most recent fiscal quarters for which internal financial statements are available, operating cash flow of such person and its restricted subsidiaries less DBS cash flow for the most recent four-quarter period plus DBS cash flow for the most recent quarterly period, multiplied by four." Operating cash flow is income from operations before income taxes, depreciation and amortization, interest expense, extraordinary items and non-cash charges. Although adjusted operating cash flow is not a measure of performance under generally accepted accounting principles, we believe that location cash flow, operating cash flow and adjusted operating cash flow are accepted within our business segments as generally recognized 72 measures of performance and are used by analysts who report publicly on the performance of companies operating in such segments. Restricted subsidiaries carries the same meaning as in the certificate of designation. Digital Television Services, Inc., among certain other of Pegasus' subsidiaries, are not included in the definition of restricted subsidiaries and, accordingly, their operating results are not included in the adjusted operating cash flow data provided below. Pro forma for the acquisition of the Aguadilla, Puerto Rico cable system, the three completed DBS acquisitions occurring in the fourth quarter of 1999 and the sale of our New England cable systems, as if such acquisitions/disposition occurred on January 1, 1999, adjusted operating cash flow would have been approximately $75.1 million as follows:
Four Quarters Ended December 31,1999 (in thousands) -------------------- Revenues ................................................................................. $244,645 Direct operating expenses, excluding depreciation, amortization and other non-cash charges................................................................................. 164,997 Income from operations before incentive compensation, corporate expenses, depreciation and amortization and other non-cash charges ................................................. 79,628 Corporate expenses ....................................................................... 4,569 -------- Adjusted operating cash flow ............................................................. $ 75,059 ========
Financings In 1999, Pegasus Media & Communications maintained a $180.0 million senior, reducing revolving credit facility. Borrowings under the credit facility were available for acquisitions, subject to the approval of the lenders in certain circumstances, working capital, capital expenditures and for general corporate purposes. As of December 31, 1999, $142.5 million was outstanding under its $180.0 million credit facility. The credit facility was amended and restated in January 2000. In 1999, Digital Television Services maintained a $70.0 million senior, reducing revolving credit facility and a $20.0 million senior term credit facility. Borrowings under the credit facilities were available to refinance certain indebtedness and for acquisitions, subject to the approval of the lenders in certain circumstances, working capital, capital expenditures and for general corporate purposes. As of December 31, 1999, $61.7 million was outstanding and standby letters of credit amounting to $10.4 million were issued under its $90.0 million credit facilities, including $2.6 million collateralizing certain of Pegasus' sellers' notes. The credit facilities were refinanced in January 2000 with the first amended and restated Pegasus Media & Communications credit facility. In March 1999, Pegasus completed its secondary public offering in which it sold approximately 3.6 million shares of its Class A common stock to the public at a price of $22.00 per share, resulting in net proceeds to Pegasus of approximately $74.9 million. Pegasus applied $49.9 million of the net proceeds to pay down indebtedness under the Pegasus Media & Communications credit facility and $25.0 million towards the acquisition of the cable system serving Aguadilla, Puerto Rico and neighboring communities. In December 1999, Pegasus entered into a $35.5 million interim letter of credit facility. As of December 31, 1999, $35.5 million of standby letters of credit were issued under the credit facility, including $19.5 million collateralizing certain of Pegasus' outstanding sellers' notes. In January 2000, Pegasus Media & Communications entered into a first amended and restated credit facility, which consists of a $225.0 million senior revolving credit facility which expires in 2004 and a $275.0 million senior term credit facility which expires in 2005. This new credit facility amends Pegasus Media & Communications' existing $180.0 million senior, reducing revolving credit facility. The new credit facility is collateralized by substantially all of the assets of Pegasus Media & Communications and its subsidiaries and is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. Borrowings under the new Pegasus Media & Communications credit facility can be used for acquisitions and general corporate purposes. Commensurate with the closing of the new Pegasus Media & Communications credit facility, Pegasus borrowed $275.0 million under the term loan, outstanding balances under Pegasus Media & Communications' existing $180.0 million senior, reducing revolving credit facility, Digital Television Services' existing $90.0 73 million credit facilities and Pegasus' existing $35.5 million interim letter of credit facility were repaid and commitments under Digital Television Services' existing $90.0 million credit facilities and Pegasus' existing $35.5 million interim letter of credit facility were terminated. Additionally, in connection with the closing of the new Pegasus Media & Communications credit facility, Digital Television Services was merged with and into a subsidiary of Pegas Media & Communications. In January 2000, Pegasus completed an offering of 3,000,000 shares of its 6.5% Series C convertible preferred stock, with a liquidation preference of $100 per share plus any accrued but unpaid dividends. Each share of 6.5% Series C convertible preferred stock will initially be convertible at the option of the holder into 0.7843 shares of Pegasus' Class A common stock. Pegasus may redeem the 6.5% Series C convertible preferred stock on or after August 1, 2001, subject to certain conditions, at redemption prices set forth in the certificate of designation, plus accumulated and unpaid dividends, if any. Pegasus believes that it has adequate resources to meet its working capital, maintenance capital expenditure and debt service obligations for at least the next twelve months. However, Pegasus is highly leveraged and our ability in the future to repay our existing indebtedness will depend upon the success of our business strategy, prevailing economic conditions, regulatory matters, levels of interest rates and financial, business and other factors that are beyond our control. We cannot assure you that we will be able to generate the substantial increases in cash flow from operations that we will need to meet the obligations under our indebtedness. Furthermore, our agreements with respect to our indebtedness contain numerous covenants that, among other things, restrict our ability to: o pay dividends and make certain other payments and investments; o borrow additional funds; o create liens; and o sell our assets. Failure to make debt payments or comply with our covenants could result in an event of default which if not cured or waived could have a material adverse effect on us. Pegasus closely monitors conditions in the capital markets to identify opportunities for the effective use of financial leverage. In financing its future expansion and acquisition requirements, Pegasus would expect to avail itself of such opportunities and thereby increase its indebtedness. This could result in increased debt service requirements. We cannot assure you that such debt financing can be completed on terms satisfactory to Pegasus or at all. Pegasus may also issue additional equity to fund its future expansion and acquisition requirements. Year 2000 The year 2000 issue is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other equipment as the year 2000 is approached and reached. An issue exists for all companies that rely on computers. This issue involves computer programs and applications that were written using two digits rather than four to identify the applicable year, and could result in systems failures or miscalculations. We have completed an assessment of and taken corrective measures to mitigate the potential adverse effects the year 2000 issue may have on our operations. Costs in connection with any modifications to make our systems compliant have not been and are not expected to be material. We are not currently aware of any operational or technical problems as a result of the change to the year 2000 and will continue to monitor the potential adverse impact of the year 2000 issue on our business; however, there can be no assurance that the year 2000 issue will not have a material adverse impact on our financial condition or our results of operations in the future. Dividend Policy As a holding company, Pegasus' ability to pay dividends is dependent upon the receipt of dividends from its direct and indirect subsidiaries. Pegasus Media & Communiations' credit facility and publicly held debt securities restricts it from paying dividends to Pegasus. In addition, Pegasus' ability to pay dividends and to incur indebtedness are subject to certain restrictions contained in Pegasus' publicly held debt securities, in the terms of Pegasus' Series A preferred stock and by Pegasus Media & Communications' credit facility and publicly held debt securities. 74 Seasonality Pegasus' revenues vary throughout the year. As is typical in the broadcast television industry, Pegasus' first quarter generally produces the lowest revenues for the year and the fourth quarter generally produces the highest revenues for the year. Pegasus' operating results in any period may be affected by the incurrence of advertising and promotion expenses that do not necessarily produce commensurate revenues in the short-term until the impact of such advertising and promotion is realized in future periods. Inflation Pegasus believes that inflation has not been a material factor affecting its business. In general, Pegasus' revenues and expenses are impacted to the same extent by inflation. A majority of Pegasus' indebtedness bears interest at a fixed rate. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). As a result of the subsequent issuance of SFAS No. 137, SFAS No. 133 is now effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. We do not expect that the adoption of SFAS No. 133 will have a material effect on our business, financial position or results of operations. OTHER In January 2000, Pegasus entered into an agreement and plan of merger to acquire Golden Sky Holdings, Inc. for approximately 6.5 million shares of Pegasus' Class A common stock and the assumed net liabilities of Golden Sky Holdings, Inc. As of December 31, 1999, Golden Sky Holdings, Inc.'s operations consisted of providing DIRECTV services to approximately 345,200 subscribers in certain rural areas of 24 states in which Golden Sky Holdings, Inc. holds the exclusive rights to provide such services. Upon completion of the acquisition of Golden Sky Holdings, Inc., it will become a wholly owned subsidiary of Pegasus. In January 2000, Pegasus made an investment in Personalized Media Communications, LLC, an advanced communications technology company, of approximately $111.8 million, which consisted of $14.3 million in cash, 200,000 shares of Pegasus' Class A common stock (amounting to $18.8 million) and Pegasus' agreement, subject to certain conditions, to issue warrants to purchase 1.0 million shares of Pegasus' Class A common stock at an exercise price of $90.00 per share and with a term of ten years. The fair value of the warrants to be issued was estimated using the Black-Scholes pricing model and is approximately $78.8 million. A subsidiary of Personalized Media Communications, LLC granted to Pegasus an exclusive license for use of Personalized Media Communications, LLC's patent portfolio in the distribution of satellite services from specified orbital locations. 75 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, except as otherwise indicated. This discussion should be read in conjunction with Golden Sky's consolidated financial statements and the related notes appearing elsewhere in this proxy statement/prospectus. 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 141,500 subscribers as of the date of acquisition. 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 local offices in its territories and dealer relationships with approximately 450 local retailers of direct broadcast satellite equipment. During 1999, Golden Sky acquired ten rural DIRECTV markets. These markets included approximately 134,000 households and served approximately 18,300 subscribers as of the dates of acquisition. The aggregate purchase price for these recent acquisitions, including direct acquisition costs, approximated $35.3 million. Also during 1999, Golden Sky acquired certain minority ownership interests in its rural DIRECTV markets for aggregate consideration of $3.4 million. As a result of its announced merger with Pegasus, Golden Sky has suspended evaluation of future acquisition opportunities. To the extent Golden Sky resumes its acquisition activities, its pace of any future acquisitions may be slower than its historical experience due to, among other factors, a reduction in the number of attractive acquisition opportunities 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 76 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 year ended December 31, 1999 Golden Sky: o used net cash of $61.1 million in operating activities; o used net cash of $12.2 million in investing activities; and o provided net cash of $72.1 million from financing activities. 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. Churn Golden Sky's rate of subscriber disconnects, or churn, has increased in recent periods on both an average monthly and last twelve months basis. During 1999, Golden Sky's average monthly churn approximated 1.8%, compared to 0.8% during 1998. For the twelve-month periods ended December 31, 1999 and 1998, Golden Sky's churn rate approximated 15.9% and 7.5%, 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. 77 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.
Inception To Years Ended December 31, December 31, ------------------------------------------ 1996 1997 1998 1999 -------------- ------------ ------------ ------------ Revenue: DBS services ............................ 85.9% 94.6% 98.7% 99.5% Lease and other ......................... 14.1 5.4 1.3 0.5 -------- ------- ------- ----- Total revenue ............................ 100.0 100.0 100.0 100.0 Costs and Expenses: Costs of DBS services ................... 51.0 53.5 59.7 63.1 System operations ....................... 10.2 21.8 14.5 14.0 Sales and marketing ..................... 28.6 42.0 42.4 46.2 General and administrative .............. 405.9 13.4 9.8 11.2 Depreciation and amortization ........... 38.0 42.0 30.5 25.6 -------- ------- ------- ----- Total costs and expenses ................. 533.7 172.7 156.9 160.1 -------- ------- ------- ----- Operating loss ........................... (433.7) (72.7) (56.9) (60.1) Net interest expense and other ........... ( 23.9) (18.4) (25.0) (31.2) -------- ------- ------- ----- Loss before extraordinary charge ......... (457.6)% (91.1)% (81.9)% (91.3)% ======== ======= ======= =====
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 DBS 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 DBS equipment and the cost of installation of DBS equipment. Equipment and installation revenues and related expenses are recognized upon the delivery and installation of DBS equipment. Net transaction costs associated with the sale and installation of DBS equipment are reported as a component of sales and marketing expenses in 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 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. 78 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, 1999, Golden Sky had net operating loss carryforwards for federal income tax purposes of approximately $179.0 million. These net operating loss carryforwards expire beginning in 2011. Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 Revenue. DBS services revenue for the year ended December 31, 1999 totaled $139.9 million, which represented an 87% increase as compared to 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 1999 increased to approximately 285,400, compared to approximately 151,100 during 1998. Average monthly revenue per subscriber approximated $41.00 and $41.75 during those same periods. The decrease in revenue per subscriber resulted primarily from lower revenues from distant broadcast network services and lower sports programming revenues. Distant broadcast network services revenue decreased as a result of an agreement between DIRECTV and the National Association of Broadcasters. Pursuant to that agreement, 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 adversely impacted Golden Sky's revenues and contributed to its increased churn. 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 $43.4 million, or 96%, during 1999 to $88.7 million. This increase resulted from the 89% 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 total revenue, the costs of DBS services increased to 63.1% during 1999, compared to 59.7% during 1998. This increase resulted from the higher fees charged by DIRECTV previously described. System Operations. System operations expenses totaled $19.7 million during the year ended December 31, 1999, an $8.7 million increase, or 79%, over 1998. 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 decreased to 14.0% during 1999, from 14.5% during 1998. This decrease in system operations expenses as a percentage of total revenues resulted primarily from scale economies realized from Golden Sky's larger subscriber base. Sales and Marketing. Sales and marketing expenses totaled $64.9 million during the year ended December 31, 1999, an increase of $32.7 million, or 102%, compared to the year ended December 31, 1998. Sales and marketing costs per new subscriber activation approximated $380 and $320 during the years ended December 31, 1999 and 1998, respectively. The increase in sales and marketing expenses resulted from: o an 82% increase in the number of new subscriber activations during 1999; o higher subscriber acquisition costs associated with Golden Sky's conversions of Primestar subscribers to its DIRECTV service; 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 April 1999, Hughes acquired Primestar's medium-power broadcast satellite business and high-powered DBS 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 DBS service, the DISH Network. EchoStar is the second largest provider of DBS service in the 79 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 30% of Golden Sky's gross subscriber additions during 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 year ended December 31, 1999, general and administrative expenses totaled $15.7 million, compared to $7.4 million during 1998. As a percentage of total revenue, general and administrative expenses increased to 11.2% during 1999, from 9.8% during 1998. These increases in general and administrative expenses resulted from the addition of administrative resources necessary to support Golden Sky's growth and increased bad debts expenses. Golden Sky's bad debts expenses increased from $1.5 million, or 2.0% of total revenue, during 1998, to $4.1 million, or 2.9% of total revenue, during 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 year ended December 31, 1999 totaled negative $48.3 million, compared to EBITDA of negative $20.0 million during the year ended December 31, 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 $12.8 million to $36.0 million during the year ended December 31, 1999, compared to $23.2 million during the year ended December 31, 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 $45.0 million during the year ended December 31, 1999 and $20.5 million during 1998. This increase of $24.5 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's 131/2% senior discount notes due 2007 in February 1999. Merger, Initial Public Offering and Other Non-Operating Expenses. On July 9, 1999, Golden Sky DBS filed a registration statement with the Securities and Exchange Commission for the initial public offering of its common stock. As a result of its pending merger with Pegasus, Golden Sky has suspended efforts to consummate Golden Sky DBS's initial public offering. Accordingly, related offering costs totaling approximately $466,000 were expensed during the fourth quarter of 1999. Further, direct out-of-pocket costs related to Golden Sky's pending merger with Pegasus of $391,000 were recognized as a non-operating expense during the fourth quarter of 1999. Other non-operating expenses of approximately $402,000 principally resulted from a loss incurred upon Golden Sky's disposition of certain non-essential assets. 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. 80 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 total revenue, the costs of DBS services increased to 59.7% during 1998, compared to 53.5% 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. 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. 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 DBS 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 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. Provided 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. Improvement in Golden Sky's results of operations is principally dependent upon its ability to cost effectively expand its subscriber base, control subscriber churn and effectively manage its operating and 81 overhead costs. Golden Sky plans to reduce its future operating and overhead costs by transitioning from a principally direct sales distribution model to a largely indirect, retail sales distribution model. Accordingly, during the year ending December 31, 2000 Golden Sky plans, among other things, to: o close approximately 30 of its local sales offices; o reduce its corporate overhead expenses through headcount and other expense reductions; and o increase the number of third-party retailers of Golden Sky's direct broadcast satellite television service in its rural DIRECTV markets. Golden Sky estimates that it will incur aggregate, non-recurring costs of approximately $1.5 million in connection with these actions. These costs are expected to primarily consist of employee severance and lease termination costs. Golden Sky's operations require substantial capital for: o financing subscriber growth (including DBS 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 and related minority interests, totaled $40.2 million during 1999, $107.8 million during 1998 and $121.0 million during 1997. Net cash used in operations totaled $61.1 million in 1999, $36.6 million in 1998 and $3.1 million in 1997. To date, Golden Sky's acquisitions, subscriber growth and operations have been financed from borrowings under Golden Sky Systems' bank credit facility, proceeds from the offering of Golden Sky Systems' 12 3/8% Notes, proceeds from the offering of Golden Sky DBS's 13 1/2% 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 year ended December 31, 1999, Golden Sky's net cash flows from financing activities totaled $72.1 million. This was comprised of: o gross proceeds of $100.0 million from the offering of Golden Sky DBS's 13 1/2% Notes, which it completed in February 1999; o net repayments of $15.0 million under Golden Sky Systems' bank credit facility; o repayments of other debt totaling $8.8 million; o increased deferred financing costs of $5.5 million resulting from the amendment of Golden Sky Systems' bank credit facility and the offering of Golden Sky DBS's 13 1/2% Notes; and o capital contributions of $1.4 million received from certain minority interest holders. In 1998, Golden Sky's net cash flows from financing activities of $187.4 million were comprised 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 resulting from the amendment of Golden Sky Systems' bank credit facility and the offering of Golden Sky Systems' 12 3/8% Notes; and o $3.7 million of repayments on other debt. 82 In 1997, Golden Sky's net cash flows from financing activities of $137.0 million were comprised of: o $71.1 million from the issuance of preferred stock; o deferred financing costs of $3.3 million resulting from the execution of Golden Sky Systems' bank credit facility; 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 December 31, 1999, Golden Sky Systems (1) had fully utilized the entire $35.0 million of term loan availability, (2) had borrowed $17.0 million under the revolving credit line, and (3) had utilized approximately $19.6 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 (approximately 10.0% as of December 31, 1999) 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 fourth quarter 1999 and year 2000 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 Holdings' shareholders, must be repaid by May 31, 2000 from the proceeds of either a private or public equity offering. Upon repayment of the incremental borrowings prior to May 31, 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 Holdings 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 change in ownership of Golden Sky that would result from the merger with Pegasus. As of December 31, 1999, Golden Sky was in compliance with the credit facility's amended covenants. 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 12 3/8% Notes. Interest on the 12 3/8% Notes is payable in cash semi-annually on February 1 and August 1 of each year. The 12 3/8% 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. In the event Golden Sky's merger with Pegasus is consummated, Golden Sky will be required to make an offer to the holders of the 12 3/8% Notes to purchase those notes for 101% of their principal amount plus accrued interest. If Golden Sky's offer for the 12 3/8% Notes is accepted by any of its note holders, and it is unable to purchase those notes, Golden Sky may be in default of the terms of the 12 3/8% Notes Indenture. Pegasus has entered into a commitment letter with an investment bank under which that investment bank has agreed to purchase any and all 12 3/8% Notes tendered in response to Golden Sky's offer to purchase. This commitment is subject to the execution of definitive documentation and customary closing conditions. There can be no assurance that Pegasus will be able to agree on definitive documentation with the investment bank or make alternative arrangements if necessary. 83 13 1/2% Notes On February 19, 1999, Golden Sky DBS completed the sale of $193.1 million aggregate principal amount at maturity of its 13 1/2% 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 13 1/2% 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. In the event Golden Sky's merger with Pegasus is consummated, Golden Sky DBS will be required to make an offer to the holders of the 13 1/2% Notes to purchase those notes for 101% of their accreted value plus accrued interest. If Golden Sky DBS' offer for the 13 1/2% Notes is accepted by any of its note holders, and it is unable to purchase those notes, Golden Sky DBS may be in default of the terms of the 13 1/2% Notes Indenture. Pegasus has entered into a commitment letter with an investment bank under which that investment bank has agreed to purchase any and all 13 1/2% Notes tendered in response to Golden Sky DBS' offer to purchase. This commitment is subject to the execution of definitive documentation and customary closing conditions. There can be no assurance that Pegasus will be able to agree on definitive documentation with the investment bank or make alternative arrangements if necessary. 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 DBS equipment and subscriber installations. The extent of Golden Sky's future subsidies of DBS 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 in federal court in Los Angeles against DIRECTV as representatives of a proposed class that would include all members and affiliates of the National Rural Telecommunications Cooperative that are distributors of DIRECTV. The complaint contains causes of action for various torts, common counts and declaratory relief based on DIRECTV's failure to provide the National Rural Telecommunications Cooperative with premium programming, thereby preventing the National Rural Telecommunications Cooperative from providing this programming to the class action members and affiliates. The claims are also based on DIRECTV's position with respect to launch fees and other benefits, term and rights of first refusal. The complaint seeks monetary damages and a court order regarding the rights of the National Rural Telecommunicaitons Cooperative and its members and affiliates. See Business of Pegasus -- Legal Proceedings. On February 10, 2000, Pegasus and Golden Sky filed an amended complaint, which added new tort claims against DIRECTV for interference with plaintiffs' relationships with manufacturers, distributors and dealers of direct broadcast satellite equipment. Pegasus and Golden Sky also withdrew the class action allegations to allow a new class action to be filed on behalf of the members and affiliates of the National Rural Telecommunications Cooperative. The outcome of this litigation and the litigation filed by the National Rural Telecommunications Cooperative could have a material adverse effect on 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. During 1999, Golden Sky acquired ten rural DIRECTV markets. These markets included approximately 134,000 households and served approximately 18,300 subscribers as of the dates of acquisition. The aggregate purchase price for these acquisitions, including direct acquisition costs, approximated $35.3 million. As noted above under -- Overview -- Company History, Golden Sky has suspended evaluation of future acquisition opportunities as a result of its pending merger with Pegasus. To the extent Golden Sky resumes its acquisition activities and identifies attractive acquisition candidates in the future, it may require additional capital to complete such acquisitions. 84 Golden Sky is highly leveraged and, to the extent it is able to borrow additional funds under Golden Sky Systems' credit facility or otherwise, its leverage will continue to increase. The approximately $9.8 million of seller notes payable outstanding at December 31, 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. 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' 12 3/8% 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 Golden Sky Systems will be in compliance with these covenants at the time of a required interest payment on Golden Sky DBS' 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 13 1/2% Notes. Golden Sky Systems' ability to generate sufficient dividend capacity under the indenture governing the 12 3/8% Notes to service Golden Sky DBS's 13 1/2% 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 December 31, 1999, Golden Sky had unrestricted cash on hand of approximately $3.3 million. While there can be no assurance, Golden Sky believes it has sufficient cash and availability under Golden Sky Systems' amended bank credit facility to finance Golden Sky's expected internal growth through at least December 31, 2000. There are 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. 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 the date of this proxy statement/prospectus, 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" ("FAS No. 133"). As a result of the subsequent issuance of FAS No. 137, FAS No. 133 is now effective for fiscal years beginning after June 15, 2000. FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. Currently, Golden Sky has no derivative instruments or hedging arrangements. Accordingly, adoption of FAS No. 133 is not expected to have a material effect on Golden Sky's business, financial position or results of operations. 85 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 89% per annum since our inception in 1991. Direct Broadcast Satellite Television The introduction of direct broadcast satellite receivers is widely regarded as the most successful introduction of a consumer electronics product in U.S. history, surpassing the rollout of color televisions, videocassette recorders and compact disc players. According to a recent Paul Kagan study, in 1998 direct broadcast satellite was the fastest growing multichannel television service in the country, capturing almost two out of every three new subscribers to those services. There are currently three nationally branded direct broadcast satellite programming services: DIRECTV, Primestar and EchoStar. At December 31, 1999, there were 11.5 million direct broadcast satellite subscribers in the United States: o 6.7 million DIRECTV subscribers, including approximately 5.2 million subscribers served by DIRECTV itself, 1.1 million subscribers served by Pegasus and Golden Sky and 400,000 subscribers served by the approximately 100 other DIRECTV rural affiliates; o 1.4 million Primestar subscribers; and o 3.4 million EchoStar subscribers. All three direct broadcast satellite programming services are digital satellite services, and therefore require that a subscriber install a satellite receiving antenna or dish and a digital receiver. DIRECTV and EchoStar require a satellite dish of approximately 18 inches in diameter that may be installed by the consumer without professional assistance. Primestar requires a dish of approximately 36 inches in diameter that generally must be professionally installed. The market shares of DIRECTV, Primestar and EchoStar among all direct broadcast satellite subscribers nationally are currently 58%, 12% and 30%, respectively. The Carmel Group has estimated that the number of direct broadcast satellite subscribers will grow to 21.1 million by 2003. 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 86 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. 87 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. 88 As of December 31, 1999, we distributed DIRECTV in the following DIRECTV exclusive territories:
Exclusive Total Homes Not Homes DIRECTV Homes in Passed By Passed By Total Territories Territory Cable Cable Subscribers Penetration - ------------------------ ----------- ----------- ----------- ------------- ------------ 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% ========= ========= ========= ======= ====
- ------------ Total homes in territory, homes not passed by cable, and homes passed by cable are based on estimates of primary residences by Claritas, Inc. For the month ended January 31, 2000, on an actual basis, Pegasus added 17,974 gross subscriber additions and 5,530 net subscriber additions. At January 31, 2000, Pegasus' total subscribers on an actual and pro forma basis (without giving effect to the merger with Golden Sky) were 726,585 and 758,656, respectively. 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 89 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.
Station Station Acquisition Date Affiliation Market Area DMA (1) Households (2) - ----------------------------- ------------------ ------------- ----------------- --------- --------------- 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
- ------------ (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. 90 Recent Completed and Pending Transactions Completed Transactions Completed Direct Broadcast Satellite Acquisitions. From January 1, 2000 through February 15, 2000, we completed four acquisitions for DIRECTV distribution rights in rural areas of California, Indiana, Illinois, Oregon and South Dakota. In the aggregate, the consideration for the completed direct broadcast satellite acquisitions was $13.5 million in cash, $22.5 million in Series D junior converible participating preferred stock, $39.7 million in Pegasus' Class A common stock, $200,000 in promissory notes and $381,000 in assumed net liabilities. The territories covered by these transactions include approximately 241,500 households, including approximately 12,100 seasonal residences and 24,200 business locations and 34,000 subscribers. In January 2000, we completed an acquisition for DIRECTV distribution rights in rural areas of Michigan that was effective December 14, 1999. In the aggregate, the total consideration for this direct broadcast satellite acquisition was $707,000 in cash, $5.7 million in Series B junior convertible participating preferred stock, $315,000 in promissory notes and $61,000 in assumed net liabilities. The territories covered by this transaction include approximately 27,700 households, including approximately 1,400 seasonal residences and 2,800 business locations and 3,700 subscribers. Convertible Preferred Stock Offering. On January 25, 2000, Pegasus completed an offering of $300.0 million in liquidation amount of its 61/2% Series C convertible preferred stock. 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 Acqusitions. As of February 15, 2000, we have entered into letters of intent or definitive agreements to acquire DIRECTV distribution rights in rural areas of four states. In the 91 aggregate, the consideration for these pending direct broadcast satellite acquisitions is $25.7 million in cash and $10.0 million in preferred stock. The territories covered by the letters of intent or definitive agreements include approximately 195,800 television households, including approximately 9,800 seasonal residences and 19,600 business locations and 16,700 subscribers. The closings of these acquisitions are subject to negotiation of definitive agreements, third-party approvals and other customary conditions. We cannot assure you that these conditions will be satisfied. Sale of Puerto Rico Cable System. We have entered into a letter of intent to sell the assets of our cable system in Puerto Rico. See -- Cable Television. Competition Our direct broadcast satellite business faces competition from other current or potential multichannel programming distributors, including other direct broadcast satellite operators, direct-to-home providers, cable operators, wireless cable operators, Internet and local and long-distance telephone companies, which may be able to offer more competitive packages or pricing than we or DIRECTV can provide. In addition, the direct broadcast satellite industry is still evolving and recent or future competitive developments could adversely affect us. 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 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 92 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 101- W orbital location; o to provide certain other services over the DIRECTV satellites; and o to have the National Rural Telecommunications Cooperative exercise a right of first refusal to acquire comparable rights in the event that DIRECTV elects to launch successor satellites upon the removal of the DIRECTV satellites from their orbital location at the end of their lives. The financial terms of the right of first refusal are likely to be the subject of negotiation and Pegasus is unable to predict whether substantial additional expenditures by the National Rural Telecommunications Cooperative will be required in connection with the exercise of such right of first refusal. The agreements between the National Rural Telecommunications Cooperative and participating National Rural Telecommunications Cooperative members and 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. 93 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 $23.7 million in connection with completed direct broadcast satellite acquisitions. Although this requirement can be expected to reduce somewhat our acquisition capacity inasmuch as it ties up capital that could otherwise be used to make acquisitions, we expect this reduction to be manageable. There can be no assurance, however, that the National Rural Telecommunications Cooperative will not in the future seek to institute other policies, or to change this policy, in ways that would be material to us. Broadcast Television FCC Licensing. The broadcast television industry is subject to regulation by the FCC pursuant to the Communications Act of 1934, as amended. Approval by the FCC is required for the issuance, renewal, transfer and assignment of broadcast station operating licenses. Television license terms are generally eight years. While in the vast majority of cases such licenses are renewed by the FCC, there can be no assurance that our licenses or the licenses for the TV stations that we program pursuant to local marketing agreements will be renewed at their expiration dates or that such renewals will be for full terms. The licenses with respect to TV stations WOLF/WILF, WPXT, WDSI, WTLH and WDBD are scheduled to expire on August 1, 2007, April 1, 2007, August 1, 2005, April 1, 2005, and June 1, 2005, respectively. The licenses with respect to WSWB, WFXU 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 94 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 95 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. 96 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 97 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 FCC has issued a notice of proposed rulemaking concerning 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. 98 The FCC has also 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 99 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: 100 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 101 television stations authorized as of April 1997 with a second channel on which to broadcast a digital television signal. The FCC has attempted to provide digital television coverage areas that are comparable to stations' existing service areas. The FCC has ruled that television broadcast licensees may use their digital channels for a wide variety of services such as high-definition television, multiple standard definition television programming, audio, data, and other types of communications, subject to the requirement that each broadcaster provide at least one free video channel equal in quality to the current technical standard and further subject to the requirement that broadcast licensees pay a fee of 5% of gross revenues on all digital television subscription services. The FCC required that affiliates of ABC, CBS, Fox and NBC in the top ten television markets begin digital broadcasting by May 1, 1999, and that affiliates of these networks in markets 11 through 30 begin digital broadcasting by November 1999. All other commercial stations are required to begin digital broadcasting by May 1, 2002. The FCC's plan calls for the digital television transition period to end in the year 2006 at which time the FCC expects that television broadcasters will have ceased broadcasting on their non-digital channels, allowing that spectrum to be recovered by the government for other uses. Under the Balanced Budget Act signed into law by President Clinton, however, the FCC is authorized to extend the December 31, 2006 deadline for reclamation of a television station's non-digital channel if, in any given case: o one or more television stations affiliated with one of the four major networks in a market are not broadcasting digitally, and the FCC determines that the station(s) has (have) "exercised due diligence" in attempting to convert to digital broadcasting; o less than 85% of the television households in the station's market subscribe to a multichannel video service (cable, wireless cable or direct broadcast satellite) that carries at least one digital channel from each of the local stations in that market; or o less than 85% of the television households in the station's market can receive digital signals off the air using either a set-top converter box for an analog television set or a new digital television set. The Balanced Budget Act also directs the FCC to auction the non-digital channels by September 30, 2002 even though they are not to be reclaimed by the government until at least December 31, 2006. The Balanced Budget Act also permits broadcasters to bid on the non-digital channels in cities with populations greater than 400,000 provided the channels are used for digital television. The FCC has opened separate proceedings to consider the surrender of existing television channels and how those frequencies will be used after they are eventually recovered from television broadcasters and to what extent the cable must-carry requirements will apply to digital television signals. In addition, the digital order restricts current stations' abilities to relocate transmitter sites and otherwise change technical facilities in any manner that could impact proposed digital television stations. This may preclude the improvement of the facilities of certain stations owned or programmed by Pegasus. The order also allotted digital television stations at the current analog transmitter sites. Changes in the location of digital stations are dependent on the lack of interference to other digital and analog stations. Pegasus has filed applications with the FCC for digital television construction permits for all of its stations. 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 102 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; 103 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 104 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 105 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. 106 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. 107 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 108 Telecommunications Cooperative also sought a temporary restraining order preventing DIRECTV from marketing the premium programming in such markets and requiring DIRECTV to provide the National Rural Telecommunications Cooperative with the premium programming for exclusive distribution in those areas. The court, in an order dated June 17, 1999, denied the National Rural Telecommunications Cooperative a preliminary injunction on such matters, without deciding the underlying claims. On July 22, 1999, DIRECTV responded to the National Rural Telecommunications Cooperative's continuing lawsuit by rejecting the National Rural Telecommunications Cooperative's claims to exclusive distribution rights and by filing a counterclaim seeking judicial clarification of certain provisions of DIRECTV's contract with the National Rural Telecommunications Cooperative. In particular, DIRECTV contends in its counterclaim that the term of DIRECTV's contract with the National Rural Telecommunications Cooperative is measured solely by the orbital life of DBS-1, the first DIRECTV satellite launched into orbit at the 101o W orbital location, without regard to the orbital lives of the other DIRECTV satellites at the 101o W orbital location. DIRECTV also alleges in its counterclaim that the National Rural Telecommunications Cooperative's right of first refusal, which is effective at the end of the term of DIRECTV's contract with the National Rural Telecommunications Cooperative, does not provide for certain programming and other rights comparable to those now provided under the contract. On September 8, 1999, the court denied a motion by DIRECTV to dismiss certain of the National Rural Telecommunications Cooperative's claims, leaving all of the causes of action asserted by the National Rural Telecommunications Cooperative at issue. On September 9, 1999, the National Rural Telecommunications Cooperative filed a response to DIRECTV's counterclaim contesting DIRECTV's interpretations of the end of term and right of first refusal provisions. On August 26, 1999, the National Rural Telecommunications Cooperative filed a separate lawsuit in federal court against DIRECTV claiming that DIRECTV had failed to provide to the National Rural Telecommunications Cooperative its share of launch fees and other benefits that DIRECTV and its affiliates have received relating to programming and other services. On November 15, 1999, the court granted a motion by DIRECTV and dismissed a portion of the National Rural Telecommunications Cooperative's lawsuit regarding launch fees and other benefits. In particular, the court dismissed the tort claim asserted by the National Rural Telecommunications Cooperative, but left in place the remaining claims asserted by the National Rural Telecommunications Cooperative. The court also consolidated that lawsuit with the other pending National Rural Telecommunications Cooperative/DIRECTV lawsuit. The court set various discovery and motion deadlines for the spring and summer of 2000 but did not set a trial date. On December 29, 1999, DIRECTV filed a motion for partial summary judgment. The motion seeks a court order that the National Rural Telecommunications Cooperative's right of first refusal, effective at the termination of DIRECTV's contract with the National Rural Telecommunications Cooperative, does not include programming services and is limited to 20 program channels of transponder capacity. The hearing date on DIRECTV's motion was vacated by the court pending resolution of certain procedural issues raised by a new lawsuit we and Golden Sky filed against DIRECTV, discussed below. The court has not yet set a trial date on the merits of the motion for partial summary judgment. On January 10, 2000, we and Golden Sky filed a class action lawsuit in federal court in Los Angeles against DIRECTV as representatives of a proposed class that would include all members and affiliates of the National Rural Telecommunications Cooperative that are distributors of DIRECTV. The complaint contains causes of action for various torts, common counts and declaratory relief based on DIRECTV's failure to provide the National Rural Telecommunications Cooperative with premium programming, thereby preventing the National Rural Telecommunications Cooperative from providing this programming to the class members and affiliates. The claims are also based on DIRECTV's position with respect to launch fees and other benefits, term and rights of first refusal. The complaint seeks monetary damages and a court order regarding the rights of the National Rural Telecommunications Cooperative and its members and affiliates. On February 10, 2000, we and Golden Sky filed an amended complaint which added new tort claims against DIRECTV for interference with plaintiffs' relationships with manufacturers, distributors and dealers of direct broadcast satellite equipment. We and Golden Sky also withdrew the class action allegations to allow a new class action to be filed on behalf of the members and affiliates of the National Rural Telecommunications Cooperative. The outcome of this litigation and the litigation filed by the National Rural Telecommunications 109 Cooperative could have a material adverse effect on our direct broadcast satellite business. In November 1998 we were sued in Indiana for allegedly charging DBS subscribers excessive fees for late payments. The plaintiffs, who claim to represent a class consisting of residential DIRECTV customers in Indiana, seek unspecified damages for the purported class and modification of our late-fee policy. We are unable to estimate the amount involved or to determine whether this suit is material to us. Similar suits have been brought against DIRECTV and various cable operators in other parts of the United States. In addition to the matters discussed above, from time to time we are involved with claims that arise in the normal course of our business. In our opinion, the ultimate liability with respect to these claims will not have a material adverse effect on our consolidated operations, cash flows or financial position. Properties Our corporate headquarters are located in Bala Cynwyd, Pennsylvania. In February 2000, we purchased our corporate headquarters building for $12.5 million with mortgage financing of approximately $8.8 million. Our direct broadcast satellite operations are headquartered in Marlborough, Massachusetts and we operate call centers out of leased space in San Luis Obispo, California, Marlborough, Massachusetts, and Louisville, Kentucky. These leases expire on various dates through 2002. In connection with our TV operations, we own or lease various transmitting equipment, television stations, and office space. Our cable operations include office, head end, and warehouse space in Puerto Rico. The property that we do not own in Puerto Rico is operated under various leases expiring at various dates through 2004. Our property in Puerto Rico will be sold in connection with the pending sale of our Puerto Rico cable system. 110 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.
Number of Rural Geographical Area DIRECTV Markets Total Households States Represented - ------------------------ ----------------- ------------------ -------------------- Southeast .............. 6 210,000 AL, FL, GA, NC, TN Southwest .............. 13 520,000 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 == =========
- ------------ 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 relatively low churn rate. Golden Sky's annual churn rate approximated 15.9% during the twelve-month period ended December 31, 1999. 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 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 its inception, Golden Sky has opened approximately 70 full service retail stores in its rural DIRECTV markets. 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. 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. During the year ending December 31, 2000, Golden Sky plans to close approximately 30 of its local sales offices. 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. 111 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 existing marketing effort of DIRECTV and its other national distribution partners through focused local marketing and sales, including local print and radio advertising. Golden Sky also implements support-advertising programs for its indirect distribution channels. 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 Golden Sky's 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. 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. Overflow and after hours assistance is provided 24 hours a day, seven days a week, by Golden Sky's national call center located in Kansas City, Missouri and, beginning in February 2000, by a third-party provider of call center services. 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 112 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 not 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 programming via satellite, except in 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. 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. 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. 113 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. Based upon publicly available data, Golden Sky believes that, 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 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. In addition, Golden Sky currently has approximately 70 local offices in 24 states. Management and Employees As of January 31, 2000, Golden Sky had 580 full-time and 191 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. 114 PEGASUS MANAGEMENT Executive Officers, Directors, and Designees for Director Set forth below is certain information concerning the executive officers and directors of Pegasus.
Name Age Position - -------------------------------- ----- ------------------------------------------------------------- Marshall W. Pagon .............. 44 Chairman of the Board, President and Chief Executive Officer Robert N. Verdecchio ........... 43 Senior Vice President, Chief Financial Officer, Treasurer, Assistant Secretary and Director Ted S. Lodge ................... 43 Senior Vice President, Chief Administrative Officer, General Counsel, Secretary and Director Designee Howard E. Verlin ............... 38 Vice President and Assistant Secretary Nicholas A. Pagon .............. 43 Vice President M. Kasin Smith ................. 39 Vice President and Acting Chief Financial Officer Michael C. Brooks .............. 55 Director Harry F. Hopper III ............ 46 Director James J. McEntee, III .......... 42 Director Mary C. Metzger ................ 54 Director William P. Phoenix ............. 42 Director Riordon B. Smith ............... 39 Director Donald W. Weber ................ 63 Director Robert F. Benbow ............... 64 Director Designee William P. Collatos ............ 45 Director Designee
Marshall W. Pagon has served as President, Chief Executive Officer and Chairman of the Board of Pegasus since its incorporation, and served as Treasurer of Pegasus from its incorporation to June 1997. From 1991 to October 1994, when the assets of various affiliates of Pegasus Media & Communications, Inc., principally limited partnerships that owned and operated Pegasus' broadcast and cable operations, were transferred to Pegasus Media & Communication's subsidiaries, entities controlled by Mr. Pagon served as the general partners of these partnerships and conducted the business of Pegasus. Mr. Pagon's background includes over 18 years of experience in the media and communications industry. Mr. Pagon is the brother of Nicholas A. Pagon. Robert N. Verdecchio has served as Pegasus' Senior Vice President, Chief Financial Officer and Assistant Secretary since its inception and as Pegasus' Treasurer since June 1997. He has also served similar functions for Pegasus Media & Communication's affiliates and predecessors in interest since 1990. Mr. Verdecchio has been a director of Pegasus and Pegasus Media & Communications since December 18, 1997. Mr. Verdecchio is a certified public accountant and has over 13 years of experience in the media and communications industry. Mr. Verdecchio is serving as a director of Pegasus as Marshall W. Pagon's designee to the board of directors. Mr. Verdecchio is currently on a leave of absence from Pegasus. Ted S. Lodge has served as Senior Vice President, Chief Administrative Officer, General Counsel and Assistant Secretary of Pegasus since July 1, 1996. In June 1997, Mr. Lodge became Pegasus' Secretary. From June 1992 through June 1996, Mr. Lodge practiced law with the law firm of Lodge & Company. During that period, Mr. Lodge was engaged by Pegasus as its outside legal counsel in connection with various matters. Mr. Lodge is expected to be elected a director of Pegasus, as one of Mr. Pagon's designees, at the time of the special meeting. 115 Howard E. Verlin is a Vice President and Assistant Secretary of Pegasus and is responsible for operating activities of Pegasus' direct broadcast satellite and cable subsidiaries, including supervision of their general managers. Mr. Verlin has served similar functions with respect to Pegasus' predecessors in interest and affiliates since 1987 and has over 15 years of experience in the media and communications industry. Nicholas A. Pagon has served as a Vice President of Pegasus and Chief Executive Officer of its broadcast subsidiaries since November 1998 and is responsible for all broadcast television activities of Pegasus. From January to November 1998, Mr. Pagon served as President of Pegasus Development Corporation, a subsidiary of Pegasus. From 1990 through December 1998, Mr. Pagon was President of Wellspring Consulting, Inc., a telecommunications consulting business. Mr. Pagon is the brother of Marshall W. Pagon. M. Kasin Smith served as a financial analyst of Pegasus from September 1998 through February 1999 and has served as Vice President of Finance since February 1999 and Acting Chief Financial Officer since August 1999. From May 1997 through September 1998, Mr. Smith served as a General Manager, Northwest region, of SkyView World Media Group, a master system operator for DIRECTV. From November 1996 to May 1997, Mr. Smith was director of finance for Sky Zone Media Access, LLC, a distributor of DIRECTV to apartments and multiple dwelling units. From 1993 to November 1996, Mr. Smith served as a manager at PricewaterhouseCoopers LLP. Mr. Smith is a certified public accountant and has over 8 years of public accounting experience. Michael C. Brooks has been a director of Pegasus since April 27, 1998. From February 1997 until April 27, 1998, Mr. Brooks had been a director of Digital Television Services, Inc. He has been a general partner of J.H. Whitney & Co., a venture capital firm, since January 1985. Mr. Brooks is also a director of Media Matrix, an Internet audience measurement company, SunGuard Data Systems Inc., a computer services company, USinternetworking, Inc., a web-based applications hosting company, and several private companies. Mr. Brooks is serving as a director of Pegasus as Whitney's designee to the board of directors and has informed Pegasus that he intends to resign from the Pegasus board at the time of the special meeting. Harry F. Hopper III has been a director of Pegasus since April 27, 1998. From June 1996 until April 27, 1998, Mr. Hopper had been a director of Digital Television Services, Inc., or a manager of its predecessor, Digital Television Services, LLC. Mr. Hopper is a Managing Director of Columbia Capital Corporation and Columbia Capital LLC, which he joined in January 1994. Columbia Capital is a venture capital firm with an investment focus on communications services, network infrastructure and technologies and electronic commerce. Mr. Hopper is also a director of eBiz.Net, Inc., a web-hosting company, Pacific Internet Exchange Corporation, an Internet peering and data center company, Xemod, Inc., a producer of next-generation linear power amplifiers, Singleshop.com, Inc., a business-to-business, outsourced Internet shopping platform, and Broadslate Networks, Inc., a digital subscriber line service provider. Mr. Hopper is serving as a director of Pegasus as Columbia's designee to the board of directors. James J. McEntee, III has been a director of Pegasus since October 8, 1996. Mr. McEntee has been a member of the law firm of Lamb, Windle & McErlane, P.C. for the past eight years and a principal of that law firm for the past six years. Mr. McEntee is one of the directors designated as an independent director under the voting agreement. Mary C. Metzger has been a director of Pegasus since November 14, 1996. Ms. Metzger has been Chairman of Personalized Media Communications LLC and its predecessor company, Personalized Media Communications Corp. since February 1989. Ms. Metzger has also been Managing Director of Video Technologies International, Inc. since June 1986. Ms. Metzer is one of the directors designated as an independent director under the voting agreement. She is also a designee of Personalized Media under the agreement between Pegasus and Personalized Media. See Certain Transactions. William P. Phoenix has been a director of Pegasus since June 17, 1998. He is a Managing Director of CIBC World Markets Corp. and co-head of its Credit Capital Markets Group. Mr. Phoenix is also a member of CIBC World Markets Corp.'s credit investment and risk committees. Prior to joining CIBC World Markets Corp. in 1995, Mr. Phoenix had been a Managing Director of Canadian Imperial Bank of Commerce with management responsibilities for the bank's acquisition finance, mezzanine finance and loan workout and restructuring businesses. Mr. Phoenix joined Canadian Imperial Bank of Commerce in 1982. Mr. Phoenix is one of the directors designated as an independent director under the voting agreement. 116 Riordon B. Smith has been a director of Pegasus since April 27, 1998. From February 1997 until April 27, 1998, Mr. Smith had been a director of Digital Television Services, Inc., or a manager of its predecessor, Digital Television Services, LLC. Mr. Smith is a Senior Vice President of Fleet Private Equity Co., Inc., which he joined in 1990. Fleet Private Equity Co., Inc. is a private equity fund with an investment focus in media and information, telecommunications, healthcare services, industrial manufacturing and business services. Mr. Smith also serves as a director of FreeRide.com LLC, a provider of online loyalty programs and direct marketing services, The MVL Group, Inc., a provider of custom market research and data collection services, HASCO International, Inc., a direct marketer of in-hospital infant portraits, and Root Communications Group, L.P., an operator of radio stations in the Southeast. Mr. Smith is serving as a director of Pegasus as Fleet's designee to the board of directors. Donald W. Weber has been a director of Pegasus since its incorporation and a director of Pegasus Media & Communications since November 1995. Until its acquisition by Pegasus in November 1997, Mr. Weber had been the President and Chief Executive Officer of ViewStar Entertainment Services, Inc., a National Rural Telecommunications Cooperative affiliate that distributed DIRECTV services in North Georgia, from August 1993 to November 1997. Mr. Weber is currently a member of the boards of directors of Powertel, Inc., a provider of wireless communications service, Knology Holdings, Inc., a provider of broadband communications service, Headhunter.net an online employment recruiter, and HIE, Inc., a producer of healthcare software, which are publicly-traded companies. Mr. Weber is one of the directors designated as an independent director under the voting agreement. Robert F. Benbow will be designated as a director by Alta Communications under the amended and restated voting agreement. 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 managing general partner of Alta Communications, Inc., a private venture capital firm. Prior to joining Burr, Egan, Deleage & Co. in 1990, Mr. Benbow spent 22 years with the Bank of New England N.A., where he was a Senior Vice President responsible for special industries lending in the areas of media, project finance and energy. Additionally, he serves as a director of Diginet Americas, Inc., a fixed wireless local loop service provider throughout South America, of Advanced Telcom Group, Inc., a competitive local exchange carrier, and of Preferred Networks, Inc., a public paging company. William P. Collatos will be designated as a director by Spectrum Equity Investors under the amended and restated voting agreement. 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, ITXC Corp., a global provider of Internet-based voice, fax and voice-enabled services, and JazzTel, a competitive local exchange provider based in Madrid, Spain. 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.
Annual Compensation ------------------------------------------- Other Annual Name Principal Position Year Salary Compensation(1) - ---------------------- --------------------- ------ ---------------- ----------------- 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) --
Long-Term Compensation Awards -------------------------- Restricted Securities Stock Underlying All Other Name Award(2) Options Compensation(3) - ---------------------- ------------ ------------ ---------------- Marshall W. Pagon $124,978 190,000 $60,096(4) $ 77,161 85,000 $67,274(4) $100,558 85,000 $63,228(4) Robert N. Verdecchio $ 49,967 70,000 $ 6,380 $ 38,580 40,000 $12,720 $ 50,279 40,000 $ 9,500 Ted S. Lodge $ 54,068 85,000 $ 3,600 $ 30,864 60,000 $ 9,263 $ 40,223 40,000 $ 1,800 Howard E. Verlin $ 99,974 95,000 $ 1,620 $110,125 40,000 $ 5,480 $100,558 40,000 $ 1,685 Nicholas A. Pagon -- 45,000 -- -- 40,000 --
117 - ------------ (1) Pursuant to Pegasus' restricted stock plan, an executive officer may elect to receive a portion of the award in the form of cash. The amounts listed in this column reflect the cash portion of discretionary awards granted under the restricted stock plan. (2) During fiscal 1999, an aggregate of 3,164, 2,531, 2,685 and 3,670 shares were granted to Messrs. Marshall Pagon, Verdecchio, Lodge and Verlin, respectively. Based upon the closing price of the Class A common stock on December 31, 1999 of $97.75 per share, the shares awarded to Messrs. Marshall Pagon, Verdecchio, Lodge and Verlin during fiscal 1999 had a value of $309,281, $247,405, $262,459, and $358,743, respectively, on December 31, 1999. All awards made during fiscal 1999 were fully vested on the date of grant. Generally, awards made under Pegasus' restricted stock plan were based upon years of service with Pegasus from date of initial employment. As a consequence, all awards made to Messrs. Marshall Pagon, Verdecchio and Verlin were fully vested in 1997 and 1998 on the date of grant. During 1997, 9,090, 4,545, and 9,090 shares issued to Messrs. Marshall Pagon, Verdecchio, and Verlin were fully vested on March 21, 1997, the date they were granted. During 1998, 3,609, 1,804 and 5,152 shares issued to Messrs. Marshall Pagon, Verdecchio and Verlin were fully vested on February 17, 1998, the date they were granted. Mr. Lodge's employment with Pegasus began on July 1, 1996. Mr. Lodge's awards granted in fiscal 1998 were vested as to 34% on July 1, 1998, an additional 33% on July 1, 1999 and the remaining 33% on July 1, 2000. (3) Unless otherwise indicated, the amounts listed represent Pegasus' contributions under its 401(k) plans. (4) Of the amounts listed for Marshall W. Pagon 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
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% - -------------------------- ------------ ----------- ----------- ------------- ------------- ------------- 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
118 The table below shows aggregated stock option exercises by the named executive officers in 1999 and 1999 year-end values. In-the-money options, which are listed in the last two columns, are those in which the fair market value of the underlying securities exceeds the exercise price of the option. The closing price of Pegasus' Class A common stock on December 31, 1999 was $97.75 per share. Aggregated Option Exercises in 1999 and 1999 Year-End Option Values
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 - ------------------------------ ------------- ---------- --------- ------------ ------------- -------------- 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
Compensation of Directors Under Pegasus' by-laws, each director is entitled to receive such compensation, if any, as may from time to time be fixed by the board of directors. Pegasus currently pays its directors who are not employees or officers of Pegasus an annual retainer of $10,000 plus $750 for each board meeting attended in person, $350 for each meeting of a committee of the board and $375 for each board meeting held by telephone. The annual retainer is payable, at each director's option, in cash or in the form of options to purchase Pegasus' Class A common stock. Pegasus also reimburses each director for all reasonable expenses incurred in traveling to and from the place of each meeting of the board or committee of the board. On May 5, 1999, James J. McEntee, III, Mary C. Metzger, Donald W. Weber, William P. Phoenix, Harry F. Hopper III, Michael C. Brooks, and Riordon B. Smith, who were then all of Pegasus' nonemployee directors, each received options to purchase 5,000 shares of Class A common stock under Pegasus' stock option plan. Each option vests in annual installments of 2,500 shares, was issued at an exercise price of $39.50 per share -- the closing price of the Class A common stock at the time of the grant -- and is exercisable until the tenth anniversary from the date of grants. On December 17, 1999, James J. McEntee, III, Mary C. Metzger, Donald W. Weber, William P. Phoenix, Harry F. Hopper III, Michael C. Brooks, and Riordon B. Smith, who were then all of Pegasus' nonemployee directors, each received options to purchase 5,000 shares of Class A common stock under Pegasus' stock option plan. Each option vests in annual installments of 2,500 shares, was issued at an exercise price of $80.875 per share -- the closing price of the Class A common stock at the time of the grant -- and is exercisable until the tenth anniversary from the date of grant. Compensation Committee Interlocks and Insider Participation During 1999, the board of directors generally made decisions concerning executive compensation of executive officers. The board included Marshall W. Pagon, the President and Chief Executive Officer of Pegasus, and Robert N. Verdecchio, Pegasus' Senior Vice President and Chief Financial Officer. A special stock option committee, however, made certain decisions regarding option grants under the stock option plan. Both the stock option plan and restricted stock plan are discussed below. Incentive Program 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. 119 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. 120 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 each of the years of 1997, 1998 and 1999. Relationship with W.W. Keen Butcher and Affiliated Entities Pegasus entered into an arrangement in 1998 with W.W. Keen Butcher, the stepfather of Marshall W. Pagon and Nicholas A. Pagon, certain entities controlled by him and the owner of a minority interest in one of the entities. Under this agreement, Pegasus agreed to provide and maintain collateral for up to $4.0 million in principal amount of bank loans to Mr. Butcher and the minority owner. Mr. Butcher and the minority owner must lend or contribute the proceeds of those bank loans to one or more of the entities owned by Mr. Butcher for the acquisition of television broadcast stations to be programmed by Pegasus pursuant to local marketing agreements. Pegasus amended its agreement with W.W. Keen Butcher and his affiliated entities in the fourth quarter of 1999 to increase the amount of collateral that Pegasus will maintain for bank loans to Mr. Butcher and the affiliated entities. Under the amendment, Pegasus will maintain collateral for up to $8.0 million in principal amount such bank loans. Mr. Butcher and the affiliated entities must continue to contribute the proceeds from these bank loans to one or more entities owned by Mr. Butcher for acquisition of 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 currently provides programming under a local marketing agreement to television station WPME. Under the local marketing agreement, Pegasus also holds an option to purchase WPME. One of the Butcher companies expects to acquire WPME and the FCC license from the current owner in the near future. The Butcher company would continue the local marketing agreement with Pegasus and Pegasus would retain its 121 option to acquire WPME. Pegasus believes that the WOLF and WFXU transactions were done at fair value and that any future transactions that may be entered into with the Butcher companies or similar entities, including the WPME transaction as described, will also be done at fair value. Acquisition of Digital Television Services, Inc. On April 27, 1998, Pegasus acquired Digital Television Services, Inc. through the merger of a subsidiary of Pegasus into Digital Television Services. Prior to the merger, Digital Television Services was the second largest independent distributor of DIRECTV services serving 140,000 subscribers in 11 states. In connection with the merger, Pegasus issued approximately 5.5 million shares of its Class A common stock to the stockholders of Digital Television Services and assumed approximately $159 million of liabilities. Pegasus also granted registration rights to certain of Digital Television Service's stockholders, including Columbia Capital Corporation, Columbia DBS, Inc., Whitney Equity Partners, L.P., Fleet Venture Resources, Inc. and its affiliates and Harry F. Hopper III. Mr. Hopper received shares of Class A common stock in the Digital Television Services merger and has an ownership interest in Columbia Capital Corporation, which received 429,812 shares. As a result of the Digital Television Services merger and the voting agreement described below, Michael C. Brooks, Harry F. Hopper, III and Riordon B. Smith were elected to Pegasus' board of directors. Voting Agreement On April 27, 1998, in connection with the Digital Television Services merger, Pegasus, Marshall W. Pagon and a number of partnerships and corporations controlled by him, and Fleet Venture Resources, Fleet Equity Partners, Chisholm Partners III, L.P., Kennedy Plaza Partners, Whitney Equity Partners, Columbia Capital Corporation and Columbia DBS, Inc. entered into a voting agreement. The voting agreement covers all shares of Class B common stock and other voting securities of Pegasus held at any time by Mr. Pagon and his controlled entities and shares of Class A common stock received in the Digital Television Services merger by Chisholm and the Fleet entities, Columbia and Whitney. It provides that holders of such shares vote their respective shares in the manner specified in the voting agreement. In particular, the voting agreement establishes that Pegasus' board of directors will consist initially of nine members: three independent directors, three directors designated by Mr. Pagon and one director to be designated by each of Chisholm Partners III, L.P., Columbia Capital Corporation and Whitney Equity Partners. The voting agreement also provides that the committees of the board of directors will consist of an audit committee, a compensation committee and a nominating committee. Each committee shall consist of one independent director, one director designated by Mr. Pagon and one director designated by a majority of the directors designated by Chisholm Partners III, L.P., Columbia Capital Corporation and Whitney Equity Partners. As a result of the voting agreement, the parties to the agreement have sufficient voting power without the need for the vote of any other shareholder, to elect the entire board of directors. James J. McEntee, III, Mary C. Metzger, William P. Phoenix and Donald W. Weber are serving as independent directors of Pegasus. Marshall W. Pagon and Robert N. Verdecchio are serving as directors of Pegasus as designees of Mr. Pagon. Harry F. Hopper III is serving as a director of Pegasus as a designee of Columbia Capital Corporation; Michael C. Brooks is serving as a director of Pegasus as a designee of Whitney Equity Partners; and Riordon B. Smith is serving as a director of Pegasus as a designee of Chisholm Partners III, L.P. The voting agreement terminates with respect to any covered share upon the sale or transfer of any such share to any person other than a permitted transferee. In addition, the right of Chisholm Partners III, L.P., Columbia Capital Corporation and Whitney Equity Partners to designate a director terminates when the Fleet entities, Columbia Capital Corporation and certain of its owners, and Whitney Equity Partners cease owning one-half of the shares originally received by each of them in the Digital Television Services merger or in certain other circumstances. Whitney distributed shares it owned to its partners in 1999 and, thus, has lost its right to designate a director under the voting agreement. Columbia Capital Corporation and its subsidiaries and owners have sold more than one-half of the shares originally received by them. Columbia Capital Corporation has therefore also lost its right to designate a director under the voting agreement. The voting agreement described above will be amended and restated in connection with the merger, as described in The Merger -- Voting Agreement. 122 Communications License Re-Auction Pegasus PCS Partners, a company owned and controlled by Marshall W. Pagon, holds personal communications system licenses in Puerto Rico. We have made an approximately $4.8 million investment in Pegasus PCS Partners. Pegasus itself did not meet the qualification criteria for the FCC's re-auction in which Pegasus PCS Partners acquired certain of its licenses. CIBC World Markets Corp. and Affiliates William P. Phoenix is a Managing Director of CIBC World Markets Corp. CIBC World Markets and its affiliates have provided various services to Pegasus and its subsidiaries since the beginning of 1997. CIBC World Markets has historically performed a number of services for Pegasus, including serving as one of the initial purchasers in Pegasus' January 2000 Rule 144A offering of $300.0 million in aggregate liquidation preference of Series C convertible preferred stock. In this capacity, CIBC World Markets received customary underwriting discounts and commissions. CIBC World Markets has also performed the following services for Pegasus: o provided a fair market value appraisal in connection with the merger of Digital Television Services, Inc. into a wholly-owned subsidiary of Pegasus and the designation of Digital Television Services as a restricted subsidiary; o acted as a dealer manager in connection with an offer by Pegasus to exchange its 121/2% Series A senior notes due 2007 for senior subordinated notes of Digital Television Services and DTS Capital, Inc. and a related consent solicitation; o issued letters of credit in connection with bridge financing obtained by Pegasus; o provided fairness opinions to Pegasus and/or its affiliates in connection with certain intercompany loans and other intercompany transactions; o acted as lender in connection with the Pegasus Media & Communications credit facility; o provided a fairness opinion in connection with this merger; o acted as Administrative Agent in connection with a credit facility of Digital Television Services; and o acted as underwriter in Pegasus' 1999 equity offering. In addition, CIBC World Markets has agreed to purchase, subject to definitive documentation, any and all Golden Sky notes tendered in response to Golden Sky's offer to purchase such notes. CIBC World Markets will receive fees of approximately $1.0 million under this arrangement. In 2000 to date and during 1999, for services rendered, Pegasus or its subsidiaries paid to CIBC World Markets an aggregate of $3.4 million and $940,000, respectively, in fees. Pegasus believes that all fees paid to CIBC World Markets in connection with the transactions described above were customary. Pegasus anticipates that it or its subsidiaries may engage the services of CIBC World Markets in the future, although no such engagement is currently contemplated. Investment in Personalized Media Communications, LLC and Licensing of Patents On January 13, 2000, Pegasus made an investment in Personalized Media Communications, LLC. Personalized Media is an advanced communications technology company that owns as intellectual property portfolio consisting of seven issued U.S. patents and over 10,000 claims submitted in several hundred pending U.S. patent applications. A majority of pending claims are based on a 1981 filing date, with the remainder based on a 1987 filing date. Mary C. Metzger, Chairman of Personalized Media and a member of Pegasus' board of directors, and John C. Harvey, Managing Member of Personalized Media and Ms. Metzger's husband, own a majority of and control Personalized Media as general partners of the Harvey Family Limited Partnership. 123 A subsidiary of Personalized Media granted 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 granted to Pegasus the right to license on an exclusive basis and on favorable terms the patent portfolio of Personalized Media in connection with other frequencies that may be licensed to Pegasus in the future. The license granted by Personalized Media's subsidiary provides rights to all claims covered by Personalized Media's patent portfolio, including functionality for automating the insertion of programming at a direct broadcast satellite uplink, the enabling of pay-per-view buying, the authorization of receivers, the assembly of records of product and service selections made by viewers including the communication of this information to billing and fulfillment operations, the customizing of interactive program guide features and functions made by viewers and the downloading of software to receivers by broadcasters. Pegasus will pay license fees to Personalized Media of $100,000 per year for three years. Pegasus acquired preferred interests of Personalized Media for approximately $14.3 million in cash, 200,000 shares of Pegasus' Class A common stock and Pegasus' agreement, subject to certain conditions, to issue warrants to purchase 1.0 million shares of Pegasus' Class A common stock at an exercise price of $90.00 per share and with a term of ten years. After certain periods of time, Personalized Media may redeem the preferred interests, and Pegasus may require the redemption of preferred interests, in consideration for Personalized Media's transfer to Pegasus of Personalized Media's ownership interest in its wholly-owned subsidiary that holds the exclusive license from Personalized Media for the rights that are licensed to Pegasus. Pegasus may also be required to make an additional payment to Personalized Media if certain contingencies occur that Pegasus believes are unlikely to occur. Because of the speculative nature of the contingencies, it is not possible to estimate the amount of any such additional payments, but in some cases it could be material. As part of the transaction, Personalized Media will be entitled to designate one nominee to serve on Pegasus' board of directors. Mary C. Metzger is currently serving as Personalized Media's designee. Other Transactions In 1999, Pegasus loaned $199,999 to Nicholas A. Pagon, Pegasus' Vice President of Broadcast Operations, bearing interest at the rate of 6% per annum, with the principal amount due on the fifth anniversary of the date of the promissory note. Mr. Pagon is required to use half of the proceeds of the loan to purchase shares of Class A common stock, and the loan is collateralized by those shares. The balance of the loan proceeds may be used at Mr. Pagon's discretion. 124 OWNERSHIP AND CONTROL The following table sets forth share information as of January 31, 2000, regarding the beneficial ownership of the Class A common stock and Class B common stock by: o each stockholder known to Pegasus to be the beneficial owner, as defined in Rule 13d-3 under the Securities Exchange Act of 1934, of more than 5% of the Class A common stock and Class B common stock, based upon Pegasus' records or the records of the SEC; o each 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 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 20.8% and 17.2% of the common stock before and after the merger, respectively, and without giving effect to the voting agreement, 74.2 % and 67.6% 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. 125
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 % % ------------------------------ --------- ------------------ ----- -------- Marshall W. Pagon(1) ............... 5,579,375(2)(3)(5) 27.8 4,581,900(3) 100 76.4 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(14) 1.1 -- -- * William P. Phoenix ................. 170(15) * -- -- * Harry F. Hopper III ................ 196,168(16) 1.3 -- -- * Michael C. Brooks .................. 31,216(17) * -- -- * Riordon B. Smith ................... 5,579,375(3)(18) 27.8 4,581,900(3) 100 76.4 Harron Communications Corp.(19) ......................... 852,110 5.5 -- -- 1.4 T. Rowe Price Associates, Inc. and related entities(20) .......... 1,400,000 9.1 -- -- 2.3 Wellington Management Company, LLP(21) .................. 1,600,000 10.4 -- -- 2.6 PAR Capital Management, Inc.(22) .......................... 950,000 6.2 -- -- 1.6 Fleet Venture Resources, Inc. and related entities(23) .......... 5,579,375(3) 27.8 4,581,900(3) 100 76.4 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 14 persons after the merger) ...... 6,618,500 32.6 4,581,900 100 77.8
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 % % ------------------------------ --------- ------------------ ----- --------- Marshall W. Pagon(1) ............... 8,318,649(2)(4)(5) 31.3 4,581,900(4) 100 73.1 Robert N. Verdecchio ............... 322,552(5)(6)(7) 1.5 -- -- * 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 .................... 1,210,500(13) 5.3 -- -- * Donald W. Weber .................... 173,420(14) * -- -- * William P. Phoenix ................. 170(15) * -- -- * Harry F. Hopper III ................ 196,168(16) * -- -- * Michael C. Brooks .................. 31,216(17) * -- -- * Riordon B. Smith ................... 8,318,649(4)(18) 31.6 4,581,900(4) 100 73.1 Harron Communications Corp.(19) ......................... 852,110 3.9 -- -- 1.3 T. Rowe Price Associates, Inc. and related entities(20) .......... 1,400,000 6.4 -- -- 2.1 Wellington Management Company, LLP(21) .................. 1,600,000 7.3 -- -- 2.4 PAR Capital Management, Inc.(22) .......................... 950,000 4.3 -- -- 1.4 Fleet Venture Resources, Inc. and related entities(23) .......... 8,318,649(4) 31.3 4,581,900(4) 100 73.1 Alta Communications VI, L.P. and related entities(24) .......... 8,318,649(4) 31.3 4,581,900(4) 100 73.1 Spectrum Equity Investors L.P. and related entities(25) .......... 8,318,649(4) 31.3 4,581,900(4) 100 73.1 Robert F. Benbow(26) ............... 8,318,649(4) 31.3 4,581,900(4) 100 73.1 William P. Collatos(27) ............ 8,318,649(4) 31.3 4,581,900(4) 100 73.1 Directors and executive officers as a group(28) (consists of 13 persons before the merger and 14 persons after the merger) ...... 10,325,558 37.2 4,581,900 100 74.7
- ------------ * 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; 126 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 8,318,649 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 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 3,736,749 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 and 139,411 shares of Class A common stock issuable upon the exercise of the vested portion of stock options. 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. (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 exercise 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, of which Ms. Metzger is Chairman. 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. 127 (13) In addition to the amounts listed in note 12, this includes warrants exercisable by Personalized Media Communications LLC for 1,000,000 shares of Class A common stock. (14) This includes 13,385 shares of Class A common stock issuable upon the exercise of the vested portion of outstanding stock options. (15) This consists of 170 shares of Class A common stock issuable upon the exercise of the vested portion of outstanding stock options. (16) This includes 170 shares of Class A common stock issuable upon the exercise of the vested portion of outstanding stock options, and 4,750 shares held by the Hopper Family Foundation, of which Mr. Hopper is a trustee and officer. The address of this person is c/o Columbia Capital Corporation, 201 N. Union Street, Suite 300, Alexandria, Virginia 22314-2642. (17) 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. (18) 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. (19) The address of Harron Communications Corp, is 70 East Lancaster Avenue, Frazer, Pennsylvania 19355. (20) The address of T. Rowe Price Associates is 100 East Pratt St., Baltimore, Maryland 21202. (21) The address of Wellington Management Company is 75 State Street, Boston, Massachusetts 02109. (22) The address of this entity is Suite 1600, One Financial Center, Boston, Massachusetts 02111. (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. (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 shares. 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. 128 (25) The address of each of these entities is One International Place, 29th Floor, 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 general 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 general 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, One International Place, 29th Floor, 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, 14, 15, 16, 17 and 18 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 note 13 with respect to Ms. Metzger, 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. 129 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, 22,500 shares have been designated as Series D junior convertible participating preferred stock and 10,000 shares have been designated as Series E junior convertible participating preferred stock. As of February 25, 2000, we had outstanding 15,895,968 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. The following is a summary of certain terms of the Series A preferred stock. The terms of the Series A 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 and restated certificate of incorporation and the Series A certificate of designation 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, 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 130 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; 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, Series D and Series E Junior Convertible Participating Preferred Stock General. The following is a summary of certain terms of the Series B, Series D and Series E junior convertible participating preferred stock. The terms of the Series B, Series D and Series E junior convertible participating preferred stock are set forth in the respective certificates of designation. This summary is not intended to be complete and is subject to, and qualified in its entirety by reference to, Pegasus' amended and restated certificate of incorporation and the certificates of designation which are filed with the SEC as exhibits to the registration statement of which this proxy statement/prospectus is a part. Under the respective certificates of designation, the following number of shares of Series B, Series D and Series E junior convertible participating preferred stock, each with a liquidation preference of $1,000 per share plus any accrued but unpaid dividends, have been issued: o 5,707 shares of Series B junior convertible participating preferred stock; o 22,500 shares of Series D junior convertible participating preferred stock; and o 10,000 shares of Series E junior convertible participating preferred stock. With respect to dividend distributions the Series B, Series D and Series E junior convertible participating preferred stock rank senior to all classes of our common stock, junior to the Series A preferred stock and Series C convertible preferred stock, and on a parity with each other. In the event of a liquidation, the Series B, Series D and Series E junior convertible participating preferred stock will rank, to the extent of their respective liquidaiton preferences, junior to the Series A preferred stock and Series C convertible preferred stock, senior to the common stock and on parity with each other. The Series B, Series D and Series E preferred stock will also share pro rata with the common stock, each other 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. 131 Voting Rights. Holders of Series B, Series D and Series E junior convertible participating preferred stock will have no voting rights with respect to general corporate matters except as provided by Delaware law. They have no right to consent or withhold consent to any of the proposals described herein. Dividends. The holders of shares of the Series B, Series D and Series E 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 in the amount of $1.4 million per year in the aggregate for all series. Conversion Rights. Each share of Series B, Series D and Series E 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, and Series D junior convertible participating preferred stock will initially be convertible into 16.24, and 9.77 shares of Class A common stock, respectively. The conversion ratio of the Series E junior convertible participating perferred stock will be approximately 10.78. 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. 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. 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 at any time after March 1, 2000, an additional 6,125 of the outstanding shares at any time after February 1, 2002, and the remainder of the outstanding shares 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. At our option, we may redeem all, but not less than all, of the outstanding shares of Series E junior convertible participating preferred stock at any time until February 2001 for $1,100 per share, and thereafter for $1,000 per share, in both cases plus accrued but unpaid dividends, if any, whether or not declared. At the option of the holders of all outstanding shares of Series E junior convertible participating preferred stock, they may require us to redeem 5,000 of the oustanding shares beginning in February 2002, and the remaining 5,000 shares beginning in February 2003. The redemption price will be $1,000 per share plus accrued but unpaid dividends, if any, whether or not declared. However, we will not be obligated to redeem any of the Series B, Series D and Series E 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, Series D and Series E 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 junior to our Series A preferred stock and senior to our Series B, D and E preferred stock all classes of our common stock. 132 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 61/2% 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, 2001 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. 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. 133 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, Series E 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 and certificates of designation; 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; 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; and o Golden Sky's Stock and Warrant Purchase Agreement, dated as of January 4, 2000, by and among Golden Sky Holdings and the investors identified therein. 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, 22,500 shares have been designated as Series D junior convertible participating preferred stock and 10,000 shares will be designated as Series E junior convertible participating preferred stock. As of February 25, 2000, Pegasus had outstanding 15,895,968 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: 134 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; o 228,500 shares have been designated as Series B convertible participating preferred stock, 228,442 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, Class B common stock and non-voting common stock are identical in all respects, except that: o the holders of Class A common stock are entitled to one vote per share, the holders of Class B common stock are entitled to ten votes per share and the holders of non-voting common stock have no voting rights except as provided by law; o stock dividends on Class A common stock may be paid only in shares of Class A common stock or non-voting common stock, stock dividends on Class B common stock may be paid only in shares of Class B common stock or non-voting common stock, and stock dividends on non-voting common stock may be paid only in shares of non-voting common stock; and o shares of Class B common stock 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. Holders of non-voting common stock are not entitled to vote on amendments to Pegasus' certificate of incorporation, whether such amendment increases or decreases the number of shares of non-voting common stock, or otherwise. Where holders of non-voting common stock are entitled to a vote by law, they are entitled to one vote per share, and they will vote together as a single class with the holders of the Class A common stock and Class B common stock, unless the law requires a separate vote. 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, Class B common stock and non-voting common stock will be entitled to receive the same consideration, except that, in a merger in which Pegasus is not the surviving corporation, holders of Class B common stock may receive stock with greater voting power in lieu of stock with lesser voting power received by holders of the Class A common stock, and holders of non-voting common stock may receive stock with no voting rights. 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 135 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, other than the Series D redeemable preferred stock, is entitled to vote as a separate class with respect to certain corporate actions, which vary depending upon the series. The holders of Series A redeemable preferred stock or Series B redeemable 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 control 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 or Series A redeemable preferred stock, on the one hand, and Series B convertible participating preferred stock or 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 of 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 or non-voting common stock, stock dividends on Class B common stock may be paid only in shares of Class B common stock or non-voting common stock and stock dividends on non-voting common stock may be paid only in shares of non-voting common stock. Each share of common stock is entitled to receive 136 dividends if, as and when declared by Pegasus' board of directors out of funds legally available. The Class A common stock, Class B common stock and non-voting 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, Series D and Series E 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, Series D and Series E Junior Convertible Participating Preferred Stock and Description of Series C Convertible 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, with such dividend payable exclusively in shares of Series D redeemable preferred stock; 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 or Series A redeemable preferred stock, on the one hand, and Series B convertible participating preferred stock or 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 pro rata 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. 137 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. In connection with the merger, the holders of Series A and B convertible participating preferred stock have agreed to the conversion ratios described under The Merger -- The Merger Agreement -- Conversion of Golden Sky Capital Stock. Conversion Rights and Transfer Restrictions Pegasus' Class A common stock and non-voting common stock have 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. In the event that shares of non-voting common stock are issued in the future, Pegasus would decide at the time whether to register those shares under the Securities Act of 1933. If they are not registered, the shares of non-voting common stock would be subject to restrictions on transfer. See Description of Capital Stock -- Description of Series B, Series D and Series E Junior Convertible Participating Preferred Stock and -- Description of Series C Convertible 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 without the written consent of 58% in interest of the Series A convertible participating preferred shares and the Series B convertible participating preferred shares, 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, other than in certain specified transactions, 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. 138 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. 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 Pegasus' stockholders' receipt of an opinion from McDermott, Will & Emery in form and substance reasonably satisfactory to Pegasus. Golden Sky's obligation to complete the merger is conditioned upon Golden Sky's receipt of an opinion from Drinker Biddle & Reath LLP in form and substance reasonably satisfactory to Golden Sky. EXPERTS Pegasus' consolidated balance sheets as of December 31, 1998 and 1999 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, 1999 included in this proxy statement/prospectus, have been so included 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, 1998 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999 included in this proxy statement/prospectus, have been included herein in reliance on the report of KPMG LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. 139 FINANCIAL STATEMENT INDEX
Page ----- Pegasus Communications Corporation Report of PricewaterhouseCoopers LLP ..................................................... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999 ............................. F-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999.................................................................................... F-4 Consolidated Statements of Changes in Total Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999 ........................................................ F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999.................................................................................... F-6 Notes to Consolidated Financial Statements ............................................... F-7 Golden Sky Holdings, Inc. (GSH) (a proposed acquisition) Report of KPMG LLP ....................................................................... F-25 Consolidated Balance Sheets as of December 31, 1998 and 1999 ............................. F-26 Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999.................................................................................... F-27 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999 ........................................................ F-28 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999.................................................................................... F-29 Notes to Consolidated Financial Statements ............................................... F-30 Pegasus Communications Corporation Pro Forma Consolidated Financial Information (unaudited) Basis of Presentation ................................................................. F-59 Pro Forma Consolidated Statement of Operations Data for the Year Ended December 31, 1999.................................................................................... F-60 Notes to Pro Forma Consolidated Statement of Operations Data .......................... F-61 Pro Forma Consolidated Balance Sheet as of December 31, 1999 .......................... F-62 Notes to Pro Forma Consolidated Balance Sheet ......................................... F-63
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Pegasus Communications Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and changes in total equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Pegasus Communications Corporation and its subsidiaries at December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with accounting standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Philadelphia, Pennsylvania February 11, 2000 F-2 Pegasus Communications Corporation Consolidated Balance Sheets (Dollars in thousands)
December 31, December 31, 1998 1999 -------------- ------------- ASSETS Current assets: Cash and cash equivalents ............................................... $ 54,505 $ 40,453 Restricted cash ......................................................... 21,479 2,379 Accounts receivable, less allowance of $567 and $1,410, respectively .... 20,882 31,984 Inventory ............................................................... 5,427 10,020 Program rights .......................................................... 3,157 4,373 Deferred taxes .......................................................... 2,603 536 Prepaid expenses and other .............................................. 1,207 4,597 ---------- ---------- Total current assets .................................................. 109,260 94,342 Property and equipment, net .............................................. 34,067 44,415 Intangible assets, net ................................................... 729,406 760,637 Program rights ........................................................... 3,428 5,732 Deferred taxes ........................................................... 9,277 30,371 Investment in affiliate .................................................. -- 4,598 Deposits and other ....................................................... 872 5,237 ---------- ---------- Total assets .......................................................... $ 886,310 $ 945,332 ========== ========== LIABILITIES AND TOTAL EQUITY Current liabilities: Current portion of long-term debt ....................................... $ 14,399 $ 15,488 Accounts payable ........................................................ 4,795 8,999 Accrued interest ........................................................ 17,465 11,592 Accrued satellite programming, fees and commissions ..................... 22,681 37,885 Accrued expenses ........................................................ 9,599 14,139 Amounts due seller ...................................................... -- 6,729 Current portion of program rights payable ............................... 2,432 4,446 ---------- ---------- Total current liabilities ............................................. 71,371 99,278 Long-term debt ........................................................... 544,629 668,926 Program rights payable ................................................... 2,472 4,211 Deferred taxes ........................................................... 80,672 90,310 ---------- ---------- Total liabilities ..................................................... 699,144 862,725 ---------- ---------- Commitments and contingent liabilities ................................... -- -- Minority interest ........................................................ 3,000 3,000 Preferred Stock; $0.01 par value; 5.0 million shares authorized .......... -- -- Series A Preferred Stock; $0.01 par value; 143,684 shares authorized; 119,369 and 135,073 issued and outstanding .............................. 126,028 142,734 Common stockholders' equity (deficit): Class A Common Stock; $0.01 par value; 50.0 million shares authorized; 11,315,809 and 15,216,510 issued and outstanding ...................... 113 152 Class B Common Stock; $0.01 par value; 15.0 million shares authorized; 4,581,900 issued and outstanding ...................................... 46 46 Non-Voting Common Stock; $0.01 par value; 20.0 million shares authorized ............................................................ -- -- Additional paid-in capital .............................................. 173,871 237,566 Deficit ................................................................. (115,892) (300,704) Class A Common Stock in treasury, at cost; 4,253 shares ................. -- (187) ---------- ---------- Total common stockholders' equity (deficit) ........................... 58,138 (63,127) ---------- ---------- Total liabilities and stockholders' equity (deficit) .................. $ 886,310 $ 945,332 ========== ==========
See accompanying notes to consolidated financial statements F-3 Pegasus Communications Corporation Consolidated Statements of Operations (Dollars in thousands, except per share data)
Years Ended December 31, -------------------------------------------- 1997 1998 1999 ------------ ------------- ------------- Net revenues: DBS .................................................................. $ 38,254 $ 147,142 $ 286,353 Broadcast ............................................................ 31,876 34,311 36,415 -------- --------- --------- Total net revenues ................................................. 70,130 181,453 322,768 Operating expenses: DBS Programming, technical, general and administrative ................. 26,042 102,419 201,158 Marketing and selling .............................................. 5,973 45,706 117,774 Incentive compensation ............................................. 795 1,159 1,592 Depreciation and amortization ...................................... 17,042 59,077 82,744 Broadcast Programming, technical, general and administrative ................. 15,672 18,056 22,812 Marketing and selling .............................................. 5,704 5,993 6,304 Incentive compensation ............................................. 298 177 57 Depreciation and amortization ...................................... 3,754 4,557 5,144 Corporate expenses ................................................... 2,256 3,614 5,975 Corporate depreciation and amortization .............................. 1,353 2,105 3,119 Other expense, net ................................................... 630 1,409 1,995 -------- --------- --------- Loss from operations .............................................. (9,389) (62,819) (125,906) Interest expense ...................................................... (14,275) (44,559) (64,904) Interest income ....................................................... 1,508 1,586 1,356 -------- --------- --------- Loss from continuing operations before income taxes, equity loss and extraordinary items ............................................ (22,156) (105,792) (189,454) Provision (benefit) for income taxes .................................. 168 (901) (8,892) Equity in net loss of unconsolidated affiliate ........................ -- -- (201) -------- --------- --------- Loss from continuing operations before extraordinary items ........... (22,324) (104,891) (180,763) Discontinued operations: Income from discontinued operations of cable segment, net of income taxes ....................................................... 257 1,047 2,128 Gain on sale of discontinued operations, net of income taxes ......... 4,451 24,727 -- -------- --------- --------- Loss before extraordinary items ...................................... (17,616) (79,117) (178,635) Extraordinary loss from extinquishment of debt, net ................... (1,656) -- (6,178) -------- --------- --------- Net loss ............................................................. (19,272) (79,117) (184,813) Preferred stock dividends ............................................ 12,215 14,764 16,706 -------- --------- --------- Net loss applicable to common shares ................................. ($ 31,487) ($ 93,881) ($ 201,519) ======== ========= ========= Basic and diluted earnings per common share: .......................... Loss from continuing operations ...................................... $ (3.50) $ (8.46) $ (10.46) Income from discontinued operations .................................. 0.03 0.07 0.11 Gain on sale of discontinued operations .............................. 0.45 1.75 -- -------- --------- --------- Loss before extraordinary items ...................................... (3.02) (6.64) (10.35) Extraordinary loss ................................................... (0.17) -- ( 0.33) -------- --------- --------- Net loss ............................................................. $ (3.19) $ (6.64) $ (10.68) ======== ========= ========= Weighted average shares outstanding (000's) .......................... 9,858 14,130 18,875 ======== ========= =========
See accompanying notes to consolidated financial statements F-4 Pegasus Communications Corporation Consolidated Statements of Changes in Total Equity (Deficit) (In thousands)
Common Stock Series A -------------------- Additional Preferred Number Par Paid-In Stock of Shares Value Capital ----------- ----------- ------- ------------ Balances at January 1, 1997 .................... -- 9,245 $ 92 $ 57,736 Net loss ....................................... Issuance of Class A Common Stock due to: Acquisitions .................................. 958 10 15,188 Incentive compensation and awards ............. 119 1 1,307 Issuance of Series A Preferred Stock due to: Unit Offering ................................. $100,000 Paid and accrued dividends .................... 12,215 (12,215) Issuance of warrants due to: Acquisitions .................................. 1,068 Unit Offering ................................. (951) 951 -------- ------ ---- --------- Balances at December 31, 1997 .................. 111,264 10,322 103 64,035 Net loss ....................................... Issuance of Class A Common Stock due to: Acquisitions .................................. 5,509 55 119,641 Incentive compensation and awards ............. 67 1 1,414 Issuance of Series A Preferred Stock due to: Paid and accrued dividends .................... 14,764 (14,764) Issuance of warrants and options due to: Acquisitions .................................. 3,545 -------- ------ ---- --------- Balances at December 31, 1998 .................. 126,028 15,898 159 173,871 Net loss ....................................... Issuance of Class A Common Stock due to: Secondary Offering ............................ 3,616 36 74,857 Acquisitions .................................. 12 -- 550 Exercise of warrants and options .............. 220 2 2,781 Incentive compensation and awards ............. 52 1 1,399 Issuance of Series A Preferred Stock due to: Paid and accrued dividends .................... 16,706 (16,706) Issuance of warrants due to: Acquisitions .................................. 814 Repurchase of Class A Common Stock ............. -------- ------ ---- --------- Balances at December 31, 1999 .................. $142,734 19,798 $198 $ 237,566 ======== ====== ==== =========
Treasury Stock Total Retained ----------------------- Common Earnings Number Stockholders' (Deficit) of Shares Cost Equity (Deficit) ------------- ----------- ---------- ----------------- Balances at January 1, 1997 .................... ($ 17,502) -- -- $ 40,326 Net loss ....................................... (19,272) (19,272) Issuance of Class A Common Stock due to: Acquisitions .................................. 15,198 Incentive compensation and awards ............. 1,308 Issuance of Series A Preferred Stock due to: Unit Offering ................................. Paid and accrued dividends .................... (12,215) Issuance of warrants due to: Acquisitions .................................. 1,068 Unit Offering ................................. 951 --------- -- ----- --------- Balances at December 31, 1997 .................. (36,774) -- -- 27,364 Net loss ....................................... (79,117) (79,117) Issuance of Class A Common Stock due to: Acquisitions .................................. 119,696 Incentive compensation and awards ............. 1,415 Issuance of Series A Preferred Stock due to: Paid and accrued dividends .................... (14,764) Issuance of warrants and options due to: Acquisitions .................................. 3,545 --------- -- ----- --------- Balances at December 31, 1998 .................. (115,891) -- -- 58,139 Net loss ....................................... (184,813) (184,813) Issuance of Class A Common Stock due to: Secondary Offering ............................ 74,893 Acquisitions .................................. 550 Exercise of warrants and options .............. 2,783 Incentive compensation and awards ............. 1,400 Issuance of Series A Preferred Stock due to: Paid and accrued dividends .................... (16,706) Issuance of warrants due to: Acquisitions .................................. 814 Repurchase of Class A Common Stock ............. 4 ($ 187) (187) --------- -- ----- --------- Balances at December 31, 1999 .................. ($ 300,704) 4 ($ 187) ($ 63,127) ========= == ===== =========
See accompanying notes to consolidated financial statements F-5 Pegasus Communications Corporation Consolidated Statements of Cash Flows (Dollars in thousands)
Years Ended December 31, ---------------------------------------------- 1997 1998 1999 ------------- ------------- -------------- Cash flows from operating activities: Net loss .................................................... ($ 19,272) ($ 79,117) ($ 184,813) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Extraordinary loss on extinguishment of debt, net .......... 1,656 -- 6,178 Depreciation and amortization .............................. 27,792 70,731 97,989 Program rights amortization ................................ 1,716 2,366 3,686 Accretion on discount of bonds and seller notes ............ 394 1,320 1,446 Stock incentive compensation ............................... 1,274 1,452 2,002 Gain on disposal of assets ................................. -- -- (78) Gain on sale of cable systems .............................. (4,451) (24,727) -- Equity in net loss of unconsolidated affiliate ............. -- -- 201 Bad debt expense ........................................... 1,142 2,851 8,369 Deferred income taxes ...................................... 200 (896) (8,892) Change in assets and liabilities: Accounts receivable ....................................... (5,608) (6,464) (18,982) Inventory ................................................. (116) (3,105) (4,422) Prepaid expenses and other ................................ 305 (244) (3,315) Accounts payable and accrued expenses ..................... 5,834 9,747 21,985 Accrued interest .......................................... 2,585 4,372 (5,873) Capitalized subscriber acquisition costs .................. (4,515) -- -- Deposits and other ........................................ (458) (248) (4,360) --------- --------- --------- Net cash provided (used) by operating activities ........... 8,478 (21,962) (88,879) --------- --------- --------- Cash flows from investing activities: Acquisitions ............................................... (133,886) (109,340) (106,907) Cash acquired from acquisitions ............................ 379 3,284 5 Capital expenditures ....................................... (9,929) (12,400) (14,784) Purchase of intangible assets .............................. (3,034) (10,489) (4,552) Payments for programming rights ............................ (2,584) (2,561) (3,452) Proceeds from sale of assets ............................... -- -- 509 Proceeds from sale of cable system ......................... 6,945 30,133 -- Investment in affiliate .................................... -- -- (4,800) --------- --------- --------- Net cash used for investing activities ...................... (142,109) (101,373) (133,981) --------- --------- --------- Cash flows from financing activities: Proceeds from long-term debt ............................... 115,000 100,000 -- Repayments of long-term debt ............................... (320) (14,572) (14,291) Borrowings on bank credit facilities ....................... 94,726 108,800 180,900 Repayments of bank credit facilities ....................... (124,326) (64,400) (50,600) Restricted cash ............................................ (1,220) 7,541 19,100 Debt issuance costs ........................................ (10,237) (3,179) (3,608) Capital lease repayments ................................... (337) (399) (183) Proceeds from issuance of Class A Common Stock ............. -- -- 82,334 Proceeds from issuance of Series A Preferred Stock ......... 100,000 -- -- Underwriting and stock offering costs ...................... (4,188) -- (4,657) Repurchase of Class A Common Stock ......................... -- -- (187) --------- --------- --------- Net cash provided by financing activities ................... 169,098 133,791 208,808 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ......... 35,467 10,456 (14,052) Cash and cash equivalents, beginning of year ................. 8,582 44,049 54,505 --------- --------- --------- Cash and cash equivalents, end of year ....................... $ 44,049 $ 54,505 $ 40,453 ========= ========= =========
See accompanying notes to consolidated financial statements F-6 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company: Pegasus Communications Corporation ("Pegasus" or together with its subsidiaries, the "Company") operates in growing segments of the media industry and is a direct subsidiary of Pegasus Communications Holdings, Inc. ("PCH" or the "Parent"). Pegasus' significant direct operating subsidiaries are Pegasus Media & Communications, Inc. ("PM&C") and Digital Television Services, Inc. ("DTS"). PM&C's subsidiaries provide direct broadcast satellite television ("DBS") services to customers in certain rural areas of the United States; own and/or program broadcast television ("Broadcast" or "TV") stations affiliated with the Fox Broadcasting Company ("Fox"), United Paramount Network ("UPN") and The WB Television Network ("WB"); and own and operate a cable television ("Cable") system that provides service to individual and commercial subscribers in Puerto Rico. DTS and its subsidiaries provide DBS services to customers in certain rural areas of the United States. 2. Summary of Significant Accounting Policies: Basis of Presentation: The accompanying consolidated financial statements include the accounts of Pegasus and all of its subsidiaries. All intercompany transactions and balances have been eliminated. Certain amounts for 1997 and 1998 have been reclassified for comparative purposes. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingencies. Actual results could differ from those estimates. Significant estimates relate to barter transactions and the useful lives and recoverability of intangible assets. Cash and Cash Equivalents: Cash and cash equivalents include highly liquid investments purchased with an initial maturity of three months or less. The Company has cash balances in excess of the federally insured limits at various banks. Restricted Cash: The Company had restricted cash held in escrow of approximately $21.5 million and $2.4 million at December 31, 1998 and 1999, respectively. At December 31, 1998, $18.9 million was to fund interest payments on the DTS Notes, $1.6 million was to collateralize certain outstanding loans and $1.0 million was held in escrow for the purchase of a cable system serving Aguadilla, Puerto Rico. At December 31, 1999, $2.4 million is to collateralize certain outstanding loans. Inventories: Inventories consist of equipment held for resale to customers and installation supplies. Inventories are stated at the lower of cost or market on a first-in, first-out basis. Long-Lived Assets: The Company's assets are reviewed for impairment whenever events or circumstances provide evidence which suggest the carrying amounts may not be recoverable. The Company assesses the recoverability of its assets by determining whether the depreciation or amortization of the respective asset balance can be recovered through projected undiscounted future cash flows. To date, no such impairments have occurred. Property and Equipment: Property and equipment are stated at cost. The cost and related accumulated depreciation of assets fully depreciated, sold, retired or otherwise disposed of are removed from the respective accounts and any resulting F-7 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. Summary of Significant Accounting Policies: -- (Continued) gains or losses are included in the statement of operations. For cable television systems, initial subscriber installation costs including material, labor and overhead costs of the hookup are capitalized as part of the distribution facilities. The costs of disconnection and reconnection are charged to expense. Satellite equipment that is leased to customers is stated at cost. Depreciation is computed for financial reporting purposes using the straight-line method based upon the following lives: Reception and distribution facilities ......... 7 to 11 years Transmitter equipment ......................... 5 to 10 years Equipment, furniture and fixtures ............. 5 to 10 years Building and improvements ..................... 12 to 39 years Vehicles and other equipment .................. 3 to 5 years Intangible Assets: Intangible assets are stated at cost. The cost and related accumulated amortization of assets fully amortized, sold, retired or otherwise disposed of are removed from the respective accounts and any resulting gains or losses are included in the statement of operations. Costs of successful franchise applications are capitalized and amortized over the lives of the related franchise agreements, while unsuccessful franchise applications and abandoned franchises are charged to expense. Financing costs incurred in obtaining long-term financing are amortized over the term of the applicable loan. Amortization of intangible assets is computed for financial reporting purposes using the straight-line method based upon the following lives: Network affiliation agreements ......... 40 years Goodwill ............................... 40 years DBS rights ............................. 10 years Broadcast licenses ..................... 7 years Other intangibles ...................... 2 to 14 years Revenue: The Company operates in growing segments of the media industry: DBS and Broadcast. The Company recognizes revenue in its DBS operations when video and audio services are provided. The Company recognizes revenue in its Broadcast operations when advertising spots are broadcast. The Company obtains a portion of its TV programming through its network affiliations with Fox, UPN and WB and also through independent producers. The Company does not make any direct payments for this programming. Instead, the Company retains a portion of the available advertisement spots to sell on its own account. Barter programming revenue and the related expense are recognized when the advertisements sold by the networks or independent producers are broadcast. Gross barter amounts of $7.5 million, $8.1 million and $7.6 million for 1997, 1998 and 1999, respectively, are included in Broadcast revenue and programming expense in the accompanying consolidated statements of operations. Advertising Costs: Advertising costs are charged to operations in the period incurred and totaled approximately $3.6 million, $14.0 million and $23.3 million for the years ended December 31, 1997, 1998 and 1999, respectively. F-8 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. Summary of Significant Accounting Policies: -- (Continued) Program Rights: The Company enters into agreements to show motion pictures and syndicated programs on television. The Company records the right and associated liabilities for those films and programs when they are currently available for showing. These rights are recorded at the lower of unamortized cost or estimated net realizable value and are amortized on the straight-line method over the license period, which approximates amortization based on the estimated number of showings during the contract period. Amortization of $1.7 million, $2.4 million and $3.7 million is included in Broadcast programming expense for the years ended December 31, 1997, 1998 and 1999, respectively. The obligations arising from the acquisition of film rights are recorded at the gross amount. Payments for the contracts are made pursuant to the contractual terms over periods which are generally shorter than the license periods. Income Taxes: The Company accounts for income taxes utilizing the asset and liability approach, whereby deferred tax assets and liabilities are recorded for the tax effect of differences between the financial statement carrying values and tax bases of assets and liabilities. A valuation allowance is recorded for deferred taxes where it appears more likely than not that the Company will not be able to recover the deferred tax asset. MCT Cablevision, LP, a subsidiary of the Company, is treated as a partnership for federal and state income tax purposes but taxed as a corporation for Puerto Rico income tax purposes. Concentration of Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables, cash and cash equivalents. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across different businesses and geographic regions. As of December 31, 1998 and 1999, the Company had no other significant concentrations of credit risk. Reliance on DIRECTV: A substantial portion of the Company's business is derived from providing DBS services as an independent DIRECTV(R) ("DIRECTV") provider. Because the Company is a distributor of DIRECTV services, the Company may be adversely affected by any material adverse changes in the assets, financial condition, programming, technological capabilities or services of DIRECTV or its parent, Hughes Electronics Corporation ("Hughes"). New Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). As a result of the subsequent issuance of SFAS No. 137 in July 1999, SFAS No. 133 is now effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. The Company does not expect the adoption of SFAS No. 133 to have a material effect on our business, financial position or results of operations. F-9 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 3. Property and Equipment: Property and equipment consist of the following (in thousands):
December 31, December 31, 1998 1999 -------------- ------------- Reception and distribution facilities ......... $ 20,713 $ 32,179 Transmitter equipment ......................... 17,728 16,940 Equipment, furniture and fixtures ............. 8,530 12,491 Building and improvements ..................... 3,410 7,951 Land .......................................... 1,229 1,618 Vehicles ...................................... 1,112 2,122 Other equipment ............................... 5,894 3,500 --------- --------- 58,616 76,801 Accumulated depreciation ...................... (24,549) (32,386) --------- --------- Net property and equipment .................... $ 34,067 $ 44,415 ========= =========
Depreciation expense amounted to $5.7 million, $6.2 million and $7.9 million for the years ended December 31, 1997, 1998 and 1999, respectively. 4. Intangibles: Intangible assets consist of the following (in thousands):
December 31, December 31, 1998 1999 -------------- ------------- DBS rights .............................................. $ 712,232 $ 793,040 Deferred financing costs ................................ 33,763 32,927 Franchise costs ......................................... 31,158 71,657 Goodwill ................................................ 28,033 28,033 Broadcast licenses and affiliation agreements.. ......... 19,062 20,436 Consultancy and non-compete agreements .................. 7,023 7,964 Other deferred costs .................................... 13,121 16,873 ---------- ---------- 844,392 970,930 Accumulated amortization ................................ (114,986) (210,293) ---------- ---------- Net intangible assets ................................... $ 729,406 $ 760,637 ========== ==========
Amortization expense amounted to $22.1 million, $64.5 million and $90.1 million for the years ended December 31, 1997, 1998 and 1999, respectively. 5. Equity Investment in Affiliate: Pegasus Development Corporation ("PDC"), a subsidiary of Pegasus, has a 93% investment in Pegasus PCS Partners, LP ("PCS") which is accounted for by the equity method. PCS, a jointly owned limited partnership, acquires, owns, controls and manages wireless licenses. Pegasus PCS, Inc. is the sole general partner of PCS and is controlled by Marshall W. Pagon, the Company's President and Chief Executive Officer. PDC's share of undistributed losses of PCS included in continuing operations was a loss of $201,000 for 1999. PDC's total investment in PCS at December 31, 1999 was $4.6 million. 6. Common Stock: In March 1999, Pegasus completed a secondary public offering in which it sold approximately 3.6 million shares of its Class A Common Stock to the public at a price of $22 per share, resulting in net proceeds to the Company of $74.9 million. F-10 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 6. Common Stock: -- (Continued) On June 21, 1999, the Company amended Pegasus' Certificate of Incorporation, increasing the number of authorized shares of Class A Common Stock from 30.0 million to 50.0 million and authorizing 20.0 million shares of Non-Voting Common Stock, par value $0.01 per share. During 1999, the Company repurchased 4,253 shares of its Class A Common Stock for $186,822. The shares, which are held in treasury, were surrendered by employees to satisfy withholding obligations under the Company's restricted stock plan. The Company applies the cost method in accounting for treasury stock. As of December 31, 1998 and 1999, the Company had three classes of Common Stock: Class A Common Stock, Class B Common Stock and Non-Voting Common Stock. Holders of Class A Common Stock and Class B Common Stock are entitled to one vote per share and ten votes per share, respectively. The Company's ability to pay dividends on its Common Stock is subject to certain restrictions. 7. Preferred Stock: As of December 31, 1998 and 1999, the Company had 5.0 million shares of Preferred Stock authorized of which 126,978 and 143,684 shares have been designated as 12.75% Series A Cumulative Exchangeable Preferred Stock (the "Series A Preferred Stock"). The Company had approximately 119,369 and 135,073 shares of Series A Preferred Stock issued and outstanding at December 31, 1998 and 1999, respectively. In December, 1999 the Board of Directors declared a dividend on the Series A Preferred Stock in the aggregate of approximately 8,611 shares of Series A Preferred Stock, payable on January 1, 2000. Each whole share of Series A Preferred Stock has a liquidation preference of $1,000 per share (the "Liquidation Preference"). Cumulative dividends, at a rate of 12.75% are payable semi-annually on January 1 and July 1. Dividends may be paid, occurring on or prior to January 1, 2002, at the option of the Company, either in cash or by the issuance of additional shares of Series A Preferred Stock. Subject to certain conditions, the Series A Preferred Stock is exchangeable in whole, but not in part, at the option of the Company, for Pegasus' 12.75% Senior Subordinated Exchange Notes due 2007 (the "Exchange Notes"). The Exchange Notes would contain substantially the same redemption provisions, restrictions and other terms as the Series A Preferred Stock. Pegasus is required to redeem all of the Series A Preferred Stock outstanding on January 1, 2007 at a redemption price equal to the Liquidation Preference thereof, plus accrued dividends. The carrying amount of the Series A Preferred Stock is periodically increased by amounts representing dividends not currently declared or paid but which will be payable under the mandatory redemption features. The increase in carrying amount is effected by charges against retained earnings, or in the absence of retained earnings, by charges against paid-in capital. Under the terms of the Series A Preferred Stock, Pegasus' ability to pay dividends on its Common Stock is subject to certain restrictions. F-11 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 8. Long-Term Debt: Long-term debt consists of the following (in thousands):
December 31, December 31, 1998 1999 -------------- ------------- Series B Senior Notes payable by Pegasus, due 2005, interest at 9.625%, payable semi-annually in arrears on April 15 and October 15 ................ $115,000 $115,000 Series B Senior Notes payable by Pegasus, due 2006, interest at 9.75%, payable semi-annually in arrears on June 1 and December 1 .................. 100,000 100,000 Series A Senior Notes payable by Pegasus, due 2007, interest at 12.5%, payable semi-annually in arrears on February 1 and August 1 ................ -- 155,000 Senior six-year $180.0 million revolving credit facility, payable by PM&C, interest at PM&C's option at either the bank's base rate plus an applicable margin or LIBOR plus an applicable margin (8.25% at December 31, 1999 .......................................................... 27,500 142,500 Senior six-year $70.0 million revolving credit facility, payable by DTS, interest at DTS' option at either the bank's base rate plus an applicable margin or the Eurodollar Rate plus an applicable margin (10.04% at December 31, 1999 .......................................................... 26,800 42,700 Senior six-year $20.0 million term loan facility, payable by DTS, interest at DTS' option at either the bank's base rate plus an applicable margin or the Eurodollar Rate plus an applicable margin .............................. 19,600 19,000 Series B Notes payable by PM&C, due 2005, interest at 12.5%, payable semi-annually in arrears on January 1 and July 1, net of unamortized discount of $2.6 million and $2.2 million as of December 31, 1998 and 1999, respectively ......................................................... 82,378 82,776 Series B Notes payable by DTS, due 2007, interest at 12.5%, payable semi-annually in arrears on February 1 and August 1, net of unamortized discount of $1.8 million as of December 31, 1998 ........................... 153,215 -- Mortgage payable, due 2000, interest at 8.75% ............................... 455 431 Sellers' notes, due 2000 to 2005, interest at 3% to 8% ...................... 33,538 26,648 Capital leases and other .................................................... 543 359 -------- -------- 559,029 684,414 Less current maturities ..................................................... 14,399 15,488 -------- -------- Long-term debt .............................................................. $544,629 $668,926 ======== ========
Certain of the Company's sellers' notes are collateralized by stand-by letters of credit issued pursuant to the PM&C Credit Facility and the DTS Credit Facility. DTS maintains a $70.0 million senior revolving credit facility and a $20.0 million senior term credit facility (collectively, the "DTS Credit Facility") which expires in 2003 and is collateralized by substantially all of the assets of DTS and its subsidiaries. The DTS Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. As of December 31, 1999, $10.4 million of stand-by letters of credit were issued pursuant to the DTS Credit Facility, including $2.6 million collateralizing certain of the Company's outstanding sellers' notes. PM&C maintains a $180.0 million senior revolving credit facility (the "PM&C Credit Facility") which expires in 2003 and is collateralized by substantially all of the assets of PM&C and its subsidiaries. The PM&C Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. F-12 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 8. Long-Term Debt: -- (Continued) In November 1998, Pegasus completed an offering of senior notes (the "9.75% Senior Notes Offering") in which it sold $100.0 million of its 9.75% Series A Senior Notes due 2006 (the "9.75% Series A Notes"), resulting in net proceeds to the Company of approximately $96.8 million. $64.0 million of the net proceeds from the 9.75% Senior Notes Offering were used to repay a portion of the outstanding indebtedness under the PM&C Credit Facility. In November 1999, Pegasus exchanged its 12.5% Series A senior notes due 2007 (the "12.5% Series A Notes") for DTS' outstanding 12.5% Series B senior subordinated notes due 2007 (the "DTS Series B Notes"), of which $155.0 million in principal amount at maturity were outstanding (the "DTS Exchange Offer"). The 12.5% Series A Notes have substantially the same terms and provisions as the DTS Series B Notes. Deferred financing fees related to the DTS Series B Notes were written off, resulting in an extraordinary loss of approximately $6.2 million on the refinancing transaction. In December 1999, Pegasus entered into a $35.5 million interim letter of credit facility (the "PCC Credit Facility"). As of December 31, 1999, $35.5 million of stand-by letters of credit were issued pursuant to the PCC Credit Facility, including $19.5 million collateralizing certain of the Company's outstanding sellers' notes. The Company's publicly held notes may be redeemed, at the option of the Company, in whole or in part, at various points in time after July 1, 2000 at the redemption prices specified in the indentures governing the respective notes, plus accrued and unpaid interest thereon. The Company's indebtedness contain certain financial and operating covenants, including restrictions on the Company to incur additional indebtedness, create liens and to pay dividends. At December 31, 1999, maturities of long-term debt and capital leases are as follows (in thousands): 2000 ....................... $ 15,488 2001 ....................... 9,752 2002 ....................... 3,550 2003 ....................... 59,848 2004 ....................... 142,800 Thereafter ................. 452,976 -------- $684,414 ======== F-13 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 9. Earnings Per Common Share: Calculation of basic and diluted earnings per common share: The following table sets forth the computation of the number of shares used in the computation of basic and diluted earnings per common share (in thousands):
1997 1998 1999 ------------- ------------- -------------- Net loss applicable to common shares .................. ($ 31,487) ($ 93,881) ($ 201,519) -------- -------- --------- Weighted average common shares outstanding ............ 9,858 14,130 18,875 -------- -------- --------- Total shares used for calculation of basic earnings per common share ......................................... 9,858 14,130 18,875 Stock options ......................................... -- -- -- -------- -------- --------- Total shares used for calculation of diluted earnings per common share ..................................... 9,858 14,130 18,875 -------- -------- ---------
Basic earnings per share amounts are based on net loss after deducting preferred stock dividend requirements divided by the weighted average number of Class A, Class B and Non-Voting Common Stock outstanding during the year. For the years ended December 31, 1997, 1998 and 1999, net loss per common share was determined by dividing net loss, as adjusted by the aggregate amount of dividends on the Company's Series A Preferred Stock, approximately $12.2 million, $14.8 million and $16.7 million, respectively, by applicable shares outstanding. Securities that have not been issued and are antidilutive amounted to approximately 582,000 shares in 1997, 1.3 million shares in 1998 and 1.8 million shares in 1999. 10. Leases: The Company leases certain studios, towers, utility pole attachments, and occupancy of underground conduits and headend sites under operating leases. The Company also leases office space, vehicles and various types of equipment through separate operating lease agreements. The operating leases expire at various dates through 2004. Rent expense for the years ended December 31, 1997, 1998 and 1999 was $1.1 million, $1.6 million and $2.3 million, respectively. The Company leases equipment under long-term leases and has the option to purchase the equipment for a nominal cost at the termination of the leases. The related obligations are included in long-term debt. Property and equipment at December 31 include the following amounts for leases that have been capitalized (in thousands): 1998 1999 -------- --------- Equipment, furniture and fixtures .......... $ 662 $ 320 Vehicles ................................... 541 422 ------ ------ 1,203 742 Accumulated depreciation ................... (562) (322) ------ ------ Total .................................... $ 641 $ 420 ====== ====== F-14 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 10. Leases: -- (Continued) Future minimum lease payments on noncancellable operating and capital leases at December 31, 1999 are as follows (in thousands):
Operating Capital Leases Leases ----------- -------- 2000 ........................................................ $1,899 $192 2001 ........................................................ 1,629 153 2002 ........................................................ 1,108 58 2003 ........................................................ 682 2 2004 ........................................................ 609 -- Thereafter .................................................. 15 -- ------ ---- Total minimum payments ...................................... $5,942 405 ====== Less: amount representing interest .......................... 46 ---- Present value of net minimum lease payments including current maturities of $161 ......................................... $359 ====
11. Income Taxes: The following is a summary of the components of income taxes from continuing operations (in thousands):
1997 1998 1999 ------ ------------ ------------ Federal -- deferred .............................. ($ 1,071) ($ 9,388) State and local -- current ....................... $168 170 496 ---- ------- ------- Provision (benefit) for income taxes .......... $168 ($ 901) ($ 8,892) ==== ======= =======
The deferred income tax assets and liabilities recorded in the consolidated balance sheets at December 31, 1998 and 1999 are as follows (in thousands):
1998 1999 ------------ ------------ Assets: Receivables ................................................. $ 216 $ 536 Excess of tax basis over book basis from tax gain recognized upon incorporation of subsidiaries ......................... 2,112 -- Loss carryforwards .......................................... 56,700 125,856 Other ....................................................... 973 -- -------- -------- Total deferred tax assets .................................. 60,001 126,392 -------- -------- Liabilities: Excess of book basis over tax basis of property, plant and equipment ................................................... 1,907 4,383 Excess of book basis over tax basis of amortizable intangible assets ..................................................... 78,765 85,927 -------- -------- Total deferred tax liabilities ............................. 80,672 90,310 -------- -------- Net deferred tax assets (liabilities) ......................... (20,671) 36,082 -------- -------- Valuation allowance ........................................ (48,121) (95,485) -------- -------- Net deferred tax liabilities ................................ ($ 68,792) ($ 59,403) ======== ========
F-15 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 11. Income Taxes: -- (Continued) The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized due to the expiration of the Company's net operating loss carryforwards and portions of other deferred tax assets related to prior acquisitions. The valuation allowance increased primarily as the result of net operating loss carryforwards generated during 1999, which may not be utilized. At December 31, 1999, the Company has net operating loss carryforwards of approximately $331.2 million which are available to offset future taxable income and expire through 2018. A reconciliation of the Federal statutory rate to the effective tax rate is as follows:
1997 1998 1999 ----------- ----------- ----------- U.S. statutory federal income tax rate .......... 34.00% 35.00% 35.00% Valuation allowance ............................. (34.38) (34.40) (30.24) Other ........................................... 1.43 0.70 -- ------ ------ ------ Effective tax rate .............................. 1.05% 1.30% 4.76% ====== ====== ======
12. Supplemental Cash Flow Information: Significant noncash investing and financing activities are as follows (in thousands):
Years ended December 31, ---------------------------------- 1997 1998 1999 --------- ---------- --------- Barter revenue and related expense .................................. $ 7,520 $ 8,078 $ 7,598 Acquisition of program rights and assumption of related program payables ................................................... 3,453 4,630 7,205 Acquisition of plant under capital leases ........................... 529 37 -- Capital contribution and related acquisition of intangibles ......... 15,198 123,241 1,364 Minority interest and related acquisition of intangibles ............ 3,000 -- -- Notes payable and related acquisition of intangibles ................ 7,114 219,889 6,467 Series A Preferred Stock dividend and reduction of paid-in capital ............................................................ 12,215 14,763 16,706 Deferred taxes, net and related acquisition of intangibles .......... -- 82,934 29
For the years ended December 31, 1997, 1998 and 1999 the Company paid cash for interest in the amount of $13.5 million, $35.3 million and $70.8 million, respectively. The Company paid no federal income taxes for the years ended December 31, 1997, 1998 and 1999. 13. Acquisitions: In 1998, the Company acquired (exclusive of the acquisition of DTS), from 26 independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of the United States and the related assets in exchange for total consideration of approximately $132.1 million, which consisted of $109.3 million in cash, 37,304 shares of the Company's Class A Common Stock (amounting to $900,000), warrants to purchase a total of 25,000 shares of the Company's Class A Common Stock (amounting to $222,000), $20.4 million in promissory notes and $1.3 million in assumed net liabilities. On April 27, 1998, the Company acquired DTS, which holds the rights to provide DIRECTV programming in certain rural areas of eleven states, in exchange for total consideration of approximately $363.9 million, which consisted of approximately 5.5 million shares of the Company's Class A Common Stock (amounting to $118.8 million), options and warrants to purchase a total of 224,038 shares of the Company's Class A Common Stock (amounting to $3.3 million), approximately $158.9 million in assumed net liabilities and approximately $82.9 million of a deferred tax liability. F-16 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 13. Acquisitions: -- (Continued) In 1999, the Company acquired, from fifteen independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of the United States and the related assets in exchange for total consideration of approximately $79.5 million, which consisted of $64.6 million in cash, 12,339 shares of PCC's Class A Common Stock (amounting to $550,000), warrants to purchase a total of 25,000 shares of PCC's Class A Common Stock (amounting to $814,000), $6.5 million in promissory notes, $6.7 million in accrued expenses and $365,000 in assumed net liabilities. The Company's 1999 acquisitions of rights to provide DIRECTV programming were not significant, and accordingly, the pro forma impact of those acquisitions has not been presented. Unaudited pro forma net revenues from continuing operations, unaudited net loss and unaudited net loss applicable to common shares for the year ended December 31, 1998 approximated $225.8 million, $124.9 million and $149.0 million, respectively. This unaudited pro forma information reflects the Company's 1998 acquisitions of rights to provide DIRECTV programming and the disposition of the Cable segment as if each such DBS territory and the Cable segment had been acquired or sold as of the beginning of 1998 and includes the impact of certain adjustments, such as the depreciation of fixed assets, amortization of intangibles, interest expense, preferred stock dividends and related income tax effects. This information does not purport to be indicative of what would have occurred had the acquisitions/disposition been made on that date or of results which may occur in the future. 14. Discontinued Operations: Effective January 31, 1997, the Company sold substantially all the assets of its New Hampshire cable system for approximately $6.9 million in cash, net of certain selling costs and recognized a gain on the transaction of approximately $4.5 million. Effective July 1, 1998, the Company sold substantially all the assets of its remaining New England cable systems for approximately $30.1 million in cash and recognized a gain on the transaction of approximately $24.7 million. Effective March 31, 1999, the Company purchased a cable system serving Aguadilla, Puerto Rico and neighboring communities for approximately $42.1 million in cash. The Aguadilla cable system is contiguous to the Company's other Puerto Rico cable system and the Company has consolidated the Aguadilla cable system with its existing cable system. On January, 10, 2000, the Company entered into a letter of intent to sell its remaining Cable operations for $170.0 million in cash, subject to certain adjustments. The Company anticipates closing this sale during the third quarter of 2000. Accordingly, the results of operations from the entire Cable segment have been classified as discontinued with prior years restated. Net revenues and income from discontinued operations were as follows (in thousands):
Years Ended December 31, ------------------------------------ (unaudited) 1997 1998 1999 ---------- ---------- ---------- Net revenues .................................... $16,688 $13,767 $21,158 Income from operations .......................... 2,077 648 2,110 Provision for income taxes ...................... 32 5 -- Income from discontinued operations ............. 257 1,047 2,128 Gain on sale of discontinued operations ......... 4,451 24,727 --
F-17 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 15. Financial Instruments: The carrying values and fair values of the Company's financial instruments at December 31, 1999 consisted of (in thousands):
1998 1999 ------------------------ ------------------------ Carrying Fair Carrying Fair Value Value Value Value ---------- ----------- ---------- ----------- Long-term debt, including current portion . $559,029 $583,460 $684,414 $707,988 Series A Preferred Stock .................. 126,028 126,978 142,734 149,871
Long-term debt: The fair value of long-term debt is estimated based on the quoted market price for the same or similar instruments. Series A Preferred Stock: The fair value of Series A Preferred Stock is estimated based on the quoted market price for the same or similar instruments. All other financial instruments are stated at cost which approximates fair market value. 16. Warrants: In 1998, in connection with the acquisition of DBS properties, the Company issued warrants to purchase approximately 182,000 shares of Class A Common Stock at exercise prices between $14.64 and $24.26 per share. These warrants are exercisable through October 10, 2007. At December 31, 1999, warrants to purchase approximately 119,000 shares of Class A Common Stock have been exercised. The fair value of the warrants issued was estimated using the Black-Scholes pricing model and was approximately $2.7 million. The value assigned to these warrants increased the carrying amount of the DBS rights acquired and was effected by an increase in paid-in-capital. In 1999, in connection with the acquisition of DBS properties, the Company issued warrants to purchase 25,000 shares of Class A Common Stock at an exercise price of $24.18 per share. These warrants are exercisable through April 13, 2004. At December 31, 1999, none of these warrants had been exercised. The fair value of the warrants issued was estimated using the Black-Scholes pricing model and was approximately $814,000. The value assigned to these warrants increased the carrying amount of the DBS rights acquired and was effected by an increase in paid-in-capital. 17. Employee Benefit Plans: The Company has two active stock plans available to grant stock options (the "Stock Option Plan") and restricted stock awards (the "Restricted Stock Plan") to eligible employees, executive officers and non-employee directors of the Company. The Company applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") in accounting for its stock plans. The Company has adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). Stock Option Plan The Stock Option Plan provides for the granting of nonqualified and qualified options to purchase a maximum of 1,300,000 shares (subject to adjustment to reflect stock dividends, stock splits, recapitalizations and similar changes in the capitalization of Pegasus) of Class A Common Stock of the Company. The Stock Option Plan terminates in September 2006. As of December 31, 1999, options to purchase an aggregate of approximately 1.3 million shares of Class A Common Stock at exercise prices between $11.00 and $80.88 were outstanding. All options granted under the Stock Option Plan have been granted at fair market value at the time of grant. F-18 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 17. Employee Benefit Plans: -- (Continued) The following table summarizes information about the Company's stock options outstanding at December 31, 1999:
Outstanding Weighted Exercisable Weighted Range of at 12/31/99 Average at 12/31/99 Average Exercise Price (in thousands) Exercise Price (in thousands) Exercise Price - ------------------ ---------------- ---------------- ---------------- --------------- $11-$19 242 $ 11.37 124 $ 11.66 20-29 338 22.51 186 22.87 30-39 372 39.48 25 39.50 40-49 50 42.32 -- -- 80-81 315 80.88 -- -- ------- --- -------- --- -------- $11-$81 1,317 $ 39.97 335 $ 19.97 ======= ===== ======== === ========
Under SFAS 123, companies can either continue to account for stock compensation plans pursuant to existing accounting standards or elect to expense the value derived from using an option pricing model. The Company is continuing to apply existing accounting standards. However, SFAS 123 requires disclosures of pro forma net income and earnings per share as if the Company had adopted the expensing provisions of SFAS 123. The fair value of options was estimated using the Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1998 and 1999:
1997 1998 1999 ----------- ----------- ----------- Risk-free interest rate ................. 6.35% 5.11% 5.56% Dividend Yield .......................... 0.00% 0.00% 0.00% Volatility Factor ....................... 0.403 0.479 0.536 Weighted average expected life .......... 5 years 4.5 years 4.4 years
Pro forma net losses for 1997, 1998 and 1999 would have been $31.7 million, $94.7 million and $205.2 million, respectively; pro forma net losses per common share for 1997, 1998 and 1999 would have been $3.22, $6.70 and $10.87, respectively. The weighted average fair value of options granted were $4.99, $11.19 and $26.74 for 1997, 1998 and 1999, respectively. The following table summarizes stock option activity over the past three years:
Weighted Number of Average Shares Exercise Price ------------- --------------- Outstanding at January 1, 1997 ................... 3,385 $ 14.00 Granted .......................................... 220,000 11.00 ------- -------- Outstanding at December 31, 1997 ................. 223,385 11.05 Granted .......................................... 418,842 21.23 ------- -------- Outstanding at December 31, 1998 ................. 642,227 17.69 Granted .......................................... 797,346 55.58 Exercised ........................................ (83,577) 18.99 Canceled or expired .............................. (38,667) 37.09 ------- -------- Outstanding at December 31, 1999 ................. 1,317,329 $ 39.97 ========= ======== Options exercisable at December 31, 1997 ......... 3,385 $ 14.00 Options exercisable at December 31, 1998 ......... 143,728 15.09 Options exercisable at December 31, 1999 ......... 334,807 19.97
F-19 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 17. Employee Benefit Plans: -- (Continued) Restricted Stock Plan The Restricted Stock Plan provides for the granting of four types of restricted stock awards representing a maximum of 350,000 shares (subject to adjustment to reflect stock dividends, stock splits, recapitalizations and similar changes in the capitalization of Pegasus) of Class A Common Stock of the Company to eligible employees who have completed at least one year of service. Restricted stock received under the Restricted Stock Plan vests based on years of service with the Company and are fully vested for employees who have four years of service with the Company, with the exception of special recognition awards which are fully vested on the date of grant. The Restricted Stock Plan terminates in September 2006. As of December 31, 1999, approximately 184,000 shares of Class A Common Stock had been granted under the Restricted Stock Plan. The expense for this plan amounted to $823,000, $763,000 and $819,000 in 1997, 1998 and 1999, respectively. 401(k) Plans Substantially all Company employees who, as of the enrollment date under the 401(k) plans, have completed at least one year of service with the Company are eligible to participate in one of the 401(k) plans. Participants may make salary deferral contributions of 2% to 6% of their salary to the 401(k) plans. The Company may make three types of contributions to the 401(k) plans, each allocable to a participant's account if the participant completes at least 1,000 hours of service in the applicable plan year, and is employed on the last day of the applicable plan year. Discretionary Company contributions and Company matches of employee salary deferral contributions and rollover contributions are made in the form of Class A Common Stock, or in cash used to purchase Class A Common Stock. The Company has authorized and reserved for issuance up to 205,000 shares of Class A Common Stock in connection with the 401(k) plans. Company contributions to the 401(k) plans are subject to limitations under applicable laws and regulations. All employee contributions to the 401(k) plans are fully vested at all times and all Company contributions, if any, vest based on years of service with the Company and are fully vested for employees who have four years of service with the Company. A participant also becomes fully vested in Company contributions to the 401(k) plans upon attaining age 65 or upon his or her death or disability. The expense for these plans amounted to $451,000, $689,000 and $1.2 million in 1997, 1998 and 1999, respectively. 18. Commitments and Contingent Liabilities: Legal Matters: The Company has been sued in Indiana for allegedly charging DBS subscribers excessive fees for late payments. The plaintiffs, who purport to represent a class consisting of residential DIRECTV customers in Indiana, seek unspecified damages for the purported class and modification of the Company's late-fee policy. The Company is advised that similar suits have been brought against DIRECTV and various cable operators in other parts of the United States. From time to time the Company is involved with claims that arise in the normal course of business. In the opinion of management, the ultimate liability with respect to the aforementioned claims and matters will not have a material adverse effect on the consolidated operations, liquidity, cash flows or financial position of the Company. The Company is a rural affiliate of the National Rural Telecommunications Cooperative ("NRTC"). The NRTC is a cooperative organization whose members and associates are engaged in the distribution of telecommunications and other services in predominantly rural areas of the United States. The Company's ability to distribute DIRECTV programming services is dependent upon agreements between the NRTC and Hughes and between the Company and the NRTC. F-20 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 18. Commitments and Contingent Liabilities: -- (Continued) On June 3, 1999, the NRTC filed a lawsuit in federal court against DIRECTV seeking a court order to enforce the NRTC's contractual rights to obtain from DIRECTV certain premium programming formerly distributed by United States Satellite Broadcasting Company, Inc. for exclusive distribution by the NRTC's members and affiliates in their rural markets. On July 22, 1999, DIRECTV responded to the NRTC's continuing lawsuit by rejecting the NRTC's claims to exclusive distribution rights and by filing a counterclaim seeking judicial clarification of certain provisions of DIRECTV's contract with the NRTC. In particular, DIRECTV contends in its counterclaim that the term of DIRECTV's contract with the NRTC is measured solely by the orbital life of DBS-1, the first DIRECTV satellite launched into orbit at the 101o W orbital location, without regard to the orbital lives of the other DIRECTV satellites at the 101o W orbital location. DIRECTV also alleges in its counterclaim that the NRTC's right of first refusal, which is effective at the end of the term of DIRECTV's contract with the NRTC, does not provide for certain programming and other rights comparable to those now provided under the contract. On August 26, 1999, the NRTC filed a separate lawsuit in federal court against DIRECTV claiming that DIRECTV has failed to provide to the NRTC its share of launch fees and other benefits that DIRECTV and its affiliates have received relating to programming and other services. On September 9, 1999, the NRTC filed a response to DIRECTV's counterclaim contesting DIRECTV's interpretations of the end of term and right of first refusal provisions. On January 10, 2000, the Company and Golden Sky Systems, Inc. ("Golden Sky", a subsidiary of Golden Sky Holdings, Inc.) filed a lawsuit in federal court against DIRECTV which contains causes of action for various torts, common counts and declaratory relief based on DIRECTV's failure to provide the NRTC with premium programming, thereby preventing the NRTC from providing this programming to the Company and Golden Sky. The claims are also based on DIRECTV's position with respect to launch fees and other benefits, term and rights of first refusal. The complaint seeks monetary damages and a court order regarding the rights of the NRTC and its members and affiliates. Management is not currently able to predict the outcome of the DIRECTV litigation matters or the effect such outcome will have on the consolidated operations, liquidity, cash flows or financial position of the Company. Commitments: The Company has entered into a multi-year agreement with a provider of integrated marketing, information and transaction services to provide customer relationship management services which will significantly increase the Company's existing call center capacity. The initial term of the agreement ends on December 31, 2004. Beginning January 1, 2000, the Company must pay minimum fees to the provider as follows (in thousands): Annual Minimum Year Fees - ------------------------------------------ ---------- 2000 ................................... $12,600 2001 ................................... 18,216 2002 ................................... 20,250 2003 ................................... 20,250 2004. .................................. 20,250 ------- Total minimum payments ................. $91,566 ======= Program Rights: The Company has entered into agreements totaling $7.4 million as of December 31, 1999 for film rights and programs that are not yet available for showing at December 31, 1999, and accordingly, are not recorded by the Company. At December 31, 1999, the Company has commitments for future program rights of approximately $3.3 million, $1.4 million, $214,000 and $87,000 in 2000, 2001, 2002 and 2003. F-21 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 19. Related Party Transactions: The Company entered into an arrangement in 1998 with W.W. Keen Butcher (the stepfather of Marshall W. Pagon, the Company's President and Chief Executive Officer, and Nicholas A. Pagon, a Vice President of Pegasus), certain entities controlled by him (the "KB Companies") and the owner of a minority interest in one of the KB Companies, under which the Company agreed to provide and maintain collateral for up to $4.0 million in principal amount of bank loans to Mr. Butcher and the minority owner. The agreement was recently amended to increase the amount of collateral that the Company will maintain for such loans to up to $8.0 million. Mr. Butcher and the minority owner must lend or contribute the proceeds of those bank loans to one or more of the KB Companies for the acquisition of television broadcast stations to be operated by the Company pursuant to local marketing agreements. As of December 31, 1998 and 1999, the Company had provided collateral of $1.6 million and $2.4 million pursuant to this arrangement, respectively, which is included as restricted cash on the Company's consolidated balance sheets. William P. Phoenix, a director of Pegasus since June 1998, is a managing director of CIBC World Markets Corporation ("CIBC"). CIBC and its affiliates have provided various services to the Company since the beginning of 1997, including serving as one of the initial purchasers in the 9.75% Senior Notes Offering, providing a fair market value appraisal in connection with the contribution to Pegasus of certain assets between related parties, providing fairness opinions in connection with an acquisition and certain intercompany transactions, acting as a standby purchaser in connection with DTS' offer to repurchase the DTS Notes as a result of the change of control arising by Pegasus' acquisition of DTS, acting as a dealer manager in connection with the DTS Exchange Offer, issuing letters of credit pursuant to the PCC Credit Facility and acting as an Administrative Agent in connection with the DTS Credit Facility. Total fees and expenses were approximately $3.3 million and $940,000 for the years ended December 31, 1998 and 1999, respectively. In 1999, Pegasus loaned $199,999 to Nicholas A. Pagon, Pegasus' Vice President of Broadcast Operations, bearing interest at the rate of 6% per annum, with the principal amount due on the fifth anniversary of the date of the promissory note. Mr. Pagon is required to use half of the proceeds of the loan to purchase shares of Class A Common Stock, and the loan is collateralized by those shares. The balance of the loan proceeds may be used at Mr. Pagon's discretion. 20. Industry Segments: The Company operates in growing segments of the media industry: DBS and Broadcast. DBS consists of providing direct broadcast satellite television services to customers in certain rural areas of 36 states. Broadcast consists of ten television stations affiliated with Fox, UPN and the WB and two transmitting towers, all located in the eastern United States. All of the Company's revenues are derived from external customers. Capital expenditures for the Company's DBS segment were $506,000, $2.0 million and $3.6 million for 1997, 1998 and 1999, respectively. Capital expenditures for the Company's Broadcast segment were $6.4 million, $6.8 million and $4.1 million for 1997, 1998 and 1999, respectively. Capital expenditures for the Company's discontinued Cable segment were $2.9 million, $2.0 million and $5.6 million for 1997, 1998 and 1999, respectively. All other capital expenditures for 1997, 1998 and 1999 were at the corporate level. Identifiable total assets for the Company's DBS segment were $715.6 million and $701.9 million as of December 31, 1998 and 1999, respectively. Identifiable total assets for the Company's Broadcast segment were $67.1 million and $70.6 million as of December 31, 1998 and 1999, respectively. Identifiable total assets for the Company's discontinued Cable segment were $47.0 million and $86.5 million as of December 31, 1998 and 1999, respectively. All other identifiable assets as of December 31, 1998 and 1999 were at the corporate level. 21. Subsequent Events (unaudited): In January 2000, the Company entered into a an agreement and plan of merger to acquire Golden Sky Holdings, Inc. ("GSH"), for approximately 6.5 million shares of the Company's Class A Common Stock and F-22 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 21. Subsequent Events (unaudited): -- (Continued) the assumed net liabilities of GSH. As of December 31, 1999, GSH's operations consisted of providing DIRECTV services to approximately 345,200 subscribers in certain rural areas of 24 states in which GSH holds the exclusive rights to provide such services. Upon completion of the acquisition of GSH, GSH will become a wholly owned subsidiary of Pegasus. In January 2000, the Company made an investment in Personalized Media Communications, LLC ("PMC"), an advanced communications technology company, of approximately $111.8 million, which consisted of $14.3 million in cash, 200,000 shares of the Company's Class A Common Stock (amounting to $18.8 million) and Pegasus' agreement, subject to certain conditions, to issue warrants to purchase 1.0 million shares of the Company's Class A Common Stock at an exercise price of $90.00 per share and with a term of ten years. The fair value of the warrants to be issued was estimated using the Black-Scholes pricing model and is approximately $78.8 million. A subsidiary of PMC granted to Pegasus an exclusive license for use of PMC's patent portfolio in the distribution of satellite services from specified orbital locations. Mary C. Metzger, Chairman of PMC and a member of the Company's board of directors, and John C. Harvey, Managing Member of PMC and Ms. Metzger's husband, own a majority of and control PMC. In January 2000, PM&C entered into a first amended and restated credit facility, which consists of a $225.0 million senior revolving credit facility which expires in 2004 and a $275.0 million senior term credit facility which expires in 2005 (collectively, the "New PM&C Credit Facility"). The New PM&C Credit Facility amends the PM&C Credit Facility, is collateralized by substantially all of the assets of PM&C and its subsidiaries and is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. Borrowings under the New PM&C Credit Facility can be used for acquisitions and general corporate purposes. Commensurate with the closing of the New PM&C Credit Facility, the Company borrowed $275.0 million under the term loan, outstanding balances under the PM&C Credit Facility, the DTS Credit Facility, and the PCC Credit Facility were repaid and commitments under the DTS Credit Facility and the PCC Credit Facility were terminated. Additionally, in connection with the closing of the New PM&C Credit Facility, DTS was merged with and into a subsidiary of PM&C. In January 2000, Pegasus issued 5,707 shares of its Series B junior convertible participating preferred stock, with a liquidation preference of $1,000 per share plus any accrued but unpaid dividends (the "Series B Preferred Stock"), as part of an acquisition of DIRECTV distribution rights from an independent DIRECTV provider. Each share of Series B Preferred Stock will initially be convertible at the option of the holder into 16.24 shares of the Company's Class A Common Stock. In January 2000, Pegasus completed an offering of 3,000,000 shares of its 6.5% Series C convertible preferred stock, with a liquidation preference of $100 per share plus any accrued but unpaid dividends (the "Series C Preferred Stock"). Each share of Series C Preferred Stock will initially be convertible at the option of the holder into 0.7843 shares of the Company's Class A Common Stock. Pegasus may redeem the Series C Preferred Stock on or after August 1, 2001, subject to certain conditions, at redemption prices set forth in the certificate of designation, plus accumulated and unpaid dividends, if any. In February 2000, Pegasus issued approximately 22,500 shares of its Series D junior convertible participating preferred stock, with a liquidation preference of $1,000 per share plus any accrued but unpaid dividends (the "Series D Preferred Stock"), as part of an acquisition of DIRECTV distribution rights from an independent DIRECTV provider. Each share of Series D Preferred Stock will initially be convertible at the option of the holder into 9.77 shares of the Company's Class A Common Stock. As of February 11, 2000, the Company acquired, from two independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of California, Indiana and Oregon and the related F-23 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) assets in exchange for total consideration of approximately $35.0 million, which consisted of $11.9 million in cash, 22,500 shares of the Company's Series D Preferred Stock (amounting to $22.5 million), $200,000 in promissory notes, payable over two years, and $381,000 in assumed net liabilities. 22. Quarterly Information (unaudited): The net revenues and loss from operations data provided in the tables below are from continuing operations and therefore will not necessarily agree to quarterly information previously reported.
Quarter Ended ------------------------------------------------------------- March 31, June 30, September 30, December 31, 1999 1999 1999 1999 ------------ ------------ --------------- ------------- (in thousands, except per share data) 1999 - ---- Net revenues ................................. $ 66,285 $ 73,740 $ 84,668 $ 98,075 Loss from operations ......................... (27,218) (30,546) (39,788) (28,354) Loss before extraordinary items .............. (45,925) (48,672) (56,432) (44,312) Net loss applicable to common shares ......... (45,925) (48,672) (56,432) (50,490) Basic and diluted earnings per share: Loss from operations ......................... $ 1.66) $ 1.56) $ 2.02) $ 1.44) Loss before extraordinary items .............. (2.81) (2.48) (2.86) (2.24) Net loss ..................................... (2.81) (2.48) (2.86) (2.56)
For the fourth quarter of 1999, the Company had an extraordinary loss of approximately $6.2 million or $0.32 per share in connection with the DTS Exchange Offer.
Quarter Ended ------------------------------------------------------------- March 31, June 30, September 30, December 31, 1998 1998 1998 1998 ------------ ------------ --------------- ------------- (in thousands, except per share data) 1998 - ---- Net revenues ................................. $ 24,389 $ 42,162 $ 52,659 $ 62,243 Loss from operations ......................... (7,053) (9,967) (18,993) (26,806) Loss before extraordinary items .............. (15,936) (22,804) (10,752) (44,389) Net loss applicable to common shares ......... (15,936) (22,804) (10,752) (44,389) Basic and diluted earnings per share: Loss from operations ......................... $ 0.68) $ 0.70) $ 1.19) $ 1.69) Loss before extraordinary items .............. (1.54) (1.59) (0.68) (2.79) Net loss ..................................... (1.54) (1.59) (0.68) (2.79)
The Company had no extraordinary gains or losses for the year ended December 31, 1998. F-24 Independent Auditors' Report Board of Directors and Investors Golden Sky Holdings, Inc.: We have audited the accompanying consolidated balance sheets of Golden Sky Holdings, Inc. as of December 31, 1998 and 1999 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Golden Sky Holdings, Inc. as of December 31, 1998 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP February 14, 2000 Kansas City, Missouri F-25 GOLDEN SKY HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts)
December 31, ----------------------------- 1998 1999 ------------- ------------- Assets Current assets: Cash and cash equivalents .................................................. $ 4,488 $ 3,270 Restricted cash, current portion ........................................... 28,083 23,731 Subscriber receivables (net of allowance for uncollectible accounts of $293 and $973, respectively) .................................................. 8,632 12,333 Other receivables .......................................................... 2,465 742 Inventory .................................................................. 10,146 3,108 Prepaid expenses and other ................................................. 1,859 1,652 ---------- ---------- Total current assets ........................................................ 55,673 44,836 Restricted cash, net of current portion ..................................... 23,534 -- Property and equipment (net of accumulated depreciation of $3,214 and $5,918, respectively) .............................................................. 4,994 5,853 Intangible assets, net ...................................................... 233,139 236,926 Deferred financing costs .................................................... 10,541 11,462 Other assets ................................................................ 218 260 ---------- ---------- Total assets ............................................................. $ 328,099 $ 299,337 ========== ========== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Trade accounts payable ..................................................... $ 13,539 $ 22,893 Interest payable ........................................................... 11,009 11,679 Current maturities of long-term obligations ................................ 8,916 3,248 Unearned revenue ........................................................... 5,574 8,669 Accrued payroll and other .................................................. 1,391 933 ---------- ---------- Total current liabilities ................................................... 40,429 47,422 Long-term obligations, net of current maturities: 12 3/8% Notes .............................................................. 195,000 195,000 13 1/2% Notes .............................................................. -- 112,095 Bank debt .................................................................. 67,000 52,000 Seller notes payable ....................................................... 6,912 6,932 Other notes payable and obligations under capital leases ................... 376 103 Minority interest .......................................................... 2,420 936 ---------- ---------- Total long-term obligations, net of current maturities ...................... 271,708 367,066 ---------- ---------- Total liabilities ........................................................... 312,137 414,488 Mandatorily Redeemable Preferred Stock: Series A Convertible Participating Preferred Stock, par value $.01; 418,000 shares authorized, issued and outstanding ................................ 56,488 65,135 Series B Convertible Participating Preferred Stock, par value $.01; 228,500 shares authorized, 228,442 shares issued and outstanding ................. 53,489 61,677 Series C Senior Convertible Preferred Stock, par value $.01; 51,000 shares authorized, issued and outstanding ....................................... 10,455 11,540 ---------- ---------- 120,432 138,352 Commitments and contingencies Stockholders' Equity (Deficit): Common Stock, par value $.01; 1,000,000 shares authorized, 24,931 shares issued and outstanding at December 31, 1998; 25,399 shares issued and outstanding at December 31, 1999 ......................................... -- -- Additional paid-in capital ................................................. 25 179 Accumulated deficit ........................................................ (104,495) (253,682) ---------- ---------- Total stockholders' equity (deficit) ........................................ (104,470) (253,503) ---------- ---------- Total liabilities and stockholders' equity (deficit) ..................... $ 328,099 $ 299,337 ========== ==========
See accompanying Notes to Consolidated Financial Statements. F-26 GOLDEN SKY HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands)
Years Ended December 31, ------------------------------------------- 1997 1998 1999 ------------ ------------ ------------- Revenue: DBS services ............................................ $ 16,452 $ 74,910 $ 139,933 Lease and other ......................................... 944 1,014 640 --------- --------- ---------- Total revenue ............................................ 17,396 75,924 140,573 Costs and expenses: Costs of DBS services ................................... 9,304 45,291 88,690 System operations ....................................... 3,796 11,021 19,733 Sales and marketing ..................................... 7,316 32,201 64,933 General and administrative .............................. 2,331 7,431 15,708 Depreciation and amortization ........................... 7,300 23,166 35,963 --------- --------- ---------- Total costs and expenses ................................. 30,047 119,110 225,027 --------- --------- ---------- Operating loss ........................................... (12,651) (43,186) (84,454) Non-operating items: Interest and investment income .......................... 40 1,573 2,393 Interest expense ........................................ (3,246) (20,538) (45,012) Merger, initial public offering and other non-operating expenses .............................................. -- -- (1,259) --------- --------- ---------- Total non-operating items ................................ (3,206) (18,965) (43,878) --------- --------- ---------- Loss before income taxes ................................. (15,857) (62,151) (128,332) Income taxes ............................................. -- -- -- --------- --------- ---------- Loss before extraordinary charge ......................... (15,857) (62,151) (128,332) Extraordinary charge on early retirement of debt ......... -- (2,577) (2,935) --------- --------- ---------- Net loss ................................................. (15,857) (64,728) (131,267) Preferred stock dividend requirements .................... (7,888) (14,855) (17,920) --------- --------- ---------- Net loss attributable to common shareholders ............. $ (23,745) $ (79,583) $ (149,187) ========= ========= ==========
See accompanying Notes to Consolidated Financial Statements. F-27 GOLDEN SKY HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Dollars in thousands)
Additional Common Paid-In Accumulated Stock Capital Deficit Total -------- ----------- -------------- --------------- Balance at December 31, 1996 ............................... $ -- $ 1 $ (1,167) $ (1,166) Cancellation of originally issued Golden Sky Systems Common Stock .............................................. -- (1) -- (1) Issuance of 100 shares of Golden Sky Holdings Common Stock upon formation of Golden Sky Holdings, Inc. ......... -- -- -- -- Dividends accrued on Series A Preferred Stock .............. -- -- (7,189) (7,189) Dividends accrued on Series B Preferred Stock .............. -- -- (699) (699) Net loss ................................................... -- -- (15,857) (15,857) ---- ------ ---------- ----------- Balance at December 31, 1997 ............................... -- -- (24,912) (24,912) Issuance of 24,831 shares of Golden Sky Holdings Common Stock pursuant to stock options exercised .......... -- 25 -- 25 Dividends accrued on Series A Preferred Stock .............. -- -- (7,499) (7,499) Dividends accrued on Series B Preferred Stock .............. -- -- (7,101) (7,101) Dividends accrued on Series C Preferred Stock .............. -- -- (255) (255) Net loss ................................................... -- -- (64,728) (64,728) ---- ------ ---------- ----------- Balance at December 31, 1998 ............................... -- 25 (104,495) (104,470) Issuance of 468 shares of Golden Sky Holdings Common Stock pursuant to stock options exercised ................. -- -- -- -- Dividends accrued on Series A Preferred Stock .............. -- -- (8,647) (8,647) Dividends accrued on Series B Preferred Stock .............. -- -- (8,188) (8,188) Dividends accrued on Series C Preferred Stock .............. -- -- (1,085) (1,085) Deferred compensation pursuant to issuance of Common Stock options ............................................. -- 154 -- 154 Net loss ................................................... -- -- (131,267) (131,267) ---- ------ ---------- ----------- Balance at December 31, 1999 ............................... $ -- $179 $ (253,682) $(253,503) ==== ====== ========== ===========
See accompanying Notes to Consolidated FInancial Statements. F-28 GOLDEN SKY HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years Ended December 31, ----------------------------------------------- 1997 1998 1999 -------------- -------------- --------------- Cash Flows From Operating Activities Net loss ...................................................................... $ (15,857) $ (64,728) $ (131,267) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ................................................ 7,300 23,166 35,963 Amortization of debt discount, deferred financing costs and other ............ 215 977 13,676 Deferred compensation pursuant to issuance of Common Stock options ........... -- -- 154 Extraordinary charge on early retirement of debt ............................. -- 2,577 2,935 Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue ............................ (2,501) (1,757) (541) Other receivables .......................................................... (161) (1,568) 1,188 Inventory .................................................................. (1,604) (8,049) 7,038 Prepaid expenses and other ................................................. (203) (1,228) 207 Trade accounts payable ..................................................... 7,515 5,068 9,354 Interest payable ........................................................... 806 10,223 670 Accrued payroll and other .................................................. 1,379 (1,270) (478) ---------- ---------- ----------- Net cash used in operating activities ......................................... (3,111) (36,589) (61,101) Cash Flows From Investing Activities Acquisitions of Rural DIRECTV Markets ......................................... (120,051) (104,487) (35,339) Purchases of minority interests ............................................... -- -- (1,439) Proceeds from interest escrow account ......................................... -- (51,617) 24,224 Release of amounts reserved for contingent reduction of bank debt ............. -- -- 5,449 Investment earnings placed in escrow .......................................... -- -- (1,787) Purchases of property and equipment ........................................... (998) (3,317) (3,452) Other ......................................................................... 320 (500) 112 ---------- ---------- ----------- Net cash used in investing activities ......................................... (120,729) (159,921) (12,232) Cash Flows From Financing Activities Proceeds from issuance of Series A preferred stock ............................ 35,489 -- -- Proceeds from bridge loan ..................................................... 10,000 -- -- Proceeds from issuance of Series B preferred stock ............................ 35,616 -- -- Net proceeds from issuance of 123/8% Notes .................................... -- 189,150 -- Net proceeds from issuance of 131/2% Notes .................................... -- -- 100,049 Borrowings on bank debt ....................................................... 75,000 90,000 38,000 Principal payments on bank debt ............................................... (15,000) (83,000) (53,000) Proceeds from issuance of notes payable ....................................... 2,115 -- -- Principal payments on notes payable and obligations under capital leases ...... (2,902) (3,675) (8,846) Proceeds from issuance of Common Stock ........................................ -- 25 -- Increase in deferred financing costs .......................................... (3,321) (5,138) (5,516) Capital contribution from minority partner .................................... -- -- 1,428 ---------- ---------- ----------- Net cash provided by financing activities ..................................... 136,997 187,362 72,115 ---------- ---------- ----------- Net increase (decrease) in cash and cash equivalents ......................... 13,157 (9,148) (1,218) Cash and cash equivalents, beginning of period ............................... 479 13,636 4,488 ---------- ---------- ----------- Cash and cash equivalents, end of period ..................................... $ 13,636 $ 4,488 $ 3,270 ========== ========== =========== Supplemental Disclosure of Cash Flow Information Cash paid for interest ........................................................ $ 2,225 $ 9,337 $ 30,014 Property and equipment acquired under capitalized lease obligations ........... 554 609 78 Retirement of Credit Agreement from borrowings under the Credit Facility ..................................................................... -- 88,000 -- Issuance of seller notes payable in acquisitions .............................. 8,600 10,157 -- Conversion of notes payable and subscriptions to Series A preferred stock ..... 6,311 -- -- Conversion of notes payable to Series B preferred stock ....................... 10,073 -- -- Issuance of note payable in purchase of minority interest ..................... -- -- 2,925 Series C preferred stock issued in acquisition ................................ -- 10,200 -- Preferred dividend requirements accrued and unpaid ............................ 7,888 14,855 17,920
See accompanying Notes to Consolidated Financial Statements. F-29 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Nature of Operations Organization and Legal Structure Golden Sky Holdings, Inc. ("Holdings," and together with its subsidiaries, "Golden Sky") is a Delaware corporation formed on September 9, 1997 for the purpose of holding all the common and preferred stock of Golden Sky Systems, Inc. ("Systems"). Upon the formation of Holdings, Systems issued 1,000 shares of its common stock to Holdings and all the shareholders of the then outstanding preferred stock of Systems were issued equivalent shares of Holdings stock with identical features to Systems' preferred stock (the "Exchange"). The Exchange was accounted for as a reorganization of entities under common control and the historical cost basis of consolidated assets and liabilities was not affected by the transaction. Holdings has no significant assets or liabilities other than its investment in Systems. Accordingly, Systems has been treated as the predecessor to Holdings and the historical financial statements of Holdings presented for periods prior to September 9, 1997 are those of Systems. Until February 1999, Systems was a wholly-owned subsidiary of Holdings. On February 2, 1999, Golden Sky DBS, Inc. ("Golden Sky DBS") was formed for the purpose of effecting an offering of senior discount notes. Upon formation, Golden Sky DBS issued 100 shares of its common stock to Holdings in exchange for $100 and the subsequent transfer of all of the capital stock of Systems to Golden Sky DBS. Upon completion of the aforementioned transfer, Systems became a wholly-owned subsidiary of Golden Sky DBS. Principal Business Systems is the second largest independent provider of DIRECTV subscription television services. DIRECTV is the leading direct broadcast satellite ("DBS") company serving the continental United States. Systems, a Delaware corporation formed on June 25, 1996 ("Inception"), is a non-voting affiliate of the National Rural Telecommunications Cooperative (the "NRTC"). The NRTC has contracted with Hughes Communications Galaxy, Inc. ("Hughes") for the exclusive right to distribute DIRECTV programming to homes in certain rural territories of the United States ("Rural DIRECTV Markets"). As of December 31, 1999, Systems had acquired 57 Rural DIRECTV Markets in 24 states with approximately 1.9 million households. As of that same date, Systems served approximately 345,200 subscribers. Pegasus Merger Holdings entered into a definitive merger agreement with Pegasus Communications Corporation ("Pegasus") on January 10, 2000. Pegasus is the largest independent provider of DIRECTV subscription television services in the United States. The combined operations of Pegasus and Holdings will serve in excess of 1.1 million subscribers in 41 states and have the exclusive right to serve approximately 7.2 million rural households. Under the terms of the agreement, Pegasus will issue up to 6.5 million shares of its Class A common stock to Holdings shareholders. The value of the Pegasus shares to be issued to Holdings shareholders approximated $632 million as of the date of execution of the definitive merger agreement. Upon completion of the merger, Holdings will become a wholly owned subsidiary of Pegasus. Consummation of the merger, which is subject to certain conditions and approvals, is expected in the first or second quarter of 2000. Significant Risks and Uncertainties Substantial Leverage. Golden Sky is highly leveraged, making it vulnerable to changes in general economic conditions and interest rates. As of December 31, 1999, Golden Sky had outstanding long-term debt (including current portion) totaling approximately $369.4 million. Substantially all of Golden Sky's assets are pledged as collateral on its long-term debt. Further, the terms associated with Golden Sky's long-term debt obligations significantly restrict its ability to incur additional indebtedness. Thus, it may be difficult for Golden Sky and its subsidiaries to obtain additional debt financing if desired or required in order to further implement Golden Sky's business strategy. F-30 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 1. Organization and Nature of Operations -- (Continued) Expected Operating Losses. Due to the substantial expenditures required to acquire Rural DIRECTV Markets and subscribers, Golden Sky has sustained significant losses since Inception. Golden Sky's operating losses were $12.7 million, $43.2 million, and $84.5 million for the years ended December 31, 1997, 1998 and 1999 respectively. Golden Sky's net losses during those same periods aggregated $15.9 million, $64.7 million, and $131.3 million respectively. Improvement in Golden Sky's results of operations is principally dependent upon its ability to cost effectively expand its subscriber base, control subscriber churn (i.e., the rate at which subscribers terminate service), and effectively manage its operating and overhead costs. Golden Sky plans to reduce its future operating and overhead costs by transitioning its direct sales distribution model to an indirect (i.e., retail) distribution model. Accordingly, during the year ending December 31, 2000 Golden Sky plans, among other things, to: (i) close approximately 30 of its 68 local sales offices; (ii) reduce its corporate overhead expenses through headcount and other expense reductions; and (iii) increase the number of third-party retailers in its Rural DIRECTV Markets. Golden Sky estimates that it will incur aggregate, non-recurring costs of approximately $1.5 million in connection with these actions. These costs are expected to primarily consist of employee severance and lease termination expenses. There can be no assurance that Golden Sky will be effective with regard to these plans. Golden Sky incurs significant costs to acquire DIRECTV subscribers. The high cost of obtaining new subscribers magnifies the negative effects of subscriber churn. Golden Sky anticipates that it will continue to experience operating losses through at least 2000. There can be no assurance that such operating losses will not continue beyond 2000 or that Golden Sky's operations will generate sufficient cash flows to pay its obligations, including its obligations on its long-term debt. Restrictions on Dividends and Other Distributions. The ability of Systems and its subsidiaries to pay dividends and make other distributions and advances is subject to, among other things, the terms of its long-term debt obligations and applicable law. As a result, Systems may be limited in its ability to make dividend payments and other distributions to Golden Sky DBS or Holdings at the time such distributions are needed by Golden Sky DBS or Holdings to meet their obligations. Reliance on DIRECTV/NRTC. Golden Sky obtains substantially all of its revenue from the distribution of DIRECTV programming services. As a result, Golden Sky would be materially adversely affected by any material change in the assets, financial condition, programming, technological capabilities or services of DIRECTV or Hughes. Further, Golden Sky relies upon DIRECTV to continue to provide programming services on a basis consistent with its past practice. Any change in such practice due to, for example, a failure to replace a satellite upon the expiration of its useful orbital life or a delay in launching a successor satellite may prevent Golden Sky from continuing to provide DBS services and could have a material adverse effect on Golden Sky's financial condition and results of operations. Additionally, Golden Sky's ability to offer DIRECTV programming services depends upon agreements between the NRTC and Hughes and between Golden Sky and the NRTC. The NRTC's interests may differ from Golden Sky's interests. Golden Sky would be materially and adversely affected by the termination of the NRTC's agreement with Hughes and/or the termination of Golden Sky's agreements with the NRTC. Golden Sky's agreements with the NRTC require that it use the NRTC for certain support services including subscriber information and data reporting capability, retail billing services and central office subscriber services. Such services are critical to the operation and management of Golden Sky's business. On January 10, 2000, Pegasus and Golden Sky filed a lawsuit in federal court in Los Angeles against DIRECTV (see Note 10). The outcome of this litigation and similar litigation filed by the NRTC against DIRECTV could have a material adverse effect on the scope and duration of Golden Sky's right to provide DIRECTV programming in its Rural DIRECTV Markets, its capital requirements and its costs of operations. Competition. The subscription television industry is highly competitive. Golden Sky faces competition from companies offering video, audio, data, programming and entertainment services. Many of these competitors have substantially greater financial and marketing resources than Golden Sky. Golden Sky's F-31 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 1. Organization and Nature of Operations -- (Continued) ability to effectively compete in the subscription television industry will depend on a number of factors, including competitive factors (such as the introduction of new technologies or the entry of additional strong competitors) and the level of consumer demand for such services. 2. Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The consolidated financial statements include the financial statements of Holdings and its majority-owned, direct and indirect subsidiaries. All significant intercompany transactions and balances have been eliminated. Minority interest represents the cumulative earnings and losses, after capital contributions, attributable to minority partners and stockholders. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make a number of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. Cash and Cash Equivalents Golden Sky considers all highly liquid investments with original maturities of three months or less to be cash equivalents. As of December 31, 1998 and 1999, cash and cash equivalents consisted of cash on hand, demand deposits and money market accounts. Restricted Cash Restricted cash, as reflected in the accompanying consolidated balance sheets, includes cash restricted by the indenture associated with Systems' 12 3/8% Notes (see Note 5), plus investment earnings thereon. Restricted cash, which is held in escrow, is invested in certain permitted debt and other marketable investment securities until disbursed for the express purposes identified in the indenture. As of December 31, 1998 and 1999, restricted cash was composed entirely of U.S. treasury notes. Inventory Inventory is stated at the lower of cost (first-in, first-out) or market and consists of receivers, satellite dishes and accessories ("DBS Equipment"). Golden Sky subsidizes the cost to the consumer of such equipment, which is required to receive DIRECTV programming services. Additionally, Golden Sky subsidizes the cost to the consumer of installation of DBS Equipment. Equipment and installation revenues and related expenses are recognized upon delivery and installation of DBS Equipment. Net transaction costs associated with the sale and installation of DBS Equipment are reported as a component of sales and marketing expenses in the accompanying consolidated statements of operations. During the periods ended December 31, 1997, 1998 and 1999, aggregate proceeds from the sale and installation of DBS Equipment totaled $3.8 million, $11.0 million, and $9.3 million respectively; related cost of sales totaled $4.6 million, $25.8 million, and $44.3 million during those same periods. Long-lived Assets Golden Sky reviews its long-lived assets (e.g., property and equipment) and certain identifiable intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For assets which are held and used in operations, the F-32 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. Summary of Significant Accounting Policies -- (Continued) asset would be impaired if the book value of the asset exceeded the undiscounted future cash flows related to the asset. For those assets that are to be disposed of, the assets would be impaired to the extent the fair value does not exceed the book value. Golden Sky considers relevant cash flow, estimated future operating results, trends and other available information including the fair value of DIRECTV distribution rights owned, in assessing whether the carrying value of assets can be recovered. Property and Equipment Property and equipment, consisting of computer hardware and software, furniture, vehicles, and office and other equipment, is recorded at cost. Depreciation is recognized on a straight-line basis over the related estimated useful lives, which range from two to five years. DIRECTV Distribution Rights DIRECTV distribution rights, which represent the excess of the purchase price over the fair value of net assets acquired, are amortized on a straight-line basis over the periods expected to be benefited. The expected period to be benefited corresponds to the remaining estimated orbital lives of the satellites used by Hughes for distribution of DIRECTV programming services. Deferred Financing Costs Deferred financing costs represent fees and other costs incurred in conjunction with the issuance of long-term debt. These costs are amortized over the term of the related debt using the effective interest method. Amortization of these costs totaled $215,000, $977,000, and $2,164,000 during 1997, 1998 and 1999, respectively. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying value approximates fair value as a result of the short maturity of these instruments. Receivables and payables: These assets are carried at cost, which approximates fair value as a result of the short-term nature of the instruments. Long-term debt and notes payable: Fair value of Golden Sky's publicly-traded debt securities is based on quoted market prices. The carrying value of Golden Sky's bank debt and other notes payable approximates fair value, as interest rates are variable or approximate market rates. As of December 31, 1999, the carrying and fair values of Golden Sky's publicly-traded debt securities were as follows (in thousands): Carrying Fair Value Value ---------- ----------- 12 3/8% Notes ................. $195,000 $211,575 13 1/2% Notes ................. 112,095 121,653 Revenue Recognition DBS services revenue is recognized in the month service is provided. Unearned revenue represents subscriber advance billings for one or more months; related revenue recognition is deferred until service is provided. F-33 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. Summary of Significant Accounting Policies -- (Continued) System Operations Expense System operations expense includes payroll and other administrative costs related to Golden Sky's local offices and national call center. Advertising Costs Advertising costs are expensed as incurred. Such costs aggregated $1.4 million, $5.1 million, and $5.9 million during the years ended December 31, 1997, 1998 and 1999, respectively. Free Programming Promotions Certain DIRECTV national sales promotions offer free programming, generally for up to three months of service, to new subscribers. The cost of such free programming is expensed as sales and marketing expense in the period the services are provided. During 1999, sales and marketing expenses attributable to such promotions totaled $2.5 million. Income Taxes Golden Sky uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. Effects of Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (the "FASB") issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133"). As a result of the subsequent issuance of FAS No. 137, FAS No. 133 is now effective for fiscal years beginning after June 15, 2000. FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. Currently, Golden Sky has no derivative instruments or hedging arrangements. Accordingly, adoption of FAS No. 133 is not expected to have a material effect on Golden Sky's financial position or results of operations. Comprehensive Income Golden Sky has no components of comprehensive income other than net loss. 3. Acquisitions Golden Sky accounts for its acquisitions using the purchase method. Golden Sky's consolidated statements of operations for the periods ended December 31, 1997, 1998 and 1999 include the results of operations of acquired Rural DIRECTV Markets from the respective acquisition dates. F-34 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 3. Acquisitions -- (Continued) The aggregate purchase price (including direct acquisition costs) for the acquisitions completed during 1997, 1998 and 1999 were allocated as follows (dollars in thousands):
Years Ended December 31, --------------------------------------- 1997 1998 1999 ------------ ----------- ---------- DIRECTV distribution rights ......... $ 116,394 $114,747 $31,809 Customer lists ...................... 9,450 7,114 -- Non-compete agreements .............. 4,879 2,587 4,869 Property and equipment .............. 1,953 204 -- Minority interest ................... (2,931) -- -- Working capital, net ................ (20) 192 100 --------- -------- ------- $ 129,725 $124,844 $36,778 ========= ======== =======
The following summarizes Golden Sky's acquisitions of Rural DIRECTV Markets consummated during 1997, 1998 and 1999 (dollars in thousands):
Aggregate Seller Acquisition Date State Consideration - ------------------------------------------------------ ------------------- -------------------- -------------- Deep East Texas Telecommunications, Inc .............. February 7, 1997 Texas $ 1,919 Images DBS Kansas, L.C., Images DBS Oklahoma, L.C. and Total Communications, Inc .................. February 12, 1997 Kansas/Oklahoma 12,702 Direct Satellite TV, LTD ............................. February 28, 1997 Texas 3,746 Thunderbolt Systems, Inc ............................. March 11, 1997 Missouri 6,127 Western Montana DBS, Inc. dba Rocky Mountain DBS ................................................. May 1, 1997 Colorado 4,774 TEG DBS Services, Inc ................................ June 12, 1997 Nevada 5,237 GVEC Rural TV, Inc ................................... July 8, 1997 Texas 5,176 Satellite Entertainment, Inc ......................... July 14, 1997 Minnesota/Michigan 9,640 Direct Vision ........................................ July 15, 1997 Minnesota 7,452 Argos Support Services Company ....................... August 8, 1997 Florida/Texas/Utah 18,217 JECTV, a segment of Jackson Electric Cooperative ..... August 26, 1997 Texas 9,453 Lakes Area TV ........................................ September 2, 1997 Minnesota 1,355 DCE Satellite Entertainment, LLC ..................... October 13, 1997 Wisconsin 313 Direct Broadcast Satellite, a segment of CTS Communication Corporation ........................... November 7, 1997 Michigan 4,293 DBS, L.C ............................................. November 17, 1997 Iowa 1,911 Panora Telecommunications, Inc ....................... November 20, 1997 Iowa 1,131 Souris River Television, Inc ......................... November 21, 1997 North Dakota 7,276 Cal-Ore Digital TV, Inc .............................. December 8, 1997 California/Oregon 5,095 NRTC System No. 0093, a segment of Cable and Communications Corporation .......................... December 17, 1997 Montana 3,876 Western Montana Entertainment Television, Inc. ....... December 22, 1997 Montana 7,067 South Plains DBS ..................................... December 23, 1997 Texas 9,143 Lakeland DBS ......................................... December 24, 1997 Oklahoma 3,822 -------- Total 1997 acquisitions ............................. $129,725 ========
F-35 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 3. Acquisitions -- (Continued)
Aggregate Seller Acquisition Date State Consideration - ----------------------------------------------------- -------------------- ----------------- -------------- Direct Broadcast Satellite, a segment of Nemont Communications Inc ................................. January 14, 1998 Montana/Wyoming $ 8,284 Triangle Communications System, Inc ................. January 20, 1998 Montana 9,765 Wyoming Mutual Telephone ............................ January 21, 1998 Iowa 527 North Willamette Telephone .......................... March 10, 1998 Oregon 6,015 Northwest Communications ............................ March 10, 1998 North Dakota 1,363 Beulahland Communications, Inc ...................... March 19, 1998 Colorado 835 Direct Broadcast Satellite, a segment of SCS Communications & Security, Inc ..................... April 20, 1998 Oregon 5,386 PrimeWatch, Inc ..................................... May 8, 1998 North Carolina 7,988 Mega TV ............................................. May 11, 1998 Georgia 2,103 Direct Broadcast Satellite, a division of Baldwin County Electric Membership Corporation ............. June 29, 1998 Alabama 11,769 Frontier Corporation ................................ July 8, 1998 Wisconsin 734 North Texas Communications .......................... August 6, 1998 Texas 3,118 SEMO Communications Corporation ..................... August 26, 1998 Missouri 2,918 DBS Segment of Cumby Cellular, Inc .................. August 31, 1998 Texas 7,553 Minburn Telephone ................................... September 18, 1998 Iowa 447 Western Montana DBS, Inc. dba Rocky Mountain DBS ................................................ October 2, 1998 Idaho/Montana 20,740 Direct Broadcast Satellite, a segment of Volcano Vision, Inc ........................................ October 9, 1998 California 31,425 North Central Missouri Electric Coop ................ November 2, 1998 Missouri 1,745 Star Search Rural Television, Inc ................... November 5, 1998 Oklahoma 2,129 -------- Total 1998 acquisitions ............................ $124,844 ======== Breda Telephone Corporation ......................... January 11, 1999 Iowa/Nebraska $ 8,605 Thunderbolt Systems Inc ............................. January 15, 1999 Missouri 2,731 Siskiyou Ruralvision, Inc ........................... February 28, 1999 California 4,735 Baraga Telephone Co ................................. March 31, 1999 Michigan 4,546 E. Ritter Communications ............................ April 2, 1999 Arkansas 2,689 Yelcot Telephone Co ................................. April 2, 1999 Arkansas 6,246 Van Buren DBS ....................................... April 14, 1999 Iowa 2,914 Kertel Communications, Inc .......................... June 24, 1999 California 2,033 Mutual Telephone Company ............................ August 5, 1999 Iowa 620 Dubois Telephone .................................... December 8, 1999 Montana 220 -------- Total 1999 acquisitions ............................ $ 35,339 ========
Golden Sky's 1999 acquisitions of Rural DIRECTV Markets were not material and, accordingly, the pro forma impact of those acquisitions has not been presented. Unaudited pro forma total revenue and unaudited pro forma loss before extraordinary charge for the year ended December 31, 1998 approximated $87.9 million and $79.8 million, respectively. This unaudited pro forma information reflects Golden Sky's significant acquisitions of Rural DIRECTV Markets consummated during 1998 as if each such acquisition had occurred as of the beginning of 1998. These results are not necessarily indicative of future operating results or of what would have occurred had the acquisitions been consummated as of that date. F-36 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 3. Acquisitions -- (Continued) During 1997, Golden Sky acquired a controlling interest in DCE Satellite Entertainment, LLC ("DCE"). In June 1999, Golden Sky acquired the remaining ownership interest in DCE that it did not hold in exchange for cash of $1.0 million and the issuance of seller notes payable totaling the $2.9 million. Also during 1999, Golden Sky acquired certain other minority interests for $496,000. 4. Intangible Assets Intangible assets, which are amortized using the straight-line method over the related estimated useful lives, consist of the following (dollars in thousands):
December 31, ------------------------- Estimated 1998 1999 Useful Life ----------- ----------- ------------ DIRECTV distribution rights ........... $ 236,531 $ 266,874 9 -12 years Customer lists ........................ 17,018 18,603 5 years Non-compete agreements ................ 7,501 12,370 3 years --------- --------- 261,050 297,847 Less accumulated amortization ......... (27,911) (60,921) --------- --------- Intangible assets, net ............. $ 233,139 $ 236,926 ========= =========
5. Long-Term Obligations Long-term obligations consist of the following (dollars in thousands):
December 31, --------------------------- 1998 1999 ------------ ------------ 12 3/8% Notes ..................................... $ 195,000 $ 195,000 13 1/2% Notes ..................................... -- 112,095 Bank debt ......................................... 67,000 52,000 Seller notes payable .............................. 15,407 9,823 Other notes payable and obligations under capital leases ........................................... 797 460 Minority interest ................................. 2,420 936 --------- --------- Total long-term obligations ....................... 280,624 370,314 Less current maturities ........................... (8,916) (3,248) --------- --------- Long-term obligations, net of current maturities $ 271,708 $ 367,066 ========= =========
123/8% Notes On July 31, 1998, Systems consummated an offering (the "12 3/8% Notes Offering") of 12 3/8% Senior Subordinated Notes due 2006 (the "12 3/8% Notes"). Interest on the 12 3/8% Notes is payable in cash semi-annually in arrears on February 1 and August 1 of each year, commencing February 1, 1999. The 12 3/8% Notes mature on August 1, 2006. The 12 3/8% Notes Offering resulted in net proceeds to Golden Sky of approximately $189.2 million (after payment of underwriting discounts and other issuance costs aggregating approximately $5.8 million). Approximately $45.2 million of the net proceeds of the 12 3/8% Notes Offering were placed in escrow to fund the first four semi-annual interest payments (through August 1, 2000) on the 12 3/8% Notes. Additionally, $5.3 million was reserved to fund a portion of a then contingent reduction of Golden Sky's availability under its Credit Facility. The 12 3/8% Notes are unsecured senior subordinated obligations and are subordinated in right of payment to all existing and future senior indebtedness of Systems. The 12 3/8% Notes rank pari passu in right of payment with all other existing and future senior subordinated indebtedness, if any, of Systems and senior in F-37 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. Long-Term Obligations -- (Continued) right of payment to all existing and future subordinated indebtedness, if any, of Systems. The 12 3/8% Notes are guaranteed on a full, unconditional, joint and several basis by Argos Support Services Company ("Argos") and PrimeWatch, Inc. ("PrimeWatch"). Both Argos and PrimeWatch are wholly-owned subsidiaries of Golden Sky. The 12 3/8% Notes are redeemable, in whole or in part, at Systems' option on or after August 1, 2003, at redemption prices decreasing from 112% during the year commencing August 1, 2003 to 108% on or after August 1, 2005, plus accrued and unpaid interest, if any, to the date of redemption. In addition, on or prior to August 1, 2001, Systems may, at its option, redeem up to 35% of the originally issued aggregate principal amount of the 12 3/8% Notes, at a redemption price equal to 112.375% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption solely with the net proceeds of a public equity offering of Systems or Holdings yielding gross proceeds of at least $40.0 million and any subsequent public equity offerings (provided that, in the case of any such offering or offerings by Holdings, all the net proceeds thereof are contributed to Systems); provided, further that immediately after any such redemption the aggregate principal amount of Notes outstanding must equal at least 65% of the originally issued aggregate principal amount of the 12 3/8% Notes. The indenture related to the 12 3/8% Notes (the "12 3/8% Notes Indenture") contains restrictive covenants that, among other things, impose limitations on Systems' ability to incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any senior indebtedness and senior in right of payment to the 12 3/8% Notes, incur liens, permit restrictions on the ability of subsidiaries to pay dividends or make certain payments to Systems, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of Systems' assets. In the event of a change of control, as defined in the 123/8% Notes Indenture, each holder of 12 3/8% Notes will have the right to require Systems to purchase all or a portion of such holder's 12 3/8% Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. Golden Sky's merger with Pegasus will constitute a change of control as defined in the 12 3/8% Notes Indenture. Accordingly, upon closing of the merger with Pegasus, Golden Sky will be required to make an offer to the holders of the 12 3/8% Notes to purchase those notes consistent with the terms described above. If Golden Sky's offer for the 12 3/8% Notes is accepted by any of its note holders, and it is unable to purchase those notes, Golden Sky may be in default of the terms of the 12 3/8% Notes Indenture. Pegasus has entered into a commitment letter with an investment bank under which that investment bank has agreed to purchase any and all 123/8% Notes tendered in response to Golden Sky's offer to purchase. This commitment is subject to the execution of definitive documentation and customary closing conditions. There can be no assurance that Pegasus will be able to agree on definitive documentation with the investment bank or make alternative arrangements if necessary. The 12 3/8% Notes were issued in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). During 1998, Systems filed a registration statement with the Securities and Exchange Commission (the "SEC") relating to the exchange of the privately issued notes for publicly registered notes with substantially identical terms (including principal amount, interest rate, maturity, security and ranking). Because the registration statement was not declared effective within the time period required under the registration rights agreement associated with the 12 3/8% Notes Offering, from December 29, 1998 through March 22, 1999 (the date the registration statement was declared effective), Systems was required to pay liquidated damages of $18,750 per week to holders of the 12 3/8% Notes. 13 1/2% Notes On February 19, 1999, Golden Sky DBS consummated the 13 1/2% Notes Offering, which resulted in net proceeds to Golden Sky DBS of approximately $95.4 million (after initial purchasers' discount and other F-38 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. Long-Term Obligations -- (Continued) offering expenses). The 13 1/2% Notes have an aggregate balance due at stated maturity of $193.1 million. Golden Sky DBS contributed the net proceeds of the 131/2% Notes Offering to Golden Sky Systems, of which $53.0 million was used to repay existing revolving credit indebtedness. Cash interest on the 13 1/2% Notes will not accrue prior to March 1, 2004. Thereafter, cash interest will accrue at a rate of 13 1/2% per annum and be payable in arrears on March 1 and September 1 of each year, commencing September 1, 2004. The 13 1/2% Notes mature on March 1, 2007. The 13 1/2% Notes are unsecured and effectively rank below all of the liabilities of Golden Sky DBS' direct and indirect subsidiaries. Golden Sky DBS' ability to pay interest on the notes when interest is due and to redeem the notes at maturity will depend on whether its direct and indirect subsidiaries can pay dividends or make other distributions to it under the terms of such subsidiaries' indebtedness and applicable law. The 13 1/2% Notes are redeemable, in whole or in part, at the option of Golden Sky DBS on or after March 1, 2004, at redemption prices decreasing from 106.75% during the year commencing March 1, 2004 to 103.375% on or after March 1, 2005, plus accrued and unpaid interest, if any, to the date of redemption. In addition, on or prior to March 1, 2002, Golden Sky DBS may, at its option, redeem up to 35% of the originally issued aggregate principal amount of 13 1/2% Notes, at a redemption price equal to 113.5% of the accreted value of the 13 1/2% Notes at the date of redemption solely with the net proceeds of a public equity offering of Golden Sky DBS yielding gross proceeds of at least $40 million and any subsequent public equity offerings; provided, however, that not less than 65% of the originally issued aggregate principal amount of 131/2% Notes are outstanding following such redemption. The indenture governing the 13 1/2% Notes (the "13 1/2% Notes Indenture") contains restrictive covenants that, among other things, impose limitations on the ability of Golden Sky DBS and its subsidiaries to incur additional indebtedness; pay dividends on, redeem or repurchase capital stock; make investments; issue or sell capital stock of certain subsidiaries; create specific types of liens; sell assets; engage in transactions with affiliates; and consolidate, merge or transfer all or substantially all of their assets. In the event of a change of control, as defined in the 13 1/2% Notes Indenture, each holder of the 13 1/2% Notes will have the right to require Golden Sky DBS to purchase all or a portion of such holder's 13 1/2% Notes at a price equal to 101% of the accreted value of the notes, plus accrued and unpaid interest, if any, to the date of purchase. Golden Sky's merger with Pegasus will constitute a change of control as defined in the 13 1/2% Notes Indenture. Accordingly, upon closing of the merger with Pegasus, Golden Sky will be required to make an offer to the holders of the 13 1/2% Notes to purchase those notes consistent with the terms described above. If Golden Sky's offer for the 13 1/2% Notes is accepted by any of its note holders, and it is unable to purchase those notes, Golden Sky may be in default of the terms of the 13 1/2% Notes Indenture. Pegasus has entered into a commitment letter with an investment bank under which that investment bank has agreed to purchase any and all 13 1/2% Notes tendered in response to Golden Sky's offer to purchase. This commitment is subject to the execution of definitive documentation and customary closing conditions. There can be no assurance that Pegasus will be able to agree on definitive documentation with the investment bank or make alternative arrangements if necessary. Bank Debt During 1997, Systems entered into a credit agreement (the "Credit Agreement") with a group of financial institutions, which provided for borrowings of $100.0 million. Loans outstanding under the Credit Agreement bore interest at variable rates (prime rate or LIBOR plus an applicable margin). During May 1998, Systems entered into a seven-year, $150.0 million amended credit facility (the "Credit Facility") with a syndicate of lenders. Upon execution of the Credit Facility, Systems recognized an extraordinary charge of approximately $2.6 million to write-off unamortized deferred financing costs F-39 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. Long-Term Obligations -- (Continued) associated with the Credit Agreement. In February 1999, Systems' Credit Facility was amended to permit, among other things, the 13 1/2% Notes Offering. Upon execution of the February 1999 amendment to the Credit Facility, Systems recognized an extraordinary charge of approximately $2.9 million to write off unamortized deferred financing costs associated with the Credit Facility. The Credit Facility provides for a term loan commitment of $35.0 million and a revolving loan commitment of $115.0 million. The Credit Facility's term loan commitment amortizes in specified quarterly installments from March 31, 2002 through maturity on December 31, 2005. The availability of revolving loan borrowings under the Credit Facility reduces by specified amounts over the period from March 31, 2001 through maturity on September 30, 2005. Borrowings under the Credit Facility bear interest at variable rates (approximately 10% as of December 31, 1999) calculated on a base rate, such as the prime rate or LIBOR, plus an applicable margin. Commitment fees are payable on unused amounts available under the Credit Facility. Such commitment fees, which are payable quarterly in arrears, range from 0.50% per annum to 1.25% per annum based on Systems' utilization of such commitments. As of December 31, 1999, aggregate borrowings outstanding under the Credit Facility totaled $52.0 million, including $35.0 million borrowed pursuant to the Credit Facility's term loan commitment. The Credit Facility contains a number of restrictive covenants that, among other things, limit Systems' ability to incur additional indebtedness and guaranty obligations, create liens and other encumbrances, make certain payments, investments, loans and advances, pay dividends or make other distributions in respect of Systems' capital stock, sell or otherwise dispose of assets, make capital expenditures, merge or consolidate with another entity, create subsidiaries, make amendments to its organizational documents or transact with affiliates. As of each of December 31, 1997, 1998 and 1999, no amounts were available for distribution to Holdings. The Credit Facility also contains a number of financial covenants that require Systems to meet certain financial ratios and financial condition tests. These financial covenants, in certain instances, become effective at different points in time and vary over time. The covenants include limitations on indebtedness per subscriber, limitations on subscriber acquisition costs, maintenance of a minimum fixed charge coverage ratio, maintenance of minimum interest coverage ratios, and limitations on indebtedness to pro forma EBITDA (earnings before interest, taxes, depreciation and amortization) ratios. Revolving credit availability under the Credit Facility depends upon satisfaction of the various covenants as well as minimum subscriber base requirements. As of September 30, 1999, Systems was not in compliance with certain of the restrictive covenants prescribed by the Credit Facility. During January 2000, the Credit Facility was amended to modify certain fourth quarter 1999 and year 2000 covenant requirements. Further, in conjunction with the amendment, Golden Sky's third quarter 1999 covenant violations were waived. Pursuant to the amendment, which was effective as of December 31, 1999, Golden Sky may borrow up to an additional $20.0 million under the Credit Facility prior to March 31, 2000. Any such incremental borrowings, which are secured by letters of credit provided by certain of Golden Sky Holdings' shareholders, must be repaid by March 31, 2000 from the proceeds of either a private or public equity offering. The required repayment date relative to these year 2000 incremental borrowings may be deferred until May 31, 2000 under certain conditions. Upon repayment, systems will have potential incremental borrowing capacity during the year ending December 31, 2000 equal to the lesser of the proceeds received from either a public or private equity offering or $20.0 million. Coincident with the amendment of the Credit Facility, Holdings entered into stock subscription agreements with certain of its shareholders for an aggregate of $20.0 million of its preferred stock (see note 6). Also in January 2000, the Credit Facility was further amended to approve the change in ownership of Holdings that would result from the merger with Pegasus. As of December 31, 1999, Systems was in compliance with the Credit Facility's amended covenants. F-40 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. Long-Term Obligations -- (Continued) Seller Notes Payable Seller notes payable bear interest at rates ranging from 7% to 10% and are collateralized by bank letters of credit. Other Notes Payable In November 1996, Golden Sky issued $2.0 million in promissory notes to a group of lenders under a bridge financing agreement. The notes bore interest at the rate of 10% per annum. In February 1997, these notes, along with $1.8 million in additional promissory notes issued in January 1997, were exchanged for Systems' Series A Convertible Participating Preferred Stock. In connection with the bridge agreement, Systems' issued warrants exercisable for 5,682 shares of its Common Stock at an exercise price of $.01 per share. These warrants were immediately exercisable and expire on February 12, 2007. At the date of issuance, the fair value of the warrants was not material. These warrants were assumed by Holdings after its formation and remain outstanding as of December 31, 1999. Future maturities of amounts outstanding under Golden Sky's long-term obligations as of December 31, 1999 are summarized as follows (dollars in thousands):
Seller 12 2/8% 13 1/2% Notes Notes Notes Bank Debt Payable Other Total ---------- ---------- ----------- --------- ------- ---------- Year Ending December 31, 2000 .................. $ -- $ -- $ -- $ 2,891 $357 $ 3,248 2001 .................. -- -- -- 2,970 76 3,046 2002 .................. -- -- 263 2,962 23 3,248 2003 .................. -- -- 350 1,000 4 1,354 2004 .................. -- -- 350 -- -- 350 Thereafter ............ 195,000 112,095 51,037 -- -- 358,132 -------- -------- ------- ------- ---- -------- Total debt .......... $195,000 $112,095 $52,000 $ 9,823 $460 $369,378 ======== ======== ======= ======= ==== ========
6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity (Deficit) During 1996, Systems issued 1,000 shares of Common Stock, par value $.01, for aggregate consideration of $1,000 cash. In February 1997, Systems (i) amended its certificate of incorporation to cancel its outstanding shares of Common Stock; (ii) created new classes of common and preferred stock and (iii) exchanged all of the canceled shares of Systems' Common Stock for an aggregate of ten shares of Systems' Series A Convertible Participating Preferred Stock (the "Series A Preferred Stock"). In February 1997, Systems issued 24,990 shares of Series A Preferred Stock in fulfillment of an investor's subscription to purchase Series A Preferred Stock that was outstanding at December 31, 1996 (aggregate consideration of $2,499,000). During that same month, Systems issued 100 shares of its Common Stock (par value $.01) for aggregate consideration of $100 cash and a total of 38,107 shares of Series A Preferred Stock upon the conversion of convertible promissory notes (plus accrued interest of approximately $62,000) issued in November 1996 ($2.0 million) and January 1997 ($1.8 million). In February and March 1997, Systems issued 342,893 additional shares of Series A Preferred Stock for cash totaling $34.3 million. Upon the formation of Holdings in September 1997, all shareholders of Systems' Common Stock and Series A Preferred Stock were issued equivalent shares of Holdings stock. Concurrent therewith, Systems issued 1,000 shares of its Common Stock (par value $0.01) to Holdings for cash proceeds of $10 and all previously outstanding shares of Systems' Common Stock and Series A Preferred Stock were canceled. F-41 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity (Deficit) -- (Continued) At December 31, 1999, Holdings' preferred stock consists of: Series A Convertible Participating Preferred Stock ("Series A Preferred Stock") Holders of Series A Preferred Stock are entitled to voting rights equal to the largest number of shares of common stock into which the Series A Preferred Stock can be converted. These shares are entitled to mandatory, cumulative, compounded cash dividends at the rate of 19.5% of the liquidation preference through December 31, 1997, and 14.5% thereafter, payable upon redemption, liquidation, sale of substantially all of the assets, or certain mergers. In addition the Series A Preferred Stock shall be entitled to dividends at the same rate as dividends are paid with respect to the common stock based upon the largest number of shares of Common Stock into which the Series A Preferred Stock can be converted. In the event of liquidation, holders of Series A Preferred Stock are entitled to receive, to the extent available, the sum of $100 per share plus any unpaid dividends. The Series A Preferred Stock ranks on par with the Series B Convertible Participating Preferred Stock, while the Series C Senior Convertible Preferred Stock ranks senior to the Series A Preferred Stock and Series B Convertible Participating Preferred Stock for liquidation purposes. In a liquidation, the Series C Senior Convertible Preferred Stock shall be entitled to be paid out of assets of Golden Sky available for distribution to stockholders the sum of $200 per share plus any accrued and unpaid dividends before any amount shall be paid or distributed to the holders of the Series A Preferred Stock, Series B Convertible Participating Preferred Stock, Series A Redeemable Preferred Stock, Series B Redeemable Preferred Stock, Common Stock or any stock ranking on liquidation junior to the Series C Senior Convertible Preferred Stock. After such amounts have been paid to the holders of the Series C Senior Convertible Preferred Stock, the Series A Preferred Stock, together with other preferred stockholders ranking junior to the Series C Senior Convertible Preferred Stock, will, after their respective liquidation preferences have been satisfied, share ratably with the holders of common stock in the value received for the remaining assets, as if each share of Series A Preferred Stock had been converted into Common Stock. The Series A Preferred Stock may be converted in certain circumstances into one share of common stock and 0.95 shares of Series A Redeemable Preferred Stock, with such redeemable preferred shares each having a liquidation preference equal to the sum of $100 plus accrued and unpaid dividends on the redeemable preferred stock. Series A Preferred Stock will be automatically converted upon the closing of Golden Sky's first underwritten public offering of common stock with net proceeds to Golden Sky equal to or exceeding $35 million, where the shares are offered to the public at a price per share of no less than $300, appropriately adjusted for any stock split, combination, reorganization, recapitalization, reclassification, stock distribution, stock dividend, or similar event, and in which all redeemable preferred stock issuable upon conversion is redeemed at the closing or sufficient cash to do so is segregated for that purpose (a "QPO"). Each share of Series A Preferred is also convertible into common stock and redeemable preferred stock upon election of 58% of the outstanding shareholders. Any accrued but unpaid dividends on the Series A Preferred at the time of conversion will remain deferred and accrued and will be for the benefit of the shares of the Series A Redeemable Preferred Stock into which the Series A Preferred Stock was converted. As of December 31, 1999, the cumulative, unpaid dividends associated with the Series A Preferred Stock amounted to approximately $23.3 million, or $55.83 per share. Series A Preferred Stock is mandatorily redeemable for $100 per share, plus unpaid cumulative dividends, plus the fair value of one share of Common Stock, upon approval of holders of at least 58% of the outstanding shares of Series A Preferred Stock on or after February 12, 2002. It is also F-42 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity (Deficit) -- (Continued) redeemable at the option of Golden Sky after December 31, 2002 at the same redemption price. In the event of a change of management or control of Golden Sky, and upon election of holders of at least 58% of the outstanding shares, the Series A Preferred Stock is redeemable on or after February 12, 2000. Series B Convertible Participating Preferred Stock ("Series B Preferred Stock") The Series B Preferred Stock has features similar to the Series A Preferred Stock except that mandatory, cumulative, compounded cash dividends accrue at 14.5% of the liquidation preference, and upon liquidation, the Series B Preferred Stock shareholders are entitled to a preference of $200 per share plus any unpaid dividends. Upon conversion, each share of the Series B Preferred Stock is convertible into one share of common stock and 0.95 shares of Series B Redeemable Preferred Stock having a liquidation preference equal to the sum of $200 plus accrued and unpaid dividends. A QPO with respect to Series B Preferred Stock requires a price of $600 per share rather than the $300 per share required with respect to Series A Redeemable Preferred Stock. As of December 31, 1999, the cumulative unpaid dividends associated with the Series B Preferred Stock amounted to approximately $16.0 million or $69.99 per share. Series C Senior Convertible Preferred Stock ("Series C Preferred Stock") Holders of the Series C Preferred Stock are entitled to voting rights equal to the largest number of shares of common stock into which each share of Series C Preferred Stock can be converted. These shares are entitled to mandatory, cumulative, compound cash dividends at the rate of 10.0% of the liquidation preference, payable upon any liquidation event, sale of substantially all of the assets, certain mergers, or redemption. In the event of liquidation, holders of Series C Preferred Stock are entitled to receive, to the extent available, the sum of $200 per share plus any unpaid dividends prior to any distributions to other stock. The Series C Preferred Stock will be automatically converted into common stock upon the closing of Golden Sky's first underwritten public offering of common stock with net proceeds to Golden Sky equal to or exceeding $35 million where the shares are offered to the public at a price per share of no less than $200 per share, appropriately adjusted. The shares of Series C Preferred Stock are convertible into common stock upon election of holders of at least 58% of the outstanding shares of the Series A Preferred Stock and the Series B Preferred Stock, voting separately by class, to convert all outstanding shares of Series A Preferred Stock and Series B Preferred Stock into shares of common stock and redeemable preferred stock. Any holder of Series C Preferred Stock may also elect to convert any or all of its shares at any time. Upon conversion, each share of the Series C Preferred Stock is convertible into one share of Common Stock, and accrued and unpaid dividends are also converted into common shares based on a $200 per share valuation. In addition the Series C Preferred Stock of any holder is mandatorily redeemable for $200 per share plus accrued and unpaid cumulative dividends upon the written request of such holder on or after September 30, 2003. All the shares of Series C Preferred Stock are redeemable at the option of Golden Sky after September 30, 2004 at the same redemption price. As of December 31, 1999, the cumulative unpaid dividends associated with the Series C Preferred Stock amounted to approximately $1.3 million, or $26.28 per share. Series A and Series B Redeemable Preferred Stock A total of 646,500 shares of Series A and Series B Redeemable Preferred Stock, $0.01 par value, have been authorized. No shares of Series A or Series B Redeemable Preferred Stock were issued or outstanding at December 31, 1999. The Series A and Series B Redeemable Preferred Stock have the F-43 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity (Deficit) -- (Continued) same dividend rights as the Series A Preferred Stock and the Series B Preferred Stock and are redeemable under similar conditions as the Series A Preferred Stock and Series B Preferred Stock. The Series A and Series B Redeemable Preferred Stock are also redeemable upon election of holders of at least 58% of the shares in the series following certain mergers or sale of substantially all of the assets, and are mandatorily redeemed as of the closing of a QPO. The redemption price and the liquidation preference for Series A and Series B Redeemable Preferred Stock are $100 and $200 per share, respectively, plus accrued and unpaid dividends. Series A and Series B Redeemable Preferred Stock have no voting rights, other than rights to elect certain directors and to approve certain specified corporate actions. Undesignated Preferred Stock A total of 300,000 shares of Undesignated Preferred Stock has been authorized by the Board of Directors. No shares of Undesignated Preferred Stock, $.01 par value, were issued or outstanding at December 31, 1999. The Board of Directors has the authority to designate the class of stock, dividend rates, voting powers, redemption options and conversion options of these shares. Series D Redeemable Preferred Stock During January 2000, Holdings entered into a stock purchase agreement for the sale of up to $20.0 million of its Series D Redeemable Preferred Stock (the "Series D Preferred Stock") to certain of its shareholders in connection with an amendment to Systems' Credit Facility. The Series D Preferred Stock will rank senior to all other series of Golden Sky's preferred and common stock with respect to dividends and liquidation. Holders of Series D Preferred Stock will be entitled to 10.0% mandatory, cumulative dividends compounded quarterly. These dividends are payable in additional shares of Series D Preferred Stock, which is valued at $200 per share, subject to anti-dilution adjustments. The Series D Preferred Stock has no voting rights. It has redemption and other rights similar to Golden Sky's other series of redeemable preferred stock. In connection with the execution of the stock purchase agreement, Golden Sky issued warrants to purchase a total of 3,500 shares of its common stock to the Series D investors. These warrants are immediately exercisable and have an exercise price of $0.01 per share. Golden Sky will issue additional warrants for the purchase of 3,500 shares of its common stock upon the sale of the Series D Preferred Stock and, subject to certain conditions, has agreed to issue warrants for the purchase of up to an additional 7,000 shares of Common Stock. 7. Stock Incentive Plan In July 1997 Systems adopted the Golden Sky Systems, Inc. Stock Option and Restricted Stock Purchase Plan (the "Stock Incentive Plan") to provide incentive to attract and retain certain officers, directors and key employees. Options issued pursuant to the Stock Incentive Plan are exercisable during a period of up to ten years after grant and vest over a three-year period. Effective September 9, 1997, Holdings assumed the Stock Incentive Plan. Participants in the Holdings' Stock Incentive Plan received options with terms identical to those under Systems' Stock Incentive Plan and all previously outstanding options were canceled. F-44 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 7. Stock Incentive Plan -- (Continued) The following summarizes incentive stock option activity during the three-year period ended December 31, 1999:
1997 1998 1999 ----------------------- -------------------------- ------------------------ Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price --------- ----------- ------------ ----------- ----------- ---------- Options outstanding, beginning of year .................................... -- $ -- 62,525 $ 1.00 48,745 $ 1.00 Granted .................................. 62,525 1.00 18,693 1.00 11,600 1.00 Exercised ................................ -- -- (24,831) 1.00 (468) 1.00 Forfeited ................................ -- -- (7,642) 1.00 (1,025) 1.00 ------ ----- ------- -------- ------ ------- Options outstanding, end of year ......... 62,525 $ 1.00 48,745 $ 1.00 58,852 $ 1.00 ====== ====== ======= ======== ====== ======= Options exercisable, end of year ......... 8,684 $ 1.00 5,595 $ 1.00 30,165 $ 1.00 ====== ====== ======= ======== ====== =======
Accounting for Stock-Based Compensation Golden Sky has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for the Stock Incentive Plan. Under APB 25, if the exercise price of employee stock options granted pursuant to the Stock Incentive Plan is equal to or greater than the fair value of the underlying stock on the date of grant, no compensation expense is recognized. In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123"), which established an alternative method of expense recognition for stock-based compensation awards to employees based on fair values. Golden Sky elected to not adopt FAS No. 123 for expense recognition purposes. For options granted during 1999, the estimated aggregate fair value of Golden Sky's Common Stock on the respective grant dates exceeded the related aggregate exercise price by approximately $462,000. This amount will be recognized as compensation expense over the vesting period of the related stock options. Accordingly, compensation cost of $154,000 was recorded during the year ended December 31, 1999. For options granted in 1998 and 1997, the exercise prices of the related stock options was not less than the fair value of Golden Sky's Common Stock as of the respective grant dates and, accordingly, no compensation expense was recognized relative to those options. The fair value of Golden Sky's Common Stock was estimated by management using trading prices for other similar publicly-traded companies, as adjusted for specific factors and differences deemed relevant to the valuation of Golden Sky's Common Stock. Pro forma information regarding net income is required by FAS No. 123 and has been determined as if Golden Sky had accounted for its stock-based compensation using the fair value method prescribed by that statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the corresponding vesting period. All options are initially assumed to vest. Compensation previously recognized is reversed to the extent applicable to forfeitures of unvested options. The fair value of each option grant was estimated at the date of the grant using a Black-Scholes option valuation model with the following weighted-average assumptions:
Years Ended December 31, ----------------------------------- 1997 1998 1999 ---------- ---------- --------- Risk-free interest rate .......... 6.0% 6.0% 6.0% Dividend yield ................... 0.0% 0.0% 0.0% Volatility factor ................ 0.0% 0.0% 0.0% Expected term of options ......... 10 years 10 years 10 years
F-45 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 7. Stock Incentive Plan -- (Continued) Using the preceding assumptions, there was no pro forma effect on Golden Sky's net loss from applying the fair value method under FAS No. 123. 8. 401(k) Retirement Plan Golden Sky sponsors a 401(k) Retirement Plan (the "401(k) Plan") for eligible employees. Employer matching contributions to the 401(k) Plan, which became effective as of January 1, 1997, are discretionary. During the years ended December 31, 1997, 1998 and 1999, Golden Sky made no discretionary employer matching contributions to the 401(k) Plan. Administrative expenses associated with the 401(k) Plan during those same periods were not material. 9. Income Taxes The components of Golden Sky's (provision for) benefit from income taxes are as follows (in thousands):
Years Ended December 31, -------------------------------------- 1997 1998 1999 ---------- ----------- ----------- Current (provision) benefit: Federal .................................. $ 3,911 $ 16,325 $ 36,437 State .................................... 742 3,097 6,913 Increase in valuation allowance .......... (4,653) (19,422) (43,350) -------- --------- --------- Total current (provision) benefit ......... -- -- -- Deferred benefit: Federal .................................. 1,639 3,111 3,122 State .................................... 311 590 592 Increase in valuation allowance .......... (1,950) (3,701) (3,714) -------- --------- --------- Total deferred benefit .................... -- -- -- -------- --------- --------- Total benefit (provision) .............. $ -- $ -- $ -- ======== ========= =========
As of December 31, 1999, Golden Sky had net operating loss carryforwards ("NOLs") for federal income tax purposes of approximately $179.0 million. The NOLs expire beginning in the year 2011. Use of the NOLs is subject to statutory and regulatory limitations regarding changes in ownership. FAS No. 109, "Accounting for Income Taxes" ("FAS No. 109"), requires that the potential future tax benefit of NOLs be recorded as an asset. FAS No. 109 also requires that deferred tax assets and liabilities be recorded for the estimated future tax effects of temporary differences between the tax basis and book value of assets and liabilities. Deferred tax assets are offset by a valuation allowance if deemed necessary. In 1999, Holdings increased its valuation allowance sufficient to fully offset net deferred tax assets arising during the year. Realization of net deferred tax assets is not assured and is principally dependent on generating future taxable income prior to expiration of the NOLs. Management frequently reviews the adequacy of its valuation allowance. Future decreases to the valuation allowance will be made only as changes in circumstances indicate that it is more likely than not the additional benefits will be realized. Any future adjustments to the valuation allowance will be recognized as a separate component of Holdings' provision for income taxes. F-46 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 9. Income Taxes -- (Continued) The temporary differences that give rise to deferred tax assets and liabilities as of December 31, 1998 and 1999 are as follows (in thousands):
December 31, --------------------------- 1998 1999 ------------ ------------ Current deferred tax assets: Allowance for doubtful accounts .............. $ 115 $ 383 Amortization of intangible assets ............ -- -- Accrued expenses ............................. 104 337 --------- --------- Gross current deferred tax assets ............. 219 720 Valuation allowance ........................... (219) (720) --------- --------- Net current deferred tax assets ............... -- -- Non-current deferred tax assets: Depreciation ................................. 92 139 Amortization of intangible assets ............ 5,931 8,255 Partnerships ................................. -- 841 Net operating loss carryforwards ............. 28,407 71,738 Other ........................................ -- 20 --------- --------- Total non-current deferred tax assets ......... 34,430 80,993 Valuation allowance ........................... (34,430) (80,993) --------- --------- Net non-current deferred tax assets ........... -- -- --------- --------- Net deferred tax assets ....................... $ -- $ -- ========= =========
The actual income tax benefit (provision) for 1997, 1998 and 1999 reconciles to the amounts computed by applying the statutory federal tax rate to income before income taxes as follows:
Years Ended December 31, -------------------------------------------------------------------------- 1997 1998 1999 ---------------------- ------------------------ ------------------------ Tax Rate Tax Rate Tax Rate ---------- ---------- ------------ ---------- ------------ ---------- Statutory rate ..................................... $ 5,391 34.0% $ 21,131 34.0% $ 43,633 34.0% State income taxes, net of federal benefit ......... 695 4.4 2,433 3.9 4,953 3.9 Non-deductible amortization of intangible assets ............................................ (291) ( 1.8) (415) ( 0.7) (1,507) ( 1.2) Other .............................................. (12) ( 0.1) (26) -- (15) -- Increase in valuation allowance .................... (5,783) (36.5) (23,123) (37.2) (47,064) (36.7) -------- ----- --------- ----- --------- ----- Income taxes ....................................... $ -- -- % $ -- --% $ -- --% ======== ======== ========= ====== ========= ======
10. Commitments and Contingencies DIRECTV Litigation In May 1999, Hughes acquired United States Satellite Broadcasting Company, Inc. ("USSB"). Prior to its acquisition by Hughes, USSB offered premium programming packages consisting of HBO, Showtime, Cinemax and The Movie Channel to subscribers throughout the United States, including those within the NRTC's rural DIRECTV markets. After completing its acquisition of USSB, Hughes combined its DIRECTV business with USSB's assets to expand its programming lineup through the addition of HBO, Showtime, Cinemax and The Movie Channel. F-47 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 10. Commitments and Contingencies -- (Continued) On June 3, 1999, the NRTC filed suit against DIRECTV and Hughes alleging breach of contract and seeking a court order requiring DIRECTV to provide NRTC members and affiliates with HBO, Showtime, Cinemax and The Movie Channel programming for exclusive distribution in the NRTC's rural DIRECTV markets and a temporary restraining order and preliminary injunction preventing DIRECTV from providing, marketing, selling or billing for this programming in the NRTC's rural markets. On June 17, 1999, the court denied the NRTC's request for a temporary restraining order and preliminary injunction. On July 12, 1999, the NRTC amended its complaint to add a second claim for breach of contract and to seek a declaratory judgment that, if the court determines that the NRTC does not have the exclusive right to provide HBO, Showtime, Cinemax and The Movie Channel programming in its rural markets, then the NRTC has the non-exclusive right to distribute this programming in its rural markets. In July 1999, DIRECTV and Hughes filed a motion to dismiss this portion of the NRTC's complaint on the grounds that it fails to state a claim upon which relief may be granted because DIRECTV is in the process of negotiating USSB programming distribution rights with the NRTC and the DBS Distribution Agreement requires the parties to arbitrate any claims regarding the terms and conditions of these rights. The Court denied the motion to dismiss on September 8, 1999. In July 1999, DIRECTV and Hughes filed a counterclaim against the NRTC. In the counterclaim, DIRECTV seeks the following declaratory judgments: 1. That DBS-1, the first satellite launched by Hughes, is the only relevant satellite for determining the term of the DBS Distribution Agreement; and 2. That the DIRECTV-1R satellite, which was launched in October 1999, is a successor satellite to DBS-1 within the scope and meaning of the DBS Distribution Agreement; that DIRECTV appropriately and prudently exercised its discretion, including its sole discretion to determine when and under what conditions a successor satellite should be launched, in determining to launch DIRECTV-1R in order to prevent a disruption in service; that the NRTC's right of first refusal under the DBS Distribution Agreement will be based on the satellite expiration date of DBS-1; and that pursuant to its right of first refusal, the NRTC has no right to specified programming services currently required to be provided under the DBS Distribution Agreement or more than 20 program channels of transponder capacity. On August 26, 1999, the NRTC filed a separate lawsuit against DIRECTV and Hughes in the United States District Court for the Central District of California. In this suit, the NRTC alleges that DIRECTV and Hughes have breached their fiduciary duty to the NRTC as well as the NRTC's agreement with Hughes and have engaged in unfair business practices in violation of California law by withholding from the NRTC various revenues, cost savings, discounts and other benefits belonging to the NRTC under its agreement with Hughes. On October 15, 1999 DIRECTV moved to have the NRTC's breach of fiduciary duty (and related breach of confidential relationship claims) dismissed. The court granted DIRECTV's motion on November 15, 1999. A trial date has not been set on the merits of any of the claims made by the NRTC or DIRECTV and Hughes in either lawsuit. We are unable to predict the outcome of these matters or how they will impact the business relationship between the NRTC and DIRECTV. On January 10, 2000, Golden Sky and Pegasus filed a lawsuit against DIRECTV and Hughes in the United States District Court, Central District of California. The action asserts various claims, including intentional interference with contractual relations and interference with prospective economic advantage, and seeks declaratory relief. The claims are based on DIRECTV's failure to provide NRTC with certain premium programming, thereby preventing NRTC from providing said premium programming to the class action members. The claims are also based on DIRECTV's position with respect to launch fees and other benefits it has received, contract term and rights of refusal. We are unable to predict the outcome of this matter or how it will impact our business, financial condition or results of operations. F-48 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 10. Commitments and Contingencies -- (Continued) Other Litigation Golden Sky is subject to various other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to those actions will not materially affect Golden Sky's financial position or results of operations. Operating Leases Golden Sky has non-cancelable operating leases for office, warehouse and storage space and equipment that expire at various dates. Future minimum lease payments as of December 31, 1999 are summarized as follows (dollars in thousands): 2000 ................................. $2,116 2001 ................................. 1,611 2002 ................................. 1,050 2003 ................................. 255 2004 and thereafter .................. 79 ------ Total ................................ $5,111 ====== 11. Related Party Transactions In 1997, Systems paid $66,000 to a company affiliated with Systems' president for consulting services received by Systems. Additionally, during 1997, 1998 and 1999 Systems paid $77,000, $159,000 (including $75,000 paid in connection with a 1998 acquisition) and $84,000, respectively, to one of its directors for consulting services. During 1996, Golden Sky's president provided Systems with a short-term loan in the amount of $381,000. In 1997, Golden Sky received an additional $150,000 short-term loan from its president and a $215,000 short-term loan from a shareholder. Each of these loans bore interest at an annual rate of 10% and was repaid during 1997. Through December 31, 1999, Golden Sky contracted with an entity owned by its president for air transportation services, including the lease of an aircraft. This lease, which was canceled effective December 31, 1999, required monthly payments equal to the greater of $20,000 or an aggregate fixed hourly operating charge. The fixed hourly operating charge was based on prevailing market prices. The total cost of such services approximated $109,000, $506,000 and $300,000 during 1997, 1998 and 1999, respectively. 12. Valuation and Qualifying Accounts Golden Sky's valuation and qualifying accounts as of December 31, 1997, 1998 and 1999 are as follows (in thousands):
Year Ended December 31, ------------------------------------- 1997 1998 1999 --------- ----------- ----------- Allowance for doubtful accounts, beginning of period ......... $ 4 $ 138 $ 293 Charged to costs and expenses ................................ 417 1,537 3,909 Deductions ................................................... (283) (1,382) (3,229) ------ -------- -------- Allowance for doubtful accounts, end of period ............... $ 138 $ 293 $ 973 ====== ======== ========
F-49 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 13. Consolidating Financial Information and Subsidiary Guarantors Consolidating financial information for Golden Sky, Golden Sky's guarantor subsidiaries, and Golden Sky's non-guarantor subsidiaries is as follows (dollars in thousands): Consolidating Statement of Operations -- Year Ended December 31, 1997
Consolidating Non- and Guarantor guarantor Eliminating Holdings Systems Subsidiaries Subsidiaries Adjustments Consolidated ---------- ------------- -------------- -------------- -------------- ------------- Revenue: DBS services ...................... $ -- $ 13,356 $ 2,787 $ 309 $ -- $ 16,452 Lease and other ................... -- 931 -- 13 -- 944 ----- --------- ------- ------ ------ --------- Total revenue ...................... -- 14,287 2,787 322 -- 17,396 Costs and Expenses: Costs of DBS services ............. -- 7,514 1,601 189 -- 9,304 System operations ................. -- 2,830 876 100 (10) 3,796 Sales and marketing ............... -- 6,597 693 26 -- 7,316 General and administrative ........ -- 2,260 59 12 -- 2,331 Depreciation and amortization ..... -- 6,312 109 79 800 7,300 ----- --------- ------- ------ ------ --------- Total costs and expenses ........... -- 25,513 3,338 406 790 30,047 ----- --------- ------- ------ ------ --------- Operating loss ..................... -- (11,226) (551) (84) (790) (12,651) Non-operating items: Interest and investment income..... -- 30 10 -- -- 40 Interest expense .................. (73) (3,170) (3) -- -- (3,246) ----- --------- --------- ------ ------ --------- Total non-operating items .......... (73) (3,140) 7 -- -- (3,206) ----- --------- -------- ------ ------ --------- Loss before income taxes ........... (73) (14,366) (544) (84) (790) (15,857) Income taxes ....................... -- -- -- -- -- -- ----- --------- -------- ------ ------ --------- Net loss ........................... $ (73) $ (14,366) $ (544) $ (84) $ (790) $ (15,857) ===== ========= ======== ====== ====== =========
F-50 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 13. Consolidating Financial Information and Subsidiary Guarantors -- (Continued) Consolidating Statement of Cash Flows -- Year Ended December 31, 1997
Guarantor Holdings Systems Subsidiaries ------------ ------------- -------------- Cash Flows From Operating Activities Net loss .................................... $ (73) $ (14,366) $ (544) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .............. -- 6,312 109 Amortization of debt discount, deferred financing costs and other ................ -- 215 -- Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue ................................. -- (1,827) (615) Other receivables ........................ (586) (185) 24 Inventory ................................ -- (1,499) (34) Prepaid expenses and other ............... -- (201) 8 Trade accounts payable ................... -- 7,683 (320) Interest payable ......................... 73 733 -- Accrued payroll and other ................ 574 (1,461) 2,460 ---------- ---------- ------ Net cash provided by (used in) operating activities ............................... (12) (4,596) 1,088 Cash Flows From Investing Activities Acquisitions of Rural DIRECTV Markets....... -- (120,051) -- Purchases of property and equipment ........ -- (992) (6) Other ...................................... -- 320 -- ---------- ---------- -------- Net cash provided by (used in) investing activities ............................... -- (120,723) (6) Cash Flows From Financing Activities Proceeds from issuance of Series A Preferred Stock .......................... 1,200 34,289 -- Proceeds from bridge loan .................. 10,000 -- -- Proceeds from issuance of Series B Preferred Stock .......................... 35,616 -- -- Borrowings under the Credit Agreement ...... -- 75,000 -- Principal payments on the Credit Agreement ................................ -- (14,995) (5) Proceeds from issuance of notes payable .... -- 2,115 __ Principal payments on notes payable and obligations under capital leases ......... -- (2,902) -- Contribution from Holdings ................. (46,800) 46,800 -- Increase in deferred financing costs ....... -- (3,321) -- ---------- ---------- -------- Net cash provided by (used in) financing activities ............................... 16 136,986 (5) Net increase in cash and cash equivalents... 4 11,667 1,077 Cash and cash equivalents, beginning of period ................................... -- 479 -- ---------- ---------- -------- Cash and cash equivalents, end of period ... $ 4 $ 12,146 $ 1,077 ========== ========== ========
Consolidating Non- and guarantor Eliminating Subsidiaries Adjustments Consolidated -------------- -------------- ------------- Cash Flows From Operating Activities Net loss .................................... $ (84) $ (790) $ (15,857) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .............. 79 800 7,300 Amortization of debt discount, deferred financing costs and other ................ -- -- 215 Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue ................................. (59) -- (2,501) Other receivables ........................ -- 586 (161) Inventory ................................ (71) -- (1,604) Prepaid expenses and other ............... (10) -- (203) Trade accounts payable ................... 152 -- 7,515 Interest payable ......................... -- -- 806 Accrued payroll and other ................ 402 (596) 1,379 ----- ------ ---------- Net cash provided by (used in) operating activities ............................... 409 -- (3,111) Cash Flows From Investing Activities Acquisitions of Rural DIRECTV Markets....... -- -- (120,051) Purchases of property and equipment ........ -- -- (998) Other ...................................... -- -- 320 ----- ------ ---------- Net cash provided by (used in) investing activities ............................... -- -- (120,729) Cash Flows From Financing Activities Proceeds from issuance of Series A Preferred Stock .......................... -- -- 35,489 Proceeds from bridge loan .................. -- -- 10,000 Proceeds from issuance of Series B Preferred Stock .......................... -- -- 35,616 Borrowings under the Credit Agreement ...... -- -- 75,000 Principal payments on the Credit Agreement ................................ -- -- (15,000) Proceeds from issuance of notes payable .... -- -- 2,115 Principal payments on notes payable and obligations under capital leases ......... -- -- (2,902) Contribution from Holdings ................. -- -- -- Increase in deferred financing costs ....... -- -- (3,321) ----- ------ ---------- Net cash provided by (used in) financing activities ............................... -- -- 136,997 Net increase in cash and cash equivalents... 409 -- 13,157 Cash and cash equivalents, beginning of period ................................... -- -- 479 ----- ------ ---------- Cash and cash equivalents, end of period ... $ 409 $ -- $ 13,636 ===== ====== ==========
F-51 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 13. Consolidating Financial Information and Subsidiary Guarantors -- (Continued) Consolidating Balance Sheet -- December 31, 1998
Guarantor Holdings Systems Subsidiaries ------------- ----------- -------------- Assets Current assets: Cash and cash equivalents .................. $ 28 $ 827 $ 1,189 Restricted cash, current portion ........... -- 28,083 -- Subscriber receivables, net ................ -- 6,815 1,043 Other receivables .......................... -- 2,360 87 Intercompany receivables ................... 12 11,521 -- Inventory .................................. -- 9,255 583 Prepaid expenses and other ................. -- 1,819 37 ----------- --------- ------- Total current assets ........................ 40 60,680 2,939 Restricted cash, net of current portion ..... -- 23,534 -- Property and equipment, net ................. -- 4,418 381 Investment in subsidiaries .................. 15,922 22,518 -- Intangible assets, net ...................... -- 199,867 25,051 Deferred financing costs .................... -- 10,541 -- Other assets ................................ -- 133 85 ----------- --------- ------- Total assets ............................. $ 15,962 $ 321,691 $28,456 =========== ========= ======= Liabilities and Stockholders' Equity (Deficit) Current liabilities: Trade accounts payable ..................... $ -- $ 13,482 $ 49 Interest payable ........................... -- 11,009 -- Current maturities of long-term obligations ............................... -- 8,916 -- Unearned revenue ........................... -- 4,380 789 Accrued payroll and other .................. -- 1,028 6,263 ----------- --------- ------- Total current liabilities ................... -- 38,815 7,101 Long-term obligations, net of current maturities: 12 3/8% Notes .............................. -- 195,000 -- Bank debt .................................. -- 67,000 -- Seller notes payable ....................... -- 6,912 -- Other notes payable and obligations under capital leases ...................... -- 318 58 Minority interest .......................... -- -- -- ----------- --------- ------- Total long-term obligations, net of current maturities ................................. -- 269,230 58 ----------- --------- ------- Total liabilities ........................... -- 308,045 7,159 Mandatorily redeemable preferred stock: Series A Preferred Stock ................... 56,488 -- -- Series B Preferred stock ................... 53,489 -- -- Series C Preferred Stock ................... 10,455 -- -- ----------- --------- ------- 120,432 -- -- Stockholders' Equity (Deficit): Common Stock ............................... -- -- 896 Additional paid-in capital ................. 25 97,600 1,967 Retained earnings (accumulated deficit) .... (104,495) (83,954) 18,434 ----------- --------- ------- Total stockholders' equity (deficit) ........ (104,470) 13,646 21,297 ----------- --------- ------- Total liabilities and stockholders' equity (deficit) ....................... $ 15,962 $ 321,691 $28,456 =========== ========= =======
Consolidating Non- and guarantor Eliminating Subsidiaries Adjustments Consolidated -------------- -------------- ------------- Assets Current assets: Cash and cash equivalents .................. $2,444 $ -- $ 4,488 Restricted cash, current portion ........... -- -- 28,083 Subscriber receivables, net ................ 774 -- 8,632 Other receivables .......................... 18 -- 2,465 Intercompany receivables ................... -- (11,533) -- Inventory .................................. 308 -- 10,146 Prepaid expenses and other ................. 3 -- 1,859 ------ --------- ---------- Total current assets ........................ 3,547 (11,533) 55,673 Restricted cash, net of current portion ..... -- -- 23,534 Property and equipment, net ................. 195 -- 4,994 Investment in subsidiaries .................. -- (38,440) -- Intangible assets, net ...................... 3,525 4,696 233,139 Deferred financing costs .................... -- -- 10,541 Other assets ................................ -- -- 218 ------ --------- ---------- Total assets ............................. $7,267 $ (45,277) $ 328,099 ====== ========= ========== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Trade accounts payable ..................... $ 8 $ -- $ 13,539 Interest payable ........................... -- -- 11,009 Current maturities of long-term obligations ............................... -- -- 8,916 Unearned revenue ........................... 405 -- 5,574 Accrued payroll and other .................. 5,633 (11,533) 1,391 ------ --------- ---------- Total current liabilities ................... 6,046 (11,533) 40,429 Long-term obligations, net of current maturities: 12 3/8% Notes .............................. -- -- 195,000 Bank debt .................................. -- -- 67,000 Seller notes payable ....................... -- -- 6,912 Other notes payable and obligations under capital leases ...................... -- -- 376 Minority interest .......................... -- 2,420 2,420 ------ --------- ---------- Total long-term obligations, net of current maturities ................................. -- 2,420 271,708 ------ --------- ---------- Total liabilities ........................... 6,046 (9,113) 312,137 Mandatorily redeemable preferred stock: Series A Preferred Stock ................... -- -- 56,488 Series B Preferred stock ................... -- -- 53,489 Series C Preferred Stock ................... -- -- 10,455 ------ --------- ---------- -- -- 120,432 Stockholders' Equity (Deficit): Common Stock ............................... -- (896) -- Additional paid-in capital ................. -- (99,567) 25 Retained earnings (accumulated deficit) .... 1,221 64,299 (104,495) ------ --------- ---------- Total stockholders' equity (deficit) ........ 1,221 (36,164) (104,470) ------ --------- ---------- Total liabilities and stockholders' equity (deficit) ....................... $7,267 $ (45,277) $ 328,099 ====== ========= ==========
F-52 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 13. Consolidating Financial Information and Subsidiary Guarantors -- (Continued) Consolidating Statement of Operations - Year Ended December 31, 1998
Guarantor Holdings Systems Subsidiaries ---------- ------------ -------------- Revenue: DBS services ........................... $-- $ 57,437 $ 11,172 Lease and other ........................ -- 982 22 ---- --------- -------- Total revenue ........................... -- 58,419 11,194 Costs and Expenses: Costs of DBS services .................. -- 34,640 6,813 System operations ...................... -- 7,683 2,533 Sales and marketing .................... -- 23,753 5,045 General and administrative ............. -- 7,000 267 Depreciation and amortization .......... -- 19,336 996 ---- --------- -------- Total costs and expenses ................ -- 92,412 15,654 ---- --------- -------- Operating loss .......................... -- (33,993) (4,460) Non-operating items: Interest and investment income ......... -- 1,571 2 Interest expense ....................... (1) (20,497) (28) ------ --------- -------- Total non-operating items ............... (1) (18,926) (26) ------ --------- -------- Loss before income taxes ................ (1) (52,919) (4,486) Income taxes ............................ -- -- -- ----- --------- -------- Loss before extraordinary charge ........ (1) (52,919) (4,486) Extraordinary charge on early retire- ment of debt ........................... -- (2,577) -- ----- --------- -------- Net loss ................................ $(1) $ (55,496) $ (4,486) ===== ========= ========
Consolidating Non- and guarantor Eliminating Subsidiaries Adjustments Consolidated -------------- -------------- ------------- Revenue: DBS services ........................... $ 6,301 $ -- $ 74,910 Lease and other ........................ 10 -- 1,014 -------- -------- --------- Total revenue ........................... 6,311 -- 75,924 Costs and Expenses: Costs of DBS services .................. 3,838 -- 45,291 System operations ...................... 1,318 (513) 11,021 Sales and marketing .................... 3,403 -- 32,201 General and administrative ............. 164 -- 7,431 Depreciation and amortization .......... 340 2,494 23,166 -------- -------- --------- Total costs and expenses ................ 9,063 1,981 119,110 -------- -------- --------- Operating loss .......................... (2,752) (1,981) (43,186) Non-operating items: Interest and investment income ......... -- -- 1,573 Interest expense ....................... (12) -- (20,538) -------- -------- --------- Total non-operating items ............... (12) -- (18,965) -------- -------- --------- Loss before income taxes ................ (2,764) (1,981) (62,151) Income taxes ............................ -- -- -- -------- -------- --------- Loss before extraordinary charge ........ (2,764) (1,981) (62,151) Extraordinary charge on early retire- ment of debt ........................... -- -- 2,577 -------- -------- --------- Net loss ................................ $ (2,764) $ (1,981) $ (64,728) ======== ======== =========
F-53 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 13. Consolidating Financial Information and Subsidiary Guarantors -- (Continued) Consolidating Statement of Cash Flows - Year Ended December 31, 1998
Guarantor Holdings Systems Subsidiaries ---------- ------------- -------------- Cash Flows From Operating Activities Net loss .................................... $ (1) $ (55,496) $ (4,486) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .............. -- 19,336 996 Amortization of debt discount, deferred financing and other ...................... -- 977 -- Extraordinary charge on early retirement of debt ....................... -- 2,577 -- Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue ........................ -- (1,283) (222) Other receivables ........................ 574 (2,144) 32 Inventory ................................ -- (7,335) (477) Prepaid expenses and other ............... -- (1,189) (36) Trade accounts payable ................... -- 5,357 (145) Interest payable ......................... -- 10,223 -- Accrued payroll and other ................ (574) (10,253) 4,827 ------ ---------- -------- Net cash provided by (used in) operating activities ................................. (1) (39,230) 489 Cash Flows From Investing Activities Acquisitions of Rural DIRECTV Markets........ -- (104,487) -- Offering proceeds and investment earn- ings placed in escrow ...................... -- (51,617) -- Purchases of property and equipment ......... -- (2,858) (341) Other ....................................... -- (500) -- -------- ---------- -------- Net cash used in investing activities ....... -- (159,462) (341) Cash Flows From Financing Activities Net proceeds from issuance of 12 3/8% Notes ...................................... -- 189,150 -- Borrowings under bank debt .................. -- 90,000 -- Principal payments on bank debt ............. -- (83,000) -- Principal payments on notes payable and obligations under capital leases ........... -- (3,639) (36) Proceeds from the issuance of Common Stock ...................................... 25 -- -- Increase in deferred financing costs ........ -- (5,138) -- -------- ---------- -------- Net cash provided by (used in) financing activities ................................. 25 187,373 (36) -------- ---------- -------- Net increase (decrease) in cash and cash equivalents ................................ 24 (11,319) 112 Cash and cash equivalents, beginning of period ..................................... 4 12,146 1,077 -------- ---------- -------- Cash and cash equivalents, end of period..... $ 28 $ 827 $ 1,189 ======== ========== ========
Consolidating Non- and guarantor Eliminating Subsidiaries Adjustments Consolidated -------------- -------------- ------------- Cash Flows From Operating Activities Net loss .................................... $(2,764) $ (1,981) $ (64,728) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .............. 340 2,494 23,166 Amortization of debt discount, deferred financing and other ...................... -- -- 977 Extraordinary charge on early retirement of debt ....................... -- -- 2,577 Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue ........................ (252) -- (1,757) Other receivables ........................ (18) (12) (1,568) Inventory ................................ (237) -- (8,049) Prepaid expenses and other ............... (3) -- (1,228) Trade accounts payable ................... (144) -- 5,068 Interest payable ......................... -- -- 10,223 Accrued payroll and other ................ 5,231 (501) (1,270) --------- -------- ---------- Net cash provided by (used in) operating activities ................................. 2,153 -- (36,589) Cash Flows From Investing Activities Acquisitions of Rural DIRECTV Markets........ -- -- (104,487) Offering proceeds and investment earn- ings placed in escrow ...................... -- -- (51,617) Purchases of property and equipment ......... (118) -- (3,317) Other ....................................... -- -- (500) --------- -------- ---------- Net cash used in investing activities ....... (118) -- (159,921) Cash Flows From Financing Activities Net proceeds from issuance of 12 3/8% Notes ...................................... -- -- 189,150 Borrowings under bank debt .................. -- -- 90,000 Principal payments on bank debt ............. -- -- (83,000) Principal payments on notes payable and obligations under capital leases ........... -- -- (3,675) Proceeds from the issuance of Common Stock ...................................... -- -- 25 Increase in deferred financing costs ........ -- -- (5,138) --------- -------- ---------- Net cash provided by (used in) financing activities ................................. -- -- 187,362 --------- -------- ---------- Net increase (decrease) in cash and cash equivalents ................................ 2,035 -- (9,148) Cash and cash equivalents, beginning of period ..................................... 409 -- 13,636 --------- -------- ---------- Cash and cash equivalents, end of period..... $ 2,444 $ -- $ 4,488 ========= ======== ==========
F-54 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 13. Consolidating Financial Information and Subsidiary Guarantors -- (Continued) Consolidating Balance Sheet -- December 31, 1999
Holdings DBS Systems ------------- ------------- ------------- Assets Current assets: Cash and cash equivalents ................... $ 29 $ 5 $ 2,850 Restricted cash, current portion ............ -- -- 23,731 Subscriber receivables, net ................. -- -- 10,118 Other receivables ........................... -- -- 742 Intercompany receivables .................... 10 -- 6,412 Inventory ................................... -- -- 2,525 Prepaid expenses and other .................. -- -- 1,642 ----------- ----------- ---------- Total current assets ......................... 39 5 48,020 Property and equipment, net .................. -- -- 5,459 Investment in subsidiaries ................... -- -- 17,144 Intangible assets, net ....................... -- -- 213,229 Deferred financing costs ..................... -- 4,144 7,318 Other assets ................................. -- -- 173 ----------- ----------- ---------- Total assets .............................. $ 39 $ 4,149 $ 291,343 =========== =========== ========== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Trade accounts payable ...................... $ -- $ -- $ 22,858 Interest payable ............................ -- 20 11,659 Current maturities of long-term obligations ............................... -- -- 3,248 Unearned revenue ............................ -- -- 7,146 Accrued payroll and other ................... 391 466 734 ----------- ----------- ---------- Total current liabilities .................... 391 486 45,645 Long-term obligations, net of current maturities: 12 3/8% Notes ............................... -- -- 195,000 13 1/2% Notes ............................... -- 112,095 -- Bank debt ................................... -- -- 52,000 Seller notes payable ........................ -- -- 6,932 Other notes payable and obligations under capital leases ...................... -- -- 103 Minority interest ........................... -- -- -- ----------- ----------- ---------- Total long-term obligations, net of current maturities .................................. -- 112,095 254,035 Losses of subsidiaries in excess of original basis .............................. 114,799 15,491 -- ----------- ----------- ---------- Total liabilities ............................ 115,190 128,072 299,680 Mandatorily redeemable preferred stock: Series A Preferred Stock .................... 65,135 -- -- Series B Preferred stock .................... 61,677 -- -- Series C Preferred Stock .................... 11,540 -- -- ----------- ----------- ---------- 138,352 -- -- Stockholder's Equity (Deficit): Common Stock ................................ -- -- -- Additional paid-in capital .................. 179 -- 193,145 Retained earnings (accumulated deficit) .................................. (253,682) (123,923) (201,482) ----------- ----------- ---------- Total stockholders' equity (deficit) ......... (253,503) (123,923) (8,337) ----------- ----------- ---------- Total liabilities and stockholders' equity (deficit) ......................... $ 39 $ 4,149 $ 291,343 =========== =========== ==========
Consolidating Non- and Guarantor guarantor Eliminating Subsidiaries Subsidiaries Adjustments Consolidated -------------- -------------- -------------- ------------- Assets Current assets: Cash and cash equivalents ................... $ 132 $ 254 $ -- $ 3,270 Restricted cash, current portion ............ -- -- -- 23,731 Subscriber receivables, net ................. 1,445 770 -- 12,333 Other receivables ........................... -- -- -- 742 Intercompany receivables .................... -- -- (6,422) -- Inventory ................................... 331 252 -- 3,108 Prepaid expenses and other .................. 8 2 -- 1,652 ------- ------ ---------- ---------- Total current assets ......................... 1,916 1,278 (6,422) 44,836 Property and equipment, net .................. 256 138 -- 5,853 Investment in subsidiaries ................... -- -- (17,144) -- Intangible assets, net ....................... 22,930 767 -- 236,926 Deferred financing costs ..................... -- -- -- 11,462 Other assets ................................. 87 -- -- 260 ------- ------ ---------- ---------- Total assets .............................. $25,189 $2,183 $ (23,566) $ 299,337 ======= ====== ========== ========== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Trade accounts payable ...................... $ 18 $ 17 $ -- $ 22,893 Interest payable ............................ -- -- -- 11,679 Current maturities of long-term obligations ............................... -- -- -- 3,248 Unearned revenue ............................ 1,065 458 -- 8,669 Accrued payroll and other ................... 7,032 1,638 (9,328) 933 ------- ------ ---------- ---------- Total current liabilities .................... 8,115 2,113 (9,328) 47,422 Long-term obligations, net of current maturities: 12 3/8% Notes ............................... -- -- -- 195,000 13 1/2% Notes ............................... -- -- -- 112,095 Bank debt ................................... -- -- -- 52,000 Seller notes payable ........................ -- -- -- 6,932 Other notes payable and obligations under capital leases ...................... -- -- -- 103 Minority interest ........................... -- -- 936 936 ------- ------ ---------- ---------- Total long-term obligations, net of current maturities .................................. -- -- 936 367,066 Losses of subsidiaries in excess of original basis .............................. -- -- (130,290) -- ------- ------ ---------- ---------- Total liabilities ............................ 8,115 2,113 (138,682) 414,488 Mandatorily redeemable preferred stock: Series A Preferred Stock .................... -- -- -- 65,135 Series B Preferred stock .................... -- -- -- 61,677 Series C Preferred Stock .................... -- -- -- 11,540 ------- ------ ---------- ---------- -- -- -- 138,352 Stockholder's Equity (Deficit): Common Stock ................................ 896 -- (896) -- Additional paid-in capital .................. 1,967 -- (195,112) 179 Retained earnings (accumulated deficit) .................................. 14,211 70 311,124 (253,682) ------- ------ ---------- ---------- Total stockholders' equity (deficit) ......... 17,074 70 115,116 (253,503) ------- ------ ---------- ---------- Total liabilities and stockholders' equity (deficit) ......................... $25,189 $2,183 $ (23,566) $ 299,337 ======= ====== ========== ==========
F-55 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 13. Consolidating Financial Information and Subsidiary Guarantors -- (Continued) Consolidating Statement of Operations - Year Ended December 31, 1999
Holdings DBS Systems ---------- -------------- ------------- Revenue: DBS services ........................ $ -- $ -- $ 112,714 Lease and other ..................... -- -- 636 ------ -------- ---------- Total revenue ........................ -- -- 113,350 Costs and Expenses: Costs of DBS services ............... -- -- 71,510 System operations ................... -- -- 14,349 Sales and marketing ................. -- -- 58,452 General and administrative .......... -- 5 15,703 Depreciation and amortization ....... -- -- 32,562 ------ -------- ---------- Total costs and expenses ............. -- 5 192,576 ------ -------- ---------- Operating income (loss) .............. -- (5) (79,226) Non-operating items: Interest and investment income....... 1 -- 2,392 Interest expense .................... -- (12,570) (32,435) Other non-operating expenses ........ (391) 466 (258) ------ ---------- ---------- Total non-operating items ............ (390) (13,036) (30,301) ------ ---------- ---------- Income (loss) before income taxes..... (390) (13,041) (109,527) Income taxes ......................... -- -- -- ------ ---------- ---------- Income (loss) before extraordinary charge .............................. (390) (13,041) (109,527) Extraordinary charge on early retirement of debt .................. -- -- (2,935) ------ ---------- ---------- Net income (loss) .................... $ (390) $(13,041) $ (112,462) ====== ========== ==========
Consolidating Non- and Guarantor guarantor Eliminating Subsidiaries Subsidiaries Adjustments Consolidated -------------- -------------- -------------- ------------- Revenue: DBS services ........................ $18,130 $ 9,089 $ -- $ 139,933 Lease and other ..................... 3 1 -- 640 ------- ------- ------- ---------- Total revenue ........................ 18,133 9,090 -- 140,573 Costs and Expenses: Costs of DBS services ............... 11,516 5,664 -- 88,690 System operations ................... 3,495 2,155 (266) 19,733 Sales and marketing ................. 4,142 2,339 -- 64,933 General and administrative .......... -- -- -- 15,708 Depreciation and amortization ....... 3,054 347 -- 35,963 ------- ------- ------- ---------- Total costs and expenses ............. 22,207 10,505 (266) 225,027 ------- ------- ------- ---------- Operating income (loss) .............. (4,074) (1,415) 266 (84,454) Non-operating items: Interest and investment income....... -- -- -- 2,393 Interest expense .................... (5) (2) -- (45,012) Other non-operating expenses ........ (144) -- -- (1,259) --------- --------- ------- ---------- Total non-operating items ............ (149) (2) -- (43,878) --------- ---------- ------- ---------- Income (loss) before income taxes..... (4,223) (1,417) 266 (128,332) Income taxes ......................... -- -- -- -- --------- --------- ------- ---------- Income (loss) before extraordinary charge .............................. (4,223) (1,417) 266 (128,332) Extraordinary charge on early retirement of debt .................. -- -- -- (2,935) --------- --------- ------- ---------- Net income (loss) .................... $(4,223) $(1,417) $ 266 $ (131,267) ========= ========= ======= ==========
F-56 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 13. Consolidating Financial Information and Subsidiary Guarantors -- (Continued) Consolidating Statement of Cash Flows - Year Ended December 31, 1999
Holdings DBS Systems ---------- --------------- -------------- Cash Flows From Operating Activities Net income (loss) ........................... $ (390) $(13,041) $ (112,462) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .............. -- -- 32,562 Amortization of debt discount, deferred financing costs and other ................ -- 12,550 1,126 Earned stock compensation .................. -- -- 154 Extraordinary charge on early retirement of debt ....................... -- -- 2,935 Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue ........................ -- -- (472) Other receivables ........................ -- -- 238 Inventory ................................ -- -- 6,730 Prepaid expenses and other ............... -- -- 177 Trade accounts payable ................... -- -- 9,376 Interest payable ......................... -- 20 650 Accrued payroll and other ................ 391 466 1,105 ------ -------- ---------- Net cash provided by (used in) operating activities ................................. 1 (5) (57,881) Cash Flows From Investing Activities Acquisitions of Rural DIRECTV Markets........ -- -- (35,339) Purchases of minority interests ............. -- -- (1,439) Proceeds from interest escrow account ....... -- -- 24,224 Release of amounts reserved for contingent reduction of bank debt .......... -- -- 5,449 Investment earnings placed in escrow ........ -- -- (1,787) Purchases of property and equipment ......... -- -- (3,423) Other ....................................... -- -- 114 ------ ---------- ---------- Net cash used in investing activities ....... -- -- (12,201) Cash Flows From Financing Activities Bank borrowing .............................. -- -- 38,000 Principal payments on bank debt ............. -- -- (53,000) Principal payments on notes payable and obligations under capital leases ........... -- -- (8,846) Increase in deferred financing costs ........ -- (4,648) (868) Capital contribution from minority partner .................................... -- -- 1,428 Capital Contribution to Systems ............. -- (95,391) 95,391 Net proceeds from issuance of 13 1/2% Notes ...................................... -- 100,049 -- ------ ---------- ---------- Net cash provided by financing activities.... -- 10 72,105 ------ ---------- ---------- Net increase (decrease) in cash and cash equivalents ................................ 1 5 2,023 Cash and cash equivalents, beginning of period ..................................... 28 -- 827 ------ ---------- ---------- Cash and cash equivalents, end of period..... $ 29 $ 5 $ 2,850 ====== ========== ==========
Consolidating Non- and Guarantor guarantor Eliminating Subsidiaries Subsidiaries Adjustments Consolidated -------------- -------------- -------------- ------------- Cash Flows From Operating Activities Net income (loss) ........................... $(4,223) $ (1,417) $ 266 $ (131,267) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .............. 3,054 347 -- 35,963 Amortization of debt discount, deferred financing costs and other ................ -- 266 (266) 13,676 Earned stock compensation .................. -- -- -- 154 Extraordinary charge on early retirement of debt ....................... -- -- -- 2,935 Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue ........................ (126) 57 -- (541) Other receivables ........................ 87 18 845 1,188 Inventory ................................ 252 56 -- 7,038 Prepaid expenses and other ............... 29 1 -- 207 Trade accounts payable ................... (31) 9 -- 9,354 Interest payable ......................... -- -- -- 670 Accrued payroll and other ................ (97) (1,498) (845) (478) ------- -------- ------- ---------- Net cash provided by (used in) operating activities ................................. (1,055) (2,161) -- (61,101) Cash Flows From Investing Activities Acquisitions of Rural DIRECTV Markets........ -- -- -- (35,339) Purchases of minority interests ............. -- -- -- (1,439) Proceeds from interest escrow account ....... -- -- -- 24,224 Release of amounts reserved for contingent reduction of bank debt .......... -- -- -- 5,449 Investment earnings placed in escrow ........ -- -- -- (1,787) Purchases of property and equipment ......... -- (29) -- (3,452) Other ....................................... (2) -- -- 112 ---------- -------- ------- ---------- Net cash used in investing activities ....... (2) (29) -- (12,232) Cash Flows From Financing Activities Bank borrowing .............................. -- -- -- 38,000 Principal payments on bank debt ............. -- -- -- (53,000) Principal payments on notes payable and obligations under capital leases ........... -- -- -- (8,846) Increase in deferred financing costs ........ -- -- -- (5,516) Capital contribution from minority partner .................................... -- -- -- 1,428 Capital Contribution to Systems ............. -- -- -- -- Net proceeds from issuance of 13 1/2% Notes ...................................... -- -- -- 100,049 --------- -------- ------- ---------- Net cash provided by financing activities.... -- -- -- 72,115 --------- -------- ------- ---------- Net increase (decrease) in cash and cash equivalents ................................ (1,057) (2,190) -- (1,218) Cash and cash equivalents, beginning of period ..................................... 1,189 2,444 -- 4,488 --------- -------- ------- ---------- Cash and cash equivalents, end of period..... $ 132 $ 254 $ -- $ 3,270 ========= ======== ======= ==========
F-57 GOLDEN SKY HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 14. Quarterly Financial Data (Unaudited) Golden Sky's quarterly results of operations are summarized as follows (in thousands):
Three Months Ended ---------------------------------------------------------- March 31 June 30 September 30 December 31 ------------ ----------- -------------- ------------ Period Ended December 31, 1998: Total revenue ............................ $ 14,129 $ 16,849 $ 19,912 $ 25,034 Operating loss ........................... (6,034) (8,806) (11,462) (16,884) Loss before extraordinary charge ......... (8,287) (11,761) (17,354) (24,749) Net loss ................................. (8,287) (14,338) (17,354) (24,749) Period Ended December 31, 1999: Total revenue ............................ $ 29,036 $ 31,389 $ 36,732 $ 43,416 Operating loss ........................... (16,734) (19,166) (29,930) (18,624) Loss before extraordinary charge ......... (25,872) (30,104) (41,087) (31,269) Net loss ................................. (28,807) (30,104) (41,087) (31,269)
F-58 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Basis of Presentation Pro forma consolidated statement of operations data and other data for the year ended December 31, 1999 include (i) the pending sale of our Puerto Rico cable system, (ii) the closing of the new Pegasus Media & Communications credit facility, (iii) the convertible preferred stock offering and (iv) the merger with Golden Sky, all as if these events had occurred at the beginning of 1999. The pro forma consolidated balance sheet as of December 31, 1999 gives effect to (i) the investment in Personalized Media, (ii) the pending sale of our Puerto Rico cable system, (iii) the closing of the new Pegasus Media & Communications credit facility, (iv) the convertible preferred stock offering and (v) the merger with Golden Sky, all as if these events had occurred on December 31, 1999. The acquisitions are accounted for using the purchase method of accounting. The total costs of such acquisitions are allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values. The allocation of the purchase price included in the pro forma financial statements is preliminary. We do not expect that the final allocation of the purchase price will significantly differ from the preliminary allocation. The pro forma adjustments are based upon available information and upon certain assumptions that we believe are reasonable. The pro forma consolidated financial information should be read in conjunction with our consolidated financial statements and notes thereto, Golden Sky's consolidated financial statements and notes thereto, the notes to pro forma consolidated statement of operations data and the notes to pro forma consolidated balance sheet. The pro forma consolidated financial information is not necessarily indicative of our future results of operations. There can be no assurance whether or when the pending sale of our Puerto Rico cable system will be consummated. F-59 Pegasus Communications Corporation Consolidated Statement of Operations Data Year Ended December 31, 1999 (Dollars in thousands)
Pending Actual Cable Sale(a) Adjustments Subtotal ------------- --------------- ------------------ ------------- Net revenues: DBS .......................... $ 286,353 $ 286,353 Broadcast .................... 36,415 36,415 --------- --------- Total net revenues .......... 322,768 322,768 Operating expenses: DBS Programming, technical and general and administrative ............. 201,158 201,158 Marketing and selling ....... 117,774 117,774 Incentive compensation 1,592 1,592 Depreciation and amortization ............... 82,744 82,744 Broadcast Programming, technical and general and administrative ............. 22,812 22,812 Marketing and selling ....... 6,304 6,304 Incentive compensation 57 57 Depreciation and amortization ............... 5,144 5,144 Corporate expenses ........... 5,975 5,975 Corporate depreciation and amortization ............ 3,119 3,119 Other expense, net ........... 1,995 1,995 --------- --------- Loss from operations ........ (125,906) (125,906) Interest expense .............. (64,904) ($ 9,982)(b) (74,886) Interest income ............... 1,356 1,356 Other non-operating expenses ..................... --------- ------- -------- --------- Loss from continuing operations before income taxes, equity loss and extraordinary items ........ (189,454) (9,982) (199,436) Benefit for income taxes ...... (8,892) (8,892) Equity in net loss of unconsolidated affiliate ..... (201) (201) --------- ------- -------- --------- Loss from continuing operations before extraordinary items ........ (180,763) (9,982) (190,745) Discontinued operations: Income from discontinued operations of cable segment, net of income taxes ............... 2,128 ($ 1,756) (372)(c) --------- ------- -------- --------- Loss before extraordinary items ........ (178,635) (1,756) (10,354) (190,745) Extraordinary loss from extinguishment of debt, net .......................... (6,178) 6,178 (d) --------- ------- -------- --------- Net income (loss) ........... (184,813) (1,756) (4,176) (190,745) Preferred stock dividends .................. 16,706 19,500 (e) 36,206 --------- ------- -------- --------- Net income (loss) applicable to common shares .............. ($ 201,519) ($ 1,756) ($ 23,676) ($ 226,951) ========= ======= ======== =========
Golden Sky ------------------------------------------------- Actual Adjustments Subtotal Adjustments Pro Forma ------------- ------------------ -------------- ---------------- ------------- Net revenues: DBS .......................... $ 140,573 $ 140,573 $ 426,926 Broadcast .................... 36,415 --------- Total net revenues .......... 140,573 140,573 463,341 Operating expenses: DBS Programming, technical and general and administrative ............. 124,131 124,131 ($ 782)(g) 324,507 Marketing and selling ....... 64,933 64,933 182,707 Incentive compensation 782(g) 2,374 Depreciation and amortization ............... 35,963 35,963 96,891(h) 215,598 Broadcast Programming, technical and general and administrative ............. 22,812 Marketing and selling ....... 6,304 Incentive compensation 57 Depreciation and amortization ............... 5,144 Corporate expenses ........... 5,975 Corporate depreciation and amortization ............ 3,119 Other expense, net ........... 1,995 --------- ----------- --------- ------- --------- Loss from operations ........ (84,454) (84,454) (96,891) (307,251) Interest expense .............. (45,012) (45,012) (119,898) Interest income ............... 2,393 2,393 3,749 Other non-operating expenses ..................... (1,259) (1,259) (1,259) --------- ----------- --------- ------- --------- Loss from continuing operations before income taxes, equity loss and extraordinary items ........ (128,332) (128,332) (96,891) (424,659) Benefit for income taxes ...... (8,892) Equity in net loss of unconsolidated affiliate ..... (201) --------- ----------- --------- ------- --------- Loss from continuing operations before extraordinary items ........ (128,332) (128,332) (96,891) (415,968) Discontinued operations: Income from discontinued operations of cable segment, net of income taxes ............... --------- ----------- --------- ------- --------- Loss before extraordinary items ........ (128,332) (128,332) (96,891) (415,968) Extraordinary loss from extinguishment of debt, net .......................... (2,935) $ 2,935(d) --------- ----------- --------- ------- --------- Net income (loss) ........... (131,267) 2,935 (128,332) (96,891) (415,968) Preferred stock dividends .................. 17,920 (17,920)(f) 36,206 --------- ----------- --------- ------- --------- Net income (loss) applicable to common shares .............. ($ 149,187) $ 20,855 ($ 128,332) ($96,891) ($ 452,174) ========= =========== ========= ======= =========
F-60 Notes to Pro Forma Consolidated Statement of Operations Data (a) Financial results of the Puerto Rico cable operations of Pegasus Cable Television. The pro forma income statement data for the year ended December 31, 1999 does not include a $89.4 million gain resulting from the pending sale of our Puerto Rico cable operations. (b) Interest expense is adjusted to give effect to the transactions as follows (in thousands): Year Ended December 31, 1999 ------------------ Senior notes ................................... $40,194 Senior subordinated notes ...................... 10,625 Credit facilities .............................. 22,000 Sellers' notes ................................. 2,056 Capital leases and other ....................... 11 ------- Total interest expense ....................... 74,886 Interest expense previously recorded ........... 64,904 ------- Adjustment ..................................... $ 9,982 ======= (c) To eliminate certain nonrecurring expenses related to the pending sale of our Puerto Rico cable operations. (d) To eliminate the nonrecurring extraordinary net loss from the extinguishment of debt. The pro forma income statement data for the year ended December 31, 1999 also does not include the $6.1 million extraordinary net loss from the extinguishment of debt resulting from the closing of the new Pegasus Media & Communications credit facility. (e) To record preferred dividends as a result of the convertible preferred stock offering. (f) To eliminate Golden Sky preferred stock dividends as a result of the merger with Pegasus. (g) To reclassify incentive compensation. (h) To record additional amortization expense resulting from the purchase accounting treatment of the Golden Sky merger and capitalized acquisition costs. Substantially all of the purchase price has been allocated to direct broadcast satellite rights. Such amounts are based on a preliminary allocation of the total consideration. The actual amortization may change insignificantly based upon the final allocation of the total consideration to be paid. F-61 Pegasus Communications Corporation Pro Forma Consolidated Balance Sheet December 31, 1999 (Dollars in thousands)
PMC Pending Actual Investment(a) Cable Sale(b) ------------- --------------- --------------- ASSETS Cash and cash equivalents .................. $ 40,453 ($ 14,250) $ 170,000 Restricted cash ............... 2,379 Accounts receivable, net 31,984 Inventory ..................... 10,020 (528) Prepaid expenses and other current assets ......... 9,506 Property and equipment, net .......................... 44,415 (16,870) Intangibles, net .............. 760,637 (63,233) Other non-current assets ..... 45,938 111,805 ----------- -------- --------- Total assets ................ $ 945,332 $ 97,555 $ 89,369 =========== ======== ========= LIABILITIES AND TOTAL EQUITY Accounts payable and accrued expenses ............. $ 67,752 Accrued interest .............. 11,592 Current portion of long-term debt ............... 15,488 Current portion of program rights payable ....... 4,446 Long-term debt, net ........... 11,950 Senior Notes .................. 370,000 Senior Subordinated Notes ........................ 82,776 Credit Facilities ............. 204,200 Program rights payable, net .......................... 4,211 Other long term liabilities .................. 90,310 Minority Interest ............. 3,000 Series A Preferred Stock 142,734 Series C Preferred Stock Preferred Stock ............... Class A Common Stock .......... 152 $ 2 Class B Common Stock .......... 46 Additional paid in capital 237,566 97,553 Deficit ....................... (300,704) $ 89,369 Class A Common Stock in treasury .................. (187) ----------- -------- --------- Total liabilities and equity ..................... $ 945,332 $ 97,555 $ 89,369 =========== ======== =========
Golden Sky Other(c) Subtotal Actual Adjustments(d) Pro Forma ------------ ------------- ------------- ---------------- -------------- ASSETS Cash and cash equivalents .................. $353,337 $ 549,540 $ 3,270 ($ 4,900) $ 547,910 Restricted cash ............... 2,379 23,731 26,110 Accounts receivable, net ...... 31,984 4,406 36,390 Inventory ..................... 9,492 3,108 12,600 Prepaid expenses and other current assets ......... 9,506 1,652 11,158 Property and equipment, net .......................... 27,545 5,853 33,398 Intangibles, net .............. 1,899 699,303 248,388 4,900 617,955 346,055 1,916,601 Other non-current assets ...... 157,743 260 158,003 -------- ---------- ----------- ---------- ---------- Total assets ................ $355,236 $1,487,492 $ 290,668 $ 964,010 $2,742,170 ======== ========== =========== ========== ========== LIABILITIES AND TOTAL EQUITY Accounts payable and accrued expenses ............. $ 67,752 $ 23,826 $ 91,578 Accrued interest .............. 11,592 11,679 23,271 Current portion of long-term debt ............... 15,488 3,248 18,736 Current portion of program rights payable ....... 4,446 4,446 Long-term debt, net ........... 11,950 7,035 18,985 Senior Notes .................. 370,000 112,095 482,095 Senior Subordinated Notes ........................ 82,776 195,000 277,776 Credit Facilities ............. $ 70,800 275,000 52,000 327,000 Program rights payable, net .......................... 4,211 4,211 Other long term liabilities .................. 90,310 $ 346,055 436,365 Minority Interest ............. 3,000 936 3,936 Series A Preferred Stock ...... 142,734 142,734 Series C Preferred Stock ...... 290,525 290,525 290,525 Preferred Stock ............... 138,352 (138,352) Class A Common Stock .......... 154 65 219 Class B Common Stock .......... 46 46 Additional paid in capital 335,119 179 502,560 837,858 Deficit ....................... (6,089) (217,424) (253,682) 253,682 (217,424) Class A Common Stock in treasury .................. (187) (187) -------- ---------- ----------- ---------- ---------- Total liabilities and equity ..................... $355,236 $1,487,492 $ 290,668 $ 964,010 $2,742,170 ======== ========== =========== ========== ==========
F-62 Notes to Pro Forma Consolidated Balance Sheet (a) To record the investment in Personalized Media. The total investment of $111.8 million consists of $14.3 million in cash, 200,000 shares of Pegasus' Class A common stock, valued at $93.875 per share, and warrants to purchase 1.0 million shares of Pegasus' Class A common stock. (b) To record the pending sale of the Puerto Rico Cable operations resulting in a nonrecurring gain of $89.4 million. (c) To record the closing of the new Pegasus Media & Communications credit facility and the proceeds from the convertible preferred stock offering and the uses of such proceeds. (d) To record the pending acquisition of Golden Sky. This acquisition is being accounted for using the purchase method of accounting. The purchase price of $1.3 billion was determined by combining the approximately 6.5 million shares and options of Pegasus Class A common stock, valued at $95.07 per share, issued to the shareholders of Golden Sky and the assumption of net liabilities amounting to $363.5 million (total assets of $290.7 million less intangibles of $248.4 million less total liabilities of $405.8 million). Pegasus also recorded approximately $346.1 million of a deferred tax liability which was allocated to direct broadcast satellite rights. The deferred tax liability was recorded primarily as a result of non-deductible amortization. Of the $1.3 billion purchase price, $1.2 billion was allocated to direct broadcast satellite rights, which are being amortized over a 10-year period. Additionally, Pegasus recorded $4.9 million of intangibles relating to the costs associated with the acquisition of Golden Sky and restructuring charges. Such amounts are based on a preliminary allocation of the total consideration. The actual allocation may change insignificantly based upon the actual results of Golden Sky from the period January 1, 2000 to closing. F-63 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 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 ----- 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 ---- 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 ----- 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 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 "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 12 3/8% 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 13 1/2% Senior Discount Notes due 2007, Series A, and 13 1/2% Senior Discount Notes due 2007, Series B, of Golden Sky DBS, Inc. I-7 "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 "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 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 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 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 ection "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 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 (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 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 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 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 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 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 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 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 (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 (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 (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 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 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 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 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 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 12 1/2% Senior Notes for a like principal amount of 12 1/2% I-29 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 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 (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 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 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 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 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 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 (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 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 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 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 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 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 (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 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 (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 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 (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 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 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 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 (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 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 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 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 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 (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 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 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 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 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 NORWEST VENTURE PARTNERS VI, LP By: Itasca VC Partners VI, L.L.P., General Partner By: /s/ John P. Whaley ------------------------------------ John P. Whaley Partner BANCBOSTON VENTURES INC. By: /s/ William O. Charman ------------------------------------ William O. Charman Vice President I-61 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 "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 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 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 (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 (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 (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 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 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 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 EXHIBIT A
Covered Shares --------------------------------------------- Shareholder Class A Common Stock Class B Common Stock - ------------------------------------------- ---------------------- --------------------- 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]
II-11 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") generally effective as of December 18, 1998; WHEREAS, Section 10 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, effective upon obtaining 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 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 employee over the life of the Plan; and (iii) to provide for the assumption of certain outstanding Golden Sky Holdings, Inc. 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 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): 23. 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. 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 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 500,000,000 shares, divided into 250,000,000 shares of Class A Common Stock, par value $0.01 per share, 30,000,000 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 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 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 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 February 25, 2000, at the Special Meeting of Stockholders of Pegasus to be held on March 22, 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 6.1 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 30,000,000 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. / / FOR / / AGAINST / / ABSTAIN 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. PART II. INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers. The Registrant's Amended and Restated Certificate of Incorporation provides that a director of the Registrant shall have no personal liability to the Registrant or to its stockholders for monetary damages for breach of fiduciary duty as a director except to the extent that Section 102(b)(7) (or any successor provision) of the Delaware General Corporation Law, as amended from time to time, expressly provides that the liability of a director may not be eliminated or limited. Article 6 of the Registrant's By-Laws provides that any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Registrant, or is or was serving while a director of officer of the Registrant at the request of the Registrant as a director, officer, employee, agent, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall be indemnified by the Registrant against expenses (including attorneys' fees), judgments, fines, excise taxes and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the full extent permissible under Delaware law. Article 6 also provides that any person who is claiming indemnification under the Registrant's By-Laws is entitled to advances from the Registrant for the payment of expenses incurred by such person in the manner and to the full extent permitted under Delaware law. The Registrant has obtained directors' and officers' liability insurance. Item 21. Exhibits and Financial Statement Schedules.
Exhibit Number Description of Document - -------------- ----------------------- 2.1 Agreement and Plan of Merger, dated January 10, 2000, as amended on January 25, 2000, by and among Pegasus, Golden Sky and certain stockholders of Pegasus and Golden Sky - attached as Annex I to the Proxy Statement/Prospectus included in this Registration Statement. 3.1 Certificate of Incorporation of Pegasus, as amended (which is incorporated by reference to Exhibit 3.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057)). 3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 3.3 Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of 12.75% Series A Cumulative Exchangeble Preferred Stock (which is incorporated by reference to Exhibit 3.3 to Pegasus' Registration Statement on Form S-1 (File No. 333-18739). 3.4* Certificate of Designation, Preferences and Rights of Series B Junior Convertible Participating Preferred Stock. 3.5* Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of 6 1/2% Series C Convertible Preferred Stock. 3.6* Certificate of Designation, Preferences and Rights of Series D Junior Convertible Participating Preferred Stock. 5.1* Opinion of Drinker Biddle & Reath LLP. 8.1* Tax Opinion of Drinker Biddle & Reath LLP. 10.1 Form of Voting Agreement - attached as Annex II to the Proxy Statement/Prospectus included in this Registration Statement. 10.2* Form of Registration Rights Agreement. 10.3* Class B Preferred Unit Subscription Agreement between Pegasus Communications Corporation and Personalized Media Communications, L.L.C. dated January 10, 2000. (Portions of this document were redacted and filed separately with the Securities and Exchange Commission pursuant to a request by the Company for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended in connection with the filing of this registration statement on Form S-4) 10.4* Patent License Agreement dated January 13, 2000 between PMC Satellite Development, L.L.C. and Personalized Media Communications, L.L.C. (Portions of this document were redacted and filed separately with the Securities and Exchange Commission pursuant to a request by the Company for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 as amended, in connection with the filing of this Registration Statement on Form S-4) 10.5* Second Amended and Restated Operating Agreement of Personalized Media Communications, L.L.C. dated January 13, 2000. 10.6* Series PMC Warrant Agreement dated January 13, 2000 between Pegasus Communications Corporation and Personalized Media Communications, L.L.C. 10.7* Credit Agreement dated January 14, 2000 among Pegasus Media & Communications, Inc., the lenders party thereto, CIBC World Markets Corp., Deutsche Bank Securities Inc., Canadian Imperial Bank of Commerce, Bankers Trust Company and Fleet National Bank. (Exhibits and schedules have been omitted but will be filed upon request of the Commission.) 10.8* Amendment dated December 30, 1999, to ADS Alliance Agreement among ADS Alliance Data Systems, Inc., Pegasus Satellite Television, Inc., and Digital Television Securities, Inc., dated September 13, 1999. (Portions of this document were redacted and filed separately with the Securities and Exchange Commission pursuant to a request by the Company for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended in connection with the filing of this registration statement on Form S-4) 10.9* Amendment No. 1, dated January 24, 2000, to Subscription Agreement included as Exhibit 10.3 hereto. 10.10* Patent License Agreement dated January 13, 2000 between PMC Satallite Developent, L.L.C. and Pegasus Development Corporation (Portions of this document were redacted and filed separately with the Securities and Exchange Commission pursuant to a request by the Company for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended in connection with the filing of this registration statement on Form S-4) 23.1 Consent of Drinker Biddle & Reath LLP (included in opinion filed as Exhibit 5.1). 23.2* Consent of PricewaterhouseCoopers L.L.P. 23.3* Consent of KPMG LLP 24.1 Powers of Attorney (included on Signatures and Powers of Attorney) 27.1* Financial Data Schedule 99.1* Consent of CIBC World Markets Corp.
- ----------------- * Filed herewith. II-1 Item 22. Undertakings. (a) (1) The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through the use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The Registrant undertakes that every prospectus: (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (d) The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not subject of and included in the Registration Statement when it became effective. II-2 (e) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Security Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Ac of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bala Cynwyd, Commonwealth of Pennsylvania, on February 25, 2000. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Ted S. Lodge ----------------------------------------- Ted S. Lodge Senior Vice President Date: February 25, 2000 POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Marshall W. Pagon, Robert N. Verdecchio and Ted S. Lodge as his or her attorneys-in-fact and agents, with full power of substitution for him or her in any and all capacities, to sign any or all amendments or post-effective amendments to the Registration Statement, or any Registration Statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits thereto and other documents in connection therewith or in connection with the registration of the Notes under the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission, granting unto each of such attorneys-in-fact the agents full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his or her substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Marshall W. Pagon President, Chief Executive Officer, February 25, 2000 - ---------------------------------------------- Chairman of the Board and Director Marshall W. Pagon (Principal Executive Officer) /s/ M. Kasin Smith Vice President and Acting Chief February 25, 2000 - ---------------------------------------------- Financial Officer M. Kasin Smith (Principal Financial and Accounting Officer) /s/ Robert N. Verdecchio Director February 25, 2000 - ---------------------------------------------- Robert N. Verdecchio /s/ James J. McEntee, III Director February 25, 2000 - ---------------------------------------------- James J. McEntee, III /s/ Mary C. Metzger Director February 25, 2000 - ---------------------------------------------- Mary C. Metzger
II-4
Signature Title Date --------- ----- ---- /s/ Donald W. Weber Director February 25, 2000 - ---------------------------------------------- Donald W. Weber /s/ Michael C. Brooks Director February 25, 2000 - ---------------------------------------------- Michael C. Brooks /s/ Harry F. Hopper III Director February 25, 2000 - ---------------------------------------------- Harry F. Hopper III /s/ William P. Phoenix Director February 25, 2000 - ---------------------------------------------- William P. Phoenix /s/ Riordon B. Smith Director February 25, 2000 - ---------------------------------------------- Riordon B. Smith
II-5 EXHIBIT INDEX
Exhibit Number Description of Document - -------------- ----------------------- 2.1 Agreement and Plan of Merger, dated January 10, 2000, as amended on January 25, 2000, by and among Pegasus, Golden Sky and certain stockholders of Pegasus and Golden Sky - attached as Annex I to the Proxy Statement/Prospectus included in this Registration Statement. 3.1 Certificate of Incorporation of Pegasus, as amended (which is incorporated by reference to Exhibit 3.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057)). 3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 3.3 Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of 12.75% Series A Cumulative Exchangeble Preferred Stock (which is incorporated by reference to Exhibit 3.3 to Pegasus' Registration Statement on Form S-1 (File No. 333-18739). 3.4* Certificate of Designation, Preferences and Rights of Series B Junior Convertible Participating Preferred Stock. 3.5* Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of 6 1/2% Series C Convertible Preferred Stock. 3.6* Certificate of Designation, Preferences and Rights of Series D Junior Convertible Participating Preferred Stock. 5.1* Opinion of Drinker Biddle & Reath LLP. 8.1* Tax Opinion of Drinker Biddle & Reath LLP. 10.1 Form of Voting Agreement - attached as Annex II to the Proxy Statement/Prospectus included in this Registration Statement. 10.2* Form of Registration Rights Agreement. 10.3* Class B Preferred Unit Subscription Agreement between Pegasus Communications Corporation and Personalized Media Communications, L.L.C. dated January 10, 2000. (Portions of this document were redacted and filed separately with the Securities and Exchange Commission pursuant to a request by the Company for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended in connection with the filing of this registration statement on Form S-4) 10.4* Patent License Agreement dated January 13, 2000 between PMC Satellite Development, L.L.C. and Personalized Media Communications, L.L.C. (Portions of this document were redacted and filed separately with the Securities and Exchange Commission pursuant to a request by the Company for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 as amended, in connection with the filing of this Registration Statement on Form S-4) 10.5* Second Amended and Restated Operating Agreement of Personalized Media Communications, L.L.C. dated January 13, 2000. 10.6* Series PMC Warrant Agreement dated January 13, 2000 between Pegasus Communications Corporation and Personalized Media Communications, L.L.C. 10.7* Credit Agreement dated January 14, 2000 among Pegasus Media & Communications, Inc., the lenders party thereto, CIBC World Markets Corp., Deutsche Bank Securities Inc., Canadian Imperial Bank of Commerce, Bankers Trust Company and Fleet National Bank. (Exhibits and schedules have been omitted but will be filed upon request of the Commission.) 10.8* Amendment dated December 30, 1999, to ADS Alliance Agreement among ADS Alliance Data Systems, Inc., Pegasus Satellite Television, Inc., and Digital Television Securities, Inc., dated September 13, 1999. (Portions of this document were redacted and filed separately with the Securities and Exchange Commission pursuant to a request by the Company for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended in connection with the filing of this registration statement on Form S-4) 10.9* Amendment No. 1, dated January 24, 2000, to Subscription Agreement included as Exhibit 10.3 hereto. 10.10* Patent License Agreement dated January 13, 2000 between PMC Satallite Developent, L.L.C. and Pegasus Development Corporation (Portions of this document were redacted and filed separately with the Securities and Exchange Commission pursuant to a request by the Company for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended in connection with the filing of this registration statement on Form S-4) 23.1 Consent of Drinker Biddle & Reath LLP (included in opinion filed as Exhibit 5.1). 23.2* Consent of PricewaterhouseCoopers L.L.P. 23.3* Consent of KPMG LLP 24.1 Powers of Attorney (included on Signatures and Powers of Attorney) 27.1* Financial Data Schedule 99.1* Consent of CIBC World Markets Corp.
- ------------------- * Filed herewith. II-6 EX-3.4 2 EXHIBIT 3.4 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES B JUNIOR CONVERTIBLE PARTICIPATING PREFERRED STOCK of PEGASUS COMMUNICATIONS CORPORATION Pegasus Communications Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY THAT, pursuant to authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, as amended (the "Certificate of Incorporation"), and pursuant to the provisions of Section 151 of Title 8 of the Delaware Code, a duly constituted committee of the Board of Directors, pursuant to unanimous written consent dated December 29 1999, adopted the following resolutions providing for the designations, preferences and relative, participating, optional and other rights, and the qualifications, limitations and restrictions of the Series B Junior Convertible Participating Preferred Stock: RESOLVED, that pursuant to the Corporation's Certificate of Incorporation there is hereby established a series of Preferred Stock, the distinctive serial designation of which shall be "Series B Junior Convertible Participating Preferred Stock," par value $0.01 per share. FURTHER RESOLVED, that the proper officers of this Corporation are hereby authorized and directed to execute and file on behalf of the Corporation such certificate or statement, or certificates or statements required to effectuate the foregoing resolutions under Delaware law and to take such other actions as they consider necessary or appropriate to carry out the foregoing resolutions. FURTHER RESOLVED, that the voting rights, preferences, limitations, and special rights of the Series B Junior Convertible Participating Preferred Stock not set forth in the Corporation's Certificate of Incorporation shall be as follows: 1. Designation of Series. The distinctive serial designation of this series shall be "Series B Junior Convertible Participating Preferred Stock" (herein referred to as the "Series B Preferred Stock"). Each share of Series B Preferred Stock shall be identical in all respects with the other shares of Series B Preferred Stock. 2. Number of Shares. The number of shares of Series B Preferred Stock shall be 5,707. 3. Dividends. Subject to the prior and superior rights of the holders of Senior Stock, the holders of shares of Series B Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation out of funds legally available for such purpose, cash dividends at the rate of $10.00 per share per annum, and no more, payable semiannually on January 1 and July 1 of each year, commencing on July 1, 2000. Dividends on the Series B Preferred Stock shall be cumulative and shall accrue from the date of the original issuance of the Series B Preferred Stock. In no event, so long as any Series B Preferred Stock shall remain outstanding, shall any dividend whatsoever be declared or paid upon, nor shall any distribution be made upon, any Junior Stock, nor (without the written consent of the holders of a majority of the outstanding Series B Preferred Stock) shall any shares of Junior Stock be purchased or redeemed by the Corporation, nor shall any moneys be paid to or made available for a sinking fund for the purchase or redemption of any Junior Stock, unless in each instance dividends on all outstanding shares of the Series B Preferred Stock for all past dividend periods shall have been paid and any arrears in the mandatory redemption of the Preferred Stock shall have been made good. 4. Liquidation Rights. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of Series B Preferred Stock shall be entitled, after the payment of all amounts payable to the holders of Senior Stock, and before any distribution or payment is made to the holders of any Junior Stock, to be paid in full the Liquidation Preference of each share of Series B Preferred Stock. (b) If, upon such liquidation, dissolution or winding up, the amounts available for distribution to the holders of Series B Preferred Stock and all Parity Stock shall be insufficient to permit the payment in full to such holders of the preferential amounts to which they are entitled, then such amounts shall be paid ratably among the shares of Series B Preferred Stock and Parity Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends on such Parity Stock) payable with respect thereto, if paid in full. (c) If payment of the Liquidation Preference on liquidation, dissolution or winding up of the affairs of the Corporation shall have been made in full to the holders of all shares of Series B Preferred Stock, all Parity Stock, and all Junior Stock (other than Common Stock), the remaining assets of the Corporation shall be distributed, first, to the holders of Common Stock in an amount equal to the amount paid on the Series B Preferred Stock pursuant to subparagraph 4(a) and any amounts paid on any other class or series of Participating Stock, and second, among the holders of Common Stock, the Series B Preferred Stock and any other Participating Stock in accordance with the number of shares of Common Stock outstanding, assuming, for purposes of this clause second only, that (1) all shares of Class A Common Stock then issuable upon conversion of the Series B Preferred Stock are outstanding and held by the holders of the Series B Preferred Stock and (2) all shares of Common Stock then issuable upon the conversion of any other Participating Stock are outstanding and held by the holders thereof. (d) For purposes of this Section 4, the consolidation or merger of the Corporation with or into any other corporation, the conveyance or transfer of the property and assets of the Corporation as, or substantially as, an entirety, or the reclassification of the capital stock of the Corporation -2- or the redemption or purchase of less than all of the shares of the capital stock of the Corporation, shall not be deemed to constitute a liquidation, dissolution or winding up of the Corporation. 5. Redemption. (a) Redemption at Option of Corporation. The Corporation may redeem all (but not less than all, without the consent of all holders of Series B Preferred Stock) of the outstanding shares of Series B Preferred Stock at any time after the fifth anniversary of the Closing Date, as that term is defined in that certain Agreement and Plan of Merger pursuant to which the Series B Preferred Stock is being issued (the "Merger Agreement"), at a price per share equal to the Redemption Price. Notice of every redemption of shares of Series B Preferred Stock at the option of the Corporation shall be mailed by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses as they shall appear on the books of the Corporation. Such mailing shall be made at least 10 days and not more than 60 days prior to the Redemption Date. The notice of redemption shall state: (1) the Redemption Date; (2) the amount of the Redemption Price; (3) that on the Redemption Date the Redemption Price will become due and payable upon surrender of certificates representing each share of Series B Preferred Stock; and (4) the place or places where certificates representing shares of Series B Preferred Stock to be redeemed are to be surrendered for payment of the Redemption Price. (b) Redemption at Option of Holders. Except as provided in the next sentence, the holders of all outstanding shares of Series B Preferred Stock shall have the right to require the Corporation to redeem all (but not less than all, without the consent of the Corporation) of the outstanding shares of Series B Preferred Stock, at a price per share equal to the Redemption Price, by providing written notice of redemption to the Corporation on any day after the second anniversary of the Closing Date, as that term is defined in the Merger Agreement. Notwithstanding the preceding sentence, the Corporation shall have no obligation to redeem any of the Series B Preferred Stock unless it is able at the time to do so in compliance with: (1) Section 8(a) of the Certificate of Designation, Preferences and Relative, Participating, Optional and other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of the Corporation's 12.75% Series A Cumulative Exchangeable Preferred Stock, (2) Section 4.07 of the Indenture dated as of October 21, 1997, between the Corporation and First Union National Bank as trustee, (3) Section 4.07 of the Indenture dated as of November 30, 1998, between the Corporation and First Union National Bank, as trustee, and (4) any similar or comparable provision, now or hereafter in effect, in the terms of any Preferred Stock of the Corporation or any indenture, note, bond, debenture or other agreement or instrument pursuant to which the Corporation has issued securities or borrowed money. Notice of every redemption of shares of Series B Preferred Stock at the option of the holders shall be mailed by first class mail, postage prepaid, addressed to the Corporation at its principal office. Such mailing shall be at least 30 days and not more than 60 days prior to the Redemption Date and shall state the Redemption Date and the amount of the Redemption Price. (c) Payment of Redemption Price; Deposit of Funds. In the case of any redemption under subsection (a) or (b), the Corporation shall pay to the holders of the Series B Preferred Stock, on or before the Redemption Date, the -3- full amount of the Redemption Price upon surrender by such holders of certificates representing the shares of Series B Preferred Stock being redeemed. The Corporation may elect to effect any such redemption by depositing with the bank or trust company hereinafter mentioned (and, in the case of a redemption under subsection (a), may irrevocably authorize such bank or trust company to give the notice of redemption) the funds necessary for such redemption in trust for the pro rata benefit of the holders of the shares called for redemption, whereupon, notwithstanding that any certificates for shares so called for redemption shall not have been surrendered for cancellation, from and after the Redemption Date, all shares so called for redemption shall no longer be deemed to be outstanding and all rights with respect to such shares shall forthwith cease and terminate, except only the right of the holders thereof to receive from such bank or trust company at any time after the time of such deposit the full amount of the Redemption Price, without interest. Upon surrender to the Corporation or to such bank or trust company by any holder of either (i) the certificates representing the shares of the Series B Preferred Stock being redeemed; or (ii) a lost share affidavit in a form satisfactory to the Corporation and such bank or trust company, together with an indemnity bond the amount, terms, form and issuer of which are reasonably satisfactory to the Corporation and such bank or trust company with respect to any certificate which has been lost or destroyed, the bank or trust company shall promptly pay to such holder the full amount of the redemption price being redeemed by such holder. Any interest accrued on such funds shall be paid to the Corporation from time to time. The aforesaid bank or trust company shall be organized and in good standing under the laws of the United States of America or any state thereof, shall be doing business in the United Shares of America, shall have capital, surplus and undivided profits aggregating at least $10,000,000 according to its last published statement of condition, and shall be identified in the notice of redemption. Any funds so set aside or deposited, as the case may be, and unclaimed at the end of two years from such Redemption Date shall, to the extent permitted by law, be released or repaid to the Corporation, after which repayment the holders of the shares so called for redemption shall look only to the Corporation for payment thereof. (d) Status of Redeemed Series B Preferred Stock. Shares of Series B Preferred Stock which are redeemed shall be restored to the status of authorized but unissued shares of Preferred Stock undesignated as to series. 6. Conversion. (a) Right to Convert. Subject to the terms and conditions of this Section 6, the holder of any share or shares of Series B Preferred Stock shall have the right, at its option at any time, to convert any such shares of Series B Preferred Stock (except that upon any liquidation of the Corporation the right of conversion shall terminate at the close of business on the last full business day next preceding the date fixed for payment of the amount distributable on the Series B Preferred Stock) into such number of fully paid and nonassessable whole shares of Class A Common Stock as is obtained by dividing $1,000 by the Conversion Price. Such rights of conversion shall be exercised by the holder thereof by giving written notice that the holder elects to convert a stated number of shares of Series B Preferred Stock into Class A Common Stock and by surrender of a certificate or certificates for the shares so to be converted to the Corporation at its principal office (or such other office -4- or agency of the Corporation as the Corporation may designate by notice in writing to the holders of the Series B Preferred Stock) at any time during its usual business hours on the date set forth in such notice, together with a statement of the name or names (with address) in which the certificate or certificates for shares of Class A Common Stock shall be issued. (b) Issuance of Certificates; Time Conversion Effected. Promptly after the receipt of the written notice referred to in Section 6(a) and surrender of the certificate or certificates for the share or shares of Series B Preferred Stock to be converted, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder, registered in such name or names as such holder may direct, a certificate or certificates for the number of whole shares of Class A Common Stock issuable upon the conversion of such share or shares of Series B Preferred Stock. To the extent permitted by law, such conversion shall be deemed to have been effected and the Conversion Price shall be determined as of the close of business on the date on which such written notice shall have been received by the Corporation and the certificate or certificates for such share or shares shall have been surrendered as aforesaid, and at such time the rights of the holder of such share or shares of Series B Preferred Stock shall cease, and the person or persons in whose name or names any certificate or certificates for shares of Class A Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby. (c) Fractional Shares; Dividends; Partial Conversion. No fractional shares shall be issued upon conversion of Series B Preferred Stock into Class A Common Stock and no payment or adjustment shall be made upon any conversion on account of any cash dividends on the Class A Common Stock issued upon such conversion. At the time of each conversion, the Corporation shall pay in cash an amount equal to all dividends accumulated and unpaid on the shares surrendered for conversion to the date upon which such conversion is deemed to take place as provided in Section 6(b). In case the number of shares of Series B Preferred Stock represented by the certificate or certificates surrendered pursuant to Section 6(a) exceeds the number of shares converted, the Corporation shall, upon such conversion, execute and deliver to the holder thereof, at the expense of the Corporation, a new certificate or certificates for the number of shares of Series B Preferred Stock represented by the certificate or certificates surrendered which are not to be converted. If any fractional interest in a share of Class A Common Stock would, except for the provisions of the first sentence of this Section 6(c), be delivered upon any such conversion, the Corporation, in lieu of delivering the fractional share thereof, shall pay to the holder surrendering the Series B Preferred Stock for conversion an amount in cash equal to the current market price of such fractional interest as determined in good faith by the Board of Directors of the Corporation. (d) Adjustment for Change in Capital Stock. If at any time after the date hereof, the Corporation: (1) pays a dividend or makes a distribution on its Class A Common Stock in shares of its Class A Common Stock; (2) subdivides its outstanding shares of Class A Common Stock into a greater number of shares; -5- (3) combines its outstanding shares of Class A Common Stock into a smaller number of shares; (4) makes a distribution on its Class A Common Stock in shares of its capital stock other than Class A Common Stock; or (5) issues by reclassification of its Class A Common Stock any shares of its capital stock; then the number of shares of Class A Common Stock receivable upon conversion of the Series B Preferred Stock and the Conversion Price, as in effect immediately prior to such action, shall be adjusted so that the holders may receive upon conversion of the Series B Preferred Stock and payment of the same aggregate Conversion Price the number of shares of capital stock of the Corporation which the holders would have owned immediately following such action if the holders had converted the Series B Preferred Stock immediately prior to such action. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. (e) Notice to Holders upon Certain Events. In the event that: (1) the Corporation shall authorize the issuance to holders of its Class A Common Stock of rights, warrants, options or convertible securities to subscribe for or purchase shares of its Class A Common Stock or of any other subscription rights, warrants, options or convertible securities; or (2) the Corporation shall authorize the distribution to holders of its Class A Common Stock of evidences of its indebtedness or assets; or (3) the Corporation is the subject of a voluntary or involuntary dissolution, liquidation or winding-up proceeding; then the Corporation shall cause to be mailed by first-class mail to the holders of the Corporation's Series B Preferred Stock, at least ten (10) days prior to the applicable record or effective date, a notice stating (A) the date as of which the holders of Class A Common Stock of record to be entitled to receive any such rights, warrants, options or convertible securities or distributions referred to in clauses (1) and (2) above are to be determined, or (B) the date on which any such dissolution, liquidation or winding-up referred to in clause (3) above is expected to become effective, and the date as of which it is expected that holders of Common Stock of record will be entitled to exchange their shares of Class A Common Stock for securities or other property, if any, deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up. (f) Reclassification, Reorganization, Consolidation or Merger. In the event of any reclassification, capital reorganization or other change of outstanding shares of Class A Common Stock of the Corporation (other than a subdivision or combination of the outstanding Class A Common Stock and other than a change in the par value of the Class A Common Stock) or in the event of -6- any consolidation or merger of the Corporation with or into another corporation or a non-corporate entity (other than a merger in which the Corporation is the continuing corporation and that does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock) or in the event of any sale, lease, transfer or conveyance to another corporation or non-corporate entity of the property and assets of the Corporation as an entirety or substantially as an entirety, the Corporation shall, as a condition precedent to such transaction, cause effective provisions to be made so that the holders of the Corporation's Series B Preferred Stock shall have the right thereafter, by converting the Series B Preferred Stock, to purchase the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Class A Common Stock that might have been received upon conversion of the Series B Preferred Stock immediately prior to such reclassification, capital reorganization, change, consolidation, merger, sale or conveyance. The foregoing provisions of this Section shall similarly apply to successive reclassification, capital reorganizations and changes of shares of Class A Common Stock and to successive consolidations, mergers, sales or conveyances. (g) Stock to be Reserved. The Corporation shall at all times reserve and keep available out of its authorized Class A Common Stock or its treasury shares, solely for the purpose of issuance upon the conversion of the Series B Preferred Stock as herein provided, such number of shares of Class A Common Stock as shall then be issuable upon the conversion of all outstanding shares of Series B Preferred Stock. The Corporation covenants that all shares of Class A Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable. 7. Voting Rights. (a) Except as otherwise required by law, the holders of Series B Preferred Stock shall have no right to vote on any matter to be voted on by the stockholders of the Corporation. Without limiting the generality of the foregoing, the Corporation may authorize, issue or amend the terms of Senior Stock, Parity Stock or Junior Stock, or may increase or decrease the number of authorized shares of Preferred Stock, Series B Preferred Stock, Senior Stock, Parity Stock or Junior Stock, without the vote or consent of any holder of Series B Preferred Stock. (b) In any matter upon which the holders of the Series B Preferred Stock shall be entitled by law to vote, the holders of Series B Preferred Stock shall be entitled to one vote per share, and shall not be entitled to vote as a separate class or series unless otherwise required by law. 8. Definitions. As used herein, the following terms have the following meanings: "Class A Common Stock" means the Class A Common Stock of the Corporation, par value $0.01. -7- "Common Stock" means stock of any class of the Corporation which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and which is not subject to redemption by the Corporation. "Conversion Price" means the Market Price on the Closing Date, as these terms are defined in the Merger Agreement, per share or, in case an adjustment of such price shall have taken place pursuant to the provisions of Section 6, then the such price as last adjusted and in effect at the date any share or shares of Series B Preferred Stock are surrendered for conversion. "Junior Stock" means the Common Stock and all other stock of the Corporation hereafter authorized, issues or outstanding that by its terms ranks junior to Series B Preferred Stock in whole or in part as to distribution of assets upon liquidation. The "Liquidation Preference" per share of Series B Preferred Stock means $1,000 plus accumulated and unpaid dividends. "Parity Stock" means all stock of the Corporation hereafter authorized, issued or outstanding other than Senior Stock and Junior Stock. "Participating Stock" means any stock of the Corporation hereafter authorized that participates with the Common Stock as to distribution of assets upon liquidation on terms similar to those in subparagraph 4(c). "Redemption Date" means the date on which Series B Preferred Stock is to be redeemed and the Redemption Price paid in accordance herewith. The "Redemption Price" per share of Series B Preferred Stock means $1,000 plus accumulated and unpaid dividends. "Senior Stock" means the 12.75% Series A Cumulative Exchangeable Preferred Stock of the Corporation and all other stock of the Corporation hereafter authorized, issued or outstanding that by its terms ranks senior to the Series B Preferred Stock in whole or in part as to distribution of assets upon liquidation. -8- IN WITNESS WHEREOF, the undersigned has executed this Certificate this 4th day of January, 2000. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Ted S. Lodge --------------------------------- Ted S. Lodge Senior Vice President -9- EX-3.5 3 EXHIBIT 3.5 CERTIFICATE OF DESIGNATION, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF 6 1/2% SERIES C CONVERTIBLE PREFERRED STOCK OF PEGASUS COMMUNICATIONS CORPORATION ------- PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE ------ Pegasus Communications Corporation (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, certifies that pursuant to the authority contained in the Article Fourth of its Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, a duly constituted committee of the Board of Directors of the Company, acting within the scope of the authority delegated to it by the Board of Directors, at a meeting duly held on January 19, 2000, duly approved and adopted the following resolution (this "Certificate of Designation") which resolution remains in full force and effect on the date hereof: RESOLVED, that pursuant to the authority vested in the Pricing Committee of the Board of Directors by resolutions duly adopted by the Board of Directors on December 17, 1999, the Pricing Committee of the Board of Directors does hereby designate, create, authorize and provide for the issue of 6 1/2% Series C Convertible Preferred Stock (the "Series C Convertible Preferred Stock"), par value $0.01 per share, with a liquidation preference of $100 per share, consisting of 3,000,000 shares, having the following voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof as follows: 1. Ranking. The Series C Convertible Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Company, rank (i) senior to the Class A Common Stock, par value $.01 per share, of the Company (the "Class A Common Stock"), the Class B Common Stock, par value $.01 per share, of the Company "Class B Common Stock"), the Non-voting Common Stock, par value $.01 per share, of the Company (the "Non-voting Common Stock" and, together with the Class A Common Stock and the Class B Common Stock, the "Common Stock"), the Series B Junior Convertible Participating Preferred Stock, par value $0.01 per share (the "Series B Preferred Stock"), and to each other class or series of stock of the Company (including any series of preferred stock established after January 24, 2000 by the Board of Directors), the terms of which do not expressly provide that it ranks senior to or on a parity with the Series C Convertible Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Company (collectively referred to as "Junior Securities"); (ii) on a parity with any class or series of stock (including any series of preferred stock established after January 24, 2000 by the Board of Directors), the terms of which expressly provide that it ranks on a parity with the Series C Convertible Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Company (collectively referred to as "Parity Securities"); and (iii) junior to the Series A Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock"), and to any class or series of stock (including any series of preferred stock established after January 24, 2000 by the Board of Directors), the terms of which expressly provide that such class or series will rank senior to the Series C Convertible Preferred Stock as to dividend distributions and distributions upon liquidation, winding-up and dissolution of the Company (collectively referred to as "Senior Securities"). The Series C Convertible Preferred Stock shall constitute "Junior Securities" under the Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof for the Series A Preferred Stock as defined therein. 2. Dividends. (A) The holders of shares of the Series C Convertible Preferred Stock shall be entitled to receive, when, as and if dividends are declared by the Board of Directors out of assets of the Company legally available therefor, cumulative dividends, accruing from the date of issuance (the "Series C Convertible Preferred Stock Issue Date") or the most recent Dividend Payment Date on which dividends have been paid at the rate per annum of 6 1/2% of the liquidation preference per share (initially equivalent to $6.50 per annum per share of Series C Convertible Preferred Stock), payable quarterly on each January 31, April 30, July 31 and October 31 of each year, commencing on April 30, 2000 (each a "Dividend Payment Date"). If any such date is not a Business Day, such payment shall be made on the next succeeding Business Day. In either case such payments shall be made to the holders of record as of a date preceding the Dividend Payment Date, not more than sixty days nor less than ten days preceding such Dividend Payment Date, as determined by the Board of Directors (each, a "Record Date"). Dividends. To the extent declared by the Board of Directors, may, at the Company's option, be paid in cash, by delivery of fully paid and nonassessable shares of Class A Common Stock, or a combination thereof (subject to applicable law). Notice by first class mail, postage prepaid shall be given to each holder of record of the Series C Convertible Preferred Stock on which a dividend will be paid, at such holder's address as it shall appear upon the stock transfer books of the Company, which notice shall specify whether the Company will pay the dividend in cash or Class A Common Stock. Dividends payable on the Series C Convertible Preferred Stock for each full dividend period -2- shall be computed by dividing the annual dividend rate by four. Dividends payable on the Series C Convertible Preferred Stock for any period less than a full dividend period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The Series C Convertible Preferred Stock shall not be entitled to any dividend, whether payable in cash, property or securities, in excess of the full cumulative dividends. If the Company elects to pay dividends in shares of Class A Common Stock, the number of shares of Class A Common Stock that the Company distributes shall be calculated by dividing the dividend payment by, (a) if on the date of such payment a registration statement covering the shares of Class A Common Stock so issued is effective, 97% of the Market Value on the Record Date and (b) if on the date of such payment a registration statement covering the shares of Class A Common Stock so issued is not effective, 93% of the Market Value on the Record Date. (B) On each Dividend Payment Date all dividends which shall have accrued on each share of Series C Convertible Preferred Stock outstanding on such Dividend Payment Date shall accumulate and be deemed to become "due" whether or not there shall be funds legally available for payment thereof and whether or not dividends are declared. Any dividend which shall not be paid on the Dividend Payment Date on which it shall become due (whether because of the absence of legally available funds for the payment thereof or otherwise) shall be deemed to be "past due" until such dividend shall be paid or until the share of Series C Convertible Preferred Stock with respect to which such dividend became due shall no longer be outstanding, whichever is the earlier to occur. No interest, sum of money in lieu of interest, or other property or securities shall be payable in respect of any dividend payment or payments which are past due. Dividends paid on shares of Series C Convertible Preferred Stock in an amount less than the total amount of such dividends at the time accumulated and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. (C) If dividends are not paid in full, or declared in full and sums set aside for the payment thereof, upon the Series C Convertible Preferred Stock and any Parity Securities, subject to the prior rights of holders of any Senior Securities, all dividends declared upon shares of the Series C Convertible Preferred Stock and such Parity Securities shall when, as and if declared, be declared pro rata so that in all cases the amount of dividends declared and paid per share on the Series C Convertible Preferred Stock and such Parity Securities will bear to each other the same ratio that accrued and unpaid dividends per share on the shares of Series C Convertible Preferred Stock and such other Parity Securities bear to each other. Except as set forth above, unless full cumulative dividends on the Series C Convertible Preferred Stock have been or contemporaneously are paid, or declared and sums set aside for the payment thereof for all Dividend Payment Dates terminating on or prior to the date of such declaration, payment, redemption, purchase or acquisition, dividends (other than in Common Stock or other Junior Securities) may not be paid, or declared and sums set aside for the payment thereof upon Common Stock or other Junior Securities or Parity Securities, and other distributions may not be made upon the Common Stock or other Junior Securities or Parity Securities; and no shares of Common Stock nor any other Junior Securities or Parity Securities may be redeemed, purchased or otherwise acquired for any consideration by the Company (except, in general and in both cases, by conversion into or exchange for other Junior Securities or Parity Securities and except -3- for monies for such dividend, distribution, redemption, purchase or other acquisition that is derived from the proceeds of the offering of such securities or a concurrent offering of related securities). (D) Dividends on the Series C Convertible Preferred Stock shall accrue without interest whether or not the Company has earnings or profits, whether or not there are funds legally available for the payment of such dividends and whether or not dividends are declared. Dividends will accumulate to the extent they are not paid on the Dividend Payment Date for the period to which they relate. (E) Any reference to "distribution" contained in this Section 2 shall not be deemed to include any distribution made in connection with any liquidation, winding-up or dissolution of the Company. 3. Conversion. (A) Subject to and upon compliance with the provisions of this Section 3, each share of Series C Convertible Preferred Stock shall, at the option of the holder thereof, be convertible at any time (unless such share is called for redemption, then to and including but not after the close of business on the second Business Day immediately prior to the Redemption Date (as defined herein), unless the Company shall default in payment due upon redemption thereof), into that number of fully paid and non-assessable shares of Class A Common Stock (calculated as to each conversion to the nearest 1/100,000th of a share) obtained by dividing $100 by the Conversion Price in effect at such time and by surrender of the certificate or certificates representing such shares so to be converted in the manner provided in Section 3(B) hereof. (B) To convert Series C Convertible Preferred Stock, the holder of one or more shares of Series C Convertible Preferred Stock to be converted shall surrender the certificate or certificates representing such shares at any of the offices or agencies to be maintained for such purpose by the Company and shall give written notice of conversion in the form provided on such shares of Series C Convertible Preferred Stock (or such other notice as is acceptable to the Company) to the Company at such office or agency that the holder elects to convert the shares of Series C Convertible Preferred Stock specified in said notice. Such notice shall also state the name or names, together with address or addresses, in which the certificate or certificates for shares of Class A Common Stock which shall be issuable in such conversion shall be issued. Each certificate representing a share of Series C Convertible Preferred Stock surrendered for conversion shall, unless the shares issuable on conversion are to be issued in the same name as the name in which such share is registered, be accompanied by instruments of transfer, in form satisfactory to the Company, duly executed by the holder or his duly authorized attorney and an amount sufficient to pay any transfer or similar tax. As promptly as practicable after the surrender of certificates representing such shares of Series C Convertible Preferred Stock and the receipt of such notice and instruments of transfer as aforesaid, the Company shall issue and shall deliver at such office or agency to such holder, or as designated in such holder's written instructions, a certificate or certificates for the number of full shares of Class A Common Stock issuable upon the conversion of such shares of Series C Convertible Preferred Stock in -4- accordance with the provisions of this Section 3 and a check or cash in respect of any fractional interest in a share of Class A Common Stock arising upon such conversion, as provided in Section 3(C) hereof. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which certificates representing such shares of Series C Convertible Preferred Stock shall have been surrendered and such notice (and any applicable instruments of transfer and any required taxes) received by the Company as aforesaid, and the person or persons in whose name or names any certificate or certificates for shares of Class A Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date, and such conversion shall be at the Conversion Price in effect at such time on such date, and such conversion shall be at the Conversion Price in effect at such time on such date, unless the stock transfer books of the Company shall be closed on that date, in which event such person or persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date upon which certificates representing such shares of Series C Convertible Preferred Stock shall have been surrendered and such notice received by the Company. Holders of shares of Series C Convertible Preferred Stock at the close of business on a Record Date will be entitled to receive an amount equal to the dividend declared by the Board of Directors, and payable on such shares on the corresponding Dividend Payment Date notwithstanding the conversion of such shares following such Record Date and prior to such Dividend Payment Date. Holders of shares of Series C Convertible Preferred Stock called for redemption on a redemption date between the record date for a dividend declared by the Board of Directors and the corresponding Dividend Payment Date will be entitled to receive their dividend payment on such redemption date in accordance with Section 6 hereof. Except as provided herein, the Company will make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the Class A Common Stock issued upon such conversion. (C) In the Company's discretion, no fractional shares or scrip representing fractions of shares of Class A Common Stock shall be issued upon conversion of Series C Convertible Preferred Stock. If more than one share of Series C Convertible Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares of Class A Common Stock issuable upon conversion thereof shall be computed on the basis of the liquidation preference for each such share so surrendered. In lieu of any fractional interest in a share of Class A Common Stock which would otherwise be deliverable upon the conversion of any shares of Series C Convertible Preferred Stock, the Company shall pay to the holder of such shares an amount in cash (computed to the nearest cent) equal to the closing price (as defined in Section 6 hereof) at the close of business on the trading day next preceding the day of conversion multiplied by the fractional interest that otherwise would have been deliverable upon conversion of such share. -5- (D) The "Conversion Price" shall mean and be $127.50, subject to adjustment from time to time by the Company as follows: (i) In case the Company shall (a) make a redemption payment, pay a dividend or make a distribution in shares of Class A Common Stock on any class of its capital stock, (b) subdivide its outstanding shares of Class A Common Stock into a greater number of shares, (c) combine its outstanding shares of Class A Common Stock into a smaller number of shares, or (d) issue by reclassification of its Class A Common Stock any shares of capital stock of the Company, then in each such case the Conversion Price in effect immediately prior to such action shall be adjusted so that the holder of any share of Series C Convertible Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Class A Common Stock or other capital stock of the Company which such holder would have owned or been entitled to receive immediately following such action had such share of Series C Convertible Preferred Stock been converted immediately prior to the occurrence of such event. An adjustment made pursuant to this subsection (i) shall become effective immediately after the record date, in the case of a dividend or distribution, or immediately after the effective date, in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this subsection (i), the holder of any share of Series C Convertible Preferred Stock thereafter surrendered for conversion shall become entitled to receive shares of two or more classes of capital stock or shares of Class A Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a statement filed by the Company with the Transfer Agent) shall determine the allocation of the adjusted Conversion Price between or among shares of such classes of capital stock or shares of Class A Common Stock and other capital stock. (ii) In case the Company shall issue rights, options or warrants to all holders of its outstanding shares of Class A Common Stock entitling them to subscribe for or purchase shares of Class A Common Stock, or securities convertible into or exchangeable for shares of Class A Common Stock, or securities convertible into or exchangeable for shares of Class A Common Stock, at a price per share less than the Market Value, then the Conversion Price in effect immediately prior thereto shall be adjusted so that it shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the record date by a fraction of which the numerator shall be the number of shares of Class A Common Stock outstanding on the record date plus the number of shares which the aggregate proceeds to the Company from the exercise of such rights or warrants would purchase at such Market Value, and of which the denominator shall be the number of shares of Class A Common Stock outstanding on the record date plus the number of additional shares of Class A Common Stock offered for subscription or purchase. Such adjustment shall be made successively whenever any rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants; provided, however, in the event that all the shares of Class A Common Stock offered for subscription or purchase are not delivered upon the exercise of such rights or warrants, -6- upon the expiration of such rights or warrants the Conversion Price shall be readjusted to the Conversion Price which would have been in effect had the numerator and the denominator of the foregoing fraction and the resulting adjustment been made based upon the number of shares of Class A Common Stock actually delivered upon the exercise of such rights or warrants rather than upon the number of shares of Class A Common Stock offered for subscription or purchase. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Class A Common Stock at less than such Market Value, and in determining the aggregate offering price of such shares of Class A Common Stock, there shall be taken into account any consideration received by the Company for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors (whose determination shall be conclusive and shall be described in a statement filed by the Company with the Transfer Agent). In the event that, after the issuance of the Series C Convertible Preferred Stock, the Company distributes rights or warrants (other than those referred to in Section 3(D)(ii) hereof) to all holders of Class A Common Stock, so long as any such rights or warrants have not expired or been redeemed by the Company, the holder of any shares of Series C Convertible Preferred Stock surrendered for conversion shall be entitled to receive upon such conversion, in addition to the shares of Class A Common Stock then issuable upon such conversion (the "Conversion Shares"), a number of rights or warrants to be determined as follows: (a) if such conversion occurs on or prior to the date for the distribution to the holders of rights or warrants of separate certificates evidencing such rights or warrants (the "Distribution Date"), the same number of rights or warrants of which a holder of a number of shares of Class A Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions applicable to the rights or warrants, and (b) if such conversion occurs after such Distribution Date, the same number of rights or warrants to which a holder of the number of shares of Class A Common Stock into which Series C Convertible Preferred Stock was convertible immediately prior to such Distribution Date would have been entitled on such Distribution Date in accordance with the terms and provisions of and applicable to the rights or warrants. In the event the holders of Series C Convertible Preferred Stock are not entitled to receive such rights or warrants, the Conversion Price shall be subject to adjustment upon any declaration or distribution of such rights or warrants. (iii) In case the Company shall, by dividend or otherwise, distribute to all holders of its outstanding Class A Common Stock any capital stock (other than Class A Common Stock), evidences of its indebtedness or assets, including securities (but excluding rights and warrants referred to in subsection (ii) of this Section 3(D) and dividends or distributions payable in stock for which adjustment is made pursuant to subsection (i) of this Subsection 3(D) and dividends and distributions paid in cash out of the retained earnings of the Company and distributions upon mergers or consolidations to which Section 3(H) hereof applies), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion -7- Price in effect immediately prior to the record date of such distribution by a fraction of which the numerator shall be the Market Value less the fair market value on such record date (as determined by the Board of Directors, whose determination shall be conclusive and shall be described in a statement filed by the Company with the Transfer Agent) of the portion of the capital stock or assets or the evidences of indebtedness or assets so distributed to the holder of one share of Class A Common Stock or of such subscription rights or warrants applicable to one share of Class A Common Stock, and of which the denominator shall be such Market Value. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution. (iv) In case the Company shall (a) make any distribution consisting exclusively of cash (excluding any cash distributed upon a merger or consolidation to which Section 3(D)(iv)(b) hereof applies) to all holders of shares of Class A Common Stock in an aggregate amount that, combined together with (A) all other such all cash distributions made within the then preceding twelve months in respect of which no adjustment has been made and (B) any cash and the fair market value of other consideration paid or payable in respect of any tender offer by the Company or any of its subsidiaries for shares of Class A Common Stock concluded within the then preceding twelve months in respect of which no adjustment has been made, exceeds 15% of the Company's market capitalization (defined as the product of the Market Value multiplied by the number of shares of Class A Common Stock then outstanding on the record date of such distribution), or (b) complete a tender or exchange offer which the Company or any of its subsidiaries make for shares of Class A Common Stock that involves an aggregate consideration that, together with (A) any cash and other consideration payable in a tender or exchange offer by the Company or any of its subsidiaries for shares of Class A Common Stock expiring within the then preceding twelve months in respect of which no adjustment has been made and (B) the aggregate amount of any such all cash distributions referred to in Section 3(D)(iv)(a) above to all holders of shares of Class A Common Stock within the then preceding twelve months in respect of which no adjustments have been made, exceed 15% of the Company's market capitalization just prior to the expiration of such tender offer; then the Conversion Price then in effect shall be adjusted by dividing the Conversion Price in effect immediately prior to the date of such distribution or completion of such tender or exchange offer, as the case may be, by a fraction (x) the numerator of which shall be the Market Value as of the record date referred to below, or, if such adjustment is made upon the completion of a tender or exchange offer, as of the payment date for such offer, and (y) the denominator of which shall be such Market Value less the then fair market value (as determined by the Board of Directors of the Company) of the portion of the cash, evidences of indebtedness, securities or other assets so distributed or paid in such tender or exchange offer, applicable to one share of Common Stock (but such denominator not to be less than one); provided, however, that no adjustment shall be made with respect to any distribution of rights to purchase securities of the Company if the holder of shares of Series C Preferred Stock would otherwise be entitled to receive such rights upon conversion at any time of shares of Series C Convertible Preferred Stock into shares of Class A Common Stock -8- unless such rights are subsequently redeemed by the Company, in which case such redemption shall be treated for purposes of this Section 3(D)(iv) as a dividend on the Common Stock. Such adjustment shall be made whenever any such distribution is made or tender or exchange offer is completed, as the case may be, and shall become effective retroactively to a date immediately following the close of business on the record date for the determination of stockholders entitled to receive such distribution. (v) In any case in which this Section 3(D) shall require that an adjustment be made immediately following a record date or an effective date the Company may elect to defer (but only until the filing by the Company with the Transfer Agent of the certificate required by subsection (vii) of this Section 3(D)) issuing to the holder of any share of Series C Convertible Preferred Stock converted after such record date or effective date the shares of Class A Common Stock issuable upon such conversion over and above the shares of Class A Common Stock issuable upon such conversion on the basis of the Conversion Price prior to adjustment, and paying to such holder any amount of cash in lieu of a fractional share. (vi) Notwithstanding anything to the contrary contained in this Section 3, no adjustment in the Conversion Price shall be required to be made unless such adjustment would require an increase or decrease of at least one percent of such price; provided, however, that any adjustment which by reason of this subsection (vii) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 3(D) shall be made to the nearest cent or to the nearest 1/100,000th of a share, as the case may be. Anything in this Section 3(D) to the contrary notwithstanding, the Company shall be entitled to make such reduction in the Conversion Price, in addition to those required by this Section 3(D), as it in its discretion shall determine to be advisable in order that any stock dividend, subdivision of shares, distribution of rights to purchase stock or securities, or distribution of securities convertible into or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable to the recipients. Except as set forth in subsections (i), (ii) and (iii) above, the Conversion Price shall not be adjusted for the issuance of Class A Common Stock, or any securities convertible into or exchangeable for Class A Common Stock or carrying the right to purchase any of the foregoing, in exchange for cash, property or services. (vii) Whenever the Conversion Price is adjusted as herein provided, (A) the Company shall promptly file with the Transfer Agent a certificate setting forth the Conversion Price after such adjustment and a brief statement of the facts requiring such adjustment and the manner of computing the same, which certificate shall be conclusive evidence of the correctness of such adjustment, and (B) the Company shall also mail or cause to be mailed by first class mail, postage prepaid, as soon as practicable to each holder of record of shares of Series C Convertible Preferred Stock a notice stating that the Conversion Price has been adjusted and setting forth the adjusted Conversion Price. The Transfer Agent shall not be under any duty or responsibility with respect to the certificate -9- required by this subsection (vii) except to exhibit the same to any holder of shares of Series C Convertible Preferred Stock who requests to inspect it. (viii) In the event that at any time, as a result of an adjustment made pursuant to subsection (i) of this Section 3(D), the holder of any share of Series C Convertible Preferred Stock thereafter surrendered for conversion shall become entitled to receive any shares of the Company other than shares of Class A Common Stock, thereafter the Conversion Price of such other shares so receivable upon conversion of any share of Series C Convertible Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Class A Common Stock contained in this Section 3. (ix) The Company from time to time may decrease the Conversion Price by any amount for any period of time if the period is at least 20 days and if the decrease is irrevocable during the period. Whenever the Conversion Price is so decreased, the Company shall mail to holders of record of shares of Series C Convertible Preferred Stock a notice of the decrease at least 15 days before the date the decreased Conversion Price takes effect, and such notice shall state the decreased Conversion Price and the period it will be in effect. (E) In case: (i) the Company shall take any action which would require an adjustment in the Conversion Price pursuant to Section 3(D) hereof; or (ii) the Company shall authorize the granting to the holders of its Class A Common Stock generally of rights or warrants to subscribe for or purchase any shares of stock of any class or of any other rights (other than Rights to which the second paragraph of subparagraph (D)(iii) of this Section 3 applies); or (iii) there shall be any reorganization or reclassification of the Class A Common Stock (other than an event to which subparagraph (D)(i) of this Section 3 applies) or any merger or consolidation to which the Company is a party or any sale or transfer of all or substantially all of the property and assets of the Company, in each case for which approval of any stockholders of the Company is required; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then in each such case the Company shall cause to be given to the holders of shares of Series C Convertible Preferred Stock and the Transfer Agent as promptly as possible, but in any event at least 15 days prior to the applicable date hereinafter specified, a notice stating (a) the date on which a record is to be taken for the purpose of such action or granting of rights or warrants, or, if a record is not to be taken, the date as of which the holders of Class A Common Stock of record to be entitled to such distribution, rights or warrants are to be determined, or (b) the date -10- on which such reorganization, reclassification, merger, consolidation, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Class A Common Stock of record shall be entitled to exchange their shares of Class A Common Stock for securities, cash or other property deliverable upon such reorganization, reclassification, merger, consolidation, sale transfer, dissolution, liquidation or winding-up. Failure to give such notice or any defect therein shall not affect the legality or validity or the proceedings described in subsection (i), (ii), (iii) or (iv) of this Section 3(E). (F) The Company shall at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Class A Common Stock or its issued shares of Class A Common Stock held in its treasury, or both, for the purpose of effecting conversions of shares of Series C Convertible Preferred Stock, the full number of shares of Class A Common Stock deliverable upon the conversion of all outstanding shares of Series C Convertible Preferred Stock not theretofore converted and on or before (and as a condition of) taking any action that would cause an adjustment of the Conversion Price resulting in an increase in the number of shares of Class A Common Stock deliverable upon conversion above the number thereof previously reserved and available therefor, the Company shall take all such action so required. For purposes of this Section 3(F), the number of shares of Class A Common Stock which shall be deliverable upon the conversion of all outstanding shares of Series C Convertible Preferred Stock shall be computed as if at the time of computation all outstanding shares of Series C Convertible Preferred Stock were held by a single holder. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value (if any) of the shares of Class A Common Stock deliverable upon conversion of the shares of Series C Convertible Preferred Stock, the Company shall take any corporate action (including shareholder action) which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of Class A Common Stock at such adjusted Conversion Price. (G) The Company shall pay any and all documentary stamp, issue or transfer taxes, and any other similar taxes payable in respect of the issue or delivery of shares of Class A Common Stock upon conversion of shares of Series C Convertible Preferred Stock pursuant hereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Class A Common Stock in a name other than that of the holder of the shares of Series C Convertible Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid. (H) Notwithstanding any other provision herein to the contrary, in case of any merger or consolidation to which the Company is a party (other than a merger or consolidation in which the Company is the continuing entity and in which the Class A Common Stock outstanding immediately prior to the merger or consolidation is not exchanged for cash, or the securities or other property of another entity), or in the case of any sale or transfer of all or substantially all of the Company's property and assets to another entity, or in the case of any statutory exchange of -11- securities with another corporation (other than in connection with a merger or acquisition), there will be no adjustment of the Conversion Price, and lawful provision shall be made by the entity formed by such consolidation or the entity whose securities, cash or other property will immediately after the merger or consolidation be owned, by virtue of the merger or consolidation, by the holders of Class A Common Stock immediately prior to the merger or consolidation, or the entity which shall have acquired such assets of the Company, such that each share of Series C Convertible Preferred Stock then outstanding will, without the consent of the holder thereof become convertible into the kind and amount of securities, cash or other property receivable upon such merger, consolidation, sale or transfer by a holder of the number of shares of Class A Common Stock into which such share of Series C Convertible Preferred Stock was convertible immediately prior to such merger, consolidation, sale or transfer assuming such holder of Class A Common Stock did not exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such merger, consolidation, sale or transfer. In the case of a cash merger of the Company into another entity or any other cash transaction of the type mentioned in this Section 3(H), each share of Series C Convertible Preferred Stock will thereafter be convertible at the Conversion Price in effect at such time into the same amount of cash per share into which each share of Series C Convertible Preferred Stock would have been convertible had such share been converted into Class A Common Stock immediately prior to the effective date of such cash merger or transaction. The above provisions of this Section 3(H) shall similarly apply to successive mergers, consolidations, sales or transfers. (I) The Company covenants that all shares of Class A Common Stock which may be delivered upon conversion of shares of Series C Convertible Preferred Stock will upon delivery be duly and validly issued and fully paid and non-assessable. The Company covenants that if any shares of Class A Common Stock to be provided for the purpose of conversion of shares of Series C Convertible Preferred Stock hereunder require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued upon conversion, the Company will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. The Company further covenants that so long as the Class A Common Stock shall be listed on the Nasdaq National Market or any national securities exchange, the Company will, if permitted by the rules of such exchange or market, list and keep listed so long as the Class A Common Stock shall be so listed on such exchange or market, all Class A Common Stock issuable upon conversion of the shares of Series C Convertible Preferred Stock. 4. Conversion Upon Change of Control. Notwithstanding anything contained in Section 3 herein, upon a Change of Control of the Company, holders of Series C Convertible Preferred Stock shall, if the Market Value at such time is less than the Conversion Price, have a one time option, upon not less than 30 days' notice nor more than 60 days' notice, to convert all of their outstanding shares of Series C Convertible Preferred Stock into shares of Class A Common Stock at an adjusted Conversion Price equal to the greater of (1) the Market Value as of -12- the date of the Change of Control and (2) $68.00. In lieu of issuing the shares of Class A Common Stock issuable upon conversion in the event of a Change of Control, the Company may, at its option, make a cash payment equal to the Market Value of such Class A Common Stock otherwise issuable. 5. Liquidation Rights. Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, subject to the rights of the Company's creditors and holders of Senior Securities, each holder of shares of the Series C Convertible Preferred Stock shall be entitled to payment out of the assets of the Company available for distribution of an amount equal to the liquidation preference per share of Series C Convertible Preferred Stock held by such holder, plus an amount equal to accrued and unpaid dividends, if any, to the date fixed for liquidation, dissolution or winding-up before any distribution is made on any Junior Securities, including, without limitation, the Common Stock and the Series B Preferred Stock. After payment in full of the liquidation preference and an amount equal to all accrued and unpaid dividends, if any, to which holders of Series C Convertible Preferred Stock are entitled, such holders will not be entitled to any further participation in any distribution of assets of the Company. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the amounts payable with respect to the Series C Convertible Preferred Stock and any Parity Securities are not paid in full, the holders of the Series C Convertible Preferred Stock and any Parity Securities will share equally and ratably in any distribution of assets of the Company in proportion to the full liquidation preference and accumulated and unpaid dividends, if any, to which each is entitled. However, the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company, or the consolidation or merger of the Company with or into one or more Persons will not be deemed to be a voluntary or involuntary liquidation, dissolution or winding-up of the Company, unless such sale, conveyance, exchange or transfer shall be in connection with a liquidation, dissolution or winding-up of the business of the Company. Each holder of shares of Series C Preferred Stock shall be entitled to payment out of the assets of the Company available for distribution of an amount equal to the liquidation preference per share of Series C Convertible Preferred Stock held by such holder, plus an amount equal to accrued and unpaid dividends, if any, to the date fixed for liquidation, dissolution or winding-up before any distribution is made on any Series C Convertible Preferred Stock. The holder of any shares of Series C Convertible Preferred Stock shall not be entitled to receive any payment owed for such shares under this Section 5 until such holder shall cause to be delivered to the Company (i) the certificate(s) representing such shares of Series C Convertible Preferred Stock and (ii) transfer instrument(s) satisfactory to the Company and sufficient to transfer such shares of Series C Convertible Preferred Stock to the Company free of any adverse interest. As in the case of the Redemption Price referred to below, no interest shall accrue on any payment upon liquidation after the date thereof. -13- 6. Optional Redemption. (A) Except as provided in Section 7 hereof, the Company may not redeem the Series C Convertible Preferred Stock prior to February 1, 2003. Subject to the requirement of legally available funds therefor, the Series C Convertible Preferred Stock may be redeemed, in whole or from time to time in part, at the option of the Company on or after February 1, 2003, on any date set by the Board of Directors, for cash or, at the option of the Company, for shares of Class A Common Stock during the twelve-month periods commencing on February 1 of the years indicated below, at the following redemption premiums (expressed as a percentage of the liquidation preference per share), plus in each case all accumulated and unpaid dividends (whether or not declared) to the redemption date (the "Redemption Price"): Redemption Premium Year Per Share ---- --------- 2003 104.550% 2004 103.900% 2005 103.250% 2006 102.600% 2007 101.950% 2008 101.300% 2009 100.650% 2010 and thereafter 100.000% Notwithstanding anything to the contrary contained herein, the Company may not redeem any shares of Series C Convertible Preferred Stock so long as any dividends or other distributions on the Series C Convertible Preferred Stock are accrued and unpaid. (B) In the event that the Company elects to redeem the Series C Convertible Preferred Stock with shares of Class A Common Stock, the Company shall issue in payment of the Redemption Price for each share of Series C Convertible Preferred Stock to be redeemed such number of shares of Class A Common Stock as equals (x) the then-current Redemption Price of the Series C Convertible Preferred Stock, divided by (y) 97% of the Market Value as of the Redemption Date. In order for the Company to exercise the option by paying the Redemption Price in its Class A Common Stock, a shelf registration statement must be effective between and including the date the notice of the Redemption Date is mailed pursuant to Section 6(D) hereof and such Redemption Date for the resale of the Series C Convertible Preferred Stock and the Class A Common Stock into which such Series C Convertible Preferred Stock is convertible. The "closing price" for each day shall be the last reported sale price regular way of the Class A Common Stock, or in case no such sales price takes place on such day, the average of the last reported bid and asked price, in either case, on the principal national securities exchange on which the Class A Common Stock is admitted to trading or is then listed, or if not admitted or listed in trading on such exchange, the representative closing price bid price as reported by the Nasdaq National Market. At any time such shares of Class A Common Stock are not listed on -14- the Nasdaq National Market, the Market Value shall be the fair market value thereof determined by the Board of Directors in good faith. For the purposes of this Section 6, "trading day" shall mean a day on which the securities exchange specified for purposes of this Section 6 shall be open for business or, if the shares of Class A Common Stock shall not be listed on such exchange for such period, a day with respect to which quotations of the character referred to in the next preceding sentence shall be reported. In lieu of any fractional share of Class A Common Stock which would otherwise be issued upon any redemption of Series C Convertible Preferred Stock, the Company shall pay a cash adjustment in respect of such fractional interest in an amount in cash (computed to the nearest cent) equal to the Market Value multiplied by the fractional interest to the nearest 1/1,000th of a percent that otherwise would have been deliverable upon such redemption of such Series C Convertible Preferred Stock. (C) In case of the redemption of less than all of the then outstanding Series C Convertible Preferred Stock, the shares of Series C Convertible Preferred Stock to be redeemed shall be redeemed pro rata or by lot or in such other manner as the Board of Directors may determine. (D) Not more than 60 days nor less than 20 days prior to the date specified therein for redemption (the "Redemption Date"), notice by first class mail, postage prepaid, shall be given to each holder of record of the Series C Convertible Preferred Stock to be redeemed, at such holder's address as it shall appear upon the stock transfer books of the Company. Each such notice of redemption shall specify the date fixed for redemption, the Redemption Price, whether the Series C Convertible Preferred Stock will be redeemed for cash or Class A Common Stock, the place or places of payment, that delivery of cash or shares of Class A Common Stock will be made upon presentation and surrender of the certificate(s) evidencing the shares of Series C Convertible Preferred Stock to be redeemed, that on and after the redemption date, dividends will cease to accrue on such shares, the then effective Conversion Price pursuant to Section 3 hereof and that the right of holders to convert shall terminate at the close of business on the date immediately prior to the redemption date (unless the Company defaults in the payment of the Redemption Price). (E) Any funds deposited with a bank or trust company for the purpose of redeeming Series C Convertible Preferred Stock shall be irrevocable except that: (i) the Company shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and (ii) any balance of monies so deposited by the Company and unclaimed by the holders of the Series C Convertible Preferred Stock entitled thereto at the expiration of two years from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereto, to the Company, and after such repayment, the holders of the shares entitled to the Funds so repaid to the Company shall look only to the Company for payment without interest or other earnings. -15- (F) Any notice that is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the holder of the Series C Convertible Preferred Stock receives such notice; and failure to give such notice by mail, or any defect in such notice, to the holders of any shares designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series C Convertible Preferred Stock. On or after the date fixed for redemption as stated in such notice, each holder of the shares called for redemption shall surrender the certificate evidencing such shares to the Company at the place designated in such notice and shall thereupon be entitled to receive delivery of cash or shares of Class A Common Stock as herein provided. If less than all the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. If, on the date fixed for redemption, shares of Class A Common Stock and Funds necessary for the redemption shall be available therefor and shall have been irrecoverably deposited or set aside, then, notwithstanding that the certificates evidencing any shares so called for redemption shall not have been surrendered the dividends with respect to the shares so called shall cease to accrue after the date fixed for redemption, the shares shall no longer be deemed outstanding, the holders thereof shall cease to be holders of Series C Convertible Preferred Stock, and all rights whatsoever with respect to the shares so called for redemption (except the right of the holders to receive delivery of cash or shares of Class A Common Stock as herein provided without interest or adjustment upon surrender of their certificates representing shares of Series C Convertible Preferred Stock) shall terminate. At the close of business on the redemption date, each holder of Series C Convertible Preferred Stock so redeemed (unless the Company defaults on its obligations to deliver cash or shares of Class A Common Stock) shall be, without any further action, deemed a holder of cash or the number of shares of Class A Common Stock for which such Series C Convertible Preferred Stock is redeemable. (G) The shares of Series C Convertible Preferred Stock shall not be subject to the operation of any purchase, retirement, mandatory redemption or sinking Fund. (H) The holder of any shares of Series C Convertible Preferred Stock redeemed upon any exercise of the Company's redemption right shall not be entitled to receive cash or shares of Class A Common Stock for such shares until such holder shall cause to be delivered to the place specified in the notice given with respect to such redemption (i) the certificate(s) representing such shares of Series C Convertible Preferred Stock redeemed and (ii) transfer instrument(s) satisfactory to the Company and sufficient to transfer such shares of Series C Convertible Preferred Stock to the Company free of any adverse interest. (I) All shares of Class A Common Stock which may be delivered upon redemption of the Series C Convertible Preferred Stock will upon delivery be duly and validly issued, freely tradable and fully paid and non-assessable, and prior to giving any notice of redemption the company shall take any corporate action necessary therefor. (J) In the event that any shares of Series C Convertible Preferred Stock shall be converted into Class A Common Stock prior to any Redemption Date pursuant to Section 3 hereof, then (i) the Company shall not have the right to redeem such shares and (ii) shares of Class A Common Stock and any funds which shall have been deposited for the payment of the -16- Redemption Price for such shares of Series C Convertible Preferred Stock shall be returned to the Company immediately after such conversion (subject to declared dividends payable pursuant to Section 3(B) hereof). 7. Special Redemption. Notwithstanding anything contained in Section 6 hereof, the company may redeem the Series C Convertible Preferred Stock at a redemption premium of 105.525% of the liquidation preference, plus accumulated and unpaid dividends, if any, whether or not declared, to the redemption date (the "Provisional Redemption Date") on or after August 1, 2001 but prior to February 1, 2003 (the "Provisional Redemption"), if the trading price of the Class A Common Stock equals or exceeds $191.25 per share for 20 trading days within any 30 trading day period. If the Company undertakes a Provisional Redemption, holders of Series C Convertible Preferred Stock that the Company calls for redemption, shall, in addition to the payments required by the preceding sentence, also receive a payment (the "Additional Payment") in an amount equal to the present value of the aggregate value of the dividends that would thereafter have been payable on the Series C Convertible Preferred Stock (whether or not declared) on or after the Provisional Redemption Date but prior to February 1, 2003 (the "Additional Period"). The present value will be calculated using the bond equivalent yield on U.S. Treasury notes or bills having a term nearest in length to that of the Additional Period on the day immediately preceding the date on which a notice of Provisional Redemption is mailed. The Company will be obligated to make the Additional Payment on all Series C Convertible Preferred Stock that it has called for Provisional Redemption, whether or not those shares of Series C Convertible Preferred Stock are converted into shares of Class A Common Stock prior to the Provisional Redemption Date. 8. Voting Rights. (A) The holders of record of shares of the Series C Convertible Preferred Stock shall have no voting rights, except as required by law and as hereinafter provided in this Section 8. In exercising any such voting rights, each outstanding share of Series C Convertible Preferred Stock will be entitled to one vote, excluding shares of its own capital stock belonging to the Company or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Company, which shares will have no voting rights. (B) Whenever dividends on the Series C Convertible Preferred Stock shall be in arrears in an amount equal to at least six quarterly dividends (whether or not consecutive), (i) the number of members of the Board of Directors shall be increased by two, effective as of the time of election of such directors as hereinafter provided, and (ii) the holders of the Series C Convertible Preferred Stock (voting separately as a class with all other shares of preferred stock or preference securities having similar voting rights) shall have the exclusive right to vote for and elect such two additional directors of the Company at any meeting of stockholders of the Company at which directors are to be elected held during the period such dividends remain in arrears. The right of the holders of the Series C Convertible Preferred Stock to vote for such two additional directors shall terminate when all accrued and unpaid dividends on the Series C Convertible Preferred Stock have been declared and paid or set aside for payment. The term of -17- office of all directors so elected shall terminate immediately upon the termination of the right of the holders of the Series C Convertible Preferred Stock and such other shares of preferred stock or preference securities having similar voting rights to vote for such two additional directors. The foregoing right of the holders of the Series C Convertible Preferred Stock with respect to the election of two directors may be exercised at any annual meeting of stockholders or at any special meeting of stockholders held for the purpose of electing directors. If the right to elect directors shall have accrued to the holders of the Series C Convertible Preferred Stock more than 90 days preceding the date established for the next annual meeting of stockholders, the Board of Directors shall, within 20 days after the delivery to the Company at its principal office of a written request for a special meeting signed by the holders of at least 25% of the Series C Convertible Preferred Stock then outstanding, call a special meeting of the Series C Convertible Preferred Stock to be held within 60 days after the delivery of such request for the purpose of electing such additional directors. The holders of the Series C Convertible Preferred Stock and any other shares of preferred stock or preference securities having similar voting rights, voting as a class shall have the right to remove without cause at any time and replace any directors such holders have elected pursuant to this Section 8, and such directors shall not be removed without cause except by such holders. (C) So long as the Series C Convertible Preferred Stock is outstanding, the Company shall not, without the affirmative vote of the holders of at least 66 2/3% of all outstanding shares of Series C Convertible Preferred Stock (unless the vote of a greater percentage is required by applicable law or the Certificate of Incorporation), voting separately as a class, (i) issue any class or series of stock, or security convertible into stock or evidencing a right to purchase any shares of any class or series of stock ranking senior to the Series C Convertible Preferred Stock as to dividends, liquidation rights or voting rights or (ii) amend, alter or repeal (by merger, consolidation or otherwise) any provision of the Certificate of Incorporation or the By-laws of the Company, as amended, so as to affect materially and adversely the relative rights, preferences, qualifications, limitations or restrictions of the Series C Convertible Preferred Stock. The authorization or issuance of Parity Securities will not, by itself, be deemed to adversely affect the relative rights, preferences, qualifications, limitations or restrictions of the Series C Convertible Preferred Stock within the meaning of clause (ii) of the foregoing sentence. The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Series C Convertible Preferred Stock shall have been redeemed or called for redemption upon proper notice and sufficient shares of Class A Common Stock, if needed, shall have been reserved by the Company to effect such redemption. 9. Adjustments. The liquidation preference and the Redemption Price set forth herein shall each be subject to equitable adjustment whenever there shall occur a stock split, combination, reclassification or other similar event involving the Series C Convertible Preferred Stock. Such adjustments shall be determined in good faith by the Board of Directors and submitted by the Board of Directors to the Transfer Agent. -18- 10. Exclusion of Other Rights. Except as may otherwise be required by law, the shares of Series C Convertible Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this Certificate of Designation or the Certificate of Incorporation. The shares of Series C Convertible Preferred Stock shall have no preemptive or subscription rights. 11. Preferred Stock Certificates. (A) Form and Dating. The Series C Convertible Preferred Stock and the Transfer Agent's certificate of authentication shall be substantially in the form of Exhibit A hereto. The Series C Convertible Preferred Stock may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Series C Convertible Preferred Stock certificate shall be dated the date of its authentication. The terms and provisions contained in the Series C Convertible Preferred Stock shall constitute, and are hereby expressly made, a part of this Certificate of Designation. The Series C Convertible Preferred Stock sold in reliance on Rule 144A shall be issued initially in the form of one or more fully registered global shares with the private placement legend in Section 11(C)(vi)(a)(A) and the global securities legend in Section 11(C)(vi)(b) and set forth in Exhibit A hereto (the "Global Shares"), which shall be deposited on behalf of the purchasers represented thereby with the Transfer Agent, at its New York office, as custodian for the Depository Trust Company ("DTC," and together with any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provision of this Certificate of Designation, the "Depositary") or with such other custodian as DTC may direct, and registered in the name of DTC or a nominee of DTC, duly executed by the Company and authenticated by the Transfer Agent as hereinafter provided. Subject to the terms hereof and to the requirements of applicable law, the number of shares of Series C Convertible Preferred Stock represented by Global Shares may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Share to reflect the amount of any increase or decrease in the number of shares of Series C Convertible Preferred Stock outstanding represented thereby shall be made by the Transfer Agent as hereinafter provided. Members of, or participants in, DTC ("Participants") shall have no rights under this Certificate of Designation with respect to any Global Shares held on their behalf by DTC or by the Transfer Agent as the custodian of DTC or under such Global Share, and DTC may be treated by the Company, the Transfer Agent and any agent of the Company or the Transfer Agent as the absolute owner of such Global Shares for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Transfer Agent or any agent of the Company or the Transfer Agent from giving effect to any written certification, proxy or other authorization furnished by DTC or impair, as between DTC and its Participants, the operation of customary practices of DTC governing the exercise of the rights of a holder of a beneficial interest in any Global Share. Except as otherwise provided by applicable law or as provided in Section 11(C) hereof, owners of beneficial interests in Global Shares will not be entitled to receive physical delivery of Series C Convertible Preferred Stock in definitive form registered in the name of such owner ("Certificated Shares"). -19- (B) Execution and Authentication. Two officers shall sign the certificates representing the Series C Convertible Preferred Stock for the Company by manual or facsimile signature. If an officer whose signature is on a certificate representing Series C Convertible Preferred Stock no longer holds that office at the time the Transfer Agent authenticates such certificate, the shares of Series C Convertible Preferred Stock evidenced thereby shall nevertheless be valid. A certificate representing Series C Convertible Preferred Stock shall not be valid until authenticated by the manual signature of the Transfer Agent. The signature shall be conclusive evidence that the certificate representing Series C Convertible Preferred Stock has been authenticated under this Certificate of Designation. The Transfer Agent shall, upon a written order of the Company signed by two officers (an "Authentication Order"), authenticate a certificate representing Series C Convertible Preferred Stock for original issue and, from time to time, upon notice from the Company, increase the number of shares evidenced by such certificate for the payment of dividends in accordance with Section 2 hereof. The Transfer Agent also shall, upon receipt of an Authentication Order, authenticate certificates representing shares of Series C Convertible Preferred Stock for issue only as payment of dividends in accordance with the terms described herein. Notwithstanding the foregoing, in no event shall the number of additional shares of Series C Convertible Preferred Stock, plus the total number of shares of Series C Convertible Preferred Stock then outstanding, exceed the total number of shares of Series C Convertible Preferred Stock then authorized by the Certificate of Incorporation. The Transfer Agent may appoint an authenticating agent acceptable to the Company to authenticate shares of Series C Convertible Preferred Stock. An authenticating agent may authenticate shares of Series C Convertible Preferred Stock whenever the Transfer Agent may do so. Each reference in this Certificate of Designation to authentication by the Transfer Agent includes authentication by such agent. An authenticating agent has the same rights as the Transfer Agent or agent for service of notices and demands. (C) Transfer and Exchange. (i) Transfer and Exchange of Global Shares. A Global Share may not be transferred as a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary or to another nominee of the Depositary, the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. All Global Shares will be exchanged by the Company for Certificated Shares if (i) the Company delivers to the Transfer Agent notice from the Depositary that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, a successor Depositary is not appointed by the Company within 120 days after the date of such notice from the Depositary or (ii) the Company in its sole discretion determines that -20- the Global Shares (in whole but not in part) should be exchanged for Certificated Shares and delivers a written notice to such effect to the Transfer Agent. Upon the occurrence of either of the preceding events in (i) or (ii) above, Certificated Shares shall be issued in such names as the Depositary shall instruct the Transfer Agent. Global Shares also may be exchanged or replaced, in whole or in part, as provided in Sections 11(D) and 11(G) hereof. Every certificate evidencing Series C Convertible Preferred Stock authenticated and delivered in exchange for, or in lieu of, a Global Share or any portion thereof, pursuant to this Section 11(C) or Section 11(D) or 11(G) hereof, shall be authenticated and delivered in the form of, and shall be, a Global Share. A Global Share may not be exchanged for another Global Share other than as provided in this Section 11(C)(i), however, beneficial interests in a Global Share may be transferred and exchanged as provided in Section 11(C)(ii) or (iii) hereof. (ii) Transfer and Exchange of Beneficial Interests in the Global Shares. (a) The transfer and exchange of beneficial interests in the Global Shares shall be effected through the Depositary, in accordance with the provisions of this Certificate of Designation and the Applicable Procedures. Beneficial interests in the Restricted Global Shares shall be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Beneficial interests in any Restricted Global Share may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Restricted Global Share in accordance with the transfer restrictions set forth in the Private Placement Legend. Beneficial interests in any Unrestricted Global Share may be transferred to persons who take delivery thereof in the form of a beneficial interest in an Unrestricted Global Share. No written orders or instructions shall be required to be delivered to the Transfer Agent to effect the transfers described in this Section 11(C)(ii). (b) A beneficial interest in any Restricted Global Share may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in a Unrestricted Global Share representing the same number of shares of Series C Convertible Preferred Stock only if the transferor of such beneficial interest delivers to the Transfer Agent either (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in the other Global Share in an amount equal to the beneficial interest to be transferred and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase, and: (A) such transfer is effected pursuant to the Series C Convertible Preferred Stock Registration Statement in accordance with the Series C Convertible Preferred Stock Registration Rights Agreement; or -21- (B) the Transfer Agent receives the following: (i) if the holder of such beneficial interest in a Restricted Global Share proposes to exchange such beneficial interest for a beneficial interest in an Unrestricted Global Share, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(a) thereof; or (ii) if the holder of such beneficial interest in a Restricted Global Share proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a beneficial interest in an Unrestricted Global Share, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (B), if the Transfer Agent so requests or if the Applicable Procedures so require, an opinion of counsel in form reasonably acceptable to the Transfer Agent to the effect that such transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. Beneficial interests in an Unrestricted Global Share cannot be exchanged for, or transferred to persons who take delivery thereof in the form of, a beneficial interest in a Restricted Global Share. (iii) Transfer and Exchange of Beneficial Interests in Global Shares for Certificated Shares. (a) Beneficial Interests in Restricted Global Shares to Restricted Certificated Shares. If any holder of a beneficial interest in a Restricted Global Share proposes to exchange such beneficial interest for a Restricted Certificated Share representing the same number of shares of Series C Convertible Preferred Stock or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Certificated Share representing the same number of shares of Series C Convertible Preferred Stock, then, upon receipt by the Transfer Agent of the following documentation: (A) if the holder of such beneficial interest in a Restricted Global Share proposes to exchange such beneficial interest for a Restricted Certificate Share, a certificate from such -22- holder in the form of Exhibit C hereto, including the certifications in item (2)(a) thereof; (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such beneficial interest is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such beneficial interest is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (F) if such beneficial interest is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Transfer Agent shall cause the number of shares of Series C Convertible Preferred Stock represented by the applicable Global Share to be reduced accordingly, and the Company shall execute and the Transfer Agent shall authenticate and deliver to the Person designated in the instructions a Certificated Share representing such number of shares. Any Certificated Share issued in exchange for a beneficial interest in a Restricted Global Share issued in exchange for a beneficial interest in a Restricted Global Share shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Transfer Agent through instructions from the Depositary and the Participant or Indirect Participant. The Transfer Agent shall deliver such Certificated Shares to the Persons in whose names such Series C Convertible Preferred Stock is so registered. Any Certificated Share issued in exchange for a beneficial interest in a Restricted Global Share pursuant to this Section 11(C)(iii)(a) shall bear the -23- Private Placement Legend and shall be subject to all restrictions on transfer contained therein. (b) Beneficial Interests in Restricted Global Shares to Unrestricted Certificated Shares. A holder of a beneficial interest in a Restricted Global Share may exchange such beneficial interest for an Unrestricted Certificated Share representing the same number of shares of Series C Convertible Preferred Stock or may transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Certificated Share representing the same number of shares of Series C Convertible Preferred Stock only if: (A) such transfer is effected pursuant to the Series C Convertible Preferred Stock Registration Statement in accordance with the Series C Convertible Preferred Stock Registration Rights Agreement; or (B) the Transfer Agent receives the following: (i) if the holder of such beneficial interest in a Restricted Global Share proposes to exchange such beneficial interest for a Certificated Share that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(b) thereof; or (ii) if the holder of such beneficial interest in a Restricted Global Share proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a Certificated Share that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, each such case set forth in this subparagraph (B), if the Transfer Agent so requests or if the Applicable Procedures so require, an opinion of counsel in form reasonably acceptable to the Transfer Agent to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (c) Beneficial Interests in Unrestricted Global Shares to Unrestricted Certificated Shares. If any holder of a beneficial interest in an Unrestricted Global Share proposes to exchange such beneficial interest for a Certificated Share representing the same number of shares of Series C Convertible Preferred Stock or to transfer such beneficial interest -24- to a Person who takes delivery thereof in the form of a Certificated Share representing the same number of shares of Series C Convertible Preferred Stock, then, upon the delivery by the transferor of such beneficial interest to the Transfer Agent of either (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to debit or cause to be debited a beneficial interest in the Global Share in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be debited, the Transfer Agent shall cause the number of shares of Series C Convertible Preferred Stock represented by the applicable Global Share to be reduced accordingly pursuant to Section 11(C)(vii) hereof, and the Company shall execute and the Transfer Agent shall authenticate and deliver to the Person designated in the instructions a Certificated Share representing such number of shares. Any Certificated Share issued in exchange for a beneficial interest pursuant to this Section 11(C)(iii)(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Transfer Agent through instructions from the Depositary and the Participant or Indirect Participant. The Transfer Agent shall deliver such Certificated Shares to the Persons in whose names such Series C Convertible Preferred Stock is so registered. Any Certificated Share issued in exchange for a beneficial interest pursuant to this Section 11(C)(iii)(c) shall not bear the Private Placement Legend. (iv) Transfer and Exchange of Certificated Shares for Beneficial Interests. (a) Restricted Certificated Shares to Beneficial Interests in Restricted Global Shares. If any Holder of a Restricted Certificated Share proposes to exchange such Series C Convertible Preferred Stock for a beneficial interest in a Restricted Global Share representing the same number of shares of Series C Convertible Preferred Stock or to transfer such Restricted Certificated Shares to a Person who takes delivery thereof in the form of a beneficial interest in a Restricted Global Share representing the same number of shares of Series C Convertible Preferred Stock, then, upon receipt by the Transfer Agent of the following documentation: (A) if the Holder of such Restricted Certificated Share proposes to exchange such Series C Convertible Preferred Stock for a beneficial interest in a Restricted Global Share, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (2)(b) thereof; -25- (B) if such Restricted Certificated Share is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such Restricted Certificated Share is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (D) if such Restricted Certificated Share is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (E) if such Restricted Certificated Share is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Transfer Agent shall cancel the Restricted Certificated Share, increase or cause to be increased number of shares of Series C Convertible Preferred Stock represented by the Global Share. At no time shall holders of Certificated Shares be able to transfer or exchange their Series C Convertible Preferred Stock for a beneficial interest in a Global Share in reliance on Regulation S under the Securities Act. (b) Restricted Certificated Shares to Beneficial Interests in Unrestricted Global Shares. A Holder of a Restricted Certificated Share may exchange such Series C Convertible Preferred Stock for a beneficial interest in an Unrestricted Global Share representing the same number of shares of Series C Convertible Preferred Stock or transfer such Restricted Certificated Share to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Share representing the same number of shares of Series C Convertible Preferred Stock only if: (A) such transfer is effected pursuant to the Series C Convertible Preferred Stock Registration Statement in accordance with the Series C Convertible Preferred Stock Registration Rights Agreement; or (B) the Transfer Agent receives the following: -26- (i) if the Holder of such Certificated Shares proposes to exchange such Series C Convertible Preferred Stock for a beneficial interest in the Unrestricted Global Share, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(c) thereof; or (ii) if the Holder of such Certificated Shares proposes to transfer such Series C Convertible Preferred Stock to a Person who shall take delivery thereof in the form of a beneficial interest in the Unrestricted Global Share, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (B), if the Transfer Agent so requests or if the Applicable Procedures so require, an opinion of counsel in form reasonably acceptable to the Transfer Agent to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. Upon satisfaction of the conditions of any of the subparagraphs in this Section 11(C)(iv)(b), the Transfer Agent shall cancel the Certificated Shares and increase or cause to be increased the number of shares of Series C Convertible Preferred Stock represented by the Unrestricted Global Share. (c) Unrestricted Certificated Shares to Beneficial Interests in Unrestricted Global Shares. A Holder of an Unrestricted Certificated Share may exchange such Series C Convertible Preferred Stock for a beneficial interest in an Unrestricted Global Share representing the same number of shares of Series C Convertible Preferred Stock or transfer such Certificated Shares to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Share representing the same number of shares of Series C Convertible Preferred Stock at any time. Upon receipt of a request for such an exchange or transfer, the Transfer Agent shall cancel the applicable Unrestricted Certificated Share and increase or cause to be increased the number of shares of Series C Convertible Preferred Stock represented by one of the Unrestricted Global Shares. (v) Transfer and Exchange of Certificated Shares for Certificated Shares. Upon request by a Holder of Certificated Shares and such Holder's compliance with the provisions of this Section 11(C)(v), the Transfer Agent shall register the transfer or exchange of Certificated Shares. Prior to such registration -27- of transfer or exchange, the requesting Holder shall present or surrender to the Transfer Agent the Certificated Shares duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Transfer Agent duly executed by such Holder or by his attorney, duly authorized in writing. In addition, the requesting Holder shall provide any additional certifications, documents and information, as applicable, required pursuant to the following provisions of this Section 11(C)(v). (a) Restricted Certificated Shares to Restricted Certificated Shares. Any Restricted Certificated Share may be transferred to and registered in the name of Persons who take delivery thereof in the form of a Restricted Certificated Share if the Transfer Agent receives the following: (A) if the transfer will be made pursuant to Rule 144A under the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transfer will be made pursuant to Rule 903 or Rule 904, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transfer will be made pursuant to any other exemption from the registration requirements of the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications, certificates and opinion of counsel required by item (3) thereof, if applicable. (b) Restricted Certificated Shares to Unrestricted Certificated Shares. Any Restricted Certificated Share may be exchanged by the Holder thereof for an Unrestricted Certificated Share or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Certificated Share if: (A) any such transfer is effected pursuant to the Series C Convertible Preferred Stock Registration Statement in accordance with the Series C Convertible Preferred Stock Registration Rights Agreement; or (B) the Transfer Agent receives the following: (i) if the Holder of such Restricted Certificated Shares proposes to exchange such Series C Convertible Preferred -28- Stock for an Unrestricted Certificated Share, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(d) thereof; or (ii) if the Holder of such Restricted Certificated Shares proposes to transfer such Series C Convertible Preferred Stock to a Person who shall take delivery thereof in the form of an Unrestricted Certificated Share, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (B), the Transfer Agent so requests, an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (c) Unrestricted Certificated Shares to Unrestricted Certificated Shares. A Holder of Unrestricted Certificated Shares may transfer such Series C Convertible Preferred Stock to a Person who takes delivery thereof in the form of an Unrestricted Certificated Share. Upon receipt of a request to register such a transfer, the Transfer Agent shall register the Unrestricted Certificated Shares pursuant to the instructions from the Holder thereof. (vi) Legends. The following legends shall appear on the face of all Global Shares and Certificated Shares issued under this Certificate of Designation unless specifically stated otherwise in the applicable provisions of this Certificate of Designation. (a) Private Placement Legend. (A) Except as permitted by subparagraph (B) below, each Global Share and each Certificated Share (and all Series C Convertible Preferred Stock issued in exchange therefor or substitution thereof) shall bear the legend in substantially the following form. "THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE NEXT SENTENCE HEREOF. BY ITS -29- ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER: (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (B) IT HAS ACQUIRED THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT; (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRANSFER AGENT A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE TRANSFER OF THIS SECURITY (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRANSFER AGENT) AND, IF THE COMPANY SO REQUESTS AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (G) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE CERTIFICATE OF DESIGNATION, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND -30- QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF CONTAINS A PROVISION REQUIRING THE TRANSFER AGENT TO REFUSE TO REGISTER ANY TRANSFER OF THIS SECURITY IN VIOLATION OF THE FOREGOING." (B) Notwithstanding the foregoing, any Global Share or Certificated Share issued pursuant to subparagraphs (ii)(b), (iii)(b), (iii)(c), (iv)(b), (iv)(c), (v)(b) or (v)(c) to this Section 11(C) (and all Series C Convertible Preferred Stock issued in exchange therefor or substitution thereof) shall not bear the Private Placement Legend. (b) Global Share Legend. Each Global Share shall bear a legend in substantially the following form: "THIS GLOBAL SHARE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF GOVERNING THIS SECURITY) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRANSFER AGENT MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 11(C) OF THE CERTIFICATE OF DESIGNATION, (II) THIS GLOBAL SHARE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 11(C)(i) OF THE CERTIFICATE OF DESIGNATION, (III) THIS GLOBAL SHARE MAY BE DELIVERED TO THE TRANSFER AGENT FOR CANCELLATION PURSUANT TO SECTION 11(G) OF THE CERTIFICATE OF DESIGNATION AND (IV) THIS GLOBAL SHARE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY." (vii) Cancellation and/or Adjustment of Global Shares. At such time as all beneficial interests in a particular Global Share have been exchanged for Certificated Shares or a particular Global Share has been redeemed, repurchased or canceled in whole and not in part, each such Global Share shall be returned to or retained and canceled by the Transfer Agent in accordance with Section 11(G) hereof. At any time prior to such cancellation, if any beneficial interest in a Global Share is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Share or for Certificated Shares, the number of shares of Series C Convertible Preferred Stock represented by such Global Share shall be reduced accordingly and an endorsement shall be made on such Global Share by the Transfer Agent or by the Depositary at the direction of the Transfer Agent to reflect such reduction; and if -31- the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Share, such other Global Share shall be increased accordingly and an endorsement shall be made on such Global Share by the Transfer Agent or by the Depositary at the direction of the Transfer Agent to reflect such increase. (viii) General Provisions Relating to Transfers and Exchanges. (a) To permit registrations of transfers and exchanges, the Company shall execute and the Transfer Agent shall authenticate Global Shares and Certificated Shares upon the Company's order or at the Transfer Agent's request. (b) No service charge shall be made to a holder of a beneficial interest in a Global Share or to a Holder of a Certificated Share for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 3, 4, 6, 7 and 11 hereof). (c) The Transfer Agent shall not be required to register the transfer of or exchange any Series C Convertible Preferred Stock selected for redemption in whole or in part, except the unredeemed portion of any certificate evidencing Series C Convertible Preferred Stock being redeemed in part. (d) All Global Shares and Certificated Shares issued upon any registration of transfer or exchange of Global Shares or Certificated Shares shall be the valid obligations of the Company, entitled to the same benefits under this Certificate of Designation, as the Global Shares or Certificated Shares surrendered upon such registration of transfer or exchange. (e) The Company shall not be required (A) to issue, to register the transfer of or to exchange any Series C Convertible Preferred Stock during a period beginning at the opening of business 15 days before the day of any selection of Series C Convertible Preferred Stock for redemption under Section 6 or Section 7 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Series C Convertible Preferred Stock so selected for redemption in whole or in part, except the unredeemed portion of any certificate evidencing Series C Convertible Preferred Stock being redeemed in part or (c) to register the transfer of or to exchange Series C Convertible Preferred Stock between a record date and the next succeeding Dividend Payment Date. -32- (f) Prior to due presentment for the registration of a transfer of any Series C Convertible Preferred Stock, the Transfer Agent, any agent and the Company may deem and treat the Person in whose name any Series C Convertible Preferred Stock is registered as the absolute owner of such Series C Convertible Preferred Stock, and none of the Transfer Agent, any agent or the Company shall be affected by notice to the contrary. (g) The Transfer Agent shall authenticate Global Shares and Certificated Shares in accordance with the provisions of Section 11(B) hereof. (h) All certifications, certificates and Opinions of Counsel required to be submitted to the Transfer Agent pursuant to this Section 11(C) to effect a registration of transfer or exchange may be submitted by facsimile. (D) Replacement Series C Convertible Preferred Stock. If any mutilated Series C Convertible Preferred Stock certificate is surrendered to the Transfer Agent or the Company and the Transfer Agent receives evidence to its satisfaction of the destruction, loss or theft of any Series C Convertible Preferred Stock certificate, the Company shall issue and the Transfer Agent, upon receipt of an Authentication Order, shall authenticate a replacement certificate evidencing Series C Convertible Preferred Stock if the Transfer Agent's requirements are met. If required by the Transfer Agent or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Transfer Agent and the Company to protect the Company, the Transfer Agent, any agent and any authenticating agent from any loss that any of them may suffer if a Series C Convertible Preferred Stock certificate is replaced. The Company may charge for its expenses in replacing a Series C Convertible Preferred Stock certificate. Every replacement certificate evidencing Series C Convertible Preferred Stock is an additional obligation of the Company and shall be entitled to all of the benefits of this Certificate of Designation equally and proportionately with all other Series C Convertible Preferred Stock duly issued hereunder. (E) Outstanding Series C Convertible Preferred Stock. The Series C Convertible Preferred Stock outstanding at any time is all the Series C Convertible Preferred Stock authenticated by the Transfer Agent except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Share effected by the Transfer Agent in accordance with the provisions hereof, and those described in this Section 11 as not outstanding. If a certificate evidencing Series C Convertible Preferred Stock is replaced pursuant to Section 11(D) hereof, it ceases to be outstanding unless the Transfer Agent receives proof satisfactory to it that the replaced Series C Convertible Preferred Stock is held by a bona fide purchaser. -33- (F) Temporary Series C Convertible Preferred Stock. Until certificates representing Series C Convertible Preferred Stock are ready for delivery, the Company may prepare and the Transfer Agent, upon receipt of an Authentication Order, shall authenticate temporary Series C Convertible Preferred Stock. Temporary Series C Convertible Preferred Stock shall be substantially in the form of certificated Series C Convertible Preferred Stock but may have variations that the Company considers appropriate for temporary Series C Convertible Preferred Stock and as shall be reasonably acceptable to the Transfer Agent. Without unreasonable delay, the Company shall prepare and the Transfer Agent shall authenticate Certificated Shares in exchange for temporary Series C Convertible Preferred Stock. Holders of temporary Series C Convertible Preferred Stock shall be entitled to all of the benefits of this Certificate of Designation. (G) Cancellation. The Company at any time may deliver Series C Convertible Preferred Stock to the Transfer Agent for cancellation. The Transfer Agent and Paying Agent shall forward to the Transfer Agent any Series C Convertible Preferred Stock surrendered to them for registration of transfer, exchange or payment. The Transfer Agent and no one else shall cancel all Series C Convertible Preferred Stock surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy canceled Series C Convertible Preferred Stock (subject to the record retention requirement of the Exchange Act). Certification of the destruction of all canceled Series C Convertible Preferred Stock shall be delivered to the Company. The Company may not issue new Series C Convertible Preferred Stock to replace Series C Convertible Preferred Stock that it has paid or that have been delivered to the Transfer Agent for cancellation. 12. Headings of Subdivisions. The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 13. Severability of Provisions. If any of the voting powers, preferences and relative, participating, optional and other special rights of the Series C Convertible Preferred Stock and qualifications, limitations and restrictions thereof set forth herein is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series C Convertible Preferred Stock and qualifications, limitations and restrictions thereof set forth herein which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Series C Convertible Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series C Convertible Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Series C Convertible Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. -34- 14. Reissuance of Series C Convertible Preferred Stock. Shares of Series C Convertible Preferred Stock that (i) have not been issued on or before February 29, 2000 or (ii) have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged or converted, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company, provided that any issuance of such shares as Series C Convertible Preferred Stock must be in compliance with the terms hereof. 15. Certain Definitions. As used in this Certificate of Designation, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control," as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person shall be deemed to be control. For purposes of this definition, the terms "controlling," "controlled by" and "under common control with" shall have correlative meanings. "Applicable Procedures" means, with respect to any transfer or exchange of or for beneficial interests in any Global Share, the rules and procedures of the Depositary that apply to such transfer or exchange. "Board of Directors" means: (1) with respect to a corporation, the board of directors of the corporation; (2) with respect to a partnership, the Board of Directors of the general partner of the partnership; and (3) with respect to any other Person, the board or committee of such Person serving a similar function. "Business Day" means any day except a Saturday, a Sunday, or any day on which banking institutions in New York, New York are required or authorized by law or other governmental action to be closed. -35- "Capital Stock" means: (1) in the case of a corporation, corporate stock; (2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock; (3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and (4) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Change of Control" means the occurrence of any of the following: (1) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act); (2) the adoption of a plan relating to the liquidation or dissolution of the Company; (3) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that (A) any "person" (as defined above) becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time, upon the happening of an event or otherwise), directly or indirectly, of more of our voting stock, measured by voting power rather than number of shares, than is beneficially owned (as defined above) at such time by the Principal and his Related Parties in the aggregate, (B) the Principal and his Related Parties collectively cease to beneficially own (as defined above) voting stock of the Company having at least 30% of the combined voting power of all classes of the Company's Voting Stock then outstanding or (C) the Principal and his affiliates acquire, in the aggregate, beneficial ownership (as defined above) of more than 22 2/3% of the shares of Class A Common Stock at the time outstanding; or (4) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Continuing Directors" means, as of any date of determination, any member of our Board of Directors who (i) was a member of our Board of Directors on the Issue Date or (ii) was -36- nominated for election or elected to our Board of Directors with the approval of a majority of the Continuing Directors who were members of our Board at the time of such nomination or election. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Global Share Legend" means the legend set forth in Section 11(C)(vi)(b) to be placed on all Series C Convertible Preferred Stock issued under this Certificate of Designation except where otherwise permitted by the provisions of this Certification of Designation. "Holder" means a Person in whose name any Series C Convertible Preferred Stock is registered. "Indirect Participant" means an entity that clears through or maintains a custodial relationship with a Participant, either directly or indirectly. "Issue Date" means the closing date for sale and original issuance of the Series C Convertible Preferred Stock. "Market Value" means the average of the daily closing price (as defined in Section 6(B)) of the Class A Common Stock for the 5 consecutive trading days ending on one trading day prior to such redemption date. "Non-U.S. Person" means a Person who is not a U.S. Person. "Participant" means an entity that is a participating organization in DTC. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, limited liability company or government or other entity. "Principal" means Marshall W. Pagon. "Private Placement Legend" means the legend set forth in Section 11(C)(vi)(a)(A) to be placed on all Series C Convertible Preferred Stock issued under this Certificate of Designation except where otherwise permitted by the provisions of this Certificate of Designation. "QIB" means a "qualified institutional buyer" as defined in Rule 144A of the Securities Act. "Regulation S" means Regulation S promulgated under the Securities Act. "Related Party," with respect to the Principal means (A) any immediate family member of the Principal or (B) any trust, corporation, partnership or other entity, more than 50% of the voting equity interests of which are owned directly or indirectly by, -37- and which is controlled by, the Principal and/or such other Persons referred to in the immediately preceding clause (A). For purposes of this definition, (i) "immediate family member" means spouse, parent, step-parent, child, sibling or step-sibling and (ii) "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such trust, corporation, partnership or other entity, whether through the ownership of voting securities, by agreement or otherwise; provided, that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. In addition, the Principal's estate shall be deemed to be a Related Party until such time as such estate is distributed in accordance with the Principal's will or applicable state law. "Restricted Certificated Share" means a certificated share evidencing Series C Convertible Preferred Stock, registered in the name of the holder thereof, in the form of Exhibit A hereto and bearing the Private Placement Legend. "Restricted Global Share" means a global share in the form of Exhibit A hereto bearing the Global Share Legend and the Private Placement Legend and deposited with or on behalf of, and registered in the name of, the Depositary or its nominee that will be issued in a denomination equal to the outstanding aggregate liquidation preference of the Series C Convertible Preferred Stock sold in reliance on Rule 144A. "Rule 144" means Rule 144 promulgated under the Securities Act. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Rule 903" means Rule 903 promulgated under the Securities Act. "Rule 904" means Rule 904 promulgated under the Securities Act. "Securities Act" means the Securities Act of 1933, as amended. "Series C Convertible Preferred Stock" means the Company's 6 1/2% Series C Convertible Preferred Stock, par value $0.01 per share. "Series C Convertible Preferred Stock Registration Rights Agreement" means the registration rights agreement to be entered into by the Company on or before the Issue Date relating to the registration of the Series C Convertible Preferred Stock under the Securities Act. "Series C Convertible Preferred Stock Registration Statement" means a shelf registration statement pursuant to Rule 415 under the Securities Act, relating to all Series C Convertible Preferred Stock and the Class A Common Stock into which the Series C Convertible Preferred Stock is convertible, that is filed pursuant to the provisions of the Series C Convertible Preferred Stock Registration Rights Agreement, and includes the prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. -38- "Subsidiary" means, with respect to any specified Person: (1) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and (2) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof). "Transfer Agent" means the Transfer Agent for the Series C Convertible Preferred Stock, who shall be First Union National Bank unless and until a successor is selected by the Company. "Unrestricted Certificated Share" means a certificated share evidencing Series C Convertible Preferred Stock, registered in the name of the holder thereof, in the form of Exhibit A hereto and not bearing the Private Placement Legend. "Unrestricted Global Share" means a permanent global share in the form of Exhibit A attached hereto bearing the Global Share Legend and that has the "Schedule of Exchanges of Interests in the Global Share" attached thereto, and that is deposited with or on behalf of and registered in the name of the Depositary, and not bearing the Private Placement Legend. "U.S. Person" means a U.S. person as defined in Rule 902(k) under the Securities Act. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. -39- IN WITNESS WHEREOF, the Company has caused this certificate to be duly executed by Kasin Smith, Acting Chief Financial Officer of the Company, and attested by Scott A. Blank, its Assistant Secretary, this 24th day of January, 2000. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Kasin Smith --------------------------------------- Name: Kasin Smith Title: Acting Chief Financial Officer ATTEST: By: /s/ Scott A. Blank --------------------------- Name: Scott Andrew Blank Title: Assistant Secretary -40- FORMS OF SERIES C CONVERTIBLE PREFERRED STOCK CERTIFICATE [FACE OF SECURITY] THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE NEXT SENTENCE HEREOF. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER: (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (B) IT HAS ACQUIRED THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT; (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRANSFER AGENT A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE TRANSFER OF THIS SECURITY (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRANSFER AGENT) AND, IF THE COMPANY SO REQUESTS AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (G) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION; AND A-1 (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE CERTIFICATE OF DESIGNATION, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF CONTAINS A PROVISION REQUIRING THE TRANSFER AGENT TO REFUSE TO REGISTER ANY TRANSFER OF THIS SECURITY IN VIOLATION OF THE FOREGOING. THIS GLOBAL SHARE IS HELD BY THE DEPOSITARY (AS DEFINED IN THIS CERTIFICATE OF DESIGNATION GOVERNING THIS SECURITY) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRANSFER AGENT MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 11(C) OF THE CERTIFICATE OF DESIGNATION, (II) THIS GLOBAL SHARE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 11(C)(i) OF THE CERTIFICATE OF DESIGNATION, (III) THIS GLOBAL SHARE MAY BE DELIVERED TO THE TRANSFER AGENT FOR CANCELLATION PURSUANT TO SECTION 11(G) OF THE CERTIFICATE OF DESIGNATION AND (IV) THIS GLOBAL SHARE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY. A-2 Certificate Number: CUSIP No.: Number of Shares of Preferred Stock: 6 1/2% Series C Convertible Preferred Stock (par value $0.01 per share) (liquidation preference $100 per share) of Pegasus Communications Corporation Pegasus Communications Corporation, a Delaware corporation (the "Company"), hereby certifies that __________________________________________ (the "Holder") is the registered owner of fully paid and non-assessable preferred securities of the Company designated the 6 1/2% Series C Convertible Preferred Stock (par value $0.01 per share) (liquidation preference $100 per share) (the "Series C Convertible Preferred Stock"). The shares of Series C Convertible Preferred Stock are transferable on the books and records of the Transfer Agent, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Series C Convertible Preferred Stock represented hereby are issued and shall in all respects be subject to the provisions of the Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof, dated January 24, 2000, as the same may be amended from time to time (the "Certificate of Designation"). The number of shares of Series C Convertible Preferred Stock evidenced by this certificate shall be increased, from time to time, upon notice from the Company, for the payment of dividends in accordance with Section 3 of the Certificate of Designation. Capitalized terms used herein but not defined shall have the meaning given them in the Certificate of Designation. The Company will provide a copy of the Certificate of Designation to a Holder without charge upon written request to the Company at its principal place of business. Reference is hereby made to select provisions of the Series C Convertible Preferred Stock set forth on the reverse hereof, and to the Certificate of Designation, which select provisions and the Certificate of Designation shall for all purposes have the same effect as if set forth at this place. Upon receipt of this certificate, the Holder is bound by the Certificate of Designation and is entitled to the benefits thereunder. Unless the Transfer Agent's Certificate of Authentication hereon has been properly executed, these shares of Series C Convertible Preferred Stock shall not be entitled to any benefit under the Certificate of Designation or be valid or obligatory for any purpose. A-3 IN WITNESS WHEREOF, the Company has executed this certificate this 25th day of January, 2000. PEGASUS COMMUNICATIONS CORPORATION By:________________________________ Name: Title: By:________________________________ Name: Title: A-4 TRANSFER AGENT'S CERTIFICATE OF AUTHENTICATION This certificate evidences the number of shares of the Series C Convertible Preferred Stock set forth on the face hereof, which Series C Convertible Preferred Stock is referred to in the within-mentioned Certificate of Designation. Dated:_______________ FIRST UNION NATIONAL BANK, as Transfer Agent, By:_____________________________ Authorized Signatory A-5 [REVERSE OF SECURITY] Dividends on each share of Series C Convertible Preferred Stock shall be payable at a rate per annum set forth in the face hereof or as provided in the Certificate of Designation. The shares of Series C Convertible Preferred Stock shall be redeemable as provided in the Certificate of Designation. The shares of Series C Convertible Preferred Stock shall be convertible at the option of the holder thereof into the Company's Class A Common Stock, par value $0.01 per share, in the manner and according to the terms set forth in the Certificate of Designation. As required under Delaware law, the Company shall furnish to any Holder upon request and without charge, a full summary statement of the Designation, voting rights, preferences, limitations and special rights of the shares of each class or series authorized to be issued by the Company so far as they have been fixed and determined and the authority of the Board of Directors to fix and determine the Designation, voting rights, preferences, limitations and special rights of the class and series of shares of the Company. A-6 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers the shares of Series C Convertible Preferred Stock evidenced hereby to: _______________________________ ______________________________________________________________________________ ______________________________________________________________________________ _______________________________ (Insert address and zip code of assignee) _______________________________ ______________________________________________________________________________ ______________________________________________________________________________ _______________________________ (Insert assignee's social security or tax identification number) and irrevocably appoints: ______________________________________________________________________________ ______________________________________________________________________________ ____________ agent to transfer the shares of Series C Convertible Preferred Stock evidenced hereby on the books of the Transfer Agent and Registrar. The agent may substitute another to act for him or her. Date:___________________________________ Signature:______________________________ (Sign exactly as your name appears on the other side of this Series C Convertible Preferred Stock Certificate) Signature Guarantee:*_____________________ ___________________________________________ *(Signature must be guaranteed by an "eligible guarantor institution" that is, a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.) A-7 EXHIBIT B FORM OF CERTIFICATE OF TRANSFER Pegasus Communications Corporation 225 City Line Avenue, Suite 200 Bala Cynwyd, PA 19004 First Union National Bank 1525 West W.T. Harris Boulevard, 3C3 Charlotte, North Carolina 28288 Re: 6 1/2% Series C Convertible Preferred Stock Reference is hereby made to the Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof dated as of January 24, 2000 (the "Certificate of Designation") of Pegasus Communications Corporation (the "Company"), with respect to the above referenced security. Capitalized terms used but not defined herein shall have the meanings given to them in the Certificate of Designation. __________________ (the "Transferor") owns and proposes to transfer the Certificate[s] or interest in such Certificate[s] specified in Annex A hereto, which Certificate[s] or interests represent ______ shares of Series C Convertible Preferred Stock (the "Transfer"), to __________ (the "Transferee"), as further specified in Annex A hereto. In connection with the Transfer, the Transferor hereby certifies that: [CHECK ALL THAT APPLY] 1. |_| Check if Transferee will take delivery of a beneficial interest in the Global Share or a Certificated Share Pursuant to Rule 144A. The Transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the beneficial interest or Certificated Share is being transferred to a Person that the Transferor reasonably believed and believes is purchasing the beneficial interest or Certificated Share for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A and such Transfer is in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Transfer in accordance with the terms of the Certificate of Designation, the transferred beneficial interest or Certificated Share will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Global Share and/or the Certificated Share and in the Certificate of Designation and the Securities Act. 2. |_| Check if Transferee will take delivery of a beneficial interest in the Global Share or a Certificated Share pursuant to Regulation S. The Transfer is being effected B-1 pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a person in the United States and (x) at the time the buy order was originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act and/, (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act and (iv) if the proposed transfer is being made prior to the expiration of the Restricted Period, the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Upon consummation of the proposed transfer in accordance with the terms of the Certificate of Designation, the transferred beneficial interest or Certificated Share will be subject to the restrictions on Transfer enumerated in the Private Placement Legend printed on the Global Share and/or the Certificated Share and in the Certificate of Designation and the Securities Act. 3. |_| Check and complete if Transferee will take delivery of a beneficial interest in the Global Share or a Certificated Share pursuant to any provision of the Securities Act other than Rule 144A or Regulation S. The Transfer is being effected in compliance with the transfer restrictions applicable to beneficial interests in Restricted Global Shares and Restricted Certificated Shares and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that (check one): (a) |_| such Transfer is being effected pursuant to and in accordance with Rule 144A under the Securities Act; OR (b) |_| such Transfer is being effected to the Company or a subsidiary thereof; OR (c) |_| such Transfer is being effected pursuant to an effective registration statement under the Securities Act and in compliance with the prospectus delivery requirements of the Securities Act; OR (d) |_| such Transfer is being effected to an Institutional Accredited Investor and pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904, and the Transferor hereby further certifies that it has not engaged in any general solicitation within the meaning of Regulation D under the Securities Act B-2 and the Transfer complies with the transfer restrictions applicable to beneficial interests in a Restricted Global Share or Restricted Certificated Shares and the requirements of the exemption claimed, which certification is supported by (1) a certificate executed by the Transferee in the form of Exhibit D to the Certificate of Designation and (2) an opinion of counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that such Transfer is in compliance with the Securities Act. Upon consummation of the proposed transfer in accordance with the terms of the Certificate of Designation, the transferred beneficial interest or Certificated Share will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Global Share and/or the Certificated Shares and in the Certificate of Designation and the Securities Act. 4. |_| Check if Transferee will take delivery of a beneficial interest in an Unrestricted Global Share or of an Unrestricted Certificated Share. (a) |_| Check if Transfer is pursuant to Rule 144. (i) The Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act and in compliance with the transfer restrictions contained in Certificate of Designation and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Certificate of Designation and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Certificate of Designation, the transferred beneficial interest or Certificated Share will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Shares, on Restricted Certificated Shares and in the Certificate of Designation. (b) |_| Check if Transfer is Pursuant to Regulation S. (i) The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and in compliance with the transfer restrictions contained in the Certificate of Designation and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Certificate of Designation and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Certificate of Designation, the transferred beneficial interest or Certificated Share will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Shares, on Restricted Certificated Shares and in the Certificate of Designation. (c) |_| Check if Transfer is Pursuant to Other Exemption. (i) The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act other than Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions contained in the Certificate of Designation and any applicable blue sky securities laws of any State of the United States and (ii) the restrictions on transfer contained in the Certificate of Designation and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance B-3 with the terms of the Certificate of Designation, the transferred beneficial interest or Certificated Share will not be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Shares or Restricted Certificated Shares and in the Certificates of Designation. This certificate and the statements contained herein are made for your benefit and the benefit of the Company. ____________________________________ [Insert Name of Transferor] By:_________________________________ Name: Title: Dated:_____________________ B-4 ANNEX A TO CERTIFICATE OF TRANSFER 1. The Transferor owns and proposes to transfer the following: [CHECK ONE OF (A) OF (B)] 1. |_| A BENEFICIAL INTEREST IN THE: (i) |_| Global Share (CUSIP ________), or (ii) |_| Regulation S Global Share (CUSIP _________), or (iii) |_| IAI Global Share (CUSIP _______); or (b) |_| a Restricted Certificated Share. 2. After the Transfer the Transferee will hold: [CHECK ONE] (a) |_| a beneficial interest in the: (i) |_| Global Share (CUSIP______), or (ii) |_| Regulation S Global Share (CUSIP ______), or (iii) |_| IAI Global Share (CUSIP _______), or (iv) |_| Unrestricted Global Share (CUSIP________); or (b) |_| a Restricted Certificated Share; or (c) |_| an Unrestricted Certificated Share, in accordance with the terms of the Certificate of Designation. B-5 EXHIBIT C FORM OF CERTIFICATE OF EXCHANGE Pegasus Communications Corporation 225 City Line Avenue, Suite 200 Bala Cynwyd, PA 19004 First Union National Bank 1525 West W. T. Harris Boulevard, 3C3 Charlotte, North Carolina 28288 Re: 6 1/2% Series C Convertible Preferred Stock Reference is hereby made to the Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof dated as of January 24, 2000 (the "Certificate of Designation"), of Pegasus Communication Corporation (the "Company"), with respect to the above referenced security. Capitalized terms used but not defined herein shall have the meanings given to them in the Certificate of Designation. _________, (the "Owner") owns and proposes to exchange the Certificate[s] or interest in such Certificate[s] specified herein, which Certificate[s] or interests represent _______ shares of Series C Convertible Preferred Stock (the "Exchange"). In connection with the Exchange, the Owner hereby certifies that: 1. Exchange of Restricted Certificated Shares or Beneficial Interests in a Restricted Global Share for Unrestricted Certificated Shares or Beneficial Interests in an Unrestricted Global Share (a) |_| Check if Exchange is from beneficial interest in a Restricted Global Share to beneficial interest in an Unrestricted Global Share. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Share for a beneficial interest in an Unrestricted Global Share in an equal liquidation preference, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Global Shares and pursuant to and in accordance with the United States Securities Act of 1933, as amended (the "Securities Act"), (iii) the restrictions on transfer contained in the Certificate of Designation and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest in an Unrestricted Global Share is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (b) |_| Check if Exchange is from beneficial interest in a Restricted Global Share to Unrestricted Certificated Share. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Share for an Unrestricted Certificated Share, the Owner hereby C-1 certifies (i) the Certificated Share is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Shares and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Certificate of Designation and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Certificated Share is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (c) |_| Check if Exchange is from Restricted Certificated Share to beneficial interest in an Unrestricted Global Share. In connection with the Owner's Exchange of a Restricted Certificated Share for a beneficial interest in an Unrestricted Global Share, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Certificated Shares and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Certificate of Designation and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (d) |_| Check if Exchange is from Restricted Certificated Share to Unrestricted Global Share. In connection with the Owner's Exchange of a Restricted Certificated Share for an Unrestricted Certificated Share, the Owner hereby certifies (i) the Unrestricted Certificated Share is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with transfer restrictions applicable to Restricted Certificated Shares and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Certificate of Designation and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Unrestricted Certificated Share is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. 2. Exchange of Restricted Certificated Shares or Beneficial Interests in Restricted Global Shares for Restricted Certificated Shares or Beneficial Interests in Restricted Global Shares (a) |_| Check if Exchange is from beneficial interest in a Restricted Global Share to Restricted Certificated Share. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Share for a Restricted Certificated Share with an equal liquidation preference, the Owner hereby certifies that the Restricted Certificated Share is being acquired for the Owner's own account without transfer. Upon consummation of the proposed Exchange in accordance with the terms of the Certificate of Designation, the Restricted Certificated Share issued will continue to be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Certificated Share and in the Certificate of Designation and the Securities Act. (b) |_| Check if Exchange is from Restricted Certificated Share to beneficial interest in a Restricted Global Share. In connection with the Exchange of the Owner's C-2 Restricted Certificated Share for a beneficial interest in the Restricted Global Share, with an equal aggregate liquidation preference, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer and (ii) such Exchange has been effected in compliance with the transfer restriction applicable to the Restricted Global Shares and pursuant to and in accordance with the Securities Act, and in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Exchange in accordance with the terms of the Certificate of Designation, the beneficial interest issued will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the relevant Restricted Global Share and in the Certificate of Designation and the Securities Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Company. ___________________________________ [Insert Name of Owner] By:________________________________ Name: Title: Dated: __________, ____ C-3 EX-3.6 4 EXHIBIT 3.6 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES D JUNIOR CONVERTIBLE PARTICIPATING PREFERRED STOCK of PEGASUS COMMUNICATIONS CORPORATION Pegasus Communications Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY THAT, pursuant to authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, as amended (the "Certificate of Incorporation"), and pursuant to the provisions of Section 151 of Title 8 of the Delaware Code, a duly constituted committee of the Board of Directors, pursuant to unanimous written consent dated January 31, 2000, adopted the following resolutions providing for the designations, preferences and relative, participating, optional and other rights, and the qualifications, limitations and restrictions of the Series D Junior Convertible Participating Preferred Stock: RESOLVED, that pursuant to the Corporation's Certificate of Incorporation there is hereby established a series of Preferred Stock, the distinctive serial designation of which shall be "Series D Junior Convertible Participating Preferred Stock," par value $0.01 per share. FURTHER RESOLVED, that the proper officers of this Corporation are hereby authorized and directed to execute and file on behalf of the Corporation such certificate or statement, or certificates or statements required to effectuate the foregoing resolutions under Delaware law and to take such other actions as they consider necessary or appropriate to carry out the foregoing resolutions. FURTHER RESOLVED, that the voting rights, preferences, limitations, and special rights of the Series D Junior Convertible Participating Preferred Stock not set forth in the Corporation's Certificate of Incorporation shall be as follows: 1. Designation of Series. The distinctive serial designation of this series shall be "Series D Junior Convertible Participating Preferred Stock" (herein referred to as the "Series D Preferred Stock"). Each share of Series D Preferred Stock shall be identical in all respects with the other shares of Series D Preferred Stock. 2. Number of Shares. The number of shares of Series D Preferred Stock shall be 22,500. 3. Dividends. Subject to the prior and superior rights of the holders of Senior Stock, the holders of shares of Series D Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation out of funds legally available for such purpose, dividends at the rate of 4% of the outstanding liquidation preference per share per annum, and no more, payable annually on January 1 of each year, commencing on January 1, 2001. Dividends on the Series D Preferred Stock shall be cumulative and shall accrue from the date of the original issuance of the Series D Preferred Stock. At the Corporation's option, dividends shall be payable in cash or in the number of restricted shares of the Class A Common Stock that can be purchased at the "Market Price" (as defined in the Asset Purchase Agreement) at the time the applicable cash dividend is due. In no event, so long as any Series D Preferred Stock shall remain outstanding, shall any dividend whatsoever be declared or paid upon, nor shall any distribution be made upon, any Junior Stock, nor (without the written consent of the holders of a majority of the outstanding Series D Preferred Stock) shall any shares of Junior Stock be purchased or redeemed by the Corporation, nor shall any moneys be paid to or made available for a sinking fund for the purchase or redemption of any Junior Stock, unless in each instance dividends on all outstanding shares of the Series D Preferred Stock for all past dividend periods shall have been paid and any arrears in the mandatory redemption of the Preferred Stock shall have been made good. 4. Liquidation Rights. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of Series D Preferred Stock shall be entitled, after the payment of all amounts payable to the holders of Senior Stock, and before any distribution or payment is made to the holders of any Junior Stock, to be paid in full the Liquidation Preference of each share of Series D Preferred Stock. (b) If, upon such liquidation, dissolution or winding up, the amounts available for distribution to the holders of Series D Preferred Stock and all Parity Stock shall be insufficient to permit the payment in full to such holders of the preferential amounts to which they are entitled, then such amounts shall be paid ratably among the shares of Series D Preferred Stock and Parity Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends on such Parity Stock) payable with respect thereto, if paid in full. (c) If payment of the Liquidation Preference on liquidation, dissolution or winding up of the affairs of the Corporation shall have been made in full to the holders of all shares of Series D Preferred Stock, all Parity Stock, and all Junior Stock (other than Common Stock), the remaining assets of the Corporation shall be distributed, first, to the holders of Common Stock in an amount equal to the amount paid on the Series D Preferred Stock pursuant to subparagraph 4(a) and any amounts paid on any other class or series of Participating Stock, and second, among the holders of Common Stock, the Series D Preferred Stock and any other Participating Stock in accordance with the number of shares of Common Stock outstanding, assuming, for purposes of this clause second only, that (1) all shares of Class A Common Stock then issuable upon conversion of the Series D Preferred Stock are outstanding and held by the holders of the Series B Common Stock and (2) all shares of Common Stock then -2- issuable upon the conversion of any other Participating Stock are outstanding and held by the holders thereof. (d) For purposes of this Section 4, the consolidation or merger of the Corporation with or into any other corporation, the conveyance or transfer of the property and assets of the Corporation as, or substantially as, an entirety, or the reclassification of the capital stock of the Corporation or the redemption or purchase of less than all of the shares of the capital stock of the Corporation, shall not be deemed to constitute a liquidation, dissolution or winding up of the Corporation. 5. Redemption. (a) Redemption at Option of Corporation. The Corporation may redeem all (but not less than all, without the consent of all holders of Series D Preferred Stock) of the outstanding shares of Series D Preferred Stock at any time, at a price per share equal to the Redemption Price. Notice of every redemption of shares of Series D Preferred Stock at the option of the Corporation shall be mailed by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses as they shall appear on the books of the Corporation. Such mailing shall be made at least 30 days prior to the Redemption Date. The notice of redemption shall state: (1) the Redemption Date; (2) the amount of the Redemption Price; (3) that on the Redemption Date the Redemption Price will become due and payable upon surrender of certificates representing each share of Series D Preferred Stock; and (4) the place or places where certificates representing shares of Series D Preferred Stock to be redeemed are to be surrendered for payment of the Redemption Price. Notwithstanding the foregoing, any holder of Series D Preferred Stock shall have the right, after receiving notice of the Corporation's intention to redeem, to convert the Series D Preferred Stock, as provided in Section 6, upon serving written notice of such election no later than five business days prior to the Corporation's proposed redemption. (b) Redemption at Option of Holders. Except as provided in the next sentence, the holders of all outstanding shares of Series D Preferred Stock shall have the right to require the Corporation to redeem 10,000 of the outstanding shares of Series D Preferred Stock, at a price per share equal to the Redemption Price, by providing written notice of redemption to the Corporation on any day after March 1, 2000, redeem an additional 6,125 of the outstanding shares of Series D Preferred Stock beginning on February 1, 2002 and redeem the remainder of the outstanding shares of Series D Preferred Stock on February 1, 2003. Notwithstanding the preceding sentence, the Corporation shall have no obligation to redeem any of the Series D Preferred Stock unless it is able at the time to do so in compliance with: (1) Section 8(a) of the Certificate of Designation, Preferences and Relative, Participating, Optional and other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of the Corporation's 12.75% Series A Cumulative Exchangeable Preferred Stock, (2) Section 2(C) of the Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and the Qualifications, Limitations and Restrictions Thereof of the Corporation, (3) Section 4.07 of the Indenture dated as of October 21, 1997, between the Corporation and First Union National Bank as trustee, (4) Section 4.07 of the Indenture dated as of November 30, 1998, between the Corporation and First Union National Bank, as trustee, and (5) any similar or comparable provision, now or hereafter in effect, in the terms of any Preferred -3- Stock of the Corporation or any indenture, note, bond, debenture or other agreement or instrument pursuant to which the Corporation has issued securities or borrowed money. Notice of every redemption of shares of Series D Preferred Stock at the option of the holders shall be mailed by first class mail, postage prepaid, addressed to the Corporation at its principal office. Such mailing shall be at least 30 days and not more than 60 days prior to the Redemption Date and shall state the Redemption Date and the amount of the Redemption Price. (c) Payment of Redemption Price; Deposit of Funds. In the case of any redemption under subsection (a) or (b), the Corporation shall pay to the holders of the Series D Preferred Stock, on or before the Redemption Date, the full amount of the Redemption Price upon surrender by such holders of certificates representing the shares of Series D Preferred Stock being redeemed. The Corporation may elect to effect any such redemption by depositing with the bank or trust company hereinafter mentioned (and, in the case of a redemption under subsection (a), may irrevocably authorize such bank or trust company to give the notice of redemption) the funds necessary for such redemption in trust for the pro rata benefit of the holders of the shares called for redemption, whereupon, notwithstanding that any certificates for shares so called for redemption shall not have been surrendered for cancellation, from and after the Redemption Date, all shares so called for redemption shall no longer be deemed to be outstanding and all rights with respect to such shares shall forthwith cease and terminate, except only the right of the holders thereof to receive from such bank or trust company at any time after the time of such deposit the full amount of the Redemption Price, without interest. Upon surrender to the Corporation or to such bank or trust company by any holder of either (i) the certificates representing the shares of the Series D Preferred Stock being redeemed; or (ii) a lost share affidavit in a form satisfactory to the Corporation and such bank or trust company, together with an indemnity bond the amount, terms, form and issuer of which are reasonably satisfactory to the Corporation and such bank or trust company with respect to any certificate which has been lost or destroyed, the bank or trust company shall promptly pay to such holder the full amount of the redemption price being redeemed by such holder. Any interest accrued on such funds shall be paid to the Corporation from time to time. The aforesaid bank or trust company shall be organized and in good standing under the laws of the United States of America or any state thereof, shall be doing business in the United Shares of America, shall have capital, surplus and undivided profits aggregating at least $10,000,000 according to its last published statement of condition, and shall be identified in the notice of redemption. Any funds so set aside or deposited, as the case may be, and unclaimed at the end of two years from such Redemption Date shall, to the extent permitted by law, be released or repaid to the Corporation, after which repayment the holders of the shares so called for redemption shall look only to the Corporation for payment thereof. (d) Status of Redeemed Series D Preferred Stock. Shares of Series D Preferred Stock which are redeemed shall be restored to the status of authorized but unissued shares of Preferred Stock undesignated as to series. 6. Conversion. (a) Right to Convert. Subject to the terms and conditions of this Section 6, the holder of any share or shares of Series D Preferred Stock shall have the right, at its option at any time, to convert any such shares of Series D Preferred Stock (except that upon any -4- liquidation of the Corporation the right of conversion shall terminate at the close of business on the last full business day next preceding the date fixed for payment of the amount distributable on the Series D Preferred Stock) into such number of fully paid and nonassessable whole shares of Class A Common Stock as is obtained by dividing $1,000 by the Conversion Price. Such rights of conversion shall be exercised by the holder thereof by giving written notice that the holder elects to convert a stated number of shares of Series D Preferred Stock into Class A Common Stock and by surrender of a certificate or certificates for the shares so to be converted to the Corporation at its principal office (or such other office or agency of the Corporation as the Corporation may designate by notice in writing to the holders of the Series D Preferred Stock) at any time during its usual business hours on the date set forth in such notice, together with a statement of the name or names (with address) in which the certificate or certificates for shares of Class A Common Stock shall be issued. (b) Issuance of Certificates; Time Conversion Effected. Promptly after the receipt of the written notice referred to in Section 6(a) and surrender of the certificate or certificates for the share or shares of Series D Preferred Stock to be converted, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder, registered in such name or names as such holder may direct, a certificate or certificates for the number of whole shares of Class A Common Stock issuable upon the conversion of such share or shares of Series D Preferred Stock. To the extent permitted by law, such conversion shall be deemed to have been effected and the Conversion Price shall be determined as of the close of business on the date on which such written notice shall have been received by the Corporation and the certificate or certificates for such share or shares shall have been surrendered as aforesaid, and at such time the rights of the holder of such share or shares of Series D Preferred Stock shall cease, and the person or persons in whose name or names any certificate or certificates for shares of Class A Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby. (c) Fractional Shares; Dividends; Partial Conversion. No fractional shares shall be issued upon conversion of Series D Preferred Stock into Class A Common Stock and no payment or adjustment shall be made upon any conversion on account of any cash dividends on the Class A Common Stock issued upon such conversion. At the time of each conversion, the Corporation shall pay in cash an amount equal to all dividends accumulated and unpaid on the shares surrendered for conversion to the date upon which such conversion is deemed to take place as provided in Section 6(b). In case the number of shares of Series D Preferred Stock represented by the certificate or certificates surrendered pursuant to Section 6(a) exceeds the number of shares converted, the Corporation shall, upon such conversion, execute and deliver to the holder thereof, at the expense of the Corporation, a new certificate or certificates for the number of shares of Series D Preferred Stock represented by the certificate or certificates surrendered which are not to be converted. If any fractional interest in a share of Class A Common Stock would, except for the provisions of the first sentence of this Section 6(c), be delivered upon any such conversion, the Corporation, in lieu of delivering the fractional share thereof, shall pay to the holder surrendering the Series D Preferred Stock for conversion an amount in cash equal to the current market price of such fractional interest as determined in good faith by the Board of Directors of the Corporation. -5- (d) Adjustment for Change in Capital Stock. If at any time after the date hereof, the Corporation: (1) pays a dividend or makes a distribution on its Class A Common Stock in shares of its Class A Common Stock; (2) subdivides its outstanding shares of Class A Common Stock into a greater number of shares; (3) combines its outstanding shares of Class A Common Stock into a smaller number of shares; (4) makes a distribution on its Class A Common Stock in shares of its capital stock other than Class A Common Stock; or (5) issues by reclassification of its Class A Common Stock any shares of its capital stock; then the number of shares of Class A Common Stock receivable upon conversion of the Series D Preferred Stock and the Conversion Price, as in effect immediately prior to such action, shall be adjusted so that the holders may receive upon conversion of the Series D Preferred Stock and payment of the same aggregate Conversion Price the number of shares of capital stock of the Corporation which the holders would have owned immediately following such action if the holders had converted the Series D Preferred Stock immediately prior to such action. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. (e) Notice to Holders upon Certain Events. In the event that: (1) the Corporation shall authorize the issuance to holders of its Class A Common Stock of rights, warrants, options or convertible securities to subscribe for or purchase shares of its Class A Common Stock or of any other subscription rights, warrants, options or convertible securities; or (2) the Corporation shall authorize the distribution to holders of its Class A Common Stock of evidences of its indebtedness or assets; or (3) the Corporation is the subject of a voluntary or involuntary dissolution, liquidation or winding-up proceeding; then the Corporation shall cause to be mailed by first-class mail to the holders of the Corporation's Series D Preferred Stock, at least ten (10) days prior to the applicable record or effective date, a notice stating (A) the date as of which the holders of Class A Common Stock of record to be entitled to receive any such rights, warrants, options or convertible securities or distributions referred to in clauses (1) and (2) above are to be determined, or (B) the date on which any such dissolution, liquidation or winding-up referred to in clause (3) above is expected -6- to become effective, and the date as of which it is expected that holders of Common Stock of record will be entitled to exchange their shares of Class A Common Stock for securities or other property, if any, deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up. (f) Reclassification, Reorganization, Consolidation or Merger. In the event of any reclassification, capital reorganization or other change of outstanding shares of Class A Common Stock of the Corporation (other than a subdivision or combination of the outstanding Class A Common Stock and other than a change in the par value of the Class A Common Stock) or in the event of any consolidation or merger of the Corporation with or into another corporation or a non-corporate entity (other than a merger in which the Corporation is the continuing corporation and that does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock) or in the event of any sale, lease, transfer or conveyance to another corporation or non-corporate entity of the property and assets of the Corporation as an entirety or substantially as an entirety, the Corporation shall, as a condition precedent to such transaction, cause effective provisions to be made so that the holders of the Corporation's Series D Preferred Stock shall have the right thereafter, by converting the Series D Preferred Stock, to purchase the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Class A Common Stock that might have been received upon conversion of the Series D Preferred Stock immediately prior to such reclassification, capital reorganization, change, consolidation, merger, sale or conveyance. The foregoing provisions of this Section shall similarly apply to successive reclassification, capital reorganizations and changes of shares of Class A Common Stock and to successive consolidations, mergers, sales or conveyances. (g) Stock to be Reserved. The Corporation shall at all times reserve and keep available out of its authorized Class A Common Stock or its treasury shares, solely for the purpose of issuance upon the conversion of the Series D Preferred Stock as herein provided, such number of shares of Class A Common Stock as shall then be issuable upon the conversion of all outstanding shares of Series D Preferred Stock. The Corporation covenants that all shares of Class A Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable. 7. Voting Rights. (a) Except as otherwise required by law, the holders of Series D Preferred Stock shall have no right to vote on any matter to be voted on by the stockholders of the Corporation. Without limiting the generality of the foregoing, the Corporation may authorize, issue or amend the terms of Senior Stock, Parity Stock or Junior Stock, or may increase or decrease the number of authorized shares of Preferred Stock, Series D Preferred Stock, Senior Stock, Parity Stock or Junior Stock, without the vote or consent of any holder of Series D Preferred Stock. (b) In any matter upon which the holders of the Series D Preferred Stock shall be entitled by law to vote, the holders of Series D Preferred Stock shall be entitled to -7- one vote per share, and shall not be entitled to vote as a separate class or series unless otherwise required by law. 8. Definitions. As used herein, the following terms have the following meanings: "Class A Common Stock" means the Class A Common Stock of the Corporation, par value $0.01. "Common Stock" means stock of any class of the Corporation which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and which is not subject to redemption by the Corporation. "Conversion Price" means $102.40755 per share or, in case an adjustment of such price shall have taken place pursuant to the provisions of Section 6, then the such price as last adjusted and in effect at the date any share or shares of Series D Preferred Stock are surrendered for conversion. "Junior Stock" means the Common Stock and all other stock of the Corporation hereafter authorized, issues or outstanding that by its terms ranks junior to Series D Preferred Stock in whole or in part as to distribution of assets upon liquidation. The "Liquidation Preference" per share of Series D Preferred Stock means $1,000 plus accumulated and unpaid dividends. "Parity Stock" means all stock of the Corporation hereafter authorized, issued or outstanding other than Senior Stock and Junior Stock. "Participating Stock" means any stock of the Corporation hereafter authorized that participates with the Common Stock as to distribution of assets upon liquidation on terms similar to those in subparagraph 4(c). "Redemption Date" means the date on which Series D Preferred Stock is to be redeemed and the Redemption Price paid in accordance herewith. The "Redemption Price" per share of Series D Preferred Stock means $1,000 plus accumulated and unpaid dividends. "Senior Stock" means the 12.75% Series A Cumulative Exchangeable Preferred Stock of the Corporation and the 6 1/2% Series C Convertible Preferred Stock of the Corporation and all other stock of the Corporation hereafter authorized, issued or outstanding that by its terms ranks senior to the Series D Preferred Stock in whole or in part as to distribution of assets upon liquidation. -8- IN WITNESS WHEREOF, the undersigned has executed this Certificate this 1st day of February, 2000. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Ted S. Lodge ------------------------------------- Ted S. Lodge, Senior Vice President -9- EX-5.1 5 EXHIBIT 5.1 Exhibit 5.1 Law Offices DRINKER BIDDLE & REATH LLP One Logan Square 18th and Cherry Streets Philadelphia, PA 19103 Telephone: (215) 988-2700 Fax: (215) 988-2757 February 25, 2000 PEGASUS COMMUNICATIONS CORPORATION c/o Pegasus Communications Management Company 225 City Line Avenue, Suite 200 Bala Cynwyd, Pennsylvania 19004 Ladies and Gentlemen: We have acted as counsel to Pegasus Communications Corporation, a Delaware corporation ("Pegasus"), in connection with the preparation and filing with the Securities and Exchange Commission of a Registration Statement on Form S-4 (the "Registration Statement), under the Securities Act of 1933, as amended (the "Securities Act"), relating to issuance of up to 6.5 million shares of the Pegasus' Class A common stock, par value $.01 per share (the "Shares"), to stockholders of Golden Sky Holdings, Inc., a Delaware corporation ("Golden Sky"), in a merger in which Pegasus GSS Merger Sub, Inc., a wholly-owned Delaware subsidiary of Pegasus (the "Merger Sub"), will be merged with and into Golden Sky, and Golden Sky will become a wholly-owned subsidiary of Pegasus. In that capacity, we have examined the originals and copies, certified or otherwise identified to our satisfaction, of the Agreement and Plan of Merger dated January 10, 2000 (the "Merger Agreement"), as amended, among Pegasus, Golden Sky, Merger Sub, certain stockholders of Pegasus and certain stockholders of Golden Sky, Pegasus' Certificate of Incorporation and By-laws, resolutions of Pegasus' board of directors, and such other documents and corporate records relating to Pegasus and the issuance and sale of the Shares as we have deemed appropriate. This opinion is based exclusively on the General Corporation Law of the State of Delaware. On the basis of the foregoing, we are of the opinion that the Shares have been duly authorized for issuance and that upon issuance of the Shares at the Closing (as defined in the Merger Agreement) pursuant to the terms of the Merger Agreement, the Shares will have been validly issued and will be fully paid and non-assessable. We hereby consent to the reference to our firm under the caption "Legal Matters" in the proxy statement/prospectus included in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. This does not constitute a consent under Section 7 of the Securities Act, and, in consenting to such reference to our firm, we have not certified any part of the Registration Statement and do not otherwise come within the categories of persons whose consent is required under Section 7 or the rules and regulations of the Securities and Exchange Commission issued thereunder. Very truly yours, /s/ Drinker Biddle & Reath LLP ------------------------------ DRINKER BIDDLE & REATH LLP EX-8.1 6 EXHIBIT 8.1 Exhibit 8.1 Law Offices DRINKER BIDDLE & REATH LLP One Logan Square 18th and Cherry Streets Philadelphia, PA 19103 Telephone: (215) 988-2700 Fax: (215) 988-2757 February 25, 2000 PEGASUS COMMUNICATIONS CORPORATION c/o Pegasus Communications Management Company 225 City Line Avenue, Suite 200 Bala Cynwyd, Pennsylvania 19004 Ladies and Gentlemen: As counsel to Pegasus Communications Corporation, a Delaware corporation ("Pegasus"), we have assisted in the preparation and filing of Pegasus' Registration Statement on Form S-4 (the "Registration Statement"), filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, relating to 6,500,000 shares of Pegasus' Class A common stock, par value $.01 per share. In our opinion, the statements in the proxy statement/prospectus contained in the Registration Statement (the "Proxy Statement/Prospectus") under the caption "The Merger - Certain Federal Income Tax Consequences," to the extent they constitute matters of law or legal conclusions, are accurate in all material respects. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and we consent to the reference of our name under the caption "Legal Matters" in the Proxy Statement/Prospectus. Very truly yours, /s/ Drinker Biddle & Reath LLP ------------------------------ DRINKER BIDDLE & REATH LLP EX-10.2 7 EXHIBIT 10.2 Exhibit 10.2 FORM OF REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated ___________, 2000 (the "Agreement"), among PEGASUS COMMUNICATIONS CORPORATION, a Delaware corporation (the "Company"), and the Persons executing this Agreement as Holders. The Company, Pegasus GSS Merger Sub, Inc., a Delaware corporation ("Merger Sub"), Golden Sky Holdings, Inc., a Delaware corporation ("GSS"), and certain shareholders of the Company and of GSS are parties to an Agreement and Plan of Merger dated January 10, 2000 (the "Merger Agreement"). The Holders (this and certain other terms are defined in Section 1) are shareholders of GSS. At the Closing held today under the Merger Agreement, Merger Sub is being merged with and into GSS, GSS is thereby becoming a wholly-owned subsidiary of the Company, and the Holders are receiving shares of Class A Common Stock as the Merger Consideration. It is a condition precedent to the Closing that the parties execute and deliver this Agreement. NOW, THEREFORE, in consideration of the completion of the transactions contemplated by the 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, the parties agree as follows, intending to be legally bound. Section 1. Definitions. As used in this Agreement, the following terms have the following meanings: "Alta": 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. "Business Day": any day on which the New York Stock Exchange is open for trading. "Class A Common Stock": the Company's Class A Common Stock, par value $0.01 per share. "Closing Date": the date of this Agreement. "Exchange Act": the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the relevant time. "Holder": each Person (other than the Company) executing this Agreement and each Permitted Transferee of a Holder, for so long as (and to the extent that) such Person or Permitted Transferee owns any Registrable Securities. "Holders' Agent" means the Holders' Agent appointed pursuant to Section 13, or any successor Holders' Agent appointed pursuant to such Section. "Merger Agreement": as defined in the recitals. "Merger Consideration": as defined in the Merger Agreement; any reference in this Agreement to a number or percentage of Registrable Securities initially included in the Merger Consideration shall be appropriately adjusted to reflect stock dividends, stock splits, reverse stock splits, recapitalizations and similar transactions that occur after the Closing Date. "Permitted Transferee": (a) in the case of an individual (1) a family member of such individual, (2) a charitable organization (including a private foundation) described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, to which a Holder may transfer any Registrable Securities, (3) a trust for the benefit of any of such individual, such charitable organizations or any family member of such individual, or (4) a Person substantially all of the equity interests in which are owned by such individual or by Persons described in clauses (a)(1), (2) and (3); and (b) in the case of a Person that is not an individual, (1) any shareholder, partner, member or other owner of equity interests in such Person, or (2) a Person all of the equity interests in which are owned by such first Person. "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. "Registrable Securities": (1) the Class A Common Stock included in the Merger Consideration and (2) any additional shares of Class A Common Stock or other equity securities of the Company issued or issuable after the Closing Date in respect of the Class A Common Stock included in the Merger Consideration (or other equity securities issued in respect thereof) by way of a stock dividend or stock split, in connection with a combination, exchange, reorganization, recapitalization or reclassification of Company securities, or pursuant to a merger, division, consolidation or other similar business transaction or combination involving the Company; provided that as to any particular Registrable Securities, such securities shall cease to constitute Registrable Securities (a) when a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of thereunder, (b) when such securities shall have been disposed of pursuant to Rule 144 (or any successor provision to such Rule) under the Securities Act, (c) when such securities shall have been disposed of to a Person other than a Permitted Transferee, or (d) when such securities shall have ceased to be outstanding. "Registration Expenses": all expenses incident to the Company's performance of or compliance with the registration requirements set forth in this Agreement including, without limitation, the following: (a) the fees, disbursements and expenses of the Company's counsel, accountants, and experts in connection with the registration under the Securities Act of Registrable Securities; (b) all expenses in connection with the preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus, any other offering document and amendments and supplements thereto, and the mailing and delivering of copies thereof to underwriters and dealers, if any; (c) the cost of printing or producing any agreement(s) among underwriters, underwriting agreement(s) and blue sky or legal investment memoranda, any selling agreements, and any other documents in connection with the offering, sale or delivery of Registrable Securities to be disposed of; (d) the fees and expenses incurred in connection with the listing of Registrable Securities on each securities exchange on which Company securities of the same class are then listed or with the Nasdaq National Market System; (e) the reasonable fees and expenses of a single counsel retained by the Holders participating in a particular registration pursuant to this Agreement, (f) any SEC or blue sky registration or filing fees attributable to Registrable Securities or transfer taxes applicable to Registrable Securities, (g) any other expenses in connection with the qualification of Registrable Securities for offer and sale under state securities laws, including the fees and disbursements of counsel for the underwriters in connection with such qualification and in connection with any blue sky and legal investment surveys; and (h) the fees and expenses incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of Registrable Securities to be disposed of (including, if applicable, the reasonable fees and expenses of any "qualified independent underwriter" and its counsel); but the term "Registration Expenses" does not include (i) underwriters' discounts or compensation, brokers' commissions or similar selling expenses attributable to the sale of Registrable Securities. "Registration Statement": a registration statement under the Securities Act filed by the Company pursuant to this Agreement, including all amendments thereto, all preliminary and final prospectuses included therein and all exhibits thereto. "SEC": the United States Securities and Exchange Commission, or such other federal agency at the time having the principal responsibility for administering the Securities Act. "Securities Act": the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the relevant time. "Spectrum": Spectrum Equity Investors, L.P., and Spectrum Equity Investors II, L.P. (each a Delaware limited partnership). Section 2. Underwritten Demand Registration. (a) At any time on or after _____________, _____ [six months after Closing Date], and before the fifth anniversary of the Closing Date the Holders' Agent may (by written notice delivered to the Company) require registration of all or any portion of the Registrable Securities for sale in an underwritten public offering. In each such case, such notice shall specify the number of Registrable Securities for which such underwritten offering is to be made and identify the Holders thereof. Within three Business Days after the time when other Persons having rights to include securities in such offering pursuant to agreements with the Company are required to notify the Company of their intention to do so, the Company shall notify the Holders' Agent of (1) the aggregate number of securities proposed to be included in the offering by such other Persons and (2) the proposed commencement date of the offering, which shall be a date not more than thirty days after the Company gives such notice. The managing underwriter for such offering shall be chosen by the Holders' Agent and shall be reasonably satisfactory to the Company. (b) If any request for an underwriting shall have been made pursuant to subsection (a), the Company shall, at the request of the managing underwriter for such offering, prepare and file a Registration Statement with the SEC as promptly as reasonably practicable, but in any event within thirty days after the managing underwriter's request therefor. (c) The Company shall not have any obligation to permit or participate in more than two underwritten public offerings pursuant to this Section, or to file a Registration Statement pursuant to this Section with respect to less than ten percent of the Registrable Securities initially included in the Merger Consideration. (d) The Company shall have the right to defer the filing or effectiveness of a Registration Statement relating to any registration requested under this Section for a reasonable period of time not to exceed 90 days if (1) the Company is, at such time, working on an underwritten public offering of its securities for the account of the Company and is advised by its managing underwriter in writing (with a copy to the Holders' Agent) that such offering would in its opinion be materially and adversely affected by such filing; or (2) the Company in good faith determines that any such filing or the offering of any Registrable Securities would (A) materially impede, delay or interfere with any proposed financing, offer or sale of securities, acquisition, corporate reorganization or other significant transaction involving the Company or (B) require the disclosure of material non-public information, the disclosure of which would have a material adverse effect on the Company. If the Company shall exercise its deferral right under this subsection, it may not do so again until 90 days shall have elapsed since the expiration of such deferral. (e) The Company shall have no obligation to file a Registration Statement pursuant to this Section earlier than 360 days after the effective date of a prior registration statement of the Company, if any, covering an underwritten public offering of common equity securities for the account of the Company the closing date of which is after the Closing Date if (1) the Company shall have offered pursuant to Section 4 to include the Holders' Registrable Securities in such Registration Statement; (2) the Holders (through the Holders' Agent) shall not have elected to include in such Registration Statement at least ten percent of the Registrable Securities initially included in the Merger Consideration; (3) no Registrable Securities requested to be included in such registration statement shall have been excluded therefrom pursuant to Section 4(c) or 4(d); and (4) if such registration statement is filed before _____________ [six months from Closing Date], the offering price per share of Class A Common Stock is not less than $100. (f) The Holders of any Registrable Securities requested to be included in any offering pursuant to this Section may elect by written notice to the Company (given through the Holders' Agent) not to include their Registrable Securities in the offering. If they do so, the Company shall be obligated to proceed with the registration relating to the offering only if the offering continues to include at least the number of shares of Registrable Securities specified in Section 2(c). In any such case in which the Company is not obligated to and does not proceed with the registration, the Holders on whose behalf the Holders' Agent shall have requested Registrable Securities to be included in the offering but that shall have elected not to include their shares shall pay all Registration Expenses incurred by the Company in connection with such offering. (g) Neither the Company nor any other Person not party to this Agreement (collectively with the Company, "Third Parties") shall be entitled to include any securities held by any of them in any underwritten offering pursuant to this Section, unless all Registrable Securities for which inclusion has been requested are also included and unless the managing underwriter concludes that the inclusion of such securities of Third Parties will not interfere with an orderly sale and distribution of Registrable Securities being sold in such offering or adversely affect the price of such Registrable Securities; provided, however, that if the managing underwriter concludes that the inclusion of less than all of such securities of Third Parties will not interfere with the orderly sale and distribution of the Registrable Securities being sold in the offering or adversely affect the price of such Registrable Securities, the number of shares to be included in the registration by the Third Parties shall be reduced among the Third Parties in accordance with the agreements that allow the inclusion of such shares in the registration. (h) No registration of Registrable Securities under this Section shall relieve the Company of its obligation to effect registrations of Registrable Securities pursuant to Sections 3 and 4. Section 3. Shelf Registrations. (a) At any time on or after ______________, _____ [six months after the Closing Date], and before the fifth anniversary of the Closing Date, the Holders' Agent may (by written notice to the Company) require registration of all or any portion of the Registrable Securities for sale through broker-dealers, through agents or directly to one or more purchasers in one or more transactions in the over-the-counter market, through writing of options or otherwise effected at market prices prevailing at the time of sale, at prices related to such prevailing prices, at negotiated prices or at fixed prices. Within three Business Days after the time when other Persons having rights to include securities in such registration pursuant to agreements with the Company are required to notify the Company of their intention to do so, the Company shall notify the Holders' Agent of the aggregate number of securities proposed to be included in the registration by such other Persons. (b) If any request for registration shall have been made pursuant to subsection (a), the Company shall prepare and file a Registration Statement with the SEC as promptly as reasonably practicable, but in any event within thirty days after the expiration of the time within which other Persons having rights to include securities in such registration pursuant to agreements with the Company were required to request inclusion in the registration. (c) The Company shall not have any obligation under this Section to file a Registration Statement with respect to fewer than 100,000 shares of Registrable Securities. (d) The Company shall have no obligation to file a Registration Statement pursuant to this Section earlier than 180 days after the effective date of any earlier Registration Statement filed pursuant to this Section. (e) The Holders of any of Registrable Securities requested to be included in any registration pursuant to this Section may elect by written notice to the Company (given through the Holders' Agent) not to include their Registrable Securities in such registration. If they do so, the Company shall be obligated to proceed with the registration only if it continues to include at least the number of shares of Registrable Securities specified in Section 3(c). In any such case in which the Company is not obligated to and does not proceed with the registration, the Holders on whose behalf the Holders' Agent shall have requested Registrable Securities to be included in the registration but shall have elected not to include their shares shall pay all Registration Expenses incurred by the Company in connection with such registration. (f) No registration of Registrable Securities under this Section shall relieve the Company of its obligation to effect registrations of Registrable Securities under Sections 2 and 4. Section 4. Incidental Registration. (a) From and after the Closing Date, if the Company proposes, other than pursuant to Section 2 or 3, to file a Registration Statement under the Securities Act to register any of its common equity securities for public sale under the Securities Act (whether proposed to be offered for sale by the Company or by any other Person), it will give prompt written notice (which notice shall specify the intended method or methods of disposition) to the Holders of its intention to do so, and upon the written request of the Holders' Agent delivered to the Company within ten Business Days after any such notice (which request shall identify the Holders that wish to dispose of Registrable Securities pursuant to such Registration Statement and specify the number of Registrable Securities intended to be disposed of by each such Holder), the Company shall, subject to the other provisions of this Section 4, include in such Registration Statement all Registrable Securities which the Company has been so requested to register by the Holders' Agent. (b) If at any time prior to the effective date of any Registration Statement described in subsection (a), the Company shall in good faith determine for any reason not to proceed with such registration, the Company may, at its election, give written notice of such determination to the Holders' Agent and thereupon the Company shall be relieved of its obligation to register such Registrable Securities in connection with such registration. (c) The Company will not be required to effect any registration of Registrable Securities pursuant to this Section in connection with an offering of securities for the account of the Company if the Company shall have been advised in writing (with a copy to the Holders' Agent) by a nationally recognized investment banking firm (which may be the managing underwriter for the offering) selected by the Company that, in such firm's opinion, registration of Registrable Securities and of any other securities requested to be included in such registration by other Persons having rights to include securities therein at that time may interfere with an orderly sale and distribution of the securities being sold by the Company in such offering or adversely affect the price of such securities; but if the inclusion of less than all of the Registrable Securities requested to be registered by the Holders' Agent and other securities requested to be included in such registration by other Persons having rights to include securities therein at that time would not, in the opinion of such firm, adversely affect the distribution or price of the securities to be sold by the Company in the offering, the aggregate number of Registrable Securities requested to be included in such offering by the Holders (through the Holders' Agent) shall be reduced pro rata in accordance with the proportion that the number of shares proposed to be included in such registration by Holders bears to the number of shares proposed to be included in such registration by Holders and all other such Persons having rights to include securities therein at that time. The reduction attributable to the Holders shall be allocated among Holders by the Holders' Agent, whose determination shall be conclusive. (d) The Company will not be required to effect any registration of Registrable Securities pursuant to this Section in connection with an offering of securities for the account of any former stockholders of Digital Television Services, Inc. (the "DTS Holders"), pursuant to the Registration Rights Agreement dated April 27, 1998, among the Company and certain former stockholders of Digital Television Services, Inc. (the "DTS Registration Rights Agreement") if the Company shall have been advised in writing (with a copy to the Holders' Agent) by a nationally recognized investment banking firm (which may be the managing underwriter for the offering) selected by the DTS Holders that, in such firm's opinion, registration of Registrable Securities and of any other securities requested to be included in such registration by other persons having rights to include securities therein at that time may interfere with an orderly sale and distribution of the securities being sold by the DTS Holders in such offering or adversely affect the price of such securities; but if the inclusion of less than all of the Registrable Securities requested to be registered by the Holders and other securities requested to be included in such registration by other Persons having rights to include securities therein at that time would not, in the opinion of such firm, adversely affect the distribution or price of the securities to be sold by the DTS Holders in the offering, the aggregate number of Registrable Securities requested to be included in such offering by the Holders shall be reduced pro rata in accordance with the proportion that the number of shares proposed to be included in such registration by Holders bears to the number of shares proposed to be included in such registration by Holders and all such other Persons (other than the DTS Holders) having rights to include securities therein at that time. The reduction attributable to the Holders shall be allocated among Holders by the Holders' Agent, whose determination shall be conclusive. (e) The Company shall not be required to give notice of, or effect any registration of Registrable Securities under this Section incidental to the registration of any of its securities on Form S-4 or S-8 or in connection with dividend reinvestment plans. (f) No registration of Registrable Securities effected under this Section shall relieve the Company of its obligations to effect registrations of Registrable Securities pursuant to Sections 2 and 3. Section 5. Holdbacks and Other Transfer Restrictions. (a) No Holder shall sell, transfer or otherwise dispose of any Registrable Securities or any interest therein before ______________, ______ [six months after the Closing Date], except to a Permitted Transferee or pursuant to an effective Registration Statement described in Section 4 that includes the Registrable Securities to be disposed of. (b) No Holder shall, if requested by the managing underwriter in an underwritten offering that includes such Holder's Registrable Securities, effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement (or convertible into such class), including a sale pursuant to Rule 144(k) under the Securities Act (except as part of such underwritten registration), during the ten day period prior to, and during the 90-day period (or such longer period, not to exceed 180 days, as the managing underwriter shall request) beginning on the closing date of each underwritten offering made pursuant to such Registration Statement, to the extent timely notified in writing by the Company or the managing underwriter. If the Company or such managing underwriter so requests, each Holder shall enter into a holdback agreement reflecting such restrictions. (c) No Holder shall, during any period in which any of its Registrable Securities are included in any effective Registration Statement, (1) effect any stabilization transactions or engage in any stabilization activity in connection with the Class A Common Stock or other equity securities of the Company in contravention of Regulation M under the Exchange Act; or (2) permit any Affiliated Purchaser (as that term is defined in Regulation M under the Exchange Act) to bid for or purchase for any account in which such Holder has a beneficial interest, or attempt to induce any other person to purchase, any shares of Common Stock or Registrable Securities in contravention of Regulation M under the Exchange Act. (d) The Company, upon request by the Holders' Agent, shall, at the Company's expense, in the case of a registration including Registrable Securities to be offered by Holders for sale through brokers transactions, furnish each broker through whom such Holders offer Registrable Securities such number of copies of the prospectus as the broker may require, and such Holders shall otherwise comply with the prospectus delivery requirements under the Securities Act, and the Company shall comply with Rule 153 under the Securities Act. Section 6. Registration Procedures. If and whenever the Company is required by the provisions of this Agreement to effect a registration of Registrable Securities: (a) The Company shall prepare and file with the SEC, within the time periods specified herein, a Registration Statement on Form S-3 or its equivalent (or on such other registration form available to the Company that permits the greatest extent of incorporation by reference of materials filed by the Company under the Exchange Act or, if no incorporation by reference is permitted, any form then available to the Company), and will use its best efforts to cause such registration statement to become effective as promptly as practicable (and, in any event, within sixty days) thereafter and to remain effective under the Securities Act until (1) the earlier of such time as all securities covered thereby have been disposed of pursuant to such Registration Statement or 90 days after such Registration Statement becomes effective, in the case of registrations pursuant to Section 2, or (2) 180 days after such Registration Statement becomes effective, in the case of registrations pursuant to Section 3, in every case as any such period may be extended pursuant to subsection (h) or Section 8. (b) The Company shall prepare and file with the SEC such amendments, post-effective amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for such period of time required by subsection (a), as such period may be extended pursuant to subsection (h) or Section 8. (c) The Company shall comply in all material respects with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the period during which any such Registration Statement is required to be effective. (d) The Company shall furnish to any Holder whose Registrable Securities are being registered hereunder and any underwriter of Registrable Securities (1) such number of copies (including manually executed and conformed copies) of such Registration Statement and of each amendment thereof and supplement thereto (including all annexes, appendices, schedules and exhibits), (2) such number of copies of the prospectus used in connection with such Registration Statement (including each preliminary prospectus, any summary prospectus and the final prospectus and including prospectus supplements), and (3) such number of copies of other documents, in each case as such Holder or such underwriter may reasonably request. (e) The Company shall use its best efforts to register or qualify all Registrable Securities covered by such Registration Statement under the securities or "blue sky" laws of such states of the United States as any Holder whose Registrable Securities are being registered or any underwriter shall reasonably request, and do any and all other acts and things which may be reasonably requested by such Holder or such underwriter to consummate the offering and disposition of Registrable Securities in such jurisdictions; but the Company shall not be required to qualify generally to do business as a foreign corporation or as a dealer in securities, subject itself to taxation, or consent to general service of process in any jurisdiction wherein it is not then so qualified or subject. (f) The Company shall use its best efforts to cause the Registrable Securities covered by such Registration Statement to be registered with, or approved by, such other United States public, governmental or regulatory authorities, if any, as may be required in connection with the disposition of such Registrable Securities. (g) The Company shall list the Registrable Securities covered by such Registration Statement on any securities exchange (or if applicable, the Nasdaq National Market System) on which any securities of the Company are then listed. (h) The Company shall notify the Holders' Agent as promptly as practicable and, if requested by Holders' Agent, confirm such notification in writing, (1) when a prospectus or any prospectus supplement has been filed with the SEC, and when a Registration Statement or any post-effective amendment thereto has been filed with and declared effective by the SEC, (2) of the issuance by the SEC of any stop order or the coming to its knowledge of the initiation of any proceedings for that purpose, (3) of the receipt by the Company of any notification with respect to the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (4) of the occurrence of any event which requires the making of any changes to a Registration Statement or related prospectus so that such documents will not contain any untrue statement of a material fact or omit to state any 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 (and the Company shall promptly prepare and furnish to each Holder (through the Holders' Agent) a reasonable number of copies of a supplemented or amended prospectus such that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an 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 are made, not misleading), and (5) of the Company's determination that the filing of a post-effective amendment to a Registration Statement shall be necessary or appropriate. Upon the receipt by the Holders' Agent of any notice from the Company of the occurrence of any event of the kind described in clause (4), the Holders shall forthwith discontinue any offer and disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until all Holders shall have received copies of a supplemented or amended prospectus which is no longer defective and, if so directed by the Company, shall deliver to the Company all copies (other than permanent file copies) of the defective prospectus covering such Registrable Securities which are then in the Holders' possession. If the Company shall provide any notice of the type referred to in the preceding sentence, the period during which the Registration Statement is required by subsection (a) to be effective shall be extended by the number of days from and including the date such notice is provided, to and including the date when Holders shall have received copies of the corrected prospectus. (i) The Company shall enter into such agreements and take such other appropriate actions as are customary and reasonably necessary to expedite or facilitate the disposition of such Registrable Securities, and in that regard, deliver to the Holders such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold or, as applicable, the managing underwriters, to evidence the Company's compliance with this Agreement, including, in the case of any underwritten offering, using commercially reasonable efforts to cause its independent accountants to deliver to the managing underwriters an accountants' comfort letter substantially similar in scope to that customarily delivered in an underwritten public offering and covering audited and interim financial statements included in the registration statement, or if such letter can not be obtained through the exercise of commercially reasonable efforts, cause its independent accountants to deliver to the managing underwriters a comfort letter based on negotiated procedures providing comfort with respect to the Company's financial statements included or incorporated by reference in the registration statement at the highest level permitted to be given by such accountants under the then applicable standards of the American Institute of Certified Public Accountants with respect to such Registration Statement. Section 7. Underwriting. (a) If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration under Section 2, the Company will enter into and perform its obligations under an underwriting agreement with the underwriters for such offering, such agreement to contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, customary provisions relating to indemnities and contribution and the provision of opinions of counsel and accountants' comfort letters. If Registrable Securities are to be distributed by such underwriters on behalf of any Holder, such Holder shall also be a party to any such underwriting agreement; provided, however, that no Holder shall be required to make representations or warranties concerning the Company or any other Holder. (b) If any registration pursuant to Section 4 shall involve an underwritten offering, the Company may require Registrable Securities requested to be registered pursuant to Section 4 to be included in such underwriting on the same terms and conditions as shall be applicable to the securities being sold through underwriters under such registration. In such case, each Holder requesting registration shall be a party to any such underwriting agreement. Such agreement shall contain such representations and warranties by the Holders requesting registration and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, provisions relating to indemnities and contribution; provided, however, that no Holder shall be required to make representations or warranties concerning the Company or any other Holder. (c) In any offering of Registrable Securities pursuant to a registration hereunder, each Holder requesting registration shall also enter into such additional or other agreements as may be customary in such transactions, which agreements may contain, among other provisions, such representations and warranties as the Company or the underwriters of such offering may reasonably request (including, without limitation, those concerning such Holder, its Registrable Securities, such Holder's intended plan of distribution and any other information supplied by it to the Company for use in such registration statement), and customary provisions relating to indemnities and contribution. Section 8. Information Blackout. (a) At any time when a Registration Statement is effective, upon written notice from the Company to the Holders' Agent that the Company has determined in good faith that sale of Registrable Securities pursuant to the Registration Statement would require disclosure of non-public material information, the disclosure of which would have a material adverse effect on the Company, all Holders shall suspend sales of Registrable Securities pursuant to such Registration Statement until the earlier of (1) 90 days after the Company notifies the Holders' Agent of such good faith determination, and (2) such time as the Company notifies the Holders that such material information has been disclosed to the public or has ceased to be material or that sales pursuant to such Registration Statement may otherwise be resumed (the number of days from such suspension of sales by the Holders until the day when such sales may be resumed hereunder is hereinafter called a "Sales Blackout Period"). (b) The time periods set forth in Section 6(a)(1) or (2) shall be extended for a number of days equal to the number of days in each Sales Blackout Period. (c) No Sales Blackout Period shall be commenced by the Company within 60 days after the end of a Sales Blackout Period. Section 9. Rule 144. The Company shall take all actions reasonably necessary to comply with the filing requirements described in Rule 144(c)(1) under the Securities Act so as to enable the Holders to sell Registrable Securities without registration under the Securities Act. Upon the written request of any Holder, the Company will deliver to such Holder a written statement as to whether it has complied with the filing requirements under such Rule 144(c)(1). Section 10. Preparation; Reasonable Investigation; Information. In connection with the preparation and filing of each Registration Statement registering Registrable Securities under the Securities Act, (a) the Company will give the Holders' Agent, on behalf of the Holders, and the underwriters, if any, and their respective counsel and accountants, drafts of such registration statement for their review and comment prior to filing and (during normal business hours and subject to such reasonable limitations as the Company may impose to prevent disruption of its business) such reasonable and customary access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the reasonable opinion of the Holders' Agent and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act and (b) as a condition precedent to including any Registrable Securities of any Holder in any such registration, the Company may require such Holder to furnish the Company such information regarding such Holder and the distribution of such securities as the Company may from time to time reasonably request in writing or as shall be required by law or the SEC in connection with any registration. Section 11. Indemnification and Contribution. (a) In the case of each offering of Registrable Securities made pursuant to this Agreement, the Company shall indemnify and hold harmless each Holder, its officers, directors, members and partners, each underwriter of Registrable Securities so offered and each Person, if any, who controls any of the foregoing persons within the meaning of the Securities Act ("Holder Indemnitees"), from and against any and all claims, liabilities, losses, damages, expenses and judgments, joint or several, to which they or any of them may become subject, including any amount paid in settlement of any litigation commenced or threatened, and shall promptly reimburse them, as and when incurred, for any legal or other expenses incurred by them in connection with investigating any claims and defending any actions, insofar as such losses, claims, damages, liabilities or actions shall arise out of, or shall be based upon, any violation or alleged violation by the Company of the Securities Act, any blue sky laws, securities laws or other applicable laws of any state or county in which the Registrable Securities are offered, and relating to action taken or action or inaction required of the Company in connection with such offering, or shall arise out of, or shall be based upon, any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in any preliminary or final prospectus included therein) relating to the offering and sale of such Registrable Securities, or any amendment thereof or supplement thereto, or in any document incorporated by reference therein, or any omission or alleged omission to state therein 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; but the Company shall not be liable to any Holder Indemnitee in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement, or any omission or alleged omission, if such statement or omission shall have been made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of such Holder (including information furnished by the Holders' Agent) specifically for inclusion in the Registration Statement (or in any preliminary or final prospectus included therein), or any amendment thereof or supplement thereto. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Holder and shall survive the transfer of such securities. The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to any Holder Indemnitee. (b) In the case of each offering of Registrable Securities made pursuant to this Agreement, each Holder whose Registrable Securities are included in such offering shall indemnify and hold harmless the Company, its officers and directors and each person, if any, who controls any of the foregoing within the meaning of the Securities Act (the "Company Indemnitees"), from and against any and all claims, liabilities, losses, damages, expenses and judgments, joint or several, to which they or any of them may become subject, including any amount paid in settlement of any litigation commenced or threatened, and shall promptly reimburse them, as and when incurred, for any legal or other expenses incurred by them in connection with investigating any claims and defending any actions, insofar as any such losses, claims, damages, liabilities or actions shall arise out of, or shall be based upon, any violation or alleged violation by such Holder or the Holders' Agent of the Securities Act, any blue sky laws, securities laws or other applicable laws of any state or country in which the Registrable Securities are offered and relating to action taken or action or inaction required of such Holder or the Holders' Agent in connection with such offering, or shall arise out of, or shall be based upon, any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in any preliminary or final prospectus included therein) relating to the offering and sale of such Registrable Securities or any amendment thereof or supplement thereto, or any omission or alleged omission to state therein 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, but in each case only to the extent that such untrue statement is contained in, or such fact is omitted from, information furnished in writing to the Company by or on behalf of such Holder or the Holders' Agent specifically for inclusion in such Registration Statement (or in any preliminary or final prospectus included therein). Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Company Indemnitee. The foregoing indemnity is in addition to any liability which a Holder or the Holders' Agent may otherwise have to any Company Indemnitee. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 11, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in subsection (a) or (b) shall be available to any person who shall fail to give notice as provided in this subsection (c) if the indemnifying party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of subsection (a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (1) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (2) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel, in the written opinion of such counsel, would be inappropriate due to actual or potential differing interests between them. The indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties (in addition to local counsel). Such firm shall be designated in writing by the Holders' Agent in the case of Holder Indemnitees and by the Company in the case of Company Indemnitees. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 11 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, or if the indemnified party failed to give the notice required under subsection (c), then each indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect not only both the relative benefits received by such party (as compared to the benefits received by all other parties) from the offering in respect of which indemnity is sought, but also the relative fault of all parties in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by a party shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by it bear to the total amounts received by each other party. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) The indemnity provided for hereunder shall not inure to the benefit of any indemnified party to the extent that the claim is based on such indemnified party's failure to comply with the applicable prospectus delivery requirements of the Securities Act as then applicable to the person asserting the loss, claim, damage or liability for which indemnity is sought. Section 12. Expenses. In connection with any registration under this Agreement the Company shall pay all Registration Expenses (to the extent not borne by underwriters or others), except as provided in Section 2(f) or 3(e), and each Holder participating in such registration shall pay its pro rata share of the items described in clause (i) of the definition of "Registration Expenses" in Section 1. Section 13. Appointment of Holders' Agent; Reliance. The Holders appoint ______________________________________ as their agent and representative (the "Holders' Agent") to take such actions under this Agreement on their behalf as the Holders' Agent shall consider advisable. Notwithstanding anything herein or in the Merger Agreement to the contrary, the Holders' Agent shall not be required to request registration of any Registrable Securities of any Holders other than Spectrum or Alta (to the extent requested by Spectrum or Alta) in any Registration Statement pursuant to this Agreement, and the decision of whether to include or exclude any such Registrable Securities in or from any such Registration Statement shall be in the sole discretion of the Holders' Agent. The Holders' Agent shall deliver copies of all materials and notices required hereunder to the Holders in a timely fashion, and shall comply with written direction from any Holder concerning the Registrable Securities beneficially owned by such Holder. The Holders' Agent may be removed by Spectrum and Alta, acting together, by their written notice to the Holders' Agent and Pegasus. Upon any vacancy in the position of Holders' Agent caused by resignation or removal, Spectrum and Alta, acting together, shall appoint a new Holders' Agent by written notice to Pegasus and the Holders. The Holders will indemnify the Holders' Agent for any liability it may incur by reason of acting as such, except liability caused by its gross negligence or willful misconduct. Pegasus shall be entitled to rely on the statements and directions of the Holders' Agent, notwithstanding any statement or direction to the contrary by one or more of the Holders. Section 14. 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, delivered by the U.S. mail, delivered by overnight courier service, or sent by telecopy, as follows: (a) if to the Holders' Agent or any Holder, to William P. Collatos at the address set forth in the Merger Agreement, with a copy to Karen A. Dewis, at the address set forth in the Merger Agreement; and (b) if to the Company, at the Company's address set forth in the Merger Agreement. Any party may change the address at which it wishes to receive notice by giving notice of the same in accordance with the provisions of this Section 14. The furnishing of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly furnished or served on the party to which it is addressed, in the case of delivery in person or by telecopy, on the date when sent (with receipt personally acknowledged in the case of telecopied notice), in the case of delivery by overnight courier service, on the dated delivered as evidenced by delivery receipt, and in all other cases, five business days after it is sent. Section 15. 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 the Company and the Holders of a majority of the Registrable Securities then outstanding. Section 16. Headings. The section 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 17. Applicable Law. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State 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 18. 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 19. 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 20. 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 or delivery of an original executed counterpart. Section 21. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; but nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of applicable law. If any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such Holder shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement, and such Holder shall be entitled to receive the benefits hereof. IN WITNESS WHEREOF, this Agreement has been executed and delivered as of the date first above written. PEGASUS COMMUNICATIONS CORPORATION By__________________________________________ HOLDERS' AGENT By__________________________________________ HOLDERS: EX-10.3 8 EXHIBIT-10.3 EXECUTION COPY CLASS B PREFERRED UNIT SUBSCRIPTION AGREEMENT This CLASS B PREFERRED UNIT SUBSCRIPTION AGREEMENT (the "Agreement") is entered into as of January 10, 2000 by and between Personalized Media Communications, L.L.C., a Delaware limited liability company (the "Company"), and Pegasus Development Corporation, a Delaware corporation (the "Subscriber"). SECTION 1 AUTHORIZATION AND SALE OF CLASS B PREFERRED UNITS 1.1 Authorization of Class B Units. The Company has authorized the sale and issuance of up to 500,000 units of Class B preferred membership interests in the Company (the "Class B Units" and together with the Class A membership interests in the Company, the "Units") having the rights, preferences, privileges and restrictions as set forth in the form of Second Amended and Restated Operating Agreement of the Company in substantially the form attached hereto as Exhibit A (the "Restated Operating Agreement"), 1.2 Sale of Class B Units. Subject to the terms and conditions hereof, the Company shall issue and sell to the Subscriber, and the Subscriber shall subscribe to and purchase from the Company, 500,000 Class B Units (such number of Class B Units, the "Purchased Units") for the Purchase Price (as defined below). 1.3 Use of Proceeds. The net proceeds from the sale of the Purchased Units will be used by the Company for general corporate purposes including, without limitation, distribution to the Company's members. SECTION 2 CLOSING 2.1 Closing Date. The purchase and sale of the Purchased Units hereunder (the "Closing") shall take place on January 13, 2000 at the midtown offices of Cleary, Gottlieb, Steen & Hamilton (Citicorp Center, 153 East 53rd Street, 38th Floor, New York, New York 10022-4611) at 9:00 a.m. (Eastern Standard Time) or on such other date or at such other place as the Company and the Subscriber shall agree. 2.2 Payment for Units. At the Closing, the Subscriber shall pay, deliver or cause to be delivered to the Company the purchase price, payable as follows (collectively the "Purchase Price"): (a) cash in the amount of $14,250,000, payable by wire transfer of immediately available funds to the following account: Citibank N.A. (330 Madison Avenue, New York, NewYork 10017), ABA number 021000089, account number 96437046 in the name of Personalized Media Communications, L.L.C.; (b) 200,000 shares of class A common stock (the "Stock") of Pegasus Communications Corporation, a Delaware corporation ("Pegasus"); and (c) 1,000,000 warrants (the "Warrants") issued by Pegasus, which shall permit the Company, upon exercise of the warrants, to acquire an additional 1,000,000 shares of class A common stock of Pegasus. 2.3 Delivery of the Stock and Warrants. At the Closing, the Company shall deliver to the Subscriber any documents necessary to reflect the subscription and purchase by the Subscriber of the Purchased Units, and the Subscriber shall deliver to the Company any documents necessary to reflect the Company's ownership of the Stock and the Warrants. SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Subscriber as of the date hereof and the Closing Date as follows: 3.1 Organization and Standing. The Company is a limited liability company duly organized and validly existing under, and by virtue of, the laws of the State of Delaware and is in good standing under such laws. The Company has all requisite limited liability company power and authority to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company has furnished the Subscriber with true, correct and complete copies of its operating agreement and certificate of formation. 3.2 Company Power. The Company has all requisite legal and limited liability company power and authority to execute and deliver this Agreement, to sell and issue the Units hereunder, and to carry out and perform its obligations under the terms of this Agreement. 3.3 Subsidiaries. (a) The Company owns one hundred percent (100%) of the outstanding membership interests of PMC Satellite Development, L.L.C. ("PMC Satellite") and PMC Satellite Development-Education, L.L.C. ("PMC Satellite II"). The Company has no subsidiaries other than PMC Satellite and PMC Satellite II and does not otherwise own or control, directly or indirectly, any equity interest in any corporation, association or business entity. The Company is not a party to any joint venture, partnership or similar arrangements. True and complete copies of the Limited Liability Company Operating Agreement of PMC Satellite Development, L.L.C. and the Limited Liability Company Operating Agreements of PMC Satellite Development-Education, L.L.C. are attached hereto as Exhibits B and C, respectively. (b) PMC Satellite was formed on January 4, 2000 and, since such date, has not conducted any business. PMC Satellite II was formed on January 6, 2000 and, since such date, has not conducted any business. 2 3.4 Capitalization. (a) Immediately prior to the Closing, the authorized and outstanding membership interests in the Company, and the ownership thereof, is as set forth on Schedule 3.4 hereto. (b) Except as set forth herein or in the Amended and Restated Limited Liability Company Operating Agreement of the Company attached hereto as Exhibit D, there are no options, warrants or other rights (including conversion or preemptive rights) to purchase any class or series of equity or membership interest in the Company, and there are no agreements, understandings, commitments or obligations outstanding with respect to the voting, sale or transfer of any class or series of equity or membership interests in the Company. 3.5 Operating Agreement. Attached hereto as Exhibit D is a true and complete copy of the Amended and Restated Limited Liability Company Operating Agreement of the Company, as currently in effect. 3.6 Accredited Investor. The Company represents and warrants that it is an "accredited investor" as defined in Rule 501(a) of Regulation D of the Securities Act of 1933, as amended (the "1933 Act") (an "Accredited Investor"). 3.7 Rule 144. It acknowledges that the Stock must be held indefinitely unless subsequently registered under the 1933 Act or unless an exemption from such registration is available. It is aware of the provisions of Rule 144 promulgated under the 1933 Act which permit limited resale of equity purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the equity, the availability of certain current public information about the Subscriber, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being effected through a "broker's transaction" or in a transaction directly with a "market maker", and the amount of equity being sold during any three-month period not exceeding specified limitations. 3.8 Restrictions on Transfer. It understands that the transfer of the Stock is restricted by applicable state and federal securities laws. 3.9 Authorization. All company action on the part of the Company, its managers and members necessary for the authorization, execution, delivery and performance of this Agreement by the Company and the authorization, sale, issuance and delivery of the Purchased Units has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered by the Company, shall constitute a valid and binding obligation of the Company, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. The Purchased Units, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable, and will have the rights, preferences, privileges and restrictions described in the Restated Operating Agreement, and such Purchased Units will be free of restrictions on transferability other than restrictions under this Agreement, the Restated Operating Agreement, and applicable federal and state law. The issuance of the Purchased Units is not subject to any preemptive rights or rights of first refusal, other than rights waived prior to the date hereof. 3 SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE SUBSCRIBER The Subscriber hereby represents and warrants to the Company as follows: 4.1 Accredited Investor. It understands that the offering and sale of the Units are intended to be exempt from the registration under the 1933 Act and applicable U.S. state securities laws by virtue of the private placement exemption from registration provided in Section 4(2) of the 1933 Act and exemptions under applicable U.S. state securities laws, and it agrees that any Units acquired by the Subscriber may not be sold, offered for sale, transferred, pledged, hypothecated or otherwise disposed of in any manner that would require the Company to register the Units under the 1933 Act. The Subscriber understands that the Company requires each investor in the Company to be an Accredited Investor and the Subscriber represents and warrants that it is an Accredited Investor. The Subscriber covenants that it will not transfer, pledge, hypothecate or otherwise dispose of its Interest (or any portion thereof) to any person that the Company reasonably believes is not an Accredited Investor. 4.2 Rule 144. It acknowledges that the Units must be held indefinitely unless subsequently registered under the 1933 Act or unless an exemption from such registration is available. It is aware of the provisions of Rule 144 promulgated under the 1933 Act which permit limited resale of equity purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the equity, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being effected through a "broker's transaction" or in a transaction directly with a "market maker", and the amount of equity being sold during any three-month period not exceeding specified limitations. 4.3 No Public Market. It understands that no public market now exists for any of the securities issued by the Company and that the Company has made no assurances that a public market will ever exist for the Company's securities. 4.4 Restrictions on Transfer. It understands that the transfer of the Units is restricted by applicable state and federal securities laws and by the provisions of the Restated Operating Agreement. 4.5 Access to Data. It has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management, and, to its knowledge, has received all information it considers necessary or appropriate for deciding whether to purchase the Units. It has also had an opportunity to ask questions of managers, officers and employees of the Company. It understands that such discussions, as well as any written information issued by the Company, were intended to describe certain aspects of the Company's business and prospects but were not necessarily a thorough or exhaustive description. 4 4.6 Authorization. This Agreement, when executed and delivered by the Subscriber, shall constitute a valid and binding obligation of the Subscriber, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 4.7 Brokers or Finders. The Company has not and will not incur, directly or indirectly, as a result of any action taken by the Subscriber, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or the transactions contemplated hereby. 4.8 Tax Liability. It has reviewed with its own tax advisors the tax consequences of the transactions contemplated by this Agreement. It relies solely on such advisors and not on any statements or representations of the Company or any of the Company's agents with respect to such tax consequences. It understands that it, and not the Company, shall be responsible for its own tax liability that may arise as a result of the transactions contemplated by this Agreement. SECTION 5 CONDITIONS TO CLOSING OF THE SUBSCRIBER The Subscriber's obligation to purchase the Purchased Units is, unless waived in writing by the Subscriber, subject to the fulfillment as of the Closing Date of the following conditions: 5.1 Representations and Warranties Correct. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects as of the Closing Date. 5.2 Covenants. All covenants, agreements and conditions contained in this Agreement to be performed or complied with by the Company on or prior to the Closing shall have been performed or complied with in all material respects. 5.3 Restated Operating Agreement. The Restated Operating Agreement shall have been executed by the Managing Member of the Company and delivered to the Subscriber. 5.4 License Agreements and Option Agreement. License agreements between the Company and PMC Satellite and the Company and PMC Satellite II in substantially the form attached hereto as Exhibits E and F respectively and an option agreement between the Company and the Subscriber in substantially the form attached hereto as Exhibit G shall have been executed and copies of such agreements shall have been delivered to the Subscriber. 5.5 Sublicense Agreement. A sublicense agreement (the "Sublicense Agreement") in substantially the form attached hereto as Exhibit H shall have been executed and delivered to the Subscriber. 5.6 Security Agreements. Security agreements in a form reasonably satisfactory to the Subscriber granting to the Subscriber a security interest in (i) the Company's interest in PMC Satellite and (ii) PMC Satellite's interest under the License Agreement to be dated between the Company and PMC Satellite, and financing statements evidencing such security interests, shall have been executed by the Company and copies of such agreement and statements shall have been delivered to the Subscriber. Both the security interest granted by the Company and the security interest granted by PMC Satellite will secure (i) the Company's obligations under this Agreement and the Company's obligations to the Class B Members under the Restated Operating Agreement and (ii) PMC Satellite's obligations under the Sublicense Agreement. 5 5.7 Forbearance Agreement. A forbearance agreement substantially in the form attached hereto as Exhibit I shall have been executed and a copy thereof delivered to the Subscriber. 5.8 Hart Scott Rodino Representation Letter. A Hart Scott Rodino representation letter substantially in the form attached hereto as Exhibit J shall have been executed and delivered to the Subscriber. SECTION 6 CONDITIONS TO CLOSING OF THE COMPANY The Company's obligation to sell and issue the Purchased Units to the Subscriber at the Closing is, unless waived in writing by the Company, subject to the fulfillment as of the Closing Date of the following conditions: 6.1 Representations and Warranties Correct. The representations made in Section 4 hereof by the Subscriber shall be true and correct in all material respects as of the Closing Date. 6.2 Covenants. All covenants, agreements, and conditions contained in this Agreement to be performed or complied with by the Subscriber on or prior to the Closing Date shall have been performed or complied with in all material respects. 6.3 Payment of Purchase Price. The Subscriber shall have delivered to the Company the Purchase Price. 6.4 Restated Operating Agreement. The Restated Operating Agreement shall have been executed by the Subscriber and delivered to the Company. 6.5 Sublicense Agreement. A sublicense agreement in substantially the form attached hereto as Exhibit H shall have been executed by the Subscriber and delivered to the Company. 6.6 Warrant Agreement. A warrant agreement in a form reasonably satisfactory to the Company shall have been executed by the Subscriber and delivered to the Company. 6.7 Registration Rights Agreement. A registration rights agreement in a form reasonably satisfactory to the Company, granting the Company registration rights in respect of the Stock and the stock obtainable upon exercise of the Warrants for the period beginning on July 10, 2000 through January 10, 2001, shall have been executed by the Subscriber and delivered to the Company. 6 SECTION 7 COVENANTS 7.1 Transfer Restrictions on Warrants. (a) The Company shall not sell, transfer or otherwise dispose of the Warrants, or the stock issued to the Company upon exercise of the Warrants, until: (i) in the event that the Subscriber exercises its rights under Section 14.0.1 of the Restated Operating Agreement (the "Withdrawal Rights"), the date on which the closing of the Withdrawal Rights has been effectuated; provided that if such closing is not effectuated within fifteen (15) days of the receipt by the Company of the notice of exercise of the Withdrawal Rights as a result of an act or omission of the Subscriber, the transfer restrictions shall cease as of the expiration of such fifteen (15) day period; provided further that in the event that the closing has not been effectuated as a result of the failure by the Subscriber to obtain regulatory approvals in respect of the closing, the transfer restrictions shall remain in effect until the earlier of (i) the date on which (A) any necessary regulatory approvals are received or (B) the regulatory authority from which such approvals are sought provides notice that such regulatory approvals will not be granted and any litigation or appeal with respect thereto have been finally resolved and (ii) January 14, 2005, with the understanding that if regulatory approvals are sought and, as a result of such, a regulatory authority requires termination of the sublicense granted pursuant to the Sublicense Agreement, the transfer restriction shall remain in effect; (ii) in the event that the Company exercises its rights under Section 14.0.2 of the Restated Operating Agreement (the "Redemption Rights"), January 14, 2005; or (iii) in the event that neither the Subscriber has exercised its Withdrawal Rights nor Company has exercised its Redemption Rights prior to March 17, 2003, as of March 18, 2003; (b) Notwithstanding the provisions of Section 7.1(a), the transfer restriction set forth above shall automatically cease to exist immediately upon the occurrence of any of the following events: (i) the occurrence of any of the following: (A) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of Pegasus and its subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) other than Marshall W. Pagon or his Related Parties (as defined below), (B) the adoption of a plan relating to the liquidation or dissolution of Pegasus, (C) the consummation of any transaction (including, without 7 limitation, any merger or consolidation) the result of which is that (x) any "person" (as defined above) becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the 1934 Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time, upon the happening of an event or otherwise), directly or indirectly, of more of the voting stock of Pegasus (measured by voting power rather than number of shares) than is at the time beneficially owned (as defined above) by Marshall W. Pagon and his Related Parties in the aggregate, (y) Marshall W. Pagon and his Related Parties collectively cease to beneficially own (as defined above) voting stock of Pegasus having at least thirty percent (30%) of the combined voting power of all classes of voting stock of Pegasus then outstanding or (z) Marshall W. Pagon and his Affiliates (as defined below) acquire, in the aggregate, beneficial ownership (as defined above) of more than sixty six and two-thirds percent (66 2/3%) of the shares of class A common stock of Pegasus at the time outstanding or (D) the first day on which a majority of the current members of the board of directors of Pegasus are no longer directors; where: "Affiliate" of any specified individual, legal entity (including, without limitation, a corporation, a partnership, a limited liability company, a legal entity of public law, a trust or an unincorporated organization), or a government or any agency or political subdivision thereof (a "Person") means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided, however, that beneficial ownership of ten percent (10%) or more of the voting securities of a Person shall be deemed to be control. "Related Party" with respect to Marshall W. Pagon means (A) any immediate family member of Marshall W. Pagon or (B) any trust, corporation, partnership or other entity, more than fifty percent (50%) of the voting equity interests of which are owned directly or indirectly by, and which is controlled by, Marshall W. Pagon and/or such other Persons referred to in the immediately preceding clause (A). For purposes of this definition, (i) "immediate family member" means spouse, parent, step-parent, child, sibling or step-sibling and (ii) "control" has the meaning specified in the definition of "Affiliate" contained herein. In addition, the estate of Marshall W. Pagon shall be deemed to be a Related Party until such time as such estate is distributed in accordance with Marshall W. Pagon's will or applicable state law. 8 (ii) [omitted and filed separately with the Commission]; (iii) the Subscriber granting a sublicense under the Sublicense Agreement to any third party other than an Affiliate (as defined in Section 7.1(b)(i)) of Pegasus; or (iv) the mutual agreement of the Parties to remove the transfer restriction. SECTION 8 MISCELLANEOUS 8.1 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS BY THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS. 8.2 Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto; provided, however, that the rights of the Subscriber to purchase the Units shall not be assignable without the consent of the Company. 8.3 Entire Agreement; Amendment. This Agreement, including the exhibits hereto, constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. This Agreement including the exhibits hereto supersedes any prior written or oral agreement or understanding with respect to the subject matter hereof. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 8.4 Notices, etc. All notices, requests and other communications to any party hereunder shall be in writing and addressed to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 8.4): (a) if to the Company, to: Personalized Media Communications, L.L.C. 110 East 42nd Street Suite 1704 New York, NY 10017-5611 Attention: Stephen P. McCandless Telephone: 212-286-0554 Facsimile: 212-286-0559 9 with a copy to: Gerald Holtzman Beirne, Maynard & Parsons, LLP Suite 2400 Houston, TX 77056 Telephone: 713-960-7390 Facsimile: 713-960-1527 (b) if to the Subscriber, to: Pegasus Development Corporation c/o Pegasus Communications Management Corporation 225 City Line Avenue Bala Cynwyd, PA 19004 Attention: Marshall W. Pagon Telephone: 610-934-7000 Facsimile: 610-934-7072 with a copy to: Pegasus Development Corporation Pegasus Communications Management Corporation 225 City Line Avenue Bala Cynwyd, PA 19006 Attention: Ted S. Lodge Telephone: 610-934-7000 Facsimile: 610-934-7072 All notices under this Section 8.4 shall be deemed to have been given upon receipt if delivered in person and shall be deemed to have been given (i) two Business Days after transmission of a telegram or telex, (ii) upon confirmation of receipt if transmitted by facsimile transmission, (iii) four Business Days after deposit in United States registered or certified mail (postage prepaid, return receipt requested) or (iv) two Business Days after delivery to a reputable overnight courier, provided, however, that such notice provision may be waived in writing by any party hereto. 8.5 Delays or Omissions. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach or default of another party under this Agreement, shall impair any such right, power or remedy of such party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing and signed by the party against whom enforcement of such waiver, permit, consent or approval is sought. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. 10 8.6 Expenses. Each of the Company and the Subscriber shall bear its own expenses incurred on its behalf with respect to this Agreement and the transactions contemplated hereby. 8.7 Counterparts. This Agreement may be executed in two counterparts, each of which shall be an original, and both of which together shall constitute one instrument. 8.8 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision, which shall be replaced with an enforceable provision closest in intent and economic effect as the severed provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 8.9 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 8.10 Finder's Fees. The Subscriber agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee (and the cost and expenses of defending against such liability or asserted liability) for which the Subscriber or any of its partners, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Subscriber from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees, or representatives is responsible. 8.11 Survival of Warranties. The warranties, representations and covenants of the Company and the Subscriber contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing. 8.12 Further Assurances. Each party to this Agreement agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances, as may be reasonably requested by any other party, to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. 8.13 Exhibits and Schedules. All of the Exhibits and Schedules to this Agreement are hereby incorporated by reference herein, and any disclosure made on any Schedule delivered pursuant hereto shall be deemed to have been disclosed for purposes of any other Schedule required hereby. 11 SIGNATURES IN WITNESS WHEREOF, this Agreement is hereby executed as of the date first written above. PERSONALIZED MEDIA COMMUNICATIONS, L.L.C. By: /s/ John C. Harvey ------------------------------ Name: John C. Harvey Title: Managing Member PEGASUS DEVELOPMENT CORPORATION By: /s/ Ted S. Lodge ------------------------------ Name: Ted S. Lodge Title: Senior Vice President EX-10.4 9 EXHIBIT-10.4 PATENT LICENSE AGREEMENT FOR PEGASUS DEVELOPMENT CORPORATION This Agreement is made this 13th day of January 2000 by and between: PMC SATELLITE DEVELOPMENT, L.L.C., a limited liability company organized and existing under the laws of the State of Delaware, United States of America and having a principal place of business at 110 East 42nd Street, Suite 1704, New York, New York 10017-5611 (hereinafter "LICENSOR"), and PEGASUS DEVELOPMENT CORPORATION, a subsidiary of PEGASUS Communications Corporation ("PCC"), a corporation organized and existing under the laws of the State of Delaware and located c/o Pegasus Communications Management Company, 225 City Line Avenue, Bala Cynwyd, Pennsylvania 19006 (hereinafter "PEGASUS" or "LICENSEE"); RECITALS LICENSOR is the exclusive licensee under that certain Patent License Agreement dated January 13, 2000 ("PMC SATELLITE LICENSE") for a specified FIELD OF USE as to certain issued patents and patent applications pending in the United States and foreign countries relating to, among other things, personalized interactive broadcast media which are assigned to Personalized Media Communications, L.L.C., a limited liability company organized and existing under the laws of the State of Delaware and having a principal place of business at 110 East 42nd Street, Suite 1704, New York, New York 10017-5611 ("PMC"). The currently issued United States patents and any patents issuing from any pending United States and foreign patent applications assigned to PMC and exclusively licensed to LICENSOR are further identified below and are referred to herein as the SUBJECT PATENTS. LICENSEE desires to acquire an exclusive sublicense under the SUBJECT PATENTS, including any patents issuing after the date of this Agreement, for the FIELD OF USE, with a right to sublicense such patents and subject to certain conditions in prior licenses as recited below. LICENSOR has the right to grant the exclusive sublicense described herein to LICENSEE under the SUBJECT PATENTS, including any patent issuing after the date of this Agreement, within the FIELD OF USE, and is willing to do so on the terms and conditions recited in this Agreement. NOW, THEREFORE, LICENSOR and LICENSEE agree as follows. In addition to the terms appearing in bold type above, other terms appearing in bold type are defined in Article 8 of this Agreement. ARTICLE 1. LICENSE GRANT 1.01 LICENSOR hereby grants to LICENSEE, during the term of this Agreement, an exclusive sublicense to use the inventions disclosed and claimed in the SUBJECT PATENTS within the FIELD OF USE including the right to grant sublicenses on the conditions specified herein. The license granted herein is subject to rights granted in the prior field-of-use licenses issued to (1) The Weather Channel, Inc. for the delivery of weather information under the Patent License Agreement for Lanmark Communications, Inc. and The Weather Channel, Inc. dated January 31, 1996 and (2) to StarSight Telecast Inc. ("STARSIGHT") for the delivery of schedule information under the Patent License Agreement for StarSight Telecast Inc. dated March 2, 1994 ("STARSIGHT LICENSE"), only if such StarSight license exists. -2- Notwithstanding the foregoing, in the event that PMC or an AFFILIATE(s) (i) assigns any of the SUBJECT PATENTS to any person or entity, (ii) accepts an equity investment of $1 million or more from any person or entity (other than its existing interest holders or LICENSEE or its AFFILIATES) , (iii) engages in any transaction resulting in a change of control of PMC, (iv) licenses or sublicenses inventions disclosed in the SUBJECT PATENTS to STARSIGHT or any entity AFFILIATED with STARSIGHT (STARSIGHT and its AFFILIATES collectively being referred to as "STARSIGHT AFFILIATES") for a field of use other than that described in the STARSIGHT LICENSE or (v) settles its outstanding disputes with STARSIGHT, then PMC will, or will cause its AFFILIATE(s) to, obligate in writing any party to the foregoing transactions to: (i) if the party is a STARSIGHT AFFILIATE, not sue LICENSEE and its SUBLICENSEES and their AFFILIATES for infringement of the SUBJECT PATENTS within the field of use licensed to STARSIGHT under the STARSIGHT LICENSE, if such license exists; (ii) if the party is not a STARSIGHT AFFILIATE, agree to cause STARSIGHT not to sue LICENSEE and its SUBLICENSEES and their AFFILIATES for infringement of the SUBJECT PATENTS within the field of use licensed to STARSIGHT under the STARSIGHT LICENSE, if such license exists, in the event that such party becomes a STARSIGHT AFFILIATE or engages in an intellectual property licensing transaction with a STARSIGHT AFFILIATE. -3- 1.02 In furtherance of the sublicense granted herein, LICENSOR agrees to and will require PMC to furnish to LICENSEE all information requested by LICENSEE concerning the issued patents identified in Schedule A attached hereto and any subsequent patent which issues from the pending patent applications identified in Schedule B attached hereto; as well as all manufacturing and technical information requested by LICENSEE concerning or pertaining to the use of the inventions disclosed and/or claimed in those patents and pending patent applications within the FIELD OF USE, which manufacturing and technical information is in PMC's possession at the time of such request. 1.03 No provision in this Agreement shall be deemed to prevent LICENSOR and LICENSEE from entering into other agreements with PMC involving the SUBJECT PATENTS for activities or products other than those expressly set forth in the FIELD OF USE as defined in this Agreement. 1.04 LICENSOR warrants and represents that it has obtained from PMC and hereby conveys to LICENSEE covenants from PMC not to sue LICENSEE and the CONSUMERS who subscribe to any of LICENSEE's or its AFFILIATES' services for any of the following: (i) the COMMUNICATION of any infringing PROGRAMMING SERVICES within the FIELD OF USE and the use by CONSUMERS who subscribe to LICENSEE's or its AFFILIATES' services of such PROGRAMMING SERVICES, (ii) the combination by a RECEIVER at a CONSUMER's location of PROGRAMMING SERVICES delivered by any means outside the FIELD OF USE with PROGRAMMING SERVICES delivered within the FIELD OF USE, but only if such combination is made independent of any service provided by LICENSEE or its AFFILIATES other than PROGRAMMING SERVICES within the FIELD OF USE, or (iii) any sale or provision of infringing RECEIVERS by LICENSEE or its AFFILIATES or their agents or dealers or use of such infringing RECEIVERS, when such RECEIVERS are principally intended for receipt of PROGRAMMING SERVICES delivered by LICENSEE or its AFFILIATES to such RECEIVERS within the FIELD OF USE. Further, LICENSOR warrants and represents that it has obtained from PMC and hereby conveys to LICENSEE the authority from PMC for LICENSEE, as agent for PMC, to grant to any party sublicensed by LICENSEE under this Agreement the covenants not to sue specified above, provided that such covenants not to sue are construed as though any such party sublicensed is LICENSEE, and LICENSOR agrees to require PMC to be bound by such specified covenants granted by LICENSEE. This provision shall, in no way, be construed as an implied license for the creators, programmers or distributors of infringing PROGRAMMING SERVICES, CONSUMERS who combine licensed PROGRAMMING SERVICES with infringing signals or program content, or the manufacturers of infringing RECEIVERS to make or sell any invention disclosed and claimed in the SUBJECT PATENTS. -4- ARTICLE 2. LICENSE FEES 2.01 In consideration of the license granted hereunder, LICENSEE shall pay to LICENSOR (a) One Hundred Thousand United States Dollars ($100,000) twelve months after the EFFECTIVE DATE, (b) One Hundred Thousand United States Dollars ($100,000) twenty-four months after the EFFECTIVE DATE and (c) One Hundred Thousand United States Dollars ($100,000) thirty-six months after the EFFECTIVE DATE. 2.02 PMC may, pursuant to this Agreement, designate one person to serve on PCC's Board of Directors ("DIRECTOR DESIGNATION RIGHT"). The DIRECTOR DESIGNATION RIGHT shall terminate upon the first to occur of the following: (i) termination of this Agreement or the commencement of litigation by one of the parties to this Agreement against the other relating to the respective party's rights and/or obligations under this Agreement; (ii) PMC's designee commits a breach of fiduciary duty to PCC; (iii) PMC or PMC's designee or AFFILIATES commits a material violation of any federal or state securities law in connection with the purchase or sale of any of PCC's securities; and (iv) PMC disposes of 50 percent or more of its holdings of PCC Class A Common Stock, measured on a fully diluted basis taking into consideration all of PCC Class A Common Stock and warrants to purchase PCC Class A Common Stock owned by PMC as of the EFFECTIVE DATE. -5- ARTICLE 3. ENFORCEMENT 3.01 LICENSEE shall have the right to enforce the SUBJECT PATENTS in its own name against any person operating in the FIELD OF USE. Any enforcement action brought under this provision shall be conducted in consultation with PMC and LICENSOR and at LICENSEE'S sole expense. LICENSOR shall, and shall require PMC to, use reasonable best efforts to cooperate to the extent feasible with LICENSEE in any such enforcement action. LICENSOR shall, and shall require PMC to, execute upon request by LICENSEE all documents and take all other actions, including joining as a party, to the extent reasonably necessary to enforce any SUBJECT PATENT under this provision. PMC will be reimbursed for the reasonable time of its employees and its reasonable expenses which result from such cooperation, including any litigation costs resulting from becoming a party to any action (except for litigation costs relating to PMC's claims for infringements outside the FIELD OF USE that may be pursued in conjunction with LICENSEE's claims for infringements within the FIELD OF USE). If LICENSEE enforces the SUBJECT PATENTS in the FIELD OF USE, LICENSEE shall receive all proceeds and benefits from such enforcement action to the extent that the revenue and other benefits from such enforcement proceeding relates to infringement in the FIELD OF USE (even if PMC and LICENSOR cooperate in such enforcement, by joining as parties or otherwise). [omitted and filed separately with the Commission] 3.02 If, under this Agreement, LICENSEE or any SUBLICENSEE is obligated to make any payment to LICENSOR or PMC under Exhibit 7.01 to this Agreement or the Option Agreement executed by PMC and PEGASUS concurrently herewith, LICENSEE or any such SUBLICENSEE shall keep and make available to PMC on reasonable notice sufficient records to allow PMC to determine that such payment is proper and complete. LICENSEE shall ensure that any SUBLICENSEE is obligated to keep and make available records as required by this Section 3.02. During the term of this Agreement and for two years following the termination or expiration of this Agreement, LICENSEE and any SUBLICENSEE shall permit its records to be inspected to determine the correctness of the computation of any payments made hereunder. Such inspections shall be during reasonable business hours and on reasonable notice to LICENSEE and any such SUBLICENSEES and shall be conducted by an auditor designated by PMC and acceptable to LICENSEE or such SUBLICENSEES. The acceptance by LICENSEE and any such SUBLICENSEE of such auditor designated by PMC shall not be unreasonably withheld. The auditor shall report to PMC the amount of any payments and the basis upon which it was determined. If the payments made in any payment period are found to have been understated by ten percent (10%) or more, LICENSEE or any such SUBLICENSEE shall reimburse PMC for its costs and expenses incurred in having the inspection conducted. -6- ARTICLE 4. WARRANTIES AND LIABILITY 4.01 LICENSOR represents and warrants that it owns an exclusive license in the SUBJECT PATENTS for the FIELD OF USE and the inventions disclosed and/or claimed therein, and that it has the right to grant the license granted to LICENSEE pursuant to this Agreement, including all requirements for PMC to act on behalf of LICENSOR. 4.02 Nothing in this Agreement shall be construed as: (a) a warranty or representation by LICENSOR or PMC as to the validity or scope of any of the SUBJECT PATENTS; (b) a warranty or representation by LICENSOR or PMC that any manufacture, use, lease, or sale of any product does not or will not infringe patents, copyrights, industrial design rights or other proprietary rights owned or controlled by third parties. LICENSOR or PMC shall not be liable to LICENSEE directly or as an indemnitor of (i) LICENSEE, (ii) LICENSEE'S sublicensees or (iii) customers of LICENSEE'S sublicensees as a consequence of any alleged infringement of any such third party patents, copyrights, industrial design rights or other proprietary rights; (c) a requirement that LICENSOR or PMC shall file any patent applications, secure any patent, or maintain any patent in force. Notwithstanding the foregoing, LICENSOR shall require PMC to use its reasonable best efforts to prosecute the pending patent applications set out in Schedule B hereto. However, PMC shall have the sole discretion to abandon any application set out in Schedule B as is, in its opinion, unnecessary to claim fully the inventions disclosed in such applications; (d) an obligation to bring or prosecute actions or suits against third parties for infringement of any patent, except as otherwise set forth in Section 3.01; or -7- (e) granting by implication, estoppel or otherwise, any license or rights under patents other than the SUBJECT PATENTS. 4.03 In no event shall LICENSOR have any liability, in contract, tort or otherwise, arising out of or in any way connected with this Agreement to pay or return to LICENSEE royalties paid or accrued hereunder by LICENSEE to LICENSOR. ARTICLE 5. TERM AND TERMINATION 5.01 Unless terminated earlier under a provision of this Article 5, the license granted to LICENSEE under this Agreement shall extend from the EFFECTIVE DATE to the date of expiration of the last to expire of the SUBJECT PATENTS. 5.02 LICENSOR may terminate the license granted to LICENSEE under this Agreement (a) for material breach by LICENSEE at any time of any duty to make required payments required by Exhibit 7.01 or the Option Agreement executed concurrently herewith or to mark RECEIVERS as required by Section 7.02, upon thirty (30) days written notice to LICENSEE identifying such breach; provided, however, that if LICENSEE satisfactorily remedies such breach within the thirty (30) days after receiving notice of breach, then the license granted herein by LICENSOR to LICENSEE shall not terminate; (b) upon bankruptcy of PEGASUS or PCC if, at the time of such bankruptcy, any further payments to LICENSOR of any kinds may be due from LICENSEE; and (c) upon dissolution of PEGASUS. 5.03 Any provision herein notwithstanding, LICENSEE may terminate this Agreement at any time by giving PMC at least thirty (30) days prior written notice. Upon such termination, all rights of LICENSEE and LICENSOR under this Agreement cease to have force and effect. -8- 5.04 Notwithstanding Section 5.03, termination of this Agreement for any reason shall not release either party hereto from any liability which at the time of such termination has already accrued to the other party. In the event this Agreement is terminated for any reason, any sublicense granted by LICENSEE hereunder shall survive with PMC as licensor and any rights of LICENSEE as licensor of any such sublicense shall accrue to PMC. ARTICLE 6. NOTICES Notices, reports and communications hereunder shall be deemed to have been sufficiently given if in writing and sent by overnight delivery service or registered mail, postage prepaid to the other party at the address given below. Until further notice, all notices shall be addressed as follows: If from LICENSOR to LICENSEE: Pegasus Development Corporation c/o Pegasus Communications Management Company 225 City Line Avenue Bala Cynwyd, Pennsylvania 19006 Attention: Marshall W. Pagon, President and Chief Executive Officer With a copy to: Ted S. Lodge, Senior Vice President, Chief Administrative Officer and General Counsel If from LICENSEE to LICENSOR Stephen P. McCandless Senior Vice President PMC Satellite Development L.L.C. 110 East 42nd Street Suite 1704 New York, New York 10017-5611 Each party may change such address by written notice to the other party. -9- ARTICLE 7. MISCELLANEOUS PROVISIONS 7.01 Sublicenses; Assignment; Changes of Control. (a) (i) LICENSEE may, at its sole expense, grant sublicenses under the SUBJECT PATENTS within the FIELD OF USE. (ii) LICENSEE may assign this Agreement in whole or in part, by a transfer of control of LICENSEE or otherwise, without the prior written consent of LICENSOR, provided that the assignee expressly assumes all obligations of LICENSEE under this Agreement by a writing delivered to LICENSOR. Any such assignment will be conditioned on the requirements set forth in Exhibit 7.01 hereto. LICENSOR may assign this Agreement, in whole or in part, by transfer of control of LICENSOR or otherwise, with the prior written consent of LICENSEE, provided that assignee expressly assumes all the obligations of LICENSOR under this Agreement by a writing delivered to LICENSEE. (iii) In the event of any sublicenses, assignments and changes of control set forth in Exhibit 7.01 attached hereto, LICENSEE shall be obligated to pay the additional consideration and satisfy the other obligations, all as set forth in Exhibit 7.01. (b) LICENSEE agrees that the right of LICENSOR or PMC to receive the consideration as set forth in Exhibit 7.01 and to exercise the designation rights therein may be assigned separately by LICENSOR to any of PMC's AFFILIATES without the necessity of LICENSOR assigning the entire Agreement, provided that such rights are still governed by the terms and conditions of this Agreement. 7.02 Marking. LICENSEE shall clearly and indelibly mark the packaging of any apparatus provided or sold to CONSUMERS by LICENSEE or sublicensees under this Agreement which embodies the inventions disclosed and claimed in the SUBJECT PATENTS with the words "Licensed to Patent" (or "Patents") and the number of the SUBJECT PATENTS applicable to such apparatus. LICENSEE and PMC shall review together the functionality of such apparatus to determine the SUBJECT PATENTS applicable, if any. LICENSEE shall require all SUBLICENSEES to be bound by this marking provision. 7.03 Agency. Except as provided in Paragraphs 1.04 and 3.01 above, LICENSOR and LICENSEE agree and stipulate that neither LICENSEE nor LICENSOR shall be construed as acting as an agent or representative of the other or PMC in any dealings which either party may have with any other person, firm or corporation and that neither LICENSEE nor LICENSOR has any power to act for or legally bind the other or PMC in any transaction. This Agreement shall not be construed as any form of joint venture or partnership between LICENSEE and LICENSOR. 7.04 APPLICABLE LAW. THIS AGREEMENT SHALL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 7.05 Severability. The terms and conditions of this Agreement are severable. If any condition of this Agreement is found to be illegal or unenforceable under any rule of law, all other terms shall remain in force. Further, the term or condition which is held to be illegal or unenforceable shall remain in effect as far as possible in accordance with the intention of the parties. 7.06 Costs and Attorneys' Fees. In the event it is necessary for either party to commence legal proceedings against the other to enforce this Agreement, or to collect amounts due hereunder, the prevailing party will be entitled to recover from the losing party its reasonable costs of suit and collection, including attorneys' fees. -10- 7.07 Entire Agreement. This Agreement constitutes the complete and exclusive statement of the agreement between LICENSOR and LICENSEE with respect to the subject matter hereof. There are no understandings, representations or warranties of any kind, oral or written, express or implied, with respect to the subject matter indicated above, except as expressly set forth herein. Failure by either party to enforce any provision of this Agreement shall not be deemed a waiver of that provision or of any other provision of this Agreement. Any claim of waiver of any right, obligation, term or condition of this Agreement and any claim that any provision of this Agreement has been modified or amended shall be null and void unless such waiver, modification or amendment is made in writing and signed by authorized representatives of both LICENSEE and LICENSOR. 7.08 Confidentiality. The parties hereto agree that they will keep the terms of this Agreement confidential, and neither of the parties shall disclose such terms to any third party without prior written consent of the other party, except (i) as required by federal and state securities law (as determined by independent counsel to the party required to make such disclosure), (ii) in connection with a judicial or administrative proceeding or other filing with an administrative agency, (iii) to professional advisors who are bound by an obligation of confidentiality, or (iv) to existing or prospective lenders or investors who agree in writing not to disclose the terms and conditions of this Agreement. In addition, LICENSOR or LICENSEE may, in its discretion, disclose the FIELD OF USE licensed in this Agreement to third parties who agree in writing not to disclose the terms and conditions of this Agreement. With regard to a press release related to this Agreement and the relationship between LICENSOR and LICENSEE, both parties shall discuss and determine the timing and manner of the announcement and other details thereof after the execution of this Agreement. 7.09 Third Party Beneficiary. The parties agree that PMC is intended to be a third beneficiary of the Agreement and PMC may directly enforce the rights given to it hereunder. ARTICLE 8. DEFINITIONS 8.01 "SUBJECT PATENTS" means the United States and foreign patents assigned to LICENSOR identified in Schedule A attached hereto, any United States or foreign patent issuing from the applications identified in Schedule B attached hereto and any United States or foreign patent issuing from any application that claims filing priority from any of the patents or patent applications identified on Schedule A or Schedule B. -11- 8.02 "FIELD OF USE" means the field of COMMUNICATION of PROGRAMMING SERVICES through a SATELLITE COMMUNICATION SYSTEM to a CONSUMER through a RECEIVER, the CONSUMER's use of such PROGRAMMING SERVICES and the COMMUNICATION of information resulting from a CONSUMER's use of PROGRAMMING SERVICES by means of any return path, including satellite and terrestrial modes. The FIELD OF USE expressly excludes (i) the manufacture of RECEIVERS, including the software supplied with RECEIVERS, and the sale of such RECEIVERS by manufacturers (but not the use of RECEIVERS by CONSUMERS or sale of RECEIVERS by LICENSEE or any sublicensee or its dealers or agents); (ii) the creation or origination of PROGRAMMING SERVICES and the sale of PROGRAMMING SERVICES by programmers (but not the use of PROGRAMMING SERVICES by CONSUMERS or sale of PROGRAMMING SERVICES by LICENSEE or any sublicensee or its dealers or agents); (iii) the COMMUNICATION of PROGRAMMING SERVICES produced for and targeted specifically for a professional, occupational, commercial, governmental or educational market, including continuing professional education; (iv) the COMMUNICATION of PROGRAMMING SERVICES through a cable or MMDS head-end facility, a broadcasting facility using a terrestrial propagation path, or a telephone system; (v) the COMMUNICATION of any signal from the ORBITAL SATELLITES to a CONSUMER at a RECEIVER, which involves changes to such signal or the insertion or inclusion of other signals in such signal at any point intermediate between the ORBITAL SATELLITES and a CONSUMER at a RECEIVER ; (vi) the delivery of computer software to RECEIVERS for purposes other than specifically to facilitate the use of PROGRAMMING SERVICES by a CONSUMER; and, (vii) the monitoring of the operations of any computer, including its output, at the CONSUMER'S location, for the purpose of developing commercially salable data. Notwithstanding the foregoing, the FIELD OF USE explicitly includes (i) the use of RECEIVERS by a CONSUMER within the FIELD OF USE, including the use by such CONSUMER of any capability of the RECEIVER which allows the CONSUMER to time shift the use of any PROGRAMMING SERVICES, (ii) the COMMUNICATION from a remote device such as a satellite receiver antenna to a CONSUMER'S location, such as, for example, through an apartment rooftop MDU installation, if no change is made in the retransmitted signal and the signal is merely amplified and/or retransmitted with no other signal inserted in or included with that retransmitted signal, (iii) the COMMUNICATION of services specifically designed to promote the use by a CONSUMER of PROGRAMMING SERVICES received by such CONSUMER from the ORBITAL SATELLITES, including any program guide which provides a CONSUMER schedule information and recording capabilities for PROGRAMMING SERVICES, and (iv) the provision of any service which allows the delivery of pay-per-view movies to a CONSUMER and the making of a record of a CONSUMER'S selection of pay-per-view movies for purposes of payment for such selected movies. 8.03 "COMMUNICATION SYSTEM" means a system for the COMMUNICATION of PROGRAMMING SERVICES and the return path for the COMMUNICATION of information resulting from a CONSUMER'S use of such PROGRAMMING SERVICES. 8.04 "SATELLITE COMMUNICATION SYSTEM" means a COMMUNICATION SYSTEM which uses any part or all of the ORBITAL SATELLITES for the COMMUNICATION of PROGRAMMING SERVICES from a terrestrial ground station and uses any means of COMMUNICATION, including satellite and terrestrial modes, for the return of information resulting from a CONSUMER'S use of such PROGRAMMING SERVICES. -12- 8.05 "PROGRAMMING SERVICES" as used herein means any programming content, including video, audio, voice services and/or data services delivered to, or intended to be delivered to, a CONSUMER through a RECEIVER, and all advertising content which is embedded in such PROGRAMMING SERVICES and which is directed to CONSUMERS. 8.06 "CONSUMER," as used in this Agreement, means one or more individuals, including those located in single family households, multiple dwelling units, hotels and motels, public facilities such as bars or restaurants, commercial establishments such as offices and showrooms, vehicles, and airplanes, to the extent such individuals receive, by means of a RECEIVER, PROGRAMMING SERVICES intended solely for their use. Specifically, CONSUMER excludes individuals receiving and using information produced for and targeted specifically for a professional, occupational, commercial, governmental or educational market. 8.07 "RECEIVER" means the apparatus which is used by a CONSUMER to receive, access, process and display PROGRAMMING SERVICES, emit PROGRAMMING SERVICES as sound or transmits any information resulting from a CONSUMER'S use of such PROGRAMMING SERVICES. 8.08 "COMMUNICATION" means any activity relating to the communication, delivery, transmission, retransmission, distribution and/or transport of PROGRAMMING SERVICES, without modification of the programming content of such services, through a transmission station, such as a satellite uplink, to a remote location such as a satellite for purposes of further delivery to a RECEIVER and the return communication, delivery, transmission, distribution and/or transport of information resulting from a CONSUMER's use of such PROGRAMMING SERVICES, provided that the term COMMUNICATION specifically excludes the origination and/or creation of PROGRAMMING SERVICES. 8.09 "ORBITAL SATELLITES" means the earth orbiting satellites in the geosynchronous orbital locations as specified by International Telecommunications Union (ITU) identified in the table below and operating at the specific frequencies and frequency bands for such locations as specified by ITU identified in the table below or any other location or frequencies for which the parties authorized by the Federal Communications Commission or their successors in interest on the EFFECTIVE DATE of this Agreement to operate at the locations and frequencies identified in the table below (or their successor in interest) may directly exchange for such identified locations and frequencies or otherwise acquire. Location Frequency Band Specific Frequencies -------- -------------- -------------------- West Longitude 101(0) Ku All frequencies West Longitude 110(0) Ku Channels 28, 30, 32 West Longitude 119(0) Ku Channels 22 through 32 West Longitude 99(0) Ka All frequencies West Longitude 101(0) Ka All frequencies West Longitude 103(0) Ka All frequencies West Longitude 125(0) Ka All frequencies 8.10 "AFFILIATE" means any person or entity controlling, controlled by or under the common control with the person or entity being referenced. 8.11 "AFFILIATED" means that a person or entity is an AFFILIATE of the person or entity being referenced. 8.12 "SUBLICENSEE" means any sublicensee of LICENSEE or their sublicensees. 8.13 "EFFECTIVE DATE" means the date of execution of this Agreement by both parties hereto. -13- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year written below. For PEGASUS DEVELOPMENT For PMC SATELLITE CORPORATION DEVELOPMENT L.L.C. /s/ Ted S. Lodge 1/13/00 /s/ John C. Harvey 1/13/00 --------------------------- ---------------------------- Signature Date Signature Date Ted S. Lodge John C. Harvey Senior Vice President Managing Member -14- SCHEDULE A PMC PATENTS HARVEY PATENTS United States Patent No. 4,694,490 for "Signal Processing Apparatus and Methods" United States Patent No. 4,704,725 for "Signal Processing Apparatus and Methods" United States Patent No. 4,965,825 for "Signal Processing Apparatus and Methods" United States Patent No. 5,109,414 for "Signal Processing Apparatus and Methods" United States Patent No. 5,233,654 for "Signal Processing Apparatus and Methods" United States Patent No. 5,335,277 for "Signal Processing Apparatus and Methods" United States Patent No. 5,887,243 for "Signal Processing Apparatus and Methods" European Patent No. 0382764 for "Signal Processing Apparatus and Methods" Japanese Patent No. 2676710 for "Signal Processing Apparatus and Methods" Japanese Patent No. 2690676 for "Signal Processing Apparatus and Methods" -1- SCHEDULE B PMC APPLICATIONS PMC APPLICATIONS United States Patent Applications for "Signal Processing Apparatus Methods" Serial Number Filing Date - ------------- ----------- 08/113,329 30-Aug-93 08/397,636 2-Mar-95 08/435,757 9-May-95 08/435,758 9-May-95 08/437,044 9-May-95 08/437,045 9-May-95 08/437,635 9-May-95 08/437,791 9-May-95 08/437,819 9-May-95 08/437,864 9-May-95 08/437,887 9-May-95 08/437,937 9-May-95 08/438,011 9-May-95 08/438,206 9-May-95 08/438,216 9-May-95 08/438,659 9-May-95 08/439,668 15-May-95 08/439,670 15-May-95 08/440,837 15-May-95 08/441,033 15-May-95 08/441,575 15-May-95 08/441,577 15-May-95 08/441,701 15-May-95 08/441,027 16-May-95 08/441,749 16-May-95 08/441,880 16-May-95 08/441,996 16-May-95 08/442,165 16-May-95 08/442,335 16-May-95 08/442,369 16-May-95 08/442,383 16-May-95 08/442,505 16-May-95 08/442,507 16-May-95 08/444,756 19-May-95 08/444,758 19-May-95 08/444,786 19-May-95 -2- 08/444,787 19-May-95 08/444,788 19-May-95 08/444,887 19-May-95 08/445,045 19-May-95 08/445,054 19-May-95 08/445,290 19-May-95 08/445,294 19-May-95 08/445,296 19-May-95 08/445,328 19-May-95 08/446,124 19-May-95 08/446,553 19-May-95 08/446,579 19-May-95 08/446,429 22-May-95 08/446,431 22-May-95 08/446,432 22-May-95 08/446,494 22-May-95 08/447,380 23-May-95 08/447,415 23-May-95 08/447,446 23-May-95 08/447,447 23-May-95 08/447,496 23-May-95 08/447,502 23-May-95 08/447,611 23-May-95 08/447,621 23-May-95 08/447,679 23-May-95 08/447,711 23-May-95 08/447,712 23-May-95 08/447,724 23-May-95 08/447,908 23-May-95 08/447,938 23-May-95 08/447,974 23-May-95 08/447,977 23-May-95 08/448,099 23-May-95 08/448,143 23-May-95 08/448,175 23-May-95 08/448,251 23-May-95 08/448,309 23-May-95 08/448,326 23-May-95 08/449,530 23-May-95 08/449,901 23-May-95 08/447,529 24-May-95 08/448,644 24-May-95 08/448,662 24-May-95 08/448,810 24-May-95 -3- 08/448,977 24-May-95 08/448,979 24-May-95 08/449,097 24-May-95 08/449,110 24-May-95 08/449,248 24-May-95 08/449,263 24-May-95 08/449,281 24-May-95 08/449,291 24-May-95 08/449,302 24-May-95 08/449,369 24-May-95 08/449,413 24-May-95 08/449,523 24-May-95 08/449,532 24-May-95 08/449,652 24-May-95 08/449,702 24-May-95 08/449,717 24-May-95 08/449,800 24-May-95 08/449,867 24-May-95 08/451,203 26-May-95 08/451,377 26-May-95 08/451,746 26-May-95 08/452,395 26-May-95 08/458,760 2-Jun-95 08/459,216 2-Jun-95 08/459,218 2-Jun-95 08/459,506 2-Jun-95 08/459,507 2-Jun-95 08/459,521 2-Jun-95 08/459,522 2-Jun-95 08/459,788 2-Jun-95 08/460,043 2-Jun-95 08/460,081 2-Jun-95 08/460,085 2-Jun-95 08/460,187 2-Jun-95 08/460,256 2-Jun-95 08/460,274 2-Jun-95 08/460,387 2-Jun-95 08/460,394 2-Jun-95 08/460,556 2-Jun-95 08/460,591 2-Jun-95 08/460,592 2-Jun-95 08/460,634 2-Jun-95 08/460,677 2-Jun-95 08/460,711 2-Jun-95 -4- 08/460,766 2-Jun-95 08/460,770 2-Jun-95 08/460,793 2-Jun-95 08/460,817 2-Jun-95 08/466,888 6-Jun-95 08/466,890 6-Jun-95 08/466,894 6-Jun-95 08/468,324 6-Jun-95 08/469,078 6-Jun-95 08/469,103 6-Jun-95 08/469,106 6-Jun-95 08/469,108 6-Jun-95 08/469,355 6-Jun-95 08/469,612 6-Jun-95 08/469,623 6-Jun-95 08/470,051 6-Jun-95 08/470,054 6-Jun-95 08/470,448 6-Jun-95 08/470,476 6-Jun-95 08/470,571 6-Jun-95 08/471,024 6-Jun-95 08/471,191 6-Jun-95 08/472,066 6-Jun-95 08/511,491 6-Jun-95 08/472,399 7-Jun-95 08/472,462 7-Jun-95 08/472,980 7-Jun-95 08/473,484 7-Jun-95 08/473,927 7-Jun-95 08/473,997 7-Jun-95 08/473,999 7-Jun-95 08/474,119 7-Jun-95 08/474,139 7-Jun-95 08/474,146 7-Jun-95 08/474,147 7-Jun-95 08/474,496 7-Jun-95 08/474,674 7-Jun-95 08/474,964 7-Jun-95 08/475,341 7-Jun-95 08/475,342 7-Jun-95 08/477,547 7-Jun-95 08/477,564 7-Jun-95 08/477,660 7-Jun-95 08/477,711 7-Jun-95 -5- 08/477,712 7-Jun-95 08/477,805 7-Jun-95 08/477,955 7-Jun-95 08/478,544 7-Jun-95 08/478,794 7-Jun-95 08/478,864 7-Jun-95 08/478,908 7-Jun-95 08/479,042 7-Jun-95 08/479,215 7-Jun-95 08/479,374 7-Jun-95 08/479,375 7-Jun-95 08/479,414 7-Jun-95 08/479,523 7-Jun-95 08/479,524 7-Jun-95 08/480,059 7-Jun-95 08/480,383 7-Jun-95 08/480,392 7-Jun-95 08/482,573 7-Jun-95 08/482,574 7-Jun-95 08/482,857 7-Jun-95 08/483,054 7-Jun-95 08/483,169 7-Jun-95 08/483,174 7-Jun-95 08/483,269 7-Jun-95 08/483,980 7-Jun-95 08/484,275 7-Jun-95 08/484,858 7-Jun-95 08/484,865 7-Jun-95 08/485,283 7-Jun-95 08/485,507 7-Jun-95 08/485,775 7-Jun-95 08/486,258 7-Jun-95 08/486,259 7-Jun-95 08/486,266 7-Jun-95 08/487,155 7-Jun-95 08/487,397 7-Jun-95 08/487,408 7-Jun-95 08/487,410 7-Jun-95 08/487,411 7-Jun-95 08/487,428 7-Jun-95 08/487,526 7-Jun-95 08/487,536 7-Jun-95 08/487,546 7-Jun-95 08/487,556 7-Jun-95 -6- 08/487,565 7-Jun-95 08/487,649 7-Jun-95 08/487,851 7-Jun-95 08/487,895 7-Jun-95 08/487,981 7-Jun-95 08/488,058 7-Jun-95 08/488,378 7-Jun-95 08/488,383 7-Jun-95 08/488,436 7-Jun-95 08/488,438 7-Jun-95 08/488,439 7-Jun-95 08/488,619 7-Jun-95 08/488,620 7-Jun-95 08/498,002 7-Jun-95 08/474,145 7-Jul-95 Country Serial No. Filing Date Japan 8-273536 October 16, 1996 (in Japan) Europe 96-1149358 September 8, 1988 (PCT filed) PCT PCT/US88/03000 September 8, 1988 -7- EXHIBIT 7.01(a) [omitted and filed separately with the Commission] -8- EX-10.5 10 EXHIBIT 10.5 SECOND AMENDED AND RESTATED OPERATING AGREEMENT of PERSONALIZED MEDIA COMMUNICATIONS L.L.C. This Second Amended and Restated Operating Agreement of PERSONALIZED MEDIA COMMUNICATIONS L.L.C. (the "Company"), a limited liability company organized pursuant to the Delaware Limited Liability Company Act, is made as of this thirteenth day of January, 2000 for the purpose of amending and restating the Amended and Restated Operating Agreement of the Company, dated as of September 3, 1996 (the "First Amended Agreement"). ARTICLE I. DEFINITIONS 1.0.1 Definitions are found in Exhibit A. ARTICLE II. ORGANIZATION 2.0.1 Amendment and Restatement of the First Amended Agreement - The undersigned, representing a Majority of the Members, hereby amends and restates the First Amended Agreement and enters into this Agreement. 2.0.2 Name - The name of the Company is PERSONALIZED MEDIA COMMUNICATIONS L.L.C., and all business of the Company may be conducted under that name or under any other name, but in any case, only to the extent permitted by applicable law. 2.0.3 Term - The Company shall be dissolved and its affairs wound up in accordance with the Act and the Operating Agreement upon the earlier to occur of December 31, 2035 (unless the term shall be extended by amendment to this Operating Agreement and the Certificate in accordance with the procedures for amendment thereof set forth herein), or the occurrence of an event requiring the Company to be dissolved and its affairs wound up under the Act or the terms of this Operating Agreement. 2.0.4 Registered Agent and Office - The registered agent for the service of process and the registered office shall be that Person and location reflected in the Certificate as filed in the office of the Secretary of State of Delaware. The Managing Member(s) may, from time to time, change the registered agent or office through appropriate filings with the Secretary of State of Delaware. In the event the registered agent ceases to act as such for any reason or the registered office shall change, the Managing Member(s) shall promptly designate a replacement registered agent or file a notice of change of address as the case may be. If the Managing Member(s) shall fail to designate a replacement registered agent or change of address of the registered office, any Member may designate a replacement registered agent or file a notice of change of address. 2.0.5 Principal Office - The Principal Office of the Company shall be located at 110 East 42nd Street, Suite 1704, New York, New York 10017. ARTICLE III. NATURE OF BUSINESS 3.0.1 The Company is formed solely for the purpose of developing, licensing and commercialization of certain broadcasting, computing and information metering technology, and undertaking ancillary activities related thereto, including, without limitation, venture capital and similar transactions. The Company shall have the authority to do all things necessary or convenient to accomplish its purposes and operate its business as described in this Article III. The Company exists only for the purpose specified in this Article III, and may not conduct any other business without the consent of a Managing Member, a Majority of the Members and a Majority of the Class B Members. The authority granted to the Members hereunder to bind the Company shall be limited to actions necessary or convenient to this business. ARTICLE IV. ACCOUNTING AND RECORDS 4.0.1 Records to be Maintained - The Company shall maintain the following records at the Principal Office: (a) A current and a past list, setting forth the full name and last known mailing address of each Member and Managing Member; (b) A copy of the Certificate of Formation and all Certificates of Amendment thereto, together with executed copies of any powers of attorney pursuant to which any Certificates have been executed; (c) Copies of the Company's Federal, state and local income tax returns and reports for all years; (d) Copies of any effective written Operating Agreements, and all amendments thereto, and copies of any written Operating Agreements no longer in effect; (e) Copies of any financial statements of the Company; (f) Unless contained in a written Operating Agreement, a writing setting out the amount of cash and a statement of agreed value of other property or services contributed by each Member and the times at which or events upon the happening of which any additional contributions are to be made. 2 4.0.2 Accounts - The Managing Member(s) shall maintain a record of the Capital Account of each Member in accordance with Article VIII. ARTICLE V. NAMES AND ADDRESSES OF MEMBERS The names, addresses and Units of the Members are as reflected on Exhibit B attached hereto and by this reference made a part hereof as if set forth fully herein. ARTICLE VI. RIGHTS AND DUTIES OF MEMBERS 6.0.1 Management Rights - All Class A Members (other than Assignees) who have not Dissociated shall be entitled to vote on any matter submitted to a vote of the Class A Members and any matter submitted to a vote of all of the Members. Class B Members shall be entitled to vote only on those matters expressly specified in this Agreement. The Members hereby agree that only those Members and agents of the Company who have been expressly authorized to act on behalf of the Company may do so. Subject to Section 7.0.9, such Members and authorized agents of the Company shall have the authority to bind the Company. No Member other than an authorized Member or agent shall take any action as a Member to bind the Company. A Member shall be obligated to indemnify the Company for any costs or damages incurred by the Company as a result of the unauthorized action of such Member. Any difference arising as to any matter within the authority of a Member (other than matters set forth in Section 7.0.9) shall be decided by a Majority of the Class A Members. No act of a Member in contravention of such determination shall bind the Company to Persons having knowledge of such determination. 6.0.2 Members' Standard of Care - A Member's duty of care in the discharge of the Member's duties to the Company and the other Members is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. In discharging its duties, a Member shall be fully protected in relying in good faith upon the records required to be maintained under Article IV and upon such information, opinions, reports or statements by any of the other Members, or agents, or by any other person, as to matters the Member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits or losses of the Company or any other facts pertinent to the existence and amount of assets from which distributions to Members might properly be paid. 6.0.3 Requisite Action - Except as specifically provided otherwise herein, whenever the Members are entitled to vote on any matter under the Act or Operating Agreement, such matter shall be considered approved or consented to upon the receipt of the affirmative approval or consent, either in writing or at a meeting, of Members having Units in excess of sixty percent (60%) of the Units of all the Members entitled to vote on a particular matter (a "Majority"). Assignees and Dissociating Members shall not be considered Members entitled to vote for the purpose of determining a Majority. In the case of a Member who has Disposed of that Member's entire Membership Interest to an Assignee (other than by reason of his death), the Units of such Assignee shall not be considered in determining a Majority and such Member shall not have the right to vote or 3 consent with respect to such Units; but such Assignor shall be permitted to vote those Units not assigned. The Units of a deceased Member shall be voted by the deceased Member's personal representative for so long as the Units comprise an asset of his estate. 6.0.4 Meetings: (a) Meetings of the Members, or any Class of Members, may be called upon the written request of the Managing Member(s). The call shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Members, or all Members forming part of the relevant Class in the case of a meeting of a Class of Members, not less than three (3) days nor more than thirty (30) days prior to the date of such meeting. Members may vote in person or by proxy at such meeting. (b) Such notice may be communicated in person (either in writing or orally), by telephone, fax, or other form of wire or wireless communication, or by mail, and shall be effective at the earlier of the time of its receipt or, if mailed, five (5) days after its mailing. Notice of any meeting of the Members, or any Class of Members, may be waived if the waiver is signed by the Member entitled to notice and is filed with the Company's minutes or records. A Member's attendance at or participation in a meeting waives notice of the meeting, unless the Member objects to holding the meeting or transacting business at the meeting and does not vote or assent to any action taken at the meeting. (c) A Member may authorize any Person or Persons to act for him by proxy on all matters in which a Member is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Member or his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Member executing it. (d) Any or all Members may participate in a meeting by, or through the use of any means of communication, such as conference telephone, by which all Members participating may simultaneously hear each other during the meeting. A Member participating in a meeting by such means shall be deemed to be present in person at the meeting. (e) Any action required or permitted to be taken at any meeting of Members, or any Class of Members, may be taken without a meeting if a consent or consents in writing, setting forth such action are signed by those Members holding that number of Units (or Units of the particular Class) as would be necessary to authorize or take such action at a meeting at which all Members (or Members of the particular Class) entitled to vote thereon were present and voted, and such consent or consents are included in the minutes or filed with 4 the Company's records reflecting the action taken. For this purpose, delivery to any Managing Member(s) of a written consent of any Member shall constitute filing with the Company's records. Such consent or consents shall bear the date of signature of each Member who signs the consent or consents and such consent or consents shall not be effective until the latest of such dates of signature, unless the consent specifies a different prior or subsequent effective date, in which case the action is effective on or as of the specified date. A consent signed under this Section 6.0.4(e) has the effect of a meeting vote and may be described as such in any document. (f) Each meeting of Members shall be conducted by the Managing Member(s) or his designee. 6.0.5 Liability of Members - No Member shall be liable for the liabilities of the Company. The failure of the Company to observe any formalities or requirements relating to the exercise of its powers or management of its business or affairs under this Agreement or the Act shall not be grounds for imposing personal liability on the Managing Member(s) or the Members for liabilities of the Company. 6.0.6 Indemnification - (a) The Company shall indemnify the Members and agents for all costs, losses, liabilities, and damages paid or incurred by such Member, or agent in connection with the business of the Company, to the fullest extent provided or allowed by the laws of Delaware. (b) The indemnification obligations of the Company under Section 6.0.6(a) shall be subordinate to any claims against the Company arising out of or resulting from any breach of the Company's obligations under the License Agreement of even date herewith by and between the Company and PMC Satellite (the "License Agreement"). 6.0.7 Representations and Warranties - Each Member, and in the case of an Entity, the person(s) executing the Operating Agreement on behalf of the Entity, hereby represents and warrants to the Company and each other Member that: (a) if that Member is an Entity, that it is duly organized, validly existing and in good standing under the law of its state of organization and that it has full power to execute and agree to the Operating Agreement and to perform its obligations hereunder; (b) the Member is acquiring its Membership Interest in the Company for the Member's own account as an investment and without an intent to distribute the Membership Interest; and (c) the Member acknowledges that the Membership Interests have not been registered under the Securities Act of 1933 or any state securities laws, and may not be resold or transferred by the Member without appropriate registration or the availability of an exemption from such requirements. 5 ARTICLE VII. MANAGING MEMBERS 7.0.1 Managing Member(s) - (a) Except as otherwise provided in this Section 7.0.1 or in Section 7.0.9, the ordinary and usual decisions concerning the business affairs of the Company shall be made by its Managing Member, or in the event there shall be more than one (1) Managing Member, then by a majority in number of the Managing Members. There shall initially be a single Managing Member - John Harvey. In the event that John Harvey shall be unwilling or unable to serve, or if at any time that John Harvey shall cease to be a Managing Member, there shall otherwise be less than two (2) Managing Members, then a sufficient number of Managing Member(s) shall be elected by the Members to cause there to be two (2) Managing Members. (b) Notwithstanding anything in this Section 7.0.1 to the contrary and subject to the provisions of Section 14.0.3(b), the following matters shall be subject to the affirmative vote of a majority in number (and not a Majority as defined in Section 6.03) of the Managing Member(s) and a Majority of the Members: (i) a sale of all or substantially all of the Company's property; (ii) a merger or consolidation with another entity as a result of which the Members control less than fifty percent (50%) of the voting rights of the resulting entity; and (iii) the dissolution of the Company. (c) With respect to the appointment by the Company, in its capacity as sole member of PMC Satellite Development, L.L.C. ("PMC Satellite"), of three Managers (as such term is defined in the Limited Liability Company Operating Agreement of PMC Satellite Development, L.L.C.) of PMC Satellite, two (2) of such Managers shall be appointed by the Managing Member(s), and the other Manager shall be appointed by the Class B Members voting as a class. For so long as Class B units of the Company are outstanding, no Manager appointed by the Class B Members pursuant to this Section 7.01(c) shall be removed without the written consent of such Class B Members. 7.0.2 Authority of Members to Bind the Company - The Members hereby agree that only the Managing Member(s) and authorized agents of the Company shall have the authority to bind the Company, subject to Section 7.0.9. No Member other than a Managing Member shall take any action as a Member to bind 6 the Company, and a Member shall be obligated to indemnify the Company for any costs or damages incurred by the Company as a result of the unauthorized action of such Member. Notwithstanding anything contained herein to the contrary, the Managing Member(s) may make advances to the employees of the Company on such terms as the Managing Member(s) determine, in their sole discretion. 7.0.3 Actions of the Managing Member(s) - Subject to Section 7.0.9, no individual Managing Member has the power to bind the Company as provided in this Article VII without the express consent of a majority in number (and not a Majority as defined in Section 6.03) of the Managing Members; provided, however, that in the event that there shall only be one Managing Member, the individual Managing Member shall have the power to bind the Company, subject to Section 7.0.9. Any difference arising as to any matter within the authority of the Managing Member(s) shall be decided by a majority in number (and not a Majority as defined in Section 6.03) of the Managing Member(s). No act of a Member in contravention of such determination shall bind the Company to Persons having knowledge of such determination. Notwithstanding such determination, but subject to Section 7.0.9, the act of the Managing Member(s) for the purpose of apparently carrying on in the usual way the business or affairs of the Company, including the exercise of the authority indicated in this Article VII, shall bind the Company and no person dealing with the Company shall have any obligation to inquire into the power or authority of a Managing Member acting on behalf of the Company. 7.0.4 Meetings - Meetings of the Managing Member(s) shall be called, and conducted pursuant to the terms of Section 6.03; except that any Managing Member may call a meeting on one (1) day's notice, and no proxies shall be permitted. 7.0.5 Compensation of Members - Each Member shall be reimbursed all reasonable expenses incurred on behalf of the Company. A Member's entitlement to compensation, if any, shall be determined from time to time by the Managing Member(s). 7.0.6 Managing Member(s)' Standard of Care - A Managing Member's duty of care in the discharge of the Managing Member's duties to the Company and the other Members is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. In discharging its duties, a Managing Member shall be fully protected in relying in good faith upon the records required to be maintained under Article IV and upon such information, opinions, reports or statements by any of the other Managing Member(s), Members, or agents, or by any other person, as to matters the Managing Member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits or losses of the Company or any other facts pertinent to the existence and amount of assets from which distributions to Members might properly be paid. 7.0.7 Indemnification - (a) The Managing Member(s) shall be indemnified and held harmless by the Company from and against any and all losses, liabilities, damages and expenses arising from claims, 7 demands, investigations, actions, suits or proceedings, whether civil, criminal or administrative, in which it may be involved, as a party or otherwise, by reason of their status as Managing Member(s), or any acts or omissions by them, or the business or their management of the affairs of the Company, whether or not they continue to be such at the time any such loss, liability, damage or expense is paid or incurred. The Managing Member(s) shall not be entitled to indemnification hereunder against any loss or liability found by a court to have arisen from their gross negligence or willful misconduct or their willful breach of this Agreement. The rights of indemnification provided in this Section 7.0.7 are in addition to any rights to which the Managing Member(s) may otherwise be entitled by contract or as a matter of law and shall extend to their successors and assigns and apply to the fullest extent permitted under the Act or any other applicable statute. In particular, and without limitation of the foregoing, the Managing Member(s) shall be entitled to indemnification by the Company against reasonable expenses (as incurred), including attorneys' fees actually and necessarily incurred, by the Managing Member(s) in connection with the defense of any action to which the Managing Member(s) may be made a party, and as to which he shall be entitled to indemnification hereunder, including any derivative or similar action relating to the right of the Company to procure a judgment in their favor. Notwithstanding the foregoing, there will be no exculpation or indemnification for violations of federal securities laws. (b) The indemnification obligations of the Company under Section 7.0.7(a) shall be subordinate to any claims against the Company arising out of or resulting from any breach of the Company's obligations under the License Agreement. 7.0.8 Advisory Board - The Managing Member(s) may establish an Advisory Board to generally advise the Managing Member(s) with respect to the conduct of the Company's business. The Advisory Board shall have no authority to bind the Company. The Managing Member(s) may disband and reconstitute the Advisory Board at any time. The number of Members of the Advisory Board, their duties and terms of office, shall be set by the Managing Member(s), who shall be free to change such duties and terms at any time. 7.0.9 Actions Requiring the Consent of a Majority of Class B Members - For so long as Class B units of the Company are outstanding, the Managing Member(s) shall not take any of the following actions without the affirmative consent of a Majority of the Class B Members: (a) incur indebtedness, including Optional Loans pursuant to Section 8.0.3, in excess of one million dollars ($1,000,000) or create or impose any lien upon the property or assets of the Company (a "Lien") to secure indebtedness in excess of one million dollars ($1,000,000); provided that any indebtedness incurred, or any Lien to secure indebtedness, in excess of one million dollars ($1,000,000) in the aggregate, the legal documentation for which includes an agreement by the lender that its rights, if any, to recover assets of the Company shall be subordinate to the rights of the Class B 8 Members to receive all of the interest in PMC Satellite pursuant to Section 16.03, shall not be subject to this requirement; (b) commence any insolvency, receivership, bankruptcy or similar proceedings; (c) amend the Limited Liability Company Operating Agreement of PMC Satellite; (d) withdraw or resign as the Member of PMC Satellite; (e) dispose of its membership interest in PMC Satellite or impose any liens on the membership interest in PMC Satellite; (f) create or impose any lien on the rights granted by the Company under the License Agreement; (g) amend any provision of this Agreement that affects the rights and obligations of the Class B Members; (h) cause PMC Satellite to sell, assign or otherwise dispose of its assets; or (i) assign or otherwise transfer the License Agreement. ARTICLE VIII. CONTRIBUTIONS AND CAPITAL ACCOUNTS 8.0.1 Initial Contributions - The initial Capital Contribution of each Initial Member shall be as reflected on Exhibit B. No interest shall accrue on any Capital Contribution and no Member shall have the right to withdraw or be repaid any Capital Contribution except as provided in this Operating Agreement. 8.0.2 Additional Contributions - The Managing Member(s) may require the contribution of additional amounts from the Initial Members to pay that portion of the debt service with respect to the Purchase Note issued by the Company to acquire its operating assets as is guaranteed. Such amounts shall be due within three (3) business days of a written request of the Managing Member(s). In the event any Initial Member fails to make the additional contributions required by this Section 8.0.2 (a "Delinquent Member"), the Managing Member(s) shall give the Delinquent Member a Notice of the failure to meet such commitment (the "Commitment"). If the Delinquent Member fails to make the required contributions within ten (10) Business Days of the giving of Notice, the Company may proceed to collect the Commitment together with all costs and attorneys fees and monthly interest on such obligation at one percent (1%) above the rate charged by Citibank, N.A., to its most creditworthy customers from time to time, including but not limited to enforcing the Commitment in a court of appropriate jurisdiction in the state in which the Principal Office is located or the state of the Delinquent Member's address as reflected in the Operating Agreement. Each Delinquent Member expressly agrees to the jurisdiction of such courts but only for the enforcement of Commitments. The Class A Members may elect to allow the other Class A Members to contribute the amount of the Delinquent Member's Commitment that is in default. Those Class A Members who elect to contribute 9 shall be entitled to contribute additional amounts in proportion to their Units or in such other proportions as they may mutually agree. A Contributing Member shall be entitled to elect to treat the amount contributed pursuant to this section as an additional contribution to its Capital Account or as a loan from the Contributing Member to the Delinquent Member bearing interest at the applicable federal rate secured by the Delinquent Member's interest in the Company. Until they are fully repaid, the Contributing Members who have elected to treat the additional contribution as a loan shall be entitled to all Distributions to which the Delinquent Member would have been entitled, with said Distributions being applied first to interest and then to the principal balance of the loan. Notwithstanding the foregoing, no obligation to make an additional contribution pursuant to Section 8.0.2 may be enforced by a creditor of the Company unless the Class A Member expressly consents to such enforcement or to the assignment of the obligation to such creditor. Notwithstanding anything in this Article VIII or Section 9.0.2 to the contrary: (i) the Managing Member(s) may pay debt service owed with respect to the purchase money note issued by the Company to acquire its operating assets from funds received by the Company from patent license revenue and/or patent litigation damage awards received by the Company at any time; and (ii) may repay such additional contributions at any time, in his sole discretion. 8.0.3 Loans - Any Member may, but shall not be obligated or required to, advance or lend moneys to the Company ("Optional Loans"). Optional Loans shall bear interest at such rates as the Managing Member(s) shall determine, in his absolute discretion. The amount of any such Optional Loan, together with interest thereon, may be secured by such assets of the Company as the Managing Member(s) shall determine, in his absolute discretion. Any such Optional Loan shall be payable solely out of proceeds from the operations of the Company or Initial or Additional Capital Contributions. 8.0.4 Distribution of Assets - If the Company at any time distributes any of its assets in-kind to any Member, the Capital Account of each Member shall be adjusted to account for that Member's allocable share (as determined under Article IX below) of the Net Profits or Net Losses that would have been realized by the Company had it sold the assets that were distributed at their respective fair market values immediately prior to their distribution. 8.0.5 Compliance with Section 704(b) of the Code - The provisions of this Article VIII as they relate to the maintenance of Capital Accounts are intended, and shall be construed, and, if necessary, modified to cause the allocations of profits, losses, income, gain and credit pursuant to Article IX to have substantial economic effect under the Regulations promulgated under 704(b) of the Code, in light of the distributions made pursuant to Articles IX and XIV and the Capital Contributions made pursuant to this Article VIII. 10 ARTICLE IX. CAPITALIZATION; DISPOSITIONS OF INTERESTS 9.0.1 Capitalization - (a) The Company is authorized to issue two classes (individually, a "Class" and collectively the "Classes") of Units designated, respectively, as Class A Units (the "Class A Units") and Class B Units (the "Class B Units"). The capitalization of the Company as of the date hereof is as set forth on Exhibit B. (b) The Company shall not issue additional Class B Units without the prior written consent of the Majority of the Class B Members. 9.0.2 Voting Rights - Owners of the Class A Units shall have full voting rights. Owners of the Class B Units shall have no voting rights except as specified in Sections 7.0.1., 7.0.9, 9.0.1(b) and 10.0.2(a). ARTICLE X. ALLOCATIONS AND DISTRIBUTION 10.0.1 Allocations of Net Profits and Net Losses from Operations - Except as otherwise provided in this Article X, Net Profits, Net Losses, and other items of income, gain, loss, deduction and credit shall be apportioned among the holders of Class A Units in proportion to their Units. Notwithstanding the foregoing: (a) The first five million dollars ($5,000,000) of deductions derived from the payment of legal fees to Howrey & Simon shall be specially allocated to Class B Members in proportion to their Units. (b) Five percent (5%) of the Net Profits in any fiscal year, and from and after January 1, 2010, ninety five percent (95%) of the Net Profits, if any, allocated to the Company from PMC Satellite Development-Education, L.L.C. shall be allocated to Class B Members in proportion to their Units. (c) All interest deductions relating to the Purchase Note issued by the Company on its formation, and all of the depreciation and amortization deductions attributable to the assets acquired on its formation to the extent that the purchase price is attributable to the Purchase Note, shall be specially allocated to the Class A Members that are Initial Members and Additional Members in proportion to their respective Units. (d) All interest deductions relating to the Contingent Purchase Price Payments to be paid by the Company, and all of the depreciation and amortization deductions attributable to the assets acquired on its formation to the extent that the purchase price is attributable to the Contingent Purchase 11 Price Payments, shall be allocated to all Class A Members in proportion to their respective Units. (e) After giving effect to the special allocations described above in Sections 10.0.1(a), 10.0.1 (b), 10.0.1 (c) and 10.0.1 (d), Net Losses shall be allocated as follows: Class A Members 99.0% Class B Members 1.0% in proportion to the respective number of units within the relevant Class. 10.0.2 Interim Distributions - From time to time, the Managing Member(s) shall determine in their reasonable judgment to what extent, if any, the Company's cash on hand exceeds the current and anticipated needs, including, without limitation, needs for operating expenses, debt service, acquisitions, and reserves. To the extent such excess exists, the Managing Member(s) may make Distributions to the Members in proportion to the Net Profits allocated to them for the fiscal year on account of which the distribution is being made, to be shared by the Members of each Class in proportion to the Units owned by them; provided however that: (a) The aggregate Distributions to the Class A Members on account of any fiscal year shall not exceed the Net Profits allocated to the Class A Members for such fiscal year by more than one million Dollars ($1,000,000), except with the approval of a Majority of the Class B Members; and (b) The Managing Member(s) may elect to distribute amounts otherwise payable to the Class A Members in such other proportion as they determine, in their sole discretion. Such Distributions shall be in cash or Property (which need not be distributed proportionately) or partly in both, as determined by the Managing Member(s). The Company will use its best efforts to fund annual distributions to the Members of at least forty-five percent (45%) of the Net Profits, if any, so as to provide funds with which the Members may pay taxes due with respect to the Company's income. ARTICLE XI. TAXES 11.0.1 Elections - The Managing Member(s) may make any tax elections for the Company allowed under the Code or the tax laws of any state or other jurisdiction having taxing jurisdiction over the Company. 11.0.2 Tax Matters Partner - The Class A Members shall designate one of their number as the tax matters partner of the Company pursuant to 623 1 (a)(7) 12 of the Code. Any Member designated as tax matters partner shall take such action as may be necessary to cause each other Member to become a notice partner within the meaning of 6223 of the Code. Any Member who is designated tax matter partner may not take any action contemplated by 6222 through 6232 of the Code without the consent of the Members. 11.0.3 Method of Accounting - The records of the Company shall be maintained on a cash receipts and disbursements method of accounting or such other method as shall be required by the Code or chosen by the Managing Member(s). ARTICLE XII. DISPOSITION OF MEMBERSHIP INTERESTS 12.0.1 Disposition by Members - Except as otherwise permitted by this Article XII, no Class A Member may Dispose of all or a portion of its Membership Interest without the prior written approval of the Managing Member(s), who may approve or disapprove of any such transfer in his absolute discretion. A Class B Member may Dispose of all or a portion of its Membership Interest without the prior written approval of the Managing Member(s), provided that the Assignee expressly assumes all of the obligations of the Class B Member under this Agreement by a writing delivered to the Company. Any such Assignee of a Class B Member shall automatically become a Substitute Member entitled to the rights of a Class B Member hereunder, provided that the requirements of this Section 12.0.1 are fulfilled. Transferees of Membership Interests transferred pursuant to the terms of this Article XII shall be Assignees, subject to the terms of Article XIII. In no event may any Membership Interest be Disposed of: (a) If such disposition, alone or when combined with other transactions, would result in a termination of the Company within the meaning of 708 of the Code; (b) Without an opinion of counsel satisfactory to the Managing Member(s) that such assignment is subject to an effective registration under, or exempt from the registration requirements of, the applicable state and federal securities laws, if, in the sole discretion of the Managing Member(s), such opinion is required; and (c) Unless and until the Company receives from the Assignee the information and agreements that the Managing Member(s) may reasonably require, including but not limited to any taxpayer identification number and any agreement that may be required by any Taxing Jurisdiction. 12.0.2 Sales to Third Parties by Class A Members - If any Class A Member (the "Selling Member") desires to sell all or a portion of his Membership Interest to any third party, the Selling Member must first offer to sell such interest (the "Offered Interest") to the Company and, if not accepted, to the other Class A Members (the "Non-Selling Members") by providing written notice to the Company and all Class A Members of such offer (the "Notice of Sale"). The Notice of Sale shall identify the portion of the Selling Member's interest which is proposed for sale and the proposed purchase price and all other terms of sale. 13 (a) The Company shall have the right to purchase all or a portion of the Offered Interest for a period of forty-five (45) days from receipt of the Notice of Sale (the "Company's Option Period"). Such right shall be exercised by giving written notice to all Class A Members of the Company's intent within such forty-five (45) day period. (b) In the event that the Company does not elect to purchase all of the Offered Interest, the Non-Selling Members shall have the second right to purchase their pro rata portion of the remaining portion of the Offered Interest for a period of forty-five (45) days after the expiration of the Company's Option Period (the "Non-Selling Member's Option Period"). In the event that one or more Non-Selling Members do not elect to purchase their pro rata portion of the Offered Interest, then the Non-Selling Members that did elect to purchase their full pro rata portion shall have the right for the next fifteen (15) day period (the "Final Option Period") to elect to purchase all or part of the unsold Offered Interest in such proportion as may be agreed among themselves or, in the absence of agreement, their pro rata portion. Such rights shall be exercised by giving written notice to all Class A Members of the Non-Selling Member's intent within the periods specified. (c) In the event that all of the Offered Interest is not purchased by the Company or the Non-Selling Members the Selling Member shall have the right to sell the Offered Interest to any party for a period of ninety (90) days from the expiration of the last relevant option period but on terms no more favorable to the purchaser than contained in the Notice of Sale. Such third party must agree in writing to be bound by the terms and provisions of this Agreement as a condition precedent to sale. Prior to the closing of any such sale, the Selling Member shall furnish evidence reasonably acceptable to the Company that the consideration being received therefor is no more favorable to the purchaser than the purchase price specified in the Notice of Sale. (d) The closing of any sale of an Offered Interest whether to the Company, the Class A Members or a third party, shall take place on such date as may be agreed to by the parties, which date shall be no later than ninety (90) days after the expiration of the last relevant notification period set forth above. 12.0.3 Permitted Transfers by Class A Members - Subject to the provisions of Section 12.0.1, the restrictions on the Sale of Membership Interests contained in Section 12.0.2 shall not apply to any of the following transfers: (a) any transfer by a Class A Member (i) to a Relative of such Class A Member; or (ii) to an Entity, the entire beneficial ownership of which is held individually or in the aggregate by, or which benefits, as the case may be, such Class A Member and/or the Relatives of such Class A Member; 14 (b) in the event that the transferring Class A Member is not a natural person, any transfer by such Class A Member (i) to any of the owners of such Class A Member or to a Relative of such owners; or (ii) to an Entity, the entire beneficial ownership of which is held individually or in the aggregate by, or which benefits, as the case may be, such Class A Member, any of the owners of such Class A Member or the Relatives of such owners; (c) any transfer by a Class A Member to another Class A Member. 12.0.4 Take Along - In the event that the Harvey Family Limited Partnership desires to sell Units possessing at least twenty percent (20%) of the voting rights of all Class A Units, which sale, if consummated would cause the Harvey Family Limited Partnership to own less than sixty percent (60%) of the voting rights of all Class A Units outstanding, then no such sale shall be consummated unless the purchaser(s) of the Harvey Family Limited Partnership's Units offers to purchase the same proportionate share of the Units of all other Class A Members as the Harvey Family Limited Partnership is selling, and on the same per Unit terms and conditions offered to the Harvey Family Limited Partnership. The putative purchaser(s) of the Harvey Family Limited Partnership's Units shall send written notice to all Class A Members of such proposed sale and its terms. The sale of the Harvey Family Limited Partnership's Units and those of any other Class A Member accepting the purchaser(s)' offer shall be held simultaneously, to the extent practicable. 12.0.5 Drag Along - In the event that Class A Members who possess more than ninety percent (90%) of the Class A Units desire to sell all of their Class A Units to a single person, or multiple persons simultaneously, and the purchasers desire to purchase all of the Class A Units of the Company, then, each Class A Member shall agree to sell all of his Units to such third party or parties pursuant to the same terms and conditions that are applicable to the sale of all of the Class A Units. The Class A Members shall exercise the drag along right set forth in this Section by sending written notice to all Class A Members of the proposed sale and its terms, including the identity of the third party purchaser(s) and the purchase price. 12.0.6 Noncompliance - Dispositions not in compliance with this Article are void. Any attempted Disposition of a Membership Interest, or any part thereof, not in compliance with this Article is null and void ab initio. ARTICLE XIII. DISSOCIATION OF A MEMBER 13.0.1 Dissociation - A Person shall cease to be a Member upon the happening of any of the following events: (a) The Withdrawal of the Member; (b) The Member becoming a Bankrupt Member; 15 (c) In the case of a Member who is a natural person - the death of the Member; the entry of an order by a court of competent jurisdiction adjudicating the Member incompetent to manage the Member's person or estate; the divorce of a Member resulting in the transfer of all or a portion of such Member's interest; (d) In the case of a Member that is a corporation, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; and (e) In the case of an estate or trust, the distribution by the fiduciary of the estate or trust's entire interest in the Company. 13.0.2 Rights of Dissociating Member - In the event any Member Dissociates prior to the expiration of the Term: (a) If the Dissociation causes a Dissolution and winding up of the Company under Article XVI, the Member shall be entitled to participate in the winding up of the Company to the same extent as any other Member except that any Distributions to which the Member would have been entitled shall be reduced by the damages sustained by the Company as a result of the Dissolution and winding up; (b) If the Dissociation does not cause a Dissolution and winding up of the Company under Article XVI, the transferee shall be an Assignee, subject to the terms of Article XV. ARTICLE XIV. WITHDRAWAL OR REDEMPTION OF CLASS B MEMBER 14.0.1 Withdrawal of Class B Member - Upon the terms and subject to the conditions set forth in this Agreement, the Class B Member shall have the right (the "Withdrawal Option") to withdraw from the Company. 14.0.2 Redemption of Class B Membership Interest - Upon the terms and subject to the conditions set forth in this Agreement, the Company shall have the right to redeem the Membership Interest of the Class B Member (the "Redemption Option"). 14.0.3 Exercise of Option - (a) The Class B Member may exercise its Withdrawal Option by giving written notice thereof to the Company during the period from, and including February 13, 2002 through, and including February 13, 2003 (such period of time, the "Withdrawal Period"). In the event that the Class B Member has not given notice of its intention to exercise its Withdrawal Option within the Withdrawal Period, the Company may exercise its Redemption Option by giving written notice 16 thereof to the Class B Member during the period from, and including February 14, 2003 through, and including March 17, 2003 (such period of time, the "Redemption Period"). In the event that the Company has not given notice of its intention to exercise its Redemption Option within the Redemption Period, the Class B Member shall again have the right to exercise its Withdrawal Option by giving notice thereof the Company on any date following the expiration of the Redemption Period. (b) Notwithstanding the provisions of Section 14.0.3(a), in the event that the Company, without the consent of a Majority of the Class B Members, elects to either (i) take any of the actions set forth in Section 7.0.1(b) or (ii) distribute the patent rights granted to PMC Satellite under the License Agreement to any person other than PMC Satellite (together, the "Actions"), the Class B Members shall automatically have the right to immediately exercise their Withdrawal Option. In the event that the Company elects to take any of the Actions without the consent of a Majority of the Class B members, the Company shall give the Class B Members written notice of such election (an "Election Notice"). The Class B Members shall, within fifteen (15) days of receipt of the Company's Election Notice, provide the Company with notice (the "Withdrawal Notice") of whether or not they intend to exercise their Withdrawal Option. In the event that the Class B Members elect to exercise their Withdrawal Option, the Company shall not take any of the Actions until the closing of the Withdrawal Option has been effectuated; provided that if such closing is not effectuated within fifteen (15) days of the receipt by the Company of the Withdrawal Notice as a result an act or omission of the Class B Member, the Company shall be entitled to take such Actions as of the expiration of such fifteen (15) day period; provided further that in the event that the closing has not been effectuated as a result of the failure by the Class B Members to obtain regulatory approvals in respect of the closing, the Company shall not be entitled to take any of the Actions until the earlier of (i) the date on which (A) any necessary regulatory approvals are received or (B) the regulatory authority from which such approvals are sought provides notice that such regulatory approvals will not be granted and any litigation or appeals with respect thereto have been finally resolved and (ii) January 14, 2005. 14.0.4 Consideration for Option - (a) In the event that the Withdrawal Option is exercised, the Class B Members shall receive one hundred percent (100%) of the membership interest in PMC Satellite, free and clear of liens, charges and encumbrances (other than liens, charges and encumbrances running to the benefit of the Class B Members or their Affiliates); provided that in the event that the Withdrawal Option is exercised pursuant to Section 14.0.3(b) and the sublicense (the "Sublicense") granted to 17 Pegasus Development Corporation ("PDC") pursuant to the License Agreement of even date herewith between PMC Satellite and PDC is terminated pursuant to an order by or settlement with a regulatory authority within five (5) years of the date hereof, the Class B Members shall receive as additional compensation for the exercise of the Withdrawal Option the Warrants (as defined in the Class B Preferred Unit Subscription Agreement dated January 10, 2000 between the Company and PDC) or, if such Warrants have been previously exercised by the Company, the stock received by Company upon exercise of the Warrants. (b) In the event that the Redemption Option is exercised, the Class B Member shall receive, at the election of the Managing Member(s), either: (i) a payment equal to the Class B Member's Capital Account, as carried on the books of the Company as of the close of business on the last day of the calendar quarter preceding the closing or (ii) one hundred percent (100%) of the membership interest in PMC Satellite, free and clear of all liens, charges and encumbrances (other than liens, charges and encumbrances running to the benefit of the Class B Members or their Affiliates); provided that in the event that the Redemption Option is exercised and the Sublicense is terminated pursuant to an order by or settlement with a regulatory authority within five (5) years of the date hereof, the Class B Members shall receive as additional compensation for the exercise of the Redemption Option the Warrants or, if such Warrants have been previously exercised by the Company, the stock received by the Company upon exercise of the Warrants. 14.0.5 Option Closing - (a) In the event that either the Withdrawal Option or the Redemption Option is exercised, the closing of such transaction (the "Option Closing") shall be held at the offices of the Company on the date that is fifteen (15) days after the date upon which the Class B Member or the Company, as the case may be, delivers to the other party written notice of its exercise of its respective Option or at such other time, place and date as the Parties hereto may designate by mutual consent. (b) At the Option Closing: (i) In the event of the exercise of the Withdrawal Option, the Company shall deliver to the Class B Member documents necessary to reflect the Class B Member's ownership of one hundred percent (100%) of the membership interest in PMC Satellite. (ii) In the event of the exercise of the Redemption Option, the Company shall deliver to the Class B Member either 18 (A) documents necessary to reflect the Class B Member's ownership of one hundred percent (100%) of the membership interest in PMC Satellite or (B) the applicable consideration (by cashier's check or wire transfer) if the Managing Member(s) determine to retire the Class B Member's Membership Interest for an amount equal to its Capital Account. (iii) Class B Member shall deliver to the Company such evidence representing its withdrawal from the Company or retirement of its Membership Interest as the Company shall reasonably request. ARTICLE XV. ADMISSION OF ASSIGNEES, SERVICE AND ADDITIONAL MEMBERS 15.0.1 Rights of Assignees - Subject to the provisions of Section 12.0.1 concerning an Assignee of a Class B Member, the Assignee of a Membership Interest has no right to participate in the management of the business and affairs of the Company or to become a Member. The Assignee is only entitled to receive the Distributions and return of capital, and to be allocated the Net Profits and Net Losses attributable to the Membership Interest assigned to the Assignee. 15.0.2 Admission of Substitute Members - Subject to the provisions of Section 12.0.1 concerning an Assignee of a Class B Member, an Assignee of a Membership Interest shall be admitted as a Substitute Member and admitted to all the rights of the Member who initially assigned the Membership Interest only with the approval of the Managing Member(s) and a Majority of the Members; provided, however, that the Assignee of an estate or trust who receives his interest pursuant to the terms of the relevant estate planning instrument shall be automatically substituted as a Substitute Member. The Managing Member(s) and the Members may grant or withhold the approval of such admission for any reason in their sole and absolute discretion. If so admitted, the Substitute Member has all the rights and powers and is subject to all the restrictions and liabilities of the Member originally assigning the Membership Interest and shall be required to execute an Admission Agreement agreeing to abide by the terms and conditions of this Operating Agreement. The admission of a Substitute Member, without more, shall not release the Member originally assigning the Membership Interest from any liability to the Company that may have existed prior to the approval. 15.0.3 Admission of Service and Additional Members - The Managing Member(s) may admit Service and Additional Members, other than Class B Members, on such terms and conditions as he shall determine, in his sole and absolute discretion; provided that the Units to be offered Additional Members shall first be offered to existing Members in proportion to the number of Units owned by each. Notwithstanding the foregoing, no such offer of Units need be made to the Members, if: (i) such Units are issued in lieu of compensation for services to the Company; or (ii) the Units to be issued would: (A) constitute more than ten percent (10%) of the Units outstanding; and (B) are offered to a single person or entity who, in the absolute discretion of the Managing Member(s), possesses financial or business attributes useful or necessary to the furtherance of the business of the Company; provided that, as to the Units described in subsection B, they are offered at no less than their fair market value, as determined by 19 the Managing Member(s). Each Additional Member shall make the Initial Capital Contribution described in the Admission Agreement, if any. The value of the Additional Member's Initial Capital Contribution and the time for making such contribution, if any, shall be set forth in the Admission Agreement. No Initial or Additional Capital Contributions shall be required of any Service Member. ARTICLE XVI. DISSOLUTION AND WINDING UP 16.0.1 Dissolution - The Company shall be dissolved and its affairs wound up, upon the first to occur of the following events: (a) The expiration of the Term, unless the business of the Company is continued with the consent of the Members acting in accordance with Section 6.0.3; or (b) The written consent of all of the Managing Members and a Majority of the Members. 16.0.2 Effect of Dissolution - (a) In the event of a dissolution of the Company for any reason other than pursuant to Section 16.0.1(b), the Members agree to continue the business of the Company through a newly-constituted limited liability company, the organizational documents of which shall be substantially similar to the organization documents of the Company. Any amounts to which a Member would otherwise be entitled as a result of the dissolution of the Company will become part of the capital of such newly-constituted limited liability company and will be reflected in the capital account of such Member. (b) Upon dissolution of the Company pursuant to Section 16.0.1(b), the Company shall cease carrying on, as distinguished from the winding up of, the Company business, but the Company is not terminated, but continues until the winding up of the affairs of the Company is completed. 16.0.3 Distribution of Assets on Dissolution - Upon the winding up of the Company, the Company Property shall be distributed: (a) To creditors, including Members who are creditors, to the extent permitted by law, in satisfaction of Company Liabilities; (b) To Members in accordance with positive Capital Account balances taking into account all Capital Account adjustments for the Company's taxable year in which the liquidation occurs. Liquidation proceeds shall be paid within sixty (60) days of the end of the Company's taxable year or, if later, within ninety (90) days after the date of liquidation. Such Distributions shall be in cash or Property (which need not 20 be distributed proportionately) or partly in both, as determined by the Managing Member(s). 16.0.4 Positive Capital Accounts - In the event the Company is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) distributions shall be made pursuant to this Article XVI to the Members who have positive Capital Account balances in compliance with Regulation Section 1.704-1 (b)(2). 16.0.5 Winding Up and Certificate of Dissolution - The winding up of the Company shall be completed when all debts, liabilities, and obligations of the Company have been paid and discharged or reasonably adequate provision therefor has been made, and all of the remaining property and assets of the Company have been distributed to the Members. Upon the completion of winding up of the Company, a certificate of dissolution shall be delivered to the Secretary of State of Delaware for filing. The certificate of dissolution shall set forth the information required by the Act. ARTICLE XVII. AMENDMENT 17.0.1 Operating Agreement May Be Modified - The Operating Agreement may be modified as provided in this Article XVII (as the same may, from time to time be amended). No Member shall have any vested rights in the Operating Agreement which may not be modified through an amendment to the Operating Agreement. 17.0.2 Amendment or Modification of Operating Agreement - The Operating Agreement may be amended or modified from time to time only by a written instrument adopted and executed by the Managing Member(s) and a Majority of the Members; provided, however, that any amendment to the Operating Agreement which would have the effect of reducing the number of Units of a Member, other than pursuant to specific provisions herein, shall not be effective unless consented to by such Member. Notwithstanding the foregoing, (i) no provision in the Operating Agreement may be amended to reduce the vote of the Members (including the Class B Members as a separate class) required to approve or consent to any matter except by a vote of Members (including the Class B Members as a separate class) which would be sufficient to approve or consent to such matter, and (ii) no provision of Section 7.0.9 or Article XIV shall be amended without the written consent of all of the Class B Members. ARTICLE XVIII. MISCELLANEOUS PROVISIONS 18.0.1 Entire Agreement - The Operating Agreement represents the entire agreement among all the Members and between the Members and the Company. 18.0.2 No Partnership Intended for Nontax Purposes - The Members have formed the Company under the Act, and expressly do not intend hereby to form a partnership under either the Delaware Uniform Partnership Act nor the Delaware Revised Uniform Limited Partnership Act. The Members do not intend to be 21 partners one to another, or partners as to any third party. To the extent any Member, by word or action, represents to another person that any other Member is a partner or that the Company is a partnership, the Member making such wrongful representation shall be liable to any other Member who incurs personal liability by reason of such wrongful representation. 18.0.3 Rights of Creditors and Third Parties under Operating Agreement - - The Operating Agreement is entered into among the Company and the Members for the exclusive benefit of the Company, its Members, and their successors and assignees. The Operating Agreement is expressly not intended for the benefit of any creditor of the Company or any other Person. Except and only to the extent provided by applicable statute, no such creditor or third party shall have any rights under the Operating Agreement or any agreement between the Company and any Member with respect to any Capital Contribution or otherwise. 18.0.4 Counterparts - This Agreement may be signed in any number of counterparts, and may be executed through the use of counterpart execution pages. 22 IN WITNESS WHEREOF, we have hereunto set our hands and seals on the date set forth beside our names. The Harvey Family Limited Partnership, representing a Majority of the Members /s/ John C. Harvey 1/13/00 - ------------------------------------ ------------------------------- John C. Harvey, General Partner Date Class B Members: Pegasus Development Corporation /s/ Ted S. Lodge 1/13/00 - ------------------------------------ ------------------------------- Name: Ted S. Lodge Date Title: Senior Vice President 23 EXHIBIT A DEFINITIONS 1. Act - The Delaware Limited Liability Company Act and all amendments to the Act. 2. Additional Member - A Member other than an Initial Member or a Substitute Member who has acquired a Membership Interest from the Company. 3. Admission Agreement - The Agreement between a Substitute Member or an Additional Member and the Company described in Article XV. 4. Affiliate - With respect to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person, whether through ownership of voting securities or otherwise. For purposes hereof, "control" shall mean with respect to any Person, any other Person that has the ability to elect a majority of such Person's board of directors or similar governing body or the ability (by contract, share ownership or otherwise) to direct the policies and management of such Person. 5. Assignee - A transferee of a Membership Interest who has not been admitted as a Substitute Member. 6. Bankrupt Member - A Member who: (1) has become the subject of an Order for Relief under the United States Bankruptcy Code or (2) has initiated, either in an original Proceeding or by way of answer in any state insolvency or receivership proceeding, an action for liquidation, arrangement, composition, readjustment, dissolution or similar relief. 7. Business Day - Any day other than Saturday, Sunday or any legal holiday observed in Delaware. 8. Capital Account - With respect to any Member, the capital account maintained for such Member in accordance with the following provisions: (a) To each Member's capital account there shall be credited such Member's Capital Contributions, such Member's distributive share of Net Profits allocated to such Member, and the amount of any Company Liabilities assumed by such Member or which are secured by any Company Property distributed to such Member. (b) To each Member's capital account there shall be debited the amount of cash and the Gross Asset Value of any Company Property distributed to such Member pursuant to any provision of this Agreement, such Member's distributive share of Net Losses allocated to such Member and the amount of any liabilities of such Member assumed by the Company or which are secured by any Property contributed by such Member to the Company. A-1 (c) In the event any interest in the Company is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. (d) In determining the amount of any liability for purposes of (a) and (b) hereof, there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations. (e) In the event that the Capital Accounts of the Members are adjusted to reflect a revaluation of Company Property pursuant to Regulations Section 1.704-1(b)(2)(iv)(f), the Members' Capital Accounts shall be adjusted in accordance with Regulations Section 1.704-1 (b)(2)(iv)(g) for allocations to them of Depreciation, depletion, amortization and gain or loss. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1 (b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the Members shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Company or the Members), are computed in order to comply with such Regulations, the Members may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Member upon the dissolution of the Company. The Members shall also make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). 9. Capital Contribution - The amount of cash and the value of other Property or services, as agreed to pursuant to this Agreement or by a Majority of the Members, which is contributed to the capital of the Company. 10. Certificate - The Certificate of Formation of the Company as properly adopted and amended from time to time by the Members and filed with the Secretary of State of Delaware. 11. Class A Member - Those persons identified as such on Exhibit B attached hereto and made a part hereof by this reference who have executed the Operating Agreement or an Admission Agreement. 12. Class B Member - Those persons identified as such on Exhibit B attached hereto and made a part hereof by this reference who have executed the Operating Agreement or an agreement by which they are bound by the Operating Agreement. 13. Code - The Internal Revenue Code of 1986, as amended. A-2 14. Company - PERSONALIZED MEDIA COMMUNICATIONS L.L.C., a limited liability company formed under the laws of the State of Delaware, and any successor limited liability company. 15. Company Liability - Any enforceable debt or obligation for which the Company is liable or which is secured by any Company Property. 16. Company Property - Any Property owned by the Company. 17. Contingent Purchase Price Payments - Certain contingent and revenue-related payments to be paid by the Company to The Personalized Mass Media Corporation as consideration for the purchase of certain of the property and assets of The Personalized Mass Media Corporation in addition to the Purchase Note. 18. Contributing Members - Those Class A Members making contributions as a result of the failure of a Delinquent Member to make the contributions required by the Commitment as described in Article VIII. 19. Delinquent Member - A Member who has failed to meet the Commitment of that Member. 20. Depreciation - For each fiscal year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis. 21. Distribution - A transfer of Property to a Member on account of a Membership Interest as described in Article X. 22. Disposition (Dispose) - Any sale, assignment, transfer, exchange, mortgage, pledge, grant, hypothecation, or other transfer, absolute or as security or encumbrance (including dispositions by operation of law). 23. Dissociation - Any action which causes a Person to cease to be Member as described in Article XIII hereof. 24. Dissolution Event - An event, the occurrence of which will result in the dissolution of the Company under Article XVI unless the Members agree to the contrary. 25. Entity - A Person other than a natural person. Entity includes, without limitation, corporations (both non-profit and other corporations), partnerships (both limited and general), joint ventures, limited liability companies, trusts, estates and unincorporated associations. For purposes of this Operating Agreement, the term Entity shall include joint tenancies and tenancies by the entirety. A-3 26. Gross Asset Value - with respect to any Property, the Property's adjusted basis for federal income tax purposes, except as follows: (a) The initial Gross Asset Value of any Property contributed by a Member to the Company shall be the gross fair market value of such Property, as determined by the Member making the contribution and the Company; (b) The Gross Asset Values of all Company Property shall be adjusted to equal such Property's gross fair market value, as determined by the Members, as of the following times: (i) The acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (ii) The distribution by the Company to a Member of more than a de minimis amount of Company Property as consideration for an interest in the Company if the Members reasonably determine that such adjustment is necessary or appropriate to reflect the relative economic interests of the Members in the Company; and (iii) The liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); (c) The Gross Asset Value of any Company Property distributed to any Member shall be the gross fair market value of such Property on the date of distribution; and (d) The Gross Asset Values of Company Property shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1 (b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this subsection to the extent the Members determine that an adjustment pursuant to subsection (b) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subsection. If the Gross Asset Value of an asset has been determined or adjusted pursuant to subsection (a), (b) or (d) hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses. A-4 27. Initial Members - Those persons identified as such on Exhibit B attached hereto and made a part hereof by this reference who have executed the Operating Agreement and which, for the avoidance of doubt, shall not include any Class B Members. 28. Lien - Lien shall have the meaning specified in Section 7.0.9(a). 29. Liquidating Transaction - The sale, transfer or other disposition of all or substantially all of the Company's Property in a transaction or series of related transactions occurring at a time when it is the intent of the Company to terminate its business or after the Company has dissolved pursuant to Article XVI hereof or by operation of law and has not been continued pursuant to Article XVI hereof. 30. Majority - Majority shall have the meaning specified in Section 6.03. 31. Management Right - The right of a Member to participate in the management of the Company, including the right to consent or approve actions of the Company. 32. Member - Initial Member, Service Member, Substitute Member or Additional Member, and, unless the context expressly indicates to the contrary, includes Members and Assignees. 33. Membership Interest - The rights of a Member or, in the case of an Assignee, the rights of the assigning Member in Distributions (liquidating or otherwise) and allocations of the profits, losses, gains, deductions, and credits of the Company. 34. Net Profits and Net Losses - For each fiscal year or other applicable period of the Company, an amount equal to the Company's taxable income or loss for such year or period, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (a) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Net Profits or Net Losses pursuant to this Section shall be added to such taxable income or loss; (b) Any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as Code Section 705(a)(2)(B) expenditures pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations, and not otherwise taken into account in computing Net Profits or Net Losses pursuant to this Section, shall be subtracted from such taxable income or loss; (c) In the event the Gross Asset Value of any Company asset is adjusted (as provided in the definition of Gross Asset Value herein), the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Profits or Net Losses; A-5 (d) Gain or loss resulting from any disposition of Company Property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the Property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; and (e) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period. 35. Notice - Notice shall be in writing. Notice to the Company shall be considered given when mailed by first class mail postage prepaid addressed to any Managing Member in care of the Company at the address of the Principal Office. Notice to a Member shall be considered given when mailed by first class mail postage prepaid addressed to the Member at the address reflected on Exhibit B of the Operating Agreement unless the Member has given the Company a Notice of a different address. 36. Operating Agreement - This Operating Agreement and amendments adopted in accordance with the Operating Agreement and the Act. 37. Person - An individual, trust, estate, or any incorporated or unincorporated Entity permitted to be a member of a limited liability company under the laws of Delaware. 38. Proceeding - Any administrative, judicial, or other adversary proceeding, including, without limitation, litigation, arbitration, administrative adjudication, mediation, and appeal or review of any of the foregoing. 39. Property - Any property real or personal, tangible or intangible, including Money and any legal or equitable interest in such property, but excluding services and promises to perform services in the future. 40. Purchase Note - A fifteen year, secured, interest bearing promissory note executed by the Company for the benefit of The Personalized Mass Media Corporation as partial consideration for the purchase of certain of the property and assets of The Personalized Mass Media Corporation. 41. Regulations - Except where the context indicates otherwise, the permanent, temporary, proposed, or proposed and temporary regulations of the Department of the Treasury under the Code, as such regulations may be lawfully changed from time to time. 42. Relative - Ancestor, descendant, sibling, spouse and divorced spouse. 43. Service Members - Those persons identified as such on Exhibit B attached hereto and made a part hereof by this reference who have executed the Operating Agreement. 44. Substitute Member - An Assignee who has been admitted to all of the rights of membership pursuant to the Operating Agreement. A-6 45. Taxable Year - The taxable year of the Company as determined pursuant to ss.706 of the Code. 46. Taxing Jurisdiction - Any state, local, or foreign government that collects tax, interest or penalties, however designated, on any Member's share of the income or gain attributable to the Company. 47. Unit - An interest in the Company. 48. Withdrawal - Any event described in this Operating Agreement or the Act, which terminates a Person's status as a Member. A-7 EXHIBIT B MEMBERS INITIAL MEMBERS Member/Address Initial Contribution Class and Additional Number of Units Contributions ADDITIONAL MEMBERS Member/Address Initial Contribution Class and Additional Number of Units Contributions SERVICE MEMBERS Member/Address Class and Number of Units B-1 EX-10.6 11 EXHIBIT 10.6 PEGASUS COMMUNICATIONS CORPORATION SERIES PMC WARRANT AGREEMENT THIS AGREEMENT is made as of January 13, 2000, between PEGASUS COMMUNICATIONS CORPORATION, a Delaware corporation (the "Company"), and PERSONALIZED MEDIA COMMUNICATIONS, L.L.C., a Delaware limited liability company ("PMC" and together with the Company, the "Parties"). WHEREAS, PMC and Pegasus Development Corporation (a wholly-owned subsidiary of the Company) have entered into a Series B Unit Subscription Agreement (the "Subscription Agreement") dated as of January 10, 2000, pursuant to which Pegasus Development Corporation will purchase certain Series B Units in PMC; WHEREAS, a portion of the consideration for such Series B Units are certain warrants in the Company to be issued by the Company to PMC; NOW, THEREFORE, the parties agree as follows, intending to be legally bound: SECTION 1. Issuance of the Warrants. On the date hereof and subject to the terms and conditions hereof, the Company hereby issues to PMC, and PMC hereby acquires from the Company, 1,000,000 Series PMC Warrants (the "Warrants") to purchase in the aggregate 1,000,000 shares of Common Stock (this and certain other capitalized terms being defined in Section 13). The exercise price for the Warrants shall be $90.00 per share, as adjusted from time to time pursuant to Section 11 (the "Exercise Price"). Each Warrant entitles the holder thereof to purchase one Warrant Share. SECTION 2. Warrant Certificates. The certificates evidencing the Warrants (the "Warrant Certificates") to be delivered pursuant to this Agreement shall be in registered form only and shall be substantially in the form of Exhibit A. SECTION 3. Execution of Warrant Certificates. The Warrant Certificates shall be signed on behalf of the Company by one of its officers. The Company's corporate seal need not be affixed to the Warrant Certificates. SECTION 4. Registration. The Company will keep at its principal office a register or registers in which the Company shall record the registration of the Warrants and the names and addresses of the holders thereof from time to time and all transfers, exchanges, exercises and cancellations of outstanding warrant certificates thereof. The Company shall number and register the Warrant Certificates in such register as they are issued by the Company. The Company may deem and treat the registered holders of the Warrant Certificates as the absolute owners thereof, for all purposes, and the Company shall not be affected by any notice to the contrary. SECTION 5. Registration of Transfers, Exchanges or Assignment of Warrants. Subject to the limitations of this Section, the Warrant holders shall be entitled to assign their Warrants in whole or in part. The Company shall, from time to time, register the transfer of any outstanding Warrant Certificates upon the register maintained by it for that purpose pursuant to Section 4, upon surrender thereof accompanied by a written instrument or instruments of transfer in the form of the Assignment Form attached to the Warrant Certificate duly executed by the registered holder or holders thereof or by the duly appointed legal representative thereof or by his duly-authorized attorney. If a transfer is made otherwise than pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), the Company may require the transferor to deliver, prior to such transfer, an opinion of counsel, which may be counsel to such transferor, reasonably satisfactory to the Company, that the Warrants or Warrant Shares may be sold without registration under the Securities Act. In such event, regardless of whether the Company requires delivery of an opinion of counsel, the Company may also require that the transferee provide, prior to such transfer: (1) a written representation, signed by the proposed transferee, that such transferee is purchasing the Warrants or Warrant Shares for investment and not with a view toward distribution; (2) an agreement by such transferee to the impression of the restrictive investment legend set forth below on the Warrant or the Warrant Shares; (3) an agreement by such transferee that the Company may place a notation in the stock books and the Warrant register of the Company in respect of the restrictions on transfer described in the legend set forth below; and (4) an agreement by such transferee to be bound by the provisions of this Section relating to the restrictions on transfer of such Warrants or Warrant Shares. Each Warrant Certificate and each certificate representing Warrant Shares shall, until the Warrants or Warrant Shares represented by such certificates have been distributed to the public pursuant to an offering registered under the Securities Act, or the Company has received an opinion of counsel, which may be counsel to the holder of such certificate (or the Company is otherwise satisfied), that such legend is not required under the Securities Act, bear a legend in substantially the following form: THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE OFFERED, SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR APPLICABLE EXEMPTION FROM REGISTRATION. -2- Warrant Certificates may be exchanged or combined at the option of the holder thereof for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants upon presentation thereof to the Company at its principal office, together with a written notice signed by the holder specifying the names and denominations in which the new Warrants are to be issued. Upon surrender of a Warrant Certificate to the Company at its principal office for transfer or exchange in accordance with this Section, the Company shall, without charge, execute and deliver a new Warrant Certificate of like tenor, and in the amount of the Warrants being transferred, in the name of the assignee named in the instrument of assignment and, if the holder's entire interest is not being assigned, in the name of the holder with respect to that portion not transferred, and the Warrant Certificate so surrendered shall promptly be canceled. SECTION 6. Terms of Warrants; Exercise of Warrants. Subject to the terms of this Agreement, and subject to compliance with all applicable legal requirements, each Warrant holder shall have the right, which may be exercised at any time during the period from (and including) the date of this Agreement until 5:00 p.m., Philadelphia, Pennsylvania, time, on the date which is ten years after the date of this Agreement (such period being herein referred to as the "Exercise Period"), to receive from the Company the number of Warrant Shares which the holder may at the time be entitled to receive on exercise of such Warrants and payment of the Exercise Price then in effect for such Warrant Shares. The Warrant Shares issued to a Warrant holder upon exercise of its Warrants shall be fully paid, nonassessable and subject to no preemptive rights. Each Warrant not exercised prior to the expiration of the Exercise Period shall become void, and all rights thereunder and all rights in respect thereof under this Agreement shall cease as of such time. During the Exercise Period, each Warrant holder may exercise, at any time or from time to time and in its sole discretion, some or all of the Warrants represented by its Warrant Certificates by (i) surrendering to the Company at its principal office such Warrant Certificates with the Form of Election to Purchase attached thereto duly filled in and signed, and (ii) paying to the Company the Exercise Price for the number of Warrant Shares in respect of which such Warrants are then being exercised. Warrants shall be deemed exercised on the date (the "Exercise Date") Warrant Certificates representing such Warrants are surrendered to the Company accompanied by the Form of Election to Purchase and payment of the Exercise Price for such Warrants is received by the Company. Warrant Shares in respect of which the Warrants are exercised shall be deemed issued on the Exercise Date, and the Person in whose name the certificate representing the Warrant Shares is to be issued shall be deemed the holder of such Warrant Shares as of the Exercise Date for all purposes. Payment of the aggregate Exercise Price by the Warrant holder shall be made by certified or official bank check payable to the order of the Company or by wire transfer of immediately available funds. -3- In addition to the rights of the holders under the preceding provisions of this Section, each holder shall have the right, in lieu of paying the Exercise Price in cash, to instruct the Company to reduce the number of shares of Common Stock thereafter eligible to be purchased by such holder upon exercise of Warrants held by it in accordance with the following formula: P N = --------- ( M - E ) where: N = the number of shares of Common Stock to be subtracted from the number of Warrant Shares purchasable upon exercise of such holder's Warrants; P = the aggregate Exercise Price which would otherwise be payable in cash for the shares issuable upon exercise of the Warrant; M = the last reported sale price of the Common Stock before the date of such exercise; and E = the Exercise Price on the date of such exercise. Subject to the provisions of Section 7, upon the exercise of any Warrants, the Company shall issue and cause to be delivered as soon as reasonably practicable (but in any event within ten Business Days) to or upon the written order of the holder and in such name or names as the Warrant holder may designate, a certificate or certificates for the number of full Warrant Shares issuable pursuant to the exercise of such Warrants together with such other property, including cash, which may be deliverable upon such exercise. If fewer than all of the Warrants represented by a Warrant Certificate are exercised, a new certificate evidencing the Warrants not exercised will be issued by the Company at the Company's expense to the holder of such Warrants as soon as reasonably practicable (but in any event within ten Business Days). All Warrant Certificates surrendered upon exercise of Warrants shall be canceled by the Company. -4- SECTION 7. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the initial issuance of the Warrants or the initial issuance of the Warrant Shares upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any transfer tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for Warrant Shares in a name other than that of the registered holder of the Warrant Certificate surrendered for exercise or transfer of a Warrant, and the Company shall not be required to issue or deliver such Warrant Certificate or certificates representing such Warrant Shares unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 8. Mutilated or Missing Warrant Certificates. In case any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue in exchange and substitution for, upon surrender of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of a proper affidavit or other evidence reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate. The new Warrant Certificate shall be dated the date of issue of the lost, stolen or destroyed Warrant Certificate. Applicants for such substitute Warrant Certificates shall also comply with any other reasonable requests of the Company (including, without limitation, in the case of any such loss, theft or destruction, a request to provide an indemnity bond, the form and issuer of which shall be reasonably satisfactory to the Company). SECTION 9. Reservation of Warrant Shares. The Company will at all times reserve and keep available, free from preemptive rights and liens, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the maximum number of shares of Common Stock which may then be deliverable upon the exercise of all outstanding Warrants. SECTION 10. Certain Other Agreements of the Company. The Company hereby covenants and agrees that (i) it will not increase the par value of the shares of Common Stock receivable upon the exercise of the Warrants above the Exercise Price then in effect, (ii) before taking any action which would cause an adjustment under Section 11 to reduce the Exercise Price below the then par value of the shares of Common Stock so receivable, the Company will take all such corporate action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Exercise Price upon the exercise of the Warrants, and (iii) the Company will not take any action which results in any adjustment under Section 11 if the total number of Warrant Shares issuable after the action upon the exercise of the Warrants would exceed the total number of Warrant Shares then authorized by the Company's certificate of incorporation and available for the purpose of issue upon such exercise. SECTION 11. Adjustments to Exercise Price. The Exercise Price shall be subject to adjustment as follows: (a) Stock Splits, Stock Dividends, Etc. In case the Company after the date hereof shall (i) pay a dividend or make a distribution to all holders of shares of Common Stock in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, -5- then in any such case the Exercise Price in effect immediately prior thereto shall be adjusted to a price obtained by multiplying such Exercise Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding prior to such action and the denominator shall be the number of shares of Common Stock outstanding after giving effect to such action. An adjustment made pursuant to clause (i) of this subsection (a) shall become effective retroactively immediately after the record date for such dividend or distribution, and an adjustment made pursuant to clause (ii) or (iii) of this subsection (a) shall become effective immediately after the effective date of such subdivision or combination. (b) Issuances Below Market. In case the Company after the date hereof shall issue rights or warrants to all holders of shares of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Market Price per share on the record date (or, if applicable, the ex-distribution date) mentioned below, the Exercise Price in effect immediately prior thereto shall be adjusted to a price obtained by multiplying such Exercise Price by a fraction of which (x) the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares of Common Stock that the aggregate offering price of the total number of shares so to be offered would purchase at the Market Price on such date and (y) the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock to be offered for subscription or purchase; provided, however, that no adjustment shall be made if the Company issues or distributes to each Holder the rights or warrants that each Holder would have been entitled to receive had the Warrants held by such Holder been exercised prior to the record date mentioned below. Any such adjustments shall be made whenever such rights or warrants are issued and shall become effective retroactively immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. (c) Special Dividends. In case the Company after the date hereof shall distribute to all holders of shares of Common Stock (i) evidences of its indebtedness or assets (excluding any regular periodic cash dividend if the per share amount thereof, when added to the per share amount of other distributions made within the preceding 12 months (other than those distributions which resulted in an Exercise Price adjustment) does not exceed 15% of the Market Price per share of Common Stock on the date of declaration of such dividend or distribution) or (ii) rights to subscribe (excluding those referred to in subsection (b) above) for shares of capital stock of any class other than the Common Stock, in each such case the Exercise Price in effect immediately prior thereto shall be adjusted to a price obtained by multiplying such Exercise Price by a fraction of which (x) the numerator shall be the sum of the Market Price multiplied by the number of outstanding shares of Common Stock, in each case on the record date (or, if applicable, the ex-distribution date) mentioned below, less the then-current fair market value (as determined by the Board of Directors in good faith, whose determination shall be conclusive) of the assets or evidences of -6- indebtedness so distributed or of such subscription rights or of such shares of capital stock of any class other than Common Stock, and (y) the denominator shall be the sum of the amount of the Market Price multiplied by the number of outstanding shares of Common Stock, in each case on the record date (or, if applicable, the ex-distribution date) mentioned below; provided, however, that no adjustment shall be made (1) if the Company issues or distributes to each Holder the subscription rights referred to above in this subsection (c) that each Holder would have been entitled to receive had the Warrants held by such Holder been exercised prior to the record date mentioned below or (2) if the Company grants to each Holder the right to receive, upon the exercise of the Warrants held by such Holder at any time after the distribution of the evidences of indebtedness or assets or shares of capital stock of any class other than the Common Stock referred to above in this subsection (c), the evidences of indebtedness or assets or shares of capital stock of any class other than the Common Stock that such Holder would have been entitled to receive had such Warrants been exercised prior to the record date mentioned below. The Company shall provide any Holder, upon receipt of a written request therefor, with any indenture or other instrument defining the rights of the holders of any indebtedness, assets, subscription rights or capital stock referred to in this Section 9.1(c). Any such adjustment shall be made whenever any such distribution is made and shall become effective retroactively immediately after the record date for the determination of stockholders entitled to receive such distribution. (d) Tender or Exchange Offer. In case a tender or exchange offer made by the Company or any subsidiary of the Company for all or any portion of the Company's Common Stock shall expire and such tender or exchange offer shall involve the payment by the Company or such subsidiary of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors in its reasonable judgment whose determination shall be conclusive) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it shall have been amended) that exceeds the Market Price per share of the Common Stock on the day next succeeding the Expiration Time, the Exercise Price shall be reduced so that the same shall equal the price determined by multiplying the Exercise Price in effect immediately prior to the Expiration Time by a fraction of which (x) the numerator shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) at the Expiration Time multiplied by the Market Price per share of the Common Stock on the Trading Day next succeeding the Expiration Time and (y) the denominator shall be the sum of (A) the fair market value (as determined by the Board of Directors in good faith, whose determination shall be conclusive) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum being referred to as the "Purchased Shares") and (B) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) on the Expiration Time and the Market Price per share of the Common Stock on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. -7- (e) Minimum Adjustment Requirement. No adjustment shall be required unless such adjustment would require an increase or decrease of at least $0.01 in the Exercise Price then subject to adjustment; provided, however, that any adjustments that are not made by reason of this subsection (e) shall be carried forward and taken into account in any subsequent adjustment. In case the Company shall at any time issue shares of Common Stock by way of dividend on any stock of the Company or subdivide or combine the outstanding shares of Common Stock, said amount of $0.01 specified in the preceding sentence (as theretofore increased or decreased, if said amount shall have been adjusted in accordance with the provisions of this subsection (e)) shall forthwith be proportionately increased in the case of such a combination or decreased in the case of such a subdivision or stock dividend so as appropriately to reflect the same. All calculations under this Section shall be made to the nearest cent. (f) Officers' Certificate Filing. Whenever an adjustment in the Exercise Price is made as required or permitted by the provisions of this Section, the Company shall promptly mail or cause to be mailed a notice of such adjustment to each Holder at his or her last address as the same appears on the Warrant Register a certificate executed by an officer of the Company (A) setting forth the adjusted Exercise Price as provided in this Section and a brief statement of the facts requiring such adjustment and the computation thereof and (B) setting forth the number of shares of Common Stock (or portions thereof) purchasable upon exercise of a Warrant after such adjustment in the Exercise Price in accordance with subsection (j) and the record date therefor, which certificate shall be conclusive evidence of the correctness of any such adjustment. (g) Notice. In case: (i) the Company shall declare any dividend or any distribution of any kind or character (whether in cash, securities or other property) on or in respect of shares of Common Stock or to the stockholders of the Company (in their capacity as such), excluding any regular periodic cash dividend paid out of current or retained earnings (as such terms are used in generally accepted accounting principles); or (ii) the Company shall authorize the granting to the holders of shares of Common Stock of rights to subscribe for or purchase any shares of capital stock or of any other right; or (iii) of any reclassification of shares of Common Stock (other than a subdivision or combination of outstanding shares of Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or -8- (iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company shall cause to be filed with the Warrant Agent and shall cause to be mailed to the Holders, at their last addresses as they shall appear upon the Warrant Register, at least 20 days prior to the applicable record date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or, if a record is not to be taken, the date as of which the holders of shares of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and, if applicable, the date as of which it is expected that holders of shares of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property (including cash) deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Failure to give any such notice, or any defect therein, shall not affect the validity of the proceedings referred to in clauses (i), (ii), (iii) and (iv) above. (h) Section 305. Anything in this Section to the contrary notwithstanding, the Company shall be entitled, but not required, to make such reductions in the Exercise Price, in addition to those required by this Section, as it in its discretion shall determine to be advisable, including, without limitation, in order that any dividend in or distribution of shares of Common Stock or shares of capital stock of any class other than Common Stock, subdivision, reclassification or combination of shares of Common Stock, issuance of rights or warrants, or any other transaction having a similar effect, shall not be treated as a distribution of property by the Company to its stockholders under Section 305 of the Internal Revenue Code of 1986, as amended, or any successor provision and shall not be taxable to them. (i) No Adjustment. Anything to the contrary herein notwithstanding, no adjustment to the Exercise Price or the number of shares of Common Stock purchasable upon exercise of a Warrant shall be made pursuant to this Section as a result of, or in connection with, (i) the issuance of options or rights to purchase Common Stock issued to employees of the Company or its Subsidiaries pursuant to a stock option or other similar plan adopted by the Board of Directors, or the modification, renewal or extension of any such plan if approved by the Board of Directors or (ii) the issuance of any preferred stock purchase rights. (j) Adjustment to Number of Warrant Shares. Upon each adjustment of the Exercise Price pursuant to this Section the number of shares of Common Stock purchasable upon exercise of a Warrant outstanding prior to the effectiveness of such adjustment shall be adjusted to the number of shares of Common Stock, calculated to the nearest one-hundredth of a share, obtained by (x) multiplying the number of shares of Common Stock purchasable immediately prior to such adjustment upon the exercise of a Warrant by the Exercise Price in effect prior to such adjustment and (y) dividing the product so obtained by the Exercise Price in effect after such adjustment of the Exercise Price. -9- Section 12. Organic Change. (a) Company Survives. Upon the consummation of an Organic Change (other than a transaction in which the Company is not the surviving entity), lawful provision shall be made as part of the terms of such transaction whereby the terms of the Warrant Certificates shall be modified, without payment of any additional consideration therefor, so as to provide that upon purchase of Common Stock pursuant to the exercise of Warrants following the consummation of such Organic Change, the Holders of such Warrants shall have the right to purchase (in lieu of or in addition to the shares of Common Stock purchasable prior to the Organic Change) such securities, cash and other property as such Holder would have received if such Holder had purchased shares of Common Stock upon exercise of its Warrants immediately prior to such Organic Change. Lawful provision also shall be made as part of the terms of the Organic Change so that all other terms of the Warrant Certificates shall remain in full force and effect following such an Organic Change. The provisions of this Section shall similarly apply to successive Organic Changes. (b) Company Does Not Survive. The Company shall not enter into an Organic Change that is a transaction in which the Company is not the surviving entity unless lawful provision shall be made as part of the terms of such transaction whereby the surviving entity shall issue new securities to each Holder, without payment of any additional consideration therefor, with terms that provide that upon purchase of Common Stock pursuant to the exercise of the Warrants, the Holders of such Warrants shall have the right to purchase (in lieu of or in addition to the shares of Common Stock purchasable upon exercise of the Warrants prior to such Organic Change) such securities, cash and other property (the "New Securities") as such Holder would have been entitled to purchase if such Holder had exercised its Warrants immediately prior to such Organic Change. The certificate or articles of incorporation or other constituent document of the surviving entity shall provide for such adjustments which, for events subsequent to the effective date of such certificate or articles of incorporation or other constituent document, shall be equivalent to the adjustments provided for in Section 11. SECTION 13. Definitions. The following terms shall have the following meanings: "Business Day" means any day on which the New York Stock Exchange is open for trading. "Common Stock" means the Class A Common Stock, par value $0.01 per share, of the Company. -10- "Exercise Period" is defined in Section 6. "Exercise Price" is defined in Section 1. "Holder" means a registered holder of Warrants. "Market Price" for any date means the average of the Quoted Prices of the Class A Common Stock for 30 consecutive trading days commencing 45 trading days before the date in question. The "Quoted Price" of the Class A Common Stock means the last reported sales price per share of the Class A Common Stock as reported by the Nasdaq National Market or, if the Class A Common Stock is listed on a securities exchange, the last reported sales price of the 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 Class A Common Stock. "Organic Change" means, with respect to any Person, any transaction (including without limitation any recapitalization, capital reorganization or reclassification of any class of capital stock, any consolidation or amalgamation of such Person with, or merger of such Person into, any other Person, any merger of another Person into such Person (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of outstanding shares of capital stock of such Person), any sale or transfer or lease of all or substantially all of the assets of such Person or any compulsory share exchange) pursuant to which any class of capital stock of such Person is converted into the right to receive other securities, cash or other property. "Securities Act" is defined in Section 5. "Warrant Certificate" is defined in Section 2. "Warrant Shares" means shares of Common Stock (and any other securities or property) issued or issuable upon exercise of the Warrants. "Warrants" is defined in Section 1. SECTION 14. Fractional Interests. The Company may issue fractional Warrant Shares on the exercise of Warrants. In lieu of doing so, the Company may pay the holder cash equal to the product of (1) any fraction of a Warrant Share otherwise issuable and (2) the excess of the last reported sale price of a share of Common Stock before the date of exercise over the Exercise Price. SECTION 15. No Rights as Stockholders. Nothing contained in this Agreement shall be construed as conferring upon the holder or any transferee of any Warrant prior to the time of the exercise thereof, the right to vote, to receive dividends or to consent to or receive notice as a stockholder in respect of any meeting of stockholders for the election of directors of the Company, or otherwise to enjoy the rights of a stockholder of the Company. -11- SECTION 16. Notices. All notices and/or other communications provided for herein shall be in writing and addressed to the respective Parties at the following addresses: If to the Company: Pegasus Communications Corporation c/o Pegasus Communications Management Company 225 City Line Avenue Suite 200 Bala Cynwyd, Pennsylvania 19004 Attention: Ted S. Lodge, Esq. and if to a Warrant holder, to its address shown from time to time on the register maintained by the Company pursuant to Section 4. All notices under this Section 16 shall be deemed to have been given upon receipt if delivered in person and shall be deemed to have been given (i) two business Days after transmission of a telegram or telex, (ii) upon confirmation of receipt if transmitted by facsimile transmission, (iii) four Business Days after deposit in United States registered or certified mail (postage prepaid, return receipt requested) or (iv) two Business Days after delivery to a reputable overnight courier, provided, however, that such notice provisions may be waived in writing by either Party hereto. The address of the Company for the purposes of such notice may be changed from time to time by a similar notice to be effective ten (10) days after such change is supplied. SECTION 17. Minimum Realized Value. If a Warrant holder exercises Warrants within 120 days before the end of the Exercise Period, and the excess of the last reported sale price per share of the Common Stock before the date of exercise over the Exercise Price per share (such excess being the "Realized Value") is less than $32 (subject to adjustment as provided below, the "Guaranteed Amount"), the Company will pay to such Warrant Holder the product of the number of Warrant Shares for which such Warrants are exercised times the excess of the Guaranteed Amount over the Realized Value. The Guaranteed Amount shall be appropriately adjusted to reflect any event described in Section 11(a). SECTION 18. Supplements and Amendments. Any amendment or supplement to this Agreement shall require the written consent of the Company and the registered holders of a majority of the Warrants then outstanding, except that the consent of each holder of a Warrant affected shall be required for any amendment to this Agreement pursuant to which the Exercise Price would be increased or the number of shares of Common Stock purchasable at the time of such amendment upon exercise of Warrants would be decreased, other than pursuant to adjustments provided in this Agreement. -12- SECTION 19. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or PMC shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 20. Termination. This Agreement shall terminate upon the expiration of the Exercise Period. SECTION 21. Benefits of this Agreement. This Agreement shall be for the sole and exclusive benefit of the Company, PMC and the registered holders of the Warrants. Nothing in this Agreement shall be construed to give to any person, company or entity other than the Company, PMC and the registered holders of the Warrants any legal or equitable right, remedy or claim under this Agreement. SECTION 22. Counterparts; Effectiveness. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. This Agreement shall become effective on the date on which each party hereto shall have received counterparts hereof executed by each of the parties hereto. SECTION 23. Entire Agreement. This Agreement embodies the entire agreement and understanding among the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to the subject matter hereof. SECTION 24. Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision, which shall be replaced with an enforceable provision closest in intent and economic effect as the severed provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to either Party. -13- SECTION 25. Governing Law. All issues and questions concerning the construction, validity, interpretation and enforcement of this Warrant Agreement shall be governed by the laws of the State of Delaware. -14- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed under seal, as of the day and year first above written. PEGASUS COMMUNICATIONS CORPORATION By /s/ Ted S. Lodge ------------------------------------------- Ted S. Lodge, Senior Vice President PERSONALIZED MEDIA COMMUNICATIONS, L.L.C. By /s/ John Harvey ------------------------------------------- John Harvey, Managing Member -15- EXHIBIT A to Warrant Agreement -------------------- THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED. PMC- ___ _______ Warrants Series PMC Warrant Certificate PEGASUS COMMUNICATIONS CORPORATION This Warrant Certificate certifies that _______________________, or its assigns, is the holder of _____ Series PMC Warrants (the "Warrants") expiring at 5:00 p.m., Philadelphia, Pennsylvania, time on January 13, 2010 (the "Expiration Date") to purchase shares of the Class A Common Stock, par value $.01 per share (the "Common Stock"), of Pegasus Communications Corporation, a Delaware corporation (the "Company"). Each Warrant entitles the holder, upon exercise, to receive from the Company, if exercised on or before 5:00 p.m., Philadelphia, Pennsylvania, time, on the Expiration Date, one fully paid share of Common Stock (a "Warrant Share") at the exercise price (the "Exercise Price") of $_______ per share, payable as provided in the Warrant Agreement (defined below), upon surrender of this Warrant Certificate and payment of the Exercise Price at the principal office of the Company, subject to the conditions set forth herein and in the Warrant Agreement. The Exercise Price and number of Warrant Shares issuable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events, as provided in Section 11 of the Warrant Agreement. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Series PMC Warrants of the Company and are issued pursuant to a Warrant Agreement dated as of January 13, 2000(the "Warrant Agreement"), between the Company and Personalized Media Communications, L.L.C. The Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitations or rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the holders or holder of the Warrants). A copy of the Warrant Agreement may be obtained by the holder hereof upon written request to the Company. All issues and questions concerning the construction, validity, interpretation and enforcement of this Warrant Certificate shall be governed by the laws of the State of Delaware without regard to principles of conflicts of laws. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed. PEGASUS COMMUNICATIONS CORPORATION Dated By: ------------------------------ --------------------------------- [Name] [Title] -2- FORM OF ELECTION TO PURCHASE Dated --------- The undersigned, being duly authorized, hereby irrevocably elects to exercise the within Warrant to the extent of purchasing _______________________ shares of Class A Common Stock and hereby makes payment of $__________________ in payment of the exercise price thereof. * * * * * INSTRUCTIONS FOR REGISTRATION OF STOCK -------------------------------------- Name ---------------------------------------------------------------------------- (please typewrite or print in block letters) Address ------------------------------------------------------------------------- Signature/ Title --------------------------------------------- Note: The signature must conform in all respects to the name of the holder as specified on the face of this Warrant Certificate. - --------------------------------------------- Taxpayer Identification Number of holder - -------------------------------------------- Signature Guarantee ASSIGNMENT FORM --------------- FOR VALUE RECEIVED, the undersigned, being duly authorized, hereby sells, assigns and transfers unto Name --------------------------------------------------------------------------- (please typewrite or print in block letters) Address ------------------------------------------------------------------------- Taxpayer Identification No. ----------------------------------------------------- its right represented by this Warrant to purchase ____________ shares of Class A Common Stock and does hereby irrevocably constitute and appoint________________ attorney-in-fact to transfer the same on the books of Pegasus Communications Corporation with full power of substitution in the premises. Date: -------------- Signature/ Title ---------------------------------------------------------------- Note: The signature must conform in all respects to name of the holder as specified on the face of this Warrant Certificate. - -------------------------------------------- Taxpayer Identification number of transferor - -------------------------------------------- Signature Guarantee EX-10.7 12 EXHIBIT 10.7 ================================================================================ FIRST AMENDED AND RESTATED CREDIT AGREEMENT among PEGASUS MEDIA & COMMUNICATIONS, INC. THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO and CIBC WORLD MARKETS CORP. and DEUTSCHE BANK SECURITIES, INC. as Co-Arrangers CANADIAN IMPERIAL BANK OF COMMERCE as Syndication Agent for such Lenders BANKERS TRUST COMPANY as Administrative Agent for such Lenders and FLEET NATIONAL BANK as Documentation Agent for such Lenders Dated as of January 14, 2000 ================================================================================ TABLE OF CONTENTS
SECTION PAGE NO. - ------- -------- RECITALS.................................................................................................1 I. GENERAL TERMS..................................................................................................3 1.01. Revolver Facilities...............................................................................3 1.02. Letters of Credit.................................................................................4 1.03. Initial Term Loans................................................................................9 1.04. Incremental Term Loans...........................................................................10 1.05. Interest on the Notes............................................................................11 1.06. Loan Requests; Type of Loan......................................................................14 1.07. Loan Disbursements...............................................................................15 1.08. Voluntary Prepayments and Voluntary Termination or Reduction of the Commitments..................15 1.09 Mandatory Commitment Reductions and Prepayments..................................................17 1.10. Commitment Fee...................................................................................21 1.11. Requirements of Law..............................................................................21 1.12. Limitations on LIBOR Loans; Illegality...........................................................23 1.13. Taxes............................................................................................24 1.14. Indemnification..................................................................................25 1.15. Payments Under the Notes.........................................................................26 1.16. Set-Off, Etc.....................................................................................26 1.17. Pro Rata Treatment; Sharing; Payments after Default..............................................27 1.18. Non-Receipt of Funds by the Agent................................................................28 1.19. Replacement of Notes.............................................................................29 1.20. Replacement of Notes.............................................................................29 II. SECURITY; SUBORDINATION; USE OF PROCEEDS...................................................................30 2.01. Security for the Obligations; Subordination; Etc.................................................30 2.02. Use of Proceeds..................................................................................32 III. CONDITIONS OF MAKING THE LOANS..............................................................................32 3.01. Conditions to This Agreement, the First Loans and Additional Letters of Credit...................32 3.02. Acquisition Loans................................................................................34 3.03. All Loans........................................................................................36 3.04. Lender Approvals.................................................................................36 IV. REPRESENTATIONS AND WARRANTIES...............................................................................36 4.01. Financial Statements.............................................................................37 4.02. Organization, Qualification, Etc.................................................................37 4.03. Authorization; Compliance; Etc...................................................................37 4.04. Governmental and Other Consents, Etc.............................................................38 4.05. Litigation.......................................................................................39 4.06. Compliance with Laws and Agreements..............................................................39 4.07. Franchises.......................................................................................39 4.08. Licenses.........................................................................................40
SECTION PAGE NO. - ------- -------- 4.09. The Systems......................................................................................40 4.10. Rate Regulation..................................................................................42 4.11. The Stations.....................................................................................43 4.12. DBS Rights.......................................................................................44 4.13. Title to Properties; Condition of Properties.....................................................44 4.14. Interests in Other Businesses....................................................................45 4.15. Solvency.........................................................................................45 4.16. Full Disclosure..................................................................................45 4.17. Margin Stock.....................................................................................46 4.18. Tax Returns......................................................................................46 4.19. Pension Plans, Etc...............................................................................46 4.20. Material Agreements..............................................................................46 4.21. Projections......................................................................................46 4.22. Brokers, Etc.....................................................................................47 4.23. Capitalization...................................................................................47 4.24. Environmental Compliance.........................................................................47 4.25. Investment Company Act...........................................................................48 4.26. Labor Matters....................................................................................48 4.27. Delaware Code Provisions.........................................................................48 4.28. Year 2000 Compliance.............................................................................49 V. FINANCIAL COVENANTS..........................................................................................49 5.01. Leverage.........................................................................................49 5.02. Interest Coverage................................................................................51 5.03. Fixed Charge Coverage............................................................................51 5.04. Restricted Payments..............................................................................51 VI. AFFIRMATIVE COVENANTS........................................................................................53 6.01. Preservation of Assets; Compliance with Laws, Etc................................................53 6.02. Insurance........................................................................................54 6.03. Taxes, Etc.......................................................................................56 6.04. Notice of Proceedings, Defaults, Adverse Change, Etc.............................................56 6.05. Financial Statements and Reports.................................................................57 6.06. Inspection.......................................................................................60 6.07. Accounting System................................................................................60 6.08. Additional Assurances............................................................................61 6.09. Renewal of DBS Agreements, FCC Licenses, and CATV Franchises.....................................61 6.10. Compliance with Environmental Laws...............................................................62 6.11. Interest Rate Protection.........................................................................63 VII. NEGATIVE COVENANTS..........................................................................................63 7.01. Indebtedness and Guarantees......................................................................63 7.02. Liens............................................................................................64 7.03. Disposition of Assets; Mergers, Etc..............................................................65 7.04. Fundamental Changes..............................................................................66 7.05. Investments and Acquisitions.....................................................................66 7.06. Local Marketing Agreements, Etc..................................................................70
-ii-
SECTION PAGE NO. - ------- -------- 7.07. Management.......................................................................................70 7.08. Sale and Leaseback...............................................................................70 7.09. Repurchase or Issuance of Equity Securities......................................................70 7.10. Change in Business, Limits on Activities of Special Purpose Subsidiary...........................70 7.11. Accounts Receivable..............................................................................71 7.12. Transactions with Affiliates.....................................................................71 7.13. Amendment of Certain Agreements, Negative Pledges, Etc...........................................71 7.14. ERISA............................................................................................72 7.15. Margin Stock.....................................................................................72 VIII. DEFAULTS...................................................................................................73 IX. REMEDIES ON DEFAULT, ETC.....................................................................................76 X. THE AGENT.....................................................................................................77 10.01. Appointment, Powers and Immunities..............................................................77 10.02. Reliance by Agent...............................................................................78 10.03. Events of Default...............................................................................78 10.04. Rights as a Lender..............................................................................78 10.05. Indemnification.................................................................................79 10.06. Non-Reliance on Agent and Other Lenders.........................................................79 10.07. Failure to Act..................................................................................79 10.08. Resignation of Agent...........................................................................80 10.09. Cooperation of Lenders..........................................................................80 10.10. Documentation Agent and Syndication Agent.......................................................80 XI. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS; SEPARATE ACTIONS BY THE LENDERS....................................80 XII. BENEFIT OF AGREEMENT; ASSIGNMENTS AND PARTICIPATIONS........................................................83 XIII. MISCELLANEOUS..............................................................................................86 13.01. Survival........................................................................................86 13.02. Fees and Expenses; Indemnity; Etc...............................................................86 13.03. Notice..........................................................................................87 13.04. Governing Law...................................................................................89 13.05. CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL...................................................89 13.06. Severability....................................................................................90 13.07. Section Headings, Etc...........................................................................90 13.08. Several Nature of Lenders' Obligations..........................................................90 13.09. Counterparts....................................................................................90 l3.10. Knowledge and Discovery.........................................................................90 13.11. Amendment of Other Agreements...................................................................90 13.12. FCC and Municipal Approvals.....................................................................91 13.13. Disclaimer of Reliance..........................................................................91 13.14. Environmental Indemnification...................................................................91 XIV. DEFINITIONS................................................................................................92
-iii- INDEX OF SCHEDULES ------------------ Schedule 1.01(a) Allocation of Loans and Commitments Schedule 1.01(c) Reducing Revolving Credit Note Schedule 1.02(a)(ii) Existing Letters of Credit Schedule 1.02(a)(iv) Letter of Credit Request Schedule 1.03 Initial Term Note Schedule 1.04(a) Joinder by New Lender Schedule 1.04(c) Incremental Term Note Schedule 1.06(a) Loan Request Schedule 1.06(d) Interest Rate Option Notice Schedule 1.08(a) Commitment Reduction Notice Schedule 1.08(b) Prepayment Notice Schedule 1.09 Prepayment Option Notice Schedule 2.01(a) Exceptions to Security Schedule 2.01(b) Form of Seller Subordination Agreement Schedule 2.02 Sources and Uses of Capital Schedule 3.01 Omnibus Officer's Certificate(s) and Compliance Certificate/Closing Schedule 3.02(d) Officer's Compliance Certificate/Acquisition Loans Schedule 3.02(e)(i) Form of General Counsel Opinion/Acquisition Loans Schedule 3.02(e)(ii) Forms of FCC Counsel Opinion/Acquisition Loans Schedule 3.02(e)(iii) Form of Local Counsel Opinion/Acquisition Loans Schedule 4.01(a) Opening Balance Sheet Schedule 4.01(b) Parent Indebtedness Schedule 4.02 Organization, Qualification, Etc. Schedule 4.04 Governmental and Other Consents Schedule 4.05 Litigation Schedule 4.07 CATV Franchises Schedule 4.08 FCC Licenses Schedule 4.10 Rate Regulation Schedule 4.12 DBS Agreements and Service Areas Schedule 4.13 Head-End and Tower Site Leases, Etc. Schedule 4.14 Interests in Other Businesses Schedule 4.19 Pension Plans Schedule 4.20 Material Agreements Schedule 4.21 Projections Schedule 4.23 Capitalization Schedule 4.24 Environmental Compliance Schedule 6.05 Compliance Report Schedule 7.01 Certain Permitted Indebtedness Schedule 7.02 Certain Permitted Liens Schedule 7.05(a) Acquisition Compliance Certificate Schedule 7.05(b) Form of General Counsel Opinion/Permitted Acquisitions Schedule 7.05(c) Form of FCC Counsel Opinion/Permitted Acquisitions Schedule 7.05(d) Form of Local Counsel Opinion/Permitted Acquisitions Schedule 12 Form of Assignment and Acceptance FIRST AMENDED AND RESTATED CREDIT AGREEMENT ------------------------------------------- THIS FIRST AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") dated as of January 14, 2000, by and among the financial institutions which are now, or in accordance with Section 1.04 or Article XII hereafter become, parties hereto (collectively, the "Lenders" and each individually, a "Lender"); CIBC WORLD MARKETS CORP. and DEUTSCHE BANK SECURITIES, INC. (together, the "Co-Arrangers"); BANKERS TRUST COMPANY, as administrative agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, the "Agent"); CANADIAN IMPERIAL BANK OF COMMERCE, as syndication agent for such Lenders (in such capacity, together with its successors and assigns in such capacity, the "Syndication Agent"); FLEET NATIONAL BANK, as documentation agent for such Lenders (in such capacity, together with its successors and assigns in such capacity, the "Documentation Agent"); and PEGASUS MEDIA & COMMUNICATIONS, INC., a Delaware corporation (the "Borrower") and a wholly owned subsidiary of Pegasus Communications Corporation, a Delaware corporation (the "Parent"). Certain capitalized terms used herein without definition are defined in Article XIV of this Agreement. RECITALS -------- A. The Borrower's various direct and indirect Subsidiaries (1) own the rights to deliver direct broadcast satellite ("DBS") service in various territories in the United States, (2) own and operate cable television systems located in Puerto Rico and (3) own and operate broadcast television stations located in Florida, Maine, Mississippi, Pennsylvania and Tennessee. Certain special purpose subsidiaries of the Borrower, referred to herein as the License Subsidiaries, own the licenses for each broadcast television station. B. Certain of the foregoing DBS rights are being acquired on the date hereof, and as a condition to the execution of this Agreement, pursuant to the transfer by merger of Digital Television Services, Inc., a Delaware corporation and an Affiliate of the Borrower ("DTS"), into Pegasus Satellite Television, Inc., a Delaware corporation and a Subsidiary of the Borrower ("PST"). C. DTS is a party to a Second Amended and Restated Credit Agreement dated as of July 30, 1997 with Canadian Imperial Bank of Commerce, as Administrative Agent (in such capacity, the "DTS Agent"), Fleet National Bank, as Documentation Agent, CIBC Wood Gundy Securities Corp., as Arranger, and the "Lenders" referred to therein (the "DTS Lenders") as amended (the "DTS Credit Agreement"). D. The Borrower, certain of the Lenders (the "Original Lenders") and the Agent are parties to a Credit Agreement dated as of December 10, 1997, as amended by a First Amendment to Credit Agreement dated as of March 10, 1998, a Second Amendment to Credit Agreement dated as of August 3, 1998 and a Third Amendment to Credit Agreement dated as of December 31, 1998 (as so amended, the "Original Agreement") under which the Borrower received certain revolving credit loans and term loans (the "Original Loans") pursuant to lending commitments totaling $180,000,000 in the aggregate. E. The Borrower desires to obtain additional funds (1) to support the issuance of letters of credit (including without limitation, Restored Letters of Credit), (2) to retire all existing Indebtedness of DTS, DTS Management and DTS Indiana under the DTS Credit Agreement and the Security Documents referred to therein, (3) to repurchase the Original Subordinated Notes, (4) to make permitted Restricted Payments to the Parent, (5) for working capital, Capital Expenditures and general corporate purposes and (6) subject to availability, to finance Permitted Acquisitions. F. The Lenders are willing to provide such funds, all subject to the terms and conditions of this Agreement. G. The Borrower desires to amend and restate the Original Agreement to increase its maximum borrowing capacity to $500,000,000 (with the option to seek up to $200,000,000 in additional funds), to permit and reflect the DTS Merger, to restructure its existing credit facilities, to add additional institutions to its lending group (the "New Lenders"), to add additional agents therefor (with Bankers Trust Company remaining as agent for all administrative and collateral matters, as provided in the Original Agreement) and to make certain other amendments, modifications and revisions. H. The parties hereto, for their convenience, have elected to amend and restate the Original Agreement pursuant to this Agreement rather than amend the Original Agreement or enter into a new credit agreement and intend that all indebtedness, obligations and liens created under the Original Agreement and the other Loan Documents be continued hereunder and thereunder and remain in full force and effect and not be discharged, paid, satisfied or cancelled except to the extent otherwise provided herein and therein. I. On the Closing Date, (1) all amounts owing under or in connection with the Original Agreement and the Short-Term L/C Agreements will be paid in full, (2) the Short-Term L/C Agreements will be of no further force and effect with respect to the Restored Letters of Credit , (3) the Original Agreement will be amended and restated in its entirety as set forth in this Agreement and (4) the Borrower may then and thereafter obtain extensions of credit from the Lenders under this Agreement in accordance with the conditions set forth below. NOW THEREFORE, the parties hereto, intending to be legally bound, and in consideration of the foregoing and the mutual covenants contained herein, hereby agree that the Original Agreement be, and it hereby is, amended and restated to read in its entirety (but retaining references to the foregoing Recitals) as follows: -2- I. GENERAL TERMS. Section 1.01. Revolver Facilities. (a) On the Closing Date, subject to the terms and conditions contained in this Agreement, the Lenders agree to establish in favor of the Borrower reducing revolving credit facilities (the "Revolvers") in the aggregate principal amount of $225,000,000, allocated among the Lenders as set forth in Schedule 1.01(a) (collectively, in either case, as reduced pursuant to Section 1.01(e) and subject to Sections 1.01(b) and to assignments under Article XII, the "Commitments" and, with respect to each Lender's allocation of the Revolvers, its "Commitment"), which shall expire on October 31, 2004 (such date, or such earlier date as the Commitments shall expire or be terminated hereunder, being referred to herein as the "Expiration Date"). (b) The Lenders shall have no obligation to make any loans under the Commitments (the "Revolving Loans") if, after giving effect to such Revolving Loans, the sum of (A) the aggregate amount of all outstanding Revolving Loans plus (B) the Commitment Reserve plus (C) the Letter of Credit Exposure plus (D) that portion of the Permitted Seller Debt Outstandings not secured by Letters of Credit (such sum being referred to herein as the "Aggregate Exposure") would exceed the aggregate Commitments then in effect. For purposes of this Agreement, the term "Available Commitments" shall mean, at any time, the aggregate amount of the Commitments then in effect minus the Commitment Reserve, if any, minus the Letter of Credit Exposure minus that portion of the Permitted Seller Debt Outstandings not secured by Letters of Credit. (c) The borrowings under this Section 1.01 shall be evidenced by the Borrower's Reducing Revolving Credit Notes, each in the form attached hereto as Schedule 1.01(c) (together with any additional Reducing Revolving Credit Notes issued to any assignee(s) of the Commitments under Article XII or otherwise issued in substitution therefor or replacement thereof, the "Revolving Notes"). (d) The aggregate principal amount of Revolving Loans made by the Lenders as requested in any Loan Request shall be (i) at least $1,000,000 and, if more, a multiple of $100,000 in the case of LIBOR Loans, and $500,000, and, if more, a multiple of $100,000, in the case of Base Rate Loans or (ii) such lesser amount as equals the then unadvanced portion of the aggregate Available Commitments. From the Closing Date to and including the Expiration Date and within the limits of the aggregate Available Commitments, the Borrower may borrow, repay and reborrow under this Section 1.01. (e) The Commitments (i) shall be automatically permanently reduced on March 31, 2001 and each Quarterly Date thereafter, with a final reduction on the Expiration Date, on each of which dates the Borrower shall, subject to Section 1.15, repay such amount of the aggregate Revolving Loans as shall cause the aggregate outstanding principal balance thereunder to be less than or equal to the Available Commitments, after giving effect to such reductions, and (ii) shall expire on the Expiration Date, when all outstanding principal and accrued interest on the Revolving Notes shall be due and payable in full. Such reductions of the Commitments shall be in the respective percentages of the Commitments set forth below, without giving effect to any other mandatory or optional Commitment reductions: -3- - ------------------------------------------------------- Quarterly Dates Aggregate Percentage of Automatic Permanent Reduction - ------------------------------------------------------- March 31, 2001 2.50% - ------------------------------------------------------- June 30, 2001 2.50% - ------------------------------------------------------- September 30, 2001 2.50% - ------------------------------------------------------- December 31, 2001 2.50% - ------------------------------------------------------- March 31, 2002 3.75% - ------------------------------------------------------- June 30, 2002 3.75% - ------------------------------------------------------- September 30, 2002 3.75% - ------------------------------------------------------- December 31, 2002 3.75% - ------------------------------------------------------- March 31, 2003 6.25% - ------------------------------------------------------- June 30, 2003 6.25% - ------------------------------------------------------- September 30, 2003 6.25% - ------------------------------------------------------- December 31, 2003 6.25% - ------------------------------------------------------- March 31, 2004 12.50% - ------------------------------------------------------- June 30, 2004 12.50% - ------------------------------------------------------- September 30, 2004 12.50% - ------------------------------------------------------- October 31, 2004 12.50% - ------------------------------------------------------- Section 1.02. Letters of Credit. From time to time from the date of this Agreement to but not including the date which is ten (10) Business Days prior to the Expiration Date, and on the terms and subject to the conditions contained in this Agreement, the Agent shall cause the Issuing Bank to issue stand-by letters of credit in Dollar denominations for the account of the Borrower (each a "Letter of Credit" and collectively, the "Letters of Credit") as follows: (a) Issuance of Letters of Credit. The obligation of the Issuing Bank to issue any Letter of Credit requested by the Borrower is subject to the following conditions: (i) The Issuing Bank shall not issue any Letter of Credit if, after giving effect to the issuance thereof, (A) the Aggregate Exposure would exceed the aggregate Commitments then in effect, (B) the aggregate NRTC Letter of Credit Exposure would exceed $45,000,000, (C) the aggregate General Purpose Letter of Credit Exposure would exceed $10,000,000 or (D) the aggregate Seller Letter of Credit Exposure would exceed $45,000,000. (ii) Each Letter of Credit shall be issued (i) in favor of the NRTC, as beneficiary, to secure obligations of the Companies under the NRTC Member Agreements, (ii) in favor of one or more Sellers, to secure obligations of the Companies under Permitted Seller Debt or (iii) for such other valid business purpose of the Companies or any of them as -4- the Borrower shall determine. As of the date hereof and in accordance with the Original Agreement and this Agreement, the Issuing Bank has issued certain Letters of Credit, which Letters of Credit are described in Part A of Schedule 1.02(a)(ii). It is hereby agreed that the Letters of Credit shall include the Restored BT Letters of Credit. (iii) Letters of Credit shall be issued hereunder on a sight basis only. (iv) Each Letter of Credit and any related documentation shall be in a form and scope and upon terms acceptable to the Issuing Bank, in its sole discretion but, in any event, in accordance with its customary practices (collectively with the Letters(s) of Credit issued pursuant hereto, the "Letter of Credit Documents"). Whenever the Borrower desires that a Letter of Credit be issued, the Borrower shall give the Agent and the Issuing Bank a written notice requesting such issuance at least three (3) Business Days (or such shorter period as may be acceptable to the Issuing Bank) prior to the proposed issuance date. Each such notice shall be in the form of Schedule 1.02(a)(iv) (each, a "Letter of Credit Request"). (v) Each Letter of Credit shall have an expiry date occurring not later than the earlier of (A) the date which is one year from the date of issuance (or, solely with respect to Seller Letters of Credit issued after March 10, 1998, four (4) years from the date of issuance) and (B) the date which is ten (10) Business Days prior to the Expiration Date. The expiry date for any Letter of Credit may be automatically extended for successive periods; each of up to one year, but no such extension shall extend beyond the date which is ten (10) Business Days prior to the Expiration Date. (vi) The Issuing Bank will not issue any Letter of Credit after it has received notice that any Default exists, until such time as the Issuing Bank receives a notice of (i) the rescission of such notice of Default, provided by the party or parties originally delivering the same, or (ii) the waiver of such Default, provided by the Lenders as required under Article XII. Notwithstanding the foregoing, in the event a Lender Default exists, the Issuing Bank shall not be required to issue any Letter of Credit unless the Issuing Bank has entered into arrangements satisfactory to it and to the Borrower to eliminate the Issuing Bank's risk with respect to the participation of the Defaulting Lender or Lenders in Letters of Credit. (b) DTS Letters of Credit. (i) The DTS Agent is the issuing bank with respect to certain letters of credit issued under the DTS Credit Agreement for the account of DTS and, upon consummation of the DTS Merger, PST, as successor to DTS, which letters of credit are described in Part B of Schedule 1.02(a)(ii) (collectively, the "DTS Letters of Credit"). It is hereby agreed that the DTS Letters of Credit shall include the Restored DTS Letters of Credit. Within sixty (60) days after the date hereof, the Borrower shall cause each of the DTS Letters of Credit to be replaced with Letters of Credit issued by the Issuing Bank for the Borrower's account under this Section 1.02. -5- (ii) Pending such replacement of the DTS Letters of Credit, (A) the DTS Letters of Credit shall be deemed Seller Letters of Credit and NRTC Letters of Credit, as indicated on such Schedule 1.02(a)(ii), and Letters of Credit, for all purposes hereof, except as specifically provided in this Section 1.02, (B) the Issuing Bank and the Lenders (pursuant to Section 1.02(e) below), hereby assume responsibility for the funding of any draws thereunder or other obligations arising in connection therewith and (C) the Borrower hereby assumes all Reimbursement Obligations in connection therewith. The agreements of the Issuing Bank and the Lenders in respect of the DTS Letters of Credit shall supersede and replace the obligations of the DTS Lenders with respect to such DTS Letters of Credit under Section 3.4 of the DTS Credit Agreement, which will terminate upon repayment of all obligations of DTS thereunder as provided in Section 2.02. (iii) In furtherance of the foregoing, the Lenders hereby agree to reimburse the DTS Agent, on behalf of the DTS Lenders, upon demand for, and to indemnify and reimburse the DTS Agent, on behalf of the DTS Lenders, and hold such parties harmless from and against, payments of amounts drawn under the DTS Letters of Credit, commissions, interest and other charges, fees and expenses of counsel, and any and all claims, liabilities, losses, costs and expenses incurred or sustained by such parties in connection with or relating to the DTS Letters of Credit which DTS has agreed to pay to such respective parties under the terms of the DTS Credit Agreement or for which DTS has indemnified such respective parties under the DTS Credit Agreement or any letter of credit documents or letter or credit applications or other documents entered into in connection with the DTS Letters of Credit; provided, however, that such party or parties shall have made written demand therefor to the Issuing Bank no later than thirty (30) days after expiration of such DTS Letter of Credit. The Lenders agree that their respective obligations under this Section 1.02(b)(iii) shall be shared pro rata based upon their respective Commitments. (iv) The DTS Agent and the Borrower agree that no amendments or other modifications of the DTS Letters of Credit shall be made without the prior written consent of the Required Lenders. (c) Letter of Credit Fees. The Borrower shall pay (i) to the Issuing Bank, for its own account, a non-refundable issuance fee computed at the rate of .125% per annum of the amount of each Letter of Credit (the "Issuance Fee"), provided that (A) in no event shall the annual Issuance Fee with respect to any Letter of Credit be less than $500.00 and (B) in any instance where such minimum Issuance Fee applies, such minimum shall be paid in full on the date of issuance of the respective Letter of Credit and on each anniversary date thereof, if any, and (ii) to the Agent, for the ratable account of each Lender, a non-refundable fee (the "Letter of Credit Fee") which shall be computed at a per annum rate equal to the Applicable Margin for LIBOR Loans under the Revolvers in effect from time to time under the Commitments. The Issuance Fee and Letter of Credit Fee shall accrue on the daily stated amount of each Letter of Credit from and including the issuance date of such Letter of Credit to and including the expiry date thereof and (except as otherwise provided in clause (B) above) shall be payable quarterly in arrears on each Quarterly Date and on the Expiration Date, -6- without setoff, deduction or counterclaim. The Issuance Fee and Letter of Credit Fee shall be calculated on the basis of the actual number of days elapsed in a 360-day year. Upon receipt from the Borrower of payment of the Letter of Credit Fee, the Agent will promptly remit to each Lender such Lender's share of the Letter of Credit Fee. In addition to the Issuance Fee and the Letter of Credit Fee, the Borrower will pay the Issuing Bank or the DTS Agent, as applicable, upon each issuance of, payment under and/or amendment to each Letter of Credit, such amount as shall at such time be the administrative charge which the Issuing Bank or the DTS Agent, as applicable, is customarily assessing for such operations. (d) Obligation of Borrower to Repay Letter of Credit Disbursements, Etc. The Borrower assumes all risks in connection with the Letters of Credit and the Borrower's obligation to repay any payments made by the Issuing Bank or the DTS Agent on a demand presented under any Letter of Credit (each a "Letter of Credit Disbursement") shall be absolute, unconditional and irrevocable under any and all circumstances and irrespective of: (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, setoff, defense or other right which the Borrower or any other person may at any time have against the beneficiary under any Letter of Credit, the Agent, the Issuing Bank, the DTS Agent, any Lender or any other Person, whether in connection with this Agreement or otherwise; (iii) any demand or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect, unless payment by the Issuing Bank or the DTS Agent, as applicable, under such Letter of Credit (A) shall have been made against presentation of demands or documents that, on their face, do not substantially conform to the requirements of such Letter of Credit, or (B) shall have been the result of the gross negligence or willful misconduct of the Issuing Bank, or the DTS Agent, as applicable, as finally determined by a court of competent jurisdiction; and (iv) any other circumstance or event whatsoever, whether or not similar to any of the foregoing, provided that such circumstance or event shall not have been the result of the gross negligence or willful misconduct of the Issuing Bank or the DTS Agent, as applicable. (e) Participation by Lenders. Promptly after the issuance of or amendment of any Letter of Credit, the Issuing Bank shall give the Agent and the Borrower written notice of such issuance and/or amendment, accompanied by a copy of such Letter of Credit and/or amendment. Upon receipt of such notice, the Agent shall promptly notify each Lender accordingly and, if requested by any Lender, shall provide to such Lender copies of any such newly issued Letter of Credit or amendment. By the issuance of a Letter of Credit and without any further action, the Issuing Bank or, with respect to all existing DTS Letters of Credit, the DTS Agent, as applicable, hereby grants to each Lender, and each Lender hereby agrees to acquire from the Issuing Bank or the DTS Agent, as applicable, a participation in such Letter of Credit equal to such Lender's pro rata share of the face amount thereof, determined as provided in Section 1.17, effective upon the date of issuance. In furtherance of the foregoing, each -7- Lender hereby absolutely and unconditionally agrees to pay to the Agent, for the account of the Issuing Bank or the DTS Agent, as applicable, the amount of such Lender's pro rata share of each Letter of Credit Disbursement. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this Section 1.02(e) is absolute and unconditional and shall not be affected by any circumstances whatsoever, and that each payment obligation arising from a Letter of Credit Disbursement shall be made promptly by each Lender to the Agent without any offset, abatement, withholding or reduction whatsoever. (f) Payments by Lenders to Issuing Bank or the DTS Agent. Upon notification by the Issuing Bank or the DTS Agent to the Agent that a Letter of Credit Disbursement has been made and that the Borrower has failed to meet its reimbursement obligations to the Issuing Bank or the DTS Agent, as applicable, the Agent shall promptly notify the Issuing Bank or the DTS Agent and each other Lender of the amount of the Letter of Credit Disbursement and, in the case of each Lender, its pro rata share thereof. Each Lender shall pay to the Agent, not later than 2:00 P.M., New York time, on such date, provided that such notice shall have been provided by the Agent by 11:00 A.M., New York time, on such date (or, otherwise, not later than 12:00 Noon, New York time, on the next following Business Day), such Lender's pro rata share of such Letter of Credit Disbursement, which the Agent shall promptly pay to the Issuing Bank or the DTS Agent, as applicable. The Agent will promptly remit to each Lender its share of any amounts subsequently received by the Issuing Bank or the Agent (directly or from the DTS Agent) from the Borrower in respect of all Letter of Credit Disbursements. (g) Cash Collateral. (i) At any time and from time to time after the occurrence and during the continuance of an Event of Default, upon notice from the Agent, at the direction or with the consent of the Required Lenders (and, in the case of any Event of Default referred to in paragraph (m) or (n) of Article VIII, forthwith, without any demand or the taking of any other action by the Agent or such Lenders), the Borrower shall immediately deliver to the Agent, for deposit in the Collateral Account controlled by the Agent as provided in the Security Agreements, such additional amount of cash as is equal to the aggregate Letter of Credit Exposure (whether or not any beneficiary under any Letter of Credit shall have drawn or be entitled at such time to draw thereunder). (ii) In addition, in the event of a mandatory prepayment under Section 1.09 resulting in payment in full of all outstanding Loans and the termination of the Commitments in full, the Agent will retain such amount as may then be required to be retained as cover for the Letter of Credit Exposure, as contemplated by Section 1.09(e)(iii). (iii) In the event of a drawing, and subsequent payment by the Issuing Bank or the DTS Agent, under any Letter of Credit at any time during which any amounts are held in respect thereof in the Collateral Account, the Agent will deliver to the Issuing Bank or the DTS Agent, as applicable, an amount equal to the Reimbursement Obligation created -8- as a result of such payment (or, if the amounts so held are less than such Reimbursement Obligation, all of such amounts) to reimburse the Issuing Bank or the DTS Agent, as applicable, therefor, in each case in the order in which each such drawing is presented to the Issuing Bank or the DTS Agent, as applicable. (iv) Any such amounts remaining in the Collateral Account after the expiration of all Letters of Credit and the reimbursement in full of the Issuing Bank and the DTS Agent for all of their obligations thereunder shall be held by the Agent, for the benefit of the Borrower, to be applied against the Obligations (A) in such order and manner as the Agent may direct in accordance with Section 1.17, if a Default then exists, or (B) otherwise, as the Borrower may direct in accordance with this Agreement. (v) If the Borrower is required to provide cover for the Letter of Credit Exposure pursuant to Section 1.09(e)(iii), such amount (to the extent not applied as aforesaid) shall be returned to the Borrower on demand, provided that, after giving effect to such return, (A) the Aggregate Exposure at such time would not exceed the aggregate Commitments at such time and (B) no Default shall have occurred and be continuing at such time. If the Borrower is required to provide cover for the Letter of Credit Exposure as a result of an Event of Default, as provided under paragraph (i) above, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three (3) Business Days after (1) any grace or cure periods applicable to unmatured Defaults shall have expired and (2) all Events of Default shall have been cured or waived. Section 1.03. Initial Term Loans. (a) Subject to the terms and conditions contained in this Agreement, the Lenders agree to make term loans to the Borrower on the Closing Date in an aggregate principal amount of $275,000,000 (collectively, the "Initial Term Loans"), allocated among the Lenders as set forth in Schedule 1.01(a) (subject to adjustment for assignments under Article XII). (b) The Initial Term Loans shall be evidenced by the Borrower's Term Notes, substantially in the form attached hereto as Schedule 1.03 (together with any additional such Term Notes issued to any assignee(s) of the Initial Term Loans under Article XII or otherwise issued in substitution therefor or replacement thereof, the "Initial Term Notes"). (c) The Borrower will pay to the Agent, for the ratable account of each Lender, the principal under the Initial Term Notes, without setoff, deduction or counterclaim, in eighteen (18) installments, payable on each Quarterly Date in each year, commencing March 31, 2001, with a final installment payable on April 30, 2005, when all amounts outstanding under the Initial Term Notes, including all outstanding principal and accrued interest, fees, expenses and other charges in respect thereof shall be due and payable in full. Each such payment shall be in the respective percentage of the Initial Term Loans set forth in the following table: -9- ---------------------------------------------- Aggregate Percentage Payment Dates of Principal Payable ---------------------------------------------- March 31, 2001 through June 30, 2004 .25% ---------------------------------------------- September 30, 2004, December 31, 2004 and March 31, 2005 25.00% ---------------------------------------------- April 30, 2005 21.50% ---------------------------------------------- Section 1.04. Incremental Term Loans. (a) Subject to the terms and conditions contained in this Agreement, the Borrower may from time to time, by written notice to the Agent and the Syndication Agent, request additional term loans in accordance with the terms of this Section 1.04 up to a maximum aggregate principal amount of $200,000,000 (collectively, the "Incremental Term Loans"). Upon receipt of any such notice, the Agent and the Syndication Agent agree to seek Incremental Term Loans from existing Lenders or from other financial institutions, each of which institutions shall become a Lender hereunder by executing and delivering a Joinder in the form of Schedule 1.04(a). (b) The Incremental Term Loans, if any, shall be made prior to June 30, 2001 in installments of at least $50,000,000 in the aggregate on each Credit Extension Date. No Incremental Term Loans repaid may be reborrowed hereunder. (c) The Incremental Term Loans shall be evidenced by the Borrower's Incremental Term Notes in the aggregate principal amount of no more than $200,000,000, in the form attached hereto as Schedule 1.04(c) (together with any additional such Incremental Term Notes issued to any assignee(s) of the Incremental Term Loans under Article XII or otherwise issued in substitution therefor or replacement thereof, the "Incremental Term Notes" and, together with the Revolving Notes and the Initial Term Notes, the "Notes"). The Notes are hereby incorporated herein by reference and made a part hereof. (d) The Borrower will pay to the Agent, for the ratable account of each Lender, the aggregate principal under the Incremental Term Notes outstanding as of June 30, 2001 (the "Incremental Term Loan Principal"), without setoff, deduction or counterclaim, in sixteen (16) installments, payable on each Quarterly Date in each year, commencing September 30, 2001, with a final payment on July 31, 2005, when all amounts outstanding under the Incremental Term Notes, including all outstanding principal and accrued interest, fees, expenses and other charges in respect thereof shall be due and payable in full. Each such payment shall be in the respective percentage of the Incremental Term Loan Principal set forth in the following table: -10- ---------------------------------------------- Quarterly Dates Aggregate Percentage of Principal Payable ---------------------------------------------- September 30, 2001 through September 30, 2004 .25% ---------------------------------------------- December 31, 2004, March 31, 2005 and June 30, 2005 25.00% ---------------------------------------------- July 31, 2005 21.75% ---------------------------------------------- Section 1.05. Interest on the Notes. (a) Interest Rate. Subject to the terms and conditions set forth in this Section 1.05, the Borrower may elect an interest rate for the outstanding principal balances from time to time of the Notes, or any portion thereof, based on either the Base Rate or the applicable LIBOR Rate and determined as of any date, as set forth in the Table in Section 1.05(b) below, as follows: (i) the rate for any Base Rate Loan shall be the Base Rate plus the Applicable Margin for Base Rate Loans then in effect; and (ii) the rate for any LIBOR Loan shall be the applicable LIBOR Rate plus the Applicable Margin for LIBOR Loans in effect on the first day of the applicable Interest Period. (b) Determination of Applicable Margin for Revolving Loans. (i) The Applicable Margin for Revolving Loans during the period commencing on the date hereof and ending on June 30, 2000 shall be 2.00%, with respect to Base Rate Loans, and 3.00%, with respect to LIBOR Loans. The Applicable Margin for Loans during the Pricing Period commencing on July 1, 2000 and ending on August 14, 2000 and during each Pricing Period thereafter shall be determined based upon the PCC Leverage Ratio as of the last day of the fiscal quarter immediately preceding the first day of such Pricing Period (the "Pricing Ratio"), as indicated in the following Table: -11- - -------------------------------------------------------------------------------- Applicable Margin for Revolving Loans - -------------------------------------------------------------------------------- Pricing Ratio Base Rate Loans LIBOR Loans - -------------------------------------------------------------------------------- Greater than or equal to 6.00:1.00 2.00% 3.00% - -------------------------------------------------------------------------------- Less than 6.00:1.00 but greater than or equal to 5.50:1.00 1.75% 2.75% - -------------------------------------------------------------------------------- Less than 5.50:1.00 but greater than or equal to 5.00:1.00 1.50% 2.50% - -------------------------------------------------------------------------------- Less than 5.00:1.00 but greater than or equal to 4.50:1.00 1.25% 2.25% - -------------------------------------------------------------------------------- Less than 4.50:1.00 1.00% 2.00% - -------------------------------------------------------------------------------- (ii) Nothing in Section 1.05(b) shall be deemed to constitute a waiver of the requirements of Section 5.01, default under which will result in an Event of Default and the application of the default rate of interest specified in Section 1.05(f). (iii) As used in Section 1.05, the first "Pricing Period" shall commence on July 1, 2000 and end on August 14, 2000 and, thereafter, the term "Pricing Period" shall mean each period commencing on (A) the last date as of which the Borrower is required, under Section 6.05(b) and Section 6.05(d), to deliver financial statements and a Compliance Report indicating the applicable Pricing Ratio, being February 15, May 15, August 15 and November 15 of each year (in each case, a "Compliance Report Delivery Date"), and ending on (B) the day preceding next following Compliance Report Delivery Date. (iv) The determination of the Applicable Margin for any Pricing Period shall be based on the quarterly financial statements and Compliance Report required to be delivered on the first date of such Pricing Period, as provided above (except with respect to the first Pricing Period, for which the Applicable Margin will be based on the quarterly financial statements and Compliance Report delivered for the fiscal quarter ending March 31, 2000, adjusted to reflect any Acquisitions, Dispositions, incurrence of Indebtedness or other material transactions effected from April 1, 2000 through June 30, 2000). Notwithstanding the preceding sentence, in the event of any discrepancy between the computation based on such financial statements and Compliance Report and the related audited financial statements furnished pursuant to Section 6.05(a) (the "Audited Financial Statements") or any information disclosed in connection therewith, the computation based upon the Audited Financial Statements shall govern, retroactive to the first day of the applicable Pricing Period. In the event of a retroactive correction in the determination of the Applicable Margin in favor of the Borrower, the amount of interest thereby refundable to the Borrower shall be applied on the date of such -12- retroactive correction, to prepay interest payable on the Notes. If the retroactive correction is in favor of the Lenders, the amount of interest due to the Lenders shall be paid in full to the Agent within five (5) days after written notice of such correction is provided to the Borrower. (v) Notwithstanding the foregoing, no downward adjustment of the Applicable Margin hereunder shall be permitted (A) unless the Compliance Report for the relevant fiscal period delivered to the Agent includes a request by the Borrower for such adjustment or (B) during the existence of any Default. (c) Determination of Applicable Margin for Term Loans. The Applicable Margin for Term Loans shall be 2.50%, with respect to Base Rate Loans, and 3.50%, with respect to LIBOR Loans. (d) Computations. Interest on Base Rate Loans shall be computed on the basis of the actual number of days elapsed over a 365 or 366-day year, as applicable (unless such interest is based upon the Federal Funds Rate, in which case interest shall be computed on the basis of the actual number of days elapsed over a 360-day year). Interest on LIBOR Loans shall be computed on the basis of the actual number of days elapsed over a 360-day year. (e) Interest Payment Dates. Interest on the Loans shall be payable in arrears, without setoff, deduction or counterclaim, as follows: (i) Interest on each Base Rate Loan shall be due and payable on the Quarterly Dates, commencing March 31, 2000 and at maturity, whether by reason of acceleration, prepayment, payment or otherwise, provided that interest accrued on any Base Rate Loan which is converted to a LIBOR Loan shall be paid on the Quarterly Date following the date of such conversion (or, if accrued on a Base Rate Loan which is so converted on a Quarterly Date, on such Quarterly Date). The interest rate on Base Rate Loans shall change on the date of any change in the applicable Base Rate without any prior notice thereof being provided to the Borrower. (ii) Interest on each LIBOR Loan shall be due and payable on the last day of the Interest Period applicable to such Loan and, if such Interest Period exceeds three (3) months, every three (3) months after the beginning thereof, until and at maturity, whether by reason of acceleration, prepayment, payment or otherwise. (f) Effect of Defaults, Etc. (i) During the existence of any Event of Default, the outstanding principal under the Notes and, to the extent permitted by applicable law, overdue interest, fees or other amounts payable hereunder or under the other Loan Documents (including without limitation Reimbursement Obligations) shall bear interest, from and including the date such Event of Default occurred until such Event of Default is waived in writing as provided herein, at a rate per annum (computed on the basis of the actual number of days elapsed over a 360-day year) equal to two -13- percent (2.00%) above (a) the interest rate or rates then applicable to Base Rate Loans and overdue interest, fees and other expenses, or (b) with respect to any LIBOR Loans then in effect (and only until the end of the Interest Period applicable to such LIBOR Loans) the interest rate or rates then applicable to such LIBOR Loans. (ii) Nothing in this Section 1.05(f) shall affect the rights of the Agent or the Lenders to exercise any rights or remedies under the Loan Documents or applicable law arising upon the occurrence of an Event of Default. Section 1.06. Loan Requests; Type of Loan. (a) Loan Requests. Each request by the Borrower for Loans under the Revolvers or for Term Loans (other than the initial Loans, if made concurrently herewith) shall be made not later than (i) 11:00 A.M. (New York time) on the Business Day prior to the proposed Borrowing Date, if such Loans are Base Rate Loans, or (ii) 11:00 A.M. (New York time) on the third Business Day prior to the proposed Borrowing Date, if any of such Loans are LIBOR Loans, by a written Loan Request, in the form of Schedule 1.06(a) (each, a "Loan Request"), signed by an Authorized Officer and indicating (i) the date of such Loans, (ii) whether such Loans shall be Base Rate Loans or LIBOR Loans or a combination of the two types of Loans and, if so, the Interest Period for such LIBOR Loans, and (iii) the use of proceeds thereof, to the extent any such proceeds are not being used for working capital purposes. The Agent shall promptly notify the Lenders of such Loan Request and the information contained therein. Such Loan Request shall be irrevocable and binding on the Borrower. (b) Conversion to a Different Type of Loan. The Borrower may elect from time to time to convert any outstanding Loans to Base Rate Loans or LIBOR Loans, as the case may be, provided that (i) with respect to any such conversion of LIBOR Loans to Base Rate Loans, the Borrower shall provide the appropriate Interest Rate Option Notice by 11:00 A.M. (New York time) on the date of such proposed conversion; (ii) with respect to any such conversion of Base Rate Loans to LIBOR Loans, the Borrower shall provide the appropriate Interest Rate Option Notice by 11:00 A.M. (New York time ) at least three Business Days' prior to the date of such proposed conversion; (iii) with respect to any such conversion of LIBOR Loans into Base Rate Loans, such conversion shall only be made on the last day of the related Interest Period; (iv) no Loans may be converted into LIBOR Loans when any Default has occurred and is continuing, unless the Required Lenders shall consent to such conversion; (v) the Borrower may have no more than six (6) LIBOR Loans outstanding at any time; (vi) any conversion of less than all of the outstanding Base Rate Loans into LIBOR Loans shall be in a minimum aggregate principal amount of $1,000,000 and, if greater, an integral multiple of $100,000; and (vii) any conversion of less than all of the outstanding LIBOR Loans into Base Rate Loans shall be in a minimum aggregate principal amount of $1,000,000 and, if greater, an integral multiple of $100,000. The Agent shall promptly notify the Lenders of such Interest Rate Option Notice and the information contained therein. -14- (c) Continuance of an Interest Rate Option. The Borrower may continue any LIBOR Loans as such upon the expiration of the related Interest Period by providing to the Agent (i) an Interest Rate Option Notice in compliance with the notice provisions set forth in Section 1.06(b) or (ii) standing written instructions authorizing the automatic continuation of such Loans, which instructions shall be effective until written notice to the Agent by the Borrower, signed by an Authorized Officer, revoking the same (such notice to take effect no sooner than three Business Days after receipt by the Agent); provided that no LIBOR Loans may be continued when any Default has occurred and is continuing, but shall be automatically converted to Base Rate Loans on the last day of the first applicable Interest Period which ends during the continuance of such Default. Base Rate Loans shall be deemed to continue as such until receipt of an Interest Rate Option Notice requesting conversion thereof to LIBOR Loans. (d) Form of Notice. Each Interest Rate Option Notice shall be substantially in the form of Schedule 1.06(d) and shall specify: (i) the aggregate principal amount of Loans to be continued or converted; (ii) the proposed date thereof; (iii) the Interest Period for such LIBOR Loans; and (iv) whether such Loans shall be LIBOR Loans or Base Rate Loans. Section 1.07. Loan Disbursements. The Loans shall be made by the applicable Lenders pro rata as provided in Section 1.17. Not later than 12:00 noon (New York time), in the case of LIBOR Loans, or 2:00 P.M. (New York time), in the case of Base Rate Loans, on the Credit Extension Date for any Loans, each applicable Lender shall make available to the Agent the portion of the Loans to be made by it on such date, in immediately available funds, for the account of the Borrower. The amount so received by the Agent shall, subject to the terms and conditions of this Agreement, be made available to the Borrower by depositing the same in immediately available funds in the appropriate account or accounts of the Borrower and by disbursing such funds as indicated in writing in the related Loan Request prior to the Credit Extension Date for such Loans. Section 1.08. Voluntary Prepayments and Voluntary Termination or Reduction of the Commitments. (a) Voluntary Reductions of Commitments and Prepayments. At any time prior to the Expiration Date, upon at least three (3) Business Days' written notice to the Agent in the form of Schedule 1.08(a) (each, a "Commitment Reduction Notice") signed by an Authorized Officer, the Borrower may permanently terminate or permanently reduce the Commitments, provided as follows: (i) any such reduction shall be in an aggregate amount of not less than $1,000,000 or, if greater, an integral multiple thereof; (ii) after giving effect to any such reduction of the Commitments, the aggregate unutilized portion of the aggregate Available Commitments shall equal or exceed $15,000,000; -15- (iii) any such reduction shall apply to each Lender's Commitment pro rata as provided in Section 1.17; and (iv) simultaneously with each such reduction, as applicable, the Borrower (A) shall pay to the Agent, for the ratable account of each Lender, any then accrued unpaid Commitment Fee on the terminated or reduced portion of the respective Commitments, (B) shall pay any indemnification payments due in accordance with Section 1.14 in respect of LIBOR Loans so prepaid and (C) shall repay such amount of the aggregate principal amount of the related Notes as shall cause the outstanding principal balance thereunder to be less than or equal to the aggregate Available Commitments, after giving effect to such reduction, provided that any such prepayment shall be in an aggregate amount of not less than $1,000,000 or, if greater, an integral multiple of $250,000, in the case of LIBOR Loans so prepaid, or $250,000 or, if greater, integral multiples thereof, with respect to Base Rate Loans so prepaid. Each Commitment Reduction Notice shall specify the date fixed for such termination or reduction, the aggregate principal amount thereof and the aggregate principal amount of the Notes required to be repaid hereunder on such date. Upon receipt of any Commitment Reduction Notice, the Agent shall promptly notify each affected Lender thereof. (b) Voluntary Prepayments of Term Loans. The Borrower may at any time and from time to time prepay the Term Loans, in whole or in part, without premium or penalty, upon written notice to the Agent in the form of Schedule 1.08(b) (each, a "Prepayment Notice") at least three (3) Business Days prior thereto, provided as follows: (i) any such reduction shall apply to each Lender's Initial Term Note or Incremental Term Note, if any, pro rata as provided in Section 1.17; (ii) simultaneously with each such prepayment, the Borrower shall pay any indemnification payments due in accordance with Section 1.14 in respect of LIBOR Loans so prepaid; and (iii) any such prepayment shall be an aggregate amount of not less than $1,000,000 or, if greater, an integral multiple of $250,000, in the case of LIBOR Loans so prepaid, or $250,000 or, if greater, integral multiples thereof, with respect to Base Rate Loans so prepaid. Each Prepayment Notice shall specify the date fixed for such prepayment and the aggregate principal amount thereof whether the prepayment is of LIBOR Loans or Base Rate Loans. Upon receipt of any Prepayment Notice, the Agent shall promptly notify each affected Lender thereof. (c) Application of Reductions and Prepayments. Voluntary reductions of the Commitments shall be applied to scheduled reductions thereof in inverse order of maturity and voluntary prepayments of the Term Loans shall be applied pro rata to the Initial Term Loans and the Incremental Term Loans (if any are outstanding) and to the respective installments thereof in inverse order of -16- maturity. Voluntary reductions of the Commitments shall be permanent and irrevocable and voluntary prepayments of Term Loans may not be reborrowed. Notwithstanding the foregoing, during the existence of any Default, voluntary prepayments of the Loans shall be applied as determined by the Required Lenders, in their sole discretion. Section 1.09. Mandatory Commitment Reductions and Prepayments. (a) Casualty Events. Subject to the provisions of Section 6.02, within one hundred eighty (180) days following the receipt by the Borrower or any of the Subsidiaries of any Insurance Proceeds in respect of any Casualty Event (or upon such earlier date as the Borrower or any Subsidiary shall have determined not to restore, repair or replace the asset or property affected by such Casualty Event), which Insurance Proceeds, together with all other such Insurance Proceeds theretofore received in respect of Casualty Events and not so applied, exceed $1,000,000 in the aggregate, (i) the Commitments shall be automatically reduced and the Notes shall be prepaid in an aggregate amount, if any, equal to the aggregate amount of such proceeds not theretofore applied to the repair or replacement of such asset or property under Section 6.02(b), as provided in Section 1.09(e). Nothing in this Section 1.09(a) shall be deemed (i) to limit any obligation of the Companies pursuant to the Security Agreements to remit to the Collateral Account the Insurance Proceeds received in respect of any Casualty Event, (ii) to obligate the Agent to release any of such proceeds from the Collateral Account to the Borrower or any Subsidiary during the existence of any Default or (iii) to apply to temporary prepayments of the Revolving Notes from Insurance Proceeds pending completion of repairs, replacements and restoration within the one hundred eighty (180) day period referred to above. (b) Excess Cash Flow. On or before May 1 of each year, commencing May 1, 2002, the Commitments shall be automatically reduced and/or the Borrower shall prepay the Revolving Notes and/or the Term Notes in an aggregate amount equal to Adjusted Excess Cash Flow for the immediately preceding fiscal year, as provided in Section 1.09(e). (c) Debt Issuances. Without limiting the obligation of the Borrower to obtain any required consent thereto of the Required Lenders under Section 7.01, upon any issuance of additional debt securities of the Borrower not permitted under such Section, the Borrower shall prepay the Notes in an aggregate amount equal to the net cash proceeds thereof, as provided in Section 1.09(e). (d) Dispositions of Assets. (i) Prepayment of the Notes. Without limiting the obligation of the Borrower under Section 7.03 to obtain the consent of the Required Lenders to any Disposition not otherwise permitted hereunder, the Borrower agrees (A) two (2) Business Days prior to the occurrence of any Disposition, to deliver to the Agent (in sufficient copies for each Lender) a statement, certified by an Authorized Officer of the Borrower and in reasonable detail, of the estimated amount of the Net Cash Proceeds of such Disposition and (B) that in the event such Disposition is completed, the Commitments shall be automatically reduced and/or the Notes shall be prepaid as follows and as provided in Section 1.09(e): -17- (1) on the date of such Disposition, in an aggregate amount equal to 100% of the Net Cash Proceeds of such Disposition received by the Borrower or any of the Subsidiaries on the date of such Disposition; and (2) thereafter, quarterly, on the date of the delivery to the Agent pursuant to Section 6.05 hereof of the financial statements for each fiscal quarter or (if earlier) the date which is forty-five (45) days after the end of such fiscal quarter, to the extent the Borrower or any Subsidiary shall receive Net Cash Proceeds during such fiscal quarter under deferred payment arrangements or investments entered into or received in connection with any Disposition, an amount equal to 100% of the aggregate amount of such Net Cash Proceeds, provided that if, prior to the date upon which the Borrower would otherwise be required to make a prepayment under this paragraph (B) with respect to any fiscal quarter, all such Net Cash Proceeds received in cash shall aggregate an amount that will require a prepayment of $250,000 or more under this paragraph (B) with respect to such fiscal quarter, then the Borrower shall immediately make a prepayment under this paragraph (B) in an amount equal to such required prepayment. (ii) Redeployment of Net Cash Proceeds. Notwithstanding the foregoing, provided that no Default exists as of the date of any such Disposition, no reduction of the Commitments or prepayment of the Notes shall be required under this Section 1.09(d) with respect to the Net Cash Proceeds from any Disposition permitted under Section 7.03(d) or (e), in the event that the Borrower advises the Agent at the time the Net Cash Proceeds from such Disposition (or the last in any such series of Dispositions) are received that it intends to reinvest such Net Cash Proceeds in replacement assets pursuant to one or more Permitted Acquisitions and/or apply a portion thereof to make Capital Expenditures, so long as: (A) the first $100,000,000 of such Net Cash Proceeds are (1) held by the Agent in the Collateral Account, in which event the Agent shall release such funds from time to time upon written request of the Borrower to be used to finance Permitted Acquisitions or for any other corporate purpose for which Loan proceeds are permitted to be used under Section 2.02 and otherwise in compliance with this Agreement, (2) applied by the Borrower to the prepayment of the Revolving Notes, without permanent reduction of the Commitments in such amount, or (3) held and applied in any combination of clauses (1) and (2) above; (B) Net Cash Proceeds in excess of $100,000,000 in the aggregate are (1) held by the Agent in the Collateral Account pending such reinvestment, in which event the Agent need not release such Net Cash Proceeds except upon presentation of evidence -18- satisfactory to it that such Net Cash Proceeds are to be so reinvested in compliance with the provisions of this Agreement, (2) applied by the Borrower to the prepayment of the Revolving Notes, with such prepayment to be reflected in the Commitment Reserve, without permanent reduction of the Commitments in such amount (in which event the Borrower agrees to advise the Agent in writing at the time of such prepayment of Notes that such prepayment is being made from the proceeds of a Disposition) or (3) held and applied in any combination of clauses (1) and (2) above; and (C) the Net Cash Proceeds from any such Disposition referred to in subparagraph (ii)(B) above are in fact so reinvested prior to the earlier to occur of (1) 180 days following the date of such Disposition, unless one or more definitive agreements with respect to such Permitted Acquisition(s) utilizing Net Cash Proceeds shall have been entered into within such period, or (2) in such event, 360 days following such Disposition, it being understood that, in the event Net Cash Proceeds from more than one Disposition are paid into the Collateral Account or applied to the prepayment of the Notes as provided in subparagraph (i)(1) above, such Net Cash Proceeds shall be deemed to be released in the same order in which such Dispositions occurred. Accordingly, any such Net Available Proceeds so held and any portion thereof reflected in the Commitment Reserve (as provided in subparagraph (ii)(B) above) for more than the 180 or 360 day period, as applicable, referred to in subparagraph (ii)(C) above shall be forthwith applied to the prepayment of the Notes and/or the permanent reduction of the Commitments (by an amount equal to the portion of such prepayments applied to the Notes and/or the portion thereof reflected in the Commitment Reserve) as provided in Section 1.09(e). Nothing in this Section 1.09(d) shall be deemed to obligate the Agent to release any Net Cash Proceeds from the Collateral Account (whether deposited under subparagraph (ii)(A) or (ii)(B)) to the Borrower or any Subsidiary for any purpose as aforesaid during the existence of any Default. (e) Application of Reductions and Prepayments; Cash Collateral, Etc. (i) Subject to Section 1.09(d)(ii) and 1.09(e)(iv), upon the occurrence of any of the events described in the above paragraphs of this Section 1.09, the amount required to be applied to the Commitments and to prepayment of the Notes shall be allocated as follows: (A) First, pro rata to scheduled reductions of the Commitments, scheduled prepayments of the Initial Term Loans and scheduled payments of the Incremental Term Loans, in each case in inverse order of maturity, until the aggregate Commitments shall have been reduced to $150,000,000; and (B) Thereafter, to prepayments of Term Loans, allocated proportionately between the Initial Term Loans and the Incremental Term Loans, until all principal thereunder has been paid in full, and then to further reductions in the Commitments, in each case in the inverse order of maturity. -19- (ii) Simultaneously with any termination of the Commitments or any mandatory automatic reduction of the Commitments under Section 1.01(e) or this Section 1.09, the Borrower shall (A) pay to the Agent, for the ratable account of each Lender, any then accrued unpaid Commitment Fee on the reduced portion of the Commitments, (B) repay such amount of the aggregate principal amount of the Revolving Notes as shall cause the Aggregate Exposure to be less than or equal to the aggregate Commitments, after giving effect to such termination or reduction and (C) pay any indemnification payments due in accordance with Section 1.14 in respect of LIBOR Loans so prepaid. (iii) If and to the extent that the repayment in full of all outstanding Loans is insufficient to cause the Aggregate Exposure to be less than or equal to the aggregate Commitments, the Borrower shall, without notice or demand, immediately make payment to the Agent, for deposit in the Collateral Account, as cover for the Letter of Credit Exposure, as described in Section 1.02(g). (iv) All voluntary and mandatory prepayments of the Notes under this Section 1.09 (A) shall be made without set-off, deduction or counterclaim and (B) shall be applied first, to overdue interest, fees and expenses hereunder, second, to pay principal of the Notes as provided above, and third, to the extent of any excess remaining after application as provided above, to pay any outstanding Reimbursement Obligations and, thereafter, to cash collateralize the Letter of Credit Exposure as provided in Section 1.02(g), provided, in each case, that (1) payments of principal of the Notes shall be applied to the Lenders' respective Notes pro rata as provided in Section 1.17, unless otherwise agreed to by the Lenders and (2) applications of prepayments to principal shall be made first to Base Rate Loans and then to LIBOR Loans. Notwithstanding the foregoing, during the existence of any Default mandatory prepayments of the Notes shall be applied as provided in Section 1.17. (f) Refusal of Prepayments by Term Note Holders. Notwithstanding anything to the contrary set forth above in this Section 1.09, with respect to the amount of any mandatory prepayment that is allocated to the Term Loans (in each case, the "Term Loan Prepayment Amount"), at any time when the Available Commitments equal or exceed $150,000,000 in the aggregate, the Borrower will, in lieu of applying such amount to the prepayment of Term Loans as provided in Section 1.09 above, on the date of such prepayment, give the Agent telephonic notice (promptly confirmed in writing) requesting that the Agent prepare and provide to each Lender holding a Term Note a notice (each, a "Prepayment Option Notice") as described below. As promptly as practicable after receiving such notice from the Borrower, the Agent will send to each such Lender a Prepayment Option Notice, which shall be in the form of Schedule 1.09, and shall include an offer by the Borrower to prepay on the date (each a "Mandatory Prepayment Date") that is ten (10) Business Days after the date of the Prepayment Option Notice, the relevant Term Loans of such Lender by an amount equal to the portion of the prepayment amount indicated in such Lender's Prepayment Option Notice as being applicable to such Lender's Term Loans. Each Lender shall give written notice to the Agent at least one (1) Business Day prior to the Mandatory Prepayment Date -20- indicating whether and to what extent it wishes to accept such prepayment of the Term Loans held by such Lender. On the Mandatory Prepayment Date, (i) the Borrower shall pay to the Agent, for the accounts of the relevant Lenders, the aggregate amount necessary to prepay that portion of the outstanding relevant Term Loans in respect of which such Lenders have accepted prepayment by notice to the Agent, as described above (such Lenders being referred to as the "Accepting Lenders"), applied as provided in Section 1.09(e)(ii) above and (ii) the Borrower shall pay to the Agent, for the accounts of the Lenders holding Revolving Notes, an amount equal to the portion of the Prepayment Amount not accepted by the relevant Lenders, which amount shall be applied to the scheduled reductions of the Commitments in the inverse order of maturity. Section 1.10. Commitment Fee. (a) The Borrower shall pay to the Agent, for the ratable account of each Lender, a non-refundable fee (the "Commitment Fee") on the aggregate daily unutilized portion of the Commitments from the Closing Date to and including the earlier of the termination of the Commitments or the Expiration Date, at the Commitment Fee Rate (computed on the basis of the actual number of days elapsed over a 365 -366-day year), payable quarterly in arrears on each Quarterly Date, commencing March 31, 2000, without setoff, deduction or counterclaim, with a final payment at the maturity of the Revolving Notes, whether by payment, prepayment, acceleration or otherwise. (b) The Commitment Fee Rate shall be (i) .75% per annum, so long as the sum of the aggregate principal balance under the Revolving Notes plus the aggregate Letter of Credit Exposure is less than or equal to fifty percent (50%) of the Commitments and (ii) .50% per annum so long as such sum exceeds fifty percent (50%) of the Commitments. Section 1.11. Requirements of Law. (a) In the event that any Regulatory Change shall: (i) change the basis of taxation of any amounts payable to any Lender under this Agreement or any Notes in respect of any Loans, including without limitation LIBOR Loans made by it or any Letters of Credit issued or participated in by it (other than taxes imposed on the overall net income of such Lender in its jurisdiction of organization or in the jurisdiction where its lending office is located); (ii) impose or modify any reserve, compulsory loan assessment, special deposit or similar requirement relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, any office of such Lender (including any of such Loans or any deposits referred to in the definition of "LIBOR Base Rate" in Article XIV); or -21- (iii) impose any other conditions affecting this Agreement in respect of Loans, including without limitation LIBOR Loans and Letters of Credit (or any of such extensions of credit, assets, deposits or liabilities); and the result of any of the foregoing shall be to increase such Lender's costs of making or maintaining any Loans, including without limitation LIBOR Loans, or any Commitment or of issuing or maintaining (or participating in) any Letters of Credit, or to reduce any amount receivable by such Lender hereunder in respect of any of its LIBOR Loans or any Commitment, in each case only to the extent that such additional amounts are not included in the LIBOR Base Rate or Base Rate applicable to such Loans or the Letter of Credit Fee applicable to such Letters of Credit, then the Borrower shall pay on demand to such Lender, through the Agent, and from time to time as specified by such Lender, such additional amounts as such Lender shall reasonably determine are sufficient to compensate such Lender for such increased cost or reduced amount receivable. (b) If at any time after the date of this Agreement any Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Lending Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption or implementation of any Regulatory Change regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof (whether or not having the force of law), has or will have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of the existence of its obligations hereunder (whether with respect to the Commitments, the Loans, any Letter of Credit or any other Obligation) to a level below that which such Lender or its holding company could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy) by an amount reasonably deemed by such Lender to be material, then from time to time following written notice by such Lender to the Borrower as provided in paragraph (c) of this Section, within fifteen (15) days after demand by such Lender, the Borrower shall pay to such Lender, through the Agent, such additional amount or amounts as such Lender shall reasonably determine will compensate such Lender or such corporation, as the case may be, for such reduction, provided that to the extent that any or all of the Borrower's liability under this Section arises following the date of the adoption of any such Regulatory Change (the "Effective Date"), such compensation shall be payable only with respect to that portion of such liability arising after notice of such Regulatory Change is given by such Lender to the Borrower (unless such notice is given within sixty (60) days after the Effective Date, in which case such compensation shall be payable in respect of all periods before and after the Effective Date). (c) If any Lender becomes entitled to claim any additional amounts pursuant to this Section, it shall promptly notify the Borrower of the event by reason of which it has become so entitled. A certificate setting forth in reasonable detail the computation of any additional amounts payable pursuant to this Section submitted by such Lender to the Borrower shall be delivered to the Borrower and the other Lenders promptly after the initial incurrence of such -22- additional amounts and shall be conclusive in the absence of manifest error. The covenants contained in this Section shall survive for six months following the termination of this Agreement and the payment of the outstanding Notes. No failure on the part of any Lender to demand compensation under paragraph (a) or (b) above on any one occasion shall constitute a waiver of its rights to demand compensation on any other occasion. The protection of this Section shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of any law, regulation or other condition which shall give rise to any demand by such Lender for compensation thereunder. Section 1.12. Limitations on LIBOR Loans; Illegality. (a) Anything herein to the contrary notwithstanding, if, on or prior to the determination of an interest rate for any LIBOR Loans for any applicable Interest Period, the Agent shall determine (which determination shall be conclusive absent manifest error) that: (i) by reason of any event affecting United States money markets or the London interbank market, quotations of interest rates for the relevant deposits are not being provided in the relevant amounts or for the relevant maturities for purposes of determining the rate of interest for such Loans under this Agreement; or (ii) the rates of interest referred to in the definition of "LIBOR Base Rate" in Article XIV, on the basis of which the rate of interest on any LIBOR Loans for such period is determined, do not accurately reflect the cost to the Lenders of making or maintaining such LIBOR Loans for such period; then the Agent shall give the Borrower prompt notice thereof (and shall thereafter give the Borrower prompt notice of the cessation, if any, of such condition), and so long as such condition remains in effect, the Lenders shall be under no obligation to make LIBOR Loans or to convert Base Rate Loans into LIBOR Loans and the Borrower shall, on the last day(s) of the then current Interest Period(s) for any outstanding LIBOR Loans, either prepay such LIBOR Loans in accordance with Sections 1.01 and 1.08 or convert such Loans into Base Rate Loans in accordance with Section 1.06. (b) Notwithstanding any other provision herein, if for any reason a Lender shall be unable to make or maintain LIBOR Loans as contemplated by this Agreement, such Lender shall provide prompt written notice to the Borrower and (i) such Lender's commitment hereunder to make LIBOR Loans, continue LIBOR Loans as such and convert Base Rate Loans to LIBOR Loans shall thereupon terminate and (ii) such Lender's Loans then outstanding as LIBOR Loans, if any, shall be converted automatically to Base Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a LIBOR Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, and if the reason for such Lender's inability to make or maintain LIBOR Loans as contemplated by this Agreement is a Regulatory Change, then the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to Section 1.14. -23- Section 1.13. Taxes. (a) All payments made by the Borrower under this Agreement and the Notes shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority (all such taxes, levies, imposts, duties, charges, fees, deductions and withholdings being hereinafter called "Taxes"); provided, however, that the term "Taxes" shall not include net income taxes, franchise taxes (imposed in lieu of net income taxes) and general intangibles taxes (such as those imposed by the State of Florida) imposed on the Agent or any Lender, as the case may be, as a result of a present or former connection or nexus between the jurisdiction of the government or taxing authority imposing such tax (or any political subdivision or taxing authority thereof or therein) and the Agent or such Lender other than that arising solely from the Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement, the Notes or any of the Security Documents. If any Taxes are required to be withheld from any amounts payable to the Agent or any Lender hereunder or under the Notes or the Letter of Credit Documents, the amounts so payable to the Agent or such Lender shall be increased to the extent necessary to yield to the Agent or such Lender (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the Notes or in the Letter of Credit Documents, as the case may be. Whenever any Taxes are payable by the Borrower in respect of this Agreement or the Notes or the Letter of Credit Documents, as promptly as possible thereafter the Borrower shall send to the Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Agent or any Lender as a result of any such failure. If, after any payment of Taxes by the Borrower under this Section, any part of any Tax paid by the Agent or any Lender is subsequently recovered by the Agent or such Lender, the Agent or such Lender shall reimburse the Borrower to the extent of the amount so recovered. A certificate of an officer of the Agent or such Lender setting forth the amount of such recovery and the basis therefor shall, in the absence of manifest error, be conclusive. The Agent and the Lenders shall use reasonable efforts to notify the Borrower of their attempts, if any, to obtain abatements of any such Taxes and the receipt by the Agent or the Lenders of any funds in connection therewith. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. (b) Each Lender, if any, that is not incorporated under the laws of the United States or a state thereof agrees that prior to the date any payment is required to be made to it hereunder it will deliver to the Borrower and the Agent either (i) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, and an Internal Revenue Service Form W-8 or W-9 or successor applicable form or (ii) in the case of a Lender that is not legally entitled to deliver either form listed in clause (b), (A) a certificate of such Lender to the effect that such Lender is not (1) a "bank" within the meaning of Section 881(c)(3)(A) of the -24- Code, (2) a "10 percent shareholder" of the Borrower within the meaning of Section 881(c)(3)(B) of the Code, or (3) a controlled foreign corporation receiving interest from a related person within the meaning of Section 881(c)(3)(C) of the Code (such certificate, an "Exemption Certificate") and (B) two duly completed copies of Internal Revenue Service Form W-8BEN or applicable successor form. Each such Lender also agrees to deliver to the Borrower and the Agent two further copies of the said Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower, and such extensions or renewals thereof as may reasonably be requested by the Borrower or the Agent, unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Agent. Such Lender shall certify (x) in the case of a Form 1001 or 4224, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (y) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States backup withholding tax. Section 1.14. Indemnification. The Borrower shall pay to the Agent, for the account of each Lender, upon the request of such Lender delivered to the Agent and thereafter delivered by the Agent to the Borrower, such amount or amounts as shall compensate such Lender for any loss, cost or expense incurred by such Lender (as reasonably determined by such Lender) as a result of: (a) any payment or prepayment or conversion of any LIBOR Loan held by such Lender on a date other than the last day of the Interest Period for such LIBOR Loan (including without limitation any such payment, prepayment or conversion required under Section 1.01, 1.03, 1.04, 1.06, 1.08 or 1.09); or (b) any failure by the Borrower to borrow, convert into or continue a LIBOR Loan on the date for such borrowing specified in the relevant Loan Request or Interest Rate Option Notice under Section 1.06 or otherwise. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. The determination by each such Lender of the amount of any such loss or expense, when set forth in -25- a written notice delivered to the Agent (and thereafter delivered by the Agent to the Borrower), containing such Lender's calculation thereof in reasonable detail, shall be conclusive in the absence of manifest error. Section 1.15. Payments Under the Notes. (a) All payments and prepayments made by the Borrower of principal of, and interest on, the Notes and other sums and charges payable under this Agreement and, with respect to fees payable to the Agent and its affiliates, the Fee Agreements, including without limitation the Commitment Fee and any payments under Sections 1.11, 1.13 and 1.14, shall be made in immediately available funds to the Agent (as specified in Section 13.03) for the accounts of the Lenders as provided in Section 1.17 and otherwise herein not later than 2:00 P.M. (New York Time), on the date on which such payment shall become due. The failure by the Borrower to make any such payment by such hour shall not constitute a Default hereunder so long as payment is received later that day, provided that any such payment made after 2:00 P.M. (New York Time), on such due date shall be deemed to have been made on the next Business Day for the purpose of calculating interest on amounts outstanding on the Notes. The Borrower shall, at the time of making each payment under this Agreement or the Notes, specify to the Agent the Notes or amounts payable by the Borrower hereunder to which such payment is to be applied (and in the event that it fails to so specify, or if an Event of Default has occurred and is continuing, the Agent may distribute such payments in such manner as the Required Lenders may direct or, absent such direction, as it determines to be appropriate, subject to the provisions of Section 1.17). (b) Except as otherwise provided in the definition of "Interest Period" with respect to LIBOR Loans, if any payment hereunder or under the Notes shall be due and payable on a day which is not a Business Day, such payment shall be deemed due on the next following Business Day and interest shall be payable at the applicable rate specified herein through such extension period. The Agent, or any Lender for whose account any such payment is made, may (but shall not be obligated to) debit the amount of any such payment which is not made by such time to any deposit account of the Borrower with the Agent or such Lender, as the case may be. Each payment received by the Agent under this Agreement or any Note for the account of a Lender shall be paid promptly to such Lender, in immediately available funds, for the account of such Lender for the Note in respect to which such payment is made. Section 1.16. Set-Off, Etc. The Borrower agrees that, in addition to (and without limitation of) any right of set-off, bankers' lien or counterclaim a Lender may otherwise have and in addition to the debit right afforded in Section 1.15, each Lender (and each subsequent holder of any Note) shall be entitled, at its option, to offset balances held by it, or by any of its respective branches or agencies, for the account of the Borrower at any of its or their offices, in Dollars or in any other currency, against any principal of or interest on the Notes held by such Lender (or subsequent noteholder) or other fees or charges owed to such Lender (or subsequent noteholder) hereunder which are not paid when due (regardless of whether such balances are then due to the Borrower and regardless of whether the Lenders are otherwise fully secured), in which case it shall promptly notify the Borrower and the Agent thereof, provided that such Lender's (or subsequent noteholder's) failure to give such notice -26- shall not affect the validity thereof and (as security for any Indebtedness hereunder) the Borrower hereby grants to the Agent and the Lenders a continuing security interest in any and all balances, credit, deposits, accounts or moneys of the Borrower maintained with the Agent and any Lender now or hereafter. If a Lender (or subsequent noteholder) shall obtain payment of any principal, interest or other amounts payable under this Agreement through the exercise of any right of set-off, banker's lien or counterclaim or otherwise or pursuant to the debit right provided in Section 1.15, it shall promptly purchase from the other Lenders participations in (or, if and to the extent specified by such Lender, direct interests in) the Note(s) held by the other Lenders in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Lenders shall share the benefit of such payment (net of any expenses which may be incurred by such Lender in obtaining or preserving such benefit) pro rata based upon the unpaid principal amounts of and interest on the Note(s) held by each of them. To such end, the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. The Borrower agrees that any Lender or any other Person which purchases a participation (or direct interest) in the Note(s) held by any or all of the Lenders (each being hereinafter referred to as a "Participant") may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Participant were a direct holder of Notes in the amount of such participation, provided that the Borrower was notified of such purchase. Nothing contained herein shall be deemed to require any Participant to exercise any such right or shall affect the right of any Participant to exercise, and retain the benefits of exercising, any such right with respect to any indebtedness or obligation of the Borrower, other than the Borrower's indebtedness and obligations under this Agreement. Section 1.17. Pro Rata Treatment; Sharing; Payments after Default. (a) Except to the extent otherwise provided in this Agreement and, with respect to fees payable to the Agent, the Syndication Agent, the Documentation Agent and their affiliates, the Fee Agreements, and except as otherwise agreed by the Lenders: (i) each borrowing from the Lenders under the Commitments shall be made from the Lenders and each payment of the Commitment Fee under Section 1.10 shall be made to the Lenders pro rata according to the amounts of their respective unutilized Commitments; (ii) the principal amount of LIBOR Loans made by each Lender shall be determined on a pro rata basis in accordance with its respective Commitment (when making Loans), or the outstanding principal amount of the applicable Loans owed to such Lender (in the case of conversions to or continuations of Loans as LIBOR Loans); (iii) each Lender's share of each Letter of Credit under Section 1.02 and of the Letter of Credit Fee shall be determined pro rata according to the amounts of the Lenders' respective Commitments; (iv) each payment and prepayment of principal of any Notes and repayments of Letter of Credit Disbursements shall be allocated to the Lenders holding such Notes pro rata in accordance with the unpaid principal amounts of the respective Notes held by such Lenders; (v) each payment of interest on the Notes shall be allocated to the Lenders pro rata in accordance with the unpaid principal amounts of their respective Loans evidenced by such Notes; (vi) each payment of any other sums and charges payable for the Lenders' account under this Agreement (except for the Issuance Fee, which shall be retained by the Issuing Bank, and the fees payable under the Fee Agreements, which are payable solely in -27- accordance therewith) shall be allocated to the Lenders pro rata in accordance with the respective unpaid principal amounts of the aggregate Loans made by each of them; (vii) each payment under Section 1.11, 1.13 or 1.14 shall be made to each Lender in the amount required to be paid to such Lender to adequately indemnify or compensate such Lender for losses suffered or costs incurred by such Lender as provided in such Section; and (viii) notwithstanding the foregoing, after and during the continuance of a Default, each payment or distribution of cash, property, securities or other value received by the Agent or any Lender, directly or indirectly, in respect of the Borrower's Indebtedness hereunder, whether pursuant to this Article I or any attachment, garnishment, execution or other proceedings for the collection thereof or pursuant to any bankruptcy, reorganization, liquidation or other similar proceeding or otherwise, after payment of collection and other expenses as provided herein and in the Security Documents, shall be apportioned among the Lenders pro rata based upon the respective aggregate unpaid principal amount of all Loans owed to each of them and their respective shares of the aggregate Commitments, which Commitments shall be permanently reduced in such pro rated amount, together with any applicable prepayments of the Revolving Notes and any other payments required under Section 1.09(e)(iv). (b) Notwithstanding the foregoing, if any Lender (a "Recovering Party") shall receive any such distribution referred to in Section 1.17 (a)(viii) above (a "Recovery") in respect thereof, such Recovering Party shall pay to the Agent for distribution to the Lenders as set forth herein their respective pro rata shares of such Recovery, based on the Lenders' pro rata shares of all Loans outstanding at such time, unless the Recovering Party is legally required to return any Recovery, in which case each party receiving a portion of such Recovery shall return to the Recovering Party its pro rata share of the sum required to be returned without interest. For purposes of this Agreement, calculations of the amount of the pro rata share of each Lender shall be rounded to the nearest whole dollar. (c) The Borrower acknowledges and agrees that, if any Recovering Party shall be obligated to pay to the other Lenders a portion of any Recovery pursuant to Section 1.17(b) and shall make such recovery payment, the Borrower shall be deemed to have satisfied its obligations in respect of Indebtedness held by such Recovering Party only to the extent of the Recovery actually retained by such Recovering Party after giving effect to the pro rata payments by such Recovering Party to the other Lenders. The obligations of the Borrower in respect of Indebtedness held by each other Lender shall be deemed to have been satisfied to the extent of the amount of the Recovery distributed to each such other Lender by the Recovering Party. Section 1.18. Non-Receipt of Funds by the Agent. Unless the Agent shall have been notified in writing by a Lender or the Borrower prior to the date on which such Lender or the Borrower is scheduled to make payment to the Agent of (in the case of a Lender) the proceeds of a Loan to be made by it hereunder or (in the case of the Borrower) a payment to the Agent for the account of any or all of the Lenders hereunder (such payment being herein referred to as a "Required Payment"), which notice shall be effective upon actual receipt, that it does not intend to make such Required Payment to the Agent, the Agent may (but shall not be required to) assume that the Required Payment has been made and may (but shall not be required to), in reliance upon such assumption, make -28- the amount thereof available to the intended recipient(s) on such date and, if such Lender or the Borrower (as the case may be) has not in fact made the Required Payment to the Agent, the recipient(s) of such payment shall, on demand, or with respect to payment received by the Borrower, within three (3) Business Days after such receipt repay to the Agent for the Agent's own account the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (a) the Federal Funds Rate for such day, with respect to interest paid by such Lender, or (b) the applicable rate provided under Section 1.05, with respect to interest paid by the Borrower. Section 1.19. Replacement of Notes. Upon receipt of evidence reasonably satisfactory to the Borrower of the loss, theft, destruction or mutilation of any Note and (a) in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory to the Borrower (provided, however, that if the holder of such Note is the original holder of such Note or a financial institution with net capital, capital surplus and undivided profits in excess of $50,000,000 its own agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of any such mutilation, upon the surrender of such Note for cancellation, the Borrower will execute and deliver, in lieu of such lost, stolen, destroyed, or mutilated Note, a new Note of like tenor. Section 1.20. Replaced Lenders. (a) Upon the occurrence of any event requiring the payment of additional sums by the Borrower pursuant to Section 1.11, 1.13 or 1.14 with respect to any Lender, such Lender will, if requested by the Borrower, use commercially reasonable efforts to designate another lending office for any Loans or such Lender's interest in any Letters of Credit affected by such event. (b) Upon the occurrence of any event giving rise to the operation of Section 1.11, 1.13 or 1.14 with respect to any Lender which results in such Lender charging to the Borrower increased costs materially in excess of those being charged generally by the other Lenders, or upon the occurrence of a Lender Default which is not addressed to the reasonable satisfaction of the Borrower within ten (10) Business Days, the Borrower shall have the right, so long as no Event of Default then exists, to replace such Lender (the "Replaced Lender") with one or more new lenders (each, a "New Lender") reasonably acceptable to the Agent, provided that: (i) at the time of any replacement pursuant to this paragraph, the New Lender shall enter into one or more Assignment and Acceptances pursuant to paragraph (b) of Article XII (with all fees payable pursuant to such paragraph (b) to be paid by the New Lender), pursuant to which the New Lender shall acquire the Commitment and outstanding Loans of, and all of the interest in obligations and rights with respect to Letters of Credit of, the Replaced Lender, and in connection therewith shall pay to the Replaced Lender an amount equal to the principal amount of, and all accrued interest on, all outstanding Loans of the Replaced Lender; and -29- (ii) all obligations of the Borrower owing to the Replaced Lender under the Loan Documents (other than those expressly described in the preceding subparagraph (i) in respect of which the assignment purchase price has been, or is concurrently being, paid) shall be paid in full to such Replaced Lender by the Borrower concurrently with such replacement. Upon the execution of the respective Assignment and Acceptance, the payment of the amounts referred to in subparagraphs (i) and (ii) above and delivery to the New Lender of the appropriate replacement Notes executed by the Borrower, the New Lender shall become a Lender hereunder and the Replaced Lender shall cease to constitute a Lender hereunder, except with respect to indemnification provisions applicable to the Replaced Lender under this Agreement, which shall survive as to such Replaced Lender. II. SECURITY; SUBORDINATION; USE OF PROCEEDS. Section 2.01. Security for the Obligations; Subordination; Etc. (a) Collateral. Except as specified in Schedule 2.01(a) the Borrower's obligations hereunder, under the Notes and in respect of any Rate Hedging Obligations entered into with any Hedging Lenders shall be secured at all times by: (i) the unconditional guaranty of each of the Subsidiaries (including the Finance Subsidiaries but excluding the Special Purpose Subsidiary) and the Parent (provided that the Parent's guaranty shall be non-recourse, except to the extent of the Collateral required to be provided by the Parent under subparagraph (v) below); (ii) a first priority perfected security interest in and lien upon all presently owned and hereafter acquired tangible and intangible personal property and fixtures of each of the Borrower and the Subsidiaries (including the Finance Subsidiaries but excluding the Special Purpose Subsidiary), including without limitation the MCT Note Documents and any other intercompany notes, obligations or agreements, subject only to (A) any prior Permitted Liens and (B) the exclusion of any FCC License or CATV Franchise, except to the extent (if any) that such a security interest is permitted or not prohibited by the Communications Act of 1934, as amended, and the rules, regulations and policies of the FCC or the laws governing such CATV Franchise, as applicable (but including, to the maximum extent permitted by law, all rights incident or appurtenant to any such FCC License or CATV Franchise including without limitation the right to receive all proceeds derived or arising from or in connection with the sale, assignment or transfer thereof); (iii) first mortgages on all presently owned and hereafter acquired real estate owned by each of the Borrower and the Subsidiaries, subject only to any prior Permitted Liens, together with mortgagee's title insurance policies acceptable to the Lenders; -30- (iv) first priority perfected collateral assignments of or leasehold mortgages on all real estate leases in which any of the Borrower and the Subsidiaries now has or may in the future have an interest, subject only to any prior Permitted Liens, and such third party consents, lien waivers, non-disturbance agreements and estoppel certificates as the Agent shall reasonably require, together with mortgagee's title insurance policies acceptable to the Agent; (v) a first priority perfected collateral assignment and/or pledge of all of the issued and outstanding ownership interests of each of the Borrower and the Subsidiaries and all warrants, options and other rights to purchase such ownership interests; and (vi) without limiting the generality of Section 2.01(a)(i), first priority perfected collateral assignments of (i) all NRTC Member Agreements and any other satellite broadcasting distribution agreements, (ii) all CATV Franchises and (iii) all such management agreements, programming agreements, network affiliation agreements and agreements as the Agent shall reasonably deem necessary to protect the interests of the Lenders, together with such third party consents, lien waivers and estoppel certificates as the Agent shall reasonably require. (b) Subordination. (i) All existing and hereafter arising indebtedness of the Borrower and the Subsidiaries, if any, to Sellers which constitutes Permitted Seller Subordinated Debt shall be subordinated to any Indebtedness of the Companies to the Agent or the Lenders pursuant to subordination agreements substantially in the form of Schedule 2.01(b) with any material changes thereto to be satisfactory to the Required Lenders, in their sole discretion (each, a "Seller Subordination Agreement", and collectively, the "Seller Subordination Agreements"). Notwithstanding the foregoing, the consent of the Agent (in its sole discretion) shall be sufficient (without further approval by the Lenders) to approve revisions to such form necessary (i) to permit the issuance to any subordinated Seller of Junior Reorganization Securities and (ii) to waive the requirement that the promissory notes evidencing such Seller's Permitted Seller Subordinated Debt be pledged and delivered to the Agent as security. (ii) Without limiting the generality of Section 7.01, all existing and hereafter arising indebtedness of the Borrower and the Subsidiaries to the Parent and its other subsidiaries, including without limitation the Manager, shall be subordinated to any Indebtedness of the Companies to the Lenders pursuant to subordination agreements satisfactory in form and substance to the Required Lenders (each, an "Affiliate Subordination Agreement", and collectively, the "Affiliate Subordination Agreements"). (c) Security Documents. All agreements and instruments described or contemplated in this Section 2.01, together with any and all other agreements and instruments heretofore or hereafter securing the Notes, the Rate Hedging Obligations and the other Obligations or otherwise executed in connection with this Agreement, are sometimes hereinafter referred to collectively as the -31- "Security Documents" and each individually as a "Security Document". The Borrower agrees to execute and deliver any and all Security Documents, in form and substance satisfactory to the Agent, and take such action as the Lenders may reasonably request from time to time in order to cause the Agent and the Lenders to be secured at all times as described in this Section. Section 2.02. Use of Proceeds. As of the Closing Date, the aggregate Letter of Credit Exposure will be $41,681,402.21. The proceeds of the Loans shall be used (a) to repay all existing Indebtedness under the Original Agreement, including accrued interest and fees; (b) for distributions to PCC permitted under Sections 5.04(b)(v), (vi) and (vii); (c) to repay existing Indebtedness of DTS under the DTS Credit Agreement; (d) to repurchase or redeem the Original Subordinated Notes; (e) to support the issuance of Letters of Credit; (f) for working capital, Capital Expenditures and general corporate purposes; and (g) subject to availability, to finance Permitted Acquisitions, including Transaction Costs. Attached as Schedule 2.02 hereto is the Borrower's current projection, as of the date hereof, of its sources and uses of proceeds as of the Closing Date. III. CONDITIONS OF MAKING THE LOANS. Section 3.01. Conditions to this Agreement, the First Loans and Additional Letters of Credit. The obligations of the Lenders to enter into this Agreement, to make Loans to the Borrower and to issue Letters of Credit on the Closing Date are subject to the following conditions: (a) Representations and Warranties. The representations and warranties of the Borrower and its Affiliates set forth in this Agreement and in the other Loan Documents shall be true and correct in all material respects on and as of the date hereof and on the Closing Date and the Borrower shall have performed all obligations which were to have been performed by it hereunder prior to the Closing Date. (b) Loan Documents and Organizational Documents. The Borrower shall have executed and/or delivered to the Agent (or shall have caused to be executed and delivered to the Agent by the appropriate Persons), the following: (i) The Notes; (ii) All of the Security Documents, including without limitation all Uniform Commercial Code Financing Statements and Termination Statements and all Mortgages, amendments thereto, lessor consents and waivers and related title insurance policies, if any, required by the Agent or its counsel, in connection with the Borrower's compliance with the provisions of Section 2.01; (iii) Certified copies (attached as required in Part A of the form attached as Schedule 3.01) of the resolutions of the Board of Directors or other governing body of each Company, or of each Company's equityholders, managers, officers and/or corporate general partner, as -32- the case may be, authorizing the execution and delivery of the Loan Documents to which it is a party; (iv) Copies of the Organizational Documents of each Company and each corporate general partner or manager of each Company, with any amendments thereto, certified (as applicable) by the appropriate Secretary of State and by the Secretary or an Assistant Secretary of such Company, general partner or manager (in each case, attached as required in Part A of the form attached as Schedule 3.01); (v) For each Company, certificates of legal existence and good standing (both as to corporate law, if applicable, and, if available, tax matters) issued as of a reasonably recent date by such Company's state of organization or formation and any other state in which such Company is authorized or qualified to transact business; (vi) No later than three (3) Business Days prior to the Closing Date, to the extent requested by the Agent, true and correct copies of all CATV Franchises, FCC Licenses, NRTC Member Agreements and other DBS Agreements, all other material governmental licenses, franchises and permits, all material CATV Franchise Consents, FCC Consents, NRTC Consents and other third party consents and all other material leases, contracts, agreements, instruments and other documents specified in Schedules 4.04, 4.07, 4.08, 4.12, 4.13, 4.20 and 4.23; (vii) Such Uniform Commercial Code, Federal tax lien and judgment searches with respect to the Companies and any other third parties as the Agent shall require, the results thereof to be satisfactory to the Agent; (viii) The Opening Balance Sheet; (ix) The Environmental Site Assessments and similar diligence referenced in Section 4.24 and Schedule 4.24; (x) Certificates of insurance evidencing the insurance coverage and policy provisions required in this Agreement; and (xi) Such other supporting documents and certificates as the Agent or the Lenders may reasonably request from time to time. (c) The DTS Merger. The Agent shall have received satisfactory evidence of the consummation of the DTS Merger, including without limitation true and complete copies of all relevant documents and evidence of all required filings with Governmental Authorities. (d) Officer's Certificates as to Compliance, Documents, Etc. The Borrower shall have provided to the Agent a compliance certificate substantially in the form of Part B of the form attached as Schedule 3.01 hereto or such other form as shall be satisfactory to the Agent, duly executed on behalf of the Borrower by its chief executive officer or chief financial officer, certifying -33- as to satisfaction by the Borrower of the conditions to lending set forth in this Section 3.01 and in Sections 3.02 and 3.03, if and as applicable, and, specifically, as to certain matters specified therein. (e) No Material Adverse Change. As of the date hereof and as of the Closing Date, and since December 31, 1998, no event or circumstance shall have occurred which could have a Material Adverse Effect. (f) Company Counsel Opinions. The Agent shall have received: (i) the favorable written opinion of Drinker Biddle & Reath LLP (including opinions with respect to matters of local Pennsylvania law), counsel to the Parent and the Companies, dated as of the Closing Date, addressed to the Agent and the Lenders and reasonably satisfactory to the Agent in scope and substance; (ii) the favorable written opinions of special communications counsel to the Parent and the Companies with respect to both cable and broadcast matters, each dated as of the Closing Date, addressed to the Agent and the Lenders and reasonably satisfactory to the Lenders in scope and substance; and (iii) the favorable written opinions of special local counsel to the Companies in the States of Florida, Georgia, Maine, Mississippi, Tennessee, and the Commonwealth of Puerto Rico dated as of the Closing Date, addressed to the Agent and the Lenders and reasonably satisfactory to the Lenders in scope and substance. (g) Legal and Other Fees. As of the date hereof and as of the Closing Date, all fees owed to the Agent, the Lenders and their respective Affiliates under the Fee Agreements and all legal fees and expenses of counsel to the Agent incurred through such date shall have been paid in full. (h) Review by Agent's Counsel. All legal matters incident to the transactions hereby contemplated shall be reasonably satisfactory to counsel for the Agent. Section 3.02. Acquisition Loans. Without in any way limiting the discretion of the Required Lenders to approve or withhold approval (if required hereunder) of any Acquisition or to impose additional conditions upon their consent (if required hereunder) to such Acquisitions, the obligations of the Lenders to make any Loans to finance any Permitted Acquisition (collectively, "Acquisition Loans") are subject to the following conditions, in addition to those set forth in Section 3.03: (a) Revolver Availability. After giving effect to any such Acquisition Loans, the unutilized portion of the aggregate Adjusted Available Commitments shall equal or exceed $25,000,000. -34- (b) Acquisition Closing. The transactions contemplated by the applicable Acquisition Agreement shall have been consummated (except for the payment of that portion of the purchase price thereunder being paid with the proceeds of Loans) substantially in accordance with the terms thereof and, in any event, in a manner reasonably satisfactory to the Agent, including without limitation the valid assumption by the acquiring Company of all liabilities of the applicable Seller(s) in respect of the assets and properties transferred under such Acquisition Agreement, other than liabilities not subject to assumption under such Acquisition Agreement which are otherwise addressed in a manner reasonably satisfactory to the Agent. (c) Conditions to Acquisition. All conditions set forth in Section 7.05(b) applicable to such Permitted Acquisition, including all conditions imposed by the Required Lenders in giving their consent (if required hereunder) to such Permitted Acquisition, shall have been satisfied and the Acquisition Compliance Certificate required thereunder shall have been duly completed, executed and delivered. (d) Pro Forma No Default. After giving effect to such Loans and the application of the proceeds thereof, both as of the Credit Extension Date and, on a pro forma basis, as of the last day of the most recently ended fiscal quarter for which financial statements are required to be delivered to the Lenders, and have been so delivered, under Section 6.05 of the Credit Agreement, no Default shall have occurred (under Article V or otherwise) and be continuing. (e) General and Local Counsel Opinions. (i) In connection with an Acquisition involving the purchase or formation of a new Subsidiary and/or the execution of additional Security Documents or any other Loan Document, or otherwise, if reasonably required by the Agent, the Agent shall have received the favorable written opinions of (A) Drinker Biddle & Reath LLP and (B) special FCC counsel to the Companies (in the case of acquisitions of cable and broadcast television properties), in each case dated the date of such Loans, addressed to the Agent and the Lenders and substantially in the forms attached as Schedules 3.02(e)(i) and (ii) (subject to changes approved by the Agent), respectively. (ii) Only if reasonably requested in connection with the recording of any mortgages or similar instruments or any material issues of state law raised in connection with such Loans or the related Permitted Acquisition, the Agent shall have received the favorable opinion of local counsel to the Companies, dated the date of such Loans, addressed to the Agent and the Lenders and substantially in the form attached as Schedule 3.02(e)(iii) (subject to changes approved by the Agent). (f) Legal Fees. All reasonable legal fees and expenses of counsel to the Agent incurred through the date of such Loans shall have been paid in full. (g) Review by Agent's Counsel. All legal matters incident to the transactions hereby contemplated shall be reasonably satisfactory to counsel for the Agent. -35- Section 3.03. All Loans. The obligations of the Lenders to make any Loans (including Loans made on the Closing Date, if any, and in respect of Permitted Acquisitions consummated thereafter) and the obligation of the Issuing Bank to issue any Letters of Credit are, in each case, subject to the following conditions: (a) (i) All warranties and representations set forth in this Agreement shall be true and correct in all material respects as of the applicable Credit Extension Date, except to the extent they relate specifically to an earlier specified date or are affected by transactions or events occurring after the Closing Date and permitted or not prohibited hereunder; (ii) No Default shall have occurred and be continuing; and (iii) After giving effect to such Loans or to the issuance of such Letter of Credit and since December 31, 1998, no event shall have occurred and no circumstance shall exist that has had, or could reasonably be expected to have, a Material Adverse Effect. Each telephonic or written request for Loans or for the issuance of a Letter of Credit shall constitute a representation to such effect as of the date of such request and as of the date of such borrowing. (b) After giving effect to such Loans or the issuance of such Letter of Credit, no Default shall have occurred and be continuing. (c) The Agent shall have received a properly completed Loan Request or Letter of Credit Request, and, if requested by the Agent, all such certified financial calculations as the Agent shall reasonably require to substantiate the current and pro forma certifications of leverage and no Default referred to in such Loan Request or Letter of Credit Request and, if applicable, in Section 3.02(e). Section 3.04. Lender Approvals. For purposes of determining compliance with the conditions precedent referred to in Sections 3.01, 3.02 and 3.03, on the date of the first Loans hereunder, each of the Lenders shall be deemed to have consented to, approved or accepted or be satisfied with each document or other matter which is the subject of such Lender's consideration under any of the provisions of such Sections, unless an officer of the Agent responsible for the transactions contemplated by the Loan Documents shall have received notice from such Lender prior to the first Loans hereunder specifying its objection thereto and such Lender shall have failed to make available to the Agent such Lender's ratable share of the first Loans. IV. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Agent and the Lenders (which representations and warranties shall give effect to the consummation of all of the transactions referred to in Section 3.01 and shall survive the delivery of the Notes, the making of the Loans and the issuance of all Letters of Credit) that: -36- Section 4.01. Financial Statements. The Borrower has heretofore furnished to the Lenders: (a) the various audited and unaudited balance sheets and related statements of operations, equity and cash flow of the Parent, the Borrower and the Borrower's Subsidiaries required to be delivered through the date hereof under Section 6.05 of the Original Agreement (the "Financial Statements"); and (b) the September 30, 1999 Consolidated balance sheet of the Borrower and the Subsidiaries showing their pro forma financial condition after the consummation of any and all transactions contemplated to have occurred as of the Closing Date, as if they occurred on such date, attached as Schedule 4.01(a) (the "Opening Balance Sheet"). The Financial Statements have been prepared in accordance with GAAP. Since December 31, 1998, there has been no material adverse change in the assets, properties, business or condition (financial or otherwise) of the Parent or any of the Companies and, other than distributions permitted under the Original Agreement, no dividends or distributions have been declared or paid by the Parent or any of the Companies. Neither the Parent nor any of the Companies has any contingent obligations, liabilities for taxes or unusual forward or long-term commitments except as specified in such Financial Statements and except for the Offering. The Opening Balance Sheet fairly represents the pro forma financial condition of the Companies as of its date. All financial projections submitted to the Lenders by the Borrower (including all projections set forth in the Budget) are believed by the Borrower to be reasonable in light of all information presently known by the Borrower. Except as set forth on Schedule 4.01(b), as of the date of this Agreement, the Parent has no Indebtedness. (Notwithstanding the foregoing, the representations set forth above with respect to the Parent are made and, shall be deemed made, solely as of the date hereof and the Closing Date.) Section 4.02. Organization, Qualification, Etc. Each of the Companies (a) is a corporation, limited partnership or limited liability company, duly organized or formed, validly existing and in good standing under the laws of its state of organization or formation, all as specified in Schedule 4.02, (b) has the power and authority to own its properties and to carry on its business as now being conducted and as presently contemplated, (c) has the power and authority to execute and deliver, and perform its respective obligations under, this Agreement, the Notes and the Security Documents and all other Loan Documents contemplated hereby and (d) is duly qualified to transact business in the jurisdictions specified in such Schedule 4.02 and in each other jurisdiction where the nature of its activities requires such qualification. As of the date of this Agreement none of the Companies has any Subsidiaries, except as described in Schedule 4.23. Section 4.03. Authorization; Compliance; Etc. The execution and delivery of, and performance by the Companies of their respective obligations under, this Agreement, the Notes, the Security Documents, the Acquisition Agreements and the other agreements and instruments relating thereto (all of the foregoing being hereinafter referred to collectively as the "Transaction Documents") have been duly authorized by all requisite corporate, partnership -37- and membership action and will not violate any provision of law (including without limitation the Communications Act of 1934, as amended, the Copyright Revisions Act of 1976, as amended, the Rate Regulation Act, the Rate Regulation Rules and all other rules, regulations, administrative orders and policies of the FCC, the FAA and the Copyright Office), any order, judgment or decree of any court or other agency of government, the Organizational Documents of any Company or any indenture, agreement or other instrument to which any Company or the Parent is a party, or by which any Company or the Parent is bound (including without limitation the PCC Exchange Indenture, the PCC Exchange Notes, the PCC 1997 Indenture, the PCC 1997 Senior Notes, the PCC 1998 Indenture, the PCC 1998 Senior Notes, the Subordinated Debt Documents, the PCC Preferred Stock Designation and any DBS Agreement), or be in conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under, or except as may be permitted under this Agreement, result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of any Company or the Parent pursuant to, any such indenture, agreement or instrument. Each of the Transaction Documents constitutes the valid and binding obligation of each of the Companies and their Affiliates party thereto, enforceable against such party in accordance with its terms, subject, however to bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally or the application of principles of equity, whether in any action in law or proceeding in equity, and subject to the availability of the remedy of specific performance or of any other equitable remedy or relief to enforce any right under any such agreement. Section 4.04. Governmental and Other Consents, Etc. (a) Except for filings and recordings required under Section 2.01 and the Security Documents and except as set forth in Schedule 4.04, none of the Companies or the Parent is required to obtain any consent, approval or authorization from, to file any declaration or statement with or to give any notice to, any Governmental Authority (including without limitation, any Specified Authority), the NRTC, DirecTV, any Seller or any other Person (including, without limitation, any notices required under the applicable bulk sales law) in connection with or as a condition to the execution, delivery or performance of any of the Transaction Documents. Except as set forth in such Schedule 4.04, all consents, approvals and authorizations described in such Schedule have been duly granted and are in full force and effect on the date hereof and all filings described in such Schedule have been properly and timely made. (b) Notwithstanding the foregoing, (i) from time to time, the Companies may be required to obtain certain authorizations of or to make certain filings with the FCC and local franchising authorities which are required in the ordinary course of business, (ii) copies of certain documents, including without limitation certain Transaction Documents, may be required to be filed with the FCC pursuant to 47 C.F.R. ss.73.3613 and with local franchising authorities, (iii) the FCC must be notified of the consummation of any assignments or transfers of control of FCC authorizations for any television broadcast stations and ownership reports are required to be filed with the FCC after such consummation pursuant to 47 C.F.R. ss.73.3615, and similar requirements of local franchising authorities exist under state and local law, and (iv) prior to the exercise of certain rights or remedies under the Loan Documents by the Agent or the Lenders, FCC consents and notifications and similar actions with respect to -38- local franchising authorities with respect to such exercise may be required to be timely obtained or made. Section 4.05. Litigation. Except as specified in Schedule 4.05, there is no action, suit or proceeding at law or in equity or by or before any Governmental Authority (including without limitation any Specified Authority) now pending or, to the knowledge of the Borrower, threatened (nor is any basis therefor known to the Borrower), (a) which questions the validity of any of the Transaction Documents, or any action taken or to be taken pursuant hereto or thereto, in a manner or to an extent which could reasonably be expected to have a Material Adverse Effect, or (b) against or affecting any Company or the Parent which, if adversely determined, either in any case or in the aggregate, would have a Material Adverse Effect. Section 4.06. Compliance with Laws and Agreements. Except as disclosed in this Agreement, none of the Companies is a party to any agreement or instrument or subject to any corporate, partnership or other restriction which could have a Material Adverse Effect. None of the Companies or the Parent is in violation of any provision of its Organizational Documents or of any material indenture, agreement or instrument to which it is a party or by which it is bound (including without limitation the PCC Exchange Indenture, the PCC Exchange Notes, the PCC 1997 Indenture, the PCC 1997 Senior Notes, the PCC 1998 Indenture, the PCC 1998 Senior Notes, the Subordinated Debt Documents, the PCC Preferred Stock Designation and any DBS Agreement) or, to the best of the Borrower's knowledge and belief, of any provision of law (including without limitation the Communications Act of 1934, as amended, the Copyright Revisions Act of 1976, as amended, the Rate Regulation Act, the Rate Regulation Rules and all other rules, regulations, administrative orders and policies of the FCC, the FAA and the Copyright Office), the violation of which could have a Material Adverse Effect, or any order, judgment or decree of any court or other Governmental Authority (including without limitation any Specified Authority). Without limiting the generality of the foregoing, all of the Obligations (a) are permitted under, and do not and will not violate, the PCC Preferred Stock Designation, the PCC Exchange Indenture, the PCC Exchange Notes, the PCC 1997 Indenture, the PCC 1997 Senior Notes, the PCC 1998 Indenture, the PCC 1998 Senior Notes and the Subordinated Debt Documents, (b) constitute "Senior Debt" and, with the exception of Rate Hedging Obligations, "Designated Senior Debt" under the Subordinated Indenture, (c) constitute "Eligible Indebtedness" under the PCC Exchange Indenture, the PCC 1997 Indenture and the PCC 1998 Indenture and (d) with the exception of Rate Hedging Obligations, are hereby designated as "Designated Senior Debt" under the Subordinated Indenture. Section 4.07. Franchises. (a) Schedule 4.07 sets forth a complete and correct list of all CATV Franchises (identified by issuing authority, Franchise Area, franchisee and expiration date) granted, issued or assigned to any Company as of the Closing Date. The Companies possess all such CATV Franchises and all copyrights, licenses, trademarks, service marks, trade names and other contract rights, including licenses and permits granted by the FCC, agreements with public utilities and microwave transmission companies, pole or conduit attachment, use, access or rental agreements, utility easements and agreements the delivery of pay programming to subscribers that are necessary for the operation and planned expansion of the Systems, free and clear of any Liens other than Permitted -39- Liens, except to the extent the absence thereof could not reasonably be expected to have a Material Adverse Effect. Each of such CATV Franchises, copyrights, licenses, patents, trademarks, service marks, trade names and other rights and agreements is in full force and effect and no material default has occurred and is continuing thereunder. (b) No approval, application, filing, registration, consent or other action of any Governmental Authority (including any Specified Authority) is required to enable any Company to take advantage of the rights and privileges intended to be conferred by the CATV Franchises, except for approvals, applications, filings, registrations, consents or other actions that (if not made or obtained) could not reasonably be expected to have a Material Adverse Effect. None of the Companies has received any notice with respect to any breach of any covenant under, or any default with respect to, any CATV Franchise. Complete and correct copies of all CATV Franchises have heretofore been delivered to the Agent. Section 4.08. Licenses. Schedule 4.08 accurately and completely lists all Licenses (identified by issuing authority, licensee, Station call letters and expiration date) granted, issued or assigned to any Company as of the date hereof. Each FCC License is held by a License Company. The Companies hold all such Licenses and all copyrights, licenses, trademarks, service marks, trade names and other contract rights, including agreements with public utilities, use, access or rental agreements, utility easements, network affiliation agreements, film rental agreements and talent employment agreements that are necessary for the operation of the Stations, free and clear of any Liens other than Permitted Liens, except to the extent the absence thereof could not reasonably be expected to have a Material Adverse Effect. Each of such Licenses, copyrights, licenses, patents, trademarks, service marks, trade names and other rights and agreements is in full force and effect and no material default by any Company 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 any restriction or condition that would limit in any material respect the operation of the business as it is now conducted. Except as specified in Schedule 4.08, (a) there is not, as of the date hereof, pending or to, the knowledge of the Borrower 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 (b) there is not now issued or outstanding, pending or, to the knowledge of the Borrower 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 Borrower and or any of its Subsidiaries with respect to any of the FCC Licenses. Except as specified in Schedule 4.08, none of the FCC Licenses is the subject of a pending license renewal application and the Borrower has no reason to believe that any of the FCC Licenses will be revoked or will not be renewed in the ordinary course. Section 4.09. The Systems. (a) Each of the Companies and the Systems are in compliance with all applicable federal, state and local laws, rules and regulations, including without limitation the Telecommunications Act of 1996, the Communications Act of -40- 1934, as amended, the Cable Communications Policy Act of 1984, the Cable Television Consumer Protection and Competition Act of 1992, the Copyright Revisions Act of 1976, and the rules and policies of the FCC, the FAA and the Copyright Office, including without limitation rules, regulations and laws governing system registration, use of aeronautical frequencies and signal carriage, equal employment opportunity, cumulative leakage index testing and reporting, signal leakage and subscriber privacy, except to the extent that the failure to so comply could not (either individually or in the aggregate) reasonably be expected to have a Material Adverse Effect. Without limiting the generality of the foregoing (except to the extent that the failure to comply with any of the following could not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect): (i) the communities included in the Franchise Areas have been registered with the FCC; (ii) all of the annual performance tests on the Systems required under the rules and policies of the FCC have been performed and the results of such tests demonstrate satisfactory compliance with the applicable requirements being tested in all material respects; (iii) the Companies have filed all material reports and other submissions required to be filed with the FCC with respect to the Systems and their operations; (iv) the Systems currently meet or exceed the technical standards set forth in the rules and policies of the FCC, including, without limitation, the leakage limits contained in 47 C.F.R. Section 76.605(a)(11); (v) the channel capacities of the MCT Systems have a capacity of 60-channels; the San German System has a capacity of 50 channels; the Aguadilla System has a capacity of 62 channels; and each System is fully addressable or capable thereof and delivers picture quality that complies in all material respects with applicable FCC requirements and the requirements of the applicable CATV Franchises; (vi) the Systems are being operated in compliance with the provisions of 47 C.F.R. Sections 76.610 through 76.619 (mid-band and super-band signal carriage), including 47 C.F.R. Section 76.611 (compliance with the cumulative signal leakage index); (vii) the Systems are being operated in compliance with the requirements of the applicable CATV Franchises; (viii) where required, appropriate authorizations from the FCC have been obtained for the use of all aeronautical frequencies in use in the Systems and the Systems are presently being operated in compliance with such authorizations; -41- (ix) all of the existing towers used in the operation of the Systems are obstruction-marked and lighted to the extent required by, and in accordance with, the rules and regulations of the FAA and appropriate notification to the FAA has been filed for each such tower where required by the Rules and policies of the FCC, and all other required certificates, permits and clearances from Governmental Authorities, including the FAA, with respect to all towers, earth stations, business radios and frequencies utilized and carried by the Systems have been obtained; and (x) all notices to subscribers of the Systems required by the rules and policies of the FCC have been provided. (b) All notices, statements of account, supplements and other documents required under Section 111 of the Copyright Act of 1976 and under the rules of the Copyright Office with respect to the carriage of off-air signals by the Systems have been duly filed, and the proper amount of copyright fees have been paid on a timely basis, and each System qualifies for the compulsory license under Section 111 of the Copyright Act of 1976, except to the extent that the failure to so file or pay could not (either individually or in the aggregate) reasonably be expected to have a Material Adverse Effect. (c) The carriage of all off-air signals by the Systems to be owned by the Companies is permitted by valid transmission consent agreements or by must-carry elections by broadcasters, except to the extent the failure to obtain any of the foregoing could not (either individually or in the aggregate) reasonably by expected to have a Material Adverse Effect. (d) Each of the Companies has complied with its respective obligations with regard to protecting the privacy rights of any past or present customers of the Systems, except to the extent that the failure to so comply could not (either individually or in the aggregate) reasonably be expected to have a Material Adverse Effect. (e) None of the Companies which owns the Systems has been denied EEO certification by the FCC, and no FCC proceedings against any such Company in respect of EEO violation are pending or, to the Borrower's best knowledge, threatened, which, if resolved adversely to the Companies, could reasonably be expected (either individually or in the aggregate) to have a Material Adverse Effect. (f) The assets of the Systems are adequate and sufficient in all material respects for all of the current operations of the Systems. Section 4.10. Rate Regulation. Each of the Companies has reviewed and evaluated in detail the FCC rules currently in effect (the "Rate Regulation Rules") implementing the rate regulation provisions of the Cable Television Consumer Protection and Competition Act of 1992 as amended by the Telecommunications Act of 1996 (as so amended, the "Rate Regulation Act"). Based upon such review and completion by the Companies of all applicable worksheets contemplated by the Rate Regulation Rules for each System, and except as set forth in Schedule 4.10: -42- (a) The Systems are in material compliance with the Rate Regulation Act and the Rate Regulation Rules applicable to them; and (b) The Systems are owned by Companies which are "small cable operators" as defined by the Telecommunications Act of 1996. As such, the Cable Programming Services Tier rates of the Systems have been deregulated and the Basic Service Tier rates of the Systems with Basic-only rates have likewise been deregulated. Schedule 4.10 lists all pending rate proceedings before the FCC and any local franchising authorities that have jurisdiction over the Company. Schedule 4.10 also sets forth FCC and local franchising authority orders approving the Companies' rates. Section 4.11. The Stations. (a) Each of the Companies and the Stations is in compliance with all applicable federal, state and local laws, rules and regulations, including without limitation, the Telecommunications Act of 1996, the Communications Act of 1934, as amended, and the rules and policies of the FCC and all rules and laws governing equal employment opportunity, except to the extent that the failure to so comply could not (either individually or in the aggregate) reasonably be expected to have a Material Adverse Effect. Without limiting the generality of the foregoing (except to the extent that the failure to comply with any of the following could not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect): (i) the Companies have filed all material reports and other submissions required to be filed with the FCC by the Companies or any of them with respect to the Stations and their operations; (ii) the operation of the Stations is in compliance in all material respects with ANSI Standards C95.1-1982 to the extent required under applicable rules and regulations; (iii) all of the existing towers used in the operation of the Stations are obstruction-marked and lighted to the extent required by, and in accordance with, the rules and regulations of the FAA and appropriate notification to the FAA has been filed for each such tower where required by the rules and policies of the FCC; (iv) the Stations are in compliance with Part V of Title VI of the Communications Act of 1934, as amended, as well as any and all rules and policies adopted by the FCC to implement said Part V; (v) the Stations are being operated in compliance with the applicable Licenses; and -43- (vi) the Stations are in compliance with the provisions of the Communications Decency Act of 1996 in effect, as well as any and all FCC rules and policies in effect to implement such Act. (b) No FCC proceedings against any of the Companies in respect of EEO violations are pending or, to the Borrower's best knowledge, threatened. (c) The assets of the Stations are adequate and sufficient for all of the current operations of the Stations as contemplated as of the date hereof. Section 4.12. DBS Rights. Schedule 4.12 accurately and completely lists all DBS Agreements, including without limitation all NRTC Member Agreements, to which any Company is a party as of the date hereof, and all areas in which any Company distributes DIRECTV and other DBS services thereunder. The DBS Subsidiaries possess all such DBS Agreements, all exclusive DBS Rights and all copyrights, licenses, trademarks, service marks, trade names and other contract rights necessary for the operation of the Companies' DBS businesses, including the distribution of DBS services, free and clear of any Liens other than Permitted Liens, except to the extent the absence of such rights could not reasonably be expected to have a Material Adverse Effect. Each of such DBS Agreements, copyrights, licenses, trademarks, service marks, trade names and other contract rights is in full force and effect and no material default has occurred and is continuing thereunder. Section 4.13. Title to Properties; Condition of Properties. (a) Schedule 4.13 sets forth a description of all real properties owned or leased by the Companies. The Companies have good title to all of their properties and assets free and clear of all Liens (other than FCC restrictions on the transfer of equity interests or FCC Licenses) of any kind, except Permitted Liens. (b) Schedule 4.13 accurately and completely lists, and sets forth a description of, all agreements between any Company and any Person relating to the location of (i) headend sites used in the operation of the Systems (the "Headend Site Leases"), (ii) tower and transmitter sites used in the operation of the Stations (the "Tower Site Leases") and (iii) offices, studios and other facilities, and the same constitute the only Headend Site Leases, Tower Site Leases and other leases necessary in connection with the conduct by the Companies of their businesses as presently conducted. Each of the Companies enjoys quiet possession under all leases (including without limitation the Headend Site Leases and the Tower Site Leases) to which it is a party as lessee, and all of such leases are valid, subsisting and in full force and effect. None of such leases contains any provision restricting the incurrence of indebtedness by the lessee. (c) Except as specified in such Schedule 4.13, none of the improved real property owned or leased by any Company that is required to be mortgaged under Section 2.01(a) is situated in a flood zone designated as type "A", "B" or "V" by the U.S. Department of Housing and Urban Development. -44- Section 4.14. Interests in Other Businesses. Except as reflected in Schedule 4.14 or Schedule 4.23 hereto, none of the Companies holds or owns any of the issued and outstanding capital stock, partnership interests, membership interests or similar equity interests, or any rights to acquire the same, of any corporation, partnership, limited liability company, firm or entity other than as specified or permitted in this Agreement. Section 4.15. Solvency. (a) The aggregate amount of the full saleable value of the assets and properties of each Company exceeds the amount that will be required to be paid on or in respect of such Company's existing debts and other liabilities (including contingent liabilities) as they mature. (b) No Company's assets and properties constitute unreasonably small capital for such Company to carry out its business as now conducted and as proposed to be conducted, including such Company's capital needs, taking into account the particular capital requirements of such Company's business and the projected capital requirements and capital availability thereof. (c) The Companies do not intend to, nor will the Companies, incur debts beyond their ability to pay such debts as they mature, taking into account the timing and amounts of cash reasonably anticipated to be received by each Company and the amounts of cash reasonably anticipated to be payable on or in respect of each Company's obligations. The Companies' aggregate cash flow, after taking into account all anticipated sources and uses of cash, will at all times be sufficient to pay all such amounts on or in respect of their indebtedness when such amounts are required to be paid. (d) The Borrower believes that no reasonably anticipated final judgment in a pending action or, to its knowledge, any threatened actions for money damages will be rendered at a time when, or in an amount such that, any Company will be unable to satisfy such judgments promptly in accordance with their terms (taking into account the maximum reasonable amount thereof and the earliest reasonable time at which such judgments might be rendered). The cash available to each Company, after taking into account all other anticipated uses of cash (including the payment of all such Company's indebtedness) is anticipated to be sufficient to pay any such judgments promptly in accordance with their terms. (e) No Company is contemplating either the filing of a petition by it under any state or federal bankruptcy or insolvency laws or the liquidating of all or a substantial portion of its property, and the Borrower has no knowledge of any Person contemplating the filing of any such petition against any Company. Section 4.16. Full Disclosure. No statement of fact made by or on behalf of any Person other than the Lenders in this Agreement, the Security Documents or in any certificate or schedule furnished to the Lenders pursuant hereto or thereto contains any untrue statement of a material fact or omits to state any material fact necessary to make statements contained therein or herein not misleading. There is no fact presently known to the Borrower which has not -45- been disclosed to the Lenders in writing which has had or, as far as the Borrower can reasonably foresee, could have a Material Adverse Effect, other than facts and circumstances generally known within the cable television, broadcast television and DBS industries. Section 4.17. Margin Stock. The Companies do not own or have any present intention of acquiring any "margin stock" within the meaning of Regulation U (12 CFR Part 221), of the Board of Governors of the Federal Reserve System (herein called "Margin Stock"). Section 4.18. Tax Returns. Each of the Companies has filed all federal, state and local tax and information returns required to be filed, and has paid or made adequate provision for the payment of all material federal, state and local taxes, franchise fees, charges and assessments shown thereon. Section 4.19. Pension Plans, Etc. (a) Except as described in Schedule 4.19, neither the Borrower nor any member of the Controlled Group has any pension, profit sharing or other similar plan providing for a program of deferred compensation to any employee. (b) Neither the Borrower nor any member of the Controlled Group has any material liability (i) under Section 412 of the Code for failure to satisfy the minimum funding requirements for pension plans, (ii) as the result of the termination of a defined benefit plan under Title IV of ERISA, (iii) under Section 4201 of ERISA for withdrawal or partial withdrawal from a multiemployer plan, or (iv) for participation in a prohibited transaction with an employee benefit plan as described in Section 406 of ERISA and Section 4975 of the Code. Section 4.20. Material Agreements. Except for matters disclosed in Schedule 4.07, 4.08, 4.12, 4.13 and 4.23, Schedule 4.20 hereto accurately and completely lists all agreements, if any, among the equityholders of the Borrower or any of the Subsidiaries and all material, acquisition, construction, engineering, management, consulting, film rental, time brokerage, local marketing network affiliation, employment and other agreements, if any, which are reasonably necessary for the operation of the business of the Borrower and the Subsidiaries, including without limitation the acquisition, construction, extension and/or operation of the Systems and the Stations and the distribution of DBS services. Each of the foregoing agreements is in full force and effect; no material default by any party thereto has occurred and is continuing thereunder; and the Borrower has provided true and complete copies thereof to the Agent and its counsel. In addition, the Companies are in compliance with all requirements set forth in the definition of "Permitted LMA" and applicable to each LMA to which any Company is a party. Section 4.21. Projections. Attached as Schedule 4.21 are projections of the operation of the Companies' businesses through December 31, 2005 (the "Projections"). Section 4.22. Brokers, Etc. None of the Companies has dealt with any broker, finder, commission agent or other similar Person in connection with the Loans or the transactions contemplated by this Agreement or is under any -46- obligation to pay any broker's fee, finder's fee or commission in connection with such transactions. Section 4.23. Capitalization. Attached as Schedule 4.23 is a description of the ownership relationships among the Companies, the Parent and the other Parent Affiliates, showing, as to the Companies, accurate ownership percentages of the equityholders of record and accompanied by a statement of authorized and issued Equity Securities for each such entity as of the date hereof. Such Schedule 4.23 also states, as of the date hereof (a) which Equity Securities, if any, carry preemptive rights; (b) to the best of the Borrower's knowledge whether there are any outstanding subscriptions, warrants or options to purchase any Equity Securities; (c) whether any Company is obligated to redeem or repurchase any of its Equity Securities, and the details of any such committed redemption or repurchase; and (d) any other agreement, arrangement or plan to which any Company is a party or participant or of which any Company has knowledge which will directly or indirectly affect the capital structure of the Companies. All such Equity Securities of the Companies are validly issued and fully paid and non-assessable, and owned as set forth on such Schedule 4.23. All such Equity Securities of the Companies are owned, legally and beneficially, free of any Lien, except for Permitted Liens and restrictions on transfer imposed by applicable securities laws indicated on the certificates evidencing such shares or as may be imposed by the FCC or local franchising authorities. Section 4.24. Environmental Compliance. (a) To the best of the Borrower's knowledge, all real property leased, owned, controlled or operated by the Companies (the "Properties") and their existing and, to the best of the Borrower's knowledge, prior uses and activities thereon, including, but not limited to, the use, maintenance and operation of each of the Properties and all activities in conduct of business related thereto comply and have at all times complied in all material respects with all Environmental Laws. (b) None of the Companies and, to the best of the Borrower's knowledge, no previous owner, tenant, occupant or user of any of the Properties or any other Person, has engaged in or permitted any operations or activities upon any of the Properties for the purpose of or in any way involving the handling, manufacture, treatment, storage, use, generation, release, discharge, refining, dumping or disposal of a material amount of any Hazardous Materials the removal of which is required or the maintenance of which is prohibited or penalized. (c) To the best of the Borrower's knowledge, no Hazardous Material has been or is currently located in, on, under or about any of the Properties in a manner which materially violates any Environmental Law or which requires cleanup or corrective action of any kind under any Environmental Law. (d) No notice of violation, lien, complaint, suit, order or other notice or communication concerning any alleged violation of any Environmental Law in, on, under or about any of the Properties has been received by any Company or, to the best of the Borrower's knowledge, any prior owner or occupant of any of the Properties which has not been fully satisfied and complied with in -47- a timely fashion so as to bring such Property into full compliance with all Environmental Laws. (e) The Companies have all permits and licenses required under any Environmental Law to be issued to them by any Governmental Authority on account of any or all of its activities on any of the Properties, except to the extent that the absence of any such permit or license has had, or could have, a Material Adverse Effect, and are in material compliance with the terms and conditions of such permits and licenses. To the best of the Borrower's knowledge, no change in the facts or circumstances reported or assumed in the application for or granting of such permits or licenses exist, and such permits and licenses are in full force and effect. (f) No portion of any of the Properties has been listed, designated or identified in the National Priorities List (NPL) or the CERCLA information system (CERCLIS), both as published by the United States Environmental Protection Agency, or any similar list of sites published by any Federal, state or local authority proposed for or requiring cleanup, or remedial or corrective action under any Environmental Law. (g) The Borrower, at its expense, has provided to the Agent and the Lenders a governmental environmental records search for each of the Properties designated on Schedule 4.24 (collectively the "Environmental Data Reports"), prepared by an environmental consulting firm of national reputation reasonably satisfactory to the Agent. Each of the Environmental Data Reports provided to the Agent and the Lenders is, to the best of the Borrower's knowledge, true and accurate in all material respects. In addition, if requested by the Agent, the Borrower has provided to the Agent and the Lenders true and accurate responses to the Agent's Environmental Questionnaire (each an "Environmental Questionnaire") as to each of the other Properties. Section 4.25. Investment Company Act. None of the Companies is an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company," or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 4.26. Labor Matters. No Company is experiencing any strike, labor dispute, slow down or work stoppage due to labor disagreements which has had, or could reasonably be expected to have, a Material Adverse Effect; there is no such strike, dispute, slow down or work stoppage threatened against any Company, to the best of the Borrower's knowledge, none of the Companies is subject to any collective bargaining or similar arrangements. Section 4.27. Delaware Code Provisions. None of the Organizational Documents of the Companies contains any provision similar to those set forth in Section 102(b)(2) of Title 8 of the Delaware Code. -48- Section 4.28. Year 2000 Compliance. (a) The Borrower has taken all actions necessary to ensure that the Year 2000 Risk will not have a Material Adverse Effect. All of the Companies are Year 2000 Compliant. As used in this Section, (i) the "Year 2000 Risk" shall mean the risk that computer applications used by the Companies and/or their suppliers, vendors and customers may be unable to recognize and perform without error date-sensitive functions involving certain dates prior to and any date after December 31, 1999; (ii) "At-Risk Equipment" shall mean all computer systems and other material equipment containing embedded microchips, if such systems or other equipment is owned or operated by the Companies or any of them or used or relied upon in the conduct of any Company's business, including any such computer systems and other equipment supplied by others or with which any Company's computer systems interface; and (iii) "Year 2000 Compliant" shall mean, with regard to the Companies, that all At-Risk Equipment is able to interpret and manipulate data on and involving all calendar dates correctly, including in relation to dates on and after January 1, 2000, and without having a Material Adverse Effect or resulting in a Default. (b) Any and all reprogramming required to address the Year 2000 Risk and assure the proper functioning (to the extent that such proper functioning would otherwise be impaired by the occurrence of the year 2000) on and after January 1, 2000 of all At-Risk Equipment and the testing of all reprogrammed At-Risk Equipment, has been completed. (c) The costs which the Companies have incurred to reprogram and test the At-Risk Equipment and to address the reasonably foreseeable consequences to the Companies of any improper functioning of the At-Risk Equipment due to the Year 2000 Risk have not resulted, and could not reasonably be expected to result, in a Default and have not had, and could not reasonably be expected to have, a Material Adverse Effect. Except for any reprogramming referred to above, the Companies' computer systems are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, appropriate for the conduct of the Companies' businesses as currently conducted in all material respects. V. FINANCIAL COVENANTS. The Borrower covenants and agrees that, so long as any Lender has any obligation to extend credit to the Borrower hereunder, and for so long thereafter as there remains outstanding any portion of any Obligation, whether now existing or arising hereafter, the Borrower and its Subsidiaries (other than the Special Purpose Subsidiary, except with respect to Section 5.05) will (on a Consolidated basis): Section 5.01. Leverage. (a) PCC Leverage. At all times, maintain a PCC Leverage Ratio which is less than 7.00:1.00. -49- (b) Borrower Leverage. At all times during each period indicated below, maintain a ratio of Total Funded Debt to Annualized EBITDA (the "Borrower Leverage Ratio") for the most recently ended fiscal quarter for which financial statements have been, or are required to have been, delivered under Section 6.05(b) of not more than the following: Period Maximum Ratio ------ ------------- The Closing Date through June 29, 2001 4.00:1.00 June 30, 2001 through December 30, 2001 3.75:1.00 December 31, 2001 through June 29, 2002 3.50:1.00 June 30, 2002 through December 30, 2002 3.00:1.00 December 31, 2002 through June 29, 2003 2.50:1.00 June 30, 2003 through December 30, 2003 2.00:1.00 December 31, 2003 and thereafter 1.50:1.00 For purposes of this covenant, Annualized EBITDA shall be determined on a pro forma basis after giving effect to all Acquisitions and Dispositions made by the Companies at any time during the applicable fiscal periods, in each case as if such Acquisitions and Dispositions had occurred at the beginning of such fiscal period and calculated in a manner reasonably satisfactory to the Agent.. (c) Churn Adjusted Borrower Leverage Ratio. At all times during each period indicated below, maintain a ratio of (i) Total Funded Debt to (ii) (A) Annualized EBITDA for the most recently ended fiscal quarter for which financial statements have been, or are required to have been, delivered under Section 6.05(b), minus (B) Cost of Churn for the most recently ended period of four (4) fiscal quarters for which financial statements have been, or are required to have been, delivered under Section 6.05(b) (the "Churn Adjusted Borrower Leverage Ratio"), of not more than the following: Period Maximum Ratio ------ ------------- The Closing Date through June 29, 2001 5.25:1.00 June 30, 2001 through December 30, 2001 4.75:1.00 December 31, 2001 through June 29, 2002 4.50:1.00 June 30, 2002 through December 30, 2002 4.00:1.00 December 31, 2002 through June 29, 2003 3.50:1.00 June 30, 2003 through December 30, 2003 3.00:1.00 December 31, 2003 and thereafter 2.50:1.00 For purposes of this covenant, Annualized EBITDA shall be determined on a pro forma basis after giving effect to all Acquisitions and Dispositions made by the Companies at any time during the applicable fiscal periods, in each case as if such Acquisitions and Dispositions had occurred at the beginning of such fiscal period and calculated in a manner reasonably satisfactory to the Agent. -50- Section 5.02. Interest Coverage. For each fiscal quarter ending on the Quarterly Dates indicated below, maintain a ratio of EBITDA to Total Interest Expense (the "Interest Coverage Ratio") of at least the following: Quarterly Date Minimum Ratio -------------- ------------- March 31, 2000 through September 30, 2000 2.50:1.00 December 31, 2000 through September 30, 2001 3.25:1.00 December 31, 2001 through September 30, 2002 4.00:1.00 December 31, 2002 through September 30, 2003 4.75:1.00 December 31, 2003 and each Quarterly Date thereafter 5.50:1.00 Section 5.03. Fixed Charge Coverage. For each period of four (4) fiscal quarters ended on the Quarterly Dates indicated below, maintain a ratio of Annualized EBITDA to Fixed Charges (the "Fixed Charge Coverage Ratio") of at least the following: Quarterly Date Minimum Ratio -------------- ------------- December 31, 2000 through September 30, 2001 1.00:1.00 December 31, 2001 through September 30, 2002 1.25:1.00 December 31, 2002 through September 30, 2003 1.60:1.00 December 31, 2003 through June 30, 2004 1.90:1.00 September 30, 2004 and each Quarterly Date thereafter 1.05:1.00 Section 5.04. Restricted Payments. Not directly or indirectly declare, order, pay or make any Restricted Payment or set aside any sum or property therefor except as follows: (a) The Companies may pay monthly Management Fees to the Manager; provided that (i) such payments shall be subject to the applicable Affiliate Subordination Agreement and (ii) such payments shall not exceed, during any period of twelve (12) consecutive months, the actual cost of providing management and administrative support services to the Companies for such period. (b) Subject to the provisions of the Affiliate Subordination Agreements: (i) The Subsidiaries may (A) pay dividends and make distributions to the Borrower or other Subsidiaries holding equity interests in the payor, (B) repay indebtedness owed to the Borrower or to Subsidiaries other than MCT and MCT Cablevision, Ltd. and (C) make intercompany loans to one another subject to the limitations set forth in Section 7.05. (ii) The Subsidiaries may repay Indebtedness owed to the Borrower or to Subsidiaries. -51- (iii) The Subsidiaries may pay lease payments to Pegasus Towers, Inc. in respect of the tower leases in effect on the date hereof, and any renewals thereof. (iv) The Borrower may (A) make regularly scheduled payments (but not prepayments) of interest under the Original Subordinated Notes and (B) repurchase or redeem the Original Subordinated Notes in full as provided in Section 2.02 with the proceeds of Loans permitted under Section 3.03 or equity contributions made to the Borrower by the Parent, provided that no Default shall exist as of the date of any such payment or repurchase or after giving effect thereto (calculated both as of such date and on a pro forma basis as of the end of and for the fiscal period(s) most recently ended prior thereto for which financial statements are required to be provided under Section 6.05) and, with respect to such repurchase or redemption (1) the aggregate Available Commitments shall equal or exceed $25,000,000 after giving effect to such repurchase and the Loans made in connection therewith; and (2) if the Churn Adjusted Borrower Leverage Ratio is greater than or equal to 4.00:1.00 after giving effect to such repurchase, the Borrower shall have obtained at least $85,000,000 in additional cash equity contributions from the Parent and Incremental Term Loans made under Section 1.04. (v) From and after the date audited financial statements are delivered pursuant to Section 6.05(a) for the year ended December 31, 2001 and each year thereafter, the Borrower may pay annual or semi-annual dividends or distributions to the Parent solely for the purpose of financing dividends due or interest due and payable under the PCC Preferred Stock Designation in respect of the PCC Preferred Stock or the PCC Subordinated Notes, respectively (collectively, the "PCC Preferred Stock Dividends"), provided that (A) no Default shall exist as of the date of the proposed payment or after giving effect thereto and (B) the aggregate amount of such dividends paid in any fiscal year shall not exceed the lesser of (1) Excess Cash Flow for the prior fiscal year or (2) the aggregate PCC Preferred Stock Dividends due and payable in such fiscal year. For purposes of the preceding sentence, a dividend or distribution paid to the Parent in respect of the PCC Preferred Stock Dividend Payment due January 1 of any fiscal year shall be treated as having been paid in the preceding fiscal year. (vi) The Borrower may pay annual or semi-annual dividends or distributions to the Parent solely for the purpose of financing interest due and payable under the PCC 1997 Senior Notes, the PCC 1998 Senior Notes and the PCC Exchange Notes, provided that no Default shall exist as of the date of the proposed payment or after giving effect thereto (calculated both as of such date and on a pro forma basis as of the end of and for the fiscal period(s) most recently ended prior thereto for which financial statements are required to be provided under Section 6.05). (vii) In addition to the foregoing, the Borrower may pay further dividends or distributions to the Parent from time to time, provided that (i) no Default shall exist as of the date of the proposed payment or after giving effect thereto (calculated both as of such date and on a pro forma basis as of the end of and for the fiscal period(s) most recently ended prior thereto for which financial statements are required to be provided under Section 6.05) and (ii) the aggregate amount of all such dividends paid from and after the date hereof minus the aggregate amount of all cash equity contributions made to the Borrower from and after the date hereof (other than equity contributions made as provided under Section 5.04(b)(iv) above) shall not exceed $50,000,000. (viii) The Borrower may make Tax Sharing Payments to the Parent provided that the same shall reflect adjustments for all credits and deductions enjoyed by the Parent. VI. AFFIRMATIVE COVENANTS. The Borrower hereby covenants and agrees to and with each of the Lenders that, so long as any Lender has any obligation to extend credit to the Borrower hereunder, and for so long thereafter as there remains outstanding any portion of any Obligation, whether now existing or hereafter arising, the Borrower and each of the Subsidiaries shall: -52- Section 6.01. Preservation of Assets; Compliance with Laws, Etc. (a) Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its corporate, partnership or limited liability company existence, as the case may be, all material rights, licenses, permits and franchises (including all material CATV Franchises, FCC Licenses and DBS Agreements) and comply in every material respect with all laws and regulations applicable to it (including without limitation the Communications Act of 1934, as amended, the Copyright Revisions Act of 1976, as amended, the Rate Regulation Act, the Rate Regulation Rules and all other rules, regulations, administrative orders and policies of the FCC, the FAA and the Copyright Office) and all material agreements to which it is a party, including without limitation all material CATV Franchises and DBS Agreements, and all agreements with its equityholders the violation of which could have a Material Adverse Effect; (b) at all times maintain, preserve and protect all material trade names and proprietary rights; (c) at all times maintain in full force and effect a License Agreement between each Subsidiary holding Station assets and the related License Subsidiary, and provide a true and complete copy thereof to the Agent; and (d) preserve all the remainder of its material property used or useful in the conduct of its business and keep the same in good repair, working order and condition (reasonable wear and tear and damage by fire or other casualty excepted), and from time to time, make or cause to be made all needful and proper repairs, renewals, replacements, betterments and improvements thereto, so that the business carried on in connection therewith may be conducted at all times in the ordinary course in a manner substantially consistent with past practices. Section 6.02. Insurance. (a) Keep all of its insurable properties now or hereafter owned adequately insured at all times against loss or damage by fire or other casualty to the extent customary with respect to like properties of companies conducting similar businesses; maintain public liability, business interruption, broadcasters' liability and workers' compensation insurance insuring such Company to the extent customary with respect to companies conducting similar businesses, all by financially sound and reputable insurers and furnish to the Lenders satisfactory evidence of the same (including certification by an Authorized Officer of the Borrower of timely renewal of, and timely payment of all insurance premiums payable under, all such policies, which certification shall be included in the next succeeding Compliance Report delivered pursuant to Section 6.05(d)); notify each of the Lenders of any material change in the insurance maintained on its properties after the date hereof and furnish each of the Lenders satisfactory evidence of any such change; maintain insurance with respect to its headend, tower, transmission and/or studio facilities and related equipment in an amount equal to the full replacement cost thereof; provide that each insurance policy pertaining to any of its insurable properties shall: (i) name the Agent, on behalf of the Lenders, (A) as loss payee pursuant to a so-called "standard mortgagee clause" or "Lender's loss payable endorsement", with respect to property coverage, or (B) as additional insured, with respect to general liability coverage; (ii) provide that no action of any Company shall void any such policy as to the Agent or the Lenders; and (iii) provide that the insurer(s) shall notify the Agent of any proposed cancellation of such policy at least thirty (30) days in advance thereof (unless such proposed cancellation arises by reason of non-payment of insurance premiums in which case such notice shall be given at least ten (10) days in advance thereof) and that the Agent or the Lenders will have the opportunity to correct any deficiencies justifying such proposed cancellation. (b) Promptly following the occurrence of any Casualty Event affecting any asset or property of any Company (whether or not such property constitutes Collateral) (the "Damaged Property") resulting in Insurance Proceeds aggregating $ 1,000,000 or more, give prompt notice thereof to the Agent and cause such Insurance Proceeds to be paid to the Agent for deposit into the Collateral Account, as additional collateral security for the payment of the Obligations, pending disbursement thereof as hereinafter provided. If, on or before the last day of the applicable Restoration Period, the Borrower or any Subsidiary shall not have restored, repaired or replaced the Damaged Property (or, if earlier, on the date such Company shall have determined not to restore, repair or replace the Damaged Property) the Insurance Proceeds so deposited in the Collateral Account shall be applied to repay the Notes, to the extent required in Section 1.09(e). -53- (c) In the event of a Casualty Event affecting any Damaged Property, whether or not subject to Section 6.02(b), and provided that no Event of Default shall have occurred and be continuing, the Agent or the Lenders will deliver to the Borrower (for the benefit of such Company) any Insurance Proceeds therefrom, if the Borrower so elects following notice thereof provided by the Agent, provided that (i) such Company shall use such proceeds for the restoration or replacement of the Damaged Property within the applicable Restoration Period, (ii) the Borrower shall have demonstrated to the reasonable satisfaction of the Lenders that the Damaged Property will be restored to substantially its previous condition or will be replaced by substantially identical property or assets and (iii) if the Agent, on behalf of the Lenders, had a security interest in and lien upon the Damaged Property, the Lenders shall have received, at their request, a favorable opinion from the Borrower's counsel, in form and substance satisfactory to the Agent, as to the perfection of the Agent's security interest in and lien upon such restored or replaced property or asset and such evidence satisfactory to the Agent as to the priority of such security interest and liens. If the Borrower fails to elect the disbursement of such Insurance Proceeds as provided in the foregoing sentence within thirty (30) days following receipt of the Agent's notice, the Borrower shall be deemed to have elected that such Insurance Proceeds be applied to the prepayment of the Loans and, if the related Casualty Event was subject to Section 6.02(b), the permanent reduction of the Commitments provided in such Section and in Section 1.09. (d) If the Borrower receives any disbursements of Insurance Proceeds as contemplated by Section 6.02(c), but fails to restore or replace the Damaged Property within the applicable Restoration Period, as required under Section 6.02(c), then the Borrower shall return all such disbursements to the Agent for application, together with the balance of any related Insurance Proceeds not so disbursed, to the prepayment of the Loans and, if the related Casualty Event was subject to Section 6.02(b), the permanent reduction of the Commitments provided in such Section and in Section 1.09. (e) The Agent may, if directed by the Required Lenders upon the occurrence and during the existence of any Default, elect to apply any Insurance Proceeds paid into the Collateral Account or otherwise received by the Agent pursuant to this Section 6.02 to the replacement, restoration and/or repair of the Damaged Property, in lieu of effecting the prepayment of the Loans required under Section 1.09(b) or 6.02(d). (f) If the Borrower or the Agent elects to replace, restore and/or repair the Damaged Property as provided in Section 6.02(c) or (e), the related Insurance Proceeds (and any earnings thereon) held in the Collateral Account shall be applied to the replacement, restoration and repair of the Damaged Property and advanced by the Agent in periodic installments upon compliance by the Borrower with such reasonable conditions to disbursement as may be imposed by the Agent, including, but not limited to, reasonable retention amounts and receipt of lien releases and, if a Casualty Event results in the Agent's receipt of Insurance Proceeds aggregating $1,000,000 or more, disbursement of such Insurance Proceeds jointly to the Borrower and any contractors, subcontractors and materialmen to whom payment is owed in connection with such repair, replacement and/or restoration. (g) Following the occurrence and the continuance of any Default, the Agent shall have no obligation to release any proceeds from the Collateral Account to the Borrower as provided above and all such proceeds shall be subject to the provisions of the Security Agreements. All Insurance Proceeds remaining in the Collateral Account after application to the repair, replacement and/or restoration of Damaged Property pursuant to this Section may, at the option of the Agent, be applied to the prepayment of the Loans or (if consented to by the Required Lenders) released to the Borrower. (h) With respect to any Casualty Event resulting in Insurance Proceeds aggregating $1,000,000 or more, the Agent shall be entitled at its option to participate in any compromise, adjustment or settlement in connection with any claims for damage or destruction under any policy or policies of insurance, and the Borrower shall, within five (5) Business Days after request therefor, reimburse the Agent for all reasonable out-of-pocket expenses (including reasonable attorneys' fees and disbursements) incurred by the Agent in connection with such participation. None of the Companies shall make any compromise, adjustment or settlement in connection with any such claim without the approval of the Agent. (i) To the extent, if any, that any improved real property (whether owned or leased) of the Companies that is mortgaged as required under Section 2.01(a) is situated in a special flood hazard zone, as defined in 12 CFR ss. 22 or 339, in which flood insurance is available, obtain and maintain flood insurance in coverage and amount satisfactory to the Agent. -54- Section 6.03. Taxes, Etc. Pay and discharge or cause to be paid and discharged all taxes, assessments and governmental charges or levies imposed upon it or upon its income and profits or upon any of its property, real, personal or mixed, or upon any part thereof, before the same shall become in default, as well as all lawful claims for labor, materials and supplies or otherwise, which, if unpaid, might become a lien or charge upon such properties or any part thereof; provided that no Company shall be required to pay and discharge or cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity thereof shall be contested in good faith by appropriate proceedings and it shall have set aside on its books adequate reserves with respect to any such tax, assessment, charge, levy or claim, so contested; and provided, further that, in any event, payment of any such tax, assessment, charge, levy or claim shall be made before any of its property shall be seized or sold in satisfaction thereof. Section 6.04. Notice of Proceedings, Defaults, Adverse Change, Etc. Promptly (and in any event within five (5) days after the discovery by the Borrower thereof) give written notice to each of the Lenders of (a) any proceedings instituted or threatened against it by or in any federal, state or local court or before any commission or other regulatory body, whether federal, state or local (including without limitation any Specified Authority), which, if adversely determined, could have a Material Adverse Effect; (b) any notices of default received by any Company (together with copies thereof, if requested by any Lender) with respect to (i) any alleged default under or violation of any of its material licenses, permits or franchises, including any FCC License or CATV Franchise, or under any DBS Agreement or other material agreement to which it is a party, or (ii) any alleged default with respect to, or redemption or acceleration or other action under, the PCC Preferred Stock Designation, the Subordinated Debt Documents, any Permitted Seller Debt or Permitted Seller Subordinated Debt, any material Acquisition Agreement or any evidence of material Indebtedness of any Company or any mortgage, indenture or other agreement relating thereto; (c) (i) any notice of any material violation or administrative or judicial complaint or order filed or to be filed against any Company and/or any real property owned or leased by it alleging any violations of any law, ordinance and/or regulation or requiring it to take any action in connection with the release and/or clean-up of any Hazardous Materials, or (ii) any notice from any governmental body or other Person alleging that any Company is or may be liable for costs associated with a release or clean-up of any Hazardous Materials or any damages resulting from such release; (d) any change in the condition, financial or otherwise, of any Company or the Parent which has, or could have, a Material Adverse Effect; or (e) the occurrence of any Default. Section 6.05. Financial Statements and Reports. Furnish to the Agent (with multiple copies for each of the Lenders, which the Agent shall promptly provide to the respective Lenders): (a) As soon as available but, in any event, within one hundred twenty (120) days after the end of each fiscal year, (i) the Consolidated balance sheets and statements of income, equity and cash flows of PCC and (ii) the Consolidated and Consolidating balance sheets and statements of income, equity and cash flows of the Borrower and its Subsidiaries, together with supporting schedules in form and substance satisfactory to the Lenders (and accompanied by an unaudited breakdown of revenues, expenses and EBITDA for each Company), audited by, and delivered with the opinion of, independent certified public accountants selected by the Borrower and reasonably acceptable to the Required Lenders (the "Accountants"), which opinion (A) shall not be qualified as to going concern or scope of audit, (B) shall be to the effect that such financial statements present fairly the Consolidated financial condition and results of operation of PCC or the Companies, as the case may be, as of the dates and for the periods indicated, in accordance with GAAP applied on a basis consistent with that of the preceding year, and shall otherwise be in form reasonably satisfactory to the Required Lenders, and (C) shall be accompanied by a report by the Accountants to the effect that the Accountants have examined the provisions of this Agreement and that, to the best of their knowledge, no Event of Default has occurred under Article V (or, if such an event has occurred, a statement explaining its nature and extent); provided, however, that in issuing such statement, the Accountants shall not be required to exceed the scope of normal auditing procedures conducted in connection with their opinion referred to above; (b) Within forty-five (45) days after the end of each quarter in each fiscal year, (i) the Consolidated balance sheets and statements of income, equity and cash flows of PCC and (ii) the Consolidated and Consolidating balance sheets and statements of income, equity and cash flows of the Borrower and its Subsidiaries, together with supporting schedules, setting forth in each case in comparative form the corresponding figures from the preceding fiscal period of the same duration, prepared by PCC or the Borrower, as the case may be, in accordance with GAAP (except for the absence of notes) and certified by an -55- Authorized Officer of PCC or the Borrower, as the case may be, such balance sheets to be as of the close of such quarter, and such statements of income, equity and cash flow to be for the quarter then ended and the period from the beginning of the then current fiscal year to the end of such quarter (in each case subject to normal audit and year-end adjustments) and to include, in the case of the Companies' financial statements, (i) a comparison of actual results to results for the comparable period of the preceding fiscal year (if available) and projected results set forth in the Budget for such period, (ii) a breakdown of Location Cash Flow for the DBS Subsidiaries and for the Borrower's other Subsidiaries and (iii) if and to the extent prepared by the Borrower, a breakdown of revenues, expenses and EBITDA for each Company; (c) Within forty-five (45) days after the end of each month, the Consolidated and Consolidating balance sheets and statements of income of the Borrower and its Subsidiaries, together with supporting schedules, prepared by the Borrower in accordance with GAAP (except for the absence of notes) and certified by an Authorized Officer of the Borrower, such balance sheets to be as of the end of such month and such income statements to be for the period from the beginning of the then current fiscal year to the end of such month (subject to normal audit and year-end adjustments); (d) Concurrently with the delivery of any annual financial statements required by Section 6.05(a) and any quarterly financial statements required by Section 6.05(b), a certified report (hereafter, a "Compliance Report") in the form of Schedule 6.05 attached hereto (or otherwise in a form satisfactory to the Agent), with appropriate calculations, including a detailed breakout of Subscriber Acquisition Costs, signed on behalf of the Borrower by an Authorized Officer of the Borrower, setting forth the calculations contemplated in Article V of this Agreement and certifying as to the fact that such Person has examined the provisions of this Agreement and that no Default has occurred and is continuing (or if a Default exists, a statement explaining its nature and extent); (e) (i) On or before February 15 of each fiscal year, an updated quarterly budget approved by the Board of Directors of the Parent, including planned Capital Expenditures and projected borrowings for such fiscal year, with updated Projections showing financial covenant compliance (collectively, the "Budget"), for the operation of the Companies' businesses during the current fiscal year, setting forth in detail reasonably satisfactory to the Lenders the projected results of operations of the Companies and stating underlying assumptions, and (ii) within five (5) days after the effective date thereof, notice of any material changes or modifications in the Budget (which shall not include changes resulting from non-material adjustments to the timing of any proposed borrowings); (f) As soon as reasonably possible and in any event within forty-five (45) days after the end of each fiscal quarter and each month, one or more certificates of a responsible officer of the Borrower (collectively, the "Subscriber Reports"), setting forth in reasonable detail, the following: (i) as to each of the Systems, (A) the numbers of basic subscribers, as at the end of such month, (B) net changes in numbers of each such category of basic subscribers (including numbers of disconnects and connects within each such category), (C) the average monthly revenues per subscriber as at the end of such month, (D) rate changes, if any, and (E) the numbers of subscribers more than forty-five (45) days delinquent measured from the date of original billing; and (ii) as to the operations of the DBS Subsidiaries, (A) each of the DBS Subscriber Areas and the number of homes, subscribers and Paying Subscribers in each, as of the most recent month end, (B) the penetration percentage and Churn for the most recently ended month and the most recently ended period of six (6) consecutive months for which such information is available, (C) the average monthly aggregate revenues per subscriber as at the end of such month, (D) rate changes, if any, on core programming packages and (E) the number of subscribers more than forty-five (45) days delinquent measured from the date of original billing; (g) Promptly upon their becoming available, and in any event within ten (10) Business Days after receipt thereof, all Nielsen and other rating reports, if any, received by any Company; (h) Within ten (10) days after the receipt or filing thereof by any Company, as applicable, copies of any periodic or special reports filed by any Company with the FCC or any state or local governmental body having jurisdiction over any System, Station, CATV Franchise or FCC License, and copies of any material notices and other material communications from the FCC or any such state or local governmental body which specifically relate to any Company, any -56- System or Station or any CATV Franchise or FCC License, but in each case only if such reports or communications indicate any material adverse change in such Company's standing before the FCC, in the Franchise Areas or in respect of any CATV Franchise or FCC License or if copies thereof are requested by the Agent; (i) Promptly, and in any event within five (5) days, after the Borrower or any member of the Controlled Group (i) is notified by the Internal Revenue Service of its liability for the tax imposed by Section 4971 of the Code, for failure to make required contributions to a pension, or Section 4975 of the Code, for engaging in a prohibited transaction, (ii) notifies the PBGC of the termination of a defined benefit pension plan, if there are or may not be sufficient assets to convert the plan's benefit liabilities as required by Section 4041 of ERISA, (iii) is notified by the PBGC of the institution of pension plan termination proceedings under Section 4042 of ERISA or that it has a material liability under Section 4063 of ERISA, or (iv) withdraws from a multiemployer pension plan and is notified that it has withdrawal liability under Section 4202 of ERISA which is material, copies of the notice or other communication given or sent; (j) Promptly upon receipt or issuance thereof, and in any event within five (5) Business Days after such receipt, copies of all audit reports submitted to any Company by its accountants in connection with each yearly, interim or special audit of the books of any Company made by such accountants, including any material related correspondence between such accountants and the Borrower's management; (k) Promptly upon circulation thereof, and in any event within five (5) Business Days after such circulation, copies of any material written reports issued by the Borrower or any Subsidiary to any of its equityholders or material creditors relating to the Notes or any material change in any Company's financial condition; (l) Within ten (10) days after the receipt or filing thereof by any Company, the Parent or any other Affiliate of the Borrower, copies of (i) any registration statements, prospectuses and any amendments and supplements thereto, and any regular and periodic reports (including without limitation reports on Form 10-K, Form 10-Q or Form 8-K), if any, filed by any Company, the Parent or such Affiliate with any securities exchange or with the United States Securities and Exchange Commission (the "SEC"); and (ii) any letters of comment or correspondence with respect to filings or compliance matters sent to any Company, the Parent or such Affiliate by any such securities commission or the SEC in relation to any Company, the Parent or such Affiliate and its respective affairs; and (m) As soon as reasonably possible after request therefor, such other information regarding its operations, assets, business, affairs and financial condition or regarding any of the Companies or (to the extent available to the Borrower without undue effort and expense) their equityholders or other Affiliates (including without limitation the Parent Affiliates) as any Lender may reasonably request, including without limitation copies of any and all material agreements to which any Company is a party from time to time. Section 6.06. Inspection. Permit employees, agents and representatives of the Lenders to inspect, during normal business hours, its premises and any other facilities and systems of the Companies and its books and records and to make abstracts or reproductions thereof, including without limitation those which any Lender may wish to inspect in connection with the Year 2000 Risk and the Companies' representation that each of the Companies is Year 2000 Compliant. In connection with any such inspections, the Lenders will use reasonable efforts to avoid an unreasonable disruption of the Companies' businesses and, to the extent possible or appropriate absent any Default, will give reasonable notice thereof. Section 6.07. Accounting System. Maintain a system of accounting in accordance with generally accepted accounting principles and maintain a fiscal year ending December 31 for each of the Companies. Section 6.08. Additional Assurances. From time to time hereafter: (a) without limiting the generality of Section 2.01(a), execute and deliver or cause to be executed and delivered, such additional instruments, certificates and documents, and take all such actions, as the Agent or the Lenders shall reasonably request for the purpose of implementing or effectuating the provisions of this Agreement and the other Loan Documents, including without limitation (i) the items set forth in Schedules 2.01(a) and 4.24 which require action after the date hereof, as stated in each such Schedule, and (ii) only if reasonably requested by the Agent, the execution and delivery to the Agent of a mortgage or deed of trust or collateral assignment of lease or leasehold mortgage in form and substance satisfactory to the Agent (in a recordable form and in such number of copies as the Agent shall have requested) covering any -57- real properties acquired by the Companies, together with any necessary consents relating thereto; (b) without limiting the generality of Section 2.01, at the request and direction of the Agent, cooperate with the Agent and the Lenders from time to time in preparing, executing and/or filing and recording such (i) timely continuation statements under the Uniform Commercial Code with respect to financing statements filed under Section 2.01(a), (ii) new financing statements and (iii) conforming amendments to the Security Documents as shall be necessary from time to time to reflect the passage of time and other changed circumstances and to assure continued compliance with the Loan Documents and with Section 2.01; and (c) upon the exercise by the Agent or the Lenders of any power, right, privilege or remedy pursuant to this Agreement or any other Loan Document which requires any consent, approval, registration, qualification or authorization of any Governmental Authority (including any Specified Authority), execute and deliver all applications, certifications, instruments and other documents and papers that the Agent or Lenders may be so required to obtain. Nothing contained in this Section 6.08 shall constitute a waiver of any Event of Default arising from the Borrower's failure to locate, deliver and/or file or record any Security Document, any consent of any Governmental Authority or other Person or any other document required under Section 2.01, Article III or otherwise under this Agreement. Section 6.09. Renewal of DBS Agreements, FCC Licenses, and CATV Franchises. (a) Renew all DBS Agreements and FCC Licenses in a timely manner and in accordance with all applicable provisions thereof. (b) Comply with the provisions of all applicable federal and local laws relating to the renewal of Significant Franchises, including without limitation pursuing proceedings for the renewal of such Significant Franchises in accordance with those procedures customarily followed by holders of similar franchises. Without limiting the foregoing, the Companies will seek renewal of all Significant Franchises within the time periods prescribed by, and otherwise in compliance with, Section 546 of the Cable Communications Policy Act of 1984 (47 U.S.C. Section 546). Section 6.10. Compliance with Environmental Laws. (a) Comply, and cause all tenants or other occupants of any of the Properties to comply in all material respects with all Environmental Laws and not generate, store, handle, process, dispose of or otherwise use and not permit any tenant or other occupant of any of the Properties to generate, store, handle, process, dispose of or otherwise use Hazardous Materials in, on, under or about the Property in a manner that could lead or potentially lead to imposition on any Company or the Agent or any Lender or any of the Properties of any liability or lien of any nature whatsoever under any Environmental Law. (b) Notify the Agent promptly in the event of any spill or other release of any Hazardous Material in, on, under or about any of the Properties which is required to be reported to a Governmental Authority under any Environmental Law, promptly forward to the Agent copies of any notices received by any Company relating to any alleged violation of any Environmental Law and promptly pay when due any fine or assessment against the Lenders, any Company or any of the Properties relating to any Environmental Law. (c) If at any time it is determined that the operation or use of any of the Properties violates any applicable Environmental Law or that there is any Hazardous Material located in, on, under or about the Properties which under any Environmental Law requires special handling in collection, treatment, storage or disposal or any other form of cleanup or remedial or corrective action, then, within thirty (30) days after receipt of notice thereof from a Governmental Authority (or such other time period as may be specified in the notice sent by such Governmental Authority) or from the Lenders, take, at its sole cost and expense, such actions as may be necessary to fully comply in all respects with all Environmental Laws, provided, however, that if such compliance cannot reasonably be completed within such thirty (30) day period, the Borrower shall commence such necessary action within such thirty (30) day period and shall thereafter diligently and expeditiously proceed to fully comply in all respects and in a timely fashion with all Environmental Laws. Nothing herein shall prohibit the Borrower from asserting any good faith defenses against the government in any governmental demands. -58- (d) If a lien is filed against any of the Properties by any Governmental Authority resulting from the need to expend or the actual expending of monies arising from an action or omission, whether intentional or unintentional, of any Company or for which any Company is responsible, resulting in the releasing, spilling, leaking, leaching, pumping, emitting, pouring, emptying or dumping of any Hazardous Material, then, within thirty (30) days from the date that such Company is first given notice such lien has been placed against the Properties, either (i) pay the claim and remove the lien or (ii) furnish a cash deposit, bond or such other security with respect thereto as is satisfactory in all respects to the Lenders and is sufficient to effect a complete discharge of such lien on the Properties. (e) At the Borrower's expense, if and as reasonably requested by the Agent in connection with any Property now or hereafter owned, acquired or leased by any Company, (i) conduct and deliver to the Agent and the Lenders, an Environmental Site Assessment prepared by an environmental consulting firm of national reputation reasonably satisfactory to the Agent, together with a letter from such firm to the Agent authorizing the Agent and the Lenders to rely thereon, or (ii) prepare and deliver to the Agent and the Lenders true and accurate responses to the Agent's Environmental Questionnaire as to such Property. Each Environmental Site Assessment and completed Environmental Questionnaire shall be, to the best of the Borrower's knowledge, true and accurate in all material respects. (f) Conduct any further diligence recommended under any Environmental Data Report or Environmental Site Assessment and perform any and all Remedial Work necessary under all Environmental Laws applicable (now or in the future) to the Companies or their businesses, whether as recommended under any Environmental Site Assessment or otherwise. Section 6.11. Interest Rate Protection. (a) Within ninety (90) days after the Closing Date, enter into, and, thereafter, maintain in full force and effect, one or more Rate Hedging Agreements containing terms and conditions reasonably satisfactory to the Agent and sufficient to ensure that at least fifty percent (50%) of the aggregate principal amount of the Initial Term Loans then outstanding is protected at all times against increases in the applicable Base Rate or LIBOR Rate for a term extending for at least three (3) years. (b) Within sixty (60) days after the Credit Extension Date for any Incremental Term Loans, enter into, and, thereafter, maintain in full force and effect, one or more Rate Hedging Agreements containing terms and conditions reasonably satisfactory to the Agent and sufficient to ensure that at least fifty percent (50%) of the aggregate principal amount of the Incremental Term Loans then outstanding is protected at all times against increases in the applicable Base Rate or LIBOR Rate for a term extending for at least three (3) years. (c) Deliver to the Agent copies of each such Rate Hedging Agreement, including any and all amendments thereto and substitutions thereof, and such other documentation relating thereto as the Agent or the Lenders may from time to time request. VII. NEGATIVE COVENANTS. The Borrower covenants and agrees that, so long as any Lender has any obligation to extend credit to the Borrower hereunder, and for so long thereafter as there remains outstanding any portion of any Obligation, whether now existing or arising hereafter, unless the Required Lenders shall otherwise consent in writing in accordance with the terms of Article XI, none of the Companies will, directly or indirectly: Section 7.01. Indebtedness and Guarantees. Incur, create, assume, become or be liable, directly, indirectly or contingently, in any manner with respect to, or permit to exist, any Indebtedness or Guarantee except: (a) Indebtedness of the Borrower to the Lenders hereunder under the Notes and in respect of the Letters of Credit; (b) the guaranties of the Subsidiaries required under Section 2.01; (c) any Rate Hedging Obligation with terms and conditions reasonably acceptable to the Agent; (d) Indebtedness existing on the date hereof and described in Schedule 7.01, provided however, that the terms of such indebtedness shall not be modified or amended in any material respect, nor shall payment thereof be modified, without the prior written consent of the Required Lenders; -59- (e) Indebtedness in respect of endorsements of negotiable instruments for collection in the ordinary course of business; (f) Guarantees by the Borrower of Indebtedness and other obligations incurred by its Subsidiaries and permitted by this Section 7.01; (g) Indebtedness under Capital Leases and purchase money Indebtedness relating to the purchase price of real estate and equipment to be used in the businesses of the Borrower and its Subsidiaries (other than the Special Purpose Subsidiary) which does not exceed $10,000,000 in the aggregate outstanding at any time; (h) customary indemnities set forth in the Acquisition Agreements; (i) intercompany loans permitted under Section 7.05; (j) trade payables incurred in the ordinary course of business; (k) Permitted Seller Debt not exceeding $50,000,000 in the aggregate outstanding at any time, in addition to the Permitted Seller Debt specified in Schedule 7.01; (l) Permitted Seller Subordinated Debt, not exceeding $20,000,000 in the aggregate outstanding at any time; (m) Indebtedness to the Subordinated Noteholders under the Subordinated Debt Documents; and (n) unsecured Indebtedness of the Borrower and the Subsidiaries (other than the Special Purpose Subsidiary and the Specified Subsidiaries) of a type not covered by any of the other provisions of this Section 7.01 and which does not exceed $10,000,000 in the aggregate outstanding at any time. Section 7.02. Liens. Create, incur, assume, suffer or permit to exist any Lien of any nature whatsoever on any of its assets or ownership interests, now or hereafter owned, other than the following (collectively, "Permitted Liens"): (a) liens securing the payment of taxes, assessments or government charges or levies either not yet due or the validity of which is being contested in good faith by appropriate proceedings, and as to which it shall have set aside on its books adequate reserves; (b) deposits under workers' compensation, unemployment insurance and social security laws, or to secure the performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, or to secure statutory obligations or surety or appeal bonds, or to secure indemnity, performance or other similar bonds arising in the ordinary course of business; (c) liens existing on the date hereof and described on Schedule 7.02 attached hereto; (d) liens against the Companies imposed by law, such as vendors', carriers', lessors', warehousers' or mechanics' liens, incurred in the ordinary course of business; (e) liens arising out of a prejudgment attachment, a judgment or award against it with respect to which it shall currently be prosecuting an appeal, a stay of execution pending such appeal having been secured, except any such lien arising in connection with a judgment, attachment or proceeding which gives rise to an Event of Default under paragraph (m) or (n) of Article VIII; (f) liens in favor of the Agent or the Lenders (and any Hedging Lenders) securing the Notes or the other obligations of the Companies to the Lenders hereunder or under Rate Hedging Obligations entered into with any Lender or any Lender's affiliate; (g) liens against the Companies under or securing Capital Leases and liens or mortgages securing purchase money Indebtedness described in Section 7.01(g), provided that the obligation secured by any such lien shall not exceed one hundred percent (100%) of the lesser of cost or fair market value as of the time of the acquisition of the property covered thereby and that each such lien or mortgage shall at all times be limited solely to the item or items of property so acquired; and (h) restrictions, easements and minor irregularities in title which do not and will not interfere in any material respect with the occupation, use and enjoyment by any Company of such properties and assets in the normal course of its business as presently conducted or materially impair the value of such properties and assets for the purpose of such business. -60- Section 7.03. Disposition of Assets; Mergers, Etc. Merge or enter into a consolidation or sell, lease, exchange, sell and lease back, sublease or otherwise dispose of any of its assets (hereinafter a "Disposition") (including without limitation the transfer of any assets to the Special Purpose Subsidiary or any Specified Subsidiary and Dispositions in exchange for similar assets and properties and commonly referred to as "asset swaps"), except the following: (a) Dispositions of (i) inventory and cash equivalents in the ordinary course of business and (ii) tangible assets to be replaced in the ordinary course of business within twelve (12) months by other tangible assets of equal or greater value (provided that the Agent's and the Lenders' lien upon such newly acquired assets shall have the same priority as the Agent's and the Lenders' lien upon the replaced assets subject to any prior Liens permitted by Sections 7.02(g) or (iii) tangible assets that are no longer used or useful in the business of any Company. (b) Any wholly owned Subsidiary of the Borrower may merge or be liquidated into the Borrower or any other wholly owned Subsidiary of the Borrower so long as, after giving effect to any such merger to which the Borrower is a party, the Borrower shall be the surviving or resulting Person, provided that Pegasus Satellite Television of Virginia, Inc. may merge with and into PST. (c) Licensing of and leasing of intangible assets for fair value in the ordinary course of business. (d) The Disposition of the Puerto Rico Systems, free from the Liens of the Security Documents, in a manner reasonably satisfactory to the Required Lenders, provided that the Borrower shall comply with the provisions of Section 1.09(d). (e) The Disposition of any other assets having a fair market value of not more than $25,000,000 in the aggregate (all of which Dispositions may be made free from the Liens of the Security Documents); provided, however, that (i) the selling Subsidiaries shall have received payment in cash or cash equivalents of at least eighty-five percent (85%) of gross proceeds from any such disposition of assets (other than like-kind exchanges under Section 1031 of the Code), (ii) all rights of the Companies under any escrow or similar agreements entered into in connection with like-kind exchanges under Section 1031 of the Code shall have been collaterally assigned to the Agent and (iii) the Borrower shall have complied with the provisions of Section 1.09(d), if applicable. Section 7.04. Fundamental Changes. (a) Form any subsidiary (other than the Finance Subsidiaries) or otherwise change the corporate structure or organization of the Borrower or the Subsidiaries from that set forth in Schedule 4.23, except (i) pursuant to mergers permitted under Section 7.03, (ii) pursuant to repurchases of Equity Securities permitted under Section 7.09 and (iii) in connection with, and in accordance with the conditions to, any Permitted Acquisition. (b) Permit or suffer any amendment of its Organizational Documents which could have a Material Adverse Effect (it being expressly agreed that the inclusion in any such Organizational Documents of any provision similar to those set forth in Section 102(b)(2) of Title 8 of the Delaware Code is prohibited under this Section). Section 7.05. Investments and Acquisitions. (a) Permitted Investments. Acquire, have outstanding or hold any Investment (including any Investment consisting of the acquisition of any business), except the following: (i) Existing Investments of the Borrower in its Subsidiaries and of the Borrower's Subsidiaries in other Subsidiaries, as reflected in Schedule 4.23; (ii) Intercompany loans and advances from any wholly owned Subsidiary of the Borrower to the Borrower, but in each case only to the extent reasonably necessary for Consolidated tax planning and working capital management; (iii) Intercompany loans and advances from the Borrower to its Subsidiaries other than the Specified Subsidiaries and the Special Purpose Subsidiary, from the proceeds of the Loans, to the extent necessary to fund working capital, Capital Expenditures and other operating expenses permitted hereunder and described in Section 2.02, -61- provided that no more than $2,000,000 in the aggregate in additional loans and advances to Pegasus San German and MCT shall be permitted hereunder; (iv) Investments in Cash Equivalents; (v) Short-term loans to employees and advances to employees in the ordinary course of business for the payment of bona fide, properly documented, business expenses to be incurred on behalf of the Borrower and its Subsidiaries, provided that the aggregate outstanding amount of all such loans and advances shall not exceed $500,000 in the aggregate at any time; (vi) Guarantees permitted by Section 7.01; (vii) equity investments by PSTH in the Special Purpose Subsidiary made solely for the purpose of funding SAC Payments and subject to the Special Purpose Subsidiary's obligations to distribute SAC Commissions and Excess SAC Cash to the Finance Subsidiaries and contribute the Equity Securities in the Finance Subsidiaries to PSTH under Section 7.09; (viii) equity investments by the Borrower in PSTH made solely for the purpose of funding the equity investments referred to in clause (vii) above; and (ix) Any Acquisition (including without limitation the transfer of assets by the Parent to the Borrower, for further transfer to a Subsidiary, and in each case as a capital contribution, free and clear of any Liens, other than Permitted Liens) made in accordance with the conditions set forth in Section 7.05(b) below (in each case, a "Permitted Acquisition"). (b) Conditions to Acquisitions. Not consummate any Acquisition unless the following conditions shall have been satisfied in full: (i) The prior written approval of the Required Lenders, in their sole and absolute discretion, shall be required for (A) any such Acquisition of DBS territories involving consideration in excess of $50,000,000 and (B) any such Acquisition of broadcast television or cable television properties involving consideration in excess of $20,000,000. (ii) If such Acquisition involves the purchase of stock or other ownership interests, the same shall be effected in such a manner as to assure that the acquired entity becomes a direct or indirect Subsidiary of the Borrower and that the parent of such Subsidiary shall own all of such ownership interests. (iii) If such Acquisition involves the acquisition of broadcast television properties, each of the related FCC Licenses shall be held after the Acquisition in a License Subsidiary and each such License Subsidiary shall enter into an appropriate License Agreement with the Subsidiary holding the operating assets for the related Station. (iv) The Borrower shall have delivered to the Agent (in sufficient copies for all the Lenders) the following: (A) no later than thirty (30) days (or such shorter period as may be reasonably practicable, if approved by the Agent) prior to the consummation of any such Acquisition or, if earlier, ten (10) business days after the execution and delivery of the related Acquisition Agreement, copies of executed counterparts of such Acquisition Agreement, together with all Schedules thereto, the forms of any additional agreements or instruments to be executed at the closing thereunder (to the extent available), and all applicable financial information, including (1) as soon as practicably available following any fiscal quarter with respect to which the aggregate consideration paid or payable with respect to Permitted Acquisitions in such fiscal quarter exceeds $50,000,000, new Projections through December 31, 2005 (updated to reflect such Acquisition and any related transactions and showing compliance with all financial covenants), and (2) Subscriber Reports; (B) promptly following a request therefor, copies of such other information or documents relating to such Acquisition as any Lender shall have reasonably requested; and -62- (C) promptly following the consummation of such Acquisition, certified copies of the agreements, instruments and documents referred to above to the extent the same has been executed and delivered at the closing under such Acquisition Agreement. (v) The aggregate amount of all consideration payable by the Borrower or any Subsidiary or Subsidiaries in connection with such Acquisition (other than noncompetition and consulting agreements, earn-outs and customary post-closing adjustments, escrows, holdbacks and indemnities and Indebtedness permitted under Section 7.01) shall be payable on the date of such Acquisition. (vi) Neither the Borrower nor any Subsidiary shall, in connection with any such Acquisition, assume or remain liable with respect to any indebtedness (including any material tax or ERISA liability) of the related Seller(s), except (i) to the extent permitted under Section 7.01 and (ii) obligations of such Seller(s) incurred in the ordinary course of business and necessary or desirable to the continued operation of the underlying properties, and any other such liabilities or obligations not permitted to be assumed or otherwise supported by any of the Companies hereunder shall be paid in full or released as to the assets being so acquired on or before the consummation of such Acquisition. (vii) All other assets and properties acquired in connection with any such Acquisition shall be free and clear of any Liens other than Permitted Liens. (viii) The Borrower shall have complied as applicable with all of the provisions of Sections 2.01, 6.08 and 6.10 with respect to any acquired entity or assets, including the execution and delivery of such additional agreements, instruments, certificates, documents, consents, environmental site assessments, opinions and other papers as the Agent may reasonably require. (ix) Immediately prior to any such Acquisition and after giving effect thereto, no Default shall have occurred and be continuing. (x) Without limiting the generality of the foregoing, after giving effect to such Acquisition the Borrower shall be in compliance with the provisions of Article V, (A) calculated on a pro forma basis as of the last day of the most recently ended fiscal quarter for which financial statements are required to be provided, and have been so delivered, under Section 6.05 and (B) under the Borrower's updated Projections referred to in Section 7.05(b)(iv), if required to be provided thereunder. The Borrower shall provide to the Agent a certificate signed on behalf of the Borrower by an Authorized Officer demonstrating such compliance in reasonable detail. (xi) On or before the consummation of each such Acquisition, the Borrower shall deliver to the Agent (in sufficient copies for all the Lenders) and to the Agent's counsel a compliance certificate, substantially in the form of Schedule 7.05(a) hereto or such other form as shall be satisfactory to the Agent (each, an "Acquisition Compliance Certificate"), duly executed by an Authorized Officer of the Borrower, certifying as to the matters set forth above with respect to such Acquisition. In the event that such Acquisition is financed, in whole or in part, with the proceeds of Loans hereunder, the foregoing requirement shall be deemed satisfied upon delivery of the compliance certificate required under Section 3.02, in the form of Schedule 3.02(d), in connection with such Loans. -63- (xii) On or before the consummation of each such Acquisition involving the purchase or formation of a new Subsidiary and/or the execution of additional Security Documents or any other Loan Document, or otherwise, if reasonably required by the Agent, the Agent shall have received the favorable written opinions of (i) general counsel or regularly employed outside counsel to the Companies and (ii) special FCC counsel to the Companies (in the case of Acquisitions of cable television and broadcast television properties), in each case dated the date of such Loans, addressed to the Agent and the Lenders and substantially in the forms attached as Schedules 7.05(b) and (c) hereto. (xiii) Only if reasonably requested in connection with the recording of any mortgages or similar instruments or any material issues of state law raised in connection with such Acquisition, the Agent shall have received the favorable opinion of local counsel to the Companies, dated the date of such Acquisition, addressed to the Agent and the Lenders and substantially in the form attached as Schedule 7.05(d) hereto. Section 7.06. Local Marketing Agreements, Etc. Enter into any LMA or other similar arrangement, other than Permitted LMAs. Section 7.07. Management. Turn over the management of its properties, assets, rights, licenses and franchises to any Person other than the Manager or a full-time employee of the Companies. Section 7.08. Sale and Leaseback. Enter into any arrangements, directly or indirectly, with any Person whereby it shall sell or transfer any property, real, personal or mixed, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property; provided, however, that the Borrower and the Subsidiaries may engage in such transactions to the extent structured as Capital Leases and subject to the limitations in Section 7.01(g). -64- Section 7.09. Repurchase or Issuance of Equity Securities. (a) Repurchase or redeem any Equity Securities, except for repurchases and redemptions by the Companies of Equity Securities in the Subsidiaries which do not result in any Default (under Section 2.01 or otherwise); or (b) Issue any additional Equity Securities, except for securities (A) in respect of which the issuing Company has no obligation to redeem or to pay cash distributions or dividends, (B) which are pledged and, if certificated, delivered to the Agent in accordance with Section 2.01 and the applicable Security Document and (C) the issuance of which does not result in any Default. Section 7.10. Change in Business, Limits on Activities of Special Purpose Subsidiary. Engage, directly or indirectly, in any business other than the businesses in which it is currently engaged. Without limiting the generality of the foregoing, no Specified Subsidiary shall undertake any transactions or hold any assets or properties in addition to its existing assets, if any, until it shall have executed and delivered to the Agent all Security Documents required under Section 2.01 (without giving effect to any exceptions to such requirements set forth in Schedule 2.01(a)). In addition, the Special Purpose Subsidiary shall not engage, directly or indirectly, in any business other than that of paying, or reimbursing the DBS Subsidiaries for, Subscriber Acquisition Costs incurred by the DBS Subsidiaries (such payments or reimbursements being referred to collectively herein as the "SAC Payments") in exchange for commissions payable by the DBS Subsidiaries for each affected subscriber to DBS Services (collectively, the "SAC Commissions"), and shall (a) hold no assets other than such funds; (b) not incur, create, assume, become or be liable, directly, indirectly or contingently, in any manner with respect to, any Indebtedness or liability (other than liabilities to make SAC Payments accrued in the ordinary course); (c) not create, incur, assume, suffer or permit to exist any mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on any of its assets, now or hereafter owned; (d) not make any payments or engage in any other transactions, other than SAC Payments and distributions to the Finance Subsidiaries and PSTH; (e) not maintain cash on hand and other liquid investments exceeding $3,500,000 in the aggregate at any time; (f) distribute to the Finance Subsidiaries (i) all SAC Commissions on a regular basis (and, in any event, no less frequently than every third month) and (ii) any cash or other liquid investments exceeding $3,500,000 ("Excess SAC Cash"), no later than thirty (30) Business Days after such excess shall arise; and (g) concurrently with the distributions required under paragraph (f) above, contribute the Equity Securities in the Finance Subsidiaries to PSTH. Section 7.11. Accounts Receivable. Sell, assign, discount or dispose in any way of any accounts receivable, promissory notes or trade acceptances held by any Company, with or without recourse, except for collection (including endorsements) in the ordinary course of business and except to the extent permitted under Section 7.03. Section 7.12. Transactions with Affiliates. Except for the payment of permitted Management Fees and the License Agreements, enter into any transaction, including, without limitation, the purchase, sale or exchange of property or assets or the rendering or accepting of any service with or to any Affiliate of any Company, except in the ordinary course of business and pursuant to the reasonable requirements of its business and upon terms not less favorable to such Company than it could obtain in a comparable arm's-length transaction with a third party other than such Affiliate. Section 7.13. Amendment of Certain Agreements, Negative Pledges, Etc. (a) (i) Amend, modify, reform or terminate or permit the amendment, modification, reform or termination of, or waive compliance with any provision of or consent to any variance from the requirements of any CATV Franchise or FCC License, the MCT Note Documents, any DBS Agreement, the Subordinated Debt Documents, any agreement or instrument evidencing Permitted Seller Debt, Permitted Seller Subordinated Debt or other Subordinated Debt or any material agreement to which any Company is a party, in each case, if the effect thereof would be (i) to confer additional rights upon the other parties thereto which could have a Material Adverse Effect, (ii) to reduce the compensation payable by any party to any Company thereunder if the same could have a Material Adverse -65- Effect, (iii) to increase materially the obligations of any Company thereunder if the same could have a Material Adverse Effect or (iii) with respect to Subordinated Debt, to effect any material change to the terms or conditions thereof which is adverse to the obligor thereunder or to the Lenders or the Agent. (b) In any event, subject to applicable law, elect to terminate or amend any License Agreement. (c) Except for this Agreement, enter into or be bound by any agreement (including covenants requiring the maintenance of specified amounts of net worth or working capital) restricting the right of any Subsidiary to make distributions or extensions of credit to the Borrower (directly or indirectly through another Subsidiary). (d) Enter into any agreement (excluding this Agreement or any other Loan Document) prohibiting (a) any Company from amending or otherwise modifying this Agreement or any other Loan Document or (b) the creation or assumption of any Lien in favor of the Agent, the Lenders or their successors as holders of senior indebtedness upon the properties, revenues or assets of any Company, whether now owned or hereafter acquired. (e) Renew or enter into any material agreement without using commercially reasonable efforts to obtain the written consents of such third parties necessary to effect the collateral assignment thereof in accordance with Section 2.01. (f) Enter into any agreement to effect a transaction that is prohibited under this Agreement or any other Loan Document, unless such agreement is expressly subject to the written consent of the Required Lenders hereunder. Section 7.14. ERISA. (a) Fail to make contributions to pension plans required by Section 412 of the Code, (b) fail to make payments required by Title IV of ERISA as the result of the termination of a single employer pension plan or withdrawal or partial withdrawal from a multiemployer pension plan, or (c) fail to correct a prohibited transaction with an employee benefit plan with respect to which it is liable for the tax imposed by Section 4975 of the Code. Section 7.15. Margin Stock. Use or permit the use of any of the proceeds of the Loans, directly or indirectly, for the purpose of purchasing or carrying, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry, any Margin Stock or for any other purpose which might constitute the transactions contemplated hereby a "purpose credit" within the meaning of Regulation U (12 CFR Part 221) of the Board of Governors of the Federal Reserve System, or cause any Loan, the application of proceeds thereof or this Agreement to violate Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of such Board or the Securities Exchange Act of 1934, as amended, or any rules or regulations promulgated under such statutes. VIII. DEFAULTS. In each case of happening of any of the following events (each of which is herein sometimes called an "Event of Default"): (a) any representation or warranty made by or on behalf of any Company or any of its Affiliates (including without limitation those of the Parent Affiliates which are parties to any Loan Documents) in this Agreement or any other Loan Documents, or in any report, certificate, financial statement or other instrument furnished in connection with this Agreement or the borrowings hereunder, shall prove to be false or misleading in any material respect when made or reconfirmed; (b) default in the payment or mandatory prepayment of any installment of the principal of any Note or any payment of any installment of the principal of any other indebtedness of any Company to the Agent or any Lender, or any payment in respect of any Reimbursement Obligation, or any payment in respect of any Rate Hedging Obligations entered into with the Agent or any Lender, when the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment or by acceleration or otherwise; (c) default in the payment of any interest on any Note, or any premium, fee or other indebtedness of any Company to the Agent or any Lender for more than five (5) calendar days after the date when the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment or by acceleration or otherwise; (d) default by any Person other than the Agent or any Lender in the due observance or performance of, or compliance with, any covenant or agreement contained in Article III or V, Sections 6.02, 6.03 (but only if the same involves any seizure or property), 6.04, 6.05, 6.06, 6.07, 6.09 and 6.11 or -66- Article VII of this Agreement; provided, however, that a default in the delivery of financial or other information under paragraphs (b) through (e) of Section 6.05 shall not constitute an Event of Default unless and until the same continues unremedied for thirty (30) days after (i) written notice thereof from the Agent or any Lender to the Borrower or (ii) if earlier, the occurrence thereof (provided that such thirty (30) day period shall be available for the remedy of any such default only once in any period of twelve (12) consecutive months and three (3) times during the term of this Agreement); (e) default by any Person other than the Agent or any Lender in the due observance or performance of, or compliance with, any other covenant, condition or agreement to be observed or performed pursuant to the terms of this Agreement or pursuant to the terms of any Security Document or any Rate Hedging Obligation entered into with the Agent or any Hedging Lender, which default is not referred to in paragraphs (a) through (d), inclusive, of this Article VIII and which default shall continue unremedied for thirty (30) days after the earlier to occur of (i) the Borrower's discovery of such default, or (ii) written notice thereof from the Agent or any Lender to the Borrower, provided, however, that if any such default cannot be remedied, then such default shall be deemed to be an Event of Default as of the date of the occurrence thereof; (f) (i) any Subordinated Indenture Default or (ii) any default with respect to any Indebtedness of any Company (other than to the Lenders hereunder) for borrowed money, or default under any agreement giving rise to monetary remedies, in each case which, when aggregated with all other such defaults of the Companies, exceeds $2,000,000, if the effect of such default is to permit the holder of such Indebtedness to accelerate the maturity of such Indebtedness, unless such holder shall have permanently waived the right to accelerate the maturity of such Indebtedness on account of such default; (g) (i) any Company shall lose, fail to keep in force, suffer the termination, suspension or revocation of or terminate, forfeit or suffer a material adverse amendment to any CATV Franchise at any time held by it, the loss, termination, suspension, revocation or amendment of which could adversely affect the Borrower's ability to perform its obligations under this Agreement or the Notes, including without limitation the obligations set forth in Section 5.01 (a "Significant Franchise") or any material FCC License; (ii) any governmental regulatory authority shall conduct a hearing on the renewal of any Significant Franchise or any material FCC License and the result thereof is reasonably likely to be the termination, revocation, suspension or material adverse amendment of such Significant Franchise or FCC License; or (iii) any governmental regulatory authority shall commence an action or proceeding seeking the termination, suspension, revocation or material adverse amendment of any Significant Franchise or any material FCC License and the result thereof is likely to be the termination, suspension, revocation or material adverse amendment of such Significant Franchise or FCC License; (h) the cable television operations of any System(s) served pursuant to one or more Significant Franchises or the on-the-air television operation of any Stations(s) shall be interrupted at any time for more than (x) seventy-two (72) consecutive hours, unless such interruption occurs by reasons of force majeure, or (y) in the event of force majeure, fourteen (14) days, in each case, unless (and only so long as) all damages, liabilities and other effects of such interruption of service (including any adverse effect on the Borrower's ability to perform its obligations under this Agreement and the Notes) are fully covered by business interruption insurance; (i) (i) any NRTC Member Agreement or other DBS Agreement shall be terminated, shall expire or shall be amended in a manner reasonably likely to have a Material Adverse Effect, (ii) any DirecTV Agreement (including the HCG Agreement) shall terminate, shall expire or shall be amended in a manner reasonably likely to have a Material Adverse Effect or (iii) any default shall occur under the HCG Agreement, and NRTC shall take action to terminate the HCG Agreement; (j) the loss, termination, suspension, revocation or amendment (in a manner reasonably likely to have a Material Adverse Effect) of any license issued to HCG, any Company or DirecTV or any other party by the FCC in connection with the delivery of DIRECTV or other DBS Rights under any DirecTV Agreement or any NRTC Member Agreement; (k) DBS services provided to any of the Subscribers shall be interrupted or terminated, whether due to satellite damage or destruction or other circumstances, if the same has or could have a Material Adverse Effect; (l) any default with respect to any Indebtedness of the Parent which, when aggregated with all other such defaults of the Parent, exceeds $15,000,000, if the effect of such default is to permit the holder of such Indebtedness to -67- accelerate the maturity of such Indebtedness, unless such holder shall have permanently waived the right to accelerate the maturity of such Indebtedness on account of such default; (m) any Company or group of Companies generating in the aggregate more than five percent (5%) of EBITDA for any period shall discontinue its or their respective business(es) or the Parent, any Company or the Manager shall (i) apply for or consent to the appointment of a receiver, trustee, custodian or liquidator of it or any of its property, (ii) be unable, or admit in writing its inability, to pay its debts as they mature, (iii) make a general assignment for the benefit of creditors, (iv) be adjudicated a bankrupt or insolvent or be the subject of an order for relief under Title 11 of the United States Code or (v) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law or corporate action shall be taken for the purpose of effecting any of the foregoing; (n) there shall be filed against any Company, the Parent or the Manager an involuntary petition seeking reorganization of such company or the appointment of a receiver, trustee, custodian or liquidator of such company or a substantial part of its assets, or an involuntary petition under any bankruptcy, reorganization or insolvency law of any jurisdiction, whether now or hereafter in effect and such involuntary petition shall not have been dismissed within sixty (60) days thereof; (o) final judgment for the payment of money which, when aggregated with all other outstanding judgments against any of the Companies, exceeds $5,000,000 (exclusive of amounts covered by insurance or actually contributed in cash by third party obligors with respect to such judgments) shall be rendered against any Company, and the same shall remain undischarged (unless fully bonded upon terms satisfactory to the Required Lenders) for a period of thirty (30) consecutive days, during which execution shall not be effectively stayed; (p) the occurrence of any attachment of any deposits or other property of any Company in the hands or possession of the Agent or any of the Lenders, or the occurrence of any attachment of any other property of any Company in an amount which, when aggregated with all other attachments against the Companies, exceeds $1,000,000 and which shall not be discharged within sixty (60) days of the date of such attachment; (q) for any reason, (i) the Borrower shall cease to own directly or indirectly all of the issued and outstanding capital stock of each of its Subsidiaries (other than the Permitted Preferred Stock); (ii) the Parent shall cease to own all of the issued and outstanding shares of capital stock of the Borrower; or (iii) a "Change of Control" (as defined in the Subordinated Indenture, the PCC Preferred Stock Designation, the PCC Exchange Indenture, the PCC 1997 Indenture or the PCC 1998 Indenture) shall occur; or (r) for any reason (other than the gross negligence of the Agent or the Lenders, but without limiting in any way the Borrower's obligations under Section 6.08(b), any material Security Document or other Loan Document shall not be in full force and effect in all material respects or shall not be enforceable in all material respects in accordance with its terms, or any security interest(s) or lien(s) granted pursuant thereto which is, or are in the aggregate, material shall fail to be perfected, or any party thereto other than the Agent or the Lenders shall contest the validity of any material lien(s) granted under, or shall disaffirm its obligations under, any material Security Document or other Loan Document; then and upon every such Event of Default and at any time thereafter during the continuance of such Event of Default, at the election of the Required Lenders as provided in Article XI, the Commitments shall terminate and the Notes and any and all other Indebtedness of the Borrower to the Lenders shall immediately become due and payable, both as to principal and interest, without presentment, demand, prior notice, or protest, all of which are hereby expressly waived, anything contained herein or in the Notes or other evidence of such indebtedness to the contrary notwithstanding (except in the case of an Event of Default under paragraph (m) or (n) of this Article VIII which, under applicable law, would result in the automatic acceleration of the Borrower's Indebtedness, in which event the Commitments shall automatically terminate and such Indebtedness shall automatically become due and payable). IX. REMEDIES ON DEFAULT, ETC. In case any one or more Events of Default shall occur and be continuing, the Agent and the Lenders may proceed to protect and enforce their rights by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained in this Agreement, any Security Document or the Notes, or for an injunction against a violation of any of the terms hereof or thereof or in and -68- of the exercise of any power granted hereby or thereby or by law, all subject to the provisions of Article XI. IN THE EVENT THAT THE AGENT SHALL APPLY FOR THE APPOINTMENT OF, OR TAKING POSSESSION BY, A TRUSTEE, RECEIVER OR LIQUIDATOR OF THE BORROWER OR ANY OF ITS SUBSIDIARIES OR OF ANY OTHER SIMILAR OFFICIAL, TO HOLD OR LIQUIDATE ALL OR ANY SUBSTANTIAL PART OF THE PROPERTIES OR ASSETS OF THE BORROWER OR SUCH SUBSIDIARY FOLLOWING THE OCCURRENCE OF A DEFAULT IN PAYMENT OF ANY AMOUNT OWED TO THE AGENT OR ANY LENDER HEREUNDER, THE BORROWER, FOR ITSELF AND ON BEHALF OF ITS SUBSIDIARIES (WITH ALL DUE AND PROPER AUTHORIZATION OF THE BOARDS OF DIRECTORS, PARTNERS OR MEMBERS, AS THE CASE MAY BE, OF EACH OF THE SUBSIDIARIES), HEREBY JOINTLY AND SEVERALLY CONSENT TO SUCH APPOINTMENT AND TAKING OF POSSESSION AND AGREE TO EXECUTE AND DELIVER ANY AND ALL DOCUMENTS REQUESTED BY THE AGENT RELATING THERETO (WHETHER BY JOINING IN A PETITION FOR THE VOLUNTARY APPOINTMENT OF, OR ENTERING NO CONTEST TO A PETITION FOR THE APPOINTMENT OF, SUCH AN OFFICIAL OR OTHERWISE, AS APPROPRIATE UNDER APPLICABLE LAW). No right conferred upon the Agent or the Lenders hereby or by any Security Document or the Notes shall be exclusive of any other right referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. X. THE AGENT. Section 10.01. Appointment, Powers and Immunities. (a) Each Lender hereby irrevocably (subject to Section 10.08) designates and appoints Bankers Trust Company, which designation and appointment is coupled with an interest, as the Agent of such Lender under this Agreement and the other Loan Documents, acting in the capacity of an administrative agent, and each such Lender irrevocably authorizes Bankers Trust Company, as the Agent of such Lender, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. (b) The Agent (which term as used in this sentence and in Section 10.05 and the first sentence of Section 10.06 shall include reference to its affiliates and its own and such affiliates' officers, directors, employees and agents) shall not: (i) have any duties or responsibilities to be a trustee or other fiduciary for any Lender; (ii) be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by either of them under, this Agreement, or for the value, validity, effectiveness, genuineness, enforceability, perfection or sufficiency of this Agreement, any Note, any Security Document or any other document referred to or provided for herein or for any failure by any Company or any other Person to perform any of its obligations hereunder or thereunder; (iii) be required to initiate or conduct any litigation or collection proceedings hereunder except to the extent requested by the Required Lenders; and (iv) be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith, except for its own gross negligence or willful misconduct. (c) The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact it selects with reasonable care. (d) Subject to the foregoing, to Article XI and to the provisions of any intercreditor agreement among the Lenders in effect from time to time, the Agent shall, on behalf of the Lenders, (i) hold and apply any and all Collateral, and the proceeds thereof, at any time received by it, in accordance with the provisions of the Security Documents and this Agreement; (ii) exercise any and all rights, powers and remedies of the Lenders under this Agreement, the Security Documents and the other Loan Documents, including the giving of any consent or waiver or the entering into of any amendment, subject to the provisions of Article XI; (iii) execute, deliver and file UCC Financing Statements, Mortgages, lease assignments and other such agreements, and possess instruments on behalf of any or all of the Lenders; and (iv) in the event of acceleration of the Borrower's Indebtedness hereunder, sell or otherwise liquidate or dispose of any portion of the Collateral held by it and otherwise exercise the rights of the Lenders hereunder and under the Security Documents. (e) The Lenders hereby authorize the Agent, at its option and in its discretion, to release any Lien granted to or held by the Agent upon any Collateral (i) upon termination or expiration of the Commitments and payment in full of all of the Obligations, (ii) constituting property sold or to be sold or disposed of as part of or in connection with any Disposition expressly permitted hereunder or under any other Loan Document or to which the Required Lenders have -69- consented as provided herein or (iii) otherwise pursuant to and in accordance with the provisions of any applicable Loan Document. Upon request by the Agent at any time, the Lenders will confirm in writing the Agent's authority to release Collateral pursuant to this Section. Section 10.02. Reliance by Agent. The Agent shall be entitled to rely upon any certification, notice or other communication (including any communication by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by this Agreement, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Required Lenders or the Lenders, as the case may be, and such instructions and any action taken or failure to act pursuant thereto shall be binding on the Lenders. Section 10.03. Events of Default. The Agent shall not be deemed to have knowledge of the occurrence of an Event of Default (other than the non-payment of principal of or interest on the Notes) unless it has received written notice from any Lender or the Borrower specifying such Event of Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of an Event of Default, the Agent shall give prompt notice thereof to the Lenders (and shall give each Lender prompt notice of each such non-payment). The Agent shall (subject to Section 10.07) take such action with respect to such Event of Default as shall be directed by the Required Lenders, as provided under Article XI, provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action on behalf of the Lenders, or refrain from taking such action, with respect to such Event of Default as it shall deem advisable in the best interest of the Lenders. Section 10.04. Rights as a Lender. With respect to its Commitment and the Loans made by Bankers Trust Company hereunder, Bankers Trust Company shall have the same rights and powers hereunder as any other Lenders and may exercise the same as though it were not acting as the Agent. The Agent and its affiliates may, without having to account therefor to the Lenders and without giving rise to any fiduciary or other similar duty to any Lender, accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with the Borrower and any of its Affiliates as if it were not acting as an Agent and as if it were not a Lender, and the Agent may accept fees and other consideration from any Company, the Parent or any other Parent Affiliate for services in connection with this Agreement or otherwise without having to account for the same to the Lenders. Section 10.05. Indemnification. The Lenders agree to indemnify the Agent (to the extent not reimbursed under Section l3.02, but without limiting the obligations of the Borrower under such Section 13.02), ratably in accordance with the aggregate principal amount of the Notes and Commitments held by the Lenders (or, if no such principal or interest is outstanding, ratably in accordance with their respective Commitments), for any and all liabilities, obligations, losses, damages, penalties, action, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent any way relating to or arising out of this Agreement or any other Loan Document contemplated by or referred to herein or the transactions contemplated by or referred to herein or therein (including, without limitation, the costs and expenses which the Borrower is obligated to pay under Section 13.02) or the enforcement of any of the terms of this Agreement or of any other Loan Document or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. Section 10.06. Non-Reliance on Agent and Other Lenders. Each Lender agrees that it has, independently and without reliance on the Agent or any other Lenders, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Companies and its own decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Lenders, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Agent shall not be required to keep itself informed as to the performance or observance by the Companies of this Agreement or any other Loan Document or to inspect the properties or books of the Companies. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall have no duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or businesses of the Companies (or any of their -70- Affiliates) which may come into the possession of the Agent or any of its affiliates. Notwithstanding the foregoing, the Agent will provide to the Lenders any and all information reasonably requested by them and reasonably available to the Agent promptly upon such request. Section 10.07. Failure to Act. Except for action expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Section 10.08. Resignation of Agent. Bankers Trust Company (or any other Agent hereunder), may resign as the Agent at any time by giving ten (10) days' prior written notice thereof to the Lenders and the Borrower. Any such resignation shall take effect at the end of such ten (10) day period or upon the earlier appointment of a successor Agent by the Required Lenders as provided below. Upon any resignation of Bankers Trust Company (or any other Agent hereunder), and subject to the Borrower's approval (which approval shall not be unreasonably withheld or delayed and shall not be required with respect to any such appointment made during the existence of any Event of Default) the Required Lenders shall appoint a successor agent from among the Lenders or, if such appointment is deemed inadvisable or impractical by the Required Lenders, another financial institution with a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent. After the effective date of the resignation of an Agent hereunder, the retiring Agent shall be discharged from its duties and obligations hereunder, provided that the provisions of this Article X shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. In the event that there shall not be a duly appointed and acting Agent, the Borrower agrees to make each payment due to the Agent hereunder and under the Notes, and the other Loan Documents if any, directly to each Lender entitled thereto, pursuant to written instructions provided by the resigning Agent or, after such resignation, the Lenders, and to provide copies of each certificate or other document required to be furnished to the Agent hereunder, if any, directly to each Lender. Section 10.09. Cooperation of Lenders. Each Lender shall (a) promptly notify the other Lenders and the Agent of any Event of Default known to such Lender under this Agreement and not reasonably believed to have been previously disclosed to the other Lenders; (b) provide the other Lenders and the Agent with such information and documentation as such other Lenders or the Agent shall reasonably request in the performance of their respective duties hereunder, including, without limitation, all information relative to the outstanding balance of principal, interest and other sums owed to such Lender by the Borrower; and (c) cooperate with the Agent with respect to any and all collections and/or foreclosure procedures at any time commenced against the Borrower or otherwise in respect of the Collateral by the Agent in the name and on behalf of the Lenders. Section 10.10. Documentation Agent, Syndication Agent and Co-Arrangers. Except as expressly provided in this Agreement and the Fee Agreements, the Documentation Agent, the Syndication Agent and the Co-Arrangers shall not have any rights or obligations under this Agreement or any of the other Loan Documents other than in their respective capacities as Lenders hereunder and thereunder. XI. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS; SEPARATE ACTIONS BY THE LENDERS. (a) This Agreement (including the Schedules hereto) and the other Loan Documents constitute the entire agreement of the parties herein and supersede any and all prior agreements, written or oral, as to the matters contained herein, and no modification or waiver of any provision hereof or of the Notes or any other Loan Document, nor consent to the departure by any Company therefrom, shall be effective unless the same is in writing, and then such waiver or consent shall be effective only in the specific instance, and for the purpose, for which given. Except as hereafter provided, the consent of the Required Lenders shall be required and sufficient (i) to amend, with the consent of the Borrower, any term of this Agreement, the Notes or any other Loan Document or to waive the observance of any such term (either generally or in a particular instance or either retroactively or prospectively); (ii) to take or refrain from taking any action under this Agreement, the Notes, any other Loan Document or applicable law, including, without limitation, (A) the acceleration of the payment of the Notes, (B) the termination of the Commitments, (C) the exercise of the Agent's and the Lenders' remedies hereunder and under the Security Documents and (D) the giving of any approvals, consents, directions or instructions required under this Agreement or the Security Documents; provided that no such amendment, waiver, consent or other action shall, without the prior -71- written consent of each Lender (other than a Defaulting Lender and, with respect to matters addressed in clause (1) below, only such Lenders holding Obligations directly affected thereby), (1) extend the final scheduled maturity of any Loan or Note or extend the stated maturity of any Letter of Credit beyond the Expiration Date (it being understood that no waiver or modification of any condition precedent, covenant or Default shall constitute any such extension), or reduce the rate or extend the time of payment of interest or fees thereon, or reduce the principal amount thereof; (2) release all or substantially all of the Collateral (except as expressly provided in this Agreement or the Security Documents) under the Security Documents; (3) amend, modify or waive any provision of Section 1.09(e) or this Article XI; (4) reduce any percentage specified in the definition of Required Lenders (it being understood that, with the consent of the Required Lenders, additional extensions of credit pursuant to this Agreement may be included in the determination of the Required Lenders on substantially the same basis as the Commitments are included on the Closing Date); or (5) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement; and provided, further, that no such amendment, waiver, consent or other action shall (x) increase the Commitment of any Lender over the amount thereof then in effect without the consent of such Lender (it being understood that (aa) no waiver or modification of any condition precedent, covenant or Default or of any mandatory reduction in the aggregate Commitments shall constitute an increase in the respective Commitment of any Lender and (bb) an increase in the available portion of any Commitment of any Lender shall not constitute an increase in the respective Commitment of such Lender); (y) without the consent of the Issuing Bank or the DTS Agent, amend, modify or waive any provision of Section 1.02 applicable thereto or alter its respective rights or obligations with respect to the Letters of Credit or the DTS Letters of Credit, respectively; or (z) without the consent of the Agent, amend, modify or waive any provision of Article X as same applies to the Agent or any other provision of any Loan Document as same relates to the rights or obligations of the Agent. (b) If, in connection with any such proposed amendment, waiver, consent or other action under any of the provisions of this Agreement as contemplated by clauses (1) through (5), of subsection (a) above, the consent of the Required Lenders is obtained but the consent of one or more of such other Lenders whose consent is required is not obtained, then the Borrower shall have the right (so long as all non-consenting Lenders whose individual consent is required are treated as described in either clause (i) or (ii) below), to either (i) replace such non-consenting Lender or Lenders with one or more Replacement Lenders, so long as at the time of such replacement each such Replacement Lender consents to the proposed amendment, waiver, consent or other action or (ii) terminate such non-consenting Lender's Commitment (if such Lender's consent is required as a result of its Commitment) and repay all outstanding Loans of such Lender which gave rise to the need to obtain such Lender's consent and/or cash collateralize its Letter of Credit Exposure, in accordance with Sections 1.02(g) and 1.09(e), provided that, unless the Commitments which are terminated and the Loans which are repaid pursuant the preceding clause (ii) are immediately replaced in full at such time through the addition of one or more new Lenders or the increase of the Commitments and/or outstanding Loans of existing Lenders (which in each case must specifically consent thereto), then in the case of any action pursuant to the foregoing clause (ii), the Required Lenders (determined after giving effect to the proposed action) shall specifically consent thereto, and provided, further, that the Borrower shall not have the right to replace a Lender, terminate its Commitments or repay its Loans solely as a result of the exercise of such Lender's rights (and the withholding of any required consent by such Lender) pursuant to the second proviso to subsection (a) of this Article XI. (c) Any amendment or waiver effected in accordance with this Article XI shall be binding upon each holder of any Note at the time outstanding, each future holder of any Note and the Borrower. The Lenders' failure to insist -72- (directly or through the Agent) upon the strict performance of any term, condition or other provision of this Agreement, any Note, or any of the Security Documents or other Loan Documents, or to exercise any right or remedy hereunder or thereunder, shall not constitute a waiver by the Lenders of any such term, condition or other provision or Default in connection therewith, nor shall a single or partial exercise of any such right or remedy preclude any other or future exercise, or the exercise of any other right or remedy; and any waiver of any such term condition or other provision or of any such Default shall not affect or alter this Agreement, any Note or any of the Security Documents or other Loan Documents, and each and every term, condition and other provision of this Agreement, the Notes and the Security Documents or other Loan Documents shall, in such event, continue in full force and effect and shall be operative with respect to any other then existing or subsequent Default in connection therewith. An Event of Default hereunder and under any Note or Security Document shall be deemed to be continuing unless and until cured or waived in writing by the applicable Lenders, as provided in subsection (a) above. XII. BENEFIT OF AGREEMENT; ASSIGNMENTS AND PARTICIPATIONS. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders and the Agent and their respective successors and permitted assigns, and all subsequent holders of any of the Notes or any portion thereof. (b) Each Lender may assign its rights and interests under this Agreement, the Notes and the Security Documents and/or delegate its obligations hereunder and thereunder, in whole or in part, and sell participations in the Notes and the Security Documents as security therefor, provided as follows: (i) Any such assignment, other than an assignment in whole, made other than to (A) another Lender, (B) a separately organized branch of a Lender or (C) a Related Lender Party, shall reflect an assignment of such assigning Lender's Notes and Commitments which is in an aggregate principal amount of at least $2,500,000, unless each of the Borrower and the Agent otherwise consents to a lesser amount. (ii) Notwithstanding any provision of this Agreement to the contrary, (A) each Lender may at any time pledge all or any portion of its rights under this Agreement and each of the other Loan Documents, including without limitation its Loans and the Notes held by such Lender, to a Federal Reserve Bank (or equivalent thereof in the case of Lenders chartered outside of the United States) in support of borrowings made by such Lender from such Federal Reserve Bank and (B) any Lender that is a fund that invests in bank loans may, without the consent of the Agent or the Borrower, pledge all or any portion of its Notes or Loans to any holders of obligations owed, or securities issued, by such fund, as security for such obligations or securities, or to any trustee for, or any other representative of, such holders; provided that any foreclosure or similar action by such trustee shall be subject to the provisions of this Section concerning assignments. No pledge pursuant to this subsection (ii) shall release the transferor Lender from any of its obligations and liabilities under the Loan Documents. (iii) Any assignments and/or delegations made hereunder shall be pursuant to an instrument of assignment and acceptance (the "Assignment and Acceptance") substantially in the form of Schedule 12 and the parties to each such assignment shall execute and deliver to the Agent for its acceptance the Assignment and Acceptance together with any Note or Notes subject thereto. Upon such execution and delivery, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof unless otherwise permitted by the Agent, (A) the assignee thereunder shall become a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with applicable Commitments as set forth therein and (B) the assigning Lender thereunder shall, to the extent provided in such assignment, be released from its obligations under this Agreement as to that portion of its obligation being so assigned and delegated. The Assignment and Acceptance shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of the assignee as a Lender and the resulting adjustment of Commitments arising from the purchase by and delegation to such assignee of all or a portion of the rights and obligations of such assigning Lender under this Agreement. -73- (iv) The Agent, on behalf of the Borrower, shall maintain at the address of the Agent referred to in Section 13.03 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Commitments of, and principal amounts of the Loans owing to, and any Notes evidencing the Loans owned by, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders shall treat each Person whose name is recorded in the Register as the owner of a Loan or other obligation hereunder as the owner thereof for all purposes of this Agreement and the other Loan Documents, notwithstanding any notice to the contrary. Any assignment of any Loan or other obligation hereunder shall be effective only upon appropriate entries with respect thereto being made in the Register. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (v) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and the assignee together with the Note or Notes subject to such assignment (or a standard indemnity letter from the respective assigning Lender in respect of any lost Note or Notes) and payment by the assigning Lender or the assignee to the Agent of registration and processing fees of $3,500 in the aggregate (except with respect to assignments (A) to any Related Lender Party or another Lender or (B) by the Agent, the Syndication Agent or the Documentation Agent, in their capacities as Lenders), the Agent shall promptly accept such Assignment and Acceptance and record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrower. Such Assignment and Acceptance and the assignment evidenced thereby shall only be effective upon appropriate entries with respect to the information contained therein being made in the Register pursuant to subparagraph (iv) above. (vi) Within five (5) Business Days after receipt of such notice, the Borrower shall execute and deliver to the Agent in exchange for evidence of the delivery to the Agent of a copy of each such surrendered Note, marked "Superseded"), one or more new Notes payable to the order of such assignee in an amount equal to the portion of the applicable Commitment assumed and/or Loans purchased by such assignee pursuant to such Assignment and Acceptance and a new Note payable to the order of the assigning Lender in an amount equal to the portion of the applicable Commitment(s) and/or Loans retained by it hereunder. Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form provided in Section 1.01. Copies of the superseded Notes shall be delivered to the Borrower upon execution and delivery of such new Notes and the original superseded Notes shall be returned to the assignors thereof. (vii) Each Lender may sell participations in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments and the Notes held by it); provided, however, that, no Lender shall transfer or grant any participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any other Loan Document, except to the extent such amendment or waiver would (A) extend the final scheduled maturity of any Loan, Note or Letter of Credit (unless such Letter of Credit is not extended beyond the Expiration Date) in which such participant is participating, or reduce the rate or extend the time of payment of interest or fees thereon (except in connection with a waiver of applicability of any post-default increase in interest rates) or reduce the principal amount thereof, or increase the amount of the participant's participation over the amount thereof, or increase the amount of the participant's participation over the amount thereof then in effect (it being understood that no waiver or modification of any condition precedent, covenant or Default or of any mandatory reduction in the aggregate Commitments shall constitute a change in the terms of such participation, that an increase in any Commitment or Loan shall be permitted without the consent of any participant if the participant's participation is not increased as a result thereof and that any amendment or modification to the financial definitions in this Agreement shall not constitute a reduction in any rate of interest or fees for purposes of this clause (A)), (B) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement or (C) release all or substantially all of the Collateral under all of the Security Documents (except as expressly provided in the Security Documents) supporting the Loans hereunder in which such participant is participating. In the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Loan Documents (the participant's rights -74- against such Lender in respect of such participation to be those set forth in the agreement executed by such Lender in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Lender had not sold such participation. (viii) Except for an assignment made to (i) another Lender, (ii) a separately organized branch of a Lender or (iii) a Related Lender Party, and except during the existence of a Default, no assignment referred to above shall be permitted without the prior written consent of the Agent and the Borrower, which consent shall not be unreasonably withheld or delayed. (ix) The Borrower may not assign any of its rights or delegate any of its duties or obligations hereunder. (x) To the extent that an assignment of all or any portion of a Lender's Commitment and outstanding Loans pursuant to subsection (b) of Article XI or this Article XII would, due to circumstances existing at the time of such assignment, result in costs under Sections 1.11, 1.13 or 1.14 which are increased from those being charged by the respective assigning Lender prior to such assignment, then the Borrower shall not be obligated to pay such increased costs (although the Borrower shall be obligated to pay any other increased costs of the type described above resulting from changes after the date of the respective assignment). (xi) Any Lender may, in connection with any assignment or participation pursuant to this Section, disclose to the assignee or participant any information relating to the Companies and the Parent Affiliates furnished to such Lender by or on behalf of the Borrower and such assignee or participant shall treat such information as confidential. XIII. MISCELLANEOUS. Section 13.01. Survival. This Agreement and all covenants, agreements, representations and warranties made herein and in the certificates delivered pursuant hereto, shall survive the making by the Lenders of the Loans and shall continue in full force and effect so long as any Obligation is outstanding and unpaid or any Lender has any obligation to advance funds to the Borrower or any other Company hereunder. In addition, notwithstanding anything herein or under applicable law to the contrary, the provisions of this Agreement and the other Loan Documents relating to indemnification or payment of fees, costs and expenses, including without limitation the provisions of Sections 1.11, 1.13, 1.14, 10.05, 13.02 and 13.14, shall survive the payment in full of all Loans, the termination or expiration of the Commitments and any termination of this Agreement or of any other Loan Document. Section 13.02. Fees and Expenses; Indemnity; Etc. The Borrower agrees (a) to pay or reimburse the Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation, negotiation, interpretation and execution of, and any amendment, supplement or modification to, this Agreement, the Notes and any other Loan Documents and the consummation and administration of the transactions contemplated hereby, including without limitation the reasonable fees and disbursements of (i) counsel to the Agent, and (ii) such agents of the Agent not regularly in its employ, and accountants, other auditing services, consultants and appraisers engaged by or on behalf of the Agent or by the Borrower at the request of the Agent (collectively, "Third Parties"); (b) to pay or reimburse the Agent for all its reasonable costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the Notes and any other Loan Documents, including, without limitation, the reasonable fees and disbursements of (i) counsel to the Agent and (ii) Third Parties; (c) following the occurrence of an Event of Default hereunder, to pay or reimburse the Lenders for the reasonable fees and disbursements of counsel for the respective Lenders engaged for the preservation or enforcement of such Lender's rights under this Agreement or any other Loan Documents relating to such Event of Default; (d) to pay, indemnify, and hold each Lender and the Agent harmless from, any and all recording and filing fees and taxes, lien discharge fees and taxes, intangible taxes and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which -75- may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the Notes and any other Loan Documents; and (e) to pay, indemnify, and hold each Lender and the Agent (and their respective directors, officers, employees, agents and other affiliates) harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of, or any transaction contemplated by, any Loan Document or the use or proposed use of the proceeds of the Loans or the refinancing or restructuring of the credit arrangement provided under this Agreement in the nature of a "work-out" or any proceedings with respect to the bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation of any Company or any other party other than the Lender or the Agent to any Loan Document (all the foregoing in this clause (e), collectively, the "indemnified liabilities"); provided, that the Borrower shall have no obligation hereunder to the Agent or any Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Agent or any such Lender. The agreements in this Section shall survive repayment of the Notes and all other amounts payable hereunder. Section 13.03. Notice. (a) All notices, requests, demands and other communications provided for hereunder (including without limitation Loan Requests) shall be in writing (including telecopied communication) and mailed or telecopied or delivered to the applicable party at the addresses indicated below. If to the Agent: Bankers Trust Company One Bankers Trust Plaza 130 Liberty Street - 34th Floor New York, New York 10006 Attention: Gregory P. Shefrin Telecopy No.: (212) 250-7218 and if to any Lender, at the address set forth on the appropriate signature page hereto or, with respect to any assignee of the Notes under Article XII, at the address designated by such assignee in a written notice to the other parties hereto.; in each case (except for routine communications), with a copy to: Elizabeth H. Munnell, Esq. Edwards & Angell, LLP 101 Federal Street Boston, Massachusetts 02110 Telecopy No.: (617) 439-4170 If to the Borrower: Mr. Marshall W. Pagon Pegasus Media & Communications, Inc. c/o Pegasus Communications Management Company 225 City Line Avenue Bala Cynwyd, Pennsylvania 19004 Telecopy No.: (610) 934-7072 with a required copy to Ted S. Lodge, Esq. at the immediately foregoing address and with a copy (except for routine communications) to: Michael B. Jordan, Esq. Drinker Biddle & Reath LLP One Logan Square 18th and Cherry Street Philadelphia, Pennsylvania 19103-6996 Telecopy No.: (215) 988-2757 -76- or, as to each party, at such other address as shall be designated by such parties in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communication shall be deemed given upon receipt by the party to whom such notice is directed. (b) The address of the Agent for payment hereunder is as follows: Bankers Trust Company One Bankers Trust Plaza 130 Liberty Street - 14th Floor New York, New York 10006 ABA: 021001033 For credit to Commercial Loan Division, Account No.: 99401268 Re: Pegasus Media & Communications, Inc. Telecopy No.: (212) 250-7351 Attention: Gaelle J. Vaval Section 13.04. Governing Law. This Agreement and the Notes shall be construed in accordance with and governed by the internal laws of the State of New York (without giving effect to any conflicts or choice of laws provisions that would cause the application of the domestic substantive laws of any other jurisdiction). Section 13.05. CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL. (a) THE BORROWER, TO THE EXTENT THAT IT MAY LAWFULLY DO SO, HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AS WELL AS TO THE JURISDICTION OF ALL COURTS TO WHICH AN APPEAL MAY BE TAKEN FROM SUCH COURTS, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF ANY OF ITS OBLIGATIONS ARISING HEREUNDER OR UNDER THE NOTES OR THE SECURITY DOCUMENTS OR WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY, AND EXPRESSLY WAIVES ANY AND ALL OBJECTIONS IT MAY HAVE AS TO VENUE, INCLUDING, WITHOUT LIMITATION, THE INCONVENIENCE OF SUCH FORUM, IN ANY OF SUCH COURTS. IN ADDITION, TO THE EXTENT THAT IT MAY LAWFULLY DO SO, THE BORROWER CONSENTS TO THE SERVICE OF PROCESS BY PERSONAL SERVICE OR U.S. CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO THE BORROWER AT THE ADDRESS PROVIDED HEREIN. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO THE MAXIMUM EXTENT PERMITTED BY LAW. (b) WAIVER OF JURY TRIAL. EACH OF THE BORROWERS, THE AGENT AND THE LENDERS HEREBY VOLUNTARILY AND IRREVOCABLY WAIVES TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS AGREEMENT, THE NOTES, THE SECURITY DOCUMENTS OR ANY OTHER AGREEMENTS EXECUTED IN CONNECTION HEREWITH. Section 13.06. Severability. Any provision of this Agreement, the Notes or any of the Security Documents or other Loan Documents which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 13.07. Section Headings, Etc. Any Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 13.08. Several Nature of Lenders' Obligations. Notwithstanding anything in this Agreement, the Notes or any of the Security Documents to the contrary, all obligations of the Lenders hereunder shall be several and not joint in nature, and in the event any Lender fails to perform any of its obligations hereunder, the Borrower shall have no recourse against any other Lender(s) who has (have) performed its (their) obligations hereunder. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement, subject to the provisions of Article XII, and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. Section 13.09. Counterparts. This Agreement may be executed by the parties hereto in several counterparts hereof and by the different parties hereto on separate counterparts hereof, each of which shall be an original and all of which counterparts shall together constitute one and the same agreement. Delivery of an executed signature page of this Agreement by facsimile -77- transmission shall be effective as an in-hand delivery of an original executed counterpart hereof. Section l3.10. Knowledge and Discovery. All references in this Agreement to "knowledge" of, or "discovery" by, the Borrower shall be deemed to include, without limitation, any such knowledge of, or discovery by, the Borrower or any executive officer of the Borrower. Section 13.11. Amendment of Other Agreements. All references in this Agreement to other documents and agreements to which the Lenders are not parties (including without limitation the Acquisition Agreements, the PCC Preferred Stock Designation, the PCC Exchange Indenture, the PCC 1997 Indenture, the PCC 1998 Indenture, the Management Agreement, the Affiliate Agreements, the Subordinated Debt Documents, the NRTC Member Agreements and any other DBS Agreements) shall be deemed to refer to such documents and agreements as presently constituted and, except for any amendments and modifications not prohibited under Section 7.12, not as hereafter amended or modified unless the Lenders shall have expressly consented in writing to such amendment(s) or modification(s). Section 13.12. FCC and Municipal Approvals. Notwithstanding anything herein or in any of the Security Documents to the contrary, but without limiting or waiving in any way the Borrower's obligations under Section 2.01, the Agent's and the Lenders' rights hereunder and under the Security Documents are subject to all applicable rules and regulations of the FCC and other Specified Authorities. The Agent and the Lenders will not take any action pursuant to this Agreement or the Security Documents which would constitute or result in any assignment or transfer control of any FCC License or CATV Franchise, whether de jure or de facto, if such assignment or transfer of control would require under then existing law (including the written rules and regulations promulgated by the FCC), the prior approval of the FCC or other Specified Authority, without first obtaining such approval. The Agent and the Lenders specifically agree that (a) voting rights in the ownership interests of the Companies will remain with the holders thereof even in an Event of Default unless any required prior consent of the FCC or other Specified Authority shall be obtained to the transfer of such voting rights; (b) in an Event of Default, there will be either a private or public sale of the ownership interests of the Companies; and (c) prior to the exercise of member or other equityholder rights by a purchaser at such sale, the prior consent of the FCC, pursuant to 47 U.S.C. ss. 310(d), in each case only if required, will be obtained prior to such exercise. The Borrower agrees to take any action which the Agent or any Lender may reasonably request in order to cause the Agent and the Lenders to obtain and enjoy the full rights and benefits granted to by this Agreement and the other Loan Documents, including specifically, at the cost and expense of the Borrower, the use of its best efforts to assist in obtaining approval of the FCC or any state or municipality or other governmental authority for any action or transaction contemplated by this Agreement or any Security Document which is then required by law, and specifically, without limitation, upon request following an Event of Default, to prepare, sign and file (or cause to be filed) with the FCC or such state or municipality or other governmental authority the assignor's, transferor's or controlling person's portion of any application or applications for consent to (i) the assignment of any FCC License or transfer or control thereof, (ii) any sale or sales of property constituting any Collateral by or on behalf of the Lenders or (iii) any assumption by the Agent or the Lenders or their designees of voting rights or management rights in property constituting any Collateral effected in accordance with the terms of this Agreement. Section 13.13. Disclaimer of Reliance. The Borrower has not relied on any oral representations concerning any of the terms or conditions of the Loans, the Notes, this Agreement or any of the Security Documents in entering into the same. The Borrower acknowledges and agrees that none of the officers of the Agent or any Lender has made any representations that are inconsistent with the terms and provisions of this Agreement, the Notes and the Security Documents, and neither the Borrower nor any of its Affiliates has relied on any oral promises or representations in connection therewith. Section 13.14. Environmental Indemnification. Without limiting the generality of Section 13.02, in consideration of the execution and delivery of this Agreement by the Lenders and the making of the Loans, the Borrower hereby indemnifies, exonerates and holds the Lenders and each of their respective officers, directors, employees and agents (collectively, the "Indemnified Parties") free and harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "Environmental Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to: -78- (a) any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to the protection of the environment or the release by any Company of any Hazardous Material; or (b) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or releases from, any real property owned or operated by any Company of any Hazardous Material (including any losses, liabilities, damages, injuries, costs, expense or claims asserted or arising under any Environmental Law), regardless of whether caused by, or within the control of, any Company; except, in each case, for any such Environmental Liabilities arising for the account of a particular Indemnified Party by reason of the relevant Indemnified Party's negligence or misconduct, and if and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower agrees to make the maximum contribution to the payment and satisfaction of each of the Environmental Liabilities which is permissible under applicable law. Notwithstanding anything to the contrary herein contained, the obligations and liabilities under this Section shall survive and continue in full force and effect and shall not be terminated, discharged or released in whole or in part irrespective of whether all the Obligations have been paid in full or the Commitments have been terminated and irrespective of any foreclosure of any mortgage, deed of trust or collateral assignment on any real property or acceptance by any Lender of a deed or assignment in lieu of foreclosure. XIV. DEFINITIONS. As used herein the following terms have the following respective meanings: Accepting Lenders. See Section 1.09. Accountants. See Section 6.05. Acquisition. The acquisition by the Borrower or any Subsidiary, whether by way of the purchase of assets or stock, by merger or consolidation or otherwise, of (i) exclusive (or, with the prior written consent of the Required Lenders, non-exclusive) DBS Rights for the delivery of DIRECTV, (ii) any broadcast television business or (iii) any cable television business, including without limitation a swap of any such existing DBS Rights or business for any other such DBS Rights or any other such business or an equity contribution of any such DBS Rights or business to a Subsidiary by any Affiliate of any Company. Acquisition Agreements. With respect to any Permitted Acquisition, the respective acquisition, purchase or other agreement which sets forth the terms and conditions of such acquisition. Acquisition Compliance Certificate. See Section 7.05. Acquisition Loans. See Section 3.02. Adjusted Available Commitments. As of any date, the aggregate amount of the Commitments then in effect minus the Letter of Credit Exposure, minus that portion of the Permitted Seller Debt Outstandings not secured by Letters of Credit plus the amount by which the NRTC Letter of Credit Exposure as of such date exceeds the actual amount then owed to the NRTC by the Companies under the NRTC Member Agreements. Adjusted Excess Cash Flow. For any period, Excess Cash Flow for such period minus Restricted Payments made to fund PCC Preferred Stock Dividends under Section 5.04(b)(v). Affiliate(s). With respect to any Person, any other Person that would be considered to be an affiliate of any Company under Rule 144(a) of the Rules and Regulations of the Securities and Exchange Commission, as in effect on the date hereof, if such Company were issuing securities. Affiliate Subordination Agreements. See Section 2.01. Agent. See the Preamble. Aggregate Exposure. See Section 1.01. Agreement. See the Preamble. -79- Aguadilla System. The cable television systems owned and operated by Pegasus San German in the communities of Aguadilla, Aguada Moca, Isabella and Quebradillas, Puerto Rico. Annualized EBITDA. For any fiscal quarter, (a) Location Cash Flow derived from the DBS Subsidiaries for such fiscal quarter, multiplied by four (4), plus (b) Location Cash Flow derived from the other Subsidiaries for such fiscal quarter and the immediately preceding three (3) fiscal quarters minus (c) corporate overhead charges for all of the Borrower's Subsidiaries for such fiscal quarter and the immediately preceding three (3) fiscal quarters (including Management Fees), all determined on a Consolidated basis in accordance with GAAP. Applicable Margin. See Section 1.05. Approved Institution. See the definition of "Cash Equivalents". Assignment and Acceptance. See Article XII. At Risk Equipment. See Section 4.28. Audited Financial Statements. See Section 1.05. Authorized Officer. With respect to any certificate, agreement or other document to be executed by or on behalf of the Borrower or any Subsidiary or by the Parent, the chairman, president, chief executive officer, chief operating officer, chief financial officer, vice president, treasurer or director (serving as an officer) of such entity, who shall, in any event, be an officer duly authorized by all required action of such entity to execute and deliver such document. Available Commitments. See Section 1.01. Average Subscriber Acquisition Cost. For any period, Subscriber Acquisition Costs divided by Gross Subscriber Additions. Base Rate. As of any date, the fluctuating interest rate per annum equal to the greater of (a) the rate established by Bankers Trust Company from time to time at its office in New York City as its "Base Rate" for commercial loans in United States Dollars, and (b) the Federal Funds Rate plus 1.00%; in each case, including any applicable adjustments for reserves or Federal Deposit Insurance Corporation requirements. The Base Rate is not necessarily intended to be the lowest rate of interest determined by Bankers Trust Company in connection with extensions of credit. Base Rate Loans. Loans bearing interest at a rate determined on the basis of the Base Rate. Borrower. See the Preamble. Borrower Leverage Ratio. See Section 5.01. Borrowing Date. With respect to any Loans requested hereunder, the date such Loans are to be made. Budget. See Section 6.05. Business Day. (a) For all purposes other than as provided in clause (b) below, any day other than a Saturday, Sunday or legal holiday on which banks in New York, New York are open for the transaction of a substantial part of their commercial banking business; and (b) with respect to all notices and determinations in connection with, and payments of principal and interest on, LIBOR Loans, any day that is a Business Day described in clause (a) and that is also (i) a day when on which banks in London, England are open for the transaction of a substantial part of their commercial banking business and (ii) a day for trading by and between banks in U.S. Dollar deposits in the London interbank market. Capital Expenditures. For any period, the aggregate amount of payments made by the Companies during such period (including the aggregate amount of Capital Lease Obligations incurred during such period) for the rental, lease, purchase, construction or use of any fixed or capital assets (other than Permitted Acquisitions and Permitted Investments). Capital Lease. Any lease of property (real, personal or mixed) which, in accordance with GAAP and Statement No. 13 of the Financial Accounting Standards Board would be capitalized on the lessee's balance sheet. -80- Capital Lease Obligations. All obligations of the Companies to pay rent or other amounts under a lease of (or other agreement conveying the right to use) property (real, personal or mixed) to the extent such obligations are required to be classified and accounted for as a capital lease on any such Company's balance sheet under GAAP, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. Cash Equivalents. (a) Investments (of one year or less) in direct or guaranteed obligations of the United States, or any agency thereof; (b) investments (of 90 days or less) in certificates of deposit of the Lenders or any other domestic commercial bank of recognized standing having capital, surplus and undivided profits in excess of $100,000,000, membership in the Federal Deposit Insurance Corporation ("FDIC") and senior debt carrying one of the two highest ratings of Standard & Poor's Ratings Service, A Division of McGraw Hill, Inc., or Moody's Investors Service, Inc. (an "Approved Institution"); (c) investments (of 90 days or less) in commercial paper given one of the two highest ratings by an Approved Institution; (d) investments redeemable at any time without penalty in money market instruments placed through a Lender or an Approved Institution;(e) repurchase agreements fully collateralized by United States government securities; and (f) deposits fully insured by the FDIC. Casualty Event. Any loss of, or damages to, or any condemnation or other taking of any assets or property of the Companies for which any Company receives insurance proceeds, proceeds of a condemnation award or other compensation. CATV Franchise. All franchises, licenses, authorizations or rights by contract or otherwise to construct, own, operate, promote, extend and/or otherwise exploit any System operated or granted by any state, county, city, town, village or other local or state government authority or by the FCC. The term "Franchise" shall include each of the CATV Franchises set forth on Schedule 4.07. CATV Franchise Consents. In connection with any Acquisition of cable television properties, all consents of the applicable franchising authorities to the collateral assignment of the related CATV Franchises to the Agent, on behalf of the Lenders, the grant of security interests in such cable television properties and the execution and delivery of the related Security Documents required hereunder. CERCLA. The Comprehensive Environmental Response, Compensation and Liability Act of 1989 (42 USC 9601, et. seq.). Churn Adjusted Borrower Leverage Ratio. See Section 5.01. Churned Subscribers. For any period, subscribers to the DBS services offered by the DBS Subsidiaries as of the first day of such period which cease to be subscribers during such period (including any such subscribers whose service has been discontinued for non-payment, but excluding any such subscribers discontinued in connection with a Disposition) minus any subscribers which resubscribe to such DBS services during such period. CIBC. Canadian Imperial Bank of Commerce. Closing Date. The date on which this Agreement becomes effective and the first new Loans are made or the first new Letter of Credit is issued. Co-Arrangers. See the Preamble. Code. The Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. Collateral. Collectively, any and all collateral referred to herein and in the Security Documents. Collateral Account. The "Collateral Account", as defined in the Security Agreements. Commitment and Commitments. See Section 1.01. Commitment Fee. See Section 1.10. Commitment Fee Rate. See Section 1.10. -81- Commitment Reduction Notice. See Section 1.08. Commitment Reserve. As of any date, the aggregate amount by which the Revolving Notes shall have been temporarily prepaid from the Net Cash Proceeds of any Disposition, as provided under Section 1.09(d)(1) in anticipation of the redeployment of such funds for purposes of financing Capital Expenditures and/or any Permitted Acquisition. With respect to any such Disposition, the amount so prepaid and deemed part of the Commitment Reserve shall be available for borrowing under Sections 1.01 and 3.03 subject to the terms and within the time periods provided in Section 1.09(d)(2) and, if not so borrowed for reinvestment as contemplated therein, shall be applied to permanent reductions of the Commitments under Section 1.09(e). Companies. Collectively, the Borrower and its Subsidiaries. Compliance Report. See Section 6.05. Compliance Report Delivery Date. See Section 1.05. Consolidated and Consolidating. When used with reference to financial or accounting terms, that term as applied to the accounts of the Borrower (or other specified Person) and all of its Subsidiaries, or such of its Subsidiaries as may be specified, consolidated (or combined) or consolidating (or combining), as the case may be, in accordance with GAAP and with appropriate deductions for minority interests in Subsidiaries. Controlled Group. All trades or businesses (whether or not incorporated) under common control that, together with the Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Code or Section 40001 of ERISA. Copyright Office. The United States Copyright and Trademark Office or any other federal government agency which may hereafter perform its functions. Cost of Churn. For any fiscal period, the number of Churned Subscribers for such period multiplied by the Average Subscriber Acquisition Costs for such period. Credit Extension Date. With respect to any Loans or Letter of Credit requested hereunder, the date such Loans are to be made or such Letter of Credit is issued. Current Assets. On any date, all assets of the Companies (other than the Special Purpose Subsidiary) on such date which, in accordance with GAAP, would be classified on a Consolidated balance sheet of the Companies as "current assets". Current Liabilities. On any date, all liabilities of the Companies (other than the Special Purpose Subsidiary) on such date which, in accordance with GAAP, would be classified on a Consolidated balance sheet of the Companies as "current liabilities" (other than the current portion of long-term Indebtedness). Damaged Property. See Section 6.02. DBS. See the Recitals. DBS Agreements. The NRTC Member Agreements and any and all other agreements entered into by the Borrower or any of the Subsidiaries from time to time (as amended from time to time with the Lenders' consent, if required under this Agreement), to license the right to deliver DBS Services. DBS Rights. Any rights to market, sell, deliver and retain revenues from direct broadcast television programming initially transmitted over satellite frequencies, and all rights to distribute services of the type known as "DBS Services" under the NRTC Member Agreements, including without limitation all such rights with respect to DIRECTV and DBS under the DirecTV Agreements or the NRTC Member Agreements. DBS Subscriber Areas. On any date, all of the geographic areas in which the Companies, or any of them, have the right to distribute DIRECTV and other DBS services, as described in the NRTC Member Agreements. DBS Subsidiaries. Any Subsidiary of the Borrower which now or hereafter holds DBS Rights. -82- Default. (a) An Event of Default or (b) an event or condition that, but for the requirement that time elapse or notice be given, or both, would constitute an Event of Default. Defaulting Lender. Any Lender with respect to which a Lender Default is in effect. DirecTV. DirecTV, Inc., an affiliate of HCG, and any successor thereof. DIRECTV. The video, audio and data services provided over satellite frequencies by DirecTV. DirecTV Agreements. The HCG Agreement (as defined in the NRTC Member Agreements) whether or not assigned to DirecTV by HCG, and any other material agreements under which NRTC has obtained rights to distribute DBS services covered by any of the NRTC Member Agreements or has obtained any other DBS Rights granted to any of the Companies by NRTC. Disposition. See Section 7.03. Documentation Agent. See the Preamble. Dollars and $. Lawful money of the United States of America. DTS. See the Recitals. DTS Agent. See the Recitals. DTS Credit Agreement. See the Recitals. DTS Indiana. Digital Television Services of Indiana, LLC, a Georgia limited liability company. DTS Lenders. See the Recitals. DTS Letters of Credit. See Section 1.02. DTS Management. DTS Management, LLC, a Georgia limited liability company. DTS Merger. The merger of DTS with and into PST, with PST being the surviving corporation and, following such merger, the sole equityholder in DTS Management and DTS Indiana. EBITDA. For any period, Net Income for such period, plus, to the extent deducted in the determination of Net Income and not otherwise restored in accordance with the definition of such term, (a) Subscriber Acquisition Costs, (b) Total Interest Expense, (c) depreciation, (d) amortization, (e) taxes in respect of income and profits expensed during such period, including without limitation but without duplication payments paid under the Tax Sharing Agreement as permitted in Section 5.04, (f) Transaction Costs, and (g) other non-cash expenses (including the amortization of television program license and rental fees) minus (h) television program license and rental fees actually paid in cash; all determined on a Consolidated basis in accordance with GAAP. Effective Date. See Section 1.11. Environmental Data Report. See Section 4.24. Environmental Laws. Any and all present and future Federal, state, local and foreign laws, rules or regulations, and any orders or decrees, in each case as now or hereafter in effect, relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes into the indoor or outdoor environment, including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes. Environmental Liabilities. See Section 13.14. Environmental Questionnaire. See Section 4.24. -83- Environmental Site Assessment. A so-called "Phase I" site assessment prepared by an environmental consulting firm of national reputation reasonably satisfactory to the Agent, together with a letter from such firm to the Agent authorizing the Agent and the Lenders to rely thereon. Equity Securities. With respect to any Person that is a corporation, the authorized shares of such Person's capital stock, including all classes of common, preferred, voting and nonvoting capital stock, and, as to any Person that is not a corporation or an individual, the ownership interests in such Person, including, without limitation, the right to share in profits and losses, the right to receive distributions of cash and property, and the right to receive allocations of items of income, gain, loss, deduction and credit and similar items from such Person, whether or not such interests include voting or similar rights entitling the holder thereof to exercise control over such Person ERISA. The Employee Retirement Security Act of 1974, as amended. Event of Default. See Article VIII. Excess Cash Flow. For any period, EBITDA for such period minus (a) Fixed Charges for such period, minus (b) Subscriber Acquisition Costs for such period, to the extent not included in Fixed Charges, minus (c) voluntary prepayments of the Notes made during such period, as provided in Section 1.08 minus (d) Restricted Payments made under Section 5.04(b)(vii) minus (e) payments of principal made in respect of Permitted Seller Debt and Permitted Seller Subordinated Debt, minus (f) any increase in Working Capital during such period, measured as of the last day of such period by comparison with Working Capital on the first day of such period, plus (g) any decrease in Working Capital during such period, measured as of the last day of such period by comparison with Working Capital on the first day of such period. Excess SAC Cash. See Section 7.10. Excluded Disposition. A Disposition permitted under Section 7.03(a) or Section 7.03(b), so long as no Default has occurred and is continuing on the date such Disposition is consummated. Exemption Certificate. See Section 1.13. Expiration Date. See Section 1.01. FAA. The Federal Aviation Administration or any other federal governmental agency which may hereafter perform its functions. FCC. The Federal Communications Commission or any other federal governmental agency which may hereafter perform its functions. FCC Consents. In connection with any Acquisition of broadcast television properties, all consents of the FCC to such Acquisition and to the execution and delivery of the related Security Documents required hereunder. FCC Licenses. Any Licenses issued by the FCC, including those listed on Schedule 4.08. Federal Funds Rate. For any period, a fluctuating interest rate per annum (based on a 360 day year) equal for each day during such period to the weighted average of the rates of interest charged on overnight Federal funds transactions with member banks of the Federal Reserve System arranged by Federal funds brokers on such day, as published for any day which is a Business Day by the Federal Reserve Bank of New York (or, in the absence of such publication, as reasonably determined by the Agent). Fee Agreements. The Fee Agreements entered into as of November 30, 1999, between the Borrower and each of the Agent, the Syndication Agent and the Documentation Agent, as amended from time to time in accordance with the respective terms thereof. -84- Finance Subsidiary. A Subsidiary formed and wholly owned by the Special Purpose Subsidiary, (a) to which the Special Purpose Subsidiary contributes all SAC Commissions received in exchange for its financing of Subscriber Acquisition Costs for the DBS Subsidiaries, and (b) all shares of capital stock of which the Special Purpose Subsidiary dividends to PSTH immediately after such contribution. Financial Statements. See Section 4.01. Fixed Charge Coverage Ratio. See Section 5.03. Fixed Charges. For any fiscal period, the sum of (a) Costs of Churn for such fiscal period, (b) Total Debt Service for such period (excluding payments of principal in respect of Permitted Seller Debt and Permitted Seller Subordinated Debt); (b) Capital Expenditures made by the Companies during such fiscal period; (c) taxes paid or payable by the Companies (other than the Special Purpose Subsidiary) during such fiscal year in respect of income and profits, including without limitation payments owed under the Tax Sharing Agreement; and (d) Restricted Payments made to PCC during such period under Section 5.04(b)(vi). Franchise Areas. The communities listed in Schedule 4.09. GAAP. Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other entity as may be approved by a significant segment of the accounting profession, as in effect on December 31, 1998, applied on a basis consistent with (a) the application of the same in prior fiscal periods, (b) that employed by the Accountants in preparing the financial statements referred to in Section 6.05(a) and (c) the accounting principles generally utilized in the cable television, broadcast television or direct broadcast satellite industry, as the case may be. General Purpose Letter of Credit Exposure. The portion of the aggregate Letter of Credit Exposure arising from General Purpose Letters of Credit. General Purpose Letters of Credit. Any and all Letters of Credit issued pursuant hereto, other than NRTC Letters of Credit and Seller Letters of Credit, provided that no such Letter of Credit may be issued for the purpose of supporting any Indebtedness constituting "antecedent debt" (as such term is used in Section 547 of the United States Bankruptcy Code) unless the Agent shall otherwise consent. Governmental Authority. Any nation or government, any state or other political subdivision thereof and any entity exercising any executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, government. Gross Subscriber Additions. For any period, the total amount of Paying Subscribers for DBS services of the DBS Subsidiaries added in the ordinary course of operations of such Companies, excluding (a) any Paying Subscribers which resubscribe to the Companies' DBS services during such period, (b) any Paying Subscribers purchased, acquired or swapped during such period and (c) any Paying Subscribers sold or otherwise disposed of during such period. Guarantee. With respect to the Borrower or a specified Person: (a) any guarantee by the Borrower (or such specified Person) of the payment or performance of, or any contingent obligation by the Borrower (or such specified Person) in respect of, any Indebtedness or other obligation of any primary obligor; (b) any other arrangement whereby credit is extended to a primary obligor on the basis of any promise or undertaking of the Borrower (or such specified Person), including any binding "comfort letter", "makewell agreement" or "keepwell agreement" written by the Borrower (or such specified Person), to a creditor or prospective creditor of such primary obligor, to (i) pay the Indebtedness of such primary -85- obligor, (ii) purchase an obligation owed by such primary obligor, (iii) pay for the purchase or lease of assets or services regardless of the actual delivery thereof or (iv) maintain the capital, working capital, solvency or general financial condition of such primary obligor; (c) any liability of the Borrower (or such specified Person), as a general partner of a partnership in respect of Indebtedness or other obligations of such partnership; (d) any liability of the Borrower (or such specified Person) as a joint venturer of a joint venture in respect of Indebtedness or other obligations of such joint venture; (e) any liability of the Borrower (or such specified Person) with respect to the tax liability of others as a member of a group (other than a group consisting solely of the Borrower and its Subsidiaries) that is Consolidated for tax purposes; and (f) reimbursement obligations, whether contingent or matured, of the Borrower (or such specified Person) with respect to letters of credit, bankers acceptances, surety bonds, other financial guarantees and Interest Rate Protection Agreements, in each case whether or not any of the foregoing are reflected on the balance sheet of the Borrower (or such specified Person) or in a footnote thereto, provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Guarantee and the amount of Indebtedness resulting from such Guarantee shall be the maximum amount that the guarantor may become obligated to pay in respect of the obligations (whether or not such obligations are outstanding at the time of computation). Hazardous Materials. (a) any petroleum or petroleum products, flammable materials, explosives, radioactive materials, asbestos, urea formaldehyde foam insulation, and transformers or other equipment that contain polychlorinated biphenyls ("PCB's"), (b) any chemicals or other materials or substances that are now or hereafter become defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous wastes", "restricted Hazardous wastes", "toxic substances", "toxic pollutants", "contaminants", "pollutants" or words of similar import under any Environmental Law and (c) any other chemical or other material or substance, exposure to which is now or hereafter prohibited, limited or regulated under any Environmental Law. HCG. Hughes Communications Galaxy, Inc. and any successor thereof. Headend Site Leases. See Section 4.13. Hedging Lender. Any Lender, or any affiliate of any Lender, which from time to time enters into a Rate Hedging Agreement with any Company. Incremental Term Loan Principal. See Section 1.04. Incremental Term Loans. See Section 1.04. Incremental Term Notes. See Section 1.04. Indebtedness or indebtedness. With respect to the Borrower or any specified Person, all obligations, contingent or otherwise, which in accordance with GAAP are required to be classified upon the balance sheet of the Borrower (or other specified Person) as liabilities, but in any event including (without duplication): (a) borrowed money; (b) indebtedness evidenced by notes, debentures or similar instruments, -86- (c) Capital Lease Obligations; (d) the deferred purchase price of assets, services or securities, including related noncompetition, consulting and stock repurchase obligations (other than ordinary trade accounts payable within six months after the incurrence thereof in the ordinary course of business); (e) mandatory redemption or cash dividend rights on capital stock (or other Equity Securities), (f) reimbursement obligations, whether contingent or matured, with respect to letters of credit, bankers acceptances, surety bonds, other financial guarantees and Rate Hedging Agreements (without duplication of other Indebtedness supported or guaranteed thereby); (g) unfunded pension liabilities; (h) obligations that are immediately and directly due and payable out of the proceeds of or production from property; (i) liabilities secured by any Lien existing on property owned or acquired by the Borrower (or such specified Person), whether or not the liability secured thereby shall have been assumed; and (j) all Guarantees in respect of Indebtedness of others. Indemnified Parties. See Section 13.14. Initial Term Loans. See Section 1.03. Initial Term Notes. See Section 1.03. Insurance Proceeds. With respect to any Casualty Event, any proceeds of insurance, condemnation award or other compensation in respect thereof. Interest Coverage Ratio. See Section 5.02. Interest Expense. For any period, the aggregate amount (determined on a Consolidated basis in accordance with GAAP) of interest, commitment fees, letter of credit fees and net payments under Rate Hedging Agreements accrued (whether such interest is reflected as an item of expense or capitalized, but excluding interest paid in kind) during such period (including without limitation the Commitment Fee, the Issuance Fee, the Letter of Credit Fee and the interest component of Capital Lease Obligations, but excluding non-recurring structuring and facility fees payable under the Fee Agreements and interest in respect of overdue trade payables) by the Companies (other than the Special Purpose Subsidiary) in respect of all Indebtedness for borrowed money. Interest Rate Option Notice. A notice given by the Borrower to the Agent of the Borrower's election to convert Loans to a different type or continue Loans as the same type, in accordance with Section 1.06(c). Investment. With respect to the Borrower or any specified Person and whether made or acquired by purchase, exchange, issuance of stock or other Equity Securities, merger, consolidation, reorganization or otherwise: (a) any share of capital stock, partnership, membership or other equity interest, evidence of Indebtedness or other security issued by any other Person (other than securities acquired in connection with the satisfaction or enforcement of, or as security for, Indebtedness or claims due to the Borrower (or such specified Person)); (b) any loan, advance or extension of credit to, or contribution to the capital of, any other Person (other than trade and customer accounts receivable for property leased, goods furnished or services rendered in the ordinary course of business and payable on a current basis in accordance with customary trade terms); -87- (c) any Guarantee of the Indebtedness of any other Person; (d) any acquisition of all, or any division or similar operating unit of, the business of any other Person or the assets comprising such business, division or unit; and (e) any other similar investment. Issuance Fee. See Section 1.02. Issuing Bank. Bankers Trust Company, any affiliate thereof (including but not limited to Deutsche Bank AG, New York Branch) designated by Bankers Trust Company or any other Lender which may serve as the "Issuing Bank" in the event that Bankers Trust Company elects to cease providing letter of credit services hereunder. Junior Reorganization Securities. With respect to any Seller Subordination Agreement, debt or equity securities of the Company obligated under the applicable Permitted Seller Subordinated Debt, or of any successor corporation provided for by a plan of reorganization, that are subordinated at least to the same extent that such Permitted Seller Subordinated Debt is subordinated to the payment of the Obligations then outstanding (including all limitations on rights of action set forth in such Seller Subordination Agreement and all other obligations and restrictions imposed thereunder); provided that (a) if a new corporation results from such reorganization, such corporation shall have assumed all Obligations not paid in full in cash in connection with such reorganization and (b) no such debt or equity securities shall be permitted if the issuance thereof causes or could cause the applicable Permitted Seller Subordinated Debt to be treated in any bankruptcy, reorganization or similar proceeding as part of (i) the same class of claims as any of the Obligations or (ii) any class of claims pari passu with, or senior to, any of the Obligations with respect to any payment or distribution. Lender Default. (a) The refusal (which has not been retracted) of a Lender to make available its portion of any Loan or, if applicable, to fund its portion of any Letter of Credit Disbursement, or (b) a Lender having notified the Borrower and/or the Agent in writing that it does not intend to lend under this Agreement or comply with its obligation, if any, with respect to any Letter of Credit Disbursement; in either case other than by reason of any failure of the Borrower to meet any material condition precedent thereto hereunder. Lenders. See the Preamble. Letter of Credit and Letters of Credit. See Section 1.02. Letter of Credit Disbursement. See Section 1.02. Letter of Credit Documents. See Section 1.02. Letter of Credit Exposure. The sum of (a) the aggregate amount of all Reimbursement Obligations and (b) the aggregate undrawn amount under all outstanding Letters of Credit. The Letter of Credit Exposure of any Lender at any time shall mean its pro rata percentage of the aggregate Letter of Credit Exposure, based on the aggregate Commitments. Letter of Credit Fee. See Section 1.02. Letter of Credit Request. See Section 1.02. LIBOR Base Rate. With respect to each day during each Interest Period pertaining to any LIBOR Loan, the rate per annum determined by the Agent to be the arithmetic mean of the offered rates for deposits in Dollars with a term comparable to such Interest Period that appears on the Telerate British Bankers Assoc. Interest Settlement Rates Page (as defined below) at approximately 11:00 A.M., London time, on the second full Business Day preceding the first day of such Interest Period; provided, however, that if there shall at any time no longer exist a Telerate British Bankers Assoc. Interest Settlement Rates Page, the term "LIBOR Base Rate" shall mean, with respect to each day during each Interest Period pertaining to any LIBOR Loan, the rate per annum equal -88- to the rate at which the Agent is offered Dollar deposits at or about 10:00 A.M., New York City time, two (2) Business Days prior to the beginning of such Interest Period in the London interbank deposit market where the eurodollar and foreign currency and exchange operations in respect of its LIBOR Loans are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its LIBOR Loan to be outstanding during such Interest Period. As used herein, the "Telerate British Bankers Assoc. Interest Settlement Rates Page" means the display designated as Page 3750 on the Telerate System Incorporated Service (or such other page as may replace such page on such service for the purpose of displaying the rates at which Dollar deposits are offered by leading banks in the London interbank deposit market). LIBOR Loans. Loans bearing interest at a rate determined on the basis of the LIBOR Rate. LIBOR Period. With respect to each LIBOR Loan, the period commencing on the date such Loan is made or converted from a Base Rate Loan, or the last day of the immediately preceding LIBOR Period, as to LIBOR Loans being continued as such, and ending one (1), two (2), three (3) or six (6) months thereafter, as the Borrower may elect in the applicable Loan Request or Interest Rate Option Notice, provided that: (a) any LIBOR Period (other than an LIBOR Period determined pursuant to clause (d) below) that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (b) if the Borrower shall fail to give notice as provided in Section 1.04, the Borrower shall be deemed to have requested a conversion of the affected LIBOR Loan to a Base Rate Loan on the last day of the then current LIBOR Period with respect thereto; (c) any LIBOR Period relating to a LIBOR Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (d) below, end on the last Business Day of a calendar month; (d) any LIBOR Period related to a LIBOR Loan that would otherwise end after the final maturity date of the Loans shall end on such final maturity date; (e) no LIBOR Period shall include a principal repayment date for the Loans unless an aggregate principal amount of Loans at least equal to the principal amount due on such principal repayment date shall be Base Rate Loans or LIBOR Loans having Interest Periods ending on or before such date; and (f) notwithstanding clauses (d) and (e) above, no Interest Period shall have a duration of less than one (1) month. LIBOR Rate. With respect to each day during each Interest Period pertaining to a LIBOR Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward, if necessary, to the nearest 1/16th of 1%): LIBOR Base Rate 1.00 - LIBOR Reserve Requirements LIBOR Reserve Requirements. For any day as applied to a LIBOR Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including without limitation basic, supplemental, marginal and emergency reserves) under any regulations of the Board of Governors of the Federal Reserve System (or other Governmental Authority having jurisdiction with respect thereto) prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of the Federal Reserve System. -89- License Agreements. The several Operating Agreements dated as of October 31, 1994 between PBT and each of the License Subsidiaries, as the same are in effect as of the date hereof, and all similar Operating Agreements entered into after the date hereof in connection with the acquisition of new Stations. License Subsidiaries. WDBD License Corp., WDSI License Corp., HMW, Inc., Pegasus Broadcast Associates, L.P., and WOLF License Corp., each a Subsidiary of Pegasus Broadcast Television, Inc. formed for the sole purpose of owning one or more FCC Licenses. Licenses. A license, authorization or permit to construct, own or operate any Station granted by the FCC or any other Governmental Authority. The term "License" shall include each of the Licenses set forth on Schedule 4.07. Lien. Any mortgage, pledge, hypothecation, deposit arrangement, encumbrance, assignment, lien (statutory or other), charge, option or other security interest, any restriction or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any Capital Lease having substantially the same economic effect as any of the foregoing). LMA. A local marketing agreement, program service agreement or time brokerage agreement between a broadcaster and a television station licensee pursuant to which the broadcaster provides programming to, and retains the advertising revenues of, such station in exchange for fees paid to licensee. LMA Purchase Option. With respect to any Permitted LMA, any option to purchase the broadcast station or assets subject thereto which is binding upon any one or more of the Companies. Loan Documents. This Agreement, the Notes, the Security Documents and all other agreements, instruments and certificates contemplated hereby and thereby, including without limitation any Rate Hedging Agreements entered into with any of the Lenders or their Affiliates. Loan Request. See Section 1.06. Loans. The Revolving Loans and the Term Loans. Location Cash Flow. With respect to any Subsidiary or Subsidiaries (other than the Special Purpose Subsidiary) of the Borrower, for any fiscal period, EBITDA for such period derived from such Subsidiary or Subsidiaries, after restoring thereto amounts deducted for corporate overhead charges, determined on a Consolidated basis in accordance with GAAP. Management Fees. Amounts due and payable by the Companies (other than the Special Purpose Subsidiary) to the Manager in consideration for management and administrative support services. Manager. Pegasus Communications Management Company, a Pennsylvania corporation which is wholly owned by the Parent. Mandatory Prepayment Date. See Section 1.09. Margin Stock. See Section 4.17. Material Adverse Effect. (a) An adverse effect on the validity or enforceability of this Agreement or any of the other Loan Documents in any material respect, (b) an adverse effect on the condition (financial or other), business, results of operations, prospects or properties of the Borrower and its Subsidiaries, taken as a whole, in any material respect or (c) an impairment of the ability of the Companies to fulfill their obligations under this Agreement or any other Loan Document to which any Company is a party, in any material respect. MCT. MCT Cablevision Limited Partnership, a Delaware limited partnership which is a Subsidiary of Pegasus Cable Television, Inc. MCT Note Documents. The $15,000,000 Second Amended and Restated Promissory Note dated March 12, 1993, issued to Philips Credit Corporation by MCT; endorsed by Philips Credit Corporation to the Borrower and by the Borrower to the Agent; the $9,074,135.13 Second Amended and Restated Promissory Note dated March 12, 1993, issued to Philips Credit Corporation by MCT, endorsed by Philips Credit -90- Corporation to the Borrower and by the Borrower to the Agent; and any and all other instruments, documents, certificates and agreements executed and delivered in connection therewith. MCT Systems. The Systems serving Mayaguez, Puerto Rico and certain contiguous communities and owned and operated by MCT. Mortgages. Collectively, one or more mortgages, deeds of trust, deeds to secure debt or collateral assignments of leasehold interest, in form and substance satisfactory to the Agent, to effect a Lien on real property or leasehold interests in the state where the respective real property to be covered by such instrument is located, executed by the party that is the owner or lessee of such real property in favor of the Agent (or, in the case of a deed of trust, in favor of a trustee for the benefit of the Agent and the Lenders), covering the respective fee or leasehold interest owned by the such party, and duly recorded, as said mortgages, deeds of trust, deeds to secure debt, leasehold deeds of trust and collateral assignments of leasehold interests may be modified and supplemented and in effect from time to time. Net Cash Proceeds. With respect to any Disposition, the aggregate amount of all cash payments received by (a) any Company or (b) any Qualified Intermediary, as defined in the United States Treasury Regulations promulgated under Section 1031 of the Code and as used in connection with a like-kind exchange under such Section 1031, directly or indirectly, in connection with such Disposition, whether at the time thereof or after such Disposition under deferred payment arrangements or investments entered into or received in connection with such Disposition, minus the aggregate amount of any legal, accounting, regulatory, title and recording tax expenses, commissions and other fees and expenses paid by any Company in connection with such Disposition, and minus any income taxes payable by any Company in connection with such Disposition. Net Income. For any period, net income of the Companies (other than the Special Purpose Subsidiary) from their respective operations, after deducting all operating expenses, provisions for all taxes and reserves (including Management Fees and reserves for deferred income taxes) and all other proper deductions (including Interest Expense), but excluding (a) any gains or losses derived from any sales of assets made during such period, to the extent such gains or losses are properly includable in the determination of Net Income such period, (b) the effect of Trades, and (c) non-cash restructuring charges, provided that subsequent cash payments made in respect of such charges shall be deducted in determining Net Income for the relevant period, all determined on a Consolidated basis in accordance with GAAP. New Lender. See Section 1.20. New Lenders. See the Recitals. Notes. See Section 1.04. NRTC. The National Rural Telecommunications Cooperative, a District of Columbia corporation, and any successor thereto under the NRTC Member Agreements. NRTC Consents. In connection with any Acquisition of DBS Rights, all NRTC or DirecTV consents to the collateral assignment of any related NRTC Member Agreements and any other DBS Agreements to the Agent, on behalf of the Lenders. NRTC Letter of Credit Exposure. That portion of the aggregate Letter of Credit Exposure arising from NRTC Letters of Credit. NRTC Letters of Credit. Any and all Letters of Credit issued in favor of the NRTC, as beneficiary. NRTC Member Agreements. The NRTC/Member Agreements for Marketing and Distribution of DBS Services between any Company and the NRTC listed as such on Schedule 4.12, as amended through the date hereof (including without limitation the amendment described on Schedule 4.12 providing for certain letter of credit requirements in connection with the delivery of DBS by the Subsidiaries to certain households in the DBS Subscriber Areas), as originally executed and delivered and as amended in accordance with Section 7.11, pursuant to which the DBS Subsidiaries hold the exclusive rights to provide cable programming services and all other video, audio and data packages transmitted by DirecTV over the DirecTV frequencies (as defined therein) to residential and commercial -91- subscribers in specified service areas, and any other NRTC/Member Agreements for Marketing and Distribution of DBS Services or other agreements between any Company and the NRTC for the provision of DBS services in any other specified service areas not covered by the existing NRTC Member Agreements referred to above. Obligations. The Loans, the Borrower's obligations to repay Letter of Credit Disbursements and the other obligations of the Companies under this Agreement and the other Loan Documents, including without limitation any and all future loans, advances, debts, liabilities, obligations, covenants and duties owing by the Companies to the Agent, the Lenders and the Hedging Lenders, or any of them, of any kind or nature, whether or not evidenced by any note, mortgage or other instrument, whether arising by reason of an extension of credit, loan, guarantee, letter of credit, indemnification or in any other manner, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term "Obligations" also includes, without limitation, all interest, charges, expenses, fees (including attorneys', accountants', appraisers', consultants' and other fees) and any other sums chargeable to the Companies under this Agreement or any other Loan Documents. Offering. The Parent's offering of the PCC Exchange Notes pursuant to the PCC Exchange Indenture in exchange for the outstanding 12 1/2% Series B Senior Subordinated Notes Due 2007 issued by DTS and DTS Capital, Inc. Offering Memorandum. The Offering Memorandum dated October 5, 1999, setting forth information regarding the Parent, the Borrower and its Subsidiaries and the PCC Exchange Notes in connection with the sale of the PCC Exchange Notes. Opening Balance Sheet. See Section 4.01. Organizational Documents. (a) With respect to any corporation, its certificate or articles of incorporation and by-laws, (b) with respect to any partnership, its partnership certificate and partnership agreement, (c) with respect to any limited liability company, its certificate of formation and operating agreement and (d) with respect to any other entity, the documents pursuant to which such entity was formed and organized. Original Agreement. See the Recitals. Original Lenders. See the Recitals. Original Loans. See the Recitals. Original Subordinated Notes. The 12 1/2% Series B Senior Subordinated Notes due 2005 of the Borrower, in the aggregate principal amount of $85,000,000, issued to the Subordinated Noteholders under the Subordinated Indenture on November 14, 1995, in exchange for the 12 1/2% Series A Senior Subordinated Notes due 2005 of the Borrower in the same aggregate principal amount issued under the Subordinated Indenture on July 7, 1995. Parent. See the Preamble. Parent Affiliates. Pegasus Development Corporation, Pegasus Satellite Holdings, Inc., Pegasus Towers, Inc., Pegasus GSS Merger Sub, Inc., Pegasus Travel Inc., Pegasus BTV Sub, LLC, Pegasus Communications Management Company, Pegasus Communications PAC and Pegasus Real Estate Company. Participant. See Section 1.16. Paying Subscriber. Any subscriber to DBS services provided by a DBS Subsidiary (a) from whom such DBS Subsidiary has received at least one payment for programming service, (b) whose account balance is not more than sixty (60) days past due, measured from the invoice due date thereof, without giving effect to any extensions thereof, and (c) who shall not have disconnected service. PBT. Pegasus Broadcast Television, Inc., a Pennsylvania corporation wholly owned by the Borrower. -92- PCC Debt. As of any date, the aggregate amount of "Indebtedness" (as defined in the PCC 1997 Indenture and the PCC 1998 Indenture) of PCC and its Restricted Subsidiaries outstanding on such date. PCC Exchange Indenture. The Indenture dated as of November 19, 1999 between the Parent and First Union National Bank, as trustee, providing for the issuance of the PCC Exchange Notes. PCC Exchange Notes. The Parent's 12 1/2% Series A Senior Notes Due 2007 in the aggregate principal amount of $155,000,000 issued on November 19, 1999. PCC Leverage Ratio. The meaning given to the term "Indebtedness to Adjusted Operating Cash Flow Ratio" (as applied to indebtedness classified as having been incurred on the basis of such ratio) in the PCC 1998 Senior Indenture, as in effect on the date hereof, without giving effect to any amendment thereto after the date hereof (unless the Required Lenders agree in writing, in their sole discretion, that any such amendment shall be given effect for purposes of this Agreement). PCC 1998 Indenture. The Indenture dated as of November 30, 1998 between the Parent and First Union National Bank, as trustee, as amended pursuant to the First Supplemental Indenture dated as of April 9, 1999. PCC 1998 Senior Notes. The Parent's 9 3/4% Senior Notes due 2006 in the aggregate principal amount of $100,000,000, issued pursuant to the PCC 1998 Indenture. PCC 1997 Indenture. The Indenture dated October 21, 1997 between the Parent and First Union National Bank, as Trustee, as originally executed and delivered. PCC 1997 Senior Notes. The Parent's 9 5/8% Senior Notes due 2005 issued on October 21, 1997 in the aggregate face amount of $115,000,000, pursuant to the PCC 1997 Indenture. PCC Preferred Stock. The Parent's 12.75% Series A Cumulative Exchangeable Preferred Stock issued on January 24, 1997, on the terms and conditions set forth in the PCC Preferred Stock Designation. PCC Preferred Stock Designation. The Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of 12.75% Series A Cumulative Exchangeable Preferred Stock of Pegasus Communications Corporation filed with the office of the Secretary of State of the State of Delaware on January 24, 1997, as amended by the Certificate of Amendment of Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of 12.75% Series A Cumulative Exchangeable Preferred Stock of Pegasus Communications Corporation filed with the office of the Secretary of State of the State of Delaware on June 2, 1998. PCC Preferred Stock Dividends. See Section 5.04. PCC Subordinated Notes. The Parent's 12.75% Senior Subordinated Exchange Notes due 2007 issuable in exchange for PCC Preferred Stock pursuant to the PCC Preferred Stock Designation. PCT. Pegasus Cable Television, Inc., a Massachusetts corporation wholly owned by the Borrower. Pegasus San German. Pegasus Cable Television of San German, Inc., a Delaware corporation wholly owned by PCT. Permitted Acquisitions. See Section 7.05. Permitted Investments. Investments permitted under Section 7.05(a). Permitted Liens. See Section 7.02. Permitted LMA. An LMA which meets the following criteria: (a) The LMA is entered into between an FCC television station licensee or permittee and a Subsidiary. (b) Excess cash flow of each such Subsidiary which is a special purpose Subsidiary formed for the purpose of operating under the LMA -93- shall be distributed to the Borrower on a periodic basis as reasonably required by the Agent, but, in any event, at least once in each fiscal year. (c) No LMA shall bind any Company to purchase the broadcast station or assets subject thereto (unless such Acquisition is otherwise permitted hereunder). (d) The Borrower will provide to the Agent at least ten (10) Business Days' notice prior to the execution and delivery of any LMA entered into after the date hereof, together with updated Projections showing calculations of covenant ratios and demonstrating compliance therewith, and any other information or documents reasonably requested by the Agent or any Lender. Permitted Preferred Stock. (a) The Series A Preferred Stock of Pegasus Satellite Television of Virginia, Inc. having a liquidation preference of $3,000,000, issued in connection with a prior acquisition, and (b) any other preferred stock of any of the Companies issued to Sellers in connection with Permitted Acquisitions which (i) has terms and conditions satisfactory to the Agent and (ii) without limiting the generality of the foregoing, (A) will have no redemption or other exit rights which arise earlier than one year after the scheduled maturity of the Notes, (B) will not be redeemable, in any event (other than with shares of the common stock of the Companies or securities of the Parent issued without any resulting Event of Default), until all of the Obligations have been paid in full in cash, (C) will not carry any dividend rights (other than dividends paid in shares of Permitted Preferred Stock or common stock of the Companies or the Parent issued without any resulting Event of Default), and (D) will otherwise conform with the meaning of "Qualified Subsidiary Stock", as such term is defined in the PCC Preferred Stock Designation. Permitted Seller Debt. Indebtedness of the Companies (other than Indebtedness described in Schedule 7.01) to Sellers incurred in connection with Permitted Acquisitions which (a) has terms and conditions satisfactory to the Agent and (b) is not secured other than by a Seller Letter of Credit. Permitted Seller Debt Outstandings. As of any date, all principal, overdue interest and other amounts then outstanding in respect of Permitted Seller Debt, but excluding accrued interest which is not yet overdue. Permitted Seller Subordinated Debt. Indebtedness of the Companies to Sellers which is incurred in connection with Permitted Acquisitions and (a) is subordinated to any Indebtedness of the Companies to the Agent or the Lenders pursuant to one or more Seller Subordination Agreements and (b) is unsecured. Person or person. Any individual, corporation, partnership, limited liability company, joint venture, trust, business unit, unincorporated organization, or other organization, whether or not a legal entity, or any government or any agency or political subdivision thereof. Prepayment Notice. See Section 1.08. Prepayment Option Notice. See Section 1.09. Pricing Period. See Section 1.05. Pricing Ratio. See Section 1.05. Projections. See Section 4.21. Properties. See Section 4.24. PST. See the Recitals. PSTH. PST Holdings, Inc., a Delaware corporation which is wholly owned by the Borrower and is the parent of the DBS Subsidiaries. Puerto Rico Systems. The MCI Systems, the Aguadilla System and the San German System. Quarterly Dates. The last day of March, June, September and December of each fiscal year. -94- Rate Hedging Agreements. Any written agreements evidencing Rate Hedging Obligations, including without limitation the LIBOR provisions of this Agreement. Rate Hedging Obligations. Any and all obligations of the Borrower, whether direct or indirect and whether absolute or contingent, at any time created, arising, evidenced or acquired (including all renewals, extensions, modifications and amendments thereof and all substitutions therefor), in respect of: (a) any and all agreements, arrangements, devices and instruments designed or intended to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including without limitation dollar-denominated or cross currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants and so-called "rate swap" agreements; and (b) any and all cancellations, buy-backs, reversals, terminations or assignments of any of the foregoing. Rate Regulation Act. See Section 4.10. Rate Regulation Rules. See Section 4.10. Recovering Party. See Section 1.17. Recovery. See Section 1.17. Register. See Article XII. Regulation D. Regulation D of the Board of Governors of the Federal Reserve System, as the same may be amended or supplemented from time to time. Regulatory Change. With respect to any Lender, any change after the date of this Agreement in any law, rule or regulation (including without limitation Regulation D) of the United States, any state or any other nation or political subdivision thereof, including without limitation the issuance of any final regulations or guidelines, or the adoption or making after the date of this Agreement of any interpretation, directive or request, applying to a class of banks in which such Lender is included under any such law, rule or regulation (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation thereof. Reimbursement Obligations. As of any date, all then outstanding obligations of the Companies to repay Letter of Credit Disbursements. Related Lender Party. With respect to any Lender, such Lender's parent company and/or any affiliate of such Lender which is at least fifty percent (50%) owned by such Lender or its parent company or, in the case of any Lender which is a fund investing in bank loans, any other fund that invests in bank loans and is managed by the same investment advisor of such Lender or by a controlled affiliate of such investment advisor. Remedial Work. All activities, including, without limitation, cleanup design and implementation, removal activities, investigation, field and laboratory testing and analysis, monitoring and other remedial and response actions, taken or to be taken, arising out of or in connection with Hazardous Materials, including without limitation all activities included within the meaning of the terms "removal," "remedial action" or "response," as defined in 42 U.S.C. Section 9601(23), (24) and (25). Replaced Lenders. See Section 1.20. Replacement Lender. Any entity which becomes a Lender in accordance with the provisions of Article XII. Required Lenders. At any time, Lenders, excluding Defaulting Lenders, holding more than fifty percent (50%) of (a) the aggregate outstanding principal amount of the Loans and (without duplication) the Revolving Exposure and (b) in any event, the Revolving Exposure. Required Payment. See Section 1.17. -95- Restoration Period. With respect to any Casualty Event resulting in Insurance Proceeds one hundred eighty (180) days following receipt by the Borrower, or any other Company, of such Insurance Proceeds. Restored BT Letters of Credit. The "Restored Letters of Credit" issued by the Agent. Restored DTS Letters of Credit. The "Restored Letters of Credit" issued by CIBC. Restored Letters of Credit. The "Letters of Credit", as such term is defined in that certain Reimbursement Agreement dated as of December 29, 1999 by and among the Parent, CIBC and Bankers Trust Company and that certain Indemnity Agreement dated as of December 29, 1999 by and among CIBC (individually), Bankers Trust Company, CIBC, in its capacity as the administrative agent under the DTS Credit Agreement and for the benefit of the DTS Lenders; Bankers Trust Company, in its capacity as agent under the Original Agreement and for the benefit of the Original Lenders, the Borrower and DTS (together, the "Short-Term L/C Agreements"), pursuant to which CIBC and Bankers Trust Company assumed sole responsibility for the funding of any reimbursement or other obligations arising in connection with certain irrevocable letters of credit issued by the DTS Agent and the Agent, respectively, under the DTS Credit Agreement and the Original Agreement, pending consummation of the transactions contemplated by this Agreement. It is hereby understood and agreed that this Agreement, including the provisions of Section 1.02 hereof, shall supersede and replace such Reimbursement Agreement and Indemnity Agreement, which shall have no further force and effect with respect to any draws under or other obligations with respect to such Letters of Credit arising on or after the date of this Agreement. Restricted Payment. Any distribution or payment of cash or property, or both, directly or indirectly (a) in respect of any Subordinated Debt, or (b) to any partner, stockholder or other equityholder of any of the Companies, any of the Parent Affiliates or of any of their respective Affiliates for any reason whatsoever, including without limitation, salaries, loans, debt repayment, consulting fees, Management Fees, expense reimbursements and dividends, distributions, put, call or redemption payments and any other payments in respect of equity interests; provided, however, that Restricted Payments shall not include: (i) reasonable Transaction Costs; and (ii) transactions that comply with Section 7.11. Revolvers. See Section 1.01. Revolving Credit Period. The period from the date of this Agreement to the Expiration Date. Revolving Exposure. At any time the sum of (a) the aggregate outstanding principal amount of the Revolving Loans, (b) the aggregate Letter of Credit Exposure and (c) the aggregate amount of the unutilized Commitments. Revolving Loans. See Section 1.01. Revolving Notes. See Section 1.01. SAC Commissions. See Section 7.10. SAC Payments. See Section 7.10. San German Systems. The Systems serving San German, Puerto Rico, and certain contiguous communities and owned and operated by Pegasus San German. Scheduled Principal Payments. For any fiscal period, (a) the aggregate principal amount of Loans outstanding on the first day of such period minus (b) the aggregate Commitments at the close of business on the first Business Day following the end of such period, as reduced as provided under Section 1.01(e), but in no event less than zero. SEC. See Section 6.05. -96- Security Agreements. The First Amended and Restated Security and Pledge Agreement signed by the Borrower and the First Amended and Restated Guaranty, Security and Pledge Agreement signed by each of the Subsidiaries (a) as of the Closing Date or (b) with respect to Subsidiaries formed or acquired after the date hereof, by joinder thereto, in connection with their formation or Acquisition as required under Section 2.01. Security Document(s). See Section 2.01. Seller. With respect to any Acquisition permitted hereunder, the owner of the stock (or other ownership interests) to be acquired, or the entity the assets and properties of which are to be acquired by the related respective Company pursuant to such Acquisition. Seller Letter of Credit Exposure. The portion of the aggregate Letter of Credit Exposure arising from Seller Letters of Credit. Seller Letters of Credit. All Letters of Credit issued in favor of Sellers, as beneficiaries, in connection with Permitted Acquisitions. Seller Subordination Agreements. See Section 2.01. Short-Term L/C Agreements. See the definition of "Restored Letters of Credit." Significant Franchise. See paragraph (g) of Article VIII. Special Purpose Subsidiary. Pegasus Satellite Development Corporation, a Delaware corporation wholly owned by PSTH and formed for the sole purpose of reimbursing the DBS Subsidiaries for Subscriber Acquisition Costs. Specified Authorities. (a) With respect to cable television properties, the communities included in the related Franchise Areas, the FCC, the Copyright Office, the FAA, the Commonwealth of Puerto Rico, the Department of Public Utilities of the State of Connecticut and all other Governmental Authorities having jurisdiction over the Companies and/or any CATV Franchise; (b) with respect to broadcast television properties, the FCC, the FAA and all other Governmental Authorities having jurisdiction over the Companies and/or any FCC License; and (c) with respect to DBS Rights, all Governmental Authorities, if any, having jurisdiction over the Companies and/or any such DBS Rights. Specified Subsidiaries. PCT SG, Inc., PT Broadcast, Inc., Pegasus Cable Television of Anasco, Inc. and Pegasus Anasco Holdings, Inc., until each such Subsidiary has complied in full with the requirements of Section 2.01. Stations. All of the television stations owned or programmed by the Companies, where each such station consists of all of the properties and operating rights constituting a complete, fully integrated system for transmitting broadcast television signals from a transmitter licensed by the FCC, together with any subsystem ancillary thereto, without payment of any fee by the Persons receiving such signals. Subordinated Debt. (a) Indebtedness of the Borrower and any of its Subsidiaries to the Subordinated Noteholders under the Subordinated Indenture and the Original Subordinated Notes, (b) Permitted Seller Subordinated Debt and (c) any Indebtedness which is subject to an Affiliate Subordination Agreement. -97- Subordinated Debt Documents. The Subordinated Indenture, the Original Subordinated Notes, the Subsidiary Guarantees executed as required under the Subordinated Indenture, the Stockholders Agreement executed by the Subordinated Noteholders in connection with the issuance to them of 8,500 shares of the Borrower's Class B Common Stock and any and all other agreements and instruments executed pursuant thereto. Subordinated Indenture. The Indenture dated as of July 7, 1995 among the Borrower, as Issuer, certain of the Subsidiaries, as Guarantors, and First Union National Bank (successor to First Fidelity Bank, National Association), as Trustee, providing for the issuance of the Original -Subordinated Notes, as amended pursuant to the First Supplemental Indenture dated as of September 26, 1997. Subordinated Indenture Default. Any "Event of Default", as defined in the Subordinated Indenture. Subordinated Noteholders. The registered holders from time to time of the Subordinated Notes. Subscriber Acquisition Costs. For any period, those expenses and capitalized costs incurred in the generation of Gross Subscriber Additions, such as sales commissions, advertising expenses and promotional expenses, including the amount, if any, by which the cost of equipment sold to subscribers to the DBS services offered by the DBS Subsidiaries (including rebates, subsidies and the like) exceeds the revenue generated from such sale(s). Subscriber Reports. See Section 6.05. Subsidiary. (a) Any corporation, association, joint stock company, business trust or other similar organization of which more than 50% of the ordinary voting power for the election of a majority of the members of the board of directors or other governing body of such entity is held or controlled by the Borrower or a Subsidiary of the Borrower; (b) any other such organization the management of which is directly or -98- indirectly controlled by the Borrower or a Subsidiary of the Borrower through the exercise of voting power or otherwise; or (c) any joint venture, association, partnership, limited liability company or other entity in which the Borrower or a Subsidiary of the Borrower has a 50% equity interest. All of the Borrower's Subsidiaries as of the date hereof are listed on Schedule 4.02 and such term shall include each new Subsidiary formed after the date hereof in compliance with the terms of the foregoing definition and this Agreement. Syndication Agent. See the Preamble. Systems. All of the cable television systems owned or managed by the Companies, where each such system consists of a cable distribution system that receives broadcast signals by antennae, microwave transmissions, satellite transmission or any other form of transmission and that amplifies such signals and distributes them to Persons who pay to receive such signals. Tax Sharing Agreement. The Amended and Restated Tax Sharing Agreement dated as of July 1, 1997 among the Parent and its subsidiaries. Tax Sharing Payments. Payments under the Tax Sharing Agreement arising solely as a result of the operations of the Companies. Taxes. See Section 1.13. Term Loan Prepayment Amount. See Section 1.09. Term Loans. The Initial Term Loans and the Incremental Term Loans. Third Parties. See Section 13.02. Total Debt Service. For any period, the aggregate amount (determined on a Consolidated basis, in accordance with GAAP) of principal and premium, if any, and cash interest, commitment fees and agency fees and other amounts required to be paid during such period in respect of Total Funded Debt. For purposes of this definition, the aggregate amount of all principal required to be paid in respect of the Revolving Loans shall be limited to Scheduled Principal Payments. Total Funded Debt. As of any date, (a) all Indebtedness of the Companies (other than the Special Purpose Subsidiary) described in paragraphs (a) through (f) of the definition of "Indebtedness" set forth above and, without duplication, Guarantees by the Companies of such Indebtedness plus the aggregate amount payable (whether or not due) in respect of any and all LMA Purchase Options, determined on a Consolidated basis, in accordance with GAAP. Total Interest Expense. For any period, Interest Expense for such period which is payable, or currently paid, in cash. Tower Site Leases. See Section 4.13. Trades. Those items of income and expense of the Companies which do not represent the right to receive payment in cash or the obligation to make payment in cash and which arise pursuant to so-called trade or barter transactions. Transaction Costs. For any period, nonrecurring out-of-pocket expenses (including attorneys' fees, investment banking fees and facility fees, but excluding recurring costs such as commitment and agency fees) accrued by the Borrower and the Subsidiaries (other than the Special Purpose Subsidiary) to Persons who are not Affiliates of any Company during such period in connection with the closing of the transactions under this Agreement, the DTS Merger, any Permitted Acquisition and any other transactions occurring after the Closing Date which are consented to in writing by the Required Lenders. Transaction Documents. See Section 4.03. Working Capital. On any date, Current Assets minus Current Liabilities on such date. Year 2000 Compliant. See Section 4.28. -99- Year 2000 Risk. See Section 4.28. [The next pages are the signature pages] [Signature page to First Amended and Restated Credit Agreement] IN WITNESS WHEREOF, the Agent, the Lenders and the Borrower have caused this Agreement to be duly executed by their duly authorized representatives, as a sealed instrument, all as of the day and year first above written. BORROWER: PEGASUS MEDIA & COMMUNICATIONS, INC. By:/s/ Robert N. Verdecchio ------------------------------------------- Robert N. Verdecchio, Senior Vice President CO-ARRANGERS: CIBC WORLD MARKETS CORP. By:/s/ Matthew B. Jones ------------------------------------------- Matthew B. Jones, Managing Director DEUTSCHE BANK SECURITIES, INC. By:/s/ Gregory R. Paul ------------------------------------------- Gregory R. Paul, Managing Director AGENT (in an Administrative capacity): ------------------------------------- BANKERS TRUST COMPANY By:/s/ Gregory P. Shefrin ------------------------------------------- Gregory P. Shefrin, Vice President SYNDICATION AGENT: CIBC INC. By:/s/ Matthew B. Jones ------------------------------------------- Matthew B. Jones, Managing Director, CIBC World Markets Corp., as Agent DOCUMENTATION AGENT: FLEET NATIONAL BANK By:/s/ Stephen J. Healey ------------------------------------------- Stephen J. Healey, Senior Vice President EX-10.8 13 EXHIBIT 10.8 FIRST AMENDMENT TO AGREEMENT, DATED SEPTEMBER 13, 1999, BY AND AMONG ADS ALLIANCE DATA SYSTEMS, INC., PEGASUS SATELLITE TELEVISION, INC., AND DIGITAL TELEVISION SERVICES, INC. This First Amendment ("First Amendment") to the agreement, dated September 13, 1999 (the "Agreement"), by and among ADS Alliance Data Systems, Inc. ("Alliance"), Pegasus Satellite Television, Inc. ("PST") and Digital Television Services, Inc. ("DTS" and together with PST, the "Customer") is dated as of December 30, 1999. RECITALS WHEREAS, Alliance and Customer entered into the Agreement on September 13, 1999; WHEREAS, Section 1.2 (Procedures/Reporting) of the Agreement provides for the establishment of certain policies, procedures and standard reporting concerning call center activities, performance, escalation and recovery no later than December 31, 1999; WHEREAS, Section 5 (Performance/Call Forecasting) of the Agreement provides for Alliance and Customer to mutually agree upon certain performance targets, a call forecasting process, and a methodology to allocate call volume no later than December 31, 1999; and WHEREAS, Alliance and Customer desire to amend the Agreement with this First Amendment to reflect their mutual agreement as to the items to be agreed upon pursuant to Section 1.2 and Section 5 of the Agreement. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. Unless otherwise defined in this First Amendment, including the attachment hereto, capitalized terms used but not otherwise defined herein shall have the meaning set forth in the Agreement. 2. Section 1.2 of the Agreement is hereby amended in its entirety to read as follows: "1.2 Procedures/Reporting. The Parties will follow the policies, procedures, and standard reporting concerning call center activities, performance, escalation and recovery procedures set forth on Exhibit C to this Agreement." 3. Section 5 of the Agreement is hereby amended in its entirety to read as follows: "5. PERFORMANCE/CALL FORECASTING. Prior to January 1, 2000 (or such later date they may be mutually agreed upon in writing by Alliance and Customer), Alliance will use commercially reasonable efforts to answer eighty-five percent (85%) of calls offered within 30 seconds and to maintain an abandon rate of less than or equal to ten percent (10%). Beginning on January 1, 2000 (or such later date as agreed upon above), the customer care performance targets set forth in Exhibit C to this Agreement shall become effective." 4. The following sentence from Section 7.1 of the Agreement shall be deleted in its entirety: "In addition, if the Customer and Alliance cannot mutually agree, prior to the applicable deadlines set forth in this Agreement or any mutually agreed upon extension of those deadlines, upon (i) the procedures and reporting policies pursuant to Section 1.2 or (ii) pursuant to Section 5, performance targets, a call forecasting process and a method to allocate call volume, Customer shall have the right to terminate this Agreement, without penalty (notwithstanding any other provision of this Agreement), upon forty-five (45) days' notice to Alliance." 5. The Agreement is amended by the addition of an Exhibit C as set forth in Attachment 1 to this First Amendment. 6. In all other respects, the Agreement remains unchanged. IN WITNESS WHEREOF, the Parties have caused this First Amendment to be execute by and through their duly authorized representatives. PEGASUS SATELLITE TELEVISION, INC. By: /s/ Howard E. Verlin ------------------------ Name: Howard E. Verlin Title: Vice President DIGITAL TELEVISION SERVICES, INC. By: /s/ Howard E. Verlin ------------------------ Name: Howard E. Verlin Title: Vice President ADS ALLIANCE DATA SYSTEMS, INC. By: /s/ Richard J. Jerrier ------------------------ Name: Richard J. Jerrier Title: Director -2- ATTACHMENT 1 EXHIBIT C CUSTOMER CARE PERFORMANCE TARGETS [omitted and filed separately with the Commission] Exhibit C Attachment 1 [omitted and filed separately with the Commission] -3- EX-10.9 14 EXHIBIT 10.9 AMENDMENT NO. 1, dated January 24, 2000, and effective as provided below, to Class B Preferred Unit Subscription Agreement dated as of January 10, 2000 (the "Subscription Agreement"), between PERSONALIZED MEDIA COMMUNICATIONS, L.L.C. ("PMC") and PEGASUS DEVELOPMENT CORPORATION (the "Subscriber"), and to Series PMC Warrant Agreement dated as of January 13, 2000 (the "Warrant Agreement"), between PMC and PEGASUS COMMUNICATIONS CORPORATION ("Pegasus"). IN CONSIDERATION OF the mutual covenants contained herein, and for other good and valuable consideration the receipt of which is hereby acknowledged, and intending to be legally bound, the parties agree as follows. 1. Section 2.2 of the Subscription Agreement is amended by striking out "At the Closing" and inserting in its place "At the Closing, or as otherwise provided in Section 2.4". 2. Section 2.3 of the Subscription Agreement is amended (a) by striking out "and Warrants" from the caption and (b) by striking out "and the Warrants" at the end thereof. 3. The Subscription Agreement is amended by adding the following new section immediately after Section 2.3: "2.4 Issuance of Warrants. The Subscriber shall cause Pegasus to execute and deliver a warrant agreement (the "Warrant Agreement") as provided in Section 6.6. The Subscriber shall cause Pegasus to issue to the Company the Warrants provided for in the Warrant Agreement, and to execute and deliver the Warrant Certificate(s) evidencing the Warrants as contemplated by the Warrant Agreement, on the first to occur of: "(a) three business days after the stockholders of Pegasus shall have approved the issuance of the Warrants, or "(b) three business days after the occurrence of any event that causes the approval of the stockholders of Pegasus not to be required under the rules of the Nasdaq Stock Market. "If no event described in clause (a) or (b) shall have occurred on or before July 1, 2000, the transactions contemplated by this Agreement and the other documents delivered pursuant to this Agreement shall be rescinded; provided, however, that in no event shall the Company be required to reimburse the Subscriber for the Stock or the cash in the amount of $14,250,000 payable at the Closing." 4. Section 6.6 of the Subscription Agreement is amended by striking out "by the Subscriber" and replacing it with "by Pegasus". 5. Section 1 of the Warrant Agreement is amended by (a) striking out "On the date hereof" and replacing it with "On the date specified in Section 2.4 of the Subscription Agreement", (b) striking out "hereby issues" and replacing it with "will issue", and (c) striking out "hereby acquires" and replacing it with "will acquire". 6. The first paragraph of Section 6 of the Warrant Agreement is amended by striking out "from (and including) the date of this Agreement" and replacing it with "from (and including) the date of issuance of each such Warrant". 7. The amendments effected by paragraphs 1 through 4 are effective January 10, 2000. The amendments effected by paragraphs 5 and 6 are effective January 13, 2000. The warrant certificate dated January 13, 2000, shall be deemed not to have been issued and shall be returned to Pegasus promptly after the execution of this Amendment. Except as expressly amended by this Amendment, the Subscription Agreement, the Warrant Agreements and the other agreements referred to therein or executed and delivered pursuant thereto remain in full force and effect in accordance with their terms. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the date first written above, effective the dates specified in paragraph 7. PERSONALIZED MEDIA COMMUNICATIONS, L.L.C. By: /s/ John C. Harvey ---------------------------- John C. Harvey, Managing Member PEGASUS DEVELOPMENT CORPORATION By: /s/ Ted S. Lodge ---------------------------- Ted S. Lodge, Senior Vice President PEGASUS COMMUNICATIONS CORPORATION By: /s/ Ted S. Lodge ---------------------------- Ted S. Lodge, Senior Vice President -2- JOINDER BY CERTAIN SHAREHOLDERS OF PEGASUS The undersigned (a) represent and warrant to Personalized Media Communications, L.L.C. that the shares of Class B Common Stock of Pegasus held by them carry sufficient voting power to approve the issuance of the Warrants if stockholder approval is sought, without the need to obtain the vote of any other stockholder; and (b) agree to vote all their shares of Class B Common Stock in favor of the issuance of the Warrants at a meeting of stockholders of Pegasus to be held not later than June 30, 2000, unless prior to that time an event occurs that makes stockholder approval not required under the rules of the Nasdaq Stock Market. PEGASUS COMMUNICATIONS HOLDINGS, INC. By: /s/ Ted S. Lodge ---------------------------- Ted S. Lodge, Senior Vice President PEGASUS CAPITAL, LTD., general partner By: /s/ Ted S. Lodge ---------------------------- Ted S. Lodge, Senior Vice President -3- EX-10.10 15 EXHIBIT-10.10 PATENT LICENSE AGREEMENT This Agreement is made this 13th day of January 2000 by and between: PERSONALIZED MEDIA COMMUNICATIONS, L.L.C., a limited liability company organized and existing under the laws of the State of Delaware, United States of America and having a principal place of business at 110 East 42nd Street, Suite 1704, New York, New York 10017-5611 (hereinafter "PMC" or "LICENSOR"), and PMC SATELLITE DEVELOPMENT, L.L.C., a limited liability company organized and existing under the laws of the State of Delaware, United States of America, having a principal place of business at 110 East 42nd Street, Suite 1704, New York, New York 10017-5611 (hereinafter "PSD" or "LICENSEE"); RECITALS PMC is the sole assignee of certain issued patents and patent applications pending in the United States and foreign countries relating to, among other things, personalized interactive broadcast media. The currently issued United States patents and any patents issuing from any pending United States and foreign patent applications assigned to PMC are further defined and identified below and are referred to herein as the SUBJECT PATENTS. LICENSEE desires to acquire an exclusive license under the SUBJECT PATENTS, including any patents issuing after the date of this Agreement, for the FIELD OF USE, including the complete right to sublicense such patents, subject to certain conditions in prior licenses as recited below. PMC has the right to grant the exclusive license described herein to LICENSEE under the SUBJECT PATENTS, including any patent issuing after the date of this Agreement, within the FIELD OF USE, and is willing to do so on the terms and conditions recited in this Agreement. NOW, THEREFORE, PMC and LICENSEE agree as follows. In addition to the terms appearing in bold type above, other terms appearing in bold type are defined in Article 8 of this Agreement. ARTICLE 1. LICENSE GRANT 1.01 LICENSOR hereby grants to LICENSEE, during the term of this Agreement, an exclusive license to use the inventions disclosed and claimed in the SUBJECT PATENTS within the FIELD OF USE including the right to grant sublicenses on the conditions specified herein. The license granted herein is subject to rights granted in the prior field-of-use licenses issued to (1) The Weather Channel, Inc. for the delivery of weather information under the Patent License Agreement for Landmark Communications, Inc. and The Weather Channel, Inc. dated January 31, 1996 and (2) to StarSight Telecast Inc. ("STARSIGHT") for the delivery of schedule information under the Patent License Agreement for StarSight Telecast Inc. dated March 2, 1994 ("STARSIGHT LICENSE"), only if such StarSight license exists. Notwithstanding the foregoing, in the event that PMC or an AFFILIATE(s) (i) assigns any of the SUBJECT PATENTS to any person or entity, (ii) accepts an equity investment of $1 million or more from any person or entity (other than its existing interest holders or LICENSEE or its AFFILIATES) , (iii) engages in any transaction resulting in a change of control of PMC, (iv) licenses or sublicenses inventions disclosed in the SUBJECT PATENTS to STARSIGHT or any entity AFFILIATED with STARSIGHT (STARSIGHT and its AFFILIATES collectively being referred to as "STARSIGHT AFFILIATES") for a field of use other than that described in the STARSIGHT LICENSE or (v) settles its outstanding disputes with STARSIGHT, then PMC will, or will cause its AFFILIATE(s) to, obligate in writing any party to the foregoing transactions to: (i) if the party is a STARSIGHT AFFILIATE, not sue LICENSEE and its SUBLICENSEES and their AFFILIATES for infringement of the SUBJECT PATENTS within the field of use licensed to STARSIGHT under the STARSIGHT LICENSE, if such license exists; (ii) if the party is not a STARSIGHT AFFILIATE, agree to cause STARSIGHT not to sue LICENSEE and its SUBLICENSEES and their AFFILIATES for infringement of the SUBJECT PATENTS within the field of use licensed to STARSIGHT under the STARSIGHT LICENSE, if such license exists, in the event that such party becomes a STARSIGHT AFFILIATE or engages in an intellectual property licensing transaction with a STARSIGHT AFFILIATE. -2- 1.02 In furtherance of the license granted herein, PMC agrees to furnish all information upon request from LICENSEE or any SUBLICENSEE hereunder concerning the issued patents identified in Schedule A attached hereto and any subsequent patent which issues from the pending patent applications identified in Schedule B attached hereto; as well as all manufacturing and technical information requested by LICENSEE on behalf of any SUBLICENSEE or directly by any SUBLICENSEE, if appropriate, concerning or pertaining to the use of the inventions disclosed and/or claimed in those patents and pending patent applications within the FIELD OF USE, which manufacturing and technical information is in LICENSOR's possession at the time of such request. 1.03 No provision in this Agreement shall be deemed to prevent LICENSOR and LICENSEE or any SUBLICENSEE from entering into other agreements involving the SUBJECT PATENTS for activities or products other than those expressly set forth in the FIELD OF USE as defined in this Agreement. 1.04 PMC agrees and covenants not to sue LICENSEE, and LICENSEE (as agent for PMC) shall have the right to grant covenants not to sue any SUBLICENSEE and its AFFILIATES and the CONSUMERS who subscribe to any of SUBLICENSEE's and its AFFILIATES' services, for any of the following: (i) the COMMUNICATION of any infringing PROGRAMMING SERVICES within the FIELD OF USE and the use by CONSUMERS who subscribe to any such SUBLICENSEE's and its AFFILIATEs' services of such PROGRAMMING SERVICES, (ii) the combination by a RECEIVER at a CONSUMER's location of PROGRAMMING SERVICES delivered by any means outside the FIELD OF USE with PROGRAMMING SERVICES delivered within the FIELD OF USE, but only if such combination is made independent of any service provided by any LICENSEE or SUBLICENSEE or its AFFILIATES other than PROGRAMMING SERVICES within the FIELD OF USE, or (iii) any sale or provision of infringing RECEIVERS by any such SUBLICENSEE or its AFFILIATES, or their agents or dealers, or use of such infringing RECEIVERS, when such RECEIVERS are principally intended for receipt of PROGRAMMING SERVICES delivered by any such SUBLICENSEE or its AFFILIATES to such RECEIVERS within the FIELD OF USE. Such covenants not to sue shall be construed as though any SUBLICENSEE is the LICENSEE, and LICENSOR agrees to be bound by such specified covenants granted by any such SUBLICENSEE hereunder. This provision shall in no way be construed as an implied license for the creators, programmers or distributors of infringing PROGRAMMING SERVICES, CONSUMERS who combine licensed PROGRAMMING SERVICES with infringing signals or program content, or the manufacturers of infringing RECEIVERS to make or sell any invention disclosed and claimed in the SUBJECT PATENTS. -3- ARTICLE 2. LICENSE CONSIDERATION 2.01 In consideration of the license granted hereunder, LICENSEE agrees to pay to LICENSOR (a) One Hundred Thousand United States Dollars ($100,000) twelve months after the EFFECTIVE DATE, (b) One Hundred Thousand United States Dollars ($100,000) twenty-four months after the EFFECTIVE DATE and (c) One Hundred Thousand United States Dollars ($100,000) thirty-six months after the EFFECTIVE DATE. 2.02 If LICENSEE sublicenses Pegasus Communications Corporation ("PCC") or any of its AFFILIATES ("PCC SUBLICENSE AGREEMENT"), the PCC SUBLICENSE AGREEMENT will provide for LICENSOR's right to designate one person to serve on PCC's Board of Directors ("DIRECTOR DESIGNATION RIGHT"). The DIRECTOR DESIGNATION RIGHT shall terminate upon the first to occur of the following: (i) termination of this Agreement or the PCC SUBLICENSE AGREEMENT (for reasons other than PCC's or its AFFILIATE's acquisition of control of LICENSEE); (ii) the commencement of litigation by one of the parties to this Agreement or the PCC SUBLICENSE AGREEMENT against any other party to this Agreement or the PCC SUBLICENSE AGREEMENT relating to the respective party's rights and/or obligations under this Agreement or the PCC SUBLICENSE AGREEMENT, as the case may be; (iii) LICENSOR's designee commits a breach of fiduciary duty to PCC; (iv) LICENSOR or LICENSOR's designee or AFFILIATES commits a material violation of any federal or state securities law in connection with the purchase or sale of any of PCC's securities; and (iv) PMC disposes of 50 percent or more of its holdings of PCC Class A Common Stock, measured on a fully diluted basis taking into consideration all of PCC Class A Common Stock and warrants to purchase PCC Class A Common Stock owned by PMC as of the EFFECTIVE DATE. ARTICLE 3. ENFORCEMENT 3.01 LICENSEE shall have the right to grant to any SUBLICENSEE the right to enforce the SUBJECT PATENTS in its own name against any person operating in the FIELD OF USE. Any enforcement action brought under this provision shall be conducted in consultation with PMC and at any such SUBLICENSEE's sole expense. PMC shall use reasonable best efforts to cooperate to the extent feasible with any such SUBLICENSEE in any such enforcement action. PMC shall upon request of such SUBLICENSEE execute all documents and take all other actions, including joining as a party, to the extent reasonably necessary to enforce any SUBJECT PATENT under this provision. PMC will be reimbursed by such SUBLICENSEE for the reasonable time of its employees and its reasonable expenses which result from such cooperation, including any litigation costs resulting from becoming a party to any action (except for litigation costs relating to PMC's claims for infringements outside the FIELD OF USE that may be pursued in conjunction with SUBLICENSEE's claims relating to infringements within the FIELD OF USE). If any such SUBLICENSEE enforces the SUBJECT PATENTS in the FIELD OF USE, that SUBLICENSEE shall receive all proceeds and other benefits from such enforcement action to the extent that the revenue and other benefits from such enforcement proceeding relates to infringement in the FIELD OF USE (even if PMC cooperates in such enforcement, by joining as a party or otherwise). [omitted and filed separately with the Commission] -4- 3.02 If any SUBLICENSEE is obligated to make any payment or compensation to LICENSEE or PMC of any kind, LICENSEE shall require such SUBLICENSEE to keep and make available to PMC on reasonable notice sufficient records to allow PMC to determine that such payment or compensation is proper and complete. During the term of this Agreement and for two years following the termination or expiration of this Agreement, LICENSEE shall require any SUBLICENSEE hereunder to permit its records to be inspected to determine the correctness of the computation of any compensation made hereunder. Such inspections shall be during reasonable business hours and on reasonable notice to SUBLICENSEE, and shall be conducted by an auditor designated by PMC and acceptable to the appropriate SUBLICENSEE. The acceptance by any SUBLICENSEE of such auditor designated by PMC shall not be unreasonably withheld. The auditor shall report to PMC the amount of any compensation and the basis upon which it was determined. If the compensation payable in any payment period is found to have been understated by ten percent (10%) or more, SUBLICENSEE shall reimburse PMC for its costs and expenses incurred in having the inspection conducted. ARTICLE 4. WARRANTIES AND LIABILITY 4.01 LICENSOR represents and warrants that it is the owner of the entire right, title and interest in and to the SUBJECT PATENTS and the inventions disclosed and/or claimed therein, and that it has the right to grant the license granted to LICENSEE pursuant to this Agreement. 4.02 Nothing in this Agreement shall be construed as: (a) a warranty or representation by LICENSOR as to the validity or scope of any of the SUBJECT PATENTS; (b) a warranty or representation by LICENSOR that any manufacture, use, lease, or sale of any product does not or will not infringe patents, copyrights, industrial design rights or other proprietary rights owned or controlled by third parties. LICENSOR shall not be liable to LICENSEE directly or as an indemnitor of (i) LICENSEE, (ii) SUBLICENSEES or (iii) customers of SUBLICENSEES as a consequence of any alleged infringement of any such third party patents, copyrights, industrial design rights or other proprietary rights; (c) a requirement that LICENSOR shall file any patent applications, secure any patent, or maintain any patent in force. Notwithstanding the foregoing, LICENSOR shall use its reasonable best efforts to prosecute the pending patent applications set out in Schedule B hereto. However, LICENSOR shall have the sole discretion to abandon any application set out in Schedule B as is, in its opinion, unnecessary to claim fully the inventions disclosed in such applications; -5- (d) an obligation to bring or prosecute actions or suits against third parties for infringement of any patent, except as otherwise set forth in Section 3.01; or (e) granting by implication, estoppel or otherwise, any license or rights under patents other than the SUBJECT PATENTS. 4.03 In no event shall LICENSOR have any liability, in contract, tort or otherwise, arising out of or in any way connected with this Agreement to pay or return to LICENSEE royalties paid or accrued hereunder by LICENSEE and/or any SUBLICENSEE. ARTICLE 5. TERM AND TERMINATION 5.01 Unless terminated earlier under Section 5.02 herein, the license granted to LICENSEE under this Agreement shall extend from the EFFECTIVE DATE to the date of expiration of the last to expire of the SUBJECT PATENTS. 5.02 Any provision herein notwithstanding, LICENSEE, with the consent of SUBLICENSEE (if any), may terminate this Agreement at any time by giving PMC at least thirty (30) days prior written notice. Upon such termination, all rights of LICENSEE and LICENSOR under this Agreement cease to have force and effect. 5.03 Notwithstanding Section 5.02, termination of this Agreement for any reason shall not release either party hereto from any liability which at the time of such termination has already accrued to the other party. In the event this Agreement is terminated for any reason, any sublicense granted by LICENSEE hereunder shall survive with PMC as licensor and any rights of LICENSEE as licensor of any such sublicense shall accrue to PMC. -6- ARTICLE 6. NOTICES Notices, reports and communications hereunder shall be deemed to have been sufficiently given if in writing and sent by overnight delivery service or registered mail, postage prepaid to the other party at the address given below. Until further notice, all notices shall be addressed as follows: If from LICENSOR to LICENSEE: Stephen P. McCandless Senior Vice President PMC Satellite Development L.L.C. 110 East 42nd Street Suite 1704 New York, New York 10017-5611 If from LICENSEE to LICENSOR Stephen P. McCandless Senior Vice President Personalized Media Communications, L.L.C. 110 East 42nd Street Suite 1704 New York, New York 10017-5611 Copies of notices should also be sent to Ted Lodge at Pegasus Development Corporation, 225 City Line Avenue, Bala Cynwyd, Pennsylvania 19006. Each party may change such address by written notice to the other party. ARTICLE 7. MISCELLANEOUS PROVISIONS 7.01 Sublicenses; Assignment; Changes of Control. (a)(i) LICENSEE may, at its sole expense, grant sublicenses under the SUBJECT PATENTS within the FIELD OF USE. (ii) LICENSEE may assign this Agreement in whole or in part, by a transfer of control of LICENSEE or otherwise, with the prior written consent of LICENSOR and SUBLICENSEE, provided that assignee expressly assumes all obligations of LICENSEE under the Agreement by a writing delivered to PMC. PMC may assign this Agreement, in whole or in part, by transfer of control of PMC or otherwise, with the prior written consent of LICENSEE and SUBLICENSEE, provided that assignee expressly assumes all the obligations of PMC under this Agreement by a writing delivered to LICENSEE. (iii) In the event of any sublicenses, assignments and changes of control set forth in Exhibit 7.01 attached hereto, LICENSEE shall be obligated to pay the additional consideration and satisfy the other obligations, all as set forth in Exhibit 7.01. LICENSEE agrees to impose on any SUBLICENSEE the obligations of LICENSEE required under this Section 7.01. (b) LICENSEE agrees that the right of PMC to receive the consideration as set forth in Exhibit 7.01 and to exercise the designation rights therein may be assigned separately by PMC to any of its AFFILIATES without the necessity of PMC assigning the entire Agreement, provided that such rights are still governed by the terms and conditions of this Agreement. 7.02 Marking. LICENSEE shall require any SUBLICENSEE hereunder to clearly and indelibly mark the packaging of any apparatus provided or sold to CONSUMERS by such SUBLICENSEE which embodies the inventions disclosed and claimed in the SUBJECT PATENTS with the words "Licensed to Patent" (or "Patents") and the number of the SUBJECT PATENTS applicable to such apparatus. LICENSOR shall together with such SUBLICENSEE review the functionality of such apparatus to determine the SUBJECT PATENTS applicable, if any. -7- 7.03 Agency. Except as provided in Paragraphs 1.04 and 3.01 above, LICENSOR and LICENSEE agree and stipulate that neither LICENSEE nor LICENSOR shall be construed as acting as an agent or representative of the other in any dealings which either party may have with any other person, firm or corporation and that neither LICENSEE nor LICENSOR has any power to act for or legally bind the other in any transaction. This Agreement shall not be construed as any form of joint venture or partnership between LICENSEE and LICENSOR. 7.04 APPLICABLE LAW. THIS AGREEMENT SHALL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 7.05 Severability. The terms and conditions of this Agreement are severable. If any condition of this Agreement is found to be illegal or unenforceable under any rule of law, all other terms shall remain in force. Further, the term or condition which is held to be illegal or unenforceable shall remain in effect as far as possible in accordance with the intention of the parties. 7.06 Costs and Attorneys' Fees. In the event it is necessary for either party to commence legal proceedings against the other to enforce this Agreement, or to collect amounts due hereunder, the prevailing party will be entitled to recover from the losing party its reasonable costs of suit and collection, including attorneys' fees. 7.07 Entire Agreement. This Agreement constitutes the complete and exclusive statement of the agreement between LICENSOR and LICENSEE with respect to the subject matter hereof. There are no understandings, representations or warranties of any kind, oral or written, express or implied, with respect to the subject matter indicated above, except as expressly set forth herein. Failure by either party to enforce any provision of this Agreement shall not be deemed a waiver of that provision or of any other provision of this Agreement. Any claim of waiver of any right, obligation, term or condition of this Agreement and any claim that any provision of this Agreement has been modified or amended shall be null and void unless such waiver, modification or amendment is made in writing and signed by authorized representatives of both LICENSEE and LICENSOR, and all SUBLICENSEES have consented in writing to such waiver, modification and amendment. -8- 7.08 Confidentiality. The parties hereto agree that they will keep the terms of this Agreement confidential, and neither of the parties shall disclose such terms to any third party without prior written consent of the other party, except (i) as required by federal and state securities law (as determined by independent counsel to the party required to make such disclosure), (ii) in connection with a judicial or administrative proceeding or other filing with an administrative agency, (iii) to professional advisors who are bound by an obligation of confidentiality, or (iv) to existing or prospective lenders or investors who agree in writing not to disclose the terms and conditions of this Agreement. In addition, LICENSOR or LICENSEE may, in its discretion, disclose the FIELD OF USE licensed in this Agreement to third parties who agree in writing not to disclose the terms and conditions of this Agreement. With regard to a press release related to this Agreement and the relationship between LICENSOR and LICENSEE, both parties shall discuss and determine the timing and manner of the announcement and other details thereof after the execution of this Agreement. 7.09 Third Party Beneficiary. The parties agree that each SUBLICENSEE is intended to be a third beneficiary of this Agreement and each SUBLICENSEE may directly enforce its rights as a third party beneficiary. ARTICLE 8. DEFINITIONS 8.01 "SUBJECT PATENTS" means the United States and foreign patents assigned to LICENSOR identified in Schedule A attached hereto, any United States or foreign patent issuing from the applications identified in Schedule B attached hereto and any United States or foreign patent issuing from any application that claims filing priority from any of the patents or patent applications identified on Schedule A or Schedule B. 8.02 "FIELD OF USE" means the field of COMMUNICATION of PROGRAMMING SERVICES through a SATELLITE COMMUNICATION SYSTEM to a CONSUMER through a RECEIVER, the CONSUMER's use of such PROGRAMMING SERVICES and the COMMUNICATION of information resulting from a CONSUMER's use of PROGRAMMING SERVICES by means of any return path, including satellite and terrestrial modes. The FIELD OF USE expressly excludes (i) the manufacture of RECEIVERS, including the software supplied with RECEIVERS, and the sale of such RECEIVERS by manufacturers (but not the use of RECEIVERS by CONSUMERS or sale of RECEIVERS by LICENSEE or any sublicensee or its dealers or agents); (ii) the creation or origination of PROGRAMMING SERVICES and the sale of PROGRAMMING SERVICES by programmers (but not the use of PROGRAMMING SERVICES by CONSUMERS or sale of PROGRAMMING SERVICES by LICENSEE or any sublicensee or its dealers or agents); (iii) the COMMUNICATION of PROGRAMMING SERVICES produced for and targeted specifically for a professional, occupational, commercial, governmental or educational market, including continuing professional education; (iv) the COMMUNICATION of PROGRAMMING SERVICES through a cable or MMDS head-end facility, a broadcasting facility using a terrestrial propagation path, or a telephone system; (v) the COMMUNICATION of any signal from the ORBITAL SATELLITES to a CONSUMER at a RECEIVER, which involves changes to such signal or the insertion or inclusion of other signals in such signal at any point intermediate between the ORBITAL SATELLITES and a CONSUMER at a RECEIVER ; (vi) the delivery of computer software to RECEIVERS for purposes other than specifically to facilitate the use of PROGRAMMING SERVICES by a CONSUMER; and, (vii) the monitoring of the operations of any computer, including its output, at the CONSUMER'S location, for the purpose of developing commercially salable data. Notwithstanding the foregoing, the FIELD OF USE explicitly includes (i) the use of RECEIVERS by a CONSUMER within the FIELD OF USE, including the use by such CONSUMER of any capability of the RECEIVER which allows the CONSUMER to time shift the use of any PROGRAMMING SERVICES, (ii) the COMMUNICATION from a remote device such as a satellite receiver antenna to a CONSUMER'S location, such as, for example, through an apartment rooftop MDU installation, if no change is made in the retransmitted signal and the signal is merely amplified and/or retransmitted with no other signal inserted in or included with that retransmitted signal, (iii) the COMMUNICATION of services specifically designed to promote the use by a CONSUMER of PROGRAMMING SERVICES received by such CONSUMER from the ORBITAL SATELLITES, including any program guide which provides a CONSUMER schedule information and recording capabilities for PROGRAMMING SERVICES, and (iv) the provision of any service which allows the delivery of pay-per-view movies to a CONSUMER and the making of a record of a CONSUMER'S selection of pay-per-view movies for purposes of payment for such selected movies. -9- 8.03 "COMMUNICATION SYSTEM" means a system for the COMMUNICATION of PROGRAMMING SERVICES and the return path for the COMMUNICATION of information resulting from a CONSUMER'S use of such PROGRAMMING SERVICES. 8.04 "SATELLITE COMMUNICATION SYSTEM" means a COMMUNICATION SYSTEM which uses any part or all of the ORBITAL SATELLITES for the COMMUNICATION of PROGRAMMING SERVICES from a terrestrial ground station and uses any means of COMMUNICATION, including satellite and terrestrial modes, for the return of information resulting from a CONSUMER'S use of such PROGRAMMING SERVICES. 8.05 "PROGRAMMING SERVICES" as used herein means any programming content, including video, audio, voice services and/or data services delivered to, or intended to be delivered to, a CONSUMER through a RECEIVER, and all advertising content which is embedded in such PROGRAMMING SERVICES and which is directed to CONSUMERS. 8.06 "CONSUMER," as used in this Agreement, means one or more individuals, including those located in single family households, multiple dwelling units, hotels and motels, public facilities such as bars or restaurants, commercial establishments such as offices and showrooms, vehicles, and airplanes, to the extent such individuals receive, by means of a RECEIVER, PROGRAMMING SERVICES intended solely for their use. Specifically, CONSUMER excludes individuals receiving and using information produced for and targeted specifically for a professional, occupational, commercial, governmental or educational market. 8.07 "RECEIVER" means the apparatus which is used by a CONSUMER to receive, access, process and display PROGRAMMING SERVICES, emit PROGRAMMING SERVICES as sound or transmits any information resulting from a CONSUMER'S use of such PROGRAMMING SERVICES. 8.08 "COMMUNICATION" means any activity relating to the communication, delivery, transmission, retransmission, distribution and/or transport of PROGRAMMING SERVICES, without modification of the programming content of such services, through a transmission station, such as a satellite uplink, to a remote location such as a satellite for purposes of further delivery to a RECEIVER and the return communication, delivery, transmission, distribution and/or transport of information resulting from a CONSUMER's use of such PROGRAMMING SERVICES, provided that the term COMMUNICATION specifically excludes the origination and/or creation of PROGRAMMING SERVICES. 8.09 "ORBITAL SATELLITES" means the earth orbiting satellites in the geosynchronous orbital locations as specified by International Telecommunications Union (ITU) identified in the table below and operating at the specific frequencies and frequency bands for such locations as specified by ITU identified in the table below or any other location or frequencies for which the parties authorized by the Federal Communications Commission or their successors in interest on the EFFECTIVE DATE of this Agreement to operate at the locations and frequencies identified in the table below (or their successor in interest) may directly exchange for such identified locations and frequencies or otherwise acquire. -10- Location Frequency Band Specific Frequencies -------- -------------- -------------------- West Longitude 101(0) Ku All frequencies West Longitude 110(0) Ku Channels 28, 30, 32 West Longitude 119(0) Ku Channels 22 through 32 West Longitude 99(0) Ka All frequencies West Longitude 101(0) Ka All frequencies West Longitude 103(0) Ka All frequencies West Longitude 125(0) Ka All frequencies 8.10 "AFFILIATE" means any person or entity controlling, controlled by or under the common control with the person or entity being referenced. 8.11 "AFFILIATED" means that a person or entity is an AFFILIATE of the person or entity being referenced. 8.12 "SUBLICENSEE" means any sublicensee of LICENSEE or their sublicensees. 8.13 "EFFECTIVE DATE" means the date of execution of this Agreement by both parties hereto. -11- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year written below. For PMC SATELLITE DEVELOPMENT For PERSONALIZED MEDIA L.L.C. COMMUNICATIONS, L.L.C. /s/ John C. Harvey 1/13/00 /s/ John C. Harvey 1/13/00 ---------------------------- ---------------------------- Signature Date Signature Date John C. Harvey John C. Harvey Managing Member Managing Member -12- SCHEDULE A PMC PATENTS HARVEY PATENTS United States Patent No. 4,694,490 for "Signal Processing Apparatus and Methods" United States Patent No. 4,704,725 for "Signal Processing Apparatus and Methods" United States Patent No. 4,965,825 for "Signal Processing Apparatus and Methods" United States Patent No. 5,109,414 for "Signal Processing Apparatus and Methods" United States Patent No. 5,233,654 for "Signal Processing Apparatus and Methods" United States Patent No. 5,335,277 for "Signal Processing Apparatus and Methods" United States Patent No. 5,887,243 for "Signal Processing Apparatus and Methods" European Patent No. 0382764 for "Signal Processing Apparatus and Methods" Japanese Patent No. 2676710 for "Signal Processing Apparatus and Methods" Japanese Patent No. 2690676 for "Signal Processing Apparatus and Methods" -1- SCHEDULE B PMC APPLICATIONS PMC APPLICATIONS United States Patent Applications for "Signal Processing Apparatus Methods" Serial Number Filing Date - ------------- ----------- 08/113,329 30-Aug-93 08/397,636 2-Mar-95 08/435,757 9-May-95 08/435,758 9-May-95 08/437,044 9-May-95 08/437,045 9-May-95 08/437,635 9-May-95 08/437,791 9-May-95 08/437,819 9-May-95 08/437,864 9-May-95 08/437,887 9-May-95 08/437,937 9-May-95 08/438,011 9-May-95 08/438,206 9-May-95 08/438,216 9-May-95 08/438,659 9-May-95 08/439,668 15-May-95 08/439,670 15-May-95 08/440,837 15-May-95 08/441,033 15-May-95 08/441,575 15-May-95 08/441,577 15-May-95 08/441,701 15-May-95 08/441,027 16-May-95 08/441,749 16-May-95 08/441,880 16-May-95 08/441,996 16-May-95 08/442,165 16-May-95 08/442,335 16-May-95 08/442,369 16-May-95 08/442,383 16-May-95 08/442,505 16-May-95 08/442,507 16-May-95 08/444,756 19-May-95 08/444,758 19-May-95 08/444,786 19-May-95 08/444,787 19-May-95 -2- 08/444,788 19-May-95 08/444,887 19-May-95 08/445,045 19-May-95 08/445,054 19-May-95 08/445,290 19-May-95 08/445,294 19-May-95 08/445,296 19-May-95 08/445,328 19-May-95 08/446,124 19-May-95 08/446,553 19-May-95 08/446,579 19-May-95 08/446,429 22-May-95 08/446,431 22-May-95 08/446,432 22-May-95 08/446,494 22-May-95 08/447,380 23-May-95 08/447,415 23-May-95 08/447,446 23-May-95 08/447,447 23-May-95 08/447,496 23-May-95 08/447,502 23-May-95 08/447,611 23-May-95 08/447,621 23-May-95 08/447,679 23-May-95 08/447,711 23-May-95 08/447,712 23-May-95 08/447,724 23-May-95 08/447,908 23-May-95 08/447,938 23-May-95 08/447,974 23-May-95 08/447,977 23-May-95 08/448,099 23-May-95 08/448,143 23-May-95 08/448,175 23-May-95 08/448,251 23-May-95 08/448,309 23-May-95 08/448,326 23-May-95 08/449,530 23-May-95 08/449,901 23-May-95 08/447,529 24-May-95 08/448,644 24-May-95 08/448,662 24-May-95 08/448,810 24-May-95 08/448,977 24-May-95 08/448,979 24-May-95 -3- 08/449,097 24-May-95 08/449,110 24-May-95 08/449,248 24-May-95 08/449,263 24-May-95 08/449,281 24-May-95 08/449,291 24-May-95 08/449,302 24-May-95 08/449,369 24-May-95 08/449,413 24-May-95 08/449,523 24-May-95 08/449,532 24-May-95 08/449,652 24-May-95 08/449,702 24-May-95 08/449,717 24-May-95 08/449,800 24-May-95 08/449,867 24-May-95 08/451,203 26-May-95 08/451,377 26-May-95 08/451,746 26-May-95 08/452,395 26-May-95 08/458,760 2-Jun-95 08/459,216 2-Jun-95 08/459,218 2-Jun-95 08/459,506 2-Jun-95 08/459,507 2-Jun-95 08/459,521 2-Jun-95 08/459,522 2-Jun-95 08/459,788 2-Jun-95 08/460,043 2-Jun-95 08/460,081 2-Jun-95 08/460,085 2-Jun-95 08/460,187 2-Jun-95 08/460,256 2-Jun-95 08/460,274 2-Jun-95 08/460,387 2-Jun-95 08/460,394 2-Jun-95 08/460,556 2-Jun-95 08/460,591 2-Jun-95 08/460,592 2-Jun-95 08/460,634 2-Jun-95 08/460,677 2-Jun-95 08/460,711 2-Jun-95 08/460,766 2-Jun-95 08/460,770 2-Jun-95 08/460,793 2-Jun-95 -4- 08/460,817 2-Jun-95 08/466,888 6-Jun-95 08/466,890 6-Jun-95 08/466,894 6-Jun-95 08/468,324 6-Jun-95 08/469,078 6-Jun-95 08/469,103 6-Jun-95 08/469,106 6-Jun-95 08/469,108 6-Jun-95 08/469,355 6-Jun-95 08/469,612 6-Jun-95 08/469,623 6-Jun-95 08/470,051 6-Jun-95 08/470,054 6-Jun-95 08/470,448 6-Jun-95 08/470,476 6-Jun-95 08/470,571 6-Jun-95 08/471,024 6-Jun-95 08/471,191 6-Jun-95 08/472,066 6-Jun-95 08/511,491 6-Jun-95 08/472,399 7-Jun-95 08/472,462 7-Jun-95 08/472,980 7-Jun-95 08/473,484 7-Jun-95 08/473,927 7-Jun-95 08/473,997 7-Jun-95 08/473,999 7-Jun-95 08/474,119 7-Jun-95 08/474,139 7-Jun-95 08/474,146 7-Jun-95 08/474,147 7-Jun-95 08/474,496 7-Jun-95 08/474,674 7-Jun-95 08/474,964 7-Jun-95 08/475,341 7-Jun-95 08/475,342 7-Jun-95 08/477,547 7-Jun-95 08/477,564 7-Jun-95 08/477,660 7-Jun-95 08/477,711 7-Jun-95 08/477,712 7-Jun-95 08/477,805 7-Jun-95 08/477,955 7-Jun-95 08/478,544 7-Jun-95 -5- 08/478,794 7-Jun-95 08/478,864 7-Jun-95 08/478,908 7-Jun-95 08/479,042 7-Jun-95 08/479,215 7-Jun-95 08/479,374 7-Jun-95 08/479,375 7-Jun-95 08/479,414 7-Jun-95 08/479,523 7-Jun-95 08/479,524 7-Jun-95 08/480,059 7-Jun-95 08/480,383 7-Jun-95 08/480,392 7-Jun-95 08/482,573 7-Jun-95 08/482,574 7-Jun-95 08/482,857 7-Jun-95 08/483,054 7-Jun-95 08/483,169 7-Jun-95 08/483,174 7-Jun-95 08/483,269 7-Jun-95 08/483,980 7-Jun-95 08/484,275 7-Jun-95 08/484,858 7-Jun-95 08/484,865 7-Jun-95 08/485,283 7-Jun-95 08/485,507 7-Jun-95 08/485,775 7-Jun-95 08/486,258 7-Jun-95 08/486,259 7-Jun-95 08/486,266 7-Jun-95 08/487,155 7-Jun-95 08/487,397 7-Jun-95 08/487,408 7-Jun-95 08/487,410 7-Jun-95 08/487,411 7-Jun-95 08/487,428 7-Jun-95 08/487,526 7-Jun-95 08/487,536 7-Jun-95 08/487,546 7-Jun-95 08/487,556 7-Jun-95 08/487,565 7-Jun-95 08/487,649 7-Jun-95 08/487,851 7-Jun-95 08/487,895 7-Jun-95 08/487,981 7-Jun-95 -6- 08/488,058 7-Jun-95 08/488,378 7-Jun-95 08/488,383 7-Jun-95 08/488,436 7-Jun-95 08/488,438 7-Jun-95 08/488,439 7-Jun-95 08/488,619 7-Jun-95 08/488,620 7-Jun-95 08/498,002 7-Jun-95 08/474,145 7-Jul-95 Country Serial No. Filing Date - ------- ---------- ----------- Japan 8-273536 October 16, 1996 (in Japan) Europe 96-1149358 September 8, 1988 (PCT filed) PCT PCT/US88/03000 September 8, 1988 -7- EXHIBIT 7.01(a) [omitted and filed separately with the Commission] -8- EX-23.2 16 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-4 of Pegasus Communication Corporation of our report dated February 11, 2000 relating to the financial statements and financial statement schedules of Pegasus Communications Corporation, which appears in such Registration Statement and "Selected Financial Data" in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 24, 2000 EX-23.3 17 EXHIBIT 23.3 Exhibit 23.3 Board of Directors Golden Sky Holdings, Inc.: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the proxy statement/prospectus. KPMG LLP Kansas City, Missouri February 24, 2000 EX-27.1 18 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet of Pegasus Communications Corporation as of December 31, 1999 and the related consolidated statement of operations for the year then ended. This information is qualified in its entirety by reference to such financial statements. Dollars in thousands, except per share data. U.S. DOLLARS YEAR DEC-31-1999 DEC-31-1999 1 40,453 0 33,394 1,410 10,020 94,342 76,801 32,386 945,332 99,278 452,776 142,734 3,000 198 (63,325) 945,332 322,768 322,768 0 448,674 (1,155) 0 64,904 (189,655) (8,892) (180,763) 2,128 (6,178) 0 (184,813) (10.68) (10.68)
EX-99.1 19 EXHIBIT 99.1 Exhibit 99.1 [LETTERHEAD OF CIBC WORLD MARKETS CORP.] 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: CIBC World Markets Corp. ("CIBC World Markets") hereby consents to the inclusion of the opinion of CIBC World Markets dated January 10, 2000 (the "Opinion") as Annex VI to, and to the reference thereto under the captions "SUMMARY -- Opinion of CIBC World Markets Corp." and "PROPOSAL 1: APPROVAL OF MERGER -- Opinion of CIBC World Markets" in, the Proxy Statement/Prospectus of Pegasus Communications Corporation ("Pegasus") relating to the proposed merger transaction involving Pegasus and Golden Sky Holdings, Inc. In giving such consent, we do not admit that we come within the category of persons whose consent is required under, and we do not admit that we are "experts" for purposes of, the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. By: /s/ CIBC World Markets Corp. -------------------------------------- CIBC WORLD MARKETS CORP. New York, New York February 25, 2000 -----END PRIVACY-ENHANCED MESSAGE-----