-----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, WMww2077h1H0FieTqB6tcmNSeLPZp9ddvPK0KPgzsxwFGvorUWv0hWauRf70m7VM v4yGkszSPGqOXrco7ZwOCQ== 0000950116-96-001043.txt : 19961002 0000950116-96-001043.hdr.sgml : 19961002 ACCESSION NUMBER: 0000950116-96-001043 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19961001 SROS: NONE 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-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-05057 FILM NUMBER: 96638004 BUSINESS ADDRESS: STREET 1: 5 RADNOR CORPORATE CENTER STE 454 STREET 2: 100 MATSONFORD ROAD CITY: RADNOR 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-1/A 1 =============================================================================== AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1996 REGISTRATION NO. 333-05057 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------ AMENDMENT NO. 2 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------ Pegasus Communications Corporation (Exact name of registrant as specified in its charter) ------
Delaware 4833 51-0374669 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation of Organization) Classification Code Number) Identification Number)
c/o Pegasus Communications Management Company Suite 454, 5 Radnor Corporate Center 100 Matsonford Road Radnor, Pennsylvania 19087 (610) 341-1801 (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 Suite 454, 5 Radnor Corporate Center 100 Matsonford Road Radnor, Pennsylvania 19087 (610) 341-1801 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Michael B. Jordan, Esq. Kirk A. Davenport, Esq. Scott A. Blank, Esq. Latham & Watkins Drinker Biddle & Reath 885 Third Avenue 1100 Philadelphia National Bank Building Suite 1000 1345 Chestnut Street New York, New York 10022 Philadelphia, Pennsylvania 19107-3496 (212) 906-1200 (215) 988-2700 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective and the Underwriting Agreement is executed. ------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, 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, please 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(c) 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 delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] 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. =============================================================================== Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Subject to Completion, dated October 1, 1996 PROSPECTUS 3,000,000 Shares Class A Common Stock ------ All of the shares of Class A Common Stock of Pegasus Communications Corporation ("Pegasus" and, together with its direct and indirect subsidiaries, the "Company") offered hereby are being offered by Pegasus. All of the shares of Class A Common Stock are being offered (the "Offering") by the Underwriters (the "Underwriters"). Prior to this Offering, there has been no public market for the Class A Common Stock. It is currently anticipated that the initial public offering price will be between $14.00 and $16.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Class A Common Stock has been approved for listing on the Nasdaq National Market under the symbol "PGTV," subject to official notice of issuance. Upon consummation of this Offering, after giving effect to the Transactions (as defined) and assuming an initial public offering price of $15.00 per share, Pegasus' issued and outstanding capital stock will consist of 4,600,704 shares of Class A Common Stock and 4,483,805 shares of Class B Common Stock. 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 Pegasus' Amended and Restated Certificate of Incorporation, the authorization or issuance of additional shares of Class B Common Stock, and as required by Delaware law. See "Description of Capital Stock." Immediately after this Offering, Marshall W. Pagon, Pegasus' President and Chief Executive Officer, by virtue of his beneficial ownership of all the Class B Common Stock, will generally have the voting power to determine all matters submitted to the stockholders for approval. ------ For a discussion of certain factors that should be considered by prospective purchasers of the Class A Common Stock offered hereby, see "Risk Factors" beginning on page 17. ------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. =============================================================================== Price to Underwriting Discounts Proceeds to Public and Commissions(1) Company(2) - ------------------------------------------------------------------------------- Per Share ... $ $ $ - ------------------------------------------------------------------------------- Total(3) .... $ $ $ =============================================================================== (1) Pegasus has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by Pegasus estimated at $975,000. (3) Pegasus has granted to the Underwriters a 30-day option to purchase up to 450,000 additional shares of Class A Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------ The shares of Class A Common Stock offered by this Prospectus are offered by the Underwriters subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the Underwriters and to certain further conditions. It is expected that delivery of the Class A Common Stock will be made at the offices of Lehman Brothers Inc., New York, New York, on or about , 1996. ------ LEHMAN BROTHERS BT SECURITIES CORPORATION CIBC WOOD GUNDY SECURITIES CORP. PAINEWEBBER INCORPORATED , 1996 *Cable TV Systems (New Hampshire -- pending sale) *To be programmed by Pegasus through an LMA Figures based on estimates of the U.S. television market derived from Paul Kagan & Associates and Warren Publishing Inc.'s 1996 Television & Cable Fact Book.
Primary TV Households 95,000,000 ABC Network Affiliates 204 Secondary TV Households 8,000,000 CBS Network Affiliates 201 Total TV Households 103,000,000 FOX Network Affiliates 140 Total Homes Unpassed by Cable 11,000,000 NBC Network Affilates 209 Total Homes Passed by Cable 92,000,000 UPN Network Affiliates 78 Cable Subscribers 62,000,000 WB Network Affiliates 69 ---------- Non-cable subscribers 30,000,000 Total 901 Cable Penetration 67% Total Business Locations 8,600,000 - ------------------------------ ------------- -------------------------- ----------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless the context otherwise requires, all references herein to the "Company" refer to Pegasus Communications Corporation ("Pegasus") together with its direct and indirect subsidiaries. The historical financial and other data for the Company are presented herein on a combined basis. See Note 1 to Pegasus' Combined Financial Statements included elsewhere herein. Unless otherwise indicated, the information in this Prospectus assumes the Underwriters' over-allotment option is not exercised and that all of the PM&C Class B Shares have been exchanged pursuant to the Registered Exchange Offer. The discussion below includes certain Transactions that, if not already completed, are scheduled or anticipated to occur concurrently with or after the consummation of this Offering. The "Transactions" consist of certain acquisitions (the Portland Acquisition, the Portland LMA, the Michigan/Texas DBS Acquisition, the Ohio DBS Acquisition, and the Cable Acquisition), certain corporate reorganization events (the Parent's contribution of PM&C Class A Shares to Pegasus, the Management Agreement Acquisition, the Registered Exchange Offer, the Management Share Exchange, and the Towers Purchase), the New Hampshire Cable Sale and the closing of the New Credit Facility. See "-- Acquisitions and Other Transactions." This Offering is conditioned upon the consummation of all of the Transactions except for the Registered Exchange Offer, the Management Share Exchange, the Ohio DBS Acquisition and the New Hampshire Cable Sale. It is anticipated that the Ohio DBS Acquisition will occur by November 15, 1996 and that the New Hampshire Cable Sale will occur by December 31, 1996. See "Glossary of Defined Terms," which begins on page 14 of this Prospectus Summary, for definitions of certain terms used in this Prospectus. THE COMPANY The Company is a diversified media and communications company operating in three business segments: broadcast television ("TV"), direct broadcast satellite television ("DBS") and cable television ("Cable"). The Company has grown through the acquisition and operation of media and communications properties characterized by clearly identifiable "franchises" and significant operating leverage, which enables increases in revenues to be converted into disproportionately greater increases in Location Cash Flow. The Company's business segments are described below. TV. The Company owns and operates five Fox affiliates in midsize television markets. The Company has entered into agreements to program additional television stations, pending certain FCC approvals, in two of these markets in 1997, which stations the Company anticipates will be affiliated with the United Paramount Network ("UPN"). DBS. The Company is the largest independent provider of DIRECTV(R) ("DIRECTV") services with an exclusive DIRECTV service territory that includes approximately 476,000 television households and 50,000 business locations in rural areas of New York, Connecticut, Massachusetts and New Hampshire. The Company has recently agreed to acquire the DIRECTV distribution rights and related assets of the third largest independent provider of DIRECTV services (the "Michigan/Texas DBS Acquisition"), whose exclusive territory includes approximately 391,000 television households and 20,000 business locations in rural areas of Michigan and Texas. The Company has entered into a letter of intent regarding its acquisition of the DIRECTV distribution rights and related assets of the fifth largest independent provider of DIRECTV services (the "Ohio DBS Acquisition"), whose exclusive territory includes approximately 168,000 television households and 13,000 business locations in rural areas of Ohio. After giving effect to the Michigan/Texas DBS Acquisition and the Ohio DBS Acquisition, the Company will have approximately 23,000 DIRECTV subscribers in territories that include approximately 1,035,000 television households and 83,000 business locations or a penetration rate of 2.2% in its service territories. Although the Company's service territories are exclusive fot DIRECTV, other DBS operators may compete with the Company in its service territories. See "Business -- Competition." 3 Cable. The Company owns and operates cable systems in Puerto Rico and New England serving approximately 47,000 subscribers. The Company recently acquired a contiguous cable system in Puerto Rico (the "Cable Acquisition"), which will be interconnected with the Company's existing system. It is anticipated that as a result of the Cable Acquisition, the Company's Puerto Rico Cable system will serve approximately 27,000 subscribers in a franchise area comprising approximately 111,000 households from a single headend. The Company has entered into a letter of intent with respect to the sale of its New Hampshire Cable systems (the "New Hampshire Cable Sale"). Following the New Hampshire Cable Sale, the Company's New England Cable systems will serve approximately 15,500 subscribers in a franchise area comprising approximately 22,900 households. After giving effect to the Transactions, the Company would have had pro forma net revenues and EBITDA of $51.0 million and $14.7 million, respectively, for the twelve months ended June 30, 1996. The Company's net revenues and EBITDA have increased at compound annual growth rates of 98% and 84%, respectively, from 1991 to 1995. The following tables set forth certain information with respect to the Company's TV, DBS and Cable segments: TV
Number Ratings Rank Acquisition Station Market of TV ----------------- Oversell Station Date Affiliation Area DMA Households(1) Competitors(2) Prime(3) Access(4) Ratio(5) - ---------------- ----------- ----------- --------------- ----- ------------- ------------- -------- -------- ------- Existing Stations: WWLF-56/WILF-53/ WOLF-38(6) .... May 1993 Fox Northeastern PA 49 553,000 3 3 (tie) 1 166% WPXT-51 ........ January 1996 Fox Portland, ME 79 344,000 3 2 4 122% WDSI-61 ........ May 1993 Fox Chattanooga, TN 82 320,000 4 4 3 125% WDBD-40 ........ May 1993 Fox Jackson, MS 91 287,000 3 2 (tie) 2 114% WTLH-49 ........ March 1996 Fox Tallahassee, FL 116 210,000 3 2 2 100% Additional Stations: WOLF-38(6) ..... May 1993 UPN Northeastern PA 49 553,000 3 N/A N/A N/A WWLA-35(7) ..... May 1996 UPN Portland, ME 79 344,000 3 N/A N/A N/A
DBS
Homes Average Not Homes Monthly Total Passed Passed Penetration Revenue DIRECTV Homes in by by Total ------------------------------ Per Territory Territory Cable(8) Cable(9) Subscribers(10) Total Uncabled Cabled Subscriber(11) ----------------- ----------- --------- --------- --------------- ------- ---------- -------- -------------- Owned: Western New England ........ 288,273 41,465 246,808 5,208 1.8% 10.5% 0.3% New Hampshire ... 167,531 42,075 125,456 3,273 2.0% 6.6% 0.4% Martha's Vineyard and Nantucket .. 20,154 1,007 19,147 635 3.2% 51.7% 0.6% ----------- --------- --------- --------------- ------- ---------- -------- -------------- Total .......... 475,958 84,547 391,411 9,116 1.9% 9.1% 0.4% $40.32 ----------- --------- --------- --------------- ------- ---------- -------- -------------- To Be Acquired: Michigan ........ 241,713 61,774 179,939 5,213 2.2% 6.6% 0.6% $43.35 Texas ........... 149,530 54,504 95,026 4,449 3.0% 6.2% 1.1% $36.95 Ohio ............ 167,558 32,180 135,378 4,355 2.6% 10.1% 0.8% $39.27 ----------- --------- --------- --------------- ------- ---------- -------- -------------- Total .......... 558,801 148,458 410,343 14,017 2.5% 7.2% 0.8% $40.10 ----------- --------- --------- --------------- ------- ---------- -------- -------------- Total ......... 1,034,759 233,005 801,754 23,133 2.2% 7.9% 0.6% $40.18 =========== ========= ========= =============== ======= ========== ======== ==============
4 CABLE
Average Monthly Homes in Homes Basic Revenue Channel Franchise Passed Basic Service per Cable Systems Capacity Area(12) by Cable(13) Subscribers(14) Penetration(15) Subscriber ------------------- ---------- ----------- ------------ --------------- --------------- ------------ Owned: New England ....... (16) 29,400 28,600 20,100 70% $33.08 Mayaguez .......... 62 38,300 34,000 10,900 32% $32.68 San German(17) .... 50(18) 72,400 47,700 16,300 34% $30.82 ----------- ------------ --------------- --------------- ------------ Total Puerto Rico 110,700 81,700 27,200 34% $31.57 ----------- ------------ --------------- --------------- ------------ To be Sold: New Hampshire ..... (19) 6,500 6,100 4,600 75% $34.20 ----------- ------------ --------------- --------------- ------------ Total ........... 133,600 104,200 42,700 41% $31.99 =========== ============ =============== =============== ============
- ------ (1) Represents total homes in a DMA for each TV station as estimated by Broadcast Investment Analysts ("BIA"). (2) Commercial stations not owned by the Company which are licensed to and operating in the DMA. (3) "Prime" represents local station rank in the 18 to 49 age category during "prime time" based on A.C. Nielsen Company ("Nielsen") estimates for May 1996. (4) "Access" indicates local station rank in the 18 to 49 age category during "prime time access" (6:00 p.m. to 8:00 p.m.) based on Nielsen estimates for May 1996. (5) The oversell ratio is the station's share of the television market net revenue divided by its in-market commercial audience share. The oversell ratio is calculated using 1995 BIA market data and 1995 Nielsen audience share data. (6) WOLF, WILF and WWLF are currently simulcast. Pending receipt of certain FCC approvals, the Company intends to separately program WOLF as an affiliate of UPN. (7) The Company anticipates programming WWLA pursuant to an LMA as an affiliate of UPN. (8) Based on NRTC estimates of primary residences derived from 1990 U.S. Census data and after giving effect to a 1% annual housing growth rate and seasonal residence data obtained from county offices. Does not include business locations. Includes approximately 23,400 seasonal residences. (9) Based on NRTC estimates of primary residences derived from 1990 U.S. Census data and after giving effect to a 1% annual housing growth rate and seasonal residence data obtained from county offices. Does not include business locations. Includes approximately 87,600 seasonal residences. (10) As of August 1996. (11) Based upon July 1996 revenues and average July 1996 subscribers. (12) Based on information obtained from municipal offices. (13) A home is deemed to be "passed" by cable if it can be connected to the distribution system without any further extension of the cable distribution plant. These data are the Company's estimates as of July 31, 1996. (14) A home with one or more television sets connected to a cable system is counted as one basic subscriber. Bulk accounts (such as motels or apartments) are included on a "subscriber equivalent" basis whereby the total monthly bill for the account is divided by the basic monthly charge for a single outlet in the area. This information is as of July 31, 1996. (15) Basic subscribers as a percentage of homes passed by cable. (16) The channel capacities of the New England Cable systems are 36, 50 and 62 and represent 44%, 24% and 32% of the Company's New England Cable subscribers, respectively. After giving effect to certain system upgrades which are anticipated to be completed by October 1996, the 36, 50 and 62 channel systems would have represented 22%, 24% and 54% of the Company's total New England Cable subscribers, respectively. (17) The San German Cable System was acquired upon consummation of the Cable Acquisition in August 1996. (18) After giving effect to certain system upgrades which are anticipated to be completed during the first quarter of 1997, this system will be capable of delivering 62 channels. (19) The channel capacities of the New Hampshire Cable systems are 36 and 50 and represent 16% and 84% of the Company's New Hampshire Cable subscribers, respectively. 5 OPERATING AND ACQUISITION STRATEGY The Company's operating strategy is to generate consistent revenue growth and to convert this revenue growth into disproportionately greater increases in Location Cash Flow. The Company's acquisition strategy is to identify media and communications businesses in which significant increases in Location Cash Flow can be realized and where the ratio of required investment to potential Location Cash Flow is low. TV. The Company's business strategy in broadcast television is to acquire and operate television stations whose revenues and market shares can be substantially improved with limited increases in fixed costs. The Company has focused upon midsize markets because it believes that they have exhibited consistent and stable increases in local advertising and that television stations in them have fewer and less aggressive direct competitors. The Company seeks to increase the audience ratings of its TV stations in key demographic segments and to capture a greater share of their markets' advertising revenues than their share of the local television audience. The Company accomplishes this by developing aggressive, opportunistic local sales forces and investing in a cost-effective manner in programming, promotion and technical facilities. The Company is actively seeking to acquire additional stations in new markets and to enter into LMAs with owners of stations or construction permits in markets where it currently owns and operates Fox affiliates. The Company has historically purchased Fox affiliates because (i) Fox affiliates generally have had lower ratings and revenue shares than stations affiliated with ABC, CBS and NBC, and, therefore, greater opportunities for improved performance, and (ii) Fox-affiliated stations retain a greater percentage of their inventory of advertising spots than do affiliates of ABC, CBS and NBC, thereby enabling these stations to retain a greater share of any increase in the value of their inventory. The Company is pursuing expansion in its existing markets through LMAs because second stations can be operated with limited additional fixed costs (resulting in high incremental operating margins) and can allow the Company to create more attractive packages for advertisers and program providers. DBS. The Company believes that DBS is the lowest cost medium for delivering high capacity, high quality, digital video, audio and data services to television households and commercial locations in rural areas and that DIRECTV offers superior video and audio quality and a substantially greater variety of programming than is available from other multichannel video services. DIRECTV initiated service to consumers in 1994 and, as of August 20, 1996, there were approximately 1.8 million DIRECTV subscribers. The introduction of DIRECTV is widely reported to be one of the most successful rollouts of a consumer service ever. As the exclusive provider of DIRECTV services in its purchased territories, the Company provides a full range of services, including installation, authorization and financing of equipment for new customers as well as billing, collections and customer service support for existing subscribers. The Company's business strategy in DBS is to (i) establish strong relationships with retailers, (ii) build its own direct sales and distribution channels, (iii) develop local and regional marketing and promotion to supplement DIRECTV's national advertising, and (iv) offer aggressively priced equipment rental, lease and purchase options. The Company anticipates continued significant growth in subscribers and operating profitability in DBS through increased penetration of DIRECTV territories it currently owns and will acquire pursuant to the Michigan/Texas DBS Acquisition and the Ohio DBS Acquisition. The Company's current DBS operations achieved positive Location Cash Flow in 1995, its first full year of operations. The Company's DIRECTV subscribers currently generate revenues of approximately $40 per month at an average gross margin of 34%. The Company's remaining expenses consist of marketing costs incurred to build its growing base of subscribers and overhead costs which are predominantly fixed. As a result, the Company believes that future increases in its DBS revenues will result in disproportionately greater increases in Location Cash Flow. For the first six months of 1996, the Company has been adding DIRECTV subscribers at approximately twice the rate of the same period in 1995. 6 The Company also believes that there is an opportunity for additional growth through the acquisition of DIRECTV territories held by other NRTC members. NRTC members are the only independent providers of DIRECTV services. In excess of 250 NRTC members have collectively purchased DIRECTV territories consisting of approximately 7.7 million television households in predominantly rural areas of the United States, which are the most likely to subscribe to DBS services. These territories comprise 8% of United States television households, but represent between 25% and 30% of DIRECTV's existing subscriber base. As the largest, and only publicly held, independent provider of DIRECTV services, the Company believes that it is well positioned to achieve economies of scale through the acquisition of DIRECTV territories held by other NRTC members. Cable. The Company's business strategy in cable is to achieve revenue growth by (i) adding new subscribers through improved signal quality, increases in the quality and the quantity of programming, housing growth and line extensions, and (ii) increasing revenues per subscriber through new program offerings and rate increases. ACQUISITIONS AND OTHER TRANSACTIONS Set forth below are a number of transactions, including acquisitions and corporate reorganization events, that, if not already completed, are scheduled or anticipated to occur concurrently with or after the consummation of this Offering. This Offering is conditioned upon the consummation of all of the Transactions except for the Registered Exchange Offer, the Management Share Exchange, the Ohio DBS Acquisition and the New Hampshire Cable Sale. The pro forma financial data included in this Prospectus assume, unless otherwise indicated, the completion of each of the Transactions, including those whose completion is not a condition to the completion of this Offering. See "The Company -- Acquisitions," "The Company -- Pending Sale" and "The Company -- Corporate Reorganization and Other Transactions." See "Ownership and Control" for a chart that sets forth the organizational structure and ownership interests of Pegasus after giving effect to this Offering and the Transactions. COMPLETED ACQUISITIONS Since January 1, 1996, the Company has acquired the following media and communications properties: Television Station WPXT. The Company acquired the principal tangible assets of television station WPXT, the Fox-affiliated television station serving the Portland, Maine DMA. Upon the consummation of this Offering, the Company will have acquired WPXT's license and Fox Affiliation Agreement. These transactions are collectively referred to as the "Portland Acquisition." Television Station WTLH. The Company acquired WTLH, the Fox-affiliated TV station serving the Tallahassee, Florida DMA (the "Tallahassee Acquisition"). Television Station WWLA. Upon the consummation of this Offering, the Company will have acquired an LMA with the holder of a construction permit for WWLA, a new TV station licensed to operate UHF channel 35 in the Portland, Maine DMA (the "Portland LMA"). Under the Portland LMA, the Company will lease facilities and provide programming to WWLA. Construction of WWLA is expected to be completed in 1997. Cable Acquisition. In August 1996, the Company acquired substantially all of the assets of a cable system (the "San German Cable System"), serving ten communities contiguous to the Company's Mayaguez Cable system (the "Cable Acquisition"). 7 CONCURRENT ACQUISITION Michigan/Texas DBS Acquisition. In May 1996, the Company entered into an agreement to acquire DIRECTV distribution rights for portions of Texas and Michigan and related assets (the "Michigan/Texas DBS Acquisition"). The Michigan/Texas DBS Acquisition is subject to conditions typical in acquisitions of this nature, certain of which conditions may be beyond the Company's control. This Offering is conditioned on completion of the Michigan/Texas DBS Acquisition. See "Risk Factors -- Risks Attendant to Acquisition Strategy." PENDING ACQUISITION Ohio DBS Acquisition. In July 1996, the Company entered into a letter of intent with respect to the acquisition of DIRECTV distribution rights for portions of Ohio and related assets (the "Ohio DBS Acquisition"). The Ohio DBS Acquisition is subject to the negotiation of a definitive agreement and, among other conditions, the prior approval of Hughes Communications Galaxy, Inc. ("Hughes"). In addition to these conditions, the Ohio DBS Acquisition is also expected to be subject to conditions typical in acquisitions of this nature, certain of which conditions, like the Hughes consent, may be beyond the Company's control. The letter of intent provides for a closing to occur no later than November 15, 1996. There can be no assurance that the Ohio DBS Acquisition will be consummated on the terms described herein or at all. See "Risk Factors -- Risks Attendant to Acquisition Strategy." PENDING SALE New Hampshire Cable Sale. In July 1996, the Company entered into a letter of intent with respect to the sale of its New Hampshire Cable systems (the "New Hampshire Cable Sale"). The New Hampshire Cable Sale is subject to the negotiation of a definitive agreement, the prior approval of the local franchising authorities and to other conditions typical in transactions of this nature, certain of which are beyond the Company's control. The letter of intent provides for execution of a definitive agreement no later than October 15, 1996. It is anticipated that the New Hampshire Cable Sale will occur by December 31, 1996. There can be no assurance that the New Hampshire Cable Sale will be consummated on the terms described herein or at all. CORPORATE REORGANIZATION AND OTHER TRANSACTIONS Parent's Contribution of PM&C Class A Shares. The Parent is the holder of all PM&C Class A Shares. PM&C is the principal subsidiary of the Parent which now conducts through subsidiaries the Company's current operations as described in this Prospectus. Concurrently with the consummation of this Offering, the Parent will contribute all of the PM&C Class A Shares to Pegasus. Management Agreement Acquisition. PM&C and its operating subsidiaries are party to a management agreement (the "Management Agreement") with the Management Company under which PM&C and its subsidiaries are obligated to pay the Management Company 5% of their net revenues and reimburse the Management Company for its accounting department costs. Upon consummation of this Offering, the Management Agreement together with certain net assets will be transferred to the Company (the "Management Agreement Acquisition"). Registered Exchange Offer. Purchasers of the Notes in PM&C's 1995 Note offering hold all of the PM&C Class B Shares. The Company will offer through a registered exchange offer (the "Registered Exchange Offer") to exchange all of the PM&C Class B Shares for shares of Class A Common Stock. Management Share Exchange. Certain members of the Company's management hold shares of Parent Non-Voting Stock. It is anticipated that all of these members will exchange their shares for shares of Class A Common Stock pursuant to an exchange offer (the "Management Share Exchange") and that the Parent Non-Voting Stock will be distributed to the Parent. 8 Towers Purchase. An affiliate of the Company operates in the broadcast tower business. The Company intends to acquire certain tower properties from this affiliate concurrently with the consummation of this Offering. New Credit Facility. In August 1996, the Company entered into the New Credit Facility. Borrowings under the New Credit Facility are available for acquisitions, subject to the approval of the lenders of the New Credit Facility, and general corporate purposes. See "Description of Indebtedness -- New Credit Facility." 9 THE OFFERING
Class A Common Stock offered by the Company .......................... 3,000,000 shares(1) Common Stock to be outstanding after this Offering: Class A Common Stock ........... 4,600,704 shares(1)(2)(3 Class B Common Stock ........... 4,483,805 shares(2)(4) Total Common Stock ............. 9,084,509 shares(1)(2)(3)(4) Voting and conversion rights ...... Holders of Class A Common Stock and Class B Common Stock (collectively, the "Common Stock") are entitled to one vote per share and ten votes per share, respectively. Both classes vote together as a single class on all matters except in connection with certain amendments to Pegasus' Amended and Restated Certificate of Incorporation, the authorization or issuance of additional shares of Class B Common Stock, and as required by Delaware law. Immediately after this Offering, after giving effect to the Transactions and assuming an initial public offering price of $15.00 per share, (i) holders of Class A Common Stock and Class B Common Stock will have approximately 9.3% and 90.7%, respectively, of the combined voting power of all outstanding Common Stock, and (ii) Marshall W. Pagon, Pegasus' President and Chief Executive Officer, by virtue of his beneficial ownership of all of the Class B Common Stock, will generally have the voting power to determine the outcome of all matters submitted to the stockholders for approval. The Class B Common Stock is convertible into Class A Common Stock on a share for share basis, at the election of the holder and automatically upon certain transfers of the Class B Common Stock. See "Description of Capital Stock." Use of Proceeds ................... The net proceeds to the Company from this Offering (after deducting underwriting discounts and commissions and estimated offering expenses) are estimated to be approximately $40.9 million (approximately $47.2 million if the Underwriters' over-allotment option is exercised in full). The Company intends to apply the total estimated net proceeds as follows: (i) $17.9 million for the payment of the cash portion of the purchase price of the Michigan/Texas DBS Acquisition, (ii) $12.0 million for the Ohio DBS Acquisition, (iii) $6.0 million to repay indebtedness under the New Credit Facility, (iv) $1.9 million to make a payment on account of the Portland Acquisition, (v) $1.4 million for the payment of the cash portion of the purchase price in the Management Agreement Acquisition and (vi) $1.4 million for the Towers Purchase. The remaining net proceeds, if any, together with available borrowings under the New Credit Facility, will be used for future expansion and general corporate purposes; however, a portion of the net proceeds may be used for future acquisitions by the Company. See "Use of Proceeds." Nasdaq National Market Symbol ........................... The Class A Common Stock has been approved for listing on the Nasdaq National Market under the symbol "PGTV," subject to official notice of issuance.
10 - ------ (1) Excludes up to 450,000 shares of Class A Common Stock that may be issued upon the exercise of the over-allotment option granted to the Underwriters. (2) Assuming an initial public offering price of $15.00 per share. (3) Includes 795,303 shares to be issued in the Michigan/Texas DBS Acquisition, 191,792 shares to be issued pursuant to the Registered Exchange Offer (assuming that all holders of the PM&C Class B Shares accept the Registered Exchange Offer), 263,606 shares to be issued pursuant to the Management Share Exchange, 269,964 shares initially issued as Class B Common Stock and transferred as Class A Common Stock to certain members of management who are participants in the Management Share Exchange, 10,000 shares to be issued in connection with the Portland Acquisition and 66,667 shares to be issued in connection with the Portland LMA. Excludes 720,000 shares reserved for issuance under the Incentive Program, 3,385 reserved for outstanding stock options and 4,483,805 shares reserved for issuance upon conversion of the Class B Common Stock. (4) Includes 1,124,015 shares to be issued in the Management Agreement Acquisition (after giving effect to 182,652 shares of Class B Common Stock transferred as Class A Common Stock to certain members of management who are participants in the Management Share Exchange), 66,667 shares to be issued in the Portland Acquisition, and 3,293,124 shares to be issued to the Parent on account of the Parent's contribution of all of the outstanding PM&C Class A Shares to Pegasus (after giving effect to 87,312 shares of Class B Common Stock transferred as Class A Common Stock to certain members of management who are participants in the Management Share Exchange). RISK FACTORS Prior to making an investment in the Class A Common Stock offered hereby, prospective purchasers of the Class A Common Stock should take into account the specific considerations set forth in "Risk Factors" as well as other information set forth in this Prospectus. 11 SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA The following table sets forth summary historical and pro forma combined financial data for the Company. This information should be read in conjunction with the Financial Statements and the notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Historical and Pro Forma Combined Financial Data" and "Pro Forma Combined Financial Data" included elsewhere herein.
Year Ended December 31, -------------------------------------------------------------- 1991 (1) 1992 1993 (1) 1994 1995 ---------- ---------- ---------- ---------- --------- (Dollars in thousands, except earnings per share) Income Statement Data: Net revenues: $ $ TV ...................... -- -- $10,307 $17,808 $19,973 DBS ..................... -- -- -- 174 1,469 Cable ................... 2,095 5,279 9,134 10,148 10,606 Other ................... 9 40 46 61 100 ---------- ---------- ---------- ---------- --------- Total net revenues .... 2,104 5,319 19,487 28,191 32,148 ---------- ---------- ---------- ---------- --------- Location operating expenses: TV ...................... -- -- 7,564 12,380 13,933 DBS ..................... -- -- -- 210 1,379 Cable ................... 1,094 2,669 4,655 5,545 5,791 Other ................... 3 12 16 18 38 Incentive compensation (3) . -- 36 192 432 528 Corporate expenses ......... 206 471 1,265 1,506 1,364 Depreciation and amortization ............ 1,175 2,541 5,978 6,940 8,751 ---------- ---------- ---------- ---------- --------- Income (loss) from operations .............. (374) (410) (183) 1,160 364 Interest expense ........... (621) (1,255) (4,402) (5,973) (8,817) Interest income ............ -- -- -- -- 370 Other expense, net ......... (21) (21) (220) (65) (44) Provision (benefit) for taxes ................... -- -- -- 140 30 Extraordinary gain (loss) from extinguishment of debt .................... -- -- -- (633) 10,211 ---------- ---------- ---------- ---------- --------- Net income (loss) .......... $(1,016) $(1,686) $(4,805) $(5,651) $2,054 ========== ========== ========== ========== ========= Net income (loss) per share $0.40 ========= Weighted average shares outstanding (000's) ..... 5,143 ========= Other Data: Location Cash Flow (5) ..... $ 1,007 $ 2,638 $ 7,252 $10,038 $11,007 EBITDA (5) ................. 801 2,131 5,795 8,100 9,115 Capital expenditures ....... 213 681 885 1,264 2,640
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Six Months Ended June 30, -------------------------------------- Pro Pro Forma Forma 1995 (2) 1995 1996 1996 (2) ----------- ---------- ---------- ---------- Income Statement Data: Net revenues: TV ...................... $27,305 $ 8,861 $11,932 $12,600 DBS ..................... 4,924 528 1,568 4,328 Cable ................... 14,919 5,177 5,626 8,032 Other ................... 100 36 56 56 ----------- ---------- ---------- ---------- Total net revenues .... 47,248 14,602 19,182 25,016 ----------- ---------- ---------- ---------- Location operating expenses: TV ...................... 19,210 6,714 8,271 8,765 DBS ..................... 5,138 622 1,261 3,604 Cable ................... 8,176 2,912 3,087 4,298 Other ................... 38 14 9 9 Incentive compensation (3) . 511 356 430 421 Corporate expenses ......... 1,364 613 709 709 Depreciation and amortization ............ 15,368 3,927 4,905 7,356 ----------- ---------- ---------- ---------- Income (loss) from operations .............. (2,557) (556) 510 (146) Interest expense ........... (11,307) (3,350) (5,570) (6,583) Interest income ............ 129 -- 151 151 Other expense, net ......... (58) (84) (62) (59) Provision (benefit) for taxes ................... 30 20 (133) (133) Extraordinary gain (loss) from extinguishment of debt .................... -- (4) -- -- -- ----------- ---------- ---------- ---------- Net income (loss) .......... $(13,823) $(4,010) $(4,838) $(6,504) =========== ========== ========== ========== Net income (loss) per share $(1.52) $(0.94) $(0.72) =========== ========== ========== Weighted average shares outstanding (000's) ..... 9,085 5,143 9,085 =========== ========== ========== Other Data: Location Cash Flow (5) ..... $14,686 $ 4,340 $6,554 $8,340 EBITDA (5) ................. 12,811 3,371 5,415 7,210 Capital expenditures ....... 3,022 1,536 2,748 2,734
Pro Forma Twelve Months Ended June 30, 1996 (2) -------------- Net revenues ........ $50,963 Location Cash Flow (5) .............. 16,714 EBITDA (5) .......... 14,666
As of December 31, As of June 30, 1996 --------------------------------------------------------- -------------------------- 1991 1992 1993 1994 1995 Actual Pro Forma (2) -------- -------- --------- ---------- --------- --------- ------------- Balance Sheet Data: Cash, cash equivalents and restricted cash .......... $ 901 $ 938 $ 1,506 $ 1,380 $21,856 $ 8,068 $ 13,247 Working capital (deficiency) 78 (52) (3,844) (23,074) 17,566 4,073 8,479 Total assets ................ 17,306 17,418 76,386 75,394 95,770 104,247 178,016 Total debt (including current) ................. 13,675 15,045 72,127 61,629 82,896 94,863 111,663 Total liabilities ........... 14,572 16,417 78,954 68,452 95,521 108,730 126,303 Total equity (deficit) (6) .. 2,734 1,001 (2,427) 6,942 249 (4,483) 51,713
(footnotes on following page) 12 - ------ (1) The Company's operations began in 1991. The 1991 data include the results of the Massachusetts and New Hampshire Cable systems from June 26, 1991 (with the exception of the North Brookfield, Massachusetts Cable system, which was acquired in July 1992), the Connecticut Cable system from August 7, 1991 and the results of Pegasus Towers L.P. ("Towers") from May 21, 1991. The 1993 data include the results of the Mayaguez, Puerto Rico Cable system from March 1, 1993 and WOLF/WWLF/WILF, WDSI and WDBD from May 1, 1993. (2) Pro forma income statement and other data for the year ended December 31, 1995, six months ended June 30, 1996 and the twelve months ended June 30, 1996 give effect to the acquisitions and this Offering as if such events had occurred at the beginning of such periods. The pro forma balance sheet data as of June 30, 1996 give effect to the acquisitions after June 30, 1996 and this Offering as if such events had occurred on such date. See "Pro Forma Combined Financial Data." (3) Incentive compensation represents compensation expenses pursuant to the Restricted Stock Plan and 401(k) Plans. See "Management and Certain Transactions -- Incentive Program." (4) The pro forma income statement data for the year ended December 31, 1995 do not include the extraordinary gain on the extinguishment of debt of $10.2 million and the $214,000 writeoff of deferred financing costs that were incurred in 1995 in connection with the creation of the Old Credit Facility. (5) Location Cash Flow is defined as net revenues less location operating expenses. Location operating expenses consist of programming, barter programming, general and administrative, technical and operations, marketing and selling expenses. EBITDA is defined as income (loss) before (i) extraordinary items, (ii) provision (benefit) for income taxes, (iii) other (income) expense, (iv) interest (income) expense, and (v) depreciation and amortization expenses. The difference between Location Cash Flow and EBITDA is that EBITDA includes incentive compensation and corporate expenses. Although Location Cash Flow and EBITDA are not measures of performance under generally accepted accounting principles, the Company believes that Location Cash Flow and EBITDA are accepted within the Company's business segments as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such segments. Nevertheless, these measures should not be considered in isolation or as a substitute for income from operations, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. (6) The Company has not paid any cash dividends and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. 13 GLOSSARY OF DEFINED TERMS
Cable Acquisition The acquisition of the San German Cable System. Class A Common Stock Pegasus' Class A Common Stock, par value $.01 per share. Class B Common Stock Pegasus' Class B Common Stock, par value $.01 per share. Common Stock The Class A Common Stock and the Class B Common Stock. Company Pegasus and its direct and indirect subsidiaries. DBS Direct broadcast satellite television. DIRECTV The video, audio and data services provided via satellite by DIRECTV Enterprises, Inc. DMA Designated Market Area. There are 211 DMAs in the United States with each county in the continental United States assigned uniquely to one DMA. Ranking of DMAs is based upon Nielsen estimates of the number of television households. DSS Digital satellite system or DSS(R). DSS(R) is a registered trademark of DIRECTV Enterprises, Inc. EBITDA Income (loss) before extraordinary items, provision (benefit) for income taxes, other (income) expense, interest (income) expense, and depreciation and amortization expenses. Although EBITDA is not a measure of performance under generally accepted accounting principles, the Company believes that EBITDA is accepted within the Company's business segments as a generally recognized measure of performance and is used by analysts who report publicly on the performance of companies operating in such segments. Nevertheless, the measure should not be considered in isolation or as a substitute for income from operations, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. FCC Federal Communications Commission. Fox Fox Broadcasting Company. Fox Affiliation Agreements The affiliation agreements between WOLF, WDSI, WDBD, WTLH, and WPXT and Fox. Incentive Program The Company's Restricted Stock Plan together with its 401(k) Plans and Stock Option Plan. See "Management and Certain Transactions -- Incentive Program." Indenture The indenture dated July 7, 1995 by and among PM&C, certain of its subsidiaries and First Union National Bank, as trustee. LMAs Local marketing agreements, program service agreements or time brokerage agreements between broadcasters and television station licensees pursuant to which broadcasters provide programming to and retain the advertising revenues of such stations in exchange for fees paid to television station licensees. 14 Location Cash Flow Net revenues less location operating expenses, which consist of programming, barter programming, general and administrative, technical and operations, marketing and selling expenses. The difference between Location Cash Flow and EBITDA is that EBITDA includes incentive compensation and corporate expenses. Although Location Cash Flow is not a measure of performance under generally accepted accounting principles, the Company believes that Location Cash Flow is accepted within the Company's business segments as a generally recognized measure of performance and is used by analysts who report publicly on the performance of companies operating in such segments. Nevertheless, this measure should not be considered in isolation or as a substitute for income from operations, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. Management Agreement The agreement between PM&C and its operating subsidiaries and the Management Company to provide management services. Management Company BDI Associates L.P., an affiliate of the Company. Michigan/Texas DBS Acquisition The acquisition of DIRECTV distribution rights for certain rural areas of Texas and Michigan and related assets. New Credit Facility The Company's seven-year, senior collateralized credit facility. See "Description of Indebtedness -- New Credit Facility." New Hampshire Cable Sale The sale of the Company's New Hampshire Cable systems. Notes PM&C's 12 1/2% Series B Senior Subordinated Notes due 2005 issued in an aggregate principal amount of $85.0 million. NRTC The National Rural Telecommunications Cooperative, the only entity authorized to provide DIRECTV services that is independent of DIRECTV Enterprises, Inc. There are 252 NRTC members that are authorized to provide DIRECTV services in exclusive territories granted to the NRTC by DIRECTV Enterprises, Inc. Ohio DBS Acquisition The acquisition of DIRECTV distribution rights for certain rural areas of Ohio and related assets. Old Credit Facility The Company's $10.0 million revolving credit facility that was retired concurrently with the entering into of the New Credit Facility. Parent Pegasus Communications Holdings, Inc., the direct parent of Pegasus. Parent Non-Voting Stock The Class B Non-Voting Stock of the Parent. Pegasus Pegasus Communications Corporation, the issuer of the Class A Common Stock offered hereby. PM&C Pegasus Media & Communications, Inc., which is currently a direct subsidiary of the Parent and will become a direct subsidiary of Pegasus upon completion of this Offering. 15 PM&C Class A Shares The Class A shares of PM&C held by the Parent, which will be transferred to Pegasus upon completion of this Offering. PM&C Class B Shares The Class B shares of PM&C held by purchasers in the Notes offering. Portland Acquisition The acquisition of WPXT. Portland LMA The LMA relating to WWLA. Registered Exchange Offer Pegasus' registered exchange offer to holders of PM&C Class B Shares for 191,792 shares in the aggregate of Class A Common Stock. Tallahassee Acquisition The acquisition of the principal tangible assets of WTLH. Towers Purchase The acquisition of certain tower properties from Towers, an affiliate of the Company. Towers Pegasus Towers, L.P. WDBD Station WDBD-TV in the Jackson, Mississippi DMA. WDSI Station WDSI-TV in the Chattanooga, Tennessee DMA. WILF Station WILF-TV in the Northeastern Pennsylvania DMA. WOLF Station WOLF-TV in the Northeastern Pennsylvania DMA. WPXT Station WPXT-TV in the Portland, Maine DMA. WTLH Station WTLH-TV in the Tallahassee, Florida DMA. WTLH Warrants Warrants to purchase $1.0 million of the Class A Common Stock at an exercise price equal to the price to the public in this Offering, which were issued in connection with the Tallahassee Acquisition. WWLA Station WWLA-TV to be constructed to serve the Portland, Maine DMA. WWLF Station WWLF-TV in the Northeastern Pennsylvania DMA.
16 RISK FACTORS Many of the statements in this Prospectus are forward-looking in nature and, accordingly, whether they prove to be accurate is subject to many risks and uncertainties. The actual results that the Company achieves may differ materially from any forward-looking statements in this Prospectus. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and those contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. DEPENDENCE ON FOX NETWORK AFFILIATION Certain of the Company's TV stations are affiliated with the Fox Network, which provides the stations with up to 40 hours of programming time per week, including 15 hours of prime time programming, in return for the broadcasting of Fox-inserted commercials by the stations during such programming. As a result, the successful operation of the Company's TV stations is highly dependent on the Company's relationship with Fox and on Fox's success as a broadcast network. All of the Company's affiliation agreements with Fox expire on October 31, 1998 with the exception of the affiliation agreement with respect to WTLH, which expires on December 31, 2000. Thereafter, the affiliation agreements may be extended for additional two-year terms by Fox in its sole discretion. Fox has, in the past, changed affiliates in certain markets where it acquired a significant ownership position in a station in such market. In the event that Fox, directly or indirectly, acquires any significant ownership and/or controlling interest in any TV station licensed to any community within the Company's TV markets, Fox has the right to terminate the affiliation agreement of the Company's TV station serving that market. As a consequence, there is no assurance that Fox could not enter into such an arrangement in one of the Company's markets. There can also be no assurance that Fox programming will continue to be as successful as in the past or that Fox will continue to provide programming to its affiliates on the same basis as it currently does, all of which matters are beyond the Company's control. The non-renewal or termination of the Fox affiliation of one or more of the Company's stations could have a material adverse effect on the Company's operations. See "Business -- TV" and "Business -- Licenses, LMAs, DBS Agreements and Cable Franchises." RELIANCE ON DBS TECHNOLOGY AND DIRECTV The Company's DBS business is a new business with unproven potential. There are numerous risks associated with DBS technology, in general, and DIRECTV, in particular. DBS technology is highly complex and requires the manufacture and integration of diverse and advanced components that may not function as expected. Although the DIRECTV satellites are estimated to have orbital lives at least through the year 2007, there can be no assurance as to the longevity of the satellites or that loss, damage or changes in the satellites as a result of acts of war, anti-satellite devices, electrostatic storms or collisions with space debris will not occur and have a material adverse effect on DIRECTV and the Company's DBS business. Furthermore, the digital compression technology used by DBS providers is not standardized and is undergoing rapid change. Since the Company serves as an intermediary for DIRECTV, the Company would be adversely affected by material adverse changes in DIRECTV's financial condition, programming, technological capabilities or services, and such effect could be material to the Company's prospects. There can also be no assurance that there will be sufficient demand for DIRECTV services since such demand depends upon consumer acceptance of DBS, the availability of equipment and related components required to access DIRECTV services and the competitive pricing of such equipment. See "Business -- DBS" and "Business -- Competition." The NRTC is a cooperative organization whose members are engaged in the distribution of telecommunications and other services in predominately rural areas of the United States. Pursuant to agreements between Hughes and the NRTC (the "NRTC Agreement") and between the NRTC and participating NRTC members (the "Member Agreement" and, together with the NRTC Agreement, the "DBS Agreements"), participating NRTC members acquired the exclusive right to provide DIRECTV programming services to residential and commercial subscribers in certain service areas. The DBS Agreements authorize the NRTC and participating NRTC members to provide all commercial services offered by Hughes that are transmitted from the frequencies that the FCC has authorized for DIRECTV's use at its present orbital location for a term running through the life of Hughes' current satellites. The NRTC has advised the Company 17 that the NRTC Agreement also provides the NRTC a right of first refusal to acquire comparable rights in the event that Hughes elects to launch successor satellites upon the removal of the present satellites from active service. The financial terms of any such purchase are likely to be the subject of negotiations. Any exercise of such right is uncertain and will depend, in part, on DIRECTV's costs of constructing, launching and placing in service such successor satellites. The Company is, therefore, unable to predict whether substantial additional expenditures by the NRTC and its members, including the Company, will be required in connection with the exercise of such right of first refusal. SUBSTANTIAL INDEBTEDNESS AND LEVERAGE The Company is highly leveraged. As of June 30, 1996, on a pro forma basis after giving effect to this Offering and the use of the proceeds therefrom and the Transactions (assuming an initial public offering price of $15.00 per share), the Company would have had consolidated indebtedness of $111.7 million, total stockholders' equity of $51.7 million and, assuming certain conditions are met, $50.0 million available under the New Credit Facility. For the year ended December 31, 1995 and the six months ended June 30, 1996, on a pro forma basis after giving effect to this Offering and the use of the proceeds therefrom and the Transactions (assuming an initial public offering price of $15.00 per share), the Company's earnings would have been inadequate to cover its fixed charges by $13.2 million and approximately $7.1 million, respectively. The ability of the Company to repay its existing indebtedness will depend upon future operating performance, which is subject to the success of the Company's business strategy, prevailing economic conditions, regulatory matters, levels of interest rates and financial, business and other factors, many of which are beyond the Company's control. The current and future debt service obligations of the Company could have important consequences, including the following: (i) the ability of the Company to obtain additional financing for future working capital needs or financing for possible future acquisitions or other purposes may be limited, (ii) a substantial portion of the Company's cash flow from operations will be dedicated to the payment of the principal and interest on its indebtedness, thereby reducing funds available for other purposes, and (iii) the Company will be more vulnerable to adverse economic conditions than some of its competitors and, thus, may be limited in its ability to withstand competitive pressures. The agreements with respect to the Company's indebtedness contain numerous financial and operating covenants, including, among others, restrictions on the ability of the Company to incur additional indebtedness, to create liens or other encumbrances, to pay dividends and to make certain other payments and investments, and to sell or otherwise dispose of assets or merge or consolidate with another entity. These covenants may have the effect of impeding the Company's growth opportunities, which may affect its cash flow and the value of the Class A Common Stock. There can be no assurance that future cash flows of the Company will be sufficient to meet all of the Company's obligations and commitments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Indebtedness." RISKS ATTENDANT TO ACQUISITION STRATEGY The Company plans to pursue additional acquisitions. Since January 1, 1996, the Company has acquired or entered into agreements to acquire a number of properties, including the Ohio DBS Acquisition. The Ohio DBS Acquisition is subject to a number of conditions, certain of which are beyond the Company's control, and there can be no assurance that this acquisition will be completed on the terms described herein and as reflected in the pro forma financial statements included herein or at all. Furthermore, there can be no assurance that the anticipated benefits of any of the acquisitions described herein or future acquisitions will be realized. The process of integrating acquired operations into the Company's operations may result in unforeseen operating difficulties, could absorb significant management attention and may require significant financial resources that would otherwise be available for the ongoing development or expansion of the Company's existing operations. The Company's acquisition strategy may be unsuccessful since the Company may be unable to identify acquisitions in the future or, if identified, to take advantage of them. The successful completion of an acquisition may depend on consents from third parties, including federal, state and local regulatory authorities or private parties such as Fox, the NRTC and Hughes, all of whose consents are beyond the Company's control. Possible future acquisitions by the Company could result in dilutive issuances of equity securities, the incurrence of additional debt and contingent liabilities, and additional amortization expenses related to goodwill and other intangible assets, which could materially adversely affect the Company's financial condition and operating results. 18 INABILITY TO MANAGE GROWTH EFFECTIVELY The Company has experienced a period of rapid growth primarily as a result of its acquisition strategy. In order to achieve its business objectives, the Company expects to continue to expand largely through acquisitions, which could place a significant strain on its management, operating procedures, financial resources, employees and other resources. The Company's ability to manage its growth may require it to continue to improve its operational, financial and management information systems, and to motivate and effectively manage its employees. If the Company's management is unable to manage growth effectively, the Company's results of operations could be materially adversely affected. DEPENDENCE ON KEY PERSONNEL The Company's future success may depend to a significant extent upon the performance of a number of the Company's key personnel, including Marshall W. Pagon, Pegasus' President and Chief Executive Officer. See "Management and Certain Transactions." The loss of Mr. Pagon or other key management personnel or the failure to recruit and retain personnel could have a material adverse effect on the Company's business. The Company does not maintain "key-man" insurance and has not entered into employment agreements with respect to any such individuals. COMPETITION IN THE TV, DBS AND CABLE BUSINESSES Each of the markets in which the Company operates is highly competitive. Many of the Company's competitors have substantially greater resources than the Company and may be able to compete more effectively than the Company in the Company's markets. In addition, the markets in which the Company operates are in a constant state of change due to technological, economic and regulatory developments. The Company is unable to predict what forms of competition will develop in the future, the extent of such competition or its possible effects on the Company's businesses. The Company's TV stations compete for audience share, programming and advertising revenue with other television stations in their respective markets, and compete for advertising revenue with other advertising media, such as newspapers, radio, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail and local cable systems. The Company's DBS business faces competition from other current or potential multichannel programming distributors, including other DBS operators, other DTH providers, cable operators, wireless cable operators and local exchange and long-distance telephone companies, which may be able to offer more competitive packages or pricing than the Company or DIRECTV. The Company's Cable systems face competition from television stations, SMATV systems, wireless cable systems, direct to home ("DTH") and DBS systems. See "Business -- Competition." GOVERNMENT LEGISLATION, REGULATION, LICENSES AND FRANCHISES The Company's businesses are subject to extensive and changing laws and regulations, including those of the FCC and local regulatory bodies. Many of the Company's operations are subject to licensing and franchising requirements of federal, state and local law and are, therefore, subject to the risk that material licenses and franchises will not be obtained or renewed in the future. The United States Congress and the FCC have in the past, and may in the future, adopt new laws, regulations and policies regarding a wide variety of matters, including rulemakings arising as a result of the Telecommunications Act of 1996 (the "1996 Act"), that could, directly or indirectly, affect the operations of the Company's businesses. The business prospects of the Company could be materially adversely affected by the application of current FCC rules or policies in a manner leading to the denial of pending applications by the Company, by the adoption of new laws, policies and regulations, or changes in existing laws, policies and regulations, including changes to their interpretations or applications, that modify the present regulatory environment or by the failure of certain rules or policies to change in the manner anticipated by the Company. See "Business - -- Licenses, LMAs, DBS Agreements and Cable Franchises" and "Business -- Legislation and Regulation." To the extent that the Company expects to program stations through the use of LMAs, there can be no assurance that the licensees of such stations will not unreasonably exercise rights to preempt the programming of the Company, or that the licensees of such stations will continue to maintain the transmission facilities of 19 the stations in a manner sufficient to broadcast a high quality signal over the station. As the licensees must also maintain all of the qualifications necessary to be a licensee of the FCC, and as the principals of the licensees are not under the control of the Company, there can be no assurance that these licenses will be maintained by the entities which currently hold them. In the 1996 Act, the continued performance of then existing LMAs was generally grandfathered. Currently, LMAs are not considered attributable interests under the FCC's multiple ownership rules. However, the FCC is currently considering proposals which would make LMAs attributable, as they generally are in the radio broadcasting industry. If the FCC were to adopt a rulemaking that makes such interests attributable, without modifying its current prohibitions against the ownership of more than one television station in a market, the Company could be prohibited from entering into such arrangements with other stations in markets in which it owns television stations. CONCENTRATION OF SHARE OWNERSHIP AND VOTING CONTROL BY MARSHALL W. PAGON The Company's capital 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 the Company's 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. See "Description of Capital Stock." Upon completion of this Offering, as a result of his beneficial ownership of all the outstanding voting stock of the sole general partner of a limited partnership that indirectly controls the Parent and of his control of the only other holder of Class B Common Stock, Marshall W. Pagon, the President and Chief Executive Officer of Pegasus, will beneficially own all of the Class B Common Stock of Pegasus. After giving effect to the greater voting rights attached to the Class B Common Stock, Mr. Pagon will be able to effectively vote 90.7% of the combined voting power of the outstanding Common Stock and will have sufficient power (without the consent of the holders of the Class A Common Stock) to elect the entire Board of Directors of the Company and, in general, to determine the outcome of matters submitted to the stockholders for approval. See "Ownership and Control" and "Description of Capital Stock -- Common Stock." Purchasers in this Offering will be acquiring, assuming an initial public offering price of $15.00 per share of Class A Common Stock, shares of Class A Common Stock representing 33.0% of all of the outstanding Common Stock but possessing only 6.1% of the total voting power of the Common Stock to be outstanding immediately following this Offering, after giving effect to the shares to be issued in the Transactions. ABSENCE OF PRIOR PUBLIC MARKET AND VOLATILITY OF STOCK PRICE Prior to this Offering, there has been no public market for the Class A Common Stock, and there can be no assurance that an active trading market will develop or be sustained in the future. The initial public offering price of the Class A Common Stock has been determined solely by negotiations between the Company and the representatives of the Underwriters and does not necessarily reflect the price at which the Class A Common Stock may be sold in the public market after this Offering. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. There may be significant volatility in the market price of the Class A Common Stock due to factors that may or may not relate to the Company's performance. The market price of the Class A Common Stock may be significantly affected by various factors such as economic forecasts, financial market conditions, reorganizations and acquisitions and quarterly variations in the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Upon completion of this Offering, assuming an initial public offering price of $15.00 per share of Class A Common Stock and after giving effect to the issuance of shares contemplated by the Transactions, the Company will have outstanding 4,600,704 shares of Class A Common Stock and 4,483,805 shares of Class B Common Stock, all of which shares of Class B Common Stock are convertible into shares of Class A 20 Common Stock on a share for share basis. Of these shares, the 3,000,000 shares of Class A Common Stock sold in this Offering will be tradeable without restriction unless they are purchased by affiliates of the Company. All shares to be received pursuant to the Registered Exchange Offer will also be tradeable without restriction, except that the terms of the Registered Exchange Offer are expected to require that each exchanging holder agrees not to sell, otherwise dispose of or pledge any shares of Class A Common Stock received in the Registered Exchange Offer for a period of at least 180 days after the date of this Prospectus without the prior written consent of Lehman Brothers Inc. The approximately 1,600,704 remaining shares of Class A Common Stock and all of the 4,483,805 shares of Class B Common Stock will be "restricted securities" under the Securities Act of 1933, as amended (the "Securities Act"). These "restricted securities" and any shares purchased by affiliates of the Company in this Offering may be sold only if they are registered under the Securities Act or pursuant to an applicable exemption from the registration requirements of the Securities Act, including Rule 144 and Rule 701 thereunder. The holders of 4,846,409 of the 6,084,509 shares constituting restricted securities have agreed not to sell, otherwise dispose of or pledge any shares of the Company's Common Stock or securities convertible into or exercisable or exchangeable for such Common Stock for 180 days after the date of this Prospectus without the prior written consent of Lehman Brothers Inc. No prediction can be made as to the effect, if any, that market sales of such shares or the availability of such shares for future sale will have on the market price of shares of Class A Common Stock prevailing from time to time. Up to an additional 720,000 and 3,385 shares of Class A Common Stock are reserved for issuance under the Incentive Program and for outstanding stock options, respectively. In connection with the Michigan/Texas DBS Acquisition and the acquistion of the Portland LMA, holders of the Class A Common Stock have been granted certain piggyback registration rights in connection with the issuance of their shares. See "Shares Eligible for Future Sale." POTENTIAL EFFECT ON COMPANY OF MINORITY OWNERSHIP OF PM&C CAPITAL STOCK Upon completion of this Offering, PM&C will be the principal subsidiary of Pegasus with two classes of capital stock outstanding: the PM&C Class A Shares and the PM&C Class B Shares. Holders of the PM&C Class A Shares are entitled to ten votes per share, and holders of the PM&C Class B Shares are entitled to one vote per share. The Parent owns all of the PM&C Class A Shares, constituting 95% of the capital stock of PM&C and representing 99.5% of the combined voting power of PM&C, and will transfer these shares to the Company upon the closing of this Offering. Pegasus has filed a registration statement with the Securities and Exchange Commission to commence the Registered Exchange Offer of the PM&C Class B Shares for shares of Class A Common Stock. Unless all of the holders of the PM&C Class B Shares accept the Registered Exchange Offer, PM&C will not be a wholly owned subsidiary of the Company. The pro forma financial data included in this Prospectus assume that the Registered Exchange Offer has been consummated and that all holders of the PM&C Class B Shares accepted the offer. If all holders do not accept this offer, the actual pro forma data would differ from that set forth herein. In addition, holders of the PM&C Class B Shares have certain preemptive, tag-along and registration rights which may restrict the Company from engaging in certain transactions. DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS The Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Moreover, Pegasus is a holding company, and its ability to pay dividends is dependent upon the receipt of dividends from its direct and indirect subsidiaries. The Company is a party to the New Credit Facility and the Indenture that restrict its ability to pay dividends. See "Dividend Policy" and "Description of Indebtedness." POTENTIAL ANTI-TAKEOVER PROVISIONS Pegasus' Amended and Restated Certificate of Incorporation contains, among other things, provisions authorizing the issuance of "blank check" preferred stock and two classes of Common Stock with different voting rights. See "Description of Capital Stock." In addition, the Company is 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 the Company that some or a majority of the Company's stockholders might consider to be in their best interests, 21 including tender offers or attempted takeovers that might otherwise result in such stockholders receiving a premium over the market price for the Class A Common Stock. In the event of a Change of Control (as defined in the Indenture), the Company will be required, subject to certain conditions, to offer to purchase all outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued interest to the date of purchase. In addition, upon such a Change of Control, the Company will be obligated to prepay all amounts owing under the New Credit Facility and the commitments thereunder will be reduced to zero. The requirement that the Company offer to repurchase the Notes and the obligation to prepay the amounts owing under the New Credit Facility and the reduction of the commitments thereunder to zero in the event of a Change of Control may have the effect of deterring a third party from acquiring the Company in a transaction that would constitute a Change of Control. See "Description of Indebtedness." DILUTION IN INVESTMENT TO PURCHASERS OF THE CLASS A COMMON STOCK Assuming an initial public offering price of $15.00 per share of Class A Common Stock, purchasers of the Class A Common Stock offered hereby will realize an immediate and substantial dilution of approximately $23.88 in net tangible book value per share of Common Stock of their investment from the initial public offering price after giving effect to the Transactions. See "Dilution." 22 THE COMPANY GENERAL The Company is a diversified media and communications company operating in three business segments: TV, DBS and Cable. The Company has grown through the acquisition and operation of media and communications properties characterized by clearly identifiable "franchises" and significant operating leverage, which enables increases in revenues to be converted into disproportionately greater increases in Location Cash Flow. Pegasus was incorporated under the laws of the State of Delaware in May 1996. In October 1994, the assets of various affiliates of Pegasus, principally limited partnerships that owned and operated the Company's TV and New England Cable operations, were transferred to subsidiaries of PM&C. In July 1995, the subsidiaries operating the Company's Mayaguez Cable systems and the Company's New England DBS business became wholly owned subsidiaries of PM&C. Upon consummation of this Offering, PM&C will become a subsidiary of Pegasus. Management's principal executive offices are located at Suite 454, 5 Radnor Corporate Center, 100 Matsonford Road, Radnor, Pennsylvania 19087. Its telephone number is (610) 341-1801. ACQUISITIONS Since January 1, 1996, the Parent has entered into agreements and completed certain transactions in connection with the Portland and Tallahassee Acquisitions, the Portland LMA and the Cable Acquisition. The assets relating to these transactions were subsequently contributed to the Company. Upon the consummation of this Offering, the Company will hold all of the assets acquired by the Parent in the Michigan/Texas DBS Acquisition and will have all rights of acquisition with respect to the Ohio DBS Acquisition. Set forth below is certain information relating to these acquisitions. COMPLETED ACQUISITIONS Television Station WPXT. The Company acquired the principal tangible assets of WPXT, the Fox-affiliated television station serving the Portland, Maine DMA, and entered into a noncompetition agreement with WPXT's prior owner for consideration totalling $12.4 million in cash and $400,000 of assumed liabilities. Upon completion of this Offering and subject to any necessary FCC approvals, the Parent will contribute WPXT's FCC license and Fox Affiliation Agreement to the Company in exchange for $1.9 million in cash and $150,000 of Class A Common Stock (valued at the price to the public in this Offering) to be paid to WPXT's prior owner and $1.0 million of Class B Common Stock (valued at the price to the public in this Offering) resulting in an aggregate consideration of $15.8 million for the Portland Acquisition. Television Station WTLH. In March 1996, the Company acquired substantially all of the tangible assets of WTLH, the Fox-affiliated TV station serving the Tallahassee, Florida DMA, for $5.0 million in cash and WTLH Warrants to purchase $1.0 million of Class A Common Stock (valued at the price to the public in this Offering). In August 1996, the Company acquired WTLH's FCC licenses in exchange for notes of a subsidiary of the Company aggregating $3.1 million, payable on March 1, 1998, with interest at 10% payable March 1, 1997 and 1998. Television Station WWLA. In May 1996, the Parent acquired the Portland LMA. As a condition of the completion of this Offering, the Parent will contribute the Portland LMA to Pegasus in exchange for $1.0 million of Class A Common Stock (valued at the price to the public in this Offering), which the Parent will transfer to the seller. Under the Portland LMA, the Company will lease facilities and provide programming to WWLA, retain all revenues generated from advertising sales, and make payments of $52,000 per year to the FCC license holder in addition to reimbursement of certain expenses. Construction of WWLA is expected to be completed in 1997. Both WWLA's and WPXT's offices, studio and transmission facilities will share the same location. 23 Cable Acquisition. In August 1996, the Company acquired substantially all of the assets of the San German Cable System, which serves ten communities contiguous to the Company's Mayaguez Cable system, for approximately $26.4 million in cash and assumed liabilities. The Company plans to interconnect the Mayaguez and San German Cable systems and operate them from a single headend. CONCURRENT ACQUISITION Michigan/Texas DBS Acquisition. In May 1996, the Parent entered into an agreement with Harron Communications Corp. ("Harron"), under which the Company will acquire rights as exclusive provider of DIRECTV services in certain rural areas of Texas and Michigan and related assets in exchange for $11.9 million of Class A Common Stock (valued at the price to the public in this Offering) and approximately $17.9 million in cash. Based upon an assumed initial public offering price of $15.00 per share of Class A Common Stock, after giving effect to this Offering and the Transactions, Harron would own approximately 795,303 shares of the Class A Common Stock and would be deemed to be the beneficial owner of approximately 8.8% of the outstanding Common Stock. The Michigan/Texas DBS Acquisition is subject to conditions typical in acquisitions of this nature, certain of which conditions may be beyond the Company's control. One of the conditions precedent for the completion of this Offering is the consummation of the Michigan/Texas DBS Acquisition. In connection with the Michigan/Texas DBS Acquisition, the Parent agreed to nominate a designee of Harron as a member of Pegasus' Board of Directors. See "Risk Factors -- Risks Attendant to Acquisition Strategy." PENDING ACQUISITION Ohio DBS Acquisition. In July 1996, the Company entered into a letter of intent with respect to the acquisition of DIRECTV distribution rights for portions of Ohio and related assets. The letter of intent contemplates a purchase price of approximately $12.0 million in cash. The Ohio DBS Acquisition is subject to the negotiation of a definitive agreement and, among other conditions, the prior approval of Hughes. In addition to these conditions, the Ohio DBS Acquisition is also expected to be subject to conditions typical in acquisitions of this nature, certain of which conditions, like the Hughes consent, may be beyond the Company's control. The letter of intent terminates on October 20, 1996 if a definitive agreement is not entered into by that date and provides for a closing to occur no later than November 15, 1996. There can be no assurance that the Ohio DBS Acquisition will be consummated on the terms described herein or at all. The Ohio DBS Acquisition is expected to be financed by proceeds from this Offering or borrowings under the New Credit Facility. See "Risk Factors -- Risks Attendant to Acquisition Strategy." PENDING SALE New Hampshire Cable Sale. In July 1996, the Company entered into a letter of intent with respect to the sale of its New Hampshire Cable systems. The letter of intent contemplates a sale price of approximately $7.3 million in cash. After payment of a sales commission, the net proceeds are expected to be approximately $7.1 million. The New Hampshire Cable Sale is subject to the negotiation of a definitive agreement, the prior approval of the local franchising authorities and to other conditions typical in transactions of this nature, certain of which are beyond the Company's control. The letter of intent provides for execution of a definitive agreement by no later than October 15, 1996. It is anticipated that the New Hampshire Cable Sale will occur by December 31, 1996. There can be no assurance that the New Hampshire Cable Sale will be consummated on the terms described herein or at all. CORPORATE REORGANIZATION AND OTHER TRANSACTIONS Set forth below is a description of certain of the Transactions that have occurred or are scheduled to occur concurrently with or after the consummation of this Offering. Completion of this Offering is conditioned on all of the Transactions described below except for the Registered Exchange Offer and the Management Share Exchange. PARENT'S CONTRIBUTION OF PM&C CLASS A SHARES Pegasus is a newly-formed subsidiary of the Parent and has no material assets or operating history. The Parent's principal subsidiary is PM&C, which now conducts through subsidiaries the Company's current 24 operations as described herein. Simultaneously with, and as a condition of, the closing of this Offering, the Parent will contribute to Pegasus all of its stock in PM&C, which consists of 161,500 PM&C Class A Shares in exchange for 3,380,435 shares of Class B Common Stock. MANAGEMENT AGREEMENT ACQUISITION PM&C and its operating subsidiaries are party to the Management Agreement with the Management Company, under which the Management Company provides certain management and accounting services and PM&C and its subsidiaries are obligated to pay the Management Company 5% of their net revenues and reimburse the Management Company for its accounting department costs. The Management Company is an affiliate of PM&C and Pegasus and is controlled and predominantly owned by Marshall W. Pagon, the President and Chief Executive Officer of PM&C and Pegasus. Concurrently with the completion of this Offering, the Company will acquire the Management Agreement together with certain net assets, including approximately $1.4 million of accrued management fees, from the Management Company in exchange for the Company's issuance of 1,306,667 shares of Class B Common Stock (based upon an assumed initial public offering price of $15.00 per share) and approximately $1.4 million in cash. Of these shares, 182,652 will be exchanged for an equal number of shares of Class A Common Stock and transferred to certain members of management who are participants in the Management Share Exchange. The fair market value of the Management Agreement has been determined by an independent appraiser. At the time that the Management Agreement is transferred, the executive officers and other employees of the Management Company will become employees of the Company. See "Management and Certain Transactions -- Management Agreement." REGISTERED EXCHANGE OFFER PM&C has outstanding 8,500 PM&C Class B Shares that were issued to purchasers of the Notes in PM&C's Notes offering. Shortly after the date of this Prospectus, Pegasus intends to make the Registered Exchange Offer to the holders of the PM&C Class B Shares to exchange such shares for 191,792 shares in the aggregate of Class A Common Stock. The exchange ratio of Class A Common Stock to be issued in the Registered Exchange Offer for PM&C Class B Shares has been determined such that immediately after giving effect to the Parent's contribution of the PM&C Class A Shares to Pegasus and the completion of the Registered Exchange Offer (assuming all holders of PM&C Class B Shares exchange their PM&C Class B Shares), but before giving effect to the closing of this Offering and the issuance of additional shares of Common Stock in connection with the remaining Transactions, the Parent and holders of the PM&C Class B Shares, respectively, will hold 95% and 5% of the equity of Pegasus and 99.5% and 0.5% of the voting rights of Pegasus' Common Stock, which are the same proportions in which they now own PM&C. Holders of PM&C Class B Shares who accept the Registered Exchange Offer will receive shares of Class A Common Stock that have been registered under the Securities Act and will be freely tradeable, except that the terms of the Registered Exchange Offer are expected to require that each exchanging holder agree not to sell, otherwise dispose of or pledge any shares of Class A Common Stock received in the Registered Exchange Offer for a period of at least 180 days after the date of this Prospectus without the prior written consent of Lehman Brothers Inc. Holders who do not accept the Registered Exchange Offer will retain their PM&C Class B Shares, for which there will be no trading market. For this reason, the Company expects that all holders of PM&C Class B Shares will accept the Registered Exchange Offer. However, there can be no assurance that this will be the case, and the completion of this Offering is not conditioned on any level of acceptances of the Registered Exchange Offer. Accordingly, it is possible that PM&C will have up to a 5% minority equity interest outstanding after completion of this Offering, which minority interest is not reflected in the pro forma financial statements included in this Prospectus. MANAGEMENT SHARE EXCHANGE Certain members of the Company's management hold 5,000 shares of Parent Non-Voting Stock. It is expected that all shares of the Parent Non-Voting Stock will be exchanged for 263,606 shares of Class A Common Stock of Pegasus pursuant to the Management Share Exchange and that the Parent Non-Voting Stock will be distributed to the Parent. 25 TOWERS PURCHASE Concurrently with this Offering, the Company will purchase the broadcast tower assets of Towers, an affiliate of the Company, for cash consideration of approximately $1.4 million. These assets consist of ownership or leasehold interests in three tower properties. Towers leases space on all of its towers to the Company and also leases space to unaffiliated companies. The purchase price has been determined by an independent appraisal. NEW CREDIT FACILITY In August 1996, the Company entered into the New Credit Facility. The New Credit Facility provides for up to $50.0 million in revolving credit borrowings, subject to syndication of $15.0 million of the facility. See "Description of Indebtedness -- New Credit Facility." 26 USE OF PROCEEDS The net proceeds to the Company from its sale of 3,000,000 shares of Class A Common Stock in this Offering at an assumed initial public offering price of $15.00 per share, after deducting underwriting discounts and commissions and estimated fees and expenses of this Offering, are estimated to be approximately $40.9 million (approximately $47.2 million if the Underwriters' over-allotment option is exercised in full). The Company intends to apply the total net proceeds from this Offering as follows: (i) $17.9 million for the payment of the cash portion of the purchase price of the Michigan/Texas DBS Acquisition, (ii) $12.0 million for the Ohio DBS Acquisition, (iii) $6.0 million to repay indebtedness under the New Credit Facility, (iv) $1.9 million to make a payment on account of the Portland Acquisition, (v) $1.4 million for the payment of the cash portion of the purchase price of the Management Agreement Acquisition, and (vi) $1.4 million for the Towers Purchase. See "Management and Certain Transactions." The remaining net proceeds, if any, together with available borrowings under the New Credit Facility will be used for working capital and general corporate purposes; however, they may be applied to future acquisitions. Pending application of the net proceeds as set forth above, the Company intends to temporarily invest the net proceeds in short-term, investment grade securities. If the Ohio DBS Acquisition is not consummated, the Company intends to use the approximately $12.0 million in net proceeds designated for this acquisition to fund future acquisitions, for working capital and general corporate purposes or to repay additional indebtedness under the New Credit Facility. On August 29, 1996, all outstanding indebtedness under the Old Credit Facility, which amounted to $8.8 million, was repaid from borrowings under the New Credit Facility. In addition to the $8.8 million drawn under the New Credit Facility to retire all outstanding indebtedness under the Old Credit Facility, $22.8 million was also drawn on August 29, 1996 to fund the Cable Acquisition. Borrowings under the New Credit Facility bear interest, payable monthly, at LIBOR or the prime rate (as selected by the Company) plus spreads that vary with PM&C's ratio of total debt to adjusted operating cash flow (as defined therein). As of September 1, 1996, the New Credit Facility bore interest at a blended rate of 9.375%. Borrowings under the New Credit Facility mature on June 30, 2003, when all outstanding principal and accrued interest is due and payable. DIVIDEND POLICY Pegasus is a newly formed corporation and has not paid any cash dividends on its Common Stock. The Company currently intends to retain future earnings for use in its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. The payment of future dividends, if any, will depend, among other things, on the Company's results of operations and financial condition, any restriction in the Company's loan agreements and on such other factors as the Company's Board of Directors may, in its discretion, consider relevant. Since Pegasus is a holding company, its ability to pay dividends is dependent upon the receipt of dividends from its direct and indirect subsidiaries. PM&C, which upon consummation of this Offering will be a direct subsidiary of Pegasus, is a party to the New Credit Facility and the Indenture that restrict its ability to pay dividends. See "Description of Indebtedness" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 27 DILUTION The net tangible book deficit of the Company at June 30, 1996 was $68.2 million, or $20.18 per share of Common Stock. The net tangible book deficit per share of Common Stock represents the amount of the Company's total tangible assets less its total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the Transactions (assuming an initial public offering price of $15.00 per share of Class A Common Stock), the pro forma net tangible book deficit of the Company as of June 30, 1996 would have been $121.5 million, or $19.97 per share of Common Stock. After giving effect to the sale of the 3,000,000 shares of Class A Common Stock offered by the Company in this Offering and the issuance of Common Stock pursuant to the Transactions (assuming an initial public offering price of $15.00 per share of Class A Common Stock), the pro forma net tangible book deficit of the Company as of June 30, 1996 would have been $80.6 million, or $8.88 per share of Common Stock. This represents an immediate increase in net tangible book value of $11.30 per share of Common Stock to existing stockholders and an immediate dilution in net tangible book value of $23.88 per share of Common Stock to purchasers of the Class A Common Stock in this Offering, as shown in the following table.
Assumed initial public offering price per share ....................... $ 15.00 Net tangible book deficit per share as of June 30, 1996(1) ....... $(20.18) Increase in net tangible book value per share attributable to new stockholders purchasing stock ("Purchasers") in this Offering .. $ 15.90 ---------- Pro forma net tangible book value per share after giving effect to this Offering .................................................. $ (4.28) Decrease in net tangible book value per share after giving effect to the Transactions ............................................ $ (4.60) ---------- Pro forma net tangible book deficit after giving effect to this Offering and the Transactions ....................................... $ (8.88) ---------- Dilution in net tangible book value per share to the Purchasers in this Offering after giving effect to the Transactions .................... $(23.88) ==========
- ------ (1) Assumes initial exchange of 3,380,435 shares of Class B Common Stock for 161,500 PM&C Class A Shares. 28 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1996 and as adjusted to give effect to (i) the sale and issuance by the Company of 3,000,000 shares of Class A Common Stock at an assumed offering price of $15.00 per share and (ii) the issuance of 1,600,704 shares of Class A Common Stock and 4,483,805 shares of Class B Common Stock pursuant to the Transactions (after giving effect to the 269,964 shares of Class B Common Stock transferred as Class A Common Stock to certain members of management who are participating in the Management Share Exchange). See "Use of Proceeds," "Selected Historical and Pro Forma Combined Financial Data," and "Pro Forma Combined Financial Data."
As of June 30, 1996 --------------------------- Pro Forma Actual As Adjusted ---------- ------------- (Dollars in thousands) Cash, cash equivalents and restricted cash ................................... $ 8,068 $ 13,127 ========== ============= Total debt: New Credit Facility(1)(2) .................................................. $ -- $ 25,600 Old Credit Facility ........................................................ 8,800 -- 12 1/2 % Series B Senior Subordinated Notes due 2005(3) .................... 81,391 81,391 Capital leases and other ................................................... 4,672 4,672 ---------- ------------- Total debt ................................................................. 94,863 111,663 ---------- ------------- Total stockholders' equity: Preferred Stock, $0.01 par value, 5,000,000 shares authorized; no shares issued and outstanding .................................................. -- -- Class A Common Stock, $0.01 par value, 30,000,000 shares authorized; 4,600,704 shares issued and outstanding, as adjusted .................... 2 46 Class B Common Stock, $0.01 par value, 15,000,000 shares authorized; 4,483,803 shares issued and outstanding, as adjusted .................... -- 45 Additional paid-in capital ................................................. 7,881 59,928 Retained earnings (deficit) ................................................ (474) 3,586 Partners' deficit .......................................................... (11,892) (11,892) ---------- ------------- Total stockholders' equity (deficit) .................................... (4,483) 51,713 ---------- ------------- Total capitalization .................................................... $ 90,380 $163,376 ========== =============
- ------ (1) For a description of the New Credit Facility, see "Description of Indebtedness -- New Credit Facility." (2) As of August 29, 1996, $31.6 million had been drawn under the New Credit Facility in connection with the retirement of the Old Credit Facility and the consummation of the Cable Acquisition. (3) For a description of the principal terms of the Notes, see "Description of Indebtedness -- Notes." 29 SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA The selected historical combined financial data for the years ended December 31, 1992 and 1993 have been derived from the Company's Combined Financial Statements for such periods, which have been audited by Herbein + Company, Inc., as indicated in their report included elsewhere herein. The selected historical combined financial data for the years ended December 31, 1994 and 1995 have been derived from the Company's Combined Financial Statements for such periods, which have been audited by Coopers & Lybrand L.L.P., as indicated in their report included elsewhere herein. The selected historical combined financial data for the year ended December 31, 1991 and the six months ended June 30, 1995 and 1996 have been derived from unaudited combined financial information, which in the opinion of the Company's management, contain all adjustments necessary for a fair presentation of this information. The selected historical combined financial data for the six months ended June 30, 1996 should not be regarded as indicative of the results that may be expected for the entire year. The information should be read in conjunction with the Combined Financial Statements and the notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Pro Forma Combined Financial Data," which are included elsewhere herein. 30 SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
Year Ended December 31, -------------------------------------------------------------- 1991(1) 1992 1993 (1) 1994 1995 ---------- ---------- ---------- ---------- --------- (Dollars in thousands, except earnings per share) Income Statement Data: Net revenues: TV ....................... $ -- $ -- $10,307 $17,808 $19,973 DBS ...................... -- -- -- 174 1,469 Cable .................... 2,095 5,279 9,134 10,148 10,606 Other .................... 9 40 46 61 100 ---------- ---------- ---------- ---------- --------- Total net revenues ..... 2,104 5,319 19,487 28,191 32,148 ---------- ---------- ---------- ---------- --------- Location operating expenses: TV ....................... -- -- 7,564 12,380 13,933 DBS ...................... -- -- -- 210 1,379 Cable .................... 1,094 2,669 4,655 5,545 5,791 Other .................... 3 12 16 18 38 Incentive compensation (3) .. -- 36 192 432 528 Corporate expenses .......... 206 471 1,265 1,506 1,364 Depreciation and amortization 1,175 2,541 5,978 6,940 8,751 ---------- ---------- ---------- ---------- --------- Income (loss) from operations (374) (410) (183) 1,160 364 Interest expense ............ (621) (1,255) (4,402) (5,973) (8,817) Interest income ............. -- -- -- -- 370 Other expense, net .......... (21) (21) (220) (65) (44) Provision (benefit) for taxes -- -- -- 140 30 Extraordinary gain (loss) from extinguishment of debt ..................... -- -- -- (633) 10,211 ---------- ---------- ---------- ---------- --------- Net income (loss) ........... $(1,016) $(1,686) $(4,805) $(5,651) $2,054 ========== ========== ========== ========== ========= Income (loss) per share: Loss before extraordinary item ..................... $(1.59) Extraordinary item .......... 1.99 --------- Net income (loss) per share . $0.40 ========= Weighted average shares outstanding (000's) ...... 5,143 ========= Other Data: Location Cash Flow (5) ...... $ 1,007 $ 2,638 $ 7,252 $10,038 $11,007 EBITDA (5) .................. 801 2,131 5,795 8,100 9,115 Capital expenditures ........ 213 681 885 1,264 2,640
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Six Months Ended June 30, -------------------------------------- Pro Pro Forma Forma 1995 (2) 1995 1996 1996 (2) ----------- ---------- ---------- ---------- Income Statement Data: Net revenues: TV ....................... 27,305 $8,861 $11,932 $12,600 DBS ...................... 4,924 528 1,568 4,328 Cable .................... 14,919 5,177 5,626 8,032 Other .................... 100 36 56 56 ----------- ---------- ---------- ---------- Total net revenues ..... 47,248 14,602 19,182 25,016 ----------- ---------- ---------- ---------- Location operating expenses: TV ....................... 19,210 6,714 8,271 8,765 DBS ...................... 5,138 622 1,261 3,604 Cable .................... 8,176 2,912 3,087 4,298 Other .................... 38 14 9 9 Incentive compensation (3) .. 511 356 430 421 Corporate expenses .......... 1,364 613 709 709 Depreciation and amortization 15,368 3,927 4,905 7,356 ----------- ---------- ---------- ---------- Income (loss) from operations (2,557) (556) 510 (146) Interest expense ............ (11,307) (3,350) (5,570) (6,583) Interest income ............. 129 -- 151 151 Other expense, net .......... (58) (84) (62) (59) Provision (benefit) for taxes 30 20 (133) (133) Extraordinary gain (loss) from extinguishment of debt ..................... -- (4) -- -- -- ----------- ---------- ---------- ---------- Net income (loss) ........... $(13,823) $(4,010) $(4,838) $(6,504) =========== ========== ========== ========== Income (loss) per share: Loss before extraordinary item ..................... $(1.52) $(0.94) $(0.72) Extraordinary item .......... -- (4) -- -- ----------- ---------- ---------- Net income (loss) per share . $(1.52) $(0.94) $(0.72) =========== ========== ========== Weighted average shares outstanding (000's) ...... 9,085 5,143 9,085 =========== ========== ========== Other Data: Location Cash Flow (5) ...... $14,686 $4,340 $6,554 $8,340 EBITDA (5) .................. 12,811 3,371 5,415 7,210 Capital expenditures ........ 3,022 1,536 2,748 2,734
Pro Forma Twelve Months Ended June 30, 1996 (2) -------------- Net revenues ................ $ 50,963 Location Cash Flow (5) ...... 16,714 EBITDA (5) .................. 14,666
As of December 31, --------------------------------------------------------- 1991 1992 1993 1994 1995 -------- -------- --------- ---------- --------- Balance Sheet Data: Cash, cash equivalents and restricted cash ..........$ 901 $ 938 $ 1,506 $ 1,380 $21,856 Working capital (deficiency) 78 (52) (3,844) (23,074) 17,566 Total assets ................ 17,306 17,418 76,386 75,394 95,770 Total debt (including current) ................. 13,675 15,045 72,127 61,629 82,896 Total liabilities ........... 14,572 16,417 78,954 68,452 95,521 Total equity (deficit) (6) .. 2,734 1,001 (2,427) 6,942 249 As of June 30, 1996 ------------------------------------- Actual Pro Forma (2) --------- -------------- Balance Sheet Data: Cash, cash equivalents and restricted cash .......... $ 8,068 $ 13,247 Working capital (deficiency) 4,073 8,479 Total assets ................ 104,247 178,016 Total debt (including current) ................. 94,863 111,663 Total liabilities ........... 108,730 126,303 Total equity (deficit) (6) .. (4,483) 51,713
(footnotes on following page) 31 - ------ (1) The Company's operations began in 1991. The 1991 data include the results of the Massachusetts and New Hampshire Cable systems from June 26, 1991 (with the exception of the North Brookfield, Massachusetts Cable system, which was acquired in July 1992), the Connecticut Cable system from August 7, 1991 and the results of Towers from May 21, 1991. The 1993 data include the results of the Mayaguez, Puerto Rico Cable system from March 1, 1993 and WOLF/WWLF/WILF, WDSI and WDBD from May 1, 1993. (2) Pro forma income statement and other data for the year ended December 31, 1995, six months ended June 30, 1996 and the twelve months ended June 30, 1996 give effect to the acquisitions and this Offering as if such events had occurred in the beginning of such periods. The pro forma balance sheet data as of June 30, 1996 give effect to the acquisitions after June 30, 1996 and this Offering as if such events had occurred on such date. See "Pro Forma Combined Financial Data." (3) Incentive compensation represents compensation expenses pursuant to the Restricted Stock Plan and 401(k) Plans. See "Management and Certain Transactions -- Incentive Program." (4) The pro forma income statement data for the year ended December 31, 1995 do not include the extraordinary gain on the extinguishment of debt of $10.0 million and the $214,000 writeoff of deferred financing costs that were incurred in 1995 in connection with the creation of the Old Credit Facility. (5) Location Cash Flow is defined as net revenues less location operating expenses. Location operating expenses consist of programming, barter programming, general and administrative, technical and operations, marketing and selling expenses. EBITDA is defined as income (loss) before (i) extraordinary items, (ii) provisions for income taxes, (iii) other (income) expense, (iv) interest (income) expense, and (v) depreciation and amortization expenses. The difference between Location Cash Flow and EBITDA is that EBITDA includes incentive compensation and corporate expenses. Although EBITDA and Location Cash Flow are not measures of performance under generally accepted accounting principles, the Company believes that Location Cash Flow and EBITDA are accepted within the Company's business segments as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such segments. Nevertheless, these measures should not be considered in isolation or as a substitute for income from operations, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. (6) The Company has not paid any cash dividends and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. 32 PRO FORMA COMBINED FINANCIAL DATA Pro forma combined income statement and other data for the year ended December 31, 1995, the six months ended June 30, 1996 and the twelve months ended June 30, 1996 give effect to (i) the Portland Acquisition, which actually closed on January 29, 1996, (ii) the Tallahassee Acquisition, which actually closed on March 8, 1996, (iii) the Michigan/Texas DBS Acquisition, which is to close concurrently with the closing of this Offering, (iv) the Cable Acquisition, which actually closed on August 29, 1996, (v) the Ohio DBS Acquisition, which is a pending acquisition, (vi) the New Hampshire Cable Sale, which is a pending sale and (vii) this Offering, all as if such events had occurred at the beginning of each period. The pro forma combined balance sheet as of June 30, 1996 gives effect to (i) payments in connection with the Portland Acquisition, (ii) the Michigan/Texas DBS Acquisition, which is to close concurrently with the closing of this Offering, (iii) the Cable Acquisition, which actually closed on August 29, 1996, (iv) the Ohio DBS Acquisition, which is a pending acquisition, (v) acceptance of the Registered Exchange Offer by all holders of the PM&C Class B Shares, (vi) the New Hampshire Cable Sale, which is a pending sale and (vii) this Offering, as if such events had occurred on such date. The Company's pro forma income (loss) from continuing operations and income (loss) per share would be affected to the extent that holders of PM&C Class B Shares do not accept the Registered Exchange Offer. The Company does not believe that any such effect would be material and expects that all such holders will accept the Registered Exchange Offer. These 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. The Company does not expect that the final allocation of the purchase price will materially differ from the preliminary allocation. The pro forma adjustments are based upon available information and upon certain assumptions that the Company believes are reasonable. The pro forma combined financial information should be read in conjunction with the Company's Combined Financial Statements and notes thereto, as well as the financial statements and notes thereto of the acquisitions, included elsewhere in this Prospectus. The pro forma combined financial data are not necessarily indicative of the Company's future results of operations. There can be no assurance whether or when the Ohio DBS Acquisition or the New Hampshire Cable Sale will be consummated. See "Risk Factors -- Risks Attendant to Acquisition Strategy." 33 PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995
Acquisitions ------------------------------------------------------------ MI/TX Actual Portland(1) Tallahassee(2) DBS(3) Cable(4) Adjustments -------- --------- ------------ -------- ------- ----------- (Dollars in thousands, except earnings per share) Income Statement Data: Net revenues TV ................................ $19,973 $ 4,409 $2,784 $ -- $ -- $ 139(7) DBS ............................... 1,469 -- -- 2,513 -- -- Cable ............................. 10,606 -- -- -- 5,777 -- Other ............................. 100 -- -- -- -- -- -------- --------- ------------ -------- ------- ----------- Total net revenues ............... 32,148 4,409 2,784 2,513 5,777 139 -------- --------- ------------ -------- ------- ----------- Location operating expenses TV ................................ 13,933 3,441 2,133 -- (186)(8) -- (111)(9) DBS ............................... 1,379 -- -- 3,083 -- (280)(10) Cable ............................. 5,791 -- -- -- 3,485 (332)(11) Other ............................. 38 -- -- -- -- -- Incentive compensation .............. 528 -- -- -- -- -- Corporate expenses .................. 1,364 147 40 139 -- (326)(12) Depreciation and amortization ....... 8,751 212 107 559 501 4,527 (13) -------- --------- ------------ -------- ------- ----------- Income (loss) from operations ....... 364 609 504 (1,268) 1,791 (3,153) Interest expense .................... (8,817) (1,138) (163) (631) (850) (1,828)(14) Interest income ..................... 370 -- -- -- -- (241)(15) Other income (expense), net ......... (44) (542) (64) -- 50 542 (16) Provision (benefit) for income taxes 30 -- 105 -- (189) 84 (17) -------- --------- ------------ -------- ------- ----------- Income (loss) before extraordinary items ............................. $(8,157) $(1,071) $ 172 $(1,899) $1,180 $(4,764) ======== ========= ============ ======== ======= =========== Income (loss) per share: Loss before extraordinary items ... Weighted average shares outstanding .................... Other Data: Location Cash Flow (21) ............. $11,007 $ 968 $ 651 $ (570) $2,292 $1,048 EBITDA (21) ......................... 9,115 821 611 (709) 2,292 1,374 Capital expenditures ................ 2,640 139 28 58 304 --
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Pending Transactions ----------------------------------------- OH DBS NH The Pro Sub-Total Acquisition(5) Adjustments Cable Sale(6) Total Offering Forma --------- ------------ ----------- ----------- --------- ----------- ------- Income Statement Data: Net revenues TV ................................ $ 27,305 $ -- $-- $ -- $27,305 $ -- $27,305 DBS ............................... 3,982 942 -- -- 4,924 -- 4,924 Cable ............................. 16,383 -- -- (1,464) 14,919 -- 14,919 Other ............................. 100 -- -- -- 100 -- 100 --------- ------------ ----------- ----------- --------- ----------- -------- Total net revenues ............... 47,770 942 -- (1,464) 47,248 -- 47,248 --------- ------------ ----------- ----------- --------- ----------- -------- Location operating expenses TV ................................ 19,210 -- -- -- 19,210 -- 19,210 DBS ............................... 4,182 956 -- -- 5,138 -- 5,138 Cable ............................. 8,944 -- (768) 8,176 -- 8,176 Other ............................. 38 -- -- -- 38 -- 38 Incentive compensation .............. 528 -- -- (17) 511 -- 511 Corporate expenses .................. 1,364 -- -- -- 1,364 -- 1,364 Depreciation and amortization ....... 14,657 183 1,017 (13) (618) 15,239 129(18) 15,368 --------- ------------ ----------- ----------- --------- ----------- -------- Income (loss) from operations ....... (1,153) (197) (1,017) (61) (2,428) (129) (2,557) Interest expense .................... (13,427) -- (1,065)(14) -- (14,492) 3,185(19) (11,307) Interest income ..................... 129 -- -- -- 129 -- 129 Other income (expense), net ......... (58) -- -- -- (58) -- (58) Provision (benefit) for income taxes 30 -- -- 30 -- 30 --------- ------------ ----------- ----------- --------- ----------- --------- Income (loss) before extraordinary items ............................. $(14,539) $(197) $(2,082 ) $ (61) $(16,879) $3,056(20) $(13,823) ========= ============ =========== =========== ========= =========== ========= Income (loss) per share: Loss before extraordinary items ... $(2.77) $(1.52) ========= ========= Weighted average shares outstanding .................... 6,084,509 9,084,509 ========= ========= Other Data: Location Cash Flow (21) ............. $ 15,396 $ (14) $-- $ (696) $14,686 $ -- $14,686 EBITDA (21) ......................... 13,504 (14) -- (679) 12,811 -- 12,811 Capital expenditures ................ 3,169 -- -- (147) 3,022 -- 3,022
34 PRO FORMA STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996
Acquisitions ---------------------------------------------------------- MI/TX Actual Portland(1) Tallahassee(2) DBS(3) Cable(4) Adjustments --------- --------- ------------ ------- ------ ----------- (Dollars in thousands, except earnings per share) Income Statement Data: Net revenues TV ................................ $11,932 $ 247 $404 $ -- $ -- $ 17(7) DBS ............................... 1,568 -- -- 1,896 -- -- Cable ............................. 5,626 -- -- -- 3,190 -- Other ............................. 56 -- -- -- -- -- --------- --------- ------------ ------- ------ ----------- Total net revenues ............... 19,182 247 404 1,896 3,190 17 --------- --------- ------------ ------- ------ ----------- Location operating expenses TV ................................ 8,271 294 243 -- (28)(8) -- (15)(9) DBS ............................... 1,261 -- -- 1,769 -- (168)(10) Cable ............................. 3,087 -- -- -- 1,811 (166)(11) Other ............................. 9 -- -- -- -- -- Incentive compensation .............. 430 -- -- -- -- -- Corporate expenses .................. 709 12 21 76 -- (109)(12) Depreciation and amortization ....... 4,905 6 11 291 201 1,690 (13) --------- --------- ------------ ------- ------ ----------- Income (loss) from operations ....... 510 (65) 129 (240) 1,178 (1,187) Interest expense .................... (5,570) (565) (20) (343) (413) (732)(14) Interest income ..................... 151 -- -- -- -- -- Other income (expense), net ......... (62) 20 (17) -- -- -- Provision (benefit) for income taxes (133) -- 35 -- 333 (368)(17) --------- --------- ------------ ------- ------ ----------- Income (loss) before extraordinary items ............................. $(4,838) $(610) $ 57 $ (583) $ 432 $(1,551) ========= ========= ============ ======= ====== =========== Income (loss) per share: Loss before extraordinary items .... Weighted average shares outstanding ...................... Other Data: Location Cash Flow (21) ............. $ 6,554 $ (47) $161 $ 127 $1,379 $ 394 EBITDA (21) ......................... 5,415 (59) 140 51 1,379 503 Capital expenditures ................ 2,748 -- -- -- 133 --
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Pending Transactions ----------------------------------------- OH DBS NH The Pro Sub-Total Acquisition(5) Adjustments Cable Sale(6) Total Offering Forma --------- ------------ ----------- ----------- --------- ----------- ------- Income Statement Data: Net revenues TV ................................ $12,600 $ -- $ -- $ -- $12,600 $ -- $12,600 DBS ............................... 3,464 864 -- -- 4,328 -- 4,328 Cable ............................. 8,816 -- -- (784) 8,032 -- 8,032 Other ............................. 56 -- -- -- 56 -- 56 --------- ------------ ----------- ----------- --------- --------- --------- Total net revenues ............... 24,936 864 -- (784) 25,016 -- 25,016 --------- ------------ ----------- ----------- --------- --------- --------- Location operating expenses TV ................................ 8,765 -- -- -- 8,765 -- 8,765 DBS ............................... 2,862 742 -- -- 3,604 -- 3,604 Cable ............................. 4,732 -- -- (434) 4,298 -- 4,298 Other ............................. 9 -- -- -- 9 -- 9 Incentive compensation .............. 430 -- -- (9) 421 -- 421 Corporate expenses .................. 709 -- -- -- 709 -- 709 Depreciation and amortization ....... 7,104 94 406(13) (312) 7,292 64(18) 7,356 --------- ------------ ----------- ----------- --------- ---------- --------- Income (loss) from operations ....... 325 28 (406) (29) (82) (64) (146) Interest expense .................... (7,643) -- (533)(14) -- (8,176) 1,593(19) (6,583) Interest income ..................... 151 -- -- -- 151 -- 151 Other income (expense), net ......... (59) -- -- -- (59) -- (59) Provision (benefit) for income taxes (133) -- -- -- (133) -- (133) --------- ------------ ----------- ----------- --------- ---------- --------- Income (loss) before extraordinary items ............................. $(7,093) 28 $(939) $ (29) $(8,033) $1,529(20) $ (6,504) ========= ============ =========== =========== ========= ========== ========= Income (loss) per share: Loss before extraordinary items .... $(1.32) $ (0.72) ========= ========= Weighted average shares outstanding ...................... 6,084,509 9,084,509 ========= ========= Other Data: Location Cash Flow (21) ............. $ 8,568 $122 -- $(350) $8,340 $ -- $8,340 EBITDA (21) ......................... 7,429 122 -- (341) 7,210 -- 7,210 Capital expenditures ................ 2,881 -- -- (147) 2,734 -- 2,734
35 PRO FORMA STATEMENT OF OPERATIONS TWELVE MONTHS ENDED JUNE 30, 1996
Acquisitions ------------------------------------------------------------- MI/TX Actual Portland(1) Tallahassee(2) DBS(3) Cable(4) Adjustments --------- --------- ------------ --------- ------- ----------- (Dollars in thousands, except earnings per share) Income Statement Data : Net revenues TV ............................... $ 23,044 $ 2,467 $1,893 -- -- $100(7) DBS .............................. 2,509 -- -- $ 3,686 -- -- Cable ............................ 11,055 -- -- -- $6,184 -- Other ............................ 120 -- -- -- -- -- --------- --------- ------------ --------- ------- ----------- Total net revenues ............ 36,728 2,467 1,893 3,686 6,184 100 --------- --------- ------------ --------- ------- ----------- Location operating expenses TV ............................... 15,490 2,147 1,449 -- -- (121)(8) (67)(9) DBS .............................. 2,018 -- -- 4,044 -- (388)(10) Cable ............................ 5,966 -- -- -- 3,512 (332)(11) Other ............................ 33 -- -- -- -- -- Incentive compensation ............. 602 -- -- -- -- -- Corporate expenses ................. 1,460 -- -- 145 -- (145)(12) Depreciation and amortization ...... 9,729 172 58 575 558 4,153 (13) --------- --------- ------------ --------- ------- ---------- Income (loss) from operations ...... 1,430 148 386 (1,078) 2,114 (3,000) Interest expense ................... (11,037) (1,423) (123) (666) (852) (1,515)(14) Interest income .................... 521 -- -- -- -- (211)(15) Other income (expense), net ........ (22) (522) (85) -- -- 512 (16) Provision (benefit) for income taxes (123) -- 73 -- 273 (346)(17) --------- --------- ------------ --------- ------- ----------- Income (loss) before extraordinary items ............................ $ (8,985) $(1,797) $ 105 $(1,744) $ 989 $(3,868) ========= ========= ============ ========= ======= ======== Income (loss) per share: Loss before extraordinary items ... Weighted average shares outstanding ..................... Other Data: Location Cash Flow (21) ............ $ 13,221 $ 320 $ 444 $ (358) $2,672 $1,008 EBITDA (21) ........................ 11,159 320 444 (503) 2,672 1,153 Capital expenditures ............... 3,832 50 14 29 267 --
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Pending Transactions ----------------------------------------- OH DBS NH The Pro Sub-Total Acquisition(5) Adjustments Cable Sale(6) Total Offering Forma --------- ------------ ----------- ----------- --------- ----------- ------- Income Statement Data : Net revenues TV ............................... $ 27,504 -- $ -- -- $ 27,504 -- $ 27,504 DBS .............................. 6,195 1,473 -- -- 7,668 -- 7,668 Cable ............................ 17,239 -- -- $(1,568) 15,671 -- 15,671 Other ............................ 120 -- -- -- 120 -- 120 --------- ------------ ----------- ----------- --------- ---------- --------- Total net revenues ............ 51,058 1,473 -- (1,568) 50,963 -- 50,963 --------- ------------ ----------- ----------- --------- ---------- --------- Location operating expenses TV ............................... 18,898 -- -- -- 18.898 -- 18.898 DBS .............................. 5,674 1,329 -- -- 6,172 -- 6,172 Cable ............................ 9,146 -- -- (831) 9,146 -- 9,146 Other ............................ 33 -- -- -- 33 -- 33 Incentive compensation ............. 602 -- -- (14) 588 -- 588 Corporate expenses ................. 1,460 -- -- -- 1,460 -- 1,460 Depreciation and amortization ...... 15,245 185 1,015(13) (776) 15,669 129(18) 15,798 --------- ------------ ----------- ----------- --------- ---------- --------- Income (loss) from operations ...... -- (41) (1,015) 53 (1,003) (129) (1,132) Interest expense ................... (15,616) -- (1,065)(14) -- (16,681) 3,185(19) (13,496) Interest income .................... 310 -- -- -- 310 -- 310 Other income (expense), net ........ (117) -- -- -- (117) -- (117) Provision (benefit) for income taxes (123) -- -- -- (123) -- (123) --------- ------------ ----------- ----------- --------- ---------- --------- Income (loss) before extraordinary items ............................ $(15,300) $ (41) $(2,080) $ 53 $(17,368) $3,056(20) $(14,312) ========= ============ =========== ========= ========= ========== ========= Income (loss) per share: Loss before extraordinary items ... $ (2.85) $ (1.58) ========= ========= Weighted average shares outstanding ..................... 6,084,509 9,084,509 ========= ========= Other Data: Location Cash Flow (21) ............ $17,307 $144 -- $(737) $ 16,714 -- $ 16,714 EBITDA (21) ........................ 15,245 144 -- (723) 14,666 -- 14,666 Capital expenditures ............... 4,192 -- -- (245) 3,947 -- 3,947
36 - ------ (1) Financial results of Portland Broadcasting, Inc. (2) Financial results of WTLH, Inc. (3) Financial results of the DBS Operations of Harron Communications Corp. (4) Financial results of Dom's Tele Cable, Inc. (5) Financial results of the DBS Operations of the Chillicothe Telephone Company. (6) Financial results of the New Hampshire Operations of Pegasus Cable Television. (7) To reduce the commissions paid by WPXT and WTLH to their national advertising sales representative to conform to the Company's contract. (8) To eliminate payroll expense related to staff reductions implemented upon the consummation of the Portland Acquisition. (9) To eliminate rent expenses incurred by WTLH, Inc. for the tower site acquired and office property to be acquired by the Company in connection with the Tallahassee Acquisition. (10) To eliminate rent and other overhead expenses incurred by the prior owner that will not be incurred by the Company for certain office properties in connection with the Michigan/Texas DBS Acquisition. (11) To eliminate expense reductions, such as redundant staff, rent, professional fees and utilities to be implemented in connection with the Cable Acquisition and interconnection of its Puerto Rico Cable systems. (12) To eliminate corporate expenses charged by prior owners. (13) To record additional depreciation and amortization resulting from the purchase accounting treatment of the acquisitions outlined above. Such amounts are based on a preliminary allocation of the total consideration. The actual depreciation and amortization may change based upon the final allocation of the total consideration to be paid to the tangible and intangible assets acquired. (14) To record the increase in net interest expense associated with the borrowings incurred in connection with the acquisitions described above. (15) To eliminate interest income earned on funds escrowed and used for acquisitions. (16) To eliminate certain nonrecurring expenses, primarily comprised of legal and professional expenses incurred by the prior owners of the businesses in connection with the acquisitions. (17) To eliminate net tax benefit in connection with the acquisitions. (18) To eliminate amortization of deferred costs related to the Old Credit Facility and record amortization of costs incurred in connection with the New Credit Facility. (19) To remove interest expense on the debts to be retired with the proceeds of this Offering. (20) Upon repayment of the Old Credit Facility, the Company incurred an extraordinary expense in connection with the write-down of deferred financing costs of approximately $214,000, which is not included in these pro forma statements. Upon consummation of the New Hampshire Cable Sale, the Company will recognize a one time gain of approximately $4.3 million, which is not included in these pro forma statements. (21) Location Cash Flow is defined as net revenues less location operating expenses. Location operating expenses consist of programming, barter programming, general and administrative, technical and operations, marketing and selling expenses. EBITDA is defined as income (loss) before (i) extraordinary items, (ii) provision (benefit) for income taxes, (iii) other (income) expense, (iv) interest (income) expense, and (v) depreciation and amortization expenses. The difference between Location Cash Flow and EBITDA is that EBITDA includes incentive compensation and corporate expenses. Although Location Cash Flow and EBITDA are not measures of performance under generally accepted accounting principles, the Company believes that Location Cash Flow and EBITDA are accepted within the Company's business segments as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such segments. Nevertheless, these measures should not be considered in isolation or as a substitute for income from operations, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. 37 PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF JUNE 30, 1996
Acquisitions ----------------------------------------------- Portland MI/TX Actual Portland(1) LMA(2) DBS(3) Cable --------- --------- -------- ---------- ---------- (Dollars in thousands) Assets: Cash and cash equivalents $ 3,199 $ (3,550) $ -- $ (17,894) $(22,200) Restricted cash held in escrow ............... 4,869 -- -- -- -- Accounts receivable, net 6,825 -- -- -- -- Inventories ............. 460 -- -- -- -- Prepaid expenses and other current assets . 1,729 -- -- -- -- Property and equipment, net .................. 24,472 -- -- -- 1,865 Intangibles ............. 60,757 4,100 1,000 29,824 21,708 Other assets ............ 1,936 -- -- -- -- --------- --------- -------- ---------- ---------- Total assets .......... $104,247 $ 550 $1,000 $ 11,930 $ 1,373 ========= ========= ======== ========== ========== Liabilities and Equity: Current liabilities ..... $ 5,913 $ (600) $ -- $ -- $ 1,373 Notes payable ........... 54 -- -- -- -- Accrued interest ........ 5,322 -- -- -- -- Current portion of long-term debt ....... 364 -- -- -- -- Current portion of program liabilities .. 1,356 -- -- -- -- Long-term debt .......... 94,445 -- -- -- -- Long-term program liabilities .......... 1,161 -- -- -- -- Other long-term liabilities .......... 115 -- -- -- -- --------- --------- -------- ---------- ---------- Total liabilities ..... 108,730 (600) -- -- 1,373 Class A Common Stock(8) . 2 1 1 8 -- Class B Common Stock .... -- -- -- -- -- Additional paid-in capital .............. 7,881 1,149 999 11,922 -- Retained earnings (deficit) ............ (474) -- -- -- -- Partners deficit ........ (11,892) -- -- -- -- --------- --------- -------- ---------- ---------- Total equity .......... (4,483) 1,150 1,000 11,930 -- --------- --------- -------- ---------- ---------- Total liabilities and equity ............. $104,247 $ 550 $1,000 $ 11,930 $ 1,373 ========= ========= ======== ========== ========== (RESTUBBED TABLE CONTINUED FROM ABOVE) Pending Transactions --------------------------- New NH Credit OH DBS Cable The Facility Sub-Total Acquisition(5) Sale(6) Total Offering(7) Pro Forma -------- ---------- ------------ ----------- --------- --------- --------- Assets: Cash and cash equivalents $21,645 $(18,800) $(12,000) $ 7,122 $(23,678) $32,056 $ 8,378 Restricted cash held in escrow ............... -- 4,869 -- -- 4,869 -- 4,869 Accounts receivable, net -- 6,825 -- -- 6,825 -- 6,825 Inventories ............. -- 460 -- -- 460 -- 460 Prepaid expenses and other current assets . -- 1,729 -- -- 1,729 -- 1,729 Property and equipment, net .................. -- 26,337 -- (1,888) 24,449 -- 24,449 Intangibles ............. 941 118,330 12,000 (960) 129,370 -- 129,370 Other assets ............ -- 1,936 -- -- 1,936 -- 1,936 -------- ---------- ------------ ----------- --------- --------- --------- Total assets .......... $22,586 $141,686 $ -- $ 4,274 $145,960 $32,056 $178,016 ======== ========== ============ =========== ========= ========= ========= Liabilities and Equity: Current liabilities ..... $ -- $ 6,686 $ -- $ -- $ 6,686 $ -- $ 6,686 Notes payable ........... -- 54 -- -- 54 -- 54 Accrued interest ........ -- 5,322 -- -- 5,322 -- 5,322 Current portion of long-term debt ....... -- 364 -- -- 364 -- 364 Current portion of program liabilities .. -- 1,356 -- -- 1,356 -- 1,356 Long-term debt .......... 22,800 117,245 -- -- 117,245 (6,000) 111,245 Long-term program liabilities .......... -- 1,161 -- -- 1,161 -- 1,161 Other long-term liabilities .......... -- 115 -- -- 115 -- 115 -------- ---------- ------------ ----------- --------- --------- --------- Total liabilities ..... 22,800 132,303 -- -- 132,303 (6,000) 126,303 Class A Common Stock(8) . -- 12 -- -- 12 34 46 Class B Common Stock .... -- -- -- -- -- 45 45 Additional paid-in capital .............. -- 21,951 -- -- 21,951 40,796 -- (1,400) (1,419) 59,928 Retained earnings (deficit) ............ (214) (688) -- 4,274 3,586 -- 3,586 Partners deficit ........ -- (11,892) -- -- (11,892) -- (11,892) -------- ---------- ------------ ----------- --------- --------- --------- Total equity .......... (214) 9,383 -- 4,274 13,657 38,056 51,713 -------- ---------- ------------ ----------- --------- --------- --------- Total liabilities and equity ............. $22,586 $141,686 $-- $4,274 $145,960 $32,056 $178,016 ======== ========== ============ =========== ========= ========= =========
38 - ------ (1) To record the acquisition of WPXT's license and Fox Affiliation Agreement, the noncompetition agreement with the prior owner of WPXT and satisfaction of amounts due to the prior owner of WPXT for accrued compensation for aggregate consideration of $4.7 million. The aggregate consideration consists of $3.6 million in cash, $1.0 million of Class B Common Stock (valued at the price to the public in this Offering) and $150,000 of Class A Common Stock (valued at the price to the public in this Offering). Of the total consideration, $4.1 million is allocated to intangible assets consisting of broadcast licenses, network affiliation agreements and noncompetition agreements and $600,000 is applied as a reduction of current liabilities. (2) To record the acquisition of the Portland LMA for $1.0 million of Class A Common Stock (valued at the price to the public in this Offering), all of which is allocated to LMAs. (3) To record the Michigan/Texas DBS Acquisition for total consideration of approximately $29.8 million consisting of $17.9 million in cash and $11.9 million in Class A Common Stock (valued at the price to the public in this Offering), all of which is allocated to DBS rights. (4) To record the Cable Acquisition for total consideration of approximately $26.4 million consisting of $25.0 million in cash and $1.4 million in assumed liabilities. Of the total consideration, approximately $4.7 million is allocated to property and equipment and approximately $21.7 million is allocated to franchise agreements. (5) To record the Ohio DBS Acquisition for $12.0 million in cash, all of which is allocated to DBS rights. (6) To record the New Hampshire Cable Sale for $7.1 million, net of commission. (7) To record the net proceeds from the issuance of Class A Common Stock and the intended uses of such proceeds. As of August 29, 1996, $31.6 million had been drawn under the New Credit Facility in connection with the retirement of the Old Credit Facility and the consummation of the Cable Acquisition. Source of proceeds: Gross proceeds from this Offering . $45,000 ======= Intended uses of proceeds: Michigan/Texas DBS Acquisition ... $17,894 Cash pending Ohio DBS Acquisition . 12,000 Repay indebtedness under the New Credit Facility ....................... 6,000 Pay transaction costs related to this Offering ....................... 4,125 Payment on account of Portland Acquisition .................... 1,850 Management Agreement Acquisition . 1,419 Towers Purchase .................. 1,400 General corporate purposes ....... 312 ------- Total intended uses of proceeds $45,000 ======= (8) Pegasus is a newly-formed subsidiary of the Parent and has no material assets or operating history. The Parent's principal subsidiary is PM&C, which currently conducts through subsidiaries the Company's operations as described herein. Simultaneously with, and as a condition of, the closing of this Offering, the Parent will contribute to Pegasus all of its stock in PM&C, which consists of 161,500 PM&C Class A Shares in exchange for 3,380,435 shares of Class B Common Stock. 39 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPANY HISTORY The Company is a diversified media and communications company operating in three business segments: TV, DBS and Cable. The day-to-day operations of WDBD, WDSI and the Mayaguez Cable system were managed by the Company prior to their acquisition by the Company. WOLF was managed by Guyon Turner from its sign-on in 1985 until its acquisition by the Company. Each of the following acquisitions was accounted for using the purchase method of accounting. The following table presents information regarding completed acquisitions, the concurrent acquisition, the pending acquisition and the pending sale.
Acquisitions - --------------------------------------------------------------------------------------------------------------------------------- Adjusted Property Date Acquired Consideration(1) Form of Consideration - ------------------------------------ --------------- -------------- ----------------------------------------------- (Dollars in millions) Completed acquisitions: New England Cable systems ......... June 1991(2) $16.1(3) $6.0 cash and $10.1 of assumed liabilities, net Mayaguez, Puerto Rico Cable system . March 1993(4) $12.3(5) $12.3 of assumed liabilities, net WOLF/WILF/WWLF, WDSI and WDBD ..... May 1993(6) $24.2(7) $24.2 of assumed liabilities, net New England DIRECTV rights ........ June 1993(8) $ 5.0 $5.0 cash $14.2 cash, $0.4 assumed liabilities, $0.2 of Class WPXT .............................. January 1996(9) $15.8 A Common Stock and $1.0 of Class B Common Stock(10) $5.0 cash, $3.1 deferred obligation and the WTLH WTLH .............................. March 1996 $ 8.1 Warrants Portland LMA ...................... May 1996 $ 1.0 $1.0 of Class A Common Stock(10) Cable Acquisition ................. August 1996 $26.4 $25.0 cash and $1.4 of assumed liabilities, net Concurrent acquisition: Michigan/Texas DBS Acquisition .... (11) $29.8 $17.9 cash and $11.9 of Class A Common Stock(10) Pending acquisition: Ohio DBS Acquisition .............. (12) $12.0 $12.0 cash Pending sale: New Hampshire Cable Sale .......... (13) $ 7.1 $7.1 cash
- ------ (1) Adjusted consideration equals total consideration reduced by the amount of current assets obtained in connection with the acquisition and discounts realized by the Company and its affiliates on liabilities assumed in connection with certain of the acquisitions. See footnotes (3), (5) and (7). (2) The Connecticut and North Brookfield, Massachusetts Cable systems were acquired by the Company in August 1991 and July 1992, respectively. (3) An affiliate of the Company acquired for $6.0 million certain credit facilities having a face amount of $8.5 million which were assumed by the Company in connection with these acquisitions and later satisfied in full by the Company. Proceeds realized by the affiliate were subsequently used to fund the purchase of New England DIRECTV rights which the affiliate contributed to the Company. (4) This Cable system's day-to-day operations have been managed by the Company's executives since May 1, 1991. (5) In July 1995, the Company realized a $12.6 million pre-tax gain upon the extinguishment of certain credit facilities that were assumed by the Company in connection with this acquisition. (6) These television stations' day-to-day operations have been managed by the Company's executives since October 1991. (7) An affiliate of the Company acquired for $18.5 million certain credit facilities which were assumed by the Company in connection with these acquisitions. Immediately subsequent to this transaction, the Company's indebtedness under these credit facilities of approximately $23.5 million was discharged for approximately $18.5 million of cash and $5.0 million of stock issued to the affiliate. (8) The Company's rights purchases were initiated in June 1993 and completed in February 1995. The Company commenced DBS operations in October 1994. (9) The Company will acquire WPXT's FCC license and Fox Affiliation Agreement concurrently with the consummation of this Offering. (10) The number of shares of Common Stock to be issued in connection with these acquisitions will be based on the price of the Class A Common Stock to the public in this Offering. 40 (11) Consummation of the Michigan/Texas DBS Acquisition and this Offering will occur concurrently. (12) This Offering is not conditioned upon consummation of the Ohio DBS Acquisition. The Company anticipates that the Ohio DBS Acquisition will occur after the consummation of this Offering; however, there can be no assurance that the Ohio DBS Acquisition will be completed on the terms described herein or at all. See "Risk Factors -- Risks Attendant to Acquisition Strategy." (13) This Offering is not conditioned upon consummation of the New Hampshire Cable Sale. The Company anticipates that the New Hampshire Cable Sale will occur after consummation of this Offering; however, there can be no assurance that the New Hampshire Cable Sale will be completed on the terms described herein or at all. REORGANIZATION The Company's Combined Financial Statements include the accounts of PM&C, PM&C's subsidiaries, Towers and the Management Company. Concurrently with the consummation of this Offering, the Parent will contribute all of the PM&C Class A Shares to Pegasus for 3,380,435 shares of Class B Common Stock. The Company will offer through the Registered Exchange Offer to exchange all of the PM&C Class B Shares for 191,792 shares of Class A Common Stock, in the aggregate. Upon consummation of this Offering the Company will acquire the assets of Towers for $1.4 million in cash. The Company will also acquire the Management Agreement together with certain net assets, including approximately $1.4 million of accrued management fees, for $19.6 million of Class B Common Stock (valued at the price to the public in this Offering) and approximately $1.4 million in cash. Although the Company anticipates that all of the holders of the PM&C Class B Shares will accept the Registered Exchange Offer, the possibility remains that some of the PM&C Class B Shares will not be exchanged and that PM&C will not be a wholly owned subsidiary of Pegasus. In such event, the Company's Combined Financial Statements would include appropriate disclosure of such minority interests. See "Risk Factors -- Potential Effect on Company of Minority Ownership of PM&C Capital Stock." RESULTS OF OPERATIONS TV revenues are derived from the sale of broadcast air time to local and national advertisers. DBS revenues are derived from monthly customer subscriptions, pay-per-view services, DSS equipment rentals, leases and installation charges. Cable revenues are derived from monthly subscriptions, pay-per-view services, subscriber equipment rentals, home shopping commissions, advertising time sales and installation charges. The Company's location operating expenses consist of (i) programming expenses, (ii) marketing and selling costs, including advertising and promotion expenses, local sales commissions, and ratings and research expenditures, (iii) technical and operations costs, and (iv) general and administrative expenses. TV programming expenses include the amortization of long-term program rights purchases, music license costs and "barter" programming expenses which represent the value of broadcast air time provided to television program suppliers in lieu of cash. DBS programming expenses consist of amounts paid to program suppliers and also include DSS authorization charges and satellite control fees, each of which is paid on a per subscriber basis, and DIRECTV royalties which are equal to 5% of program service revenues. Cable programming expenses consist of amounts paid to program suppliers on a per subscriber basis. 41 SUMMARY COMBINED OPERATING RESULTS
Six Months Year Ended December 31, Ended June 30, ---------------------------------- --------------------- 1993 1994 1995 1995 1996 --------- --------- --------- -------- --------- (Dollars in thousands) Net revenues: TV ................................. $10,307 $17,808 $19,973 $ 8,861 $11,932 DBS ................................ -- 174 1,469 528 1,568 Cable: Puerto Rico Cable ................ 3,187 3,842 4,007 2,005 2,044 New England Cable ................ 5,947 6,306 6,599 3,172 3,582 ------- ------- ------- ------- ------- Total Cable net revenues ........ 9,134 10,148 10,606 5,177 5,626 ------- ------- ------- ------- ------- Other .............................. 46 61 100 36 56 ------- ------- ------- ------- ------- Total ......................... 19,487 28,191 32,148 14,602 19,182 ======= ======= ======= ======= ======= Location operating expenses: TV ................................. 7,564 12,380 13,933 6,714 8,271 DBS ................................ -- 210 1,379 622 1,261 Cable: Puerto Rico Cable ................ 1,654 2,319 2,450 1,244 1,857 New England Cable ................ 3,001 3,226 3,341 1,668 1,230 ------- ------- ------- ------- ------- Total Cable location operating expenses ....................... 4,655 5,545 5,791 2,912 3,087 ------- ------- ------- ------- ------- Other .............................. 16 18 38 14 9 ------- ------- ------- ------- ------- Total ......................... 12,235 18,153 21,141 10,262 12,628 ======= ======= ======= ======= ======= Location Cash Flow(1): TV ................................. 2,744 5,428 6,040 2,147 3,661 DBS ................................ -- (36) 90 (94) 307 Cable: Puerto Rico Cable ................ 1,533 1,523 1,557 761 814 New England Cable ................ 2,945 3,080 3,258 1,504 1,725 ------- ------- ------- ------- ------- Total Cable Location Cash Flow... 4,478 4,603 4,815 2,265 2,539 ------- ------- ------- ------- ------- Other .............................. 30 43 62 22 47 ------- ------- ------- ------- ------- Total ......................... $ 7,252 $10,038 $11,007 $ 4,340 $ 6,554 ======= ======= ======= ======= ======= Other data: Growth in net revenues ............. 266% 45% 14% 16% 31% Growth in Location Cash Flow ....... 175% 38% 10% 9% 51%
- ------ (1) Location Cash Flow is defined as net revenues less location operating expenses. Location operating expenses consist of programming, barter programming, general and administrative, technical and operations, marketing and selling expenses. Although Location Cash Flow is not a measure of performance under generally accepted accounting principles, the Company believes that Location Cash Flow is accepted within the Company's business segments as a generally recognized measure of performance and is used by analysts who report publicly on the performance of companies operating in such segments. Nevertheless, this measure should not be considered in isolation or as a substitute for income from operations, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 The Company's net revenues increased by approximately $4,580,000 or 31% for the six months ended June 30, 1996 as compared to the same period in 1995 as a result of (i) a $3,071,000 or 35% increase in TV revenues of which $717,000 or 23% was due to ratings growth which the Company was able to convert into higher revenues and $2,354,000 or 77% was due to acquisitions made in the first quarter of 1996, (ii) a $1,040,000 or 197% increase in revenues as a result of an increase in the number of DBS subscribers, (iii) a $39,000 or 2% increase in Puerto Rico Cable revenues due primarily to a rate increase in April, (iv) a $410,000 or 13% increase in New England Cable revenues due primarily to rate increases and new combined service packages, and (v) a $20,000 increase in Tower rental income. The Company's total location operating expenses increased by approximately $2,366,000 or 23% for the six months ended June 30, 1996 as compared to the same period in 1995 as a result of (i) a $1,557,000 or 42 23% increase in TV operating expenses as the net result of a $20,000 or 1% decrease in same station direct operating expenses and a $1,577,000 increase attributable to stations acquired in the first quarter of 1996, (ii) a $639,000 or 103% increase in operating expenses generated by the Company's DBS operations due to an increase in programming costs of $456,000, royalty costs of $45,000, and other DIRECTV costs such as security, authorization fees and telemetry and tracking charges totaling $138,000, (iii) a $14,000 or 1% decrease in Puerto Rico Cable operating expenses due primarily to reduced contractor and converter repair work that was brought "in house," (iv) a $189,000 or 11% increase in New England Cable operating expenses due primarily to increases in programming costs associated with the new combined service packages, and (v) a $5,000 decrease in administrative expenses. As a result of these factors, Location Cash Flow increased by $2,214,000 or 51% for the six months ended June 30, 1996 as compared to the same period in 1995 as a result of (i) a $1,514,000 or 71% increase in TV Location Cash Flow of which $736,000 or 49% was due to an increase in same station Location Cash Flow and $778,000 or 51% was due to an increase attributable to stations acquired in the first quarter 1996, (ii) a $401,000 increase in DBS Location Cash Flow, (iii) a $53,000 or 7% increase in Puerto Rico Cable Location Cash Flow, (iv) a $221,000 or 15% increase in New England Cable Location Cash Flow, and a $25,000 increase in Tower Location Cash Flow. Although Location Cash Flow is not a measure of performance under generally accepted accounting principles, the Company believes that Location Cash Flow is accepted within the Company's business segments as a generally recognized measure of performance and is used by analysts who report publicly on the performance of companies operating in such segments. Nevertheless, this measure should not be considered in isolation or as a substitute for income from operations, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. As a result of these factors, incentive compensation, which is calculated based on increases in Location Cash Flow, increased by approximately $74,000 or 21% for the six months ended June 30, 1996 as compared to the same period in 1995. Corporate expenses increased by $96,000 or 16% for the six months ended June 30, 1996 as compared to the same period in 1995 primarily due to the initiation of public reporting requirements for PM&C. Depreciation and amortization expense increased by approximately $978,000 or 25% for the six months ended June 30, 1996 as compared to the same period in 1995 as the Company increased its fixed and intangible assets as a result of two completed acquisitions during the first quarter of 1996. As a result of these factors, income from operations increased by approximately $1.1 million for the six months ended June 30, 1996 as compared to the same period in 1995. Interest expense increased by approximately $2.2 million or 66% for the six months ended June 30, 1996 as compared to the same period in 1995 as a result of a combination of the Company's issuance of the Notes on July 7, 1995 and an increase in debt associated with the Company's 1996 acquisitions. A portion of the proceeds from the issuance of the Notes was used to retire floating rate debt on which the effective interest rate was lower than the 12.5% interest rate under the Notes. The Company's net loss increased by $827,000 for the six months ended June 30, 1996 as compared to the same period in 1995 and was the net result of a increase in income from operations of approximately $1.1 million, an increase in interest expense of $2.2 million, an increase in interest income of $151,000, a decrease in the provision for income taxes of $143,000 and a decrease in other expenses of approximately $23,000. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 The Company's net revenues increased by approximately $4.0 million or 14% in 1995 as compared to 1994 as a result of (i) a $2.2 million or 12% increase in TV revenues due to ratings growth and improved economic conditions, within the Company's markets, which the Company was able to convert into higher revenues, (ii) a $1.3 million increase in revenues from DBS operations which commenced in the fourth 43 quarter of 1994, (iii) a $165,000 or 4% increase in Puerto Rico Cable revenues due primarily to a rate increase implemented in March 1995, (iv) a $293,000 or 5% increase in New England Cable revenues due to an increase in the number of subscribers and rate increases in the third quarter of 1995, and (v) a $39,000 increase in Tower rental income. The Company's location operating expenses increased by approximately $3.0 million or 16% in 1995 as compared to 1994 as a result of (i) a $1.6 million or 13% increase in TV operating expenses primarily due to increases in programming, sales and promotion expenses, (ii) a $1.2 million increase in DBS operating expenses primarily due to increases in programming costs which are payable based on revenues and the number of subscribers, (iii) a $131,000 or 6% increase in Puerto Rico Cable operating expenses due primarily to an increase in programming costs for existing channels, as well as increases in the number of Spanish language channels offered by the system, (iv) a $115,000 or 4% increase in New England Cable operating expenses due primarily to increases in programming costs, and (v) a $20,000 increase in Tower administrative expenses. As a result of these factors, Location Cash Flow increased by approximately $969,000 or 10% in 1995 as compared to 1994 as a result of (i) a $612,000 or 11% increase in TV Location Cash Flow, (ii) a $126,000 or 350% increase in DBS Location Cash Flow, (iii) a $34,000 or 2% increase in Puerto Rico Cable Location Cash Flow, (iv) a $178,000 or 6% increase in New England Cable Location Cash Flow, and (v) a $19,000 increase in Tower Location Cash Flow. As a result of the increase in Location Cash Flow, incentive compensation increased by approximately $96,000 or 22% in 1995 as compared to 1994. Corporate expenses decreased by approximately $142,000 or 9% in 1995 as compared to 1994 primarily as a result of the transfer of certain functions from corporate office staff to operating company staff. Depreciation and amortization expense increased by approximately $1.8 million or 26% in 1995 as compared to 1994 primarily as a result of the amortization of the Company's DBS rights and deferred financing costs. As a result of these factors, income from operations decreased by approximately $796,000 in 1995 as compared to 1994. Interest expense increased by approximately $2.8 million or 48% in 1995 as compared to 1994 as a result of the Company's issuance of the Notes on July 7, 1995. A portion of the proceeds from issuance of the Notes was used to retire floating rate debt on which the effective interest rate was lower than the 12.5% interest rate under the Notes. The Company's net income increased by approximately $7.7 million in 1995 as compared to 1994 as a net result of a decrease in income from operations of approximately $796,000, an increase in interest expense of $2.8 million, an increase in interest income of $370,000, a decrease in income taxes of $110,000, a decrease in other expenses of approximately $21,000 and an increase in extraordinary items of $10.8 million for the reasons described in "-- Liquidity and Capital Resources." YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 The Company's results for 1994 and 1993 are not directly comparable. The 1994 results include a full year of operations for all the Company's business segments. The 1993 results include TV operations from May 1, 1993, Puerto Rico Cable results from March 1, 1993 and full year results for New England Cable. The Company's net revenues increased by approximately $8.7 million or 45% in 1994 as compared to 1993 as a result of (i) a $7.5 million increase or 73% increase in TV revenues, of which $4.0 million or 53% was due to aquisitions made in May 1993 and $3.5 million or 47% was due to ratings growth that the Company was able to convert into higher revenues, (ii) a $174,000 of DBS revenues generated in 1994, the Company's first year of DBS operations, (iii) a $655,000 or 21% increase in Puerto Rico Cable revenues, (iv) a $360,000 or 6% increase in New England Cable revenues, and (v) a $15,000 increase in Tower rental income. 44 The Company's location operating expenses increased by approximately $5.9 million or 48% in 1994 as compared to 1993 as a result of (i) a $4.8 million or 64% increase in TV operating expenses, of which $3.4 million or 71% was due to operating the three TV stations for a full year and the remaining $1.4 million or 29% was due to the replacement of free programming such as infomercials with syndicated programming and sales expense increases of 73% which are a direct function of the increase in revenues, (ii) $210,000 of DBS operating expenses incurred in 1994, the Company's first year of DBS operations, (iii) a $665,000 or 40% increase in Puerto Rico Cable operating expenses primarily from operating the system for a full year, but also due to programming cost increases which were not passed on to subscribers due to rate freezes imposed by the 1992 Cable Act (as defined), (iv) a $225,000 or 8% increase in New England Cable operating expenses, as a result of subscriber growth and programming cost increases which were not passed on to subscribers due to rate freezes imposed by the 1992 Cable Act, and (v) a $2,000 increase in tower administrative expenses. As a result of these factors, Location Cash Flow increased by $2.8 million or 38% in 1994 as compared to 1993 as a result of (i) a $2.7 million or 98% increase in TV Location Cash Flow, (ii) a negative DBS Location Cash Flow of $36,000 in the Company's first year of DBS operations, (iii) a $10,000 or 1% decrease in Puerto Rico Cable Location Cash Flow, (iv) a $135,000 or 5% increase in New England Cable Location Cash Flow, and (v) a $13,000 increase in Tower Location Cash Flow. As a result of the increase in Location Cash Flow, incentive compensation increased by approximately $240,000 or 125% for year ended December 31, 1994 as compared to the same period in 1993. Corporate expenses increased by approximately $241,000 or 19% in 1994 as compared to 1993 due primarily to corporate staff additions related to the Company's 1993 acquisitions. Depreciation and amortization increased by $962,000 or 16% in 1994 as compared to 1993 due primarily to the acquisitions described above. As a result of these factors, income from operations increased by approximately $1.3 million in 1994 as compared to 1993. Interest expense increased by approximately $1.6 million or 36% in 1994 as compared to 1993 primarily as a result of increases in interest charges on the Company's floating rate debt and the inclusion of a full year of interest expense in 1994 on the indebtedness assumed by the Company in connection with the acquisitions of the three television stations and the Mayaguez Cable system. Other expenses decreased by approximately $155,000 in 1994 as compared to 1993 as a result of a tax settlement made during 1993 with the Puerto Rico Treasury Department in connection with withholding taxes on program payments made by the Puerto Rico Cable system from 1987 through 1993 which was recorded in other expenses in 1993. Income taxes increased by approximately $140,000 in 1994 as compared to 1993 due principally to deferred income taxes recorded in connection with the conversion of certain of the Company's subsidiaries from partnership to corporate form during 1994. As a result of certain refinancing transactions that occurred during 1994, the Company recorded an extraordinary loss of approximately $633,000 representing the write-off of the balance of deferred finance costs related to the refinanced indebtedness. As a result of these factors, the Company's net loss increased by approximately $845,000 in 1994 as compared to 1993. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity have been the net cash provided by its TV and Cable operations and credit available under its credit facilities. Additionally, the Company had $4.9 million in a restricted cash account that was used to pay interest on the Company's Notes in July 1996. The Company's principal uses of its cash have been to fund acquisitions, to meet its debt service obligations, to fund investments in its TV and Cable technical facilities and to fund investments in Cable and DBS customer premises equipment that is rented or leased to subscribers. 45 During the six months ended June 30, 1996, net cash utilized by operations was approximately $2.0 million, which together with $12.0 million of cash on hand and $8.8 million of net cash provided by the Company's credit facility and $5.0 million of restricted cash was used to fund investing activities of $20.6 million. Investment activities consisted of (i) the acquisitions of the principal tangible assets of television station WPXT and the Tallahassee Acquisition for approximately $17.1 million, (ii) the purchase of an office facility for the Company's Connecticut Cable operations for $135,000, (iii) the purchase of DSS units used as rental and lease units for $562,000 and (iv) maintenance and other capital expenditures and intangibles totaling approximately $2.8 million. As of June 30, 1996, the Company's cash on hand (excluding restricted cash) approximated $3.2 million. During 1995, net cash provided by operations was approximately $4.8 million, which together with $1.4 million of cash on hand and $11.1 million of net cash provided by the Company's financing activities, was used to fund a $12.5 million distribution to the Parent and to fund investment activities totalling $5.2 million. Investment activities consisted of (i) the final payment of the deferred purchase price for the Company's New England DBS rights of approximately $1.9 million, (ii) the purchase of a new WDSI studio and office facility for $520,000, (iii) the purchase of a LIBOR cap for $300,000, (iv) the purchase of DSS units used as rental and lease units for $157,000, and (v) maintenance and other capital expenditures totalling approximately $2.3 million. During 1994, net cash provided by operations amounted to $2.8 million, which together with cash on hand and borrowings of $35.0 million was used to fund capital expenditures of $1.3 million, to pay a portion of the deferred purchase price of the DBS rights for $943,000, to repay debt totalling $34.0 million and to fund debt issuance costs of $1.6 million. During 1993, net cash provided by operations amounted to $1.7 million, which together with cash received in acquisitions of $804,000 and borrowings of $15.1 million, was used to fund maintenance and other capital expenditures of $885,000, to repay debt totalling $15.2 million and to fund debt issuance costs of $843,000. The Company completed the $85.0 million Notes offering on July 7, 1995. The Notes were issued pursuant to an Indenture between PM&C and First Union National Bank, as trustee. The Indenture restricts PM&C's ability to engage in certain types of transactions including debt incurrence, payment of dividends, investments in unrestricted subsidiaries and affiliate transactions. The Notes were sold at a $4.0 million discount. The proceeds from the Notes offering, together with cash on hand, were used to (i) repay approximately $38.6 million in loans and other obligations, (ii) repurchase $25.6 million of notes for approximately $13.0 million, which resulted in a $10.2 million extraordinary gain net of expenses, (iii) make a $12.5 million distribution to the Parent, (iv) escrow $9.7 million for the purpose of paying interest on the Notes, (v) pay $3.3 million in fees and expenses, and (vi) fund $8.8 million of the cash portion of the purchase price of the Portland Acquisition. During July 1995, the Company entered into the Old Credit Facility in the amount of $10.0 million from which $6.0 million was drawn in connection with the Portland and Tallahassee Acquisitions in the first quarter of 1996 and $2.8 million was drawn to fund deposits in connection with the Cable Acquisition. The Old Credit Facility was retired in August 1996 from borrowings under the New Credit Facility. The New Credit Facility is a seven-year, senior collateralized revolving credit facility and will be for $50.0 million upon completion of the lending consortium. Until such completion, or if other lenders do not join the consortium, the New Credit Facility will be for $35.0 million. The amount of the New Credit Facility will reduce quarterly beginning March 31, 1998. As of August 29, 1996, $31.6 million had been drawn under the New Credit Facility in connection with the retirement of the Old Credit Facility and the consummation of the Cable Acquisition. The New Credit Facility is intended to be used for general corporate purposes and to fund possible future acquisitions. Borrowings under the New Credit Facility are subject to among other things, PM&C's ratio of total funded debt to adjusted operating cash flow. Currently, no additional funds may be drawn under the New Credit Facility. Upon repayment of $6.0 million of the New Credit Facility from the proceeds of this Offering, the Company will be able to draw down an additional $6.0 million from the credit facility, subject to certain exceptions. The Company's ability to draw under the New Credit Facility increases as its Location Cash Flow increases. See "Description of Indebtedness -- New Credit Facility." The Company plans to use part of the net proceeds of this Offering to repay $6.0 million of debt under the New Credit Facility (but not to reduce the commitment level thereunder) and to fund the cash portion of 46 the Michigan/Texas DBS Acquisition. The Company believes that following the completion of the concurrent and pending acquisition it will have adequate resources to meet its working capital, maintenance capital expenditure and debt service obligations. The Company believes that the net proceeds of this Offering together with available borrowings under the New Credit Facility will give the Company the ability to fund acquisitions and other capital requirements in the future. However, there can be no assurance that the future cash flows of the Company will be sufficient to meet all of the Company's obligations and commitments. See "Risk Factors -- Substantial Indebtedness and Leverage." The Company closely monitors conditions in the capital markets to identify opportunities for the effective and prudent use of financial leverage. In financing its future expansion and acquisition requirements, the Company would expect to avail itself of such opportunities and thereby increase its indebtedness which could result in increased debt service requirements. The Company is currently contemplating issuing additional debt securities to refinance existing debt, to fund expansion and future acquisitions and/or to fund general corporate purposes. There can be no assurance that such debt financing can be completed on terms satisfactory to the Company or at all. The Company may also issue additional equity to fund its future expansion and acquisition requirements. CAPITAL EXPENDITURES The Company expects to incur capital expenditures in the aggregate of $14.7 million in 1996 and 1997 in comparison to $2.6 million in 1995. With the exception of recurring renewal and refurbishment expenditures of approximately $1.6 million per year, these capital expenditures are discretionary and nonrecurring in nature. The Company believes that substantial opportunities exist for it to increase Location Cash Flow through implementation of several significant capital improvement projects. In addition to recurring renewal and refurbishment expenditures, the Company's capital expenditure plans for 1996 and 1997,currently include (i) TV expenditures of approximately $6.1 million for broadcast television transmitter, tower and facility constructions and upgrades, (ii) DBS expenditures of approximately $4.1 million for DSS equipment purchases for lease and rental to the Company's DIRECTV subscribers and certain subscriber acquisition costs, and (iii) Cable expenditures of approximately $1.3 million for the interconnection of the Puerto Rico Cable systems and fiber upgrades in Puerto Rico and New England. Beyond 1997, the Company expects its ongoing capital expenditures to consist primarily of renewal and refurbishment expenditures totalling approximately $1.6 million annually. There can be no assurance that the Company's capital expenditure plans will not change in the future. OTHER As a holding company, Pegasus' ability to pay dividends is dependent upon the receipt of dividends from its direct and indirect subsidiaries. Under the terms of the Indenture, PM&C is prohibited from paying dividends prior to July 1, 1998. The payment of dividends subsequent to July 1, 1998 will be subject to the satisfaction of certain financial conditions set forth in the Indenture, and will also be subject to lender consent under the terms of the New Credit Facility. PM&C's ability to incur additional indebtedness is limited under the terms of the Indenture and the New Credit Facility. These limitations take the form of certain leverage ratios and are dependent upon certain measures of operating profitability. Under the terms of the New Credit Facility, capital expenditures and business acquisitions that do not meet certain criteria will require lender consent. The Company's revenues vary throughout the year. As is typical in the broadcast television industry, the Company's first quarter generally produces the lowest revenues for the year, and the fourth quarter generally produces the highest revenues for the year. The Company's 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. The Company believes that inflation has not been a material factor affecting the Company's business. In general, the Company's revenues and expenses are impacted to the same extent by inflation. Substantially all of the Company's indebtedness bear interest at a fixed rate. The Company has reviewed the provisions of Statements of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and believes that future implementation of the above standards will not have a material impact on the Company. 47 BUSINESS GENERAL The Company is a diversified media and communications company operating in three business segments: TV, DBS and Cable. The Company has grown through the acquisition and operation of media and communications properties characterized by clearly identifiable "franchises" and significant operating leverage, which enables increases in revenues to be converted into disproportionately greater increases in Location Cash Flow. OPERATING AND ACQUISITION STRATEGY The Company's operating strategy is to generate consistent revenue growth and to convert this revenue growth into disproportionately greater increases in Location Cash Flow. The Company seeks to achieve revenue growth (i) in TV by attracting a dominant share of the viewing of underserved demographic groups it believes to be attractive to advertisers and by developing aggressive sales forces capable of "overselling" its stations' share of those audiences, (ii) in DBS by identifying market segments in which DIRECTV programming will have strong appeal, developing marketing and promotion campaigns to increase consumer awareness of and demand for DIRECTV programming within those market segments and building distribution networks consisting of consumer electronics and satellite equipment dealers, programming sales agents and the Company's own direct sales force, and (iii) in Cable by increasing the number of its subscribers and revenue per subscriber through improvements in signal reception, the quality and quantity of its programming, line extensions and rate increases. The Company seeks to convert increases in revenues into disproportionately greater increases in Location Cash Flow through the use of the incentive plans, which reward employees in proportion to annual increases in Location Cash Flow, coupled with rigorous budgeting and strict cost controls. The Company's acquisition strategy is to identify media and communications businesses in which significant increases in Location Cash Flow may be realized and where the ratio of required investment to potential Location Cash Flow is low. After giving effect to the Transactions, the Company would have had pro forma net revenues and EBITDA of $51.0 million and $14.7 million, respectively, for the twelve months ended June 30, 1996. The Company's net revenues and EBITDA have increased at a compound annual growth rate of 98% and 84%, respectively, from 1991 to 1995. TV BUSINESS STRATEGY The Company's operating strategy in TV is focused on (i) developing strong local sales forces and sales management to maximize the value of its stations' inventory of advertising spots, (ii) improving the stations' programming, promotion and technical facilities in order to maximize their ratings in a cost-effective manner and (iii) maintaining strict control over operating costs while motivating employees through the use of incentive plans, which rewards Company employees in proportion to annual increases in Location Cash Flow. The Company seeks to maximize demand for each station's advertising inventory and thereby increase its revenue per spot. Each station's local sales force is incentivized to attract first-time television advertisers as well as provide a high level of service to existing advertisers. Sales management seeks to "oversell" the Company's share of the local audience. A television station oversells its audience share if its share of its market's television revenues exceeds its share of the viewing devoted to all stations in the market. Historically, the Company's stations have achieved oversell ratios ranging from 120% to 200%. The Company recruits and develops sales managers and salespeople who are aggressive, opportunistic and highly motivated. In addition, the Company seeks to make cost-effective improvements in its programming, promotion and transmitting and studio equipment in order to enable its stations to increase audience ratings in its targeted demographic segments. In purchasing programming, the Company seeks to avoid competitive program purchases and to take advantage of group purchasing efficiencies resulting from the Company's ownership of multiple stations. The Company also seeks to counter-program its local competitors in order to target specific audience segments which it believes are underserved. 48 The Company utilizes its own market research together with national audience research from its national advertising sales representative and program sources to select programming that is consistent with the demographic appeal of the Fox network, the tastes and lifestyles characteristic of the Company's markets and the counter-programming opportunities it has identified. Examples of programs purchased by the Company's stations include "Home Improvement," "Seinfeld," "The Simpsons," "Mad About You," and "Frazier" (off-network); "Star Trek: The Next Generation" and "Baywatch" (syndication); and "Jenny Jones," "Rosie O'Donnell," and various game shows (first run). In addition, the Company's stations purchase children's programs to complement the Fox Children's Network's Monday through Saturday programs. Each of the Company's stations is its market leader in children's viewing audiences, with popular syndicated programming such as Disney's "Aladdin" and "Gargoyles" complementing Fox programs such as the "Mighty Morphin Power Rangers" and "R.L. Stine's Goosebumps," currently the nation's highest-rated children's program on television. The Company's acquisition strategy in TV seeks to identify stations in markets of between 200,000 and 600,000 television households (DMAs 40 to 120) which have no more than four competitive commercial television stations licensed to them and which have a stable and diversified economic base. The Company has focused upon these markets because it believes that they have exhibited consistent and stable increases in local advertising and that television stations in them have fewer and less aggressive direct competitors. In these markets, the Company seeks television stations whose revenues and market revenue share can be substantially improved with limited increases in their fixed costs. The Company is actively seeking to acquire additional stations in new markets and to enter into LMAs with owners of stations or construction permits in markets where it currently owns and operates Fox affiliates. The Company has historically purchased Fox affiliates because (i) Fox affiliates generally have had lower ratings and revenue shares than stations affiliated with ABC, CBS and NBC and, therefore, greater opportunities for improved performance, and (ii) Fox affiliated stations retain a greater share of their inventory of advertising spots than do stations affiliated with ABC, CBS or NBC, thereby enabling these stations to retain a greater share of any increase in the value of their inventory. The Company is pursuing expansion in its existing markets through LMAs because second stations can be operated with limited additional fixed costs (resulting in high incremental operating margins) and can allow the Company to create more attractive packages for advertisers and program providers. THE STATIONS The following table sets forth general information for each of the Company's stations.
Number Acquisition Station Market of TV Station Date Affiliation Area DMA Households(1) Competitors(2) ---------------- -------------- ------------- --------------- ----- ------------- -------------- Existing Stations: WWLF-56/WILF-53/ WOLF-38(6) .... May 1993 Fox Northeastern PA 49 553,000 3 WPXT-51 ........ January 1996 Fox Portland, ME 79 344,000 3 WDSI-61 ........ May 1993 Fox Chattanooga, TN 82 320,000 4 WDBD-40 ........ May 1993 Fox Jackson, MS 91 287,000 3 WTLH-49 ........ March 1996 Fox Tallahassee, FL 116 210,000 3 Additional Stations: WOLF-38(6) ..... May 1993 UPN Northeastern PA 49 553,000 3 WWLA-35(7) ..... May 1996 UPN Portland, ME 79 344,000 3
Ratings Rank Oversell ---------------------- ---------- Station Prime(3) Access(4) Ratio(5) ---------------- --------- --------- ---------- Existing Stations: WWLF-56/WILF-53/ WOLF-38(6) .... 3 (tie) 1 166% WPXT-51 ........ 2 4 122% WDSI-61 ........ 4 3 125% WDBD-40 ........ 2 (tie) 2 114% WTLH-49 ........ 2 2 100% Additional Stations: WOLF-38(6) ..... N/A N/A N/A WWLA-35(7) ..... N/A N/A N/A
- ------ (1) Represents total homes in a DMA for each TV station as estimated by BIA. (2) Commercial stations not owned by the Company which are licensed to and operating in the DMA. (3) "Prime" represents local station rank in the 18 to 49 age category during "prime time" based on Nielsen estimates for May 1996. (4) "Access" indicates local station rank in the 18 to 49 age category during "prime time access" (6:00 p.m. to 8:00 p.m.) based on Nielsen estimates for May 1996. (5) The oversell ratio is the station's share of the television market net revenue divided by its in-market commercial audience share. The oversell ratio is calculated using 1995 BIA market data and 1995 Nielsen audience share data. (6) WOLF, WILF and WWLF are currently simulcast. Pending receipt of certain FCC approvals, the Company intends to separately program WOLF as an affiliate of UPN. (7) The Company anticipates programming WWLA pursuant to an LMA as an affiliate of UPN. 49 NORTHEASTERN PENNSYLVANIA Northeastern Pennsylvania is the 49th largest DMA in the United States comprising 17 counties in Pennsylvania with a total of 553,000 television households and a population of 1,465,000. In the past, the economy was primarily based on steel and coal mining, but in recent years has diversified to emphasize manufacturing, health services and tourism. The area is within a two-hour drive of both New York City and Philadelphia. In 1995, annual retail sales in this market totaled approximately $11.4 billion and total television advertising revenues in the Northeastern Pennsylvania DMA increased 3.5% from approximately $42.5 million to approximately $44.0 million. Northeastern Pennsylvania is one of only two DMAs in the country in which all TV stations licensed to it are UHF. In addition to WOLF, WWLF and WILF, which are licensed to Scranton, Hazelton and Williamsport, respectively, there are three commercial stations and one educational station operating in the Northeastern Pennsylvania DMA. The Northeastern Pennsylvania DMA also has an allocation for an additional channel, which is not operational.
Northeastern Pennsylvania DMA Statistics -------------------------------------------------- 1992 1993 1994 1995 1996(1) ------- ------- ------- ------- --------- Market Revenues (dollars in millions) . $ 35.0 $ 37.1 $ 42.5 $ 44.0 -- Market Growth ....................... -- 6.0% 14.6% 3.5% -- Station Revenue Growth .............. -- 10.0% 18.4% 11.9% -- Prime Rank (18-49) .................. 4 4 4 4 3 (tie) Access Rank (18-49) ................. 4 4 4 3 1 Oversell Ratio ...................... 196% 176% 166% 166% --
- ------ (1) Prime and access ratings ranks based on Nielson estimates for May 1996. The Company acquired WOLF and WWLF in May 1993 from a partnership of which Guyon W. Turner was the managing general partner, and also acquired WILF at the same time from a partnership unaffiliated with Mr. Turner. Mr. Turner is a Vice President of Pegasus and Vice President of the subsidiary that operates the Company's TV stations. He has been employed by the Company since it acquired WOLF and WWLF. Historically, WOLF, WWLF and WILF have been commonly programmed with WWLF and WILF operated as satellites of WOLF. However, the Company believes that it can achieve over the air coverage of the Northeastern Pennsylvania DMA comparable to that currently provided by WOLF, WWLF and WILF together by moving WWLF to a tower site occupied by the other stations in the market and by increasing the authorized power of WILF. The Company has filed an application with the FCC, which if granted, will enable the Company to accomplish this objective. This application is currently pending. If this application is granted by the FCC, the Company intends to relocate WWLF's transmitter and tower, to increase the power of WILF and to separately program WOLF as an affiliate of UPN. The continued ownership of WOLF by the Company following relocation of the WWLF tower may depend on changes in the FCC's ownership rules. See "-- Licenses, LMAs, DBS Agreements and Cable Franchises." PORTLAND, MAINE Portland is the 79th largest DMA in the United States, comprising 12 counties in Maine and New Hampshire with a total of 344,000 television households and a population of 902,000. Portland's economy is based on financial services, lumber, tourism, and its status as a transportation and distribution gateway for central and northern Maine. In 1995, annual retail sales in the Portland market totaled approximately $8.9 billion and the total television revenues in this market increased 4.0% from approximately $40.0 million to approximately $41.6 million. In addition to WPXT, there are three VHF and three UHF stations operating in the Portland DMA, including one VHF and two UHF educational stations. 50
Portland, Maine DMA Statistics ------------------------------------------------ 1992 1993 1994 1995 1996(1) ------- ------- ------- ------- ------- Market Revenues (dollars in millions) . $ 32.3 $ 34.3 $ 40.0 $ 41.6 -- Market Growth ........................ -- 6.2% 16.6% 4.0% -- Station Revenue Growth ............... -- 9.1% 18.0% 2.0% -- Prime Rank (18-49) ................... 4 4 4 2 2 Access Rank (18-49) .................. 4 4 4 3 4 Oversell Ratio ....................... 140% 144% 139% 122% --
- ------ (1) Prime and access ratings ranks based on Nielson estimates for May 1996. In the Portland Acquisition, the Company acquired television station WPXT, the Fox-affiliated television station serving the Portland DMA. Pursuant to the Portland LMA, the Company acquired an LMA with the holder of a construction permit for WWLA, a new TV station licensed to operate UHF channel 35 in the Portland market. Under the Portland LMA, the Company will lease facilities and provide programming to WWLA, retain all revenues generated from advertising, and make payments of $52,000 per year to the FCC license holder in addition to reimbursement of certain expenses. Construction of WWLA is expected to be completed in 1997. WWLA's offices, studio and transmission facilities will be co-located with WPXT. In April 1996, an application was filed with the FCC to significantly increase WWLA's authorized power in order to expand its potential audience coverage. That application is currently pending before the FCC. CHATTANOOGA, TENNESSEE Chattanooga is the 82nd largest DMA in the United States, comprising 18 counties in Tennessee, Georgia, North Carolina and Alabama with a total of 320,000 television households and a population of 842,000. Chattanooga's economy is based on insurance and financial services in addition to manufacturing and tourism. In 1995, annual retail sales in the Chattanooga market totaled approximately $7.1 billion and total television revenues in this market increased 2.4% from approximately $37.6 million to approximately $38.5 million. In addition to WDSI, there are three VHF and four UHF stations operating in the Chattanooga DMA, including one religious and two educational stations. The Company acquired WDSI in May 1993. From October 1991 through April 1993, the station was managed by the Company. See "Management and Certain Transactions."
Chattanooga, Tennessee DMA Statisitics ------------------------------------------------ 1992 1993 1994 1995 1996(1) ------- ------- ------- ------- ------- Market Revenues (dollars in millions) . $ 29.8 $ 31.0 $ 37.6 $ 38.5 -- Market Growth ........................ -- 4.0% 21.3% 2.4% -- Station Revenue Growth ............... -- 7.7% 38.6% 9.1% -- Prime Rank (18-49) ................... 4 4 4 4 4 Access Rank (18-49) .................. 3 4 4 4 3 Oversell Ratio ....................... 132% 119% 129% 125% --
- ------ (1) Prime and access ratings ranks based on Nielson estimates for May 1996. JACKSON, MISSISSIPPI Jackson is the 91st largest DMA in the United States, comprising 24 counties in central Mississippi with a total of 287,000 television households and a population of 819,000. Jackson is the capital of Mississippi and its economy reflects the state and local government presence as well as agriculture and service industries. Because of its central location, it is also a major transportation and distribution center. In 1995, annual retail sales in the greater Jackson market totaled approximately $6.1 billion and total television revenues in the market increased 10.8% from approximately $32.5 million to approximately $36.0 million. In addition to WDBD, there are two VHF and two UHF television stations operating in the Jackson DMA, including one educational station. The Jackson DMA also has an allocation for an additional television channel which is not operational. The Company acquired WDBD in May 1993. From October 1991 through April 1993, the station was managed by the Company. See "Management and Certain Transactions." 51
Jackson, Mississippi DMA Statistics -------------------------------------------------- 1992 1993 1994 1995 1996(1) ------- ------- ------- ------- --------- Market Revenues (dollars in millions) . $ 26.3 $ 28.4 $ 32.5 $ 36.0 -- Market Growth ........................ -- 8.0% 14.4% 10.8% -- Station Revenue Growth ............... -- 21.8% 17.2% 15.9% -- Prime Rank (18-49) ................... 3 3 3 3 2 (tie) Access Rank (18-49) .................. 4 4 3 3 2 Oversell Ratio ....................... 132% 119% 125% 114% --
- ------ (1) Prime and access ratings ranks based on Nielson estimates for May 1996. TALLAHASSEE, FLORIDA The Tallahassee DMA is the 116th largest in the United States comprising 18 counties in northern Florida and southern Georgia with a total of 210,000 television households and a population of 578,000. Tallahassee is the state capital of Florida and its major industries include state and local government as well as firms providing commercial service to North Florida's cattle, lumber, tobacco and farming industries. In 1995, annual retail sales in this market totaled $4.4 billion and total television advertising revenues increased 5.3% from approximately $18.9 million in 1994 to approximately $19.9 million. In addition to WTLH, there are two VHF and two UHF television stations operating in the Tallahassee DMA, including one educational station. An additional station licensed to Valdosta, Georgia broadcasts from a transmission facility located in the Albany, Georgia DMA. The Tallahassee DMA has allocations for three TV stations that are not operational.
Tallahassee, Florida DMA Statistics ---------------------------------------------------------- 1992 1993 1994 1995 1996(1) --------- --------- --------- --------- --------- Market Revenues (dollars in millions) .... $ 16.6 $ 17.2 $ 18.9 $ 19.9 -- Market Growth ............................ -- 3.6% 9.9% 5.3% -- Station Revenue Growth ................... -- 2.4% 31.7% 8.5% -- Prime Rank (18-49) ....................... 4 3 3 2 2 Access Rank (18-49) ...................... 3 3 2 3 2 Oversell Ratio ........................... 118% 100% 117% 100% --
- ------ (1) Prime and access ratings ranks based on Nielson estimates for May 1996. In March 1996, the Company acquired the principal tangible assets of WTLH and entered into an LMA to operate WTLH. In August 1996, the Company acquired WTLH's FCC license and its Fox Affiliation Agreement. WTLH has filed with the FCC an application which, if granted, will enable the Company to move WTLH's tower and transmitter facilities to a site approximately ten miles closer to Tallahassee and to increase its tower height and power. That application is currently pending before the FCC. The Company anticipates relocating WTLH's transmitter and tower to this site in 1997 to increase its audience coverage in the Tallahassee market. DBS DIRECTV DIRECTV is a multichannel DBS programming service initially introduced to United States television households in 1994. DIRECTV currently offers in excess of 175 channels of near laser disc quality video and CD quality audio programming and transmits via three high-power Ku band satellites, each containing 16 transponders. As of August 20, 1996, there were over 1.8 million DIRECTV subscribers. DIRECTV expects to have over 2.6 million subscribers by the end of 1996 and approximately ten million subscribers by the year 2000. The equipment required for reception of DIRECTV services (a DSS unit) includes an 18-inch satellite antenna, a digital receiver approximately the size of a standard VCR and a remote control, all of which are used with standard television sets. Each DSS receiver includes a "smart card" which is uniquely addressed to it. The smart card, which can be removed from the receiver, prevents unauthorized reception of DIRECTV services and retains billing information on pay-per-view usage, which information is sent at regular intervals from the DSS receiver telephonically to DIRECTV's authorization and billing system. DSS units also enable 52 subscribers to receive United States Satellite Broadcasting Company, Inc. ("USSB") programming. USSB is a DBS service whose programming consists of 25 channels of video programming transmitted via five transponders it owns on DIRECTV's first satellite. USSB primarily offers Time Warner and Viacom satellite programming services, such as multiple channels of HBO and Showtime, which are not available through DIRECTV but which are generally complementary to DIRECTV programming. A license to manufacture DSS units was initially awarded by Hughes to Thomson Consumer Electronics, Inc., the manufacturer of RCA-branded products ("RCA/Thomson"). This license provided RCA/Thomson with an exclusivity period, which ended in April 1995, covering the first one million DSS units. RCA/Thomson's DSS units retail for as low as $399. Hughes awarded a second license to Sony which provided Sony joint exclusivity with RCA/Thomson until December 1995. Hughes has awarded additional licenses to Hughes Network Systems, Toshiba Consumer Electronics, Samsung Electronics America, Inc., Sanyo Fisher Corporation, Daewoo Electronics Corporation of America, Uniden Corporation and Philips Electronics, N.V., whose production and distribution have commenced or are expected to commence in 1996. At the end of 1995, more than 20,000 retailers were selling DSS equipment and DIRECTV programming packages. In January 1996, DIRECTV entered into a strategic relationship with AT&T that is designed to accelerate DIRECTV's market penetration. The agreement calls for AT&T to invest $137.5 million for a 2.5% equity interest in DIRECTV with rights to purchase up to 30% of DIRECTV based on subscriber acquisition performance. The agreement gives AT&T an exclusive right to market, except in NRTC territories, DIRECTV services to all residential customers. In May 1996, AT&T began to offer DIRECTV programming and DSS receiving equipment to its 90 million customers utilizing its Universal Card to provide financing and its True Rewards(R) frequent buyers program. Additionally, DIRECTV has recently announced a joint venture with Microsoft to offer interactive programming and data services to be introduced in early 1997. THE COMPANY'S DBS OPERATIONS The Company owns, through agreements with the NRTC, the exclusive right to provide DIRECTV services in certain rural areas of Connecticut, Massachusetts, New Hampshire and New York. Upon consummation of the Michigan/Texas DBS Acquisition and the Ohio DBS Acquisition, it will also acquire exclusive rights to provide DIRECTV services in certain rural areas of Michigan, Texas and Ohio. The Company is the largest independent provider of DIRECTV services not affiliated with Hughes. The Company's New England DBS service area encompasses all of its New England Cable systems except for its systems in central Massachusetts. Its Michigan DBS service area covers nine counties in the Flint, Saginaw and thumb regions of Michigan, its Texas DBS service area covers seven counties approximately 45 miles south of the Dallas/Fort Worth metroplex and its Ohio DBS service area covers 11 counties in southern Ohio. 53
Homes Average Not Homes Monthly Total Passed Passed Penetration Revenue DIRECTV Homes in by by Total -------------------------------- Per Territory Territory Cable(1) Cable(2) Subscribers(3) Total Uncabled Cabled Subscriber(4) ----------------- ----------- --------- --------- -------------- ------- ---------- -------- ------------- Owned: Western New England ........ 288,273 41,465 246,808 5,208 1.8% 10.5% 0.3% New Hampshire ... 167,531 42,075 125,456 3,273 2.0% 6.6% 0.4% Martha's Vineyard and Nantucket .. 20,154 1,007 19,147 635 3.2% 51.7% 0.6% ----------- --------- --------- -------------- ------- ---------- -------- --------- Total .......... 475,958 84,547 391,411 9,116 1.9% 9.1% 0.4% $40.32 ----------- --------- --------- -------------- ------- ---------- -------- --------- To Be Acquired: Michigan ........ 241,713 61,774 179,939 5,213 2.2% 6.6% 0.6% $43.35 Texas ........... 149,530 54,504 95,026 4,449 3.0% 6.2% 1.1% $36.95 Ohio ............ 167,558 32,180 135,378 4,355 2.6% 10.1% 0.8% $39.27 ----------- --------- --------- -------------- ------- ---------- -------- --------- Total .......... 558,801 148,458 410,343 14,017 2.5% 7.2% 0.8% $40.10 ----------- --------- --------- -------------- ------- ---------- -------- --------- Total ......... 1,034,759 233,005 801,754 23,133 2.2% 7.9% 0.6% $40.18 =========== ========= ========= ============== ======= ========== ======== =========
- ------ (1) Based on NRTC estimates of primary residences derived from 1990 U.S. census data and after giving effect to a 1% annual housing growth rate and seasonal residence data obtained from county offices. Does not include business locations. Includes approximately 22,200 seasonal residences. (2) Based on NRTC estimates of primary residences derived from 1990 U.S. census data and after giving effect to a 1% annual housing growth rate and seasonal residence data obtained from county offices. Does not include business locations. Includes approximately 80,300 seasonal residences. (3) As of August 1996. (4) Based upon July 1996 revenues and average July 1996 subscribers. BUSINESS STRATEGY As the exclusive provider of DIRECTV services in its purchased territories, the Company provides a full range of services, including installation, authorization and financing of equipment for new customers as well as billing, collections and customer service support for existing subscribers. The Company's operating strategy in DBS is to (i) establish strong relationships with retailers, (ii) build its own direct sales and distribution channels, (iii) develop local and regional marketing and promotion to supplement DIRECTV's national advertising, and (iv) offer aggressively priced equipment rental, lease and purchase options. The Company anticipates continued significant growth in subscribers and operating profitability in DBS through increased penetration of DIRECTV territories it currently owns and will acquire pursuant to the Michigan/Texas DBS Acquisition and the Ohio DBS Acquisition. The Company's DBS operations achieved positive Location Cash Flow in 1995, its first full year of operations. The Company's DIRECTV subscribers currently generate revenues of approximately $40 per month at an average gross margin of 34%. The Company's remaining expenses consist of marketing costs incurred to build its growing base of subscribers and overhead costs which are predominantly fixed. As a result, the Company believes that future increases in its DBS revenues will result in disproportionately greater increases in Location Cash Flow. For the first six months of 1996, the Company has been adding DIRECTV subscribers at approximately twice the rate of the same period in 1995. The Company also believes that there is an opportunity for additional growth through the acquisition of DIRECTV territories held by other NRTC members. NRTC members are the only independent providers of DIRECTV services. In excess of 250 NRTC members have collectively purchased DIRECTV territories consisting of approximately 7.7 million television households in predominantly rural areas of the United States, which are among the most likely to subscribe to DBS services. These territories comprise 8% of United States television households, but represent between 25% and 30% of DIRECTV's existing subscriber base. As the largest, and only publicly held, independent provider of DIRECTV services, the Company believes that it is well positioned to achieve economies of scale through the acquisition of DIRECTV territories held by other NRTC members. DIRECTV PROGRAMMING DIRECTV programming includes (i) cable networks, broadcast networks and audio services available for purchase in tiers for a monthly subscription, (ii) premium services available a la carte or in tiers for a monthly subscription, (iii) sports programming (including regional sports networks and seasonal college and major professional league sports packages) available for a yearly, seasonal or monthly subscription and (iv) movies 54 and events available for purchase on a pay-per-view basis. Satellite and premium services available a la carte or for a monthly subscription are priced comparably to cable. Pay-per-view movies are generally $2.99 per movie. Movies recently released for pay-per-view are available for viewing on multiple channels at staggered starting times so that a viewer generally would not have to wait more than 30 minutes to view a particular pay-per-view movie. The following is a summary of some of the more popular programming packages currently available from the Company's DIRECTV operations: Plus DIRECTV: Package of 45 channels (including 29 CD audio channels) which retails for $14.95 per month and includes a $2.50 coupon for purchase of pay-per-view movies or events. Plus DIRECTV consists of channels not typically offered on most cable systems and is intended to be sold to existing cable subscribers to augment their cable satellite and basic services. Economy or Select Choice: Two packages of 19 to 33 channels which retail for between $16.95 and $19.95 per month and include a $2.50 coupon for purchase of pay-per-view movies or events. The Economy service is available only in DIRECTV territories held by NRTC members. Economy and Select Choice are often offered in conjunction with DSS rental or leasing options to create a total monthly payment comparable to the price of cable. Total Choice: Package of 74 channels (including 29 CD audio channels, two Disney channels, Encore Multiplex and an in-market regional sports network) which retails for $29.95 per month and includes a $2.50 coupon for purchase of pay-per-view movies or events. This is DIRECTV's flagship package. DIRECTV Limited: Package comprising Bloomberg Information Television and the DIRECTV Preview Channel which retails for $4.95 per month and includes a $2.50 coupon for purchase of pay-per-view movies or events. This is intended for subscribers who are principally interested in DIRECTV's pay-per-view movies, sports and events. Playboy: Adult service available monthly for $9.95 or 12 hours for $4.99. Encore Multiplex: Seven theme movie services (Love Stories, Westerns, Mystery, Action, True Stories, WAM! and Encore) for $5.95 per month (free with Total Choice). Networks: ABC (East and West), NBC (East and West), CBS (East and West), Fox and PBS available individually for $0.99 per month or together for $4.95 per month. (Available only to subscribers unable to receive networks over-the-air and who have not subscribed to cable in the last 90 days.) Sports Choice: Package of 24 channels (including 19 regional networks) and five general sports networks (the Golf channel, NewSport, Speedvision, Classic Sports Network and Outdoor Life) for $12.00 per month on a stand alone basis. NBA League Pass: Out-of-market NBA games for $149.00 per season. NHL Center Ice: Out-of-market NHL games for $119.00 per season. NFL Sunday Ticket: All out-of-market NFL Sunday games for $159.00 per season. MLB Extra Innings: Up to 1,000 out-of-market major league baseball games for $139.00 per season. DIRECT Ticket: Movies available for pay-per-view from all major Hollywood studios at $2.99 and special events at a range of $14.99 to $30.00. STARZ! Package: Package of 3 channels which include STARZ! (East and West) and the Independent Film Channel for $5.00 per month. DISTRIBUTION, MARKETING AND PROMOTION In general, subscriptions to DIRECTV programming are offered through commissioned sales representatives who are also authorized by the manufacturers to sell DSS units. DIRECTV programming is offered (i) directly through national retailers (e.g. Sears, Circuit City and Best Buy) selected by DIRECTV, 55 (ii) through consumer electronics dealers authorized by DIRECTV to sell DIRECTV programming, (iii) through satellite dealers and consumer electronics dealers authorized by five regional sales management agents ("SMAs") selected by DIRECTV, (iv) through members of the NRTC who, like the Company, have agreements with the NRTC to provide DIRECTV services, and (v) by AT&T, which has the exclusive right to market, except in NRTC territories, DIRECTV services to all residential customers. All programming packages currently must be authorized by the Company in its service areas. See "Business -- Licenses, LMAs, DBS Agreements, and Cable Franchises." The Company markets DIRECTV programming services and DSS units in its distribution area in three separate but overlapping ways. In residential market segments in which authorized DSS dealers exist, the Company seeks to develop close, cooperative relationships with these dealers in which the Company provides marketing, subscriber authorization, installation and customer service support, but where the purchase, inventory and sale of the DSS unit is handled by the dealers. In these circumstances, the dealer earns a profit on the sale of the DSS unit and a commission payable by the Company from the sale of DIRECTV programming, while the Company may receive a profit from a subscriber's initial installation and receives the programming service revenues payable by the subscriber. Many DSS dealers are also authorized to offer the Company's lease program. In addition, the Company has developed a network of its own sales agents ("Programming Sales Agents") from among local satellite dealers, utilities, cable installation companies, retailers and other contract sales people or organizations. Programming Sales Agents earn commissions on the lease or sale of DSS units, as well as on the sale of DIRECTV programming. In residential market segments in which a significant number of potential subscribers wish to lease DSS units and in all commercial market segments, the Company utilizes its own telemarketing and direct sales agents to sell DIRECTV residential and commercial programming packages, to sell or lease DSS units and to provide subscriber installations. In these instances, the Company earns a profit from the sale, lease or rental of the DSS unit, from a subscriber's initial installation and from the programming service revenues payable by the subscriber. The Company offers a lease program in which subscribers may lease DSS units for $15 per month. The initial lease term is 36 months, at the end of which the subscriber has the option to continue to pay $15 a month for an additional 12 months to purchase the unit or continue on a month-to-month basis. Subscribers that lease equipment must also select a monthly programming package from DIRECTV throughout the term of the lease. Additional receivers can be leased for an additional $15 per month. Programming authorizations for additional outlets are $1.95 per month. There is a one-time charge of $199 for standard installations. The lease program is available only to subscribers that reside in the Company's service area. The Company seeks to identify and target market segments within its service area in which it believes DIRECTV programming services will have strong appeal. Depending upon their individual circumstances, potential subscribers may subscribe to DIRECTV services as a source of multichannel television where no other source currently exists, as a substitute for existing cable service due to its high price or poor quality or as a source of programming which is not available via cable but which is purchased as a supplement to existing cable service. The Company seeks to develop promotional campaigns, marketing methods and distribution channels designed specifically for each market segment. The Company's primary target market consists of residences which are not passed by cable or which are passed by older cable systems with fewer than 40 channels. The Company estimates that after giving effect to the Michigan/Texas DBS Acquisition and the Ohio DBS Acquisition, its exclusive DIRECTV territories will contain approximately 233,000 television households which are not passed by cable and approximately 488,000 television households which are passed by older cable systems with fewer than 40 channels. The Company actively markets DIRECTV services as a primary source of television programming to potential subscribers in this market segment since the Company believes that it will achieve its largest percentage penetration in this segment. The Company also targets potential subscribers who are likely to be attracted by specific DIRECTV programming services. This market segment includes (i) residences in which a high percentage of the viewing is devoted to movie rentals or sports, (ii) residences in which high fidelity audio or video systems have been 56 installed and (iii) commercial locations (such as bars, restaurants, hotels and private offices) which currently subscribe to pay television or background music services. The Company estimates that after giving effect to the Michigan/Texas DBS Acquisition and the Ohio DBS Acquisition, its exclusive DIRECTV territories will contain approximately 83,000 commercial locations in its DBS territory. The Company also targets seasonal residences in which it believes that the capacity to start and discontinue DIRECTV programming seasonally or at the end of a rental term has significant appeal. These subscribers are easily accommodated on short notice without the requirement of a service call because DIRECTV programming is a fully "addressable" digital service. The Company estimates that after giving effect to the Michigan/Texas DBS Acquisition and the Ohio DBS Acquisition, its exclusive DIRECTV territories will contain in excess of 111,000 seasonal residences in this market segment. Additional target markets include apartment buildings, multiple dwelling units and private housing developments. While DSS units designed specifically for use in such locations have not yet been introduced commercially, RCA/Thomson has announced its intention to offer such a product for sale by the end of 1996. Finally, DIRECTV has announced its intention to utilize a portion of the additional capacity from its third satellite and improved compression to offer, in a joint venture with Microsoft, one or more data services to residences and businesses in 1997. When this occurs, the Company believes that additional market segments will develop for data services within its service areas. The Company benefits from national promotion expenditures incurred by DIRECTV, USSB and licensed manufacturers of DSS, such as RCA/Thomson and Sony, to increase consumer awareness and demand for DIRECTV programming and DSS units. The Company benefits as well from national, regional and local advertising placed by national retailers, satellite dealers and consumer electronics dealers authorized to sell DIRECTV programming and DSS units. The Company also undertakes advertising and promotion cooperatively with local dealers designed for specific market segments in its distribution area, which are placed through local newspapers, television, radio and yellow pages. The Company supplements its advertising and promotion campaigns with direct mail, telemarketing and door-to-door direct sales. CABLE BUSINESS STRATEGY The Company operates cable systems whose revenues and Location Cash Flow it believes can be increased with limited increases in fixed costs. In general, the Company's Cable systems (i) have the capacity to offer in excess of 50 channels of programming, (ii) are "addressable" and (iii) serve communities where off-air reception is poor. The Company's business strategy in cable is to achieve revenue growth by (i) adding new subscribers through improved signal quality, increases in the quality and the quantity of programming, housing growth and line extensions and (ii) increasing revenues per subscriber through new program offerings and rate increases. The Company emphasizes the development of strong engineering management and the delivery of a reliable, high-quality signal to subscribers. The Company adds new programming (including new cable services, premium services and pay-per-view movies and events) and invests in additional channel capacity, improved signal delivery and line extensions to the extent it believes that it can add subscribers at a low incremental fixed cost. The Company believes that significant opportunities for growth in revenues and Location Cash Flow exist in Puerto Rico from the delivery of traditional cable services. Cable penetration in Puerto Rico averages 34% (versus a United States average of 65% to 70%). The Company believes that this low penetration is due principally to the limited amount of Spanish language programming offered on Puerto Rico's cable systems. In contrast, Spanish language programming represents virtually all of the programming offered by television stations in Puerto Rico. The Company believes that cable penetration in its Puerto Rico Cable systems will increase over the next five years as it substitutes Spanish language programming for much of the English language cable programming currently offered. The Company may also selectively expand its presence in Puerto Rico. 57 THE CABLE SYSTEMS The following table sets forth general information for the Company's Cable systems.
Average Monthly Homes in Homes Basic Revenue Channel Franchise Passed Basic Service per Cable Systems Capacity Area(1) by Cable(2) Subscribers(3) Penetration(4) Subscriber ------------------- ---------- ----------- ----------- -------------- -------------- ------------ Owned: New England ....... (5) 29,400 28,600 20,100 70% $33.08 Mayaguez .......... 62 38,300 34,000 10,900 32% $32.68 San German(6) ..... 50(7) 72,400 47,700 16,300 34% $30.82 ----------- ----------- -------------- -------------- ------------ Total Puerto Rico 110,700 81,700 27,200 34% $31.57 ----------- ----------- -------------- -------------- ------------ To Be Sold: New Hampshire ..... (8) 6,500 6,100 4,600 75% $34.20 ----------- ----------- -------------- -------------- ------------ Total ........... 133,600 104,200 42,700 41% $31.99 =========== =========== ============== ============== ============
- ------ (1) Based on information obtained from municipal offices. (2) A home is deemed to be "passed" by cable if it can be connected to the distribution system without any further extension of the cable distribution plant. These data are the Company's estimates as of July 31, 1996. (3) A home with one or more television sets connected to a cable system is counted as one basic subscriber. Bulk accounts (such as motels or apartments) are included on a "subscriber equivalent" basis whereby the total monthly bill for the account is divided by the basic monthly charge for a single outlet in the area. This information is as of July 31, 1996. (4) Basic subscribers as a percentage of homes passed by cable. (5) The channel capacities of New England Cable systems are 36, 50 and 62 and represent 44%, 24% and 32% of the Company's New England Cable subscribers, respectively. After giving effect to certain system upgrades which are anticipated to be completed by September 1996, the 36, 50 and 62 channel systems would have represented 22%, 24% and 54% of the Company's total New England Cable subscribers, respectively. (6) The San German Cable System was acquired upon consummation of the Cable Acquisition in August 1996. (7) After giving effect to certain system upgrades which are anticipated to be completed during the first quarter of 1997, this system will be capable of delivering 62 channels. (8) The channel capacities of the New Hampshire Cable systems are 36 and 50 and represent 16% and 84% of the Company's New Hampshire Cable subscribers, respectively. PUERTO RICO CABLE SYSTEMS Mayaguez. The Mayaguez Cable system serves the port city of Mayaguez, Puerto Rico's third largest municipality and the economic hub of the western coast of Puerto Rico. The economy is based largely on pharmaceuticals, canning, textiles and electronics. Key employers include Eli Lilly, Bristol Laboratories, Bumble Bee, Neptune, Allergan, Hewlett-Packard, Digital Equipment, Wrangler and Levi Strauss. At June 30, 1996, the system passed approximately 34,000 homes with 260 miles of plant and had 10,900 basic subscribers, representing a basic penetration rate of 32%. The system currently has a 62-channel capacity and offers 58 channels of programming. The system is fully addressable. San German. The San German Cable System serves a franchised area comprising ten communities and approximately 72,400 households. The system currently serves eight of these communities (two towns are unbuilt) with 480 miles of plant from two headends. At July 31, 1996, the system had 16,300 subscribers. The economy is based largely on tourism, light manufacturing, pharmaceuticals and electronics. Key employers include Baxter Laboratories, General Electric, OMJ Pharmaceuticals, White Westinghouse and Allergan Medical Optics. The system currently offers 45 channels of programming and has a 52 channel capacity. The system is fully addressable. Consolidation of Puerto Rico Systems. As a result of the Cable Acquisition, the Company serves contiguous franchise areas of approximately 111,000 households. The Company plans to increase the channel capacity of the San German Cable System to 62 channels and to consolidate the headends, offices, billing systems, channel lineup, and rates of the Mayaguez and San German Cable systems. The consolidated system will consist of one headend serving approximately 27,200 subscribers and passing approximately 82,000 homes with 740 miles of plant. The Company estimates that the consolidation will result in significant expense savings and will also enable it to increase revenues in the San German Cable System from the addition of pay-per-view movies, additional programming (including Spanish language channels) and improvements in picture quality. The Company also plans to expand the system to pass an additional 8,950 homes in the San German franchise. 58 NEW ENGLAND CABLE SYSTEMS The Company's New England Cable systems consist of seven headends serving 19 towns in Connecticut, Massachusetts and New Hampshire. At July 31, 1996, these systems had approximately 20,100 basic subscribers. From 1990 to 1995, these systems experienced compound annual growth rates of 10% in the number of their subscribers and 37% in Location Cash Flow. This growth has been principally achieved as a result of line extensions and housing growth. New England Cable systems historically have had higher than national average basic penetration rates due to the region's higher household income levels and poor off air reception. The Company's systems offer addressable converters to all premium and pay-per-view customers, which allow the Company to activate these services without the requirement of a service call. The Massachusetts and New Hampshire systems were acquired in June 1991 (with the exception of the North Brookfield, Massachusetts Cable system, which was acquired in July 1992), and the Connecticut system was acquired in August 1991. The Company has entered into a letter of intent with respect to the sale of its New Hampshire Cable systems. The Company's New Hampshire Cable systems consist of two headends serving six towns. At July 31, 1996, these systems had approximately 4,600 basic subscribers. COMPETITION The Company's TV stations compete for audience share, programming and advertising revenue with other television stations in their respective markets, and compete for advertising revenue with other advertising media, such as newspapers, radio, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail and local cable systems. Competition for audience share is primarily based on program popularity, which has a direct effect on advertising rates. Advertising rates are based upon the size of the market in which the station operates, a program's popularity among the viewers that an advertiser wishes to attract, the number of advertisers competing for the available time, the demographic composition of the market served by the station, the availability of alternative advertising media in the market area, aggressive and knowledgeable sales forces and the development of projects, features and programs that tie advertiser messages to programming. The Company believes that its focus on a limited number of markets and the strength of its programming allows it to compete effectively for advertising within its markets. Cable operators face competition from television stations, private satellite master antenna television ("SMATV") systems that serve condominiums, apartment complexes and other private residential developments, wireless cable, direct-to-home ("DTH") and DBS systems. As a result of the passage of the 1996 Act, electric utilities and telephone companies will be allowed to compete directly with cable operators both inside and outside of their telephone service areas. In September 1996, an affiliate of Southern New England Telephone Company, which is the dominant provider of local telephone service in Connecticut, was granted a non-exclusive franchise to provide cable television service throughout Connecticut. Currently, there is only limited competition from SMATV, wireless cable, DTH and DBS systems in the Company's franchise areas. The only DTH and DBS systems with which the Company's cable systems currently compete are DIRECTV, USSB, EchoStar Communications Corp. ("EchoStar"), PrimeStar Partners ("PrimeStar") and AlphaStar Digital Television. The Company is the exclusive provider of DIRECTV services to areas encompassing over 60% of its cable subscribers in New England. However, the Company cannot predict whether additional competition will develop in its service areas in the future. Additionally, cable systems generally operate pursuant to franchises granted on a non-exclusive basis and, thus, more than one applicant could secure a cable franchise for an area at any time. It is possible that a franchising authority might grant a second franchise to another cable company containing terms and conditions more favorable than those afforded the Company. Although the potential for "overbuilds" exists, there are presently no overbuilds in any of the Company's franchise areas and, except as noted above with respect to its Connecticut franchise, the Company is not aware of any other company that is actively seeking franchises for areas currently served by the Company. Both the television and cable industries are continuously faced with technological change and innovation, the possible rise in popularity of competing entertainment and communications media, and governmental restrictions or actions of federal regulatory bodies, including the FCC, any of which could possibly have a material effect on the Company's operations and results. 59 DIRECTV faces competition from cable (including in New England, the Company's Cable systems), wireless cable and other microwave systems and other DTH and DBS operators. Cable currently possesses certain advantages over DIRECTV in that cable is an established provider of programming, offers local programming and does not require that its subscribers purchase receiving equipment in order to begin receiving cable services. DIRECTV, however, offers significantly expanded service compared to most cable systems. Additionally, upgrading cable companies' coaxial systems to offer expanded digital video and audio programming similar to that offered by DIRECTV will be costly. While local programming is not currently available through DIRECTV directly, DIRECTV provides programming from affiliates of national broadcast networks to subscribers who are unable to receive networks over-the-air and who have not subscribed to cable. DIRECTV faces additional competition from wireless cable systems such as multichannel multipoint distribution systems ("MMDS") which use microwave frequencies to transmit video programming over the air from a tower to specially equipped homes within the line of sight of the tower. The Company is unable to predict whether wireless video services, such as MMDS, will continue to develop in the future or whether such competition will have a material impact on the operations of the Company. DIRECTV also faces competition from other providers and potential providers of DBS services. Of the eight orbital locations within the BSS band allocated for United States licensees, three orbital positions enable full coverage of the contiguous United States. The remaining orbital positions are situated to provide coverage to either the eastern or western United States, but cannot provide full coverage of the contiguous United States. This provides companies licensed to the three orbital locations with full coverage a significant advantage in providing DBS service to the entire United States, as they must place satellites in service at only one and not two orbital locations. The orbital location licensed to Hughes and USSB is generally recognized as the most centrally located for coverage of the contiguous United States; however, EchoStar has launched, and a joint venture of MCI and News Corp. has announced its intention to launch, DBS services from the other two orbital locations with full coverage of the contiguous United States. MCI/News Corp. was the successful bidder for the transponder slot auctioned by the FCC at 110o west longitude. MCI/News Corp. has announced that it anticipates being operational in two years. In addition, two entities, Western Tele-Communications, Inc., a wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"), and another company, TeleQuest Ventures, L.L.C., have applied for authority from the FCC to operate earth stations that would be used to communicate with Canadian DBS satellites that have service coverage of the United States. If such authority is granted, these entities could enter the United States multichannel television programming distribution market and compete with DIRECTV. The Company also competes with PrimeStar, owned primarily by a consortium of cable companies, including TCI, that currently offers medium-power Ku-band programming service to customers using dishes approximately three feet in diameter. INDUSTRY BACKGROUND TV Commercial television began in the United States on a regular basis in the 1940s. Initially, television stations operated only in the larger cities on a portion of the broadcast spectrum commonly known as the "VHF" band. Additional television channels were subsequently assigned to cities throughout the country for use on the "UHF" band. There are 12 channels in the VHF band, numbered 2 through 13, and 56 channels in the UHF band, numbered 14 through 69. UHF band channels differ from VHF channels in that UHF channels broadcast at higher frequencies and thus are more affected by terrain and obstructions to line-of-sight transmission. There are only a limited number of channels available for broadcasting in any one geographic area, with the license to operate a station being granted by the FCC. The majority of commercial television stations in the United States are affiliated with the major national networks (ABC, CBS, NBC, and Fox). Two newer networks, UPN and the Warner Brothers Network ("WB"), are affiliated with many of the remainder. Stations that operate without network affiliations are commonly referred to as "independent" stations. Each national network offers its affiliates a wide variety of television programs in exchange for the right to retain a significant portion of the available advertising time during its network programs. ABC, CBS and NBC currently offer more than 12 hours of programming a day on average, which represents approximately two-thirds of the typical broadcasting day. UPN and WB program up 60 to six hours per week in prime time. Since its inception in 1986, Fox has increased the amount of programming available to its affiliates. Fox currently provides its affiliates with six hours of programming a day on average. The Fox network currently consists of 163 primary affiliates, and Fox programming is available in more than 94% of the television households in the United States. Advertising and Ratings Most television station revenues are derived from the sale of time to national, regional and local advertisers for commercials which are inserted in or adjacent to the programming shown on the station. These commercials are commonly referred to as "spot" advertising. Network-affiliated stations are required to carry the advertising sold by the network during the network programming broadcast by the station. This reduces the amount of spot advertising available for sale by the station. The networks generally compensate their affiliates for network carriage according to a formula based on coverage as well as other qualitative factors. Independent stations retain all of the revenues received from the sale of advertising time. The advertising sales market consists of national network advertising, national spot advertising and local spot advertising. An advertiser wishing to reach a nationwide audience usually purchases advertising time directly from the major networks, including Fox, or nationwide ad hoc networks (groups of otherwise unrelated stations that combine to show a particular program or series of programs). A national advertiser wishing to reach a particular regional or local audience usually buys advertising time directly from local stations through national advertising sales representative firms. Local businesses purchase advertising directly from the stations' local sales staffs. In addition, television stations derive significant revenues from the sale of time (usually in the early morning time blocks) for the broadcast of "infomercials" and other programs supplied by advertisers. Programming that is not supplied to stations by a network is acquired from programming syndicators either for cash, in exchange for advertising time ("barter") or a combination of cash and barter. Typically, television stations acquiring syndicated programs are given the exclusive right to show the program in the station's market for the number of times and during the period of time agreed upon by the station and the syndicator. Over the last several years, there has been an increase in programming available through barter or a combination of cash and barter and a decrease in cash transactions in the syndication market. Nielsen periodically publishes data on estimated audiences for television stations in all DMAs throughout the United States. The estimates are expressed in terms of the station's share of the total potential audience in the market (the station's "rating") and of the audience actually watching television (the station's "share"). The ratings service provides such data on the basis of total television households and of selected demographic groupings in the market. Nielsen uses one of two methods to measure the station's actual viewership. In larger markets, ratings are determined by a combination of meters connected directly to selected television sets (the results of which are reported on a daily basis) and periodic surveys of television viewing (diaries), while in smaller markets only periodic surveys are conducted. Generally, ratings for Fox affiliates and independent stations are lower in diary (non-metered) markets than in metered markets. Most analysts believe that this is a result of the greater accuracy of measurement that meters allow. DBS The widespread use of satellites for television developed in the 1970s, as a means to distribute news and entertainment programming to and from broadcast television stations and to the headends of cable systems. The use of satellites by cable systems permitted low cost networking of cable systems, thereby promoting the growth of satellite-delivered pay channel services (such as HBO and Showtime) and enhanced basic services (such as CNN, ESPN and C-SPAN). The DTH satellite market developed as consumers in rural markets without access to cable or broadcast television programming purchased home satellite television receive only ("TVRO") products to receive programming directed towards broadcast television stations and cable headends. The DTH business has grown as satellite-delivered services have been developed and marketed specifically for TVRO system owners. Currently, there are estimated to be approximately 2.3 million TVRO systems authorized to receive DTH programming in the United States. 61 Until recently, most satellite applications for television were within the C band radio frequencies allocated by the FCC for fixed satellite service ("FSS"). Most TVRO systems are designed to receive the signals of C band satellites and require antennas ranging from six to 12 feet in diameter. Newer DTH services may be transmitted using Ku band satellites, the signals of which can be received with antennas ranging from three to six feet in diameter. In the 1980's, the FCC began licensing additional radio spectrum within a portion of the Ku band for broadcast satellite service ("BSS") and DBS service. Unlike traditional FSS satellites, BSS satellites are designed specifically for transmitting television signals directly to consumers. These satellites have significantly higher effective radiated power, operate at higher frequencies and are deployed at wider orbital spacing than FSS satellites. As a result, they allow for reception using antennas as small as 18 inches in diameter. Pursuant to international agreements governing the use of the radio spectrum, there are eight orbital positions allocated for use by the United States within the BSS band with 32 frequencies licensed to each orbital position. The FCC initially awarded frequencies at these eight orbital locations to nine companies, including Hughes and USSB. See "Business -- Competition." Of the eight orbital locations for United States-licensed DBS satellites, only three enable full coverage of the contiguous United States. The remaining orbital positions are situated to provide coverage to either the eastern or western United States, but not to both. The orbital location used by DIRECTV is one of the three locations with full coverage and is considered to be the most centrally located. Companies awarded frequencies at the three locations with full coverage have a significant competitive advantage in providing nationwide service. CABLE A cable system receives television, radio and data signals that are transmitted to the system's headend site by means of off-air antennas, microwave relay systems and satellite earth stations. These signals are then modulated, amplified and distributed, through coaxial and fiber optic cable, to customers who pay a fee for this service. Cable systems may also originate their own television programming and other information services. Cable systems generally are constructed and operated pursuant to non-exclusive franchises or similar licenses granted by local governmental authorities for a specified term. The cable industry developed in the United States in the late 1940s and 1950s in response to the needs of residents in predominantly rural and mountainous areas of the country where the quality of off-air television reception was inadequate due to factors such as topography and remoteness from television broadcast towers. In the 1960s and 1970s, cable systems also developed in small and medium-sized cities and suburban areas that had a limited availability of clear off-air television station signals. All of these markets are regarded within the cable industry as "classic" cable system markets. In the 1980s, cable systems were constructed in large cities and nearby suburban areas, where good off-air reception from multiple television stations usually was already available, in order to offer satellite-delivered channels which were not available via broadcast television reception. Cable systems offer customers multiple channels of television entertainment and information. The selection of programming varies from system to system due to differences in channel capacity and customer interest. Cable systems typically offer a "broadcast basic" service consisting of local broadcast stations, local origination channels and public, educational and governmental ("PEG") access channels and an "enhanced basic service" or satellite service consisting of satellite delivered non-broadcast cable networks (such as CNN, MTV, USA, ESPN and TNT) as well as satellite-delivered signals from broadcast "superstations" (such as WTBS, WGN and WWOR). For an extra monthly charge, cable systems also generally offer premium television services to their customers. These services (such as Home Box Office, Showtime, The Disney Channel and regional sports networks) are satellite-delivered channels consisting principally of feature films, live sports events, concerts and other special entertainment features, usually presented without commercial interruption. In addition to customer revenues from these services, cable systems generate revenues from additional fees paid by customers for pay-per-view programming of movies, concerts, sporting and special 62 events and from the sale of available advertising spots on advertiser-supported programming and on locally generated programming. Cable systems also frequently offer to their customers home shopping services, which pay the systems a share of revenues from sales of products in the systems' service areas. Lastly, cable systems may charge subscribers for services such as installations, reconnections, and service calls and the monthly rental of equipment such as converters and remote controls. LICENSES, LMAS, DBS AGREEMENTS AND CABLE FRANCHISES TV FCC Licensing. The broadcast television industry is subject to regulation by the FCC pursuant to the Communications Act of 1934, as amended (the "Communications Act"). Approval by the FCC is required for the issuance, renewal, transfer and assignment of broadcast station operating licenses. Under the 1996 Act, the FCC has been authorized to renew television station licenses for a term of up to eight years. The FCC is currently conducting a rulemaking to determine whether television license terms should be extended from their current term of five years to the maximum eight-year term provided by the 1996 Act. While in the vast majority of cases such licenses are renewed by the FCC, there can be no assurance that the Company's licenses will be renewed at their expiration dates or that such renewals will be for full terms. The Company's licenses with respect to TV stations WOLF/WWLF/WILF, WDSI and WDBD are scheduled to expire on August 1, 1999, August 1, 1997 and June 1, 1997, respectively. In addition, the licenses with respect to stations WTLH and WPXT are scheduled to expire on April 1, 1997 and April 1, 1999, respectively. In order for the Company to acquire the licenses for television stations WTLH and WPXT, the FCC's consent to the assignment of these licenses to the Company is required. See "Business -- TV." Fox Affiliation Agreement. Each of the Company's TV stations which are affiliated with Fox is a party to a substantially identical station affiliation agreement with Fox (as amended, the "Fox Affiliation Agreements"). Each Fox Affiliation Agreement provides the Company's Fox-affiliated stations with the right to broadcast all programs transmitted by Fox, on behalf of itself and its wholly-owned subsidiary, the Fox Children's Network, Inc. ("FCN"), which include programming from Fox as well as from FCN. In exchange, Fox has the right to sell a substantial portion of the advertising time associated with such programs and to retain the revenue from the advertising it has sold. The stations are entitled to sell the remainder of the advertising time and retain the associated advertising revenue. The stations are also compensated by Fox according to a ratings-based formula for Fox programming and a share of the programming net profits of FCN programming, as specified in the Fox Affiliation Agreements. Each Fox Affiliation Agreement is for a term ending October 31, 1998 with the exception of the WTLH Fox Affiliation Agreement, which expires on December 31, 2000. The Fox Affiliation Agreements are renewable for a two-year extension, at the discretion of Fox and upon acceptance by the Company. The Fox Affiliation Agreements may be terminated generally (a) by Fox upon (i) a material change in the station's transmitter location, power, frequency, programming format or hours of operation, with 30 days' written notice, (ii) 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, (iii) assignment or attempted assignment by the Company of the Fox Affiliation Agreements, with 30 days written notice, (iv) three or more unauthorized preemptions of Fox programming within a 12-month period, with 30 days written notice, or (b) by either Fox or the affiliate station 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. The Company's Fox Affiliation Agreements have been renewed in the past. The Company believes that it enjoys good relations with Fox. Each Fox Affiliation Agreement provides the Company's Fox-affiliated stations with all programming which Fox and FCN make available for broadcasting in the community to which the station is licensed by the FCC. Fox has committed to supply approximately six hours of programming per day during specified time periods. Each of the Company's stations have agreed to broadcast all such Fox programs in their entirety, including all commercial announcements. In return for a station's full performance of its obligations under its respective affiliation agreement, Fox will pay such station compensation determined in accordance with Fox's current, standard, performance-based station compensation formula. As part of the agreement with Fox to extend the stations' Fox Affiliation Agreements until 1998, each of the stations granted Fox the right to negotiate with the cable operators in their respective markets for 63 retransmission consent agreements. Under the Fox "Win/Win Plan," the cable operators received the right to retransmit the programming of the Company's TV stations in exchange for the carriage by the cable operators of a new cable channel owned by Fox. The Company's TV stations are to receive consideration from Fox based on the number of subscribers carrying the new Fox channel within the stations' market. Fox has reached agreements in principle with most of the largest cable operators in the country. LMAs. Current FCC rules preclude the ownership of more than one television station in a market, unless such stations are operated as a satellite of a primary station, initially duplicating the programming of the primary station for a significant portion of their broadcast day. WWLF and WILF are currently authorized as satellites of WOLF. In recent years, in a number of markets across the country, certain television owners have entered into arrangements to provide the bulk of the broadcast programming on stations owned by other licensees, and to retain the advertising revenues generated from such programming. When operating pursuant to an LMA, 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 LMA 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. To the extent that the Company currently programs WTLH through an LMA, and expects to program other stations through the use of such agreements, there can be no assurance that the licensee of such stations will not unreasonably exercise its right to preempt the programming of the Company, 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 the Company, there can be no assurances that these licenses will be maintained by the entities which currently hold them. In the 1996 Act, the continued performance of then existing LMAs was generally grandfathered. Currently, LMAs are not considered attributable interests under the FCC's multiple ownership rules. However, the FCC is currently considering proposals which would make LMAs attributable, as they generally are in the radio broadcasting industry. If the FCC were to adopt a rulemaking that makes such interests attributable, without modifying its current prohibitions against the ownership of more than one television station in a market, the Company could be prohibited from entering into such arrangements with other stations in markets in which it owns television stations. DBS 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 DSS units and with USSB for the sale of five transponders on the first satellite. At this time, Hughes also offered the NRTC and its members the opportunity to become the exclusive providers of DIRECTV services in rural areas of the United States in which an NRTC member purchased such a right. The NRTC is a cooperative organization whose members are engaged in the distribution of telecommunications and other services in predominantly rural areas of the United States. Pursuant to the DBS Agreements, participating NRTC members acquired the exclusive right to provide DIRECTV programming services to residential and commercial subscribers in certain service areas. Service areas purchased by participating NRTC members comprise approximately 7.7 million television households and were acquired for aggregate purchase payments exceeding $100 million. The DBS Agreements provide the NRTC and participating NRTC members in their service areas substantially all of the rights and benefits otherwise retained by DIRECTV in other areas, including the right 64 to set pricing (subject to certain obligations to honor national pricing on subscriptions sold by national retailers), to bill subscribers and retain all subscription remittances and to appoint sales agents within their distribution areas (subject to certain obligations to honor sales agents appointed by DIRECTV and its regional SMAs). In exchange, the NRTC and participating NRTC members paid to DIRECTV a one-time purchase price. In addition to the purchase price, NRTC members are required to reimburse DIRECTV for the allocable share 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% royalty on subscription revenues. The DBS Agreements authorize the NRTC and participating NRTC members to provide all commercial services offered by Hughes that are transmitted from the frequencies that the FCC has authorized for DIRECTV's use at its present orbital location for a term running through the life of Hughes' current satellites. The NRTC has advised the Company that the NRTC Agreement also provides the NRTC a right of first refusal to acquire comparable rights in the event that Hughes elects to launch successor satellites upon the removal of the present satellites from active service. The financial terms of any such purchase are likely to be the subject of negotiation and the Company is unable to predict whether substantial additional expenditures of the NRTC will be required in connection with the exercise of such right of first refusal. Finally, under a separate agreement with Hughes (the "Dealer Agreement"), the Company is an authorized agent for sale of DIRECTV programming services to subscribers outside of its service area on terms comparable to those of DIRECTV's other authorized sales agents. The Member Agreement terminates when Hughes removes DIRECTV satellites from their orbital location, although under the Dealer Agreement the right of the Company to serve as a DIRECTV sales agent outside of its designated territories may be terminated upon 60 days' notice by either party. If the satellites are removed earlier than June 2004, the tenth anniversary of the commencement of DIRECTV services, the Company will receive a prorated refund of its original purchase price for the DIRECTV rights. The Member Agreement may be terminated prior to the expiration of its term as follows: (a) if the NRTC Agreement is terminated because of a breach by Hughes, the NRTC may terminate the Member Agreement, but the NRTC will be responsible for paying to the Company its pro rata portion of any refunds that the NRTC receives from Hughes, (b) if the Company fails to make any payment due to the NRTC or otherwise breaches a material obligation of the Member Agreement, the NRTC may terminate the Member Agreement in addition to exercising other rights and remedies against the Company and (c) if the NRTC Agreement is terminated because of a breach by the NRTC, Hughes is obligated to continue to provide DIRECTV services to the Company (i) by assuming the NRTC's rights and obligations under the Member Agreement or (ii) under a new agreement containing substantially the same terms and conditions as the Member Agreement. The Company is not permitted under the Member Agreement or the Dealer Agreement to assign or transfer, directly or indirectly, its rights under these agreements without the prior written consent of the NRTC and Hughes, which consent cannot be unreasonably withheld. 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 1992 Cable Act. After giving effect to the Cable Acquisition and the New Hampshire Cable Sale, the Company will hold 11 cable franchises, all of which are non-exclusive. The Cable Communications Policy Act of 1984 (the "1984 Cable Act") prohibits franchising authorities from imposing annual franchise fees in excess of 5% of gross revenues and permits the cable system operator to seek renegotiation and modification of franchise requirements if warranted by changed circumstances. 65 The table below groups the Company's franchises by date of expiration and presents the number of franchises per group and the approximate number and percent of basic subscribers of the Company in each group as of July 31, 1996, after giving effect to the Cable Acquisition and the New Hampshire Cable Sale.
Number of Basic Percent of Basic Year of Franchise Expiration Number of Franchises Subscribers Subscribers ---------------------------- -------------------- --------------- ---------------- 1996-1998 .................. 1 2,900 7% 1999-2002 .................. 2 9,800 22% 2003 and thereafter ........ 8 30,000 71% -------------------- --------------- ---------------- Total .................... 11 42,700 100%
The Company has 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 1992 Cable Act provides, among other things, for an orderly franchise renewal process in which renewal will not be unreasonably withheld. In addition, the 1992 Cable 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. The Company believes that it has good relations with its franchising authorities. LEGISLATION AND REGULATION TV The ownership, operation and sale of television stations, including those licensed to subsidiaries of the Company, 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, the assignment of frequency bands for broadcast television; the approval of a television station's frequency, location and operating power; the issuance, renewal, revocation or modification of a television station's FCC license; the approval of changes in the ownership or control of a television station's licensee; the regulation of equipment used by television stations; and 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. Under law in effect prior to the 1996 Act, television station licenses were granted for a maximum allowable period of five years and were renewable thereafter for additional five year periods. The 1996 Act, however, authorizes the FCC to grant television broadcast licenses, and renewals thereof, for terms of up to eight years. The FCC is currently conducting a rulemaking to determine if television station licenses will be extended to the full eight year term. The FCC may revoke or deny licenses, after a hearing, for serious violations of its regulations. Petitions to deny renewal of a license may be filed on or before the first day of the last month of a license term. Generally, however, in the absence of serious violations of FCC rules or policies, license renewal is expected in the ordinary course. The 1996 Act prohibits the FCC from considering competing applications for the frequency used by the renewal applicant 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 Company's licenses with respect to TV stations WOLF/WWLF/WILF, WDSI and WDBD are scheduled to expire on August 1, 1999, August 1, 1997 and June 1, 1997, respectively. In addition, the licenses with respect to television stations WTLH and WPXT are scheduled to expire on April 1, 1997 and April 1, 1999, respectively. The Company is not aware of any facts or circumstances that might reasonably be expected to prevent any of its stations from having its current license renewed at the end of its respective term. 66 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. The 1996 Act and pending FCC rulemakings modify and will modify many of these requirements. The exact nature of these modifications and their impact on the Company cannot be predicted. 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-United States 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. To the Company's knowledge, the Commission has made such a finding in only one case involving a broadcast licensee. Because of these provisions, Pegasus may be prohibited from having more than one-fourth of its 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 United States audience reach. The FCC's television multiple ownership local contour overlap rule generally prohibits ownership of attributable interests by a single entity in two or more television stations which serve the same geographic market; however, changes in these rules are under consideration, but the Company cannot predict the outcome of the proceeding in which such changes are being considered. Cross-Ownership Rules. FCC rules have generally prohibited or restricted the cross-ownership, operation or control of a radio station and a television station serving the same geographic market, of a television station and a cable system serving the same geographic market, and of a television station and a daily newspaper serving the same geographic market. The 1996 Act directs the FCC to amend its rules to permit ownership of television stations and cable systems in the same geographic market. The 1996 Act also directs the FCC to presumptively waive, in the top 50 markets, its prohibition on ownership of television and radio stations in the same geographic market. Under these rules, absent waivers, the Company would not be permitted to acquire any daily newspaper or radio broadcast station in a geographic market in which it now owns or controls any TV properties. The FCC is currently considering a rulemaking to change the radio/television cross-ownership restrictions. The Company cannot predict the outcome of that rulemaking. Programming and Operation. The Communications Act requires broadcasters to serve the "public interest." Since the late 1970s, the FCC gradually has relaxed or eliminated many of the formal procedures it had developed to promote the broadcast of certain types of programming responsive to the needs of a station's community of license. However, broadcast station licensees continue to be 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. Stations also must follow various rules promulgated under the Communications Act that regulate, among other things, political advertising, sponsorship identifications, the advertisements of contests and lotteries, programming directed to children, obscene and indecent broadcasts and technical operations, including limits on radio frequency radiation. 67 In August 1996, the FCC adopted new children's television rules mandating, among other things, that as of January 1, 1996 stations must identify and provide information concerning children's programming to publishers of program guides and listings and as of September 1, 1997 stations must broadcast three hours each week of educational and informational programming directed to children. The 1996 Act also requires commercial television stations to report on complaints concerning violent programming in their license renewal applications. In addition, most broadcast licensees, including the Company's licensees, must develop and implement affirmative action programs designed to promote equal employment opportunities and must submit reports to the FCC with respect to these matters on an annual basis and in connection with a license renewal application. Must Carry and Retransmission Consent. The 1992 Cable 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 on June 2, 1993; however, stations had until June 17, 1993 to make their must carry/retransmission consent elections. Under the Company's Fox Affiliation Agreements, the Company appointed Fox as its irrevocable agent to negotiate such retransmission consents with the major cable operators in the Company's respective markets. Fox exercised the Company's stations' retransmission consent rights. 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, 1996. Although the Company expects the current retransmission consent agreements to be renewed upon their expiration, there can be no assurance that such renewals will be obtained. In April 1993, the United States District Court for the District of Columbia upheld the constitutionality of the legislative must carry provision. This decision was vacated by the United States Supreme Court in June 1994, and remanded to the District Court for further development of a factual record. The District Court has again upheld the must carry rules, and the matter will be considered again by the Supreme Court. The Company cannot predict the outcome of the case. In the meantime, the must carry provisions and the FCC's regulations implementing those provisions are in effect. Pending or Proposed Legislation and FCC Rulemakings. The FCC has proposed rules for implementing advanced (including high-definition) television ("ATV") service in the United States. Implementation of ATV is intended to improve the technical quality of television. Under certain circumstances, however, conversion to ATV operations may reduce a station's coverage area. The FCC is considering an implementation proposal that would allot a second broadcast channel to each full-power commercial television station for ATV operation. Under the proposal, stations would be required to phase in their ATV operations on the second channel over approximately nine years following adoption of a final table of allotments and to surrender their present channel six years later. Recently, there has been consideration by the FCC of shortening further this transition period. In August 1995, the FCC commenced a further rulemaking proceeding to address ATV transition issues. In August 1996, the FCC adopted a further notice of proposed rulemaking presenting a proposed table of allotments for television stations for ATV operations. The table is only a draft proposal and may differ significantly from the final table. Implementation of ATV service may impose additional costs on television stations providing the new service, due to increased equipment costs, and may affect the competitive nature of the markets in which the Company operates if competing stations adopt and implement the new technology before the Company's stations. Various proposals have been put forth in Congress to auction the new ATV channels, which could preclude the Company from obtaining such channels if better financed companies were to participate in such auction. The FCC's current proposal that television stations obtain ATV channels and subsequently surrender their existing channels appears to have stalled the auction effort, although the Company cannot predict the ultimate outcome of the legislative consideration of these matters. The FCC is now conducting a rulemaking proceeding to consider changes to the multiple ownership rules that could, under certain limited circumstances, permit common ownership of television stations with 68 overlapping service areas, while imposing restrictions on television time brokerage. Certain of these changes, if adopted, could allow owners of television stations who currently cannot buy a television station or an additional television station in the Company's markets to acquire television properties in such markets. This may increase competition in such markets, but may also work to the Company's advantage by permitting it to acquire additional stations in its present markets and by enhancing the value of the Company's stations by increasing the number of potential buyers. In addition, the FCC is conducting an inquiry to consider proposals to increase broadcasters' obligations under its rules implementing the Children's Television Act of 1990, which requires television stations to present programming specifically directed to the "educational and informational" needs of children. The FCC also is conducting a rulemaking proceeding to consider the adoption of more restrictive standards for the exposure of the public and workers to potentially harmful radio frequency radiation emitted by broadcast station transmitting facilities. Other matters which could affect the Company's 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 FCC has initiated a Notice of Inquiry proceeding seeking comment on whether the public interest would be served by establishing limits on the amount of commercial matter broadcast by television stations. No prediction can be made at this time as to whether the FCC will impose any commercial limits at the conclusion of its deliberations. The Company is unable to determine what effect, if any, the imposition of limits on the commercial matter broadcast by television stations would have upon the Company's operations. The FCC recently lifted its financial interest/syndication ("FIN/SYN") rules that prohibited ABC, CBS and NBC from engaging in syndication for the sale, licensing, or distribution of television programs for non-network broadcast exhibition in the United States. Further, these rules prohibited networks from sharing profits from any syndication and from acquiring any new financial or proprietary interest in programs of which they were not the sole producer. The Company cannot predict the effect of the elimination of the FIN/SYN rules on the Company's ability to acquire desirable programming at reasonable prices. The FCC also recently eliminated the prime time access rule ("PTAR"), effective August 30, 1996. PTAR currently limits a station's ability to broadcast network programming (including syndicated programming previously broadcast over a network) during prime time hours. The elimination of PTAR could increase the amount of network programming broadcast over a station affiliated with ABC, CBS or NBC. Such elimination also could result in (i) an increase in the compensation paid by the network (due to the additional prime time hours during which network programming could be aired by a network-affiliated station) and (ii) increased competition for syndicated network programming that previously was unavailable for broadcast by network affiliates during prime time. For purposes of the prime time access rule, the FCC defines "network" to include those entities that deliver more than 15 hours of "prime time programming" (a term defined in those rules) to affiliates reaching 75% of the nation's television homes. Neither Fox nor its affiliates, including the Company's TV stations, are subject to the prime time access rule. The Company cannot predict the effect that the repeal many ultimately have on the market for syndicated programming. The Congress and the FCC have considered in the past and may consider and adopt in the future, (i) other changes to existing laws, regulations and policies or (ii) new laws, regulations and policies regarding a wide variety of matters that could affect, directly or indirectly, the operation, ownership, and profitability of the Company's broadcast stations, result in the loss of audience share and advertising revenues for these stations or affect the ability of the Company to acquire additional broadcast stations or finance such acquisitions. DBS Unlike a common carrier, such as a telephone company, or a cable operator, DBS 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 the Company. As an operator of a privately owned United States satellite system, DIRECTV is subject to the regulatory jurisdiction of the FCC, primarily with respect to (i) the licensing of individual satellites (i.e., the requirement that DIRECTV meet minimum 69 financial, legal and technical standards), (ii) avoidance of interference with radio stations and (iii) compliance with rules that the FCC has established specifically for DBS satellite licenses. As a distributor of television programming, DIRECTV is also affected by numerous other laws and regulations, including in particular the 1992 Cable Act's program access and exclusivity provisions. In addition to regulating pricing practices and competition within the cable television industry, the 1992 Cable Act is intended to establish and support alternative multichannel video distribution services, such as wireless cable and DBS. State and local authorities in some jurisdictions restrict or prohibit the use of satellite dishes pursuant to zoning and other regulations. The FCC has recently adopted new rules that preempt state and local regulations that affect receive-only satellite dishes that are two meters or less in diameter, in any area where commercial or industrial uses are generally permitted by local land use regulation, or that are one meter or less in diameter in any area. Satellite dishes for the reception of DIRECTV's services are less than one meter in diameter, and thus the FCC's rules are expected to ease local regulatory burdens on the use of those dishes. CABLE 1984 Cable Act and 1992 Cable Act. The Cable Communications Policy Act of 1984 (the "1984 Cable Act") created uniform national standards and guidelines for the regulation of cable systems. Among other things, the 1984 Cable Act generally preempted local control over cable rates in most areas. In addition, the 1984 Cable Act affirmed 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 Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") amended the 1984 Cable Act in many respects and significantly changed the legislative and regulatory environment in which the cable industry operates. The 1992 Cable Act allows for a greater degree of regulation with respect to, among other things, cable system rates for both basic and certain nonbasic services; programming access and exclusivity arrangements; access to cable channels by unaffiliated programming services; leased access terms and conditions; horizontal and vertical ownership of cable systems; customer service requirements; franchise renewals; television broadcast signal carriage and retransmission consent; technical standards; subscriber privacy; consumer protection issues; cable equipment compatibility; obscene or indecent programming; and 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; and prohibiting the common ownership of cable systems and co-located wireless systems known as MMDS and private SMATV. The 1992 Cable Act also precludes video programmers affiliated with cable television companies from favoring cable operators over competitors and requires such programmers to sell their programming to other multichannel video distributors. This provision may limit 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 1992 Cable 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. The Telecommunications Act of 1996. On February 1, 1996, the Congress passed the 1996 Act. On February 8, 1996, the President signed it into law. This new law will alter federal, state and local laws and regulations regarding telecommunications providers and services, including the Company and the cable television and other telecommunications services provided by the Company. There are numerous rulemakings to be undertaken by the FCC which will interpret and implement the provisions of the 1996 Act. It is not possible at this time to predict the outcome of such rulemakings. 70 Cable Rate Regulation. The 1996 Act eliminates cable programming service tier ("CPST") rate regulation effective March 31, 1999, for all cable operators. In the interim, CPST rate regulation can be triggered only by a local unit of government (commonly referred to as local franchising authorities or "LFA") complaint to the FCC. Since the Company is a small cable operator within the meaning of the 1996 Act, CPST rate regulation for the Company ended upon the enactment of the 1996 Act. The Company's status as a small cable operator may be affected by future acquisitions. The 1996 Act does not disturb existing rate determinations of the FCC. The Company's basic tier of cable service ("BST") rates remain subject to LFA regulation under the 1996 Act. Rate regulation is precluded wherever a cable operator faces "effective competition." The 1996 Act expands the definition of effective competition to include any franchise area where a local exchange carrier ("LEC") (or affiliate) provides video programming services to subscribers by any means other than through DBS. 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. Under the 1996 Act, the Company will be allowed to aggregate, on a franchise, system, regional or company level, its equipment costs into broad categories, such as converter boxes, regardless of the varying levels of functionality of the equipment within each such broad category. The 1996 Act will allow the Company to average together costs of different types of converters (including non-addressable, addressable, and digital). The statutory changes will also facilitate the rationalizing of equipment rates across jurisdictional boundaries. These favorable cost-aggregation rules do not apply to the limited equipment used by "BST-only" subscribers. In June 1995, the FCC adopted rules which provide significant rate relief for small cable operators, which include operators the size of the Company. The Company's current rates are below the maximum presumed reasonable under the FCC's rules for small operators, and the Company may use this new rate relief to justify current rates, rates already subject to pending rate proceedings and new rates. Anti-Buy Through Provisions. In March 1993, the FCC adopted regulations pursuant to the 1992 Cable 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 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. The Company's systems have the necessary technical capability and have complied with this regulation. Indecent Programming on Leased Access Channels. FCC regulations pursuant to the 1992 Cable 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 1996 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 each channel carrying adult programming so that a non-subscriber does not receive it. Cable operators must also 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 occurs, cable operators must limit the carriage of such programming to hours when a significant number of children are not likely to view the programming. The Company's systems do not presently have the necessary technical capability to comply with the scrambling requirement. However, the effective date of these requirements has been stayed by the United States District Court for Delaware. Cable Entry Into Telecommunications. The 1996 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 1996 Act further 71 provides that cable operators and affiliates providing telecommunications services are not required to obtain a separate franchise from LFAs for such services. The 1996 Act prohibits LFAs 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 LFAs can seek "institutional networks" as part of franchise negotiations. The 1996 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, LFAs 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 1996 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. Telephone Company Entry Into Cable Television. The 1996 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 LECs, including the Bell Operating Companies, to compete with cable both inside and outside their telephone service areas. The 1996 Act replaces the FCC's video dialtone rules with an "open video system" ("OVS") plan by which LECs can provide cable service in their telephone service area. LECs complying with FCC OVS regulations will receive relaxed oversight. Only the program access, negative option billing prohibition, subscriber privacy, Equal Employment Opportunity, PEG, must-carry and retransmission consent provisions of the Communications Act will apply to LECs providing OVS. Franchising, rate regulation, consumer service provisions, leased access and equipment compatibility will not apply. Cable copyright provisions will apply to programmers using OVS. LFAs may require OVS operators to pay "franchise fees" only to the extent that the OVS provider or its affiliates provide cable services over the OVS. OVS operators will be subject to LFA general right-of-way management regulations. Such fees may not exceed the franchise fees charged to cable operators in the area, and the OVS provider may pass through the fees as a separate subscriber bill item. The 1996 Act requires the FCC to adopt, within six months, regulations prohibiting an OVS operator from discriminating among programmers, and ensuring that OVS rates, terms, and conditions for service are reasonable and nondiscriminatory. Further, the FCC is to adopt regulations prohibiting a LEC-OVS 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 1996 Act also mandates OVS 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 1996 Act does not require LECs to use separate subsidiaries to provide incidental inter Local Access and Transport Area ("interLATA") video or audio programming services to subscribers or for their own programming ventures. Cable and Broadcast Television Cross-Ownership. The 1996 Act requires that the FCC amend its rules to allow a person or entity to own or control a network of broadcast stations and a cable system. The 1996 Act abolishes the prohibition of ownership of cable systems and television stations where service areas overlap. Signal Carriage. The 1992 Cable Act imposed obligations and restrictions on cable operator carriage of non-satellite delivered television stations. Under the must-carry provision of the 1992 Cable Act, a cable operator, subject to certain restrictions, must carry, upon request by the station, all commercial television stations with adequate signals which are licensed to the same market as the cable system. Cable operators are also obligated to carry all local non-commercial stations. If a non-satellite delivered commercial broadcast station does not request carriage under the must-carry provisions of the 1992 Cable Act, a cable operator may not carry that station without that station's explicit written consent for the cable operator to retransmit its programming. The Company is carrying all television stations that have made legitimate requests for carriage. All other television stations are carried pursuant to written retransmission consent agreements. 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 retransmit broadcast signals. Bills 72 have been introduced in Congress over the past several years that would eliminate or modify the cable compulsory license. The 1992 Cable 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 1996 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 1992 Cable 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 1992 Cable Act also allows franchising authorities to operate their own multichannel video distribution system without having to obtain a franchise and permits states or LFAs 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, LFAs may become certified to regulate basic service cable 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 the Company 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. Massachusetts and Connecticut have adopted state level regulation. 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 the Company's cable systems can be predicted at this time. 73 PROPERTIES The Company's TV stations own and lease studio, tower, transmitter and antenna facilities and the Company's Cable systems own and lease studio, parking, storage, headend, tower, earth station and office facilities in the localities in which they operate. The Company leases office space in Marlboro, Massachusetts for its DBS operations. The television transmitter and antenna sites are generally located so as to provide optimum market coverage. The cable headend and tower sites are located at strategic points within the cable system franchise area to support the distribution system. The Company believes that its facilities are in good operating condition and are satisfactory for their present and intended uses. The following table contains certain information describing the general character of the Company's properties after giving effect to the Transactions:
Expiration of Lease Location and Type of Property Owned or Leased Approximate Size or Renewal Options ------------------------------------------------- ------------------ --------------------------------- ------------------- Corporate Office Radnor, Pennsylvania (office) Leased 4,848 square feet 11/30/97 TV Stations Jackson, MS (TV transmitting equipment) Leased 1,125 foot tower 2/28/04 Jackson, MS (television station and Lease-Purchase (1) 5,600 square foot building; N/A transmitter building) 900 square foot building West Mountain, PA (tower and transmitter) Leased 9.6 acres 1/31/00 916 Oak Street, Scranton, PA Leased 8,600 square feet 4/30/00 station) (television 400 square feet Bald Eagle Mountain, PA (transmitting) Leased (Williamsport Tower) 9/30/97 Nescopec Mountain, PA (transmitting) Owned 400 foot tower N/A Williamsport, PA (tower) Owned 175 foot tower N/A Chattanooga, TN (transmitting) Owned 577 foot tower N/A 2401 East Main St., Chattanooga, TN Owned 14,800 square feet N/A (former television station) 1201 East Main St., Chattanooga, TN Owned 16,240 square foot building N/A (present television station) on 3.17 acres 2320 Congress Street, Portland, ME Leased 8,000 square feet 12/31/97 (television station) Gray, ME (tower) Owned 18.6 acres N/A 1203 Governor's Square, Tallahassee, FL Leased 5,012 square feet 1/31/97 (television station) Leon County, FL Leased(2) 30 acres 2/28/98 Nickleville, GA (tower) Owned 22.5 acres N/A DBS Systems Marlboro, MA (office) Leased 1,310 square feet 7/31/99 Charlton, MA (warehouse) Leased 1,750 square foot area monthly Cable Systems Winchester, CT (headend) Owned 15.22 acres N/A 140 Willow Street, Winsted, CT (office) Owned 1,900 square feet N/A Charlton, MA (office, headend site) Leased 38,223 square feet 5/9/99 Hinsdale, MA (headend site) Leased 30,590 square feet 2/1/04 Lanesboro, MA (headend site) Leased 62,500 square feet 4/13/97 West Stockbridge, MA (headend site) Leased 1.59 acres 4/4/05 Bethlehem, NH (headend site)(3) Leased 1.84 acres 5/1/03 Moultonboro, NH (office)(3) Leased 1,250 square feet 12/31/02 Tuftonboro, NH (headend site)(3) Leased 58,789 square feet 6/30/03 Route #2, Puerto Rico (office) Leased 2,520 square foot building 8/30/98 Mayaguez, Puerto Rico (headend) Leased 530 square foot building 8/30/98 Mayaguez, Puerto Rico (warehouse) Leased 1,750 square foot area monthly San German, Puerto Rico (headend site) Owned 1,200 square feet; 200 foot tower N/A San German, Puerto Rico (tower and Owned 60 foot tower; 192 square meters N/A transmitter) San German, Puerto Rico (office) Leased 2,928 square feet 2/1/01 Anasco, Puerto Rico (office) Leased 500 square feet 2/28/99 Anasco, Puerto Rico (headend site) Leased 1,200 square meters 3/24/97 Anasco, Puerto Rico (headend) Owned 59 foot tower N/A Guanica, Puerto Rico (headend site) Leased 40 foot tower; 121 square meters 2/28/04 Cabo Rojo, Puerto Rico (headend site) Leased 40 foot tower; 121 square meters 11/10/04 Hormigueros, Puerto Rico (warehouse) Leased 2,000 square feet monthly
- ------ (1) The Company entered into a lease/purchase agreement in July 1993 which calls for 60 monthly payments of $4,500 at the end of which the property is conveyed to the Company. (2) The Company holds an option to purchase this site for $150,000. (3) In connection with the New Hampshire Cable Sale, these leases would be assigned to the prospective purchaser. 74 EMPLOYEES At August 15, 1996, the Company had 240 full-time and 29 part-time employees. The Company is not a party to any collective bargaining agreement and considers its relations with its employees to be good. LEGAL AND OTHER PROCEEDINGS Pursuant to the 1992 Cable Act and related regulations and orders, the Connecticut Department of Public Utility Control (the "DPUC") initiated proceedings in 1994 to review the basic service rates and certain related charges of certain cable systems in Connecticut, including those of the Company. In addition, pursuant to complaints received in accordance with the 1992 Cable Act and related regulations and orders, the FCC initiated a review of rates for CPST services (comprising traditional cable networks) provided by certain of the Company's New England Cable systems. In connection with the state and FCC proceedings, the Company has made filings to justify its existing service rates and to request further rate increases. In March and April 1996, the FCC approved the CPST rates that had been in effect for the Company's Connecticut Cable system, and in July 1996, the final rate complaint affecting the Company's Massachusetts Cable System was dismissed. The Connecticut DPUC issued two adverse rate orders on November 28, 1994 concerning the cost-of-service rate justification filed by the Company, requiring the Company to issue refunds for two different time periods. The first order ("Phase One") covers the period September 1, 1993 through May 14, 1994. The second order ("Phase Two") covers the period after May 14, 1994. In its rate orders, the Connecticut DPUC ordered refunds of basic service and equipment charges totalling $90,000 and $51,000 as of December 31, 1994 for the Phase One and Phase Two periods, respectively. The Company appealed the Connecticut DPUC order to the FCC arguing that in ordering refunds, the Connecticut DPUC misapplied its own and the FCC's cost-of-service standards by ignoring past precedent, by failing to consider the Company's unique circumstances and by failing to make appropriate exceptions to cost-of-service presumptions. The FCC has stayed the Connecticut DPUC orders. To date, the FCC has not yet issued sufficient rulings to predict how it will decide the issues raised by the Company on appeal. Although no decision with respect to the Company's Connecticut DPUC appeal has been reached, in the event the FCC issues an adverse ruling, the Company expects to make refunds in kind rather than in cash. The 1996 Act immediately eliminates rate regulation for CPST for small cable operators, such as the Company. Pursuant to the 1996 Act, a small cable operator is one that directly or through an affiliate serves in the aggregate less than one percent of the subscribers in the United States and is not affiliated with any entity or entities whose gross annual revenues in the aggregate exceeds $250,000,000. In June 1995 the FCC released an order providing rate regulation relief to small cable operators which serve 400,000 or fewer subscribers in any system with 15,000 or fewer subscribers. As a result of this order, such small cable operators are now eligible to justify their basic rates based on a four-element rate calculation. If the per channel rate resulting from this calculation is $1.24 or less, the rate is presumed reasonable. If the rate is higher than $1.24, the cable operator bears the burden of justifying the higher rate. The current per channel rate for each of the Company's Cable systems is substantially less than $1.24. This new rate regulation option is available regardless of whether the operator has used another option previously. If a small system is later acquired by a larger company, the system will continue to have this regulatory option. In addition, small systems, as defined by this ruling, are now permitted to use all previously available small system and small operator relief, which includes the ability to pass through certain headend upgrade costs, and the ability to enter into alternative rate regulation agreements with franchising authorities. Acting pursuant to the FCC's June 1995 order with respect to small cable systems, in early 1996, the Company filed with the Massachusetts Community Antenna Television Commission (the "Massachusetts Cable Commission") and the Connecticut DPUC proposed new rates for the Company's revised basic service for its Massachusetts and Connecticut cable systems. In March 1996, the Massachusetts Cable Commission approved the proposed higher rates for the Massachusetts systems, and those rates went into effect on April 1, 1996. As of this date, the Connecticut DPUC has not yet acted upon the Company's filing. On April 1, 1996, the Company put into effect the proposed new rates for its Connecticut system, subject to possible refund. The new rates are on a per-channel basis less that the $1.24 presumed-reasonable standard established by the FCC's June 1995 order. 75 MANAGEMENT AND CERTAIN TRANSACTIONS EXECUTIVE OFFICERS AND DIRECTORS Set forth below is certain information concerning the executive officers and directors of Pegasus.
Name Age Position ---------------------- ----- -------------------------------------------------- Marshall W. Pagon. ... 40 Chairman of the Board, President, Chief Executive Officer and Treasurer Robert N. Verdecchio. 39 Senior Vice President, Chief Financial Officer and Assistant Secretary Ted S. Lodge ......... 40 Senior Vice President, General Counsel, Chief Administrative Officer and Assistant Secretary Howard E. Verlin ..... 35 Vice President and Secretary Guyon W. Turner ...... 54 Vice President Donald W. Weber ...... 59 Director
Marshall W. Pagon has served as President, Chief Executive Officer, Treasurer and Chairman of the Board of Pegasus since its incorporation. Mr. Pagon also serves as Chief Executive Officer and Director of each of Pegasus' subsidiaries. From 1991 to October 1994, when the assets of various affiliates of PM&C, principally limited partnerships that owned and operated the Company's TV and Cable operations, were transferred to PM&C's subsidiaries, Mr. Pagon or entities controlled or affiliated with Mr. Pagon served as the general partner of these partnerships and conducted the business of the Company. Mr. Pagon's background includes over 15 years of experience in the media and communications industry. In 1987, Mr. Pagon organized the Management Company to provide management and other services to companies in the media and communications industry. The Management Company has provided management and accounting services to PM&C and its subsidiaries. Robert N. Verdecchio has served as Pegasus' Senior Vice President, Chief Financial Officer and Assistant Secretary since its inception. He has also served similar functions for PM&C's affiliates and predecessors in interest since 1990. Mr. Verdecchio is a certified public accountant and has over ten years of experience in the media and communications industry. Ted S. Lodge has served as Senior Vice President, General Counsel, Chief Administrative Officer and Assistant Secretary of Pegasus since July 1, 1996. From June 1992 through May 1996, Mr. Lodge practiced law with the law firm of Lodge & Company. During such period, Mr. Lodge was engaged by the Company as its outside legal counsel in connection with several of the Company's acquisitions. Prior to founding Lodge & Company, Mr. Lodge served as Vice President, Legal Department of SEI Corporation from May 1991 to June 1992 and as Vice President, General Counsel of Vik Brothers Insurance, Inc. from March 1989 to May 1991. Howard E. Verlin is a Vice President and Secretary of Pegasus and is responsible for operating activities of the Company's Cable and DBS subsidiaries, including supervision of their general managers. Mr. Verlin has served similar functions with respect to the Company's predecessors in interest and affiliates since 1987 and has over 14 years of experience in the media and communications industry. Guyon W. Turner is a Vice President of Pegasus and is responsible for the Company's broadcast television subsidiary. From 1984 to 1993, Mr. Turner was the managing general partner of Scranton TV Partners, Ltd., from which the Company acquired WOLF and WWLF in 1993. Mr. Turner was also chairman and director of Empire Radio Partners, Ltd. from March 1991 to December 1993. In November 1992, Empire filed for protection under Chapter 11 of the Bankruptcy Code. Mr. Turner's background includes over 20 years of experience in the media and communications industry. Donald W. Weber has been a Director of Pegasus since its incorporation and a director of PM&C since November 1995. Mr. Weber has been the President and Chief Executive Officer of Viewstar Entertainment Services, Inc., an NRTC member that distributes DIRECTV services in North Georgia, since August 1993. 76 From November 1991 through August 1993, Mr. Weber was a private investor and consultant to various communication companies. Prior to that time, Mr. Weber was President and Chief Operating Officer of Contel Corporation until its merger with GTE Corporation in 1991. Mr. Weber is currently a member of the boards of directors of InterCel, Inc. and Healthdyne Information Enterprises, Inc. each of which are publicly-traded companies. In connection with the Michigan/Texas DBS Acquisition, the Parent agreed to nominate a designee of Harron as a member of the Company's Board of Directors. Shortly after the consummation of this Offering, the Company anticipates having a Board of Directors consisting of five members, including Mr. Pagon, Mr. Weber and the Harron nominee. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to this Offering, the Company did not have a compensation committee or any other committee of the Board of Directors performing similar functions. Decisions concerning compensation of executive officers were made by the Board of Directors, which included Mr. Pagon, the President and Chief Executive Officer of the Company. Upon increasing the size of the Board to five members, the Company expects to establish a compensation committee. COMPENSATION OF DIRECTORS Under the Company's 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. The Company currently pays its directors who are not employees or officers of the Company an annual retainer of $5,000 plus $500 for each Board meeting attended in person and $250 for each Board meeting held by telephone. The Company 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. As additional remuneration for joining the Board, Mr. Weber was granted in April 1996 an option to purchase 3,385 shares of Class A Common Stock at an exercise price of $15.00 per share (assuming an initial offering price of $15.00 per share). Mr. Weber's option vested upon issuance, is exercisable until November 2000 and, at the time of grant, was issued at an exercise price equal to fair market value at the time Mr. Weber was elected a director. MANAGEMENT AGREEMENT The Management Company performs various management and accounting services for the Company pursuant to the Management Agreement between the Management Company and the Company. Mr. Pagon controls and is the majority owner of the Management Company. Upon the consummation of this Offering, the Management Agreement will be transferred to the Company, and the employees of the Management Company will become employees of the Company. In consideration for the transfer of this agreement together with certain net assets, including approximately $1.4 million of accrued management fees, the Management Company will receive $19.6 million of Class B Common Stock or 1,306,667 shares of Class B Common Stock (assuming an initial offering price of $15.00 per share ) and approximately $1.4 million in cash. Of these shares, 182,652 will be exchanged for an equal number of shares of Class A Common Stock and transferred to certain members of management who are participants in the Management Share Exchange. The fair market value of the Management Agreement has been determined by Kane Reece Associates, Inc. ("Kane Reece"), an independent appraiser, based upon a discounted cash flow approach using historical financial results and management's financial projections. In return for Kane Reece's services, the Company incurred a fee of approximately $15,000 plus expenses. Under the Management Agreement, the Management Company provided specified executive, administrative and management services to PM&C and its operating subsidiaries. These services included: (i) selection of personnel; (ii) review, supervision and control of accounting, bookkeeping, recordkeeping, reporting and revenue collection; (iii) supervision of compliance with legal and regulatory requirements; and (iv) conduct and control of daily operational aspects of the Company. In consideration for the services performed by the Management Company under the Management Agreement, the Company was charged management fees, which represented 5% of the Company's net revenues, and reimbursements for the Management Company's accounting department costs. The Management Company's offices are located at 5 Radnor Corporate Center, Suite 454, Radnor, Pennsylvania 19087. 77 TOWERS PURCHASE Simultaneously with the completion of this Offering, the Company will purchase Towers' assets for total consideration of approximately $1.4 million. Towers is beneficially owned by Marshall W. Pagon. The Towers Purchase consists of ownership and leasehold interests in three tower properties. Towers leases space on each of its towers to the Company and also leases space to unaffiliated companies. The purchase price has been determined by an independent appraisal. SPLIT DOLLAR AGREEMENT In October 1996, the Company plans to enter into a Split Dollar Agreement with the trustees of an insurance trust established by Marshall W. Pagon. Under the Split Dollar Agreement, the Company will agree to pay a portion of the premiums for certain life insurance policies covering Mr. Pagon owned by the insurance trust. The Agreement will provide that the Company will be repaid for all amounts it expends for such premiums, either from the cash surrender value or the proceeds of the insurance policies. EXECUTIVE COMPENSATION The salaries of the Company's executive officers have historically been paid by the Management Company. Upon the closing of this Offering, the Management Agreement will be transferred to the Company and the salaries of the Company's executive officers will be paid for by the Company. The following table summarizes the compensation paid for the last two fiscal years to the Chief Executive Officer and to each of the Company's most highly compensated officers whose total annual salary and bonus for the fiscal year ended December 31, 1995 exceeded $100,000. SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation(1) Compensation ---------------------------- -------------- Restricted Other Annual Stock Name Principal Position Year Salary Compensation Awards --------------------- -------------------------------------- ------ ---------- -------------- -------------- Marshall W. Pagon ... President and Chief Executive Officer 1995 $150,000 -- -- 1994 $150,000 -- -- Robert N. Verdecchio Senior Vice President, Chief Financial 1995 $122,083 -- $133,450(3) Officer and Assistant Secretary 1994 $ 90,000 -- -- Howard E. Verlin .... Vice President, Cable and Satellite 1995 $100,000 -- $ 95,321(3) Television, and Secretary 1994 $ 65,000 -- -- Guyon W. Turner ..... Vice President, Broadcast Television 1995 $130,486 $18,200(2) $ 95,321(3) 1994 $140,364 $20,480(2) --
- ------ (1) The Company's executive officers have never received any salary or bonus compensation from the Company. The salary amounts presented above were paid by the Management Company. There are no employment agreements between the Company and its executive officers. (2) Includes $18,000 housing allowance paid by the Company. (3) Represents grants of the Parent's Non-Voting Common Stock in 1995 (875 shares to Mr. Verdecchio and 625 shares each to Messrs. Verlin and Turner). Amounts shown in the table are based on a valuation prepared for the Parent at the time of the grants. One-fourth of the shares vest on December 31 of each of 1995, 1996, 1997 and 1998. Upon the completion of this Offering, it is anticipated that all of the Parent's Non-Voting Common Stock will be exchanged for shares of Class A Common Stock pursuant to the Managaement Share Exchange. INCENTIVE PROGRAM GENERAL The Incentive Program, which includes the Restricted Stock Plan (as defined), the 401(k) Plans (as defined) and the Stock Option Plan (as defined), 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 78 to purchase Class A Common Stock. Awards under the Restricted Stock Plan and the 401(k) Plans 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 the Company's financial results for the comparable period of the prior year. The Company has authorized up to 720,000 shares of Class A Common Stock in connection with the Incentive Program (subject to adjustment to reflect stock dividends, stock splits, recapitalizations, and similar changes in the capitalization of Pegasus). The Company believes that the Restricted Stock Plan and 401(k) Plans result in greater increases in stockholder value than result from a conventional stock option program, because these plans create a clear cause and effect relationship between initiatives taken to increase Location Cash Flow and the amount of incentive compensation that results therefrom. Although the Restricted Stock Plan and 401(k) Plans like conventional stock option programs provide compensation to employees as a function of growth in stockholder value, the tax and accounting treatments of these programs are different. For tax purposes, incentive compensation awarded under the Restricted Stock Plan (upon vesting) and the 401(k) Plans is fully tax deductible as compared to conventional stock option grants which generally are only partially tax deductible upon exercise. For accounting purposes, conventional stock option programs generally do not result in a charge to earnings while compensation under the Restricted Stock Plan and the 401(k) Plans do result in a charge to earnings. The Company believes that these differences result in a lack of comparability between the EBITDA of companies that utilize conventional stock option programs and the EBITDA of the Company. The table below lists the specific maximum components of the Restricted Stock Plan and the 401(k) Plans in terms of a $1 increase in annual Location Cash Flow.
Component Amount ------------------------------------------------------------------------------------------ ---------- Restricted Stock grants to general managers based on the increase in annual Location Cash Flow of individual business units ....................................................... 6cents Restricted Stock grants to department managers based on the increase in annual Location Cash Flow of individual business units .................................................. 6cents Restricted Stock grants to corporate managers (other than executive officers) based on the Company-wide increase in annual Location Cash Flow ...................................... 3cents Restricted Stock grants to employees selected for special recognition .................... 5cents Restricted Stock grants under the 401(k) Plan for the benefit of all eligible employees and allocated pro-rata based on wages ................................................... 10cents ---------- Total ................................................................................ 30cents ==========
Currently, the Company has seven general managers, 27 department managers and nine corporate managers. 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 (i) special recognition awards and (ii) awards made to the extent that an employee does not receive a matching contribution because of restrictions of the Internal Revenue Code of 1986, as amended (the "Code"). Executive Officers and non-employee directors are eligible to receive options under the Stock Option Plan. RESTRICTED STOCK PLAN In September 1996, Pegasus adopted the Pegasus Restricted Stock Plan (the "Restricted Stock Plan" and, together with the 401(k) Plans and the Stock Option Plan, the "Incentive Program"), which was also approved by Pegasus' stockholders in September 1996. Under the Restricted Stock Plan, 270,000 shares of Class A Common Stock (subject to adjustment to reflect stock dividends, stock splits, recapitalizations, and similar changes in the capitalization of Pegasus) are available for granting restricted stock awards to eligible employees of the Company who have completed at least one year of service. The Restricted Stock Plan provides for three types of restricted stock awards that are made in the form of Class A Common Stock as 79 shown in the table above: (i) profit sharing awards to general managers, department managers and corporate managers (other than executive officers); (ii) special recognition awards for consistency (team award), initiative (a team or individual award), problem solving (a team or individual award) and individual excellence; and (iii) awards that are made to the extent that an employee does not receive a matching contribution under the U.S. 401(k) Plan because of restrictions of the Code. Administration. The Restricted Stock Plan is administered by a committee whose members are selected by Pegasus' Board of Directors (the "Restricted Stock Plan Committee"). With respect to special recognition awards made to managers who are officers or directors, the Restricted Stock Plan will be administered by a committee of not fewer than two non-employee directors of Pegasus, or the entire Board of Pegasus. Vesting. Restricted Stock Awards vest on the following schedule: 34% after two years of service with the Company (including years before the Restricted Stock Plan was established), 67% after three years of service and 100% after four years of service. 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 the Company prior to becoming vested. The grantee will, however, be entitled to vote the restricted stock and receive any dividends of record prior to vesting. Duration and Amendment of Restricted Stock Plan. The Restricted Stock Plan became effective in September 1996, and will terminate in September 2006. The Board of Directors of Pegasus may amend, suspend or terminate the Restricted Stock Plan, and the Restricted Stock Plan administrator may amend any outstanding restricted stock awards, at any time, subject to stockholder approval under certain circumstances, including increases in the number of shares authorized under the plan. A grantee must approve the suspension, discontinuance or amendment of the Restricted Stock Plan or the agreement evidencing his restricted stock award, if such action would materially impair the rights of the grantee under any restricted stock award previously granted to him or her. Restricted Stock Awards. The following special recognition awards have been made under the Restricted Stock Plan: Number of Name and Position Shares(1) ----------------------------------------------------- ----------------- Marshall W. Pagon, President and Chief Executive Officer ........................ N/A(2) Robert N. Verdecchio, Senior Vice President, Chief Financial Officer and Assistant Secretary .......... 843 Howard E. Verlin, Vice President, Cable and Satellite Television and Secretary ................. 0 Guyon W. Turner, Vice President, Broadcast Television 0 Executive Group ..................................... 843 Non-Executive Director Group ........................ N/A(2) Non-Executive Officer Employee Group ................ 2,530 ----------- Total ..................................... 3,373 =========== - ------ (1) Number of shares of Class A Common Stock subject to restricted stock awards granted to date, based upon an assumed initial offering price of $15.00 per share of Class A Common Stock. (2) Marshall W. Pagon and non-executive directors are not eligible to receive the special recognition awards under the Restricted Stock Plan. 80 Had the Restricted Stock Plan been in effect for the last fiscal year, the following profit sharing awards would have been made under the Restricted Stock Plan: Name and Position Number of Shares(1) --------------------------------------------------------- -------------------- Marshall W. Pagon, President and Chief Executive Officer ............................ N/A(2) Robert N. Verdecchio, Senior Vice President, Chief Financial Officer and Assistant Secretary .............. N/A(2) Howard E. Verlin, Vice President, Cable and Satellite Television and Secretary ..................... N/A(2) Guyon W. Turner, Vice President, Broadcast Television ... N/A(2) Executive Group ......................................... N/A(2) Non-Executive Director Group ............................ N/A(2) Non-Executive Officer Employee Group .................... 16,867 - ------ (1) Number of shares of Class A Common Stock, based upon an assumed initial public offering price of $15.00 per share of Class A Common Stock. (2) The Company's executive officers and non-executive directors are not eligible to participate in the profit sharing awards under the Restricted Stock Plan. STOCK OPTION PLAN In September 1996, Pegasus adopted the Pegasus Communications 1996 Stock Option Plan (the "Stock Option Plan"), which was also approved by Pegasus' stockholders in September 1996. Under the Stock Option Plan, up to 450,000 shares of Class A Common Stock (subject to adjustment to reflect stock dividends, stock splits, recapitalizations, and similar changes in the capitalization of Pegasus) are available for the granting of nonqualified stock options ("NQSOs") and options qualifying as incentive stock options ("ISOs") under Section 422 of the Code. Executive officers, who are not eligible to receive profit sharing awards under the Restricted Stock Plan, are eligible to receive NQSOs or ISOs under the Stock Option Plan, but no executive officer may be granted options covering more than 275,000 shares of Class A Common Stock under the Stock Option Plan. Directors of Pegasus who are not employees of the Company are eligible to receive NQSOs under the Stock Option Plan. Currently, five executive officers and one non-employee director are eligible to receive options under the Stock Option Plan. Administration. The Stock Option Plan is administered by a committee of not fewer than two non-employee directors of Pegasus, or the entire Board of Pegasus (the "Stock Option Plan Committee"). Executive officers and non-employee directors selected by the Stock Option Plan Committee will be eligible to receive options based on an executive officer's or non-employee director's contribution to the achievement of the Company's objectives and other relevant matters. Terms and Conditions of Options. When an option is granted, the Stock Option Plan Committee determines the term of the option (which may not be more than ten years), the exercise price (which may not be less than the fair market value of Class A Common Stock on the date of grant), and the date(s) on which the option becomes exercisable. However, ISOs granted to a person who owns more than 10% of the combined voting power of the stock of Pegasus (or of a subsidiary or parent) must have a term of not more than five years, and an exercise price of not less than 110% of the fair market value of Class A Common Stock on the date of grant. Options automatically become exercisable upon a Change of Control (as defined in the Stock Option Plan). The Stock Option Plan Committee 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 membership (for any reason, including death or disability). However, an ISO will expire no later than (i) three months after termination of employment for a reason other than death or disability, or (ii) 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. 81 Duration and Amendment of Stock Option Plan. The Stock Option Plan will terminate in September 2006 (ten years after it was adopted by the Board of Directors of Pegasus). The Board of Directors of Pegasus may amend, suspend or terminate the Stock Option Plan, and the Stock Plan Committee 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, and an amendment increasing the duration of the Stock Option Plan with respect to ISOs. Further, an optionee must approve the suspension, discontinuance or amendment of the Stock Option Plan or the agreement evidencing his or her option, if such action would materially impair the rights of the optionee under any option previously granted to him or her. Federal Income Tax Treatment of Options. ISOs. If the requirements of Section 422 of the Code are met, an optionee recognizes no income upon the grant or exercise of an ISO (unless the alternative minimum tax rules apply), and the Company is not entitled to a deduction. NQSOs. An optionee recognizes no income at the time an NQSO is granted. Upon exercise of the NQSO, 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 Code, the Company will be entitled to a tax deduction in the amount and at the time that an optionee recognizes ordinary income with respect to an NQSO. 401(K) PLANS Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings Plan (the "U.S. 401(k) Plan") for eligible employees of PM&C and its domestic subsidiaries. In 1996, the Company's Puerto Rico subsidiary adopted the Pegasus Communications Puerto Rico Savings Plan (the "Puerto Rico 401(k) Plan" and, together with the U.S. 401(k) Plan, the "401(k) Plans") for eligible employees of the Company's Puerto Rico subsidiaries. The U.S. 401(k) Plan is intended to be qualified under sections 401(a) and 401(k) of the Code. The Puerto Rico 401(k) Plan is intended to be qualified under sections 1165(a) and 1165(e) of the Puerto Rico Internal Revenue Code of 1994, as amended. 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 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: (i) the Company 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; (ii) the Company, in its discretion, may contribute in 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); and (iii) the Company 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. 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. 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 on the following schedule: 34% after two years of service with the Company (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. To the extent a participant's account under the 401(k) Plans is invested in Class A Common Stock (one of eight investment alternatives currently available under the 401(k) Plans), distributions are made in Class A Common Stock. As of August 15, 1996, $88,225 of employee contributions are held by the Trustees of the 401(k) Plans pending the purchase of Class A Common Stock. 82 OWNERSHIP AND CONTROL The following table sets forth certain information with respect to the beneficial holdings of each director, each of the executive officers named in the Summary Compensation Table, and all executive officers and directors as a group, as well as the holdings of each stockholder who was known to Pegasus to be the beneficial owner, as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of more than 5% of the Class A Common Stock and Class B Common Stock and gives effect, based upon an initial public offering price of $15.00 per share, to the Transactions. 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 immediately 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. The Parent and Pegasus Capital, L.P. hold in the aggregate all shares of Class B Common Stock, representing 49.4% of the Common Stock (and 90.7% of the combined voting power of all voting stock) of Pegasus on a fully diluted basis. Marshall W. Pagon is deemed to be the beneficial owner of all of the Class B Common Stock. Upon consummation of this Offering and the Transactions, the outstanding capital stock of the Parent will consist of 64,119 shares of Class A Voting Common Stock and 5,000 shares of Parent Non-Voting Stock, all of which will be beneficially owned by Marshall W. Pagon. See "Risk Factors - -- Concentration of Share Ownership and Voting Control by Marshall W. Pagon."
Pegasus Class B Common Stock Pegasus Class A Pegasus Class A Beneficially Common Stock Beneficially Common Stock Beneficially Owned Before and After Owned Before Offering Owned After Offering Offering ------------------------- ------------------------- ----------------------- Beneficial Owner Shares % Shares % Shares % ------------------------- -------------- ------- -------------- ------- ----------- -------- Marshall W. Pagon(1)(2) . 4,483,805(3) 73.7% 4,483,805(3) 49.4% 4,483,805 100.0% Guyon W. Turner(1) ...... 114,184 7.1% 114,184 2.5% -- -- Robert N. Verdecchio(1) . 191,328 12.0% 191,328 4.2% -- -- Howard E. Verlin ........ 57,092 3.6% 57,092 1.2% -- -- Donald W. Weber(4) ...... 3,385 (5) 3,385 (5) -- -- Harron Communications Corp.(6) 70 East Lancaster Avenue Frazer, PA 19355 ....... 795,303 49.7% 795,303 17.3% -- -- Directors and Executive Officers as a Group (6 persons)(7) ............ 4,849,794 79.7% 4,849,794 53.4% 4,483,805 100.0%
- ------ (1) The address of this person is c/o Pegasus Communications Management Company, 5 Radnor Corporate Center, Suite 454, 100 Matsonford Road, Radnor, Pennsylvania 19087. (2) Pegasus Capital, L.P. holds 1,124,015 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 3,359,790 remaining shares of Class B Common Stock are owned by the Parent. All Class A Voting Common Stock of the Parent 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. As such, Mr. Pagon is the beneficial owner of 100% of Class B Common Stock with sole voting and investment power over all such shares. (3) Represents 4,483,805 shares of Class B Common Stock, which are convertible into shares of Class A Common Stock on a one-for-one basis. (4) Consists of 3,385 shares of Class A Common Stock issuable upon the exercise of the vested portion of outstanding stock options. (5) Represents less than 1% of the outstanding shares of the class of Common Stock. (6) Under the terms of a stockholder's agreement entered into by the Company in connection with the Michigan/Texas DBS Acquisition, the Company has a right of first offer to purchase any shares sold by Harron in a private transaction exempt from registration under the Securities Act. (7) See footnotes (2), (3) and (4). 83 PRO FORMA ORGANIZATIONAL STRUCTURE AND OWNERSHIP INTERESTS(1) CLASS A COMMON STOCK CLASS B COMMON STOCK Marshall W. Pagon Public Participants in Stockholders the Registered in this Exchange Offer Parent and Offering and Management Pegasus Capital, (2) Share Exchange Harron Other L.P. (3) (4) (5) (6) 33.0% 8.0% 8.8% 0.8% 49.4% 100.0% Pegasus 100.0% PM&C - ------ (1) This chart assumes an initial public offering price of $15.00 per share of Class A Common Stock and that all holders of the PM&C Class B Shares have accepted the Registered Exchange Offer. (2) Consists of 3,000,000 shares of Class A Common Stock offered to the public in this Offering, which represents 6.1% of the voting power, and does not give effect to any exercise of the Underwriters' over-allotment option. (3) Consists of 191,792 shares of Class A Common Stock offered to the holders of the PM&C Class B Shares pursuant to the Registered Exchange Offer (assuming all holders of the PM&C Class B Shares accept the Registered Exchange Offer), which represents 0.4% of the voting power; 263,606 shares of the Company's Class A Common Stock to be issued in connection with the Management Share Exchange, which represents 0.5% of the voting power; and 269,964 shares initially issued as Class B Common Stock and transferred as Class A Common Stock to certain members of management who are participants in the Management Share Exchange, which represents 0.5% of the voting power. (4) Consists of 795,303 shares of the Class A Common Stock to be issued to Harron Communications Corp. ("Harron") in connection with the Michigan/Texas DBS Acquisition, which represents 1.6% of the voting power. (5) Includes 10,000 shares of the Company's Class A Common Stock to be issued in connection with the Portland Acquisition and 66,667 shares of the Company's Class A Common Stock to be issued in connection with the Portland LMA. (6) Consists of 3,293,123 shares of Class B Common Stock to be issued to the Parent in exchange for the Parent's contribution of all of the PM&C Class A Shares (after giving effect to 87,312 shares of Class B Common Stock transferred as Class A Common Stock to certain members of management who are participants in the Management Share Exchange); 1,124,015 shares to be issued to Pegasus Capital, L.P. in connection with the Management Agreement Acquisition (after giving effect to 182,652 shares of Class B Common Stock transferred as Class A Common Stock to certain members of management who are participants in the Management Share Exchange); and 66,667 shares to be issued to the Parent in connection with the Portland Acquisition. Marshall W. Pagon is deemed to be the beneficial owner of all Common Stock held by the Parent and Pegasus Capital, L.P. See footnote 2 to the "Ownership and Control" table above. As such, Mr. Pagon has control of over 90.7% of the voting power of the Common Stock. 84 DESCRIPTION OF INDEBTEDNESS NOTES PM&C, which will become the direct subsidiary of Pegasus upon completion of this Offering, has outstanding $85.0 million in aggregate principal amount of its 12 1/2 % Series B Senior Subordinated Notes due 2005 (the "Notes"). The Notes are subject to the terms and conditions of an Indenture dated as of July 7, 1995 among PM&C, certain of its direct and indirect subsidiaries, as guarantors (the "Guarantors"), and First Union National Bank, as trustee, a copy of which is filed as an exhibit to the registration statement of which this Prospectus is a part. The Notes are subject to all of the terms and conditions of the Indenture. The following summary of the material provisions of the Indenture does not purport to be complete, and is subject to, and qualified in its entirety by reference to, all of the provisions of the Indenture and those terms made a part of the Indenture by the Trust Indenture Act of 1939, as amended. All terms defined in the Indenture and not otherwise defined herein are used below with the meanings set forth in the Indenture. General. The Notes will mature on July 1, 2005 and bear interest at 12 1/2 % per annum, payable semi-annually on January 1 and July 1 of each year. The Notes are general unsecured obligations of PM&C and are subordinated in right of payment to all existing and future Senior Debt of PM&C. The Notes are unconditionally guaranteed, on an unsecured senior subordinated basis, jointly and severally, by the Guarantors. Optional Redemption. The Notes are subject to redemption at any time, at the option of PM&C, in whole or in part, on or after July 1, 2000 at redemption prices (plus accrued interest and Liquidated Damages, if any) starting at 106.25% of principal during the 12-month period beginning July 1, 2000 and declining annually to 100% of principal on July 1, 2003 and thereafter. In addition, prior to July 1, 1998, PM&C may redeem up to 33 1/3 % of the aggregate principal amount of the Notes with the net proceeds of one or more public offerings of its common equity or the common equity of PM&C's direct parent, to the extent such proceeds are contributed (within 120 days of any such offering) to PM&C as common equity, at a price equal to 112.5% of the principal amount thereof plus accrued interest and Liquidated Damages, if any, provided that at least 66 2/3% of the original aggregate principal amount of the Notes remains outstanding thereafter. Change of Control. Upon the occurrence of a Change of Control, each holder of the Notes may require the Company to repurchase all or a portion of such holder's Notes at a purchase price equal to 101% of the principal amount thereof, together with accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of repurchase. Generally, a Change of Control, means the occurrence of any of the following: (i) the disposition of all or substantially all of PM&C's assets to any person other than Marshall W. Pagon or his Related Parties, (ii) the adoption of a plan relating to the liquidation or dissolution of PM&C, (iii) the consummation of any transaction in which a person becomes the beneficial owner of more of the voting stock of PM&C than is beneficially owned at such time by Mr. Pagon and his Related Parties, or (iv) the first day on which a majority of the members of the Board of Directors of PM&C or the Parent are not Continuing Directors. Subordination. The Notes are general unsecured obligations of PM&C and are subordinate to all existing and future Senior Debt of PM&C. The Notes will rank senior in right of payment to all junior subordinated Indebtedness of PM&C. The Subsidiary Guarantees are general unsecured obligations of the Guarantors and are subordinated to the Senior Debt and to the guarantees of Senior Debt of such Guarantors. The Subsidiary Guarantees rank senior in right of payment to all junior subordinated Indebtedness of the Guarantors. Certain Covenants. The Indenture contains a number of covenants restricting the operations of PM&C, which, among other things, limit the ability of PM&C to incur additional Indebtedness, pay dividends or make distributions, sell assets, issue subsidiary stock, restrict distributions from Subsidiaries, create certain liens, enter into certain consolidations or mergers and enter into certain transactions with affiliates. Events of Default. Events of Default under the Indenture include the following: (i) a default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Notes; (ii) default in payment when due of the principal of or premium, if any, on the Notes; (iii) failure by PM&C to comply with certain provisions of the Indenture (subject, in some but not all cases, to notice and cure periods); (iv) default 85 under certain items of Indebtedness for money borrowed by PM&C or any of its Restricted Subsidiaries; (v) failure by PM&C or any Restricted Subsidiary that would be a Significant Subsidiary to pay final judgments aggregating in excess of $2.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; (vi) except as permitted by the Indenture, any Subsidiary Guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee; or (vii) certain events of bankruptcy or insolvency with respect to PM&C or any of its Restricted Subsidiaries. Upon the occurrence of an Event of Default, with certain exceptions, the Trustee or the holders of at least 25% in principal amount of the then outstanding Notes may accelerate the maturity of all the Notes as provided in the Indenture. NEW CREDIT FACILITY PM&C entered into a seven-year, senior secured revolving credit facility. The New Credit Facility will be for $50.0 million upon the completion of the lending consortium. Until such completion, or if other lenders do not join the consortium, the New Credit Facility will be for $35.0 million. Proceeds of borrowings under the New Credit Facility may be used for acquisitions approved by the lenders in the TV, DBS or Cable businesses and for general corporate purposes. All subsidiaries of PM&C (other than Pegasus Cable Television of Connecticut, Inc. and subsidiaries that hold certain of the Company's broadcast licenses) are guarantors of the New Credit Facility, which is collateralized by a security interest in all assets of, and all stock in, Pegasus' subsidiaries (other than the assets of Pegasus Cable Television of Connecticut, Inc., the assets and stock of certain of the Company's license-holding subsidiaries, and any PM&C Class B Shares not held by Pegasus following the Registered Exchange Offer). Borrowings under the New Credit Facility bear interest, payable monthly, at LIBOR or the prime rate (as selected by the Company) plus spreads that vary with PM&C's ratio of total debt to operating cash flow. The New Credit Facility required payment of a closing fee of approximately $950,000 (which will increase by $350,000 to approximately $1.3 million upon completion of the lending consortium) and an annual commitment fee of 0.5% of the unused portion of the commitment payable quarterly in arrears and requires PM&C to purchase an interest rate hedging contract covering an amount equal to at least 50% of the total amount of borrowings from the reducing revolving facility for a minimum period of at least two years. The New Credit Facility requires prepayments and concurrent reductions of the commitment from asset sales or other transactions outside the ordinary course of business (subject to provisions permitting the proceeds of certain sales to be used to make approved acquisitions within stated time periods without reducing the commitments of the lenders) and contains covenants limiting the amounts of indebtedness that PM&C may incur, requiring the maintenance of minimum fixed charge coverage, interest coverage and debt service coverage ratios and limiting capital expenditures, dividends and other restricted payments. The New Credit Facility also contains other customary covenants, representations, warranties, indemnities, conditions precedent to closing and borrowing, and events of default. Beginning March 31, 1998, commitments under the New Credit Facility will reduce in quarterly amounts ranging from $1.3 million per quarter in 1998 to $2.3 million in 2002. All indebtedness under the New Credit Facility will constitute Senior Debt (as defined in the Indenture). See "Description of Indebtedness -- Notes." 86 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company (which, in this section, refers only to Pegasus) consists of (i) 30,000,000 shares of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), (ii) 15,000,000 shares of Class B Common Stock, par value $.01 per share (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"), and (iii) 5,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"). Upon the closing of this Offering and after giving effect to the Transactions, 4,600,704 shares of Class A Common Stock and 4,483,805 shares of Class B Common Stock will be issued and outstanding, assuming an initial public offering price of $15.00 per share. There are currently no shares of Preferred Stock outstanding. The following summary description relating to the Company's capital stock sets forth the material terms of the capital stock, but does not purport to be complete. A description of the Company's capital stock is contained in the Amended and Restated Certificate of Incorporation, which is filed as an exhibit to the registration statement of which this Prospectus forms a part. Reference is made to such exhibit for a detailed description of the provisions thereof summarized below. COMMON STOCK Voting, Dividend and Other Rights. The voting powers, preferences and relative rights of the Class A Common Stock and the Class B Common Stock are identical in all respects, except that (i) the holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share, (ii) stock dividends on Class A Common Stock may be paid only in shares of Class A Common Stock and stock dividends on Class B Common Stock may be paid only in shares of Class B Common Stock and (iii) shares of Class B Common Stock have certain conversion rights and are subject to certain restrictions on ownership and transfer described below under "Conversion Rights and Restrictions on Transfer of Class B Common Stock." Any amendment to the 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: (i) 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; (ii) any increase in the number of shares of Class A Common Stock into which shares of Class B Common Stock are convertible; (iii) any relaxation on the restrictions on transfer of the Class B Common Stock; or (iv) 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 after the completion of this Offering (except for parallel action with respect to Class A Common Stock in connection with stock dividends, stock splits, recapitalizations and similar changes in the capitalization of Pegasus). Except as described above 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. After the sale of the Class A Common Stock offered hereby, assuming an initial public offering price of $15.00 per share and the consummation of the Transactions, the outstanding shares of Class A Common Stock will equal 50.6% of the total Common Stock outstanding, and the holders of Class B Common Stock will have control of approximately 90.7% of the combined voting power of the Common Stock. The holders of the Class B Common Stock will, therefore, have the power to elect the entire Board of Directors of the Company. In particular, Marshall W. Pagon, by virtue of his beneficial ownership of all of the Class B Common Stock, will have sufficient voting power to determine the outcome of any matter submitted to the stockholders for approval (except matters on which the holders of Class A Common Stock are entitled to vote separately as a class), including the power to determine the outcome of all corporate transactions. Each share of Class A Common Stock and Class B Common Stock is entitled to receive dividends if, as and when declared by the Board of Directors of the Company out of funds legally available therefor. The Class A Common Stock and Class B Common Stock share equally, on a share-for-share basis, in any cash dividends declared by the Board of Directors. 87 In the event of a merger or consolidation to which the Company is a party, each share of Class A Common Stock and Class B Common Stock will be entitled to receive the same consideration, except that holders of Class B Common Stock may receive stock with greater voting power in lieu of stock with lesser voting power received by holders of the Company's Class A Common Stock in a merger in which the Company is not the surviving corporation. Stockholders of the Company have no preemptive or other rights to subscribe for additional shares. Subject to any rights of holders of any Preferred Stock, all holders of Common Stock, regardless of class, are entitled to share equally on a share for share basis in any assets available for distribution to stockholders on liquidation, dissolution or winding up of the Company. No shares of Common Stock are subject to redemption or a sinking fund. All shares of Class B Common Stock are, and all shares of Class A Common Stock offered hereby will be, when so issued or sold, validly issued, fully paid and nonassessable. In the event of any increase or decrease in the number of outstanding shares of either Class A Common Stock or Class B Common Stock from a stock split, combination or consolidation of shares or other capital reclassification, the Company 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. Conversion Rights and Restrictions on Transfer of Class B Common Stock. The Class A Common Stock has no conversion rights. Each share of Class B Common Stock is convertible at the option of the holder at any time and from time to time into one share of Class A Common Stock. The Company's 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 Permitted Transferee (as defined below) must present such shares to the Company for conversion into an equal number of shares of Class A Common Stock upon such transfer. Thereafter, such shares of Class A Common Stock may be freely transferred to persons other than Permitted Transferees, subject to applicable securities laws. Shares of Class B Common Stock may not be transferred except to (i) Marshall W. Pagon or any "immediate family member" of his; (ii) any trust (including a voting trust), corporation, partnership or other entity, more than 50% of the voting equity interests of which are owned directly or indirectly by (or, in the case of a trust not having voting equity interests which is more than 50% for the benefit of) and which is controlled by, one or more persons referred to in this paragraph; or (iii) the estate of any person referred to in this paragraph until such time as the property of such estate is distributed in accordance with such person's will or applicable law (collectively, "Permitted Transferees"). "Immediate family member" means the spouse or any parent of Marshall W. Pagon, any lineal descendent of a parent of Marshall W. Pagon and the spouse of any such lineal descendent (parentage and descent in each case to include adoptive and step relationships). Upon any sale or transfer of ownership or voting rights to a transferee other than a Permitted Transferee or if an entity no longer remains a Permitted Transferee, such shares of Class B Common Stock will automatically convert into an equal number of shares of Class A Common Stock. Accordingly, no trading market is expected to develop in the Class B Common Stock and the Class B Common Stock will not be listed or traded on any exchange or in any market. Effects of Disproportionate Voting Rights. The disproportionate voting rights of the Class A Common Stock and Class B Common Stock could have an adverse effect on the market price of the Class A Common Stock. Such disproportionate voting rights may make the Company a less attractive target for a takeover than it otherwise might be, or render more difficult or discourage a merger proposal, a tender offer or a proxy contest, even if such actions were favored by stockholders of the Company other than the holders of the Class B Common Stock. Accordingly, such disproportionate voting rights may deprive holders of Class A Common Stock of an opportunity to sell their shares at a premium over prevailing market prices, since takeover bids frequently involve purchases of stock directly from stockholders at such a premium price. PREFERRED STOCK The Company has authorized 5,000,000 shares of Preferred Stock. No shares of Preferred Stock have been issued and the Company does not presently contemplate the issuance of such shares. The Board of 88 Directors is empowered by Pegasus' Amended and Restated Certificate of Incorporation to designate and issue from time to time one or more classes or series of Preferred Stock without any action of the stockholders. The Board of Directors may authorize issuance in one or more classes or series, and may fix and determine the relative rights, preferences and limitations of each class or series so authorized. Such action could adversely affect the voting power of the holders of the Common Stock or could have the effect of discouraging or making difficult any attempt by a person or group to obtain control of the Company. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is First Union National Bank. LIMITATION ON DIRECTORS' LIABILITY The Delaware General Corporation Law authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breach of directors' fiduciary duty of care. The duty of care requires that, when acting on behalf of the corporation, directors must exercise an informed business judgment based on all material information reasonably available to them. In the absence of the limitations authorized by the Delaware statute, directors could be accountable to corporations and their stockholders for monetary damages for conduct that does not satisfy their duty of care. Although the statute does not change directors' duty of care, it enables corporations to limit available relief to equitable remedies such as injunction or rescission. Pegasus' Amended and Restated Certificate of Incorporation limits the liability of Pegasus' directors to Pegasus or its stockholders to the fullest extent permitted by the Delaware statute. Specifically, the directors of Pegasus will not be personally liable for monetary damages for breach of a director's fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to Pegasus or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation law or (iv) for any transaction from which the director derived an improper personal benefit. The inclusion of this provision in the Amended and Restated Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited Pegasus and its stockholders. 89 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, assuming an initial public offering price of $15.00 per share of Class A Common Stock, and after giving effect to the issuance of shares contemplated by the Transactions, the Company will have outstanding 4,600,704 shares of Class A Common Stock and 4,483,805 shares of Class B Common Stock, all of which shares of Class B Common Stock are convertible into shares of Class A Common Stock on a share for share basis. Of these shares, the 3,000,000 shares of Class A Common Stock sold in this Offering will be tradeable without restriction unless they are purchased by affiliates of the Company. All shares to be received pursuant to the Registered Exchange Offer will also be tradeable without restriction, except that the terms of the Registered Exchange Offer are expected to require that each exchanging holder agrees not to sell, otherwise dispose of or pledge any shares of the Class A Common Stock received in the Registered Exchange Offer for a period of at least 180 days after the date of this Prospectus without the prior written consent of Lehman Brothers Inc. The approximately 1,600,704 remaining shares of Class A Common Stock and all of the 4,483,805 shares of Class B Common Stock are "restricted securities" under the Securities Act. These "restricted securities" and any shares purchased by affiliates of the Company in this Offering may be sold only if they are registered under the Securities Act or pursuant to an applicable exemption from the registration requirements of the Securities Act, including Rule 144 and Rule 701 thereunder. The holders of the remaining 4,846,409 shares have agreed not to sell, otherwise dispose of or pledge any shares of the Company's Common Stock or securities convertible into or exercisable or exchangeable for such Common Stock for 180 days after the date of this Prospectus without the prior written consent of Lehman Brothers Inc. All of the Company's directors and executive officers are subject to the 180-day lock-up. In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares for at least two years, including affiliates, may sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding Class A Common Stock (approximately 90,845 shares immediately after this Offering) or the average weekly trading volume in the Class A Common Stock on the Nasdaq during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain provisions regarding the manner of sale, notice requirements and the availability of current public information about the Company. A person who is not deemed an affiliate of the Company and who has beneficially owned restricted shares for three years from the date of acquisition of restricted securities from the Company or any affiliate is entitled to sell such shares under Rule 144(k) freely and without restriction or registration under the Securities Act. As used in Rule 144, affiliates of the Company generally include its directors, executive officers and persons directly or indirectly owning 10% or more of the Class A Common Stock. Without consideration of the lock-up agreements described above, none of the restricted securities would be available for immediate sale in the public market in reliance on Rule 144(k) or would be available for immediate sale under Rule 144. The Securities and Exchange Commission (the "Commission") has proposed to amend the holding period required by Rule 144 to permit sales of "restricted securities" after one year rather than two years (and two years rather than three years for non-affiliates who desire to sell such shares under Rule 144(k). If such proposed amendment were enacted, the "restricted securities" would become freely tradeable (subject to any applicable contractual restrictions) at correspondingly earlier dates. Under Rule 701, any employee, officer or director of, or consultant to the Company who prior to this Offering purchased shares pursuant to a written compensatory plan or contract and who is not an affiliate of the Company, is entitled to sell such shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 commencing 90 days after this Offering. Rule 701 also permits affiliates to sell such shares without having to comply with the Rule 144 holding period restrictions commencing 90 days after this Offering. As of the date hereof, approximately 264,449 shares of Class A Common Stock would be eligible for sale under Rule 701. OPTIONS AND WARRANTS As additional remuneration for joining the Board of Directors of PM&C, Donald W. Weber was granted in April 1996 an option to purchase 3,385 shares of Class A Common Stock at an exercise price of $15.00 per 90 share (assuming an initial public offering price of $15.00 per share). Mr. Weber's option vested upon issuance, is exercisable until November 2000 and, at the time of grant, was issued at an exercise price equal to fair market value at the time Mr. Weber was elected a director. In connection with the acquisition of WTLH, the Parent issued to various trusts controlled by the sellers of WTLH (the "WTLH Trusts") the WTLH Warrants to purchase in the aggregate $1,000,000 of Class A Common Stock of Pegasus at the price to the public in this Offering, commencing on the date that the registration statement to which this Prospectus relates is declared effective and ending 120 days after such date. Assuming an initial public offering price of $15.00 per share of Class A Common Stock, the WTLH Trusts will have the right to acquire approximately 66,667 shares of Class A Common Stock. Such shares will be "restricted securities" within the meaning of Rule 144. REGISTRATION RIGHTS Class A Common Stock. In connection with the Michigan/Texas DBS Acquisition, the Company granted certain piggyback registration rights to Harron. These rights expire upon the Class A Common Stock issued to Harron becoming eligible for sale under Rule 144 of the Securities Act. Similar rights have been granted to the holder of the $1.0 million in shares of Class A Common Stock issued in connection with the acquisition of the Portland LMA and the $150,000 of shares of Class A Common Stock issued in connection with the Portland Acquisition. PM&C Class B Shares. The holders of the PM&C Class B Shares are entitled to certain demand and piggyback registration rights with respect to the registration of capital stock by the Parent or PM&C. These rights do not apply with respect to offerings by Pegasus. Although the Company expects that all holders of the PM&C Class B Shares will accept the Registered Exchange Offer, a possibility exists that some holders of the PM&C Class B Shares will retain their shares. It is likely that once this Offering is completed that these registration rights will provide little or no practical benefit to holders of the PM&C Class B Shares who fail to accept the Registered Exchange Offer. First, it is unlikely that PM&C, once it is a subsidiary of Pegasus, or the Parent will ever make a public equity offering. Thus, it is unlikely that holders would have an opportunity to exercise their piggyback registration rights. Second, the demand registration rights may be exercised only if the demand registration includes at least 25% of the PM&C Class B Shares originally issued. If, as the Company anticipates, the holders of more than 75% of the PM&C Class B Shares accept the Registered Exchange Offer, the remaining holders of the PM&C Class B Shares will not hold the 25% necessary to require registration of the PM&C Class B Shares. Third, even if holders of the PM&C Class B Shares retain more than 25% of their stock after the Registered Exchange Offer and can initiate a demand registration after July 7, 2000, the date when the demand registration right applies in the absence of a prior public equity offering by PM&C or the Parent, there is not expected to be a market for the PM&C Class B Shares. LOCK-UP AGREEMENT All of the executive officers and directors of Pegasus, who will be deemed to beneficially own 4,792,702 shares of Common Stock upon consummation of this Offering, have agreed with the Underwriters not to sell, otherwise dispose of or pledge any shares of the Common Stock or any securities convertible into or exercisable for such Common Stock for 180 days after the date of this Prospectus without the prior written consent of Lehman Brothers Inc. In addition, the terms of the Registered Exchange Offer are expected to require that each exchanging holder agree not to sell, otherwise dispose of or pledge any shares of the Class A Common Stock received in the Registered Exchange Offer for a period of at least 180 days after the date of this Prospectus without the consent of Lehman Brothers Inc. 91 UNDERWRITING Under the terms and subject to the conditions contained in the Underwriting Agreement, the form of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part, the Underwriters named below, for whom Lehman Brothers Inc., BT Securities Corporation, CIBC Wood Gundy Securities Corp. and PaineWebber Incorporated are acting as representatives (the "Representatives"), have severally agreed to purchase from Pegasus, and Pegasus has agreed to sell to each Underwriter, the aggregate number of shares of Class A Common Stock set forth opposite the name of each such Underwriter below: Number Underwriter of Shares ------------------------------------- ------------- Lehman Brothers Inc. ................ BT Securities Corporation ........... CIBC Wood Gundy Securities Corp. .... PaineWebber Incorporated ............ ------------- Total .............................. 3,000,000 ============= Pegasus has been advised by the Representatives that the Underwriters propose to offer the shares of Class A Common Stock to the public at the initial public offering price set forth on the cover page hereof, and to certain dealers at such initial public offering price less a selling concession not in excess of $____ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $____ per share to certain other Underwriters or to certain other brokers or dealers. After the initial offering to the public, the offering price and other selling terms may be changed by the Representatives. The Underwriting Agreement provides that the obligation of the several Underwriters to pay for and accept delivery of the shares of Class A Common Stock offered hereby are subject to approval of certain legal matters by counsel and to certain other conditions, including the condition that no stop order suspending the effectiveness of the Registration Statement is in effect and no proceedings for such purpose are pending or threatened by the Commission and that there has been no material adverse change or any development involving a prospective material adverse change in the condition of the Company from that set forth in the Registration Statement otherwise than as set forth or contemplated in this Prospectus, and that certain certificates, opinions and letters have been received from the Company and its counsel and independent auditors. The Underwriters are obligated to take and pay for all of the above shares of Class A Common Stock if any such shares are taken. Pegasus and the Underwriters have agreed in the Underwriting Agreement to indemnify each other against certain liabilities, including liabilities under the Securities Act. Pegasus has granted to the Underwriters an option to purchase up to an additional 450,000 shares of Class A Common Stock, exercisable solely to cover over-allotments, at the initial public offering price less the underwriting discounts and commissions shown on the cover page of this Prospectus. Such option may be exercised at any time within 30 days after the date of the Underwriting Agreement. To the extent that the option is exercised, each Underwriter will be committed to purchase a number of the additional shares of Class A Common Stock proportionate to such Underwriter's initial commitment as indicated in the preceding table. 92 The Underwriters have reserved for sale, at the initial public offering price, up to shares of Class A Common Stock offered hereby to employees of the Company and certain other individuals who have expressed an interest in purchasing such shares of Class A Common Stock in the Offering. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. The Representatives of the Underwriters have informed Pegasus that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. Stockholders of 4,792,702 shares have agreed not to, directly or indirectly, offer, sell or otherwise dispose of shares of Common Stock of Pegasus or any securities convertible into, or exercisable or exchangeable for such Common Stock, with certain limited exceptions, for a period of 180 days after the date of this Prospectus without the prior written consent of Lehman Brothers Inc. Pegasus has agreed not to offer, sell, contract to sell or otherwise issue any shares of Common Stock or other capital stock or any securities convertible into or exchangeable for, or any rights to acquire, Common Stock or other capital stock, with certain limited exceptions, prior to the expiration of 180 days from the date of this Prospectus without the prior written consent of Lehman Brothers Inc., other than (i) Class A Common Stock to be issued in this Offering and Common Stock to be issued pursuant to the Transactions, (ii) stock grants pursuant to the Incentive Program, and (iii) securities issued as consideration for an acquisition if the party being issued the securities agrees to similar lock-up provisions or if the securities issued are "restricted securities" under the Securities Act. Prior to this Offering, there has been no public market for the Class A Common Stock. The initial public offering price will be negotiated between Pegasus and the Representatives. Among the factors to be considered in determining the initial public offering price of the Class A Common Stock, in addition to the prevailing market conditions, will be the Company's historical performance, capital structure, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and consideration of the above factors in relation to market values of the companies in related businesses. An affiliate of CIBC Wood Gundy Securities Corp., one of the Representatives of this Offering, is one of the lenders under the New Credit Facility. CIBC Wood Gundy Securities Corp. has acted as a financial advisor to the Company in connection with, among other things, the selection of the Representatives. For its financial advisory services, CIBC Wood Gundy Securities Corp. has received a fee of $100,000. Under Rule 2710(c)(8) of the Conduct Rules of the National Association of Securities Dealers, Inc. (the "NASD"), if more than 10% of the net proceeds of a public offering of equity securities are to be paid to members of the NASD that are participating in the offering, or affiliated or associated persons, the price at which the equity securities are distributed to the public must be no lower than that recommended by a "qualified independent underwriter," as defined in Rule 2720 of the Conduct Rules of the NASD. Because CIBC Inc., an affiliate of CIBC Wood Gundy Securities Corp., one of the Representatives of this Offering, may receive more than 10% of the net proceeds of this Offering as a result of the repayment of amounts under the New Credit Facility, Lehman Brothers Inc. will act as a qualified independent underwriter in connection with this Offering. 93 LEGAL MATTERS The validity of the issuance of the Class A Common Stock offered hereby will be passed upon by Drinker Biddle & Reath, counsel for the Company. Michael B. Jordan, a partner of Drinker Biddle & Reath, is an Assistant Secretary of the Company. Certain legal matters in connection with this Offering will be passed upon for the Underwriters by Latham & Watkins, New York, New York. EXPERTS The Company's combined balance sheets as of December 31, 1994 and 1995 and the related combined statements of operations, statements of changes in total equity and statements of cash flows for each of the two years in the period ended December 31, 1995 included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The Company's combined statement of operations, statement of changes in total equity and statement of cash flows for the year ended December 31, 1993 included in this Prospectus, have been included herein in reliance on the report of Herbein + Company, Inc., independent accountants, given on the authority of that firm as experts in accounting and auditing. The balance sheets of Portland Broadcasting, Inc. as of September 25, 1994 and September 24, 1995 and the related statements of operations, statements of deficiency in assets and statements of cash flows for the fiscal years ended September 26, 1993, September 25, 1994 and September 24, 1995, included in this Prospectus, have been included herein in reliance on the report of Ernst & Young LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. The balance sheets of WTLH, Inc. as of December 31, 1994 and 1995 and the related statements of operations, statements of capital deficiency, and statements of cash flows for each of the two years in the period ended December 31, 1995, included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The combined balance sheets of the DBS Operations of Harron Communications Corp. as of December 31, 1994 and 1995 and the related combined statements of operations, and statements of cash flows for each of the two years in the period ended December 31, 1995 included in this Prospectus, have been included herein in reliance on the report of Deloitte & Touche, LLP, independent auditors, given on the authority of that firm as experts in accounting and auditing. The balance sheets of Dom's Tele-Cable, Inc. as of May 31, 1995 and 1996 and the related statements of operations and deficit, and statements of cash flows for each of the three years in the period ended May 31, 1996 included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. In March 1995, the Company, with the recommendation and approval of the Company's sole director, selected Coopers & Lybrand L.L.P. to act as independent accountants for the Company and informed Herbein + Company, Inc., the Company's independent accountants since 1990, of its decision. In connection with its audit for the year ended December 31, 1993 and through its dismissal in March 1995, there were no disagreements with Herbein + Company, Inc. on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures. Herbein + Company, Inc.'s report on the Company's financial statements for the fiscal year ended December 31, 1993 contained no adverse opinions or disclaimers of opinion and were not modified or qualified as to uncertainly, audit scope, or accounting principles. 94 ADDITIONAL INFORMATION The Company is not currently subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 under the Securities Act with respect to the registration of the Class A Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, omits certain information contained in the Registration Statement, and reference is made to the Registration Statement and the exhibits thereto for further information with respect to the Company and the Class A Common Stock to which this Prospectus relates. Statements contained herein concerning the provisions of any contract, agreement or other document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. The Registration Statement, including the exhibits and schedules filed therewith, may be inspected at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60606. Copies of such materials may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a web site at http://www.sec.gov that contains reports, proxy information statements and other information regarding registrants, like Pegasus, that file electronically with the Commission. As a result of this Offering of the Class A Common Stock, the Company will become subject to the informational requirements of the Exchange Act. PM&C, the direct subsidiary of the Company, has been subject to the informational requirements of the Exchange Act since October 5, 1995. The Company intends to furnish to its stockholders annual reports containing audited financial information and furnish quarterly reports containing condensed unaudited financial information for each of the first three quarters of each fiscal year. 95 [The inside back cover page contains a map of Puerto Rico which shows color coded regions where Cable TV operators operate. Below the map is the following color coded chart: Puerto Rico Cable TV Operators: MCT Cablevision (Pegasus) Dom's TeleCable TV (Pegasus) Cable TV del noroeste (Independent) Tele Ponce (Independent) Buena Vision (50% owned by TCI) Greater TV of San Juan (Century) Puerto Rico Totals* Population 3,483,000 TV Households 1,132,000 Homes Passed by Cable 735,000 Cable Subscribers 254,000 Cable Penetration 34% *Based on estimates provided by Media Fax, Inc. PEGASUS COMMUNICATIONS CORPORATION INDEX TO FINANCIAL STATEMENTS
Page -------- Pegasus Communications Corporation (a newly formed entity which has nominal assets and includes the combined operations of entities under common control) Report of Coopers & Lybrand L.L.P. .................................................................... F-2 Report of Herbein + Company, Inc. ..................................................................... F-3 Combined Balance Sheets as of December 31, 1994, 1995 and June 30, 1996 (unaudited) ................... F-4 Combined Statements of Operations for the years ended December 31, 1993, 1994, 1995 and six months ended June 30, 1995 (unaudited) and 1996 (unaudited) ................................................. F-5 Combined Statements of Changes in Total Equity for the years ended December 31, 1993, 1994, 1995 and June 30, 1996 (unaudited) ............................................................................ F-6 Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 (unaudited) and 1996 (unaudited) .......................................... F-7 Notes to Combined Financial Statements ................................................................ F-8 Portland Broadcasting, Inc. (an acquired entity) Report of Ernst & Young LLP ........................................................................... F-20 Balance Sheets as of September 25, 1994, September 24, 1995, and December 31, 1995 (unaudited) ........ F-21 Statements of Operations for fiscal year ended September 26, 1993, September 25, 1994, September 24, 1995 and fiscal quarters ended December 25, 1994 (unaudited) and December 31, 1995 (unaudited) ....... F-22 Statements of Deficiency in Assets for the fiscal years ended September 26, 1993, September 25, 1994 and September 24, 1995 and the fiscal quarter ended December 31, 1995 (unaudited) .................... F-23 Statements of Cash Flows for fiscal years ended September 26, 1993, September 25, 1994 and September 24, 1995 and fiscal quarter ended December 1994 (unaudited) and 1995 (unaudited) ..................... F-24 Notes to Financial Statements ......................................................................... F-25 WTLH, Inc. (an acquired entity) Report of Coopers & Lybrand L.L.P. .................................................................... F-29 Balance Sheets as of December 31, 1994, 1995 and February 29, 1996 (unaudited) ........................ F-30 Statements of Operations for the years ended December 31, 1994, 1995 and for the two months ended February 28, 1995 (unaudited) and February 29, 1996 (unaudited) ...................................... F-31 Statements of Capital Deficiency for the years ended December 31, 1994, 1995 and for the two months ended February 29, 1996 (unaudited) .................................................................. F-32 Statements of Cash Flows for the years ended December 31, 1994, 1995 and the two months ended February 28, 1995 (unaudited) and February 29, 1996 (unaudited) ............................................... F-33 Notes to Financial Statements ......................................................................... F-34 DBS Operations of Harron Communications Corp. (a proposed acquisition) Report of Deloitte & Touche LLP ....................................................................... F-40 Combined Balance Sheets as of December 31, 1994, 1995 and June 30, 1996 (unaudited) ................... F-41 Combined Statements of Operations for years ended December 31, 1994, 1995 and the six months ended June 30, 1995 (unaudited) and 1996 (unaudited) ............................................................ F-42 Combined Statements of Cash Flows for years ended December 31, 1994, 1995 and the six months ended June 30, 1995 (unaudited) and 1996 (unaudited) ............................................................ F-43 Notes to Combined Financial Statements ................................................................ F-44 Dom's Tele Cable, Inc. (an acquired entity) Report of Coopers & Lybrand L.L.P. .................................................................... F-48 Balance Sheets as of May 31, 1995 and 1996 ............................................................ F-49 Statements of Operations and Deficit for years ended May 31, 1994, 1995 and 1996 ...................... F-50 Statements of Cash Flows for the years ended May 31, 1994, 1995 and 1996 .............................. F-51 Notes to Financial Statements ......................................................................... F-52
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Pegasus Communications Corporation We have audited the accompanying combined balance sheets of Pegasus Communications Corporation and affiliates as of December 31, 1994 and 1995, and the related combined statements of operations, changes in total equity, and cash flows for each of the two years in the period ended December 31, 1995. 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 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 combined financial statements referred to above present fairly, in all material respects, the financial position of Pegasus Communications Corporation and affiliates as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania May 31, 1996 except as to Note 14 for which the date is October 1, 1996 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Pegasus Communications Corporation We have audited the accompanying combined statements of operations, changes in total equity, and cash flows of Pegasus Communications Corporation and affiliates for the year ended December 31, 1993. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined results of the operations and cash flows of Pegasus Communications Corporation and affiliates for the year ended December 31, 1993, in conformity with generally accepted accounting principles. HERBEIN + COMPANY, INC. Reading, Pennsylvania March 4, 1994 F-3 PEGASUS COMMUNICATIONS CORPORATION COMBINED BALANCE SHEETS
December 31, ------------------------------ June 30, 1994 1995 1996 ------------- ------------- -------------- (unaudited) ASSETS Current assets: Cash and cash equivalents ................. $ 1,380,029 $11,974,747 $ 3,199,051 Restricted cash ........................... -- 9,881,198 4,869,114 Accounts receivable, less allowance for doubtful accounts at December 31, 1994, 1995 and June 30, 1996 of $348,000, $238,000 and $223,000, respectively ..... 4,000,671 4,884,045 6,825,211 Program rights ............................ 1,097,619 931,664 1,194,954 Inventory ................................. 711,581 1,100,899 460,395 Deferred taxes ............................ 77,232 42,440 77,887 Prepaid expenses and other ................ 629,274 329,895 456,280 ------------- ------------- -------------- Total current assets .................... 7,896,406 29,144,888 17,082,892 Property and equipment, net .................... 18,047,416 16,571,538 24,472,098 Intangible assets, net ......................... 47,354,826 48,028,410 60,757,363 Program rights ................................. 1,688,866 1,932,680 1,777,760 Deposits and other ............................. 406,168 92,325 156,556 ------------- ------------- -------------- Total assets ............................ $75,393,682 $95,769,841 $104,246,669 ============= ============= ============== LIABILITIES AND TOTAL EQUITY Current liabilities: Notes payable ............................. $ 285,471 $ 316,188 $ 53,893 Advances payable -- related party ......... 142,048 468,327 343,905 Current portion of long-term debt ......... 25,578,406 271,934 363,516 Accounts payable .......................... 2,388,974 2,494,738 2,618,456 Accrued interest .......................... -- 5,173,745 5,321,500 Accrued expenses .......................... 1,619,052 1,712,000 2,951,216 Current portion of program rights payable . 956,740 1,141,793 1,356,325 ------------- ------------- -------------- Total current liabilities ............... 30,970,691 11,579,328 13,008,811 ------------- ------------- -------------- Long-term debt, net ............................ 35,765,495 82,308,195 94,445,326 Program rights payable ......................... 1,499,180 1,421,399 1,161,393 Deferred taxes ................................. 216,694 211,902 114,593 ------------- ------------- -------------- Total liabilities ....................... 68,452,060 95,520,824 108,730,123 Commitments and contingent liabilities ......... -- -- -- Total equity (deficiency): Common stock .............................. 494 1,700 1,700 Additional paid-in capital ................ 16,382,054 7,880,848 7,880,848 Retained earnings (deficit) ............... (3,905,909) 1,825,283 (474,404) Partners' deficit ......................... (5,535,017) (9,458,814) (11,891,598) ------------- ------------- -------------- Total equity (deficiency) ............... 6,941,622 249,017 (4,483,454) ------------- ------------- -------------- Total liabilities and equity ............ $75,393,682 $95,769,841 $104,246,669 ============= ============= ==============
See accompanying notes to combined financial statements F-4 PEGASUS COMMUNICATIONS CORPORATION COMBINED STATEMENTS OF OPERATIONS
Years Ended December 31, Six Months Ended June 30, ------------------------------------------------ -------------------------------- 1993 1994 1995 1995 1996 -------------- -------------- ------------- -------------- -------------- (unaudited) Revenues: Broadcasting revenue, net of agency commissions ......... $ 7,572,051 $13,204,148 $14,862,734 $6,415,733 $9,326,825 Barter programming revenue .... 2,735,500 4,604,200 5,110,662 2,319,960 2,482,357 Basic and satellite service ... 7,537,325 8,455,815 10,002,579 4,800,924 6,111,267 Premium services .............. 1,335,108 1,502,929 1,652,419 801,619 947,948 Other ......................... 307,388 423,998 519,682 263,572 313,842 -------------- -------------- ------------- -------------- -------------- Total revenues ............... 19,487,372 28,191,090 32,148,076 14,601,808 19,182,239 -------------- -------------- ------------- -------------- -------------- Operating expenses: Barter programming expense .... 2,735,500 4,604,200 5,110,662 2,319,960 2,482,357 Programming ................... 3,139,284 4,094,688 5,475,623 2,636,623 3,664,245 General and administrative .... 2,219,133 3,289,532 3,885,473 1,894,129 2,497,190 Technical and operations ...... 2,070,896 2,791,885 2,740,670 1,357,530 1,610,481 Marketing and selling ......... 2,070,404 3,372,482 3,928,073 2,053,531 2,374,617 Incentive compensation ........ 192,070 432,066 527,663 356,207 429,765 Corporate expenses ............ 1,265,451 1,505,904 1,364,323 613,040 709,118 Depreciation and amortization . 5,977,678 6,940,147 8,751,489 3,927,134 4,904,796 -------------- -------------- ------------- -------------- -------------- Income (loss) from operations (183,044) 1,160,186 364,100 (556,346) 509,670 Interest expense .............. (4,043,692) (5,360,729) (8,793,823) (3,349,836) (5,570,257) Interest expense - related party ...................... (358,318) (612,191) (22,759) -- -- Interest income ............... -- -- 370,300 -- 151,487 Other expenses, net ........... (220,319) (65,369) (44,488) (84,298) (61,541) -------------- -------------- ------------- -------------- -------------- Loss before income taxes and extraordinary items ........ (4,805,373) (4,878,103) (8,126,670) (3,990,480) (4,970,641) Provision (benefit) for income taxes ...................... -- 139,462 30,000 20,000 (132,756) -------------- -------------- ------------- -------------- -------------- Loss before extraordinary items (4,805,373) (5,017,565) (8,156,670) (4,010,480) (4,837,885) Extraordinary gain (loss) from extinguishment of debt, net -- (633,267) 10,210,580 -- -- -------------- -------------- ------------- -------------- -------------- Net income (loss) ............. ($ 4,805,373) ($ 5,650,832) $2,053,910 ($4,010,480) ($4,837,885) ============== ============== ============= ============== ============== Pro forma income (loss) per share; (See Note 14) Loss before extraordinary items .................... $(1.59) $(0.94) Extraordinary gain ......... 1.99 -- ------------- -------------- Net income (loss) .......... $0.40 $(0.94) ============= ============== Weighted average shares .... 5,142,500 5,142,500
See accompanying notes to combined financial statements F-5 PEGASUS COMMUNICATIONS CORPORATION COMBINED STATEMENTS OF CHANGES IN TOTAL EQUITY
Common Stock ---------------------- Additional Retained Partners' Total Number Par Paid-In Earnings Capital Equity of Shares Value Capital (Deficit) (Deficit) (Deficiency) ----------- -------- -------------- ------------- --------------- -------------- Balances at December 31, 1992 .. $ 157,819 $ 1,000,492 $ 1,158,311 Net loss ....................... (17,447) (4,787,926) (4,805,373) Distributions to partners ...... (115,290) (115,290) Issuance of LP interest ........ 1,335,000 1,335,000 ----------- -------- -------------- ------------- --------------- -------------- Balances at December 31, 1993 .. 140,372 (2,567,724) (2,427,352) Net loss ....................... (790,501) (4,860,331) (5,650,832) Incorporation of partnerships .. 444 $ 444 (3,255,780) 3,228,038 (27,298) Redemption of minority interest ($ 49,490) (49,490) LP interests contribution ...... 1,335,000 (1,335,000) Conversion of term loans ....... 50 50 15,096,544 15,096,594 ----------- -------- -------------- ------------- --------------- -------------- Balances at December 31, 1994 .. 494 494 16,382,054 (3,905,909) (5,535,017) 6,941,622 Net income (loss) .............. 5,731,192 (3,677,282) 2,053,910 Distributions to partners ...... (246,515) (246,515) Distribution to Parent ......... (12,500,000) (12,500,000) Exchange of PM&C Class A Shares 161,500 1,121 (1,121) Issuance of PM&C Class B Shares 8,500 85 3,999,915 4,000,000 ----------- -------- -------------- ------------- --------------- -------------- Balances at December 31, 1995 .. 170,000 1,700 7,880,848 1,825,283 (9,458,814) 249,017 Net loss ....................... (2,299,687) (2,538,198) (4,837,885) Contribution by partner ........ 105,414 105,414 ----------- -------- -------------- ------------- --------------- -------------- Balances at June 30, 1996 (unaudited) ................... 170,000 $1,700 $ 7,880,848 ($ 474,404) ($11,891,598) ($ 4,483,454) =========== ======== ============== ============= =============== ==============
See accompanying notes to combined financial statements F-6 PEGASUS COMMUNICATIONS CORPORATION COMBINED STATEMENTS OF CASH FLOWS
Years Ended December 31, Six Months Ended June 30, ------------------------------------------------- -------------------------------- 1993 1994 1995 1995 1996 -------------- -------------- -------------- -------------- -------------- (unaudited) Cash flows from operating activities: Net income (loss) ..................... ($ 4,805,373) ($ 5,650,832) $ 2,053,910 ($ 4,010,480) ($ 4,837,885) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary (gain) loss on extinguishment of debt, net ...... -- 633,267 (10,210,580) -- -- Depreciation and amortization ...... 5,977,678 6,940,147 8,751,489 3,927,134 4,904,796 Program rights amortization ........ 1,342,194 1,193,559 1,263,190 662,542 760,929 Accretion of bond discount ......... -- -- -- -- 195,926 Gain (loss) on disposal of fixed assets (9,344) 30,524 -- -- -- Bad debt expense ................... 96,932 200,039 146,147 91,470 130,713 Deferred income taxes .............. -- 139,462 30,000 20,000 (132,756) Payments of programming rights ..... (1,278,650) (1,310,294) (1,233,777) (605,078) (607,085) Interest paid with refinancing of debt (671,803) -- -- -- -- Change in assets and liabilities: Accounts receivable .............. (853,305) (1,353,448) (815,241) 751,771 (2,086,735) Inventory ........................ -- (711,581) (389,318) (326,382) 590,352 Prepaid expenses and other ....... (133,745) (250,128) 490,636 -- 50,152 Accounts payable & accrued expenses (113,160) 702,240 (826,453) 19,657 (942,632) Advances payable -- related party . -- 142,048 326,279 370,488 (124,422) Accrued interest ................. 1,851,800 2,048,569 5,173,745 443 134,464 Deposits and other ............... 64,133 39,633 5,843 2,631 (68,611) -------------- -------------- -------------- -------------- -------------- Net cash provided (used) by operating activities ......................... 1,693,677 2,793,205 4,765,870 904,196 (2,032,794) Cash flows from investing activities: Acquisitions ....................... -- -- -- -- (17,107,329) Capital expenditures ............... (884,950) (1,264,212) (2,640,475) (1,536,086) (2,747,890) Purchase of intangible assets ...... -- (943,238) (2,334,656) (1,895,493) (573,239) Cash acquired from acquisitions .... 803,908 -- -- -- -- Other .............................. (25,065) (53,648) (250,000) (28,761) (157,500) -------------- -------------- -------------- -------------- -------------- Net cash used for investing activities . (106,107) (2,261,098) (5,225,131) (3,460,340) (20,585,958) Cash flows from financing activities: Proceeds from long-term debt ....... 15,060,000 35,015,000 81,651,373 590,202 247,736 Borrowings on revolving credit facility -- -- 2,591,335 2,591,335 8,800,000 Proceeds from long-term borrowings from related parties .................. 5,574 26,000 20,000 13,000 -- Repayments on revolving credit facility ......................... -- -- (2,591,335) -- -- Repayments of long-term debt ....... (15,194,664) (33,991,965) (48,095,692) (38,150) (53,283) Restricted cash .................... -- -- (9,881,198) -- 5,012,084 Debt issuance costs ................ (843,380) (1,552,539) (3,974,454) -- -- Capital lease repayments ........... (47,347) (154,640) (166,050) (138,302) (163,481) Distributions to Parent ............ -- -- (12,500,000) -- -- Proceeds from the issuance of PM&C Class B Shares ......................... -- -- 4,000,000 -- -- -------------- -------------- -------------- -------------- -------------- Net cash provided (used) by financing activities ....................... (1,019,817) (658,144) 11,053,979 3,018,085 13,843,056 Net increase (decrease) in cash and cash equivalents ........................... 567,753 (126,037) 10,594,718 461,941 (8,775,696) Cash and cash equivalents, beginning of period 938,313 1,506,066 1,380,029 1,380,029 11,974,747 -------------- -------------- -------------- -------------- -------------- Cash and cash equivalents, end of period . $ 1,506,066 $ 1,380,029 $ 11,974,747 $ 1,841,970 $ 3,199,051 ============== ============== ============== ============== ==============
See accompanying notes to combined financial statements F-7 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS 1. THE COMPANY: Pegasus Communications Corporation ("Pegasus" or together with its subsidiaries and affiliates stated below, the "Company"), a Delaware corporation incorporated in May 1996, is a wholly owned subsidiary of Pegasus Communications Holdings, Inc. ("PCH" or the "Parent"). Pegasus Media & Communications, Inc. ("PM&C") is a diversified media and communications company whose subsidiaries consist of Pegasus Broadcast Television, Inc. ("PBT"), Pegasus Cable Television, Inc. ("PCT"), Pegasus Broadcast Associates, L.P. ("PBA"), Pegasus Satellite Television, Inc. ("PST") and MCT Cablevision, Limited Partnership ("MCT"). PBT operates broadcast television stations affiliated with the Fox Broadcasting Company television network ("Fox"). PCT, together with its subsidiary, Pegasus Cable Television of Connecticut, Inc. ("PCT-CT") and MCT operate cable television systems that provide service to individual and commercial subscribers in New England and Puerto Rico, respectively. PST provides direct broadcast satellite service to customers in the New England area. PBA holds a television station license which simulcasts programming from a station operated by PBT. On October 31, 1994, the limited partnerships which owned and operated PCH's broadcast television, cable and satellite operations, restructured and transferred their assets to the PM&C's subsidiaries, PBT, PCT and PST, respectively. This reorganization has been accounted for as if a pooling of interests had occurred. Pegasus Towers L.P. ("Towers"), an affiliated entity of Pegasus, owns and operates television and radio transmitting towers located in Pennsylvania and Tennessee. Pegasus Communications Management Company ("PCMC"), an affiliated entity of Pegasus, provides certain management and accounting services to its affiliates. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION: The combined financial statements include the accounts of Pegasus, PM&C, PBT, PCT, PST, PBA, MCT, Towers and PCMC. All significant intercompany transactions and balances have been eliminated. The 1994 conversion from limited partnerships to corporate form has been treated as a reorganization of the aforementioned subsidiaries and affiliated entities, with the assets and liabilities recorded at their historical cost. The accompanying combined financial statements and notes hereto reflect the limited partnerships' historical results of operations for the periods prior to October 31, 1994 and the operations of the Company as a corporation from that date through December 31, 1994, except for MCT which reflects the limited partnership's results of operations from the effective date of acquisition, March 1, 1993. 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 disclosure of contingencies. Actual results could differ from those estimates. F-8 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 2. Summary of Significant Accounting Policies: - (Continued) INVENTORIES: Inventories consist of equipment held for resale to customers and installation supplies. Inventories are stated at lower of cost or market on a first-in, first-out basis. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. The cost and related accumulated depreciation of assets 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. 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 ................................................. 3 to 5 years INTANGIBLE ASSETS: Intangible assets are stated at cost and amortized by the straight-line method. 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. Goodwill, broadcast licenses, network affiliation agreements and other intangible assets ("Intangible Assets") are reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amounts may not be recoverable. The Company assesses the recoverability of its Intangible Assets by determining whether the amortization of the respective Intangible Asset balance can be recovered through projected undiscounted future cash flows. Amortization of Intangible Assets is computed using the straight-line method based upon the following lives: Broadcast licenses ....................................... 40 years Network affiliation agreement ............................ 40 years Goodwill ................................................. 40 years Other intangibles ........................................ 2 to 14 years REVENUE: The Company operates in three industry segments: broadcast television ("TV"), cable television ("Cable") and direct broadcast satellite television ("DBS"). The Company recognizes revenue in its TV operations when advertising spots are broadcasted. The Company recognizes revenue in its Cable and DBS operations when video and audio services are provided. PROGRAMMING: The Company obtains a portion of its programming, including presold advertisements, through its network affiliation agreement with Fox and also through independent producers. The Company does not make any direct payments for this programming. For running network programming, the Company received payments from Fox, which totaled $60,608, $71,139 and $215,310 in 1993, 1994 and 1995, respectively. For F-9 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 2. Summary of Significant Accounting Policies: - (Continued) running independent producers' programming, the Company received no direct payments. 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 presold advertisements are broadcasted. The Company recorded barter programming revenue and related programming expenses of $2,735,500, $4,604,200 and $5,110,662 for the years ended December 31, 1993, 1994 and 1995, respectively. These amounts are presented gross as barter programming revenue and expense in the accompanying combined statements of operations. 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 $9,881,198 and $4,869,114 at December 31, 1995 and June 30, 1996, respectively. These funds may be disbursed from the escrow only to pay interest on its Series B Senior Subordinated Notes due 2005 (the "Series B Notes"). PROGRAM RIGHTS: The Company enters into agreements to show motion pictures and syndicated programs on television. In accordance with the Statements of Financial Accounting Standards No. 63 ("SFAS No. 63"), only the right and associated liabilities for those films and programs currently available for showing are recorded. 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 $1,359,117, $1,238,849 and $1,306,768 is included in programming expenses for the years ended December 31, 1993, 1994 and 1995, 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. The Company has entered into agreements totaling $798,800 as of December 31, 1995, which are not yet available for showing at December 31, 1995, and accordingly, are not recorded by the Company. At December 31, 1995, the Company has commitments for future program rights of $1,141,793, $827,793, $438,947 and $154,659 in 1996, 1997, 1998 and 1999, respectively. INCOME TAXES: On October 31, 1994, in conjunction with the incorporation, PBT, PCT, and PST adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Prior to such date, the above entities operated as partnerships for federal and state income tax purposes and, therefore, no provision for income taxes was necessary. MCT is treated as a partnership for federal and state income tax purposes, but taxed as a corporation for Puerto Rico income tax purposes. The adoption of SFAS No. 109 did not have a material impact on the Company's financial position or results of operations. For the year ended December 31, 1994, income and deferred taxes are based on the Company's operations from November 1, 1994 through December 31, 1994, excluding (i) MCT, which for Puerto Rico income tax purposes is taxed as a corporation for the 12 month period ended December 31, 1994, and (ii) PBA and Towers, which are limited partnerships. CONCENTRATION OF CREDIT RISK: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. 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, 1994 and 1995, the Company had no significant concentrations of credit risk. F-10 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 2. Summary of Significant Accounting Policies: - (Continued) 3. INTERIM FINANCIAL INFORMATION: The financial statements as of June 30, 1996 and for the six months ended June 30, 1995 and 1996 are unaudited. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair presentation of the results of operations have been included. Results for the six months ended June 30, 1996 may not be indicative of the results expected for the year ending December 31, 1996. The Company has provided unaudited footnote information for the interim periods to the extent such information is substantially different from the audited periods. 4. PROPERTY AND EQUIPMENT: Property and equipment consist of the following:
December 31, December 31, June 30, 1994 1995 1996 -------------- -------------- -------------- (unaudited) Land ................................. $ 153,459 $ 259,459 $ 862,298 Reception and distribution facilities 22,261,777 22,839,470 26,163,561 Transmitter equipment ................ 7,249,289 7,478,134 10,371,864 Building and improvements ............ 823,428 1,554,743 1,579,571 Equipment, furniture and fixtures .... 938,323 1,333,797 3,830,115 Vehicles ............................. 304,509 571,456 703,042 Other equipment ...................... 655,167 997,352 1,702,213 -------------- -------------- -------------- 32,385,952 35,034,411 45,212,664 Accumulated depreciation ............. (14,338,536) (18,462,873) (20,740,566) -------------- -------------- -------------- Net property and equipment ........... $ 18,047,416 $ 16,571,538 $ 24,472,098 ============== ============== ==============
Depreciation expense amounted to $3,154,394, $4,027,866, $4,140,058, $2,065,358 and $2,277,693 for the years ended December 31, 1993, 1994, 1995 and for the six months ended June 30, 1995 and 1996, respectively. 5. INTANGIBLES: Intangible assets consist of the following:
December 31, December 31, June 30, 1994 1995 1996 -------------- -------------- -------------- (unaudited) Goodwill ............................. $28,490,035 $ 28,490,035 $ 35,980,396 Deferred franchise costs ............. 13,254,985 13,254,985 13,254,985 Broadcast licenses ................... 3,124,461 3,124,461 4,649,461 Network affiliation agreements ....... 1,236,641 1,236,641 2,761,641 Deferred financing costs ............. 1,788,677 3,974,454 4,003,702 DBS rights ........................... 3,130,093 4,832,160 4,832,160 Non-compete agreement ................ -- -- 1,800,000 Organization and other deferred costs 3,130,926 3,862,021 6,781,791 -------------- -------------- -------------- 54,155,818 58,774,757 74,064,136 Accumulated amortization ............. (6,800,992) (10,746,347) (13,306,773) -------------- -------------- -------------- Net intangible assets .............. $47,354,826 $ 48,028,410 $ 60,757,363 ============== ============== ==============
Amortization expense amounted to $2,823,284, $2,912,281, $4,611,431, $1,861,771 and $2,560,737 for the years ended December 31, 1993, 1994, 1995 and for the six months ended June 30, 1995 and 1996, respectively. F-11 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 6. LONG-TERM DEBT: Long-term debt consists of the following at:
December 31, December 31, June 30, 1994 1995 1996 -------------- -------------- ------------- (unaudited) 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 $3,804,546 and $3,608,620 as of December 31, 1995 and June 30, 1996, respectively ....... $81,195,454 $81,391,380 Senior term note, due 2001, interest at the Company's option at either the bank's prime rate, plus an applicable margin or LIBOR, plus an applicable margin (9.25% at December 31, 1994) ...................................................... $20,000,000 -- -- Subordinated term loan, due 2003, interest at the Company's option of either 4%, plus the higher of the bank's prime rate or the Federal Funds rate plus 1% or the Eurodollar rate, plus 6.5% (12.5% at December 31, 1994) ............... 15,000,000 -- -- Senior loan payable by MCT, due 1995, interest at prime, plus 2% (10.5% at December 31, 1994) ............................ 15,000,000 -- -- Junior loan payable by MCT, due 1995, interest at prime plus 2% (10.5% at December 31, 1994) ............................ 10,348,857 -- -- Senior five year revolving credit facility dated July 7, 1995, interest at the Company's option at either the banks prime rate, plus an applicable margin or LIBOR, plus an applicable margin (8.2% at June 30, 1996) .................. -- -- 8,800,000 Mortgage payable, due 2000, interest at 8.75% ............... -- 517,535 508,209 Other ....................................................... 995,044 867,140 4,109,253 -------------- -------------- ------------- 61,343,901 82,580,129 94,808,842 Less current maturities ..................................... 25,578,406 271,934 363,516 -------------- -------------- ------------- Long-term debt .............................................. $35,765,495 $82,308,195 $94,445,326 ============== ============== =============
On July 7, 1995, PM&C entered into a $10 million senior collateralized five-year revolving credit facility with a bank. There were no funds drawn on this facility as of December 31, 1995. The amount available under the credit facility was $1.2 million at June 30, 1996. On October 31, 1994, the Company repaid the outstanding balances under its senior and junior term loan agreements with a portion of the proceeds from a $20,000,000 term note agreement ("senior note") and $15,000,000 subordinated term loan agreement ("subordinated loan") from various banking institutions. The senior note and subordinated loan were scheduled to mature on December 31, 2001 and September 30, 2003, respectively. Amounts were subsequently repaid as described below. On July 7, 1995, the Company sold 85,000 units consisting of $85,000,000 in aggregate amount of 12.5% Series A Senior Subordinated Notes due 2005 (the "Series A Notes" and, together with the Series B Notes, the "Notes") and 8,500 shares of Class B Common Stock of PM&C (the "Note Offering"). The net proceeds from the sale were used to (i) repay approximately $38.6 million in loans and other obligations, (ii) repurchase $26.0 million of notes for approximately $13.0 million resulting in an extraordinary gain of $10.2 million, net of expenses of $2.8 million, (iii) make a $12.5 million distribution to PCH, (iv) escrow $9.7 million for the purpose of paying interest on the Notes, (v) pay $3.3 million in fees and expenses and (vi) to fund proposed acquisitions. F-12 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 6. Long-Term Debt: - (Continued) On November 14, 1995, the Company exchanged its Series B Notes for the Series A Notes. The Series B Notes have substantially the same terms and provisions as the Series A Notes. There was no gain or loss recorded with this transaction. The Series B Notes are guaranteed on a full, unconditional, senior subordinated basis, jointly and severally by each of the wholly owned direct and indirect subsidiaries of PM&C with the exception of PCT-CT. 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. The fair value of the Series B Notes approximates $85 million as of December 31, 1995. This amount is approximately $3.8 million higher than the carrying amount reported on the balance sheet at December 31, 1995. Fair value is estimated based on the quoted market price for the same or similar instruments. At December 31, 1995, maturities of long-term debt and capital leases are as follows: 1996 ..................................................... $ 271,934 1997 ..................................................... 296,771 1998 ..................................................... 211,103 1999 ..................................................... 147,244 2000 ..................................................... 435,515 Thereafter ............................................... 81,217,562 ------------ $82,508,129 ============ 7. LEASES: The Company leases certain studios, towers, utility pole attachments, 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 2007. Rent expense for the years ended December 31, 1993, 1994 and 1995 was $429,304, $464,477 and $503,118, 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: 1994 1995 ----------- ----------- Equipment, furniture and fixtures $ 351,854 $ 375,190 Vehicles ......................... 193,626 196,064 ----------- ----------- 545,480 571,254 Accumulated depreciation ......... (102,777) (190,500) ----------- ----------- Total Total .................... $ 442,703 $ 380,754 =========== =========== F-13 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 7. Leases: - (Continued) Future minimum lease payments on noncancellable operating and capital leases at December 31, 1995 are as follows: Operating Capital Leases Leases ----------- ---------- 1996 ............................................ $160,000 $183,000 1997 ............................................ 131,000 157,000 1998 ............................................ 106,000 88,000 1999 ............................................ 31,000 23,000 2000 ............................................ 9,000 6,000 Thereafter ...................................... 15,000 3,000 ----------- ---------- Total minimum payments .......................... $452,000 460,000 ----------- ---------- Less: amount representing interest .............. 56,000 ---------- Present value of net minimum lease payments including current maturities of $142,000 ....... $404,000 ========== 8. COMMITMENTS AND CONTINGENT LIABILITIES: LEGAL MATTERS: The operations of the Company are subject to regulation by the Federal Communications Commission ("FCC") and other franchising authorities, including the Connecticut Department of Public Utility Control ("DPUC"). During 1994, the DPUC ordered a reduction in the rates charged by PCT-CT for its basic cable service tier and equipment charges and refunds for related overcharges, plus interest, retroactive to September 1, 1993 requiring PCT-CT to issue refunds totaling $141,000. In December 1994, the Company filed an appeal with the FCC. In March 1995, the FCC granted a stay of the DPUC's rate reduction and refund order pending the appeal. The FCC has not ruled on the appeal and the outcome cannot be predicted with any degree of certainty. The Company believes it will prevail in its appeal. In the event of an adverse ruling, the Company expects to make refunds in kind rather than cash. The Company is currently contesting a claim for unpaid premiums on its workers' compensation insurance policy assessed by the state insurance fund of Puerto Rico. Based upon current information available, the Company's liability related to the claim is estimated to be less than $200,000. From time to time the Company is also involved with claims that arise in the normal course of business. In the opinion of management, the ultimate liability with respect to these claims will not have a material adverse effect on the combined operations, cash flows or financial position of the Company. 9. INCOME TAXES: Effective October 1, 1994, in conjunction with the incorporation of PBT, PCT, and PST, the Company, excluding MCT which for Puerto Rico income tax purposes has been treated as a corporation and Towers and PBA which are limited partnerships, adopted SFAS No. 109. F-14 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 9. Income Taxes: - (Continued) The following is a summary of the components of income taxes from operations: 1994 1995 ---------- --------- Federal -- deferred ....... $104,644 $23,000 State and local ........... 34,818 7,000 ---------- --------- Provision for income taxes ................ $139,462 $30,000 ========== ========= The deferred income tax assets and liabilities recorded in the combined balance sheets at December 31, 1994 and 1995, are as follows:
1994 1995 ------------- ------------- Assets: Receivables .................................... $ 77,232 $ 42,440 Excess of tax basis over book basis from tax gain recognized upon incorporation of subsidiaries ................................ 1,876,128 1,751,053 Loss carryforwards ............................. 745,862 9,478,069 Other .......................................... 739,810 806,312 ------------- ------------- Total deferred tax assets ................... 3,439,032 12,077,874 Liabilities: Excess of book basis over tax basis of property, plant and equipment ......................... (1,224,527) (1,015,611) Excess of book basis over tax basis of amortizable intangible assets ............... (597,837) (4,277,512) Total deferred tax liabilities .............. (1,822,364) (5,293,123) ------------- ------------- Net deferred tax assets ........................ 1,616,668 6,784,751 Valuation allowance ............................ (1,756,130) (6,954,213) ------------- ------------- Net deferred tax liabilities ................... $ (139,462) $ (169,462) ============= =============
The Company has recorded a valuation allowance of $6,954,213 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 1995 which may not be utilized. At December 31, 1995, the Company has net operating loss carryforwards of approximately $9.5 million which are available to offset future taxable income and expire through 2010. A reconciliation of the federal statutory rate to the effective tax rate is as follows: 1994 1995 ---------- ---------- U.S. statutory federal income tax rate ............. (34.00%) (34.00%) Net operating loss attributable to the partnerships 29.55 -- Foreign net operating income (loss) ................ (18.14) (27.09) State net operating loss ........................... (.96) -- Valuation allowance ................................ 25.70 61.46 Other .............................................. .72 -- ---------- ---------- Effective tax rate ................................. 2.87% .37% ========== ========== F-15 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 10. RELATED PARTY TRANSACTIONS: Related party transaction balances at December 31, 1994 and 1995 are as follows: 1994 1995 ---------- ---------- Notes payable ....................................... $211,728 $257,228 Interest expense related to subordinated notes payable 594,875 -- At December 31, 1994 and 1995, PCMC had advances payable to an affiliate for $142,048 and $468,327, respectively. The advances are payable on demand and are non-interest bearing. At December 31, 1994 and 1995, Towers had a demand note payable to an affiliate, with interest accruing at 8% per annum, for $131,815 and $151,815, respectively. Total interest expense on the affiliated debt was $10,440 and $10,901 for the years ended December 31, 1994 and 1995, respectively. Also, at December 31, 1994 and 1995, PBA had a demand note payable to an affiliate, with interest accruing at prime plus two percent payable monthly in arrears, for $79,913 and $105,413, respectively. The effective interest rate was 10.25% at December 31, 1995. Total interest expense on the affiliated debt was $6,876 and $11,858, for the years ended December 31, 1994 and 1995, respectively. 11. SUPPLEMENTAL CASH FLOW INFORMATION: Significant noncash investing and financing activities are as follows:
Years ended December 31, Six months ended June 30, --------------------------------------------- ---------------------------- 1993 1994 1995 1995 1996 ------------- ------------- ------------ ------------ ------------ (unaudited) (unaudited) Acquisition of subsidiaries ............ $33,804,622 Refinancing of long-term debt .......... 24,074,135 Capital contribution and related reduction of debt ..................... 7,650,335 $15,069,173 Barter revenue and related expense ..... 2,735,500 4,604,200 $5,110,662 $2,319,960 $2,482,357 Intangible assets and related affiliated debt .................................. 2,994,811 -- -- -- -- Acquisition of program rights and assumption of related program payables -- 1,797,866 1,335,275 317,265 -- Acquisition of plant under capital leases ................................ 289,786 168,960 121,373 121,373 247,736 Redemption of minority interests and related receivable .................... -- 49,490 246,515 -- -- Interest converted to principal ........ -- 867,715 -- -- -- Issuance of put/call agreement ......... -- -- -- -- 3,050,000
For the years ended December 31, 1993, 1994, 1995 and for the six months ended June 30, 1995 and 1996, the Company paid cash for interest in the amount of $3,280,520, $3,757,097, $3,620,931, $3,349,836 and $5,531,271, respectively. The Company paid no taxes for the years ended December 31, 1993, 1994, 1995 and for the six months ended June 30, 1995 and 1996. F-16 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 12. COMMON STOCK: At December 31, 1994, common stock consists of the following: PM&C common stock, $1.00 par value; 1,000 shares authorized; 394 issued and outstanding ............. $394 PST common stock, $1.00 par value; 20,000 shares authorized; 100 issued and outstanding ............. 100 ------ Total common stock ................................ $494 ====== At December 31, 1995, common stock consists of the following: PM&C Class A common stock, $0.01 par value; 230,000 shares authorized; 161,500 issued and outstanding $1,615 PM&C Class B common stock, $0.01 par value; 20,000 shares authorized; 8,500 issued and outstanding .. 85 -------- Total common stock .............................. $1,700 ======== On July 7, 1995, as part of a plan of reorganization, PM&C agreed to exchange 161,500 Class A Shares for all of the existing common stock outstanding of PM&C, all outstanding shares of PST and a 99% limited interest in PBA. The Company also acquired all of the outstanding interests of MCT for nominal consideration. Additionally, the Company issued 8,500 Class B Shares of PM&C on July 7, 1995 in connection with the Note Offering (see footnote 6). In May 1996, Pegasus was incorporated. Pegasus is authorized to issue 30,000,000 shares of Class A and 15,000,000 shares of Class B, $0.01 par value common stock and 5,000,000 shares of Preferred Stock. 13. INDUSTRY SEGMENTS: The Company operates in three industry segments: broadcast television (TV), cable television (Cable), and direct broadcast satellite television (DBS). TV consists of three Fox affiliated television stations, of which one also simulcasts its signal in Hazelton and Williamsport, Pennsylvania. Cable and DBS consists of cable television services and direct broadcast satellite services/equipment, respectively. Information regarding the Company's business segments in 1993, 1994, and 1995 is as follows:
TV DBS Cable Other Combined ---------- --------- ---------- ------- ---------- (in thousands) 1993 Revenues ................. $10,307 $ 9,134 $ 46 $19,487 Operating income (loss) .. 488 (625) (46) (183) Identifiable assets ...... 34,939 $2,995 38,251 319 76,504 Incentive compensation ... 106 -- 86 -- 192 Corporate expenses ....... 649 -- 612 4 1,265 Depreciation & amortization .......... 1,501 -- 4,405 72 5,978 Capital expenditures ..... 127 -- 691 67 885 1994 Revenues ................. $17,808 $ 174 $10,148 $ 61 $28,191 Operating income (loss) .. 2,057 (103) (769) (25) 1,160 Identifiable assets ...... 36,078 4,438 34,535 343 75,394 Incentive compensation ... 327 -- 105 -- 432 Corporate expenses ....... 860 5 634 7 1,506 Depreciation & amortization .......... 2,184 61 4,632 63 6,940 Capital expenditures ..... 411 57 704 92 1,264
F-17 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 13. Industry Segments: - (Continued)
TV DBS Cable Other Combined ---------- --------- ---------- ------- ---------- (in thousands) 1995 Revenues ................. $19,973 $1,469 $10,606 $100 $32,148 Operating income (loss) .. 2,252 (752) (1,103) (33) 364 Identifiable assets ...... 36,906 5,577 52,934 353 95,770 Incentive compensation ... 415 9 104 -- 528 Corporate expenses ....... 782 114 450 18 1,364 Depreciation & amortization .......... 2,591 719 5,364 77 8,751 Capital expenditures ..... 1,403 216 953 69 2,641
14. SUBSEQUENT EVENTS: A. PEGASUS SAVINGS PLAN Effective January 1, 1996, the Company adopted the Pegasus Communications Savings Plan (the "U.S. Plan"). The U.S. Plan is intended to be qualified under sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Substantially all the Company's employees who have completed at least one year of service are eligible to participate. Participants may make salary contributions up to 6% of their base salary. The Company makes employing matching contributions up to 100% of participant contributions. Company matching contributions vest over a four year period. B. ACQUISITIONS On January 29, 1996, PCH acquired 100% of the outstanding stock of Portland Broadcasting, Inc. ("PBI"), a wholly owned subsidiary of Bride Communications, Inc. ("BCI") which owns the tangible assets of WPXT, Portland, Maine. PCH immediately transferred the ownership of PBI to the Company. The aggregate purchase price was approximately $11,700,000 of which $4,200,000 was allocated to fixed and tangible assets and $7,500,000 to goodwill. On June 20, 1996, PCH acquired the FCC license of WPXT for aggregate consideration of $3,000,000. Effective March 1, 1996, the Company acquired the principal tangible assets of WTLH, Inc. and certain of its affiliates for approximately $5,000,000 in cash, except for the FCC license and Fox affiliation agreement. Additionally, WTLH License Corp., a subsidiary of the Company entered into a put/call agreement regarding the FCC license and Fox affiliation agreement with General Management Consultants, Inc. ("GMC"), the licensee of WTLH, Tallahassee, Florida. As a result of entering into the put/call agreement, the Company recorded $3,050,000 in intangible assets and long term debt representing the FCC license and Fox affiliation agreement and the related contingent liability. In August 1996, the Company exercised the put/call agreement for $3,050,000. The aggregate purchase price of WTLH, Inc. and the related FCC licenses and Fox affiliation agreement is approximately $8,050,000 of which $2,150,000 was allocated to fixed and tangible assets and $5,900,000 to various intangible assets. In addition, the Company granted the owners of WTLH a warrant to purchase $1,000,000 of stock at the initial public offering price. The warrant expires 120 days after the effective date of the registration statement relating to the Company's initial public offering. On March 21, 1996, the Company entered into a definitive agreement to acquire all of the assets of Dom's Tele Cable, Inc. ("Dom's") for approximately $25 million in cash and $1.4 million in assumed liabilities. Dom's operates a cable system serving ten communities contiguous to MCT. The Company completed this transaction on August 29, 1996. F-18 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 14. Subsequent Events: - (Continued) On May 30, 1996, PCH entered into an agreement with Harron Communications Corp., under which the Company will acquire the rights to provide DIRECTV programming in certain rural areas of Texas and Michigan and related assets in exchange for approximately $17.9 million in cash and $11.9 million of the Company's Class A Common Stock. The above acquisitions have been or will be accounted for as purchases. C. ADDITIONAL ACQUISITIONS AND DEPOSITIONS On July 8, 1996, the Company entered into a letter of intent to purchase the direct broadcast satellite assets of Chillicothe Telephone Company for approximately $12 million in cash. In July 1996, the Company entered into a letter of intent to sell certain assets of its New England cable system for approximately $7 million in cash. The Company anticipates recognizing a gain in the transaction. D. PRO FORMA INCOME (LOSS) PER SHARE Historical earnings per share has not been provided since it is not meaningful due to the combined presentation of Pegasus. Pro forma earnings per share has been presented as if Pegasus operated as a consolidated entity for the year ended December 31, 1995 and the six months ended June 30, 1996. The pro forma income (loss) per share has been calculated based upon 5,142,500 shares outstanding and has been retroactively applied. The pro forma average shares consists of the following:
Class A Class B Total --------- ----------- ----------- o Exchange for 161,500 Class A shares of PM&C . 3,380,435 3,380,435 o Exchange for 8,500 Class B shares of PM&C ... 191,792 191,792 o Exchange for 5,000 shares of Parent non-voting common stock ...................... 263,606 263,606 o Exchange for certain assets and liabilities of PCMC at an assumed offering price of $15 per share .................................... 1,306,667 1,306,667 --------- ----------- ----------- 455,398 4,687,102 5,142,500 ========= =========== ===========
E. STOCK OPTION PLANS In September 1996, the Pegasus Communications 1996 Stock Option Plan, which provides for the granting of up to 450,000 qualified and non qualified stock options, and the Pegasus Restricted Stock Option Plan, which provides for the granting for up to 270,000 shares, were adopted. F. NEW CREDIT FACILITY On August 29, 1996, PM&C entered into a $50.0 million seven-year senior revolving credit facility, which is collateralized by substantially all of the assets of PM&C. On the same date, the Company had drawn $8.8 million to repay all amounts outstanding under the $10 million senior collateralized five-year revolving credit facility and approximately $23 million to fund the acquisition of Dom's. F-19 REPORT OF INDEPENDENT AUDITORS Board of Directors Portland Broadcasting, Inc. Portland, Maine We have audited the accompanying balance sheets of Portland Broadcasting, Inc. as of September 25, 1994 and September 24, 1995, and the related statements of operations, deficiency in assets, and cash flows for each of the three fiscal years in the period ended September 24, 1995. These financial statements are the responsibility of Portland Broadcasting, Inc.'s management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Portland Broadcasting, Inc. as of September 25, 1994 and September 24, 1995, and the results of its operations and its cash flows for each of the three fiscal years in the period ended September 24, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Notes 3 and 5, the Company has incurred recurring operating losses, has a working capital deficiency and is delinquent in paying certain creditors. These conditions raise substantial doubt about Portland Broadcasting, Inc.'s ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 3. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Ernst & Young LLP Pittsburgh, Pennsylvania October 27, 1995 F-20 PORTLAND BROADCASTING, INC. BALANCE SHEETS
September 25, September 24, December 31, 1994 1995 1995 --------------- --------------- -------------- (unaudited) Assets Current assets: Customer accounts receivable ............... $ 764,709 $ 879,983 $ 903,700 Deferred film costs--current ............... 89,702 121,018 178,320 Other assets ............................... 70,434 14,314 91,619 --------------- --------------- -------------- Total current assets ......................... 924,845 1,015,315 1,173,639 Property, plant, and equipment: Land ....................................... 63,204 63,204 63,204 Building ................................... 111,128 113,401 114,859 Equipment .................................. 2,954,857 3,073,797 3,127,742 --------------- --------------- -------------- 3,129,189 3,250,402 3,305,805 Less accumulated depreciation .............. (2,635,855) (2,716,061) (2,733,461) --------------- --------------- -------------- 493,334 534,341 572,344 Deposits and other assets .................... 35,114 21,523 5,036 --------------- --------------- -------------- $ 1,453,293 $ 1,571,179 $ 1,751,019 =============== =============== ============== Liabilities Current liabilities: Bank overdraft ............................. $ 34,859 $ 23,324 $ -- Accounts payable and accrued expenses ...... 1,244,646 1,117,621 1,424,950 Accrued officers' compensation ............. 588,000 621,750 621,750 Accrued interest ........................... 433,454 992,699 1,106,258 Current portion of long-term debt .......... 6,731,182 6,615,165 6,621,177 Current portion of film contract commitments 1,222,244 1,246,862 1,300,241 Notes payable to affiliated companies ...... 1,452,586 1,509,217 1,503,684 --------------- --------------- -------------- Total current liabilities .................... 11,706,971 12,126,638 12,578,060 Long-term liabilities, less current portion: Long-term debt ............................. 24,417 346,489 302,168 Film contract commitments .................. 154,057 69,638 32,242 --------------- --------------- -------------- 178,474 416,127 334,410 Deficiency in assets: Common stock, no par -- authorized 1,000 shares; issued and outstanding 411 shares 10,662 10,662 10,662 Retained deficit ........................... (10,442,814) (10,982,248) (11,172,113) --------------- --------------- -------------- (10,432,152) (10,971,586) (11,161,451) --------------- --------------- -------------- $ 1,453,293 $ 1,571,179 $ 1,751,019 =============== =============== ==============
See accompanying notes. F-21 PORTLAND BROADCASTING, INC. STATEMENTS OF OPERATIONS
Fiscal year ended Fiscal quarters ended ---------------------------------------------------- -------------------------------- September 26, September 25, September 24, December 25, December 31, 1993 1994 1995 1994 1995 --------------- --------------- --------------- -------------- -------------- (unaudited) (unaudited) Broadcasting revenues: Local ............................. $1,258,595 $1,890,080 $ 2,089,864 $ 614,558 $ 549,286 National and regional ............. 1,928,266 2,303,805 2,894,417 906,756 742,793 Other ............................. 820,325 217,523 352,100 75,729 134,056 --------------- --------------- --------------- -------------- -------------- 4,007,186 4,411,408 5,336,381 1,597,043 1,426,135 Less: Agency commissions ............ 482,321 548,197 663,594 210,120 164,367 Credits and other allowances ....... 76,152 39,769 115,413 17,813 40,612 --------------- --------------- --------------- -------------- -------------- 3,448,713 3,823,442 4,557,374 1,369,110 1,221,156 Station operating costs and expenses: Broadcasting operations ........... 1,137,090 1,211,682 1,374,379 228,391 279,473 Selling, general, and administrative ................. 1,544,980 1,604,265 1,853,808 545,878 703,955 Officer's compensation ............ 84,308 90,000 146,528 33,770 35,000 Depreciation and amortization ..... 410,891 311,945 202,738 47,546 59,183 --------------- --------------- --------------- -------------- -------------- 3,177,269 3,217,892 3,577,453 855,585 1,077,611 --------------- --------------- --------------- -------------- -------------- Income before interest expense and nonoperating (loss) income ........ 271,444 605,550 979,921 513,525 143,545 Interest expense .................... (670,779) (784,763) (1,114,355) -- (196,160) Nonoperating (loss) income .......... 57,432 304,807 (405,000) (172,178) (137,250) --------------- --------------- --------------- -------------- -------------- Net (loss) income ................... $ (341,903) $ 125,594 $ (539,434) $ 341,347 $ (189,865) =============== =============== =============== ============== ==============
See accompanying notes. F-22 PORTLAND BROADCASTING, INC. STATEMENTS OF DEFICIENCY IN ASSETS
Common Retained Deficiency Stock Deficit in Assets --------- --------------- --------------- Balance at September 27, 1992 ........... $10,662 $(10,226,505) $(10,215,843) Net loss .............................. -- (341,903) (341,903) --------- --------------- --------------- Balance at September 26, 1993 ........... 10,662 (10,568,408) (10,557,746) Net income ............................ -- 125,594 125,594 --------- --------------- --------------- Balance at September 25, 1994 ........... 10,662 (10,442,814) (10,432,152) Net loss .............................. -- (539,434) (539,434) --------- --------------- --------------- Balance at September 24, 1995 ........... 10,662 (10,982,248) (10,971,586) Net loss (unaudited) .................. -- (189,865) (189,865) --------- --------------- --------------- Balance at December 31, 1995 (unaudited) $10,662 $(11,172,113) $(11,161,451) ========= =============== ===============
See accompanying notes. F-23 PORTLAND BROADCASTING, INC. STATEMENTS OF CASH FLOWS
Fiscal year ended Fiscal quarter ended ---------------------------------------------------- -------------------------------- September 26, September 25, September 24, December 25, December 31, 1993 1994 1995 1994 1995 --------------- --------------- --------------- -------------- -------------- (unaudited) (unaudited) Operating activities Net (loss) income ....................... $(341,903) $ 125,594 $(539,434) $ 341,347 $(189,865) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization ...... 410,891 311,945 202,738 47,546 59,183 Payments on film contract commitments ...................... (128,875) (127,838) (216,975) (65,790) (68,478) Gain from write-off of trade and film payables .................... (57,432) (304,807) (82,122) -- -- Loss on contingency reserve for film contracts ........................ -- -- 400,000 -- -- Net change in operating assets and liabilities (using) or providing cash: Customer accounts receivable .. (38,612) (93,717) (115,274) (340,036) (23,717) Other assets .................. 4,641 (41,991) 57,756 634 (60,817) Accounts payable and accrued expenses .................... 98,098 (25,402) (138,560) (77,081) 284,005 Accrued officer's compensation 55,000 45,000 33,750 8,438 -- Accrued interest .............. 71,302 187,710 559,245 125,784 113,559 --------------- --------------- --------------- -------------- -------------- Net cash provided by operating activities 73,110 76,494 161,124 40,842 113,870 Investing activities Net purchases of equipment .............. (15,664) (40,811) (88,801) (19,651) (70,028) Financing activities Proceeds from long-term debt ............ -- 87,857 -- -- -- Repayment of long-term debt ............. (56,771) (126,710) (126,357) (15,306) (38,309) Borrowings (repayments) on notes payable to affiliated company and officer ..... (675) 3,170 54,034 (5,885) (5,533) --------------- --------------- --------------- -------------- -------------- Net cash used by financing activities ... (57,446) (35,683) (72,323) (21,191) (43,842) --------------- --------------- --------------- -------------- -------------- Change in cash .......................... -- -- -- -- -- Cash at beginning of period ............. -- -- -- -- -- --------------- --------------- --------------- -------------- -------------- Cash at end of period ................... $ -- $ -- $ -- $ -- $ -- =============== =============== =============== ============== ==============
See accompanying notes. F-24 PORTLAND BROADCASTING, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION Portland Broadcasting, Inc. (the "Company") is principally engaged in television broadcasting. The Company, a wholly owned subsidiary of Bride Communications, Inc. (Bride), operates a television station, WPXT-TV, Channel 51, a FOX network affiliate, in Portland, Maine. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The accounts of the Company are maintained on the accrual basis of accounting. The financial statements include only the accounts of the Company and do not include the accounts of Bride, its parent, or other Bride subsidiaries. DEFERRED FILM COSTS AND FILM CONTRACT COMMITMENTS The Company has contracts with various film distributors from which films are leased for television transmission over various contract periods (generally one to five years). The total obligations due under these contracts are recorded as liabilities and the related film costs are stated at the lower of amortized cost or estimated net realizable value. Deferred film costs are amortized based on an accelerated method over the contract period. The portions of the cost to be amortized within one year and after one year are reported in the balance sheet as current and other assets, respectively, and the payments under these contracts due within one year and after one year are similarly classified as current and long-term liabilities. BANK OVERDRAFT Bank overdraft represents the overdrawn balance of the Company's demand deposit accounts with a financial institution, and is included in the change in accounts payable and accrued expenses for statement of cash flow purposes. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost or value received in exchange for broadcasting. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. In general, estimated useful lives of such assets are 19 years for buildings and range from 5 to 10 years for equipment. BARTER TRANSACTIONS Revenue from barter transactions (advertising provided in exchange for goods and services) is recognized as income when advertisements are broadcast and goods or services received are capitalized or charged to operations when received or used. Included in the statements of operations is broadcasting net revenue from barter transactions of $290,168, $278,935, and $331,233 and station operating costs and expenses from barter transactions of $307,525, $277,806, and $321,667 for 1993, 1994, and 1995, respectively. Included in the balance sheets is equipment capitalized from barter transactions of $4,437, $8,869, and $30,814 during 1993, 1994, and 1995, respectively, and deferred barter expense of $21,581, $26,593, and $7,103 at September 26, 1993, September 25, 1994, and September 24, 1995, respectively. INCOME TAXES The operations of the Company are included in the consolidated federal and state income tax returns filed under Bride Communications, Inc. and subsidiaries. Federal and state income taxes are provided based on the amount that would be payable on a separate company basis. Tax benefits are allocated to loss members in the same year the losses are availed of by the profit members of the consolidated group. Investment tax credits have been accounted for using the flow-through method. F-25 PORTLAND BROADCASTING, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 2. Significant Accounting Policies - (Continued) Deferred income taxes are normally provided on timing differences between financial and tax reporting due to depreciation, allowance for doubtful accounts, and vacation and officer's salary accrual. However, certain net operating loss carryovers have been utilized to eliminate current tax liability. FISCAL YEAR The Company operates on a 52/53 week fiscal year corresponding to the national broadcast calendar. The Company's fiscal year ends on the last Sunday in September. RECLASSIFICATIONS Certain amounts from the prior year have been reclassified to conform to the statement presentation for the current year. These reclassifications have no effect on the statements of operations. 3. GOING CONCERN At September 24, 1995, the Company was delinquent in payment of amounts due to former shareholders, amounts due under film contract commitments, certain of its trade payables, and other contractual obligations. The amounts owing under all such obligations are classified as current liabilities in the accompanying financial statements. Other delinquencies, if declared in default and not cured, could adversely affect the Company's ability to continue operations. During 1995, the senior obligation to a bank was sold by the bank to former shareholders, who also hold other notes receivable from the Company as described in Note 4. At September 24, 1995, the Company continues to be in default on this former bank obligation, which currently has no stated maturity or repayment terms. Management continues to negotiate settlements with its creditors. Settlement arrangements are comprised of extended payment schedules with additional interest charges, and write-off of a percentage of the balance due. The Company may require additional funding in order to sustain its operations. Management is currently pursuing the sale of the net assets of the Company as discussed in Note 8. The Company expects its efforts in this regard to be successful, and has no reason to believe that the net proceeds would not be sufficient to repay its recorded liabilities and recover the stated value of its assets; however, no estimate of the outcome of the Company's negotiations can be determined at this time. If the Company is unable to arrange additional funding as may be required, or successfully complete the sale transaction as further discussed in Note 8, the Company may be unable to continue as a going concern. 4. LONG-TERM LIABILITIES LONG-TERM DEBT Long-term debt consists of the following:
September 25, September 24, 1994 1995 --------------- --------------- Term notes payable to former shareholders: Stock purchase agreement ...................................... $2,789,875 $2,789,875 Bank term note acquired by former shareholders ................ -- 3,347,595 Term note payable to a bank (in default) ........................ 3,441,202 -- Notes payable under noncompete agreements with former shareholders .................................................. 430,228 430,228 Consent judgment, film contract payable ......................... -- 286,645 Capital equipment notes ......................................... 10,138 35,655 Other ........................................................... 84,156 71,656 --------------- --------------- 6,755,599 6,961,654 Less current portion ............................................ 6,731,182 6,615,165 --------------- --------------- $ 24,417 $ 346,489 =============== ===============
F-26 PORTLAND BROADCASTING, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 4. Long-Term Liabilities - (Continued) The term notes payable to former shareholders in connection with a stock purchase agreement were issued by Bride in October 1987 in the amount of $2,010,000. These notes were assigned to the Company by Bride, which was agreed to by the former shareholders. The notes were due in quarterly payments of principal and interest at 10% from August 1989 through November 1992. In accordance with the terms of the notes, accrued interest in the amount of $779,875 was capitalized into the note balance on November 11, 1992, and interest was accrued at 12% thereafter on the adjusted note balance of $2,789,875. Scheduled principal payments of the term notes payable to former shareholders have not been made when due. At September 24, 1995, the entire obligation is reflected as currently payable. The bank term note of $3,347,595 was purchased from the bank by the former shareholders on May 30, 1995. The note provided $3,600,000 for the purpose of paying off existing notes payable, along with accrued interest, and to provide additional working capital. The note was payable in monthly payments of interest only through August 1990, followed by 25 consecutive monthly payments of principal and interest based on a 108-month amortization, followed by one final installment of the balance of principal and interest. Interest continues to be applied on the unpaid balance at a monthly rate equivalent to the Bank of New York Prime plus 3.00% per annum, or 10.75% and 11.75% as of September 25, 1994 and September 24, 1995, respectively. The note is secured by a pledge of the stock of Portland and substantially all tangible and intangible property. The note also contains restrictive covenants with respect to the payment of dividends, distributions, obtaining additional indebtedness, etc. Notes payable under noncompete agreements totaling $430,228 were payable to former shareholders in scheduled quarterly installments through November 1992; however, no installment payments have been made. In March 1995, the Company entered into a consent judgment related to a film contract payable of $300,000. Under the terms of the judgment, the amount is unsecured, and is being repaid over three- or four-year monthly installments including interest at 10%. A balloon payment of $159,324 or $219,368 is due at the end of the third year or fourth year, respectively, the former amount representing a discount of $100,000 from principal. Payments on long-term debt disclosed below assume a four-year repayment schedule. The amount had previously been included in the current portion of film contract commitments at September 25, 1994. Other long-term liabilities relate to a 6% promissory note for $84,156 related to the previous lease agreement for a building. The payment terms are $500 weekly through September 1997, with an additional $15,817 lump sum due at the end of this term. The Company is currently negotiating a new lease for its current facility. Future principal payments of long-term debt are as follows: 1996 -- $6,615,165; 1997 -- $71,662; and 1998 -- $274,827. The Company paid interest of $599,477, $492,441, and $305,942 in 1993, 1994, and 1995, respectively. FILM CONTRACT COMMITMENTS Film contract commitments are payable under license arrangements for program material in monthly installments over periods ranging from one to five years. Annual payments required under these commitments are as follows: 1995, and prior, payments not made when due -- $1,162,578; 1996 -- $84,284; and 1997 -- $69,638. 5. OFFICER'S COMPENSATION Accrued officer's compensation totaling $588,000 and $621,750 was recorded by the Company at September 25, 1994 and September 24, 1995, respectively, pursuant to a resolution approved by the Board of Directors (Board). The Board resolution provides for payments only in the event of sufficient cash flows or pursuant to the sale or liquidation of the Company. In addition, the amount of officer's compensation paid is limited by certain covenants of the note payable to former shareholders acquired from a bank. F-27 PORTLAND BROADCASTING, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 6. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of customers' accounts receivable. Credit is extended based on the Company's evaluation of the customer's financial condition, and the Company does not require collateral. The Company's accounts receivable consist primarily of credit extended to a variety of businesses in the greater Portland area and to national advertising agencies for the purchase of advertising. 7. INCOME TAXES The Company has unused income tax loss carryforwards approximating $6,039,000 for tax purposes expiring between years 2001 and 2008. An investment tax credit carryforward of $89,641 (after reduction required by the Tax Reform Act of 1986) expires in 2001. Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes including the temporary differences between book and tax deductibility of the officer's salary accrual, vacation accrual, bad debt reserve and depreciation. They represent future tax benefits or costs to be recognized when those temporary differences reverse. At September 24, 1995, a valuation allowance of $2,821,579 ($2,643,744 at September 25, 1994) was recorded to offset net deferred tax assets. Significant components of the Company's deferred tax assets and liabilities are as follows:
1994 1995 ------------- ------------- Deferred tax assets: Accrued officer's salary ................. $ 235,200 $ 248,700 Contingent liability ..................... -- 160,000 Accrued interest to shareholders ......... 7,143 387 Bad debt reserve ......................... 13,346 16,800 Accrued vacation ......................... 4,374 7,779 Net operating loss carryforwards ......... 2,415,084 2,405,479 Investment tax credit carryforward ....... 89,641 89,641 ------------- ------------- Total deferred assets ...................... 2,764,788 2,928,786 Valuation allowance for deferred tax assets (2,643,744) (2,821,579) ------------- ------------- Net deferred tax assets .................... 121,044 107,207 Deferred tax liability: Depreciation .............................. 121,044 107,207 ------------- ------------- Net deferred tax assets .................... $ -- $ -- ============= =============
During 1994 and 1995, the Company utilized net operating loss carryforwards of approximately $235,000 and $24,000, realizing a benefit of approximately $89,000 and $5,500, respectively. 8. SUBSEQUENT EVENT On October 16, 1995, the Company entered into an Asset Purchase Agreement for the sale of substantially all assets and liabilities of the Company, with the exception of the station's FCC License. F-28 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of WTLH, Inc. We have audited the accompanying balance sheets of WTLH, Inc. as of December 31, 1994 and 1995, and the related statements of operations, capital deficiency, and cash flows for the years then ended. 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 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 financial statements referred to above present fairly, in all material respects, the financial position of WTLH, Inc. as of December 31, 1994 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Jacksonville, Florida March 8, 1996 F-29 WTLH, INC. BALANCE SHEETS
December 31, December 31, February 29, ASSETS 1994 1995 1996 -------------- -------------- -------------- (unaudited) Current assets: Cash ............................................ $ 190,582 $ 337,665 $ 375,813 Accounts receivable, less allowance for doubtful accounts of $8,000 at December 31, 1994 and 1995 and February 29, 1996 ................... 623,317 673,434 588,961 Film rights ..................................... 154,098 200,585 200,585 Prepaid expenses ................................ 6,925 4,475 1,388 Deferred income taxes ........................... 176,753 71,347 72,209 -------------- -------------- -------------- Total current assets ......................... 1,151,675 1,287,506 1,238,956 Equipment, net .................................... 77,283 51,005 50,246 Building and equipment under capital leases, net .. 226,003 692,819 682,514 Film rights ....................................... 216,745 262,022 228,591 Deferred income taxes ............................. 24,291 24,790 24,790 Deposits and other assets ......................... 11,914 8,992 8,992 -------------- -------------- -------------- Total assets ................................. $ 1,707,911 $ 2,327,134 $ 2,234,089 ============== ============== ============== LIABILITIES AND CAPITAL DEFICIENCY Current liabilities: Accounts payable ................................ $ 148,449 $ 175,809 $ 112,539 Accrued interest due affiliates ................. 237,360 180,953 182,456 Other accrued expenses .......................... 76,460 74,489 65,742 Current portion of long-term debt to affiliates . 4,250 0 0 Current portion of capital lease obligations .... 92,247 61,559 65,432 Current portion of film rights payable .......... 169,475 225,211 225,211 -------------- -------------- -------------- Total current liabilities .................... 728,241 718,021 651,380 Long-term liabilities: Long-term debt to affiliates .................... 610,257 531,181 494,893 Obligations under capital leases ................ 187,772 692,619 686,051 Film rights payable ............................. 248,138 280,117 239,335 Subordinated debt ............................... 1,200,000 1,200,000 1,200,000 -------------- -------------- -------------- Total liabilities ............................ 2,974,408 3,421,938 3,271,659 Shareholder deficiency: Common stock, $1 par value, 1,000 shares authorized, 100 shares issued and outstanding 100 100 100 Additional paid-in capital ...................... 900 900 900 Accumulated deficit ............................. (1,145,639) (973,946) (916,712) Receivable from affiliate ....................... (121,858) (121,858) (121,858) -------------- -------------- -------------- Total capital deficiency ..................... (1,266,497) (1,094,804) (1,037,570) -------------- -------------- -------------- Total liabilities and capital deficiency ..... $ 1,707,911 $ 2,327,134 $ 2,234,089 ============== ============== ==============
See accompanying notes to financial statements. F-30 WTLH, INC. STATEMENTS OF OPERATIONS
Years Ended Two Months Ended -------------------------------- -------------------------------- December 31, December 31, February 28, February 29, 1994 1995 1995 1996 -------------- -------------- -------------- -------------- (Unaudited) (Unaudited) Revenues: Broadcasting revenue, net of agency commissions of $587,810, $585,124, $80,559 and $79,300 .............. $2,256,174 $2,313,467 $316,268 $325,964 Barter broadcasting revenue ......... 310,208 470,589 51,701 78,431 -------------- -------------- -------------- -------------- Total revenues ................... 2,566,382 2,784,056 367,969 404,395 -------------- -------------- -------------- -------------- Operating expenses: Technical and operations ............ 278,312 320,215 46,777 33,256 Programming, including amortization of $194,993, $199,260, $31,624 and $33,431 .......................... 242,769 253,959 39,614 42,946 Barter programming .................. 310,208 470,589 51,701 78,431 General and administrative .......... 401,675 440,370 20,537 11,104 Promotion ........................... 237,419 346,529 28,174 26,236 Sales ............................... 279,031 300,903 46,363 51,066 Depreciation ........................ 135,474 107,197 14,985 11,064 Management fee ...................... 55,600 40,500 11,000 21,400 -------------- -------------- -------------- -------------- Total operating expenses ......... 1,940,488 2,280,262 259,151 275,503 -------------- -------------- -------------- -------------- Income from operations ........... 625,894 503,794 108,818 128,892 Interest expense ...................... (135,064) (163,111) (31,162) (19,853) Other expenses, net ................... 0 (63,743) (8,189) (17,089) -------------- -------------- -------------- -------------- Income before income taxes ....... 490,830 276,940 69,467 91,950 Provision for income taxes ............ 190,000 105,247 26,437 34,716 -------------- -------------- -------------- -------------- Net income ....................... $ 300,830 $ 171,693 $ 43,030 $ 57,234 ============== ============== ============== ==============
See accompanying notes to financial statements. F-31 WTLH, INC. STATEMENTS OF CAPITAL DEFICIENCY
Additional Receivable Total Common Paid-In From Capital Stock Capital Deficit Affiliate Deficiency -------- ------------ --------------- ------------- --------------- Balance, December 31, 1993 $100 $900 $(1,446,469) $ 121,858) $(1,567,327) Net income ............... 0 0 300,830 0 300,830 -------- ------------ --------------- ------------- --------------- Balance, December 31, 1994 100 900 (1,145,639) (121,858) (1,266,497) Net income ............... 0 0 171,693 0 171,693 -------- ------------ --------------- ------------- --------------- Balance, December 31, 1995 100 900 (973,946) (121,858) (1,094,804) Net income (unaudited) ... 0 0 57,234 0 57,234 -------- ------------ --------------- ------------- --------------- Balance February 29, 1996 (unaudited) ............. $100 $900 $ (916,712) $(121,858) $(1,037,570) ======== ============ =============== ============= ===============
See accompanying notes to financial statements. F-32 WTLH, INC. STATEMENTS OF CASH FLOWS
Years Ended Two Months Ended -------------------------------- -------------------------------- December 31, December 31, February 28, February 29, 1994 1995 1995 1996 -------------- -------------- -------------- -------------- (unaudited) (unaudited) Cash flows from operating activities: Net income ................................. $ 300,830 $ 171,693 $ 43,030 $ 57,234 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................ 135,474 107,197 14,985 11,064 Deferred income taxes ................... 186,243 104,907 26,437 (862) Loss on sale of vehicle ................. 0 2,853 0 0 Change in assets and liabilities: Accounts receivable ................... (191,338) (50,117) 188,612 84,473 Film rights ........................... 106,738 (91,764) (91,347) 33,431 Prepaid expenses ...................... 675 2,450 3,954 3,087 Other assets .......................... 276 2,922 11,813 0 Accounts payable ...................... (104,678) 27,360 (28,631) (63,270) Accrued interest due affiliates ....... 27,172 (56,407) (54,121) 1,503 Other accrued expenses ................ (20,109) (1,973) (50,664) (8,747) Film rights payable ................... (84,401) 87,715 (29,672) (40,782) -------------- -------------- -------------- -------------- Net cash provided by operating activities ....................... 356,882 306,836 34,396 77,131 -------------- -------------- -------------- -------------- Cash flows for investing activities: Purchase of property and equipment ......... (34,973) (28,311) (16,672) 0 Proceeds from sale of vehicle .............. 0 2,723 0 0 -------------- -------------- -------------- -------------- Net cash used in investing activities . (34,973) (25,588) (16,672) 0 -------------- -------------- -------------- -------------- Cash flows (for) from financing activities: Principal payments on long-term debt to affiliates .............................. (108,586) (83,324) 0 (36,288) Advances from affiliates ................... 0 0 31,436 0 Payments made under capital leases ......... (16,426) (50,841) 0 (2,695) -------------- -------------- -------------- -------------- Net cash (used in) provided by financing activities ............... (125,012) (134,165) 31,436 (38,983) -------------- -------------- -------------- -------------- Net increase in cash ......................... 196,897 147,083 49,160 38,148 Cash (overdraft) at beginning of year ........ (6,315) 190,582 190,582 337,665 -------------- -------------- -------------- -------------- Cash at end of year .......................... $ 190,582 $ 337,665 $239,742 $375,813 ============== ============== ============== ============== Supplemental Disclosure of Cash Flow Information: Cash paid for interest ..................... $ 103,287 $ 224,404 $ 16,881 12,607 ============== ============== ============== ============== Cash paid for income taxes ................. $ 0 $ 7,757 $ 0 $ 0 ============== ============== ============== ============== Supplemental Schedule of Noncash Investing and Financing Activities: Capital lease obligation incurred for building ................................ $ 0 $ 525,000 $525,000 $ 0 ============== ============== ============== ==============
See accompanying notes to financial statements. F-33 WTLH, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization -- WTLH, Inc. (the Company) was formed in 1988 to own and operate a broadcast television station, WTLH, located in Tallahassee, Florida. The station is a Fox Network affiliate. Unaudited Interim Financial Information -- The unaudited balance sheet as of February 29, 1996 and the unaudited statements of operations and accumulated deficit and cash flows for the two months ended February 28, 1995 and February 29, 1996 (interim financial information) are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of the Company, the interim financial information includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim period. The results of operations for the two month period ending February 29, 1996 are not necessarily indicative of the results for a full year. All disclosures for the two month periods ended February 28, 1995 and February 29, 1996 included herein are unaudited. Property and Equipment -- Equipment is stated at cost less accumulated depreciation. The Company operates in leased facilities with lease terms ranging up to 2014. Real property and equipment leased under capital leases are amortized over the lives of the respective leases using the straight-line method. Maintenance and repairs are expensed as incurred. Depreciation of equipment is computed using principally accelerated methods based upon the following estimated useful lives: Tower and building under lease ...... 20 years Transmitter and studio equipment .... 5-7 years Computer equipment .................. 5 years Furniture and fixtures .............. 7 years Other equipment ..................... 5-7 years Use of Estimates -- 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 assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Film Rights -- The Company enters into agreements to show motion pictures and syndicated programs on television. Only the rights and associated liabilities for those films and programs currently available for showing are recorded on the Company's books. These rights are recorded at cost, the gross amount of the contract liability. Program rights are amortized over the license period, which approximates amortization based on the estimated number of showings during the contract period, using the straight-line method except where an accelerated method would produce more appropriate matching of cost with revenue. Payments for the contracts are made pursuant to contractual terms over periods which are generally shorter than the license periods. Programming -- The Company obtains a portion of its programming, including presold advertisements, through its network affiliation agreement with Fox Broadcasting, Inc. ("Fox"), and also through independent producers. The Company does not make any direct payments for network and certain independent producers' programming. For broadcasting network programming, the Company receives payments from Fox, which totaled $38,559, $63,023, $11,302 and $6,955 for the years ended December 31, 1994 and 1995 and the two month period ended February 28, 1995 and February 29, 1996, respectively. For running independent producers' programming, the Company receives no direct payments. Instead, the Company retains a portion of the available advertisement spots to sell on its own account, which are recorded as broadcasting revenue. Management estimates the value, and related programming expense, of the presold advertising included in the F-34 WTLH, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 1. Summary of Significant Accounting Policies: - (Continued) independent producers' programming to be $310,208, $470,589, 51,701 and $78,431 for the years ended December 31, 1994 and 1995 and the two month periods ended February 28, 1995 and February 29, 1996, respectively. These amounts are presented gross as barter broadcasting revenue and barter programming expense in the accompanying financial statements. Income Taxes -- Deferred income tax assets are recognized for the expected future consequences of events that have been included in the financial statements and income tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. 2. PROPERTY AND EQUIPMENT: The major classes of equipment consist of the following:
February 29, 1994 1995 1996 ----------- ----------- -------------- (Unaudited) Transmitter and studio equipment $731,962 $718,958 $718,958 Computer equipment .............. 40,772 25,019 25,019 Furniture and fixtures .......... 27,914 27,914 27,914 Other equipment ................. 56,141 63,827 63,827 ----------- ----------- -------------- 856,789 835,718 835,718 Less accumulated depreciation ... 779,506 784,713 785,472 ----------- ----------- -------------- $ 77,283 $ 51,005 $ 50,246 =========== =========== ==============
Building and equipment under capital leases consist of the following:
December 31, December 31, February 29, 1994 1995 1996 -------------- -------------- -------------- (Unaudited) Building ........................ $ 0 $525,000 $525,000 Transmitter and studio equipment 38,400 38,400 38,400 Tower ........................... 210,055 210,055 210,055 Computer equipment .............. 41,300 41,300 41,300 Furniture and fixtures .......... 7,950 7,950 7,950 Vehicle ......................... 8,952 0 0 -------------- -------------- -------------- 306,657 822,705 822,705 Less accumulated depreciation ... 80,654 129,886 140,191 -------------- -------------- -------------- $226,003 $692,819 $682,514 ============== ============== ==============
Depreciation expense amounted to $135,474, $107,197, $13,936 and $10,305 for the years ended December 31, 1994 and 1995 and the two months ended February 28, 1995 and February 29, 1996, respectively. F-35 WTLH, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 3. LONG-TERM DEBT TO AFFILIATES: The following is a summary of long-term debt to affiliates:
December 31, December 31, February 29, 1994 1995 1996 -------------- -------------- -------------- (Unaudited) Note payable to affiliated company through common ownership, interest at 12.97%, due at the earlier of August 12, 1999 or the date the station is refinanced or sold, collateralized by an assignment of outstanding accounts receivable .................................... $453,673 $418,623 $392,335 Note payable to stockholders, interest at 12.97%, due upon sale of the station ............................... 156,584 112,558 102,558 Other ................................................... 4,250 0 0 -------------- -------------- -------------- Total ................................................. 614,507 531,181 494,893 Less current portion .................................. 4,250 0 0 -------------- -------------- -------------- Long-term debt to affiliates .......................... $610,257 $531,181 $494,893 ============== ============== ==============
Scheduled maturities of long-term debt to affiliates, exclusive of $112,558 for sale of the station, are as follows:
1999 ........................................................... $418,623 ========
4. LEASES: The Company leases a broadcasting tower, a vehicle and computer and other equipment which have been accounted for as capital leases. The following is a summary of capital lease obligations:
December 31, December 31, February 29, 1994 1995 1996 -------------- -------------- -------------- (Unaudited) Lease of a building with stockholders, interest at 10.4%, payable in varying monthly installments through January 1, 2014 ................................................ $ 0 $497,634 $498,314 Lease of a broadcasting tower with an affiliated company through common ownership, interest at 12.97%, payable in varying monthly installments through October 2010 ...... 210,055 210,055 210,055 Lease of equipment, interest at 14.47%, payable in monthly installments of $1,114 through August 1998 ..... 33,283 25,170 23,710 Leases of computer equipment, interest ranging from 12.05% to 17.42%, payable in monthly installments ranging from $166 to $725 through April 1998 ........... 27,653 19,329 17,794 Lease of a vehicle, interest at 9%, payable in monthly installments of $285 through July 1996 ................. 4,776 0 0 Lease of telephone equipment, interest at 14.33%, payable in monthly installments of $227 through January 1997 ... 4,252 1,990 1,610 -------------- -------------- -------------- Total ................................................. 280,019 754,178 751,483 Less current portion .................................. (92,247) (61,559) (65,432) -------------- -------------- -------------- Long-term portion ..................................... $187,772 $692,619 $686,051 ============== ============== ==============
F-36 WTLH, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 4. Leases: - (Continued) The Company also leases its studios, the land surrounding its tower from an affiliated company, three vehicles from its stockholders and various other equipment under non-cancelable operating leases. The leases expire at various dates through 2014. Rent expense under non-cancelable operating leases totaled $141,684, $166,680, $25,522, and $25,900 for the years ended December 31, 1994 and 1995 and the two months ended February 28, 1995 and February 29, 1996, respectively. Future minimum payments as of December 31, 1995 under capital leases and non-cancelable operating leases consist of the following: Capital Operating Year ended December 31: Leases Leases -------------------------------------------- ----------- ----------- 1996 ....................................... $ 97,613 $151,728 1997 ....................................... 102,767 63,575 1998 ....................................... 94,240 46,495 1999 ....................................... 88,211 35,321 2000 ....................................... 92,428 36,387 Thereafter ................................. 1,473,638 634,110 ----------- ----------- Total lease payments .................. 1,948,897 967,616 Less amount representing interest ..... 1,194,719 0 ----------- ----------- Present value of net minimum lease payments ............................ $ 754,178 $967,616 =========== =========== 5. FILM RIGHTS PAYABLE: Commitments for film rights payable as of December 31, 1995 are as follows for years ending December 31: 1996 ....................................................... $225,211 1997 ....................................................... 143,208 1998 ....................................................... 93,668 1999 ....................................................... 40,457 2000 ....................................................... 2,784 ----------- $505,328 =========== The Company has entered into agreements totaling $154,500 as of December 31, 1995, which are not yet available for showing at December 31, 1995, and, accordingly, are not recorded on the Company's financial statements. 6. INCOME TAXES: The provision for income taxes is summarized as follows: Year Ended Two Months Ended ------------------------------- -------------------------------- December 31, December 31, February 28, February 29, 1994 1995 1995 1996 -------------- -------------- -------------- -------------- (Unaudited) (Unaudited) Current ... $ 3,757 $ 0 $ 0 $35,578 Deferred .. 186,243 105,247 26,437 (862) -------------- -------------- -------------- -------------- $190,000 $105,247 $26,437 $34,716 ============== ============== ============== ============== F-37 WTLH, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 6. Income Taxes: - (Continued) The differences between the federal statutory tax rate and the Company's effective tax rate are as follows:
Year Ended Two Months Ended -------------------------------- -------------------------------- December 31, December 31, February 28, February 29, 1994 1995 1995 1996 -------------- -------------- -------------- -------------- (Unaudited) (Unaudited) Federal income tax at federal statutory rate 34.0 % 34.0 % 34.0 % 34.0% State income taxes, net of federal income tax benefit .................................... 3.6 3.6 3.6 3.6 Other ....................................... 1.1 0.6 0.4 0.1 -------------- -------------- -------------- -------------- 38.7 % 38.2 % 38.0 % 37.7 % ============== ============== ============== ==============
The components of net deferred tax assets are as follows:
December 31, December 31, February 29, 1994 1995 1996 -------------- -------------- -------------- (Unaudited) Current deferred tax assets: ... Net operating loss benefits .. $ 80,714 $14,044 $ 0 Accrued interest due affiliates ................ 92,869 54,293 72,209 Allowance for doubtful accounts .................. 3,170 3,010 0 -------------- -------------- -------------- 176,753 71,347 72,209 Long-term deferred tax assets: Program rights amortization .. 24,291 24,790 24,790 -------------- -------------- -------------- $201,044 $96,137 $96,999 ============== ============== ==============
At December 31, 1995, the Company has recorded a deferred tax asset of $96,137, including the benefit of approximately $37,000 in loss carryforwards, which expire in 2006. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. 7. RELATED PARTY TRANSACTIONS: The Company has a $121,858 receivable from an affiliated company for reimbursement of certain costs. The receivable is non interest bearing with no fixed terms of repayment. The receivable has been presented as a reduction of stockholders' equity in the accompanying financial statements. The Company paid $55,600, $151,500 (including $111,000 of payments for lease obligations which have been reclassified for financial statement presentation purposes) $11,000 and $21,400 in management fees to an affiliated company through common ownership for the years ended December 31, 1994 and 1995 and the two months ended February 28, 1995 and February 29, 1996, respectively. The Company made payments to stockholders and affiliates under leases as described in Note 4 aggregating $45,777, $138,236, $20,500 and $23,039 for the years ended December 31, 1994 and 1995 and the two months ended February 28, 1995 and February 29, 1996, respectively. F-38 WTLH, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 8. FINANCIAL INSTRUMENTS: Concentrations of Credit Risk -- Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of accounts receivable and cash. Concentrations of credit risk with respect to receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across different business and geographic regions, of which approximately 60% was related to national accounts. Disclosures About Fair Value of Financial Instruments -- The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and Accounts Receivable: The carrying amount approximates fair value. Long-Term Debt: The fair value of the Company's long-term debt approximates fair value since the debt was settled in full in 1996. See Note 10. 9. SUBORDINATED DEBT: The $1,200,000 subordinated debt is non-interest bearing and is payable to the Company's former stockholder under certain circumstances. The debt is subordinate to up to $1,500,000 of institutional or stockholder loans and is collateralized by all tangible and intangible personal property of the Company. In connection with the sale of the Company (see Note 10) a settlement agreement was entered into that reduced the outstanding liability to $521,100, which was paid in March 1996. 10. SUBSEQUENT EVENT: On March 8, 1996, the principal assets of the Company were sold to Pegasus Media & Communications, Inc. for $5 million in cash, including payments under noncompetition agreements with the owners and an employee of the station. F-39 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Harron Communications Corp. We have audited the accompanying combined balance sheets of the DBS Operations of Harron Communications Corp. (operating divisions of Harron Communications Corp., as more fully described in Note 1 to financial statements) (the "Divisions") as of December 31, 1995 and 1994, and the related combined statements of operations, and cash flows for the years then ended. These financial statements are the responsibility of the Divisions' management. Our responsibility is to express an opinion on these 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, such combined financial statements present fairly, in all material respects, the financial position of the DBS Operations of Harron Communications Corp. at December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements may not necessarily be indicative of the conditions that would have existed or the results of operations had the Divisions been unaffiliated with Harron Communications Corp. As discussed in Notes 1 and 8 to the combined financial statements, Harron Communications Corp. provides financing and certain legal, treasury, accounting, tax, risk management and other corporate services to the Divisions. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania April 26, 1996, except for Note 9 as to which the date is September 3, 1996 F-40 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. COMBINED BALANCE SHEETS DECEMBER 31, 1994 AND 1995, AND JUNE 30, 1996
December 31, ------------------------------ June 30, 1994 1995 1996 ------------- ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash ........................................... $ 140,311 $ 452,016 $ 313,923 Accounts Receivable, net of allowance for doubtful accounts of $64,100 in 1995 and 1996 71,818 485,803 323,659 Inventory ...................................... 766,945 304,335 31,079 ------------- ------------- ------------- Total current assets ................... 979,074 1,242,154 668,661 ------------- ------------- ------------- PROPERTY AND EQUIPMENT ........................... 14,270 71,777 71,777 Accumulated depreciation ....................... (1,000) (9,565) (17,132) ------------- ------------- ------------- Property and equipment, net ............ 13,270 62,212 54,645 ------------- ------------- ------------- FRANCHISE COSTS .................................. 5,399,321 5,590,167 5,590,167 Accumulated amortization ....................... (224,877) (775,423) (1,058,599) ------------- ------------- ------------- Franchise costs, net ................... 5,174,444 4,814,744 4,531,568 ------------- ------------- ------------- TOTAL ............................................ $6,166,788 $ 6,119,110 $ 5,254,874 ============= ============= ============= LIABILITIES AND DIVISION DEFICIENCY CURRENT LIABILITIES: Accounts payable ............................... $ 272,340 $ 49,290 $ 22,987 Accrued expenses (Note 4) ..................... 121,085 504,339 651,127 ------------- ------------- ------------- Total current liabilities .............. 393,425 553,629 674,114 ------------- ------------- ------------- DUE TO AFFILIATE (Note 8) ........................ 6,708,407 8,399,809 7,997,900 ------------- ------------- ------------- Total liabilities ............................ 7,101,832 8,953,438 8,672,014 COMMITMENTS AND CONTINGENCIES DIVISION DEFICIENCY .............................. (935,044) (2,834,328) (3,417,140) ------------- ------------- ------------- TOTAL ............................................ $6,166,788 $ 6,119,110 $ 5,254,874 ============= ============= =============
See notes to combined financial statements. F-41 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. COMBINED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994 AND 1995, AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Year Ended Six Months Ended December 31, June 30, -------------------------------- ----------------------------- 1994 1995 1995 1996 ------------- --------------- ------------ ------------- (Unaudited) REVENUES: Programming ................ $ 95,488 $ 1,677,581 $ 576,032 $1,606,878 Equipment and other ........ 279,430 835,379 147,175 289,708 ------------- --------------- ------------ ------------- 374,918 2,512,960 723,207 1,896,586 ------------- --------------- ------------ ------------- COST OF SALES: Programming ................ 42,464 707,880 245,717 798,796 Equipment and other ........ 233,778 901,420 135,386 288,284 ------------- --------------- ------------ ------------- 276,242 1,609,300 381,103 1,087,080 ------------- --------------- ------------ ------------- GROSS PROFIT ................. 98,676 903,660 342,104 809,506 ------------- --------------- ------------ ------------- OPERATING EXPENSES: Selling .................... 17,382 463,425 85,806 87,241 General and administrative . 199,683 1,009,633 341,657 594,479 Corporate allocation ....... 103,200 139,700 69,800 76,393 Depreciation and amortization ............ 225,877 559,111 274,661 290,743 ------------- --------------- ------------ ------------- 546,142 2,171,869 771,924 1,048,856 ------------- --------------- ------------ ------------- LOSS FROM OPERATIONS ......... (447,466) (1,268,209) (429,820) (239,350) INTEREST EXPENSE ............. 487,578 631,075 307,843 343,462 ------------- --------------- ------------ ------------- NET LOSS ..................... $(935,044) $ 1,899,284) $(737,663) $ (582,812) ============= =============== ============ =============
See notes to combined financial statements. F-42 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994 AND 1995, AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Year Ended Six Months Ended December 31, June 30, -------------------------------- ------------------------------ 1994 1995 1995 1996 ------------- --------------- ------------- ------------- (Unaudited) OPERATING ACTIVITIES: Net loss .................................. $ (935,044) $(1,899,284) $ (737,663) $(582,812) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .......... 225,877 559,111 274,661 290,743 Changes in assets and liabilities: Accounts receivable .................. (71,818) (413,985) (35,256) 162,144 Inventory ............................ (766,945) 462,610 (169,343) 273,256 Accounts payable ..................... 272,340 (223,050) (165,084) (26,303) Accrued expenses ..................... 121,085 383,254 66,048 146,788 ------------- --------------- ------------- ------------- Net cash provided by (used in) operating activities ............ (1,154,505) (1,131,344) (766,637) 263,816 ------------- --------------- ------------- ------------- INVESTING ACTIVITIES: Purchase of property and equipment ........ (14,270) (57,507) (48,217) -- Purchase of franchise rights and other .... (190,846) (189,690) -- ------------- --------------- ------------- ------------- Net cash used in investing activities ...................... (14,270) (248,353) (237,907) -- ------------- --------------- ------------- ------------- FINANCING ACTIVITIES -- Advances from (to) affiliate, net ............................ 1,309,086 1,691,402 1,006,890 (401,909) ------------- --------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH ............. 140,311 311,705 2,346 (138,093) CASH, BEGINNING OF YEAR ..................... 140,311 140,311 452,016 ------------- --------------- ------------- ------------- CASH, END OF YEAR ........................... $ 140,311 $ 452,016 $ 142,657 $ 313,923 ============= =============== ============= =============
See notes to combined financial statements. F-43 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. NOTES TO COMBINED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994 AND 1995 1. PRESENTATION AND NATURE OF BUSINESS Basis of Presentation -- The DBS Operations of Harron Communications Corp. (the "Divisions") are comprised of the assets and liabilities of two operating divisions of Harron Communications Corp. ("Harron") that provide direct broadcast satellite ("DBS") services. Harron intends to sell these assets pursuant to an agreement with Pegasus Communications Holdings, Inc. (see Note 9). These divisions have no separate legal existence apart from Harron. The historical combined financial statements of the DBS Operations of Harron Communications Corp. do not necessarily reflect the results of operations or financial position that would have existed if the component DBS operating divisions were independent companies. Harron provides certain legal, treasury, accounting, tax, risk management and other corporate services to the Divisions (see Note 8). There are no significant intercompany transactions or balances between the component divisions. Nature of Business -- The Divisions provide direct broadcast satellite television distribution services and sell the related equipment in rural territories located in Michigan and Texas franchised by the National Rural Telecommunications Cooperative ("NRTC") and DIRECTV. While these franchises are exclusive as they relate to programming provided by DIRECTV, other programming providers may offer DBS services within the Divisions' markets. In 1993, the Divisions purchased their initial franchises with a potential subscriber base of 343,174 homes for approximately $5,395,000. In July 1994, the Divisions added their first DBS subscriber. In 1995, the Divisions purchased an additional franchise with a potential subscriber base of 7,695 homes for approximately $190,000. Total subscribers at December 31, 1995 and 1994 were 6,573 and 1,737 homes, respectively. Under the franchise agreements, DIRECTV operates a satellite through which programming is transmitted. The NRTC provides certain billing and collection services to the Divisions. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounts Receivable -- Accounts receivable consist of amounts due from customers for programming services and equipment purchases and installation. In 1995, the Divisions sold equipment and related installation to approximately 50 customers under contracts with repayment terms of up to 48 months. The Divisions have provided a reserve for estimated uncollectible amounts of $64,100 at December 31, 1995. Bad debt expense in 1994 and 1995 was $0 and $87,400, respectively. Inventory -- Inventory, consisting of DBS systems (primarily, satellite dishes and converter boxes) and related parts and supplies, is stated at the lower of cost (first in - first out method) or market. Because of the nature of the technology involved, the value of inventory held by the Divisions is subject to changing market conditions. Accordingly, inventory has been written down to its estimated net realizable value, and results of operations in 1995 include a corresponding charge of approximately $105,000. In 1995, the Divisions provided demonstration units to certain dealers and others. The cost of demonstration units is expensed when such units are placed in service. In 1995, demonstration units amounting to approximately $32,000 were placed in service. Property and Equipment -- Property and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Franchise Costs -- Franchise acquisition costs are capitalized and are being amortized using the straight-line method over the remaining minimum franchise period (originally 10 years) which approximates the estimated useful life of the satellite operated by DIRECTV. F-44 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) YEARS ENDED DECEMBER 31, 1994 AND 1995 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) The Divisions evaluate the carrying value of long-term assets, including franchise acquisition costs, based upon current anticipated undiscounted cash flows, and recognizes impairment when it is probable that such estimated cash flows will be less than the carrying value of the asset. Measurement of the amount of the impairment, if any, is based upon the difference between the carrying value and the estimated fair value. Revenue Recognition -- Revenue in connection with programming services and associated costs are recognized when such services are provided. Amounts received in advance of the services being provided are recorded as unearned revenue. Revenue in connection with the sale of equipment and installation and associated costs are recognized when the equipment is installed. Income Taxes -- The Divisions are included in the consolidated tax return of Harron. Accordingly, income taxes have been presented in these combined financial statements as though the Divisions filed a separate combined federal income tax return and separate state tax returns. The Divisions account for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes (See Note 5). Use of Estimates -- 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 assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Unaudited Data -- The combined balance sheet as of June 30, 1996 and the combined statements of operations and cash flows for the three months ended June 30, 1995 and 1996 have been prepared by the Divisions and have not been audited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the combined financial position, results of operations and cash flows of the Divisions as of June 30, 1996 and for the six months ended June 30, 1995 and 1996 have been made. The combined results of operations for the six months ended June 30, 1996 are not necessarily indicative of operating results for the full year. Disclosures About Fair Value of Financial Instruments -- The following disclosure of the estimated fair value of financial instruments is made in accordance with SFAS No. 107, Disclosures About Fair Value of Financial Instruments. Cash, Accounts Receivable, Accounts Payable, and Accrued Expenses -- The carrying amounts of these items approximate their fair values as of December 31, 1994 and 1995 because of their short maturity. Due to Affiliates -- A reasonable estimate of fair value is not practicable to obtain because of the related party nature of this item. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following: Estimated December 31, Years -------------------------- Useful Life 1994 1995 ------------- --------- --------- Furniture and fixtures . 10 $ 8,550 $19,435 Computer equipment ..... 5 5,720 25,839 Automobiles ............ 3 21,005 Other .................. 3 5,498 --------- --------- 14,270 71,777 Accumulated depreciation . (1,000) (9,565) --------- --------- $13,270 $62,212 ========= ========= F-45 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) YEARS ENDED DECEMBER 31, 1994 AND 1995 4. ACCRUED EXPENSES Accrued expenses consist of the following: December 31, -------------------------------------- 1994 1995 ---------- ---------- Programming ......... $ 33,038 $200,300 Commissions ......... 5,618 84,676 Salaries and benefits 25,000 16,019 Unearned revenue .... 47,339 165,496 Other ............... 10,090 37,848 ---------- ---------- $121,085 $504,339 ========== ========== 5. INCOME TAXES The Divisions account for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach for financial accounting and reporting of income taxes. Under this approach, deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax law will be reflected in the tax provision as they occur. Deferred income taxes reflect the net tax effects of (a) temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss carryforwards. For each year presented, there is no provision or benefit for income taxes due to net losses incurred and the effect of recording a 100% valuation allowance on net deferred tax assets. Significant items comprising the Divisions' deferred tax assets and liabilities at December 31, are as follows: 1994 1995 ----------- ------------- Differences between book and tax basis: Intangible assets ................... $ 17,000 $ 85,000 Inventory ........................... 52,000 Other ............................... 24,000 Net operating carryforwards ........... 342,000 978,000 ----------- ------------- Net deferred tax asset ...... 359,000 1,139,000 Valuation allowance ................... (359,000) (1,139,000) ----------- ------------- Net deferred tax balance .............. $ 0 $ 0 =========== ============= The Divisions have recorded a valuation allowance of $359,000 and $1,139,000 at December 31, 1994 and 1995, respectively, against deferred tax assets, reducing these assets to amounts which are more likely than not to be realized. The increase in the valuation allowance of $780,000 from December 31, 1994 is primarily attributable to the increase in the tax benefits associated with the Divisions' net operating loss carryforwards. The benefits of these net operating loss carryforwards are not transferable pursuant to the transaction described in Note 9. F-46 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) YEARS ENDED DECEMBER 31, 1994 AND 1995 6. DIVISION DEFICIENCY Changes in division deficiency for the years ended December 31, 1994 and 1995 are as follows: Balance, January 1, 1994 ................................ $ 0 1994 Net Loss .......................................... (935,044) ------------- Balance, December 31, 1994 ................................ (935,044) 1995 Net loss .......................................... (1,899,284) ------------- Balance, December 31, 1995 ................................ $(2,834,328) ============= 7. EMPLOYEE SAVINGS PLAN Employees of the Divisions who have completed one year of service, as defined, may contribute from 1% to 15% of their earnings to a 401(k) plan administered by Harron for its employees. The Divisions will match 50% of the employee contributions up to 6% of earnings. The Divisions' expense related to the savings plan was $0 and $1,280 in 1994 and 1995, respectively. 8. RELATED PARTY TRANSACTIONS Amounts due to affiliate represent cash advances for franchise acquisitions, capital expenditures and working capital deficiencies. Interest expense of approximately $488,000 and $631,000 was charged in 1994 and 1995, respectively, and was added to the outstanding balance. The rate of interest is determined by Harron based on its cost of borrowed funds. At December 31, 1995, this rate was approximately 8.3%. Although these advances have no stated repayment terms, Harron has agreed not to seek repayment through March 1997. Approximately $103,200 and $139,700 of Harron's corporate expenses has been charged to the Divisions in 1994 and 1995, respectively. In addition, approximately $26,000 and $143,000 has been charged to the Divisions for Harron's regional support of the Divisions' operations in 1994 and 1995, respectively, and are included in general and administrative expenses. These costs include legal, treasury, accounting, tax, risk management, advertising and building rent and are charged to the Divisions based on management's estimate of the Divisions' allocable share of such costs. Management believes that its allocation method is reasonable. The Divisions' assets have been pledged as collateral for certain loans of Harron that have outstanding balances of approximately $188,000,000 at December 31, 1995. 9. SUBSEQUENT EVENT On April 4, 1996, Harron entered into a letter of intent with Pegasus Communications Holdings, Inc. ("Pegasus"). The terms of this letter are subject to change pursuant to ongoing negotiations between Pegasus and Harron. Under the present understanding of terms as of September 3, 1996, Pegasus and Harron would simultaneously contribute assets into a newly-formed Delaware Corporation ("Newco"). Newco would simultaneously undertake an initial public offering of common stock ("Public Stock"). At the closing of the transaction, Harron would contribute its DBS operations to Newco in exchange for (a) cash in the amount of $17.9 million and (b) the number of shares of Newco common stock that could be purchased for $11.9 million at the price at which the Public Stock is first offered to the public. Although the Divisions believe that this transaction will be consummated, there can be no assurances that it will occur at all or on the terms described above. F-47 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Dom's Tele Cable, Inc. We have audited the accompanying balance sheets of Dom's Tele Cable, Inc. as of May 31, 1995 and 1996 and the related statements of operations and deficit and cash flows for the years ended May 31, 1994, 1995 and 1996. 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 in accordance with generally accepted auditing standards. Those standards required 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 financial statements referred to above present fairly, in all material respects, the financial position of Dom's Tele Cable, Inc. as of May 31, 1995 and 1996, and the results of operations and deficit and its cash flows for the years ended May 31, 1994, 1995 and 1996 in conformity with generally accepted accounting principles. As discussed in Note 11, to the financial statements, the Company has restated the depreciation expense for the year ended May 31, 1994, to properly reflect the calculation of depreciation expense. COOPERS & LYBRAND L.L.P. San Juan, Puerto Rico August 9, 1996 F-48 DOM'S TELE CABLE, INC. BALANCE SHEETS MAY 31, 1995 AND 1996
May 31, May 31, 1995 1996 ------------- ------------- ASSETS Property, plant, and equipment net of accumulated depreciation and amortization ...................... $ 5,077,102 $ 4,839,293 Cash ................................................ 60,648 146,368 Accounts receivable, trade -- net of allowance for doubtful accounts of $26,900 and $30,390 for May 31, 1995 and 1996, respectively ........................ 107,876 26,314 Prepaid expenses .................................... 85,536 62,856 Other assets ........................................ 11,086 11,086 Due from related parties ............................ 212 212 Deferred tax asset .................................. 330,200 0 ------------- ------------- Total assets ................................... $ 5,672,660 $ 5,086,129 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIENCY Liabilities: Notes and loans payable ........................... $ 6,079,357 $ 5,086,232 Accounts payable, trade ........................... 695,519 194,856 Accrued expenses .................................. 942,227 1,055,337 Unearned revenues ................................. 53,852 41,369 Income tax payable ................................ 16,840 15,410 ------------- ------------- 7,787,795 6,393,204 ------------- ------------- Commitments and contingencies ....................... 477,083 495,352 Stockholders' Deficiency: Common stock -- $10 par value; authorized, 100,000 shares, issued and outstanding 9,575 shares .... 95,750 95,750 Accumulated deficit ............................... (2,687,968) (1,898,177) ------------- ------------- (2,592,218) (1,802,427) ------------- ------------- Total liabilities and stockholders' deficiency . $ 5,672,660 $ 5,086,129 ============= =============
The accompanying notes are an integral part of these financial statements. F-49 DOM'S TELE CABLE, INC. STATEMENTS OF OPERATIONS AND DEFICIT FOR THE YEARS ENDED MAY 31, 1994, 1995 AND 1996
May 31, May 31, May 31, 1994 1995 1996 --------------- --------------- -------------- As Restated Revenues ............................ $ 5,356,652 $ 5,447,228 $ 6,015,072 Operating costs and expenses ........ 1,521,390 1,950,762 1,909,206 --------------- --------------- -------------- Gross profit ................... 3,835,262 3,496,466 4,105,866 --------------- --------------- -------------- Marketing, general, and administrative expenses ...... 1,346,487 1,412,951 1,636,322 Depreciation and amortization .. 634,750 491,295 505,042 --------------- --------------- -------------- 1,981,237 1,904,246 2,141,364 --------------- --------------- -------------- Operating income .................... 1,854,025 1,592,220 1,964,502 Non-operating (income) expenses: Other ............................. -- (50,000) -- Interest expense .................. 753,047 777,461 827,800 --------------- --------------- -------------- Income before benefit (provision) for income taxes ............... 1,100,978 864,759 1,136,702 Benefit (provision) for income taxes .......................... 184,000 129,356 (346,911) --------------- --------------- -------------- Net income ..................... 1,284,978 994,115 789,791 Deficit at beginning of period ...... (4,967,061) (3,682,083) (2,687,968) --------------- --------------- -------------- Deficit at end of period ............ $(3,682,083) $(2,687,968) $(1,898,177) =============== =============== ==============
The accompanying notes are an integral part of these financial statements. F-50 DOM'S TELE CABLE, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MAY 31, 1994, 1995 AND 1996
May 31, May 31, May 31, 1994 1995 1996 ------------- ------------- ------------- As Restated Cash flows from operating activities: Net income .................................. $ 1,284,978 $ 994,115 $ 789,791 ------------- ------------- ------------- Adjustments to reconcile net income to net cash provided by operating activities: ........... Depreciation and amortization ............ 634,750 491,295 505,042 Provision for doubtful accounts .......... 50,595 9,241 110,408 Changes in assets and liabilities: Increase in accounts receivables, trade .................. (24,781) (51,864) (28,846) (Increase) decrease in accounts receivable, other ................... (14,743) 35,866 -- (Increase) decrease in prepaid expenses (35,218) (4,845) 22,679 Increase in other assets ............... (3,916) -- -- (Increase) decrease in due from related parties ............................. (2,887) 3,414 -- (Increase) decrease in deferred tax asset ............................... (184,000) (146,200) 330,200 Increase (decrease) in accounts payable 238,870 266,705 (500,663) Increase (decrease) in accrued expenses (186,870) (120,322) 113,110 Increase (decrease) in income tax payable ............................. -- 16,840 (1,430) Decrease in unearned revenues .......... (12,483) (22,908) (12,483) Increase in contingencies .............. -- 191,083 18,269 ------------- ------------- ------------- Total adjustments ................... 459,317 668,305 556,286 ------------- ------------- ------------- Net cash provided by operating activities ........................ 1,744,295 1,662,420 1,346,077 ------------- ------------- ------------- Cash flows from investing activities: Capital expenditures ........................ (390,172) (249,727) (267,232) ------------- ------------- ------------- Net cash used in investing activities (390,172) (249,727) (267,232) ------------- ------------- ------------- Cash flows from financing activities: Payments of notes payable ................... (1,469,104) (1,443,650) (1,011,925) Proceeds from issuance of loan payable ...... 40,000 -- 18,800 ------------- ------------- ------------- Net cash used in financing activities (1,429,104) (1,443,650) (993,125) ------------- ------------- ------------- Net increase (decrease) in cash ............... (74,981) (30,957) 85,720 Cash, beginning of period ..................... 166,586 91,605 60,648 ------------- ------------- ------------- Cash, end of period ........................... $ 91,605 $ 60,648 $ 146,368 ============= ============= ============= Supplemental disclosure of cash flows information: Cash paid during the period for interest ..... $ 713,821 $ 805,421 $ 833,209 ============= ============= =============
The accompanying notes are an integral part of these financial statements. F-51 DOM'S TELE CABLE, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Dom's Tele Cable, Inc. (the "Company") was incorporated pursuant to the provisions of the General Corporations Law of the Commonwealth of Puerto Rico on February 23, 1983. The Company operates a cable television system under a franchise authorization by the Public Service Commission of Puerto Rico and the Federal Communications Commission which includes the towns of San German, Lajas, Cabo Rojo, Sabana Grande, Hormigueros, Guanica, Rincon, Anasco, Las Marias, and Maricao in Puerto Rico. CLASSIFICATION OF ACCOUNTS There is no distinction between current assets and liabilities and non-current assets and liabilities inasmuch such distinction is not practical in the cable industry. REVENUE RECOGNITION Revenues as well as costs and expenses are recognized under the accrual method of accounting; as such revenues are earned as the related costs and expenses are incurred. UNEARNED REVENUES Unearned revenues are recorded when a customer pays for the services before they are delivered or rendered, and are included in income over the contract or service period. INITIAL SUBSCRIBER INSTALLATION COSTS Initial subscriber installation costs, including material, labor and overhead costs of the drop, are capitalized and depreciated over a period no longer than 7 years. HOOKUP REVENUES The excess of revenues over selling costs for initial cable television hookups are deferred and amortized over the estimated average period that subscribers are expected to remain connected to the system, which is estimated at 10 years. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Expenditures for additions and improvements that increase the productive capacity or extend the useful life of the assets are capitalized and expenditures for maintenance and repairs are charged to operations. When properties are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the books, and any gain or loss from disposal is included in operations. Fully depreciated assets are written off against accumulated depreciation. Depreciation of property, and equipment is computed on the straight-line method based upon the following estimated useful lives: Tower and distribution system 18 years Machinery and equipment 5 years Furniture and fixtures 5 years Motor vehicles 5 years Building 30 years Leasehold improvements 5 years F-52 DOM'S TELE CABLE, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) INCOME TAXES Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. FAIR VALUE OF FINANCIAL INSTRUMENTS For cash and accounts receivable, the estimated fair value is the same or approximately the same as the recorded value. RISKS AND UNCERTAINTIES 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 assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to the 1995 financial statements to be consistent with the current year presentation. 2. FRANCHISE FEES AND COMMITMENTS The Company was granted a cable television franchise for certain municipalities on December 28, 1984 by the Puerto Rico Service Commission for twenty years. The franchise agreement requires a payment of 3% of the Company's gross revenues. In addition, the Company has to pay its subscribers 5% interest on its customer deposits. The Company's pole rental agreements with the Puerto Rico Telephone Company and the Puerto Rico Electric Power Authority are renewed on a yearly basis. These contracts specify that the Company will pay $3.00 and $7.33, respectively, for the use of each pole. The rental expense for the years ended May 31, 1994, 1995, and 1996, amounted to $58,334, $73,063 and $73,065, respectively. 3. RELATED PARTY TRANSACTION The Company was partially owned by Three-Sixty Corporation. Transactions with Three-Sixty Corporation not disclosed elsewhere are management fees amounting to $55,367, $54,952 and $55,367 in May 31, 1994, 1995, and 1996, respectively. In October 1994, all of the Company's stock was acquired by the majority stockholder. F-53 DOM'S TELE CABLE, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 4. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consists of: May 31, May 31, 1995 1996 ------------- ------------ Building ..................................... $ 122,713 $ 122,713 Tower and distribution ....................... 11,006,704 11,223,338 Furniture and fixtures ....................... 137,498 142,128 Equipment .................................... 394,703 433,743 Leasehold improvements ....................... 32,350 39,279 ------------- ------------ 11,693,968 11,961,201 Less accumulated depreciation and amortization 6,781,354 7,286,396 Land ......................................... 164,488 164,488 ------------- ------------ Property, plant and equipment, net ........... $ 5,077,102 $ 4,839,293 ============= ============ 5. NOTES AND LOANS PAYABLE
May 31, May 31 1995 1996 ------------- ----------- Loan payable in 84 monthly installments which fluctuates from $13,543 up to $67,711 during the term of the loan in accordance with a payment schedule known as the Term Loan, plus interest at .75% over the prevailing prime rate as published from time to time by Citibank N.A. in New York or at 2% over the U.S. Internal Revenue Code Section 936 interest rate for the portion of the loan funded with 936 funds. The loan matures on July 1, 1996. $ 974,315 $ 188,874 Loan payable in 83 monthly installments which fluctuates from $15,000 up to $100,000 during the term of the loan in accordance with the payment schedule and one final balloon payment of $3,305,000, known as the Credit Facility Loan, plus interest at .75% over the prevailing prime rate as published from time to time by Citibank N.A. in New York or at 2% over the U.S. Internal Revenue Code Section 936 interest rate for the portion of the loan funded with 936 funds. The loan matures on July 1, 1996. ................................................... 5,080,020 4,880,021 Loan payable to Western Bank of Puerto Rico in 60 equal monthly installments of $1,112, plus interest at 2% over the prevailing prime rate, and collateralized with a motor vehicle. This loan was paid in full on January 19, 1996. ................................................... 25,022 -- Capital lease equipment bearing interest at 7.56% with a residual value of $3,900. This lease agreement is due in 2001. ................................................... -- 17,337 ------------- ----------- $6,079,357 $5,086,232 ============= ===========
F-54 DOM'S TELE CABLE, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 5. NOTES AND LOANS PAYABLE - (Continued) Aggregate maturities of notes and loans payable are as follows: Years Ending May 31, -------------------- 1997 ............................................ $5,072,483 Thereafter ...................................... 13,749 ------------ $5,086,232 ============ On October 26, 1995, Philip Credit Corporation sold, assigned and transferred all of its rights, title, and interest, in and to the credit agreement dated June 28, 1988, as amended to Lazard Freres & Co., L.L.C. The credit agreement between the Company is comprised of a Term Loan and a Credit Facility Loan which are collateralized by substantially all of the assets owned by the Company along with a personal guarantee of the Company's stockholder. The credit agreement contains certain restrictive covenants such as: (i) subscriber debt ratio; (ii) subscriber payment; (iii) number of homes in cable system; (iv) number of subscribers; (v) combined plant mileage; and (vi) subscribers' mileage ratio. As of May 31, 1995, and 1996, the Company was not in compliance with certain of the restrictive covenants and is in default on principal payments amounting to approximately $1,500,000 on the Credit Facility Loan. See Note 10. 6. INCOME TAXES The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," as of June 1, 1993. The application of the statement did not affect the Company's financial position and result of operations because the components of the deferred tax primarily relate to net operating loss carryforwards of $1,611,300 for which a valuation allowance of 100% was provided. During 1994, the Company changed its conclusion about the realization of operating loss carryforwards and decided to record $184,000 for the realization of losses during 1995. The Company did not recognize a deferred tax asset for net operating losses to be realized after May 31, 1995 because management expects to have completed the assets sale and liquidation of the Company shortly after May 31, 1996. The components of deferred tax asset were as follows: May 31, May 31, 1995 1996 ----------- ----------- Net operating loss carryforwards $ 712,758 $ 500,677 Valuation allowance ............. (382,558) (500,677) ----------- ----------- $ 330,200 $ -- =========== =========== The comparison of income tax expense at the Puerto Rico statutory rate to the Company's income tax benefit (provision) is as follows:
May 31, May 31, May 31, 1994 1995 1996 ------------- ------------- ----------- As Restated Tax at statutory rate ..................... $ 462,411 $ 363,199 $ 443,314 Adjustment due to: Benefit of net operating loss carryforwards ...................... (456,149) (354,255) (439,187) Alternative minimum tax .............. 0 16,844 16,711 Change in valuation allowances ....... (184,000) (146,200) 330,200 Others, net .......................... (6,262) (8,944) (4,127) ------------- ------------- ----------- $(184,000) $(129,356) $ 346,911 ============= ============= ===========
F-55 DOM'S TELE CABLE, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 7. CONCENTRATION OF CREDIT RISK Substantially all of the Company's business activity is with customers located in eight municipalities located in the southwestern area of Puerto Rico and as such the Company is subject to the risks of Puerto Rico and more specifically the economy of such geographic area. 8. CONTINGENCIES The Company is involved in various litigations arising in the normal course of business. Management believes that the outcome of these uncertainties will not have a material adverse effect on its financial statements. The Company has not filed the Copyright Statement of Accounts with the Copyright Office nor has paid royalty fees and interest amounting to approximately $477,083 and $495,352 for May 31, 1995, and 1996, respectively. The Company can be subject to various remedies for copyright infringement and additional penalties for not filing the Copyright Statement of Accounts. Management has accrued $477,083 and $495,352 for May 31, 1995 and 1996, respectively, for royalty fees and interest for the unexpired filing periods, which is three years in accordance with the statute of limitations. Management plans to make the filing and payment concurrently with the proposed sale of the Company. 9. SIGNIFICANT TRANSACTIONS On January 11, 1996, the Company's sole stockholder signed a letter of intent with respect to the liquidation of the Company's operations and the eventual sale of its net assets, in an transaction that should be consummated on or before August 31, 1996. Long-term obligations payable to Lazard Freres & Co., L.L.C., at present, CIBC Wood Gundy Securities Corporation, will be paid from the proceeds of this sale. In the event the planned sale is not made the Company may need to seek additional financing from other sources or restructure its debt. 10. SUBSEQUENT EVENTS Effective on June 1, 1996, the Company was liquidated and a new legal entity was incorporated under the laws of the Commonwealth of Puerto Rico known as DOMAR Inc., to be in accordance with the sale contract agreement entered with the buyer, Pegasus Media & Communications, Inc. On July 1, 1996, Lazard Freres & Co., L.L.C., sold, assigned and transferred all of its rights, title, interest and obligation to CIBC Wood Gundy Securities Corporation. 11. PRIOR PERIOD ADJUSTMENT The Company restated its depreciation expense by $520,329 to correct the depreciation expense for the year ended May 31, 1994. The effect was to increase net income for the year ended May 31, 1994 by $520,329. F-56 [The inside back cover page contains a map of Puerto Rico which shows color coded regions where Cable TV operators operate. Below the map is the following color coded chart: Puerto Rico Cable TV Operators: MCT Cablevision (Pegasus) Dom's TeleCable TV (Pegasus) Cable TV del noroeste (Independent) Tele Ponce (Independent) Buena Vision (50% owned by TCI) Greater TV of San Juan (Century) Puerto Rico Totals* Population 3,483,000 TV Households 1,132,000 Homes Passed by Cable 735,000 Cable Subscribers 254,000 Cable Penetration 34% *Based on estimates provided by Media Fax, Inc. ============================================================================= No dealer, sales representative or any other person has been authorized to give any information or to make any representations not contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any of the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of any offer to buy any securities offered hereby in any jurisdiction in which such an offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to the date hereof. ----------------- TABLE OF CONTENTS Page -------- Prospectus Summary .............................. 3 Risk Factors .................................... 17 The Company ..................................... 23 Use of Proceeds ................................. 27 Dividend Policy ................................. 27 Dilution ........................................ 28 Capitalization .................................. 29 Selected Historical and Pro Forma Combined Financial Data ................................. 30 Pro Forma Combined Financial Data ............... 33 Management's Discussion and Analysis of Financial Condition and Results of Operations .. 40 Business ........................................ 48 Management and Certain Transactions ............. 76 Ownership and Control ........................... 83 Description of Indebtedness ..................... 85 Description of Capital Stock .................... 87 Shares Eligible for Future Sale ................. 90 Underwriting .................................... 92 Legal Matters ................................... 94 Experts ......................................... 94 Additional Information .......................... 95 Index to Financial Statements ................... F-1 ----------------- Until , 1996 (25 days after the date of this Prospectus), all dealers effecting transactions in the Class A Common Stock offered hereby, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligations of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. ============================================================================== ============================================================================== 3,000,000 SHARES LOGO CLASS A COMMON STOCK ---------- PROSPECTUS , 1996 ---------- LEHMAN BROTHERS BT SECURITIES CORPORATION CIBC WOOD GUNDY SECURITIES CORP. PAINEWEBBER INCORPORATED ============================================================================= PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses payable by the Registrant in connection with this Registration Statement. All of such expenses are estimates, other than the filing and listing fees payable to the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Filing Fee -- Securities and Exchange Commission ............ $ 19,035 Filing Fee -- National Association of Securities Dealers, Inc. ....................................................... $ 6,250 Listing Fees -- Nasdaq National Market ...................... $ 22,500 Fees and Expenses of Accountants ............................ $225,000 Fees and Expenses of Counsel ................................ $435,000 Printing Expenses ........................................... $140,000 Blue Sky Fees and Expenses .................................. $ 15,000 Miscellaneous Expenses ...................................... $112,215 ---------- Total ..................................................... $975,000 ========== - ------ ITEM 14. 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 form 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 or 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 Underwriting Agreement provides that the Underwriters are obligated, under certain circumstances, to indemnify directors, officers and controlling persons of the Registrant against certain liabilities under the Securities Act of 1933, as amended. Reference is made to Section 8 of the form of Underwriting Agreement which is filed as Exhibit 1.1 hereto. The Registrant intends to obtain directors' and officers' liability insurance. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The Registrant was incorporated on May 30, 1996. In connection with its incorporation, the Registrant issued 100 shares of Class B Common Stock to its parent, Pegasus Communications Holdings, Inc. on May 30, 1996, in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act. See "The Company -- Acquisitions" and "The Company -- Corporate Reorganization and Other Transactions" for information concerning certain issuances (in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act) of securities that are proposed to be made concurrently with the completion of the offering to which this Registration Statement relates. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
Exhibit Number Description of Document ------------ ------------------------------------------------------------------------------------------------------ 1.1* Form of Underwriting Agreement. 2.1 Asset Purchase Agreement, dated March 21, 1996, among Dominica Padilla Acosta, Maria Del Carmen Padilla Lopez, Dom's Tele-Cable, Inc. and the Parent relating to the acquisition of Dom's Tele-Cable, Inc. (which is incorporated herein by reference to Exhibit 2.1 of the Form 10-K for the year ended December 31, 1995 of Pegasus Media & Communications, Inc.). 2.2 Contribution and Exchange Agreement by and between the Parent and Harron dated as of May 30, 1996. (including form of Joinder Agreement, Stockholder's Agreement and Noncompetition Agreement) 2.3* Amendment No. 1 to Exhibit 2.1 (which is incorporated by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated August 29, 1996). 2.4* Joinder Agreement dated as of May 31, 1996 by and among the Parent, Dominica Padilla Acosta (aka Dominick Padilla), Maria Del Carmen Padilla Lopez and Domar (which is incorporated by reference to Exhibit 5 to Pegasus Media & Communications, Inc.'s Form 8-K dated August 29, 1996). 2.5* Amendment No. 2 to Exhibit 2.2 3.1* Certificate of Incorporation of Pegasus, as amended. 3.2 By-Laws of Pegasus. 4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media & Communications, Inc., the Guarantors (as this term is defined in the Indenture), and First Fidelity Bank, National Association, as Trustee, relating to the 12 1/2% Series B Senior Subordinated Notes due 2005 (including the form of Notes and Subsidiary Guarantee) (which is incorporated herein by reference to Exhibit 4.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 4.2 Form of Notes (included in Exhibit 4.1 above)). 4.3 Form of Subsidiary Guarantee (included in Exhibit 4.1 above). 5.1* Opinion of Drinker Biddle & Reath. 10.1 Tax Sharing Agreement, made as of July 7, 1995, among the Parent, Pegasus Media & Communications, Inc., the Guarantors, Pegasus Cable Television of Connecticut, Inc., and Pegasus Communications Portfolio Holdings, Inc. (which is incorporated herein by reference to Exhibit 10.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.2 Management Agreement, dated July 7, 1995, between Pegasus Media & Communications, Inc. and BDI Associates L.P. (which is incorporated herein by reference to Exhibit 10.2 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and D. & K. Broadcast Properties L.P. relating to television station WDBD (which is incorporated herein by reference to Exhibit 10.5 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33- 95042)). 10.4 Agreement and Amendment to Station Affiliation Agreement, dated as of June 11, 1993, between Fox Broadcasting Company and Donatelli & Klein Broadcast relating to television station WDBD (which is incorporated herein by reference to Exhibit 10.6 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.5 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcast Company and Scranton TV Partners Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.8 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
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Exhibit Number Description of Document - ------------ ------------------------------------------------------------------------------------------------------ 10.6 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting Company and Scranton TV Partners, Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.9 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.7 Amendment to Fox Broadcasting Company Station Affiliation Agreement Regarding Network Nonduplication Protection, dated December 2, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television stations WOLF, WWLF, and WILF (which is incorporated herein by reference to Exhibit 10.10 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33- 95042)). 10.8 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.11 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.9 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and WDSI Ltd. relating to television station WDSI (which is incorporated herein by reference to Exhibit 10.12 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.10 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WDSI (which is incorporated herein by reference to Exhibit 10.13 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.11 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated herein by reference to Exhibit 10.14 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.12 NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.28 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.13 Amendment to NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.29 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.14 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and Pegasus Satellite Television, Inc. (which is incorporated herein by reference to Exhibit 10.30 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.15 Stock Purchase Agreement dated January 25, 1996, among the Parent, Portland Broadcasting, Inc., HMW, Inc., Bride Communications, Inc., John W. Bride, John W. Bride and Christopher McHenry Bride, as amended (the "Stock Purchase Agreement") (which is incorporated herein by reference to Exhibit A to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996). 10.16 Amendment to the Stock Purchase Agreement (which is incorporated herein by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996). 10.17 Time Brokerage Agreement dated as of January 28, 1996, between HMW, Inc. and the Parent (which is incorporated herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996). 10.18 Asset Purchase Agreement, dated October 13, 1995, among WTLH, Inc. ("WTLH"), General Management Consultants, Inc. ("GMC"), TV 57 Live-Oak Gainsville, Inc. ("TV-57"), Paul Lansat, Renee Lansat and Pegasus Broadcast Television, Inc. ("PBT") (which is incorporated herein by reference to Exhibit A to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.19 Agreement of Sale, dated October 13, 1995, between Lansat Communications Inc. ("LCI") and PBT (which is incorporated herein by reference to Exhibit B to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
II-3
Exhibit Number Description of Document - ------------ ------------------------------------------------------------------------------------------------------ 10.20 Modification Agreement, dated March 8, 1996, among WTLH, GMC, TV57, LCI, Paul Lansat, Renee Lansat, WTLH License Corp. ("License Corp.") and the Parent (which is incorporated herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996). 10.21 Put-Call and Security Agreement, dated March 8, 1996, among WTLH, GMC, Paul Lansat, renee Lansat, License Corp., PBT and the Parent (which is incorporated herein by reference to Exhibit 4 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996). 10.22 Time Brokerage Agreement, dated March 8, 1996, among GMC, WTLH and the Parent (to be assigned to a subsidiary of Pegasus) (which is incorporated herein by reference to Exhibit 5 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996). 10.23 Noncompetition Agreement, dated March 8, 1996, among Paul Lansat, Renee Lansat, the Parent, PBT and License Corp. (which is incorporated herein by reference to Exhibit 6 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996). 10.24 Noncompetition Agreement, dated March 8, 1996, among Frank Watson, the Parent, PBT and License Corp. (which is incorporated herein by reference to Exhibit 7 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996). 10.25 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and operate cable television systems for the municipalities of Cabo Rojo, San German, Lajas, Hormigueros, Guanica, Sabana Grande and Maricao (which is incorporated herein by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996). 10.26 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and operate cable television systems for the municipalities of Anasco, Rincon and Las Marias (which is incorporated herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996). 10.27* New Credit Facility (Certain Schedules and exhibits described in the agreement are omitted, but will be furnished Supplementally to the Commission upon request) 10.28* Pegasus Restricted Stock Plan 10.29* Form of Option Agreement for Donald W. Weber 10.30* Pegasus 1996 Stock Option Plan 16.1 Letter from Herbein + Company, Inc. relating to change in certifying accountant. 21.1(a)* Subsidiaries of Pegasus 23.1 Consent of Drinker Biddle & Reath (included in their opinion filed as Exhibits 5.1) 23.2* Consent of Herbein + Company, Inc. 23.3* Consents of Coopers & Lybrand L.L.P. 23.4* Consent of Ernst & Young LLP 23.5* Consent of Deloitte & Touche LLP 24.1 Powers of Attorney (included in Signatures and Powers of Attorney) 27.1 Financial Data Schedule
- ------ * Filed herewith. All other exhibits have been previously filed. (b) Financial Statement Schedules Schedule II. Valuation and Qualifying Accounts All other schedules of Pegasus for which provision is made in the applicable accounting regulations of the Commission are not required, are inapplicable or have been disclosed in the notes to the consolidated financial statements and therefore have been omitted. ITEM 17. UNDERTAKINGS. 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, II-4 the registrant has been advised that in the opinion of the 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. II-5 The undersigned registrant hereby undertakes that: 1. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. 2. For the purposes of determining any liability under the Securities Act of 1933, each post- effective amendment that contains a form of prospectus 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. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. II-6 SIGNATURES AND POWERS OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned and hereunto duly authorized in the City of Radnor, Commonwealth of Pennsylvania, on the 1st day of October, 1996. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Marshall W. Pagon ----------------------------------- Marshall W. Pagon Chief Executive Officer and President Each person whose signature appears below hereby constitutes and appoints Marshall W. Pagon and Robert N. Verdecchio as his attorneys-in-fact and agents, with full power and substitution for him in any and all capacities, to sign any or all amendments or post-effective amendments to this 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 Class A Common Stock 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 ever act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his substitutes may do or cause to be done by virtue hereof.
Signature Title Date --------------------------------- ------------------------------------- ------------------ /s/ Marshall W. Pagon President, Chief Executive Officer and October 1, 1996 -------------------------------- Chairman of the Board Marshall W. Pagon (Principal Executive Officer) /s/ Robert N. Verdecchio Senior Vice President, Chief October 1, 1996 -------------------------------- Financial Officer and Assistant Robert N. Verdecchio Secretary (Principal Financial and Accounting Officer) /s/ Donald W. Weber Director October 1, 1996 -------------------------------- Donald W. Weber
II-7 REPORT OF INDEPENDENT ACCOUNTANTS In connection with our audits of the combined financial statements of Pegasus Communications Corporation as of December 31, 1994 and 1995, and for each of the two years in the period ended December 31, 1995 which financial statements are included in the Prospectus, we have audited the financial statement schedule listed in Item 16 herein. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Philadelphia, Pennsylvania May 31, 1996 S-1 HERBEIN+COMPANY, INC. To the Board of Directors and Stockholders Pegasus Communications Corporation Radnor, Pennsylvania REPORT OF INDEPENDENT ACCOUNTANTS In connection with our audit of the combined financial statements of Pegasus Communications Corporation for the year ended December 31, 1993, which financial statements are included in the Form S-1 Registration Statement, we have audited the financial statement Schedule II -- Valuation and Qualifying Accounts. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. HERBEIN + COMPANY, INC. Reading, Pennsylvania March 4, 1994 S-2 PEGASUS COMMUNICATIONS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 (DOLLARS IN THOUSANDS)
Balance at Additions Additions Balance at Beginning Charged To Charged To End of Description of Period Expenses Other Accounts Deductions Period Allowance for Uncollectible Accounts Receivable Year 1993 ............ $ 108 $ 156 $245 (a) $ 201 (b) $ 308 Year 1994 ............ $ 308 $ 200 $ -- $ 160 (b) $ 348 Year 1995 ............ $ 348 $ 151 $ -- $ 261 (b) $ 238 Valuation Allowance for Deferred Tax Assets Year 1994 ............ $ 0 $1,756 $ -- $ -- $1,756 Year 1995 ............ $1,756 $8,675 $ -- $3,477 $6,954
(a) Balance at acquisition date. (b) Amounts written off, net of recoveries. S-3 EXHIBIT INDEX
Exhibit Number Description of Document ------------ ------------------------------------------------------------------------------------------------------ 1.1* Form of Underwriting Agreement. 2.1 Asset Purchase Agreement, dated March 21, 1996, among Dominica Padilla Acosta, Maria Del Carmen Padilla Lopez, Dom's Tele-Cable, Inc. and the Parent relating to the acquisition of Dom's Tele-Cable, Inc. (which is incorporated herein by reference to Exhibit 2.1 of the Form 10-K for the year ended December 31, 1995 of Pegasus Media & Communications, Inc.). 2.2 Contribution and Exchange Agreement by and between the Parent and Harron dated as of May 30, 1996. (including form of Joinder Agreement, Stockholder's Agreement and Noncompetition Agreement) 2.3* Amendment No. 1 to Exhibit 2.1 (which is incorporated by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated August 29, 1996). 2.4* Joinder Agreement dated as of May 31, 1996 by and among the Parent, Dominica Padilla Acosta (aka Dominick Padilla), Maria Del Carmen Padilla Lopez and Domar (which is incorporated by reference to Exhibit 5 to Pegasus Media & Communications, Inc.'s Form 8-K dated August 29, 1996). 2.5* Amendment No. 2 to Exhibit 2.2 3.1* Certificate of Incorporation of Pegasus, as amended. 3.2 By-Laws of Pegasus. 4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media & Communications, Inc., the Guarantors (as this term is defined in the Indenture), and First Fidelity Bank, National Association, as Trustee, relating to the 12 1/2 % Series B Senior Subordinated Notes due 2005 (including the form of Notes and Subsidiary Guarantee) (which is incorporated herein by reference to Exhibit 4.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 4.2 Form of Notes (included in Exhibit 4.1 above). 4.3 Form of Subsidiary Guarantee (included in Exhibit 4.1 above). 5.1* Opinion of Drinker Biddle & Reath. 10.1 Tax Sharing Agreement, made as of July 7, 1995, among the Parent, Pegasus Media & Communications, Inc., the Guarantors, Pegasus Cable Television of Connecticut, Inc., and Pegasus Communications Portfolio Holdings, Inc. (which is incorporated herein by reference to Exhibit 10.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.2 Management Agreement, dated July 7, 1995, between Pegasus Media & Communications, Inc. and BDI Associates L.P. (which is incorporated herein by reference to Exhibit 10.2 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and D. & K. Broadcast Properties L.P. relating to television station WDBD (which is incorporated herein by reference to Exhibit 10.5 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33- 95042)). 10.4 Agreement and Amendment to Station Affiliation Agreement, dated as of June 11, 1993, between Fox Broadcasting Company and Donatelli & Klein Broadcast relating to television station WDBD (which is incorporated herein by reference to Exhibit 10.6 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.5 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcast Company and Scranton TV Partners Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.8 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
Exhibit Number Description of Document ------------ ------------------------------------------------------------------------------------------------------ 10.6 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting Company and Scranton TV Partners, Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.9 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.7 Amendment to Fox Broadcasting Company Station Affiliation Agreement Regarding Network Nonduplication Protection, dated December 2, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television stations WOLF, WWLF, and WILF (which is incorporated herein by reference to Exhibit 10.10 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33- 95042)). 10.8 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.11 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.9 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and WDSI Ltd. relating to television station WDSI (which is incorporated herein by reference to Exhibit 10.12 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.10 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WDSI (which is incorporated herein by reference to Exhibit 10.13 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.11 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated herein by reference to Exhibit 10.14 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.12 NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.28 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.13 Amendment to NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.29 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.14 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and Pegasus Satellite Television, Inc. (which is incorporated herein by reference to Exhibit 10.30 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.15 Stock Purchase Agreement dated January 25, 1996, among the Parent, Portland Broadcasting, Inc., HMW, Inc., Bride Communications, Inc., John W. Bride, John W. Bride and Christopher McHenry Bride, as amended (the "Stock Purchase Agreement") (which is incorporated herein by reference to Exhibit A to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996)). 10.16 Amendment to the Stock Purchase Agreement (which is incorporated herein by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996)). 10.17 Time Brokerage Agreement dated as of January 28, 1996, between HMW, Inc. and the Parent (which is incorporated herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996). 10.18 Asset Purchase Agreement, dated October 13, 1995, among WTLH, Inc. ("WTLH"), General Management Consultants, Inc. ("GMC"), TV 57 Live-Oak Gainsville, Inc. ("TV-57"), Paul Lansat, Renee Lansat and Pegasus Broadcast Television, Inc. ("PBT") (which is incorporated herein by reference to Exhibit A to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
Exhibit Number Description of Document - ------------ ------------------------------------------------------------------------------------------------------ 10.19 Agreement of Sale, dated October 13, 1995, between Lansat Communications Inc. ("LCI") and PBT (which is incorporated herein by reference to Exhibit B to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)). 10.20 Modification Agreement, dated March 8, 1996, among WTLH, GMC, TV57, LCI, Paul Lansat, Renee Lansat, WTLH License Corp. ("License Corp.") and the Parent (which is incorporated herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996). 10.21 Put-Call and Security Agreement, dated March 8, 1996, among WTLH, GMC, Paul Lansat, renee Lansat, License Corp., PBT and the Parent (which is incorporated herein by reference to Exhibit 4 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996). 10.22 Time Brokerage Agreement, dated March 8, 1996, among GMC, WTLH and the Parent (to be assigned to a subsidiary of Pegasus) (which is incorporated herein by reference to Exhibit 5 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996). 10.23 Noncompetition Agreement, dated March 8, 1996, among Paul Lansat, Renee Lansat, the Parent, PBT and License Corp. (which is incorporated herein by reference to Exhibit 6 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996). 10.24 Noncompetition Agreement, dated March 8, 1996, among Frank Watson, the Parent, PBT and License Corp. (which is incorporated herein by reference to Exhibit 7 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996). 10.25 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and operate cable television systems for the municipalities of Cabo Rojo, San German, Lajas, Hormigueros, Guanica, Sabana Grande and Maricao (which is incorporated herein by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996). 10.26 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and operate cable television systems for the municipalities of Anasco, Rincon and Las Marias (which is incorporated herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996). 10.27* New Credit Facility (Certain Schedules and exhibits described in the agreement are omitted, but will be furnished Supplementally to the Commission upon request). 10.28* Pegasus Restricted Stock Plan 10.29* Form of Option Agreement for Donald W. Weber 10.30* Pegasus 1996 Stock Option Plan 16.1 Letter from Herbein + Company, Inc. relating to change in certifying accountant. 21.1(a)* Subsidiaries of Pegasus 23.1 Consent of Drinker Biddle & Reath (included in their opinion filed as Exhibits 5.1) 23.2* Consent of Herbein + Company, Inc. 23.3* Consents of Coopers & Lybrand L.L.P. 23.4* Consent of Ernst & Young LLP 23.5* Consent of Deloitte & Touche LLP 24.1 Powers of Attorney (included in Signatures and Powers of Attorney) 27.1 Financial Data Schedule
- ------ * Filed herewith. All other exhibits have been previously filed. EX-1.1 2 EXHIBIT 1.1 Exhibit 1.1 L&W Draft of September 30, 1996 PEGASUS COMMUNICATIONS CORPORATION Class A Common Stock LEHMAN BROTHERS INC. BT SECURITIES CORPORATION CIBC WOOD GUNDY SECURITIES CORP. PAINEWEBBER INCORPORATED As Representatives of the several Underwriters named in Schedule 1, c/o Lehman Brothers Inc. Three World Financial Center New York, New York 10285 Ladies and Gentlemen: Pegasus Communications Corporation, a Delaware corporation (the "Company"), proposes to sell 3,000,000 shares (the "Firm Shares") of the Company's Class A Common Stock, par value $.01 per share (the "Class A Common Stock") to the Underwriters named in Schedule 1 hereto (the "Underwriters"). In addition, the Company proposes to grant to the Underwriters an option to purchase up to an additional 450,000 shares of the Class A Common Stock on the terms and for the purposes set forth in Section 2 (the "Option Shares"). The Firm Shares and the Option Shares, if purchased, are hereinafter collectively referred to as the "Shares." Capitalized terms used herein without definition shall have the meanings assigned to them in the Registration Statement and the Prospectus (each as defined below). Concurrent with or shortly after the offering (the "Offering") to the public of the Firm Shares by the Company, the following transactions (the "Transactions"), if not already completed, are expected to take place: (i) the contribution by Pegasus Communications Holdings, Inc., the direct parent of the Company (the "Parent"), of 100% of the outstanding shares of Class A Common Stock (the "PM&C Class A Shares") of Pegasus Media & Communications, Inc. ("PM&C") to the Company for ___ shares of the Company's Class B Common Stock, par value $.01 per share (the "Class B Common Stock") (the "Contribution"); (ii) the commencement of a registered exchange offer (the "Exchange Offer") of an aggregate of ____ shares of Class A Common Stock for all of the outstanding shares of PM&C's Class B Common Stock (the "PM&C Class B Shares"); (iii) the contribution by the Parent to the Company of all of the outstanding stock of Bride Communications, Inc. for $1,850,000 in cash, _____ shares of Class A Common Stock and ___ shares of Class B Common Stock (the "WPXT Contribution"); (iv) the contribution by the Parent to the Company of all of the outstanding stock of B.T. Satellite, Inc. for ___ shares of Class A Common Stock (the "WWLA Contribution"); (v) the acquisition by the Company of DIRECTV distribution rights for $17,894,319 in cash and ___ shares of Class A Common Stock (the "DBS Acquisition") pursuant to an agreement between the Parent and Harron Communications Corp. dated May 30, 1996 (the "DBS Acquisition Agreement"); (vi) the contribution of the stock of Pegasus Communications Management Company, which holds the management agreement (the "Management Agreement") among PM&C and its operating subsidiaries and BDI Associates L.P. (the "Management Company") together with certain net assets, including $1.4 million of accrued management fees, to the Company for ___ shares of Class B Common Stock and approximately $1.4 million in cash (the "Management Agreement Acquisition"); (vii) the acquisition of substantially all of the 1 assets of a cable system in San German, Puerto Rico (the "Cable Acquisition") pursuant to an agreement among the Parent, Dominica Padilla Acosta, Maria Del Carmen Padilla Lopez and Dom's Tele-Cable, Inc. dated March 21, 1996, as amended by an Amendment No. 1 thereto dated May 31, 1996 (as amended, the "Cable Acquisition Agreement"); (viii) the entering into by the PM&C of a $50.0 million revolving credit facility (the "New Credit Facility"); (ix) the acquisition by the Company of the broadcast tower assets of Pegasus Towers, L.P. (the "Towers Purchase") for $1.4 million in cash and (x) the exchange pursuant to an exchange offer of the Parent's Class B Non-Voting Stock (the "Parent NonVoting Stock") for ___ shares of Class A Common Stock held by Suite 454 Partners and the subsequent liquidation of Suite 454 Partners and the distribution of the shares of Class A Common Stock to certain members of the Company's management (the "Management Share Exchange"). The Offering is conditioned upon the consummation of (i) the DBS Acquisition, (ii) the Contribution, (iii) the Management Agreement Acquisition, (iv) the Towers Purchase, (v) the WPXT Contribution, (vi) the WWLA Contribution, and (vii) the entering into of the New Credit Facility (collectively, the "Operative Transactions"). The "Operative Documents" means each of (i) the DBS Acquisition Agreement, (ii) the agreement governing the Contribution, (iii) the agreement governing the Management Agreement Acquisition, (iv) the deeds and other instruments governing the Towers Purchase, (v) the agreement governing the WPXT Contribution, (vi) the agreement governing the WWLA Contribution, (vii) the Cable Acquisition Agreement, (viii) the agreements governing the New Credit Facility, (ix) the documents governing the Exchange Offer and (x) the documents governing the Management Share Exchange and, in each case, all documents ancillary thereto. This is to confirm the agreement concerning the purchase of the Shares from the Company by the Underwriters hereto. 1. Representations, Warranties and Agreements of the Company and the Subsidiaries. The Company and each of the Subsidiaries (as defined below) represents, warrants and agrees that: (a) The Registration Statement on Form S-1 with respect to the Shares has (i) been prepared by the Company in conformity with the requirements of the United States Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations (the "Rule and Regulations") of the United States Securities and Exchange Commission (the "Commission") thereunder, (ii) been filed with the Commission under the Securities Act and (iii) become effective under the Securities Act or will become effective not later than 10:00 a.m., New York City time, on the date of this Agreement or at such later date and time as the Underwriters may approve. Copies of the Registration Statement have been delivered by the Company to each of you as the representatives (the "Representatives") of the Underwriters. As used in this Agreement, "Effective Time" means the date and the time as of which the Registration Statement, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission; "Effective Date" means the date of the Effective Time; "Preliminary Prospectus" means each prospectus included in such Registration Statement, or amendments thereof, before it became effective under the Securities Act and any prospectus filed with the Commission by the Company with the consent of the Representatives pursuant to Rule 424(a) of the Rules and Regulations; "Registration Statement" means such Registration Statement, as amended at the Effective Time, including a registration statement (if any) filed pursuant to Rule 462(b) under the Securities Act increasing the size of the Offering registered under the Securities Act and all information contained in the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations in accordance with Section 5(a) hereof and deemed to be a part of the Registration Statement as of the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules and Regulations; and "Prospectus" means such final prospectus, as first filed with the 2 Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Rules and Regulations. The Commission has not issued any order preventing or suspending the use of the Registration Statement or any Preliminary Prospectus. (b) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will, when they become effective or are filed with the Commission, as the case may be, conform in all respects to the requirements of the Securities Act and the Rules and Regulations and do not and will not (i) as of the Effective Date, as to the Registration Statement and any amendment thereto, contain 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 not misleading and (ii) as of the applicable filing date, as to the Prospectus and any amendment or supplement thereto, contain 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 the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. (c) The Company is duly organized and validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, has all requisite corporate power and authority to carry on its business as it is being conducted and as described in the Registration Statement and the Prospectus and to own, lease and operate its properties, and is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification. (d) All the outstanding shares of capital stock or other securities evidencing equity ownership of the Company have been and, after consummation of the Transactions, will be duly authorized and validly issued and are and, after consummation of the Transactions, will be fully paid, non-assessable and not subject to any preemptive or similar rights. The Shares to be issued and sold by the Company hereunder have been duly authorized and, when issued and delivered to the Representatives for the account of each Underwriter against payment therefor as provided in this Agreement, will have been validly issued and will be fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. The authorized, issued and outstanding stock of the Company was as of [October ___], 1996 and will be, after giving effect to the consummation of this Offering and the Transactions, as set forth in the Registration Statement and the Prospectus under the captions "Capitalization" and "Description of Capital Stock." After giving effect to the Offering, the Transactions and the application of the proceeds thereof as described in the Registration Statement and the Prospectus under the caption "Use of Proceeds," the Company's consolidated capitalization as of [October __], 1996 would have been as set forth under the "Pro Forma As Adjusted" column under the caption "Capitalization." The table under the caption "Capitalization" sets forth and identifies in reasonable detail all outstanding short-term and long-term indebtedness of the Company and its Subsidiaries, on a consolidated basis, prior to and after giving effect to the Offering and the Transactions. The authorized capital stock of the Company, including the Shares, conforms as to legal matters to the description thereof contained in the Registration Statement and the Prospectus. Except as set forth in the Registration Statement and the Prospectus, there are no 3 outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Company. (e) After giving effect to the Transactions, the Company's direct and indirect subsidiaries (collectively, the "Subsidiaries") will be as set forth on Schedule 2 hereto. Each Subsidiary is duly organized and validly existing as a corporation or partnership, as the case may be, in good standing under the laws of its jurisdiction of incorporation or organization, as the case may be, and has all requisite corporate power (in the case of corporations) or legal capacity (in the case of partnerships) and authority to carry on its business as it is being conducted and as described in the Registration Statement and the Prospectus and to own, lease and operate its properties, and is duly qualified and in good standing as a foreign corporation or partnership, as the case may be, authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification. All of the outstanding shares of capital stock and other securities evidencing equity ownership of each of the Subsidiaries are fully paid and (except in the case of general partnership interests and in the case of limited partnership interests, except to the extent that the provisions of the applicable limited partnership act requiring partners to return distributions may be deemed to constitute assessability) nonassessable and, in the case of Subsidiaries other than PM&C, free of any preemptive or similar rights, and, after giving effect to the Transactions will be (with the exception of the PM&C Class B Shares) owned by the Company directly, or indirectly through one of the other Subsidiaries, free and clear of any lien, adverse claim, security interest or other encumbrance, except as are in effect under the New Credit Facility. (f) The Company and each of the Subsidiaries has all requisite corporate power (in the case of corporations) or legal capacity (in the case of partnerships) and authority to execute, deliver and perform its obligations under this Agreement and the Operative Documents, as applicable, and to consummate the transactions contemplated hereby and thereby, including, without limitation, in the case of the Company, all requisite corporate power and authority to issue, sell and deliver the Shares, as provided herein. (g) This Agreement has been duly and validly authorized, executed and delivered by each of the Company and the Subsidiaries and is the legally valid and binding agreement of each of them, enforceable against each of them in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers or conveyances), by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law) and, as to rights of indemnification and contribution, by federal and state securities laws and principles of public policy. (h) The DBS Acquisition Agreement has been duly and validly authorized, executed and delivered by the Parent and is the legally valid and binding obligation of the Parent, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers or conveyances) and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4 (i) The documents governing the Towers Purchase have been duly and validly authorized, executed and delivered by each of the Company and Pegasus Towers, L.P., and are the legally valid and binding obligations of each of the Company and Pegasus Towers, L.P., enforceable against each of them in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (j) The documents governing the Management Agreement Acquisition have been duly and validly authorized, executed and delivered by each of Pegasus Capital, L.P., Pegasus Communications Management Company, the Company and the Management Company, and are the legally valid and binding obligations of each of them, enforceable against each of them in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (k) The documents governing the Contribution have been duly and validly authorized, executed and delivered by each of the Parent and the Company, and are the legally valid and binding obligations of each of the Parent and the Company, enforceable against each of them in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (l) The Cable Acquisition Agreement has been duly and validly authorized, executed and delivered by the Parent and is the legally valid and binding obligation of the Parent, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (m) The New Credit Facility and the documents executed in connection therewith have been duly and validly authorized by PM&C and each of the Subsidiaries that is a party thereto and, when duly executed and delivered by PM&C and the Subsidiaries party thereto, will be the legally valid and binding obligations of PM&C and each of the Subsidiaries party thereto, enforceable against each of them in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (n) The documents governing the WPXT Contribution have been duly and validly authorized, executed and delivered by each of the Company and the Parent and are the legally valid and binding obligations of each of the Company and the Parent, enforceable against each 5 of them in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (o) The documents governing the WWLA Contribution have been duly and validly authorized, executed and delivered by each of the Company and the Parent and are the legally valid and binding obligations of each of the Company and the Parent, enforceable against each of them in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (p) Neither the Company nor any of the Subsidiaries is (A) in violation of its charter, bylaws, limited partnership agreement or other organizational documents or (B) in default in the performance of any material bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties is subject, or (C) in violation in any material respect of any law, statute, rule, regulation, judgment or court decree applicable to it or any of its assets or properties, except in the case of clauses (B) and (C), for any violation or default that would not, singly or in the aggregate, have a Material Adverse Effect (as defined below). There exists no condition that, with notice, the passage of time or otherwise, would constitute a default under any such document or instrument. (q) None of (A) the execution, delivery or performance by the Company or any of the Subsidiaries of this Agreement and the Operative Documents, as applicable, (B) the issuance and sale of the Shares or (C) the transactions contemplated by this Agreement and the Operative Documents will violate, conflict with or constitute a breach of any of the terms or provisions of, or a default under (or an event that with notice or the lapse of time, or both, would constitute a default), or require consent under (except as contemplated in the second and third sentences of this paragraph), or result in the imposition of a lien or encumbrance on any properties of the Company or any Subsidiary, or an acceleration of any indebtedness of the Company or any Subsidiary pursuant to, (i) the charter, bylaws, limited partnership agreement or other organizational documents of the Company or any Subsidiary, (ii) any bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party or by which any of them or their respective property is or may be bound, (iii) any statute, rule or regulation applicable to the Company or any Subsidiary or their respective assets or properties (except such as are, in the aggregate, immaterial) or (iv) any judgment, order or decree of any court or governmental agency, body or administrative agency or authority having jurisdiction over the Company, any Subsidiary or their respective assets or properties, except for any such violation, default, consent, imposition of a lien or acceleration that would not, in the case of clauses (ii), (iii) and (iv), singly or in the aggregate, have a Material Adverse Effect. No consent, approval, authorization or order of, or filing, registration, qualification, license or permit of or with, any court or governmental agency, body or administrative agency or authority is required for (1) the execution, delivery and performance by the Company and the Subsidiaries of this Agreement and the Operative Documents, as applicable, (2) the issuance and sale of the Shares or (3) the transactions contemplated by this Agreement or 6 the Operative Documents, except for (A) the registration of the Shares under the Securities Act, (B) such consents, approvals, authorizations, registrations or qualifications as may be required under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters, (C) such as may be required by the National Association of Securities Dealers, Inc. (the "NASD"), (D) to the extent that governing laws, regulations, or orders may require post-closing filings with the FCC, the Connecticut Department of Public Utility Control (the "DPUC") and the Puerto Rico Public Service Commission (the "PSC"), and from time to time, FCC, DPUC or PSC authorizations or filings required in the ordinary course of business of the Company and the Subsidiaries, and that certain resales of shares could require, if combined with other offerings of equity in the Company, FCC, DPUC or PSC consent or be restricted by FCC, DPUC or PSC rules, regulations or policies, and (E) such as have been obtained or made. No consents or waivers from any other person are required for the execution, delivery and performance by the Company, the Parent and the Subsidiaries, as applicable, of this Agreement and the Operative Documents, the issuance and sale of the Shares or the consummation of the transactions contemplated by this Agreement and the Operative Documents, other than (A) such consents and waivers as have been obtained and (B) such as are disclosed in the Registration Statement and the Prospectus. (r) There is (i) except as otherwise disclosed in the Registration Statement and the Prospectus, no action, suit, proceeding or investigation before or by any court, arbitrator or governmental agency, body or official, domestic or foreign, now pending or, to the best knowledge of the Company and the Subsidiaries, threatened or contemplated to which the Company or any Subsidiary is or may be a party or to which the business or property of the Company or any Subsidiary is subject, (ii) except as otherwise disclosed in the Registration Statement and the Prospectus, no statute, rule, regulation or order that has been enacted, adopted or issued by any governmental agency or that has been proposed by any governmental body, (iii) no injunction, restraining order or order of any nature by a federal or state court or foreign court of competent jurisdiction to which the Company or any Subsidiary is or may be subject or to which the business, assets, or property of the Company or any Subsidiary is or may be subject, issued that, in the case of clauses (i), (ii) and (iii) above, (x) might, singly or in the aggregate, result in a material adverse effect on the assets, liabilities, business, results of operations, condition (financial or otherwise), cash flows, affairs or prospects of the Company and the Subsidiaries, taken as a whole, (y) would interfere with or adversely affect the issuance or marketability of the Shares pursuant hereto or (z) in any manner draw into question the validity of this Agreement or any of the Operative Documents or any of the transactions contemplated hereby or thereby (any of the events set forth in clauses (x), (y) or (z), a "Material Adverse Effect"). (s) No action has been taken by the Company or any Subsidiary (or, to the best knowledge of the Company and the Subsidiaries, by any other Person) and no statute, rule, regulation or order has been enacted, adopted or issued by any governmental agency that prevents the issuance of the Shares or prevents or suspends the use of the Registration Statement or the Prospectus; no injunction, restraining order or order of any nature by a federal, state or municipal court or any governmental authority or agency or any other tribunal of competent jurisdiction has been issued that prevents the issuance of the Shares or prevents or suspends the sale of the Shares in any jurisdiction referred to in Section 5(h) hereof; and every request of any securities authority or agency of any jurisdiction for additional information has been complied with in all material respects. 7 (t) There is (i) no significant unfair labor practice complaint pending or, to the best knowledge of the Company and the Subsidiaries, threatened against the Company or any Subsidiary before the National Labor Relations Board, any state or local labor relations board or any foreign labor relations board, and no significant grievance or significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending or, to the best knowledge of the Company and the Subsidiaries, threatened against the Company or any Subsidiary, (ii) no significant strike, labor dispute, slowdown or stoppage pending against the Company or any Subsidiary nor, to the best knowledge of the Company and the Subsidiaries, threatened against the Company or any Subsidiary, and (iii) no union representation question existing with respect to the employees of the Company or any Subsidiary. To the best knowledge of the Company and the Subsidiaries, no union organizing activities are taking place. Neither the Company nor any Subsidiary has violated (A) any federal, state or local law, statute, rule or regulation or foreign law, statute, rule or regulation relating to discrimination in hiring, promotion or pay of employees, (B) any applicable wage or hour laws, (C) any provision of the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations thereunder, or (D) analogous foreign laws, statutes, rules and regulations, which in the case of clause (A), (B), (C) or (D) above might, individually or in the aggregate, result in a Material Adverse Effect. (u) In the ordinary course of its business, the Company and each Subsidiary conducts periodic reviews of the effect of Environmental Laws (as defined below) and the disposal of hazardous or toxic substances, wastes, pollutants and contaminants on the business, assets, operations and properties of the Company and each Subsidiary, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, all material capital and operating expenditures required for clean-up, closure of properties and compliance with Environmental Laws, all permits, licenses and approvals, all related constraints on operating activities and all potential liabilities to third parties). On the basis of such reviews the Company has reasonably concluded that such associated costs and liabilities would not have a Material Adverse Effect. Neither the Company nor any Subsidiary has violated any environmental, safety or similar law or regulation applicable to it or its business or property relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), lacks any permit, license or other approval required of it under applicable Environmental Laws or is violating any term or condition of such permit, license or approval which might, either individually or in the aggregate, have a Material Adverse Effect. (v) The Company and each Subsidiary has (i) good and marketable title to all of the properties and assets necessary for the operation of its business as described in the Registration Statement and the Prospectus as owned by it, free and clear of all liens, charges, encumbrances and restrictions, except such as (A) are described in the Registration Statement and the Prospectus, (B) are in effect under the New Credit Facility, or (C) would not have a Material Adverse Effect, (ii) peaceful and undisturbed possession under all leases to which it is party as lessee except such as would not either individually or in the aggregate have a Material Adverse Effect, (iii) all licenses, certificates, permits, authorizations, approvals, franchises and other rights from, and will have made all declarations and filings with, all federal, state and local authorities, all self-regulatory authorities and all courts or governmental agencies, bodies or administrative agencies or authorities (each an "Authorization") necessary to engage in the business conducted by it in the manner described in the Registration Statement and the Prospectus, except where failure to hold such Authorizations would not have a Material Adverse Effect and (iv) no reason 8 to believe that any governmental body or agency is considering limiting, suspending or revoking any such Authorization. Except where the failure to be in full force and effect would not have a Material Adverse Effect, all such Authorizations are valid and in full force and effect. The Company and each Subsidiary is in compliance in all material respects with the terms and conditions of all such Authorizations and with the rules and regulations of the regulatory authorities having jurisdiction with respect thereto. All material leases to which the Company and each Subsidiary is a party are valid and binding and no default by the Company or any such Subsidiary has occurred and is continuing thereunder and no material defaults by the landlord are existing under any such lease. (w) The Company and each Subsidiary owns or has valid and enforceable licenses to use all patents, patent rights, licenses, inventions, copyrights, know-how (including, without limitation, trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, the "Intellectual Property") employed by it in connection with the businesses operated by it as described in the Registration Statement and the Prospectus, and neither the Company nor any Subsidiary has received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing. To the best knowledge of the Company, the use of the Intellectual Property in connection with the business and operations of the Company and the Subsidiaries does not infringe on the rights of any person. (x) All tax returns required to be filed by the Company and each Subsidiary, in all jurisdictions, have been so filed, except to the extent such failure to file would not, individually or in the aggregate, have a Material Adverse Effect. All taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due or claimed to be due from such entities or that are due and payable have been paid, other than those being contested in good faith and for which adequate reserves have been provided or those currently payable without penalty or interest. There are no material proposed additional tax assessments against the Company or any Subsidiary or the assets or property of the Company or any Subsidiary. (y) None of the Company or the Subsidiaries is (i) an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"). (z) There are no holders of securities of the Company or any Subsidiary who, by reason of the execution by the Company, the Parent or the Subsidiaries of this Agreement or any Operative Document to which any of the Company, the Parent or any Subsidiary is a party or the consummation by the Company, the Parent or the Subsidiaries, as applicable, of the transactions contemplated hereby and thereby, have the right to request or demand that the Company or any Subsidiary register under the Securities Act or analogous foreign laws and regulations securities held by them, other than as disclosed in the Registration Statement and the Prospectus. (aa) There are no contracts, agreements or understandings between the Company or any Subsidiary and any other person that would give rise to a valid claim against the Company, any Subsidiary or any of the Underwriters for a brokerage commission, finder's fee or like payment in connection with the issuance, purchase and sale of the Shares, other than arrangements with CIBC Wood Gundy Securities Corp. with respect to the selection of the Representatives. 9 (ab) The Company and each Subsidiary maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect thereto. (ac) The Company and each Subsidiary maintains insurance covering its properties, operations, personnel and businesses. Such insurance insures against such losses and risks as are adequate in accordance with customary industry practice to protect the Company, the Subsidiaries and their businesses. Neither the Company nor any Subsidiary has received notice from any insurer or agent of such insurer that substantial capital improvements or other expenditures will have to be made in order to continue such insurance. All such insurance is outstanding and duly in force on the date hereof. (ad) Neither the Company nor any Subsidiary has (i) taken, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of any security of the Company or any Subsidiary to facilitate the sale or resale of the Shares. Except as permitted by the Securities Act, none of the Company or any of the Subsidiaries has distributed any Registration Statement, Preliminary Prospectus, Prospectus or other offering material in connection with the offering and sale of the Shares. (ae) Except as described in the Registration Statement and the Prospectus, the Company has not sold or issued any shares of Class A Common Stock during the six-month period preceding the date of the Prospectus, including any sales pursuant to Rule 144A or Regulations D or S under the Securities Act. (af) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and up to the Delivery Date (as defined below), except as set forth or contemplated in the Registration Statement and the Prospectus, neither the Company nor any Subsidiary has incurred any liabilities or obligations, direct or contingent, that are material to the Company and the Subsidiaries, taken as a whole, or entered into any transaction not in the ordinary course of business; there has not been, singly or in the aggregate, any material adverse change, or any development that may reasonably be expected to involve a material adverse change, in the assets, liabilities, business, results of operations, condition (financial or otherwise), cash flows, affairs or prospects of the Company and the Subsidiaries, taken as a whole; and there has been no dividend or distribution of any kind declared, paid or made by the Company or any Subsidiary on any class of its capital stock. (ag) The accountants who have certified or shall certify the financial statements included or to be included as part of the Registration Statement and the Prospectus (the "Accountants"), are independent accountants within the meaning of the Securities Act. The historical combined financial statements and schedules of the Company and the Subsidiaries and the historical financial statements and schedules of each of the entities and businesses acquired or to be acquired by the Company and the Subsidiaries comply as to form in all material respects with the requirements applicable to registration statements on Form S-1 under the Securities Act and present fairly the combined financial position and results of operations of the Company and 10 the Subsidiaries and the financial position and results of operations of each of the entities and businesses acquired or to be acquired by the Company and the Subsidiaries at the respective dates and for the respective periods indicated. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods presented. The pro forma financial statements included in the Registration Statement and the Prospectus have been prepared on a basis consistent with such historical statements, except for the pro forma adjustments specified therein, and give effect to assumptions made on a reasonable basis and present fairly the historical and proposed transactions contemplated by this Agreement and as set forth in the Prospectus; and such pro forma financial statements comply as to form in all material respects with the requirements applicable to pro forma financial statements included in registration statements on Form S-1 under the Securities Act. The other historical and pro forma financial and statistical information and data included in the Prospectus and the Registration Statement are accurately presented in all material respects and prepared on a basis consistent with the financial statements, historical and pro forma, included in the Registration Statement, the Prospectus and the books and records of the Company, the Subsidiaries or the entities or businesses acquired or to be acquired by the Company and the Subsidiaries. (ah) Neither the Company nor any of the Subsidiaries nor, to the best knowledge of the Company or any Subsidiary, any employee or agent of the Company or any of the Subsidiaries has made any payment of funds of the Company or any of the Subsidiaries or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Registration Statement and the Prospectus. (ai) Each certificate signed by any officer of the Company or any Subsidiary and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company or such Subsidiary, as applicable, to the Underwriters as to the matters covered thereby. (aj) Neither the Company nor any Subsidiary intends to, nor do they believe that they will, incur debts beyond their ability to pay such debts as they mature. The present fair saleable value of the assets of the Company and the Subsidiaries exceeds the amount that will be required to be paid on or in respect of the existing debts and other liabilities (including, without limitation, contingent liabilities) of the Company and the Subsidiaries as they become absolute and matured. The assets of the Company and the Subsidiaries do not constitute unreasonably small capital to carry out the business of the Company and the Subsidiaries, as conducted or as proposed to be conducted. Upon the issuance of the Shares, the present fair saleable value of the assets of the Company and the Subsidiaries will exceed the amount that will be required to be paid on or in respect of the existing debts and other liabilities (including, without limitation, contingent liabilities) of the Company and the Subsidiaries as they become absolute and matured. Upon the issuance of the Shares, the assets of the Company and the Subsidiaries will not constitute unreasonably small capital to carry out their businesses as now conducted, including the capital needs of the Company and the Subsidiaries, taking into account the projected capital requirements and capital availability. (ak) There are no contracts or other documents which are required to be described in the Registration Statement or the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described in the 11 Registration Statement or the Prospectus or filed as exhibits to the Registration Statement or incorporated therein by reference as permitted by the Rules and Regulations. (al) No relationship, direct or indirect, exists between or among the Company or any Subsidiary on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any Subsidiary on the other hand, which is required to be described in the Prospectus and which is not so described. (am) Since the date as of which information is given in the Registration Statement or the Prospectus through the date hereof, and except as may otherwise be disclosed or contemplated in the Registration Statement or the Prospectus, the Company and the Subsidiaries have not (i) issued or granted any securities, (ii) incurred any liability or obligation, direct or contingent, other than liabilities and obligations which were incurred in the ordinary course of business, (iii) entered into any transaction not in the ordinary course of business or (iv) declared or paid any dividend on their capital stock. 2. Purchase of the Shares by the Underwriters. On the basis of the representations and warranties contained in, and subject to the terms and conditions of, this Agreement, the Company agrees to sell the Firm Shares to the several Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase the number of Firm Shares set forth opposite that Underwriter's name in Schedule 1 hereto. The respective purchase obligations of the Underwriters with respect to the Firm Shares shall be rounded among the Underwriters to avoid fractional shares, as the Representatives may determine. In addition, the Company grants to the Underwriters an option to purchase up to _______ Option Shares. Such option is granted solely for the purpose of covering over-allotments in the sale of the Firm Shares and is exercisable as provided in Section 4 hereof. Option Shares shall be purchased severally for the account of the Underwriters in proportion to the number of Firm Shares set forth opposite the name of such Underwriters in Schedule 1 hereto. The respective purchase obligations of each Underwriter with respect to the Option Shares shall be adjusted by the Representatives so that no Underwriter shall be obligated to purchase Option Shares other than in 100 share amounts. The price to the Underwriters of both the Firm Shares and any Option Shares shall be $_____ per share. The Company shall not be obligated to deliver any of the Shares to be delivered on the First Delivery Date (as hereinafter defined) or the Option Delivery Date (as hereinafter defined), as the case may be, except upon payment for all the Shares to be purchased on such Delivery Date as provided herein. 3. Offering of Shares by the Underwriters. Upon authorization by the Representatives of the release of the Shares, the several Underwriters propose to offer the Shares for sale upon the terms and conditions set forth in the Prospectus. 4. Delivery of and Payment for the Shares. Delivery of and payment for the Firm Shares shall be made at the office of Latham & Watkins, 885 Third Avenue, New York, New York 10022, at 9:00 a.m., New York City time, on __________, 1996 or at such other date or place as shall be determined by agreement among the Representatives and the Company. This date and time are sometimes referred to as the "First Delivery Date." On the First Delivery Date, the Company shall 12 deliver or cause to be delivered certificates representing the Firm Shares to the Representatives for the account of each Underwriter against payment to or upon the order of the Company or as the Company may direct of the purchase price (deposit of which the Underwriters shall bear no responsibility for) by certified or official bank check or checks payable in next day funds, or in such manner as all parties to this Agreement shall have previously agreed. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Firm Shares shall be registered in such names and in such denominations as the Representatives shall request in writing not less than two full Business Days prior to the First Delivery Date. For the purpose of expediting the checking and packaging of the certificates for the Firm Shares, the Company shall make the certificates representing the Firm Shares available for inspection by the Representatives in New York, New York, not later than 2:00 p.m., New York City time, on the Business Day prior to the First Delivery Date. At any time, and from time to time, on or before the thirtieth day after the date of this Agreement the option granted in Section 2 may be exercised, in whole or in part, by written notice being given to the Company by the Representatives. Such notice shall set forth the aggregate number of Option Shares as to which the option is being exercised, the names in which the Option Shares are to be registered, the denominations in which the Option Shares are to be issued and the date and time, as determined by the Representatives, when the Option Shares are to be delivered; provided, however, that this date and time shall not be (i) earlier than the First Delivery Date or (ii) earlier than the second Business Day, or later the tenth Business Day, after the Company's receipt of the notice of exercise. The date[s] and time[s] the Option Shares are delivered are sometimes referred to as the "Option Delivery Date" and the First Delivery Date and the Option Delivery Date are sometimes each referred to as a "Delivery Date." Delivery of and payment for the Option Shares shall be made at the place specified in the first sentence of the first paragraph of this Section 4 (or at such other place as shall be determined by agreement between the Representatives and the Company) at 9:00 a.m., New York City time, on the Option Delivery Date. On the Option Delivery Date, the Company shall deliver or cause to be delivered the certificates representing the Option Shares to the Representatives for the account of each Underwriter against payment to or upon the order of the Company or as the Company may direct of the purchase price (deposit of which the Underwriters shall bear no responsibility for) by certified or official bank check or checks payable in next day funds, or in such manner as all parties to this Agreement shall have previously agreed. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Option Shares shall be registered in such names and in such denominations as the Representatives shall request in the aforesaid written notice. For the purpose of expediting the checking and packaging of the certificates for the Option Shares, the Company shall make the certificates representing the Option Shares available for inspection by the Representatives in New York, New York, not later than 2:00 p.m., New York City time, on the Business Day prior to the respective Option Delivery Date. 5. Further Agreements of the Company. The Company agrees: (a) To prepare the Prospectus in a form approved by the Representatives and to file such Prospectus, if required by the Act, pursuant to Rule 424(b) under the Securities Act not later than Commission's close of business on the second Business Day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act; to make no further amendment or any supplement to the Registration Statement or to the Prospectus except as permitted herein; to advise the 13 Representatives, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof; to advise the Representatives, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of the Registration Statement, any Preliminary Prospectus or the Prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of the Registration Statement, any Preliminary Prospectus or the Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal; (b) To furnish promptly to each of the Representatives and to counsel for the Underwriters, without charge, a signed copy of the Registration Statement as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith; (c) To deliver promptly to the Representatives, without charge, such number of the following documents as the Representatives shall reasonably request: (i) conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto (in each case including exhibits) and (ii) each Preliminary Prospectus, the Prospectus and any amended or supplemented Prospectus and, if the delivery of a prospectus is required at any time after the Effective Time in connection with the offering or sale of the Shares or any other securities relating thereto and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Securities Act, to notify the Representatives and, upon their request, to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representatives may from time to time reasonably request of an amended or supplemented Prospectus which will correct such statement or omission or effect such compliance; (d) To file promptly with the Commission any amendment to the Registration Statement or the Prospectus, any supplement to the Prospectus or any registration statement pursuant to Rule 462(b) under the Securities Act that may, in the judgment of the Company or the Representatives, be required by the Securities Act or requested by the Commission; (e) Prior to filing with the Commission any amendment to the Registration Statement or supplement to the Prospectus or any Prospectus pursuant to Rule 424 of the Rules and Regulations, to furnish, at least two days before filing such amendment to the Registration Statement or supplement to the Prospectus, a copy thereof to the Representatives and counsel for the Underwriters and obtain the consent of the Representatives to the filing; (f) As soon as practicable after the Effective Date, to make generally available to the Company's security holders and to deliver to the Representatives an earnings statement of the 14 Company and its Subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including Rule 158); (g) For a period of five years following the Effective Date, to furnish to the Representatives copies of all materials furnished by the Company to its shareholders and all public reports and all reports and financial statements furnished by the Company to the principal national securities exchange upon which the Class A Common Stock may be listed pursuant to requirements of or agreements with such exchange or to the Commission pursuant to the Exchange Act or any rule or regulation of the Commission thereunder; (h) The Company will arrange for the qualification of the Shares for sale under the securities or Blue Sky laws of such jurisdictions in the United States as the Representatives may designate, and will maintain such qualifications in effect so long as required for the sale of the Shares; provided that the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction. The Company will promptly advise the Representatives of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (i) For a period of 180 days from the date of the Prospectus (the "Lock-Up Period"), not to, directly or indirectly, offer for sale, sell or otherwise dispose of or pledge (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person during the Lock-Up Period of) any shares of Class A Common Stock or other capital stock of the Company (other than (i) the Class A Common Stock to be issued in pursuant to this Agreement and Class A Common Stock or Class B Common Stock to be issued pursuant to the Operative Documents, (ii) stock grants made pursuant to the terms of the Incentive Program (as in effect on the date of the Prospectus), (iii) stock grants made pursuant to the Stock Option Plan (as in effect on the date of the Prospectus) and (iv) securities issued as consideration for an acquisition if the party being issued the securities agrees to lock-up provisions similar to those contained in this subsection or if the securities issued are "restricted securities" under the Securities Act), or sell or grant options, rights or warrants with respect to any shares of Class A Common Stock or other capital stock of the Company (other than the grant of options pursuant to option plans existing on the date hereof), without the prior written consent of Lehman Brothers Inc.; and that the document that sets forth the terms of the Exchange Offer will require that each holder participating in the Exchange Offer agree not to, directly or indirectly, offer for sale, sell or otherwise dispose of or pledge (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person during the Lock-Up Period of) any shares of Class A Common Stock received in such Exchange Offer during the Lock-Up Period, without the prior written consent of Lehman Brothers Inc.; (j) Prior to the Effective Date, to apply for the listing of the Shares on the Nasdaq National Market and to use its best efforts to complete that listing, subject only to official notice of issuance and evidence of satisfactory distribution, prior to the First Delivery Date; (k) Prior to filing with the Commission a registration statement on Form 8-A, to furnish a copy thereof to the counsel for the Underwriters and receive and consider its comments thereon, and to deliver promptly to the Representatives a signed copy of the registration statement on Form 8-A filed by it with the Commission; 15 (l) The Company will use all amounts received by it pursuant to Section 4 of this Agreement in the manner described under "Use of Proceeds" in the Registration Statement and the Prospectus and pursuant to a funds flow memorandum, which shall be available for review prior to the Delivery Date and acceptable in both form and substance to the Representatives (the "Funds Flow Memorandum"); and (m) To take such steps as shall be necessary to ensure that neither the Company nor any subsidiary shall become an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. 6. Expenses. The Company agrees to pay (a) the costs incident to the authorization, issuance, sale and delivery of the Shares and any taxes payable in connection therewith; (b) the costs incident to the preparation, printing and filing under the Securities Act of the Registration Statement and any amendments and exhibits thereto; (c) the costs of distributing the Registration Statement as originally filed and each amendment thereto and any post-effective amendments thereof (including, in each case, exhibits), any Preliminary Prospectus, the Prospectus and any amendment or supplement to the Prospectus, all as provided in this Agreement; (d) the costs of producing and distributing this Agreement and any other related documents in connection with the offering, purchase, sale and delivery of the Shares; (e) the filing fees incident to securing any required review by the NASD of the terms of sale of the Shares; (f) any applicable listing or other fees; (g) the fees and expenses of qualifying the Shares under the securities laws of the several jurisdictions as provided in Section 5(h) and of preparing, printing and distributing a Blue Sky Memorandum (including related fees and expenses of counsel to the Underwriters in connection therewith); (h) all fees and expenses of Lehman Brothers, Inc. ("Lehman Brothers") in its capacity as a qualified independent underwriter; and (i) all other costs and expenses incident to the performance of the obligations of the Company and the Subsidiaries under this Agreement; provided that, except as provided in this Section 6 and in Section 11, the Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel, any transfer taxes on the Shares which they may sell and the expenses of advertising any offering of the Shares made by the Underwriters. 7. Conditions of Underwriters' Obligations. The respective obligations of the Underwriters hereunder are subject to the accuracy, when made and on each Delivery Date, of the representations and warranties of the Company and the Subsidiaries contained herein, to the performance by the Company and the Subsidiaries of obligations hereunder, and to each of the following additional terms and conditions: (a) The Registration Statement, including a registration statement filed under Rule 462(b) of the Securities Act, shall have become effective not later than 10:00 a.m., New York City time, on the date of this Agreement or at such later date and time as the Representatives may approve; the Prospectus shall have been timely filed with the Commission in accordance with Section 5(a) hereof; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with. (b) No Underwriter shall have discovered and disclosed to the Company on or prior to such Delivery Date that the Registration Statement or the Prospectus or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of Latham & 16 Watkins, counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading. (c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Shares, the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement, the Operative Documents and the transactions contemplated hereby and thereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. (d) Drinker Biddle & Reath shall have furnished to the Representatives its written opinion, as counsel to the Company, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably satisfactory to the Representatives, to the effect that: (i) The Company is duly incorporated and validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, and has all requisite corporate power and authority to carry on its business as, to such counsel's knowledge, it is being conducted and as described in the Registration Statement and the Prospectus and to own, lease and operate its properties known to such counsel, and is not qualified as a foreign corporation authorized to do business in any other jurisdiction. (ii) Each of the Subsidiaries is duly incorporated or formed and validly existing as a corporation or partnership, as the case may be, in good standing under the laws of its jurisdiction of incorporation or formation, as the case may be, and has all requisite corporate power and authority (in the case of corporations) or legal capacity (in the case of partnerships) to carry on its business as, to such counsel's knowledge, it is being conducted and as described in the Registration Statement and the Prospectus and to own, lease and operate its properties know to such counsel, and is duly qualified and in good standing as a foreign corporation or partnership, as the case may be, authorized to do business in each jurisdiction mentioned on Schedule 1 to such opinion. All of the outstanding shares of capital stock and other securities evidencing equity ownership of each of the Subsidiaries are fully paid and (except in the case of general partnership interests and, in the case of limited partnership interests, except to the extent that the provisions of the applicable limited partnership act requiring partners to return distributions may be deemed to constitute assessability) nonassessable and free of any preemptive or similar rights, and are owned by the Company directly, or indirectly through one of the other Subsidiaries, free and clear of any lien, adverse claim, security interest or other encumbrance known to such counsel except as described in the Registration Statement and the Prospectus and for security interests securing the New Credit Facility. (iii) The authorized capital stock of the Company consists of 30,000,000 shares of Class A Common Stock, par value $.01 per share, 15,000,000 shares of Class B Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01 per share. Upon the consummation of the Offering and the Transactions (assuming all holders of the PM&C Class B Shares exchange their shares for Class A Common Stock in the Exchange Offer), _______ shares of Class A Common Stock and 17 _______ shares of Class B Common Stock will be issued and outstanding. There are currently no shares of Preferred Stock outstanding. The authorized capital stock of the Company, including the Shares, conforms as to legal matters to the description thereof contained in the Registration Statement and the Prospectus. The Shares to be issued and sold by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will have been validly issued and will be fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (iv) The Registration Statement was declared effective under the Securities Act as of the date and time specified in such opinion; the Prospectus was filed with the Commission pursuant to the subparagraph of Rule 424(b) of the Rules and Regulations on the date specified therein; and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose is pending or threatened by the Commission. (v) The Registration Statement and the Prospectus and any further amendments or supplements thereto made by the Company prior to such Delivery Date (other than the financial statements, including the notes thereto, and supporting schedules and other financial, statistical and accounting data included therein or omitted therefrom, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and the Rules and Regulations. (vi) To the best of such counsel's knowledge, there are no contracts or other documents which are required to be described in the Registration Statement and the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described or filed as exhibits to the Registration Statement or incorporated therein by reference as permitted by the Rules and Regulations. (vii) To the best of such counsel's knowledge, except as set forth in the Registration Statement and the Prospectus, there are no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Company. (viii) There are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any of the Shares pursuant to the Company's charter or by-laws or any agreement or other instrument known to such counsel. (ix) The Parent, the Company and each of the Subsidiaries have all requisite power and authority to execute, deliver and perform their respective obligations under this Agreement and the Operative Documents, as applicable, and to consummate the transactions contemplated hereby and thereby, including, without limitation, in the case of the Company, the corporate power and authority to issue, sell and deliver the Shares, as provided herein. (x) This Agreement has been duly and validly authorized, executed and delivered by the Company and the Subsidiaries. 18 (xi) The DBS Acquisition Agreement has been duly and validly authorized, executed and delivered by the Parent and is the legally valid and binding obligation of the Parent, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (xii) The documents governing the Towers Purchase have been duly and validly authorized, executed and delivered by each of the Company and Pegasus Towers, L.P. and are the legally valid and binding obligations of each of the Company and Pegasus Towers, L.P., enforceable against each of them in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (xiii) The documents governing the Management Agreement Acquisition have been duly and validly authorized, executed and delivered by each of Pegasus Capital, L.P., Pegasus Communications Management Company, the Company and the Management Company and are the legally valid and binding obligations of each of them, enforceable against each of them in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (xiv) The documents governing the Contribution have been duly and validly authorized, executed and delivered by each of the Parent and the Company and are the legally valid and binding obligations of each of the Parent and the Company, enforceable against each of them in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (xv) The Cable Acquisition Agreement has been duly and validly authorized, executed and delivered by the Parent and is the legally valid and binding obligation of the Parent, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 19 (xvi) The New Credit Facility and the documents executed in connection therewith have been duly and validly authorized, executed and delivered by PM&C and each of the Subsidiaries party thereto and are the legally valid and binding obligations of PM&C and each of the Subsidiaries party thereto, enforceable against each of them in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (xvii) The documents governing the WPXT Contribution have been duly and validly authorized, executed and delivered by each of the Company and the Parent and are the legally valid and binding obligations of each of the Company and the Parent, enforceable against each of them in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (xviii) The documents governing the WWLA Contribution have been duly and validly authorized, executed and delivered by each of the Company and the Parent and are the legally valid and binding obligations of each of the Company and the Parent, enforceable against each of them in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (xix) Each of the DBS Acquisition, the Cable Acquisition, the Towers Purchase, the Contribution, the Management Agreement Acquisition, the New Credit Facility, the WPXT Contribution and the WWLA Contribution and the Operative Documents conform in all material respects to the descriptions thereof in the Registration Statement and the Prospectus. (xx) None of (A) the execution, delivery or performance by the Company or any of the Subsidiaries of this Agreement or any of the Operative Documents, as applicable, (B) the issuance and sale of the Shares or (C) the transactions contemplated by this Agreement and the Operative Documents will violate, conflict with or constitute a breach of any of the terms or provisions of, or a default under (or an event that with notice or the lapse of time, or both, would constitute a default), or (except as contemplated in the second and third sentences of this paragraph) require consent under, or result in the imposition of a lien or encumbrance on any properties of the Company or any Subsidiary, or an acceleration of any indebtedness of the Company or any Subsidiary pursuant to, (i) the charter, bylaws, limited partnership or other organizational documents of the Company or any Subsidiary, (ii) any material bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument known to such counsel relating to borrowed money to which the Company or any Subsidiary is a party 20 or by which any of them or their respective property is bound, (iii) any statute, rule or regulation known to such counsel applicable to the Company or any Subsidiary or their respective assets or properties (except such as are, in the aggregate, immaterial) or (iv) any judgment, order or decree known to such counsel of any court or governmental agency, body or administrative agency or authority having jurisdiction over the Company, any Subsidiary or their respective assets or properties. No consent, approval, authorization or order of, or filing, registration, qualification, license or permit of or with, any regulatory agency or body, administrative agency, or other governmental agency is required for (1) the execution, delivery and performance by the Company and the Subsidiaries of this Agreement or any of the Operative Documents, as applicable, (2) the issuance and sale of the Shares or (3) the transactions contemplated by this Agreement or the Operative Documents, except for (A) the registration of the Shares under the Securities Act, (B) such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters, (C) such as may be required by the NASD, and (D) such as have been obtained or made, it being understood that such counsel need express no opinion concerning any law administered by, or any rule, regulation or order of, the FCC, the DPUC or the PSC, or any other law, rule or regulation pertaining to the broadcast television or cable television industry. To the best of such counsel's knowledge, no consents or waivers from any other person are required for the execution, delivery and performance by the Company, the Parent and the Subsidiaries, as applicable, of this Agreement and the Operative Documents, the issuance and sale of the Shares to the Underwriters or the consummation of the transactions contemplated by this Agreement and the Operative Documents, other than (1) such consents and waivers as have been obtained and (2) such as are disclosed in the Registration Statement and the Prospectus. (xxi) None of the Company or the Subsidiaries is (i) an "investment company" or (ii) a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (xxii) The statements in the Prospectus under the captions "Prospectus Summary," "Risk Factors," "Business - Licenses, LMAs, DBS Agreements and Cable Franchises," "Management and Certain Transactions - Management Agreement," "Management and Certain Transactions - Incentive Program," "Description of Indebtedness," "Description of Capital Stock" and "Shares Eligible for Future Sale," and Items 14, 15 and 17 of Part II of the Registration Statement, in so far as they are descriptions of contracts, agreements or other legal documents or laws, regulations or statutes are accurate, in all material respects, and present fairly the information required to be shown. (xxiii) To the best of such counsel's knowledge, there are no holders of securities of the Company or any Subsidiary who, by reason of the execution by the Company, the Parent or any Subsidiary of this Agreement or any of the Operative Documents to which any of the Company, the Parent or any Subsidiary, as applicable, is a party or the consummation by the Company, the Parent and the Subsidiaries of the transactions contemplated hereby and thereby, as applicable, have the right to request or demand that the Company or any Subsidiary register under the Securities Act or 21 analogous foreign laws and regulations securities held by them, other than as disclosed in the Registration Statement and the Prospectus. (xxiv) To the best of such counsel's knowledge, there are no contracts, agreements or understandings between the Company or any Subsidiary and any other person that would give rise to a valid claim against the Company, any Subsidiary or any of the Underwriters for a brokerage commission, finder's fee or like payment in connection with the issuance, purchase and sale of the Shares. (xxv) To the best of such counsel's knowledge and other than as set forth in the Registration Statement and the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of the Subsidiaries is a party or of which any property or assets of the Company or any of the Subsidiaries is the subject which, if determined adversely to the Company or any of the Subsidiaries, might have a Material Adverse Effect; and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. In addition, such counsel shall state that it has participated in conferences with officers and other representatives of the Company and the Subsidiaries and representatives of the Accountants at which the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel has not undertaken to investigate or verify independently, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus, on the basis of the foregoing (relying as to materiality to a large extent upon the opinions of officers and other representatives of the Company) such counsel does not believe that (A) the Registration Statement and any amendment or supplement thereto (except as to financial statements, including the notes thereto, and supporting schedules and other financial, statistical and accounting data included therein or omitted therefrom, as to which no belief need be expressed) as of the Effective Date, contained an untrue statement of a material fact or omitted to state any fact required to be stated therein or necessary to make the statements therein not misleading and (B) the Prospectus and any amendment or supplement thereto (except as to financial statements, including the notes thereto, and supporting schedules and other financial, statistical and accounting data included therein or omitted therefrom, as to which no belief need be expressed) as of its date or the Delivery Date, contained an untrue statement of a material fact or omitted to state any 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. (e) Vorys, Sater, Seymour and Pease shall have furnished to the Representatives its written opinion, as special regulatory counsel for the Company and the Subsidiaries, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably satisfactory to the Representatives, substantially in the form of Exhibit A attached hereto. (f) Fisher Wayland Cooper Leader & Zaragoza L.L.P. shall have furnished to the Representatives its written opinion, as special regulatory counsel for the Company and the Subsidiaries, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably satisfactory to the Representatives, substantially in the form of Exhibit B attached hereto. 22 (g) Murtha, Cullina, Richter and Pinney shall have furnished to the Representatives its written opinion, as special regulatory counsel for the Company and the Subsidiaries, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably satisfactory to the Representatives, substantially in the form of Exhibit C attached hereto. (h) The Representatives shall have received from Latham & Watkins, counsel for the Underwriters, such opinion or opinions, dated such Delivery Date, with respect to the issuance and sale of the Shares, the Registration Statement, the Prospectus and other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. (i) The Accountants shall have furnished to the Representatives a letter or letters, dated respectively as of the date hereof and such Delivery Date, addressed to the Underwriters, in form and substance satisfactory to each of the Representatives, containing statements and information, of the type ordinarily included in accountants' "comfort letters" with respect to the financial statements and financial information contained in the Registration Statement and the Prospectus. (j) The Company shall have furnished to the Underwriters a certificate of the Company and the Subsidiaries, signed by the Chairman of the Board or the President and the principal financial or accounting officer of the Company and each of the Subsidiaries, dated such Delivery Date, to the effect that the signers of such certificate have carefully examined the Registration Statement and the Prospectus (and any amendment or supplement thereto) and this Agreement and that: (i) the representations and warranties of the Company and the Subsidiaries in this Agreement are true and correct in all material respects on and as of such Delivery Date with the same effect as if made on such Delivery Date and the Company and the Subsidiaries have complied with all the agreements and satisfied all the conditions on their part to be performed or satisfied at or prior to such Delivery Date; (ii) they have carefully examined (A) the Registration Statement and, in their opinion (1) as of the Effective Date, the Registration Statement did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (2) since the Effective Date no event has occurred which should have been set forth in an amendment to the Registration Statement and (B) the Prospectus and, in their opinion (1) as of the Effective Date, the Prospectus did not include any untrue statement of a material fact and did not 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, and (2) since the Effective Date no event has occurred which should have been set forth in a supplement or amendment to the Prospectus. (iii) since the date of the most recent financial statements included in the Registration Statement and the Prospectus (including any amendment or supplement thereto), there has been no material adverse change in the condition (financial or other), earnings, business, properties or prospects of the Company and the Subsidiaries, taken as a whole, or any development involving a prospective material adverse change in the 23 capital stock or in the long-term debt of the Company and the Subsidiaries from that set forth in the Registration Statement and the Prospectus, whether or not arising from transactions in the ordinary course of business, except as set forth in the Registration Statement and the Prospectus (exclusive of any amendment or supplement thereto); (iv) the Company and the Subsidiaries have no liability or obligation, direct or contingent, which is material to the Company and the Subsidiaries, taken as a whole, other than those reflected in the Registration Statement and the Prospectus; and (v) the copies furnished by the Company, on or before the date hereof, of each of the Operative Documents are true, correct and complete, were duly and validly authorized and constitute valid and binding obligations of the Parent, the Company and the Subsidiaries, as applicable, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers and conveyances), and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (k) Subsequent to the date hereof or, if earlier, the dates as of which information is given in the Registration Statement and the Prospectus (exclusive of any amendment or supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in paragraph (i) of this Section 7 or (ii) any change, or any development involving a prospective change, in or affecting the business or properties of the Company or any of the Subsidiaries, the effect of which is, in the judgment of the Representatives, so material and adverse as to make it impractical or inadvisable to market the Shares as contemplated by the Registration Statement and the Prospectus (exclusive of any amendment or supplement thereto). (l) Subsequent to the date hereof and on or prior to such Delivery Date, there shall not have been any decrease in the rating of any of the Company's or the Subsidiaries' securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g)(2) under the Securities Act) or any notice given of any intended or potential decrease in any such rating or of a possible change in any such rating that does not indicate the direction of the possible change. (m) The Company, the Parent and each of the Subsidiaries shall have duly entered into this Agreement and the Operative Documents, as applicable, and the Underwriters shall have received executed copies of each of such documents and agreements. (n) The rights to act as the exclusive provider of DIRECTV programming in certain rural areas of Texas and Michigan and the assets related to such rights shall have been transferred to the Company, free and clear of any lien, adverse claim, security interest or other encumbrance pursuant to the DBS Acquisition Agreement, as in effect on the date hereof, in the manner described in the Registration Statement and the Prospectus. There shall exist at and as of the Delivery Date, after giving effect to the transactions contemplated by this Agreement and the Operative Documents, no conditions that would constitute a default (or an event that with notice or the lapse of time, or both, would constitute a default) under the DBS Acquisition Agreement or that would have a material adverse effect on the Company's ability to consummate the DBS Acquisition as described in the Registration Statement and the Prospectus. 24 (o) The Parent shall have contributed to the Company all of its stock in PM&C, which consists of 161,500 PM&C Class A Shares, free and clear of any lien, adverse claim, security interest or other encumbrance on the terms described in the Registration Statement and the Prospectus. (p) The Management Agreement shall have been transferred to the Company pursuant to the documents governing the Management Agreement Acquisition, as in effect on the date hereof, on the terms described in the Registration Statement and the Prospectus. (q) The broadcast tower assets of Pegasus Towers, L.P. shall have been transferred to the Company pursuant to the documents governing the Towers Purchase, as in effect on the date hereof, on the terms described in the Registration Statement and the Prospectus. (r) The contribution by the Parent to the Company of all of the outstanding stock of B.T. Satellite, Inc. shall have been made on the terms described in the Registration Statement and the Prospectus. (s) The contribution by the Parent to the Company of all of the outstanding stock of Bride Communications, Inc. shall have been made on the terms described in the Registration Statement and the Prospectus. (t) An appraisal by Kane Reece Associates, Inc. of the fair market value of the Management Agreement shall have been furnished and delivered to the Representatives. (u) A report of an independent appraiser shall have been furnished and delivered to the Representatives setting forth the fair market purchase price of the properties to be acquired pursuant to the Towers Purchase. (v) Each of the Operative Documents shall be in full force and effect. (w) PM&C shall have entered into the New Credit Facility, the form and substance of which shall be reasonably acceptable to the Representatives, and the Representatives shall have received counterparts, conformed as executed, thereof and of all other documents and agreements entered into in connection therewith. (x) Each condition to the closing contemplated by the New Credit Facility shall have been satisfied or waived. There shall exist at and as of the Delivery Date (after giving effect to the transactions contemplated by this Agreement and the other Operative Documents) no conditions that would constitute a default (or an event that with notice or the lapse of time, or both, would constitute a default) under the New Credit Facility. On the Delivery Date, the closing under the New Credit Facility shall have been consummated on terms that conform in all material respects to the description thereof in the Registration Statement and Prospectus and the Representatives shall have received evidence satisfactory to the Underwriters of the consummation thereof. (y) On such Delivery Date, the Representatives shall have received evidence reasonably satisfactory to each of the Representatives that any consents or waivers necessary for the Company and the Subsidiaries to effect the transactions contemplated hereby are in effect. 25 (z) The Underwriters' counsel shall have been furnished with such documents as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Section 7 and in order to evidence the accuracy, completeness or satisfaction in all material respects of any of the representations, warranties or conditions herein contained. (aa) The Old Credit Facility shall have been repaid in accordance with the terms of the governing instrument and the Representatives shall have received copies of instruments of satisfaction and discharge satisfactory to them from the lender under the Old Credit Facility evidencing the discharge and satisfaction of the Old Credit Facility. (ab) Each officer and director of the Company shall have furnished to the Representatives, prior to the First Delivery Date, a letter or letters, in form and substance satisfactory to counsel for the Underwriters, pursuant to which each such person shall agree not to, directly or indirectly, offer for sale, sell or otherwise dispose of or pledge (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person during the Lock-Up Period of) any shares of Class A Common Stock or other capital stock of the Company during the Lock-Up Period, without the prior written consent of Lehman Brothers Inc. (ac) The amounts received by the Company pursuant to Section 4 of this Agreement shall have been disbursed by the Company as described in the Funds Flow Memorandum. (ad) On or prior to such Delivery Date, the Company shall have furnished to the Underwriters such further information, certificates and documents as the Underwriters may reasonably request. (ae) No action shall have been taken and no statute, rule or regulation or order shall have been enacted, adopted or issued by any governmental agency that would as of such Delivery Date prevent the issuance of the Shares; no injunction, restraining order or order of any nature by a federal or state court of competent jurisdiction shall have been issued as of such Delivery Date that would prevent the issuance of the Shares; and, on such Delivery Date no action, suit or proceeding shall be pending against or affect the Company or any of the Subsidiaries, before any court or arbitrator or any governmental body, agency or official that, if adversely determined, would interfere with or adversely affect the issuance of the Shares or would, except as disclosed in the Registration Statement and the Prospectus, individually or in the aggregate have a Material Adverse Effect or in any manner draw into question the validity of this Agreement, the Operative Documents or the Shares. (af) The Nasdaq National Market shall have approved the Shares for listing, subject only to official notice of issuance and evidence of satisfactory distribution. If any of the conditions specified in this Section 7 shall not have been waived by the Representatives or fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to each of the Representatives and counsel for the Underwriters, this Agreement and all obligations of the Underwriters hereunder may be canceled at, or at any time prior to, such Delivery Date by the Underwriters. Notice of such cancellation shall be given to the Company in writing or by telephone or telegraph confirmed in writing. 26 8. Indemnification and Contribution. (a) The Company and the Subsidiaries, jointly and severally, shall indemnify and hold harmless each Underwriter (including any Underwriter in its role as qualified independent underwriter pursuant to the rules of the NASD), its officers and employees and each person, if any, who controls any Underwriter within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Shares), to which that Underwriter, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto or (B) in any blue sky application or other document prepared or executed by the Company (or based upon any written information furnished by the Company) specifically for the purpose of qualifying any or all of the Shares under the securities laws of any state or other jurisdiction (any such application, document or information being hereinafter called a "Blue Sky Application"), (ii) the omission or alleged omission to state in the Registration Statement or in any amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements therein not misleading, or in any Preliminary Prospectus or the Prospectus, or in any amendment or supplement thereto, any material facts required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (iii) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (i) or (ii) above (provided that the Company and the Subsidiaries shall not be liable under this clause (iii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct), and shall reimburse each Underwriter and each such officer, employee or controlling person promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter, officer, employee or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company and the Subsidiaries shall not be liable 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 omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any such amendment or supplement, or in any Blue Sky Application, in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. The Company and the Subsidiaries agree, jointly and severally, to indemnify and hold harmless Lehman Brothers for any liability caused by, based upon or arising from Lehman Brothers acting or serving as "qualified independent underwriter" for the Offering of the Shares within the meaning of Schedule E to the By-Laws of the NASD, except for any such losses, claims, damages or liabilities which are finally judicially determined to have resulted from bad faith or gross negligence on the part of Lehman Brothers. The foregoing indemnity agreement is in addition to any liability which the Company or the Subsidiaries may otherwise have to any Underwriter or to any officer, employee or controlling person of that Underwriter. 27 (b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, its officers and employees, each of its directors (including any person who, with his or her consent, is named in the Registration Statement as about to become a director of the Company), and each person, if any, who controls the Company within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company or any such director, officer or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged omission to state in the Registration Statement or in any amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements therein not misleading or in any Preliminary Prospectus or the Prospectus, or in any amendment or supplement thereto, any material facts 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 the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of that Underwriter specifically for inclusion therein, and shall reimburse the Company and any such director, officer or controlling person for any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred. The foregoing indemnity agreement is in addition to any liability which any Underwriter may otherwise have to the Company or any such director, officer, employee or controlling person. No Underwriter shall be required to make any reimbursements pursuant to this Section 8(b) in excess of the amount by which the underwriting discounts and commissions received by such Underwriter on the Shares underwritten by it and distributed to the public exceeds the amount of such damages which such Underwriter has otherwise paid or become liable to pay under this Section 8. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 8 except to the extent it has been materially prejudiced by such failure and, provided further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 8. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 8 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that the Representatives shall have the right to employ counsel to represent jointly the Representatives and those other Underwriters and their respective officers, employees and 28 controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Underwriters against the Company or the Subsidiaries under this Section 8 if, in the reasonable judgment of the Representatives, it is advisable for the Representatives and those Underwriters, officers, employees and controlling persons to be jointly represented by separate counsel, and in that event the fees and expenses of such separate counsel shall be paid by the Company or the Subsidiaries. No indemnifying party shall (i) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding, or (ii) be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with the consent of the indemnifying party or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any 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 8 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or 8(b) above in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company and the Subsidiaries, on the one hand, and the Underwriters, on the other hand, from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Subsidiaries, on the one hand, and the Underwriters, on the other hand, with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Subsidiaries on the one hand and the Underwriters on the other with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares purchased under this Agreement (before deducting expenses) received by the Company, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the shares of the Shares purchased under this Agreement, on the other hand, bear to the total gross proceeds from the offering of the Shares under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, the Subsidiaries or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. For purposes of the preceding two sentences, the net proceeds deemed to be received by the Company shall be deemed to be also for the benefit of the Subsidiaries and information supplied by the Company shall also be deemed to have been supplied by the Subsidiaries. The Company, the Subsidiaries and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8 were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable 29 considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 8 shall be deemed to include, for purposes of this Section 8(d), 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 Section 8(d), no Underwriter shall be required to contribute any amount in excess of the amount by which the underwriting discounts and commissions received by such Underwriter on the Shares underwritten by it and distributed to the public was offered to the public exceeds the amount of any damages which such Underwriter has otherwise paid or become liable to pay under this Section 8. 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. The Underwriters' obligations to contribute as provided in this Section 8(d) are several in proportion to their respective underwriting obligations and not joint. (e) The Underwriters severally confirm and the Company and the Subsidiaries acknowledge that the statements with respect to the public offering of the Shares by the Underwriters set forth on the cover page of, the legend concerning over-allotments on the inside front cover page of and the concession and reallowance figures appearing under the caption "Underwriting" in, the Prospectus are correct and constitute the only information concerning such Underwriters furnished in writing to the Company or the Subsidiaries by or on behalf of the Underwriters specifically for inclusion in the Registration Statement and the Prospectus. 9. Defaulting Underwriters. (a) If, on any Delivery Date, any Underwriter defaults in its obligation to purchase the Shares which it has agreed to purchase hereunder, the remaining non-defaulting Underwriters may in their discretion arrange for the non-defaulting Underwriters or another party or other parties to purchase the Shares on the terms contained herein. If the aggregate number of Shares as to which Underwriters default is more than 9.09% of the aggregate number of Shares to be purchased on such Delivery Date and within 36 hours after such default by any Underwriter the non-defaulting Underwriters do not arrange for the purchase of such Shares, then the Company shall be entitled to a further period of 36 hours within which to procure another party or other parties satisfactory to the Representatives to purchase such Shares on such terms. In the event that, within the respective prescribed periods, the non-defaulting Underwriters notify the Company that they have arranged for the purchase of such Shares, or the Company notifies the Representatives that it has so arranged for the purchase of such Shares, either the Representatives or the Company shall have the right to postpone the Delivery Date for up to seven full Business Days in order to effect any changes that in the opinion of counsel for the Company or counsel for the Underwriters may be necessary in the Registration Statement, the Prospectus or in any other document or arrangement. As used in this Agreement, the term "Underwriter" includes, for all purposes of this Agreement, unless the context requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to this Section 9, purchases Shares which a defaulting Underwriter agreed but failed to purchase. (b) If, after giving effect to any arrangements for the purchase of the Shares of such defaulting Underwriter or Underwriters by the non-defaulting Underwriters or the Company or both as provided in subsection (a) above, the aggregate number of such Shares that remain unpurchased does not exceed 9.09% of the total number of Shares to be purchased on such Delivery Date, then the remaining non-defaulting Underwriters shall be obligated to purchase (i) 30 the number of Shares which each Underwriter agreed to purchase hereunder and, in addition, (ii) the number of Shares which the defaulting Underwriter or Underwriters agreed but failed to purchase on such Delivery Date in the respective proportions which the number of Firm Shares set opposite the name of each remaining non-defaulting Underwriter in Schedule 1 hereto bears to the total number of Firm Shares set opposite the names of all the remaining non-defaulting Underwriters in Schedule 1 hereto. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters or the Company as provided in subsection (a) above, the aggregate number of such Shares that remain unpurchased exceeds 9.09% of the aggregate number of the total number of Shares to be purchased on such Delivery Date, this Agreement (or, with respect to the Option Delivery Date, the obligation of the Underwriters to purchase, and of the Company to sell, the Option Shares) shall terminate without liability on the part of any non-defaulting Underwriters or the Company, except that the Company will continue to be liable for the payment of expenses to the extent set forth in Sections 6 and 11 hereof. Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company for damages caused by its default. 10. Termination. This Agreement shall be subject to termination in the absolute discretion of the Representatives, by notice given to the Company prior to delivery of and payment for the Shares, if prior to such time any of the following shall have occurred: (i) the Company or any of the Subsidiaries shall have failed, refused or been unable to perform in any material respect any agreement on its part to be performed hereunder; (ii) any other condition of the obligations of the Underwriters hereunder as provided in Section 7 hereof is not fulfilled when and as required in any material respect; (iii) trading in securities generally on the New York or American Stock Exchanges or in the Nasdaq National Market shall have been suspended or materially limited, or minimum prices shall have been established on such exchange by the Commission, or by such exchange or other regulatory body or governmental authority having jurisdiction; (iv) a general moratorium on commercial banking activities declared by either Federal or New York State authorities; (v) the outbreak or escalation of hostilities involving the United States, declaration by the United States of a national emergency or war or other calamity or crisis, if the effect of any such event specified in this clause (v) in the reasonable judgment of the Representatives makes it impracticable or inadvisable to proceed with the offering or delivery of the Shares being delivered at such Delivery Date on the terms and in the manner contemplated in the Prospectus; or (vi) the occurrence of any material adverse change in the existing financial, political or economic conditions in the United States or elsewhere that in the reasonable judgment of the Representatives, would materially and adversely affect the financial markets or the market for the Shares. 11. Reimbursement of Underwriters' Expenses. If the Company shall fail to tender the Shares for delivery to the Underwriters by reason of any failure, refusal or inability on the part of the Company or the Subsidiaries to perform any agreement on their part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company or the Subsidiaries is not fulfilled, the Company and the Subsidiaries will reimburse the Underwriters for all reasonable out-of-pocket expenses (including fees and disbursements of counsel) incurred by the Underwriters in connection with this Agreement and the proposed purchase of the Shares, and upon demand the Company and the Subsidiaries shall pay the full amount thereof to the Representatives. If this Agreement is terminated pursuant to Section 9 hereof by reason of the default of one or more Underwriters, the Company and the Subsidiaries shall not be obligated to reimburse any defaulting Underwriter on account of those expenses. 31 12. Notices, etc. All statements, requests, notices and agreements hereunder shall be in writing, and: (a) if to the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission to Lehman Brothers Inc., Three World Financial Center, New York, New York 10285, Attention: Syndicate Department (Fax: 212-526-6588), with a copy to Latham & Watkins, 885 Third Avenue, Suite 1000, New York, New York 10022, Attention: Kirk A. Davenport, Esq. and, in the case of any notice pursuant to Section 8(c), an additional copy to the Director of Litigation, Office of the General Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th Floor, New York, NY 10285; (b) if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Chief Financial Officer (Fax: (610) 341-1835), with a copy to Drinker Biddle & Reath, 1345 Chestnut Street, Suite 1100, Philadelphia, Pennsylvania 19107, Attention: Michael B. Jordan, Esq.; provided, however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its acceptance telex to the Representatives, which address will be supplied to any other party hereto by the Representatives upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Company shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of the Representatives. 13. Persons Entitled to Benefit of this Agreement. This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Company, the Subsidiaries, and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (A) the representations, warranties, indemnities and agreements of the Company and the Subsidiaries contained in this Agreement shall also be deemed to be for the benefit of the person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Securities Act and (B) the indemnity agreement of the Underwriters contained in Section 8(b) of this Agreement shall be deemed to be for the benefit of directors of the Company, officers of the Company who have signed the Registration Statement and any person controlling the Company within the meaning of Section 15 of the Securities Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 13, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 14. Survival. The respective indemnities, representations, warranties and agreements of the Company, the Subsidiaries and the Underwriters contained in this Agreement or made by or on behalf on them, respectively, pursuant to this Agreement, shall survive the delivery of and payment for the Shares and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them. 15. Definition of the Term "Business Day." For purposes of this Agreement, "Business Day" means any day on which the New York Stock Exchange, Inc. is open for trading. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of New York. 32 17. Counterparts. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument. 18. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 33 If the foregoing correctly sets forth the agreement among the Company, the Subsidiaries and the Underwriters, please indicate your acceptance in the space provided for that purpose below. Very truly yours, PEGASUS COMMUNICATIONS CORPORATION (the "Company) MCT CABLEVISION, LTD. ("MCT LTD") PEGASUS ANASCO HOLDINGS, INC. ("PAH") PEGASUS BROADCAST TELEVISION, INC. ("PBT") PEGASUS CABLE TELEVISION, INC. ("PCT INC") PEGASUS CABLE TELEVISION OF ANASCO, INC. ("PCT ANASCO") PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. ("PCT CONN") PEGASUS CABLE TELEVISION OF SAN GERMAN, INC. ("PCT SG") PEGASUS MEDIA & COMMUNICATIONS, INC. ("PM&C") PEGASUS SATELLITE TELEVISION, INC. ("PST") PORTLAND BROADCASTING, INC. ("PBI") WDBD LICENSE CORP. ("WDBD") WDSI LICENSE CORP. ("WDSI") WILF INC. ("WILF") WOLF LICENSE CORP. ("WOLF") WTLH, INC. ("WTLH INC") WTLH LICENSE CORP. ("WTLH") By: _______________________________________ Marshall W. Pagon, President of each of the Company, MCT LTD, PAH, PBT, PCT INC, PCT ANASCO, PCT CONN, PCT SG, PM&C, PST, PBI,WDBD, WDSI, WILF, WOLF, WTLH INC and WTLH. MCT CABLEVISION, LIMITED PARTNERSHIP ("MCT LP") By: MCT CABLEVISION, LTD., General Partner By: ------------------------------------------------ Marshall W. Pagon, President PEGASUS BROADCAST ASSOCIATES, L.P. ("PBA LP") By: WILF, INC., General Partner By: ------------------------------------------------ Marshall W. Pagon, President LEHMAN BROTHERS INC. BT SECURITIES CORPORATION CIBC WOOD GUNDY SECURITIES CORP. PAINEWEBBER INCORPORATED For themselves and as Representatives of the several Underwriters named in Schedule 1 hereto By: LEHMAN BROTHERS INC. By: ----------------------------------------------- Name: Title: By: BT SECURITIES CORPORATION By: ----------------------------------------------- Name: Title: By: CIBC WOOD GUNDY SECURITIES CORP. By: ----------------------------------------------- Name: Title: By: PAINEWEBBER INCORPORATED By: ----------------------------------------------- Name: Title: Schedule 1 The Underwriters Number of Firm Shares Underwriter to be Purchased - ----------- --------------------- Lehman Brothers, Inc. BT Securities Corporation CIBC Wood Gundy Securities Corp. PaineWebber Incorporated ===================== Total Schedule 2 The Subsidiaries MCT Cablevision, Limited Partnership MCT Cablevision, Ltd. Pegasus Anasco Holdings, Inc. Pegasus Broadcast Associates, L.P. Pegasus Broadcast Television, Inc. Pegasus Cable Television, Inc. Pegasus Cable Television of Anasco, Inc. Pegasus Cable Television of Connecticut, Inc. Pegasus Cable Television of San German, Inc. Pegasus Media & Communications, Inc. Pegasus Satellite Television, Inc. Portland Broadcasting, Inc. WBDB License Corp. WDSI License Corp. WILF, Inc. WOLF License Corp. WTLH, Inc. WTLH License Corp. Appendix A Form of Opinion of Vorys, Sater, Seymour and Pease. Vorys, Sater, Seymour and Pease shall have furnished to the Representatives its written opinion, as special regulatory counsel for the Company and MCT Cablevision, Ltd., Pegasus Cable Television, Inc., ____________ and Pegasus Satellite Television (the "Vorys Affiliates"), addressed to the Underwriters and dated such Delivery Date, to the effect that: (i) There are no FCC licenses, authorizations, consents or permits required by the FCC as necessary in connection with the conduct of the Company and the Vorys Affiliates with respect to the operation of the systems owned and operated by Company and the Vorys Affiliates (the "Systems") as presently conducted. (ii) Such "Registrations" or "Certificates of Compliance" as are required by the FCC are on file with the FCC. Carriage of the commercial television broadcast signals presently offered by the Systems are, as of this date, consistent with the FCC's regulations and are carried pursuant to retransmission consent or pursuant to request for carriage by the applicable station. (iii) All commercial and non-commercial television broadcast stations that have requested carriage are being carried pursuant to the terms and conditions of their request. (iv) All current FCC reports and filings required to be filed for the Systems have been filed. (v) All required FCC Forms 320 have been filed for the Systems and reflect compliance with the FCC's cumulative leakage index ("CLI") and signal leakage requirements. (vi) The Systems are in substantial compliance with the FCC's rules and regulations with regard to equal employment opportunity. (vii) No consent, approval, or authorization of, or filing with the FCC is necessary to issue and sell the Shares. (viii) No consent, approval, or authorization of, or filing with the FCC is necessary for the execution and delivery of the this Agreement or the Operative Documents in accordance with their terms. (ix) The execution and delivery of the Operative Documents, and the performance, on the Delivery Date, by the Company and the Vorys Affiliates of the obligations required under the Operative Documents, will not violate the Telecommunications Act of 1996, the Communications Act of 1934 or the rules of the FCC, provided, however that no interest in any license issued by the FCC may be transferred or assigned without prior FCC consent. (x) The statements set forth in the Registration Statement and the Prospectus under the caption "Business - Legislation and Regulation - Cable," fairly present the information contained under such caption insofar as such statements constitute a summary, with respect to the federal regulation of cable television, of material (i) statements of law, (ii) statutes, rules or regulations, or (iii) legal conclusions. (xi) All relevant Statements of Account (as defined by the Copy Right Act of 1976) required by Section 111 of the Copyright Act of 1976, as amended (the "Copyright Act"), and royalty payments accompanying said Statements of Account, have been submitted to the Licensing Division of the United States Copyright Office with respect to the Systems. There have been no inquiries received from the United States Copyright Office or any other party which would have a material adverse impact upon the operation of the Company and the Vorys Affiliates and which questions the Statements of Account or any copyright payments made by the Company and the Vorys Affiliates with respect to the Systems, nor are we aware of any claim, action, or demand for copyright infringement or for non-payment of royalties pending or threatened against the Company and the Vorys Affiliates with respect to the Systems' compliance with former Section 111(d)(1) of the Copyright Act with regard to the requirement to file initial notices of identity and signal carriage complement in view of the elimination of this requirement. (xii) There is no FCC judgment, decree or order which has been issued against any System or the Company, or Vorys Affiliates with respect to the Systems, other than rule makings which are applicable to the cable industry generally, nor is there any FCC action, proceeding, or investigation pending, or, to the best of our knowledge, threatened by the FCC against any system, the Company, or the Vorys Affiliates with respect to the Systems. (xiii) A review of the FCC files indicates that the basic rates for all communities in Massachusetts and Connecticut and the cable program service tiers of the communities listed on Attachment 1 are subject to rate regulation by the local franchise authority or the FCC. (xiv) The FCC has rendered no adverse rate finding with respect to Company, the Vorys Affiliates, or the Systems. Appendix B Form of Opinion of Fisher Wayland Cooper Leader & Zaragoza L.L.P. Fisher Wayland Cooper Leader & Zaragoza L.L.P. shall have furnished to the Representatives its written opinion, as special regulatory counsel for the Company and Pegasus Broadcast Associates, L.P., Pegasus Broadcast Television, Inc. WBDB License Corp., WDSI License Corp., WILF, Inc., ____________ and WOLF License Corp. (the "Wayland Affiliates"), addressed to the Underwriters and dated such Delivery Date, to the effect that: 1. The statements set forth in the Registration Statement and the Prospectus under the caption "Business - Legislation and Regulation - TV," insofar as such statements constitute a summary with respect to FCC matters of material (i) statements of law, (ii) statutes, rules, or regulations, or (iii) legal conclusions, fairly present the information contained under such caption. 2. The execution, delivery, and performance in accordance with their terms of the Operative Documents by the Company and the Wayland Affiliates that is a party thereto does not require any authorization, consent, or approval of the FCC not previously obtained, and does not violate the Communications Acts of 1934, as amended, and the published rules, regulations and policies promulgated thereunder by the FCC. Appendix C Form of Opinion of Murtha, Cullina, Richter and Pinney Murtha, Cullina, Richter and Pinney shall have furnished to the Representatives its written opinion, as special regulatory counsel for Pegasus Cable Television, Inc., __________ and Pegasus Cable Television of Connecticut, Inc. (the "Murtha Affiliates"), addressed to the Underwriters and dated such Delivery Date, to the effect that there are no facts that causes such counsel to believe that the Registration Statement or the Prospectus, either at October __, 1996 or the Delivery Date, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statement therein not misleading with respect to the Murtha Affiliates' cable television operations and activities in Connecticut and Massachusetts. EX-2.5 3 CONTRIBUTION AND EXCHANGE AGREEMENT AMENDMENT NO. 2 TO CONTRIBUTION AND EXCHANGE AGREEMENT This AMENDMENT NO. 2 ("Amendment") made and entered into as of the 3rd day of September, 1996, by and between PEGASUS COMMUNICATIONS HOLDINGS, INC. ("Pegasus"), a Delaware corporation, and HARRON COMMUNICATIONS CORP. ("Harron"), a New York corporation. Pegasus and Harron are collectively referred to herein as the "Parties." R E C I T A L S: WHEREAS, the Parties have entered into that certain Contribution and Exchange Agreement dated as of May 30, 1996, as amended by Amendment No. 1 dated as of August 19, 1996 ("Agreement"); and WHEREAS, the Parties wish to amend the Agreement as provided herein. NOW, THEREFORE, in consideration of the premises and mutual promises made herein and in the Agreement, and in consideration of the representations, warranties and covenants contained herein and in the Agreement, and intending to be legally bound hereby, the Parties agree that Section 2.2 of the Agreement shall be amended in its entirety as follows: Section 2.2. Consideration. In exchange for Harron's contribution of the Assets to PCC, Pegasus shall cause PCC to pay to Harron the following consideration ("Consideration"): (a) Cash in an amount equal to $17,894,319 minus the amount of the Current Liabilities ("Cash Consideration"), subject to the Operating Adjustment. (b) The number of shares of Unregistered Class A Common Stock that could be purchased for $11,929,546 at the price at which the Registered Class A Common Stock is first sold to the public in the IPO ("Stock Consideration"). IN WITNESS WHEREOF, the Parties hereto have duly executed this Amendment as of the day and year first above written. PEGASUS COMMUNICATIONS HOLDINGS, INC. By: /s/ Ted S. Lodge --------------------------------------- Ted S. Lodge, Senior Vice President HARRON COMMUNICATIONS CORP. By: /s/ John F. Quigley, III ----------------------------------------- John F. Quigley, III, Vice President and Chief Financial Officer EX-3.1 4 CERTIFICATE OF INCORPORATION CERTIFICATE OF INCORPORATION OF PEGASUS COMMUNICATIONS AND MEDIA CORPORATION THE UNDERSIGNED, for the purpose of forming a corporation pursuant to the provisions of the Delaware General Corporation Law, does hereby certify as follows: FIRST: The name of the Corporation is PEGASUS COMMUNICATIONS AND MEDIA CORPORATION (the "Corporation"). SECOND: The address of the Corporation's registered office in the State of Delaware is 103 Springer Building, 3411 Silverside Road, Wilmington, Delaware, 19810. The name of the Corporation's registered agent at such address is Organization Services, Inc., in the County of New Castle. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is 5,000 shares, divided into 3,000 shares of Class A Common Stock par value $0.01 per share, 1,500 shares of Class B Common Stock, par value $0.01 per share and 500 shares of Preferred Stock, par value $0.01 per share. No stockholder shall have any preemptive right to subscribe to or purchase any issue of stock or other securities of the Corporation, or any treasury stock or other treasury securities. The powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights are as follows: I. PREFERRED STOCK 1. General. The Board of Directors shall have authority, by resolution, to divide any or all of the shares of Preferred Stock into, and to authorize the issue of, one or more series, and with respect to each such series to establish and, prior to the issue thereof, to fix and determine: (a) a distinguishing designation for such series and the number of shares comprised by such series, which number may (except as otherwise provided by the Board of Directors in creating such series) be increased or decreased from time to time (but not below the number of shares then outstanding) by action of the Board of Directors; (b) the rate and times at which and the other conditions on which dividends, if any, on the shares may be declared and paid or set aside for payment; whether the shares shall be entitled to any participating or other dividends in addition to dividends at the rate so determined and, if so, on what terms; and whether dividends shall be cumulative and, if so, from what date or dates and on what terms; (c) whether or not the shares shall have voting rights, in addition to the voting rights provided by law and, if so, the terms and conditions thereof; (d) whether the shares shall be convertible or exchangeable, at the option of either the holder or the Corporation or upon the happening of a specified event, and, if so, the terms and conditions of such conversion or exchange, including provisions for any adjustment of the conversion or exchange rate; (e) whether or not the shares shall be redeemable and, if so, the terms and conditions, if any, upon which they may be redeemed, including the date or dates or event or events upon or after which they shall be redeemable, the cash, property or rights (including securities of the Corporation and of a corporation or corporations other than the Corporation) for which they may be redeemed, whether they shall be redeemable at the option of the holder or the Corporation, or both, or upon the happening of a specified event or events and the amount or rate of cash, property or rights (including securities of the Corporation and of a corporation or corporations other than the Corporation) per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates, including provisions for any adjustment of the redemption prices or rates; (f) whether any shares shall be redeemed through sinking fund payments and, if so, on what terms; (g) the amounts payable upon shares in the event of voluntary or involuntary liquidation, dissolution, winding up or distribution of the assets of the Corporation; and (h) the subject to the provisions of the next succeeding paragraph of this Section 1 of Part I, any other relative powers, preferences and rights and qualifications, limitations and restrictions of such series. In the resolution establishing a new series of Preferred Stock, the Board of Directors may provide for such additional rights, and with respect to rights as to dividends, redemption and liquidation, such relative preferences between shares of different series, as are not -2- inconsistent with the rights of any outstanding shares of previously established series, and not inconsistent with any other provision of this Article FOURTH, but in the resolution creating a new series of Preferred Stock the Board of Directors may provide that such series shall have a preference over outstanding shares of any previously created series of Preferred Stock with respect to rights as to dividends, redemption and liquidation only to the extent that the resolutions of the Board of Directors authorizing such previously created series expressly so permit. All shares of Preferred Stock of all series shall be identical except as to the above mentioned rights and preferences which the Board of Directors is authorized as aforesaid to fix and determine. Except to the extent that the resolution of the Board of Directors establishing a particular series shall otherwise provide: (i) in case the stated dividends are not paid in full, all shares of Preferred Stock of all series shall participate ratably in the payment of dividends, including accumulated but unpaid dividends, in accordance with the sums which would be payable thereon if all dividends thereon were declared and paid in full, and (ii) in case amounts payable upon liquidation of all series are not paid in full, all shares of Preferred Stock of all series having a liquidation preference on a parity with one another shall participate ratably in any distribution of assets other than by way of dividends, in accordance with the sums which would be payable on such distribution if all sums payable thereon to holders of all shares of Preferred Stock were discharged in full. 2. Dividends. When and as declared by the Board of Directors, in its discretion or upon the occurrence of conditions specified in the resolution of the Board of Directors authorizing a particular series of Preferred Stock (including, without limitation, the sole specified condition that funds for the payment of any dividend be legally available for the payment of dividends under the laws of the State of Delaware as in effect at the time any periodic dividend is declared or payable, in which event the Board of Directors, in considering the payment of a dividend on such a series of Preferred Stock, shall not exercise any element of discretion which it might otherwise exercise in determining whether a dividend should be declared and paid), the holders of the shares of Preferred Stock shall be entitled to receive out of any funds of the Corporation lawfully available for dividends under the laws of the State of Delaware, dividends at such fixed rate, if any (or, if participating, such participating rate and such fixed rate, if any), per share for each particular series, and no more, payable with such frequency and on such dates, and payable in cash, in property or in rights (including securities of the Corporation or of one or more corporations or other legal entities other than the Corporation), or a combination thereof, in each case as the Board of Directors may determine in fixing and determining the rights and preferences of such series as above provided. Except to the extent that the resolution of the Board of Directors establishing a particular series shall provide that dividends on shares of such series shall not be cumulative or shall otherwise provide, such dividends on the Preferred Stock shall be cumulative from the dates as follows: -3- (a) in the case of shares issued prior to the record date for the initial dividend on shares of the series of which such shares shall constitute a part, then from the date of issuance of such shares; (b) in the case of shares issued during the period commencing immediately after the record date for a dividend on shares of such series and terminating at the close of the payment date for such dividend, then from such dividend payment date; and (c) otherwise, from the dividend payment date next preceding the date of issuance of such shares. Accrued but undeclared or unpaid dividends on any shares of Preferred Stock shall not bear interest. Further restrictions with respect to dividends and distributions on, and acquisitions for value of, shares of Preferred Stock and shares of Class A Common Stock and Class B Common Stock are set forth in Section 6 of this Part 1. 3. Redemption of Preferred Stock. Except as otherwise provided in Section 6 of this Part 1, and except to the extent that the resolution of the Board of Directors establishing a particular series shall provide that shares of such series (a) shall not be redeemable by the Corporation or (b) shall be redeemable by the Corporation only after a specified date or period or subject to any other condition or conditions or (c) shall be redeemable in another manner, the Corporation may redeem all or any of the outstanding shares of Preferred Stock, or all or any shares of any series thereof, at any time or from time to time, upon payment in respect of the shares so redeemed of the amount payable upon redemption thereof fixed as aforesaid by the Board of Directors in respect of the series of which such shares shall constitute a part, together in each case, to the extent that such shares have cumulative dividend rights, with an amount equal to all accumulated and unpaid dividends accrued thereon to the date of redemption, whether or not such dividends shall have been earned or declared (such price, including such amount equal to such accumulated and unpaid dividends, and whether payable in cash, property or rights or a combination thereof, as hereinafter provided, being hereinafter called the "redemption price"). In fixing the redemption price for shares of Preferred Stock of a particular series as aforesaid, the Board of Directors shall specify whether such redemption price shall be paid in cash, in property or in rights (including securities of the Corporation or of one or more legal entities other than the Corporation), or a combination thereof. If the redemption price of shares of a particular series may be paid in whole or in part in property or rights, the resolution fixing the redemption price shall specify the method to be followed in valuing the property or rights which may be used to make such payment. Any redemption by the Corporation shall be in such amount, at such place and in such manner as the Board of Directors shall determine. Except to the extent that the -4- resolution of the Board of Directors authorizing a particular series of Preferred Stock shall otherwise provide, in the case of a redemption by the Corporation of less than all the outstanding shares of Preferred Stock of any series, the particular shares to be redeemed shall be selected by lot in such manner as the Board of Directors shall determine. Unless otherwise waived in writing by the holder thereof, notice of every redemption shall be mailed at least 30 days (or such shorter period as shall be specified in the resolutions of the Board of Directors establishing the particular series) prior to the date fixed for such redemption to the holders of record of the shares so to be redeemed at their respective addresses as the same shall appear on the books of the Corporation. From and after the date fixed in any such notice as the date of redemption by the Corporation, unless default shall be made by the Corporation in providing the redemption price at the time and place specified for the payment thereof pursuant to said notice, all dividends on the shares of Preferred Stock thereby called for redemption shall cease to accrue and all rights of the holders thereof as stockholders in the Corporation, except the right to receive the redemption price upon surrender of their share certificates, shall cease and terminate, and such shares shall not be deemed outstanding for any purpose. The Corporation may, however, give or irrevocably authorize the Depositary hereinafter mentioned forthwith to give written notice (in the manner as the notice of redemption is required to be given as aforesaid) to the holders of all the shares of Preferred Stock selected for redemption by the Corporation that the redemption price has been or will on a date specified be deposited with a designated bank, bank and trust company, or private bank, which shall have an office in Wilmington, Delaware, Philadelphia, Pennsylvania, or New York, New York, and shall have a capital and surplus of not less than $25,000,000 (hereinafter called the "Depositary"), in trust for the account of the holders of such shares of Preferred Stock, and that such holders may receive the redemption price of such shares of Preferred Stock from such Depositary on or after the date of such deposit upon the surrender of their share certificates without awaiting the date fixed for redemption. In such event, if the redemption price shall have been so deposited by the Corporation with such Depositary, all rights as stockholders in the Corporation of the holders of the shares so called, except the right to receive the redemption price from such Depositary upon such surrender, shall cease and terminate upon the date of such deposit or the date of the giving of such notice or authority, whichever be later, and such shares of Preferred Stock shall thereafter not be deemed to be outstanding for any purpose; but if any shares so called for redemption shall at that time be convertible, the conversion privilege may be exercised in accordance with its terms, but not later than the close of business on the day prior to the date fixed for redemption. Any portion of the redemption price so deposited which represents the redemption price of convertible shares which are actually converted shall promptly be repaid by the Depository to the Corporation. Any remaining portion of the redemption price so deposited which shall remain unclaimed by the holders of such shares of Preferred Stock at the end of two years after the date so fixed for redemption shall be paid by such Depositary to the Corporation, after which the holders of such shares of Preferred Stock shall look only to the Corporation for payment of the redemption price thereof. -5- Shares of Preferred Stock of any series redeemed, purchased or otherwise acquired may be cancelled by the Board of Directors and thereupon restored to the status of authorized but unissued shares of Preferred Stock undesignated as to series. 4. Liquidation or Dissolution. Except to the extent that the resolution of the Board of Directors establishing a particular series, shall otherwise provide with respect to shares of such series, on any voluntary or involuntary liquidation or dissolution of the Corporation, before any payment or distribution shall be made to the holders of any Common Stock, the holders of the shares of Preferred Stock shall be entitled to be paid the amounts, if any, respectively fixed therefor as aforesaid by the Board of Directors in respect of each outstanding series of Preferred Stock, together in each case, to the extent such shares have cumulative dividend rights, with an amount equal to all accumulated and unpaid dividends thereon to the date of such payment, whether or not such dividends shall have been earned or declared. After such payment shall have been made in full to the holders of shares of Preferred Stock, they shall be entitled to no further payment or distribution, and the holders of Common Stock and Class A Common Stock shall be entitled to share ratably in all remaining assets of the Corporation. A consolidation with or merger with or into any other corporation or corporations shall not be deemed a liquidation or dissolution of the Corporation within the meaning of this Section 4 of Part I. 5. Voting Rights. Except to the extent that the resolution of the Board of Directors establishing a particular series shall otherwise provide, and except as otherwise provided herein or by law, at each meeting of stockholders of the Corporation, each holder of shares of Preferred Stock shall be entitled to one vote for each such share standing in his or her name on the books of the Corporation on each matter to come before the meeting. The resolution of the Board of Directors establishing a particular series may confer on holders of the shares of such series, voting separately or with holders of shares of Preferred Stock of other series, the right to elect a member or members of the Board of Directors at any time or from time to time. 6. Restrictions on Dividends and Purchase of Shares of Preferred and Common Stock. (a) So long as any shares of Preferred Stock shall be outstanding, no dividend (other than dividends payable in shares of Class A Common Stock or Class B Common Stock) shall be paid or distribution shall be made on the shares of Class A Common Stock or Class B Common Stock, nor shall any shares of Class A Common Stock or Class B Common Stock be purchased, retired or otherwise acquired by the Corporation, unless in each such case: -6- (1) all accumulated and unpaid dividends, if any, on all outstanding shares of Preferred Stock for all past dividend periods shall have been paid and full dividends, if any, on all shares of Preferred Stock for the then current dividend period declared and a sum sufficient for the payment thereof set apart; and (2) the Corporation shall not be in arrears in respect of any sinking fund obligation or obligations of a similar nature in respect of any series of Preferred Stock. (b) The resolutions of the Board of Directors establishing a particular series of Preferred Stock may provide that the payment of any dividend or the making of any distribution on, or the redemption, purchase or other acquisition (for sinking fund purposes or otherwise) by the Corporation of, shares of that series or any other series of Preferred Stock (but, in the case of any other series established before the series in question, only if the resolution of the Board of Directors establishing such other series so permits) shall be conditioned on: (1) the payment of all accumulated and unpaid dividends, if any, on all outstanding shares of Preferred Stock of one or more specified series and the declaration of full dividends, if any, on all shares of Preferred Stock of one or more specified series for the then current dividend period and the setting apart of a sum sufficient for the payments thereof; (2) the absence of any arrearage in respect of any sinking fund obligation or obligations of a similar mature in respect of one or more specified series of Preferred Stock; or (3) any other condition specified in such resolution. 7. Certain Matters Requiring Consent of Holders of Two-Thirds of Preferred Stock. So long as any shares of Preferred Stock shall be outstanding, and subject to the provisions of the last sentence of this Section 7 of Part I, the Corporation shall not, without the consent of the holders of at least two-thirds of the shares of Preferred Stock at the time outstanding, voting as a single class and not separately by series, given in person or by proxy, either in writing or at a meeting called for the purpose: (a) adopt or effect any amendment to the Corporation's Certificate of Incorporation, including any amendment to the terms of any previously created series of Preferred Stock, other than an amendment of the nature described under Section 8 of this Part I, which would adversely affect the powers, preferences or special rights of the Preferred Stock; but if any such amendment shall adversely affect the powers, preferences or special rights of one or more, but not all, of the several series of Preferred Stock at the time outstanding, the consent of the holders of at least two-thirds of the shares then outstanding of those series adversely affected, voting together -7- and not by series, shall be required in lieu of the consent of the holders of two-thirds of the Preferred Stock; or (b) authorize any new class of stock which is senior to the Preferred Stock with respect to the payment of dividends or distributions on liquidation or dissolution. Notwithstanding the foregoing provisions, the resolution of the Board of Directors creating a particular series may provide that the consent of the holders of the outstanding shares of such series shall not be required with respect to some or all of the foregoing matters and, to the extent so provided, such shares shall not be deemed outstanding for the purpose of applying the provisions of this Section 7 of Part I. 8. Certain Matters Requiring Consent of Holders of Majority of All Outstanding Shares. The Corporation may increase the authorized number of shares of Preferred Stock, or authorize any new class of stock which is on a parity with the Preferred Stock with respect to the payment of dividends or distributions on liquidation or dissolution, by obtaining the affirmative vote, given in person or by proxy, of the holders of at least a majority of the then outstanding Class A Common Stock, Class B Common Stock and Preferred Stock, voting together and not by class. II. CLASS A COMMON STOCK AND CLASS B COMMON STOCK 1. Dividends. (a) Subject to the rights of the holders of Preferred Stock, and subject to any other provisions of this Certificate of Incorporation, as amended from time to time, the holders of Class A Common Stock and the holders of Class B Common Stock shall be entitled to receive such dividends and other distributions in cash or property of the Corporation, or, subject to subsection (b), securities or obligations of the Corporation, as may be declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor; but except as provided in subsection (b), a dividend may be declared and paid on shares of either the Class A Common Stock or the Class B Common Stock only if an identical dividend shall be simultaneously declared and paid on each share of the other class. (b) In the case of dividends or other distributions payable on the Class A Common Stock or the Class B Common Stock, including distributions pursuant to stock splits or divisions of the Class A Common Stock or the Class B Common Stock, (1) only Class A Common Stock shall be paid or distributed on the Class A Common Stock, and only Class B Common Stock shall be paid or distributed on the Class B Common Stock, and (2) any such payment or distribution on either class may be made only if parallel action is simultaneously taken in respect of the other class, so that the number of shares of each class outstanding immediately following such stock dividend, stock split or stock division shall bear the same -8- relationship to each other as the number of shares of each class outstanding immediately before such stock dividend, stock split or stock division. (c) In the case of any decrease in the number of outstanding shares of the Class A Common Stock or the Class B Common Stock resulting from a combination or consolidation of shares or other capital reclassification, parallel action shall be simultaneously taken in respect of the other class so that the number of shares of each class outstanding immediately following such combination, consolidation or capital reclassification shall bear the same relationship to each other as the number of shares of each class outstanding immediately before such combination, consolidation or capital reclassification. 2. Voting. (a) At every meeting of stockholders and in respect of each action by consent in writing of the holders, every holder of Class A Common Stock shall be entitled to one (1) vote in person or by proxy for each share of Class A Common Stock standing in his or her name on the transfer books of the Corporation, and every holder of Class B Common Stock shall be entitled to ten (10) votes in person or by proxy for each share of Class B Common Stock standing in his or her name on the transfer books of the Corporation. (b) Except as may be otherwise required by law or by Section 2(c) of this Part II, the holders of Class A Common Stock and Class B Common Stock shall vote together as a single class on all matters with respect to which a vote of the shareholders of the Corporation is required or permitted under applicable law, including, without limitation, any amendment of this Certificate of Incorporation, subject to any voting rights that may be granted to holders of Preferred Stock. (c) Notwithstanding Section 2(b) of this Part II, but subject to any voting rights that may be granted to holders of Preferred Stock, any amendment to this Certificate of Incorporation that has any of the following effects may be authorized only by the vote of the holders of a majority of the outstanding shares of the Class A Common Stock and a majority of the outstanding shares of the Class B Common Stock, voting as separate classes: (1) any decrease in the voting rights per share of the Class A Common Stock or any increase in the voting rights per share of the Class B Common Stock; (2) any increase in the number of shares of Class A Common Stock into which shares of Class B Common Stock are convertible, as provided herein; (3) any relaxation on the restrictions on transfer of the Class B Common Stock, as provided herein; (4) the authorization or issuance (other than issuances that comply with Section 1(b)(2) of this Part II) of additional shares of Class B Common Stock after the -9- closing date of the Corporation's initial public offering of shares of Class A Common Stock registered under the Securities Act of 1933; or (5) any change in the powers, preferences or special rights of the Class A Common Stock or the Class B Common Stock adversely affecting the holders of the Class A Common Stock. 3. Transfer. (a) No person holding shares of Class B Common Stock of record (hereinafter called "Class B Holder") may transfer, and the Corporation shall not register the transfer of, such shares of Class B Common Stock, whether by sale, assignment, gift, bequest, appointment, operation of law or otherwise, except to a Permitted Transferee. "Permitted Transferee" means: (1) Marshall W. Pagon or any immediate family member of his; or (2) any trust (including a voting trust), corporation, partnership or other entity, more than 50% of the voting equity interests of which are owned directly or indirectly by (or, in the case of a trust not having voting equity interests, which is more than 50% for the benefit of) and which is controlled by, one or more persons referred to in Section 3(a)(1) of this Part II; or (3) the estate of any person referred to in Section 3(a)(1) of this Part II until such time as the property of such estate is distributed in accordance with his will or applicable law. For purposes of the definition of "Permitted Transferee": (A) "immediate family member" means (i) the spouse or any parent of Marshall W. Pagon, (ii) any lineal descendant of a parent of Marshall W. Pagon, and (iii) the spouse of any such lineal descendant (parentage and descent in each case to include adoptive and step relationships); and (B) "control" of a trust, corporation or other entity means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the trust, corporation or other entity, whether through the ownership of voting securities, by agreement or otherwise. (b) Notwithstanding anything to the contrary set forth herein, any Class B Holder may pledge such Holder's shares of Class B Common Stock to a pledgee pursuant to a bona fide pledge of such shares as collateral security for indebtedness due to the pledgee, provided that such shares shall not be transferred to or registered in the name of the pledgee and shall remain subject to the provisions of this Section 3. In the event of foreclosure or other similar action by the pledgee, such pledged shares of Class B Common Stock may be transferred only to a Permitted Transferee or may be converted into shares of Class A Common Stock, as the pledgee may elect. -10- (c) The following events shall result in the conversion of the applicable shares of Class B Common Stock into shares of Class A Common Stock: (1) a Class B Holder shall transfer Class B Common Stock to a person or entity not a Permitted Transferee; (2) a Class B Holder shall transfer to any person or entity not a Permitted Transferee, including, without limitation, a pledgee, the right to vote any Class B Common Stock, whether by agreement, voting trust or otherwise; or (3) a trust, corporation, partnership or other entity holding Class B Common Stock ceases to meet the description contained in Section 3(a)(2) of this Part II. If any of the foregoing events shall occur, all shares of Class B Common Stock subject to such transfer or then held by such trust, corporation, partnership or other entity, whichever is applicable, shall, without further act on anyone's part, be converted into shares of Class A Common Stock effective upon the date such event occurs, and stock certificates formerly representing such shares of Class B Common Stock shall thereupon and thereafter be deemed to represent the like number of shares of Class A Common Stock. The Corporation may, in connection with preparing a list of shareholders entitled to vote at any meeting of shareholders, or as a condition to the transfer or the registration of shares of Class B Common Stock on the Corporation's books, require the furnishing of such affidavits, documents or other proof as it deems necessary to establish that any person is a Permitted Transferee or to ascertain that none of the events described in this subsection (c) has occurred. (d) Shares of Class B Common Stock shall be registered in the names of a beneficial owner thereof and not in "street" or "nominee" name. For this purpose, a "beneficial owner" of any shares of Class B Common Stock means a person or entity that possesses the power, either singly or jointly, to direct the voting or disposition of such shares. The Corporation shall note on the certificates for shares of Class B Common Stock the existence of the restrictions on transfer imposed by this Section 3. 4. Conversion Rights. (a) Subject to the terms and conditions of this Section 4, each share of Class B Common Stock shall be convertible at any time or from time to time, at the option of the respective holder thereof, at the office of any transfer agent for Class B Common Stock, and at such other place or places, if any, as the Board of Directors may designate, or, if the Board of Directors shall fail so to designate, at the principal office of the Corporation, into one (1) fully paid and nonassessable share of Class A Common Stock. Upon conversion, the Corporation shall make no payment or adjustment on account of dividends accrued or in arrears on Class B Common Stock surrendered for conversion or on account of any dividends -11- on the Class A Common Stock issuable on such conversion. Before any holder of Class B Common Stock shall be entitled to convert the same into Class A Common Stock, he shall surrender the certificate or certificates for such Class B Common Stock at the office of said transfer agent (or other place as provided above), which certificate or certificates, if the Corporation shall so request, shall be duly endorsed to the Corporation in blank or be accompanied by proper instruments of transfer to the Corporation in blank (such endorsements or instruments of transfer to be in form satisfactory to the Corporation), and shall give written notice to the Corporation at said office that he elects so to convert said Class B Common Stock in accordance with the terms of this Section 4 and shall state in writing therein the name or names in which he wishes the certificate or certificates for Class A Common Stock to be issued. The Corporation will as soon as practicable after such deposit of a certificate or certificates for Class B Common Stock, accompanied by the written notice and the statement above prescribed, issue and deliver at the office of said transfer agent (or other place as provided above) to the person for whose account such Class B Common Stock was so surrendered, or to his nominee or nominees, a certificate or certificates for the number of full shares of Class A Common Stock to which he or she shall be entitled as aforesaid. Subject to the provisions of subsection (c) of this Section 4, such conversion shall be deemed to have been made as of the date of such surrender of the Class B Common Stock to be converted; and the person or persons entitled to receive the Class A Common Stock issuable upon conversion of such Class B Common Stock shall be treated for all purposes as the record holder of holder of such Class A Common Stock on such date. (b) The issuance of certificates for shares of Class A Common Stock upon conversion of shares of Class B Common Stock shall be made without charge for any stamp or other similar tax in respect of such issuance. However, if any such certificate is to be issued in a name other than that of the holder of the share or shares of Class B Common Stock converted, the person or persons requesting the issuance thereof shall pay to the Corporation the amount of any tax which may be payable in respect of any transfer involved in such issuance or shall establish to the satisfaction of the Corporation that such tax has been paid. (c) The Corporation shall not be required to convert Class B Common Stock, and no surrender of Class B Common Stock shall be effective for that purpose, while the stock transfer books of Class A Common Stock or Class B Common Stock are closed for any purpose; but the surrender of Class B Common Stock for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books, as if the conversion had been made on the date such Class B Common Stock was surrendered. (d) The Corporation covenants that it will at all times reserve and keep available, solely for the purpose of issuance upon conversion of the outstanding shares of Class B Common Stock, such number of shares of Class A Common Stock as shall be issuable upon the conversion of all such outstanding shares, but nothing contained herein shall be -12- construed to preclude the Corporation from satisfying its obligations in respect of the conversion of the outstanding shares of Class B Common Stock by delivery of shares of Class A Common Stock held in the treasury of the Corporation. The Corporation covenants that if any shares of Class A Common Stock, required to be reserved for purposes of conversion hereunder, require registration with or approval of any governmental authority under any federal or state law before such shares of Class A Common Stock may be issued upon conversion, the Corporation will use its best efforts to cause such shares to be duly registered or approved, as the case may be. The Corporation will endeavor to list the shares of Class A Common Stock required to be delivered upon conversion prior to such delivery upon each national securities exchange, if any, upon which the outstanding Class A Common Stock is listed at the time of such delivery. The Corporation covenants that all shares of Class A Common Stock which shall be issued upon conversion of the shares of Class B Common Stock, will, upon issuance, be fully paid and nonassessable and not entitled to an preemptive rights. (e) Shares of Class A Common Stock, including shares originally issued upon conversion of Class B Common Stock, shall not be convertible into Class B Common Stock or any other class of stock. 5. Subscription and Related Rights; Mergers and Other Transactions. In the event that rights to subscribe to Class A Common Stock, options or warrants to purchase Class A Common Stock, or any securities convertible into Class A Common Stock are offered or granted to all holders of Class A Common Stock or Class B Common Stock, parallel action shall be simultaneously taken in respect of the other class, so that the number of shares of each class that would be outstanding immediately after the exercise in full of such rights, options or warrants or the conversion of such convertible securities shall bear the same relationship to each other as the number of shares of each class outstanding immediately before the offer or grant of such rights, options, warrants or convertible securities. Except as provided in the following sentence, if there should be any merger, consolidation, purchase or acquisition of property or stock, separation, reorganization or liquidation of the Corporation, the holders of Class A Common Stock and the holders of Class B Common Stock shall receive the shares of stock, securities or other assets as would be issuable or payable upon such merger, consolidation, purchase or acquisition of such property or stock, separation, reorganization or liquidation as if the Class A Common Stock and the Class B Common Stock were one and the same class of stock. Notwithstanding the foregoing, in the event of a merger or consolidation which, by its terms, contemplates that the holders of Class B Common Stock will receive, in exchange for their Class B Common Stock, capital stock of the surviving corporation, the holders of Class B Common Stock shall be entitled (to the extent provided for in the terms of such merger or consolidation) to receive, in exchange for their Class B Common Stock, shares of stock of the surviving corporation having substantially similar relative designations, preferences, qualification, privileges, limitations, restrictions (including, without limitation, restrictions on transferability) and rights as the relative designations, preferences, qualifications, privileges, limitations, restrictions and rights of the Class B Common Stock. -13- 6. Liquidation Rights. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation, and after payment in full of amounts, if any, required to be paid to the holders of shares of stock having preferential liquidation rights, including without limitation the holders of Preferred Stock, the remaining assets of the Corporation shall be divided among and distributed ratably to the holders of Class A Common Stock and Class B Common Stock (including those persons who shall become holders of Class A Common Stock by reason of converting their shares of Class B Common Stock), with no distinction between the Class A Common Stock and the Class B Common Stock. A merger or consolidation of the Corporation with or into any corporation or other entity or a sale of all or any part of the assets of the Corporation (which shall not in fact result in the liquidation of the Corporation and the distribution of its assets to stockholders) shall not be deemed to be a dissolution, liquidation or winding up of the affairs of the Corporation within the meaning of this Section 6. 7. Other Rights. Except as expressly set forth in this Article FOURTH, each share of Class A Common Stock shall entitle the holder thereof to rights that are in all respects identical to the rights of a holder of Class B Common Stock. FIFTH: The name and mailing address of the incorporator is as follows: Name Mailing Address ----- --------------- Michael B. Jordan Drinker Biddle & Reath Philadelphia National Bank Building 1345 Chestnut Street Philadelphia, PA 19107-3496 SIXTH: In furtherance and not in limitation of the general powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to make, alter or repeal the bylaws of the Corporation, except as specifically otherwise provided therein. SEVENTH: A director of the Corporation shall have no personal liability to the Corporation or 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. No amendment or repeal of this Article SEVENTH shall apply to or affect the liability or alleged liability of any director of the Corporation for or in respect of any act or omission of such director occurring before such amendment or repeal. -14- IN WITNESS WHEREOF, the undersigned, being the incorporator hereinabove named, does hereby execute this Certificate of Incorporation this 30th day of May 1996. /s/ Michael B. Jordan ------------------------- Michael B. Jordan Incorporator -15- CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF PEGASUS COMMUNICATIONS AND MEDIA CORPORATION ---------------- Pegasus Communications and Media Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: 1. That the Board of Directors of this Corporation, by unanimous written consent of all of its members, adopted the following resolutions to amend its Certificate of Incorporation: RESOLVED, that Article First of the Certificate of Incorporation of this Corporation be amended to read in its entirety as follows: 1. The name of the Corporation is PEGASUS COMMUNICATIONS CORPORATION (the "Corporation"). RESOLVED, that Article Fourth, Part II, Section 2(c) of the Certificate of Incorporation of this Corporation be amended to read in its entirety as follows: (c) Notwithstanding Section 2(b) of this Part II, but subject to any voting rights that may be granted to holders of Preferred Stock, the following matters may be authorized only by the vote of the holders of a majority of the outstanding shares of the Class A Common Stock and a majority of the outstanding shares of the Class B Common Stock, voting as separate classes: (i) the authorization or issuance (other than issuances that comply with Section 1(b)(2) of this Part II) of additional shares of Class B Common Stock after the closing date of the Corporation's initial public offering of shares of Class A Common Stock under the Securities Act of 1933; and (ii) any amendment to this certificate of Incorporation that has any of the following effects: (1) any decrease in the voting rights per share of Class A Common Stock or any increase in the voting rights per share of the Class B Common Stock; (2) any increase in the number of shares of Class A Common Stock into which shares of Class B Common Stock are convertible, as provided herein; (3) any relaxation on the restrictions on transfer of the Class B Common Stock, as provided herein; or (4) any change in the powers, preferences or special rights of the Class A Common Stock or the Class B Common Stock adversely affecting the holders of the Class A Common Stock. 2. That the aforesaid amendment was consented to and authorized by all of the Stockholders entitled to vote of this Corporation by unanimous written consent given in accordance with Section 228 of the General Corporation Law of the State of Delaware. 3. That the aforesaid amendment was duly adopted in accordance with Sections 242 and 228 of the General Corporation Law of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by Michael B. Jordan, the Assistant Secretary of the Corporation, this 3rd day of July, 1996. /s/ Michael B. Jordan ---------------------------- Michael B. Jordan Assistant Secretary CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF PEGASUS COMMUNICATIONS CORPORATION ---------------- PEGASUS COMMUNICATIONS CORPORATION, a corporation organized and existing under and by virtue of the Delaware General Corporation Law, as amended (the "Company"), DOES HEREBY CERTIFY THAT: FIRST: The Board of Directors of the Company has, by unanimous written consent of its directors, adopted the following resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of the Company (the "Amendment"): RESOLVED, that the first sentence of Article FOURTH of the Company's Certificate of Incorporation, as amended, be amended to read as follows (the "Amendment") and is hereby proposed and declared to be advisable and in the best interests of the Company: "FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is 50,000,000 shares, divided into 30,000,000 shares of Class A Common Stock, par value $0.01 per share, 15,000,000 shares of Class B Common Stock, par value $0.01 per share and 5,000,000 shares of Preferred Stock, par value $0.01 per share." SECOND: Thereafter, pursuant to resolution of its Board of Directors, in lieu of a meeting and vote of stockholders, the sole stockholder of the common stock of the Company entitled to vote thereon has given a written consent to the Amendment in accordance with the provisions of the Delaware General Corporation Law, as amended. THIRD: The Amendment has been duly adopted in accordance with the provisions of Sections 242 and 228 of the Delaware General Corporation Law, as amended. IN WITNESS WHEREOF, the Company has caused this certificate to be signed by its Senior Vice President, General Counsel, Chief Administrative Officer and Assistant Secretary, this 11th day of September 1996. /s/ Ted Lodge ------------------------------- Ted S. Lodge Senior Vice President, General Counsel, Chief Administrative Officer and Assistant Secretary -2- EX-5.1 5 EXHIBIT 5.1 Exhibit 5.1 DRINKER BIDDLE & REATH Philadelphia National Bank Building 1345 Chestnut Street Philadelphia, PA 19107-3496 Telephone: (215) 988-2700 Fax: (215) 988-2757 September 30, 1996 Pegasus Communications Corporation c/o Pegasus Communications Management Company 100 Matsonford Road Suite 454, 5 Radnor Corporate Center Radnor, PA 19087 Re: Registration Statement on Form S-1 Ladies and Gentlemen: As counsel to Pegasus Communications Corporation, a Delaware corporation (the "Company"), we have assisted in the preparation and filing of the Company's Registration Statement on Form S-1, File No. 333-05057 (the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), covering (i) 3,000,000 shares of the Company's Class A common stock, par value $.01 per share (the "Class A Common Stock") which are being sold by the Company and (ii) up to 450,000 shares of Class A Common Stock which the Underwriters will have an option to purchase from the Company solely for the purpose of covering over-allotments, if any, pursuant to the terms of an underwriting agreement (the "Underwriting Agreement"). All of the shares of Class A Common Stock will be sold by the underwriters for whom Lehman Brothers Inc., B.T. Securities Corporation, CIBC Wood Gundy Securities Corp. and PaineWebber Incorporated are acting as representatives (collectively, the "Underwriters"). In this connection, we have examined the originals or copies, certified or otherwise identified to our satisfaction, of the Certificate of Incorporation and By-laws of the Company, as amended, minutes and resolutions of the Company's Board of Directors and such other documents and corporate records relating to the Company and the issuance of the Class A Common Stock as we have deemed appropriate for the purpose of rendering this opinion. We express no opinion concerning the laws of any jurisdiction other than the federal law of the United States and the General Corporation Law of the State of Delaware. In all examinations of documents, instruments and other papers, we have assumed the genuineness of all signatures on Pegasus Communications Corporation September 30, 1996 Page 2 original and certified documents and the conformity with original and certified documents of all copies submitted to us as conformed, photostatic or other copies. As to matters of fact which have not been independently established, we have relied upon representations of officers of the Company. On the basis of the foregoing, it is our opinion that (i) appropriate corporate action has been taken to authorize the sale and issuance of up to 3,450,000 shares of Class A Common Stock to be sold by the Company to the Underwriters (including up to 450,000 shares to be issued pursuant to the over-allotment option), and (ii) when issued and sold pursuant to the terms of the Underwriting Agreement, such shares of Class A Common Stock will be legally issued, fully paid and nonassessable. We hereby consent to the reference to our firm under the caption "Legal Matters" in the 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 as 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. Very truly yours, /s/DRINKER BIDDLE & REATH DRINKER BIDDLE & REATH EX-10.27 6 CREDIT AGREEMENT Exhibit 10/27 CREDIT AGREEMENT among PEGASUS MEDIA & COMMUNICATIONS, INC. THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO - and - CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY as Agent Dated as of August 29, 1996 TABLE OF CONTENTS
SECTION PAGE NO. RECITALS ...................................................................... 1 I. GENERAL TERMS.................................................................... 1 1.01 Reducing Revolver Facilities.......................................... 1 1.02 Revolving Lines of Credit............................................. 2 1.03 Interest on the Notes................................................. 3 1.04 Requests for Advances; Type of Loan................................... 6 1.05 Loan Disbursements.................................................... 7 1.06 Payments, Prepayments and Termination or Reduction of the Commitments........................................................... 7 1.07 Fees.................................................................. 11 1.08 Requirements of Law................................................... 11 1.09 Limitations on LIBOR Loans; Illegality................................ 12 1.10 Taxes................................................................. 13 1.11 Indemnification....................................................... 14 1.12 Payments Under the Notes.............................................. 14 1.13 Set-Off, Etc.......................................................... 15 1.14 Pro Rata Treatment; Sharing........................................... 16 1.15 Non-Receipt of Funds by the Agent..................................... 16 1.16 Replacement of Notes.................................................. 17 II. SECURITY; SUBORDINATION; USE OF PROCEEDS......................................... 17 2.01 Security for the Obligations; Subordination; Etc...................... 17 2.02 Use of Proceeds....................................................... 18 III. CONDITIONS OF MAKING THE LOANS................................................... 18 3.01 Conditions to the First Advances...................................... 18 3.02 Acquisition Loans..................................................... 21 3.03 All Loans............................................................. 23 3.04 Lender Approvals...................................................... 23 IV. REPRESENTATIONS AND WARRANTIES................................................... 23 4.01 Financial Statements.................................................. 23 4.02 Organization, Qualification, Etc...................................... 24 4.03 Authorization; Compliance; Etc........................................ 24 4.04 Governmental and Other Consents, Etc.................................. 24 4.05 Litigation............................................................ 25 4.06 Compliance with Laws and Agreements................................... 25 4.07 Franchises; Licenses, Etc............................................. 25 4.08 The Systems........................................................... 26 4.09 Rate Regulation....................................................... 28 4.10 The Stations.......................................................... 28 4.11 DBS Rights............................................................ 29 4.12 Title to Properties; Condition of Properties.......................... 29 4.13 Interests in Other Businesses......................................... 29 4.14 Solvency.............................................................. 29 4.15 Full Disclosure....................................................... 30 4.16 Margin Stock.......................................................... 30 4.17 Tax Returns........................................................... 30 4.18 Pension Plans, Etc.................................................... 30 4.19 Material Agreements................................................... 30 4.20 Projections........................................................... 31 4.21 Brokers, Etc.......................................................... 31 4.22 Capitalization........................................................ 31 4.23 Environmental Compliance.............................................. 31 4.24 Investment Company Act................................................ 32 4.25 Labor Matters......................................................... 32 4.26 Senior Debt........................................................... 32
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V. FINANCIAL COVENANTS.............................................................. 32 5.01 Leverage.............................................................. 33 5.02 Interest Coverage..................................................... 33 5.03 Fixed Charges......................................................... 34 5.04 Pro Forma Debt Service Coverage....................................... 34 5.05 Capital Expenditures.................................................. 34 5.06 Restricted Payments................................................... 35 VI. AFFIRMATIVE COVENANTS............................................................ 35 6.01 Preservation of Assets; Compliance with Laws, Etc..................... 35 6.02 Insurance............................................................. 36 6.03 Taxes, Etc............................................................ 36 6.04 Notice of Proceedings, Defaults, Adverse Change, Etc.................. 37 6.05 Financial Statements and Reports...................................... 37 6.06 Inspection............................................................ 40 6.07 Accounting System..................................................... 40 6.08 Appraisals............................................................ 40 6.09 Additional Assurances................................................. 40 6.10 Completion of Improvements............................................ 41 6.11 Renewal of Franchises................................................. 41 6.12 Compliance with Environmental Laws.................................... 41 6.13 Interest Rate Protection.............................................. 42 VII. NEGATIVE COVENANTS............................................................... 42 7.01 Indebtedness.......................................................... 42 7.02 Liens................................................................. 43 7.03 Disposition of Assets; etc............................................ 44 7.04 Fundamental Changes; Acquisitions..................................... 44 7.05 Local Marketing Agreements, Etc....................................... 45 7.06 Management............................................................ 45 7.07 Sale and Leaseback.................................................... 45 7.08 Investments........................................................... 45 7.09 Change in Business.................................................... 45 7.10 Accounts Receivable................................................... 45 7.11 Transactions with Affiliates.......................................... 45 7.12 Amendment of Certain Agreements, Etc.................................. 45 7.13 ERISA................................................................. 46 7.14 Margin Stock.......................................................... 46 7.15 Negative Pledges, etc................................................. 46 VIII. DEFAULTS ...................................................................... 46
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IX. REMEDIES ON DEFAULT, ETC......................................................... 49 X. THE AGENT ...................................................................... 49 10.01 Appointment, Powers and Immunities.................................... 49 10.02 Reliance by Agent..................................................... 50 10.03 Events of Default..................................................... 50 10.04 Rights as a Lender.................................................... 50 10.05 Indemnification....................................................... 50 10.06 Non-Reliance on Agent and Other Lenders............................... 51 10.07 Failure to Act........................................................ 51 10.08 Resignation or Removal of Agent....................................... 51 10.09 Cooperation of Lenders................................................ 51 XI. DEFINITIONS...................................................................... 52 XII. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS; SEPARATE ACTIONS BY THE LENDERS.................................................. 69 XIII. BENEFIT OF AGREEMENT; ASSIGNMENTS AND PARTICIPATIONS................................................................... 70 XIV. MISCELLANEOUS.................................................................... 72 14.01 Survival.............................................................. 72 14.02 Fees and Expenses; Indemnity; Etc..................................... 72 14.03 Notice................................................................ 73 14.04 Governing Law......................................................... 74 14.05 CONSENT TO JURISDICTION, WAIVER OF JURY TRIAL............................................................ 74 14.06 Severability.......................................................... 74 14.07 Section Headings, Etc................................................. 75 14.08 Several Nature of Lenders' Obligations................................ 75 14.09 Counterparts.......................................................... 75 14.10 Knowledge and Discovery............................................... 75 14.11 Amendment of Other Agreements......................................... 75 14.12 FCC and Municipal Approvals........................................... 75 14.13 Disclaimer of Reliance................................................ 76 14.14 Environmental Indemnification......................................... 76 14.15 Designation of Senior Debt............................................ 76
iii INDEX OF SCHEDULES Schedule 1.01(a) Allocation of Loans and Commitments Schedule 1.01(c) Form of Reducing Revolving Credit Note Schedule 1.02 Form of Revolving Credit Note Schedule 1.04(a) Request for Advances Schedule 1.04(d) Interest Rate Option Notice Schedule 2.01 Exceptions to Security Schedule 2.02 Sources and Uses of Proceeds Schedule 4.01(a) Financial Statements Schedule 4.01(b) Opening Balance Sheet Schedule 4.01(c) Parent's Indebtedness Schedule 4.02 Organization, Etc. Schedule 4.04 Governmental and Other Consents Schedule 4.05 Litigation Schedule 4.07(a) Franchises Schedule 4.07(b) Licenses Schedule 4.09 Rate Regulation Schedule 4.10 Stations Schedule 4.11 DBS Agreements Schedule 4.12 Head-End and Tower Site Leases, Etc. Schedule 4.13 Interests in Other Businesses Schedule 4.18 Pension Plans Schedule 4.19 Material Agreements Schedule 4.20 Projections Schedule 4.22 Capitalization Schedule 4.23 Environmental Compliance Schedule 4.26 Senior Debt Schedule 6.05 Compliance Certificate Schedule 7.01 Indebtedness Schedule 7.02 Liens Schedule 13(b)(iv) Form of Assignment and Acceptance Schedule 13(b)(v) Form of Notice of Assignment and Acceptance CREDIT AGREEMENT AGREEMENT dated as of August 29, 1996, by and among CIBC INC. ("CIBC") and the various other financial institutions which are now, or in accordance with Article XIII hereafter become, parties hereto by execution of the signature pages to this Agreement (collectively, the "Lenders" and each individually, a "Lender"); CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, as agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, the "Agent"); and PEGASUS MEDIA & COMMUNICATIONS, INC., a Delaware corporation (the "Borrower"), a subsidiary of Pegasus Communications Holdings, Inc., a Delaware corporation ("Holdings"). Certain capitalized terms used herein without definition are defined in Article XI of this Agreement. RECITALS A. The Borrower's various direct and indirect Subsidiaries own and operate (1 ) cable television systems located in Connecticut, Massachusetts, New Hampshire and Puerto Rico, (2) broadcast television stations located in Florida, Maine, Mississippi, Pennsylvania and Tennessee and (3) rights to deliver direct broadcast satellite ("DBS") service in portions of Connecticut, Massachusetts, New Hampshire and New York. Certain special purpose subsidiaries of the Borrower or Holdings, referred to herein as the License Subsidiaries, own the licenses for each broadcast television station. B. Holdings and Dominica Padilla Acosta (a/k/a Dominick Padilla), Maria del Carmen Padilla Lopez, Dom's Tele-Cable, Inc. and Domar, Inc. (collectively, the "San German Sellers") are parties to an Asset Purchase Agreement dated as of March 21, 1996, as amended as of May 31, 1996, July 1, 1996, (the "San German Acquisition Agreement"), providing for the purchase of certain additional cable television systems in Puerto Rico (the "San German Systems") by Holdings or its designee (the "San German Acquisition"). C. The Borrower desires to obtain additional funds (1) to retire the Borrower's existing indebtedness to IBJ Schroder Bank and Trust Company, (2) for working capital and Capital Expenditures, (3) to finance the San German Acquisition and (4) subject to availability, to finance Permitted Acquisitions. D. The Lenders are willing to provide such funds, all subject to the terms and conditions of this Agreement. NOW THEREFORE, the parties hereto, intending to be legally bound, and in consideration of the foregoing and the mutual covenants contained herein, hereby agree as follows: I. GENERAL TERMS Section 1.01. Reducing 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 "Reducing Revolvers") in the aggregate principal amount of (i) $40,000,000, allocated among the Lenders as set forth in Schedule 1.01(a) (collectively, in either case, as reduced pursuant to Section 1.06, the "Reducing Revolver Commitments" and, with respect to each Lender's allocation of the Reducing Revolvers, its "Reducing Revolver Commitment"), which shall expire on June 30, 2003 (such date, or such earlier date as the Reducing Revolver Commitments shall be terminated hereunder, being referred to herein as the "Expiration Date"). (b) Borrowings under the Reducing Revolver Commitments shall be limited to $28,000,000, until such time, if any, as CIBC assigns at least $12,000,000 of the Reducing Revolver Commitments to one or more lenders unaffiliated with CIBC. For purposes of this Agreement, the term "Available Reducing Revolver Commitments" shall mean, at any time, the aggregate amount of the Reducing Revolver Commitments specified in the second table set forth in Section 1.06(b) (and reduced as otherwise provided in Section 1.06), until the completion of the assignment(s) referred to above. In the event that, as contemplated by Section 1.06(e), the Borrower shall prepay the Reducing Revolver Notes from the proceeds of a Disposition, then an amount of the Available Reducing Revolver Commitments equal to the amount of such prepayment (the "Reserved Commitment Amount") shall be reserved and shall not be available for borrowings hereunder except and to the extent that the proceeds of such borrowings are to be applied to make Permitted Acquisitions consummated within the time periods applicable to reinvestments under Section 1.06(e)(y). The Borrower agrees, upon the occasion of any borrowing hereunder made for the purpose of utilizing all or any portion of the Reserved Commitment Amount, to advise the Agent in writing of such fact at the time of such borrowing, identifying (i) the amount of such borrowing to be so applied, (ii) the Permitted Acquisition in respect of which the proceeds of such borrowing are to be applied and (iii) the reduced Reserved Commitment Amount to be in effect after giving effect to such borrowing. (c) Loans made under the Reducing Revolvers are hereinafter sometimes referred to collectively as the "Reducing Revolver Advances". The aggregate principal amount of Reducing Revolver Advances made by the Lenders as requested in any Request for Advances 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 Prime Rate Loans or (ii) such lesser amount as equals the then unadvanced portion of the aggregate Available Reducing Revolver Commitments. From the Closing Date to and including the Expiration Date and within the limits of the aggregate Available Reducing Revolver Commitments, the Borrower may borrow, repay and reborrow under this Section 1.01. (d) 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 Reducing Revolver Commitments under Article XIII or otherwise issued in substitution therefor, the "Reducing Revolver Notes"). The Reducing Revolver Notes are hereby incorporated by reference herein and made a part hereof. (e) The parties hereby expressly acknowledge and agree that (i) the initial allocation of $40,000,000 of the Reducing Revolver Commitments to CIBC in Schedule 1.01(a) has been effected for the sole purpose of eliminating the need to revise this Agreement, if and when one or more other lenders unaffiliated with CIBC subsequently become parties hereto and assume at least $12,000,000 of such Reducing Revolver Commitments, and (ii) in no event shall CIBC have any liability under any circumstances to advance more than $28,000,000 (such maximum amount to be reduced from time to time as provided in Section 1.06) under the Reducing Revolver Commitments or to arrange for other lenders to advance the balance of the Reducing Revolver Commitments. Section 1.02. Revolving Lines of Credit. (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 revolving lines of credit (the "Revolving Lines of Credit") in the aggregate principal amount of $10,000,000, allocated among the Lenders as set forth in Schedule 1.01(a) (collectively, as reduced pursuant to Section 1.06, the -2- "Revolving Credit Commitments" and, with respect to each Lender's allocation of the Revolving Lines of Credit, its "Revolving Credit Commitment") which shall expire on the Expiration Date. (b) Borrowings under the Revolving Credit Commitments shall be limited to an aggregate amount of $7,000,000 until such time, if any, as CIBC assigns at least $3,000,000 of the Revolving Credit Commitments to one or more lenders unaffiliated with CIBC (as so limited, the "Available Revolving Credit Commitments"). (c) Loans made under the Revolving Lines of Credit are hereinafter sometimes referred to collectively as the "Revolving Credit Advances" and, together with the Reducing Revolver Advances, the "Advances"). The aggregate principal amount of Revolving Credit Advances made by the Lenders as requested in any Request for Advances 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 Prime Rate Loans, or (ii) such lesser amount as equals the then unadvanced portion of the aggregate Available Revolving Credit Commitments. From the date hereof to and including the Expiration Date and within the limits of the aggregate Available Revolving Credit Commitments, the Borrower may borrow, repay and reborrow under this Section 1.02. (d) The borrowings under this Section 1.02 shall be evidenced by the Borrower's Revolving Credit Notes, each in the form attached hereto as Schedule 1.02 (together with any additional Revolving Credit Notes issued to any assignee(s) of the Revolving Credit Commitments under Article XIII or otherwise issued in substitution therefor, the "Revolving Credit Notes" and, collectively with the Reducing Revolver Notes, the "Notes"). The Revolving Credit Notes are hereby incorporated by reference herein and made a part hereof. (e) The parties hereby expressly acknowledge and agree that (i) the initial allocation of $10,000,000 of the Revolving Credit Commitments to CIBC in Schedule 1.01(a) has been effected for the sole purpose of eliminating the need to revise this Agreement if and when one or more other Lenders unaffiliated with CIBC subsequently become parties hereto and assume at least $3,000,000 of such Revolving Credit Commitments, and (ii) in no event shall CIBC have any liability under any circumstances to advance more than $7,000,000) (such maximum amount to be reduced from time to time as provided in Section 1.06) under the Revolving Credit Commitments or to arrange for other Lenders to advance the balance of the Revolving Credit Commitments. Section 1.03. Interest on the Notes. (a) Interest Rate . Subject to the terms and conditions set forth in this Section 1.03, including without limitation paragraph (b) (iii) below, 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 Prime Rate or the applicable LIBOR Rate and determined as follows: (i) the rate for any Prime Rate Loan shall be the Prime Rate plus the Applicable Margin for Prime 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. -3- (b) Applicable Margin. The "Applicable Margin" shall be determined as follows: (i) from and after the Closing Date until the first Interest Adjustment Date, the Applicable Margin for Prime Rate Loans shall be 1.75% and the Applicable Margin for LIBOR Loans shall be 3.00%; (ii) from and after the first Interest Adjustment Date until the next Interest Adjustment Date and each subsequent Interest Adjustment Date until the next Interest Adjustment Date, subject to the provisions of subparagraph (v) below, the Applicable Margin shall be determined as provided in this Section 1.03(b), from the following table based upon the ratio of Total Funded Debt on the Quarterly Date immediately preceding the applicable Interest Adjustment Date , to Adjusted Operating Cash Flow for the Interest Adjustment Period ended on such Quarterly Date (the "Leverage Ratio"), provided that, if the Leverage Ratio shall exceed 6.50:1.00, the provisions of paragraph (iii) below shall govern:
- --------------------------------------------------------------------------------------------------------------------- Applicable Margin - -------------------------------------------------------------------------------------------------------------------- Ratio of Total Funded Debt to Adjusted Operating Cash Flow Prime Rate Loans LIBOR Loans - -------------------------------------------------------------------------------------------------------------------- Less than or equal to 6.50:1.00 but greater than or equal to 5.50:1.00 1.75% 3.00% - -------------------------------------------------------------------------------------------------------------------- Less than 5.50:1.00 but greater than or equal to 5.00:1.00 1.50% 2.75% - -------------------------------------------------------------------------------------------------------------------- Less than 5.00:1.00 but greater than or equal to 4.50:1.00 1.25% 2.50% - -------------------------------------------------------------------------------------------------------------------- Less than 4.50:1.00 but greater than or equal to 4.00:1.00 1.00% 2.25% - -------------------------------------------------------------------------------------------------------------------- Less than 4.00:1.00 .75% 2.00% - ------------------------------------------------------------------------------ -------------------------------------
(iii) If, with respect to any Interest Adjustment Period, the Leverage Ratio exceeds 6.50:1.00, then from and after the Closing Date until the first Interest Adjustment Date or from and after any subsequent Interest Adjustment Date until the next Interest Adjustment Date, as applicable, (x) that portion of the aggregate outstanding principal balances of the Notes other than the Enhanced Yield Balances shall bear interest, as elected by the Borrower in accordance with Section 1.04, at either (A) the Prime Rate plus 1.75% or (B) the applicable LIBOR Rate plus 3.00%; and (y) the Enhanced Yield Balances of the Notes shall bear interest, as elected by the Borrower in accordance with Section 1.04, at either (A) the Prime Rate plus 3.75% or (B) the applicable LIBOR Rate plus 5.00%. As used herein, the term "Enhanced Yield Balances" shall mean, as of any Quarterly Date, the portion of the aggregate outstanding principal balances of the Notes which, if repaid, would cause the applicable Leverage Ratio to be less than or equal to 6.50:1.00. For purposes of this clause (iii), the Enhanced Yield Balances as of the Closing Date shall be deemed to be $11,500,000. (iv) Nothing in paragraph (a) above or in this Section 1.03(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 1.03(e). -4- (v) As used in this Section 1.03, the term "Interest Adjustment Date" shall mean the first day of the first month after the date on which the Lenders have received all of the unaudited financial statements and compliance certificates required to be delivered under Section 6.05(b) and (d) (the "Required Financial Statements") with respect to any period of four (4) consecutive fiscal quarters (each an "Interest Adjustment Period"), commencing with the Interest Adjustment Period ending September 30, 1996, in each case together with a certificate of the chief executive officer or chief financial officer of the Borrower as to the ratio of Total Funded Debt to Adjusted Operating Cash Flow. (vi) The determination of the Applicable Margin under this Section 1.03 as of any Interest Adjustment Date shall be based on unaudited quarterly financial statements as provided above. Notwithstanding the preceding sentence, in the event of any discrepancy between the computation based on unaudited financial statements upon which the Applicable Margin shall have been increased or decreased and the related audited financial statements furnished pursuant to Section 6.05(a) (the "Audited Financial Statements"), the computation based upon the Audited Financial Statements shall govern retroactive to the first day of the first month following the month in which the event giving rise to such discrepancy occurred, if such event and the date of the occurrence thereof is readily and objectively identifiable, or, if such event or the date of the occurrence thereof is not so identifiable, then retroactive to the Interest Adjustment Date as of which the Applicable Margin was adjusted based on such unaudited financial statements. 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 retroactive correction, to prepay interest payable on the Notes. In the event of a retroactive correction in the determination of the Applicable Margin in favor of the Lenders, the amount of interest thereby due and payable by the Borrower shall be paid to the Agent (without additional penalty thereon), for the ratable account of the Lenders, within three (3) Business Days after the Agent gives notice to the Borrower of such retroactive correction. (c) Interest Payment Dates. Interest on the Loans shall be payable in arrears, without setoff, deduction or counterclaim, as follows: (i) Interest on each Prime Rate Loan shall be due and payable on the last Business Day of March, June, September and December of each year (the "Quarterly Dates"), commencing September 30, 1996, and at maturity, whether by reason of acceleration, prepayment, payment or otherwise, provided that interest accrued on any Prime 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 Prime Rate Loan which is so converted on a Quarterly Date, on such Quarterly Date). The interest rate on Prime Rate Loans shall change on the date of any change in the applicable Prime Rate. (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. (d) Computations. Interest on Prime Rate Loans shall be computed on the basis of the actual number of days elapsed over a 365 or 366-day year, as applicable. Interest on LIBOR Loans shall be computed on the basis of the actual number of days elapsed over a 360-day year. -5- (e) Effect of Defaults, Etc. (i) Notwithstanding the foregoing, no downward adjustment of the Applicable Margin hereunder shall be permitted (A) unless the financial statements for the relevant fiscal period delivered to the Agent are accompanied (or followed before the applicable Interest Adjustment Date) by a written request by the Borrower for such adjustment or (B) during the existence of any Default. (ii) 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 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 percent (2.00%) above (a) the interest rate or rates then applicable to Prime 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. (iii) Nothing in this Section 1.03(e) 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 1.04. Requests for Advances; Type of Loan. (a) Requests for Advances. Each request by the Borrower for Advances under the Reducing Revolvers or the Revolving Lines of Credit (other than the initial Advances, 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 Advances are Prime 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 Advances are LIBOR Loans, by a written Request for Advances, in the form of Schedule 1.04(a) (each, a "Request for Advances"), signed by a duly authorized representative of the Borrower and indicating (i) the date of such Advances, (ii) whether such Advances shall be Prime Rate Loans or LIBOR Loans and, if so, the Interest Period therefor, 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 Request for Advances and the information contained therein. Such Request for Advances 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 Advances to Prime Rate Loans or LIBOR Loans, as the case may be, provided that (i) with respect to any such conversion of LIBOR Loans to Prime 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 Prime 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 Prime 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; (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 Prime Rate Loans into LIBOR Loans shall be in a minimum aggregate principal amount of $1,000,000 and, if greater, an integral multiple of $500,000; and (vii) any conversion of less than all of the -6- outstanding LIBOR Loans into Prime 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. (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 1.04(b) or (ii) standing written instructions authorizing the automatic continuation of such Loans, which instructions shall be effective until notice to the Agent by the Borrower 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 Prime Rate Loans on the last day of the first applicable Interest Period which ends during the continuance of such Default. Prime 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 1.04(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 Prime Rate Loans. Section 1.05. Loan Disbursements. The Advances shall be made by the Lenders pro rata as provided in Section 1.14. 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 Prime Rate Loans, on the date specified for any Advances, each Lender shall make available to the Agent the portion of the Advances 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 Request for Advances prior to the date such Advances are proposed to be made. Section 1.06. Payments, Prepayments and Termination or Reduction of the Commitments. (a) Voluntary Reductions and Related Prepayments. At any time prior to the Expiration Date, upon at least three (3) Business Days' written notice to the Agent (each, a "Commitment Reduction Notice"), the Borrower may permanently terminate or permanently reduce any of 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) any such reduction shall apply to each Lender's Reducing Revolver Commitment or Revolving Credit Commitment, as the case may be, pro rata as provided in Section 1.14; (iii) each such reduction of the Reducing Revolver Commitments shall apply to subsequent scheduled automatic reductions thereof under Section 1.06(b) in the order in which they first occur, but only to the extent that the aggregate amount so applied does not exceed the aggregate amount of reductions so scheduled during the twelve (12) month period commencing on the applicable Commitment Reduction Date, with any excess amount to be applied to each of the next following scheduled automatic reductions under Section 1.06(b); -7- (iv) simultaneously with each such reduction, 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 repay such amount of the aggregate principal amount of the respective Notes as shall cause the outstanding principal balance thereunder to be less than or equal to the aggregate Reducing Revolver Commitments or the aggregate Available Revolving Credit Commitments, as the case may be, after giving effect to such reduction, and (C) shall pay any indemnification payments due in accordance with Section 1.11 in respect of LIBOR Loans so prepaid, provided that 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, or $250,000 or, if greater, integral multiples thereof, with respect to Prime Rate Loans. 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 applicable Notes required to be repaid hereunder on such date. (b) Mandatory Scheduled Reductions of Reducing Revolver Commitments. The Reducing Revolver Commitments (i) shall be automatically permanently reduced on March 31, 1998 and each Quarterly Date thereafter, on each of which dates the Borrower shall repay such amount of the aggregate Reducing Revolver Notes as shall cause the outstanding principal balance thereunder to be less than or equal to the Available Reducing Revolver Commitments, as so reduced, and (ii) shall expire on the Expiration Date, when all outstanding principal and accrued interest on the Reducing Revolving Notes shall be due and payable in full. Such quarterly reductions of the Reducing Revolver Commitments shall be in such amount as is necessary to cause the Reducing Revolver Commitments to equal the following levels before giving effect to any other mandatory or optional Commitment reductions:
Maximum Level if Maximum Level if $12,000,000 of $12,000,000 of Commitments Have Not Commitments Have Been Quarterly Date Been Assigned by CIBC Assigned by CIBC -------------- ---------------------- --------------------- December 31, 1997 $28,000,000 $40,000,000 March 31, 1998 $27,125,000 $38,750,000 June 30, 1998 $26,250,000 $37,500,000 September 30, 1998 $25,375,000 $36,250,000 December 31, 1998 $24,500,000 $35,000,000 March 31, 1999 $23,450,000 $33,500,000 June 30, 1999 $22,400,000 $32,000,000 September 30, 1999 $21,350,000 $30,500,000 December 31, 1999 $20,300,000 $29,000,000 March 31, 2000 $19,075,000 $27,250,000 June 30, 2000 $17,850,000 $25,500,000 September 30, 2000 $16,625,000 $23,750,000 December 31, 2000 $15,400,000 $22,000,000 March 31, 2001 $14,000,000 $20,000,000 June 30, 2001 $12,600,000 $18,000,000 September 30, 2001 $11,200,000 $16,000,000 December 31, 2001 $ 9,800,000 $14,000,000 March 31, 2002 $ 8,225,000 $11,750,000 June 30, 2002 $ 6,650,000 $ 9,500,000 September 30, 2002 $ 5,075,000 $ 7,250,000 December 31, 2002 $ 3,500,000 $ 5,000,000 March 31, 2003 $ 1,750,000 $ 2,500,000 June 30, 2003 - 0- - 0-
-8- (c) Casualty Events. Within one hundred eighty (180) days following the receipt by the Borrower or any of the Operating Companies of the proceeds of insurance, condemnation award or other compensation in respect of any Casualty Event (or upon such earlier date as the Borrower or any Operating Company shall have determined not to repair or replace the asset or property affected by such Casualty Event), which proceeds, together with all other such proceeds theretofore received in respect of Casualty Events, exceed $500,000 in the aggregate, the Borrower shall prepay the Notes, and the Commitments shall be automatically reduced, as provided in Section 1.06(f), 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). Nothing in this Section 1.06(c) shall be deemed (i) to limit any obligation of the Companies pursuant to the Security Agreement to remit to the Collateral Account the proceeds of insurance, condemnation award or other compensation 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 Operating Company during the existence of any Default or (iii) to apply to temporary prepayments of the Notes from insurance proceeds pending completion of repairs and restoration within the one hundred eighty (180) day period referred to above. (d) Excess Cash Flow. On or before May 1 of each year, commencing May 1, 1999, the Borrower shall prepay the Notes, and the Commitments shall be automatically reduced, in an aggregate amount equal to fifty percent (50%) of Excess Cash Flow for the immediately preceding fiscal year, as provided in Section 1.06(f). (e) Dispositions of Assets. 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 (i) two (2) Business Days prior to the occurrence of any disposition of assets or properties other than pursuant to Section 7.03(a), to deliver to the Agent (in sufficient copies for each Lender) a statement, certified by the chief executive officer or chief financial officer of the Borrower and in reasonable detail, of the estimated amount of the Net Cash Proceeds of such Disposition and (ii) that in the event such Disposition is completed, the Borrower will prepay the Notes, and the Commitments will be subject to automatic reduction, as follows: (A) 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 Operating Companies on the date of such Disposition; and (B) 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 Operating Company 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. Notwithstanding the foregoing, the Borrower shall not be required to make a prepayment pursuant to this Section 1.06(e) with respect to the Net Cash Proceeds from any such Disposition (1) to the extent that the aggregate Net Cash Proceeds of such Disposition and all prior Dispositions do not exceed $5,000,000, or (2) in the event that the Borrower advises the Agent at the time -9- the Net Cash Proceeds from such Disposition are received that it intends to reinvest such Net Cash Proceeds in replacement assets pursuant to a Permitted Acquisition, so long as: (x) such Net Cash Proceeds are (i) 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 satisfactory to it that such Net Cash Proceeds are to be so reinvested in compliance with the provisions of this Agreement, (ii) applied by the Borrower to the prepayment of the Reducing Revolver Notes (in which event the Borrower agrees to advise the Agent in writing at the time of such prepayment of Reducing Revolver Notes that such prepayment is being made from the proceeds of a Disposition and that, as contemplated by Section 1.01, a portion of the Reducing Revolving Commitments hereunder equal to the amount of such prepayment gives rise to a Reserved Commitment Amount that shall be available hereunder only for the purposes of making Permitted Acquisitions) or (iii) held and applied in any combination of clauses (i) and (ii) above; and (y) the Net Cash Proceeds from any such Disposition are in fact so reinvested prior to the earlier to occur of (i) 270 days following said Disposition or (ii) 180 days following the date of such Disposition, except to the extent a definitive agreement with respect to a Permitted Acquisition utilizing Net Cash Proceeds shall have been entered into, 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 Reducing Revolving Notes as provided in paragraph (x) above, such Net Cash Proceeds shall be deemed to be released (or, as the case may be, Loans utilizing the Reserved Commitment Amount shall be deemed to be made) in the same order in which such Dispositions occurred. Accordingly, (1) any such Net Available Proceeds so held for more than the 180 or 270 day period referred to in paragraph (y) above shall be forthwith applied to the prepayment of the Notes and the reduction of the Commitments as provided above and (2) any Reserved Commitment Amount that remains unutilized for more than such 180 or 270 day period, as the case may be, shall be automatically terminated and the aggregate Commitments shall be permanently reduced in such amount, as provided in Section 1.06(f) below. Nothing in this Section 1.06 shall be deemed to obligate the Agent to release any of such proceeds from the Collateral Account to the Borrower or any Operating Company for purposes of reinvestment as aforesaid during the existence of any Default. (f) Application of Reductions. Upon the occurrence of any of the events described in the above paragraphs of this Section 1.06, the amount of the proposed or required reduction shall be applied to the reduction of the Commitments on a pro rata basis, as provided in Section 1.14. Each such reduction of the Commitments shall be applied as follows: (i) in the case of reductions made out of Excess Cash Flow under Section 1.06(d), first, to subsequent scheduled automatic reductions of the Reducing Revolver Commitments under Section 1.06(b) in the inverse order in which they appear, and second, to the Revolving Credit Commitments; and (ii) in the case of reductions from the proceeds of Dispositions and Casualty Events under Sections 1.06(c) and (e), first, to reduce the dollar levels of each of the Reducing Revolver Commitments shown in the Table of scheduled automatic reductions Section 1.06(b) for reduction dates occurring after the date of the reduction under Sections 1.06(c) or (e), and second, to the Revolving Credit Commitments. -10- (g) Applications of Prepayments. All prepayments of the Notes under this Section 1.06 shall be made without set-off, deduction or counterclaim, (ii) shall (unless otherwise determined by the Lenders) be applied to the Lenders' Notes pro rata as provided in Section 1.14 and (iii) unless otherwise specified in this Section 1.06, shall be applied first, to overdue interest, fees and expenses hereunder, second, to pay principal of the Reducing Revolver Notes, and third, to pay principal of the Revolving Credit Notes, provided that applications of prepayments to principal shall be made first to Prime Rate Loans and then to LIBOR Loans, and provided further that, so long as no Default then exists, the Borrower may, at or prior to the time said payment is made, elect to allocate all or any portion of the application of voluntary prepayments of principal pursuant to Section 1.06(a) to the Revolving Credit Notes. Section 1.07. Fees. (a) Commitment Fee. 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 unused portion of the Available Commitments from the Closing Date hereof to and including the earlier of the termination of the Commitments or the Expiration Date, at the rate of one-half of one percent (1/2%) (computed on the basis of the actual number of days elapsed over a 365-366 day year), payable quarterly on each Quarterly Date, without setoff, deduction or counterclaim, with a final payment at the maturity of the Notes, whether by payment, prepayment, acceleration or otherwise. (b) Facility Fees. The Borrower shall pay CIBC a non-refundable facility fee in the amount specified in the Fee Letter (the "Facility Fee"). (c) Agency Fee. The Borrower shall pay the Agent a non-refundable agency fee in the amount specified in the Fee Letter. Section l.08. 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 the Notes in respect of any Loans, including without limitation LIBOR Loans (other than taxes imposed on the overall net income of such Lender); (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 XI); or (iii) impose any other conditions affecting this Agreement in respect of Loans, including without limitation LIBOR Loans (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 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 Prime Rate applicable to such Loans, 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. -11- (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 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 full). (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 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 1.09. 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 XI, 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 -12- obligation to make LIBOR Loans or to convert Prime 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, 1.02 and 1.06 or convert such Loans into Prime Rate Loans in accordance with Section 1.04. (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 Prime 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 Prime 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 1.11. Section 1.10. 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, 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. Whenever any Taxes are payable by the Borrower in respect of this Agreement or the Notes, 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. -13- (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 (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 (ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable 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 1.11. 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 (including, in the case of LIBOR Loans, loss of profit), 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 1.04 or 1.06); 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 Request for Advances or Interest Rate Option Notice under Section 1.04 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 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 presumed correct in the absence of manifest error. Section 1.12. Payments Under the Notes. 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, including without limitation the Commitment Fee and any payments under Sections 1.08, 1.10 and 1.11, shall be made in immediately available funds to the Agent (as specified in Section 14.03) -14- for the accounts of the Lenders as provided in Section 1.14 and otherwise herein or in the Fee Letter, 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 1.14). 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 1.13. 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, each Lender shall be entitled, at its option, to offset balances held by it for the account of the Borrower at any of its offices, in Dollars or in any other currency, against any principal of or interest on the Notes held by such Lender or other fees or charges owed to such Lender hereunder which are not paid when due (regardless of whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower and the Agent thereof, provided that such Lender's failure to give such notice 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 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, 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 in accordance with 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. -15- Section 1.14. Pro Rata Treatment; Sharing. (a) Except to the extent otherwise provided herein and in the Fee Letter or 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 1.07 shall be made to the Lenders pro rata according to the amounts of their respective unused 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 Advances) or the outstanding principal amounts of the Loans owed to such Lender (in the case of conversions to or continuations of Loans as LIBOR Loans); (iii) each payment and prepayment of principal of the Notes shall be made to the Lenders pro rata in accordance with the respective unpaid principal amounts of the respective Notes held by the Lenders; (iv) each payment of interest on the Notes shall be made for the accounts of the Lenders and each payment of any other sums and charges payable under this Agreement (except for the Agency Fee and the Facility Fees, which are payable in accordance with the Fee Letter) shall be made to the Lenders pro rata in accordance with the respective unpaid principal amounts of, and interest on, the Loans made by each of them; (v) each payment under Section 1.08, 1.10 or 1.12 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 (vi) each distribution of cash, property, securities or other value received by any Lender, directly or indirectly, in respect of the Borrower's Indebtedness hereunder, whether pursuant to any attachment, garnishment, execution or other proceedings for the collection thereof or pursuant to any bankruptcy, reorganization, liquidation or other similar proceeding, after payment of collection and other expenses as provided herein and in the Security Documents, shall be apportioned among the Lenders pro rata in accordance with the respective unpaid principal amounts of and interest on the Notes held by each of them. (b) Notwithstanding the foregoing, if any Lender (a "Recovering Party") shall receive any such distribution (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, as set forth herein, 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 1.15. 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 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) -16- 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 1.03, with respect to interest paid by the Borrower. Section 1.16. Replacement of Notes. Upon receipt of evidence reasonably satisfactory to the Borrower of the loss, theft, destruction or mutilation of any Note and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory to the Borrower, or 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. II. SECURITY; SUBORDINATION; USE OF PROCEEDS Section 2.01. Security for the Obligations; Subordination; Etc. (a) Except as specified in Schedule 2.01 attached hereto, the Borrower's obligations hereunder, under the Notes and in respect of any Rate Hedging Obligations entered into with any of the Lenders or any Affiliates of any of the Lenders shall be secured at all times by: (i) the unconditional guaranty of each of the Operating Companies and the Parent (provided that the Parent's guaranty shall be non-recourse except to the extent of any Collateral required to be provided by the Parent); (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 Operating Companies (except for licenses and permits issued by the FCC and local franchising authorities, to the extent it is unlawful to grant a security interest in such licenses and permits), including the PCT-CONN Note Documents, the MCT Note Documents and any other intercompany notes, obligations or agreements, subject only to any prior Liens expressly permitted under this Agreement; (iii) first mortgages on all presently owned and hereafter acquired real estate owned by each of the Borrower and the Operating Companies, subject only to any prior Liens expressly permitted under this Agreement, together with mortgagee's title insurance policies acceptable to the Lenders; (iv) first priority perfected collateral assignments of or leasehold mortgages on all real estate leases in which any of the Borrower and the Operating Companies (other than PCT-CONN and MCT, to the extent provided in Schedule 2.01) now has or may in the future have an interest 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 (other than the Borrower's now outstanding shares of its Class B Common Stock) and the Operating Companies and all warrants, options and other rights to purchase such ownership interests; -17- (vi) first priority perfected collateral assignments of all such franchises, pole attachment agreements, construction contracts, management agreements, programming agreements, network affiliation agreements, satellite broadcasting distribution agreements and other licenses, permits and authorizations (except for licenses and permits issued by the FCC and local franchising authorities, to the extent it is unlawful to grant a security interest in such licenses and permits) and other 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. To the extent requested by the Required Lenders, all existing and hereafter arising indebtedness of the Borrower and the Operating Companies to the Manager, Pegasus Towers, L.P., the Unrestricted Subsidiaries and any other Affiliates of the Companies 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 and to the Agent's counsel (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 and the Borrower's obligations hereunder or otherwise executed in connection with this Agreement, are sometimes hereinafter referred to collectively as the "Security Documents" and each individually as a "Security Document". The Borrower agrees to 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. (a) The proceeds of the Reducing Revolver Advances shall be applied (i) to retire the Borrower's existing indebtedness to IBJ Schroder in the principal amount not exceeding $9,000,000, (ii) to finance a portion of the San German Acquisition, (iii) to finance Permitted Acquisitions, (iv) to finance Capital Expenditures permitted under this Agreement, and (v) for working capital purposes of the Borrower and the Restricted Subsidiaries, 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. (b) The proceeds of the Revolving Credit Advances shall be applied (i) to finance the balance of the San German Acquisition, (ii) to finance Capital Expenditures permitted under this Agreement and (ii) for working capital purposes of the Borrower and the Restricted Subsidiaries, including Transaction Costs. III. CONDITIONS OF MAKING THE LOANS Section 3.01. Conditions to the First Advances. The obligations of the Lenders to enter into this Agreement and to make Advances to the Borrower 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 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 Borrowing Date of such Advances. -18- (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, deeds of trusts and amendments thereto, lessor consents and waivers and related title insurance policies required by the Agent or its counsel in connection with the Borrower's compliance with the provisions of Section 2.01; (iii) Certified copies of the resolutions of the Board of Directors of each Company, or of each Company's partners and/or corporate general partner, as the case may be, authorizing the execution and delivery of the Loan Documents to which it is a party; (iv) A copy of the Certificate or Articles of Incorporation of each corporate Company and each corporate general partner of a partnership Company, with any amendments thereto, certified by the appropriate Secretary of State and by the Secretary or an Assistant Secretary of such Company or general partner; (v) A copy of the limited partnership agreement of each partnership Company, with any amendments thereto, certified by the Secretary or an Assistant Secretary of such Company's corporate general partner; (vi) For each Company, certificates of legal existence and good standing (both as to corporation law, if applicable, and, if available, tax matters) issued as of a reasonably recent date by such Company's state of organization and any other state in which such Company is authorized or qualified to transact business; (vii) 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 Franchises, Licenses and DBS Agreements, all other material governmental licenses, franchises and permits, all material franchiser and other third party consents and all other material leases, contracts, agreements, instruments and other documents specified in Schedules 4.04, 4.07(a), 4.07(b), 4.11, 4.12, 4.18 and 4.19; (viii) Such Uniform Commercial Code, Federal tax lien and judgment searches with respect to the Companies, any Seller being paid with the proceeds of any Advances (and the assets to be acquired under the related Acquisition Agreement) and any other third parties as the Agent shall require, the results thereof to be satisfactory to the Agent; (ix) The Opening Balance Sheet; (x) The Environmental Site Assessments and completed Environmental Questionnaires referred to in Section 4.23; (xi) Certificates of insurance evidencing the insurance coverage and policy provisions required in this Agreement; and (xii) Such other supporting documents and certificates as the Agent or the Lenders may reasonably request from time to time. -19- (c) Subordinated Indenture, Etc. The Borrower shall have delivered to the Agent true and complete copies of the Subordinated Debt Documents, certified as such by an executive officer of the Borrower. (d) Officer's Certificates as to Compliance, Solvency, Documents, Etc. The Borrower shall have provided to the Agent one or more compliance and other closing certificates, in forms satisfactory to the Agent, executed on behalf of the Borrower by its chief executive officer or chief financial officer, certifying 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, as applicable, and, specifically, as to certain matters specified therein. (e) Company Counsel Opinions. The Agent shall have received: (i) the favorable written opinion of Drinker Biddle & Reath, counsel to the Companies dated as of the date hereof, addressed to the Agent and the Lenders and reasonably satisfactory to the Agent in scope and substance; (ii) the favorable written opinions of Drinker Biddle & Reath and special local counsel to the Companies, for each State or Commonwealth in which the Companies do business other than Massachusetts, New Hampshire and New York, each dated as of the date hereof, addressed to the Agent and the Lenders and reasonably satisfactory to the Agent in scope and substance; and (iii) the favorable written opinion(s) of special communications counsel to the Companies dated as of the date hereof and addressed to the Agent and the Lenders, with respect to FCC (both cable and broadcast) and related matters, which opinion(s) shall be reasonably satisfactory to the Lenders in scope and substance. (f) Repayment of Existing Indebtedness. As of the Closing Date, the Agent shall have received evidence that (i) the principal of and interest on, and all other amounts owing in respect of, Indebtedness indicated on Schedule 2.02 which is to be repaid on the date of the first Advances hereunder shall have been (or shall simultaneously be) paid in full in cash, (ii) any commitments to extend credit under the agreements or instruments relating to such Indebtedness have been terminated or canceled and (iii) all guaranties in respect of, and liens securing, any such Indebtedness have been released (or arrangements for such releases made to the reasonable satisfaction of the Agent), which requirement shall include receipt by the Agent of all such executed pay-off letters, Uniform Commercial Code termination statements, mortgage releases and other instruments as the Agent shall have requested to release and terminate of record any such liens. (g) Adjusted Operating Cash Flow. After giving effect to the San German Acquisition, Adjusted Operating Cash Flow for the period of twelve (12) consecutive months ending July 31, 1996 shall equal or exceed $16,300,000 and the Agent shall have received satisfactory evidence to such effect. (h) No Material Adverse Change. As of the date hereof and as of the Closing Date, and since December 31, 1995, no event or circumstance shall have occurred which could have a Material Adverse Effect. (i) Legal and Other Fees. As of the date hereof and as of the Closing Date, all fees owed to the Agent and the Lenders under the Fee Letter and all legal fees and expenses of counsel to the Agent incurred through such date shall have been paid in full. (j) Review by Agent's Counsel. All legal matters incident to the transactions hereby contemplated shall be reasonably satisfactory to counsel for the Agent. -20- Section 3.02. Acquisition Loans. Without in any way limiting the discretion of the Required Lenders to approve or withhold approval of any Acquisition or to impose additional conditions upon their consent to such Acquisitions, the obligations of the Lenders to make any Advances to finance any Permitted Acquisition are subject to the following conditions: (a) Acquisition Closings. (i) 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 Advances) substantially in accordance with the terms thereof and, in any event, in a manner reasonably satisfactory to Agent, including without limitation (A) the repayment in full in cash (simultaneously with, and from the proceeds of, Advances, or otherwise) of all Indebtedness of the applicable Sellers not being assumed by the Borrower or a Restricted Subsidiary (other than, in the case of the San German Acquisition, the liabilities referred to in Sections 5.17 and 5.24 of Amendment No. 1 to the San German Acquisition Agreement) and (B) the valid assumption by the Borrower or such Restricted Subsidiary of all other liabilities of the applicable Sellers in respect of the assets and properties transferred under such Acquisition Agreement. (ii) The Agent shall have received evidence of the receipt of all licenses, permits, approvals and consents, if any, required with respect to such Acquisition and any other related transaction contemplated by this Agreement (including without limitation the consents of municipal franchising authorities and the FCC to the sale contemplated by such Acquisition Agreement and to the collateral assignment of any related franchises or other material agreements or licenses to the Agent, on behalf of the Lenders, and any other consents or filings of or with applicable governmental authorities or other third parties. (iii) The applicable Sellers shall have consented to the collateral assignment to the Agent of the rights of the Borrower or the applicable Restricted Subsidiary under the Acquisition Agreement and any other agreements executed thereunder, as required under Section 2.01(a). (iv) The Agent shall have received copies of the legal opinions delivered by the Seller(s) pursuant to the applicable Acquisition Agreement in connection with the Acquisition, together with a letter from each Person delivering an opinion (or authorization within the opinion) authorizing reliance thereon by the Agent and the Lenders. (v) Any other conditions imposed by the Required Lenders in giving their consent to such Permitted Acquisition shall have been satisfied. (b) Due Diligence. The Agent and its counsel shall have completed their due diligence review with respect to the proposed Acquisition, including a review of all of the Franchises, DBS Agreements, Tower Site Leases, Headend Site Leases and other material agreements and shall be satisfied with the results of such review. (c) Officer's Certificates as to Compliance, Solvency, Documents, Etc. The Borrower shall have provided to the Agent one or more compliance and other closing certificates, in forms satisfactory to the Agent, executed on behalf of the Borrower by its chief executive officer or chief financial officer, certifying as to satisfaction by the Borrower of the conditions to lending set forth in this Section 3.02 and in Section 3.03 and, specifically, as to certain matters specified therein. -21- (d) Compliance Certificate. The Borrower shall have executed and delivered (or caused to be executed and delivered by the appropriate Operating Companies) to the Agent a certificate of representations, warranties and compliance satisfactory in form and substance to the Agent, together with updated versions of Schedules to this Agreement and of the applicable Officer's Certificates delivered pursuant to the Security and Pledge Agreements, and otherwise adjusting the Companies' representations and warranties contained herein and therein, to the extent appropriate in connection with such Acquisition and approved by the Required Lenders in writing in their sole discretion (which certificate, if so approved, shall be deemed an amendment of this Agreement and such Security Documents and shall be incorporated by reference herein and therein). (e) Other Deliveries. The Companies 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) With respect to the assets to be acquired pursuant to such Acquisition, and the applicable Seller(s), all Uniform Commercial Code Financing Statements and Termination Statements and all mortgages, deeds of trusts and amendments thereto and related title insurance policies required by the Agent or its counsel in connection with the Borrower's compliance with the provisions of Section 2.01; (ii) Certified copies of the resolutions of the Board of Directors or partners of each applicable Company authorizing such Acquisition; (iii) Such certificates of public officials and copies of material consents, agreements and other documents and such other supporting documents and information as the Agent shall reasonably request; (iv) If requested by the Agent, Environmental Site Assessments, Environmental Questionnaires and other information with respect to owned and leased real properties, which shall be reasonably satisfactory in all respects to the Required Lenders; (v) Such Uniform Commercial Code, Federal tax lien and judgment searches as the Agent shall reasonably require, the results thereof to disclose no liens except liens permitted by this Agreement and liens to be discharged upon completion of the Acquisition; (vi) A combined balance sheet for the Companies, pro forma for the Acquisition and the proposed Advances; (vii) Certificates of insurance evidencing the additional insurance coverage and policy provisions required in this Agreement; and (ix) Such other supporting documents and certificates as the Agent or the Lenders may reasonably request. (f) General and Local Counsel Opinions. The Agent shall have received the favorable written opinions of regular and local counsel to the Companies dated the date of such Loans and addressed to the Agent and the Lenders, reasonably satisfactory to the Agent in scope and substance. (g) FCC Opinions. The Agent shall have received the favorable written opinion of special communications counsel to the Companies dated the date of such Loans and addressed to the Agent and the Lenders, with respect to FCC and related matters, which opinion shall be reasonably satisfactory to the Lenders in scope and substance. -22- (h) Legal Fees. All legal fees and expenses of counsel to the Agent incurred through the date of such Loans shall have been paid in full. (i) Review by Agent's Counsel. All legal matters incident to the transactions hereby contemplated shall be reasonably satisfactory to counsel for the Agent. Section 3.03. All Loans. The obligations of the Lenders to make any Loans (including the Advances made on the Closing Date and in respect of Acquisitions consummated thereafter) are subject to the following conditions: (a) All warranties and representations set forth in this Agreement shall be true and correct in all material respects as of the date such Loans are made (except to the extent they expressly relate to an earlier specified date or are affected by transactions or events occurring after the Closing Date and permitted or not prohibited hereunder). (b) After giving effect to such Loans (both as of the proposed date thereof and, on a pro forma basis, the last day of the most recent month for which financial statements have been delivered to the Lenders under Section 6.05), no Default shall have occurred and be continuing. Each telephonic or written request for such Loans shall constitute a representation to such effect as of the date of such request and as of the date of such borrowing. (c) The Agent shall have received a properly completed Request for Advances, together with all such financial and other information as the Agent shall require to substantiate the current and pro forma certifications of no Default contained therein. (d) The Agent shall have received such other supporting documents and certificates as the Agent and the Required Lenders may reasonably request. 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 Advances 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 Advances 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 Advances. IV. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to 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 and the making of the Loans) that: Section 4.01. Financial Statements. The Borrower has heretofore furnished to the Lenders: (a) the audited and unaudited balance sheets and related statements of operations, stockholders' equity and cash flow of the Borrower and its Subsidiaries attached as Schedule 4.01(a) (the "Financial Statements"); and (b) the June 30, 1996 balance sheet of the Borrower and the Operating Companies 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 had occurred on June 30, 1996, attached as Schedule 4.01(b) (the "Opening Balance Sheet"). -23- The Financial Statements have been prepared in accordance with GAAP. Since December 31, 1995, there has been no material adverse change in the assets, properties, business or condition (financial or otherwise) of any of the Companies and no dividends or distributions have been declared or paid by any of the Companies. None of the Companies has any contingent obligations, liabilities for taxes or unusual forward or long-term commitments except as specified in such Financial Statements. The Opening Balance fairly represents the pro forma financial condition of the Borrower and the Operating 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(c), as of the date of this Agreement, the Parent has no Indebtedness. Section 4.02. Organization, Qualification, Etc. Each of the Companies (a) is a corporation or limited partnership duly organized or formed, as the case may be, 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 agreements and instruments 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 4.22. 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 Registration Statement, 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 and partnership action and will not violate any provision of law, any order, judgment or decree of any court or other agency of government, including without limitation the FCC, the charter documents or by-laws of any corporate Company, the limited partnership agreement or certificate of limited partnership of any partnership Company or any indenture, agreement or other instrument to which any Company is a party, or by which any Company is bound, 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 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 recording required under Section 2.01 and the Security Documents and except as set forth in Schedule 4.04, none of the Companies 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 the Commonwealth of Puerto Rico, the State of Connecticut, the FCC, the Copyright Office and the communities included in the Franchise Areas), 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 -24- 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. Section 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. Section 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 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 instrumentality or other agency (including without limitation the FCC), 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 would have a Material Adverse Effect, or (b) against or affecting any Company 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 partnership or other restriction which could have a Material Adverse Effect. None of the Companies is in violation of any provision of its corporate charter or by-laws or partnership agreement, as the case may be, or of any material indenture, agreement or instrument to which it is a party or by which it is bound or, to the best of the Borrower's knowledge and belief, of any provision of law, the violation of which could have a Material Adverse Effect, or any order, judgment or decree of any court or other agency of government (including without limitation the Commonwealth of Puerto Rico, the State of Connecticut, the FCC, the FAA, the Copyright Office and the communities included in the Franchise Areas). Section 4.07. Franchises; Licenses, Etc. (a) (i) Schedule 4.07(a) sets forth a complete and correct list of all 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 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, except to the extent the absence thereof could not reasonably be expected to have a Material Adverse Effect. Each of such 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. -25- (ii) No approval, application, filing, registration, consent or other action of any Governmental Authority (including the Commonwealth of Puerto Rico, the State of Connecticut, the FCC, the Copyright Office and the communities included in the Franchise Areas) is required to enable any Company to take advantage of the rights and privileges intended to be conferred by the 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 Franchise. Complete and correct copies of all Franchises have heretofore been delivered to the Agent. (b) Schedule 4.07(b) 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 Closing Date. The Companies possess 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, 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 has occurred and is continuing thereunder. None of the FCC Licenses held by any Company is the subject of a pending license renewal application and the Borrower has no reason to believe that any of such FCC Licenses will be revoked or will not be renewed in the ordinary course. Section 4.08. 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 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 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); -26- (v) the channel capacities of the New England Systems are 36, 50 and 62 channels, representing approximately 45%, 22% and 33% of New England cable subscribers; the MCT Systems have a capacity of 60-channels; the San German System has a capacity of 50-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 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 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; (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 and, to the Borrower's best knowledge, the San German Sellers, have complied with their 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. -27- (f) The assets of the Systems are adequate and sufficient in all material respects for all of the current operations of the Systems. Section 4.09. 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 4.09: (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 with Basic-only rates have likewise been deregulated. Schedule 4.09 lists all pending rate proceedings before the FCC and any local franchising authorities that have jurisdiction over the Company. Schedule 4.09 also sets forth FCC and local franchising authority orders approving the Companies' rates. Section 4.10. 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, including without limitation 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 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; and (iv) the Stations are being operated in compliance with the applicable Licenses. (b) No material 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 in all material respects for all of the current operations of the Stations. -28- Section 4.11. DBS Rights. Schedule 4.11 accurately and completely lists all DBS Agreements to which PST is a party as of the Closing Date. PST possesses all such DBS Agreements, and all exclusive DBS Rights and other rights and agreements as are necessary for the operation of its DBS business in accordance with the Projections, except to the extent that the absence thereof could not reasonably be expected to have a Material Adverse Effect. Each of such DBS Agreements and other rights and agreements is in full force and effect. Section 4.12. Title to Properties; Condition of Properties. (a) Except as set forth on Schedule 4.12, the Companies have good title to all of their properties and assets (including all of the Systems and Stations) free and clear of all mortgages, security interests, restrictions (other than FCC restrictions on the transfer of capital stock or FCC authorizations), liens and encumbrances of any kind, including without limitation liens or encumbrances in respect of unpaid taxes (collectively, "Liens"), except liens and encumbrances permitted under this Agreement. Such Schedule 4.12 also sets forth a description of all real properties owned by the Companies. (b) Schedule 4.12 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 4.12, none of the real property owned by any Company is located within any federal, state or municipal flood plain zone. Section 4.13. Interests in Other Businesses. Except as reflected in Schedule 4.13 or Schedule 4.22 hereto, neither the Borrower nor any Operating Company holds or owns any of the issued and outstanding capital stock, partnership interests or similar equity interests, or any rights to acquire the same, of any corporation, partnership, firm or entity other than as specified or permitted in this Agreement. Section 4.14. Solvency. (a) The aggregate amount of the full salable 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 the 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. -29- (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 4.15 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 been disclosed to the Lenders in writing which materially affects adversely, 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 or broadcast television industry. Section 4.16. 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 4.17. 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 4.18. Pension Plans, Etc. (a) Except as described in Schedule 4.18, 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 4.19. Material Agreements. Except for matters disclosed in Schedules 4.07(a), 4.07(b) , 4.09, 4.10, 4.11 and 4.12, Schedule 4.19 hereto accurately and completely lists all agreements, if any, among the stockholders or partners of the Borrower or any of the Operating Companies and all material construction, engineering, management, consulting and other agreements, if any, which are in effect on the date hereof in connection with the conduct of the business of the Borrower and the Operating Companies, including without limitation the acquisition, construction, extension and/or operation of the Systems and the Stations, or for the distribution of satellite broadcasting service. -30- Section 4.20. Projections. Attached as Schedule 4.20 are projections of the operation of the Companies' businesses through December 31, 2003 (the "Projections"). Section 4.21. 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 obligation to pay any broker's fee, finder's fee or commission in connection with such transactions. Section 4.22. Capitalization. Attached as Schedule 4.22 is a schematic diagram of the ownership relationships among the Companies, showing accurate ownership percentages of the stockholders of record and accompanied by a statement of authorized and issued equity securities for each such entity as of the date hereof. Such Schedule 4.22 also includes a narrative indicating, as of the date hereof (a) which 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 securities; (c) whether any Company is obligated to redeem or repurchase any of its 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 4.22. All such equity securities of the Companies are owned, legally and beneficially, free of any assignment, pledge, lien, security interest, charge, option or other encumbrance, except for liens and security interests granted to the Agent or the Lenders or permitted under Section 7.02 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 4.23. 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 a timely fashion so as to bring such Property into full compliance with all Environmental Laws. -31- (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 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 "Phase One" site assessment for each of the Properties designated by the Lenders, including all owned Properties (collectively the "Environmental Site Assessments"), prepared by an environmental consulting firm of national reputation satisfactory to the Lenders. Each of the Environmental Site Assessments is, to the best of the Borrower's knowledge, true and accurate in all material respects. In addition, the Borrower has provided to the Agent and the Lenders true and accurate responses to the Agent's Environmental Questionnaire as to each of the other Properties. Section 4.24. 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 4.25. Labor Matters. No Company is experiencing any strike, labor dispute, slow down or work stoppage due to labor disagreements which 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; none of the Companies is subject to any collective bargaining or similar arrangements. Section 4.26. Senior Debt. All of the Obligations constitute "Senior Debt" and, with the exception of Rate Hedging Obligations owed to the Lenders, "Designated Senior Debt" under the Subordinated Indenture. As of the date hereof, the Calculation of Leverage Ratio attached hereto as Schedule 4.26 correctly applies the provisions of the Subordinated Indenture to the appropriate financial statements and books and records of the Borrower and accurately calculates the Indebtedness to Adjusted Operating Cash Flow Ratio (as defined in the Subordinated Indenture). After giving effect to the initial requested Advance of $22,250,000 on the date hereof, including the uses of the proceeds thereof, the Indebtedness to Adjusted Operating Cash Flow Ratio will not exceed 6.50 to 1.00, and the Borrower will be in full compliance with Section 4.09 of the Subordinated Indenture. After giving effect to the subsequent requested Advances of $5,750,000 and $3,600,000 on the date hereof, the Borrower will be in full compliance with Section 4.09 of the Subordinated Indenture. 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 the principal of, or interest on, any Note or any other Obligations, whether now existing or arising hereafter, the Borrower and the Operating Companies will (on a consolidated or combined basis, as applicable): -32- Section 5.01. Leverage (a) At all times during each period indicated below, maintain a ratio of (i) Total Funded Debt to (ii) Adjusted Operating Cash Flow for the most recently ended period of four (4) consecutive fiscal quarters of not more than the following:
Maximum Ratio of Total Funded Debt Period to Adjusted Operating Cash Flow ------ ----------------------------------- Closing Date through December 30, 1996 7.20:1.00 December 31, 1996 through March 30, 1997 6.60:1.00 March 31, 1997 through December 30, 1997 6.50:1.00 December 31, 1997 through June 29, 1998 6.25:1.00 June 30, 1998 through September 29, 1998 6.00:1.00 September 30, 1998 through December 30, 1998 5.75:1.00 December 31, 1998 through June 29, 1999 5.25:1.00 June 30, 1999 through December 30, 1999 4.75:1.00 December 31, 1999 through June 29, 2000 4.25:1.00 June 30, 2000 and thereafter 4.00:1.00
(b) At all times during each period indicated below, maintain a ratio of (i) Senior Funded Debt to (ii) Adjusted Operating Cash Flow for the most recently ended period of four (4) consecutive fiscal quarters of not more than the following:
Maximum Ratio of Senior Funded Debt Period to Adjusted Operating Cash Flow ------ ------------------------------------ The Closing Date through June 29, 2000 2.50:1.00 June 30, 2000 and thereafter 2.00:1.00
Section 5.02. Interest Coverage. For each period of four (4) consecutive fiscal quarters ending on the Quarterly Dates indicated below, maintain a ratio of Operating Cash Flow to Total Interest Expense of at least the following:
Minimum Ratio of Operating Quarterly Dates Cash Flow to Total Interest Expense ----------------- ------------------------------------- September 30, 1996 1.05:1.00 December 31, 1996 1.10:1.00 March 31, 1997 through December 31, 1997 1.20:1.00 March 31, 1998 through September 30, 1999 1.50:1.00 December 31, 1999 through September 30, 2000 2.00:1.00 December 31, 2000 and each Quarterly Date thereafter 2.50:1.00
-33- Section 5.03. Fixed Charges. For each period of four (4) consecutive fiscal quarters ending on the Quarterly Dates indicated below, maintain a ratio of Operating Cash Flow to Fixed Charges for such period of at least the following:
Minimum Ratio of Operating Quarterly Dates Cash Flow to Fixed Charges --------------- --------------------------- December 31, 1997 through June 30, 1998 1.00:1.00 September 30, 1998 and each Quarterly Date thereafter 1.10:1.00
Section 5.04. Pro Forma Debt Service Coverage. As of each Quarterly Date indicated below, maintain a ratio of Adjusted Operating Cash Flow to Pro Forma Debt Service for the immediately succeeding period of four (4) consecutive fiscal quarters of at least the following:
Minimum Ratio of Adjusted Operating Cash Flow to Quarterly Date Pro Forma Debt Service Coverage -------------- ------------------------------- September 30, 1996 through December 31, 1996 1.00:1.00 March 31, 1997 through December 31, 1997 1.10:1.00 March 31, 1998 and each Quarterly Date thereafter 1.25:1.00
For purposes of this Section 5.04 only, and only as of March 31, 1997, June 30, 1997, September 30, 1997 and December 31, 1997, the above ratios will be computed by adding to Adjusted Operating Cash Flow the lesser of (i) the unused borrowing availability under the Available Reducing Revolver Commitments as of the applicable Quarterly Date or (ii) the sum of $3,050,000. Section 5.05. Capital Expenditures. Not make or incur Capital Expenditures in any of the following periods in excess of the respective aggregate amounts for all of the Operating Companies indicated below: Fiscal Year Maximum Ending December 31 Capital Expenditures ------------------ -------------------- December 31, 1996 $12,700,000 December 31, 1997 $ 5,500,000 December 31, 1998 and each December 31 thereafter $ 4,500,000 provided, however, that so long as no Event of Default shall then exist, Capital Expenditures permitted, but not made, in any such fiscal year (or portion thereof) as provided under the foregoing table may be deferred and made in the subsequent fiscal year in addition to permitted Capital Expenditures for such subsequent fiscal year specified above, provided that no such deferred Capital Expenditures may be further deferred. -34- Section 5.06. 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 Operating Companies may pay (i) monthly Management Fees to the Manager and (ii) lease payments to Pegasus Towers, L.P. in respect of the tower leases in effect on the date hereof, and any renewals thereof; provided that (aa) such payments shall be subject to the applicable Affiliate Subordination Agreement, (bb) no Default shall exist as of the date of any such proposed payment and after giving effect thereto, and (cc) such payments shall not exceed, during any period of twelve (12) consecutive months, the lesser of $1,750,000 or the actual cost of providing management and administrative support services to the Operating Companies for such period. (b) The Borrower may make regularly scheduled payments of interest under the Subordinated Notes unless an Event of Default shall have occurred and be continuing. (c) Subject to the provisions of the Affiliate Subordination Agreements and provided that no Default shall exist as of the date of the proposed payment or after giving effect thereto (i) the Restricted Subsidiaries may pay dividends and make distributions to the Borrower or other Restricted Subsidiaries holding equity interests in the payor, (ii) the Operating Companies may repay indebtedness owed to the Borrower or to Restricted Subsidiaries other than PCT-CONN, MCT and MCT Cablevision, Ltd. and (iii) the Operating Companies and the Borrower may make intercompany loans to one another subject to the limitations set forth in Section 7.01. 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 Operating Companies shall: 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 or partnership existence, as the case may be, all material rights, licenses, permits and franchises (including all Licenses, Franchises 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 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) and all material agreements to which it is a party, including without limitation all network affiliation agreements and all agreements with its stockholders or partners, as the case may be, 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; and (c) 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. -35- 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 the chief executive 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 certificate 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 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, as loss payee pursuant to a so-called "standard mortgagee clause" or "Lender's loss payable endorsement", or as additional insured (as appropriate), (ii) provide that no action of any Company shall void 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) In the event of a casualty loss, the Lenders will deliver to such Company the proceeds of any insurance thereon, subject to the provisions of Section 1.06(c), provided that (i) such Company shall use such proceeds for the restoration or replacement of the property or asset which was the subject of such loss within 180 days after the receipt thereof, (ii) such Company shall have demonstrated to the reasonable satisfaction of the Lenders that such property or asset 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 property or asset which was the subject of such loss, 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. Notwithstanding the foregoing, and subject to Section 1.06(c), if a casualty loss results in the Agent's receipt of insurance proceeds aggregating $500,000.00 or more, then in lieu of delivering such proceeds to a Company, the Lenders shall have the right to retain such proceeds for the purpose of making disbursement thereof jointly to such Company and any contractors, subcontractors and materialmen to whom payment is owed in connection with such restoration. (c) To the extent, if any, that the real property (whether owned or leased) of the Companies is situated in a flood zone designated as type "A" or "B" by the U.S. Department of Housing and Urban Development, obtain and maintain flood insurance in coverage and amount satisfactory to the Required Lenders. 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 -36- 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 the FCC, 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 the Franchises and the Licenses), any Headend Site Lease or Tower Site Lease, any DBS Agreement or any other material agreement to which it is a party, or (ii) any alleged default with respect to, or acceleration or other action under, the Subordinated Debt Documents or any other 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 which could have a Material Adverse Effect; or (e) the occurrence of any Default or the occurrence of any event which, upon notice or lapse of time or both, would constitute such a Default. Section 6.05. Financial Statements and Reports. Furnish to the Agent (with multiple copies for each of the Lenders): (a) Within one hundred twenty (120) days after the end of each fiscal year, the consolidated and consolidating (or, if applicable, combined and combining) balance sheets and statements of income, stockholders' or partners' equity (as applicable) and cash flows of the Borrower, all of its Subsidiaries and the Parent Subsidiaries, together with supporting schedules in form and substance satisfactory to the Lenders, audited by independent certified public accountants selected by the Borrower and reasonably acceptable to the Required Lenders (the "Accountants"), the form of opinion to be also reasonably satisfactory to the Required Lenders, showing the financial condition of the Borrower, all of its subsidiaries and the Parent Subsidiaries at the close of such fiscal year and the results of operations during such year, and containing a statement 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, nor any event which upon notice or lapse of time or both would constitute an Event of Default, has occurred under Article V or otherwise (or, if such an event has occurred, a statement explaining its nature and extent), including without limitation any Subordinated Indenture Default; 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, the consolidated (or, if applicable, combined) balance sheets and statements of income, stockholders' or partners' equity (as applicable) and cash flows of the Borrower, all of its Subsidiaries and the Parent 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 the Borrower in accordance with GAAP (except for the absence of notes) and certified by the Borrower's chief financial officer, such -37- balance sheets to be as of the close of such quarter, and such statements of income, stockholders' 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 (i) a comparison of actual results to results for the comparable period of the preceding fiscal year and projected results set forth in the Budget for such period and (ii) a breakdown of revenues, expenses and Operating Cash Flow for each division and each Station; (c) Within forty-five (45) days after the end of each month, consolidated (or, if applicable, combined) balance sheets and statements of income of the Borrower, all of its Subsidiaries and the Parent Subsidiaries, together with supporting schedules, prepared by the Borrower in accordance with GAAP (except for the absence of notes) and certified by an authorized representative 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) and to include a comparison of actual results to results for the comparable period of the preceding fiscal year and projected results set forth in the Budget for such period and (ii) a breakdown of revenues, expenses and Operating Cash Flow for each division and each Station; (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 certificate in the form of Schedule 6.05 attached hereto (or otherwise in a form satisfactory to the Agent) signed on behalf of the Borrower by the chief financial officer or chief executive 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 Event of Default nor any event which upon notice or lapse of time, or both, would constitute such an Event of Default, including without limitation any Subordinated Indenture Default, has occurred and is continuing (or, if such event has occurred, a statement explaining its nature and extent) which certificate shall also provide detailed reconciliations breaking out the results of any Subsidiaries included in such financial statements and shall be delivered together with a certification of compliance with Section 4.09 (and all other provisions) of the Subordinated Indenture and the absence of any Subordinated Indenture Default, including an updated Calculation of Leverage Ratio in the form attached as Schedule 4.26, in reasonable detail and reasonably satisfactory to the Required Lenders; (e) (i) On or before February 15 of each fiscal year, an updated monthly cost budget approved by the Board of Directors of the Parent, including planned Capital Expenditures other Improvements 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 unmaterial adjustments to the timing of any proposed borrowings); (f) As soon as reasonably possible and in any event within thirty (30) days after the end of each month, a certificate of a responsible officer of PCT, setting forth in reasonable detail, as to each of the Systems, (i) the miles of activated plant and number of homes passed, (ii) the numbers of basic subscribers, the numbers of pay television units as at the end of such month, (iii) changes in numbers of each such category of subscribers (including numbers of disconnects and connects within each such category), (iv) the average monthly aggregate basic and pay -38- service revenues per subscriber as at the end of such month (excluding revenues in respect of home shopping services, connects, disconnects, repair calls or other related services), (v) rate changes, if any, (vi) changes in wattage, channel capacity and addressability, and (vii) the numbers of subscribers more than forty-five (45) days delinquent measured from the date of original billing; (g) As soon as reasonably possible and in any event within thirty (30) days after the end of each month, a certificate of a responsible officer of PST (together with the report referred to in paragraph (f) above, the "Monthly Subscriber Reports"), setting forth in reasonable detail, (i) the numbers of DBS subscribers as at the end of the most recent monthly cut off, (iii) changes in numbers of subscribers, (ii) the average monthly aggregate revenues per subscriber as at the end of such month, (iii) rate changes, if any, and (iii) the number of subscribers more than forty-five (45) days delinquent measured from the date of original billing; (h) 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; (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 Operating Company to any of its stockholders, partners 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, 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, Franchise or 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 System or Station or any Franchise or 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 Franchise or License or if copies thereof are requested by the Agent; (m) Within ten (10) days after the receipt or filing thereof by 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 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 -39- filings or compliance matters sent to the Parent or such Affiliate by any such securities commission or the SEC in relation to the Parent or such Affiliate and its respective affairs; and (n) 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 stockholders, partners or other Affiliates as the Lenders may reasonably request, including 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 its books and records (and those of the Unrestricted Subsidiaries) and to make abstracts or reproductions thereof. 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 (other than Bride Communications, Inc., HMW, Inc., Portland Broadcasting, Inc. and BT Satellite, Inc., until such time as it is reasonably practicable to amend each such corporations fiscal year to conform to that of the other Companies). Section 6.08. Appraisals. If any Lender determines in good faith that it is required, by applicable law or by the Comptroller of Currency or any other Governmental Authority, to obtain appraisals as to the market value of any real property constituting Collateral, obtain such appraisals, at the sole cost and expense of the Borrower and in conformity with all requirements of applicable law, as from time to time in effect. Section 6.09. Additional Assurances. From time to time hereafter: (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 Schedule 2.01 which require action after the Closing Date, as stated in such Schedule, and (ii) 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 real property interests acquired (by ownership or lease) by the Borrower or any of the Operating Companies, together with any necessary consents relating thereto; (b) 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, execute and deliver all applications, certifications, instruments and other documents and papers that the Lenders may be so required to obtain; and (c) use reasonable efforts to obtain any consents from any Governmental Authorities and other Persons necessary to create and perfect a valid and enforceable first priority lien on the Franchises and any other applicable contract and agreement not so encumbered as of the Closing Date as specified in Schedule 4.04, so that, to the maximum extent practicable, the lien of the Agent and the Lenders created therein pursuant to the Security Documents will be a valid and enforceable first priority lien on all Franchises and other contracts and agreements of the Companies. -40- Nothing contained in this Section 6.09 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 or otherwise under this Agreement, after giving effect to the Post-Closing Obligations Agreement of even date herewith between the Borrower and the Agent, as amended from time to time. Section 6.10. Completion of Improvements. Complete all Improvements by such date as may be necessary to comply with applicable Franchise and other regulatory or contractual requirements, and, within thirty (30) days thereafter, supply the Lenders with such documentation as the Lenders shall reasonably request evidencing such completion. Section 6.11. Renewal of Franchises. 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 6.12. 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. (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 -41- 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) Perform any and all Remedial Work necessary under all Environmental Laws applicable (now or in the future) to the Companies or their businesses. Section 6.13. Interest Rate Protection. (a) Within ninety (90) days after the date of the first Advances under the Reducing Revolving Commitments, enter into, and, thereafter, maintain in full force and effect, one or more Rate Hedging Agreements containing terms and conditions reasonably satisfactory to the Required Lenders and generally prevailing at such time and sufficient to ensure that at least fifty percent (50%) of the aggregate principal amount of the Reducing Revolver Advances then outstanding is protected at all times against increases in the applicable Prime Rate or LIBOR Rate for a term extending for at least two (2) years. (b) (i) Within fifteen (15) days prior to the expiration of the Rate Hedging Agreement(s) entered into as required under Section 6.13(a) and each subsequent Rate Hedging Agreement executed by the Borrower hereunder, enter into and thereafter maintain one or more Rate Hedging Agreements containing terms and conditions reasonably satisfactory to the Required Lenders and covering at least fifty percent (50%) of the aggregate principal amount of the Reducing Revolver Advances then outstanding. (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 XII, none of the Borrower, the Operating Companies or the Unrestricted Subsidiaries will, directly or indirectly: Section 7.01. Indebtedness. Incur, create, assume, become or be liable, directly, indirectly or contingently, in any manner with respect to, or permit to exist, any Indebtedness or liability, except: (a) Indebtedness of the Borrower to the Lenders hereunder and under the Notes; (b) the guaranties of the Operating Companies and the Parent required under Section 2.01; (c) any Rate Hedging Obligation incurred in accordance with Section 6.13; (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 extended, without the prior written consent of the Required Lenders; (e) Indebtedness in respect of endorsements of negotiable instruments for collection in the ordinary course of business; -42- (f) Indebtedness under Capital Leases and purchase money Indebtedness relating to the purchase price of real estate and equipment to be used in the Companies' businesses, in the aggregate principal amount (including any such amounts set forth on Schedule 7.01 attached hereto) of not more than $2,000,000 outstanding at any time; (g) Indebtedness to the Subordinated Noteholders under the Subordinated Debt Documents; (h) Indebtedness among the Borrower and the Operating Companies (including Indebtedness under the PCT-CONN Note Documents and the MCT Note Documents), provided, (i) that not more than $400,000 in additional loans to PCT - -CONN and (ii) $1,000,000 in aggregate amount of additional loans to Pegasus San German and MCT shall be permitted under this Section 7.01; (i) the WTLH Debt; and (j) Unsecured Indebtedness of the Borrower and the Operating Companies of a type not covered by any of the other provisions of this Section 7.01 and which does not at any time exceed $1,000,000 in aggregate amount as to the Borrower and all Operating Companies as a group. Section 7.02. Liens. 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 or ownership interests, now or hereafter owned, other than: (a) liens securing the payment of taxes, 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', warehouser's or mechanics' liens, incurred by it in good faith 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 (k) or (l) of Article VIII; (f) liens in favor of the Agent or the 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; -43- (g) liens against the Companies arising under or securing Capital Leases and liens or mortgages securing purchase money Indebtedness described in Section 7.01(f), 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 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. Section 7.03. Disposition of Assets; etc. Sell, lease, transfer or otherwise dispose of its properties, assets, rights, licenses and franchises to any Person (including without limitation dispositions in exchange for similar assets and properties and commonly referred to as "asset swaps") (all of the foregoing being referred to herein as a "Disposition"), except for: (a) Dispositions made in the ordinary course of business (including the Disposition, without replacement, of equipment which is obsolete or no longer needed by the Companies in the conduct of their businesses and the replacement of equipment with other equipment of at least equal utility and value (provided that the Agent's or the Lenders' lien upon such newly acquired equipment shall have the same priority as the Agent's or the Lenders' lien upon the replaced equipment subject to any prior liens permitted by Sections 7.01(f) and 7.02(g)); and (b) the Disposition of the Operating Companies' existing cable television systems in Connecticut, Massachusetts and New Hampshire prior to March 31, 1998 and the Disposition of other assets having a fair market value of not more than $5,000,000 in the aggregate for all such other assets ( all of which dispositions may be made free from the liens of the Security Documents); provided, however, that (i) the Operating Companies shall have received payment in cash or cash equivalents of at least eighty-five percent (85%) of both gross and net proceeds from any such disposition of assets (other than like-kind exchanges under Section 1031 of the Internal Revenue Code) and (ii) the Borrower shall have complied with the provisions of Section 1.06(e). The Companies may dispose of additional properties made outside the ordinary course of business with the prior written consent of the Required Lenders, in their sole and absolute discretion, which consent, if given, shall in any event be contingent upon satisfaction of the threshold conditions set forth in clauses (i) and (ii) above. Section 7.04. Fundamental Changes; Acquisitions. (a) (i) Form any subsidiary or otherwise change the corporate structure or organization of the Borrower or the Operating Companies from that set forth in Schedule 4.22, except in connection with any Permitted Acquisition and as expressly contemplated in the Registration Statement in connection with the consummation of the Offering; (ii) permit any of the Inactive Subsidiaries to engage in any activities, other than the dissolution thereof; (iii) permit or suffer any amendment of its charter or partnership documents which could have a Material Adverse Effect (it being expressly agreed that the inclusion in any such charter 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); (iv) dissolve, liquidate, consolidate with or merge with, or otherwise acquire any Station, System or DBS Rights or all or any substantial portion of the ownership interests or assets or properties of any corporation, partnership or other entity or any other material assets, other than pursuant to (A) Permitted Acquisitions and Capital Expenditures permitted hereunder (B) purchases of inventory and supplies in the ordinary course of business; (v) repurchase any shares of capital stock or partnership interests; or (vi) issue any additional shares of capital stock or partnership interests, except for securities (A) in respect of which the issuing Company has no obligation to redeem or to pay cash distributions or dividends, (B) the issuance of which does not result in an Event of Default and (C) which shall have been collaterally assigned or pledged to the Agent as required hereunder. -44- (b) Notwithstanding the foregoing, (i) the Borrower and one or more Restricted Subsidiaries may merge or consolidate with each other if the surviving or resulting corporation is either the Borrower or a Restricted Subsidiary and if all actions required by Section 2.01 shall have been taken and (ii) the Parent may transfer to the Borrower and the Borrower may transfer to one or more Restricted Subsidiaries the outstanding capital stock of Bride Communications, Inc., HMW, Inc. and BT Satellite, Inc. Section 7.05. Local Marketing Agreements, Etc. Enter into any LMA or other similar arrangement, other than Permitted LMAs. Section 7.06. 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 7.07. 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 Operating Companies may engage in such transactions to the extent structured as Capital Leases and subject to the limitations in Section 7.01(f). Section 7.08. Investments. Except for Permitted Investments, purchase, invest in or otherwise acquire or hold securities, including, without limitation, capital stock and evidences of indebtedness of, or make loans or advances to, or enter into any arrangement for the purpose of providing funds or credit to, any other Person. Section 7.09. Change in Business. Engage, directly or indirectly, in any business other than the businesses in which it is currently engaged. Section 7.10. 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. Section 7.11. Transactions with Affiliates. Except for transactions contemplated by the Management Agreement 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 7.12. Amendment of Certain Agreements, Etc. (a) Amend, modify or terminate any Franchise or License, the PCT-CONN Note Documents, the MCT Note Documents, any DBS Agreement, any agreement or instrument evidencing Subordinated Debt or any material agreement to which any Company is a party, or enter into any material agreement, in each case, if the effect thereof would be to increase materially the obligations of any Company thereunder or to confer additional rights upon the other parties thereto which could have a Material Adverse Effect or (b), in any event, subject to applicable law, elect to terminate or amend any License Agreement. -45- Section 7.13. 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 7.14. 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 G, 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. Section 7.15. Negative Pledges, etc. Enter into any agreement (excluding this Agreement or any other Transaction Document) prohibiting (a) any Company from amending or otherwise modifying this Agreement or any other Transaction Document, or (b) the creation or assumption of any lien upon the properties, revenues or assets of any Company, whether now owned or hereafter acquired. 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 in this Agreement or the Security Documents, or in any report, certificate, financial statement or other instrument furnished in connection with this Agreement, or the borrowing 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 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 installment of any interest on any Note, or any premium or fee or any other indebtedness of any Company to the Agent or any Lender for more than five (5) Business 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 in the due observance or performance by, or compliance with, any Person other than the Agent or any Lender of 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), 6.05, 6.06, 6.07 and 6.11 or 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 the earlier to occur of (i) the Borrower's discovery thereof or (ii) written notice thereof from the Agent or any Lender to the Borrower (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; -46- (e) default in the due observance or performance of, or compliance with, any other covenant, condition or agreement, on the part of any Person other than the Agent or any Lender 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 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) any Subordinated Indenture Default or any other default under the Subordinated Debt Documents or with respect to any other evidence of Indebtedness of the Borrower or any Operating 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 Borrower or the Operating 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) the Borrower or any Operating 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 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 held by a License Subsidiary; (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 Franchise or FCC License; (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; or (iv) any material DBS Agreement shall be terminated or amended in a manner reasonably likely to have a Material Adverse Effect; (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) any Company shall (i) discontinue its business, (ii) apply for or consent to the appointment of a receiver, trustee, custodian or liquidator of it or any of its property, (iii) admit in writing its inability to pay its debts as they mature, (iv) make a general assignment for the benefit of creditors, (v) be adjudicated a bankrupt or insolvent or be the subject of an order for relief under Title 11 of the United States Code or (vi) 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; -47- (j) there shall be filed against any Company 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; (k) final judgment for the payment of money which, when aggregated with all other outstanding judgments against the Companies, exceeds $1,000,000 (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; (l) 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; (m) for any reason, (i) the Borrower shall cease to own all of the issued and outstanding capital stock of each of PBT, PST and PCT; (ii) PBT shall cease to own directly or indirectly all of the issued and outstanding capital stock or other equity interests of each of the License Subsidiaries (except that all the issued and outstanding capital stock of HMW, Inc., may be owned directly or indirectly by the Parent until it is transferred to the Borrower and re-transferred by the Borrower to PBT); (iii) PCT shall cease to own directly or indirectly all of the issued and outstanding capital stock or other equity interest of each of PCT-CONN, MCT and Pegasus San German or (iii) Marshall W. Pagon shall cease to control the Companies; (n) for any reason, the Parent shall cease to own all of the issued and outstanding capital stock of the Borrower (other than the shares of the Borrower's Class B Common Stock outstanding on the date of this Agreement); (o) for any reason, PCT-CONN shall retain more than $250,000 in cash balances, after the payment of all operating expenses and the distribution or advance of excess cash to PCT; or (p) for any reason (other than the gross negligence of the Agent or the Lenders, it being nonetheless understood and agreed that the Borrower shall have the primary responsibility for filing continuation statements under the Uniform Commercial Code and making other conforming amendments to the Security Documents to reflect changed circumstances and assure continued compliance therewith and with Section 2.01), any material Security 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; 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 XII, 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 (i) or (j) 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). -48- 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 of the exercise of any power granted hereby or thereby or by law, all subject to the provisions of Article XII. 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 Operating Company 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 Operating Company 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 the Operating Companies (with all due and proper authorization of the Boards of Directors and partners, as the case may be of the Operating Companies), 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. Each Lender hereby irrevocably (subject to Section 10.08) designates and appoints Canadian Imperial Bank of Commerce, New York Agency, which designation and appointment is coupled with an interest, as the Agent of such Lender under this Agreement and the other Transaction Documents, and each such Lender irrevocably authorizes Canadian Imperial Bank of Commerce, New York Agency, as the Agent of such Lender, to take such action on its behalf under the provisions of this Agreement and the other Transaction 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 Transaction Documents, together with such other powers as are reasonably incidental thereto. The Agent (which term as used in this sentence and in Section 10.05 and such first sentence of Section 10.06 hereof shall include reference to its affiliates and its own and such affiliates' officers, directors, employees and agents) shall not: (a) have any duties or responsibilities to be a trustee for any Lender; (b) 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; (c) be required to initiate or conduct any litigation or collection proceedings hereunder except to the extent requested by the Required Lenders; and (d) 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. 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. Subject to the foregoing, to Article XII 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, (a) 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; (b) exercise any and all rights, powers and remedies of the Lenders under this Agreement or any of the Security Documents, including the giving of any consent or waiver or the entering into of any amendment, subject to the provisions of Article XII; (c) execute, deliver and file UCC Financing Statements, mortgages, -49- deeds of trust, lease assignments and other such agreements, and possess instruments on behalf of any or all of the Lenders; and (d) 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. 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 such Agent 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 XII, 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 Advances made by CIBC hereunder, CIBC shall have the same rights and powers hereunder as any other Lenders and may exercise the same as though its Affiliate, Canadian Imperial Bank of Commerce, New York Agency, were not acting as the Agent. The Agent and its affiliates (including CIBC) 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 their Affiliates as if it were not acting as an Agent and as if CIBC were not a Lender, and the Agent may accept fees and other consideration from any Company 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 l4.02, but without limiting the obligations of the Borrower under such Section l4.02), ratably in accordance with the aggregate principal amount of the Notes held by the Lenders (or, if no such principal or interest is at the time 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 in any way relating to or arising out of this Agreement or any Security Document or any other 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 14.02) or the enforcement of any of the terms of this Agreement or of any Security 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. -50- 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 document referred to or provided for herein 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 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 or Removal of Agent. Canadian Imperial Bank of Commerce, New York Agency (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 Canadian Imperial Bank of Commerce, New York Agency (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 such 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, if any, directly to each Lender entitled thereto, pursuant to written instructions provided by the retiring Agent, 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. -51- XI. DEFINITIONS As used herein the following terms have the following respective meanings: Accountants. See Section 6.05. Acquisition. The San German Acquisition, the Harron Acquisition and any Permitted Acquisition. Acquisition Agreements. (a) With respect to San German Acquisition, the San German Acquisition Agreement and (b) with respect to any Permitted Acquisition, the respective acquisition, purchase or other agreement which sets forth the terms and conditions of such acquisition. Adjusted Operating Cash Flow. For any period of twelve (12) consecutive months or four (4) consecutive fiscal quarters, Operating Cash Flow for such period, adjusted as follows: (a) to reflect any Disposition or Acquisition permitted under Section 7.03 or 7.04, as the case may be, by an amount determined by the Required Lenders and the Borrower to be appropriate to reflect the effect of all such Dispositions and Acquisitions during such period, provided that (i) Operating Cash Flow shall be determined on a pro forma basis for such period as if any such Dispositions and Acquisitions were consummated on the first day of such period and (ii) adjustments for acquisitions will include the addition of non-recurring expenses deducted in computing Operating Cash Flow, subject to the approval of the Required Lenders, in their sole and absolute discretion; and (b) by calculating that portion of Operating Cash Flow attributable to DBS operations (including the pro forma results of acquired DBS rights) based on the most recently ended three (3) month period or fiscal quarter, as the case may be, multiplied by four (4). Advance(s). See Section 1.02(c). Affiliate(s). Any Person that directly or indirectly controls, or is under common control with, or is controlled by, the Borrower and, if such Person is an individual, any member of the immediate family (including parents, spouse, children and siblings) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, "control", including, its correlative meanings, "controlled by" and "under common control with", shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership or securities or partnership or other ownership interests, by contract or otherwise), provided that, in any event, any Person that owns directly or indirectly securities having ten percent (10%) or more of the voting power for the election of directors or other governing body of a corporation or ten percent (10%) or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. Notwithstanding the foregoing, no individual shall be an Affiliate solely by reason of his or her being a director, officer or employee of the Borrower or any Subsidiary. Affiliate Subordination Agreements. See Section 2.01(b). Agent. See the Preamble. -52- Applicable Margin. See Section 1.03. Assignment and Acceptance. See Article XIII. Audited Financial Statements. See Section 1.03. Available Commitments. The aggregate Available Reducing Revolver Commitments and Available Revolving Credit Commitments. Available Reducing Revolver Commitments. See Section 1.01(b). Available Revolving Credit Commitments. See Section 1.02(b). Borrower. See the Preamble. Borrowing Date. With respect to any Advances requested hereunder, the date such Advances are to be made. Budget. See Section 6.05(e). 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 a day for trading by and between banks in U.S. Dollar deposits in the London interbank market. Capital Expenditures. For any period, expenditures, (including, without duplication, the aggregate amount of Capital Lease Obligations incurred during such period) made by the Borrower and the Restricted Subsidiaries to acquire or construct fixed assets, plant or equipment (including renewals, improvements and replacements, but excluding repairs and acquisitions permitted hereunder) during such period, computed in accordance with GAAP. 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 permitted or required to be capitalized on the lessee's balance sheet. Capital Lease Obligations. All obligations of the Borrower and the Restricted Subsidiaries 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. Casualty Event. Any loss of, or damages to, or any condemnation or other taking of any assets or property of the Borrower or any Operating Company for which the Borrower or any Operating Company receives insurance proceeds, proceeds of a condemnation award or other compensation. CERCLA. The Comprehensive Environmental Response, Compensation and Liability Act of 1989 (42 USC 9601, et. seq.). CIBC. See the Preamble. -53- Closing Date. The date on which this Agreement becomes effective and the first Advances are made. 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 Agreement. Commitment Reduction Notice. See Section 1.06. Commitment Fee. See Section 1.08. Commitments. Collectively, the Reducing Revolver Commitments and the Revolving Credit Commitments. Companies. Collectively, the Borrower, the Operating Companies, the Unrestricted Subsidiaries and the Parent. Contemplated DBS Acquisition. The acquisition by the Parent or a Subsidiary of the Parent (other than the Borrower or any of the Operating Companies) of direct broadcast satellite rights pursuant to the Harron Acquisition or the Horizon Acquisition for cash using the proceeds of the Offering and using no funds or credit of the Borrower or any Operating Company and the subsequent contribution of the acquired assets (or all of the capital stock of the purchasing entity, provided that such entity has no Indebtedness after giving effect to said contribution) to the Borrower such that all of such purchased direct broadcast satellite rights and related assets are held by one or more of the Restricted 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. DBS Agreements. The DIRECTV Agreements, the Dealer Agreement and any and all other agreements entered into by the Borrower or any of the Operating Companies from time to time, with the Lenders' consent, if required under this Agreement, to license the right to deliver direct broadcast service. DBS Rights. Any and all rights owned by the Borrower or any of the Operating Companies to market, sell, deliver and retain revenues from direct broadcast television programming initially transmitted over satellite frequencies, including without limitation PST's rights under the DIRECTV Agreements. Dealer Agreement. The Dealer Agreement between Hughes Communications Galaxy, Inc. and PST, as originally executed and delivered and as amended in accordance with Section 7.12. Default. An Event of Default or event or condition that, but for the requirement that time elapse or notice be given, or both, would constitute an Event of Default. -54- DIRECTV. The video, audio and data services provided over satellite frequencies by DIRECTV Enterprises, Inc., an affiliate of Hughes Communications Galaxy, Inc. DIRECTV Agreements. The NRTC/Member Agreement for Marketing and Distribution of DBS Services between PST, as assignee of Pegasus Cable Associates, Ltd., and the National Rural Telecommunications Cooperative, a District of Columbia corporation, dated as of June 24, 1993, as amended through the date hereof, providing for the delivery of direct broadcast service by PST to certain households in the Counties or Metropolitan Statistical Areas of Dutchess, New York; Berkshire, Barnstable, Dukes, Franklin, Hampshire and Worcester, Massachusetts; Belknap, Carroll, Grafton and Merrimack, New Hampshire; and Litchfield, Connecticut; as originally executed and delivered and as amended in accordance with Section 7.12, pursuant to which PST holds the exclusive rights to provide cable programming services and all other video, audio and data packages transmitted by Hughes Communications Galaxy, Inc. over the HCG frequencies (as defined therein) to residential and commercial subscribers in specified service areas. Disposition. See Section 7.03. Dollars and $. Lawful money of the United States of America. Enhanced Yield Balances. See Section 1.03. 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 Site Assessments. See Section 4.23. ERISA. The Employee Retirement Security Act of 1974, as amended. Excess Cash Flow. For any period, Operating Cash Flow for such period minus (a) the lesser of actual or permitted Fixed Charges (other than Capital Expenditures) for such period, (b) Capital Expenditures permitted for such period under Section 5.05, without regard to the amount of permitted Capital Expenditures carried over from the prior year, and (c) voluntary prepayments of the Notes made in connection with voluntary reductions of the Commitments during such period, as provided in Section 1.06(a). Expiration Date. See Section 1.01. Event of Default. See Article VIII. 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 Licenses. Any Licenses issued by the FCC. -55- Federal Funds Rate. For any period, a fluctuating interest rate per annum (based on a 365 or 366 day year, as the case may be) 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 Letter. The letter agreement dated as of the date of this Agreement between the Borrower, CIBC and the Agent with respect to the payment of certain fees. Financial Statements. See Section 4.01. Fixed Charges. For any fiscal period, the sum of (a) Total Debt Service for such period; (b) Capital Expenditures made by the Borrower, the Operating Companies and the Unrestricted Subsidiaries during such period; and (c) taxes paid or payable by the Borrower, the Operating Companies and the Unrestricted Subsidiaries during such period in respect of income and profits (other than taxes in respect of gains excluded from Net Income in the calculation of Operating Cash Flow). Franchises. 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 Franchises set forth on Schedule 4.07(a). Franchise Areas. The communities listed in Schedule 4.07(a). 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, 1995, 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 broadcast radio, television industry or cable television, as the case may be. 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. Harron Acquisition. The acquisition of the rights as exclusive provider of DIRECTV services in certain rural areas of Texas and Michigan pursuant to the Harron Acquisition Agreement. Harron Acquisition Agreement. The Contribution and Exchange Agreement dated as of May 30, 1996 between Holdings and the Harron Seller. Harron Seller. Harron Communications Corp., a New York corporation. -56- 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 wasters", "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. Headend Site Leases. See Section 4.12. Holdings. See the Preamble. Horizon Acquisition. The acquisition of direct broadcast satellite rights and related assets in Ohio from Horizon Infotech, Inc. pursuant to a Letter of Intent dated July 8, 1996, as amended as of August 20, 1996. IBJ Schroder. IBJ Schroder Bank and Trust Company. Improvements. Any construction of plant or other improvements relating to the Systems. Inactive Subsidiaries. Pegasus Cable Television of Anasco, Inc., Pegasus Anasco Holdings, Inc. and PP Broadcast, Inc. Indebtedness or indebtedness. As applied to any Person, (a) all items (except items of capital stock, capital or paid-in surplus or of retained earnings) which, in accordance with GAAP, would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including Capital Lease Obligations but excluding Indebtedness of the Companies with respect to trade obligations and other normal accruals in the ordinary course of business not yet due and payable or not more than ninety (90) days in arrears measured from the date of billing; (b) all indebtedness secured by any mortgage, pledge, lien or conditional sale or other title retention agreement to which any property or asset owned or held by such Person is subject, whether or not the indebtedness secured thereby shall have been assumed; and (c) all indebtedness of others which such Person has directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business), discounted or sold with recourse or agreed (contingently or otherwise) to purchase or repurchase or otherwise acquire, or in respect of which such Person has agreed to supply or advance funds (whether by way of loan, stock or equity purchase, capital contribution, makewell or otherwise) or otherwise to become directly or indirectly liable. Interest Adjustment Date. See Section 1.03. Interest Adjustment Period. See Section 1.03. Interest Expense. For any period, the aggregate amount (determined on a consolidated or combined basis, as appropriate, after eliminating intercompany items, in accordance with GAAP) of interest accrued (whether or not paid) during such period (including the interest component of Capital Lease Obligations but excluding interest in respect of overdue trade payables) by the Companies in respect of all Indebtedness for borrowed money. -57- Interest Period. With respect to each LIBOR Loan, the period commencing on the date such Loan is made or converted from a Prime Rate Loan, or the last day of the immediately preceding Interest 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 Request for Advances or Interest Rate Option Notice, provided that: (i) any Interest Period (other than an Interest Period determined pursuant to clause (iv) 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; (ii) 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 Prime Rate Loan on the last day of the then current Interest Period with respect thereto; (iii) any Interest 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 (iv) below, end on the last Business Day of a calendar month; (iv) any Interest 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; (v) no Interest 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 Prime Rate Loans or LIBOR Loans having Interest Periods ending on or before such date; and (vi) notwithstanding clauses (iv) and (v) above, no Interest Period shall have a duration of less than one (1) month. 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 1.04(a). Lenders. See the Preamble. LIBOR Base Rate. With respect to each day during each Interest Period pertaining to any LIBOR Loans, the interest rate per annum (rounded upward, if necessary, to the nearest 1/16th of 1%) at which the Agent is offered deposits in U.S. Dollars at or about 11:00 A.M. (London Time), two (2) Business Days prior to the beginning of such Interest Period in the London interbank market 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 the LIBOR Loans to be outstanding during such Interest Period. LIBOR Loans. Loans bearing interest at a rate determined on the basis of the LIBOR Rate. 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 -58- 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. 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. 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(b). License Subsidiaries. WDBD License Corp., WDSI License Corp., Pegasus Broadcast Associates, L.P., and WOLF License Corp., each a Subsidiary of PBT formed for the sole purpose of owning one or more FCC Licenses, and HMW, Inc., a Subsidiary of the Parent formed solely for such purpose. Liens. See Section 4.12. 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. 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. Loans. The Advances. Management Agreement. The Management Agreement dated July 7, 1995, between the Manager and the Borrower, as originally executed and delivered and as amended in compliance with Section 7.12. Management Fees. Amounts due and payable to the Manager in accordance with the provisions of Section 3 of the Management Agreement. Manager. BDI Associates L.P., a Delaware limited partnership. Margin Stock. See Section 4.16. -59- Material Adverse Effect. Any circumstance or event which, individually or in the aggregate with other such circumstances or events, (i) has had, or could reasonably be expected to have, an adverse effect on the validity or enforceability of this Agreement or the other Loan Documents in any material respect, (ii) has had, or could reasonably be expected to have, an adverse effect on the condition (financial or other), business, results of operations, prospects or properties of the Borrower and the Operating Companies, taken as a whole, in any material respect or (iii) has impaired, or could reasonably be expected to impair, 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. 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 to Borrower and by Borrower to CIBC; 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 to Borrower and by Borrower to CIBC; 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. Monthly Subscriber Reports. See Section 6.05(g). 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. New England Systems. The Systems located in Connecticut, Massachusetts and New Hampshire. Net Income. For any period, net income of the Borrower and the Operating Companies from their respective operations, after deducting all operating expenses, provisions for all taxes and reserves (including reserves for deferred income taxes) and all other proper deductions (including Interest Expense), all determined on a consolidated or combined basis, as applicable, after eliminating intercompany items, in accordance with GAAP, but excluding Trades. Notes. See Section 1.02. -60- Obligations. The Loans 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 and the 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, 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 transactions in which (a) PCC offers and sells to the public shares of its Class A Common Stock substantially as described in the Registration Statement and (b) simultaneously with or immediately prior to the consummation of such sale of Class A. Common Stock, Holdings contributes all of its capital stock in the Borrower to PCC, as a result of which the Borrower becomes a subsidiary of PCC. Opening Balance Sheet. See Section 4.01. Operating Cash Flow. For any period, Net Income for such period, minus (i) actual cash payments made in respect of film and other broadcast contract rights and (ii) any extraordinary or unusual gains and gains derived from any sales of assets made during each period to the extent such gains are properly includable in the determination of Net Income for said period, but after restoring thereto amounts deducted for (a) depreciation; (b) amortization; (c) taxes in respect of income and profits paid during such period; (d) Interest Expense; (e) losses derived from any sales of assets made during such period; (f) other non-cash expenses (including without limitation the recognition of expenses related to the amortization of program license and rental fees); (g) Transaction Costs; and (h) extraordinary or unusual expenses incurred during such period, but only to the extent such expenses are properly includable in the determination of Net Income for such period; all determined on a consolidated or combined basis, as applicable, after eliminating intercompany items, in accordance with GAAP. Operating Companies. Collectively, the Restricted Subsidiaries and the Parent Subsidiaries. Parent. (a) Holdings, until the consummation of the Offering, and (b) thereafter, PCC. Parent Subsidiaries. Bride Communications, Inc., a Delaware corporation, HMW, Inc. a Maine corporation, and BT Satellite, Inc., a Maine corporation, each a subsidiary of the Parent. PBT. Pegasus Broadcast Television, Inc., a Pennsylvania corporation. PCC. Pegasus Communications Corporation, a Delaware corporation and the wholly owned subsidiary of Holdings as of the date of this Agreement. PCT. Pegasus Cable Television, Inc., a Massachusetts corporation. PCT-CONN. Pegasus Cable Television of Connecticut, Inc., a Connecticut corporation. -61- PCT-CONN Note Documents. The following documents, each dated as of February 18, 1993 and amended as of August 29, 1996, between PCT and PCT-CONN: Promissory Note and Loan Agreement, Security Agreement; Mortgage Deed and Collateral Assignment of Tenant's Interest in Leases of Real Property. Pegasus San German. Pegasus Cable Television of San German, Inc., a Delaware corporation. Permitted Acquisitions. The acquisition by the Borrower or any Restricted Subsidiary, whether by way of the purchase of assets or stock, by merger or consolidation or otherwise, of substantially all of the assets of or ownership interest in a television broadcast property, cable television property, or exclusive DBS Rights, which acquisition either constitutes a Contemplated DBS Acquisition or shall have been approved in writing by the Required Lenders in their sole and absolute discretion. Without in any way limiting the discretion of the Required Lenders, at a minimum, all Permitted Acquisitions (including Contemplated DBS Acquisitions) will be subject to the fulfillment of the following conditions: (a) If such acquisition involves the purchase of stock or other ownership interest, the same shall be effected in such a manner as to assure that the acquired entity becomes a wholly owned Restricted Subsidiary of the Borrower; (b) No later than (1) thirty (30) days 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, the Borrower shall have delivered to the Agent (in sufficient copies for all the Lenders) 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 new Projections, updated to reflect such acquisition and any related transactions, (2) promptly following a request therefor, copies of such other information or documents relating to such acquisition as any Lender shall have reasonably requested, and (3) 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; (c) The aggregate amount of all consideration payable by the Borrower or any Restricted Subsidiary or Subsidiaries in connection with such acquisition (other than 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; (d) Neither the Borrower nor any Restricted 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, except (i) to the extent permitted under Section 7.01 and (ii) obligations of the Seller 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; (e) All other assets and properties acquired in connection with any such acquisition shall be free and clear of any liens, charges and other encumbrances other than permitted under Section 7.02; -62- (f) The Borrower shall have complied as applicable with all of the provisions in Section 2.01, including the execution and delivery of such additional agreements, instruments, certificates, documents, consents, environmental site assessments, opinions and other papers as the Required Lenders may require; (g) Immediately prior to any such acquisition and after giving effect thereto no Default shall have occurred or be continued; and (h) 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, (i) calculated on a pro forma basis as of the end of and for the period of twelve (12) consecutive months most recently ended prior to the date of such acquisition for which financial statements are required to be provided (and have been so delivered) under Section 6.05 and (ii) under the Borrower's updated Projections referred to above. The Borrower shall provide to the Agent a certificate signed on behalf of the Borrower by its Chief Financial Officer demonstrating such compliance in reasonable detail. Permitted Investments. (a) Investments in property to be used by the Restricted Subsidiaries in the ordinary course of business; (b) current assets arising from the sale of goods and services in the ordinary course of business; (c) investments (of one year or less) in direct or guaranteed obligations of the United States, or any agency thereof; (d) 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 rated 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"); (e) investments (of 90 days or less) in commercial paper given one of the two highest ratings by Standard and Poor's Ratings Service, A Division of McGraw Hill, Inc., or by Moody's Investors Service, Inc.; (f) investments redeemable at any time without penalty in money market instruments placed through the Lenders or Approved Institutions; (g) existing investments by the Companies in Subsidiaries; (h) repurchase agreements fully collateralized by United States government securities; (i) deposits fully insured by the FDIC; (j) 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 Companies, provided that the aggregate outstanding amount of all such loans and advances shall not exceed $50,000 in the aggregate at any time; (k) investments made in connection with acquisitions permitted hereunder; and (l) investments in Unrestricted Subsidiaries formed after the date of this Agreement, provided that (i) such investments do not exceed $500,000 in aggregate amount as to all Unrestricted Subsidiaries as a group, (ii) at the time any such investment is made and after giving effect thereto, there exists no Default, (iii) after giving effect to all such investments, the ratio of Total Funded Debt as of the date of such investment to Adjusted Operating Cash Flow for the then most recently ended period of four (4) consecutive fiscal quarters is less than 6.50:1.00, and (iv) notwithstanding the satisfaction of all of the foregoing criteria, the Required Lenders have consented thereto in writing, in their sole and absolute discretion. -63- Permitted LMA. An LMA which meets the following criteria: (a) The LMA is entered into between a Restricted Subsidiary formed for the sole purpose of executing, and operating under, the LMA. (b) The maximum amount of scheduled payments under the LMA which are made (or required to be made) or guaranteed by the Borrower or any Restricted Subsidiary shall not exceed $500,000 in any fiscal year. (c) No further payments, such as revenue sharing distributions, shall be permitted under any LMA unless, after giving effect to such proposed payment, each of the Restricted Subsidiaries bound under an LMA has demonstrated positive Operating Cash Flow for the period of twelve (12) consecutive months ending on the last day of the month for which financial statements are required to be delivered (and have been so delivered) under Section 6.05. (d) Excess Cash Flow of each such Restricted Subsidiary shall be dividended to the Borrower on a periodic basis as reasonably required by the Agent, but, in any event, at least once in each fiscal year. (e) No LMA shall bind any Company to purchase the broadcast station or assets subject thereto (unless such acquisition is otherwise permitted hereunder) or to incur any other material liability or obligation other than scheduled any customary payments referred to in paragraphs (b) and (c) above. (f) No LMA shall be permitted other than with respect to broadcast properties located in markets in which one or more of the Restricted Subsidiaries already owns broadcast properties. (g) 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. Person or person. Any individual, corporation, partnership, 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. Prime Rate. As of any date, the fluctuating interest rate per annum equal to the greater of (a) the rate established by Canadian Imperial Bank of Commerce 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 Prime Rate is not necessarily intended to be the lowest rate of interest determined by Canadian Imperial Bank of Commerce in connection with extensions of credit. Prime Rate Loans. Loans bearing interest at a rate determined on the basis of the Prime Rate. Pro Forma Debt Service. For any period, Total Debt Service for such period, provided that (a) the interest rate or rates applicable to any Indebtedness shall be determined based upon the rate or rates in effect on the date of such computation and (b) for purposes of calculating Total Debt Service for any period commencing after June 30, 2002, the principal balance of the Revolving Credit Notes during such period shall be excluded. -64- Projections. See Section 4.20. Properties. See Section 4.23. PST. Pegasus Satellite Television, Inc., a Delaware corporation. Quarterly Dates. See Section 1.03. 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 4.09. Rate Regulation Rules. See Section 4.09. Reducing Revolvers. See Section 1.01. Reducing Revolving Commitments. See Section 1.01. Reducing Revolver Notes. See Section 1.01. Registration Statement. PCC's registration statement (No. 333-5057) under the Securities Act of 1933 relating to the Offering, as heretofore amended and hereafter amended from time to time in a manner reasonably satisfactory to the Required Lenders or in a manner which does not materially alter the terms or nature of the contemplated offering. 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. 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. -65- 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). Request for Advances. See Section 1.04. Required Financial Statements. See Section 1.03. Required Lenders. Lenders holding at least two-thirds of the sum of (a) the aggregate outstanding principal amount of the Loans and (b) the aggregate amount of the unused Commitments; provided, however, that, so long as the number of Lenders does not exceed two (2) the "Required Lenders" shall mean both Lenders. Reserved Commitment Amount. See Section 1.01(b). Restricted Payment. Any distribution or payment of cash or property, or both, directly or indirectly (a) in respect of any Subordinated Debt, (b) to any Unrestricted Subsidiary or (c) to any partner or stockholder of any of the Companies 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 capital stock or partnership interests; provided, however, that Restricted Payments shall not include: (i) payments made to the WTLH License Companies to retire the WTLH Debt, but only if, concurrently therewith, the WTLH License Companies become Operating Companies hereunder and Restricted Subsidiaries under the Subordinated Indenture; (ii) reasonable Transaction Costs; (iii) payments under the Tax Sharing Agreement; (iv) transactions that comply with Section 7.12; and (v) any Permitted Investments described in clause (l) of the definition thereof set forth above. Restricted Subsidiaries. At any time, all of the Borrower's Subsidiaries other than the Unrestricted Subsidiaries. Revolving Lines of Credit. See Section 1.02. Revolving Credit Commitments. See Section 1.02. Revolving Credit Notes. See Section 1.02. San German Acquisition. See the Recitals. San German Acquisition Agreement. See the Recitals. San German Sellers. See the Recitals. -66- San German Systems. See the Recitals. Scheduled Principal Payments. For any fiscal period, (a) the aggregate principal amount of Advances 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 1.06(b), but in no event less than -0-. SEC. See Section 6.05. Security Agreement. The Security and Pledge Agreement signed by each of the Borrower and the Operating Companies as of the Closing Date. Security Document(s). See Section 2.01(c). Seller. (a) With respect to the Harron Acquisition, the Harron Seller, (b) with respect to the San German Acquisition, the San German Sellers and (c) with respect to any acquisition permitted hereunder, the owner of the stock (or other ownership interest) 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. Senior Funded Debt. At any time, all outstanding Indebtedness of the Borrower, the Operating Companies and the Unrestricted Subsidiaries for borrowed money, for the purchase of property and under Capital Leases, other than Subordinated Debt. Significant Franchise. See paragraph (f) of Article VIII. Stations. All of the television stations owned or managed by the Borrower and the Operating 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 (b) any Indebtedness which is subject to an Affiliate Subordination Agreement. Subordinated Debt Documents. The Subordinated Indenture, the 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, the Restricted Subsidiaries, as Guarantors, and First Union National Bank (successor to First Fidelity Bank, National Association), as Trustee, providing for the issuance of the Subordinated Notes. Subordinated Indenture Default. Any "Event of Default", as defined in the Subordinated Indenture. 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 Note due 2005 of the Borrower in the same aggregate principal amount issued under the Subordinated Indenture on July 7, 1995. -67- Subordinated Noteholders. The registered holders from time to time of the Subordinated Notes. 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 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 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. Systems. All of the cable television systems owned or managed by the Borrower and the Operating 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 Tax Sharing Agreement dated as of July 7, 1995, among Holdings and its Subsidiaries. Taxes. See Section 1.11. Total Debt Service. For any period, the aggregate amount (determined on a combined or consolidated basis, as appropriate after eliminating intercompany items, 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 Advances shall be limited to Scheduled Principal Payments. Total Funded Debt. At any time, all outstanding Indebtedness of the Borrower the Operating Companies and the Unrestricted Subsidiaries for borrowed money, for the purchase of property and under Capital Leases, determined on a consolidated or combined basis, as applicable, after eliminating intercompany items, 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 4.12. 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) accrued by (or by the Parent on behalf of) the Borrower and the Operating Companies to Persons who are not Affiliates of any Company during such period in connection with the closing of the transactions under this Agreement, any Permitted Acquisition and any other transactions occurring after the Closing Date which are consented to by the Required Lenders. Transaction Documents. See Section 4.03. -68- Unrestricted Subsidiaries. The WTLH License Subsidiaries and all other Subsidiaries, if any, formed after the date of this Agreement as permitted hereunder (a) if and so long as each such Subsidiary is an "Unrestricted Subsidiary" under the terms of the Subordinated Indenture and (b) provided that the Agent has received written notice from the Borrower of each such Subsidiary's designation as an Unrestricted Subsidiary. WTLH License Companies. WTLH, Inc. and WTLH License Corp., but only so long as (a) they remain "Unrestricted Subsidiaries" under the terms of the Subordinated Indenture and (b) their existing Indebtedness to General Management Consultants, Inc. and its Affiliates in the approximate principal amount of $3,050,000 remains outstanding. WTLH Debt. See the definition of WTLH Companies. XII. 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 or consent shall, without the prior written consent of all of the Lenders or the holders of all of the Notes at the time outstanding, (1) extend the fixed maturity or reduce the principal amount of, or reduce the amount or extend the time of payment of any principal of, or interest on, any Note (other than mandatory prepayments of the Notes out of Excess Cash Flow required under Section 1.06(d)), (2) increase or extend any Commitment of any Lender or extend the Expiration Date (it being understood that waivers or modifications of conditions precedent, covenants, Defaults or Events of Default shall not constitute any such increase or extension), (3) release any guaranties or any Collateral, unless such release of Collateral is in connection with a sale of Collateral to which any required consent of the Required Lenders has been given and substantially all of the Net Cash Proceeds of such sale are used to repay the Borrower's indebtedness to the Lenders hereunder or otherwise used in a manner permitted hereunder, (4) change the percentage referred to in the definition of "Required Lenders" contained in Article XI, or (5) amend the provisions of this Article XII; and provided, further, that neither notice to, nor the consent of, the Borrower shall be required for any modification, amendment or waiver of the provisions of this Article XII governing the number of Lenders required to consent to any act or omission under the Loan Documents or, subject to Article XIII, of the definition of "Required Lenders". (b) Any amendment or waiver effected in accordance with this Article XII 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 (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 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 or Event of Default in connection therewith, nor shall a -69- 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 or Event of Default shall not affect or alter this Agreement, any Note or any of the Security Documents, and each and every term, condition and other provision of this Agreement, the Notes and the Security 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 or Event of Default in connection therewith. An Event of Default hereunder and a default under any Note or under any of the Security Documents shall be deemed to be continuing unless and until cured or waived in writing by the Required Lenders or all of the Lenders, as provided in paragraph (a) above. XIII. 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 assigns, and all subsequent holders of any of the Notes or any portion hereof. (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) No Lender shall make any assignment, other than to a separately organized branch or an Affiliate of the same Lender, if, after giving effect thereto, such Lender would hold less than $5,000,000 of the then aggregate outstanding principal amount of the Notes. (ii) Any such assignment made other than to a separately organized branch, or an Affiliate of, a Lender shall reflect an assignment of such assigning Lender's Notes and Commitments which is in an aggregate principal amount of at least $5,000,000, and if greater, shall be an integral multiple of $1,000,000. (iii) Notwithstanding any provision of this Agreement to the contrary, each Lender may at any time assign all or any portion of its rights under this Agreement and each of the other Loan Documents, including, without limitation, 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); provided that no such assignment shall release a Lender from any of its obligations and liabilities under the Loan Documents. Any Federal Reserve Bank (or equivalent thereof) which receives such an assignment from any Lender may make further assignments of such rights in accordance with the provisions of this Section. (iv) 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 13(b)(iv) 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, (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 Commitments as set forth therein and (B) the assigning Lender thereunder shall, to the extent provided in such -70- 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. (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 and payment by the assignee to the Agent of a registration and processing fee of $3,000, the Agent shall accept such Assignment and Acceptance. Promptly upon delivering such Assignment and Acceptance to the Agent, the assigning Lender shall give notice thereof to the Borrower and the other Lenders pursuant to a Notice of Assignment and Acceptance substantially in the form of Schedule 13(b)(v). Within five (5) Business Days after receipt of such notice, the Borrower shall execute and deliver to the Agent in exchange for each such surrendered Note a new Note payable to the order of such assignee in an amount equal to the portion of the applicable Commitment(s) assumed 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) 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. Canceled Notes shall be returned to the Borrower upon the execution and delivery of such new Notes. (vi) 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 Commitment and the Notes held by it); provided, however, that, (A) the selling Lender shall remain obligated under this Agreement to the extent as it would if it had not sold such participation, (B) the selling Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (C) at no time shall the selling Lender agree with such participant to take or refrain from taking any action hereunder or under any other Loan Document, except that the selling Lender may agree not to consent, without such participant's consent, to any of the actions referred to Article XII, to the extent that the same require the consent of each Lender hereunder, (D) all amounts payable by the Borrower hereunder shall be determined as if such Lender had not sold such participation and no participant shall be entitled to receive any greater amount pursuant to this Agreement than the selling Lender would have been entitled to receive in respect of the amount of the participation transferred by such Lender to such participant had no such transfer occurred, and (E) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with the selling Lender in connection with such Lender's rights and obligations under this Agreement. (vii) Except for an assignment made to a separately organized branch or an Affiliate of a Lender, no assignment or participation referred to above shall be permitted without the prior written consent of the Agent, which consent shall not be unreasonably withheld or delayed. (viii) The Borrower may not assign any of its rights or delegate any of its duties or obligations hereunder. (ix) 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 furnished to such Lender by or on behalf of the Borrower and such assignee or participant shall treat such information as confidential. -71- XIV. MISCELLANEOUS Section 14.01. 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 hereunder. Section 14.02. 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 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 and agents) 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 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. -72- Section 14.03. Notice. (a) All notices, requests, demands and other communications provided for hereunder (including without limitation Requests for Advances) 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: Canadian Imperial Bank of Commerce, New York Agency 425 Lexington Avenue New York, New York 10017 Attention: Syndications Telecopy No.: (212) 856-3799 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 XIII, 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, Esquire Edwards & Angell 101 Federal Street Boston, Massachusetts 02110 Telecopy No.: (617) 439-4170 If to the Borrower: Marshall W. Pagon Pegasus Communications 5 Radnor Corporate Center Suite 454 100 Matsonford Road Radnor, Pennsylvania 19087 Telecopy No.: (610) 341-1835 with a copy (except for routine communications) to: Michael B. Jordan, Esq. Drinker Biddle & Reath Philadelphia National Bank Building 1345 Chestnut Street Philadelphia, Pennsylvania 19107-3496 Telecopy: (215) 988-2757 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. -73- (b) The address of the Agent for payment hereunder is as follows: Morgan Guaranty Trust Company 60 Wall Street New York, New York 10260 ABA: 021000238 Attention: For the Account of Canadian Imperial Bank of Commerce, New York Agency Account No.: 630-00-480 For further credit to Agented Loans, Account No.: 0709611 Re: Pegasus Media & Communications Telecopy No.: (212) 856-3799 Section 14.04. 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. Section 14.05. 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. (b) WAIVER OF JURY TRIAL. THE BORROWER 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 14.06. Severability. Any provision of this Agreement, the Notes or any of the Security 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. -74- Section 14.07. 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 14.08. 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 14.09. Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute one and the same Agreement. Section l4.10. 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 14.11. 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 Subordinated Debt Documents, the Management Agreement, the DBS Agreements and the Operating 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 14.12. 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 all municipal ordinances and state law by which any Franchise is created or granted. 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 an y FCC License, 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, without first obtaining such approval. The Agent and the Lenders specifically agree that (a) voting rights in the capital stock of the Companies will remain with the holders thereof even in an Event of Default unless any required prior consent of the FCC 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 capital stock of the Companies; and (c) prior to the exercise of stockholder 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 obtain and enjoy the full rights and benefits granted to the Agent and the Lenders by this Agreement and the Security 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 Franchise -75- or transfer of 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 14.13. 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 14.14. Environmental Indemnification. Without limiting the generality of Section 14.02, 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 "Indemnified Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to: (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 for any such Indemnified 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 Indemnified 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. Section 14.15. Designation of Senior Debt. The Borrower hereby designates all of the Obligations as Designated Senior Debt, as such term is defined in the Subordinated Indenture, and in accordance with the terms thereof. -76- 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 ----------------------------------------- Its: ----------------------------------- AGENT: CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY By ------------------------------------------- Harold F. Birk, Director, CIBC Wood Gundy Securities Corp., as agent LENDER: CIBC INC. By: ------------------------------------------ Harold F. Birk, Director, CIBC Wood Gundy Securities Corp., as agent Address for Notices to CIBC Inc.: CIBC Inc. 425 Lexington Avenue New York, New York 10017 Telecopy: (212) 856-3558 Attention: Harold F. Birk, Director REDUCING REVOLVING CREDIT NOTE New York, New York $_____________ ____ _____, 1996 FOR VALUE RECEIVED, the undersigned, PEGASUS MEDIA & COMMUNICATIONS, INC. (the "Maker"), hereby promises to pay to the order of _______, having an address at ________________________ (the "Bank"), the principal sum of _________ _______________ Dollars ($__________) or, if less, the aggregate unpaid principal amount of Advances hereunder made by the Bank to the Maker pursuant to that certain Credit Agreement dated as of _______, 1996, as the same may be amended, supplemented, replaced or otherwise modified from time to time hereafter (the "Credit Agreement"), by and among the Maker, the Bank, the other Lenders referred to therein, Canadian Imperial Bank of Commerce, New York Agency, as Agent for the Lenders (with its successors and assigns in such capacity, the "Agent"), together with interest on any and all principal remaining unpaid hereunder from the date hereof until payment in full, payable on the dates and at the interest rate or rates specified in the Credit Agreement. Capitalized terms used in this Note without definition have the meanings assigned to them in the Credit Agreement. The aggregate principal amount outstanding hereunder shall be payable as provided in the Credit Agreement. This Note may be prepaid in accordance with the terms and provisions of the Credit Agreement without penalty or premium (other than certain indemnification payments under Section 1.11 of the Credit Agreement). This Note is also subject to mandatory prepayment in certain circumstances as provided in the Credit Agreement. All principal and interest hereunder are payable in lawful money of the United States of America to the Agent at its address specified in the Credit Agreement in immediately available funds as provided in the Credit Agreement on the date on which such payment shall become due. Payments of principal and interest hereunder which are not made by such date may be made by debiting any deposit account(s), if any, in the name of the Maker with the Agent. The Maker hereby irrevocably authorizes the Agent to so debit such deposit account(s). The Maker, for itself and its legal representatives, successors and assigns, to the extent it may lawfully do so, hereby expressly waives presentment, demand, protest, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection, and the benefit of any exemption under the homestead exemption laws, if any, or any other exemption or insolvency laws, and consents that the Agent or the Lenders may release or surrender, exchange or substitute any personal property or other collateral security now held or which may hereafter be held as security for the payment of this Note, and may extend the time for payment or otherwise modify the terms of payment of any part or the whole of the debt evidenced hereby to the extent provided in the Credit Agreement without in any way affecting the liability of the Maker; provided that such modifications do not increase the obligations hereunder. This Note is one of the "Reducing Revolving Credit Notes" or "Notes" referred to in and is entitled to the benefits of the Credit Agreement (including Schedules thereto) and all other instruments and agreements evidencing and/or securing the indebtedness hereunder, which Credit Agreement and other instruments and agreements are hereby made part of this Note and are deemed incorporated herein in full. The occurrence or existence of an Event of Default shall constitute a default under this Note and shall, subject to the provisions of the Credit Agreement, entitle the Bank to accelerate the entire indebtedness hereunder and to take such other action as may be provided for in the Credit Agreement or any other instrument or agreement evidencing and/or securing this Note, all in accordance with the terms of the Credit Agreement. -2- All agreements between or among the Maker, the Agent and any Lender are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness or otherwise, shall the amount paid or agreed to be paid for the use or forbearance of the indebtedness evidenced hereby exceed the maximum amount which the Bank or any Lender is permitted to receive under applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof or of the Credit Agreement, at the time performance of such provision shall be due, shall involve exceeding such amount, then the obligation to be fulfilled shall automatically be reduced to the limit of such validity and if, from any circumstances, the Bank or any Lender should ever receive as interest an amount which would exceed such maximum amount, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not to the payment of interest. As used herein, the term "applicable law" shall mean the law in effect as of the date hereof, provided, however, that in the event there is a change in the law which results in a higher permissible rate of interest, then this Note shall be governed by such new law as of its effective date. This provision shall control every other provision of all agreements between or among the Maker, the Agents and any Lender. This Note and all transactions hereunder and/or evidenced herein shall be governed by, and construed and enforced in accordance with, the laws of The State of New York. If this Note shall not be paid when due and shall be placed by the holder hereof in the hands of any attorney for collection, through legal proceedings or otherwise, the Maker will pay reasonable attorneys' fees to the holder hereof together with reasonable costs and expenses of collection, including, without limitation, any such attorneys' fees, costs and expenses relating to any proceedings with respect to the bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation of any of the Maker or any party (other than the Bank or any other Lender) to any instrument or agreement securing this Note. IN WITNESS WHEREOF, the Maker has caused this Note to be executed under seal by its duly authorized representative as of the date first above written. PEGASUS MEDIA & COMMUNICATIONS, INC. By -------------------------------------- Its: -------------------------------- -3- REVOLVING CREDIT NOTE New York, New York $_____________ _________, 1996 FOR VALUE RECEIVED, the undersigned, PEGASUS MEDIA & COMMUNICATIONS, INC. (the "Maker"), hereby promises to pay to the order of _______, having an address at ________________________ (the "Bank"), the principal sum of _________ _______________ Dollars ($__________) or, if less, the aggregate unpaid principal amount of Advances hereunder made by the Bank to the Maker pursuant to that certain Credit Agreement dated as of _______, 1996, as the same may be amended, supplemented, replaced or otherwise modified from time to time hereafter (the "Credit Agreement"), by and among the Maker, the Bank, the other Lenders referred to therein, Canadian Imperial Bank of Commerce, New York Agency, as Agent for the Lenders (with its successors and assigns in such capacity, the "Agent"), together with interest on any and all principal remaining unpaid hereunder from the date hereof until payment in full, payable on the dates and at the interest rate or rates specified in the Credit Agreement. Capitalized terms used in this Note without definition have the meanings assigned to them in the Credit Agreement. The aggregate principal amount outstanding hereunder shall be payable as provided in the Credit Agreement. This Note may be prepaid in accordance with the terms and provisions of the Credit Agreement without penalty or premium (other than certain indemnification payments under Section 1.11 of the Credit Agreement). This Note is also subject to mandatory prepayment in certain circumstances as provided in the Credit Agreement. All principal and interest hereunder are payable in lawful money of the United States of America to the Agent at its address specified in the Credit Agreement in immediately available funds as provided in the Credit Agreement on the date on which such payment shall become due. Payments of principal and interest hereunder which are not made by such date may be made by debiting any deposit account(s), if any, in the name of the Maker with the Agent. The Maker hereby irrevocably authorizes the Agent to so debit such deposit account(s). The Maker, for itself and its legal representatives, successors and assigns, to the extent it may lawfully do so, hereby expressly waives presentment, demand, protest, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection, and the benefit of any exemption under the homestead exemption laws, if any, or any other exemption or insolvency laws, and consents that the Agent or the Lenders may release or surrender, exchange or substitute any personal property or other collateral security now held or which may hereafter be held as security for the payment of this Note, and may extend the time for payment or otherwise modify the terms of payment of any part or the whole of the debt evidenced hereby to the extent provided in the Credit Agreement without in any way affecting the liability of the Maker; provided that such modifications do not increase the obligations hereunder. This Note is one of the "Revolving Credit Notes" or "Notes" referred to in and is entitled to the benefits of the Credit Agreement (including Schedules thereto) and all other instruments and agreements evidencing and/or securing the indebtedness hereunder, which Credit Agreement and other instruments and agreements are hereby made part of this Note and are deemed incorporated herein in full. The occurrence or existence of an Event of Default shall constitute a default under this Note and shall, subject to the provisions of the Credit Agreement, entitle the Bank to accelerate the entire indebtedness hereunder and to take such other action as may be provided for in the Credit Agreement or any other instrument or agreement evidencing and/or securing this Note, all in accordance with the terms of the Credit Agreement. All agreements between or among the Maker, the Agent and any Lender are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness or otherwise, shall the amount paid or agreed to be paid for the use or forbearance of the indebtedness evidenced hereby exceed the maximum amount which the Bank or any Lender is permitted to receive under applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof or of the Credit Agreement, at the time performance of such provision shall be due, shall involve exceeding such amount, then the obligation to be fulfilled shall automatically be reduced to the limit of such validity and if, from any circumstances, the Bank or any Lender should ever receive as interest an amount which would exceed such maximum amount, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not to the payment of interest. As used herein, the term "applicable law" shall mean the law in effect as of the date hereof, provided, however, that in the event there is a change in the law which results in a higher permissible rate of interest, then this Note shall be governed by such new law as of its effective date. This provision shall control every other provision of all agreements between or among the Maker, the Agents and any Lender. This Note and all transactions hereunder and/or evidenced herein shall be governed by, and construed and enforced in accordance with, the laws of The State of New York. If this Note shall not be paid when due and shall be placed by the holder hereof in the hands of any attorney for collection, through legal proceedings or otherwise, the Maker will pay reasonable attorneys' fees to the holder hereof together with reasonable costs and expenses of collection, including, without limitation, any such attorneys' fees, costs and expenses relating to any proceedings with respect to the bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation of any of the Maker or any party (other than the Bank or any other Lender) to any instrument or agreement securing this Note. IN WITNESS WHEREOF, the Maker has caused this Note to be executed under seal by its duly authorized representative as of the date first above written. PEGASUS MEDIA & COMMUNICATIONS, INC. By --------------------------------- Its: --------------------------- -2- Schedule 1.04(a) REQUEST FOR ADVANCES _________, __199__ Canadian Imperial Bank of Commerce, New York Agency, as Agent 425 Lexington Avenue New York, New York 10017 Attention: Syndications Re: Request for Advances under Credit Agreement dated as of August 29, 1996 (the "Credit Agreement") Ladies and Gentlemen: This letter shall serve as a Request for Advances to be made by the Lenders in the aggregate principal amount of $_____ , which Advances shall be [LIBOR/Prime Rate] Loans [with an Interest Period commencing__________________ ______ and ending___________]. The Borrowing Date of such Advances should be _____________. Capitalized terms used herein shall have the meanings assigned to them in the Credit Agreement. The undersigned hereby certifies that such Advances, to the extent not applied for working capital purposes of the Borrower, will be used for the following purposes: [ ] The undersigned hereby further certifies as follows: 1. The representations and warranties contained in the Credit Agreement are or will be, if qualified by a reference to materiality, true and correct in all material respects as of the Borrowing Date of such Advances, and if not so qualified, are or will be true and correct in all respects as of the Borrowing Date with the same effect as if made at and as of such time, except as may have been disclosed to the Lenders by the Borrower and to which the Lenders have consented and to the extent that (a) such representations and warranties expressly relate to an earlier specified date or (b) the facts upon which such representations and warranties are based may in the ordinary course be changed by transactions or events permitted the Credit Agreement. 2. Since the date of the Credit Agreement, there has been no change in the business condition, performance, prospects, properties or financial condition of the Companies that, individually or in the aggregate, has had or reasonably could be expected to have a Material Adverse Effect. 3. The Borrower has performed and complied in all material respects with all terms and conditions herein required to be performed or complied with by it prior to or on the Borrowing Date, and on the Borrowing Date, after giving effect to the proposed Advances on the Borrowing Date and, on a pro forma basis, as of the last day of the most recently ended month for which financial statements are available, there exists no Event of Default or condition which would, with notice or the lapse of time or both, result in an Event of Default. 4. All of the Obligations constitute "Senior Debt" and, with the exception of Rate Hedging Obligations to the Lenders, "Designated Senior Debt" under the Subordinated Indenture. 5. The Calculation of Leverage Ratio attached hereto as Exhibit A correctly applies the provisions of the Subordinated Indenture to the appropriate financial statements and books and records of the Borrower and its Subsidiaries and accurately calculates the Indebtedness to Adjusted Operating Cash Flow Ratio (as defined in the Subordinated Indenture) as of the Borrowing Date. After giving effect to the requested Advances, including the uses of the proceeds thereof, the Indebtedness to Adjusted Operating Cash Flow Ratio will not exceed 6.50 to 1.00, and the Borrower will be in full compliance with Section 4.09 of the Subordinated Indenture. Very truly yours, PEGASUS MEDIA & COMMUNICATIONS, INC. By ----------------------------------- Its: ----------------------------- Borrower will use form comparable to Schedule 4.26 and otherwise satisfactory to the Lenders. Schedule 1.04(d) INTEREST RATE OPTION NOTICE ________, 19__ Canadian Imperial Bank of Commerce, New York Agency, as Agent 425 Lexington Avenue New York, New York 10017 Attention: Harold F. Birk Re: Credit Agreement dated as of ______ 1996 (the "Credit Agreement") Ladies and Gentlemen: Pursuant to Section 1.04 of the Credit Agreement, the Borrower hereby [confirms its request made on [ ] to have] [request that] the interest rate on the outstanding [LIBOR/Prime Rate] Loans made on [ ] in the amount of $[ ] be [converted to/continued at] the [Prime/LIBOR] Rate plus the Applicable Margin. [The Borrower hereby further [confirms its request] [requests] that the Interest Period beginning on such date and applicable to such LIBOR Loan end [ ] months thereafter or earlier, if otherwise required by the Credit Agreement.] The undersigned hereby certifies that (a) the representations and warranties contained in the Credit Agreement are true and accurate on and as of the effective date of such Loans as though made at and as of such date (except to the extent that such representations and warranties expressly relate to an earlier date); and (b) there exists no Event of Default or condition which would, with notice or the lapse of time or both, result in an Event of Default, nor would any such Event of Default result from such conversion or continuance. Very truly yours, PEGASUS MEDIA & COMMUNICATIONS, INC. By ----------------------------------- Its: ----------------------------- Schedule 13(b)(iii) ASSIGNMENT AND ACCEPTANCE THIS ASSIGNMENT AND ACCEPTANCE ("this Agreement") is made this day ____ of_______, ______, by and between ("Assignor"), and __________________ ("Assignee"). 1. Recitals. (a) Assignor is a party to the Credit Agreement dated as of _______, 1996 (which, as the same has been and may from time to time be amended, modified, renewed, extended or restated, is hereinafter called the "Credit Agreement") among PEGASUS MEDIA & COMMUNICATIONS, INC. (the "Borrower"), certain persons named therein as "Lenders" and CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, as Agent for the Lenders (the "Agent"). (b) Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. (c) Immediately prior to the assignment and assumption provided herein, Assignor's Commitments and its outstanding Loans are as specified in Schedule A attached hereto. Assignor desires to assign and delegate to Assignee, and Assignee desires to acquire and assume from Assignor, a portion (the "Purchased Percentage") of Assignor's [Reducing Revolving Commitment/ Revolving Credit Commitment/ outstanding Loans] and all related claims for interest and fees after the Effective Date (as defined below). 2. Assignment. For and in consideration of the assumption of obligations by Assignee set forth in Section 3 hereof and the other consideration set forth herein, and effective as of_______, which date is at least five (5) Business Days following the execution hereof (the "Effective Date"), Assignor does hereby sell, assign, transfer and convey all of its right, title and interest in and to, and does hereby delegate its obligations in respect of, the Purchased Percentage of the [Reducing Revolver Commitment/ Revolving Credit Commitment] of Assignor (as in effect on the Effective Date) and all Loans made by Assignor and outstanding on the Effective Date and the Credit Agreement and the other Transaction Documents. Pursuant to Article XII of the Credit Agreement, on and after the Effective Date, Assignee shall have the rights, benefits and obligations of a Lender under the Loan Documents with respect to the Purchased Percentage of the Loan Documents. After giving effect to the assignment and delegation provided herein, the respective Commitments and outstanding Loans of the parties hereto shall be as set forth on Schedule A hereto, which Schedule also contains certain additional information with respect to Assignee. 3. Assumption. For and in consideration of the assignment of rights by Assignor set forth in Section 2 hereof and the other consideration set forth herein, and effective as of the Effective Date, Assignee does hereby accept the foregoing assignment of rights and delegation of obligations, and does hereby assume and covenant and agree fully, completely and timely to perform, comply with and discharge, each and all of the obligations, duties and liabilities of Assignor under the Credit Agreement, which are assigned to Assignee hereunder, which assumption includes, without limitation, the obligation to fund the unfunded portion of the Purchased Percentage of the Assignor's Commitments in accordance with the provisions set forth in the Credit Agreement. Assignee agrees to be bound by all provisions relating to the Lenders under, and as defined in, the Credit Agreement, including, without limitation, provisions relating to the dissemination of information and the payment of indemnification. From and after the Effective Date, Assignor is released from Assignor's obligations with the respect to the Purchased Percentage. 4. Fees; Etc. Assignor and Assignee have made arrangements with respect to (a) the portion, if any, to be paid, and the date or dates for payment, by Assignor to Assignee of any fees heretofore received by Assignor pursuant to the Credit Agreement prior to the Effective Date and (b) the portion, if any, to be paid, and the date or dates for payment, by Assignee to Assignor of fees or interest received by Assignee pursuant to the Credit Agreement from and after the Effective Date. 5. Payment Obligations. On and after the Effective Date, Assignee shall be entitled to receive from Agent all payments of principal, interest and fees with respect to the Purchased Percentage of Assignor's Commitments and Loans. Assignee shall advance funds directly to the Agent with respect to all Loans made on or after the Effective Date. In consideration for the sale and assignment of Loans hereunder, (i) on the date of execution hereof, Assignee shall pay to the Agent the registration and processing fee referred to in paragraph (b)(iv) of Article XII of the Credit Agreement, and (ii) on the Effective Date, Assignee shall pay Assignor an amount equal to the Purchased Percentage of all Loans made by Assignor outstanding on the Effective Date or such other purchase price for the Purchased Percentage agreed to by Assignor and Assignee. On and after the Effective Date, Assignee will also remit to Assignor any amounts of interest on Loans and fees received from Agent which relate to the Purchased Percentage of Loans made by Assignor accrued for periods prior to the Effective Date. In the event that either party hereto receives any payment to which the other party hereto is entitled under this Agreement, then the party receiving such amount shall promptly remit it to the other party hereto. 6. Representations and Certain Agreements. (a) Assignee's Representations, Warranties and Agreements. Assignee represents, warrants and agrees to and with Assignor as follows: (i) Assignee has full power and authority, and has taken all action necessary, to execute and deliver this Agreement and to fulfill its obligations under, and consummate the transactions contemplated by, this Agreement; (ii) the making and performance by Assignee of this Agreement and all documents required to be executed and delivered by it hereunder do not and will not violate any law or regulation of the jurisdiction of its organization or any other law or regulation applicable to it; (iii) this Agreement has been duly executed and delivered by it and constitutes the legal, valid and binding obligations of the Assignee, enforceable against it in accordance with its terms; (iv) all approvals and authorizations of, all filings with and all actions by any governmental or other administrative or judicial authority necessary for the validity or enforceability of Assignee's obligations under this Agreement have been obtained; (v) Assignee has received a copy of the Credit Agreement and the other Loan Documents, together with copies of the most recent financial statements delivered pursuant to Sections 6.06(a), (b) and (c) thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement; -2- (vi) Assignee appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement and the other Loan Documents as are delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (vii) Assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender, including, without limitation, obligations to make Loans to the full amount of the portion of the Commitments acquired by Assignee. (b) Assignor's Representations and Warranties. Assignor represents and warrants to Assignee as follows: (i) Assignor has full power and authority, and has taken all action necessary, to execute and deliver this Agreement and to fulfill its obligations under, and consummate the transactions contemplated by, this Agreement; (ii) the making and performance by Assignor of this Agreement and all documents required to be executed and delivered by it hereunder do not and will not violate any law or regulation of the jurisdiction of its organization or any other law or regulation applicable to it; (iii) this Agreement has been duly executed and delivered by it and constitutes the legal, valid and binding obligations of Assignor, enforceable against it in accordance with its terms; (iv) all approvals and authorizations of, all filings with and all actions by any governmental or other administrative or judicial authority necessary for the validity or enforceability of Assignor's obligations under this Agreement have been obtained; (v) the amounts of Assignor's respective Commitments and the aggregate outstanding principal amount of the Loans held by the Assignor are, on and as of the date of this Agreement (immediately prior to giving effect to the sale, assignment and transfer contemplated by Section 2), correctly set forth in Schedule A hereto; and (vi) immediately prior to giving effect to the sale, assignment and transfer contemplated by Section 2, the Assignor has good title to, and is the sole legal and beneficial owner of, the Purchased Percentage, free and clear of all liens, security interests, participations and other encumbrances. 7. Credit Determination; Limitations on Assignor's Liability. It is understood and agreed that Assignee has independently made its own credit determinations and analysis based upon such information as Assignee deems sufficient to enter into the transaction contemplated hereby and not based on any statements or representations by Assignor and that it will, independently and without reliance upon Assignor, any other Lender or Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement. It is understood and agreed that the assignment and assumption hereunder are made WITHOUT RECOURSE to Assignor and that Assignor makes no representation or warranty of any kind to Assignee (except as set forth in Section 5(b) above) and shall not be responsible for (i) the due execution, legality, validity, enforceability, genuineness, sufficiency, value or collectibility of the Credit Agreement or any other Loan Document, including without limitation, documents granting the Assignor -3- and other Lenders a security interest in assets of the Borrower , any of its Subsidiaries or the Parent, (ii) any representation, warranty or statement made in or in connection with any of the Loan Documents, (iii) the financial condition or creditworthiness of the Borrower, any of its Subsidiaries or the Parent, (iv) the performance or compliance with any of the terms or provisions of any of the Loan Documents, (v) inspecting any of the property, books or records of the Borrower or (vi) the validity, enforceability, perfection, priority, condition, value or sufficiency of any collateral securing or purporting to secure the Loans. Neither Assignor nor any of its officers, directors, employees, agents or attorneys shall be liable for any mistake, error of judgment, or action taken or omitted to be taken in connection with the Loans or the Loan Documents, except for its or their own gross negligence or willful misconduct. 8. Indemnity. Assignee agrees to indemnify and to hold harmless Assignor from and against any and all losses, costs, damages, expenses (including, without limitation, reasonable attorneys' fees) and liabilities incurred by Assignor in connection with or arising in any manner from Assignee's performance or nonperformance of obligations assumed under this Agreement. 9. Subsequent Assignments. After the Effective Date, Assignee shall have the right to assign the rights which are assigned to Assignee hereunder to any entity or person, provided that (a) any such subsequent assignment does not violate any of the terms and conditions of the Loan Documents or any law, rule, regulation, order, writ, judgment, injunction or decree and that any consent required under the terms of the Loan Documents has been obtained and (b) Assignee is not thereby released from any of its obligations to Assignor hereunder. 10. Governing Law. This Agreement shall be governed by the internal law, and not the law of conflicts, of the State of New York. 11. Notices. Notices shall be given under this Agreement in the manner set forth in the Credit Agreement. For the purpose hereof, the addresses of the parties hereto (until notice of a change is delivered) shall be the addresses set forth under the parties' respective name(s) on the signature pages hereto. 12. Further Assurances. Assignor and Assignee hereby agree to execute and deliver such other instruments, and take such other actions, as either party may reasonably request in connection with the transaction contemplated by this Agreement. 13. Expenses. Each party hereto shall bear its own expenses in connection with the execution, delivery and performance of this Agreement. 14. Amendment, Modification or Waiver. No provision of this Agreement may be amended, modified or waived except by an instrument in writing signed by Assignor and Assignee. 15. Jurisdiction; Venue. Each of the parties hereto hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, any objective which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. -4- 16. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 17. Counterparts. This Agreement may be executed in counterparts, each of which shall be identical and all of which, taken together, shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their duly authorized officers as of the date first above written. --------------------------------- By: ------------------------------ Title: --------------------------- Address: Telephone: Telecopy: --------------------------------- By: ------------------------------ Title: --------------------------- Address: Telephone: Telecopy: ACCEPTED: CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, AS AGENT By: ---------------------------------------- Title: ------------------------------------- -5- SCHEDULE A TO ASSIGNMENT AND ACCEPTANCE AGREEMENT LIST OF LENDING OFFICES, ADDRESSES FOR NOTICES AND COMMITMENT AND LOAN AMOUNTS ASSIGNOR: [Insert Name of Assignor]
- ---------------------------------------------------------------------------------------------------------- Reducing Revolver Revolving Credit Loans Commitment Commitment - ---------------------------------------------------------------------------------------------------------- Original Amount $__________ $__________ $__________ Original Percentage ______% ______% _____% - ----------------------------------------------------------------------------------------------------------
Following assignment of the Purchased Percentage, Assignor's portions of the Commitment and outstanding Loans will be as follows:
- ---------------------------------------------------------------------------------------------------------- Reducing Revolver Revolving Credit Loans Commitment Commitment - ---------------------------------------------------------------------------------------------------------- Revised Amount $__________ $__________ $__________ Revised Percentage ______% ______% _____% - ----------------------------------------------------------------------------------------------------------
ASSIGNEE: [Insert Name of Assignee]
- ---------------------------------------------------------------------------------------------------------- Reducing Revolver Revolving Credit Loans Commitment Commitment - ---------------------------------------------------------------------------------------------------------- Original $__________ $__________ $__________ Amount, if any Original Percentage, if any $__________ $__________ $__________ ______% _____% ______% - ----------------------------------------------------------------------------------------------------------
Following assignment of the Purchased Percentage, Assignee's portions of the Commitments and outstanding Loans will be as follows:
- ---------------------------------------------------------------------------------------------------------- Reducing Revolver Revolving Credit Loans Commitment Commitment - ---------------------------------------------------------------------------------------------------------- New Amount $__________ $__________ $__________ New Percentage ______% _____% ______% - ----------------------------------------------------------------------------------------------------------
Address for Notices: [Address] Attention:_______________ Telephone:_______________ Telecopy:________________ Telephone:_______________ Confirmation:____________ LIBOR/Eurodollar Lending Office: _____________ _____________ _____________ Domestic Lending Office: _____________ _____________ _____________ -2- Schedule 13(b)(iv) NOTICE OF ASSIGNMENT AND ACCEPTANCE To: Pegasus Media & Communications, Inc. 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, Pennsylvania 19087 Attention: Marshall W. Pagon [List Lenders and addresses] From: [Name of Assignor] ("Assignor") [Name of Assignee] ("Assignee") ______ , __ 1. We refer to the Credit Agreement, dated as of ______, 1996, as it may be amended, modified, renewed or extended from time to time, is herein called the "Credit Agreement") among PEGASUS MEDIA & COMMUNICATIONS, INC. ( the "Borrower"), certain banks party thereto (each a "Lender" and collectively the "Lenders"), the above-referenced Assignor and CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, in its separate capacity as Agent for the Lenders. Capitalized terms used herein without definition have the meanings assigned to them in the Credit Agreement. 2. This Notice of Assignment and Acceptance (this "Notice") is given and delivered to the Borrower, the Lenders and the Agent pursuant to Article XII of the Credit Agreement. 3.Assignor and the above-referenced Assignee have entered into an Assignment and Acceptance, dated as of_______,__ (the "Assignment Agreement"), pursuant to which, among other things, Assignor has sold, assigned, delegated and transferred to Assignee, and Assignee has purchased, accepted and assumed from Assignor, a portion of Assignor's rights and obligations under the Credit Agreement and the other Loan Documents such that Assignee's percentage of the aggregate Commitments and the outstanding Loans shall be as set forth in Schedule A to the Assignment Agreement enclosed herewith (which Schedule also sets forth Assignor's percentage of the Commitments and outstanding Loans prior to such transfer), effective as of the Effective Date. The Effective Date shall be______, ___, provided that the Effective Date shall not occur if any condition precedent explicitly agreed to in writing by Assignor and Assignee has not been satisfied. 4. Assignor and Assignee hereby give to the Borrower, the other Lenders and the Agent notice of the assignment and delegation referred to herein [ must be at least one (1) Business Day's notice] and enclose a fully executed counterpart of the Assignment Agreement. Assignor will confer with the Agent before_____, __ to determine if the assignment will become effective on such date pursuant to Section 3 hereof, and will confer with the Agent to determine the Effective Date pursuant to Section 3 hereof if it occurs thereafter. Assignor shall notify the Agent if the assignment does not become effective on any proposed Effective Date as a result of the failure to satisfy the conditions precedent explicitly agreed to in writing by Assignor and Assignee. At the request of the Agent, Assignor will give the Agent written confirmation of the occurrence of the Effective Date. 5. Assignee hereby confirms its acceptance and assumption of the assignment and delegation referred to herein and agrees as of the Effective Date (a) to perform fully all of the obligations under the Credit Agreement which it has assumed pursuant to the Assignment Agreement and (b) to be bound by the terms and conditions of the Credit Agreement as a "Lender". 6. Assignor and Assignee request and agree that any payments to be made by the Agent to Assignor on and after the Effective Date shall, to the extent of the assignment referred to herein, be made entirely to Assignee, it being understood that Assignor and Assignee shall make between themselves any desired allocations. 7. Assignor hereby agrees to deliver to the Agent on or before the Effective Date its original Note[s] subject to the assignment contemplated by the Assignment Agreement. Assignor and Assignee hereby request that the Borrower deliver to the Agent on or before the Effective Date the following new Notes payable in accordance with paragraph (b)(iv) of Article XII of the Credit Agreement. [Describe each new Note for Assignor and Assignee with principal amount and payee.] 8. Assignee advises the Agent and the other Lenders that its address for notice purposes, as well as certain other relevant information, is set forth in Schedule A to the Assignment Agreement. [Assignor] [Assignee] By: By: --------------------------------- --------------------------------- Title: Title: ----------------------------- ----------------------------- EX-10.28 7 RESTRICTED STOCK PLAN PEGASUS COMMUNICATIONS RESTRICTED STOCK PLAN (Effective September 30, 1996) TABLE OF CONTENTS
Page ---- SECTION 1 - Purpose.................................................................................... 1 SECTION 2 - Definitions................................................................................ 1 (a) "Awards"............................................................................. 1 (b) "Award Agreement".................................................................... 1 (c) "Board".............................................................................. 1 (d) "Business Unit Location Cash Flow"................................................... 1 (e) "Code"............................................................................... 1 (f) "Committee".......................................................................... 1 (g) "Common Stock"....................................................................... 1 (h) "Company Matching Contributions"..................................................... 1 (i) "Company-Wide Location Cash Flow".................................................... 1 (j) "Disability"......................................................................... 2 (k) "Excess Awards"...................................................................... 2 (l) "Fair Market Value".................................................................. 2 (m) "Grantee"............................................................................ 2 (n) "Management Committee"............................................................... 2 (o) "Officers"........................................................................... 2 (p) "PCC"................................................................................ 2 (q) "Pegasus"............................................................................ 2 (r) "Plan"............................................................................... 2 (s) "Plan Administrator"................................................................. 2 (t) "Profit-Sharing Awards".............................................................. 3 (u) "Rollover Matching Contributions".................................................... 3 (v) "Salary"............................................................................. 3 (w) "Savings Plan"....................................................................... 3 (x) "Special Recognition Awards"......................................................... 3 (y) "Year Over Year Increase in Business Unit Location Cash Flow"........................ 3 (z) "Year Over Year Increase in Company-Wide Location Cash Flow"......................... 3 (aa) "Years of Vesting Service"........................................................... 4 SECTION 3 - Administration............................................................................. 4 (a) Special Recognition Awards to Officers............................................... 4 (b) All Other Awards..................................................................... 4 (c) In General........................................................................... 5 SECTION 4 - Eligibility................................................................................ 5 (a) Special Recognition Awards........................................................... 5 (b) Profit-Sharing Awards................................................................ 6 (c) Excess Awards........................................................................ 6 SECTION 5 - Stock...................................................................................... 6 SECTION 6 - Amount of Award............................................................................ 7 (a) Special Recognition Awards........................................................... 7 (b) Profit-Sharing Awards................................................................ 7 (c) Excess Awards........................................................................ 8 SECTION 7 - Vesting.................................................................................... 9 (a) Death; Disability.................................................................... 9 (b) Vesting Schedule..................................................................... 9 (c) Forfeiture........................................................................... 9 SECTION 8 - Capital Adjustments........................................................................ 9
i
Page ---- SECTION 9 - Amendment or Discontinuance of the Plan.................................................... 10 SECTION 10 - Termination of Plan....................................................................... 10 SECTION 11 - Shareholder Approval...................................................................... 11 SECTION 12 - Miscellaneous............................................................................. 11 (a) Issuance and Delivery of Certificates................................................ 11 (b) Rights as a Shareholder.............................................................. 12 (c) Award Agreement...................................................................... 12 (d) Governing Law........................................................................ 12 (e) Rights............................................................................... 12 (f) Non-Transferability.................................................................. 13 (g) Listing and Registration of Shares................................................... 13 (h) Withholding and Use of Shares to Satisfy Tax Obligations............................. 13 (i) Indemnification of Board and Plan Administrator...................................... 14
ii PEGASUS COMMUNICATIONS RESTRICTED STOCK PLAN SECTION 1 Purpose This Pegasus Communications Restricted Stock Plan is intended to provide a means whereby PCC may, through the grant of stock subject to vesting requirements to employees of Pegasus, attract and retain such individuals and motivate them to exercise their best efforts on behalf of Pegasus. SECTION 2 Definitions Whenever the following terms are used in this Plan, they shall have the meanings specified below, unless the context clearly indicates to the contrary: (a) "Awards" shall mean Special Recognition Awards, Profit- Sharing Awards and Excess Awards. (b) "Award Agreement" shall mean the written document described in Section 12(c) evidencing Awards made pursuant to the Plan. (c) "Board" shall mean the Board of Directors of PCC. (d) "Business Unit Location Cash Flow" shall mean income from the business unit's operations before management fees, depreciation, amortization (other than amortization of film contracts), and incentive compensation (including contributions under the Plan and the Savings Plan). (e) "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) "Committee" shall mean the administrator of the Plan with respect to Special Recognition Awards to Officers, which shall be a committee of the Board or the Board, in accordance with Section 3(a). (g) "Common Stock" shall mean Class A common stock of PCC. (h) "Company Matching Contributions" shall have the meaning set forth in Section 1.15 (or any successor thereto) of the Savings Plan. (i) "Company-Wide Location Cash Flow" shall mean income from Pegasus operations before management fees, depreciation, amortization (other than amortization of film contracts), and incentive compensation (including contributions under the Plan and the Savings Plan). (j) "Disability" shall have the meaning set forth in Section 1.16 (or any successor thereto) of the Savings Plan. (k) "Excess Awards" shall mean the formula awards described in Section 6(c). (l) "Fair Market Value" shall mean the closing price of the Common Stock on a registered securities exchange or on an over-the-counter market on the last business day prior to the date of grant on which Common Stock traded. (m) "Grantee" shall mean an individual who has received an Award under the Plan. (n) "Management Committee" shall mean the committee authorized by the Board to administer the Plan with respect to all Awards other than Special Recognition Awards to Officers. (o) "Officers" shall mean employees who are officers, within the meaning of Rule 16a-1(f) under the Securities Exchange Act of 1934, or any successor thereto. (p) "PCC" shall mean Pegasus Communications Corporation. (q) "Pegasus" shall mean Pegasus Communications Holdings, Inc. and its direct and indirect subsidiaries, whether in corporate, partnership or any other form. (r) "Plan" shall mean the Pegasus Communications Restricted Stock Plan, as set forth in this document and as it may be amended from time to time. (s) "Plan Administrator" shall mean -- (1) With respect to Special Recognition Awards to Officers, the Committee; and (2) With respect to all other Awards, the Management Committee. -2- (t) "Profit-Sharing Awards" shall mean the formula awards described in Section 6(b). (u) "Rollover Matching Contributions" shall have the meaning set forth in Section 1.40 (or any successor thereto) of the Savings Plan. (v) "Salary" shall have the meaning set forth in Section 1.41 (or any successor thereto) of the Savings Plan. (w) "Savings Plan" shall mean the Pegasus Communications Savings Plan, effective January 1, 1996, and as it may be amended from time to time. (x) "Special Recognition Awards" shall mean the discretionary awards described in Section 6(a). (y) "Year Over Year Increase in Business Unit Location Cash Flow" shall mean, with respect to any year, the excess of the Business Unit Location Cash Flow for such year over the Business Unit Location Cash Flow for the preceding year, determined on a pro forma basis by the Board of Directors or a committee thereof. For purposes of determining the excess of the Business Unit Location Cash Flow in the first calendar year in which a business unit becomes a business unit of Pegasus ("Year 1") over the Business Unit Location Cash Flow for the preceding year ("Year 0"), the Business Unit Location Cash Flow attributable to the period in Year 1 during which the business unit was a business unit of Pegasus shall be compared to the business unit's income -- before management fees, depreciation, amortization (other than amortization of film contracts), and incentive compensation (including contributions under any qualified or nonqualified plan) -- from non-Pegasus operations during the same period in Year 0. For purposes of determining the excess of the Business Unit Location Cash Flow for the succeeding year ("Year 2") over the Business Unit Location Cash Flow for Year 1, the Business Unit Location Cash Flow attributable to the period in Year 1 during which the business unit was a business unit of Pegasus shall be compared to the Business Unit Location Cash Flow during the same period in Year 2. (z) "Year Over Year Increase in Company-Wide Location Cash Flow" shall have the meaning set forth in Section 1.51 (or any successor thereto) of the Savings Plan. -3- (aa) "Years of Vesting Service" shall have the meaning set forth in Section 1.50 (or any successor thereto) of the Savings Plan. SECTION 3 Administration The Plan shall be administered as follows: (a) Special Recognition Awards to Officers. With respect to Special Recognition Awards to Officers, the Plan shall be administered: (1) By a committee, which shall consist of not fewer than two non-employee directors (within the meaning of Rule 16b-3(b)(3) (or any successor thereto) under the Securities Exchange Act of 1934) of PCC who shall be appointed by, and shall serve at the pleasure of, the Board, or (2) In the event a committee has not been established in accordance with paragraph 1, by the entire Board; provided, however, that a member of the Board shall not participate in a vote approving an Award to himself or herself to the extent provided under the laws of the State of Delaware governing corporate self-dealing. The Plan Administrator with respect to Special Recognition Awards to Officers shall hereinafter be referred to as the "Committee." Each member of the Committee, while serving as such, shall be deemed to be acting in his capacity as a director of PCC. The Committee shall have full authority, upon consideration of recommendations by the Management Committee and subject to the terms of the Plan, to select the Officers to be granted Special Recognition Awards under the Plan, to grant Special Recognition Awards to Officers on behalf of PCC, and to set the date of grant and the other terms of such Awards. (b) All Other Awards. With respect to all Awards other than Special Recognition Awards to Officers, the Plan shall be administered by the Management Committee. With respect to Special Recognition Awards to employees who are not Officers, the Management Committee shall have full authority, subject to the terms of the Plan, to select the employees to be granted Special Recognition Awards under the Plan, to grant Special Recognition Awards -4- on behalf of PCC, and to set the date of grant and the other terms of such Awards. The terms and conditions of Profit-Sharing Awards and Excess Awards are intended to be fixed in advance. Consequently, Profit-Sharing Awards and Excess Awards shall be as set forth in Sections 6(b) and 6(c), respectively, of the Plan, and the Management Committee shall not have any discretionary authority with respect thereto. (c) In General. The Plan Administrator may correct any defect, supply any omission and reconcile any inconsistency in the Plan and in any Award granted hereunder to the extent it shall deem desirable. The Plan Administrator also shall have the authority to establish such rules and regulations, not inconsistent with the provisions of the Plan, for the proper administration of the Plan, and to amend, modify, or rescind any such rules and regulations, and to make such determinations, and interpretations under, or in connection with, the Plan, as it deems necessary or advisable. All such rules, regulations, determinations, and interpretations shall be binding and conclusive upon PCC, its stockholders and all employees, and upon their respective legal representatives, beneficiaries, successors, and assigns and upon all other persons claiming under or through any of them. No member of the Board, the Committee or the Management Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award granted under it. SECTION 4 Eligibility More than one Award may be granted to an employee who is eligible to receive an Award under the Plan. Employees shall be eligible to receive Awards as follows: (a) Special Recognition Awards. All employees of Pegasus, other than the Chief Executive Officer of Pegasus Communications Holdings, Inc., shall be eligible to receive Special Recognition Awards. -5- (b) Profit-Sharing Awards. A General Manager, Department Manager or Corporate Manager shall be eligible to receive a Profit-Sharing Award with respect to a year if: (1) He is not an Officer on the date the Award is made; and (2) He is employed by Pegasus as a Manager on: (A) June 30 of the year for which the Profit-Sharing Award is made; and (B) The date the Profit-Sharing Award is made. (c) Excess Awards. A Participant in the Savings Plan shall be eligible to receive an Excess Award if contributions on his behalf under the Savings Plan are limited by certain limitations imposed by the Code, as described in Section 6(c), and he is employed by Pegasus on the date the Excess Award is made. Special Recognition Awards and Profit-Sharing Awards shall be made as soon as practicable after the financial information necessary for determining the amount of the Award is available (absent extraordinary circumstances, on or before the March 31 following the year for which the Award is made). Excess Awards shall be made as soon as practicable after the availability of the information required to determine whether contributions under the Savings Plan on behalf of a Participant with respect to a year are limited (absent extraordinary circumstances, on or before the March 15 following the Savings Plan year for which such contribution is limited). SECTION 5 Stock The number of shares of Common Stock that may be subject to Awards under the Plan shall be 270,000 shares, subject to adjustment as hereinafter provided. Common Stock issuable under the Plan may be authorized but unissued shares or reacquired shares, and PCC may purchase shares required for this purpose, from time to time, if it deems such purchase to be advisable. -6- Any Common Stock subject to an Award which is forfeited shall continue to be available for the granting of Awards under the Plan. SECTION 6 Amount of Award (a) Special Recognition Awards. The Plan Administrator, in its sole discretion, shall determine the amount of the annual Special Recognition Award, if any, to be made on behalf of an eligible employee described in Section 4(a); provided, however, that the Fair Market Value of the Common Stock covered by the annual Special Recognition Awards for any year to all employees in the aggregate, determined as of the date the Awards are granted, shall not exceed the sum of (1) five percent of the Year Over Year Increase in Company-Wide Location Cash Flow, plus (2) the Year Over Year Increase in Company-Wide Location Cash Flow which could have been awarded as a Special Recognition Award in the preceding year, and was not. Special Recognition Awards may be granted for consistency (awarded to a team of employees), initiative (a team or individual award), problem solving (a team or individual award), and individual excellence. (b) Profit-Sharing Awards. An annual Profit-Sharing Award of Common Stock shall be made to each eligible employee described in Section 4(b). The number of shares of Common Stock covered by an annual Profit-Sharing Award shall be determined as follows -- (1) General Managers. The number of shares of Common Stock covered by the annual Profit-Sharing Award to each eligible employee who is a General Manager shall equal the quotient of (A) six percent of the Year Over Year Increase in Business Unit Location Cash Flow of the General Manager's business unit, divided by (B) the Fair Market Value of a share of Common Stock. (2) Department Managers. The number of shares of Common Stock covered by an annual Profit-Sharing Award to Department Managers in a business unit in the aggregate shall equal the quotient of (A) six percent of the Year Over Year Increase in Business Unit Location Cash -7- Flow of the Department Manager's business unit, divided by (B) the Fair Market Value of a share of Common Stock. Such shares shall be allocated, per capita, to each eligible employee who is a Department Manager in the business unit; provided, however, that the shares allocated to any Department Manager pursuant to an annual Profit-Sharing Award shall not exceed the shares that would have been allocated to the Department Manager if all Department Manager positions in the business unit were filled on June 30 of the year for which the Profit-Sharing Award is being made and the date the Profit-Sharing Award is made. Any shares that may not be allocated on account of the limitation set forth in the previous sentence shall not be subject to the annual Profit-Sharing Award for the year in which such limitation applies. (3) Corporate Managers. The number of shares of Common Stock covered by an annual Profit-Sharing Award to eligible employees who are Corporate Managers in the aggregate shall equal the quotient of (A) three percent of the Year Over Year Increase in Company-Wide Location Cash Flow, divided by (B) the Fair Market Value of a share of Common Stock. Such shares shall be allocated to each eligible employee who is a Corporate Manager in the same proportion that such Corporate Manager's Salary for such year bears to the total Salary of all Corporate Managers entitled to a Profit-Sharing Award for such year. (c) Excess Awards. The number of shares of Common Stock covered by an Excess Award made on behalf of an eligible employee described in Section 4(c) with respect to any year shall equal the quotient of -- (1) The sum of -- (A) Company Matching Contributions which were not contributed to the Savings Plan on the eligible employee's behalf for such year because of the limitation on such contributions contained in section 401(m)(2) of the Code, plus (B) Rollover Matching Contributions which were not contributed to the Savings Plan on the eligible employee's behalf -8- for such year (i) solely because the eligible employee was a Highly Compensated Employee (as defined in Section 4.1(o) (or any successor thereto) of the Savings Plan), and/or (ii) the limitations on contributions contained in section 415 of the Code; divided by (2) The Fair Market Value of a share of Common Stock. SECTION 7 Vesting (a) Death; Disability. A Grantee shall be 100% vested in his Awards under the Plan when he -- (1) Incurs a Disability; or (2) Dies. (b) Vesting Schedule. Except as otherwise provided in subsection (a), a Grantee shall be 100% vested in his Awards under the Plan in accordance with the following schedule -- Percentage of Shares Subject to Awards Years of Vesting Service That Are 100% Vested ------------------------ -------------------- Fewer than 2 0 2 but fewer than 3 34 3 but fewer than 4 67 4 or more 100 (c) Forfeiture. Any shares of Common Stock covered by a Grantee's Awards that are not vested pursuant to subsection (a) or subsection (b) shall be immediately forfeited upon the Grantee's voluntary or involuntary termination of employment by Pegasus. SECTION 8 Capital Adjustments The number of shares which may be issued under the Plan, and the number of shares of Common Stock issuable upon the vesting of outstanding Awards shall, subject to the provisions of section 424(a) of the Code, be adjusted, to reflect any stock dividend, stock split, share combination, or similar change in the capitalization of PCC. In the event any such change in -9- capitalization cannot be reflected in a straight mathematical adjustment of the number of shares issuable upon the vesting of outstanding Awards, the Plan Administrator shall make such adjustments as are appropriate to reflect most nearly such straight mathematical adjustment. Such adjustments shall be made only as necessary to maintain the proportionate interests of Grantees and preserve, without exceeding, the value of Awards. In the event of a corporate transaction (as that term is described in section 424(a) of the Code and the Treasury Regulations issued thereunder as, for example, a merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation), each outstanding Award shall be assumed by the surviving or successor corporation. SECTION 9 Amendment or Discontinuance of the Plan At any time and from time to time, the Board may suspend or terminate the Plan or amend it, and the Plan Administrator may amend any outstanding Awards, in any respect whatsoever, except that the following amendments shall require the approval of shareholders (given in the manner set forth in Section 11): (a) Any amendment which would increase the number of shares of Common Stock authorized under the Plan; and (b) Any amendment for which shareholder approval is required under the rules of an exchange on which Common Stock is listed. Notwithstanding the foregoing, no such suspension, discontinuance or amendment shall materially impair the rights of any holder of an outstanding Award without the consent of such holder. SECTION 10 Termination of Plan Unless earlier terminated as provided in the Plan, the Plan and all authority granted hereunder shall terminate absolutely at 12:00 midnight on September 29, 2006, and no Awards hereunder shall be granted thereafter. Nothing contained in this Section 10, however, shall terminate or affect the -10- continued existence of rights created under Awards issued hereunder and outstanding on September 29, 2006 which by their terms extend beyond such date. SECTION 11 Shareholder Approval This Plan shall become effective on September 30, 1996 (the date the Plan was adopted by the Board); provided, however, that if the Plan is not approved (i) by the written consent of the holders of at least a majority of the shares of PCC entitled to vote, or (ii) by the affirmative vote of the holders of at least a majority of the shares present, or represented, and entitled to vote at a duly held meeting of the shareholders of PCC, no later than the date of the first annual meeting of shareholders on or after September 30, 1996, all Awards granted hereunder shall be null and void. SECTION 12 Miscellaneous (a) Issuance and Delivery of Certificates. Upon the granting of an Award, (i) PCC shall issue certificates in the name of the Grantee (or the Grantee and the Grantee's spouse -- see subsection (f)) representing the Common Stock subject to the Award. Any shares of Common Stock in which the Grantee is not vested on the date the Award is granted shall bear a legend indicating that they are subject to the terms of the Plan and the Award Agreement and that they may not be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of except in accordance with the terms of the Plan and the Award Agreement. Upon issuance of such certificates, the Grantee shall immediately execute a stock power or other instrument of transfer, appropriately endorsed in blank, to be held with the certificates by PCC pursuant to the terms of the Plan and the Award Agreement with respect to shares of Common Stock in which the Grantee is not vested on the date the Award is granted. Only full shares shall be issued, and any fractional shares which might otherwise be issuable pursuant to an Award shall be forfeited. -11- (b) Rights as a Shareholder. With respect to any shares of Common Stock in which the Grantee is not vested on the date the Award is granted, the Grantee shall be entitled to receive dividends paid on such shares, shall have the right to vote such shares, and shall have all other shareholder's rights with respect to such shares, except that (i) the Grantee will not be entitled to delivery of the stock certificate, (ii) PCC will retain custody of the Common Stock, and (iii) the shares subject to Awards will revert to PCC in accordance with Section 7(c) to the extent not vested on the Grantee's voluntary or involuntary termination of employment by Pegasus. (c) Award Agreement. Awards under the Plan shall be evidenced by written documents in such form as the Plan Administrator shall, from time to time, approve, which Award Agreements shall contain such provisions, not inconsistent with the provisions of the Plan, as the Plan Administrator shall deem advisable. Each Grantee shall enter into, and be bound by the terms of, the Award Agreement. (d) Governing Law. The Plan, and the Award Agreements entered into and Awards granted thereunder, shall be governed by the Code provisions to the extent applicable. Otherwise, the operation of, and the rights of eligible individuals under, the Plan, the Award Agreements, and the Awards shall be governed by applicable federal law and otherwise by the laws of the State of Delaware. (e) Rights. Neither the adoption of the Plan nor any action of the Board or the Plan Administrator shall be deemed to give any individual any right to be granted an Award, or any other right hereunder, unless and until the Plan Administrator shall have granted such individual an Award, and then his rights shall be only such as are provided by the Plan and the Award Agreement. Further, notwithstanding any provisions of the Plan or any Award Agreement with a Grantee, but subject to any employment agreement, Pegasus shall have the right, in its discretion, to retire an employee at any time -12- pursuant to its retirement rules or otherwise to terminate his employment at any time for any reason whatsoever. (f) Non-Transferability. Except as otherwise provided in any Award Agreement, Awards which have not vested shall not be assignable or transferable by the Grantee otherwise than by will or by the laws of descent and distribution. If a Grantee is married on the date an Award is granted, and if the Grantee so requests, the certificate or certificates issued shall be registered in the name of the Grantee and the Grantee's spouse, jointly, with right of survivorship. (g) Listing and Registration of Shares. Each Award shall be subject to the requirement that, if at any time the Plan Administrator shall determine, in its discretion, that the listing, registration, or qualification of the Common Stock covered thereby upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Award or the vesting of Common Stock thereunder, or that action by PCC or by the Grantee should be taken in order to obtain an exemption from any such requirement, no shares of Common Stock shall be received pursuant to an Award, unless and until such listing, registration, qualification, consent, approval, or action shall have been effected, obtained, or taken under conditions acceptable to the Plan Administrator. Without limiting the generality of the foregoing, each Grantee or his legal representative or beneficiary may also be required to give satisfactory assurance that shares received pursuant to an Award will be held as an investment and not with a view to distribution, and certificates representing such shares may be legended accordingly. (h) Withholding and Use of Shares to Satisfy Tax Obligations. The obligation of PCC to deliver Common Stock pursuant to any Award shall be subject to applicable federal, state and local tax withholding requirements. If the vesting of any Award is subject to the withholding requirements of applicable federal tax law, the Plan Administrator, in its -13- discretion, may permit or require the Grantee to satisfy the federal, state and local withholding tax, in whole or in part, by electing to have PCC withhold shares of Common Stock subject to the Award (or by returning previously acquired shares of Common Stock to PCC). PCC may not withhold shares in excess of the number necessary to satisfy the minimum federal, state and local income tax withholding requirements. Shares of Common Stock shall be valued, for purposes of this paragraph, at their Fair Market Value, but as of the date the amount attributable to the vesting of the Award is includable in income by the Grantee under section 83 of the Code (the "Determination Date"). If shares of Common Stock acquired by the exercise of an incentive stock option (within the meaning of section 422 of the Code, or any successor thereto) are used to satisfy the withholding requirement described above, such shares of Common Stock must have been held by the Grantee for a period of not less than the holding period described in section 422(a)(1) of the Code as of the Determination Date. The Plan Administrator shall adopt such withholding rules as it deems necessary to carry out the provisions of this paragraph. (i) Indemnification of Board and Plan Administrator. Without limiting any other rights of indemnification which they may have from Pegasus, the members of the Board, the Committee and the Management Committee shall be indemnified by PCC against all costs and expenses reasonably incurred by them in connection with any claim, action, suit, or proceeding to which they or any of them may be a party by reason of any action taken or failure to act under, or in connection with, the Plan, or any Award granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by legal counsel selected by PCC) or paid by them in satisfaction of a judgment in any such action, suit, or proceeding, except a judgment based upon a finding of willful misconduct or recklessness on their part. Upon the making or institution of any such claim, action, suit, or proceeding, the Board, Committee or Management Committee member shall notify PCC in writing, giving PCC an opportunity, at its own expense, to handle and defend the same before such Board, Committee or Management Committee member undertakes to handle it on his own behalf. -14- EX-10.29 8 EXHIBIT 10.29 Exhibit 10.29 NEITHER THIS OPTION NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW, AND THEY MAY NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH APPLICABLE FEDERAL AND STATE SECURITIES LAWS AND THE OTHER RESTRICTIONS ON TRANSFER SET FORTH HEREIN. --------------------------- Date: April 1, 1996 PEGASUS MEDIA & COMMUNICATIONS, INC. OPTION TO PURCHASE COMMON STOCK Void after the Expiration Time, as provided herein. THIS CERTIFIES that the Company hereby grants Donald W. Weber (the "Option Holder") a nonqualified stock option (the "Option") to purchase all or any part of an aggregate of 150 fully paid and nonassessable shares of Common Stock at any time during the period commencing on April 1, 1996 and ending on the Effective Date. At any time during the period commencing on the Effective Date and ending at the Expiration Time, this Option entitles the Option Holder to purchase fully paid and nonassessable shares of Public Common Stock, the number of which is determined by multiplying (a) 150 minus the number of Option Shares purchased prior to the Effective Date, by (b) the Conversion Ratio. 1. Definitions. For the purpose of this Option: "Affiliate" means Pegasus Media & Communications, Inc., and any person or entity that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, Pegasus Media & Communications, Inc. "Business Day" means any day on which the New York Stock Exchange is open for trading. "Common Stock" means Class B Common Stock of Pegasus Media & Communications, Inc. "Company" means -- (1) Prior to the Effective Date, Pegasus Media & Communications, Inc., a Delaware corporation; and (2) On and after the Effective Date, the Affiliate whose common stock is offered in the Qualifying Equity Offering. "Conversion Ratio" means the ratio that will result in the Option Holder holding options to purchase the same percentage of the common equity securities of the Affiliate issuing securities in the Qualifying Equity Offering as the Option Holder holds in Pegasus Media & Communications, Inc. immediately before the completion of the Qualifying Equity Offering before giving effect to the issuance of the Public Common Stock to the public in the Qualifying Equity Offering or to any other issuance of securities related to the Qualifying Equity Offering (other than issuances to holders of common equity securities of Pegasus Media & Communications, Inc. in exchange for such securities). "Effective Date" means the effective date of the registration statement relating to the Qualifying Equity Offering. "Exercise Price" means -- (1) With respect to exercise of the Option before the Effective Date, $471.00 per share of Common Stock; and (2) With respect to exercise of the Option on and after the Effective Date, the Exercise Price per share of Public Common Stock shall equal $471.00 divided by the Conversion Ratio. "Expiration Time" means 5:00 p.m. (Philadelphia time) on October 30, 2000. "Fair Market Value" means -- (1) With respect to Public Common Stock: (a) The mean between the highest and lowest quoted selling price, if there is a market for the Option Shares on a registered securities exchange or in an over the counter market, on the date of exercise; or (b) The weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the date of exercise, if there are no sales on the date of exercise but there are sales on dates within a reasonable period both before and after the date of exercise. -2- Where the fair market value of the Option Shares is determined under (b) above, the average of the means between the highest and lowest sales on the nearest date before and the nearest date after the exercise date is to be weighted inversely by the respective numbers of trading days between the selling dates and the exercise date, in accordance with Treas. Reg. Section 20.2031-2(b)(1). (2) With respect to Common Stock, the fair market value of a share of Common Stock as determined by a qualified independent appraiser appointed by the Company on the valuation date immediately preceding, or coincident with, the exercise date. "Option Shares" means the shares of Common Stock and/or Public Common Stock issued or issuable upon exercise of the Option. "Public Common Stock" means the class or series of the common stock of an Affiliate that is offered in the Qualifying Equity Offering. "Qualifying Equity Offering" means the first public offering of common stock of any Affiliate for cash pursuant to a registration statement filed and declared effective under the Securities Act, other than a registration statement on Form S-4 or S-8, or any similar or successor form. "Securities Act" means the Securities Act of 1933, as amended. 2. Exercise of Option; Notice of Effective Date. (a) This Option may be exercised in whole or in part (but not as to fractional shares) on any Business Day on or after April 1, 1996 and until the Expiration Time by the presentation and surrender of this Option, with the Purchase Agreement attached hereto as Annex A properly completed and duly executed, to the Company at its principal office at 5 Radnor Corporate Center, Suite 454, 100 Matsonford Road, Radnor, PA 19087 (or at such other address as the Company may hereafter notify the Option Holder in writing) and upon payment to the Company of the Exercise Price for the shares to be purchased upon such exercise. The Exercise Price shall be payable in cash or its equivalent, in Option Shares newly acquired by the Option Holder upon exercise of such Option, or in a combination of cash (or its equivalent) and Option Shares. In the event the Exercise Price is paid, in whole or in part, with Option Shares, the portion of the Exercise Price so paid shall be equal to the Fair Market Value of the Option Shares surrendered in payment of such Exercise Price on the exercise date. The Option Holder shall be treated for all purposes as the holder of the shares so purchased -3- as of the close of business on the date of exercise and certificates for the shares of stock so purchased shall be delivered to the Option Holder within a reasonable time, not exceeding thirty (30) days, after such exercise. Certificates representing shares issued upon exercise of this Option shall bear a legend referring to the restrictions on transfer set forth herein. (b) Pegasus Media & Communications, Inc. shall provide written notice of the Effective Date to the Option Holder within 5 days thereafter and shall include in such notice a copy of the prospectus issued in connection with the Qualifying Equity Offering. 3. Common Stock Converted Into Public Common Stock. Within 30 days after the Effective Date, the Option Holder shall present all Common Stock (if any) purchased pursuant to this Option to the Company and shall receive in lieu thereof shares of Public Common Stock, in an amount determined by multiplying (a) the number of shares of Common Stock so presented, by (b) the Conversion Ratio. 4. Option Share Transfer to Comply with the Securities Laws. Neither the Option Shares, nor any interest in the Option Shares, may be sold, assigned, pledged, hypothecated, encumbered or in any other manner transferred or disposed of, in whole or in part, except in compliance with applicable United States federal and state securities or Blue Sky laws and the terms and conditions hereof. Each certificate for Option Shares shall bear an appropriate legend calling attention to such restrictions unless, in the opinion of counsel for the Company, the Option Shares need no longer be subject to the restriction contained herein. 5. Non-Transferability of Option. This Option is not assignable or transferable, in whole or in part, by the Option Holder. This Option shall be exercisable only by the Option Holder or, in the event of his disability, by his guardian or legal representative. 6. Qualifying Equity Offering By Affiliate. If the Qualifying Equity Offering shall be made by an Affiliate other than Pegasus Media & Communications, Inc., this Option shall be assumed by such Affiliate. 7. Certain Covenants of the Company. The Company covenants and agrees that all shares which may be issued upon the exercise of this Option, will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which this Option may be exercised, the Company will at all times have -4- authorized, and reserved for the purpose of issue upon exercise of the purchase rights evidenced by this Option, a sufficient number of shares of Common Stock (prior to the Effective Date) or Public Common Stock (on and after the Effective Date), to provide for the exercise of the rights represented by this Option. 8. Adjustment of Purchase Price and Number of Shares. This Section 8 shall not apply to the adjustments provided for in this Option which automatically occur as a result of the Qualifying Equity Offering, including, but not limited to, the common stock subject to this Option, the number of shares of common stock subject to this Option, and the decrease in the Exercise Price. The number and kind of securities purchasable upon the exercise of this Option and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Reclassification, Consolidation or Merger. In case of any consolidation or merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is a continuing corporation and which does not result in any reclassification or change, other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of this Option), or in the case of any sale or transfer to another corporation of the property of the Company as an entirety or substantially as an entirety, the Company, or such successor or purchasing corporation, as the case may be, shall, without payment of any additional consideration therefor, execute a new Option providing that the Option Holder shall have the right to exercise such new Option (upon terms not less favorable to the Option Holder than those then applicable to this Option) and to receive upon such exercise, in lieu of each share of Common Stock (prior to the Effective Date) or Public Common Stock (on and after the Effective Date), theretofore issuable upon exercise of this Option, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation, merger, sale or transfer by the holder of one share of Common Stock ( prior to the Effective Date) or Public Common Stock (on and after the Effective Date), issuable upon exercise of this Option had it been exercised immediately prior to such reclassification, change, consolidation, merger, sale or transfer. Such new Option shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 8. The provisions of this Subsection 8(a) shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales and transfers. (b) Subdivision or Combination of Shares. If the Company, at any time prior to the Expiration Time, shall -5- subdivide or combine the Common Stock (prior to the Effective Date) or Public Common Stock (on and after the Effective Date), the Exercise Price shall be proportionately reduced, in case of subdivision of such shares, as of the effective date of such subdivision, or, if the Company shall take a record of holders of its Common Stock (prior to the Effective Date) or Public Common Stock (on and after the Effective Date), for the purpose of so subdividing, as of such record date, whichever is earlier, or shall be proportionately increased, in the case of combination of such shares, as of the effective date of such combination, or, if the Company shall take a record of holders of its Common Stock (prior to the Effective Date) or Public Common Stock (on and after the Effective Date), for the purpose of so combining, as of such record date, whichever is earlier. (c) Stock Dividends. If the Company, at any time prior to the Expiration Time, shall pay a dividend in shares of, or make other distribution of shares of, the Common Stock (prior to the Effective Date) or Public Common Stock (on and after the Effective Date), then the Exercise Price shall be adjusted, as of the date the Company shall take a record of the holders of the Common Stock (prior to the Effective Date) or Public Common Stock (on and after the Effective Date), for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Exercise Price in effect immediately prior to such payment or other distribution by a fraction (i) the numerator of which shall be the total number of shares of Common Stock (prior to the Effective Date) or Public Common Stock (on and after the Effective Date), outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Common Stock (prior to the Effective Date) or Public Common Stock (on and after the Effective Date), outstanding immediately after such dividend or distribution. The provisions of this Subsection 8(c) shall not apply under any of the circumstances for which an adjustment is provided in Subsections 8(a) or 8(b). 9. Amendments and Waivers. No amendment or waiver of any provision of this Option shall be effective unless and until it shall be set forth in writing and signed by the Company and the Option Holder. 10. Notice. Any notice or other communication hereunder shall be deemed satisfactorily given if in writing and delivered by hand, mailed (registered or certified mail), telecopied or sent by reputable overnight courier service, charges prepaid, to the address set forth below, or such other address as may be given in accordance herewith: If to the Company: -6- Pegasus Media & Communications, Inc. 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, Pennsylvania 19087 Fax: 610-341-1835 Attention: Chief Financial Officer If to the Option Holder: Mr. Donald W. Weber Chief Executive Officer Viewstar Entertainment Services Suite 203, 400 Dawson Center Dawsonville, GA 30534 Fax: 706-216-1205 Any notice shall be deemed delivered and received (i) on the date delivered to any employee of the party to whom such notice or communication is made at the proper address in accordance herewith, if hand delivered, (ii) four days after being sent, if sent by registered or certified mail to the proper address in accordance herewith, (iii) one day after being telecopied, if sent by telecopier to the proper telecopier number in accordance herewith, and (iv) the first Business Day after sent by reputable overnight courier service to the proper address in accordance herewith. 11. No Rights as Shareholder. Prior to the exercise of this Option, the Option Holder shall not be entitled to any rights of a shareholder of the Company or any Affiliate, including, without limitation, the right to vote, the right to receive dividends and the right to receive other distributions. 12. Fractional Shares. No fractional shares of Common Stock or Public Common Stock will be issued in connection with any exercise of this Option, but in lieu of such fractional shares, the Company shall make a cash payment therefor equal in amount to the product of the applicable fraction multiplied by the Exercise Price per share paid by the holder for its Option Shares upon such exercise. 13. Governing Law. This Option shall be construed in accordance with and governed by the laws of the State of Delaware. 14. Headings. The descriptive headings of the several paragraphs of this Option are inserted for convenience only and do not constitute a part of this Option. IN WITNESS WHEREOF, Pegasus Media & Communications, Inc. has caused this Option to be signed by its duly authorized officer under its corporate seal, attested by its duly authorized officer, on the date of this Option. Attest: PEGASUS MEDIA & COMMUNICATIONS, INC. __________________________ By: _______________________________ -7- Annex A PURCHASE AGREEMENT I hereby exercise the option granted to me pursuant to the Option to Purchase Common Stock dated as of April 1, 1996 (the "Option") by Pegasus Media & Communications, Inc., with respect to the following number of shares of Common Stock or Public Common Stock (as defined in the Option) ("Shares") covered by said option: Number of Shares to be purchased ___________________ Option price per Share $__________________ Total option price $__________________ _____ A. Enclosed is cash or my check, bank draft or postal or express money order in the amount of $__________ in full payment for such Shares. _____ B. Enclosed is/are _________ Share(s) with a total fair market value of $__________ on the date hereof in full payment for such Shares. _____ C. Enclosed is cash or my check, bank draft or postal or express money order in the amount of $_________ and_______________ Share(s) with a total fair market value of $__________ on the date hereof in full payment for such Shares. Please have the certificate or certificates representing the purchased Shares registered in my name and sent to: _______________________________________________ . DATED: __________________ , 19__. ___________________________________ Donald W. Weber EX-10.30 9 EXHIBIT 10.30 Exhibit 10.30 PEGASUS COMMUNICATIONS 1996 STOCK OPTION PLAN Table of Contents
1. Purpose....................................................................................... 1 2. Administration................................................................................ 1 3. Eligibility................................................................................... 3 4. Stock......................................................................................... 3 5. Granting of Options........................................................................... 4 6. Annual Limit.................................................................................. 4 7. Terms and Conditions of Options............................................................... 5 8. Option Agreements -- Other Provisions......................................................... 11 9. Capital Adjustments........................................................................... 11 10. Certain Corporate Transactions................................................................ 12 11. Change in Control............................................................................. 13 12. Amendment or Termination of the Plan.......................................................... 14 13. Absence of Rights............................................................................. 15 14. Indemnification of Board and Committee........................................................ 15 15. Application of Funds.......................................................................... 16 16. Shareholder Approval.......................................................................... 16 17. No Obligation to Exercise Option.............................................................. 16 18. Termination of Plan........................................................................... 16 19. Governing Law................................................................................. 17
PEGASUS COMMUNICATIONS 1996 STOCK OPTION PLAN WHEREAS, Pegasus Communications Corporation, a Delaware corporation, desires to award incentive and nonqualified stock options to certain of its officers and directors who are not officers; NOW THEREFORE, effective September 30, 1996, the Pegasus Communications 1996 Stock Option Plan is hereby adopted under the following terms and conditions: 1. Purpose. This Pegasus Communications 1996 Stock Option Plan (the "Plan") is intended to provide a means whereby Pegasus Communications Corporation (the "Company") may, through the grant of incentive stock options and nonqualified stock options (collectively, the "Options") to Key Employees and Non-employee Directors (as defined in Section 3), attract and retain such Key Employees and Non-employee Directors and motivate them to exercise their best efforts on behalf of the Company and of any Related Company. For purposes of granting incentive stock options under the Plan, a "Related Company" shall mean either a "subsidiary corporation" of the Company, as defined in section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"), or the "parent corporation" of the Company, as defined in section 424(e) of the Code. For purposes of granting non-qualified stock options under the Plan, a "Related Company" shall mean Pegasus Communications Holdings, Inc. or any of its direct or indirect subsidiaries, whether in corporate, partnership or any other form. Further, as used in the Plan, (i) the term "ISO" shall mean an option which, at the time such option is granted, qualifies as an incentive stock option within the meaning of section 422 of the Code and is designated as an ISO in the "Option Agreement" (as defined in Section 8 hereof); and (ii) the term "NQSO" shall mean an option which, at the time such option is granted, does not qualify as an ISO, and is designated as a nonqualified stock option in the Option Agreement (as defined in Section 8 hereof). 2. Administration. The Plan shall be administered: (a) By a committee, which shall consist of not fewer than two non-employee directors (within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor thereto) of the Company who are also outside directors (within the meaning of Treas. Reg. ss.1.162-27(e)(3), or any successor thereto) of the Company, who shall be appointed by, and shall serve at the pleasure of, the Board of Directors of the Company (the "Board"); or (b) In the event a committee has not been established in accordance with subsection (a), or cannot be constituted to vote on the grant of an Option (for example, because of state laws governing corporate self-dealing), by the entire Board; provided, however, that a member of the Board shall not participate in a vote approving the grant of an Option to himself or herself to the extent provided under the laws of the State of Delaware governing corporate self-dealing. The administrator of the Plan shall hereinafter be referred to as the "Committee." Each member of the Committee, while serving as such, shall be deemed to be acting in his capacity as a director of the Company. The Committee shall have full authority, subject to the terms of the Plan, to select the Key Employees and Non-employee Directors to be granted Options under the Plan, to grant Options on behalf of the Company, and to set the date of grant and the other terms of such Options; provided, however, that Non-employee Directors shall not be eligible to receive ISOs under the Plan. The Committee may correct any defect, supply any omission and reconcile any inconsistency in this Plan and in any Option granted hereunder in the manner and to the extent it deems desirable. The Committee also shall have the authority to establish such rules and regulations, not inconsistent with the provisions of the Plan, for the proper administration of the Plan, to amend, modify, or rescind any such rules and regulations, and to make such determinations, and interpretations under, or in connection with, the Plan, as it deems necessary or advisable. All such rules, regulations, determinations, and interpretations shall be binding and conclusive upon the Company, its -2- shareholders and all Key Employees and Non-employee Directors, upon their respective legal representatives, beneficiaries, successors, and assigns, and upon all other persons claiming under or through any of them. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. 3. Eligibility. The class of employees who shall be eligible to receive Options under the Plan shall be the executive officers of the Company or a Related Company (including any directors who also are officers) ("Key Employees"). Directors of the Company or a Related Company who are not employees ("Non-employee Directors") shall be eligible to receive NQSOs (and not ISOs) under the Plan. More than one Option may be granted to a Key Employee or a Non-employee Director under the Plan. A Key Employee or Non-employee Director who has been granted an Option under the Plan shall hereinafter be referred to as an "Optionee." 4. Stock. Options may be granted under the Plan to purchase up to a maximum of 450,000 shares of Class A common stock of the Company ("Common Stock"); provided, however, that no Key Employee shall receive Options for more than 275,000 shares of the Company's Common Stock over the life of the Plan. However, both limits in the preceding sentence shall be subject to adjustment as hereinafter provided. Shares issuable under the Plan may be authorized but unissued shares or reacquired shares, and the Company may purchase shares required for this purpose, from time to time, if it deems such purchase to be advisable. If any Option granted under the Plan expires or otherwise terminates for any reason whatsoever (including, without limitation, the Optionee's surrender thereof) without having been exercised, the shares subject to the unexercised portion of the Option shall continue to be available for the granting of Options under the Plan as fully as if the shares had never been subject to an Option; provided, however, that (i) if an Option is cancelled, the shares of Common Stock covered by the cancelled Option shall -3- be counted against the maximum number of shares specified above for which Options may be granted to single Key Employee, and (ii) if the exercise price of an Option is reduced after the date of grant, the transaction shall be treated as a cancellation of the original Option and the grant of a new Option for purposes of such maximum. 5. Granting of Options. From time to time until the expiration or earlier suspension or discontinuance of the Plan, the Committee may, on behalf of the Company, grant to Key Employees and Non-employee Directors under the Plan such Options as it determines are warranted; provided, however, that grants of ISOs and NQSOs shall be separate and not in tandem, and further provided that Non-employee Directors shall not be eligible to receive ISOs under the Plan. In making any determination as to whether a Key Employee or a Non-employee Director shall be granted an Option, the type of Option to be granted to a Key Employee, the number of shares to be covered by the Option, and other terms of the Option, the Committee shall take into account the duties of the Key Employee or the Non-employee Director, his present and potential contributions to the success of the Company or a Related Company, the tax implications to the Company and the Key Employee of any Option granted, and such other factors as the Committee shall deem relevant in accomplishing the purposes of the Plan. Moreover, the Committee may provide in the Option that said Option may be exercised only if certain conditions, as determined by the Committee, are fulfilled. 6. Annual Limit (a) ISOs. The aggregate fair market value (determined under Section 7(b) hereof as of the date the ISO is granted) of the Common Stock with respect to which ISOs are exercisable for the first time by a Key Employee during any calendar year (counting ISOs under this Plan and incentive stock options under any other stock option plan of the Company or a Related Company) shall not exceed $100,000. If an Option intended as an ISO is granted to a Key Employee and the Option may not be treated in whole or in part as an ISO pursuant to the $100,000 limitation, the Option shall be treated as an ISO to -4- the extent it may be so treated under the limitation and as an NQSO as to the remainder. For purposes of determining whether an ISO would cause the limitation to be exceeded, ISOs shall be taken into account in the order granted. (b) NQSOs. The annual limits set forth above for ISOs shall not apply to NQSOs. 7. Terms and Conditions of Options. Options granted pursuant to the Plan shall include expressly or by reference the following terms and conditions, as well as such other provisions not inconsistent with the provisions of this Plan and, for ISOs granted under this Plan, the provisions of section 422(b) of the Code, as the Committee shall deem desirable -- (a) Number of Shares. The Option shall state the number of shares of Common Stock to which the Option pertains. (b) Price. The Option shall state the Option price which shall be determined and fixed by the Committee in its discretion but shall not be less than the higher of 100 percent (110 percent in the case of an ISO granted to a more-than-10-percent shareholder, as provided in paragraph (j) below) of the fair market value of the optioned shares of Common Stock on the date the Option is granted, or the par value thereof. The fair market value of a share of Common Stock shall be the closing price of the Common Stock on a registered securities exchange or on an over-the-counter market on the last business day prior to the date of grant on which Common Stock traded. (c) Term (1) ISOs. Subject to earlier termination as provided in paragraphs (e), (f), and (g) below and in Section 10 hereof, the term of each ISO shall be not more than 10 years (five years in the case of a more-than-10- percent shareholder, as discussed in paragraph (j) below) from the date of grant. -5- (2) NQSOs. Subject to earlier termination as provided in paragraphs (e), (f), and (g) below and in Section 10 hereof, the term of each NQSO shall be not more than ten years from the date of grant. (d) Exercise. Options shall be exercisable in such installments and on such dates, as the Committee may specify. The Committee may accelerate the exercise date of any outstanding Options, in its discretion, if it deems such acceleration to be desirable. Any exercisable Options may be exercised at any time up to the expiration or termination of the Option. Exercisable Options may be exercised, in whole or in part and from time to time, by giving written notice of exercise to the Company at its principal office, specifying the number of shares to be purchased and accompanied by payment in full of the aggregate Option exercise price for such shares. Only full shares shall be issued under the Plan, and any fractional share which might otherwise be issuable upon exercise of an Option granted hereunder shall be forfeited. The Option price shall be payable -- (1) in cash or its equivalent; (2) in the case of an ISO, if the Committee in its discretion causes the Option Agreement so to provide, and in the case of an NQSO, if the Committee in its discretion so determines at or prior to the time of exercise, then -- (A) in shares of Common Stock previously acquired by the Optionee; provided that if such shares of Common Stock were acquired through the exercise of an ISO and are used to pay the Option price for ISOs, such shares have been held by the Key Employee for a period of not less than the holding period described in section 422(a)(1) of the Code on the date of exercise; (B) in Company Common Stock newly acquired by the Optionee upon exercise of such Option (which shall constitute a disqualifying disposition in the case of an Option which is an ISO); -6- (C) by delivering a properly executed notice of exercise of the Option to the Company and a broker, with irrevocable instructions to the broker promptly to deliver to the Company the amount of sale or loan proceeds necessary to pay the exercise price of the Option; (D) if the Optionee is designated as an "eligible participant," and if the Optionee thereafter so requests, (i) the Company will loan the Optionee the money required to pay the exercise price of the Option; (ii) any such loan to an Optionee shall be made only at the time the Option is exercised; and (iii) the loan will be made on the Optionee's personal negotiable demand promissory note, bearing interest at the lowest rate which will avoid imputation of interest under section 7872 of the Code, and including such other terms as the Committee prescribes; or (E) in any combination of subparagraphs (1), (2)(A), (2)(B), (2)(C) and (2)(D) above. In the event the Option price is paid, in whole or in part, with shares of Common Stock, the portion of the Option price so paid shall be equal to the aggregate fair market value (determined under paragraph (b) above, but as of the date of exercise of the Option, rather than the date of grant) of the Common Stock so surrendered in payment of the Option price. (e) Termination of Employment or Board Membership. If a Key Employee's employment by the Company (and Related Companies) or a Non-employee Director's membership on the Board is terminated by either party prior to the expiration date fixed for his Option for any reason other than death or disability, such Option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of such termination, or to any greater extent permitted by the Committee, by the Optionee at any time prior to the earlier of (i) the expiration date specified in such Option, or (ii) an accelerated expiration date determined by the Committee, in its discretion, and set forth in the Option Agreement; except that, subject to Section 10 hereof, such accelerated expiration date shall not be earlier than the date of the termination of the Key Employee's -7- employment or the Non-employee Director's Board membership, and in the case of ISOs, such accelerated expiration date shall not be later than three months after such termination of employment. (f) Exercise upon Disability of Optionee. If an Optionee becomes disabled (within the meaning of section 22(e)(3) of the Code) during his employment or membership on the Board and, prior to the expiration date fixed for his Option, his employment or membership on the Board is terminated as a consequence of such disability, such Option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of such termination, or to any greater extent permitted by the Committee, by the Optionee at any time prior to the earlier of (i) the expiration date specified in such Option, or (ii) an accelerated termination date determined by the Committee, in its discretion, and set forth in the Option Agreement; except that, subject to Section 10 hereof, such accelerated termination date shall not be earlier than the date of the Optionee's termination of employment or Board Membership by reason of disability, and in the case of ISOs, such accelerated termination date shall not be later than one year after such termination of employment. In the event of the Optionee's legal disability, such Option may be exercised by the Optionee's legal representative. (g) Exercise upon Death of Optionee. If an Optionee dies during his employment or Board Membership, and prior to the expiration date fixed for his Option, or if an Optionee whose employment or Board membership is terminated for any reason, dies following his termination of employment or Board membership but prior to the earliest of (i) the expiration date fixed for his Option, (ii) the expiration of the period determined under paragraphs (e) and (f) above, or (iii) in the case of an ISO, three months following termination of employment, such Option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of his death, or to any greater extent permitted by the Committee, by the Optionee's estate, personal representative or beneficiary who acquired the -8- right to exercise such Option by bequest or inheritance or by reason of the death of the Optionee. Such post-death exercise may occur at any time prior to the earlier of (i) the expiration date specified in such Option or (ii) an accelerated termination date determined by the Committee, in its discretion, and set forth in the Option Agreement; except that, subject to Section 10 hereof, such accelerated termination date shall not be later than three years after the date of death. (h) Non-Transferability. No ISO and (except as otherwise provided in any Option Agreement) no NQSO shall be assignable or transferable by the Optionee other than by will or by the laws of descent and distribution, and during the lifetime of the Optionee, shall be exercisable only by him or by his guardian or legal representative. If the Optionee is married at the time of exercise and if the Optionee so requests at the time of exercise, the certificate or certificates shall be registered in the name of the Optionee and the Optionee's spouse, jointly, with right of survivorship. (i) Rights as a Shareholder. An Optionee shall have no rights as a shareholder with respect to any shares covered by his Option until the issuance of a stock certificate to him for such shares. (j) Ten Percent Shareholder. If the Key Employee owns more than 10 percent of the total combined voting power of all shares of stock of the Company or of a Related Company at the time an ISO is granted to him, the Option price for the ISO shall be not less than 110 percent of the fair market value (as determined under paragraph (b) above) of the optioned shares of Common Stock on the date the ISO is granted, and such ISO, by its terms, shall not be exercisable after the expiration of five years from the date the ISO is granted. The conditions set forth in this paragraph shall not apply to NQSOs. (k) Listing and Registration of Shares. Each Option shall be subject to the requirement that, if at any time the Committee shall determine, in its discretion, that the listing, registration, or qualification of the shares of Common Stock covered thereby upon any securities exchange or under any state or federal law, or the consent or approval of any governmental -9- regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the purchase of shares of Common Stock thereunder, or that action by the Company or by the Optionee should be taken in order to obtain an exemption from any such requirement, no such Option may be exercised, in whole or in part, unless and until such listing, registration, qualification, consent, approval, or action shall have been effected, obtained, or taken under conditions acceptable to the Committee. Without limiting the generality of the foregoing, each Optionee or his legal representative or beneficiary may also be required to give satisfactory assurance that shares purchased upon exercise of an Option are being purchased for investment and not with a view to distribution, and certificates representing such shares may be legended accordingly. (l) Withholding and Use of Shares to Satisfy Tax Obligations. The obligation of the Company to deliver shares of Common Stock upon the exercise of any Option shall be subject to applicable federal, state and local tax withholding requirements. If the exercise of any Option is subject to the withholding requirements of applicable federal tax law, the Committee, in its discretion, may permit or require the Key Employee to satisfy the federal, state and local withholding tax, in whole or in part, by electing to have the Company withhold shares of Common Stock subject to the exercise (or by returning previously acquired shares of Common Stock to the Company). The Company may not withhold shares in excess of the number necessary to satisfy the minimum federal, state and local income tax withholding requirements. Shares of Common Stock shall be valued, for purposes of this paragraph, at their fair market value under paragraph (b) above, but as of the date the amount attributable to the exercise of the Option is includable in income by the Key Employee under section 83 of the Code (the "Determination Date"). If shares of Common Stock acquired by the exercise of an ISO are used to satisfy the withholding requirement described above, such shares of Common Stock must have been held by the Key Employee for a period of not less -10- than the holding period described in section 422(a)(1) of the Code as of the Determination Date. The Committee shall adopt such withholding rules as it deems necessary to carry out the provisions of this paragraph. (m) Loans. If an Optionee is designated as an "eligible participant" by the Committee at the date of grant in the case of an ISO, or at or after the date of grant in the case of an NQSO, and if the Optionee thereafter so requests, the Company will loan the Optionee the money required to satisfy any regular income tax obligations (as opposed to alternative minimum tax obligations) resulting from the exercise of any Options. Any loan or loans to an Optionee shall be made only at the time any such tax resulting from such exercise is due. The Committee, in its discretion, may require an affidavit from the Optionee specifying the amount of the tax required to be paid and the date when such tax must be paid. The loan will be made on the Optionee's personal, negotiable, demand promissory note, bearing interest at the lowest rate which will avoid imputation of interest under section 7872 of the Code, and including such other terms as the Committee prescribes. 8. Option Agreements -- Other Provisions. Options granted under the Plan shall be evidenced by written documents ("Option Agreements") in such form as the Committee shall from time to time approve, and containing such provisions not inconsistent with the provisions of the Plan (and, for ISOs granted pursuant to the Plan, not inconsistent with section 422(b) of the Code), as the Committee shall deem advisable. The Option Agreements shall specify whether the Option is an ISO or NQSO. Each Optionee shall enter into, and be bound by, an Option Agreement as soon as practicable after the grant of an Option. 9. Capital Adjustments. The number of shares which may be issued under the Plan, the maximum number of shares with respect to which Options may be granted to any Optionee under the Plan, as stated in Section 4 hereof, and the number of shares issuable upon exercise of outstanding Options under the Plan (as well as the Option price per share under such outstanding Options) -11- shall, subject to the provisions of section 424(a) of the Code, be adjusted, as may be deemed appropriate by the Committee, to reflect any stock dividend, stock split, share combination, or similar change in the capitalization of the Company. In the event any such change in capitalization cannot be reflected in a straight mathematical adjustment of the number of shares issuable upon the exercise of outstanding Options (and a straight mathematical adjustment of the exercise price thereof), the Committee shall make such adjustments as are appropriate to reflect most nearly such straight mathematical adjustment. Such adjustments shall be made only as necessary to maintain the proportionate interest of Optionees, and preserve, without exceeding, the value of Options. 10. Certain Corporate Transactions. In the event of a corporate transaction (as that term is described in section 424(a) of the Code and the Treasury Regulations issued thereunder as, for example, a merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation), each outstanding Option shall be assumed by the surviving or successor corporation; provided, however, that, in the event of a proposed corporate transaction, the Committee may terminate all or a portion of the outstanding Options if it determines that such termination is in the best interests of the Company. If the Committee decides to terminate outstanding Options, the Committee shall give each Optionee holding an Option to be terminated not less than seven days' notice prior to any such termination, and any Option which is to be so terminated may be exercised (if and only to the extent that it is then exercisable) up to, and including the date immediately preceding such termination. Further, as provided in Section 7(d) hereof, the Committee, in its discretion, may accelerate, in whole or in part, the date on which any or all Options become exercisable. The Committee also may, in its discretion, change the terms of any outstanding Option to reflect any such corporate transaction, provided that, in the case of ISOs, such change would not constitute a "modification" under section 424(h) of the Code, unless the Option holder consents to the change. -12- 11. Change in Control. (a) Full Vesting. Notwithstanding any other provision of this Plan, all outstanding Options shall become fully vested and exercisable upon a Change in Control. (b) Definitions. The following definitions shall apply for purposes of this Section -- (1) "Change in Control" means the occurrence of any of the following: (i) 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 to any "person" (as such term is used in section 13(d)(3) of the Exchange Act) other than the Principal or his Related Parties, (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above) becomes the "beneficial owner" (as 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), of more of the voting stock of the Company than is "beneficially owned" (as defined above) at such time by the Principal and his Related Parties, or (iv) the first day on which a majority of the members of the Board are not Continuing Directors. (2) "Continuing Directors" means, as of any date of determination, any member of the Board who (i) was a member of the Board on September 30, 1996, or (ii) was nominated for election or elected to the Board with approval of a majority of the Continuing Directors who were members of the Board at the time of such nomination or election. (3) "Person" shall have the meaning set forth in the indenture dated July 7, 1995, by and among Pegasus Media & Communications, Inc., certain of its subsidiaries, and First Union National Bank and Trustee. -13- (4) "Principal" means Marshall W. Pagon. (5) "Related Party" 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, 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," as used with respect to any Person, means 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 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. 12. Amendment or Termination of the Plan (a) In General. The Board, pursuant to a written resolution, from time to time may suspend or terminate the Plan or amend it, and the Committee may amend any outstanding Options in any respect whatsoever; except that, without the approval of the shareholders (given in the manner set forth in paragraph (b) below) -- (1) the class of employees eligible to receive ISOs shall not be changed; (2) the maximum number of shares of Common Stock with respect to which Options may be granted under the Plan shall not be increased, except as permitted under Section 9 hereof; (3) the duration of the Plan under Section 18 hereof with respect to any ISOs granted hereunder shall not be extended; and (4) no amendment requiring shareholder approval pursuant to Treas. Reg. Section 1.162-27(e)(4)(vi) or any successor thereto may be made. -14- Notwithstanding the foregoing, no such suspension, discontinuance or amendment shall materially impair the rights of any holder of an outstanding Option without the consent of such holder. (b) Manner of Shareholder Approval. The approval of shareholders must be effected -- (1) By a method and in a degree that would be treated as adequate under applicable state law in the case of an action requiring shareholder approval (i.e., an action on which shareholders would be entitled to vote if the action were taken at a duly held shareholders' meeting); or (2) By a majority of the votes cast at a duly held shareholders' meeting at which a quorum representing a majority of all outstanding voting stock is, either in person or by proxy, present and voting on the Plan. 13. Absence of Rights. Neither the adoption of the Plan nor any action of the Board or the Committee shall be deemed to give any individual any right to be granted an Option, or any other right hereunder, unless and until the Committee shall have granted such individual an Option, and then his rights shall be only such as are provided by the Option Agreement. Any Option under the Plan shall not entitle the holder thereof to any rights as a stockholder of the Company prior to the exercise of such Option and the issuance of the shares pursuant thereto. Further, notwithstanding any provisions of the Plan or the Option Agreement with a Key Employee, the Company and any Related Company shall have the right, in its discretion but subject to any employment contract entered into with the Key Employee, to retire the Key Employee at any time pursuant to its retirement rules or otherwise to terminate his employment at any time for any reason whatsoever. 14. Indemnification of Board and Committee. Without limiting any other rights of indemnification which they may have from the Company and any Related Company, the members of the Board and the members of the Committee shall be indemnified by the Company against all costs and expenses reasonably -15- incurred by them in connection with any claim, action, suit, or proceeding to which they or any of them may be a party by reason of any action taken or failure to act under, or in connection with, the Plan, or any Option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit, or proceeding, except a judgment based upon a finding of willful misconduct or recklessness on their part. Upon the making or institution of any such claim, action, suit, or proceeding, the Board or Committee member shall notify the Company in writing, giving the Company an opportunity, at its own expense, to handle and defend the same before such Board or Committee member undertakes to handle it on his own behalf. The provisions of this Section shall not give members of the Board or the Committee greater rights than they would have under the Company's by-laws or Delaware law. 15. Application of Funds. The proceeds received by the Company from the sale of Common Stock pursuant to Options granted under the Plan shall be used for general corporate purposes. Any cash received in payment for shares upon exercise of an Option shall be added to the general funds of the Company and shall be used for its corporate purposes. Any Common Stock received in payment for shares upon exercise of an Option shall become treasury stock. 16. Shareholder Approval. This Plan shall become effective on September 30, 1996 (the date the Plan was adopted by the Board); provided, however, that if the Plan is not approved by the shareholders, in the manner described in Section 12(b) hereof, within 12 months before or after the date the Plan was adopted by the Board, ISOs granted hereunder shall be null and void and no additional Options shall be granted hereunder. 17. No Obligation to Exercise Option. The granting of an Option shall impose no obligation upon an Optionee to exercise such Option. 18. Termination of Plan. Unless earlier terminated as provided in the Plan, the Plan and all authority granted hereunder shall terminate absolutely at 12:00 midnight on September 29, 2006, which date is within 10 years after -16- the date the Plan was adopted by the Board, or the date the Plan was approved by the shareholders of the Company, whichever is earlier, and no Options hereunder shall be granted thereafter. Nothing contained in this Section, however, shall terminate or affect the continued existence of rights created under Options issued hereunder, and outstanding on the date set forth in the preceding sentence, which by their terms extend beyond such date. 19. Governing Law. The Plan shall be governed by the applicable Code provisions to the maximum extent possible. Otherwise, the laws of the State of Delaware shall govern the operation of, and the rights of Key Employees and Non-employee Directors under, the Plan and Options granted thereunder. -17- EX-21.1(A) 10 EXHIBIT 21.1 EXHIBIT 21.1 Subsidiary Jurisdiction - ---------- ------------ Bride Communications, Inc. Delaware HMW, Inc. Maine MCT Cablevision, Limited Partnership Delaware MCT Cablevision, Ltd. Pennsylvania PCT SG, Inc. Puerto Rico Pegasus Anasco Holdings, Inc. Delaware Pegasus Broadcast Associates, L.P. Pennsylvania Pegasus Broadcast Television, Inc. Pennsylvania Pegasus Cable Television, Inc. Massachusetts Pegasus Cable Television of Anasco, Inc. Puerto Rico Pegasus Cable Television Connecticut, Inc. Connecticut Pegasus Cable Television of San German, Inc. Delaware Pegasus Media & Communications, Inc. Delaware Pegasus Satellite Television, Inc. Delaware Portland Broadcasting, Inc. Maine PP Broadcast, Inc. Delaware WDBD License Corp. Delaware WDSI License Corp. Delaware WILF, Inc. Delaware WOLF License Corp. Delaware WTLH, Inc. Delaware WTLH License Corp. Delaware PHTRANS:131894_1.WP5 EX-23.2 11 EXHIBIT 23.2 HERBEIN + COMPANY INC. CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the reference to our firm under the captions "Experts" and "Selected Historical and Pro Forma Combined Financial Data" in the Form S-1 Registration Statement of Pegasus Communications Corporation filed with the Securities and Exchange Commission for the initial registration of Class A Common Stock, and to the inclusion therein of our reports dated March 4, 1994 with respect to the 1993 combined financial statements and financial statement schedule of Pegasus Communications Corporation. /s/ HERBEIN + COMPANY, INC. - ------------------------------ HERBEIN + COMPANY, INC. Reading, Pennsylvania October 1, 1996 EX-23.3 12 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-05057) of our report dated May 31, 1996 except as to Note 14 for which the date is September 3, 1996, on our audits of the combined financial statements and financial statement schedule of Pegasus Communications Corporation. We also consent to the reference to our firm under the caption "Experts" and "Selected Historical and Pro Forma Combined Financial Data." /s/ Coopers & Lybrand L.L.P. - ----------------------------- Coopers & Lybrand L.L.P. Philadelphia, Pennsylvania October 1, 1996 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-05057) of our report dated March 8, 1996 on our audits of the financial statements of WTLH, Inc. /s/ Coopers & Lybrand L.L.P. - ----------------------------- Coopers & Lybrand L.L.P. Jacksonville, Florida October 1, 1996 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-05057) of our report, which includes an explanatory paragraph regarding the restatement of depreciation expense, dated August 9, 1996 on our audits of the financial statements of Dom's Tele-Cable, Inc. /s/ Coopers & Lybrand L.L.P. - ----------------------------- Coopers & Lybrand L.L.P. San Juan, Puerto Rico October 1, 1996 EX-23.4 13 EXHIBIT 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the use of our report on the balance sheets of Portland Broadcasting, Inc. as of September 25, 1994 and September 24, 1995 and the related statements of operations, deficiency in assets, and cash flows for each of the three fiscal years in the period ended September 24, 1995, dated October 27, 1995, in the Registration Statement Form S-1 and related Prospectus of Pegasus Communications Corporation. /s/ Ernst & Young LLP - ------------------------------- ERNST & YOUNG LLP Pittsburgh, Pennsylvania October 1, 1996 EX-23.5 14 EXHIBIT 23.5 CONSENT OF INDEPENDENT ACCOUNTANTS INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement (No. 333-05057) of Pegasus Communications Corporation on Form S-1 of our report dated April 26, 1996, except for Note 9 as to which the date is September 3, 1996, on the DBS Operations of Harron Communications Corp. appearing in this Registration Statement, and to the reference to us under the heading "Experts" in such prospectus. /s/ Deloitte & Touche LLP - --------------------------- DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania October 1, 1996 -----END PRIVACY-ENHANCED MESSAGE-----