-----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, IIMmuEXMcSsy0/BkZSUopGqpIR8AoRW1BDc4MDwRicRKvQuIlBqrftyGmfAjR8QW 8XKpUZv3Y1IfN4pRX3yPZw== 0000950116-96-001151.txt : 19961028 0000950116-96-001151.hdr.sgml : 19961028 ACCESSION NUMBER: 0000950116-96-001151 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19961025 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-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-14857 FILM NUMBER: 96648090 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-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996 REGISTRATION NO. 333- =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------ Pegasus Communications Corporation (Exact name of registrant as specified in its charter) ------ 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. Scott A. Blank, Esq. Drinker Biddle & Reath 1100 Philadelphia National Bank Building 1345 Chestnut Street Philadelphia, Pennsylvania 19107-3496 (215) 988-2700 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. ------ If the Securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] CALCULATION OF REGISTRATION FEE
========================================================================================================== Title of Each Class Amount Proposed Maximum Proposed Maximum Amount of of Securities to be Offering Price Aggregate Registration to be Registered Registered Per Share (1) Offering Price (1) Fee(2) - ----------------------------------------------------------------------------------------------------------- Class A Common Stock 191,792 $14.19 $2,721,528 $824.71 ===========================================================================================================
(1) Calculated in accordance with Rule 457 based upon the price of the Registrant's Class A Common Stock on October 21, 1996. (2) Paid by wire transfer. 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 25, 1996 PROSPECTUS _________, 1996 LOGO PEGASUS COMMUNICATIONS CORPORATION Offer to Exchange its Class A Common Stock which has been registered under the Securities Act of 1933, as amended, for any or all of the outstanding Class B Common Stock of Pegasus Media & Communications, Inc. The Registered Exchange Offer will expire at 5:00 p.m., New York City time, on ------ ------, 1996, unless extended. Pegasus Communications Corporation, a Delaware corporation ("Pegasus" or, together with its subsidiaries, the "Company"), hereby offers (the "Registered Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange its Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), for any or all of the Class B Common Stock, par value $.01 per share (the "PM&C Class B Shares"), of Pegasus Media & Communications, Inc., a Delaware corporation ("PM&C"), which is a direct subsidiary of Pegasus. The Class A Common Stock to be issued pursuant to the Registered Exchange Offer has been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a registration statement of which this Prospectus is a part (the "Registration Statement"). PM&C has outstanding 8,500 PM&C Class B Shares. Each PM&C Class B Share will be exchanged for 22.564 shares of Class A Common Stock. The exchange ratio of the Class A Common Stock to be issued in the Registered Exchange Offer has been determined so that immediately after giving effect to the contribution by the Parent (as defined) of the Class A Common Stock, par value $.01 per share, of PM&C (the "PM&C Class A Shares") 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 issuance of additional shares of Common Stock in connection with the Transactions (as defined), the Parent and the holders of the PM&C Class B Shares will hold 95% and 5% of the equity of Pegasus and 99.5% and 0.5% of the voting rights of Pegasus' Common Stock, respectively, which are the same proportions in which they now own and have voting rights with respect to PM&C. Only whole shares of Class A Common Stock will be issued pursuant to the Registered Exchange Offer. In lieu of fractional shares to which a holder of PM&C Class B Shares would otherwise be entitled, the holder of PM&C Class B Shares will be paid in cash based upon the initial public offering price of the Class A Common Stock in the Public Offering (as defined) of $14.00 per share and no certificates or scrip representing fractional shares of Class A Common Stock will be issued. The Registered Exchange Offer may be accepted on behalf of a beneficial owner of PM&C Class B Shares only as to all PM&C Class B Shares owned by it since partial acceptances will not be permitted. The Letter of Transmittal contains a provision whereby each exchanging holder of the PM&C Class B Shares agrees by tendering his or her shares not to sell, otherwise dispose of or pledge any shares of Class A Common Stock received pursuant to the Registered Exchange Offer until April 3, 1997 without the consent of Lehman Brothers Inc., one of the underwriters of the Public Offering. The Company will accept for exchange any and all validly tendered PM&C Class B Shares that are tendered on or before 5:00 p.m., New York City time, on _____ __, 1996, unless the Registered Exchange Offer is extended by Pegasus (but not beyond ______ __, 1997), in its sole discretion (the "Expiration Date"). The Class A Common Stock is listed in the Nasdaq National Market under the symbol "PGTV." On October 21, 1996, the last reported sale price for the Class A Common Stock was $14.00 per share. Upon consummation of the Registered Exchange Offer (assuming all holders of PM&C Class B Shares exchange their PM&C Class B Shares), the Company's issued and outstanding capital stock will consist of 4,663,229 shares of Class A Common Stock and 4,581,900 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 after the Public Offering, and as required by Delaware law. See "Description of Capital Stock." 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 information concerning certain factors that should be considered in connection with the Registered Exchange Offer and an investment in the Class A Common Stock offered hereby, see "Risk Factors" beginning on page 21. ------ 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. Pegasus will not receive any proceeds from the Registered Exchange Offer. Pegasus has agreed to bear certain expenses of the Registered Exchange Offer. No underwriter is being used in connection with the Registered Exchange Offer. THE REGISTERED EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL PEGASUS ACCEPT TENDERS FOR EXCHANGE FROM, HOLDERS OF PM&C CLASS B SHARES IN ANY JURISDICTION IN WHICH THE REGISTERED EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. No person is authorized in connection with any offering made hereby to give any information or to make any representation not contained in this Prospectus or the accompanying Letter of Transmittal, and, if given or made, such information or representation must not be relied upon as having been authorized by Pegasus. Neither the delivery of this Prospectus nor the accompanying Letter of Transmittal, nor any exchange made hereunder shall under any circumstances create any implication that the information contained herein is correct as of any date subsequent to the date hereof. Certificates representing the Class A Common Stock issued pursuant to the Registered Exchange Offer will be issued by First Union National Bank of North Carolina, Pegasus' exchange agent (the "Exchange Agent") for the Registered Exchange Offer and the registrar and transfer agent of the Class A Common Stock, as soon as practicable after a holder of the PM&C Class B Shares properly tenders his or her PM&C Class B Shares accompanied by a properly completed and executed Letter of Transmittal, and the conditions of the Registered Exchange Offer have been satisfied. 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 Notes 1 and 2 to Pegasus' Combined Financial Statements included elsewhere herein. Unless otherwise indicated, the information in this Prospectus assumes the Underwriters' over-allotment option in the Public Offering 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 prior to or after the Expiration Date. 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 Management Share Exchange, and the Towers Purchase), the New Hampshire Cable Sale, the closing of the New Credit Facility and the Public Offering. See "-- Acquisitions and Other Transactions." 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 18 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 867,000 television households and 71,000 business locations in rural areas of New York, Connecticut, Massachusetts, New Hampshire, Michigan and Texas. The Company has entered into a definitive agreement 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 12,000 business locations in rural areas of Ohio. After giving effect to the Ohio DBS Acquisition, the Company will have approximately 25,000 DIRECTV subscribers in territories that include approximately 1,035,000 television households and 83,000 business locations or a household penetration rate of 2.2% in its service territories. Although the Company's service territories are exclusive for DIRECTV, other DBS operators may compete with the Company in its service territories. See "Business -- Competition.". 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 3 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% --------- --------- --------------- ------- ---------- -------- -------------- Michigan ........ 241,713 61,774 179,939 5,213 2.2% 6.6% 0.6% Texas ........... 149,530 54,504 95,026 4,449 3.0% 6.2% 1.1% ----------- --------- --------- --------------- ------- ---------- -------- Total .......... 867,201 200,825 666,376 18,778 2.2% 7.5% 0.6% $40.36 ----------- --------- --------- --------------- ------- ---------- -------- -------------- To Be Acquired: Ohio ............ 167,558 32,180 135,378 4,355 2.6% 10.1% 0.8% $39.27 ----------- --------- --------- --------------- ------- ---------- -------- -------------- 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 November 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 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. Approximately 245 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 certain acquisitions and corporate reorganization events and the Public Offering, that, if not already completed, are scheduled or anticipated to occur prior to or after the Expiration Date. The pro forma financial data included in this Prospectus assume, unless otherwise indicated, the completion of each of the Transactions,. 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 the Transactions and the Registered Exchange Offer. COMPLETED ACQUISITIONS Since January 1, 1996, the Company has acquired the following media and communications properties: Television Station WPXT. The Company acquired WPXT, the Fox-affiliated television station serving the Portland, Maine DMA ("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. 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, 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"). Michigan/Texas DBS Acquisition. On October 8, 1996, the Company acquired DIRECTV distribution rights for portions of Texas and Michigan and related assets (the "Michigan/Texas DBS Acquisition"). PENDING ACQUISITION Ohio DBS Acquisition. In October 1996, the Company entered into a definitive agreement to acquire the DIRECTV distribution rights for portions of Ohio and related assets (the "Ohio DBS Acquisition"). The Ohio DBS Acquisition is expected to be subject to conditions typical in acquisitions 7 of this nature, certain of which conditions may be beyond the Company's control. The agreement 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 expired on October 15, 1996 but has been extended to October 31, 1996 and provides for execution of a definitive agreement no later than such date. It is anticipated that the New Hampshire Cable Sale will occur by January 1997. 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 was the holder of all PM&C Class A Shares. Concurrently with the consummation of the Public Offering, the Parent contributed 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 the Public Offering, the Management Agreement together with certain net assets were transferred to the Company (the "Management Agreement Acquisition"). Management Share Exchange. Certain members of the Company's management held shares of Parent Non-Voting Stock. All of these members exchanged their shares for shares of Class A Common Stock pursuant to an exchange offer (the "Management Share Exchange") and the Parent Non-Voting Stock was distributed to the Parent. Towers Purchase. An affiliate of the Company operates in the broadcast tower business. Concurrently with the consummation of the Public Offering. the Company acquired certain tower properties from this affiliate. 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." THE PUBLIC OFFERING The Public Offering. Pegasus consummated the initial public offering of its Class A Common Stock on October 8, 1996 pursuant to an underwritten offering (the "Public Offering") in which Lehman Brothers, Inc., BT Securities Corporation, CIBC Wood Gundy Securities Corp. and PaineWebber Incorporated acted as representatives of the underwriters (the "Underwriters"). The initial public offering price of the Class A Common Stock was $14.00 per share and resulted in net proceeds to the Company of approximately $38.1 million. The Underwriters have a 30-day option to purchase up to 450,000 additional shares of Class A Common Stock solely to cover over-allotments, if any. 8 The net proceeds to the Company from its sale of 3,000,000 shares of Class A Common Stock in the Public Offering, after deducting underwriting discounts and commissions and estimated fees and expenses of the Public Offering, was approximately $38.1 million (approximately $44.0 million if the Underwriters' over-allotment option is exercised in full). The Company applied the net proceeds from the Public 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) $3.0 million to repay indebtedness under the New Credit Facility, (iii) $1.9 million to make a payment on account of the Portland Acquisition, (iv) $1.4 million for the payment of the cash portion of the purchase price of the Management Agreement Acquisition, and (v) $1.4 million for the Towers Purchase. The Company intends to apply $12.0 million to the Ohio DBS Acquisition. 9 THE REGISTERED EXCHANGE OFFER The Registered Exchange Offer: ...................... Pegasus is offering to exchange 22.564 shares of Class A Common Stock for each of the 8,500 PM&C Class B Shares outstanding. The exchange ratio of the Class A Common Stock to be issued in the Registered Exchange Offer has been determined such that immediately after giving effect to the Parent's contribution of the PM&C Class A Shares 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 issuance of additional shares of Common Stock in connection with the Transactions, the Parent and the holders of the PM&C Class B Shares (the "Holders") will hold 95% and 5% of the equity of Pegasus and 99.5% and 0.5% of the voting rights of Pegasus' Common Stock, respectively, which are the same proportions in which they now own and have voting rights with respect to PM&C. Only whole shares of Class A Common Stock will be issued pursuant to the Registered Exchange Offer. In lieu of fractional shares to which a holder of PM&C Class B Shares would otherwise be entitled, the holder of PM&C Class B Shares will be paid in cash based upon the initial public offering price of the Class A Common Stock of $14.00 per share, and no certificates or scrip representing fractional shares of Class A Common Stock will be issued. See "The Registered Exchange Offer." If the Registered Exchange Offer is completed, each Holder should be aware that its failure to accept the Registered Exchange Offer will result in its holding securities -- the PM&C Class B Shares -- for which there will be no trading market, whose transferability will continue to be restricted under the federal and state securities laws, and which will represent a minority interest in a controlled subsidiary, PM&C, of a publicly traded company, Pegasus. Holders should also be aware that if the Registered Exchange Offer is accepted by Holders of more than 75% of the PM&C Class B Shares, non-accepting Holders will effectively lose their existing registration rights with respect to their PM&C Class B Shares. See "The Registered Exchange Offer -- Registration Rights -- Effect on Registration Rights of Non-Acceptance of Registered Exchange Offer." In addition, if a majority of Holders exchange their PM&C Class B Shares, the Stockholders Agreement (as defined) will be amended to eliminate the provisions relating to tag-along and preemptive rights and may be amended to eliminate other provisions or to terminate the agreement itself. See "The Registered Exchange Offer -- Consequences of Failure to Exchange." Comparison of Stockholder Rights: ..................... Holders of the PM&C Class B Shares are entitled to certain exchange, registration, tag-along and preemptive rights pursuant to a stockholders agreement (the "Stockholders Agreement") entered into in connection with the issuance of the PM&C Class B Shares. 10 The Stockholders Agreement contemplates that an initial public offering might be made by either the Parent or PM&C. Accordingly, it provides holders with the right to exchange PM&C Class B Shares for similar equity securities of the Parent -- and provides the Parent and PM&C the right to require such an exchange -- in the event that the Parent makes such a public offering. The Stockholders Agreement does not provide similar exchange rights in the case of an initial public offering by Pegasus. Holders of at least 25% in aggregate of the PM&C Class B Shares have the right to one demand registration after the earlier of (i) 180 days after the initial public offering of the common stock of PM&C or the Parent or (ii) July 7, 2000. Such holders are also entitled to certain piggyback registration rights. The purpose of the Registered Exchange Offer is to carry out what Pegasus believes to be the spirit of the Stockholders Agreement: to enable Holders to hold a publicly traded class of equity securities. Accordingly, although Holders who exchange their shares will no longer have any rights under the Stockholders Agreement, they will hold securities registered under the Securities Act that may be sold, subject to a lock-up and certain exceptions, at will. In addition to the exchange and registration rights described above, the Stockholders Agreement provides Holders with certain pro rata tag-along rights in connection with any direct or indirect sale of PM&C's or the Parent's common equity (or securities convertible into or exercisable for or options to purchase such common equity) by Marshall W. Pagon and the Parent other than (i) sales to the public pursuant to Rule 144 or an effective registration statement and (ii) transfers to certain of their related parties. The Stockholders Agreement also confers preemptive rights upon Holders with respect to sales by PM&C or the Parent of equity interests (or securities convertible into or exercisable for such equity interests) to any stockholder, officer, director or affiliate of PM&C or the Parent, subject to certain exceptions for employee benefit plans. The tag-along rights and preemptive rights terminate if 25% or more of PM&C's or the Parent's outstanding common stock has been sold to the public pursuant to one or more registration statements provided that such common stock is then listed on a national securities exchange or the Nasdaq National Market. Termination of these rights would have occurred if the Public Offering had been made by PM&C or the Parent rather than Pegasus. If, as Pegasus expects, Holders of a majority of the PM&C Class B Shares exchange their shares for Class A Common Stock, Pegasus will have sufficient voting power to eliminate these provisions from the Stockholders Agreement. 11 Expiration Date: .............. The Registered Exchange Offer will expire at 5:00 p.m., New York City time, on ------ ------, 1996, unless the Registered Exchange Offer is extended by Pegasus in its sole discretion (but not beyond ------ ------, 1997), in which case the term "Expiration Date" shall mean the latest date and time to which the Registered Exchange Offer is extended. Conditions to the Registered Exchange Offer: ............. The Registered Exchange Offer is subject to certain customary conditions, which may be waived by Pegasus. See "The Registered Exchange Offer -- Conditions." The Registered Exchange Offer is not conditioned upon any minimum aggregate number of PM&C Class B Shares being tendered for exchange; however, the Registered Exchange Offer may be accepted on behalf of a beneficial owner of PM&C Class B Shares only as to all PM&C Class B Shares owned by such holder since partial acceptances will not be permitted. Lock-Up of Class A Common Stock:................ As a condition to the completion of the Public Offering, the Underwriters of the Public Offering have required that Holders who exchange their PM&C Class B Shares for Class A Common Stock in the Registered Exchange Offer agree to a lock-up of such shares. The Letter of Transmittal contains a provision whereby each exchanging Holder of the PM&C Class B Shares agrees by tendering its shares not to sell, otherwise dispose of or pledge any shares of Class A Common Stock received pursuant to the Registered Exchange Offer until April 3, 1997 without the consent of Lehman Brothers Inc., one of the Underwriters of the Public Offering, and that the Company may impose stop transfer orders upon the Class A Common Stock to be received pursuant to the Registered Exchange Offer to enforce the lock-up. Procedures for Tendering PM&C Class B Shares: ............. Each Holder wishing to accept the Registered Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with certificates(s) for such PM&C Class B Shares, if required, and any other required documentation to First Union National Bank of North Carolina, as Exchange Agent, at the address set forth herein. Holders whose PM&C Class B Shares are held through the Depository Trust Company (the "Depositary") and wishing to accept the Registered Exchange Offer may do so through the Depositary's Automated Tender Offer Program ("ATOP"), by which each tendering participant will agree to be bound by the Letter of Transmittal. See "The Registered Exchange Offer -- Procedures for Tendering." Special Procedures for Beneficial Owners: .......... Any beneficial owner whose PM&C Class B Shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender such PM&C Class B Shares in the Registered Exchange Offer should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. See "The Registered Exchange Offer -- Procedures for Tendering." If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering his or her PM&C Class B Shares, either make 12 appropriate arrangements to register ownership of the PM&C Class B Shares in such owner's name or obtain a properly completed stock power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the Expiration Date. Guaranteed Delivery Procedures: Holders of PM&C Class B Shares who wish to tender their PM&C Class B Shares and whose PM&C Class B Shares are not immediately available or who cannot deliver their PM&C Class B Shares, the Letter of Transmittal or any other documents required by the Letter of Transmittal to First Union National Bank of North Carolina, as Exchange Agent, prior to the Expiration Date, must tender their PM&C Class B Shares according to the guaranteed delivery procedures set forth in "The Registered Exchange Offer -- Guaranteed Delivery Procedures." Acceptance of the PM&C Class B Shares and Delivery of the Class A Common Stock:........ Subject to the satisfaction or waiver of the conditions to the Registered Exchange Offer, Pegasus will accept for exchange any and all PM&C Class B Shares which are properly tendered in the Registered Exchange Offer prior to the Expiration Date. The Class A Common Stock issued pursuant to the Registered Exchange Offer will be delivered on the earliest practicable date following the proper tender of the PM&C Class B Shares. See "The Registered Exchange Offer." Withdrawal Rights: ............ Tenders of PM&C Class B Shares may not be withdrawn once made. See "The Registered Exchange Offer -- Withdrawal of Tenders." Certain United States Federal Income Tax Consequences of the Registered Exchange Offer: ...................... For a discussion of certain federal income tax considerations relating to the exchange of the Class A Common Stock for the PM&C Class B Shares, see "Certain United States Federal Income Tax Consequences of the Registered Exchange Offer." Exchange Agent: ............... First Union National Bank of North Carolina is serving as the exchange agent (the "Exchange Agent") in connection with the Registered Exchange Offer. Failure to Exchange PM&C Class B Shares: ................... The Class A Common Stock will be issued in exchange for PM&C Class B Shares only after timely receipt by the Exchange Agent of such PM&C Class B Shares, a properly completed and duly executed Letter of Transmittal and all other required documents. Therefore, Holders desiring to tender such PM&C Class B Shares in exchange for Class A Common Stock should allow sufficient time to ensure timely delivery. Neither the Exchange Agent nor Pegasus is under any duty to give notification of defects or irregularities with respect to tenders of PM&C Class B Shares for exchange. 13 PM&C Class B Shares that are not tendered or are tendered but not accepted will, following consummation of the Registered Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof and entitled to rights under the Stockholders Agreement. However, Pegasus does not expect that such rights will be of practical benefit to Holders if a sufficient number of PM&C Class B Shares are exchanged. See "The Registered Exchange Offer -- Consequences of Failure to Exchange." The Michigan/Texas Acquisition was effected by direct subsidiaries of Pegasus, not by PM&C or any of its subsidiaries. It is anticipated that the Ohio DBS Acquisition will similarly be effected by a direct subsidiary of Pegasus. Accordingly, Holders who do not exchange their PM&C Class B Shares for Class A Common Stock pursuant to the Registered Exchange Offer will have no interest in the assets acquired in connection with the Michigan/Texas and Ohio DBS Acquisitions, valued in the aggregate at approximately $41.8 million. It is possible that future acquisitions will be effected by subsidiaries of Pegasus that are not subsidiaries of PM&C, and non-exchanging Holders would have no interest in any assets so acquired. SUMMARY OF TERMS OF COMMON STOCK Common Stock to be outstanding after the Registered Exchange Offer: Class A Common Stock........ 4,663,229 shares(1)(2) Class B Common Stock........ 4,581,900 shares(3) Total Common Stock.......... 9,245,129 shares(2)(3) 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 the Registered Exchange Offer, and after giving effect to the Transactions, (i) holders of Class A Common Stock and Class B Common Stock will have approximately 9.2% and 90.8%, 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 14 certain transfers of the Class B Common Stock. See "Description of Capital Stock." Nasdaq National Market Symbol....................... The Class A Common Stock is listed on the Nasdaq National Market under the symbol "PGTV." Transfer Agent and Registrar... First Union National Bank of North Carolina - ------ (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 in the Public Offering. (2) Includes 3,000,000 shares issued in the Public Offering, 852,110 shares 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 exchange their PM&C Class B Shares), 263,606 shares 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 were participants in the Management Share Exchange, 10,714 shares issued in connection with the Portland Acquisition and 71,429 shares 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 4,581,900 shares reserved for issuance upon conversion of the Class B Common Stock. (3) Includes 1,217,348 shares 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 were participants in the Management Share Exchange), 71,429 shares issued in the Portland Acquisition, and 3,293,123 shares 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 were 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. 15 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 ........... (11,573) (3,350) (5,570) (6,716) 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) .......... $(14,089) $(4,010) $(4,838) $(6,637) =========== ========== ========== ========== Net income (loss) per share $(1.52) $(0.94) $(0.72) =========== ========== ========== Weighted average shares outstanding (000's) ..... 9,245 5,143 9,245 =========== ========== ========== 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 $ 13,457 Working capital (deficiency) 78 (52) (3,844) (23,074) 17,566 4,073 8,689 Total assets ................ 17,306 17,418 76,386 75,394 95,770 104,247 178,226 Total debt (including current) ................. 13,675 15,045 72,127 61,629 82,896 94,863 114,,663 Total liabilities ........... 14,572 16,417 78,954 68,452 95,521 108,730 129,303 Total equity (deficit) (6) .. 2,734 1,001 (2,427) 6,942 249 (4,483) 48,923
(footnotes on following page) 16 - ------ (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 Registered Exchange Offer and the Transactions 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 the Registered Exchange Offer and the Transactions 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. 17 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. Exchange Agent First Union National Bank of North Carolina. FCC Federal Communications Commission. Fox Fox Broadcasting Company. Fox Affiliation Agreements The affiliation agreements between WOLF, WDSI, WDBD, WTLH, and WPXT and Fox. Holders The holders of the PM&C Class B Shares. 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. 18 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. 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 approximately 245 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. 19 Pegasus Pegasus Communications Corporation, the issuer of the Class A Common Stock offered hereby. PM&C Pegasus Media & Communications, Inc., which became a direct subsidiary of Pegasus upon completion of the Public Offering. PM&C Class A Shares The Class A shares of PM&C held by the Parent, which were transferred to Pegasus upon completion of the Public 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. Public Offering Pegasus' initial public offering of 3,000,000 shares of Class A Common Stock, which was completed on October 8, 1996. Registered Exchange Offer The registered exchange offer made by this Prospectus to holders of PM&C Class B Shares for 22.564 shares of Class A Common Stock for each PM&C Class B Share. Tallahassee Acquisition The acquisition of WTLH. Towers Purchase The acquisition of certain tower properties from Towers, an affiliate of the Company. Towers Pegasus Towers, L.P. Underwriters The underwriters of the Public Offering. 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 the Public 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.
20 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 21 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 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 the Registered Exchange Offer, the Public Offering and the use of the proceeds therefrom and the other Transactions, the Company would have had consolidated indebtedness of $114.7 million, total stockholders' equity of $48.9 million and, assuming certain conditions are met, $21.4 million available under the $50.0 million 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 the Registered Exchange Offer, the Public Offering and the use of the proceeds therefrom and the other Transactions, the Company's earnings would have been inadequate to cover its fixed charges by $14.1 million and approximately $6.8 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 22 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. 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 23 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 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." 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, beneficially owns all of the Class B Common Stock of Pegasus. After giving effect to the greater voting rights attached to the Class B Common Stock and the Registered Exchange Offer, Mr. Pagon will be able to effectively vote 90.8% 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." ABSENCE OF PRIOR PUBLIC MARKET AND VOLATILITY OF STOCK PRICE Prior to the Public Offering, there had 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. 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 After giving effect to the Registered Exchange Offer (assuming acceptance by all Holders), the Company will have outstanding 4,663,229 shares of Class A Common Stock and 4,581,900 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 the Public Offering are tradeable without restriction unless they are purchased by affiliates of the Company. All shares to 24 be received pursuant to the Registered Exchange Offer will also be tradeable without restriction, subject to the agreement of each exchanging Holder not to sell, otherwise dispose of or pledge any shares of Class A Common Stock received in the Registered Exchange Offer until April 3, 1997 without the prior written consent of Lehman Brothers Inc. The approximately 1,471,437 remaining shares of Class A Common Stock and all of the 4,581,900 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 the Public 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 4,944,564 of the 6,053,337 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 until April 3, 1997 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 PM&C is 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. Pegasus 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. 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 Pegasus. 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 have certain preemptive, tag-along and registration rights which may restrict the Company from engaging in certain transactions. See "The Registered Exchange Offer." 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, 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 25 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." 26 THE REGISTERED EXCHANGE OFFER GENERAL Pegasus offers to exchange 22,564 shares of its Class A Common Stock for each outstanding PM&C Class B Share. Only whole shares of Class A Common Stock will be issued pursuant to the Registered Exchange Offer. In lieu of fractional shares to which a holder of PM&C Class B Shares would otherwise be entitled, the holder of PM&C Class B Shares will be paid in cash based upon the initial public offering price of the Class A Common Stock of $14.00 per share, and no certificates or scrip representing fractional shares of Class A Common Stock will be issued. If the Registered Exchange Offer is accepted by all holders of the PM&C Class B Shares (the "Holders"), PM&C will become a wholly-owned subsidiary of Pegasus. The Registered Exchange Offer is for any or all PM&C Class B Shares and is not conditioned on any minimum or maximum level of acceptance by Holders; however, a Holder may accept the Registered Exchange Offer only as to all PM&C Class B Shares owned by such Holder since partial acceptances will not be permitted. If the Registered Exchange Offer is completed, each Holder should be aware that its failure to accept the Registered Exchange Offer will result in its holding securities -- the PM&C Class B Shares -- for which there will be no trading market, whose transferability will continue to be restricted under the federal and state securities laws, and which will represent a minority interest in a controlled subsidiary, PM&C, of a publicly traded company, Pegasus. Holders should also be aware that if the Registered Exchange Offer is accepted by Holders of more than 75% of the PM&C Class B Shares, non-accepting Holders will effectively lose their existing registration rights with respect to their PM&C Class B Shares. See "Registration Rights -- Effect on Registration Rights of Non-Acceptance of Registered Exchange Offer" below. In addition, if a majority of Holders exchange their PM&C Class B Shares, the Stockholders Agreement will be amended to eliminate the provisions relating to tag-along and preemptive rights and may be amended to eliminate other provisions or to terminate the agreement itself. See "-- Consequences of Failure to Exchange." BACKGROUND PM&C and the Company PM&C's stockholders consist of the Holders of the PM&C Class B Shares and Pegasus, the holder of all the issued and outstanding Class A Common Stock of PM&C (the "PM&C Class A Shares"). There are 161,500 PM&C Class A Shares and 8,500 PM&C Class B Shares outstanding . The PM&C Class A Shares and the PM&C Class B Shares are identical, except that each PM&C Class A Share carries ten votes, and each PM&C Class B Share carries one vote. Thus, the Holders own in the aggregate 5% of the equity of PM&C and have in the aggregate 0.5% of the voting rights. Pegasus' authorized capital stock consists of 30,000,000 shares of Class A Common Stock, 15,000,000 shares of Class B Common Stock, and 5,000,000 shares of undesignated Preferred Stock (the "Preferred Stock"). The Class A Common Stock and the Class B Common Stock are identical, except that each share of Class A Common Stock carries one vote, and each share of Class B Common Stock carries ten votes, and except that the Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis. See "Description of Capital Stock." Simultaneously with the completion of the Public Offering, the Parent contributed all of the PM&C Class A Shares to Pegasus in exchange for 3,380,435 shares of Class B Common Stock. Assuming all Holders accept the Registered Exchange Offer, PM&C will become a wholly-owned subsidiary of the Company. Before giving effect to the issuance of additional shares of Common Stock in the Public Offering and the other Transactions, the stockholders of Pegasus would have been the Parent and the Holders, who would have had the same relative economic and voting rights in Pegasus as they currently have in PM&C. Also before giving effect to the completion of the Public Offering and the other Transactions, the Company, on a consolidated basis, would have had no material assets or liabilities other than those of PM&C and its subsidiaries. 27 Stockholders Agreement The PM&C Class B Shares were issued as part of PM&C's offering in 1995 of units (the "Units") consisting of a total of 8,500 PM&C Class B Shares and $85,000,000 aggregate principal amount of 12 1/2 % Series A Senior Subordinated Notes due 2005 (the "Series A Notes"). Following that offering, PM&C and the holders of the Series A Notes completed in November 1995 an exchange offer in which the holders of Series A Notes received PM&C's 12 1/2% Series B Senior Subordinated Notes (the "Series B Notes" and, together with the Series A Notes, the "Notes"), which are of the same tenor and terms as the Series A Notes. The Series B Notes were registered under the Securities Act of 1933, as amended (the "Securities Act"), but the PM&C Class B Shares have not been so registered and are tradeable only among "qualified institutional buyers" pursuant to Rule 144A under the Securities Act and among institutional accredited investors who agree to certain transfer restrictions. In connection with PM&C's 1995 Unit offering, PM&C and the Parent entered into the Stockholders Agreement with the initial purchasers of the Units for the benefit of present and future holders of the PM&C Class B Shares. The Stockholders Agreement contemplates that an initial public offering of common stock might be made by either PM&C or the Parent. Accordingly, it provides the Holders with the right to exchange their PM&C Class B Shares for similar common equity securities of the Parent -- and provides the Parent and PM&C the right to require such an exchange -- in the event the Parent makes such a public offering. The Stockholders Agreement does not, however, provide similar exchange rights in the case of an initial public offering by Pegasus. The purpose of the Registered Exchange Offer is to carry out what Pegasus believes to be the spirit of the exchange and registration rights provisions of the Stockholders Agreement: to enable the Holders to hold a publicly traded class of equity securities. In addition to the registration rights provided to Holders (described more fully below under "-- Registration Rights"), the Stockholders Agreement provides to Holders (i) preemptive rights with respect to the issuance of certain equity securities by PM&C or the Parent to directors, officers and affiliates, (ii) tag-along rights in the case of sales of certain equity securities by certain direct and indirect stockholders of PM&C or the Parent, and (iii) certain procedural and substantive protections in connection with transactions between PM&C or the Parent, on the one hand, and their affiliates, on the other. The Stockholders Agreement provides that these provisions will terminate when at least 25% of the common stock of PM&C or the Parent has been sold to the public in one or more registered public offerings, if the common stock is listed on a national securities exchange or authorized for trading in the Nasdaq National Market. Since the Stockholders Agreement does not provide for termination of these rights in the case of an initial public offering by Pegasus when similar conditions have been fulfilled, Pegasus, upon obtaining a majority of the outstanding PM&C Class B Shares pursuant to the Registered Exchange Offer, will cause these rights to be terminated. REGISTRATION RIGHTS Under the Stockholders Agreement, the Holders have demand and piggyback registration rights as summarized below. Holders are referred to the Stockholders Agreement (which is filed as an exhibit to the registration statement of which this Prospectus forms a part) for a detailed description of the terms and conditions of these registration rights. Demand Registration Rights The Stockholders Agreement provides Holders the right on one occasion to require PM&C to register the PM&C Class B Shares under the Securities Act in either of two cases: (i) after 180 days following PM&C's first registered public equity offering, or (ii) after July 7, 2000, if no public equity offering occurs before that date. The exchange provisions in the Stockholders Agreement give Holders similar rights with respect to stock of the Parent, but the Stockholders Agreement does not address demand registration rights with respect to affiliates of PM&C and the Parent, such as Pegasus. Since Holders who accept the Registered Exchange Offer will receive shares of Class A Common Stock which have been registered under the Securities Act, such Holders will, subject to the lock-up that expires on April 3, 1997, generally be able to dispose of their shares of Class A Common Stock at will without the need for additional registration. See "-- Lock-up of Class A 28 Common Stock" below. PM&C is obligated to effect a demand registration only if the demand registration includes at least 25% of the PM&C Class B Shares originally issued. Consequently, if Holders of more than 75% of the PM&C Class B Shares accept the Registered Exchange Offer, the non-accepting Holders will not hold the 25% necessary to require registration of the PM&C Class B Shares. Piggyback Registration Rights Under their piggyback registration rights, if PM&C determines to register its common stock or certain convertible securities under the Securities Act, Holders would have the right to have their PM&C Class B Shares included in the registration. In addition, if the proposed registration relates to an underwritten offering, the Holders would have the right to sell their PM&C Class B Shares to the underwriters on the same terms and conditions as PM&C, subject to the managing underwriter's discretion to reduce or eliminate the Holders' participation to the extent it determines that participation by the Holders would materially adversely affect the success of the offering or the offering price. Pursuant to the exchange provisions described above under "-- Background -- Stockholders Agreement," Holders would have similar rights in the event of a public offering by the Parent. The Stockholders Agreement does not explicitly provide the Holders with exchange or registration rights in the case of a public offering by an affiliate of PM&C and the Parent, such as Pegasus. By accepting the Registered Exchange Offer, a Holder will receive shares of Class A Common Stock that are registered under the Securities Act and which may be sold without further registration or restrictions, subject to the lock-up that expires on April 3, 1997. Effect on Registration Rights of Non-Acceptance of Registered Exchange Offer Holders who do not accept the Registered Exchange Offer will retain their PM&C Class B Shares, and the registration rights provisions of the Stockholders Agreement will continue to apply to their PM&C Class B Shares. It is likely, however, that those registration rights will provide little or no practical benefit to non-accepting Holders, for three reasons. First, it is unlikely that PM&C 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 Stockholders Agreement provides that a demand registration may be required only if it includes at least 25% of the Class B Shares originally issued in PM&C's 1995 Unit offering. If, as Pegasus anticipates, Holders of more than 75% of the PM&C Class B Shares accept the Registered Exchange Offer, the non-accepting Holders will not hold the 25% of the PM&C Class B Shares necessary to require registration of the PM&C Class B Shares. Third, even if non-accepting Holders retain 25% or more of the PM&C Class B Shares and can initiate a demand registration after July 7, 2000, there is not expected to be a market for the PM&C Class B Shares. Thus, registration of the PM&C Class B Shares would not necessarily mean that they could be sold. CONDITIONS TO COMPLETION OF THE REGISTERED EXCHANGE OFFER The Registered Exchange Offer is being made for any or all PM&C Class B Shares. Completion of the Registered Exchange Offer is not conditioned on any minimum or maximum level of acceptance by the Holders; however, the Registered Exchange Offer may be accepted on behalf of a beneficial owner of PM&C Class B Shares only as to all PM&C Class B Shares owned by it since partial acceptances will not be permitted. EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" shall mean 5:00 p.m., New York City time, on ________, 1996 unless Pegasus, in its sole discretion, extends the Registered Exchange Offer (but not beyond _______, 1997), in which case the term "Expiration Date" shall mean the latest date and time to which the Registered Exchange Offer is extended. 29 In order to extend the Registered Exchange Offer, Pegasus will notify the Exchange Agent of any extension by oral or written notice and mail to the registered Holders of the PM&C Class B Shares an announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Pegasus reserves the right, in its sole discretion, (i) to delay accepting any PM&C Class B Shares, (ii) to extend the Registered Exchange Offer or (iii) if any conditions set forth below under "-- Conditions" shall not have been satisfied, to terminate the Registered Exchange Offer by giving oral or written notice of such delay, extension or termination to the Exchange Agent. Any such delay in acceptance, extension or termination will be followed as promptly as practicable by oral or written notice thereof to the registered Holders. If the Registered Exchange Offer is amended in a manner determined by Pegasus to constitute a material change, Pegasus will promptly disclose such amendment by means of a prospectus supplement that will be distributed to the registered Holders, and Pegasus will extend the Registered Exchange Offer for a period of five to ten business days, depending upon the significance of the amendment, applicable securities laws, and the manner of disclosure to the registered Holders, if the Registered Exchange Offer would otherwise expire during such five to ten business day period. Without limiting the manner in which Pegasus may choose to make a public announcement of any delay, extension, amendment or termination of the Registered Exchange Offer, Pegasus shall have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to an appropriate news agency. PROCEDURES FOR TENDERING Only a registered Holder of PM&C Class B Shares may tender such PM&C Class B Shares in the Registered Exchange Offer. To tender PM&C Class B Shares in the Registered Exchange Offer, a Holder must complete, sign and date the Letter of Transmittal, or facsimile thereof, have the signatures thereon guaranteed if required by the Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal or such facsimile to the Exchange Agent at the address set forth below under "-- Exchange Agent" for receipt prior to the Expiration Date. In addition, either (i) certificates for such PM&C Class B Shares must be received by the Exchange Agent along with the Letter of Transmittal, or (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such PM&C Class B Shares, if such procedure is available, into the Exchange Agent's account at The Depository Trust Company (the "Depositary") pursuant to the procedure for book-entry transfer described below together with the Letter of Transmittal or a properly transmitted Agent's Message (as defined below), must be received by the Exchange Agent prior to the Expiration Date or (iii) the Holder must comply with the guaranteed delivery procedures described below. The tender by a Holder will constitute an agreement between such Holder and Pegasus in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. Pegasus shall be deemed to have accepted validly tendered PM&C Class B Shares when, as and if Pegasus has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Holders of PM&C Class B Shares for the purposes of receiving the Class A Common Stock from Pegasus. THE METHOD OF DELIVERY OF PM&C CLASS B SHARES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PM&C CLASS B SHARES SHOULD BE SENT TO PEGASUS. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner(s) of the PM&C Class B Shares whose PM&C Class B Shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered Holder promptly and instruct such registered Holder to tender on such beneficial 30 owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering such owner's PM&C Class B Shares, either make appropriate arrangements to register ownership of the PM&C Class B Shares in such owner's name or obtain a properly completed stock power from the registered Holder. The transfer of registered ownership may take considerable time. Signatures on a Letter of Transmittal must be guaranteed by an Eligible Institution (as defined below) unless the PM&C Class B Shares tendered pursuant thereto are tendered (i) by a registered Holder who has not completed the box entitled "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution (as defined below). In the event that signatures on a Letter of Transmittal are required to be guaranteed, such guarantee must be made by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of the recognized signature guarantee programs identified in the Letter of Transmittal (an "Eligible Institution"). If the Letter of Transmittal is signed by a person other than the registered Holder of any PM&C Class B Shares listed therein, such PM&C Class B Shares must be endorsed or accompanied by a properly completed stock power, signed by such registered Holder as such registered Holder's name appears on such PM&C Class B Shares. If the Letter of Transmittal or any PM&C Class B Shares or stock powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by Pegasus, evidence satisfactory to Pegasus of their authority to so act must be submitted with the Letter of Transmittal. The Exchange Agent and the Depositary have confirmed that any financial institution that is a participant in the Depositary's system may utilize the Depositary's Automated Tender Offer Program to tender PM&C Class B Shares. Accordingly, participants in the Depositary's ATOP may, in lieu of physically completing and signing the Letter of Transmittal and delivering it to the Exchange Agent, electronically transmit their acceptance of the Registered Exchange Offer by causing the Depositary to transfer the PM&C Class B Shares to the Exchange Agent in accordance with the Depositary's ATOP procedures for transfer. The Depositary will then send an Agent's Message to the Exchange Agent. The term "Agent's Message" means a message transmitted by the Depositary, received by the Exchange Agent and forming part of the Book-Entry Confirmation, which states that the Depositary has received an express acknowledgement from a participant in the Depositary's ATOP that is tendering PM&C Class B Shares which are the subject of such book entry confirmation, that such participant has received and agrees to be bound by the terms of the Letter of Transmittal (or, in the case of an Agent's Message relating to guaranteed delivery, that such participant has received and agrees to be bound by the applicable Notice of Guaranteed Delivery), and that the agreement may be enforced against such participant. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of tendered PM&C Class B Shares will be determined by Pegasus in its sole discretion, which determination will be final and binding. Pegasus reserves the absolute right to reject any and all PM&C Class B Shares not properly tendered or any PM&C Class B Shares Pegasus' acceptance of which would, in the opinion of counsel for Pegasus, be unlawful. Pegasus also reserves the right to waive any defects, irregularities or conditions of tender as to particular PM&C Class B Shares. Pegasus' interpretation of the terms and conditions of the Registered Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of PM&C Class B Shares must be cured within such time as Pegasus shall determine. Although Pegasus intends to notify holders of defects or irregularities with respect to tenders of PM&C Class B Shares, neither Pegasus, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of PM&C Class B Shares will not be deemed to have been made until such defects or irregularities have been cured or waived. While Pegasus has no present plan to acquire any PM&C Class B Shares which are not tendered in the Registered Exchange Offer, Pegasus reserves the right in its sole discretion to purchase or make offers for any PM&C Class B Shares that remain outstanding subsequent to the Expiration Date or, as set forth below under "-- Conditions," to terminate the Registered Exchange Offer and, to the extent permitted by applicable law, purchase PM&C Class B Shares in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the Registered Exchange Offer. 31 RETURN OF PM&C CLASS B SHARES If any tendered PM&C Class B Shares are not accepted for any reason set forth in the terms and conditions of the Registered Exchange Offer, such tendered PM&C Class B Shares will be returned without expense to the tendering Holder thereof (or, in the case of PM&C Class B Shares tendered by book-entry transfer into the Exchange Agent's account at the Depositary pursuant to the book-entry transfer procedures described below, such PM&C Class B Shares will be credited to an account maintained with the Depositary) as promptly as practicable. BOOK-ENTRY TRANSFER The Exchange Agent will make a request to establish an account with respect to the PM&C Class B Shares at the Depositary for purposes of the Registered Exchange Offer within two business days after the date of this Prospectus, and any financial institution that is a participant in the Depositary's systems may make book-entry delivery of PM&C Class B Shares by causing the Depositary to transfer such PM&C Class B Shares into the Exchange Agent's account at the Depositary in accordance with the Depositary's procedures for transfer. However, although delivery of PM&C Class B Shares may be effected through book-entry transfer at the Depositary, the Letter of Transmittal or facsimile thereof, with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received by the Exchange Agent at the address set forth below under "-- Exchange Agent" on or prior to the Expiration Date or pursuant to the guaranteed delivery procedures described below. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their PM&C Class B Shares and (i) whose PM&C Class B Shares are not immediately available or (ii) who cannot deliver their PM&C Class B Shares, the Letter of Transmittal or any other required documents to the Exchange Agent prior to the Expiration Date, may effect a tender if: (a) The tender is made through an Eligible Institution; (b) Prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery substantially in the form provided by Pegasus (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder, the certificate number(s) of such PM&C Class B Shares and the aggregate number of PM&C Class B Shares tendered, stating that the tender is being made thereby and guaranteeing that, within five business days after the Expiration Date, the Letter of Transmittal (or a facsimile thereof) together with the certificate(s) representing the PM&C Class B Shares in proper form for transfer or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent or the Exchange Agent receives a properly transmitted Agent's Message; and (c) Such properly executed Letter of Transmittal (or facsimile thereof) or a properly transmitted Agent's Message, as well as the certificate(s) representing all tendered PM&C Class B Shares in proper form for transfer (or a Book-Entry Confirmation) and all other documents required by the Letter of Transmittal are received by the Exchange Agent within five business days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their PM&C Class B Shares according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Tenders of PM&C Class B Shares may not be withdrawn at any time prior to the Expiration Date. DELIVERY OF CLASS A COMMON STOCK CERTIFICATES The Class A Common Stock issued pursuant to the Registered Exchange Offer will be delivered on the earliest practicable date following the Expiration Date, assuming all conditions to the Registered Exchange Offer have been satisfied. CONDITIONS Notwithstanding any other term of the Registered Exchange Offer, Pegasus shall not be required to accept for exchange, or exchange the Class A Common Stock for, any PM&C Class B Shares, and may terminate the Registered Exchange Offer as provided herein before the acceptance of such PM&C Class B Shares, if the Registered Exchange Offer violates an applicable law, rule or regulation or an applicable interpretation of the staff of the Securities and Exchange Commission (the "SEC" or "Commission".) 32 If Pegasus determines in its sole discretion that any of these conditions are not satisfied, Pegasus may (i) refuse to accept any PM&C Class B Shares and return all tendered PM&C Class B Shares to the tendering Holders or (ii) extend the Registered Exchange Offer (but not beyond _____, 1997) and retain all PM&C Class B Shares tendered prior to the expiration of the Registered Exchange Offer. LOCK-UP OF CLASS A COMMON STOCK As a condition to the completion of the Public Offering, the Underwriters of the Public Offering have required that Holders of the PM&C Class B Shares who exchange their PM&C Class B Shares for Class A Common Stock in the Registered Exchange Offer agree to lock-up such shares until April 3, 1997. The Letter of Transmittal contains a provision whereby each exchanging Holder of the PM&C Class B Shares agrees by tendering his or her shares not to sell, otherwise dispose of or pledge any shares of Class A Common Stock received pursuant to the Registered Exchange Offer until April 3, 1997 without the consent of Lehman Brothers Inc., one of the Underwriters, and that the Company may impose stop transfer orders upon the Class A Common Stock to be received pursuant to the Registered Exchange Offer to enforce the lock-up. TERMINATION OF CERTAIN RIGHTS All rights of Holders under the Stockholders Agreement will terminate with respect to an individual Holder upon the acceptance by Pegasus of the tender of such Holder's PM&C Class B Shares. EXCHANGE AGENT First Union National Bank of North Carolina has been appointed as Exchange Agent of the Registered Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: By Registered, Certified, Overnight or Hand Delivery: First Union National Bank of North Carolina Attention: Corporate Actions Unit 230 South Tryon Street 11th Floor Charlotte, North Carolina 28288-1153 Telephone: 1-800-829-8432 FEES AND EXPENSES The expenses of soliciting tenders will be borne by Pegasus. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of Pegasus and its affiliates. Pegasus has not retained any dealer-manager in connection with the Registered Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptances of the Registered Exchange Offer. Pegasus, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. 33 The cash expenses to be incurred in connection with the Registered Exchange Offer will be paid by Pegasus and are estimated in the aggregate to be approximately $80,000. Such expenses include registration fees, fees and expenses of the Exchange Agent, accounting and legal fees and printing costs, among others. Pegasus will pay all transfer taxes, if any, applicable to the exchange of PM&C Class B Shares pursuant to the Registered Exchange Offer. If, however, a transfer tax is imposed for any reason other than the exchange of the PM&C Class B Shares pursuant to the Registered Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering Holder. CONSEQUENCE OF FAILURE TO EXCHANGE Participation in the Registered Exchange Offer is voluntary. Holders of the PM&C Class B Shares are urged to consult their financial and tax advisors in making their own decisions on what action to take. The PM&C Class B Shares which are not exchanged for the Class A Common Stock pursuant to the Registered Exchange Offer will remain restricted securities. Accordingly, such PM&C Class B Shares may be resold only (i) to a person whom the seller reasonably believes is a qualified institutional buyer (as defined in Rule 144A under the Securities Act) in a transaction meeting the requirements of Rule 144A, (ii) in a transaction meeting the requirements of Rule 144 under the Securities Act, (iii) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Securities Act, (iv) in accordance with another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel if the Company so requests), (v) to the Company or (vi) pursuant to an effective registration statement and, in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction. Although Holders of the PM&C Class B Shares will be entitled to all rights under the Stockholders Agreement, these rights may be of little value to such Holders or may be modified or eliminated in the future. In particular, if Holders of more than 75% of the PM&C Class B Shares accept the Registered Exchange Offer, the non-accepting Holders will not hold the 25% ownership necessary to require registration of the PM&C Class B Shares. See " -- Registration Rights -- Effect on Registration Rights of Non-Acceptance of Registered Exchange Offer." Furthermore, if a sufficient number of Holders exchange their PM&C Class B Shares, the Stockholders Agreement will be amended to eliminate provisions relating to tag-along and preemptive rights and may be amended to eliminate other provisions or to terminate the agreement itself. The Michigan/Texas Acquisition was effected by direct subsidiaries of Pegasus, not by PM&C or any of its subsidiaries. It is anticipated that the Ohio DBS Acquisition will similarly be effected by a direct subsidiary of Pegasus. Accordingly, Holders who do not exchange their PM&C Class B Shares for Class A Common Stock pursuant to the Registered Exchange Offer will have no interest in the assets acquired in connection with the Michigan/Texas and Ohio DBS Acquisitions, valued in the aggregate at approximately $41.8 million. It is possible that future acquisitions will be effected by subsidiaries of Pegasus that are not subsidiaries of PM&C, and non-exchanging Holders would have no interest in any assets so acquired. ACCOUNTING TREATMENT For accounting purposes, the Company will recognize no gain or loss as a result of the Registered Exchange Offer. The expenses of the Registered Exchange Offer will be amortized. 34 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS OF THE REGISTERED EXCHANGE OFFER The following discussion sets forth certain federal income tax consequences applicable to Holders of the PM&C Class B Shares who tender their PM&C Class B Shares pursuant to the Registered Exchange Offer. The summary is based upon existing law, and there can be no assurance that future legislation, regulations, published administrative interpretations or judicial decisions will not change the treatment of Holders described herein. The discussion may not consider all aspects of federal income taxation that may be relevant to a particular Holder. Further, the tax treatment of a Holder may vary depending upon its particular situation. Certain Holders (including insurance companies, tax-exempt organizations, financial institutions, broker-dealers and foreign persons) may be subject to special rules not discussed below. In addition, the discussion does not consider the effect of any applicable foreign, state, local or other tax laws. The completion of the Registered Exchange Offer will have no immediate federal income tax consequences to accepting Holders. The exchange of PM&C Class B Shares for Class A Common Stock will be treated as a contribution of property to Pegasus in exchange for stock of Pegasus. Under Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"), concurrent contributions of money or property to a corporation in return for stock of the corporation does not result in the recognition of gain or loss on the contributed property if the persons making such contributions, in the aggregate, own 80 percent or more of the stock of the corporation immediately after the contribution. The Registered Exchange Offer and the Transactions that involve the issuance of Class A Common Stock will be deemed to have been completed as concurrent transactions for purposes of Section 351 of the Code. As a result, the Holders, the Parent, Harron, the purchasers of Class A Common Stock in the Public Offering and the other parties to the Transactions, in the aggregate, will own 80 percent or more of the Common Stock of Pegasus. A Holder's basis in the Class A Common Stock received in the Registered Exchange Offer will be equal to its basis in the PM&C Class B Shares surrendered in the Registered Exchange Offer. EACH HOLDER IS URGED TO CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING THE PM&C CLASS B SHARES AND OF HOLDING AND DISPOSING OF THE CLASS A COMMON STOCK INCLUDING THE APPLICATION OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS. 35 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 the Public Offering, PM&C became 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 the Public Offering, the Company held all of the assets acquired by the Parent in the Michigan/Texas DBS Acquisition and had 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 the Public Offering, the Parent contributed WPXT's FCC licenses 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 the Public 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 the Public 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 the Public Offering). In August 1996, the Company acquired WTLH's FCC licenses and Fox Affiliation Agreements 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 June 1996, the Parent acquired the Portland LMA. As a condition of the completion of the Public Offering, the Parent contributed the Portland LMA to Pegasus in exchange for $1.0 million of Class A Common Stock (valued at the price to the public in the Public Offering), which the Parent transferred 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. 36 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. Michigan/Texas DBS Acquisition. On October 8, 1996, Pegasus acquired from Harron Communications Corp. ("Harron") 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 of $14.00 per share in the Public Offering) and approximately $17.9 million in cash. Harron, owns 852,110 shares of the Class A Common Stock and, after giving effect to the Public Offering, the Registered Exchange Offer and the other Transactions, is deemed to be the beneficial owner of approximately 9.2% of the outstanding Common Stock. 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. Effective October 8, 1996, James J. McEntee, III was appointed to Pegasus' Board of Directors as Harron's designee. See "Risk Factors -- Risks Attendant to Acquisition Strategy." PENDING ACQUISITION Ohio DBS Acquisition. In October 1996, the Company entered into a definitive agreement with Horizon Telcom, Inc., Horizon Infotech, Inc. and Chillicothe Telephone Company under which the Company will acquire the DIRECTV distribution rights for portions of Ohio and related assets in exchange for approximately $12.0 million in cash. The Ohio DBS Acquisition is subject to conditions typical in acquisitions of this nature, certain of which conditions may be beyond the Company's control. The agreement 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 the Public 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 expired on October 15, 1996 but has been extended to October 31, 1996 and provides for execution of a definitive agreement by no later than such date. It is anticipated that the New Hampshire Cable Sale will occur by January 1997. 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 recently occurred. PARENT'S CONTRIBUTION OF PM&C CLASS A SHARES Pegasus is a newly-formed subsidiary of the Parent and had, prior to the Public Offering, no material assets or operating history. Prior to the Public Offering, the Parent's principal subsidiary was PM&C, which conducted through subsidiaries the Company's current operations as described herein. Simultaneously with, and as a condition of, the closing of the Public Offering, the Parent contributed to Pegasus all of its stock in PM&C, which consisted of 161,500 PM&C Class A Shares in exchange for 3,380,435 shares of Class B Common Stock. 37 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 the Public Offering, the Company acquired 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 1,400,000 shares of Class B Common Stock and approximately $1.4 million in cash. Of these shares, 182,652 were exchanged for an equal number of shares of Class A Common Stock and transferred to certain members of management who were participants in the Management Share Exchange. The fair market value of the Management Agreement was determined by an independent appraiser. At the time that the Management Agreement was transferred, the executive officers and other employees of the Management Company became employees of the Company. See "Management and Certain Transactions -- Management Agreement." MANAGEMENT SHARE EXCHANGE Certain members of the Company's management held 5,000 shares of Parent Non-Voting Stock. Upon consummation of the Public Offering, all shares of the Parent Non-Voting Stock were exchanged for 263,606 shares of Class A Common Stock of Pegasus pursuant to the Management Share Exchange and the Parent Non-Voting Stock was distributed to the Parent. TOWERS PURCHASE Concurrently with the Public Offering, the Company purchased 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 was 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. See "Description of Indebtedness -- New Credit Facility." THE PUBLIC OFFERING Pegasus consummated an initial public offering of its shares of its Class A Common Stock on October 8, 1996 pursuant to an underwritten offering in which Lehman Brothers Inc., BT Securities Corporation, CIBC Wood Gundy Securities Corp. and PaineWebber Incorporated were acting as representatives of the underwriters. The initial public offering price of the Class A Common Stock was $14.00 per share. The consummation of the Public Offering was conditioned upon the consummation of all of the other Transactions except for the Management Share Exchange, the Ohio DBS Acquisition and the New Hampshire Cable Sale. The Underwriters have a 30-day option to purchase up to 450,000 additional shares of Class A Common Stock solely to cover over-allotments, if any. The net proceeds to the Company from its sale of 3,000,000 shares of Class A Common Stock in the Public Offering after deducting underwriting discounts and commissions and estimated fees and expenses of the Public Offering, were approximately $38.1 million (and are anticipated to be approximately $44.0 million if the Underwriters' over-allotment option is exercised in full). The Company applied the total net proceeds from the Public 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) $3.0 million to repay indebtedness under the New Credit Facility, (iii) $1.9 million to make a payment on account of the Portland Acquisition, (iv) $1.4 million for the payment of the cash portion of the purchase price of the Management Agreement Acquisition, and (v) $1.4 38 million for the Towers Purchase. The Company intends to apply $12.0 million of the proceeds to the Ohio DBS Acquisition. 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. USE OF PROCEEDS The Registered Exchange Offer is intended to carry out what Pegasus believes to be the spirit of the Stockholders Agreement: to enable holders of the PM&C Class B Shares to hold a publicy traded class of equity securities. Pegasus will not receive any cash proceeds from the issuance of the Class A Common Stock offered hereby. In consideration for issuing the Class A Common Stock as contemplated in the Prospectus, Pegasus will receive in exchange a proportionate number of PM&C Class B Shares. 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 is a direct subsidiary of Pegasus, is a party to the New Credit Facility and the Indenture, both of which 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." 39 CLASS A COMMON STOCK INFORMATION The Class A Common Stock is traded on the Nasdaq National Market under the symbol "PGTV." The following table sets forth the high and low sale prices per share of Class A Common Stock, as reported by Nasdaq for the 1996 fiscal year subsequent to the Company's initial public offering on October 3, 1996. These quotations and sales prices do not include retail mark-ups, mark-downs or commissions.
1996 Fiscal Year High Low -------- -------- Fourth Quarter (through October 21, 1996)(1) ............................... $14.38 $14.00
- ------ (1) The Company's Class A Common Stock began trading on October 3, 1996. On October 21, 1996, the last reported sales price for the Class A Common Stock was $14.00 per share. As of , 1996, the Company had approximately holders of record (excluding holders whose securities were held in street or nominee name) 40 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 in the Public Offering and the use of proceeds therefrom, (ii) the issuance of 1,471,437 shares of Class A Common Stock and 4,581,900 shares of Class B Common Stock pursuant to the other 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 participated in the Management Share Exchange) and (iii) the issuance of 191,792 shares of Class A Common Stock in the Registered Exchange Offer. 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 $ 13,457 ========== ============= Total debt: New Credit Facility(1)(2) .................................................. $ -- $ 28,600 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 ................................................................. 94,863 114,663 ---------- ------------- 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; 4,663,229 shares issued and outstanding, as adjusted .................... 2 47 Class B Common Stock, $0.01 par value, 15,000,000 shares authorized; 4,581,900 shares issued and outstanding, as adjusted .................... -- 46 Additional paid-in capital ................................................. 7,881 57,136 Retained earnings (deficit) ................................................ (474) 3,586 Partners' deficit .......................................................... (11,892) (11,892) ---------- ------------- Total stockholders' equity (deficit) .................................... (4,483) 48,923 ---------- ------------- Total capitalization .................................................... $ 90,380 $163,586 ========== =============
- ------ (1) For a description of the New Credit Facility, see "Description of Indebtedness -- New Credit Facility." (2) As of September 30, 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." 41 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. 42 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 ............ (11,573) (3,350) (5,570) (6,716) 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) ........... $(14,089) $(4,010) $(4,838) $(6,637) ======== ======= ======= ======= 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) ...... 9,245 5,143 9,245 ======== ======= ======= 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 $ 13,457 Working capital (deficiency) 78 (52) (3,844) (23,074) 17,566 4,073 8,689 Total assets ................ 17,306 17,418 76,386 75,394 95,770 104,247 178,226 Total debt (including current) ................. 13,675 15,045 72,127 61,629 82,896 94,863 114,663 Total liabilities ........... 14,572 16,417 78,954 68,452 95,521 108,730 129,303 Total equity (deficit) (6) .. 2,734 1,001 (2,427) 6,942 249 (4,483) 48,923 (footnotes on following page)
43 - ------ (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 the Public 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 Registered Exchange Offer and the Transactions after June 30, 1996 and the Public 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. 44 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 actually closed on October 8, 1996 concurrently with the closing of the Public 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) the Public Offering, which closed on October 8, 1996, 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 actually closed on October 8, 1996 concurrently with the closing of the Public 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) the Public Offering, which closed on October 8, 1996, 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 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." 45 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 Public 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) 2,919(19) (11,573) 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) $2,790(20) (14,089) ========= ============ =========== =========== ========= =========== ======== Income (loss) per share: Loss before extraordinary items ... $ (2.77) $(1.52) ========= ======== Weighted average shares outstanding .................... 6,084,509 9,245,129 ========= ========= 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
46 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 --
49 (RESTUBBED TABLE CONTINUED FROM ABOVE)
Pending Transactions ----------------------------------------- NH OH DBS Cable The Public Pro Sub-Total Acquisition(5) Adjustments 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) 1,460(19) (6,716) 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) $1,396(20) $(6,637) ========= ============ =========== =========== ========= ========== ========= Income (loss) per share: Loss before extraordinary items .... $(1.32) $(0.72) ========= ========= Weighted average shares outstanding ...................... 6,084,509 9,245,129 ========= ========= 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
47 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 --
51 (RESTUBBED TABLE CONTINUED FROM ABOVE)
Pending Transactions ----------------------------------------- NH OH DBS Cable The Public Pro Sub-Total Acquisition(5) Adjustments 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 -- -- 7,003 -- 7,003 Cable ............................ 9,146 -- -- (831) 8,315 -- 8,315 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) 2,919(19) (13,762) 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) $2,790(20) $(14,578) ========= ============ =========== =========== ========= ========== ========= Income (loss) per share: Loss before extraordinary items ... $(2.85) $ (1.58) ========= ========= Weighted average shares outstanding ..................... 6,084,509 9,245,129 ========= ========= 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
48 - ------ (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 the Public 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. 49 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 Public 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) $32,266 $ 8,588 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 $32,266 $178,226 ======== ========== ============ =========== ========= ========== ========= 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 (3,000) 114,245 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 (3,000) 129,303 Class A Common Stock(8) . -- 12 -- -- 12 35 47 Class B Common Stock .... -- -- -- -- -- 46 46 Additional paid-in capital .............. -- 21,951 -- -- 21,951 38,004 -- (1,400) (1,419) 57,136 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 35,266 48,923 -------- ---------- ------------ ----------- --------- ---------- --------- Total liabilities and equity ............. $22,586 $141,686 $ -- $ 4,274 $145,960 $32,266 $178,226 ======== ========== ============ =========== ========= ========== =========
50 - ------ (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 the Public Offering) and $150,000 of Class A Common Stock (valued at the price to the public in the Public 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 the Public 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 the Public 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 September 30, 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 the Public Offering $42,000 ========== Uses of proceeds: Michigan/Texas DBS Acquisition ..... $17,894 Cash pending Ohio DBS Acquisition .. 12,000 Repay indebtedness under the New Credit Facility ......................... 3,000 Pay transaction costs related to the Public Offering .................. 3,915 Payment on account of Portland Acquisition ...................... 1,850 Management Agreement Acquisition ... 1,419 Towers Purchase .................... 1,400 General corporate purposes ......... 522 ---------- Total uses of proceeds from the Public Offering ............. $42,000 ========== (8) Pegasus is a newly-formed subsidiary of the Parent and, prior to the consummation of the Public Offering, had no material assets or operating history. Prior to the consummation of the Public Offering, the Parent's principal subsidiary was PM&C, which conducted through subsidiaries the Company's operations as described herein. Simultaneously with, and as a condition of, the closing of the Public Offering, the Parent contributed 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. 51 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 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 WPXT .............................. January 1996(9) $15.8 $14.2 cash, $0.4 assumed liabilities, $0.2 of Class A Common Stock and $1.0 of Class B Common Stock(10) WTLH .............................. March 1996 $ 8.1 $5.0 cash, $3.1 deferred obligation and the WTLH 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 Michigan/Texas DBS Acquisition .... October 1996 $29.8 $17.9 cash and $11.9 of Class A Common Stock(10) Pending acquisition: Ohio DBS Acquisition .............. (11) $12.0 $12.0 cash Pending sale: New Hampshire Cable Sale .......... (12) $ 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 acquired WPXT's FCC license and Fox Affiliation Agreement concurrently with the consummation of the Public Offering. (10) The number of shares of Common Stock issued in connection with these acquisitions were based on the price of the Class A Common Stock to the public of $14.00 per share in the Public Offering. 52 (11) The Company anticipates that the Ohio DBS Acquisition will occur no later than November 15, 1996; 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." (12) The Company anticipates that the New Hampshire Cable Sale will occur by December 31, 1996; 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 the Public Offering, the Parent contributed all of the PM&C Class A Shares to Pegasus for 3,380,435 shares of Class B Common Stock. Upon consummation of the Public Offering the Company acquired the assets of Towers for $1.4 million in cash. The Company also acquired 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 the Public 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. 53 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 54 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. The Company expects to continue to report increases in Location Cash Flow in the second half of 1996 but does not expect that such increases will continue at the same rate as was experienced in the first six months of 1996. 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 55 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. 56 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. 57 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 for $50.0 million. The amount of the New Credit Facility will reduce quarterly beginning March 31, 1998. As of September 30, 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 $3.0 million of the New Credit Facility from the proceeds of the Public Offering, the Company was able to draw down an additional $3.0 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 used part of the net proceeds of the Public Offering to repay $3.0 million of debt under the New Credit Facility (but not to reduce the commitment level thereunder) and to fund the cash portion of 58 the Michigan/Texas DBS Acquisition. The Company believes that following the completion of the 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 the Public 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. 59 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. 60 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 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
- ------ (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. 61 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. A competing station has filed a letter with the FCC objecting to this application. 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. 62
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." 63
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. The FCC recently granted an application which 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. The Company anticipates relocating WTLH's transmitter and tower in 1997 to increase its audience coverage in the Tallahassee market. The Company also acquired the license for translator station W53HI, Valdosta, Georgia, in August 1996. This station rebroadcasts WTLH on Channel 53. An application is pending with the FCC for consent to assignment of the license for the translator station W13BO, Valdosta, Georgia, to the Company. This station rebroadcasts WTLH on Channel 13. 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 64 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, New York, Michigan and Texas. Upon consummation of the Ohio DBS Acquisition, it will also acquire exclusive rights to provide DIRECTV services in certain rural areas of 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. 65
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% ----------- --------- --------- -------------- ------- ---------- -------- Michigan ........ 241,713 61,774 179,939 5,213 2.2% 6.6% 0.6% Texas ........... 149,530 54,504 95,026 4,449 3.0% 6.2% 1.1% Total .......... 867,201 200,825 666,376 18,778 2.2% 7.5% 0.6% $40.36 ----------- --------- --------- -------------- ------- ---------- -------- ------------- To Be Acquired: Ohio ............ 167,558 32,180 135,378 4,355 2.6% 10.1% 0.8% $39.27 ----------- --------- --------- -------------- ------- ---------- -------- ------------- 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 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 approximately 25% 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 66 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, 67 (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 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 68 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 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 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. RCA/Thomson has recently begun commercial sales of DSS units designed specifically for use in such locations. 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. 69 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 November 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. 70 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. 71 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. This application was recently denied by the FCC, but an appeal is pending. 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 72 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. 73 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 74 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 75 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. The Company expects to program television stations through the use of LMA agreements, but 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 76 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 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. 77 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. 78 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. 79 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 last required election date was 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. The Company must complete negotiations with respect to these agreements by December 31, 1996. 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 is currently being considered 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. 80 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 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 81 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 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 82 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. 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 83 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 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 84 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 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 85 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. 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 Leased 9.6 acres 1/31/00 transmitter) 916 Oak Street, Scranton, PA Leased 8,600 square feet 4/30/00 (television station) Bald Eagle Mountain, PA (transmitting) Leased 400 square feet 9/30/97 (Williamsport Tower) 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. 86 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. 87 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. 40 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 James J. McEntee, III 38 Director Donald W. Weber ...... 60 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. 88 James J. McEntee, III, has been a Director of Pegasus since October 8, 1996. Mr. McEntee has been a member of the law firm of Lamb, Windle & McErlane, P.C. for the past five years and a principal of that law firm for the past three years. 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. 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. which are publicly-traded companies. Shortly after the commencement of the Registered Exchange Offer, the Company anticipates having a Board of Directors consisting of five members, including Mr. Pagon, Mr. McEntee and Mr. Weber. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to the Public 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 $20.87 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 the Public Offering, the Management Agreement was transferred to the Company, and the employees of the Management Company became 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 received $19.6 million of Class B Common Stock or 1,400,000 shares of Class B Common Stock and approximately $1.4 million in cash. Of the 1,400,000 shares, 182,652 were exchanged for an equal number of shares of Class A Common Stock and transferred to certain members of management who were participants in the Management Share Exchange. The fair market value of the Management Agreement was 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, 89 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. TOWERS PURCHASE Simultaneously with the completion of the Public Offering, the Company purchased 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 was 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 has agreed 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 were historically paid by the Management Company. Upon the closing of the Public Offering, the Management Agreement was transferred to the Company and the salaries of the Company's executive officers began to 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) Prior to the consummation of the Public Offering, the Company's executive officers 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 the Public Offering, all of the Parent's Non-Voting Common Stock were exchanged for shares of Class A Common Stock pursuant to the Management Share Exchange. 90 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 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 ....................................................... 6 cents Restricted Stock grants to department managers based on the increase in annual Location Cash Flow of individual business units .................................................. 6 cents Restricted Stock grants to corporate managers (other than executive officers) based on the Company-wide increase in annual Location Cash Flow ...................................... 3 cents Restricted Stock grants to employees selected for special recognition .................... 5 cents Restricted Stock grants under the 401(k) Plan for the benefit of all eligible employees and allocated pro-rata based on wages ................................................... 10 cents ---------- Total ................................................................................ 30 cents ==========
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 91 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 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 .......... 903 Howard E. Verlin, Vice President, Cable and Satellite Television and Secretary ................. 0 Guyon W. Turner, Vice President, Broadcast Television 0 Executive Group ..................................... 903 Non-Executive Director Group ........................ N/A(2) Non-Executive Officer Employee Group ................ 2,711 ----------------- Total ..................................... 3,614 ================= - ------ (1) Number of shares of Class A Common Stock subject to restricted stock awards granted to date. (2) Marshall W. Pagon and non-executive directors are not eligible to receive the special recognition awards under the Restricted Stock Plan. 92 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 .................... 18,072
- ------ (1) Number of shares 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. 93 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 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. 94 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 to the Transactions and the Registered Exchange Offer. 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 49.6% of the Common Stock (and 90.8% 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. The outstanding capital stock of the Parent consists of 64,119 shares of Class A Voting Common Stock, all of which is beneficially owned by Marshall W. Pagon. See "Risk Factors -- Concentration of Share Ownership and Voting Control by Marshall W. Pagon."
Pegasus Class A Pegasus Class B Common Stock Common Stock Beneficially Owned Beneficially Owned ------------------------ ---------------------- Beneficial Owner Shares % Shares % ------------------------------------- -------------- ------- ----------- -------- Marshall W. Pagon(1)(2) ............. 4,581,900(3) 49.6% 4,581,900 100.0% Guyon W. Turner(1) .................. 157,143 3.4% -- -- Robert N. Verdecchio(1) ............. 170,903 3.7% -- -- Howard E. Verlin .................... 39,321 (4) -- -- James J. McEntee, III ............... 500 (4) -- -- Donald W. Weber(5) .................. 3,385 (4) -- -- Harron Communications Corp.(6) 70 East Lancaster Avenue Frazer, PA 19355 ................... 852,110 18.3% -- -- Directors and Executive Officers as a Group (7 persons)(7) ........................ 4,954,652 53.6% 4,581,900 100.0%
- ------ (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 1,217,348 shares of Class B Common Stock. Mr. Pagon is the sole shareholder of the general partner of Pegasus Capital, L.P. and is deemed to be the beneficial owner of these shares. All of the 3,364,552 remaining shares of Class B Common Stock are owned by 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 4,581,900 shares of Class B Common Stock, which are convertible into shares of Class A Common Stock on a one-for-one basis. (4) Represents less than 1% of the outstanding shares of the class of Common Stock. (5) Consists of 3,385 shares of Class A Common Stock issuable upon the exercise of the vested portion of outstanding stock options. (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 (5). Also includes 1,500 shares of Class A Common Stock owned by Ted S. Lodge's wife, for which Mr. Lodge disclaims beneficial ownership. 95 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 the Exchange Offer Parent and Public and Management Pegasus Capital, Offering Share Exchange Harron Other L.P. (2) (3) (4) (5) (6) 32.4% 7.8% 9.2% 1.0% 49.6% 100% Pegasus 100% PM&C - ------ (1) This chart assumes 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 the Public Offering, which represents 5.9% 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 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 were participants in the Management Share Exchange, which represents 0.5% of the voting power. (4) Consists of 852,110 shares of the Class A Common Stock issued to Harron in connection with the Michigan/Texas DBS Acquisition, which represents 1.7% of the voting power. (5) Includes 10,714 shares of the Company's Class A Common Stock issued in connection with the Portland Acquisition and 71,429 shares of the Company's Class A Common Stock issued in connection with the Portland LMA. (6) Consists of 3,293,123 shares of Class B Common Stock 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 were participants in the Management Share Exchange); 1,217,348 shares 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 were participants in the Management Share Exchange); and 71,429 shares 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 90.8% of the voting power of the Common Stock. 96 DESCRIPTION OF INDEBTEDNESS NOTES PM&C, which became the direct subsidiary of Pegasus upon completion of the Public 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 97 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 for $50.0 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 $1.3 million 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." 98 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"). After giving effect to the Registered Exchange Offer (assuming all Holders of PM&C Class B Shares exchange their PM&C Class B Shares), 4,663,229 shares of Class A Common Stock and 4,581,900 shares of Class B Common Stock will be issued and outstanding. 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 (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 Registered Exchange Offer (assuming acceptance by all Holders), the outstanding shares of Class A Common Stock will equal 50.4% of the total Common Stock outstanding, and the holders of Class B Common Stock will have control of approximately 90.8% 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. 99 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 100 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 of North Carolina. 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. 101 SHARES ELIGIBLE FOR FUTURE SALE After giving effect to the Registered Exchange Offer (assuming acceptance by all Holders) the Company will have outstanding 4,663,229 shares of Class A Common Stock and 4,581,900 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 the Public Offering are 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, subject to the agreement of each exchanging Holder not to sell, otherwise dispose of or pledge any shares of the Class A Common Stock received in the Registered Exchange Offer until April 3, 1997 without the prior written consent of Lehman Brothers Inc. The approximately 1,471,437 remaining shares of Class A Common Stock and all of the 4,581,900 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 the Public 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 4,944,564 of the 6,053,337 "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 until April 3, 1997 without the prior written consent of Lehman Brothers Inc. All of the Company's directors and executive officers are subject to the 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 46,632 shares immediately after the Registered Exchange Offer) 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 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 the Public 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 the Public 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 the Public Offering. As of the date hereof, approximately 270,605 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 $20.87 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. 102 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 the Public Offering, commencing on the date that the registration statement to which this Prospectus relates is declared effective and ending 120 days after such date. The WTLH Trusts will have the right to acquire approximately 71,429 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 71,429 shares of Class A Common Stock issued in connection with the acquisition of the Portland LMA and the 10,714 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 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 4,954,652 shares of Common Stock (including options to purchase 3,385 shares) upon consummation of the Registered Exchange Offer, 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 until April 3, 1997, without the prior written consent of Lehman Brothers Inc. In addition, the terms of the Registered Exchange Offer 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 the same period without the consent of Lehman Brothers Inc. 103 PLAN OF DISTRIBUTION The shares of Class A Common Stock to be offered hereby pursuant to the Registered Exchange Offer are being offered by Pegasus in exchange for shares of any and all outstanding shares of PM&C Class B Shares. PM&C has outstanding 8,500 PM&C Class B Shares. Each PM&C Class B Share will be exchanged for 22,564 shares of Class A Common Stock. The exchange ratio of the Class A Common Stock to be issued in the Registered Exchange Offer has been determined so that immediately after giving effect to the Parent's contribution of the PM&C Class A Shares 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 issuance of additional shares of Common Stock in connection with the Public Offering and the other Transactions, the Parent and the holders of the PM&C Class B Shares would have held 95% and 5% of the equity of Pegasus and 99.5% and 0.5% of the voting rights of Pegasus' Common Stock, respectively, which are the same proportions in which they owned and had voting rights with respect to PM&C. Only whole shares of Class A Common Stock will be issued pursuant to the Registered Exchange Offer. In lieu of fractional shares to which a holder of PM&C Class B Shares would otherwise be entitled, the holder of PM&C Class B Shares will be paid in cash based upon the initial public offering price of the Class A Common Stock of $14.00 per share, and no certificates or scrip representing fractional shares of Class A Common Stock will be issued. The expenses of soliciting tenders will be borne by Pegasus. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of Pegasus and its affiliates. Pegasus has not retained any dealer-manager in connection with the Registered Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptances of the Registered Exchange Offer. Pegasus, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The cash expenses to be incurred in connection with the Registered Exchange Offer will be paid by Pegasus and are estimated in the aggregate to be approximately $80,000. Such expenses include registration fees, fees and expenses of the Exchange Agent, accounting and legal fees and printing costs, among others. Pegasus will pay all transfer taxes, if any, applicable to the exchange of PM&C Class B Shares pursuant to the Registered Exchange Offer. If, however, a transfer tax is imposed for any reason other than the exchange of the PM&C Class B Shares pursuant to the Registered Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering Holder. 104 LEGAL MATTERS The validity of the issuance of the Class A Common Stock offered hereby, when exchanged for shares of PM&C Class B Shares upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal 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. 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. 105 ADDITIONAL INFORMATION Pegasus has filed with the Commission a Registration Statement on Form S-4 under the Securities Act with respect to the shares of 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 the Public Offering of the Class A Common Stock, the Company became subject to the informational requirements of the Securities Exchange Act of 1934, as amended (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. 106 PEGASUS COMMUNICATIONS CORPORATION INDEX TO FINANCIAL STATEMENTS
Page -------- Pegasus Communications Corporation (a newly formed entity which 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 September 3, 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) 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 October 8, 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 PERIOD .................... 140,311 140,311 452,016 ------------- --------------- ------------- ------------- CASH, END OF PERIOD .......................... $ 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. On October 8, 1996 Harron sold its DBS operations to Pegasus Communications Corporation (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 Years December 31, -------------------------- 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 October 8, 1996, Harron contributed its DBS operations and related assets to Pegasus Communications Corporation ("Pegasus") in exchange for (a) cash in the amount of $17.9 million and (b) 852,110 shares of Class A Common Stock of Pegasus. On that date, Pegasus consummated an initial public offering of its Class A Common Stock at an initial public offering price of $14 per share. 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 ================================================================================ 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. 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 .......................... 21 The Registered Exchange Offer ......... 27 Certain Federal Income Tax Considerations of the Registered Exchange Offer ....................... 35 The Company ........................... 36 Use of Proceeds ....................... 39 Dividend Policy ....................... 39 Class A Common Stock Information ...... 40 Capitalization ........................ 41 Selected Historical and Pro Forma Combined Financial Data .............. 42 Pro Forma Combined Financial Data ..... 45 Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 52 Business .............................. 60 Management and Certain Transactions ... 88 Ownership and Control ................. 95 Description of Indebtedness ........... 97 Description of Capital Stock .......... 99 Shares Eligible for Future Sale ....... 102 Plan of Distribution .................. 104 Legal Matters ......................... 105 Experts ............................... 105 Additional Information ................ 106 Index to Financial Statements ......... F-1 ------ ================================================================================ ================================================================================ LOGO PEGASUS COMMUNICATIONS CORPORATION OFFER TO EXCHANGE ITS CLASS A COMMON STOCK WHICH HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY OR ALL OF THE OUTSTANDING CLASS B COMMON STOCK OF PEGASUS MEDIA & COMMUNICATIONS, INC. ------ PROSPECTUS ------ , 1996 ================================================================================ PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant's Amended and Restated Certificate of Incorporation provides that a director of the Registrant shall have no personal liability to the Registrant or to its stockholders for monetary damages for breach of fiduciary duty as a director except to the extent that Section 102(b)(7) (or any successor provision) of the Delaware General Corporation Law, as amended 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 in connection with the Public Offering 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 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
Exhibit Number Description of Document ------------ ------------------------------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement (which is incorporated herein by reference to Exhibit 1.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 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) (which is incorporated herein by reference to Exhibit 2.2 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057)). 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. 1 to Exhibit 2.2 (which is incorporated by reference to Pegasus' Form 8-K dated October 8, 1996).
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Exhibit Number Description of Document - ------------ ----------------------- 2.6 Amendment No. 2 to Exhibit 2.2 (which is incorporated by reference to Exhibit 2.5 to Pegasus' Registration Statement on Form S-1 (File No. 333-057057). 2.7 Amendment No. 3 to Exhibit 2.2 (which is incorporated by reference to Exhibit 4 to Pegasus' Form 8-K dated October 8, 1996). 2.8 Joinder Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation and Harron Communications Corp. dated as of October 8, 1996 (which is incorporated by reference to Exhibit 5 to Pegasus' Form 8-K dated October 8, 1996). 2.9 Stockholders' Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation and Harron Communications Corporation dated as of October 8, 1996 (which is incorporated by reference to Exhibit 6 to Pegasus' Form 8-K dated as of October 8, 1996). 2.10 Non-Competition Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation and Harron Communications Corp. dated October 8, 1996 (which is incorporated by reference to Exhibit 7 to Pegasus' Form 8-K dated as of October 8, 1996). 2.11* Asset Purchase Agreement by and among Pegasus Communications Corporation and Horizon Telcom, Inc., Horizon Infotech, Inc. and Chillicothe Telephone Company dated as of October 23, 1996. 3.1 Certificate of Incorporation of Pegasus, as amended (which is incorporated herein by reference to Exhibit 3.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 3.2 By-Laws of Pegasus (which is incorporated herein by reference to Exhibit 3.2 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 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. 8.1* Opinion of Drinker Biddle & Reath as to Tax Matters. 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 (which is incorporated herein by reference to Exhibit 10.27 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 10.28 Pegasus Restricted Stock Plan (which is incorporated herein by reference to Exhibit 10.28 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 10.29 Option Agreement for Donald W. Weber (which is incorporated herein by reference to Exhibit 10.29 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 10.30 Pegasus 1996 Stock Option Plan (which is incorporated herein by reference to Exhibit 10.30 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 16.1 Letter from Herbein + Company, Inc. relating to change in certifying accountant (which is incorporated herein by reference to Exhibit 16.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 21.1(b)* 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 99.1* Form of Letter of Transmittal to be used in conjunction with the Registered Exchange Offer.
- ------ * Filed herewith. All other exhibits have been previously filed. (b) Financial Statement Schedules Schedule II. Valuation and Qualifying Accounts II-4 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 22. 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, 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. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into this prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. The undersigned registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represents a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. 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. II-5 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. 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 25th 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, Robert N. Verdecchio and Ted S. Lodge 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 25, 1996 -------------------------------- Chairman of the Board Marshall W. Pagon (Principal Executive Officer) /s/ Robert N. Verdecchio Senior Vice President, Chief October 25, 1996 -------------------------------- Financial Officer and Assistant Robert N. Verdecchio Secretary (Principal Financial and Accounting Officer) /s/ Donald W. Weber Director October 25, 1996 -------------------------------- Donald W. Weber /s/ James J. McEntee, III Director October 25, 1996 -------------------------------- James J. McEntee, III
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 October 25, 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-4 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 ----------- ---------------------------------------------------------------------------------------------- 2.11 Asset Purchase Agreement by and among Pegasus Communications Corporation and Horizon Telcom, Inc., Horizon Infotech, Inc. and Chillicothe Telephone Company dated as of October 23, 1996. 5.1 Opinion of Drinker Biddle & Reath 8.1 Opinion of Drinker Biddle & Reath as to tax matters. 21.1(b) Subsidiaries of Pegasus 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 27.1 Financial Data Schedule 99.1 Form of Letter of Transmittal to be used in conjunction with the Registered Exchange Offer.
EX-2 2 EXHIBIT 2.11 ASSET PURCHASE AGREEMENT among PEGASUS COMMUNICATIONS CORPORATION and HORIZON TELCOM, INC. HORIZON INFOTECH, INC. CHILLICOTHE TELEPHONE COMPANY -------------------------------- Dated as of October 23, 1996 -------------------------------- Table of Contents ARTICLE I DEFINITIONS......................................................2 1.1 Certain Definitions......................................2 1.2 Other Definitions.......................................10 ARTICLE II BASIC TRANSACTION...............................................12 2.1 Sale of Assets. .......................................12 2.2 Purchase Price..........................................12 2.3 Escrow Arrangements.....................................12 2.4 Current Liabilities Adjustment..........................12 2.5 Operating Adjustment....................................14 2.6 Subscriber Adjustment...................................16 2.7 Liabilities.............................................16 2.8 Closing.................................................17 2.9 Transactions at Closing.................................17 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLING GROUP.................18 3.1 Organization and Qualification..........................18 3.2 Authority and Validity..................................18 3.3 No Breach or Violation..................................19 3.4 Consents and Approvals..................................20 3.5 Title to Assets.........................................20 3.6 Intellectual Property...................................20 3.7 Compliance with Legal Requirements......................21 3.8 Financial Information...................................21 3.9 Events Subsequent to 1995...............................22 3.10 Undisclosed Liabilities.................................23 3.11 Legal Proceedings.......................................23 3.12 Taxes Relating to the Business..........................24 3.13 Employees...............................................24 3.14 Contracts...............................................25 3.15 Books and Records; Accounts Receivable..................27 3.16 Outstanding Rights......................................28 3.17 Insurance...............................................28 3.18 Disclosure..............................................29 3.19 Brokers or Finders......................................30 3.20 Certain Payments........................................30 3.21 Subscribers.............................................30 3.22 Favorable Business Relationships........................31 3.23 Commission Program......................................31 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER.....................31 4.1 Organization and Qualification..........................31 4.2 Authority and Validity..................................31 4.3 No Breach or Violation..................................32 4.4 Consents and Approvals..................................33 4.5 Legal Proceedings.......................................33 4.6 Finders and Brokers.....................................33 i ARTICLE V PRE-CLOSING COVENANTS OF SELLING GROUP..........................34 5.1 Additional Information..................................34 5.2 Exclusivity.............................................34 5.3 Continuity and Maintenance of Operations................35 5.4 Consents and Approvals..................................36 5.5 Securities Filings......................................37 5.6 Collateral Agreements...................................38 5.7 Notification of Certain Matters.........................38 ARTICLE VI PRE-CLOSING COVENANTS OF PURCHASER..............................39 6.1 Consents and Approval...................................39 6.2 Collateral Agreements...................................39 ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER................40 7.1 Accuracy of Representations.............................40 7.2 Covenants...............................................40 7.3 Consents................................................40 7.4 Delivery of Documents...................................41 7.5 No Material Adverse Change..............................42 7.6 No Litigation...........................................42 7.7 Minimum Subscribers.....................................43 7.8 Transition Arrangements.................................43 7.9 NRTC Compliance Certificate.............................43 ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLING GROUP............43 8.1 Accuracy of Representations.............................43 8.2 Covenants...............................................44 8.3 Consents................................................44 8.4 Delivery of Documents...................................45 8.5 Litigation..............................................45 ARTICLE IX POST-CLOSING COVENANTS..........................................46 9.1 Transition..............................................46 9.2 Transfer Taxes and Fees.................................46 9.3 1996 NRTC Patronage.....................................46 9.4 Financial Statements....................................46 ARTICLE X TERMINATION.....................................................47 10.1 Events of Termination...................................47 10.2 Liabilities in Event of Termination.....................48 10.3 Procedure Upon Termination..............................48 ARTICLE XI REMEDIES FOR BREACH OF THIS AGREEMENT...........................48 11.1 Survival of Representations and Warranties..............48 11.2 Indemnification Provisions for Benefit of Purchaser.....49 11.3 Indemnification Provisions for Benefit of Selling Group..................................................51 11.4 Matters Involving Third Parties.........................52 11.5 Determination of Adverse Consequences...................54 ii ARTICLE XII MISCELLANEOUS...................................................54 12.1 Parties Obligated and Benefited.........................54 12.2 Notices.................................................54 12.3 Attorneys' Fees.........................................55 12.4 Waiver..................................................56 12.5 Headings................................................56 12.6 Choice of Law...........................................56 12.7 Rights Cumulative.......................................56 12.8 Further Actions.........................................56 12.9 Time of the Essence.....................................56 12.10 Late Payments...........................................57 12.11 Counterparts............................................57 12.12 Entire Agreement........................................57 12.13 Amendments and Waivers..................................57 12.14 Construction............................................57 12.15 Expenses................................................58 Exhibits Exhibit 1 Service Areas Exhibit 2 Escrow Agreement Exhibit 3 Noncompetition Agreement iii ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT ("Agreement") is made as of the 23rd day of October, 1996, by and among PEGASUS COMMUNICATIONS CORPORATION ("Purchaser"), a Delaware corporation, HORIZON TELCOM, INC. ("Parent"), an Ohio corporation, HORIZON INFOTECH, INC. ("Horizon"), an Ohio Corporation, and CHILLICOTHE TELEPHONE COMPANY ("Chillicothe"), an Ohio corporation. "Seller" has the meaning assigned to it in Section 1.1. Parent, Horizon and Chillicothe are collectively referred to herein as the "Selling Group." Purchaser and the Selling Group are collectively referred to herein as the "Parties." RECITALS: WHEREAS, Seller is a party to that certain NRTC Distribution Agreement (as defined below) with the National Rural Telecommunications Cooperative ("NRTC"), pursuant to which NRTC has granted to Seller the right to distribute DIRECTV(R) ("DIRECTV") programming offered by DIRECTV, Inc. ("DIRECTV") in the zipcode areas of Ohio identified in Exhibit 1 ("Service Areas") currently comprising approximately 155,683 primary residences (including 29,899 homes not presently passed by cable); WHEREAS, Purchaser is a diversified media and communications holding company which, through an indirect subsidiary, provides DIRECTV services in areas of Connecticut, Massachusetts, Michigan, New Hampshire, New York and Texas; WHEREAS, Purchaser desires to purchase the Assets (as hereinafter defined) from Seller, and Seller desires to sell the Assets to Purchaser, upon the terms and subject to the conditions set forth herein. 1 NOW, THEREFORE, in consideration of the premises and mutual promises herein made, and in consideration of the representations, warranties, covenants and agreements herein contained, and intending to be legally bound hereby, the Parties agree as follows: ARTICLE I DEFINITIONS 1.1 Certain Definitions. The following terms shall, when used in this Agreement, have the following meanings: "Accountant" means Coopers & Lybrand L.L.P. "Accounts Receivable" mean the accounts receivable identified in the Books and Records. "Adverse Consequences" mean all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, assessments, dues, penalties, fines, interest, costs, amounts paid in settlement, Liabilities, obligations, Taxes, liens, losses, expenses and fees (including court costs, settlement costs, legal, accounting, experts' and other fees, costs and expenses). "Affiliate" means, with respect to any Person: (i) any Person directly or indirectly owning, controlling, or holding with power to vote 10% or more of the outstanding voting securities of such other Person; (ii) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other Person; (iii) any Person directly or indirectly controlling, controlled by, or under common control with such other Person; and (iv) any officer, director or partner of such other Person. "Control" for the foregoing purposes shall mean the possession, directly or indirectly, of the power to direct or cause 2 the direction of the management and policies of a Person, whether through the ownership of voting securities or voting interests, by contract or otherwise. "Applicable Rate" means a rate per annum equal to the corporate base rate of interest announced from time to time by Citibank in New York City, plus 3%. "Assets" mean all properties, assets, privileges, powers, rights, interests and claims of every type and description that are owned, leased, held, used or useful in the Business and in which Seller has any right, title or interest or in which Seller acquires any right, title or interest on or before the Closing Date, wherever located, whether known or unknown, and whether or not now or on the Closing Date on the Books and Records of Seller, including the Contracts, Books and Records, Personal Property, Intangibles, Accounts Receivable, Intellectual Property, Inventory and NRTC Patronage Capital. Notwithstanding the foregoing, Assets shall not include items identified on Schedule 1.1(a). "Assumed Liabilities" mean: (a) Seller obligations to Subscribers for: (i) Subscriber deposits held by Seller as of the Closing Date and which are refundable, in the amount for which Purchaser receives credit under Section 2.4(a); (ii) Subscriber deferred or prepaid income held by Seller as of the Closing Date for services to be rendered by the Business after the Closing Date, in the amount for which Purchaser receives credit under Section 2.4(a); (iii) the delivery of DIRECTV services to Subscribers of the Business after the Closing Date; (b) obligations accruing and relating to periods after the Closing Date under the NRTC Distribution Agreement; and (c) the Closing Current Liabilities, including items identified on Schedule 1.1(b). 3 Notwithstanding anything in this Agreement to the contrary, the Assumed Liabilities shall not include: (i) any Liability of the Selling Group or its Affiliates for income, transfer, sales, use and other Taxes arising in connection with the consummation of the transactions contemplated hereby; (ii) any other Liability of the Selling Group for Taxes; (iii) any Liability of the Selling Group for costs and expenses incurred in connection with this Agreement, the Collateral Documents or the transactions contemplated hereby or thereby; (iv) any obligation of the Selling Group under this Agreement or the Collateral Documents; (v) any Liability of the Selling Group for current or long-term obligations and Liabilities except as otherwise specifically provided in this Agreement; (vi) any Liability of the Selling Group to employees or independent contractors of the Selling Group whether under any contract, Employee Benefit Plan or otherwise; (vii) any Liability of the Selling Group relating to civil, criminal and/or administrative cases, proceedings, hearings or investigations, or awards of arbitration tribunals; (viii) any Liability of any company in the Selling Group to any Affiliate of any company in the Selling Group; or (ix) any other Liability of the Selling Group not specifically included in Assumed Liabilities pursuant to (a), (b) and (c) above. "Basis" means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction that forms or could form the basis for any specified consequence. "Books and Records" mean all books and records relating principally to the Business and all portions of or extracts from other Selling Group books and records, which portions or extracts relate principally to the Business, including purchase and sale order files, invoices, sales materials and records, customer lists, mailing lists, technical data and records, all correspondence with and documents pertaining to NRTC, DIRECTV, DSS Systems, subscribers, suppliers, 4 Governmental Authorities and other third parties, all records evidencing the accounts receivable and a schedule of accounts receivable aging and all other financial records. "Business" means the DIRECTV distribution business conducted by Seller on the date of this Agreement and through the Closing Date pursuant to rights granted under the NRTC Distribution Agreement. "Business Day" means any day other than Saturday, Sunday or a day on which banking institutions in New York, New York are required or authorized to be closed. "Closing Current Liabilities" mean Liabilities from the operations of the Business incurred in the Ordinary Course as of the Closing Date. "Collateral Documents" mean the Noncompetition Agreement, Escrow Agreement and any other documents, instruments and certificates to be executed and delivered by the Parties hereunder or thereunder. "Committed Member Residence" has the meaning assigned to it in the NRTC Distribution Agreement. "Confidentiality Agreement" means that certain Confidentiality Agreement dated May 24, 1996 between Purchaser and Daniels & Associates, L.P. "DSS System" means the satellite receiving system for DIRECTV consisting of an eighteen inch satellite antenna dish, an integrated receiver decoder and a remote control. "Employee Benefit Plan" means any: (a) nonqualified deferred compensation or retirement plan or arrangement that is an Employee Pension Benefit Plan; (b) qualified defined contribution retirement plan or arrangement that is an Employee Pension Benefit Plan; (c) qualified defined benefit retirement plan or arrangement that is an Employee Pension Benefit Plan (including 5 any Multiemployer Plan); or (d) Employee Welfare Benefit Plan or material fringe benefit plan or program. "Employee Pension Benefit Plan" has the meaning set forth in ERISA Section 3(2). "Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section 3(l). "Encumbrance" means any mortgage, pledge, lien, encumbrance, charge, security interest, security agreement, conditional sale or other title retention agreement, limitation, option, assessment, restrictive agreement, restriction, adverse interest, restriction on transfer or any exception to or defect in title or other ownership interest (including restrictive covenants, leases and licenses). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Escrow Agreement" means the form of escrow agreement attached hereto as Exhibit 2. "Estimated Current Liabilities" mean Liabilities from the operations of the Business incurred in the Ordinary Course which are estimated as of the Closing Date and set forth on the Estimated Current Liabilities Schedule (which include items identified on Schedule 1.1(b) and exclude any Liabilities on account of Subscriber deposits and deferred or prepaid income). "Estimated Current Liabilities Schedule" means the schedule of Estimated Current Liabilities attached hereto as Schedule 1.1(c). "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "GAAP" means United States generally accepted accounting principles as in effect from time to time. 6 "Government Authority" means: (i) the United States of America; (ii) any state, commonwealth, territory or possession of the United States of America and any political subdivision thereof (including counties, municipalities and the like); (iii) any foreign (as to the United States of America) sovereign entity and any political subdivision thereof; or (iv) any agency, authority or instrumentality of any of the foregoing, including any court, tribunal, department, bureau, commission or board. "HCG" means Hughes Communications Galaxy, Inc., an affiliate of DIRECTV. "Intangibles" mean all accounts, notes and other receivables, claims, deposits, repayments, refunds, causes of action, choses in action, rights of recovery, rights of set-off, rights of recoupment and other intangible assets owned, used or held for use in the Business. "Intellectual Property" means all of the following that are owned, used or held solely for use in the Business, except for the name "Horizon Infotech, Inc." and all derivations and combinations thereof and its associated logo: (i) trademarks, service marks, trade dress, logos, trade names and corporate names, together with all translations, adaptations, derivations and combinations thereof (including the name SmarTView) and all applications, registrations and renewals in connection therewith; (ii) all copyrightable works, all copyrights and all applications, registrations and renewals in connection therewith; (iii) trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information and business and marketing plans and proposals); (iv) all computer software (including data and related documentation); (v) all other proprietary rights; and (vi) all copies and tangible embodiments thereof (in whatever form or medium). 7 "Inventory" means the DSS Systems and other equipment owned by Seller for sale, lease or rent to or use by Subscribers. "Legal Requirement" means any statute, ordinance, law, rule, regulation, code, plan, injunction, judgment, order, decree, ruling, charge or other requirement, standard or procedure enacted, adopted or applied by any Governmental Authority, including judicial decisions applying common law or interpreting any other Legal Requirement. "Letter of Intent" means that certain Letter of Intent dated July 8, 1996 between Purchaser and Chillicothe, as extended. "Liability" means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including any liability for Taxes. "Multiemployer Plan" has the meaning set forth in ERISA Section 3(37). "Noncompetition Agreement" means the form of noncompetition agreement attached hereto as Exhibit 3. "NRTC Distribution Agreement" means any contract, commitment, agreement, instrument or other document pursuant to which NRTC and/or HCG and/or any of their Affiliates has granted the Selling Group rights relating to the marketing and distribution of DIRECTV, including that certain NRTC/Member Agreement for Marketing and Distribution of DBS Services between NRTC and Seller as amended and supplemented (Contract Number 415). "NRTC Patronage Capital" means any equity interest in NRTC allocated to Seller or if such equity interest is not transferrable to Purchaser at Closing, the right to receive any distributions on account of such equity interest (net of any Taxes paid by the Selling Group on 8 account of such equity interest or owed by the Selling Group on account of such distributions, as evidenced by documentation reasonably satisfactory to Purchaser). "Ordinary Course" means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency). "Permit" means any license, permit, consent, approval, registration, authorization, qualification or similar right granted by a Governmental Authority. "Person" means any natural person, corporation, partnership, trust, unincorporated organization, association, limited liability company, Governmental Authority or other entity. "Personal Property" means the personal property of Seller identified on Schedule 1.1d. "Representative" means any director, officer, employee, agent, consultant, adviser or other representative of a Person, including legal counsel, accountants and financial advisors. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. "Seller" means Chillicothe until such time as a transfer of the NRTC Distribution Agreement to Horizon is effective, and Horizon thereafter. "Seller's Accountant" means Arthur Andersen L.L.P. "Subscriber" means any active DIRECTV subscriber account of the Business, excluding the account of any subscriber who resides outside the Service Areas or is not otherwise a Committed Member Residence. "Tax" means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, 9 environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated or other tax of any kind whatsoever, including any interest, penalties, fees, deficiencies, assessments, additions or other charges of any nature with respect thereto, whether disputed or not. "Tax Return" means any return, declaration, report, claim for refund or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "Termination Date" means November 15, 1996 or December 31, 1996 if Closing is extended to December 31, 1996 as provided in Section 2.8 or a mutually agreeable earlier date. 1.2 Other Definitions. The following terms shall, when used in this Agreement, have the meanings assigned to such terms in the Sections indicated. Term Section - ---- ------- "Accountant's Current Liabilities Report"............................... 2.4 "Accountant's Operating Adjustments Report"............................. 2.5(b) "Adjusted Accountant's Current Liabilities Report....................... 2.4 "Adjusted Accountant's Operating Adjustments Report".................... 2.5(b) "Agreement".............................................................Preamble "Audited Financial Statements".......................................... 3.8 "Closing"............................................................... 2.7 "Closing Date".......................................................... 2.3 "Code".................................................................. 5.8 10 "Contracts"............................................................. 3.14 "Current Liabilities Objection Period".................................. 2.4 "Current Liabilities Report"............................................ 2.4 "DIRECTV"...............................................................Recitals "DIRECTV"...............................................................Recitals "Escrow Deposit"........................................................ 2.3 "Financial Statements".................................................. 3.8 "Lease"................................................................. 9.2 "NRTC"..................................................................Recitals "Operating Adjustment".................................................. 2.5(b) "Operating Adjustment Objection Period"................................. 2.5(b) "Operating Adjustments Report".......................................... 2.5(b) "Parties"...............................................................Preamble "Purchase Price"........................................................ 2.2(a) "Purchaser".............................................................Preamble "Second Current Liabilities Objection Period"........................... 2.4 "Second Operating Adjustments Objection Period"......................... 2.5(b) "Service Areas".........................................................Recitals "Stub Period Financial Statements"...................................... 5.5(b) "Survival Period"....................................................... 11.1 "Transfer".............................................................. 5.2 11 ARTICLE II BASIC TRANSACTION 2.1 Sale of Assets. Subject to the terms and conditions of this Agreement, Seller agrees to sell, transfer, assign, convey and deliver to Purchaser at Closing, all of Seller's right, title and interest in, to and under the Assets, free and clear of all Encumbrances, for the consideration set forth in Section 2.2 below. 2.2 Purchase Price. In consideration for Seller's sale of the Assets to Purchaser, Purchaser shall pay to Seller at Closing cash in an amount equal to $12 million minus the amount of the Estimated Current Liabilities ("Purchase Price"), subject to the escrow arrangements set forth in Section 2.3 and the Purchase Price adjustments set forth in Sections 2.4, 2.5 and 2.6. 2.3 Escrow Arrangements. Upon execution of this Agreement by the Parties, Purchaser shall deposit $100,000 into escrow ("Escrow Deposit") pursuant to the terms and conditions of the Escrow Agreement, which amount shall constitute a payment on account of the Purchase Price that reduces the amount of the Purchase Price payable by Purchaser directly to Seller at Closing. 2.4 Current Liabilities Adjustment. Within 45 days after Closing, Purchaser shall deliver to the Selling Group a report (the "Current Liabilities Report"), showing in detail its final determination of Closing Current Liabilities, together with any documents substantiating the Current Liabilities Report. The Selling Group shall provide Purchaser with reasonable access to all records that the Selling Group has in its possession and that are necessary or appropriate for Purchaser to prepare the Current Liabilities Report, and Purchaser shall provide the Selling Group with reasonable access to all records that Purchaser has in its possession and that are necessary or appropriate for the Selling Group to evaluate the Current Liabilities Report. Within 20 days after receipt of the Current Liabilities Report ("Current Liabilities Objection Period"), the Selling Group 12 shall give Purchaser written notice of its objections, if any, to the Current Liabilities Report. In the event that the Selling Group notifies Purchaser of objections to the Current Liabilities Report within the Current Liabilities Objection Period, Purchaser and the Selling Group shall either agree upon Closing Current Liabilities or instruct the Accountant to make a determination ("Accountant's Current Liabilities Report") of the Closing Current Liabilities within 20 days after delivery of such instructions, whereupon the Accountant shall deliver the Current Liabilities Report to the Parties. Within 20 days after receipt of the Accountant's Current Liabilities Report ("Second Current Liabilities Objection Period"), the Selling Group shall give Purchaser written notice of the Selling Group's objections, if any, to the Accountant's Current Liabilities Report. In the event that the Selling Group notifies Purchaser of objections to the Accountant's Current Liabilities Report, the Parties shall instruct the Accountant to deliberate with Seller's Accountant and make a final and binding determination of the Closing Current Liabilities acceptable to Seller's Accountant ("Adjusted Accountant's Current Liabilities Report"). Within 20 days after (x) the Accountant delivers the Adjusted Accountant's Current Liabilities Report to the Parties, (y) expiration of the Second Current Liabilities Objection Period without notice of objections from the Selling Group or (z) agreement by the Parties upon Closing Current Liabilities or expiration of the Current Liabilities Objection Period without notice of objections from the Selling Group, as applicable, Purchaser shall pay to Seller cash in an amount equal to the excess of the Estimated Current Liabilities over the Closing Current Liabilities, or Seller shall pay to Purchaser cash in an amount equal to the excess of the Closing Current Liabilities over the Estimated Current Liabilities. The Parties shall provide to the Accountant such information and assistance as the Accountant may reasonably request for purposes of preparing the Accountant's Current Liabilities Report. Each 13 of the Selling Group and Purchaser shall pay one-half of the professional fees charged by the Accountant for the engagement required hereunder. 2.5 Operating Adjustment. (a) The Purchase Price shall be adjusted as follows ("Operating Adjustment") in accordance with the procedures set forth in Section 2.5(b): i. Adjustments on a pro rata basis as of the Closing Date shall be made for all expenses prepaid and deposits made by Seller, all as determined in accordance with GAAP consistently applied, and to reflect the principle that all such expenses and deposits attributable to the Business for the period prior to the Closing Date are for the account of Seller, and all such expenses and deposits attributable to the Business for the period on and after the Closing Date are for the account of Purchaser. ii. All Subscriber deposits which have not been applied or refunded as of the Closing Date shall be retained by Seller and shall constitute a corresponding decrease in the Purchase Price credited to the account of Purchaser. iii. All deferred or prepaid income as of the Closing Date shall be retained by Seller and shall constitute a corresponding decrease in the Purchase Price credited to the account of Purchaser. iv. All Subscriber rebates payable under the $200 Rebate Program of DirecTV on account of Subscribers activated since August 29, 1996, shall be paid to Subscribers (or credited against Subscribers' programming invoices) by Purchaser, and shall constitute a decrease in the Purchase Price credited to the account of Purchaser in an amount equal to (x) the number of Subscribers activated since August 29, 1996 minus the number of such Subscribers who have been paid a full cash rebate by Seller multiplied by (y) $160. 14 v. All DSS System access card changeover costs for Subscribers that have been or will be billed by NRTC pursuant to NRTC's memorandum of August 7, 1996, as updated, shall be paid by Purchaser and shall constitute a decrease in the Purchase Price credited to the account of Purchaser, except for those costs previously paid by Seller. (b) Within 45 days after Closing, Purchaser shall deliver to the Selling Group a report (the "Operating Adjustments Report"), showing in detail its final determination of any Operating Adjustment owed to Seller or Purchaser, together with any documents substantiating the adjustment set forth in the Operating Adjustments Report. The Selling Group shall provide Purchaser with reasonable access to all records that the Selling Group has in its possession and that are necessary or appropriate for Purchaser to prepare the Operating Adjustments Report, and Purchaser shall provide the Selling Group with reasonable access to all records that Purchaser has in its possession and that are necessary or appropriate for the Selling Group to evaluate the Operating Adjustments Report. Within 20 days after receipt of the Operating Adjustments Report ("Operating Adjustments Objection Period"), the Selling Group shall give Purchaser written notice of its objections, if any, to the Operating Adjustments Report. In the event that the Selling Group notifies Purchaser of objections to the Operating Adjustments Report within the Operating Adjustments Objection Period, Purchaser and the Selling Group shall either agree upon the Operating Adjustment or instruct the Accountant to make a determination ("Accountant's Operating Adjustments Report") of the Operating Adjustment within 20 days after delivery of such instructions, whereupon the Accountant shall deliver the Accountant's Operating Adjustments Report to the Parties. Within 20 days after receipt of the Accountant's Operating Adjustments Report ("Second Operating Adjustments Objection Period"), the Selling Group shall give Purchaser written notice of the Selling Group's objections, if any, to the Accountant's Operating Adjustments 15 Report. In the event that the Selling Group notifies Purchaser of objections to the Accountant's Operating Adjustments Report, the Parties shall instruct the Accountant to deliberate with Seller's Accountant and make a final and binding determination of the Operating Adjustment acceptable to Seller's Accountant ("Adjusted Accountant's Operating Adjustments Report"). Within 20 days after (x) the Accountant delivers the Adjusted Accountant's Operating Adjustments Report to the Parties, (y) expiration of the Second Operating Adjustments Objection Period without notice of objections from the Selling Group or (z) agreement by the Parties upon the Operating Adjustment or expiration of the Operating Adjustments Objection Period without notice of objections from the Selling Group, as applicable, Purchaser shall pay to Seller cash in an amount equal to any Operating Adjustment owed to Seller, or Seller shall pay to Purchaser cash in an amount equal to any Operating Adjustment owed to Purchaser. The Parties shall provide to the Accountant such information and assistance as the Accountant may reasonably request for purposes of preparing the Accountant's Operating Adjustments Report. Each of the Selling Group and Purchaser shall pay one-half of the professional fees charged by the Accountant for the engagement required hereunder. 2.6 Subscriber Adjustment. In the event that Purchaser waives the condition precedent to Closing set forth in Section 7.7, the Purchase Price payable by Purchaser to Seller at Closing shall be reduced by an amount equal to (x) the difference between 4,000 and the number of Subscribers at Closing (as determined in accordance with Section 7.7) multiplied by (y) $3,000. 2.7 Liabilities. Subject to the terms and conditions of this Agreement, Purchaser shall assume and become responsible for all of the Assumed Liabilities at Closing. The Parties agree that neither Purchaser nor any of its Affiliates shall assume, nor shall it be deemed to have assumed, nor shall it pay, perform, discharge or be liable in any manner whatsoever for, nor shall it have any 16 responsibility with respect to any obligation or Liability of the Business or the Selling Group not included within the definition of Assumed Liabilities. 2.8 Closing. The Closing of the transactions contemplated by this Agreement and the Collateral Documents ("Closing") shall take place at the offices of Purchaser, or at such other location as the parties may agree on the following date: (a) November 15, 1996 or such earlier date as the parties may agree, provided the conditions precedent to the obligations of the Parties hereunder set forth in Articles VII and VIII (other than those conditions with respect to actions the respective Parties will take at Closing) are satisfied or waived; or (b) if Closing has not occurred by November 15, 1996 because the consents required under the NRTC Distribution Agreement have not been obtained, December 31, 1996 or such earlier date as the Parties may agree, provided the conditions precedent to the obligations of the Parties hereunder set forth in Articles VII and VIII (other than those conditions with respect to actions the respective Parties will take at the Closing) are satisfied or waived. 2.9 Transactions at Closing. At the Closing: (a) Seller shall: i. contribute, transfer, convey, assign and deliver the Assets to Purchaser, free and clear of any Encumbrances other than the Assumed Liabilities; ii. along with the other companies in the Selling Group, deliver to Purchaser such documents, instruments and certificates as are required by this Agreement to be delivered by the Selling Group. 17 (b) Purchaser shall deliver to Seller: i. the Purchase Price (subject to the escrow arrangements and adjustments set forth in Sections 2.3 and 2.5) by wire transfer of immediately available funds to such account or accounts as Seller shall designate to Purchaser prior to the Closing; and ii. such documents, instruments and certificates as are required by this Agreement to be delivered by Purchaser. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLING GROUP The Selling Group hereby represents and warrants to Purchaser that the statements contained in Article III are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout Article III). 3.1 Organization and Qualification. Each company in the Selling Group is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio, with all requisite power and authority to own, lease and use its assets as they are currently owned, leased and used and to conduct its business as it is currently conducted. Each company in the Selling Group is duly qualified or licensed to do business and in good standing in each jurisdiction in which the character of the properties owned, leased or used by it or the nature of the activities conducted by it make such qualification necessary, except any such jurisdiction where the failure to be so qualified or licensed would not have a material adverse effect on the Assets or the Business or on the validity, binding effect or enforceability of this Agreement or the Collateral Documents. 3.2 Authority and Validity. Each company in the Selling Group has all requisite power and authority to execute and deliver, to perform its obligations under, and to consummate the 18 transactions contemplated by, this Agreement and the Collateral Documents to which it is a party. The execution and delivery by each company in the Selling Group of, the performance by each company in the Selling Group of its obligations under, and the consummation by each company in the Selling Group of the transactions contemplated by, this Agreement and the Collateral Documents to which it is a party have been duly authorized by all requisite corporate action of each respective company in the Selling Group. This Agreement has been duly executed and delivered by each company in the Selling Group and is the legal, valid, and binding obligation of each company in the Selling Group, enforceable against each such company in accordance with its terms. Upon the execution and delivery of the Collateral Documents to which it is a party by each company in the Selling Group, the Collateral Documents will be the legal, valid and binding obligations of each such company, enforceable against each such company in accordance with their respective terms. 3.3 No Breach or Violation. Subject to obtaining the consents, approvals, authorizations, and orders of and making the registrations or filings with or giving notices to Governmental Authorities and Persons recited in the exception to Section 3.4, the execution, delivery and performance by each company in the Selling Group of this Agreement and the Collateral Documents to which it is a party, and the consummation of the transactions contemplated hereby and thereby in accordance with the terms and conditions hereof and thereof, do not and will not conflict with, constitute a violation or breach of, constitute a default or give rise to any right of termination or acceleration of any right or obligation of any company in the Selling Group under, or result in the creation or imposition of any Encumbrance upon the Assets or the Business by reason of the terms of (i) the certificate of incorporation, by-laws or other charter or organizational document of any company in the Selling Group, (ii) any material contract, agreement, lease, indenture or other 19 instrument to which any company in the Selling Group is a party or by or to which any company in the Selling Group or the Assets may be bound or subject, (iii) any order, judgment, injunction, award or decree of any arbitrator or Governmental Authority or any statute, law, rule or regulation applicable to any company in the Selling Group or (iv) any Permit of any company in the Selling Group, which in the case of (ii), (iii) or (iv) above would have a material adverse effect on the Assets or the Business or the ability of any company in the Selling Group to perform its obligations under this Agreement or any Collateral Document. 3.4 Consents and Approvals. Except (i) as required under the NRTC Distribution Agreement, and (ii) as set forth in Schedule 3.4 hereto, no consent, approval, authorization or order of, registration or filing with, or notice to, any Governmental Authority or any other Person is necessary to be obtained, made or given by any company in the Selling Group in connection with the execution, delivery and performance by it of this Agreement or any Collateral Document or for the consummation by it of the transactions contemplated hereby or thereby. 3.5 Title to Assets. Seller has exclusive, good and marketable title to the Assets, free and clear of any and all Encumbrances of any kind and nature. 3.6 Intellectual Property. (a) Seller owns or has the right to use, pursuant to license, sublicense, agreement or permission, all Intellectual Property used in the operation of the Business as currently conducted and as currently proposed to be conducted, all of which Intellectual Property is identified on Schedule 3.6(a). Each item of Intellectual Property owned or used by Seller in the Business immediately prior to the Closing hereunder will be owned or available for use by Purchaser on identical terms and conditions immediately subsequent to the Closing hereunder. Seller has taken 20 all necessary and desirable action to maintain and protect each item of Intellectual Property that it owns or uses in connection with the Business. (b) Neither Seller nor any predecessor in interest has in its operation of the Business interfered with, infringed upon, misappropriated or otherwise come into conflict with, and the operation of the Business as currently conducted does not violate or infringe upon, any Intellectual Property rights of third parties, and neither Seller nor any predecessor in interest has received any charge, complaint, claim, demand or notice alleging any such interference, infringement, misappropriation or violation (including any claim that Seller or its predecessor in interest must license or refrain from using any Intellectual Property rights of any third party). To the best knowledge of the Selling Group, no third party has interfered with, infringed upon, appropriated or otherwise come into conflict with any Intellectual Property rights of Seller. 3.7 Compliance with Legal Requirements. Seller and any predecessor in interest have operated the Business in compliance with all Legal Requirements. No action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand or notice has been filed, commenced or, to the best of the Selling Group's knowledge, threatened against Seller or any predecessor in interest alleging any failure to so comply and there is no Basis for any claim that such a failure to comply exists. 3.8 Financial Information. The Selling Group has delivered, or will deliver not later than the Closing Date to Purchaser the following financial statements ("Financial Statements"): (i) audited statements of net assets to be acquired, statements of operations and statements of cash flows for the Business as of and for the fiscal years ended December 31 of each of 1993 through 1995 ("Audited Financial Statements"); (ii) internally prepared statements of operations for the Business for each month of fiscal year ended December 31, 1995 and of fiscal year ending 21 December 31, 1996 (to date); and (iii) internally prepared statements of net assets to be acquired and statements of operations for each quarter of the fiscal year ended December 31, 1995 and of the fiscal year ending December 31, 1996 (to date). The Financial Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby and present fairly the net assets to be acquired, results of operations and cash flows of the Business as of the dates and for the periods indicated, subject in the case of the unaudited Financial Statements only to normal year-end adjustments (none of which will be material in amount) and the omission of footnotes. Purchaser shall pay on the Closing Date the reasonable fees and expenses of the Selling Group's Accountant related to its preparation of the Financial Statements, provided that Purchaser's liability therefor shall in no event exceed $40,000. 3.9 Events Subsequent to 1995. Except as set forth on Schedule 3.9, since fiscal year ended December 31, 1995: (i) no company in the Selling Group has sold, leased, transferred or assigned any assets of the Business, tangible or intangible, except in the Ordinary Course; (ii) no company in the Selling Group has entered into any agreement, contract, lease or license (or series of related agreements, contracts, leases and licenses) relating to the Business and involving more than $1,000 or outside the Ordinary Course; (iii) no third party has accelerated, terminated, modified or canceled any material agreement, contract, lease or license (or series of related agreements, contracts, leases and licenses) relating to the Business; (iv) no company in the Selling Group has imposed or permitted the imposition of any Encumbrance upon any assets of the Business, tangible or intangible; (v) no company in the Selling Group has made any capital investment in, any loan to, or any acquisition of the securities or assets of, any other Person (or series of related capital investments, loans or acquisitions) relating to the Business; (vi) no company in the Selling Group has issued any note, bond or other debt security or created, incurred, assumed 22 or guaranteed any indebtedness for borrowed money or capitalized lease obligations relating to the Business; (vii) no company in the Selling Group has delayed or postponed the payment of accounts payable and other Liabilities relating to the Business and outside the Ordinary Course; (viii) no company in the Selling Group has canceled, compromised, waived or released any right or claim (or series of related rights and claims) relating to the Business and involving more than $1,000 or outside the Ordinary Course; (ix) no company in the Selling Group has granted any license or sublicense of any rights under or with respect to any Intellectual Property used or useful in the Business; (x) there has not been any other material occurrence, event, incident, action, failure to act or transaction outside the Ordinary Course involving the Business except that is generally known in the industry; and (xi) no company in the Selling Group has committed to any of the foregoing. Since the fiscal year ended December 31, 1995, there has been no material adverse change in, and no event has occurred which is likely, individually or in the aggregate, to result in any material adverse change in, the operations, assets, prospects or condition (financial or otherwise) of the Business. 3.10 Undisclosed Liabilities. To the best of the Selling Group's knowledge, no company in the Selling Group has any Liability relating to the Business and there is no Basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against any company in the Selling Group giving rise to any Liability relating to the Business, except for Liabilities set forth in Schedule 3.10 (none of which results from, arises out of, relates to, is in the nature of, or was caused by any breach of contract, breach of warranty, tort, infringement or violation of any Legal Requirement). 3.11 Legal Proceedings. Except as set forth on Schedule 3.11, there are no outstanding judgments or orders against or otherwise affecting the Business or the Assets. There is no action, 23 suit, complaint, proceeding or investigation, judicial, administrative or otherwise, that is pending or threatened and which, if adversely determined, might materially and adversely affect the Business or the Assets or which challenges the validity or propriety of any of the transactions contemplated by this Agreement or the Collateral Documents. To the best of the Selling Group's knowledge, there is no Basis upon which any such action, suit, proceeding or investigation could be brought or initiated. 3.12 Taxes Relating to the Business. The Selling Group has duly and timely filed in proper form all Tax Returns for all Taxes relating to the Business required to be filed with the appropriate Governmental Authority. All Taxes relating to the Business due and payable by the Selling Group (or claimed to be due and payable) have been paid (regardless whether Tax Returns relating to such Taxes have been duly and timely filed or if filed, regardless whether such Tax Returns are deficient), except such amounts as are being contested diligently and in good faith and are not in the aggregate material and for which the Selling Group has adequately reserved in its financial statements. Except as set forth in Schedule 3.12, there are no pending Tax audits, claims or proceedings relating to the Assets or the Business and income therefrom. 3.13 Employees. (a) No Affiliate of the Selling Group has any material financial interest, direct or indirect, in any supplier or other outside business which has engaged in business transactions with the Business. (b) The Selling Group has complied with all Legal Requirements relating to the employment of labor for the Business, including ERISA, continuation coverage requirements with respect to group health plans, and those relating to wages, hours, collective bargaining, unemployment compensation, worker's compensation, equal employment opportunity, age and 24 disability discrimination, immigration control and the payment and withholding of social security and other Taxes, and the Business is not liable for any arrearage of wages or any Taxes for failure to comply with any of the foregoing. (c) With respect to employees who provide services to the Business: i. No company in the Selling Group is a Party to or is bound by any collective bargaining agreement, nor has experienced any strikes, grievances, claims of unfair labor practices or other collective bargaining disputes. ii. No company in the Selling Group has committed any unfair labor practices. iii. No company in the Selling Group has recognized or agreed to recognize nor is required to recognize any union or other collective bargaining unit. iv. No union or other collective bargaining unit has been certified as representing any of such employees, nor has any company in the Selling Group received any requests from any party for recognition as a representative of employees for collective bargaining purposes. v. To the Selling Group's best knowledge, no employees are engaged in any organizing activity with respect to any labor organization. vi. No company in the Selling Group has employment agreements of any kind, oral or written, express or implied, that would require Purchaser or any Affiliate of Purchaser to employ any Person after the Closing Date. 3.14 Contracts. Schedule 3.14 contains a true, correct and complete list of each contract agreement or commitment, whether written or oral, relating principally to the Business ("Contracts"), including: 25 i. the NRTC Distribution Agreement; ii. any agreement (or group of related agreements) for the lease or rental of personal property to or from any Person (including any form of lease or rental agreements for DSS Systems accompanied by an itemized list of the Subscribers who are parties to such agreements and the expiration dates of such agreements); iii. any agreement (or group of related agreements) for the purchase or sale of supplies, products or other personal property, or for the furnishing or receipt of services (including any forms of agreement or purchase order relating to the sale of DSS Systems or the sale of DIRECTV services); iv. any agreement concerning a partnership or joint venture; v. any agreement (or group of related agreements) under which the Selling Group has created, incurred, assumed or guaranteed any indebtedness for borrowed money, or any capitalized lease obligation, or under which the Selling Group has imposed an Encumbrance; vi. any agreement concerning confidentiality or noncompetition; vii. any agreement involving any officer, director or shareholder of the Selling Group; viii. any agreement for the employment of any individual on a full-time, part-time, consulting or other basis; ix. any agreement relating to the services of sales representatives, agents and other independent contractors (including agreements relating to the installation of DSS Systems); 26 x. any agreement under which the Selling Group has advanced or loaned any amount to any employees or any of Selling Group's current or former directors, officers or shareholders; xi. any agreement under which the consequences of a default or termination could have a material adverse effect on the financial condition, operations, results of operations or future prospects of the Business; and xii. any other agreement (or group of related agreements) the performance of which involves consideration in excess of $1,000. The Selling Group has delivered to Purchaser a correct and complete copy of each written agreement listed on Schedule 3.14 and a written summary setting forth the terms and conditions of each oral agreement listed therein. With respect to each such agreement: (A) the agreement is legal, valid, binding, enforceable and in full force and effect; (B) the agreement will continue to be legal, valid, binding, enforceable and in full force and effect on identical terms following the consummation of the transactions contemplated hereby; (C) no party is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification or acceleration, under the agreement; and (D) no party has repudiated any provision of the agreement. 3.15 Books and Records; Accounts Receivable. Schedule 3.15 identifies and describes all of the Books and Records. The Books and Records accurately and fairly represent the Business and its results of operations in all material respects. All Accounts Receivable and Inventory of the Business are reflected properly on such Books and Records. The Accounts Receivable net of bad debt reserves are, to the knowledge of Seller, valid receivables subject to no setoffs or counterclaims and are, to the knowledge of Seller, current and collectible, and will be collected in 27 accordance with their terms at their recorded amounts. 3.16 Outstanding Rights. Except for this Agreement, there is no agreement to which any company in the Selling Group is a party or is otherwise bound relating to the direct or indirect sale of all or substantially all the Assets, the direct or indirect transfer of the Business, a merger or consolidation of Seller with or into any entity or the sale of all or the controlling portion of Parent's or Seller's capital stock. 3.17 Insurance. Schedule 3.17 sets forth the following information with respect to each insurance policy relating to the Business (including policies providing property, casualty, liability and workers' compensation coverage and bond and surety arrangements) to which Seller and any predecessor in interest have been a party, a named insured, or otherwise the beneficiary of coverage at any time: i. the name, address, and telephone number of the agent; ii. the name of the insurer, the name of the policyholder and the name of each covered insured; iii. the policy number and the period of coverage; iv. the scope (including an indication of whether the coverage was on a claims made, occurrence or other basis) and amount (including a description of how deductibles and ceilings are calculated and operate) of coverage; and v. a description of any retroactive premium adjustments or other loss-sharing arrangements. With respect to each such insurance policy: (A) the policy is legal, valid, binding, enforceable, and in full force and effect; (B) neither Seller, nor any predecessor in interest nor any other party to the policy is in breach or default (including with respect to the payment of premiums 28 or the giving of notices), and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default, or permit termination, modification or acceleration, under the policy; and (C) no party to the policy has repudiated any provision thereof. The Business and the Assets have been covered since the beginning of Business operations in scope and amount customary and reasonable for such a business and in the case of workers' compensation coverage, in scope and amount required by applicable Legal Requirements. Schedule 3.17 describes any self-insurance arrangements affecting the Assets or the Business. Schedule 3.17 also sets forth each insurance claim (other than medical claims) made or loss incurred relating to the Business pursuant to property, casualty, liability, workers' compensation and bond and surety policies and, except as indicated therein, no such claim is outstanding. 3.18 Disclosure. No representation or warranty of the Selling Group in this Agreement or the Collateral Documents and no statement in any certificate, report, instrument, list or other document furnished or to be furnished by the Selling Group pursuant to this Agreement or the Collateral Documents or in connection with the transactions contemplated hereby or thereby, contained, contains or will contain on the date such agreement, certificate, report, instrument, list or other document was or is delivered, any untrue statement of a material fact, or omitted, omits or will omit on such date to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, nor will any such representation or warranty or statement contain on the Closing Date any untrue statement of a material fact or omit on the Closing Date to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. There is no fact known to the Selling Group and not disclosed in this Agreement that is not applicable to or known by Purchaser and the other NRTC members and affiliates providing DIRECTV services 29 and which fact materially or adversely affects or may in the future materially or adversely affect, the Business or the Assets. 3.19 Brokers or Finders. Except for Daniels & Associates, L.P., whose fee shall be paid solely by the Selling Group, no broker or finder has acted directly or indirectly for the Selling Group in connection with the transactions contemplated by this Agreement, and the Selling Group has incurred no obligation to pay any brokerage or finder's fee or other commission in connection therewith. 3.20 Certain Payments. Neither Seller nor any predecessor in interest nor any of their Representatives has directly or indirectly, on behalf of or for the purpose of assisting the Business, made any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other similar payments to any Person, private or public, regardless of form, whether in money, property or services, to obtain favorable treatment in securing business, to pay for favorable treatment for business secured, to obtain special concessions or for special concessions already obtained, or in violation of any Legal Requirement, nor has any such person established or maintained any fund or asset that has not been recorded in the Books and Records. 3.21 Subscribers. Neither Seller or any predecessor in interest has solicited, nor has Seller or any predecessor in interest encouraged any Representative or any other Person to solicit, nor has Seller or any predecessor in interest employed any scheme or device for the purpose of encouraging, nor has Seller or any predecessor in interest encouraged any Representative or any other Person to employ any scheme or device for the purpose of encouraging, Persons residing outside the Service Areas or Persons who would not be deemed Committed Member Residences to become subscribers of the DIRECTV service offered by the Business. 30 3.22 Favorable Business Relationships. To the best knowledge of the Selling Group, there are no favorable business relationships relating to the Business with lessors, licensors, Subscribers, suppliers or other business associates of the Selling Group which will terminate after Closing. 3.23 Commission Program. On October 1, 1996, Seller implemented a commission program for DSS System retailers (that do not participate in the national commission program of the NRTC), which Commission Program is attached hereto as Schedule 3.23. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to the Selling Group that the statements contained in this Article IV are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Article IV). 4.1 Organization and Qualification. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with all requisite power and authority to own, lease and use its assets and to conduct its business as it is currently conducted. Purchaser is duly qualified or licensed to do business in and is in good standing in each jurisdiction in which the character of the properties owned, leased or used by it or the nature of the activities conducted by it makes such qualification necessary, except any such jurisdiction where the failure to be so qualified or licensed and in good standing would not have a material adverse effect on Purchaser or on the validity, binding effect or enforceability of this Agreement. 4.2 Authority and Validity. Purchaser has all requisite power and authority to execute and deliver, to perform its obligations under, and to consummate the transactions contemplated by, this Agreement and the Collateral Documents. The execution and delivery by Purchaser of, the 31 performance by Purchaser of its obligations under, and the consummation by Purchaser of the transactions contemplated by, this Agreement and the Collateral Documents have been duly authorized by all requisite corporate action of Purchaser. This Agreement has been duly executed and delivered by Purchaser and is the legal, valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms. Upon Purchaser's execution and delivery of the Collateral Documents to which it is a party, the Collateral Documents shall be the legal, valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their respective terms. 4.3 No Breach or Violation. Subject to obtaining the consents, approvals, authorizations, and orders of and making the registrations or filings with or giving notices to Governmental Authorities and Persons recited in the exception to Section 4.4, the execution, delivery and performance by Purchaser of this Agreement and the Collateral Documents to which it is a party and the consummation of the transactions contemplated hereby and thereby in accordance with the terms and conditions hereof and thereof, do not and will not conflict with, constitute a violation or breach of, constitute a default or give rise to any right of termination or acceleration of any right or obligation of Purchaser under, or result in the creation or imposition of any Encumbrance upon the property of Purchaser by reason of the terms of (i) the certificate of incorporation, by-laws or other charter or organizational document of Purchaser, (ii) any material contract, agreement, lease, indenture or other instrument to which Purchaser is a party or by or to which Purchaser or its property may be bound or subject, (iii) any order, judgment, injunction, award or decree of any arbitrator or Governmental Authority or any statute, law, rule or regulation applicable to Purchaser or (iv) any Permit of Purchaser, which in the case of (ii), (iii) or (iv) above would have a material 32 adverse effect on the ability of Purchaser to perform its obligations under this Agreement or any Collateral Document. 4.4 Consents and Approvals. Except (i) as required under the NRTC Distribution Agreement, (ii) as required under the Securities Act and the Exchange Act, and (iii) as set forth in Schedule 4.4 hereto, no consent, approval, authorization or order of, registration or filing with, or notice to, any Governmental Authority or any other Person is necessary to be obtained, made or given by Purchaser in connection with the execution, delivery and performance by Purchaser of this Agreement or any Collateral Documents or for the consummation by Purchaser of the transactions contemplated hereby or thereby. 4.5 Legal Proceedings. There is no action, suit, proceeding or investigation, judicial, administrative or otherwise, that is pending or, to the best knowledge of Purchaser, threatened against Purchaser and that challenges the validity or propriety of, or may prevent or delay, any of the transactions contemplated by this Agreement or the Collateral Documents. 4.6 Finders and Brokers. Except for Daniels & Associates, L.P., whose fee shall be paid solely by the Selling Group, no broker or finder has acted directly or indirectly for Purchaser in connection with the transactions contemplated by this Agreement and the Collateral Documents, and Purchaser has incurred no obligation to pay any brokerage or finder's fee or other commission in connection therewith. 33 ARTICLE V PRE-CLOSING COVENANTS OF SELLING GROUP The Selling Group covenants and agrees, from and after the execution and delivery of this Agreement to and including the Closing Date (except if another time period is specified below), as follows: 5.1 Additional Information. The Selling Group shall provide to Purchaser and its Representatives (i) full and free access to all of the Assets and (ii) such financial, operating and other documents, data and information relating to the Business and the Assets as Purchaser may reasonably request. The Selling Group shall take all action necessary to enable Purchaser and its Representatives to discuss the Assets and Business with the Selling Group's executives, employees, independent accountants, and counsel who provide services to the Business. Notwithstanding any investigation that Purchaser may conduct of the Business and the Assets, Purchaser may fully rely on the Selling Group's representations, warranties, covenants and indemnities set forth in this Agreement, the Collateral Documents and any documents, instruments or certificates delivered thereunder, which will not be waived or affected by or as a result of such investigation. 5.2 Exclusivity. The Selling Group shall not: (i) solicit, initiate or encourage the submission of any proposal or offer from any Person relating to the direct or indirect sale or transfer of any of the Assets by means of any extraordinary transaction, including a reorganization involving the Assets or the direct or indirect sale or transfer of the capital stock of Seller or Parent by means of any extraordinary transaction ("Transfer"); or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in or facilitate in any other manner any effort or attempt by any Person to do or seek a Transfer. The Selling 34 Group shall provide to Purchaser copies of any written proposals, offers or inquiries, with respect to a Transfer received by Seller after the execution of the Letter of Intent. 5.3 Continuity and Maintenance of Operations. (a) Seller shall: (i) use its best efforts to comply with all Legal Requirements relating to the Business; (ii) fulfill all of its obligations under and maintain in full force and effect all Contracts, including the NRTC Distribution Agreement, and shall not, without the prior written consent of Purchaser, alter, modify or amend any of the foregoing; (iii) use its best efforts in consultation with Purchaser and its Affiliates, to promote the financial success of the Business and promptly notify Purchaser of any material change in the prospects or condition (financial or otherwise) of the Business; and (iv) use its best efforts to promote, develop and preserve its relationships with the NRTC, DSS retailers, participating cooperatives and its present employees as well as the goodwill of its suppliers, customers and others having business relations with it, and promptly notify Purchaser of any material change in its relationship with any such Person; provided, however, that Seller's obligation to use its "best efforts" hereunder shall not require that Seller make any capital expenditures out of the Ordinary Course or bear litigation costs relating to any such obligation. Without limiting the generality of the foregoing, Seller shall maintain the Assets in good order, condition and repair, shall maintain insurance relating to the Business as in effect on the date of this Agreement and shall keep and maintain all of the Books and Records in the Ordinary Course. Other than in the Ordinary Course, Seller shall not itself pay or credit in any way any Accounts Receivable prior to the Closing Date, and shall not permit any of its agents or employees, or any officers, directors or shareholders of the Selling Group, to do so either. Seller shall continue to enforce its procedures for disconnection and discontinuance of service to 35 Subscribers whose accounts are delinquent in accordance with those procedures in effect on the date of this Agreement. (b) Seller shall not, without the prior written consent of Purchaser: (i) change the rates charged for the Economy Choice programming package or deviate from DIRECTV national programming packages or rates; except that commencing on October 9, 1996 Seller shall increase the rates charged for Economy Choice to $16.95 for all new subscribers of that programming package and on November 1, 1996, Seller shall notify all subscribers of that programming package as of October 8, 1996 that the rates for the Economy Choice programming package shall increase to $16.95 on a date approximately six months thereafter; (ii) sell, lease, transfer, convey or assign any of the Assets (or enter into any contract to do any of the foregoing) or permit the creation of any Encumbrance on any of the Assets; (iii) permit the amendment or cancellation of the NRTC Distribution Agreement or any other Contract; or (iv) enter into any contract, commitment or agreement or incur any indebtedness or other liability or obligation of any kind relating to the Business involving an expenditure in excess of $5,000; (c) No company in the Selling Group shall take or omit to take any action that would cause any company in the Selling Group to be in breach of any of its representations or warranties in this Agreement or the Collateral Documents. 5.4 Consents and Approvals. (a) As soon as practicable after execution of this Agreement, the Selling Group shall use its best efforts to obtain any necessary consent, approval, authorization or order of, make any registration or filing with or give any notice to, any Governmental Authority or Person as is required to be obtained, made or given by the Selling Group to consummate the transactions contemplated by this Agreement and the Collateral Documents, including, without limitation: (i) 36 consents required under the NRTC Distribution Agreement; and (ii) any authorizations, consents, approvals, actions, filings or notices set forth in Schedule 3.4; provided, however, that Seller's obligation to use its best efforts hereunder shall not require that Seller bear litigation costs relating to such obligation. (b) The Selling Group shall cooperate with Purchaser in providing such information and reasonable assistance as may be required in connection with the obligations of Purchaser under Section 6.1. 5.5 Securities Filings. (a) The Selling Group shall, promptly after execution of this Agreement at Purchaser's cost (subject to Section 3.8), provide such information and documents to Purchaser and its Affiliates concerning the Business as may be required or appropriate for inclusion in any filing, notification or report required to be made by Purchaser or any Affiliate of Purchaser under the Securities Act or the Exchange Act; and shall cause its counsel and independent accountants to cooperate with Purchaser, its Affiliates and their investment bankers, counsel and independent accountants in the preparation of such filings, notifications and reports. Seller's Accountant shall provide its consent to the inclusion of the Audited Financials in any such filing, notification or report without charge (unless additional work is required on the part of Seller's Accountant and only to the extent of such additional work). The Selling Group represents and warrants to Purchaser that no information or document provided by the Selling Group for inclusion in any filing, notification or report required to be made by Purchaser or any Affiliate under the Securities Act or the Exchange Act will contain any untrue statement of material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. 37 (b) Not later than the Closing Date, the Selling Group shall deliver to Purchaser unaudited statements of net assets to be acquired and statements of operations for the Business as of and for the three month periods ended March 31, June 30 and September 30, 1995 and 1996 in comparative format ("Stub Period Financial Statements"). The Stub Period Financial Statements shall be prepared in accordance with GAAP on a basis consistent with the Financial Statements, subject to the omission of footnote disclosures and normal year-end adjustments (none of which will be material in amount). (c) As soon as practicable, but no later than 30 days after each month end, Seller shall deliver to Purchaser Seller's internally prepared monthly statements of operations for the Business for the period June 1, 1996 through the Closing Date. 5.6 Collateral Agreements. On the Closing Date: (a) The Selling Group shall execute and deliver the Escrow Agreement. (b) The Selling Group shall execute and deliver the Noncompetition Agreement. 5.7 Notification of Certain Matters. The Selling Group shall promptly provide to Purchaser copies of any material notices from or correspondence from and to the NRTC or DIRECTV or any Affiliates of DIRECTV. The Selling Group shall also promptly notify Purchaser of any fact, event, circumstance or action that, if known on the date of this Agreement, would have been required to be disclosed to Purchaser pursuant to this Agreement or the existence or occurrence of which would cause any of the Selling Group's representations or warranties under this Agreement not to be correct and/or complete. In addition, the Selling Group shall give prompt written notice to Purchaser of any material adverse development causing a breach of any of the Selling Group's representations and warranties in Article III. No disclosure by the Selling Group pursuant to this Section 5.7, however, shall be deemed to amend or supplement this Agreement or 38 to prevent or cure any misrepresentation, breach of warranty, or breach of covenant by the Selling Group. ARTICLE VI PRE-CLOSING COVENANTS OF PURCHASER Purchaser covenants and agrees as follows: 6.1 Consents and Approvals. (a) As soon as practicable after execution of this Agreement, Purchaser shall use its best efforts to obtain any necessary consent, approval, authorization or order of, make any registration or filing with or give notice to, any Governmental Authority or Person as is required to be obtained, made or given by Purchaser to consummate the transactions contemplated by this Agreement and the Collateral Documents, including without limitation: (i) consents required under the NRTC Agreement; and (ii) any authorizations, consents, approvals, actions, filings or notices set forth in Schedule 4.4. Notwithstanding anything in this Section 6.1 to the contrary, Purchaser shall not be required to agree to any amendments, modifications or changes in, the waiver of any terms or conditions of, or the imposition of any condition to the transfer to Purchaser of, the NRTC Distribution Agreement in order to obtain the consents required under the NRTC Distribution Agreement. (b) Purchaser shall cooperate with the Selling Group in providing such information and reasonable assistance as may be required in connection with the Selling Group's obligations under Section 5.4(a). 6.2 Collateral Agreements. On the Closing Date: (a) Purchaser shall execute and deliver the Escrow Agreement. (b) Purchaser shall execute and deliver the Noncompetition Agreement. 39 ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER All obligations of Purchaser under this Agreement shall be subject to the fulfillment at or prior to Closing of each of the following conditions, it being understood that Purchaser may, in its sole discretion, to the extent permitted by applicable Legal Requirements, waive any or all of such conditions in whole or in part: 7.1 Accuracy of Representations. All representations and warranties of the Selling Group contained in this Agreement, the Collateral Documents and any other document, instrument or certificate delivered by the Selling Group at or prior to Closing shall be, if specifically qualified by materiality, true in all respects and, if not so qualified, shall be true in all material respects, in each case on and as of the Closing Date with the same effect as if made on and as of the Closing Date. The Selling Group shall have delivered to Purchaser a certificate dated the Closing Date to the foregoing effect. 7.2 Covenants. The Selling Group shall, in all material respects, have performed and complied with each of the covenants, obligations, conditions and agreements contained in this Agreement that are to be performed or complied with by it at or prior to Closing. The Selling Group shall have delivered to Purchaser a certificate dated the Closing Date to the foregoing effect. 7.3 Consents. (a) All consents, approvals, authorizations and orders required to be obtained from, and all registrations, filings and notices required to be made with or given to, any Governmental Authority or Person as provided in Sections 5.4(a) and 6.1(a) shall have been duly obtained, made or given, as the case may be, and shall be in full force and effect, and any waiting period required by Applicable Law or any Governmental Authority in connection with such 40 transactions shall have expired or have been earlier terminated, unless the failure to obtain, make or give any such consent, approval, authorization, order, registration, filing or notice, or to allow any such waiting period to expire or terminate would not have a material adverse effect on the Assets or the Business or the ability of the Selling Group to consummate the transactions contemplated by this Agreement and the Collateral Documents. (b) Notwithstanding the foregoing, this condition precedent shall not have been satisfied if any consent, approval, authorization or order obtained in connection with the transactions contemplated by this Agreement and the Collateral Documents has been conditioned upon the amendment, modification, cancellation or termination of, or waiver of any term or condition of, any contract, commitment or agreement, or imposes upon Purchaser any condition or requirement not now imposed upon Seller. (c) Purchaser shall have been furnished with appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such consents, approvals, authorizations and orders, the making of such registrations and filings and the giving of such notices referred to in paragraph (a) above. 7.4 Delivery of Documents. The Selling Group shall have executed and delivered to Purchaser the following documents: i. Escrow Agreement. ii. Noncompetition Agreement. iii. Bill of Sale and Assignment evidencing transfer of the Assets to Purchaser in form reasonably satisfactory to Purchaser. 41 iv. Opinion of Squire, Sanders & Dempsey, counsel to the Selling Group, dated the Closing Date, addressed to Purchaser, in form and substance reasonably satisfactory to Purchaser and its counsel. v. Such other documents and instruments as Purchaser may reasonably request: (A) to evidence the sale, assignment, conveyance and transfer to Purchaser of all of Seller's right, title and interest in, to and under the Assets; (B) to evidence the accuracy of the Selling Group's representations and warranties under this Agreement, the Collateral Documents and any documents, instruments or certificates required to be delivered thereunder; (C) to evidence the performance by the Selling Group of, or the compliance by the Selling Group with, any covenant, obligation, condition and agreement to be performed or complied with by the Selling Group under this Agreement and the Collateral Documents; or (D) to otherwise facilitate the consummation or performance of any of the transactions contemplated by this Agreement and the Collateral Documents. 7.5 No Material Adverse Change. There shall have been no material adverse change in the Assets or in the condition (financial or otherwise) of the Business since the date hereof. 7.6 No Litigation. No action, suit or proceeding shall be pending or threatened, and no Legal Requirement or policy of the NRTC, DIRECTV or its Affiliates, or any applicable regulatory authority shall have been enacted, promulgated or issued that would: (i) prohibit or adversely affect Purchaser's ownership or operation of all or a material portion of the Business or the Assets or otherwise materially impair the ability of Purchaser to realize the benefits of the transactions contemplated by this Agreement and the Collateral Documents; (ii) restrict or limit or otherwise condition Purchaser's right to transfer and/or assign the Business or the Assets in the future; (iii) compel Purchaser to dispose of or hold separate all or a material portion of the Business or the 42 Assets as a result of any of the transactions contemplated by this Agreement and the Collateral Documents; (iv) prevent or make illegal the consummation of any transactions contemplated by this Agreement and the Collateral Documents; or (v) cause any of the transactions contemplated by this Agreement and the Collateral Documents to be rescinded following consummation. 7.7 Minimum Subscribers. As of the Closing Date, the Business shall have total Subscribers of not less than 4,000, as evidenced by such Seller documentation as Purchaser may request (including the DBS Wholesale Invoice issued by NRTC for the most recent billing cycle). 7.8 Transition Arrangements. As of the Closing Date, Purchaser and the Selling Group shall have entered into mutually acceptable arrangements for transitioning the operation of the Business to Purchaser after Closing. 7.9 NRTC Compliance Certificate. The Selling Group shall have delivered to Purchaser a certificate from NRTC dated as of the Closing Date to the effect that Seller is in full compliance with the NRTC Distribution Agreement and there are no payments due by Seller under the NRTC Distribution Agreement other than payments for fees due in the Ordinary Course and not yet payable. ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLING GROUP All obligations of the Selling Group under this Agreement shall be subject to the fulfillment at or prior to Closing of the following conditions, it being understood that the Selling Group may, in its sole discretion, to the extent permitted by applicable Legal Requirements, waive any or all of such conditions in whole or in part. 8.1 Accuracy of Representations. All representations and warranties of Purchaser contained in this Agreement and the Collateral Documents shall be, if specifically qualified by 43 materiality, true and correct in all respects and, if not so qualified, shall be true and correct in all material respects, in each case on and as of the Closing Date with the same effect as if made on and as of the Closing Date. Purchaser shall have delivered to the Selling Group a certificate dated the Closing Date to the foregoing effect. 8.2 Covenants. Purchaser shall, in all material respects, have performed and complied with each obligation, agreement, covenant and condition contained in this Agreement and the Collateral Documents and required by this Agreement and the Collateral Documents to be performed or complied with by Purchaser at or prior to Closing. Purchaser shall have delivered to the Selling Group a certificate dated the Closing Date to the foregoing effect. 8.3 Consents. All consents, approvals, authorizations and orders required to be obtained from, and all registrations, filings and notices required to be made with or given to, any Governmental Authority or Person as provided in Section 6.1(a) shall have been duly obtained, made or given, as the case may be, and shall be in full force and effect, and any waiting period required by applicable law or any Governmental Authority in connection with such transactions shall have expired or have been earlier terminated, unless the failure to obtain, make or give any such consent, approval, authorization, order, registration, filing or notice, or to allow any such waiting period to expire or terminate would not have a material adverse effect on the Assets or the ability of Purchaser to consummate the transactions contemplated by this Agreement and the Collateral Documents. The Selling Group shall have been furnished with the appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such consents, approvals, authorizations and orders, the making of such registrations and filings and the giving of such notices. 44 8.4 Delivery of Documents. Purchaser shall have executed and delivered to the Selling Group the following documents: i. Escrow Agreement. ii. Assumption Agreement evidencing the assumption of the Assumed Liabilities by Purchaser in form reasonably satisfactory to Seller. iii. Opinion of Ted S. Lodge, Senior Vice President and General Counsel of Purchaser, dated the Closing Date, addressed to the Selling Group, in form and substance reasonably satisfactory to the Selling Group and its counsel. iv. Such other documents and instruments as the Selling Group may reasonably request: (A) to evidence assumption of the Assumed Liabilities; (B) to evidence the accuracy of the representations and warranties of Purchaser under this Agreement and the Collateral Documents and any documents, instruments or certificates required to be delivered thereunder; (C) to evidence the performance by Purchaser of, or the compliance by Purchaser with, any covenant, obligation, condition and agreement to be performed or complied with by Purchaser under this Agreement and the Collateral Documents; or (D) to otherwise facilitate the consummation or performance of any of the transactions contemplated by this Agreement and the Collateral Documents. 8.5 Litigation. No action, suit or proceeding shall be pending or threatened by or before any Governmental Authority and no Legal Requirement shall have been enacted, promulgated or issued or deemed applicable to any of the transactions contemplated by this Agreement and the Collateral Documents that would: (i) prevent consummation of any of the transactions contemplated by this Agreement and the Collateral Documents; or (ii) cause any of the transactions contemplated by this Agreement and the Collateral Documents to be rescinded following consummation. 45 ARTICLE IX POST-CLOSING COVENANTS The Parties agree as follows with respect to the period following Closing: 9.1 Transition. The Selling Group shall not take any action that is designed or intended to have the effect of discouraging any lessor, licensor, Subscriber, supplier or other business associate of Seller or the Business from maintaining the same business relationships with Purchaser after Closing as it maintained with Seller prior to Closing. Seller shall refer all Subscriber inquiries relating to the Business to Purchaser from and after Closing. 9.2 Transfer Taxes and Fees. Seller shall pay any sales, use, transfer, excise, documentary or license taxes or fees with respect to the transfer of any of the Assets pursuant to this Agreement and the Collateral Documents. 9.3 1996 NRTC Patronage; Other NRTC Patronage. The Selling Group agrees that Purchaser shall be entitled to receive the NRTC's 1996 patronage allocation on account of the NRTC Distribution Agreement, and the Selling Group shall instruct NRTC to allocate such patronage to Purchaser. The Selling Group shall have an ongoing obligation after Closing to pay to Purchaser any distributions on account of NRTC Patronage Capital. 9.4 Financial Statements. Within 45 days after Closing, the Selling Group shall deliver to Purchaser an unaudited statement of net assets to be acquired and statement of operations for the Business for the period from the quarter ended September 30, 1996 to Closing, which shall be prepared in accordance with GAAP on a basis consistent with the Stub Financial Statements. 46 ARTICLE X TERMINATION 10.1 Events of Termination. This Agreement may be terminated and the transactions contemplated by this Agreement may be abandoned at any time prior to Closing as provided below: (a) Purchaser and the Selling Group may terminate this Agreement by mutual written consent at any time prior to Closing. (b) Purchaser may terminate this Agreement by giving written notice to the Selling Group at any time prior to Closing: i. if the Selling Group has breached any material representation, warranty or covenant contained in this Agreement in any material respect, Purchaser has notified the Selling Group of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach; or ii. if Closing shall not have occurred on or before the Termination Date by reason of the failure of any condition precedent under Article VII (unless the failure results primarily from Purchaser itself breaching any representation, warranty or covenant contained in this Agreement). (c) The Selling Group may terminate this Agreement by giving written notice to Purchaser at any time prior to Closing: i. if Purchaser has b reached any material representation, warranty or covenant contained in this Agreement in any material respect, the Selling Group has notified Purchaser of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach; or 47 ii. if Closing shall not have occurred on or before the Termination Date by reason of the failure of any condition precedent under Article VIII hereof (unless the failure results primarily from the Selling Group itself breaching any representation, warranty or covenant contained in this Agreement). 10.2 Liabilities in Event of Termination. The termination of this Agreement will in no way limit any obligation or liability of any Party based on or arising from a breach or default by such Party with respect to any of its representations, warranties, covenants or agreements contained in this Agreement, except that Purchaser's liability under this Agreement in the event of termination shall be limited as provided in Section 11.3(c). 10.3 Procedure Upon Termination. If this Agreement is terminated by Purchaser or the Selling Group pursuant to this Article X, notice of such termination shall promptly be given by the terminating Party to the other Party. ARTICLE XI REMEDIES FOR BREACH OF THIS AGREEMENT 11.1 Survival of Representations and Warranties. All of the representations and warranties of Purchaser and the Selling Group contained in this Agreement, the Collateral Documents and other documents, instruments and certifications required to be delivered hereunder and thereunder shall survive Closing (even if the damaged Party knew or had reason to know of any misrepresentation or breach of warranty at the time of Closing) and continue in full force and effect for a period of two years thereafter. The period of survival of the representations and warranties prescribed by this Section 11.1 is referred to as the "Survival Period." The liabilities of Purchaser and the Selling Group under their respective representations and warranties will expire as of the expiration of the Survival Period; provided, however, that such expiration will not 48 include, extend or apply to any representation or warranty, the breach of which has been asserted by Purchaser in a written notice to the Selling Group before such expiration or about which the Selling Group has given Purchaser written notice before such expiration indicating that facts or conditions exist that, with the passage of time or otherwise, can reasonably be expected to result in a breach (and describing such potential breach in reasonable detail). Except as otherwise provided in this Agreement, the covenants and agreements of Purchaser and the Selling Group in this Agreement, the Collateral Documents and in the other documents, instruments and certificates required to be delivered by the Selling Group or Purchaser hereunder and thereunder shall survive Closing and shall continue in full force and effect as provided in Section 11.2(b) and Section 11.3(b). 11.2 Indemnification Provisions for Benefit of Purchaser. (a) If the Selling Group breaches (or if any third party alleges facts that, if true, would mean the Selling Group has breached) any of its representations and warranties contained in this Agreement or the Collateral Documents or any documents, instruments and certificates delivered hereunder and thereunder, and if Purchaser makes a written claim for indemnification against the Selling Group within the Survival Period, then the Selling Group shall indemnify, defend and hold harmless Purchaser and its Affiliates and the shareholders, directors, officers, employees, agents, successors and assigns of any of such Persons, from and against any Adverse Consequences that any such Person may suffer through and after the date of the claim for indemnification (including any Adverse Consequences that any such Person may suffer after the end of the Survival Period) resulting from, arising out of, relating to or caused by the breach (or the alleged breach). 49 (b) The Selling Group agrees to indemnify Purchaser and its Affiliates, and the shareholders, directors, officers, employees, agents, successors and assigns of any of such Persons, from and against the entirety of any Adverse Consequences that any such Person may suffer resulting from, arising out of, relating to, in the nature of, or caused by any of the following: (i) any breach of any covenant, agreement or obligation of the Selling Group contained in this Agreement or the Collateral Documents or any documents, instruments and certificates delivered hereunder and thereunder; (ii) any act or omission of the Selling Group with respect to, or any event or circumstance related to, the ownership or operation of the Assets or the conduct of the Business, which act, omission, event or circumstance occurred or existed prior to or at the Closing Date, without regard to whether a claim with respect to such matter is asserted before or after the Closing Date; (iii) any Liability of the Selling Group or the Business that is not an Assumed Liability; (iv) any Liability of Purchaser arising by operation of law as a consequence of the Closing (including under any bulk transfer law of any jurisdiction or under any common law doctrine of de facto merger or successor liability or under any fraudulent conveyance law of any jurisdiction) that is not an Assumed Liability; and (v) any Liability for Taxes attributable to the use, ownership or operation of the Assets by Seller or the Business relating to periods prior to Closing. Seller's obligations under this Section 11.2(b) shall expire at the end of two years after the Closing Date. (c) The Selling Group shall not have any liability for any Adverse Consequences under Sections 11.2(a) and 11.2(b) hereof, until and unless the cumulative total of such Adverse Consequences exceeds $50,000. (d) The Escrow Deposit shall be applied to satisfy any claim for indemnification of Purchaser hereunder in accordance with the terms of the Escrow Agreement. Notwithstanding 50 the foregoing, the amount of the Escrow Deposit shall not be construed in any way to limit the liability of the Selling Group for a claim of indemnification hereunder. 11.3 Indemnification Provisions for Benefit of Selling Group. (a) If Purchaser breaches (or if any third party alleges facts that, if true, would mean that Purchaser has breached) any of its representations and warranties contained in this Agreement or the Collateral Documents or any documents, instruments and certificates delivered thereunder and if the Selling Group makes a written claim for indemnification against Purchaser within the Survival Period, then Purchaser shall indemnify, defend and hold harmless the Selling Group and its Affiliates and the shareholders, directors, officers, employees, agents, successors and assigns of any of such Persons, from and against any Adverse Consequences that any such Person may suffer through and after the date of the claim for indemnification (including any Adverse Consequences that the Selling Group may suffer after the end of the Survival Period) resulting from, arising out of, relating to or caused by the breach (or the alleged breach). (b) Purchaser agrees to indemnify the Selling Group and its Affiliates, and the shareholders, directors, officers, employees, agents, successors and assigns of any of such Persons, against the entirety of any Adverse Consequences that any such Person may suffer resulting from, arising out of, relating to, in the nature of, or caused by any of the following: (i) any breach of any covenant, agreement or obligation of Purchaser contained in this Agreement or the Collateral Documents or any documents, instruments and certifications delivered hereunder and thereunder; (ii) any act or omission of Purchaser with respect to, or any event or circumstance related to, the ownership or operation of the Assets or the conduct of the Business, which act, omission, event or circumstance occurred after the Closing Date; (iii) any Assumed Liability after the Closing Date; and (iv) any Liability for Taxes attributable to the use, ownership or operation of the Assets or the 51 transferred Business by Purchaser relating to periods after the Closing Date. The obligations of Purchaser under this Section 11.3(b) shall expire at the end of two years after the Closing Date. (c) Notwithstanding anything in this Agreement to the contrary, in the event that Closing does not occur because of Purchaser's material breach or default with respect to any material representation, warranty, covenant or agreement contained in this Agreement, Purchaser's liability under this Agreement shall be limited to, and the Selling Group shall be entitled to receive, the Escrow Deposit as liquidated damages. 11.4 Matters Involving Third Parties. (a) If any third party shall notify either Purchaser or the Selling Group (the "Indemnified Party") with respect to any matter (a "Third Party Claim") that may give rise to a claim for indemnification against the other (the "Indemnifying Party") under this Article XI, then the Indemnified Party shall promptly notify the Indemnifying Party thereof in writing; provided, however, that no delay on the part of the Indemnified Party in notifying any Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party thereby is prejudiced. (b) Any Indemnifying Party shall have the right to defend the Indemnified Party against the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party so long as: (i) the Indemnifying Party notifies the Indemnified Party in writing within 15 days after the Indemnified Party has given notice of the Third Party Claim that the Indemnifying Party will indemnify the Indemnified Party from and against the entirety of any Adverse Consequences the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of or caused by the Third Party Claim; (ii) the Indemnifying Party provides the Indemnified Party with evidence acceptable to the Indemnified Party that the Indemnifying Party will have the financial 52 resources to defend against the Third Party Claim and fulfill its indemnification obligations hereunder; (iii) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief; (iv) settlement of, or an adverse judgment with respect to, the Third Party Claim is not, in the good faith judgment of the Indemnified Party, likely to establish a precedential custom or practice adverse to the continuing business interests of the Indemnified Party; and (v) the Indemnifying Party conducts the defense of the Third Party Claim actively and diligently. (c) So long as the Indemnifying Party is conducting the defense of the Third Party Claim in accordance with Section 11.4(b) above: (i) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the Third Party Claim; (ii) the Indemnified Party shall not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (not to be withheld unreasonably); and (iii) the Indemnifying Party shall not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (not to be withheld unreasonably). (d) If any of the conditions in Section 11.4(b) above is not or no longer satisfied, however: (i) the Indemnified Party may defend against, and consent to the entry of any judgment or enter into any settlement with respect to, the Third Party Claim in any manner it reasonably may deem appropriate (and the Indemnified Party need not consult with, or obtain any consent from, any Indemnifying Party in connection therewith); (ii) the Indemnifying Party shall reimburse the Indemnified Party promptly and periodically for the costs of defending against the Third Party Claim (including attorneys' fees and expenses); and (iii) the Indemnifying Party shall remain responsible for any Adverse Consequences the Indemnified Party may suffer resulting from, arising 53 out of, relating to, in the nature of or caused by the Third Party Claim to the fullest extent provided in this Article XI. 11.5 Determination of Adverse Consequences. Purchaser and the Selling Group shall take into account the time cost of money (using the Applicable Rate as the discount rate) in determining Adverse Consequences for purposes of this Article XI. All indemnification payments under this Article XI shall be deemed adjustments to the Consideration. ARTICLE XII MISCELLANEOUS 12.1 Parties Obligated and Benefited. This Agreement shall be binding upon the Parties and their respective assigns and successors in interest and shall inure solely to the benefit of the Parties and their respective assigns and successors in interest, and no other Person shall be entitled to any of the benefits conferred by this Agreement. Without the prior written consent of the other Party, no Party may assign this Agreement or the Collateral Documents or any of its rights or interests or delegate any of its duties under this Agreements or the Collateral Documents; provided, however, that Purchaser may assign this Agreement or any of its rights or interests or delegate any of its duties hereunder to an Affiliate. 12.2 Notices. Any notices and other communications required or permitted hereunder shall be in writing and shall be effective upon delivery by hand or upon receipt if sent by certified or registered mail (postage prepaid and return receipt requested) or by a nationally recognized overnight courier service (appropriately marked for overnight delivery) or upon transmission if sent by telex or facsimile (with request for immediate confirmation of receipt in a manner customary for communications of such respective type and with physical delivery of the communication being made 54 by one or the other means specified in this Section 12.2 as promptly as practicable thereafter). Notices shall be addressed as follows: (a) If to Purchaser, to: Pegasus Communications Corporation 5 Radnor Corporate Center 100 Matsonford Road, Suite 454 Radnor, PA 19087 Attn: Mr. Marshall W. Pagon (with a copy to Ted S. Lodge at the same address) (b) If to the Selling Group, to: Horizon Infotech, Inc. 68 East Main Street P.O. Box 480 Chillicothe, Ohio 45601-0480 Attn: William A. McKell with a copy to: Squire, Sanders & Dempsey Huntington Center Suite 1300 41 S. High Street Columbus, Ohio 43215 Attn: James P. Mulroy, Esquire Any Party may change the address to which notices are required to be sent by giving notice of such change in the manner provided in this Section 12.2. 12.3 Attorneys' Fees. In the event of any action or suit based upon or arising out of any alleged breach by any Party of any representation, warranty, covenant or agreement contained in this Agreement or the Collateral Documents, the prevailing Party shall be entitled to recover reasonable attorneys' fees and other costs of such action or suit from the other Party. 55 12.4 Waiver. This Agreement or any of its provisions may not be waived except in writing. The failure of any Party to enforce any right arising under this Agreement on one or more occasions will not operate as a waiver of that or any other right on that or any other occasion. 12.5 Headings. The Article and Section headings of this Agreement are for convenience only and shall not constitute a part of this Agreement or in any way affect the meaning or interpretation thereof. 12.6 Choice of Law. This Agreement and the rights of the Parties under it shall be governed by and construed in all respects in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to any choice of law provision or rule (whether of the Commonwealth of Pennsylvania or any other jurisdiction that would cause the application of the laws of any jurisdiction other than the Commonwealth of Pennsylvania). 12.7 Rights Cumulative. All rights and remedies of each of the Parties under this Agreement shall be cumulative, and the exercise of one or more rights or remedies shall not preclude the exercise of any other right or remedy available under this Agreement or applicable law. 12.8 Further Actions. The Selling Group and Purchaser shall execute and deliver to the other, from time to time at or after Closing, for no additional consideration and at no additional cost to the requesting Party, such further assignments, certificates, instruments, records, or other documents, assurances or things as may be reasonably necessary to give full effect to this Agreement and to allow each Party fully to enjoy and exercise the rights accorded and acquired by it under this Agreement. 12.9 Time of the Essence. Time is of the essence under this Agreement. If the last day permitted for the giving of any notice or the performance of any act required or permitted under 56 this Agreement falls on a day which is not a Business Day, the time for the giving of such notice or the performance of such act shall be extended to the next succeeding Business Day. 12.10 Late Payments. If either Party fails to pay the other any amounts when due under this Agreement, the amounts due will bear interest from the due date to the date of payment at the Applicable Rate. 12.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.12 Entire Agreement. This Agreement (including the Exhibits, Schedules and any other documents, instruments and certificates referred to herein, which are incorporated in and constitute a part of this Agreement) contains the entire agreement of the Parties and supersedes all prior oral or written agreements, understandings and representations to the extent that they relate in any way to the subject matter hereof, including the Letter of Intent. 12.13 Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Selling Group and Purchaser. No waiver by any Party of any default, misrepresentation or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 12.14 Construction. The Parties have participated jointly in the negotiation and drafting of this Agreement. If an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this 57 Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean "including without limitation." Nothing in the Schedules shall be deemed adequate to disclose an exception to a representation or warranty made herein unless the Schedule identifies the exception with particularity and describes the relevant facts in detail. Without limiting the generality of the foregoing, the mere listing (or inclusion of a copy) of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty made herein (unless the representation or warranty has to do with the existence of the document or other item itself). The Parties intend that each representation, warranty and covenant contained herein shall have independent significance. If any Party has breached any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the Party has not breached shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty or covenant. Any representation, warranty, covenant or agreement of the "Selling Group" shall be deemed made jointly and severally by, and any other reference herein to the "Selling Group" shall be deemed to refer jointly and severally to, Parent, Horizon and Chillicothe, unless the context specifies that such representation, warranty, covenant or agreement is made severally by, or such other reference refers severally to, each of Parent, Horizon and Chillicothe. 12.15 Expenses. Except as otherwise provided in this Agreement, each Party shall bear its own costs and expenses (including legal fees and expenses and accountants' fees and expenses) incurred in connection with the negotiation of this Agreement, the performance of its obligations and the consummation of the transactions contemplated hereby. 58 IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement as of the day and year first above written. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Ted S. Lodge -------------------------------------- Senior Vice President HORIZON TELCOM, INC. By: /s/ Thomas McKell -------------------------------------- President HORIZON INFOTECH, INC. By: /s/ William A. McKell -------------------------------------- President CHILLICOTHE TELEPHONE COMPANY By: /s/ Thomas McKell -------------------------------------- President ASSET PURCHASE AGREEMENT among PEGASUS COMMUNICATIONS CORPORATION and HORIZON TELCOM, INC. HORIZON INFOTECH, INC. CHILLICOTHE TELEPHONE COMPANY Dated as of October 23, 1996 Exhibit 1 Service Areas SmarTView Service Area (at time of License) Cabled Residences Non-Cabled-Residences Total ----------------- --------------------- ----- Athens 16,139 4,161 20,300 Adams 4,387 4,933 9,320 Fayette 9,000 1,200 10,200 Highland 12,960 340 13,300 Hocking 4,935 4,485 9,420 Jackson 6,781 4,419 11,200 Pickaway 13,421 1,382 14,803 Pike 6,198 2,712 8,910 Ross 22,955 1,545 24,500 Scioto 28,250 1,450 29,700 Vinton 788 3,312 4,100 ------- ------ ------- Total 125,784 29,899 155,683 ======= ====== ======= SmarTView Zip Code Summary by County Adams 45105 45144 45616 45618 45650 45660 45679 45693 45697 Athens 45701 45710 45711 45716 45717 45719 45723 45732 45735 45739 45740 45761 45764 45766 45777 45778 45780 45781 45782 Fayette 43106 43128 43142 43160 Highland 45110 45123 45132 45133 45135 45142 45155 45165 45172 Hocking 43111 43127 43135 43138 43144 43149 43152 43158 Jackson 45621 45640 45656 45692 Pickaway 43103 43113 43116 43117 43145 43146 43164 Pike 45613 45624 45642 45646 45661 45687 45690 Ross 43101 43115 45601 45612 45617 45628 45633 45644 45647 45673 45681 Scioto 45629 45630 45636 45649 45652 45653 45657 45662 45663 45657 45662 45663 45671 45677 45682 45684 45694 45699 Vinton 45622 45634 45651 45654 45670 45672 45695 45698 Horizon Telcom SMARTVIEW Eleven County Ohio Service Area MAP EXHIBIT 2 ESCROW AGREEMENT This ESCROW AGREEMENT ("Agreement") dated as of October 23, 1996, by and among Pegasus Communications Corporation, a Delaware corporation ("Buyer"), Chillicothe Telephone Company ("Chillicothe"), an Ohio corporation, Horizon Infotech, Inc. ("Horizon"), an Ohio corporation, and The Huntington Trust Company, N.A. ("Escrow Agent"). Chillicothe and Horizon are collectively referred to herein as "Seller." Buyer and Seller are collectively referred to herein as the "Parties." RECITALS: WHEREAS, the Parties have entered into that certain Asset Purchase Agreement dated as of October 23, 1996 ("Asset Purchase Agreement"); and WHEREAS, this Agreement is the Escrow Agreement referred to in the Asset Purchase Agreement. NOW, THEREFORE, intending to be legally bound hereby, the parties hereto agree as follows: 1. Definitions. Capitalized terms used in this Agreement without definition shall have the respective meanings assigned to them in the Asset Purchase Agreement. 2. Appointment of Escrow Agent; Establishment of Escrow. a. The Parties hereby appoint Escrow Agent as the escrow agent under this Agreement, and Escrow Agent hereby accepts such appointment and agrees to hold all funds deposited with it into escrow, together with all interest and income thereon and other proceeds thereof ("Escrow Funds"), in accordance with the terms hereof and to perform its other duties hereunder. b. Escrow Agent hereby acknowledges receipt of the Escrow Deposit from Buyer. 3. Segregation and Investment of Escrow Funds. a. Escrow Agent shall hold all Escrow Funds in a segregated account titled: "The Huntington Trust Company, N.A. as Agent pursuant to an Escrow Agreement dated as of October 23, 1996, among it, Pegasus Communications Corporation, Chillicothe Telephone Company and Horizon Infotech, Inc.," and invest and distribute the Escrow Funds pursuant to the terms of this Agreement. b. Escrow Agent shall invest all Escrow Funds held by it from time to time hereunder in one or more of the investments described on Schedule 1 as directed by Seller. All income earned on and all proceeds of the Escrow Funds shall be added to the amount thereof and distributed in accordance with the terms hereof. Escrow Agent shall, upon request of any Party, made not more frequently than quarterly, promptly provide such Party with an accounting of the Escrow Funds and of all debits and credits thereto. 4. Payment of Escrow Funds. a. Upon receipt by Escrow Agent of the joint written notice of Seller and Buyer, Escrow Agent shall disburse Escrow Funds in the amount(s) and to the Party(ies) specified in such notice. b. If Seller provides written notice ("Seller's Claim Notice") to Escrow Agent and Buyer that Seller is owed Liquidated Damages pursuant to the terms and conditions of the Asset Purchase Agreement, specifying in reasonable detail the contractual basis for any such claim, and Buyer does not give notice to Seller and Escrow Agent disputing such claim ("Buyer's Counter Notice") within 45 days following receipt by Escrow Agent and Buyer of Seller's Claim Notice, Escrow Agent shall disburse all of the Escrow Funds to Seller. If Buyer timely delivers Buyer's Counter Notice as provided herein, Escrow Agent shall disburse the Escrow Funds to Seller only in accordance with (i) joint written instructions of Buyer and Seller or (ii) a final and nonappealable judgment, decree or order of a court of competent jurisdiction or a final and nonappealable arbitration award, adjudicating the dispute with respect to Seller's Claim Notice. c. From time to time, Buyer may give notice ("Buyer's Claim Notice") to Seller and Escrow Agent specifying in reasonable detail the nature and dollar amount of any claim it may have under the Asset Purchase Agreement. If Seller does not give notice to Buyer and Escrow Agent disputing such claim ("Seller's Counter Notice") within 45 days following receipt by Escrow Agent and Seller of Buyer's notice regarding such claim, the dollar amount of damages set forth in Buyer's Claim Notice shall be deemed established for purposes of this Agreement and the Asset Purchase Agreement, and the Escrow Agent shall disburse Escrow Funds to Buyer in such amount. If Seller timely gives Seller's Counter Notice as provided herein, then Escrow Agent shall disburse Escrow Funds relating to Buyer's Claim Notice only in accordance with (i) joint written instructions of Buyer and Seller or (ii) a final and nonappealable judgment, decree or order of a court or a final and nonappealable arbitration award, adjudicating the dispute with respect to Buyer's Claim Notice. 5. Termination of Escrow. a. Escrow Agent shall disburse all of the Escrow Funds to Buyer not earlier than 15 days or later than 20 days after receipt by Escrow Agent and Seller ("Termination Waiting Period") of a written certification from Buyer that the Asset Purchase Agreement has been terminated without Closing ("Buyer's Termination Notice"); provided, however, that Escrow Agent shall make no disbursement hereunder if Escrow Agent receives Seller's Claim Notice within the Termination Waiting Period, in which event Escrow Agent shall disburse the Escrow Funds only in accordance with (i) joint written instructions of Buyer and Seller or (ii) a final and nonappealable judgment, decree or order of a court of competent jurisdiction or a final and nonappealable arbitration award, adjudicating the dispute with respect to Buyer's Termination Notice and Seller's Claim Notice. b. On the second anniversary of the Closing, Escrow Agent shall disburse the remaining Escrow Funds to Seller, unless (i) any claims pursuant to Buyer's Claim Notices are -2- then pending, in which case an amount equal to the aggregate dollar amount of such claims (as shown in Buyer's Claim Notices) shall be retained by Escrow Agent and the balance disbursed to Seller or (ii) Buyer has given notice to Seller and Escrow Agent specifying in reasonable detail the nature of any other claim it may have under the Asset Purchase Agreement with respect to which it is unable to specify the amount of damages, in which case the remaining Escrow Funds shall be retained by Escrow Agent until it receives (i) joint written instructions of the Buyer and Seller or (ii) a final and nonappealable judgment, decree or order of a court of competent jurisdiction or a final and nonappealable arbitration award, whereupon Escrow Agent shall disburse the Escrow Funds as provided therein. 6. Resignation or Removal of Escrow Agent. Escrow Agent may resign at any time upon 30 days' prior written notice to the Parties and may be removed upon four days' prior written notice by all of the Parties to Escrow Agent. Prior to the effective date of the resignation or removal of Escrow Agent or any successor escrow agent, the Parties shall appoint a mutually agreeable successor escrow agent to hold the Escrow Funds, and any such successor escrow agent shall execute and deliver to the predecessor escrow agent and all other Parties an instrument accepting such appointment, upon which such successor agent shall, without further act, become vested with all of the rights, powers and duties of the predecessor escrow agent as if originally named herein. If no successor escrow agent is appointed prior to the effective date of the termination or resignation of the Escrow Agent, Escrow Agent may place all of the Escrow Funds at the disposal of a court and petition the court to act as the successor escrow agent or to appoint another entity to act as the successor escrow agent. 7. Liability of Escrow Agent. The duties of Escrow Agent hereunder are entirely administrative and not discretionary. Escrow Agent is obligated to act only in accordance with instructions received by it as provided in this Agreement, is authorized hereby to comply with any orders, judgment or decrees of any court or arbitration panel and shall not incur any liability as a result of its compliance with such instructions, orders, judgments or decrees. Escrow Agent may assume the due execution, validity and effectiveness of, and the truth and accuracy of any information contained in, any instrument or other document presented to it which Escrow Agent shall in good faith believe to be genuine, and to have been signed or presented by the persons or parties purporting to sign or present the same. Escrow Agent shall have no liability under, or duty to inquire into, the terms and provisions of the Asset Purchase Agreement or any other agreement to which any of the Parties is a party. In the event that any of the terms and provisions of any other agreement conflict or are inconsistent with any of the terms and provisions of this Agreement, the terms and provisions of this Agreement in respect of Escrow Agent's rights and duties shall govern and control in all respects. If Escrow Agent shall be uncertain as to its duties or rights hereunder, it shall be entitled to refrain from taking any action other than to keep safely all Escrow Funds until it shall be directed otherwise by the joint written instructions of the Parties or an order of a court of competent jurisdiction. Escrow Agent may consult with counsel of its choice and shall not be liable for any action taken, suffered, or omitted by it in accordance with the written advice of such counsel. Escrow Agent shall not be required to institute legal proceedings of any kind and shall not be required to defend any legal proceedings which may be instituted against it in respect of the subject matter of this -3- Agreement unless requested to do so by another Party hereto and indemnified to its reasonable satisfaction against the costs and expenses of such proceedings. The Parties hereby waive any suit, claim, demand or cause of action of any kind which any such Party may have or assert against Escrow Agent arising out of or relating to the execution or performance by Escrow Agent of this Agreement, unless such suit, claim, demand or cause of action is based upon the willful misconduct, gross negligence, or bad faith of Escrow Agent or Escrow Agent's failure to perform an express obligation hereunder. Escrow Agent shall be indemnified and held harmless jointly and severally by the Parties against any and all liabilities, including judgments, costs and reasonable counsel fees, for anything done or omitted by Escrow Agent in the performance of this Agreement except as a result of the willful misconduct, bad faith or gross negligence of Escrow Agent or Escrow Agent's failure to perform an express obligation hereunder. All such reimbursements and indemnifications shall be paid one-half by Buyer and one-half by Seller; provided, however, if reimbursements and indemnifications relate to a dispute between Seller and Buyer with regard to the payment of Escrow Funds hereunder and there is an adjudication of such dispute, reimbursements and indemnifications related thereto shall be paid in full by the Party which does not prevail in the dispute. 8. Fees and Expenses of Escrow Agent. The Parties shall pay Escrow Agent the fee set forth in Schedule 2 as payment in full for the services to be rendered by Escrow Agent hereunder and agree to reimburse Escrow Agent for all reasonable expenses, disbursements and advances incurred or made by Escrow Agent in the performance of its duties hereunder. Any such compensation and reimbursement to which the Escrow Agent is entitled shall be borne one-half by Buyer and one-half by Seller; provided, however, if reimbursement relates to a dispute between Seller; on the one hand, and Buyer, on the other hand, with regard to the payment of Escrow Funds hereunder and there is an adjudication of such dispute, reimbursements and indemnifications related thereto shall be paid in full by the Party which does not prevail in the dispute. 9. Notices. All notices hereunder shall be in writing and shall be sufficiently given if hand-delivered, sent by documented overnight delivery service or registered or certified mail, postage prepaid, return receipt requested or by telegram or telecopy (confirmed by U.S. mail), receipt acknowledged, addressed as set forth below or to such other person and/or at such other address as may be furnished in writing by any Party hereto to the other. Any such notice shall be deemed to have been given as of the date received, in the case of personal delivery, or on the date shown on the receipt or confirmation therefor, in all other cases. -4- (a) If to Buyer: Pegasus Communications Corporation 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, Pennsylvania 19087 Attention: Marshall W. Pagon (with a copy to Ted S. Lodge) Telephone: 610-341-1801 Telecopier: 610-341-1835 (b) If to Seller: Horizon Infotech, Inc. 68 East Main Street P.O. Box 480 Chillicothe, Ohio 45601-0480 Attention: William A. McKell Telephone: 614-772-8200 Telecopier: 614-774-3400 (c) If to Escrow Agent: The Huntington Trust Company, N.A. 41 South High Street, HC1112 Columbus, OH 43215 Attn: Joanne M. Gonot Telephone: 614-480-4395 Telecopier: 614-480-5223 10. Entire Agreement and Modification. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters contemplated herein and supersedes all prior agreements and understandings with respect thereto. Any amendment, modification, or waiver of this Agreement shall not be effective unless in writing. Neither the failure nor any delay on the part of any party to exercise any right, remedy, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power, or privilege. 11. Governing Law. This Agreement is made pursuant to, and shall be construed and enforced in accordance with, the laws of the Commonwealth of Pennsylvania. 12. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which, when taken together, shall be deemed to constitute but one and the same agreement. Not all parties need execute the same counterpart. -5- 13. Further Assurances. Each of the parties hereto shall execute such further instruments and take such other actions as any other party shall reasonably request in order to effectuate the purposes of this Agreement. 14. Funds Transfer Security Procedures. Each of the Parties acknowledges that the Escrow Agent will follow the security procedures set forth in this paragraph with respect to Escrow Funds transfers. Upon receipt of instructions to deliver Escrow Funds, the Escrow Agent will confirm the instructions set forth in such instructions with the person executing such instructions at the relevant telephone number listed in Section 9 hereof. Each of the Parties will restrict access to confidential information relating to such security procedures to authorized persons. In executing Escrow Funds transfers, the Escrow Agent will rely upon account numbers or other identifying numbers of a beneficiary, beneficiary's bank or intermediary bank rather than names. The Escrow Agent shall not be liable for any loss, liability or expense resulting from any error in an account number or other identifying number provided it has accurately transmitted the numbers provided. 15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, heirs, executors, and administrators. If any provision of this Agreement shall be or become illegal or unenforceable in whole or in part for any reason whatsoever, the remaining provisions shall nevertheless be deemed valid and binding. -6- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. PEGASUS COMMUNICATIONS CORPORATION By: __________________________________________ CHILLICOTHE TELEPHONE COMPANY By: __________________________________________ HORIZON INFOTECH, INC. By: __________________________________________ THE HUNTINGTON TRUST COMPANY, N.A. By: __________________________________________ -7- EXHIBIT 3 NONCOMPETITION AGREEMENT This NONCOMPETITION AGREEMENT ("Agreement") is made as of the ____ day of November, 1996, by and among Pegasus Communications Corporation ("Purchaser"), a Delaware corporation, Horizon Telecom, Inc. ("Parent"), an Ohio corporation, Horizon Infotech, Inc. ("Horizon"), an Ohio corporation, and Chillicothe Telephone Company ("Chillicothe"), an Ohio corporation. Parent, Horizon and Chillicothe are collectively referred to herein as the "Selling Group." Purchaser and the Selling Group are collectively referred to herein as the "Parties." RECITALS: WHEREAS, the Parties have entered into that certain Asset Purchase Agreement dated as of October ___, 1996 ("Asset Purchase Agreement"); and WHEREAS, the Asset Purchase Agreement requires that the Selling Group execute and deliver this Agreement as a condition precedent to the obligations of Purchaser and the Selling Group under the Asset Purchase Agreement. NOW, THEREFORE, in consideration of the premises, mutual promises, covenants, agreements, representations and warranties contained herein and in the Asset Purchase Agreement, and intending to be legally bound hereby, the Parties agree as follows: 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the respective meanings assigned to them in the Asset Purchase Agreement. 2. Acknowledgements by the Selling Group. The Selling Group acknowledges that: (i) Purchaser has required that the Selling Group make the covenants set forth in Section 3 of this Agreement as a condition to Purchaser consummating the transactions contemplated by the Asset Purchase Agreement; (ii) the provisions of Section 3 of this Agreement are reasonable and necessary because of the unique nature of the Business; and (iii) Pegasus and its Affiliates would be irreparably damaged if the Selling Group were to breach the covenants set forth in Section 3 of this Agreement. 3. Noncompetition. The Selling Group hereby agrees that neither the Selling Group nor any of its Affiliates will participate in, own, manage, operate or control, directly or indirectly, in the Service Areas (i) for a period of three years from the date hereof, any direct-to-home satellite (including direct broadcast satellite), instructional television fixed service, multipoint distribution service, multichannel multipoint distribution service or local multipoint distribution service businesses and (ii) until January 31, 1999, any multichannel wireless video businesses other than those described in (i). The Selling Group agrees that this covenant is reasonable with respect to its duration, geographical area and scope. Nothing herein will prevent the Purchaser or any of its affiliates from retaining any company in the Selling Group as its agent for purposes of distributing DirecTV services. 4. Remedies. If the Selling Group breaches the covenant set forth in Section 3 of this Agreement, Purchaser shall be entitled to (i) damages from the Selling Group, and (ii) the right to injunctive or other equitable relief to restrain any breach or threatened breach or otherwise to specifically enforce the provisions of Section 3 of this Agreement, it being agreed by the Parties that money damages alone would be inadequate to compensate Purchaser for such breach and that damages would be an inadequate remedy for such breach. 5. General. (a) This Agreement shall be binding upon the Parties and shall inure to the benefit of their Affiliates and successors. (b) The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any Party in exercising any right, power, or 2 privilege under this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (i) no claim or right arising out of this Agreement can be discharged by one Party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other Parties; (ii) no waiver that may be given by a Party will be applicable except in the specific instance for which it is given; and (iii) no notice to or demand on one Party will be deemed to be a waiver of any obligation of such Party or of the right of the Party giving such notice or demand to take further action without notice or demand as provided in this Agreement. (c) This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania without regard to conflicts of laws principles. (d) Whenever possible, each provision and term of this Agreement shall be interpreted in a manner to be effective and valid, but if any provision or term of this Agreement is held to be prohibited by law or invalid, then such provision or term shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or affecting in any manner whatsoever the remainder of such provision or term or the remaining provisions or terms of this Agreement. If any of the covenants set forth in Section 3 of this Agreement is held to be invalid or unenforceable due to its scope, breadth or duration, then it shall be modified to the scope, breadth or duration permitted by law and shall be fully enforceable as so modified. (e) This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original copy of this Agreement and all of which, when taken together, shall be deemed to constitute one and the same agreement. 3 (f) The headings of Sections in this Agreement are provided for convenience only and shall not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement shall be construed to be of such number as the circumstances require. Any covenant of the "Selling Group" shall be made jointly and severally by, and any reference herein to the "Selling Group" shall be deemed to refer jointly and severally to, Parent, Horizon and Chillicothe. (g) This Agreement and the Asset Purchase Agreement constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all prior written and oral agreements and understandings with respect to the subject matter of this Agreement. This Agreement may not be amended except by a written agreement executed by the Parties. 4 IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement as of the day and year first above written. PEGASUS COMMUNICATIONS CORPORATION By: ____________________________________ HORIZON TELECOM, INC. By: ____________________________________ HORIZON INFOTECH, INC. By: ____________________________________ CHILLICOTHE TELEPHONE COMPANY By: ____________________________________ 5 EX-5.1 3 OPINION RE: LEGALITY 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 October 25, 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-4 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-4 (the "Registration Statement") with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), covering 191,792 shares of the Company's Class A common stock, par value $.01 per share (the "Class A Common Stock") which are being offered by the Company in exchange for any or all of the Class B Common Stock (the "PM&C Class B Stock"), par value $.01 per share, of Pegasus Media & Communications, Inc., a Delaware corporation, which is a subsidiary of the Company. 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 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 that 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 Pegasus Communications Corporation October 25, 1996 Page 2 and issuance of up to 191,792 shares of Class A Common Stock to be offered by the Company to the holders of all of the PM&C Class B Stock, and (ii) when issued and sold pursuant to the terms contained in the Company's Prospectus contained in the Registration Statement, 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 of the rules and regulations of the Securities and Exchange Commission. Very truly yours, /s/ Drinker Biddle & Reath DRINKER BIDDLE & REATH EX-8.1 4 EXHIBIT 8.1 Exhibit 8.1 DRINKER BIDDLE & REATH Philadelphia National Bank Building 1345 Chestnut Street Philadelphia, PA 19107-3496 October 25, 1996 Pegasus Communications Corporation c/o Pegasus Communications Management Company 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, PA 19087 Ladies and Gentlemen: We have acted as counsel to Pegasus Communications Corporation (the "Company") in connection with the registration under the Securities Act of 1933, as amended, of the Company's Class A Common Stock on a Registration Statement on Form S-4 (including any amendments thereto, the "Registration Statement") and the Prospectus contained in the Registration Statement (the "Prospectus"). In our opinion, the statements in the Prospectus under the caption "Certain Federal Income Tax Considerations of the Registered Exchange Offer," to the extent they constitute matters of law or legal conclusions, are accurate in all material respects. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and we consent to the reference of our name under the caption "Legal Matters" in the Prospectus. Very truly yours, /s/ Drinker Biddle & Reath ----------------------------------- DRINKER BIDDLE & REATH EX-21.1(B) 5 EXHIBIT 21.1(B) EXHIBIT 21.1(b) Subsidiary Jurisdiction - ---------- ------------ Bride Communications, Inc. Delaware B.T. Satellite, Inc. Maine 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 Pegasus Satellite Television of Michigan, Inc. Delaware Pegasus Satellite Television of Texas, Inc. Delaware Pegasus Towers, Inc. Pennsylvania Portland Broadcasting, Inc. Maine PP Broadcast, Inc. Delaware WDBD License Corp. Delaware WDSI License Corp. Delaware WILF, Inc. Delaware Subsidiary Jurisdiction - ---------- ------------ WOLF License Corp. Delaware WTLH, Inc. Delaware WTLH License Corp. Delaware EX-23.2 6 CONSENT OF INDEPENDENT ACCOUNTANTS 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-4 Registration Statement of Pegasus Communications Corporation filed with the Securities and Exchange Commission for the exchange 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 24, 1996 EX-23.3 7 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-4 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 25, 1996 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-4 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 25, 1996 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-4 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 25, 1996 EX-23.4 8 CONSENT OF INDEPENDENT ACCOUNTANTS 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-4 and related Prospectus of Pegasus Communications Corporation. /s/ Ernst & Young LLP - --------------------- ERNST & YOUNG LLP Pittsburgh, Pennsylvania October 25, 1996 EX-23.5 9 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Pegasus Communications Corporation on Form S-4 of our report dated April 26, 1996, except for Note 9 as to which the date is October 8, 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 25, 1996 EX-27 10 FINANCIAL DATA SCHEDULE
5 This Schedule contains summary financial information extracted from balance sheets and income statements of Pegasus Communications Corporation and is qualified in its entirety by reference to such financial Statements. 0001015629 PEGASUS COMMUNICATIONS CORPORATION 1 U.S. DOLLARS YEAR 6-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 JUN-30-1996 1 1 21,895,945 8,068,165 0 0 5,122,045 7,048,211 238,000 223,000 1,100,899 460,395 29,144,888 17,082,892 35,034,411 45,212,664 18,462,073 20,740,566 95,769,841 104,246,669 11,579,328 13,008,811 81,195,454 81,391,380 0 0 0 0 1,700 1,700 247,317 4,485,154 95,769,941 104,246,669 32,148,076 19,182,239 32,148,076 19,182,239 0 0 31,783,976 18,672 (325,812) (89,946) 0 0 8,816,582 5,570,257 (8,126,670) (4,970,641) 30,000 (132,756) (8,156,670) (4,837,885) 0 0 10,210,580 0 0 0 2,053,910 (4,837,885) 0.37 (0.94) 0.37 (0.94)
EX-99.1 11 LETTER OF TRANSMITTAL ---------- LETTER OF TRANSMITTAL Exchange of Shares of Class B Common Stock of Pegasus Media & Communications, Inc. for Shares of Class A Common Stock of Pegasus Communications Corporation Pursuant to the Prospectus dated ____________ __, 1996 by Pegasus Communications Corporation ================================================================================ PEGASUS COMMUNICATIONS CORPORATION WILL ACCEPT ALL SHARES OF CLASS B COMMON STOCK (AS HEREINAFTER DEFINED) TENDERED PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON ____________, 1996, UNLESS EXTENDED (BUT NOT BEYOND __________ __, 1997) (THE "EXPIRATION DATE"). ================================================================================ The Exchange Agent is: First Union National Bank of North Carolina By Registered, Certified, Overnight or Hand Delivery: First Union National Bank of North Carolina Attention: Corporate Actions Unit 230 South Tryon Street 11th Floor Charlotte, North Carolina 28288-1153 Telephone: 1-800-829-8432 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS SET FORTH IN THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. The undersigned acknowledges receipt of the Prospectus dated ____________ __, 1996 (the "Prospectus"), of Pegasus Communications Corporation (the "Company"), and this Letter of Transmittal (the "Letter of Transmittal"), which together with the Prospectus constitutes the Company's offer (the "Registered Exchange Offer") to exchange 22.564 shares of its Class A Common Stock (the "Class A Common Stock") for each share of Class B Common Stock of Pegasus Media & Communications, Inc. (the "PM&C Class B Shares"). Recipients of the Prospectus should read the requirements described in the Prospectus with respect to eligibility to participate in the Registered Exchange Offer. Capitalized terms used but not defined herein have the meaning given to them in the Prospectus. The undersigned hereby tenders the PM&C Class B Shares described in the box entitled "Description of PM&C Class B Shares" below pursuant to the terms and conditions described in the Prospectus and this Letter of Transmittal. The undersigned is the registered owner of all the PM&C Class B Shares and the undersigned represents that it has received from each beneficial owner of the PM&C Class B Shares ("Beneficial Owners") a duly completed and executed form of "Instruction to Registered Holder from Beneficial Owner" accompanying this Letter of Transmittal, instructing the undersigned to take the action described in this Letter of Transmittal. This Letter of Transmittal is to be used by a holder of the PM&C Class B Shares only (i) if certificates representing the PM&C Class B Shares are to be forwarded herewith or (ii) if delivery of the PM&C Class B Shares is to be made by book-entry transfer to the Exchange Agent's account at The Depository Trust Company ("Depositary"), pursuant to the procedures set forth in the section of the Prospectus entitled "The Registered Exchange Offer - -- Procedures for Tendering." If delivery of the PM&C Class B Shares is to be made by book-entry transfer to the account maintained by the Exchange Agent at the Depositary, this Letter of Transmittal need not be manually executed; provided, however, that tenders of the PM&C Class B Shares must be effected in accordance with the procedures mandated by the Depositary's Automated Tender Offer Program and the procedures set forth in the Prospectus under the caption "The Registered Exchange Offer -- Procedure for Tendering." The undersigned hereby represents and warrants that the information set forth in the box entitled "Beneficial Owner(s)" is true and correct. Any beneficial owner whose PM&C Class B Shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder of PM&C Class B Shares promptly and instruct such registered holder of PM&C Class B Shares to tender on behalf of the beneficial owner. If such beneficial owner wishes to tender on its own behalf, such beneficial owner must, prior to completing and executing this Letter of Transmittal and delivering its PM&C Class B Shares, either make appropriate arrangements to register ownership of the PM&C Class B Shares in such beneficial owner's name or obtain a properly completed stock power from the registered holder of PM&C Class B Shares. The transfer of record ownership may take considerable time. In order to properly complete this Letter of Transmittal, a holder of PM&C Class B Shares must (i) complete the box entitled "Description of PM&C Class B Shares," (ii) if appropriate, check and complete the boxes relating to book-entry transfer, guaranteed delivery, Special Issuance Instructions and Special Delivery Instructions, and (iii) sign the Letter of Transmittal by completing the box entitled "Sign Here." -2- Each holder of PM&C Class B Shares should carefully read the detailed instructions below prior to completing the Letter of Transmittal. Holders of PM&C Class B Shares who desire to tender their PM&C Class B Shares for exchange and (i) whose PM&C Class B Shares are not immediately available, (ii) who cannot deliver their PM&C Class B Shares and all other documents required hereby to the Exchange Agent on or prior to the Expiration Date or (iii) who are unable to complete the procedure for book-entry transfer on a timely basis, must tender the PM&C Class B Shares pursuant to the guaranteed delivery procedures set forth in the section of the Prospectus entitled "The Registered Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 2. Holders of PM&C Class B Shares who wish to tender their PM&C Class B Shares for exchange must, at a minimum, complete columns (1) through (3) in the box below entitled "Description of PM&C Class B Shares" and sign the box on page 7 entitled "Sign Here." If only those columns are completed, such holder of PM&C Class B Shares will have tendered for exchange all PM&C Class B Shares held by such holder.
======================================================================================================================= DESCRIPTION OF PM&C CLASS B SHARES ======================================================================================================================= (1) (2) (3) PM&C Class B Share Certificate Name(s) and Address(es) of Registered Number(s)1 Holder(s) of PM&C Class B Shares, exactly as name(s) (Attach Aggregate appear(s) on PM&C Class B Share Certificate(s) signed List Number of (Please fill in, if blank) if necessary) Shares - ----------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- =======================================================================================================================
1 Column (2) need not be completed by holders of PM&C Class B Shares tendering PM&C Class B Shares for exchange by book-entry transfer. Please check the appropriate box below and provide the requested information. |_| CHECK HERE IF TENDERED PM&C CLASS B SHARES ARE ENCLOSED HEREWITH. -3- |_| CHECK HERE IF TENDERED PM&C CLASS B SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE DEPOSITARY AND COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS (AS HEREINAFTER DEFINED) ONLY): Name of Tendering Institution___________________________________ Account Number__________________________________________________ Transaction Code Number_________________________________________ |_| CHECK HERE IF TENDERED PM&C CLASS B SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS ONLY): Name of Registered Holder of PM&C Class B Share(s)______________ Date of Execution of Notice of Guaranteed Delivery______________ Window Ticket Number (if available)_____________________________ Name of Institution which Guaranteed Delivery___________________ Account Number (if delivered by book-entry transfer)____________ ========================================================= ========================================================== SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (See Instructions 1, 6, 7 and 8) (See Instructions 1, 6, 7 and 8) To be completed ONLY if the Class A To be completed ONLY if the Class A Common Stock issued in exchange for PM&C Common Stock issued in exchange for PM&C Class B Shares is to be issued in the name of Class B Shares is to be mailed or delivered to someone other than the undersigned. someone other than the undersigned, or to the undersigned at an address other than the address Issue to: shown below the undersigned's signature. Name___________________________________ (Please Print) Mail or delivered to: Address________________________________ _______________________________________ Name__________________________________________ _______________________________________ (Please Print) (Include Zip Code) Address________________________________________ ________________________________________ _______________________________________________ (Tax Identification or Social Security No.) _______________________________________________ (Include Zip Code) _______________________________________________ (Tax Identification or Social Security No.) ========================================================= ==========================================================
-4-
======================================================================================================================== BENEFICIAL OWNER(S) - ------------------------------------------------------------------------------------------------------------------------ State of Principal Residence of Each Principal Amount of PM&C Class B Shares Beneficial Owner of PM&C Class B Shares Held for Account of Beneficial Owner(s) - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ ========================================================================================================================
If delivery of PM&C Class B Shares is to be made by book-entry transfer to the account maintained by the Exchange Agent at the Depositary, then tenders of PM&C Class B Shares must be effected in accordance with the procedures mandated by the Depositary's Automated Tender Offer Program and the procedures set forth in the Prospectus under the caption "The Registered Exchange Offer -- Book-Entry Transfer." -5- SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Pursuant to the offer by Pegasus Communications Corporation (the "Company"), upon the terms and subject to the conditions set forth in the Prospectus dated ____________, 1996 (the "Prospectus") and this Letter of Transmittal (the "Letter of Transmittal"), which together with the Prospectus constitutes the Company's offer (the "Registered Exchange Offer") to exchange for each share of PM&C Class B Shares, 22.564 shares of Class A Common Stock. The undersigned hereby tenders to First Union National Bank for exchange the PM&C Class B Shares indicated above. By executing this Letter of Transmittal and subject to and effective upon acceptance for exchange of the PM&C Class B Shares tendered for exchange herewith, the undersigned will have irrevocably sold, assigned, transferred and exchanged, to the Company, all right, title and interest in, to and under all of the PM&C Class B Shares tendered for exchange hereby, and hereby appoints the Exchange Agent as the true and lawful agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as agent of the Company) of such holder of PM&C Class B Shares with respect to such PM&C Class B Shares, with full power of substitution to (i) deliver certificates representing such PM&C Class B Shares, or transfer ownership of such PM&C Class B Shares on the account books maintained by the Depositary (together, in any such case, with all accompanying evidences of transfer and authenticity), to the Company, (ii) present and deliver such PM&C Class B Shares for transfer on the books of the Company and (iii) receive all benefits and otherwise exercise all rights and incidents of beneficial ownership with respect to such PM&C Class B Shares, all in accordance with the terms of the Registered Exchange Offer. The power of attorney granted in this paragraph shall be deemed to be irrevocable and coupled with an interest. The undersigned hereby represents and warrants that (i) the undersigned is the owner of the PM&C Class B Shares tendered herewith; (ii) has a net long position within the meaning of Rule 14e-4 under the Securities Exchange Act as amended ("Rule 14e-4") equal to or greater than the aggregate number of PM&C Class B Shares tendered hereby; (iii) the tender of such PM&C Class B Shares complies with Rule 14e-4 (to the extent that Rule 14e-4 is applicable to such exchange); (iv) the undersigned has full power and authority to tender, exchange, assign and transfer the PM&C Class B Shares and (v) when such PM&C Class B Shares are accepted for exchange by the Company, the Company will acquire good and marketable title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims. The undersigned will, upon receipt, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be necessary or desirable to complete the exchange, assignment and transfer of the PM&C Class B Shares tendered for exchange hereby. For purposes of the Registered Exchange Offer, the Company will be deemed to have accepted for exchange, and to have exchanged, validly tendered PM&C Class B Shares, if, as and when the Company gives oral or written notice thereof to the Exchange Agent. Tenders of PM&C Class B Shares for exchange may not be withdrawn. See "The Registered Exchange Offer -- Withdrawal of Tenders" in the Prospectus. Any PM&C Class B Shares tendered by the undersigned and not accepted for exchange will be returned to the undersigned at the address set forth above unless otherwise indicated in the box above entitled "Special Delivery Instructions." The undersigned acknowledges that the Company's acceptance of PM&C Class B Shares validly tendered for exchange pursuant to any one of the procedures described in the section of the Prospectus entitled "The Registered Exchange Offer" and in the instructions hereto will constitute a binding agreement between the undersigned and the Company upon the terms and subject to the conditions of the Registered Exchange Offer. The undersigned also agrees not to sell, otherwise dispose of or pledge any shares of Class A Common Stock received pursuant to the Registered Exchange Offer until April 3, 1997 without the consent of Lehman Brothers Inc. and that the Company may impose stop transfer orders on the Class A Common Stock to be received by the undersigned pursuant to the Registered Exchange Offer to enforce the lock-up. In the event that both "Special Issuance Instructions" and "Special Delivery Instructions" are completed, please issue the certificates representing the Class A Common Stock issued in exchange for the PM&C -6- Class B Shares accepted for exchange in the name(s) of the person(s) so indicated. The undersigned recognizes that the Company has no obligation pursuant to the "Special Issuance Instructions" and "Special Delivery Instructions" to transfer any PM&C Class B Shares from the name of the holder thereof if the Company does not accept for exchange any of the PM&C Class B Shares so tendered for exchange or if such transfer would not be in compliance with any transfer restrictions applicable to such PM&C Class B Shares. In order to validly tender PM&C Class B Shares for exchange, holders of PM&C Class B Shares must complete, execute, and deliver this Letter of Transmittal. Except as stated in the Prospectus, all authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned, and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as otherwise stated in the Prospectus, this tender for exchange of PM&C Class B Shares is irrevocable. =============================================================================== SIGN HERE X______________________________________________________________________________ X______________________________________________________________________________ (Signature(s) of Owner(s)) Date: _______________, 1996 Must be signed by the registered holder(s) of PM&C Class B Shares exactly as name(s) appear(s) on certificate(s) representing the PM&C Class B Shares or on a security position listing or by person(s) authorized to become registered holder(s) of the PM&C Class B Shares by certificates and documents transmitted herewith. If signature is by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, please provide the following information. (See Instruction 6). Name(s)________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ (Please Print) Capacity (full title)__________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ (Include Zip Code) Area Code and Telephone No. ( )____________________________________________ Tax Identification or Social Security Nos._____________________________________ GUARANTEE OF SIGNATURE(S) (Signature(s) must be guaranteed if required by Instruction 1) Authorized Signature___________________________________________________________ Dated__________________________________________________________________________ Name and Title_________________________________________________________________ (Please Print) Name of Firm___________________________________________________________________ =============================================================================== -7- INSTRUCTIONS Forming Part of the Terms and Conditions of the Registered Exchange Offer 1. Guarantee of Signatures. Except as otherwise provided below, all signatures on this Letter of Transmittal must be guaranteed by an institution which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or is a commercial bank or trust company having an office or correspondence in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934 which is a member of one of the following recognized Signature Guarantee Programs (an "Eligible Institution"): a. The Securities Transfer Agents Medallion Program (STAMP) b. The New York Stock Exchange Medallion Signature Program (MSP) c. The Stock Exchange Medallion Program (SEMP) Signatures on this Letter of Transmittal need not be guaranteed (i) if this Letter of Transmittal is signed by the registered holder(s) of the PM&C Class B Shares tendered herewith and such registered holder(s) have not completed the box entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" on this Letter of Transmittal or (ii) if such PM&C Class B Shares are tendered for the account of an Eligible Institution. IN ALL OTHER CASES, ALL SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION. 2. Delivery of this Letter of Transmittal and PM&C Class B Shares; Guaranteed Delivery Procedure. This Letter of Transmittal is to be completed by holders of PM&C Class B Shares (i) if certificates are to be forwarded herewith or (ii) if tenders are to be made pursuant to the procedures for tender by book-entry transfer or guaranteed delivery set forth in the section of the Prospectus entitled "The Registered Exchange Offer." Certificates for all physically tendered PM&C Class B Shares or any confirmation of a book-entry transfer (a "Book-Entry Confirmation"), as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile hereof, and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at its address set forth on the cover of this Letter of Transmittal prior to 5:00 p.m., New York City time, on the Expiration Date. Holders of PM&C Class B Shares who elect to tender PM&C Class B Shares and (i) whose PM&C Class B Shares are not immediately available, (ii) who cannot deliver the PM&C Class B Shares or other required documents to the Exchange Agent prior to 5:00 p.m., New York City time on the Expiration Date or (iii) who are unable to complete the procedure for book-entry transfer on a timely basis, may have such tender effected if (a) such tender is made by or through an Eligible Institution; and (b) prior to 5:00 p.m., New York City time, on the Expiration Date, the Exchange Agent has received from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or a facsimile hereof) and Notice of Guaranteed Delivery (by telegram, telex, facsimile transmission, mail or hand delivery) setting forth the name and address of the holder of such PM&C Class B Shares, the certificate numbers(s) of such PM&C Class B Shares and the aggregate number of PM&C Class B Shares tendered for exchange, stating that tender is being made thereby and guaranteeing that, within five New York Stock Exchange trading days after the Expiration Date, the certificates representing such PM&C Class B Shares (or a Book-Entry Confirmation), in proper form for transfer, and any other documents required by this Letter of Transmittal or a properly transmitted Agent's Message (as defined in the prospectus relating to the Registered Exchange Offer), will be deposited by such Eligible Institution with the Exchange Agent; and (c) certificates for all tendered PM&C Class B Shares, or a Book-Entry Confirmation, together with a copy of the previously executed Letter of Transmittal (or facsimile thereof) and any other documents required by this Letter of Transmittal are received by the Exchange Agent within five New York Stock Exchange trading days after the Expiration Date. THE METHOD OF DELIVERY OF PM&C CLASS B SHARES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE TENDERING HOLDER OF PM&C CLASS B SHARES. EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR -8- CONFIRMED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. NEITHER THIS LETTER OF TRANSMITTAL NOR ANY PM&C CLASS B SHARES SHOULD BE SENT TO THE COMPANY. No alternative, conditional or contingent tenders will be accepted. All tendering holders of PM&C Class B Shares, by execution of this Letter of Transmittal (or facsimile hereof, if applicable), waive any right to receive notice of the acceptance of their PM&C Class B Shares for exchange. 3. Inadequate Space. If the space provided in the box entitled "Description of PM&C Class B Shares" above is inadequate, the certificate numbers and principal amounts of the PM&C Class B Shares being tendered should be listed on a separate signed schedule affixed hereto. 4. Withdrawals. A tender of PM&C Class B Shares may not be withdrawn once made. 5. Partial Tenders. Partial tenders of PM&C Class B Shares will not be accepted. The Registered Exchange Offer may be accepted only as to all PM&C Class B Shares beneficially owned by a holder. 6. Signatures on this Letter of Transmittal, Powers of Attorney and Endorsements. (a) The signature(s) of the holder of PM&C Class B Shares on this Letter of Transmittal must correspond with the name(s) as written on the face of the PM&C Class B Shares without alternation, enlargement or any change whatsoever. (b) If tendered PM&C Class B Shares are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. (c) If any tendered PM&C Class B Shares are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal and any necessary or required documents as there are different registrations or certificates. (d) When this Letter of Transmittal is signed by the holder of the PM&C Class B Shares listed and transmitted hereby, no endorsements of PM&C Class B Shares or separate powers of attorney are required. If, however, PM&C Class B Shares not accepted are to be returned in the name of a person other than the holder of PM&C Class B Shares, then the PM&C Class B Shares transmitted hereby must be endorsed or accompanied by appropriate powers of attorney in a form satisfactory to the Company, in either case signed exactly as the name(s) of the holder of PM&C Class B Shares appear(s) on the PM&C Class B Shares. Signatures on such PM&C Class B Shares or powers of attorney must be guaranteed by an Eligible Institution (unless signed by an Eligible Institution). (e) If this Letter of Transmittal or PM&C Class B Shares or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and proper evidence satisfactory to the Company of their authority so to act must be submitted. (f) If this Letter of Transmittal is signed by a person other than the registered holder of PM&C Class B Shares listed, the PM&C Class B Shares must be endorsed or accompanied by appropriate powers of attorney, in either case signed exactly as the name(s) of the registered holder of PM&C Class B Shares appear(s) on the certificates. Signatures on such PM&C Class B Shares or powers of attorney must be guaranteed by an Eligible Institution (unless signed by an Eligible Institution). 7. Transfer Taxes. Holders tendering pursuant to the Registered Exchange Offer will not be obligated to pay brokerage commissions or fees to pay transfer taxes with respect to their exchange under the -9- Registered Exchange Offer unless the box entitled "Special Issuance Instructions" in this Letter of Transmittal has been completed, or unless the securities to be received upon exchange are to be issued to any person other than the holder of the PM&C Class B Shares tendered for exchange. The Company will pay all other charges or expenses in connection with the Registered Exchange Offer. If holders tender PM&C Class B Shares for exchange and the Registered Exchange Offer is not consummated, certificates representing the PM&C Class B Shares will be returned to the holders at the Company's expense. Except as provided in this Instruction 7, it will not be necessary for transfer tax stamps to be affixed to the certificate(s) specified in this Letter of Transmittal. 8. Special Issuance and Delivery Instructions. If the Class A Common Stock is to be issued to someone other than the holder of PM&C Class B Shares or to an address other than that shown above, the appropriate boxes on this Letter of Transmittal should be completed. 9. Irregularities. All questions as to the form of documents and the validity, eligibility (including time or receipt) and acceptance of PM&C Class B Shares will be determined by the Company, in its sole discretion, whose determination shall be final and binding. The Company reserves the absolute right to reject any or all tenders for exchange of any particular PM&C Class B Shares that are not in proper form, or the acceptance of which would, in the opinion of the Company or its counsel, be unlawful. The Company reserves the absolute right to waive any defect, irregularity or condition of tender for exchange with regard to any particular PM&C Class B Shares. The Company's interpretation of the term of, and conditions to, the Registered Exchange Offer (including the instructions herein) will be final and binding. Unless waived, any defects or irregularities in connection with the Registered Exchange Offer must be cured within such time as the Company shall determine. Neither the Company, the Exchange Agent nor any other person shall be under any duty to give notice of any defects or irregularities in PM&C Class B Shares tendered for exchange, nor shall any of them incur any liability for failure to give such notice. A tender of PM&C Class B Shares will not be deemed to have been made until all defects and irregularities with respect to such tender have been cured or waived. Any PM&C Class B Shares received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders, unless otherwise provided in this Letter of Transmittal, as soon as practicable following the Expiration Date. 10. Waiver of Conditions. The Company reserves the absolute right to waive, amend or modify certain of the specified conditions as described under "The Registered Exchange Offer -- Conditions of the Registered Exchange Offer" in the Prospectus in the case of any PM&C Class B Shares tendered (except as otherwise provided in the Prospectus). 11. Mutilated, Lost, Stolen or Destroyed PM&C Class B Shares. If a holder of PM&C Class B Shares desires to tender PM&C Class B Shares pursuant to the Registered Exchange Offer, but any of such PM&C Class B Shares has been mutilated, lost, stolen or destroyed, such holder of PM&C Class B Shares should write to or telephone the Exchange Agent at the address listed below, concerning the procedures for obtaining replacement certificates for such PM&C Class B Shares, arranging for indemnification or any other matter that requires handling by the Exchange Agent: First Union National Bank of North Carolina Attention: Corporate Actions Unit 230 South Tryon Street 11th Floor Charlotte, North Carolina 28288-1153 1-800-829-8432 12. Requests for Information or Additional Copies. Requests for information or for additional copies of the Prospectus and this Letter of Transmittal may be directed to the Exchange Agent at the address or telephone number set forth on the cover of this Letter of Transmittal. -10- IMPORTANT: This Letter of Transmittal (or a facsimile thereof, if applicable) together with certificates, or confirmation of book-entry or the Notice of Guaranteed Delivery, and all other required documents must be received by the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. -11- INSTRUCTION TO REGISTERED HOLDER FROM BENEFICIAL OWNER OF PEGASUS MEDIA & COMMUNICATIONS, INC. Class B Common Stock The undersigned hereby acknowledges receipt of the Prospectus dated ____________, 1996 (the "Prospectus") of Pegasus Communications Corporation, a Delaware corporation (the "Company") and the accompanying Letter of Transmittal (the "Letter of Transmittal"), that together constitute the Company's offer (the "Registered Exchange Offer"). Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus. This will instruct you, the registered holder, as to the action to be taken by you relating to the Registered Exchange Offer with respect to the shares of Class B Common Stock of Pegasus Media & Communications, Inc. (the "PM&C Class B Shares") held by you for the account of the undersigned. The aggregate number of the PM&C Class B Shares held by you for the account of the undersigned is (fill in amount): __________ of the PM&C Class B Shares. With respect to the Registered Exchange Offer, the undersigned hereby instructs you (check appropriate box): o To TENDER the PM&C Class B Shares held by you for the account of the undersigned. o NOT to TENDER any PM&C Class B Shares held by you for the account of the undersigned. If the undersigned instructs you to tender the PM&C Class B Shares held by you for the account of the undersigned, it is understood that you are authorized to make, on behalf of the undersigned (and the undersigned, by its signature below, hereby makes to you), the representations and warranties contained in the Letter of Transmittal that are to be made with respect to the undersigned as a beneficial owner of the PM&C Class B Shares, including but not limited to the representation that the undersigned's principal residence is in the state of (fill in state) ____________________. The undersigned also agrees not to sell, otherwise dispose of or pledge any shares of Class A Common Stock received pursuant to the Registered Exchange Offer until April 3, 1997 without the consent of Lehman Brothers Inc. and that the Company may impose stop transfer orders on the Class A Common Stock to be received by the undersigned pursuant to the Registered Exchange Offering to enforce the lock-up. SIGN HERE Name of Beneficial Owner(s):___________________________________________________ Signature(s):__________________________________________________________________ Name(s) (please print):________________________________________________________ Address:_______________________________________________________________________ Telephone Number:______________________________________________________________ Taxpayer Identification or Social Security Number:_____________________________ Date:__________________________________________________________________________ -12- -----END PRIVACY-ENHANCED MESSAGE-----