-----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, FVquQXpYfRF4+VG/OduVyE/5yrh7EuEe0OMbR0rcC3b+T6yIxTNbBsQgjGgYtT3t ikRuAvGU8aiE7gxz7rlgbQ== 0000950116-96-001484.txt : 19961225 0000950116-96-001484.hdr.sgml : 19961225 ACCESSION NUMBER: 0000950116-96-001484 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19961224 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEGASUS COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001015629 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 510374669 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-18739 FILM NUMBER: 96685714 BUSINESS ADDRESS: STREET 1: 5 RADNOR CORPORATE CENTER STE 454 STREET 2: 100 MATSONFORD ROAD CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 6103411801 MAIL ADDRESS: STREET 1: 1345 CHESTNUT ST STREET 2: 1345 CHESTNUT ST CITY: PHILADELPHIA STATE: PA ZIP: 19107-3496 FORMER COMPANY: FORMER CONFORMED NAME: PEGASUS COMMUNICATIONS & MEDIA CORP DATE OF NAME CHANGE: 19960530 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1996 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------ Pegasus Communications Corporation (Exact name of registrant as specified in its charter) ------ Delaware 4833 51-0374669 (State or Other Jurisdiction (Primary Standard (I.R.S. Employer of Incorporation Industrial Classification Identification Number of Organization) Code Number) c/o Pegasus Communications Management Company Suite 454, 5 Radnor Corporate Center 100 Matsonford Road Radnor, Pennsylvania 19087 (610) 341-1801 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Marshall W. Pagon, President and Chief Executive Officer c/o Pegasus Communications Management Company Suite 454, 5 Radnor Corporate Center 100 Matsonford Road Radnor, Pennsylvania 19087 (610) 341-1801 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Michael B. Jordan, Esq. Kirk A. Davenport, Esq. Scott A. Blank, Esq. Marc D. Jaffe, Esq. Drinker Biddle & Reath Latham & Watkins 1100 Philadelphia National Bank Building 885 Third Avenue 1345 Chestnut Street Suite 1000 Philadelphia, Pennsylvania 19107-3496 New York, New York 10022 (215) 988-2700 (212) 906-1200 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective and the Underwriting Agreement is executed. ------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ================================================================================ CALCULATION OF REGISTRATION FEE
========================================================================================================= Proposed Proposed Title of Amount Maximum Maximum Securities to be Offering Price Aggregate Amount of to be Registere Registered Per Unit Offering Price(1) Registration Fee - --------------------------------------------------------------------------------------------------------- Units, consisting of 100,000 shares of % Series A Cumulative Exchangeable Preferred Stock and 100,000 Class A Common Stock Purchase Warrants ............... 100,000 units $1,000 $100,000,000 $30,303.03 - --------------------------------------------------------------------------------------------------------- % Series A Cumulative Exchangeable Preferred Stock(2) 100,000 shares -- -- -- - --------------------------------------------------------------------------------------------------------- % Senior Subordinated Exchange Notes due 2007(3) ............... -- -- -- -- - --------------------------------------------------------------------------------------------------------- Class A Common Stock Purchase Warrants(2) 100,000 warrants -- -- -- - --------------------------------------------------------------------------------------------------------- Total ......................... $1,000 $100,000,000 $30,303.03 =========================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee. (2) Represents the % Series A Cumulative Exchangeable Preferred Stock and Class A Common Stock Purchase Warrants comprising the Units. (3) The % Senior Subordinated Exchange Notes due 2007 are being registered to cover the maximum face amount of % Senior Subordinated Exchange Notes due 2007 issuable upon exchange of the % Series A Cumulative Exchangeable Preferred Stock. Pursuant to Rule 457(i), no registration fee is required. ------ 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. This Prospectus and the information contained herein are subject to change, completion or amendment without notice. 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. Under no circumstances shall this Prospectus constitute an offer to sell or a solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. SUBJECT TO COMPLETION DATED DECEMBER 24, 1996 PROSPECTUS $100,000,000 LOGO 100,000 UNITS % SERIES A CUMULATIVE EXCHANGEABLE PREFERRED STOCK AND WARRANTS TO PURCHASE 193,600 SHARES OF CLASS A COMMON STOCK ------ Pegasus Communications Corporation ("Pegasus," and together with its direct and indirect subsidiaries, the "Company") hereby offers (this "Offering") 100,000 Units (the "Units") consisting of 100,000 shares of % Series A Cumulative Exchangeable Preferred Stock (the "Series A Preferred Stock") and 100,000 Warrants (the "Warrants") to purchase 193,600 shares (the "Warrant Shares") of Class A Common Stock, par value $.01 per share ("Class A Common Stock"), of Pegasus. Each Unit consists of one share of Series A Preferred Stock and one Warrant. Dividends on the Series A Preferred Stock will accumulate from the date of issuance and will be payable semi-annually on each and , commencing , 1997, at a rate per annum of % of the Liquidation Preference (as defined herein) per share. Dividends may be paid, at Pegasus' option, on any Dividend Payment Date (as defined herein) occurring on or prior to , 2002, either in cash or by the issuance of additional shares of Series A Preferred Stock (and payment of cash in lieu of fractional shares) having an aggregate Liquidation Preference equal to the amount of such dividends. The Liquidation Preference of the Series A Preferred Stock will be $1,000 per share. The Series A Preferred Stock is redeemable at Pegasus' option, in whole or in part, at any time on or after , 2002, at the redemption prices set forth herein, plus, without duplication, accumulated and unpaid dividends to the date of redemption. In addition, during the first 36 months after the Closing Date (as defined herein), Pegasus may, on any one or more occasions, use the net proceeds of one or more offerings of its Class A Common Stock to redeem up to 25% of the shares of Series A Preferred Stock then outstanding at a redemption price of 110% of the principal amount thereof plus, without duplication, accumulated and unpaid dividends to the date of redemption; provided that, after any such redemption, at least $75.0 million in aggregate Liquidation Preference of Series A Preferred Stock remains outstanding. Pegasus is required, subject to certain conditions, to redeem all of the Series A Preferred Stock outstanding on , 2007, at a redemption price equal to the Liquidation Preference thereof, plus, without duplication, accumulated and unpaid dividends to the date of redemption. Upon the occurrence of a Change of Control (as defined herein), Pegasus is required, subject to certain conditions, to offer to purchase all of the Series A Preferred Stock at a price equal to 101% of the Liquidation Preference thereof, plus, without duplication, accumulated and unpaid dividends to the date of purchase. The Series A Preferred Stock ranks senior to all outstanding classes or series of capital stock with respect to dividend rights and rights on liquidation of Pegasus. See "Description of Securities--Description of Series A Preferred Stock." (continued on next page) ------ See "Risk Factors" beginning on page 20 for a discussion of certain factors that should be considered by prospective purchasers of the Units. ------ 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 NOR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================ Underwriting Price to Discount and Proceeds to Public(1) Commissions(2) the Company(3) - -------------------------------------------------------------------------------- Per Unit ............. $ $ $ - -------------------------------------------------------------------------------- Total ............... $ $ $ ================================================================================ (1) Plus accumulated dividends on the Series A Preferred Stock, if any, from the date of issuance. (2) The Company has agreed to indemnify the Underwriters (as defined herein) against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses payable by the Company, estimated at $ . The Units are offered by the Underwriters named herein, subject to prior sale, when, as and if delivered to and accepted by them, and subject to certain conditions, including their right to reject orders in whole or in part. It is expected that delivery of the Units will be made on or about , 1997 at the offices of CIBC Wood Gundy Securities Corp., New York, New York. CIBC WOOD GUNDY SECURITIES CORP. LEHMAN BROTHERS BT SECURITIES CORPORATION ------ THE DATE OF THIS PROSPECTUS IS ______________ , 1997. [MAP] [THE INSIDE FRONT COVER CONTAINS A MAP OF A PORTION OF THE UNITED STATES, WITH MARKINGS TO INDICATE THE LOCATIONS OF THE COMPANY'S BUSINESSES, INCLUDING THE DBS ACQUISITIONS] *Cable TV Systems *To be programmed by Pegasus through an LMA Figures based on estimates of the U.S. television market derived from Paul Kagan & Associates and Warren Publishing Inc.'s 1996 Television & Cable Fact Book.
Primary TV Households 95,000,000 ABC Network Affiliates 218 Secondary TV Households 8,000,000 CBS Network Affiliates 213 Total TV Households 103,000,000 FOX Network Affiliates 173 Total Homes Unpassed by Cable 11,000,000 NBC Network Affilates 215 Total Homes Passed by Cable 92,000,000 UPN Network Affiliates 71 Cable Subscribers 62,230,000 WB Network Affiliates 58 Non-cable subscribers 29,520,000 Non-Network Affiliates 255 ---------- Cable Penetration 68% Total Commercial Stations 1,203 Total Business Locations 8,600,000
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S CLASS A COMMON STOCK AND/OR THE SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. (Continued from cover) Subject to certain conditions, the Series A Preferred Stock is exchangeable in whole, but not in part, at the option of Pegasus, on any Dividend Payment Date, for Pegasus' % Senior Subordinated Exchange Notes due 2007 (the "Exchange Notes"). Interest on the Exchange Notes will be payable at a rate of % per annum and will accrue from the date of issuance thereof. Interest on the Exchange Notes will be payable semi-annually in cash or, at the option of Pegasus on or prior to , 2002, in additional Exchange Notes, in arrears on each and commencing on the first such date after the exchange of the Series A Preferred Stock for the Exchange Notes. The Exchange Notes mature on , 2007 and are redeemable, at the option of Pegasus, in whole or part, on or after , 2002, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, during the first 36 months after the Closing Date, Pegasus may, on any one or more occasions, use the net proceeds of one or more offerings of its Class A Common Stock to redeem up to 25% of the aggregate principal amount of the Exchange Notes at a redemption price of 110% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption; provided that, after any such redemption, the aggregate principal amount of the Exchange Notes outstanding must equal at least $75.0 million. Upon the occurrence of a Change of Control, Pegasus is required, subject to certain conditions, to offer to purchase all of the Exchange Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Exchange Notes will be unsecured, senior subordinated obligations of Pegasus that will be subordinated to all existing and future Senior Debt (as defined herein) of Pegasus and will rank senior to all subordinated Indebtedness (as defined herein) of Pegasus. The Exchange Notes will not be guaranteed by any of Pegasus' subsidiaries and will be effectively subordinated to all Indebtedness and other liabilities (including trade payables) of Pegasus' subsidiaries. As of September 30, 1996, on a pro forma basis after giving effect to this Offering and the use of proceeds thereof, the Completed Transactions, the Transactions and the DBS Acquisitions (each as defined herein), approximately $86.1 million of Indebtedness would have been outstanding and the Company would have had $50.0 million of borrowing availability under the New Credit Facility (as defined herein). See "Description of Securities -- Description of Exchange Notes." Each Warrant will entitle the holder thereof to purchase 1.936 Warrant Shares at an exercise price of $ per share, subject to adjustment under certain circumstances. The Warrants will become exercisable on or after the Separation Date (as defined herein) and, unless exercised, will automatically expire on , 2007. The Warrants are exercisable, in the aggregate, for approximately 2.0% of the Common Stock of the Company, on a fully diluted basis. See "Description of Securities--Description of Warrants." The Units, the Series A Preferred Stock, the Warrants, the Warrant Shares and the Exchange Notes are referred to herein as the "Securities." 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. Unless otherwise indicated, the discussion below refers to and the information in this Prospectus gives effect to (i) certain Completed Transactions, which were completed prior to this Offering, and (ii) certain other Transactions and DBS Acquisitions, which if not completed prior to the consummation of this Offering are anticipated to occur in the first quarter of 1997. See "Glossary of Defined Terms," which begins on page 16 of this Prospectus Summary, for definitions of certain terms used in this Prospectus, including "Completed Transactions," "Transactions" and "DBS Acquisitions." 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 1,035,000 television households and 83,000 business locations in rural areas of Connecticut, Massachusetts, Michigan, New Hampshire, New York, Ohio and Texas. The Company has entered into letters of intent to acquire the DIRECTV distribution rights and related assets from four independent providers of DIRECTV services (the "DBS Acquisitions"), whose territories include, in the aggregate, approximately 361,000 television households and 37,000 business locations in rural areas of Arkansas, Indiana, Mississippi, Virginia and West Virginia. After giving effect to the DBS Acquisitions, the Company will have approximately 47,000 DIRECTV subscribers in territories that include approximately 1,396,000 television households and approximately 120,000 business locations or a household penetration rate of 3.3%. 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 46,500 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 26,900 subscribers in a franchise area comprising approximately 111,000 households from a single headend. The Company has entered into a definitive agreement to sell 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 15,300 subscribers in a franchise area comprising approximately 22,900 households. After giving effect to the Completed Transactions and the Transactions, the Company would have had pro forma net revenues and Operating Cash Flow of $52.6 million and $15.7 million, respectively, for the twelve months ended September 30, 1996. The Company's net revenues and Operating Cash Flow have increased at compound annual growth rates of 98% and 85%, respectively, from 1991 to 1995. 1 MARKET OVERVIEW BROADCAST TELEVISION
Number Acquisition Station Market of TV Ratings Rank 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
DIRECT BROADCAST SATELLITE
Homes Average Not Homes Monthly Total Passed Passed Penetration Revenue Homes in by by Total -------------------------------- Per DIRECTV Territory Territory Cable(8) Cable(9) Subscribers(10) Total Uncabled Cabled Subscriber(11) - -------------------- --------- -------- -------- --------------- -------- ---------- -------- -------------- Owned: Western New England ........... 288,273 41,465 246,808 6,119 2.1% 11.9% 0.5% New Hampshire ..... 167,531 42,075 125,456 3,800 2.3% 7.6% 0.5% Martha's Vineyard and Nantucket ...... 20,154 1,007 19,147 755 3.7% 60.4% 0.8% Michigan .......... 241,713 61,774 179,939 6,590 2.7% 7.9% 0.9% Texas ............. 149,530 54,504 95,026 5,189 3.5% 7.0% 1.4% Ohio .............. 167,558 32,180 135,378 5,010 3.0% 11.3% 1.0% -------- -------- -------- ------ --- ---- --- Owned ........... 1,034,759 233,005 801,754 27,463 2.7% 9.0% 0.8% $41.26 -------- -------- -------- ------ --- ---- --- ------ -------------- DBS Acquisitions: Arkansas .......... 36,458 2,408 34,050 1,652 4.5% 37.4% 2.2% Indiana ........... 131,025 34,811 96,214 5,959 4.5% 11.6% 1.8% Mississippi ....... 101,799 38,797 63,002 6,500 6.4% 14.3% 1.5% Virginia/West Virginia 92,097 10,015 82,082 5,012 5.4% 38.8% 1.4% -------- -------- -------- ------ --- ---- --- DBS Acquisitions . 361,379 86,031 275,348 19,123 5.3% 16.6% 1.8% --------- -------- --------- ------ --- ---- --- Total ........... 1,396,138 319,036 1,077,102 46,586 3.3% 11.1% 1.0% $40.45 ========= ======== ========= ====== === ==== === ======
CABLE TELEVISION
Average Homes Monthly Homes in Passed Basic Revenue Channel Franchise by Basic Service per Cable Systems Capacity Area(12) Cable(13) Subscribers(14) Penetration(15) Subscriber - -------------------- -------- --------- --------- --------------- --------------- ---------- Owned: New England ....... (16) 29,400 28,600 19,600 69% $33.04 Mayaguez .......... 62 38,300 34,000 10,800 32% $32.22 San German(17) .... 50(18) 72,400 47,700 16,100 34% $29.09 -------- --------- -------- -- ------ Total Puerto Rico 110,700 81,700 26,900 33% $30.35 -------- --------- -------- -- ------ To be Sold: New Hampshire ..... (19) 6,500 6,100 4,300 70% $33.01 -------- --------- -------- -- ------ Total ........... 133,600 104,200 42,200 40% $31.33 ======== ========= ======== == ======
(See footnotes on the following page) 2 NOTES TO MARKET OVERVIEW (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 and assuming no adverse regulatory requirements, 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 assuming no adverse change in current FCC regulatory requirements. (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 24,400 seasonal residences. (9) 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. 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 92,400 seasonal residences. (10) As of December 9, 1996. (11) Based upon November 1996 revenues and average November 1996 subscribers. (12) Based on information obtained from municipal offices. (13) These data are the Company's estimates as of November 30, 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 November 30, 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 22%, 24% and 54% of the Company's New England Cable subscribers, respectively. (17) 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. 3 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. BROADCAST TELEVISION 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. The Company's ability to enter into future LMAs may be restricted by changes in FCC regulations. DIRECT BROADCAST SATELLITE 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 November 30, 1996, there were approximately 2.2 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 equipment rental, lease and purchase options. The Company anticipates continued growth in subscribers and operating profitability in DBS through increased penetration of DIRECTV territories it currently owns and will acquire pursuant to the DBS Acquisitions. The Company's New England DBS Territory achieved positive Location Cash Flow in 1995, its first full year of operations. The Company's DIRECTV subscribers currently generate revenues of approximately $41 per month at an average gross margin of 34%. The Company's 4 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 eleven months of 1996, the Company has added 5,163 new DIRECTV subscribers in its New England DBS Territory as compared to 3,630 for 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. Approximately 245 NRTC members collectively own DIRECTV territories consisting of approximately 7.7 million television households in predominantly rural areas of the United States, which the Company believes are the most likely to subscribe to DBS services. These territories comprise 8% of United States television households, but represent approximately 23% 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 TELEVISION 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, (ii) increasing revenues per subscriber through new program offerings and rate increases and (iii) consolidating its Puerto Rico Cable systems. RECENT AND PENDING TRANSACTIONS 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 (the "Portland Acquisition"). Television Station WTLH. The Company acquired WTLH, the Fox-affiliated television 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 television 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. Michigan/Texas DBS Acquisition. In October 1996, the Company acquired the DIRECTV distribution rights for portions of Texas and Michigan and related assets (the "Michigan/Texas DBS Acquisition"). Ohio DBS Acquisition. In November 1996, the Company acquired the DIRECTV distribution rights for portions of Ohio and related assets (the "Ohio DBS Acquisition"). 5 PENDING ACQUISITIONS The Company has entered into letters of intent with respect to the following DIRECTV territories. Each of the acquisitions is subject to the negotiation of a definitive agreement and, among other conditions, the prior approval of Hughes and the NRTC. In addition to these conditions, each of the DBS Acquisitions is also expected to be subject to conditions typical in acquisitions of this nature, certain of which conditions, like the Hughes and NRTC consents, may be beyond the Company's control. There can be no assurance that definitive agreements will be entered into with respect to all or any of the DBS Acquisitions or, if entered into, that all or any of the DBS Acquisitions will be completed. See "Risk Factors -- Risks Attendant to Acquisition Strategy" and "Business -- DBS -- The Pending DBS Acquisitions." Arkansas DBS Acquisition. In November 1996, the Company entered into a letter of intent to acquire DIRECTV distribution rights for portions of Arkansas and related assets (the "Arkansas DBS Acquisition"). The letter of intent contemplates a purchase price of approximately $2.4 million in cash. Indiana DBS Acquisition. In December 1996, the Company entered into a letter of intent to acquire DIRECTV distribution rights for portions of Indiana and related assets (the "Indiana DBS Acquisition"). The letter of intent contemplates a purchase price of approximately $14.0 million consisting of $8.4 million in cash (subject to adjustments based on the number of subscribers) and approximately $5.6 million in either shares of Class A Common Stock or preferred stock of Pegasus convertible into Class A Common Stock. Mississippi DBS Acquisition. In November 1996, the Company entered into a letter of intent to acquire DIRECTV distribution rights for portions of Mississippi and related assets (the "Mississippi DBS Acquisition"). The letter of intent contemplates a purchase price of approximately $14.0 million in cash (subject to possible adjustment). Virginia/West Virginia DBS Acquisition. In November 1996, the Company entered into a letter of intent to acquire DIRECTV distribution rights for portions of Virginia and West Virginia and related assets (the "Virginia/West Virginia DBS Acquisition"). The letter of intent contemplates the payment of aggregate consideration (subject to adjustments based on the number of subscribers) of (i) $9.0 million in cash or (ii) at the seller's option, $10.0 million consisting of $7.0 million in cash, $3.0 million in preferred stock of a subsidiary of Pegasus and warrants to purchase 30,000 shares of Class A Common Stock. It is anticipated that the seller will opt for the latter consideration and, as a consequence, this Prospectus assumes that the seller will make such election. Pending Sale New Hampshire Cable Sale. In November 1996, the Company entered into a definitive agreement 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 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. It is anticipated that the New Hampshire Cable Sale will be consummated in the first quarter of 1997 and will result in net proceeds to the Company of approximately $7.1 million.. There can be no assurance that the New Hampshire Cable Sale will be consummated on the terms described herein or at all. 6 PUBLIC EQUITY OFFERINGS THE INITIAL PUBLIC OFFERING Pegasus consummated the initial public offering of its Class A Common Stock on October 8, 1996 pursuant to an underwritten offering (the "Initial Public Offering") in which the Underwriters of this Offering acted as representatives. 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 Company applied the net proceeds from the Initial 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) $12.0 million to the Ohio DBS Acquisition, (iii) $3.0 million to repay indebtedness under the New Credit Facility, (iv) $1.9 million to make a payment on account of the Portland Acquisition, (v) $1.4 million for the payment of the cash portion of the purchase price of the Management Agreement Acquisition, (vi) $1.4 million for the Towers Purchase and (vii) $522,000 for general corporate purposes. REGISTERED EXCHANGE OFFER Purchasers of the Notes in PM&C's 1995 Notes offering hold all of the PM&C Class B Shares. The Company through a registered exchange offer (the "Registered Exchange Offer") has offered to exchange all of the PM&C Class B Shares for 191,792 shares in the aggregate of Class A Common Stock. It is anticipated that all holders will accept the Registered Exchange Offer and that the Registered Exchange Offer will close no later than January 10, 1997. This Prospectus assumes that all of the PM&C Class B Shares have been exchanged for Class A Common Stock pursuant to the Registered Exchange Offer. 7 THE OFFERING
Issuer ............... Pegasus Communications Corporation. Securities Offered ... 100,000 Units, with each Unit consisting of one share of Series A Preferred Stock and one Warrant, with each Warrant to purchase 1.936 shares of Class A Common Stock. Separability ......... The Series A Preferred Stock and Warrants will not be separately transferable until the earlier to occur of (i) April 3, 1997 and (ii) in the event of a Change of Control, the date Pegasus mails notice thereof (the "Separation Date"). Use of Proceeds ...... The net proceeds to the Company from its sale of the Units in this Offering (after deducting the underwriting discount and commissions and estimated offering expenses) are estimated to be approximately $95.8 million. The Company intends to apply (i) $28.6 million of the net proceeds of this Offering to the repayment of all outstanding Indebtedness of PM&C under the New Credit Facility, (ii) $14.0 million for the Mississippi DBS Acquisition, (iii) $8.4 million for the cash portion of the Indiana DBS Acquisition, (iv) $7.0 million for the cash portion of the purchase price of the Virginia/West Virginia DBS Acquisition and (v) $2.4 million for the Arkansas DBS Acquisition. The remaining net proceeds together with available borrowings under the New Credit Facility and proceeds from the New Hampshire Cable Sale will be used for working capital, general corporate purposes and to finance future acquisitions. See "Use of Proceeds." The Series A Preferred Stock Securities Offered ... 100,000 shares of % Series A Cumulative Exchangeable Preferred Stock, par value $.01 per share, plus any additional shares issued from time to time in lieu of cash dividends. Liquidation Preference. $1,000 per share, plus accumulated and unpaid dividends. Dividends ............ The Series A Preferred Stock will pay dividends at a rate per annum of % of the Liquidation Preference per share. Dividends may be paid, at Pegasus' option, on any Dividend Payment Date occurring on or prior to , 2002, either in cash or by the issuance of additional shares of Series A Preferred Stock (and payment in cash in lieu of fractional shares) having an aggregate Liquidation Preference equal to the amount of such dividends. Dividend Payment Dates. Dividends on the Series A Preferred Stock will accumulate from the date of issuance and will be payable semi-annually on each and commencing , 1997.
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Ranking .............. The Series A Preferred Stock will, with respect to dividend rights and rights on liquidation, winding-up and dissolution of Pegasus, rank senior to all other classes and series of Common Stock and Preferred Stock (as defined herein) of Pegasus outstanding upon consummation of this Offering. On a pro forma basis, as of September 30, 1996, after giving effect to this Offering and the use of proceeds thereof, the Completed Transactions, the Transactions and the DBS Acquisitions, the Company had approximately $86.1 million of Indebtedness. See "Risk Factors--Substantial Indebtedness and Leverage," "-- Limitations on Access to Cash Flow of Subsidiaries; Holding Company Structure" and "--Ranking of Series A Preferred Stock and Exchange Notes." Mandatory Redemption .. Pegasus is required, subject to certain conditions, to redeem all of the Series A Preferred Stock outstanding on , 2007 at a redemption price equal to 100% of the Liquidation Preference thereof, plus, without duplication, accumulated and unpaid dividends to the date of redemption. Optional Redemption .. The Series A Preferred Stock is redeemable, at the option of Pegasus, in whole or in part, at any time on or after , 2002, at the redemption prices set forth herein, plus, without duplication, accumulated and unpaid dividends to the date of redemption. In addition, during the first 36 months after the Closing Date, Pegasus may, on one or more occasions, use the net proceeds of one or more offerings of its Class A Common Stock to redeem up to an aggregate of 25% of the shares of Series A Preferred Stock then outstanding (whether initially issued or issued in lieu of cash dividends) at a redemption price of 110% of the Liquidation Preference thereof, plus, without duplication, accumulated and unpaid dividends to the date of redemption; provided, however, that after any such redemption, there is at least $75.0 million in aggregate Liquidation Preference of the Series A Preferred Stock outstanding and that such redemption occurs within 90 days following the closing of such offering of Class A Common Stock. Change of Control .... In the event of a Change of Control, Pegasus will, subject to certain conditions, be required to offer to purchase all outstanding shares of Series A Preferred Stock at a purchase price equal to 101% of the Liquidation Preference thereof, plus, without duplication, accumulated and unpaid dividends to the date of purchase. There can be no assurance that Pegasus will have sufficient funds or be permitted by the terms of other Indebtedness to purchase all of the outstanding shares of Series A Preferred Stock in the event of a Change of Control or that Pegasus would be able to obtain financing for such purpose on favorable terms, if at all. See "Risk Factors--Potential Anti-Takeover Provisions; Change of Control."
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Exchange Provisions .. Subject to certain conditions, on any Dividend Payment Date Pegasus may, at its option, exchange all (but not less than all) of the outstanding shares of Series A Preferred Stock for Exchange Notes. Voting ............... The Series A Preferred Stock will be non-voting, except as otherwise required by law and except in certain circumstances described herein, including (i) amending certain rights of the Holders (as defined herein) of Series A Preferred Stock and (ii) the issuance of any new class of equity securities that ranks pari passu with or senior to the Series A Preferred Stock. In addition, if Pegasus (i) fails to pay dividends in respect of three or more Dividend Payment Dates (whether or not consecutive) in the aggregate, (ii) fails to make a mandatory redemption or a Change of Control Offer (as defined herein) or (iii) fails to comply with certain covenants or make certain payments on its Indebtedness, Holders of a majority of outstanding shares of Series A Preferred Stock, voting separately as a class, will be entitled to elect two directors to Pegasus' Board of Directors. Certain Restrictive Provisions .......... The Certificate of Designation (as defined herein) will contain certain restrictive provisions that, among other things, limit the ability of Pegasus and its Subsidiaries (as defined herein) to incur additional Indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, impose restrictions on the ability of a Subsidiary to pay dividends or make certain payments to Pegasus and its Subsidiaries or merge or consolidate with any other person. These restrictions will be subject to important exceptions. See "Description of Securities -- Description of Series A Preferred Stock." The Exchange Notes Issue ................ __% Senior Subordinated Exchange Notes due 2007 issuable in exchange for the Series A Preferred Stock in an aggregate principal amount equal to the Liquidation Preference of the Series A Preferred Stock so exchanged. Maturity Date ........ , 2007. Interest Rate ........ The Exchange Notes will bear interest at a rate of % per annum. Interest may be paid at Pegasus' option on any interest payment date occurring on or prior to , 2002 either in cash or in additional Exchange Notes. Interest will accrue from the date of issuance or from the most recent interest payment date for which interest has been paid or provided. Interest Payment Dates. Interest on the Exchange Notes will accrue from the Exchange Date (as defined herein) and will be payable on each and , commencing with the first such date after the Exchange Date.
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Ranking .............. The Exchange Notes will be unsecured, senior subordinated obligations of Pegasus that will be subordinated to all existing and future Senior Debt of Pegasus. The Exchange Notes will rank senior in right of payment to all subordinated Indebtedness of Pegasus. The Exchange Notes will be effectively subordinated to all Indebtedness of Pegasus' subsidiaries. See "Risk Factors -- Limitations on Access to Cash Flow of Subsidiaries; Holding Company Structure" and "-- Ranking of Series A Preferred Stock and Exchange Notes." Optional Redemption .. The Exchange Notes are redeemable, at the option of Pegasus, in whole or in part, at any time on or after , 2002, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, during the first 36 months after the Closing Date, Pegasus may, on one or more occasions, use the net proceeds of one or more offerings of its Class A Common Stock to redeem up to 25% of the aggregate principal amount of the Exchange Notes then outstanding (whether initially issued or issued in lieu of cash interest) at a redemption price of 110% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption; provided, however, that after any such redemption, the aggregate principal amount of the Exchange Notes outstanding must equal at least $75.0 million and that such redemption occurs within 90 days following the closing of such offering of Class A Common Stock. Change of Control .... In the event of a Change of Control, Pegasus will, subject to certain conditions, be required to offer to purchase all outstanding Exchange Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. There can be no assurance that Pegasus will have sufficient funds to purchase all of the Exchange Notes in the event of a Change of Control or that Pegasus would be able to obtain financing for such purpose on favorable terms, if at all. See "Risk Factors--Potential Anti-Takeover Provisions; Change of Control." Certain Covenants .... The indenture governing the Exchange Notes (the "Exchange Note Indenture") will contain certain covenants that will, among other things, limit the ability of Pegasus and the Subsidiaries to incur additional Indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, impose restrictions on the ability of a Subsidiary to pay dividends or make certain payments to Pegasus and the Subsidiaries, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of their assets to any other person. These restrictions are subject to important exceptions. See "Description of Securities -- Description of Exchange Notes."
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The Warrants Total Number of Warrants ......... 100,000 Warrants, which when exercised would entitle the Holders thereof to acquire an aggregate of 193,600 shares of Class A Common Stock (representing approximately 2.0% of the Class A Common Stock outstanding as of the date hereof, on a fully diluted basis). See "Description of Securities--Description of Warrants." The Warrants will be issued pursuant to the Warrant Agreement (as defined herein). Expiration Date ................. , 2007. Exercise ........................ Each Warrant will entitle the holder thereof to purchase 1.936 shares of Class A Common Stock. The number of shares of Class A Common Stock for which, and the price per share at which, a Warrant is exercisable are subject to adjustment upon the occurrence of certain events as provided in the Warrant Agreement. The Warrants will be exercisable on or after the Separation Date. Common Stock Common Stock to be outstanding after this Offering: Class A Common Stock ....... 4,663,229 shares(1) Class B Common Stock ....... 4,581,900 shares Total Common Stock ......... 9,245,129 shares(1) Nasdaq National Market Symbol..... The Class A Common Stock is listed on the Nasdaq National Market under the symbol "PGTV."
- ------ (1) Includes 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). Excludes 720,000 shares reserved for issuance under the Incentive Program, 3,385 reserved for outstanding stock options, 4,581,900 shares reserved for issuance upon conversion of the Class B Common Stock and 193,000 shares reserved for issuance upon exercise of the Warrants. Also excludes an assumed issuance of 400,000 shares of Class A Common Stock in connection with the Indiana DBS Acquisition based on an assumed value of $14.00 per share and warrants to purchase 30,000 shares of Class A Common Stock to be issued in connection with the Virginia/West Virginia DBS Acquisition. RISK FACTORS Prospective purchasers of the Units should consider carefully the information set forth under "Risk Factors," and all other information set forth in this Prospectus, in evaluating an investment in the Units. 12 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 Information" included elsewhere herein. 13 SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT
Year Ended December 31, -------------------------------------------------- Pro Forma Income Statement Data: 1993 (1) 1994 1995 1995 (2) - ---------------------- ---------- --------- ---------- ----------- Net revenues: TV ....................... $10,307 $17,808 $19,973 $ 27,305 DBS ...................... -- 174 1,469 4,924 Cable .................... 9,134 10,148 10,606 14,919 Other .................... 46 61 100 100 ------- -------- -------- -------- Total net revenues ..... 19,487 28,191 32,148 47,248 ------- -------- -------- -------- Location operating expenses: TV ....................... 7,564 12,380 13,933 19,210 DBS ...................... -- 210 1,379 5,077 Cable .................... 4,655 5,545 5,791 8,044 Other .................... 16 18 38 38 Incentive compensation (3) .. 192 432 528 511 Corporate expenses .......... 1,265 1,506 1,364 1,364 Depreciation and amortization 5,978 6,940 8,751 15,368 ------- -------- -------- -------- Income (loss) from operations (183) 1,160 364 (2,364) Interest expense ............ (4,402) (5,973) (8,817) (9,035) Interest income ............. -- -- 370 129 Other expense, net .......... (220) (65) (44) (58) Provision (benefit) for taxes -- 140 30 30 Extraordinary gain (loss) from extinguishment of debt -- (633) 10,211 --(4) ------- -------- -------- -------- Net income (loss) ........... $(4,805) $(5,651) 2,054 (11,358) ======= ======== Dividends on Series A Preferred Stock .......... -- (12,000) -------- -------- Net income (loss) applicable to common shares ......... $ 2,054 $(23,358) ======== ======== Net income (loss) per share . $ 0.39 $ (2.53) ======== ======== Weighted average shares outstanding (000's) ...... 5,236 9,245 ======== ======== Other Data: Location Cash Flow (5) ...... $ 7,252 $10,038 $11,007 $ 14,879 Operating Cash Flow (5) ..... 5,795 8,100 9,287 13,159 Capital expenditures ........ 885 1,264 2,640 3,022
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Nine Months Ended September 30, ----------------------------------------- Pro Forma 1995 1996 1996 (2) ---- ---- -------- Income Statement Data: Net revenues: TV ....................... $13,563 $18,363 $19,031 DBS ...................... 953 2,601 6,870 Cable .................... 7,913 9,073 11,867 Other .................... 55 83 83 --------- ------- ------- Total net revenues ..... 22,484 30,120 37,851 --------- ------- ------- Location operating expenses: TV ....................... 10,060 12,753 13,247 DBS ...................... 914 2,371 6,040 Cable .................... 4,389 4,915 6,432 Other .................... 19 17 17 Incentive compensation (3) .. 444 605 538 Corporate expenses .......... 1,025 1,074 1,183 Depreciation and amortization 6,240 8,479 12,223 -------- ------- ------- Income (loss) from operations (607) (94) (1,829) Interest expense ............ (5,970) (8,929) (7,913) Interest income ............. 184 172 172 Other expense, net .......... (68) (77) (74) Provision (benefit) for taxes 30 (110) (110) Extraordinary gain (loss) from extinguishment of debt 6,931 (251) --(4) -------- ------- ------- Net income (loss) ........... $ 440 (9,069) $(9,534) ======== Dividends on Series A Preferred Stock .......... -- (9,000) ------- ------- Net income (loss) applicable to common shares ......... $(9,069) (18,534) ======= ======= Net income (loss) per share . $ (1.73) $ (2.00) ======= ======= Weighted average shares outstanding (000's) ...... 5,236 9,245 ======= ======= Other Data: Location Cash Flow (5) ...... $ 7,102 $10,064 $12,115 Operating Cash Flow (5) ..... 5,721 8,990 10,932 Capital expenditures ........ 2,064 2,607 2,520
Pro Forma Twelve Months Ended September 30, 1996 (2) ---------------------- Net revenues .................................. $ 52,574 Location Cash Flow (5) ........................ 17,097 Operating Cash Flow (5) ....................... 15,674 Ratio of Operating Cash Flow to interest expense (5) ................................ 1.4x Ratio of total debt to Operating Cash Flow (5) 5.5x
As of September 30, 1996 ------------------------------ Actual Pro Forma (2) --------- ------------- Balance Sheet Data: Cash and cash equivalents ..................... $ 5,668 $ 46,962 Working capital ............................... 1,014 42,908 Total assets .................................. 122,569 248,339 Total debt (including current) ................ 117,669 86,069 Total liabilities ............................. 131,284 99,083 Redeemable preferred stock .................... -- 95,750 Minority interest ............................. -- 3,000 Total equity (deficit) (6) .................... (8,714) 50,506
(see footnotes on the following page) 14 Notes to Summary Historical and Pro Forma Combined Financial Data (1) 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, nine months ended September 30, 1996 and the twelve months ended September 30, 1996 give effect to the Completed Transactions, the Transactions and this Offering and the use of proceeds thereof (except for the DBS Acquisitions) as if such events had occurred at the beginning of such periods. The pro forma balance sheet data as of September 30, 1996 give effect to the Completed Transactions and the Transactions after September 30, 1996 and this Offering and the use of proceeds thereof (including the DBS Acquisitions) as if such events had occurred on such date. See "Pro Forma Combined Financial Data." The Company believes that the historical income statement and other data for the DBS Acquisitions in the aggregate would not materially impact the Company's historical and pro forma income statement data and other 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 and the nine months ended September 30, 1996 do not include the extraordinary gain on the extinguishment of debt of $10.2 million and the $251,000 writeoff of deferred financing costs that were incurred in 1995 in connection with the creation of the Old Credit Facility, respectively. (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. Operating Cash Flow is defined as income (loss) from operations plus, (i) depreciation and amortization and (ii) non-cash incentive compensation. The difference between Location Cash Flow and Operating Cash Flow is that Operating Cash Flow includes cash incentive compensation and corporate expenses. Although Location Cash Flow and Operating Cash Flow are not measures of performance under generally accepted accounting principles, the Company believes that Location Cash Flow and Operating Cash Flow 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. Payment of cash dividends on the Company's Common Stock will be restricted by the terms of the Series A Preferred Stock and the Exchange Notes. The terms of the Series A Preferred Stock and the Exchange Notes will permit the Company to pay dividends and interest thereon by issuance, in lieu of cash, of additional shares of Series A Preferred Stock and additional Exchange Notes, respectively. 15 GLOSSARY OF DEFINED TERMS
Arkansas DBS Acquisition The acquisition of DIRECTV distribution rights for certain rural areas of Arkansas and related assets. 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 (except that the "Company" refers to Pegasus only where indicated). Completed Transactions The Portland Acquisition, the Portland LMA, the Michigan/Texas DBS Acquisition, the Ohio DBS Acquisition, the Cable Acquisition, the Management Share Exchange, the Towers Purchase, the Management Agreement Acquisition, the Parent's contribution of the PM&C Class A Shares to Pegasus and the Initial Public Offering. DBS Direct broadcast satellite television. DBS Acquisitions The Arkansas DBS Acquisition, the Indiana DBS Acquisition, the Mississippi DBS Acquisition and the Virginia/West Virginia DBS Acquisition. DIRECTV The video, audio and data services provided via satellite by DIRECTV Enterprises, Inc. or the entity, as applicable. 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. Exchange Note Indenture The indenture between Pegasus and First Union National Bank, as trustee, governing the Exchange Notes. Exchange Notes The % Senior Subordinated Exchange Notes due 2007, which are issuable upon exchange of the Series A Preferred Stock. FCC Federal Communications Commission. Fox Fox Broadcasting Company. Fox Affiliation Agreements The affiliation agreements between WOLF, WDSI, WDBD, WTLH, and WPXT and Fox. Hughes Hughes Electronics Corporation or one of its subsidiaries, including DIRECTV Enterprises, Inc., as applicable. Incentive Program The Company's Restricted Stock Plan, 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. Indiana DBS Acquisition The acquisition of DIRECTV distribution rights for certain rural areas of Indiana and related assets. Initial Public Offering Pegasus' initial public offering of 3,000,000 shares of Class A Common Stock, which was completed on October 8, 1996.
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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 Operating Cash Flow is that Operating Cash Flow includes corporate expenses and cash incentive compensation. 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 Agreement The acquisition of the Management Agreement by the Company, which occurred Acquisition concurrently with the consummation of the Initial Public Offering. Management Company Following the completion of the Initial Public Offering, Pegasus Communications Management Company, a subsidiary of Pegasus; prior thereto, BDI Associates L.P., an affiliate of the Company. Management Share The exchange by certain members of the Company's management of Parent Exchange Non-Voting Stock for shares of Class A Common Stock, which occurred concurrently with the consummation of the Initial Public Offering. Michigan/Texas DBS The acquisition of DIRECTV distribution rights for certain rural areas Acquisition of Texas and Michigan and related assets. Mississippi DBS The acquisition of DIRECTV distribution rights for certain rural areas Acquisition of Mississippi and related assets. New Credit Facility The Company's seven-year, senior collateralized credit facility. See "Description of Indebtedness -- New Credit Facility." New England DBS The Company's DIRECTV service territories in Connecticut, Massachusetts, Territory New Hampshire and New York. 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. Approximately 245 NRTC members 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.
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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. Operating Cash Flow Income (loss) from operations plus (i) depreciation and amortization and (ii) non-cash incentive compensation. Although Operating Cash Flow is not a measure of performance under generally accepted accounting principles, the Company believes that Operating 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, 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. Parent Pegasus Communications Holdings, Inc., the direct parent of Pegasus. Parent Non-Voting Stock The Class B Non-Voting Stock of the Parent. Pegasus Pegasus Communications Corporation, the issuer of the Securities offered hereby. PM&C Pegasus Media & Communications, Inc., which became a direct subsidiary of Pegasus upon completion of the Initial Public Offering. PM&C Class A Shares The Class A shares of PM&C which were transferred to Pegasus concurrently with the completion of the Initial Public Offering. PM&C Class B Shares The Class B shares of PM&C held by purchasers in the Notes offering, which are being exchanged by Pegasus for shares of Class A Common Stock pursuant to the Registered Exchange Offer. Portland Acquisition The acquisition of WPXT. Portland LMA The LMA relating to WWLA. Registered Exchange Offer Pegasus' registered exchange offer to holders of PM&C Class B Shares for 191,792 shares in the aggregate of Class A Common Stock. This Prospectus assumes that all holders of PM&C Class B Shares have exchanged their stock for Class A Common Stock. Securities The Units, the Series A Preferred Stock, the Warrants, the Exchange Notes and the Warrant Shares. Series A Preferred Stock The % Series A Cumulative Exchangeable Preferred Stock, which is being offered hereby in connection with the offering of the Units. 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. Transactions The New Hampshire Cable Sale and the Registered Exchange Offer. Units The units consisting of Series A Preferred Stock and Warrants being offered hereby. Virginia/West Virginia The acquisition of DIRECTV distribution rights for certain rural areas DBS Acquisition of Virginia and West Virginia and related assets.
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Warrants The warrants to purchase shares of Class A Common Stock being offered hereby in connection with the offering of Units. 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 71,429 shares of Class A Common Stock at an exercise price of $14.00 per share, 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.
19 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. SUBSTANTIAL INDEBTEDNESS AND LEVERAGE The Company is highly leveraged. As of September 30, 1996, on a pro forma basis after giving effect to this Offering and the use of the proceeds thereof, the Completed Transactions, the Transactions and the DBS Acquisitions, the Company would have had Indebtedness of $86.1 million, total stockholders' equity of $50.5 million and Preferred Stock of $95.8 million and, assuming certain conditions are met, $50.0 million available under the New Credit Facility. For the year ended December 31, 1995 and the nine months ended September 30, 1996, on a pro forma basis after giving effect to this Offering and the use of the proceeds thereof, the Completed Transactions, the Transactions and the DBS Acquisitions, the Company's earnings would have been inadequate to cover its combined fixed charges and dividends on Series A Preferred Stock by approximately $23.3 million and $18.6 million, respectively. The ability of Pegasus to repay its existing Indebtedness and to pay dividends on the Series A Preferred Stock and to redeem the Series A Preferred Stock upon its maturity or to pay interest on the Exchange Notes, if issued, 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. There can be no assurance that the Company's growth strategy will be successful in generating the substantial increases in cash flow from operations that will be necessary for Pegasus to meet its obligations on the Series A Preferred Stock following , 2002 when such obligations will be required to be paid in cash or, if the Exchange Notes are issued, to service its obligations under the Exchange Notes. The current and future leverage 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 payment of the principal and interest on its Indebtedness, and to payment of dividends on the Series A Preferred Stock or interest on the Exchange Notes, if issued, 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, the Certificate of Designation and the Exchange Note Indenture 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 any of the Securities. 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" "Description of Securities" and "Description of Indebtedness." LIMITATIONS ON ACCESS TO CASH FLOW OF SUBSIDIARIES; HOLDING COMPANY STRUCTURE Pegasus is a holding company, and its ability to pay dividends is dependent upon the receipt of dividends from its direct and indirect subsidiaries. PM&C and its subsidiaries are parties to the New Credit Facility and the Indenture each of which imposes substantial restrictions on PM&C's ability to pay dividends to Pegasus. The New Credit Facility prohibits all payments of dividends by PM&C without lender consent. 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 the consent of the lenders under the New Credit Facility. The ability of PM&C and its 20 subsidiaries to comply with such conditions in the Indenture may be affected by events that are beyond the Company's control. The breach of any such conditions could result in a default under the Indenture and/or the New Credit Facility, and in the event of any such default, the holders of the Notes or the lenders under the New Credit Facility could elect to accelerate the maturity of all the Notes or the loans under such facility. If the maturity of the Notes or the loans under the New Credit Facility were to be accelerated, all such outstanding Indebtedness would be required to be paid in full before PM&C or its subsidiaries would be permitted to distribute any assets or cash to Pegasus. There can be no assurance that the assets of the Company would be sufficient to repay all of such outstanding Indebtedness and to meet its obligations under the Series A Preferred Stock or the Exchange Notes, as the case may be. Future borrowings by Pegasus or its subsidiaries can be expected to contain restrictions or prohibitions on the payment of dividends by such subsidiaries to Pegasus, and neither the Certificate of Designation nor the Exchange Note Indenture will prohibit Pegasus or its subsidiaries from agreeing to such restrictions or prohibitions. In addition, under Delaware law, Pegasus is permitted to pay dividends on its capital stock, including the Series A Preferred Stock, only out of its surplus or, in the event that it has no surplus, out of its net profits for the year in which a dividend is declared or for the immediately preceding fiscal year. Surplus is defined as the excess of a company's total assets over the sum of its total liabilities plus the par value of its outstanding capital stock. In order to pay dividends in cash, Pegasus must have surplus or net profits equal to the full amount of the cash dividend at the time such dividend is declared. In determining Pegasus' ability to pay dividends, Delaware law permits the Board of Directors of Pegasus to revalue Pegasus' assets and liabilities from time to time to their fair market values in order to create surplus. The Company cannot predict what the value of its assets or the amount of its liabilities will be in the future and, accordingly, there can be no assurance that Pegasus will be able to pay cash dividends on the Series A Preferred Stock. For all Dividend Payment Dates through and including , 2002, Pegasus may, at its option, pay dividends or interest in the Exchange Notes by issuing additional shares of Series A Preferred Stock with an aggregate Liquidation Preference, or additional Exchange Notes with an aggregate principal amount, as applicable, equal to the amount of such dividend or interest, as applicable. In order to meet its payment obligations on the Series A Preferred Stock or the Exchange Notes offered hereby, the Company will need to restructure or amend the terms of the existing Indebtedness of Pegasus' subsidiaries. There can be no assurance that Pegasus' existing creditors or any future lenders will permit Pegasus' subsidiaries to make distributions to Pegasus in amounts sufficient to allow Pegasus to meet its obligations on the Series A Preferred Stock or Exchange Notes, if issued, or at all. See "Description of Indebtedness" and "Description of Securities." All of the assets of the Company are held by subsidiaries of Pegasus, and all of the Company's operating revenues are derived from operations of such subsidiaries. In addition, future acquisitions may be made using the proceeds of this Offering and additional borrowings through present or future subsidiaries of the Company. Therefore, Pegasus' ability to pay the Liquidation Preference of and dividends and redemption payments when due on the Series A Preferred Stock or interest on, principal of and redemption payments when due on the Exchange Notes, if issued, is dependent upon the earnings of its subsidiaries and the distribution of sufficient funds from its direct and indirect subsidiaries to Pegasus. Pegasus' subsidiaries will have no obligation, contingent or otherwise, to make any funds available to the Company for payment of the aggregate Liquidation Preference and dividends and mandatory redemption payments on the Series A Preferred Stock and will not be guarantors of the Exchange Notes. In addition, Pegasus' subsidiaries are subject to state-law restrictions on their ability to pay dividends to Pegasus such as those set forth with respect to the Company in the preceding paragraph. RANKING OF SERIES A PREFERRED STOCK AND EXCHANGE NOTES The Series A Preferred Stock will rank junior in right of payment upon liquidation to all existing and future Indebtedness of Pegasus and to all shares of Preferred Stock of Pegasus other than Preferred Stock which by its terms ranks on a parity with or junior to the Series A Preferred Stock. The Series A Preferred Stock will rank senior in right of payment upon liquidation to the Common Stock. The Exchange Notes will be unsecured, senior subordinated obligations of Pegasus that will be subordinated to all existing and future Senior Debt of Pegasus. The Exchange Notes will not be guaranteed by any of Pegasus' subsidiaries. The Exchange Notes will be effectively subordinated to all Indebtedness and other liabilities of Pegasus' subsidiaries. As of September 30, 1996, on a pro forma basis after giving effect to this Offering and the use of 21 proceeds thereof, the Completed Transactions, the Transactions and the DBS Acquisitions, approximately $86.1 million of Indebtedness would have been outstanding and the Company would have had $50.0 million of borrowing availability under the New Credit Facility. In the event of the insolvency, liquidation, reorganization, dissolution or other winding-up of Pegasus' subsidiaries, Pegasus will not receive funds available to pay to the Holders of the Series A Preferred Stock or the Exchange Notes until after the payment in full of the claims of the creditors of Pegasus' subsidiaries and all other Senior Debt of the Company. See "Description of Securities -- Description of Series A Preferred Stock -- Ranking." 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 predominantly 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 DIRECTV 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 the current satellites. The NRTC has advised the Company that 22 the NRTC Agreement also provides the NRTC a right of first refusal to acquire comparable rights in the event that DIRECTV 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. RISKS ATTENDANT TO ACQUISITION STRATEGY The Company regularly considers the acquisition of media and communications properties and, at any given time, is in various stages of considering such opportunities. Since January 1, 1996, the Company has acquired or entered into agreements to acquire a number of properties, including the DBS Acquisitions. Each of the DBS Acquisitions is subject to the negotiation of a definitive agreement and, among other conditions, the prior approval of Hughes and the NRTC. In addition to these conditions, each of the DBS Acquisitions is also expected to be subject to conditions typical in acquisitions of this nature, certain of which conditions, like the Hughes and NRTC consents, may be beyond the Company's control. There can be no assurance that definitive agreements will be entered into with respect to all or any of the DBS Acquisitions or, if entered into, that all or any of the DBS Acquisitions will be completed. The Company sometimes structures its acquisitions, like the Indiana DBS Acquisition and the Virginia/West Virginia DBS Acquisition, to qualify for tax-free treatment. There is no assurance that such treatment will be respected by the Internal Revenue Service. There can also 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 arrive at prices and terms comparable to past acquisitions. The successful completion of an acquisition may depend on consents from third parties, including federal, state and local regulatory authorities or private parties such as Fox, the NRTC and Hughes, all of whose consents are beyond the Company's control. Possible future acquisitions by the Company could result in dilutive issuances of equity securities, the incurrence of additional debt and contingent liabilities, and additional amortization expenses related to goodwill and other intangible assets, which could materially adversely affect the Company's financial condition and operating results. DISCRETION OF MANAGEMENT CONCERNING USE OF PROCEEDS A portion of the net proceeds of this Offering is anticipated to be contributed to current or future subsidiaries of Pegasus or to be used to fund acquisitions, such as the DBS Acquisitions. It is anticipated that pending such use, such proceeds will be invested in certain short-term investments. Such funds, together with the Company's existing working capital, funds that may be available to the Company under the New Credit Facility and the net proceeds the Company may receive from the New Hampshire Cable Sale, will represent a significant amount of funds over which management will have substantial discretion as to their application. There can be no assurance the Company will deploy such funds in a manner that will enhance the financial condition of the Company. See "Use of Proceeds." 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. 23 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 direct to home ("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, DTH and DBS systems. See "Business -- Competition." GOVERNMENT LEGISLATION, REGULATION, LICENSES AND FRANCHISES The Company's businesses are subject to extensive and changing laws and regulations, including those of the FCC and local regulatory bodies. Many of the Company's operations are subject to licensing and franchising requirements of federal, state and local law and are, therefore, subject to the risk that material licenses and franchises will not be obtained or renewed in the future. The United States Congress and the FCC have in the past, and may in the future, adopt new laws, regulations and policies regarding a wide variety of matters, including rulemakings arising as a result of the Telecommunications Act of 1996 (the "1996 Act"), that could, directly or indirectly, affect the operations of the Company's businesses. The business prospects of the Company could be materially adversely affected by the application of current FCC rules or policies in a manner leading to the denial of pending applications by the Company, by the adoption of new laws, policies and regulations, or changes in existing laws, policies and regulations, including changes to their interpretations or applications, that modify the present regulatory environment or by the failure of certain rules or policies to change in the manner anticipated by the Company. See "Business - -- Licenses, LMAs, DBS Agreements and Cable Franchises" and "Business -- Legislation and Regulation." To the extent that the Company expects to program stations through the use of LMAs, there can be no assurance that the licensees of such stations will not unreasonably exercise rights to preempt the programming of the Company, or that the licensees of such stations will continue to maintain the transmission facilities of 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. Pursuant to the 1996 Act, the continued performance of then existing LMAs was generally grandfathered. The Portland LMA has been entered into but its performance is currently pending completion of construction of the station. The FCC suggested in a recent rulemaking proposal that LMAs entered into after November 6, 1996 will not be grandfathered. The Company cannot predict if the Portland LMA will be grandfathered. Currently, television LMAs are not considered attributable interests under the FCC's multiple ownership rules. However, the FCC is considering proposals which would make such LMAs attributable, as they generally are in the radio broadcasting industry. If the FCC were to adopt a rule that makes such interests attributable, 24 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 and could be required to modify any then existing LMAs. Additionally, irrespective of the FCC rules, the Department of Justice and the Federal Trade Commission (the "Antitrust Agencies") have the authority to determine that a particular transaction presents antitrust concerns. The Antitrust Agencies have recently increased their scrutiny of the television and radio industry, and have indicated their intention to review matters related to the concentration of ownership within markets (including through LMAs) even when the ownership or LMA in question is permitted under the regulations of the FCC. There can be no assurance that future policy and rulemaking activities of the Antitrust Agencies will not affect the Company's operations (including existing stations or markets) or expansion strategy. CONCENTRATION OF SHARE OWNERSHIP AND VOTING CONTROL BY MARSHALL W. PAGON Pegasus' Common Stock is divided into two classes with different voting rights. Holders of Class A Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders generally and holders of Class B Common Stock are entitled to ten votes per share. Both classes vote together as a single class on all matters except in connection with certain amendments to Pegasus' 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 consummation of 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 Pegasus 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." Except as required under the Delaware General Corporation Law and the Certificate of Designation, Holders of the Series A Preferred Stock will have no voting rights. See "Description of Securities -- Description of Series A Preferred Stock -- Voting Rights." ABSENCE OF PRIOR PUBLIC MARKET Prior to this Offering, there has been no public market for the Securities (with the exception of the Warrant Shares) 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 Securities due to factors that may or may not relate to the Company's performance. The Company does not intend to list any of the Securities (with the exception of the Warrant Shares) on any securities exchange, and there can be no assurance that a trading market for the Securities will develop and continue after this Offering. The Underwriters have advised the Company that they currently intend to make a market in the Securities but they are not obligated to do so and may discontinue market making activities at any time. If a market for the Securities were to develop, the Securities could trade at prices that may be lower than the initial offering price and could 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 of the PM&C Class B Shares), Pegasus 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. In addition, following completion of this Offering, the Company will have outstanding 100,000 shares of Series A Preferred Stock. Of these shares, the 3,000,000 25 shares of Class A Common Stock sold in the Initial Public Offering and all of the Series A Preferred Stock to be sold hereby will be tradeable without restriction (except that the Units will not be separately transferable until the Separation Date) 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 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 and any securities issued in connection with the DBS Acquisitions 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 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. Such holders have also agreed to certain restrictions on their ability to transfer their Common Stock until , 1997 without the written consent of CIBC Wood Gundy Securities Corp. 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, 3,385 and 193,000 shares of Class A Common Stock are reserved for issuance under the Incentive Program, for outstanding stock options and for issuance upon exercise of the Warrants, respectively. In connection with the Michigan/Texas DBS Acquisition, the Portland 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. It is anticipated that piggyback registration rights will also be granted in connection with the issuance of certain securities in the Indiana DBS Acquisition and the Virginia/West Virginia DBS Acquisition. 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 the Company. The pro forma financial data included in this Prospectus assume that the Registered Exchange Offer has been consummated and that all holders of the PM&C Class B Shares accepted the offer. If all holders do not accept this offer, the actual pro forma data would differ from that set forth herein. In addition, holders of the PM&C Class B Shares have certain preemptive, tag-along and registration rights which may restrict the Company from engaging in certain transactions. POTENTIAL ANTI-TAKEOVER PROVISIONS; CHANGE OF CONTROL 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. Upon a Change of Control, Pegasus will be required to offer to purchase all of the shares of Series A Preferred Stock or Exchange Notes, as the case may be, then outstanding at 101% of, in the case of Series A Preferred Stock, the Liquidation Preference thereof plus, without duplication, accumulated and unpaid dividends to the repurchase date or, in the case of Exchange Notes, the aggregate principal amount, plus 26 accrued and unpaid interest, if any. The repurchase price is payable in cash. There can be no assurance that, were a Change of Control to occur, Pegasus would have sufficient funds to pay the purchase price for all the shares of Series A Preferred Stock or Exchange Notes, as the case may be, which Pegasus might be required to purchase. There can also be no assurance that the subsidiaries of Pegasus would be permitted by the terms of their outstanding Indebtedness, including pursuant to the Indenture and the New Credit Facility, to pay dividends to Pegasus to permit Pegasus to purchase shares of Series A Preferred Stock or Exchange Notes. Any such dividends are currently prohibited. See "Description of Indebtedness." In addition, any such Change of Control transaction may also be a change of control under the New Credit Facility and the Indenture, which would require PM&C to prepay all amounts owing under the New Credit Facility and to reduce the commitments thereunder to zero and to offer to purchase all outstanding Notes at a price of 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase. In the event Pegasus does not have sufficient funds to pay the purchase price of the Series A Preferred Stock or the Exchange Notes, as the case may be, upon a Change of Control, Pegasus could be required to seek third party financing to the extent it did not have sufficient funds available to meet its purchase obligations, and there can be no assurance that Pegasus would be able to obtain such financing on favorable terms, if at all. See "Description of Indebtedness." In addition, any change of control would be subject to the prior approval of the FCC. CERTAIN TAX CONSIDERATIONS Distributions on the Series A Preferred Stock, whether paid in cash or in additional shares of Series A Preferred Stock, will be taxable as ordinary dividend income to the extent of the Company's current and accumulated earnings and profits. A Holder's initial tax basis in any additional shares of Series A Preferred Stock distributed by Pegasus in lieu of cash dividend payments on the Series A Preferred Stock ("Dividend Shares") will equal the fair market value of such Dividend Shares on their date of distribution. In addition, depending on the fair market value of shares of Series A Preferred Stock on the date of their issuance, Holders may be required to include additional amounts of income based on the difference between (x) the fair market value of such shares on the date of their issuance and (y) the amount payable in redemption of such shares, unless the difference is de minimis under the applicable standard (such difference being referred to as "Series A Preferred Stock Discount"). See "Certain Federal Income Tax Considerations -- Series A Preferred Stock Discount." If shares of Series A Preferred Stock (including Dividend Shares) bear Series A Preferred Stock Discount, such shares generally will have different tax characteristics from other shares of Series A Preferred Stock and might trade separately, which might adversely affect the liquidity of such shares. Upon an exchange of Series A Preferred Stock for Exchange Notes, the Holder generally should have capital gain or loss equal to the difference between the issue price of the Exchange Notes received and the Holder's adjusted basis in the Series A Preferred Stock redeemed. For a discussion of how to determine the issue price of the Exchange Notes, see "Certain Federal Income Tax Considerations -- Sale, Redemption and Exchange of Series A Preferred Stock." Holders should also note that if shares of Series A Preferred Stock are exchanged for Exchange Notes and the stated redemption price at maturity of such Exchange Notes exceeds their issue price by more than a de minimis amount, the Exchange Notes will be treated as having original issue discount ("OID") equal to the entire amount of such excess. For a discussion of these and other relevant tax issues, see "Certain Federal Income Tax Considerations." FRAUDULENT CONVEYANCE Various fraudulent conveyance laws have been enacted for the protection of creditors and may be utilized by a court to subordinate or avoid the Exchange Notes (if and when issued) in favor of other existing or future creditors of Pegasus. If a court in a lawsuit on behalf of any unpaid creditor of Pegasus or a representative of Pegasus' creditors were to find that, at the time Pegasus issued the Exchange Notes, Pegasus (x) intended to hinder, delay or defraud any existing or future creditor or contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (y) did not receive fair consideration or reasonably equivalent value for issuing such Exchange Notes and Pegasus (i) was insolvent, (ii) was rendered insolvent by reason of such issuance, (iii) was engaged or about to engage in a business or 27 transaction for which its remaining assets constituted unreasonably small capital to carry on its business or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, such court could void Pegasus' obligations under the Exchange Notes and void such transactions. Alternatively, in such event, claims of the Holders of such Exchange Notes could be subordinated to claims of the other creditors of Pegasus. 28 USE OF PROCEEDS The net proceeds to the Company from the sale of the Units in this Offering, after deducting underwriting discounts and commissions and estimated fees and expenses of this Offering, are estimated to be approximately $95.8 million. The Company intends to apply (i) $28.6 million of the net proceeds of this Offering to the repayment of all outstanding Indebtedness under the New Credit Facility, (ii) $14.0 million for the Mississippi DBS Acquisition, (iii) $8.4 million for the cash portion of the Indiana DBS Acquisition, (iv) $7.0 million for the cash portion of the purchase price of the Virginia/West Virginia DBS Acquisition and (v) $2.4 million for the Arkansas DBS Acquisition. The remaining net proceeds together with available borrowings under the New Credit Facility and proceeds from the New Hampshire Cable Sale will be used for working capital, general corporate purposes and to finance future acquisitions. The Company engages in discussions with respect to acquisition opportunities in media and communications businesses on a regular basis. Although the Company is in various stages of discussions in connection with potential acqisitions, the Company has not entered into any letters of intent, except in connection with the DBS Acquisitions, or any definitive agreements with respect to any acquisitions at this time. The Company anticipates entering into definitive agreements with respect to each of the DBS Acquisitions prior to the consummation of this Offering. See "Risk Factors -- Risks Attendant to Acquisition Strategy" and "-- Discretion of Management Concerning Use of Proceeds." The Company intends to temporarily invest the remaining net proceeds in short-term, investment grade securities. If any of the DBS Acquisitions are not consummated, the Company intends to use the net proceeds designated for any such acquisition for working capital, general corporate purposes and to finance future acquisitions. On August 29, 1996, all outstanding indebtedness under the Old Credit Facility, which amounted to $8.8 million, was repaid from borrowings under the New Credit Facility. In addition, $22.8 million was drawn on August 29, 1996 under the New Credit Facility to fund the Cable Acquisition. On October 8, 1996, $3.0 million of the proceeds from the Initial Public Offering were used to repay indebtedness under the New Credit Facility resulting in an outstanding balance of $28.6 million. Borrowings under the New Credit Facility bear interest, payable monthly, at LIBOR or the prime rate (as selected by the Company) plus spreads that vary with PM&C's ratio of total debt to adjusted operating cash flow (as defined therein). As of November 30, 1996, the New Credit Facility bore interest at a blended rate of 8.375%. Borrowings under the New Credit Facility mature on June 30, 2003, when all outstanding principal and accrued interest is due and payable. DIVIDEND POLICY Pegasus is a newly formed corporation and has not paid any cash dividends on its Common Stock. Under the terms of the Series A Preferred Stock, Pegasus will be required to pay dividends on the Series A Preferred Stock in cash or in additional shares of Series A Preferred Stock. 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 Pegasus' 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 that restrict its ability to pay dividends. Under the terms of the Indenture, PM&C is prohibited from paying dividends prior to July 1, 1998. The payment of dividends by PM&C 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. See "Risk Factors -- Limitations on Access to Cash Flow of Subsidiaries," "Description of Indebtedness" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 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 Pegasus' Initial Public Offering on October 3, 1996. These quotations and sales prices do not include retail mark-ups, mark-downs or commissions. 29 1996 Fiscal Year High Low ---------------------------------------- -------- -------- Fourth Quarter (through December 20, 1996)... $16.00 $11.25 On December 20, 1996, the last reported sales price for the Class A Common Stock was $14.00 per share. As of December 20, 1996, Pegasus had approximately 117 holders of record (excluding holders whose securities were held in street or nominee name). 30 CAPITALIZATION The following table sets forth the capitalization of the Company (i) as of September 30, 1996, (ii) as adjusted to reflect the Initial Public Offering, the other Completed Transactions and the Registered Exchange Offer, and (iii) on a pro forma basis to reflect the Initial Public Offering, the other Completed Transactions, the Transactions, the DBS Acquisitions and the sale by the Company of the Units offered hereby and the use of proceeds thereof. See "Use of Proceeds," "Selected Historical and Pro Forma Combined Financial Data," and "Pro Forma Combined Financial Information."
As of September 30, 1996 --------------------------------------- Actual As Adjusted Pro Forma ---------- ------------ ---------- (Dollars in thousands) Cash and cash equivalents .................................... $ 5,668 $ 4,490 $ 46,962 ======== ======== ======== Total debt: New Credit Facility(1) ..................................... 31,600 28,600 -- 12 1/2 % Series B Senior Subordinated Notes due 2005(2) .... 81,490 81,490 81,490 Capital leases and other ................................... 4,579 4,579 4,579 -------- -------- -------- Total debt ................................................ 117,669 114,669 86,069 -------- -------- -------- Series A Preferred Stock,$1,000 liquidation preference per share; 100,000 shares authorized and outstanding pro forma(3) ................................................... -- -- 95,750 Minority interest(4) ......................................... -- -- 3,000 Total stockholders' equity: Class A Common Stock, $0.01 par value, 30,000,000 shares authorized; 4,663,229 shares issued and outstanding as adjusted; 5,063,229 shares issued and outstanding pro forma(5) ................................................ 2 47 51 Class B Common Stock, $0.01 par value, 15,000,000 shares authorized; 4,581,900 shares issued and outstanding as adjusted and pro forma .................................. -- 46 46 Additional paid-in capital(5) .............................. 7,881 57,136 62,732 Retained earnings (deficit) ................................ (3,204) (3,204) 1,070 Partners' deficit .......................................... (13,393) (13,393) (13,393) -------- -------- -------- Total stockholders' equity (deficit) ..................... (8,714) 40,632 50,506 -------- -------- -------- Total capitalization ......................................... $108,955 $155,301 $235,325 ======== ======== ========
- ------ (1) For a description of the New Credit Facility, see "Description of Indebtedness -- New Credit Facility." (2) For a description of the principal terms of the Notes, see "Description of Indebtedness -- Notes." (3) For a description of the principal terms of the Series A Preferred Stock and the Warrants, see "Description of Securities." (4) Represents preferred stock of a subsidiary of Pegasus to be issued in connection with the Virginia/West Virginia DBS Acquisition. (5) Pro forma shares issued and outstanding include an assumed issuance of 400,000 shares of Class A Common Stock in connection with the Indiana DBS Acquisition based on an assumed value of $14.00 per share. 31 PRO FORMA COMBINED FINANCIAL INFORMATION Pro forma combined statement of operations and other data for the year ended December 31, 1995, the nine months ended September 30, 1996 and the twelve months ended September 30, 1996 give effect to (i) the Portland Acquisition, which closed on January 29, 1996, (ii) the Tallahassee Acquisition, which closed on March 8, 1996, (iii) the Michigan/Texas DBS Acquisition, which closed on October 8, 1996, (iv) the Cable Acquisition, which closed on August 29, 1996, (v) the Ohio DBS Acquisition, which closed on November 8, 1996, (vi) the New Hampshire Cable Sale, which is a pending sale, (vii) the Initial Public Offering, which was consummated on October 8, 1996, and (viii) this Offering, all as if such events had occurred at the beginning of each period. The Company believes that the historical income statement data and other data for the DBS Acquisitions would not materially impact the Company's historical and pro forma income statement data and other data. The pro forma condensed combined balance sheet as of September 30, 1996 gives effect to (i) payments in connection with the Portland Acquisition which were made on October 8, 1996, (ii) the Michigan/Texas DBS Acquisition, which closed on October 8, 1996, (iii) the Ohio DBS Acquisition, which closed on November 8, 1996, (iv) the Registered Exchange Offer, assuming acceptance by all holders of the PM&C Class B Shares, (v) the New Hampshire Cable Sale, which is a pending sale, (vi) the Initial Public Offering, which was consummated on October 8, 1996, (vii) the DBS Acquisitions, which are pending acquisitions, and (viii) this Offering, as if such events had occurred on such date. The Company's pro forma income (loss) from continuing operations and income (loss) per share would be affected to the extent that holders of PM&C Class B Shares do not accept the Registered Exchange Offer or choose to rescind their acceptances. The Company does not believe that any such effect would be material and expects that all such holders will accept the Registered Exchange Offer and decline to rescind their acceptances. 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 information is not necessarily indicative of the Company's future results of operations. There can be no assurance whether or when the New Hampshire Cable Sale or each of the DBS Acquisitions will be consummated. See "Risk Factors -- Risks Attendant to Acquisition Strategy." 32 PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Acquisitions -------------------------------------------------------- MI/TX OH Actual Portland(1) Tallahassee(2) DBS(3) Cable(4) DBS(5) -------- --------- ------------ ---------- ------ ------ Income Statement Data: Net revenues TV ............................. $19,973 $ 4,409 $2,784 $ -- $ -- $ -- DBS ............................ 1,469 -- -- 2,513 -- 942 Cable .......................... 10,606 -- -- -- 5,777 -- Other .......................... 100 -- -- -- -- -- -------- --------- ------------ ---------- ------ ------ Total net revenues ............ 32,148 4,409 2,784 2,513 5,777 942 -------- --------- ------------ ---------- ------ ------ Location operating expenses TV ............................. 13,933 3,441 2,133 -- -- -- DBS ............................ 1,379 -- -- 3,083 -- 956 Cable .......................... 5,791 -- -- -- 3,353 -- Other .......................... 38 -- -- -- -- -- Incentive compensation ........... 528 -- -- -- -- -- Corporate expenses ............... 1,364 147 40 139 132 -- Depreciation and amortization .... 8,751 212 107 559 501 183 -------- --------- ------------ ---------- ------ ------ Income (loss) from operations .... 364 609 504 (1,268) 1,791 (197) Interest expense ................. (8,817) (1,138) (163) (631) (850) -- Interest income .................. 370 -- -- -- -- -- Other income (expense), net ...... (44) (542) (64) -- 50 -- Provision (benefit) for income taxes .......................... 30 -- 105 -- (189) -- -------- --------- ------------ ---------- ------ ------ Income (loss) before extraordinary items .......................... (8,157) (1,071) 172 (1,899) 1,180 (197) Dividends on Series A Preferred Stock .......................... -- -- -- -- -- -- -------- --------- ------------ ---------- ------ ------ Income (loss) applicable to common shares before extraordinary items ............ $(8,157) $(1,071) $ 172 $(1,899) $1,180 $(197) ======== ========= ============ ========== ====== ====== Income (loss) per share: Loss before extraordinary items Weighted average shares outstanding ................. Other Data: Location Cash Flow (22) .......... $11,007 $ 968 $ 651 $ (570) $2,424 $ (14) Operating Cash Flow (22) ......... 9,287 821 611 (709) 2,292 (14) Capital expenditures ............. 2,640 139 28 58 304 --
The NH Unit Pro Adjustments IPO Sub-Total Cable Sale(6) Total Offering Forma(23) ----------- ---------- --------- ------------- -------- --------- --------- Income Statement Data: Net revenues TV ............................. $139(7) $-- $27,305 $ -- $27,305 $-- $ 27,305 DBS ............................ -- -- 4,924 -- 4,924 -- 4,924 Cable .......................... -- -- 16,383 (1,464) 14,919 -- 14,919 Other .......................... -- -- 100 -- 100 -- 100 ---- --- ------- ------- ------- --- --------- Total net revenues ............ 139 -- 48,712 (1,464) 47,248 -- 47,248 ---- --- ------- ------- -------- --- --------- Location operating expenses TV ............................. (186)(8) (111)(9) -- 19,210 -- 19,210 -- 19,210 DBS ............................ (341)(10) -- 5,077 -- 5,077 -- 5,077 Cable .......................... (332)(11) -- 8,812 (768) 8,044 -- 8,044 Other .......................... -- -- 38 -- 38 -- 38 Incentive compensation ........... -- -- 528 (17) 511 -- 511 Corporate expenses ............... (458)(12) -- 1,364 -- 1,364 -- 1,364 Depreciation and amortization .... 5,544(13) 129(18) 15,986 (618) 15,368 -- 15,368 ----------- ---------- --------- ----------- --------- ----- --------- Income (loss) from operations .... (3,977) (129) (2,303) (61) (2,364) -- (2,364) Interest expense ................. (2,893)(14) 2,919(19) (11,573) -- (11,573) 2,538(20) (9,035) Interest income .................. (241)(15) -- 129 -- 129 -- 129 Other income (expense), net ...... 542(16) -- (58) -- (58) -- (58) Provision (benefit) for income taxes .......................... 84(17) -- 30 -- 30 -- 30 ----------- ---------- --------- ----------- --------- ----- --------- Income (loss) before extraordinary items .......................... (6,653) 2,790 (13,835) (61) (13,896) 2,538(21) (11,358) Dividends on Series A Preferred Stock .......................... -- -- -- -- -- (12,000) (12,000) ----------- ---------- --------- ----------- --------- -------- --------- Income (loss) applicable to common shares before extraordinary items ............ $(6,653) $2,790 $(13,835) $ (61) $ (13,896) $(9,462) $ (23,358) =========== ========== ========= =========== ========= ======== ========= Income (loss) per share: Loss before extraordinary items $ (1.50) $ (2.53) ========= ========= Weighted average shares outstanding ................. 9,245,129 9,245,129 ========= ========= Other Data: Location Cash Flow (22) .......... $ 1,109 $ -- $ 15,575 $(696) $ 14,879 $ -- $ 14,879 Operating Cash Flow (22) ......... 1,567 -- 13,855 (696) 13,159 -- 13,159 Capital expenditures ............. -- -- 3,169 (147) 3,022 -- 3,022
33 PRO FORMA COMBINED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Acquisitions ------------------------------------------------------- MI/TX OH Actual Portland(1) Tallahassee(2) DBS(3) Cable(4) DBS(5) -------- --------- ------------ --------- ------ ------ Income Statement Data: Net revenues TV ............................. $18,363 $ 247 $404 $ -- $ -- $ -- DBS ............................ 2,601 -- -- 2,965 -- 1,304 Cable .......................... 9,073 -- -- -- 4,056 -- Other .......................... 83 -- -- -- -- -- -------- --------- ------------ --------- ------ ------ Total net revenues ............ 30,120 247 404 2,965 4,056 1,304 -------- --------- ------------ --------- ------ ------ Location operating expenses TV ............................. 12,753 294 243 -- -- -- -- DBS ............................ 2,371 -- -- 2,672 -- 1,294 Cable .......................... 4,915 -- -- -- 2,448 -- Other .......................... 17 -- -- -- -- -- Incentive compensation ........... 605 -- -- -- -- -- Corporate expenses ............... 1,074 12 21 115 88 21 Depreciation and amortization .... 8,479 6 11 436 365 143 -------- --------- ------------ --------- ------ ------ Income (loss) from operations .... (94) (65) 129 (258) 1,155 (154) Interest expense ................. (8,929) (565) (20) (465) (482) -- Interest income .................. 172 -- -- -- -- -- Other income (expense), net ...... (77) 20 (17) -- -- -- Provision (benefit) for income taxes .......................... (110) -- 35 -- 20 -- -------- --------- ------------ --------- ------ ------ Income (loss) before extraordinary items .......................... (8,818) (610) 57 (723) 653 (154) -------- --------- ------------ --------- ------ ------ Dividends on Series A Preferred Stock .......................... -- -- -- -- -- -- -------- --------- ------------ --------- ------ ------ Income (loss) applicable to common shares before extraordinary items ............ $(8,818) $(610) $ 57 $ (723) $ 653 $ (154) ======== ========= ============ ========= ====== ====== Income (loss) per share: Loss before extraordinary items . Weighted average shares outstanding ................... Other Data: Location Cash Flow (22) .......... $10,064 $ (47) $161 $ 293 $1,608 $ 10 Operating Cash Flow (22) ......... 8,990 (59) 140 178 1,520 (11) Capital expenditures ............. 2,607 -- -- -- 96 --
The NH Unit Pro Adjustments IPO Sub-Total Cable Sale(6) Total Offering Forma(23 ----------- --------- ------------ ------------- ------ -------- --------- Income Statement Data: Net revenues TV ............................. $ 17(7) $ -- $ 19,031 $ -- $ 19,031 $ -- $ 19,031 DBS ............................ -- -- 6,870 -- 6,870 -- 6,870 Cable .......................... -- -- 13,129 (1,262) 11,867 -- 11,867 Other .......................... -- -- 83 -- 83 -- 83 ------- ------ -------- ------- -------- ------- -------- Total net revenues ............ 17 -- 39,113 (1,262) 37,851 -- 37,851 ------- ------ -------- ------- -------- ------- -------- Location operating expenses TV ............................. (28)(8) (15)(9) -- 13,247 -- 13,247 -- 13,247 DBS ............................ (297)(10) -- 6,040 -- 6,040 -- 6,040 Cable .......................... (249)(11) -- 7,114 (682) 6,432 -- 6,432 Other .......................... -- -- 17 -- 17 -- 17 Incentive compensation ........... -- -- 605 (67) 538 -- 538 Corporate expenses ............... (148)(12) -- 1,183 -- 1,183 -- 1,183 Depreciation and amortization .... 3,155(13) 96(18) 12,691 (468) 12,223 -- 12,223 ------- ------ -------- ------- -------- ------- -------- Income (loss) from operations .... (2,401) (96) (1,784) (45) (1,829) -- (1,829) Interest expense ................. (1,546)(14) 2,190(19) (9,817) -- (9,817) 1,904(20) (7,913) Interest income .................. -- -- 172 -- 172 -- 172 Other income (expense), net ...... -- -- (74) -- (74) -- (74) Provision (benefit) for income taxes .......................... (55)(17) -- (110) -- (110) -- (110) ------- ------ -------- ------- -------- ------- -------- Income (loss) before extraordinary items .......................... (3,892) 2,094 (11,393) (45) (11,438) 1,904(21) (9,534) ------- ------ -------- ------- -------- ------- -------- Dividends on Series A Preferred Stock .......................... -- -- -- -- -- (9,000) (9,000) ------- ------ -------- ------- -------- ------- -------- Income (loss) applicable to common shares before extraordinary items ............ $(3,892) $2,094 $(11,393) $ (45) $(11,438) $(7,096) $(18,534) ======= ====== ======== ======= ======== ======= ======== Income (loss) per share: Loss before extraordinary items . $ (1.24) $ (2.00) ======== ======== Weighted average shares outstanding ................... 9,245,129 9,245,129 ========= ========= Other Data: Location Cash Flow (22) .......... $ 606 $ -- $ 12,695 $ (580) $ 12,115 $ -- $ 12,115 Operating Cash Flow (22) ......... 754 -- 11,512 (580) 10,932 -- 10,932 Capital expenditures ............. -- -- 2,703 (183) 2,520 -- 2,520
34 PRO FORMA COMBINED STATEMENT OF OPERATIONS TWELVE MONTHS ENDED SEPTEMBER 30, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Acquisitions --------------------------------------------------------- MI/TX OH Actual Portland(1) Tallahassee(2) DBS(3) Cable(4) DBS(5) --------- ---------- ------------- ------- -------- ------ Income Statement Data: Net revenues TV ............................. $ 24,773 $ 1,468 $1,464 -- -- $ -- DBS ............................ 3,117 -- -- $ 4,153 -- 1,634 Cable .......................... 11,766 -- -- -- $ 5,611 -- Other .......................... 128 -- -- -- -- -- --------- --------- ------------ --------- ------ ------ Total net revenues .......... 39,784 1,468 1,464 4,153 5,611 1,634 --------- --------- ------------ --------- ------ ------ Location operating expenses TV ............................. 16,626 1,340 1,123 -- -- -- DBS ............................ 2,836 -- -- 4,179 -- 1,584 Cable .......................... 6,317 -- -- -- 3,390 -- Other .......................... 36 -- -- -- -- -- Incentive compensation ........... 689 -- -- -- -- -- Corporate expenses ............... 1,413 13 61 149 121 2 Depreciation and amortization .... 10,990 38 36 584 240 188 --------- --------- ------------ --------- ------ ------ Income (loss) from operations .... 877 77 244 (759) 1,860 (140) Interest expense ................. (11,776) (761) (117) (636) (727) -- Interest income .................. 357 -- -- -- -- -- Other income (expense), net ...... (51) (117) (18) -- 50 -- Provision (benefit) for income taxes .......................... (110) -- 140 -- (169) -- --------- --------- ------------ --------- ------ ------ Income (loss) before extraordinary items .......................... (10,483) (801) (31) (1,395) 1,352 (140) Dividends on Series A Preferred Stock .......................... -- -- -- -- -- -- --------- --------- ------------ --------- ------ ------ Income (loss) applicable to common shares before extraordinary items ............ $(10,483) $ (801) $ (31) $(1,395) $1,352 $ (140) ========= ========= ============ ========= ====== ====== Income (loss) per share: Loss before extraordinary items . Weighted average shares outstanding ................... Other Data: Location Cash Flow (22) .......... $ 13,969 $ 128 $ 341 $ (26) $2,221 $ 50 Operating Cash Flow (22) ......... 12,556 115 280 (175) 2,100 48 Capital expenditures ............. 3,183 50 14 2 341 --
The NH Unit Pro Adjustments IPO Sub-Total Cable Sale(6) Total Offering Forma(23) ----------- --------- --------- ---------- --------- --------- --------- Income Statement Data: Net revenues TV ............................. $ 92(7) -- $ 27,797 -- $ 27,797 -- $ 27,797 DBS ............................ -- -- 8,904 -- 8,904 -- 8,904 Cable .......................... -- -- 17,377 $(1,632) 15,745 -- 15,745 Other .......................... -- -- 128 -- 128 -- 128 ------ ------ --------- -------- --------- ------- --------- Total net revenues .......... 92 -- 54,206 (1,632) 52,574 -- 52,574 ------ ------ --------- -------- --------- ------- --------- Location operating expenses TV ............................. (61)(8) (56)(9) -- 18,972 -- 18,972 -- 18,972 DBS ............................ (449)(10) -- 8,150 -- 8,150 -- 8,150 Cable .......................... (527)(11) -- 9,180 (861) 8,319 -- 8,319 Other .......................... -- -- 36 -- 36 -- 36 Incentive compensation ........... -- -- 689 (70) 619 -- 619 Corporate expenses ............... (336)(12) -- 1,423 -- 1,423 -- 1,423 Depreciation and amortization .... 5,610(13) 129(18) 17,815 (618) 17,197 -- 17,197 ------ ------ --------- -------- --------- ------- --------- Income (loss) from operations .... (4,089) (129) (2,059) (83) (2,142) -- (2,142) Interest expense ................. (2,770)(14) 2,919(19) (13,868) -- (13,868) 2,538(20) (11,330) Interest income .................. -- -- 357 -- 357 -- 357 Other income (expense), net ...... (104)(16) -- (240) -- (240) -- (240) Provision (benefit) for income taxes .......................... (29)(17) -- (110) -- (110) -- (110) ------ ------ --------- -------- --------- ------- --------- Income (loss) before extraordinary items .......................... (6,992) 2,790 (15,700) (83) (15,783) 2,538(21) (13,245) Dividends on Series A Preferred Stock .......................... -- -- -- -- -- (12,000) (12,000) ------ ------ --------- -------- --------- ------- --------- Income (loss) applicable to common shares before extraordinary items ............ $(6,992) $2,790 $(15,700) $ (83) $ (15,783) $(9,462) $ (25,245) ======= ====== ========= ======== ========= ======== ========= Income (loss) per share: Loss before extraordinary items . $ (1.71) $ (2.73) ========= ========= Weighted average shares outstanding ................... 9,245,129 9,245,129 ========= ========= Other Data: Location Cash Flow (22) .......... $ 1,185 -- $ 17,868 $ (771) $ 17,097 -- $ 17,097 Operating Cash Flow (22) ......... 1,521 -- 16,445 (771) 15,674 -- 15,674 Capital expenditures ............. -- -- 3,590 (183) 3,407 -- 3,407
35 NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS (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 reflect 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 Initial Public Offering. (20) To remove interest expense on the debt to be retired with the proceeds of this Offering. (21) Upon the repurchase of outstanding notes in 1995, the Company recorded an extraordinary gain on the extinguishment of debt of $10.2 million, which is not included in these pro forma statements. 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 $251,000, 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. (22) 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. Operating Cash Flow is defined as income (loss) from operations plus (i) depreciation and amortization and (ii) non-cash incentive compensation. The difference between Location Cash Flow and Operating Cash Flow is that Operating Cash Flow includes cash incentive compensation and corporate expenses. Although Location Cash Flow and Operating Cash Flow are not measures of performance under generally accepted accounting principles, the Company believes that Location Cash Flow and Operating Cash Flow 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. (23) Pro forma income statement data, income (loss) per share data and other data does not give effect to the DBS Acquisitions. The Company believes that the historical income statement and other data for the DBS Acquisitions in the aggregate would not materially impact the Company's historical and pro forma income statement data, income (loss) per share data and other data. 36 PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (DOLLARS IN THOUSANDS)
Acquisitions ------------------------------------------------ Portland MI/TX Actual Portland(1) LMA(2) DBS(3) OH DBS(4) -------- ----------- -------- ---------- --------- Assets: Cash and cash equivalents ........ $ 5,668 $ (3,550) $ -- $ (17,894) $(12,000) Accounts receivable, net ................ 4,468 -- -- -- -- Inventories ........... 234 -- -- -- -- Prepaid expenses and other current assets 3,009 -- -- -- -- Property and equipment, net ................ 26,015 -- -- -- -- Intangibles ........... 80,781 4,100 1,000 29,824 12,000 Other assets .......... 2,394 -- -- -- -- -------- ------- -------- ---------- --------- Total assets ........ $122,569 $ 550 $1,000 $ 11,930 $ -- ======== ======= ======== ========== ========= Liabilities and Equity: Current liabilities ... $ 7,166 $ (600) $ -- $ -- $ -- Notes payable ......... 52 -- -- -- -- Accrued interest ...... 3,190 -- -- -- -- Current portion of long-term debt ..... 376 -- -- -- -- Current portion of program liabilities ........ 1,581 -- -- -- -- Long-term debt ........ 117,241 -- -- -- -- Long-term program liabilities ........ 1,540 -- -- -- -- Other long-term liabilities ........ 137 -- -- -- -- -------- ------- -------- ---------- --------- Total liabilities .. 131,283 (600) -- -- -- Series A Preferred Stock -- -- -- -- -- Minority interest(12) ... -- -- -- -- -- Class A Common Stock(13) 2 1 1 8 -- Class B Common Stock .... -- -- -- -- -- Additional paid-in capital ............... 7,881 1,149 999 11,922 -- Retained earnings (deficit) ............. (3,204) -- -- -- -- Partners deficit ........ (13,393) -- -- -- -- -------- ------- -------- ---------- --------- Total equity .......... (8,714) 1,150 1,000 11,930 -- -------- ------- -------- ---------- --------- Total liabilities and equity ....... $122,569 $ 550 $1,000 $ 11,930 $ -- ======== ======= ======== ========== =========
The NH MS VA/WV IN AR Unit IPO(5) Sub-Total Cable Sale(6) DBS(7) DBS(8) DBS(9) DBS(10) Total Offering(11) Pro Forma ------- --------- ---------- ------ ------ ------ ------- ----- ------------ --------- Assets: Cash and cash equivalents ........ $32,266 $ 4,490 $ 7,122 $(14,000) $(7,000) $ (8,400) $(2,400) $(20,188) $67,150 $ 46,962 Accounts receivable, net ................ -- 4,468 -- -- -- -- -- 4,468 -- 4,468 Inventories ........... -- 234 -- -- -- -- -- 234 -- 234 Prepaid expenses and other current assets -- 3,009 -- -- -- -- -- 3,009 -- 3,009 Property and equipment, net ................ -- 26,015 (1,888) -- -- -- -- 24,127 -- 24,127 Intangibles ........... -- 127,705 (960) 14,000 10,000 14,000 2,400 167,145 -- 167,145 Other assets .......... -- 2,394 -- -- -- -- -- 2,394 -- 2,394 ------- -------- -------- -------- ------- -------- ------ -------- ------- -------- Total assets ........ $32,266 $168,315 $ 4,274 $ -- $ 3,000 $ 5,600 $ -- $181,189 $67,150 $248,339 ======= ======== ======== ======== ======= ======== ====== ======== ======= ======== Liabilities and Equity: Current liabilities ... $ -- $ 6,566 $ -- -- -- -- -- $ 6,566 $ -- $ 6,566 Notes payable ......... -- 52 -- -- -- -- -- 52 -- 52 Accrued interest ...... -- 3,190 -- 3,190 -- 3,190 Current portion of long-term debt ..... -- 376 -- 376 -- 376 Current portion of program liabilities . -- 1,581 -- -- -- -- -- 1,581 -- 1,581 Long-term debt ........ (3,000) 114,241 -- -- -- -- -- 114,241 (28,600) 85,641 Long-term program liabilities ........ -- 1,540 -- -- -- -- -- 1,540 -- 1,540 Other long-term liabilities ........ -- 137 -- -- -- -- -- 137 -- 137 ------- -------- -------- -------- ------- -------- ------ -------- ------- -------- Total liabilities .. (3,000) 127,683 -- -- -- -- -- 127,683 (28,600) 99,083 Series A Preferred Stock -- -- -- -- -- -- -- -- 95,750 95,750 Minority interest(12) ... -- -- -- -- 3,000 -- -- 3,000 -- 3,000 Class A Common Stock(13) 35 47 -- -- -- 4 -- 51 -- 51 Class B Common Stock .... 46 46 -- -- -- -- -- 46 -- 46 Additional paid-in capital ............... 38,004 -- -- -- -- -- -- -- -- (1,400) (1,419) 57,136 5,596 62,732 -- 62,732 Retained earnings (deficit) ............. -- (3,204) 4,274 -- -- -- -- 1,070 -- 1,070 Partners deficit ........ -- (13,393) -- -- -- -- -- (13,393) -- (13,393) ------- -------- -------- -------- ------- -------- ------ -------- ------- -------- Total equity .......... 35,266 40,632 4,274 -- -- 5,600 -- 50,506 -- 50,506 ------- -------- -------- -------- ------- -------- ------ -------- ------- -------- Total liabilities and equity ....... $32,266 $168,315 $ 4,274 $ -- $ 3,000 $ 5,600 $ -- $181,189 $67,150 $248,339 ======= ======== ======== ======== ======= ========= ====== ======== ======= ========
37 NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET (DOLLARS IN THOUSANDS) (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 Initial Public Offering) and $150,000 of Class A Common Stock (valued at the price to the public in the Initial 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 Initial 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 Initial Public Offering), all of which is allocated to DBS rights. (4) To record the Ohio DBS Acquisition for $12.0 million in cash, all of which is allocated to DBS rights. (5) To record the net proceeds from the Initial Public Offering and the uses of such proceeds. (6) To record the New Hampshire Cable Sale for $7.1 million, net of commission. (7) To record the Mississippi DBS Acquisition for $14.0 million, all of which is allocated to DBS rights. (8) To record the Virginia/West Virginia DBS Acquisition for total consideration of approximately $10.0 million, consisting of $7.0 million in cash, $3.0 million of preferred stock of a subsidiary of Pegasus and warrants to purchase 30,000 shares of Class A Common Stock, all of which is allocated to DBS rights. (9) To record the Indiana DBS Acquisition for total consideration of approximately $14.0 million, consisting of $8.4 million in cash and $5.6 million in Class A Common Stock at an assumed value of $14.00 per share, all of which is allocated to DBS rights. (10) To record the Arkansas DBS Acquisition for $2.4 million in cash, all of which is allocated to DBS rights. (11) To record the net proceeds from this Offering and the intended uses of such proceeds (dollars in thousands). Source of proceeds: Gross proceeds from this Offering ................. $100,000 ======== Intended uses of proceeds: Repay indebtedness under the New Credit Facility .. $ 28,600 General corporate purposes ........................ 35,350 Cash pending Mississippi DBS Acquisition .......... 14,000 Cash pending Virginia/West Virginia DBS Acquisition. 7,000 Cash pending Indiana DBS Acquisition .............. 8,400 Cash pending Arkansas DBS Acquisition ............. 2,400 Underwriters' discount and transaction costs related to the Unit Offering .................... 4,250 -------- Total intended uses of proceeds ........ $100,000 ======== (12) Represents preferred stock of a subsidiary of Pegasus to be issued in connection with the Virginia/West Virginia DBS Acquisition. (13) Pegasus is a newly-formed subsidiary of the Parent that prior to the consummation of the Initial Public Offering had no material assets or operating history. Prior to the Initial Public Offering, PM&C conducted through subsidiaries the Company's operations as described herein. Simultaneously with the consummation of the Initial 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. 38 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 nine months ended September 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 nine months ended September 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 Information," which are included elsewhere herein. 39 SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, -------------------------------------------------------------- 1991(1) 1992 1993 (1) 1994 1995 ---------- ---------- ---------- ---------- --------- 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 Dividends on Series A Preferred Stock .......... -- -- -- -- -- ---------- ---------- ---------- ---------- --------- Net income (loss) applicable to common shares ......... $(1,016) $(1,686) $(4,805) $(5,651) $ 2,054 ========== ========== ========== ========== ========= Income (loss) per share: Loss before extraordinary item ..................... $ (1.56) Extraordinary item .......... 1.95 --------- Net income (loss) per share . $ 0.39 ========= Weighted average shares outstanding (000's) ...... 5,236 ========= Other Data: Location Cash Flow (5) ...... $ 1,007 $ 2,638 $ 7,252 $10,038 $11,007 Operating Cash Flow (5) ..... 801 2,131 5,795 8,100 9,287 Capital expenditures ........ 213 681 885 1,264 2,640 Ratio of earnings to combined fixed charges and preferred stock dividends(6) -- -- -- -- --
Nine Months Ended September 30, -------------------------------------- Pro Pro Forma Forma 1995 (2) 1995 1996 1996 (2) ----------- --------- ---------- ------------ Income Statement Data: Net revenues: TV ....................... $ 27,305 $13,563 $18,363 $19,031 DBS ...................... 4,924 953 2,601 6,870 Cable .................... 14,919 7,913 9,073 11,867 Other .................... 100 55 83 83 ----------- --------- ---------- ------------ Total net revenues ..... 47,248 22,484 30,120 37,851 ----------- --------- ---------- ------------ Location operating expenses: TV ....................... 19,210 10,060 12,753 13,247 DBS ...................... 5,077 914 2,371 6,040 Cable .................... 8,044 4,389 4,915 6,432 Other .................... 38 19 17 17 Incentive compensation (3) .. 511 444 605 538 Corporate expenses .......... 1,364 1,025 1,074 1,183 Depreciation and amortization 15,368 6,240 8,479 12,223 ----------- --------- ---------- ------------ Income (loss) from operations (2,364) (607) (94) (1,829) Interest expense ............ (9,035) (5,970) (8,929) (7,913) Interest income ............. 129 184 172 172 Other expense, net .......... (58) (68) (77) (74) Provision (benefit) for taxes 30 30 (110) (110) Extraordinary gain (loss) from extinguishment of debt ..................... --(4) 6,931 (251) --(4) ----------- --------- ---------- ------------ Net income (loss) ........... (11,358) 440 (9,069) (9,534) Dividends on Series A Preferred Stock .......... (12,000) -- -- (9,000) ----------- --------- ---------- ------------ Net income (loss) applicable to common shares ......... $(23,358) $ 440 $(9,069) $ (18,534) =========== ========= ========== ============ Income (loss) per share: Loss before extraordinary item ..................... $ (2.53) $ (1.68) $ (2.00) Extraordinary item .......... --(4) (0.05) --(4) ----------- ---------- ------------ Net income (loss) per share . $ (2.53) $ (1.73) $ (2.00) =========== ========== ============ Weighted average shares outstanding (000's) ...... 9,245 5,236 9,245 =========== ========== ============ Other Data: Location Cash Flow (5) ...... $ 14,879 $ 7,102 $ 10,064 $ 12,115 Operating Cash Flow (5) ..... 13,159 5,721 8,990 10,932 Capital expenditures ........ 3,022 2,064 2,607 2,520 Ratio of earnings to combined fixed charges and preferred stock dividends (6) -- -- -- --
Pro Forma Twelve Months Ended September 30, 1996 (2) ----------------- Net revenues ................ $52,574 Location Cash Flow (5) ...... 17,097 Operating Cash Flow (5) ..... 15,674 Ratio of Operating Cash Flow to interest expense (5) .. 1.4x Ratio of total debt to Operating Cash Flow (5) .. 5.5x
As of December 31, --------------------------------------------------------- 1991 1992 1993 1994 1995 -------- -------- --------- ---------- --------- Balance Sheet Data: Cash and cash equivalents ...$ 901 $ 938 $ 1,506 $ 1,380 $21,856 Working capital (deficiency) 78 (52) (3,844) (23,074) 17,566 Total assets ................ 17,306 17,418 76,386 75,394 95,770 Total debt (including current) ................. 13,675 15,045 72,127 61,629 82,896 Total liabilities ........... 14,572 16,417 78,954 68,452 95,521 Redeemable preferred stock .. -- -- -- -- -- Minority interest ........... -- -- -- -- -- Total equity (deficit) (7) .. 2,734 1,001 (2,427) 6,942 249
As of September 30, 1996 ------------------------------ Actual Pro Forma (2) Balance Sheet Data: Cash and cash equivalents ....................... $ 5,668 $ 46,962 Working capital (deficiency) .................... 1,014 42,908 Total assets .................................... 122,569 248,339 Total debt (including current)................... 117,669 86,069 Total liabilities ............................... 131,283 99,083 Redeemable preferred stock ...................... -- 95,750 Minority interest ............................... -- 3,000 Total equity (deficit) (7) ...................... (8,714) 50,506 (See footnotes on the following page)
40 NOTES TO SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA (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, nine months ended September 30, 1996 and the twelve months ended September 30, 1996 give effect to the Completed Transactions, the Transactions and this Offering and the use of proceeds thereof (except for the DBS Acquisitions) as if such events had occurred in the beginning of such periods. The pro forma balance sheet data as of September 30, 1996 give effect to the acquisitions after September 30, 1996, the Initial Public Offering and this Offering and the use of proceeds thereof (including the DBS Acquisitions) as if such events had occurred on such date. See "Pro Forma Combined Financial Information." The Company believes that the historical income statement and other data for the DBS Acquisitions in the aggregate would not materially impact the Company's historical and pro forma income statement data and other 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 and the nine months ended September 30, 1996, do not include the extraordinary gain on the extinguishment of debt of $10.2 million and the $251,000 writeoff of deferred financing costs that were incurred in 1995 in connection with the creation of the Old Credit Facility, respectively. (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. Operating Cash Flow is defined as income (loss) from operations plus (i) depreciation and amortization and (ii) non-cash incentive compensation. The difference between Location Cash Flow and Operating Cash Flow is that Operating Cash Flow includes cash incentive compensation and corporate expenses. Although Operating Cash Flow and Location Cash Flow are not measures of performance under generally accepted accounting principles, the Company believes that Location Cash Flow and Operating Cash Flow 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) For purposes of this calculation, earnings are defined as net income (loss) before income taxes and extraordinary items and fixed charges. Fixed charges consist of interest expense, amortization of deferred financing costs and the component of operating lease expense which management believes represents an appropriate interest factor. Earnings were inadequate to cover combined fixed charges and preferred stock dividends by approximately $1.0 million, $1.7 million, $4.8 million, $4.9 million, $8.1 million, $6.5 million and $8.9 million, for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 and for the nine months ended September 30, 1995 and 1996, respectively. On a pro forma basis, earnings were insufficient to cover combined fixed charges and preferred stock dividends by approximately $23.3 million and $18.6 million for the year ended December 31, 1995, and the nine months ended September 30, 1996, respectively. (7) The Company has not paid any cash dividends and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Payment of cash dividends on the Company's Common Stock will be restricted by the terms of the Series A Preferred Stock and the Exchange Notes. The terms of the Series A Preferred Stock and the Exchange Notes will permit the Company to pay dividends and interest thereon by issuance, in lieu of cash, of additional shares of Series A Preferred Stock and additional Exchange Notes, respectively. 41 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 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 Clas 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) Ohio DBS Acquisition ................ November 1996 $12.0 $12.0 cash Pending acquisitions: Arkansas DBS Acquisition ............ (11) $ 2.4 $2.4 cash Indiana DBS Acquisition ............. (11) $14.0 $8.4 cash and $5.6 of Class A Common Stock or preferred stock of Pegasus convertible into Class A Common Mississippi DBS Acquisition ......... (11) $14.0 $14.0 cash Virginia/West Virginia DBS (11) $10.0 $7.0 cash, $3.0 of preferred stock of a subsidiary Acquisition ........................ of Pegasus and warrants to purchase 30,000 shares of Class A Common Stock 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 in October 1996. (10) The number of shares of Common Stock issued in connection with these acquisitions was based on the $14.00 price per share in the Initial Public Offering. (11) The Company anticipates that each of the DBS Acquisitions will occur after the consummation of this Offering; however, there can be no assurance that all or any of the DBS Acquisitions 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 in the first quarter of 1997; however, there can be no assurance that the New Hampshire Cable Sale will be completed on the terms described herein or at all. 42 CORPORATE STRUCTURE REORGANIZATION The Company's Combined Financial Statements include the accounts of PM&C, PM&C's subsidiaries, Towers and Pegasus Communications Management Company. Concurrently with the consummation of the Initial 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. The Company is offering through the Registered Exchange Offer to exchange all of the PM&C Class B Shares for 191,792 shares of Class A Common Stock in the aggregate. Upon consummation of the Initial 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 Initial 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, 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. 43 SUMMARY COMBINED OPERATING RESULTS (DOLLARS IN THOUSANDS)
Nine Months Year Ended December 31, Ended September 30, ---------------------------------- ---------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- Net revenues: TV ................................ $10,307 $17,808 $19,973 $13,563 $18,363 DBS ............................... -- 174 1,469 953 2,601 Cable: Puerto Rico Cable ............... 3,187 3,842 4,007 3,010 3,532 New England Cable ............... 5,947 6,306 6,599 4,903 5,541 -------- -------- ------- ------- ------- Total Cable net revenues ....... 9,134 10,148 10,606 7,913 9,073 -------- -------- ------- ------- ------- Other ............................. 46 61 100 55 83 -------- -------- ------- ------- ------- Total ........................ 19,487 28,191 32,148 22,484 30,120 ======== ======== ======= ======= ======= Location operating expenses: TV ................................ 7,564 12,380 13,933 10,060 12,753 DBS ............................... -- 210 1,379 914 2,371 Cable: Puerto Rico Cable ............... 1,654 2,319 2,450 1,856 2,069 New England Cable ............... 3,001 3,226 3,341 2,533 2,846 -------- -------- ------- ------- ------- Total Cable location operating expenses ........................ 4,655 5,545 5,791 4,389 4,915 -------- -------- ------- ------- ------- Other ............................. 16 18 38 19 17 -------- -------- ------- ------- ------- Total ........................ 12,235 18,153 21,141 15,382 20,056 ======== ======== ======= ======= ======= Location Cash Flow(1): TV ................................ 2,744 5,428 6,040 3,503 5,610 DBS ............................... -- (36) 90 39 230 Cable: Puerto Rico Cable ............... 1,533 1,523 1,557 1,134 1,463 New England Cable ............... 2,945 3,080 3,258 2,390 2,695 -------- -------- ------- ------- ------- Total Cable Location Cash Flow .. 4,478 4,603 4,815 3,524 4,158 -------- -------- ------- ------- ------- Other ............................. 30 43 62 36 66 -------- -------- ------- ------- ------- Total ........................ $ 7,252 $10,038 $11,007 $ 7,102 $10,064 ======== ======== ======= ======= ======= Other data: Growth in net revenues ............ 266% 45% 14% 14% 34% Growth in Location Cash Flow ...... 175% 38% 10% 10% 42%
- ------ (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. 44 NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1995 The Company's net revenues increased by approximately $7.6 million or 34% for the nine months ended September 30, 1996 as compared to the same period in 1995 as a result of (i) a $4.8 million or 35% increase in TV revenues of which $942,000 or 20% was due to ratings growth which the Company was able to convert into higher revenues and $3.9 million or 80% was the result of acquisitions made in the first quarter of 1996, (ii) a $1.6 million or 173% increase in revenues from the increased number of DBS subscribers, (iii) a $521,000 or 17% increase in Puerto Rico Cable revenues due primarily to acquisitions effective September 1, 1996, (iv) a $638,000 or 13% increase in New England Cable revenues due primarily to rate increases and new combined service packages, and (v) a $28,000 increase in Tower rental income. The Company's total location operating expenses increased by approximately $4.7 million or 30% for the nine months ended September 30, 1996 as compared to the same period in 1995 as a result of (i) a $2.7 million or 27% increase in TV operating expenses as the net result of a $47,000 or 1% decrease in same station direct operating expenses and a $2.6 million increase attributable to stations acquired in the first quarter of 1996, (ii) a $1.5 million or 159% increase in operating expenses generated by the Company's DBS operations due to an increase in programming costs of $857,000, royalty costs of $87,000, marketing expenses of $246,000, customer support charges of $119,000 and other DIRECTV costs such as security, authorization fees and telemetry and tracking charges totaling $169,000, all associated with the increased number of DBS subscribers, (iii) a $212,000 or 11% increase in Puerto Rico Cable operating expenses as the net result of a $36,000 or 2% decrease in same system direct operating expenses and a $248,000 increase attributable to the system acquired effective September 1, 1996, (iv) a $313,000 or 12% increase in New England Cable operating expenses due primarily to increases in programming costs associated with the new combined service packages, and (v) a $2,000 decrease in Tower administrative expenses. As a result of these factors, Location Cash Flow increased by $3.0 million or 42% for the nine months ended September 30, 1996 as compared to the same period in 1995 as a result of (i) a $2.1 million or 60% increase in TV Location Cash Flow of which $942,000 or 45% was due to an increase in same station Location Cash Flow and $1.2 million or 55% was due to an increase attributable to stations acquired in the first quarter of 1996, (ii) a $191,000 increase in DBS Location Cash Flow, (iii) a $309,000 or 27% increase in Puerto Rico Cable Location Cash Flow of which $73,000 or 24% was due to an increase in same system Location Cash Flow and $236,000 or 76% was due to the San German Cable System acquired effective September 1, 1996, (iv) a $325,000 or 14% increase in New England Cable Location Cash Flow, and (v) a $30,000 increase in Tower Location Cash Flow. The Company expects to continue to report increases in Location Cash Flow in the fourth quarter of 1996 but does not expect that such increases will continue at the same rate as was experienced in the first three quarters of 1996. As a result of these factors, incentive compensation which is calculated from increases in Location Cash Flow increased by approximately $161,000 for the nine months ended September 30, 1996 as compared to the same period in 1995 due mainly to the increases in revenues. Corporate expenses increased by $49,000 or 5% for the nine months ended September 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 $2.2 million for the nine months ended September 30, 1996 as compared to the same period in 1995 as the Company increased its fixed and intangible assets as a result of three completed acquisitions during 1996. As a result of these factors, income from operations increased by approximately $513,000 for the nine months ended September 30, 1996 as compared to the same period in 1995. Interest expense increased by approximately $3.0 million or 50% for the nine months ended September 30, 1996 as compared to the same period in 1995 as a result of a combination of the Company's issuance of 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 debt on which the effective interest rate was lower than the 12.5% interest rate under the Notes. 45 The Company's net loss increased by $9.5 million for the nine months ended September 30, 1996 as compared to the same period in 1995 and was the net result of an increase in income from operations of approximately $513,000, an increase in interest expenses of $3.0 million, a decrease in extraordinary items of $7.2 million from extinguishment of debt, a decrease in the provision for income taxes of $140,000 and a decrease in other expenses of approximately $21,000. 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 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. 46 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. 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. 47 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. During the nine months ended September 30, 1996, net cash provided by operations was approximately $156,000 which, together with $12.0 million of cash on hand, $9.9 million of restricted cash and $30.2 million of net cash provided by the Company's financing activities was used to fund investing activities of $46.5 million. Investment activities consisted of (i) the Portland Acquisition and the Tallahassee Acquisition for approximately $17.1 million, (ii) the Cable Acquisition for $26.0 million, (iii) the purchase of the Pegasus Cable Television of Connecticut, Inc. ("PCT-CT") office facility and headend facility for $201,000, (iv) the fiber upgrade the PCT-CT Cable system amounting to $323,000, (v) the purchase of DSS units used as rental and lease units amounting to $832,000 and (vi) maintenance and other capital expenditures and intangibles totaling approximately $2.4 million. As of September 30, 1996, the Company's cash on hand approximated $5.7 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. On October 8, 1996, the Company completed the Initial Public Offering in which it sold 3,000,000 shares of its Class A Common Stock to the public at a price of $14.00 per share resulting in net proceeds to the Company of approximately $38.1 million. The Company applied the net proceeds from the Initial 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) $12.0 million to the Ohio DBS Acquisition, (iii) $3.0 million to repay indebtedness under the New Credit Facility, (iv) $1.9 million to make a payment on account of the Portland Acquisition, (v) $1.4 million for the payment of the cash portion of the purchase price of the Management Agreement Acquisition, and (vi) $1.4 million for the Towers Purchase. The Management Agreement Acquisition and the Towers Purchase were accounted for using the pooling of interest method. The net proceeds to the Company from the sale of the Units in this Offering, after deducting underwriting discounts and commissions and estimated fees and expenses of this Offering, are estimated to be approximately $95.8 million. The Company intends to apply (i) $28.6 million of the net proceeds of this Offering to the repayment of all outstanding Indebtedness under the New Credit Facility, (ii) $14.0 million for the Mississippi DBS Acquisition, (iii) $8.4 million for the cash portion of the Indiana DBS Acquisition, (iv) $7.0 million for the cash portion of the purchase price of the Virginia/West Virginia DBS Acquisition and (v) $2.4 million for the Arkansas DBS Acquisition. The remaining net proceeds together with available borrowings under the New Credit Facility and proceeds from the New Hampshire Cable Sale will be used for 48 working capital, general corporate purposes and to finance future acquisitions. The Company engages in discussions with respect to acquisition opportunities in media and communications businesses on a regular basis. Although the Company is in various stages of discussions in connection with potential acqisitions, the Company has not entered into any letters of intent, except in connection with the DBS Acquisitions, or any definitive agreements with respect to any such acquisitions at this time. The Company anticipates entering into definitive agreements with respect to each of the DBS Acquisitions prior to the consummation of this Offering. See "Risk Factors -- Risks Attendant to Acquisition Strategy" and "-- Discretion of Management Concerning Use of Proceeds." The Company intends to temporarily invest the net remaining proceeds in short-term, investment grade securities. If any of the DBS Acquisitions are not consummated, the Company intends to use the net proceeds designated for any such acquisition for working capital, general corporate purposes and to finance future acquisitions. The Company is highly leveraged. As of September 30, 1996, on a pro forma basis after giving effect to this Offering and the use of the proceeds therefrom, the Completed Transactions, the Transactions and the DBS Acquisitions, the Company would have had Indebtedness of $86.1 million, total stockholders' equity of $50.5 million and Preferred Stock of $95.8 million and, assuming certain conditions are met, $50.0 million available under the New Credit Facility. For the year ended December 31, 1995 and the nine months ended September 30, 1996, on a pro forma basis after giving effect to this Offering and the use of the proceeds therefrom, the Completed Transacations, the Transactions and the DBS Acquisitions, the Company's earnings would have been inadequate to cover its combined fixed charges and Series A Preferred Stock dividends by approximately $23.3 million and $18.6 million, respectively. The ability of the Company to repay its existing indebtedness and to pay dividends on the Series A Preferred Stock and to redeem the Series A Preferred Stock at maturity 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. See "Risk Factors -- Substantial Indebtedness and Leverage" "--Inability to Access Cash Flow of Subsidiaries." 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. See "Description of Indebtedness." 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. The Company repaid $3.0 million of indebtedness under the New Credit Facility with proceeds from the Initial Public Offering. Upon repayment of $28.6 million of the New Credit Facility from the proceeds of this Offering, the Company will be able to draw down $50.0 million from the New Credit Facility, subject to certain exceptions. See "Description of Indebtedness -- New Credit Facility." The Company believes that following this Offering that it will have adequate resources to meet its working capital, maintenance capital expenditure and debt service obligations. The Company believes that the net proceeds of this Offering together with available borrowings under the New Credit Facility and future indebtedness which may be incurred by the Company and its subsidiaries 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 49 Company would expect to avail itself of such opportunities and thereby increase its indebtedness which could result in increased debt service requirements. 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 for 1996 and 1997 of $15.9 million in comparison to $2.6 million in 1995. With the exception of recurring renewal and refurbishment expenditures of approximately $2.0 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 1997, after giving effect to the DBS Acquisitions, 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 $5.3 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 $2.0 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. See "Risk Factors -- Limitations on Access to Cash Flow Subsidiaries; Holding Company Structure." 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. In October 1995, FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which became effective for transactions entered into in fiscal years beginning after December 15, 1995. SFAS No. 123 encourages a fair value based method of accounting for employee stock options or similar equity instruments, but allows continued use of the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Companies electing to continue to use APB No. 25 must make pro forma disclosures of net income as if the fair value based method of accounting had been applied. The new accounting standard has not had an impact on the Company's net income or financial position, as the Company has chosen to continue to utilize the accounting guidance set forth in APB No. 25. 50 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. 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 Initial 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. 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 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. The Company seeks to acquire (i) new DIRECTV services territories in order to maintain its position as the largest independent provider of DIRECTV services and to capitalize on operating efficiencies and economies of scale and (ii) new television and cable properties at attractive prices for which the Company can improve its operating results. After giving effect to the Completed Transactions and the Transactions, the Company would have had pro forma net revenues and Operating Cash Flow of $52.6 million and $15.7 million, respectively, for the twelve months ended September 30, 1996. The Company's net revenues and Operating Cash Flow have increased at a compound annual growth rate of 98% and 85%, 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 51 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. 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." The Company's acquisition strategy in TV seeks to identify stations in markets of between 200,000 and 600,000 television households (DMAs 40 to 120) which have no more than four competitive commercial television stations licensed to them and which have a stable and diversified economic base. The Company has focused upon these markets because it believes that they have exhibited consistent and stable increases in local advertising and that television stations in them have fewer and less aggressive direct competitors. In these markets, the Company seeks television stations whose revenues and market revenue share can be substantially improved with limited increases in their fixed costs. The Company is actively seeking to acquire additional stations in new markets and to enter into LMAs with owners of stations or construction permits in markets where it currently owns and operates Fox affiliates. The Company has historically purchased Fox affiliates because (i) Fox affiliates generally have had lower ratings and revenue shares than stations affiliated with ABC, CBS and NBC and, therefore, greater opportunities for improved performance, and (ii) Fox affiliated stations retain a greater share of their inventory of advertising spots than do stations affiliated with ABC, CBS or NBC, thereby enabling these stations to retain a greater share of any increase in the value of their inventory. The Company is pursuing expansion in its existing markets through LMAs because second stations can be operated with limited additional fixed costs (resulting in high incremental operating margins) and can allow the Company to create more attractive packages for advertisers and program providers. THE STATIONS The following table sets forth general information for each of the Company's stations.
Number Acquisition Station Market of TV Station Date Affiliation Area DMA Households(1) ---------------- -------------- ------------- --------------- ----- ------------- Existing Stations: WWLF-56/WILF-53/ WOLF-38(6) .... May 1993 Fox Northeastern PA 49 553,000 WPXT-51 ........ January 1996 Fox Portland, ME 79 344,000 WDSI-61 ........ May 1993 Fox Chattanooga, TN 82 320,000 WDBD-40 ........ May 1993 Fox Jackson, MS 91 287,000 WTLH-49 ........ March 1996 Fox Tallahassee, FL 116 210,000 Additional Stations: WOLF-38(6) ..... May 1993 UPN Northeastern PA 49 553,000 WWLA-35(7) ..... May 1996 UPN Portland, ME 79 344,000
52
Ratings Rank ------------------------------- Oversell Station Competitors(2) Prime(3) Access(4) Ratio(5) ---------------- -------------- ------------- --------------- -------- Existing Stations: WWLF-56/WILF-53/ WOLF-38(6) .... 3 3(tie) 1 166% WPXT-51 ........ 3 2 4 122% WDSI-61 ........ 4 4 3 125% WDBD-40 ........ 3 2 (tie) 2 114% WTLH-49 ........ 3 2 2 100% Additional Stations: WOLF-38(6) ..... 3 N/A N/A N/A WWLA-35(7) ..... 3 N/A N/A N/A
53 (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 and assuming no adverse change in current FCC regulatory requirements, 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 assuming no adverse change in current FCC regulatory requirements. 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. 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 the only one among the top 50 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 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 the Company's 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. The ability of the Company to program WOLF if a divestiture is necessary may also depend on no adverse change in current FCC regulatory requirements regarding the attribution of LMAs. See "-- Licenses, LMAs, DBS Agreements and Cable Franchises" and "Risk Factors -- Government Legislation, Regulation, Licenses and Franchises." 54 PORTLAND, MAINE Portland is the 79th largest DMA in the United States, comprising 12 counties in Maine, New Hampshire and Vermont 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 55 approximately $41.6 million. In addition to WPXT, there are four VHF and two UHF stations authorized in the Portland DMA, including one VHF and two UHF educational stations. The Portland DMA has allocations for five other UHF stations, four of which are educational.
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. The Company entered into the Portland LMA with the holder of a construction permit for WWLA, a new TV station 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 November 1996, the FCC granted an application to increase significantly WWLA's authorized power and antenna height in order to expand its potential audience coverage. See "Risk Factors -- Government Legislation, Regulation, Licenses and Franchises." 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." 56
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 VHF 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 four UHF stations that are not operational, one of which is educational.
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 in August 1996, the Company acquired WTLH's FCC licenses and its Fox Affiliation Agreements. 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. In August 1996, the Company also acquired the license for translator station W53HI, Valdosta, Georgia. In October 1996, the FCC consented to the assignment of the construction permit for translator station W13BO, Valdosta, Georgia. Special temporary authorities have been granted by the FCC for continued operation of both translators at relocated facilities, W13BO until May 7, 1997 and W53HI until June 4, 1997. 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 October 23, 1996, there were approximately 2.2 million DIRECTV subscribers. DIRECTV expects to have over 2.3 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 57 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 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 September 1996, the price of DSS units offered by DIRECTV dropped to $399 with a $200 rebate toward the first year of service. The Company believes that this price reduction has helped increase the growth in subscribers of DIRECTV services. There can be no assurance that DIRECTV will continue this pricing program in the future. 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, Michigan, New Hampshire, New York, Ohio and Texas. 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. Upon the consummation of the DBS Acquisitions, the Company will acquire exclusive rights to provide DIRECTV services in rural areas of Arkansas, Indiana, Mississippi, Virginia and West Virginia. 58
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 6,119 2.1% 11.9% 0.5% New Hampshire ........ 167,531 42,075 125,456 3,800 2.3% 7.6% 0.5% Martha's Vineyard and Nantucket ........... 20,154 1,007 19,147 755 3.7% 60.4% 0.8% ------- ---------- -------- Michigan ............. 241,713 61,774 179,939 6,590 2.7% 7.9% 0.9% Texas ................ 149,530 54,504 95,026 5,189 3.5% 7.0% 1.4% Ohio ................. 167,558 32,180 135,378 5,010 3.0% 11.3% 1.0% ----------- --------- ----------- -------------- ------- ---------- -------- Owned ............... 1,034,759 233,005 801,754 27,463 2.7% 9.0% 0.8% $41.26 ----------- --------- ----------- -------------- ------- ---------- -------- ------- DBS Acquisitions: Arkansas ............. 36,458 2,408 34,050 1,652 4.5% 37.4% 2.2% Indiana .............. 131,025 34,811 96,214 5,959 4.5% 11.6% 1.8% Mississippi .......... 101,799 38,797 63,002 6,500 6.4% 14.3% 1.5% Virginia/West Virginia . 92,097 10,015 82,082 5,012 5.4% 38.8% 1.4% DBS Acquisitions .... 361,379 86,031 275,348 19,123 5.3% 16.6% 1.8% ----------- --------- ----------- -------------- ------- ---------- -------- Total .............. 1,396,138 319,036 1,077,102 46,586 3.3% 11.1% 1.0% $40.45 =========== ========= =========== ============== ======= ========== ======== -------
- ------ (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 24,400 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 92,400 seasonal residences. (3) As of December 9, 1996. (4) Based upon November 1996 revenues and average November 1996 subscribers. THE PENDING DBS ACQUISITIONS The Company has entered into letters of intent with respect to the DBS Acquisitions. All of the DBS Acquisitions are subject to the negotiation of a definitive agreement and, among other conditions, the prior approval of Hughes and the NRTC. In addition to these conditions, each of the DBS Acquisitions is also expected to be subject to conditions typical in acquisitions of this nature, certain of which conditions like the Hughes and NRTC consents, may be beyond the Company's control. There can be no assurance that definitive agreements will be entered into with respect to all or any of the DBS Acquisitions or, if entered into, that all or any of the DBS Acquisitions will be completed. See "Risk Factors -- Risks Attendant to Acquisition Strategy." ARKANSAS DBS ACQUISITION In November 1996, the Company entered into a letter of intent to acquire DIRECTV distribution rights for portions of Arkansas and related assets. The letter of intent contemplates a purchase price of approximately $2.4 million in cash, terminates on February 15, 1997 if a definitive agreement is not entered into by that date and provides for a closing to occur no later than March 15, 1997. INDIANA DBS ACQUISITION In December 1996, the Company entered into a letter of intent to acquire DIRECTV distribution rights for portions of Indiana and related assets. The letter of intent contemplates the Company's payment of aggregate consideration of approximately $14.0 million consisting of approximately $8.4 million in cash (subject to adjustments based on the number of subscribers) and approximately $5.6 million in either shares of Class A Common Stock or preferred stock of Pegasus convertible into shares of Class A Common Stock. The letter of intent terminates on January 31, 1997 if no definitive agreement has been entered into by that date. It is anticipated that the Indiana DBS Acquisition will occur in the first quarter of 1997. 59 MISSISSIPPI DBS ACQUISITION In November 1996, the Company entered into a letter of intent to acquire DIRECTV distribution rights for portions of Mississippi and related assets. The letter of intent contemplates a purchase price of approximately $14.0 million in cash (subject to possible adjustment). The letter of intent terminates on January 15, 1997 if no definitive agreement has been entered into by that date and provides for a closing to occur no later than March 31, 1997. VIRGINIA/WEST VIRGINIA DBS ACQUISITION In November 1996, the Company entered into a letter of intent to acquire DIRECTV distribution rights for portions of Virginia and West Virginia and related assets. The letter of intent contemplates that the seller will contribute the acquired assets to a newly formed subsidiary of Pegasus in exchange for (subject to adjustments based on the number of subscribers) (i) $9.0 million in cash or (ii) at the seller's option, $10.0 million consisting of $7.0 million in cash, $3.0 million in preferred stock of the subsidiary, and warrants to purchase 30,000 shares of Class A Common Stock. It is anticipated that the seller will opt for the latter consideration and, as a consequence, this Prospectus assumes that the seller will make such election. The letter of intent terminates on January 31, 1997 if no definitive agreement has been entered into by that date and provides for a closing to occur no later than March 31, 1997. 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 subscribers 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 equipment rental, lease and purchase options. The Company anticipates continued growth in subscribers and operating profitability in DBS through increased penetration of DIRECTV territories it currently owns and will acquire pursuant to the DBS Acquisitions. The Company's New England DBS Territory achieved positive Location Cash Flow in 1995, its first full year of operations. The Company's DIRECTV subscribers currently generate revenues of approximately $41 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 eleven months of 1996, the Company has added 5,163 new DIRECTV subscribers as compared to 3,630 for the same period in 1995 in its New England DBS Territory. 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 collectively own DIRECTV territories consisting of approximately 7.7 million television households in predominantly rural areas of the United States, which the Company believes are among the most likely to subscribe to DBS services. These territories comprise 8% of United States television households, but represent approximately 23% 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 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 60 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, (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 61 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 where authorized DSS dealers offer the purchase, inventory and sale of the DSS unit, the Company seeks to develop close, cooperative relationships with these dealers and provides marketing, subscriber authorization, installation and customer service support. In these circumstances, the dealer earns a profit on the sale of the DSS unit and from a commission payable by the Company for 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 its exclusive DIRECTV territories 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 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 its exclusive DIRECTV territories contain approximately 83,000 commercial locations. 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 62 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 DBS Acquisitions, its exclusive DIRECTV territories will contain approximately 117,000 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. 63 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 19,600 69% $33.04 Mayaguez .......... 62 38,300 34,000 10,800 32% $32.22 San German(6) ..... 50(7) 72,400 47,700 16,100 34% $29.09 ----------- ----------- -------------- -------------- ------------ Total Puerto Rico 110,700 81,700 26,900 33% $30.35 ----------- ----------- -------------- -------------- ------------ To Be Sold: New Hampshire ..... (8) 6,500 6,100 4,300 70% $33.01 ----------- ----------- -------------- -------------- ------------ Total ........... 133,600 104,200 42,200 40% $31.33 =========== =========== ============== ============== ============
- ------ (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 November 30, 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 November 30, 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 22%, 24% and 54% of the Company's 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 November 30, 1996, the system passed approximately 34,000 homes with 260 miles of plant and had 10,800 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. 64 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 November 30, 1996, the system had 16,100 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 26,900 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. 65 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 November 30, 1996, these systems had approximately 19,600 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. In November 1996, the Company entered into a definitive agreement 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 November 30, 1996, these systems had approximately 4,300 basic subscribers. It is anticipated that the New Hampshire Cable Sale will be consummated in the first quarter of 1997 and will result in net proceeds to the company of approximately $7.1 million. 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. 66 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 DIRECTV 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 within 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., 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 and the denial was upheld on appeal. If these entities ultimately obtain the necessary authorizations, they 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 67 average, which represents approximately two-thirds of the typical broadcasting day. UPN and WB program up 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 173 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. 68 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 1980s, the FCC began licensing additional radio spectrum within a portion of the Ku band for broadcast satellite service ("BSS") or 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 69 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. Application has been filed with the FCC for renewal of the WTLA license. 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, each of the stations granted Fox the right to negotiate with the cable operators in their respective markets for retransmission 70 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 LMAs, 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. Pursuant to the 1996 Act, the continued performance of then existing LMAs was generally grandfathered. The Portland LMA has been entered into but its performance is pending completion of construction of the station. The FCC suggested in a recent rulemaking proposal that LMAs entered into after November 6, 1996 will not be grandfathered. The Company cannot predict whether the Portland LMA will be grandfathered. Currently, television LMAs are not considered attributable interests under the FCC's multiple ownership rules. However, the FCC is 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 and could be required to modify existing LMA arrangements. 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 71 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 DIRECTV 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 DIRECTV's 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 DIRECTV 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 the DIRECTV satellites are removed 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 DIRECTV, 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 DIRECTV, (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, DIRECTV 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. 72 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 November 30, 1996, after giving effect to the New Hampshire Cable Sale.
Number of Basic Percent of Basic Year of Franchise Expiration Number of Franchises Subscribers Subscribers ---------------------------- -------------------- --------------- ---------------- 1996-1998 .................. 1 2,800 7% 1999-2002 .................. 2 9,700 23% 2003 and thereafter ........ 8 29,700 70% -------------------- --------------- ---------------- Total .................... 11 42,200 100%
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 On February 1, 1996, the Congress passed the 1996 Act. On February 8, 1996, the President signed it into law. This new law will alter federal, state and local laws and regulations regarding telecommunications providers and services, including the Company and the cable television and other telecommunications services provided by the Company. There are numerous rulemakings undertaken and 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. 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 73 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. Ownership Matters. The Communications Act contains a number of restrictions on the ownership and control of broadcast licenses. The Communications Act prohibits the assignment of a broadcast license or the transfer of control of a broadcast licensee without the prior approval of the FCC. The Communications Act and the FCC's rules also place limitations on alien ownership; common ownership of broadcast, cable and newspaper properties; ownership by those not having the requisite "character" qualifications and those persons holding "attributable" interests in the licensee. Attribution Rules. The FCC generally applies its ownership limits to "attributable" interests held by an individual, corporation, partnership or other association. In the case of corporations holding (or through subsidiaries controlling) broadcast licenses, the interests of officers, directors and those who, directly or indirectly, have the right to vote 5% or more of the corporation's stock (or 10% or more of such stock in the case of insurance companies, investment companies and bank trust departments that are passive investors) are generally attributable, except that, in general, no minority voting stock interest will be attributable if there is a single holder of more than 50% of the outstanding voting power of the corporation. The FCC has outstanding a notice of proposed rulemaking that, among other things, seeks comment on whether the FCC should modify its attribution rules by (i) restricting the availability of the single majority shareholder exemption and (ii) attributing under certain circumstances certain interests such as non-voting stock or debt. The Company cannot predict the outcome of this proceeding or how it will affect the Company's business. 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. As required by the 1996 Act, the FCC has amended its rules to allow a person or entity to own or control a network of broadcast stations and a cable system. In addition, 74 the 1996 Act eliminates the statutory prohibition against the ownership of television stations and cable systems in the same geographic market, although FCC rules prohibiting such ownership are still in place. 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, radio broadcast station or cable system 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. In August 1996, the FCC adopted new children's television rules mandating, among other things, that as of January 1, 1997 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 contains a number of provisions relating to television violence, which, among other things, direct the television industry or the FCC to develop a television ratings system and require 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. 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. 75 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 at some point after the ATV operations have commenced. Recently, there has been consideration by the FCC of shortening further this transition period. In August 1995, the FCC commenced a further rulemaking proceeding to address ATV transition issues. In August 1996, the FCC adopted a further notice of proposed rulemaking presenting a proposed table of allotments for television stations for ATV operations. The table is only a draft proposal and may differ significantly from the final table. Implementation of ATV service may impose additional costs on television stations providing the new service, due to increased equipment costs, and may affect the competitive nature of the markets in which the Company operates if competing stations adopt and implement the new technology before the Company's stations. Various proposals have been put forth in Congress to auction the new ATV channels, which could preclude the Company from obtaining such channels if better financed companies were to participate in such auction. The FCC's current proposal that television stations obtain ATV channels and subsequently surrender their existing channels appears to have stalled the auction effort, although the Company cannot predict the ultimate outcome of the legislative consideration of these matters. The FCC is now conducting a rulemaking proceeding to consider changes to the multiple ownership rules that could, under certain limited circumstances, permit common ownership of television stations with overlapping service areas, while imposing restrictions on television LMAs. 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. Alternatively, if no changes are made in the multiple ownership rules relating to local ownership, and LMAs are made attributable, certain plans of the Company may be prohibited. Proposed changes in the FCC's "attribution" rules may also limit the ability of certain investors to invest in the Company. 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 limited 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 76 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 PTAR, 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. Additionally, irrespective of the FCC rules, the Antitrust Agencies have the authority to determine that a particular transaction presents antitrust concerns. The Antitrust Agencies have recently increased their scrutiny of the television and radio industries, and have indicated their intention to review matters related to the concentration of ownership within markets (including LMAs) even when the ownership or LMA in question is permitted under the regulations of the FCC. There can be no assurance that future policy and rulemaking activities of the Antitrust Agencies will not impact the Company's operations (including existing stations or markets) or expansion strategy. DBS Unlike a common carrier, such as a telephone company, or a cable operator, DBS operators such as DIRECTV are free to set prices and serve customers according to their business judgment, without rate of return or other regulation or the obligation not to discriminate among customers. However, there are laws and regulations that affect DIRECTV and, therefore, affect the Company. As an operator of a privately owned United States satellite system, DIRECTV is subject to the regulatory jurisdiction of the FCC, primarily with respect to (i) the licensing of individual satellites (i.e., the requirement that DIRECTV meet minimum 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. The United States Court of Appeals for the District of Columbia Circuit recently upheld a provision of the 1992 Cable Act requiring DBS providers to reserve not less than four nor more than seven percent of their channel capacity exclusively for noncommercial programming of an educational or informational nature. A rulemaking is pending to implement this requirement. 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. On August 6, 1996, the FCC released a Further Notice of Proposed Rulemaking to determine whether to prohibit restrictions against the placement on rental property of DBS dishes and devices used for reception of over-the-air broadcast and MMDS services. 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 77 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. Cable Rate Regulation. In June 1995, the FCC adopted rules which provide significant rate relief for small cable operators, which include operators the size of 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. 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. 78 Anti-Buy Through Provisions. In March 1993, the FCC adopted regulations pursuant to the 1992 Cable Act which require cable systems to permit customers to purchase video programming on a per channel or a per program basis without the necessity of subscribing to any tier of service, other than the basic service tier, unless the cable system is technically incapable of doing so. Generally, this exemption from compliance with the statute for cable systems that do not have such technical capability is available until a cable system obtains the capability, but not later than December 2002. The Company's systems have the necessary technical capability and have complied with this regulation. Indecent Programming on Leased Access Channels. FCC regulations pursuant to the 1992 Cable Act permit cable operators to restrict or refuse the carriage of indecent programming on so-called "leased access" channels, i.e., channels the operator must set aside for commercial use by persons unaffiliated with the operator. Operators were also permitted to prohibit indecent programming on public access channels. In June 1996, the Supreme Court ruled unconstitutional the indecency prohibitions on public access programming as well as the "segregate and block" restriction on indecent leased access programming. Scrambling. The 1996 Act requires that upon the request of a cable subscriber, the cable operator must, free of charge, fully scramble or otherwise fully block the audio and video programming of each channel carrying adult programming so that a non-subscriber does not receive it. Cable operators must also fully scramble or otherwise fully block the video and audio portion of sexually explicit or other programming that is indecent on any programming channel that is primarily dedicated to sexually oriented programming so that a non-subscriber to such channel may not receive it. Until full scrambling or blocking occurs, cable operators must limit the carriage of such programming to hours when a significant number of children are not likely to view the programming. The Company's systems do not presently have the necessary technical capability to comply with the scrambling requirement. However, the effective date of these requirements has been stayed by the United States District Court for the District of 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. On August 8, 1996, the FCC released its first Report and Order to implement the interconnection provisions of the 1996 Act. Several parties have sought reconsideration of the order by the FCC, and a number of parties also have petitioned for review of the order in several federal courts of appeal. Those petitions have been consolidated before the United States Court of Appeals for the Eighth Circuit, which on October 15, 1996 stayed substantial portions of the FCC order pending judicial review. On November 1, 1996, the Eighth Circuit modified the stay to exclude certain non-pricing portions of the rules that primarily relate to wireless telecommunications providers. One Justice of the U.S. Supreme Court rejected requests to vacate the stay, and the parties that sought to have the stay lifted sought review by other Justices. On November 12, 1996, the Supreme Court denied the application to lift the stay. 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. 79 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. As required by the 1996 Act, the FCC has adopted 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 has adopted 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 FCC also has adopted 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. As required by the 1996 Act, the FCC has amended its rules to allow a person or entity to own or control a network of broadcast stations and a cable system. In addition, the 1996 Act eliminates the statutory prohibition against the ownership of cable systems and television stations in the same geographic market, although FCC rules prohibiting such ownership are still in place. Signal Carriage. The 1992 Cable Act imposed obligations and restrictions on cable operator carriage of non-satellite delivered television stations. Under the must-carry provision of the 1992 Cable Act, a cable operator, subject to certain restrictions, must carry, upon request by the station, all commercial television stations with adequate signals which are licensed to the same market as the cable system. Cable operators are also obligated to carry all local non-commercial stations. If a non-satellite delivered commercial broadcast station does not request carriage under the must-carry provisions of the 1992 Cable Act, a cable operator may not carry that station without that station's explicit written consent for the cable operator to retransmit its programming. The Company is carrying all television stations that have made legitimate requests for carriage. All other television stations are carried pursuant to written retransmission consent agreements. Copyright Licensing. Cable systems are subject to federal copyright licensing covering carriage of broadcast signals. In exchange for making semi-annual payments to a federal copyright royalty pool and meeting certain other obligations, cable operators obtain a blanket license to retransmit broadcast signals. Bills 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 80 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 cable service rates. The specific terms and conditions of a franchise and the laws and regulations under which it was granted directly affect the profitability of the cable system. Cable franchises generally contain provisions governing fees to be paid to the franchising authority, length of the franchise term, renewal, sale or transfer of the franchise, territory of the franchise, design and technical performance of the system, use and occupancy of public streets and number and types of cable services provided. Although federal law has established certain procedural safeguards to protect incumbent cable television franchisees against arbitrary denials of renewal, the renewal of a franchise cannot be assured unless the franchisee has met certain statutory standards. Moreover, even if a franchise is renewed, a franchising authority may impose new and stricter requirements, such as the upgrading of facilities and equipment or higher franchise fees (subject, however, to limits set by federal law). To date, however, no request of the Company for franchise renewals or extensions has been denied. Despite favorable legislation and good relationships with its franchising authorities, there can be no assurance that franchises will be renewed or extended. Various proposals have been introduced at the state and local levels with regard to the regulation of cable systems, and several states have adopted legislation subjecting cable systems to the jurisdiction of centralized state governmental agencies, some that impose regulation similar to that of a public utility. Attempts in other states to regulate cable systems are continuing and can be expected to increase. Such proposals and legislation may be preempted by federal statute and/or FCC regulation. Massachusetts and Connecticut have adopted state level regulation. The foregoing does not purport to describe all present and proposed federal, state and local regulations and legislation relating to the cable industry. Other existing federal regulations, copyright licensing and, in many jurisdictions, state and local franchise requirements currently are the subject of a variety of judicial proceedings, legislative hearings and administrative and legislative proposals which could change, in varying degrees, the manner in which cable systems operate. Neither the outcome of these proceedings nor the impact upon the cable industry or the Company's Cable systems can be predicted at this time. 81 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:
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 3/31/98 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 9/30/97 (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. 82 EMPLOYEES As of October 31, 1996, the Company had 266 full-time and 26 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 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. On December 16, 1996, the Connecticut DPUC issued a draft decision approving the new rates. Final action by the Connecticut DPUC is scheduled for December 31, 1996. 83 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(1) 39 Director Mary C. Metzger(2) ..... 50 Director Donald W. Weber(1)(2) .. 60 Director
- ------ (1) Member of Compensation Committee. (2) Member of Audit Committee. 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. 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 84 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. 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. Mary C. Metzger has been a Director of Pegasus since November 14, 1996. Ms. Metzger has been Chairman of Personalized Media Communications L.L.C. and its predecessor company, Personalized Media Communications Corp. since February 1989. Ms. Metzger has also been Managing Director of Video Technologies International, Inc. since June 1986. 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. 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. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to the Initial Public Offering, Pegasus 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 Pegasus. Pegasus' compensation committee currently consists of Messrs. McEntee and Weber. COMPENSATION OF DIRECTORS Under Pegasus' By-laws, each director is entitled to receive such compensation, if any, as may from time to time be fixed by the Board of Directors. Pegasus currently pays its directors who are not employees or officers of Pegasus an annual retainer of $5,000 plus $500 for each Board meeting attended in person and $250 for each Board meeting held by telephone. Pegasus also reimburses each director for all reasonable expenses incurred in traveling to and from the place of each meeting of the Board or committee of the Board. 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 $14.00 per share. Mr. Weber's option vested upon issuance, is exercisable until November 2000 and, at the time of grant, was issued at an exercise price equal to fair market value at the time Mr. Weber was elected a director. MANAGEMENT AGREEMENT The Management Company performed 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 Initial 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 (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 85 determined by Kane Reece Associates, Inc. ("Kane Reece"), an independent appraiser, based upon a discounted cash flow approach using historical financial results and management's financial projections. In return for Kane Reece's services, the Company incurred a fee of approximately $15,000 plus expenses. Under the Management Agreement, the Management Company provided specified executive, administrative and management services to PM&C and its operating subsidiaries. These services included: (i) selection of personnel; (ii) review, supervision and control of accounting, bookkeeping, recordkeeping, reporting and revenue collection; (iii) supervision of compliance with legal and regulatory requirements; and (iv) conduct and control of daily operational aspects of the Company. In consideration for the services performed by the Management Company under the Management Agreement, the Company was charged management fees, which represented 5% of the Company's net revenues, and reimbursements for the Management Company's accounting department costs. The Management Company's offices are located at 5 Radnor Corporate Center, Suite 454, Radnor, Pennsylvania 19087. MANAGEMENT SHARE EXCHANGE Certain members of the Company's management, including all of the Company's executive officers with the exception of Marshall W. Pagon and Ted S. Lodge, held prior to the consummation of the Initial Public Offering 5,000 shares in the aggregate of Parent Non-Voting Stock. Upon consummation of the Initial Public Offering, all shares of the Parent Non-Voting Stock were exchanged for an aggregate of 263,606 shares of Class A Common Stock and the Parent Non-Voting Stock was distributed to the Parent. TOWERS PURCHASE Simultaneously with the completion of the Initial 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 consisted of ownership and leasehold interests in three tower properties. Towers leased space on each of its towers to the Company and to unaffiliated companies. The purchase price was determined by an independent appraisal. SPLIT DOLLAR AGREEMENT In December 1996, the Company entered into a Split Dollar Agreement with the trustees of an insurance trust established by Marshall W. Pagon. Under the Split Dollar Agreement, the Company 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. 86 EXECUTIVE COMPENSATION The salaries of the Company's executive officers were historically paid by the Management Company. Upon the closing of the Initial 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 Initial 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 Initial Public Offering, all of the Parent's Non-Voting Common Stock were exchanged for shares of Class A Common Stock pursuant to the Managaement Share Exchange. INCENTIVE PROGRAM GENERAL The Incentive Program, which includes the Restricted Stock Plan (as defined), the 401(k) Plans (as defined) and the Stock Option Plan (as defined), is designed to promote growth in stockholder value by providing employees with restricted stock awards in the form of Class A Common Stock and grants of options 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. 87 Although the Restricted Stock Plan and 401(k) Plans like conventional stock option programs provide compensation to employees as a function of growth in stockholder value, the tax and accounting treatments of these programs are different. For tax purposes, incentive compensation awarded under the Restricted Stock Plan (upon vesting) and the 401(k) Plans is fully tax deductible as compared to conventional stock option grants which generally are only partially tax deductible upon exercise. For accounting purposes, conventional stock option programs generally do not result in a charge to earnings while compensation under the Restricted Stock Plan and the 401(k) Plans do result in a charge to earnings. The Company believes that these differences result in a lack of comparability between the EBITDA of companies that utilize conventional stock option programs and the EBITDA of the Company. The table below lists the specific maximum components of the Restricted Stock Plan and the 401(k) Plans in terms of a $1 increase in annual Location Cash Flow.
Component Amount ------------------------------------------------------------------------------------------ ---------- Restricted Stock grants to general managers based on the increase in annual Location Cash Flow of individual business units ....................................................... 6cents Restricted Stock grants to department managers based on the increase in annual Location Cash Flow of individual business units .................................................. 6cents Restricted Stock grants to corporate managers (other than executive officers) based on the Company-wide increase in annual Location Cash Flow ...................................... 3cents Restricted Stock grants to employees selected for special recognition .................... 5cents Restricted Stock grants under the 401(k) Plans for the benefit of all eligible employees and allocated pro-rata based on wages ................................................... 10cents ---------- Total ................................................................................ 30cents ==========
Currently, the Company has seven general managers, 27 department managers and nine corporate managers. Executive officers and non-employee directors are not eligible to receive profit sharing awards under the Restricted Stock Plan. Executive officers are eligible to receive awards under the Restricted Stock Plan consisting of (i) special recognition awards and (ii) awards made to the extent that an employee does not receive a matching contribution because of restrictions of the Internal Revenue Code of 1986, as amended (the "Code"). Executive officers and non-employee directors are eligible to receive options under the Stock Option Plan. RESTRICTED STOCK PLAN In September 1996, Pegasus adopted the Pegasus Restricted Stock Plan (the "Restricted Stock Plan" and, together with the 401(k) Plans and the Stock Option Plan, the "Incentive Program"), which was also approved by Pegasus' stockholders in September 1996. The Restricted Stock Plan will terminate in September 2006. Under the Restricted Stock Plan, 270,000 shares of Class A Common Stock (subject to adjustment to reflect stock dividends, stock splits, recapitalizations, and similar changes in the capitalization of Pegasus) are available for granting restricted stock awards to eligible employees of the Company who have completed at least one year of service. The Restricted Stock Plan provides for three types of restricted stock awards that are made in the form of Class A Common Stock as 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. To date, 3,614 shares of Class A Common Stock have been granted as special recognition awards. Restricted Stock Awards vest 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. 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. The Stock Option Plan terminates in September 2006. Under the Stock Option Plan, up to 450,000 shares of Class A Common Stock 88 (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 three non-employee directors are eligible to receive options under the Stock Option Plan. 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. 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 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. 89 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 Exchange Act, of more than 5% of the Class A Common Stock and Class B Common Stock and gives effect to the Registered Exchange Offer (assuming all holders of the PM&C Class B Shares exchange their shares for shares of Class A Common Stock). The information does not give effect to the Warrant Shares issuable upon exercise of the Warrants offered hereby. 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 and 5,000 shares of Parent Non-Voting Stock, all of which are 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 .......................... 157,143 3.4% -- -- Robert N. Verdecchio ..................... 170,903 3.7% -- -- Howard E. Verlin ......................... 39,321 (4) -- -- James J. McEntee, III .................... 500 (4) -- -- Mary C. Metzger .......................... -- -- -- -- Donald W. Weber(5) ....................... 5,385 (4) -- -- Harron Communications Corp.(6) 70 East Lancaster Avenue Frazer, PA 19355 ........................ 852,110 18.3% -- -- Directors and Executive Officers as a Group (8 persons)(7) .................... 4,956,652 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) Includes 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. 90 DESCRIPTION OF INDEBTEDNESS NEW CREDIT FACILITY Pegasus Media & Communicaitons, Inc. ("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 and other restricted payments and disallowing dividends without the express consent of the lenders. 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." NOTES PM&C, which became the direct subsidiary of Pegasus upon completion of the Initital 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 in this section 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. 91 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 PM&C 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 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. 92 DESCRIPTION OF SECURITIES As used in this Description of Securities, the term "Company" refers to Pegasus Communications Corporation, excluding its Subsidiaries. DESCRIPTION OF THE UNITS Each Unit being offered will consist of one share of Series A Preferred Stock and one Warrant to purchase 1.93 shares of Class A Common Stock. The Series A Preferred Stock and Warrants will not be separately transferable until the earlier to occur of (i) April 3, 1997 and (ii) in the event of a Change of Control, the date the Company mails notice thereof (the "Separation Date"). DESCRIPTION OF SERIES A PREFERRED STOCK GENERAL The following is a summary of certain terms of the Series A Preferred Stock offered hereby. The terms of the Series A Preferred Stock will be set forth in the Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof (the "Certificate of Designation"). This summary is not intended to be complete and is subject to, and qualified in its entirety by reference to, the Company's Amended and Restated Certificate of Incorporation and the Certificate of Designation, including the definitions therein of certain terms used below. The definitions of certain terms used in the following summary are set forth below under "--Certain Definitions." Substantially all operations of the Company are conducted through its Subsidiaries and, therefore, the Company is dependent upon the cash flow of its Subsidiaries to meet its obligations, including its obligations under the Series A Preferred Stock. Any right of the Company to receive assets of any of its Subsidiaries will be effectively subordinated to the claims of that Subsidiary's creditors. On a pro forma basis, as of September 30, 1996, after giving effect to this Offering and the use of proceeds therefrom, the Completed Transactions and the Transactions, the aggregate amount of Indebtedness and other obligations of the Company's Subsidiaries (including trade payables, borrowings under the New Credit Facility, Capital Lease Obligations and the PM&C Notes), that would effectively rank senior in right of payment to the obligations of the Company under the Series A Preferred Stock would have been approximately $85.8 million. See "Risk Factors--Substantial Indebtedness and Leverage," "--Limitations on Ability to Pay Dividends; Holding Company Structure," and "--Ranking of Series A Preferred Stock and Exchange Notes." Pursuant to the Certificate of Designation, 100,000 shares of Series A Preferred Stock with a liquidation preference of $1,000 per share (the "Liquidation Preference") will be authorized for issuance in this Offering. The Series A Preferred Stock will, when issued, be fully paid and nonassessable, and Holders thereof will have no preemptive rights in connection therewith. The Liquidation Preference of the Series A Preferred Stock is not necessarily indicative of the price at which shares of the Series A Preferred Stock will actually trade at or after the time of their issuance, and the Series A Preferred Stock may trade at prices below its Liquidation Preference. The market price of the Series A Preferred Stock can be expected to fluctuate with changes in the financial markets and economic conditions, the financial condition and prospects of the Company and other factors that generally influence the market prices of securities. See "Risk Factors." The transfer agent for the Series A Preferred Stock will be First Union National Bank unless and until a successor is selected by the Company (the "Transfer Agent"). RANKING The Series A Preferred Stock will rank senior in right of payment to all other classes or series of Capital Stock of the Company as to dividends and upon liquidation, dissolution or winding up of the Company. The Certificate of Designation will provide that the Company may not, without the consent of the Holders of a majority of the then outstanding shares of Series A Preferred Stock, authorize, create (by way of reclassification or otherwise) or issue any class or series of Capital Stock of the Company ranking on a parity 93 with the Series A Preferred Stock ("Parity Securities") or any Obligation or security convertible or exchangeable into or evidencing a right to purchase, shares of any class or series of Parity Securities. The Certificate of Designation will provide that the Company may not, without the consent of the Holders of at least two-thirds of the then outstanding shares of Series A Preferred Stock, authorize, create (by way of reclassification or otherwise) or issue any class or series of capital stock of the Company ranking senior to the Series A Preferred Stock ("Senior Securities") or any Obligation or security convertible or exchangeable into or evidencing a right to purchase, shares of any class or series of Senior Securities. DIVIDENDS The Holders of shares of the Series A Preferred Stock will be entitled to receive, when, as and if dividends are declared by the Board of Directors out of funds of the Company legally available therefor, cumulative preferential dividends from the issue date of the Series A Preferred Stock accruing at the rate per share of $ per annum, payable semi-annually in arrears on each and or, if any such date is not a Business Day, on the next succeeding Business Day (each, a "Dividend Payment Date"), to the Holders of record as of the next preceding and (each, a "Record Date"). Dividends will be payable in cash, except that on each Dividend Payment Date occurring on or prior to , 2002, dividends may be paid, at the Company's option, by the issuance of additional shares of Series A Preferred Stock (including fractional shares) having an aggregate Liquidation Preference equal to the amount of such dividends. The issuance of such additional shares of Series A Preferred Stock will constitute "payment" of the related dividend for all purposes of the Certificate of Designation. The first dividend payment of $ per share of Series A Preferred Stock will be payable on , 1997. Dividends payable on the Series A Preferred Stock will be computed on the basis of a 360-day year consisting of twelve 30-day months and will be deemed to accrue on a daily basis. For a discussion of certain federal income tax considerations relevant to the payment of dividends on the Series A Preferred Stock, see "Certain Federal Income Tax Considerations--Distributions on Series A Preferred Stock." Dividends on the Series A Preferred Stock will accrue whether or not the Company has earnings or profits, whether or not there are funds legally available for the payment of such dividends and whether or not dividends are declared. Dividends will accumulate to the extent they are not paid on the Dividend Payment Date for the period to which they relate. Accumulated unpaid dividends will bear interest at a per annum rate 200 basis points in excess of the annual dividend rate on the Series A Preferred Stock. The Certificate of Designation will provide that the Company will take all actions required or permitted under the Delaware General Corporation Law (the "DGCL") to permit the payment of dividends on the Series A Preferred Stock, including, without limitation, through the revaluation of its assets in accordance with the DGCL, to make or keep funds legally available for the payment of dividends. No dividend whatsoever shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Series A Preferred Stock with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid, or declared and a sufficient sum set apart for the payment of such dividend, upon all outstanding shares of Series A Preferred Stock. Unless full cumulative dividends on all outstanding shares of Series A Preferred Stock for all past dividend periods shall have been declared and paid, or declared and a sufficient sum for the payment thereof set apart, then: (i) no dividend (other than a dividend payable solely in shares of any class of stock ranking junior to the Series A Preferred Stock as to the payment of dividends and as to rights in liquidation, dissolution or winding up of the affairs of the Company ("Junior Securities") shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any shares of Junior Securities; (ii) no other distribution shall be declared or made upon, or any sum set apart for the payment of any distribution upon, any shares of Junior Securities, other than a distribution consisting solely of Junior Securities; (iii) no shares of Junior Securities shall be purchased, redeemed or otherwise acquired or retired for value (excluding an exchange for shares of other Junior Securities) by the Company or any of its Subsidiaries; and (iv) no monies shall be paid into or set apart or made available for a sinking or other like fund for the purchase, redemption or other acquisition or retirement for value of any shares of Junior Securities by the Company or any of its Subsidiaries. Holders of the Series A Preferred Stock will not be entitled to any dividends, whether payable in cash, property or stock, in excess of the full cumulative dividends as herein described. 94 Any future credit agreements or other agreements relating to Indebtedness to which the Company becomes a party may contain restrictions on the ability of the Company to pay dividends on the Series A Preferred Stock. VOTING RIGHTS Holders of record of shares of the Series A Preferred Stock will have no voting rights, except as required by law and as provided in the Certificate of Designation. The Certificate of Designation will provide that upon (a) the accumulation of accrued and unpaid dividends on the outstanding Series A Preferred Stock in an amount equal to three full semi-annual dividends (whether or not consecutive); (b) the failure of the Company to satisfy any mandatory redemption or repurchase obligation (including, without limitation, pursuant to any required Change of Control Offer) with respect to the Series A Preferred Stock; (c) the failure of the Company to make a Change of Control Offer on the terms and in accordance with the provisions described below under the caption "--Change of Control;" (d) the failure of the Company to comply with any of the other covenants or agreements set forth in the Certificate of Designation and the continuance of such failure for 60 consecutive days or more; or (e) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the Closing Date, which default (i) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more (each of the events described in clauses (a), (b), (c), (d) and (e) being referred to herein as a "Voting Rights Triggering Event"), then the number of members of the Company's Board of Directors will be immediately and automatically increased by two, and the Holders of a majority of the outstanding shares of Series A Preferred Stock, voting as a separate class, will be entitled to elect two members to the Board of Directors of the Company. Voting rights arising as a result of a Voting Rights Triggering Event will continue until such time as all dividends in arrears on the Series A Preferred Stock are paid in full and all other Voting Rights Triggering Events have been cured or waived. In addition, as provided above under "--Ranking," the Company may not authorize, create (by way of reclassification or otherwise) or issue (i) any Parity Securities, or any Obligation or security convertible into or evidencing the right to purchase any Parity Securities, without the affirmative vote or consent of the Holders of a majority of the then outstanding shares of Series A Preferred Stock and (ii) any Senior Securities, or any Obligation or security convertible into or evidencing the right to purchase Senior Securities, without the affirmative vote or consent of the Holders of at least two-thirds of the then outstanding shares of Series A Preferred Stock, in each case voting as a separate class. EXCHANGE The Company may, at its option, on any Dividend Payment Date occurring after the Separation Date, exchange, in whole, but not in part, the then outstanding shares of Series A Preferred Stock for Exchange Notes; provided, that (i) on the date of such exchange there are no accumulated and unpaid dividends on the Series A Preferred Stock (including the dividend payable on such date) or other contractual impediments to such exchange; (ii) there shall be legally available funds sufficient therefor; (iii) no Voting Rights Triggering Event has occurred and is contnuing at the time of such exchange; (iv) immediately after giving effect to such exchange, no Default or Event of Default (each as defined in the Exchange Note Indenture) would exist under the Exchange Note Indenture, no default or event of default would exist under any material instrument governing Indebtedness outstanding at the time would be caused thereby; (v) the Exchange Note Indenture has been qualified under the Trust Indenture Act, if such qualification is required at the time of exchange; and (vi) the Company shall have delivered a written opinion to the Exchange Note Trustee (as defined herein) to the effect that all conditions to be satisfied prior to such exchange have been satisfied. The Exchange Notes will be issuable in principal amounts of $1,000 and integral multiples thereof to the extent possible, and will also be issuable in principal amounts less than $1,000 so that each Holder of Series 95 A Preferred Stock will receive certificates representing the entire amount of Exchange Notes to which such Holder's shares of Series A Preferred Stock entitle such Holder; provided that the Company may pay cash in lieu of issuing an Exchange Note having a principal amount less than $1,000. Notice of the intention to exchange will be sent by or on behalf of the Company not more than 60 days nor less than 30 days prior to the Exchange Date, by first class mail, postage prepaid, to each Holder of record of Series A Preferred Stock at its registered address. In addition to any information required by law or by the applicable rules of any exchange upon which Series A Preferred Stock may be listed or admitted to trading, such notice will state: (i) the Exchange Date; (ii) the place or places where certificates for such shares are to be surrendered for exchange, including any procedures applicable to exchanges to be accomplished through book-entry transfers; and (iii) that dividends on the shares of Series A Preferred Stock to be exchanged will cease to accrue on the Exchange Date. If notice of any exchange has been properly given, and if on or before the Exchange Date the Exchange Notes have been duly executed and authenticated and an amount in cash or additional shares of Series A Preferred Stock (as applicable) equal to all accrued and unpaid dividends, if any, thereon to the Exchange Date has been deposited with the Transfer Agent, then on and after the close of business on the Exchange Date, the shares of Series A Preferred Stock to be exchanged will no longer be deemed to be outstanding and may thereafter be issued in the same manner as the other authorized but unissued preferred stock, but not as Series A Preferred Stock, and all rights of the Holders thereof as stockholders of the Company will cease, except the right of the Holders to receive upon surrender of their certificates the Exchange Notes and all accrued and unpaid dividends, if any, thereon to the Exchange Date. REDEMPTION MANDATORY REDEMPTION On , 2007 (the "Mandatory Redemption Date"), the Company will be required to redeem (subject to the legal availability of funds therefor) all outstanding shares of Series A Preferred Stock at a price in cash equal to the Liquidation Preference thereof, plus accrued and unpaid dividends, if any, to the date of redemption. The Company will not be required to make sinking fund payments with respect to the Series A Preferred Stock. The Certificate of Designation will provide that the Company will take all actions required or permitted under Delaware law to permit such redemption. OPTIONAL REDEMPTION The Series A Preferred Stock may not be redeemed at the option of the Company on or prior to , 2002. The Series A Preferred Stock may be redeemed, in whole or in part, at the option of the Company on or after , 2002, at the redemption prices specified below (expressed as percentages of the Liquidation Preference thereof), in each case, together with accrued and unpaid dividends, if any, to the date of redemption, upon not less than 30 nor more than 60 days' prior written notice, if redeemed during the 12-month period commencing on of each of the years set forth below: Redemption Year Rate ---- ---- 2002 .......................... % 2003 .......................... % 2004 .......................... % 2005 and thereafter ........... 100.00 % Notwithstanding the foregoing, during the first 36 months after the Closing Date, the Company may, on any one or more occasions, use the net proceeds of one or more offerings of its Class A Common Stock to redeem up to 25% of the shares of Series A Preferred Stock then outstanding (whether initially issued or issued in lieu of cash dividends) at a redemption price of 110% of the Liquidation Preference thereof plus, without duplication, accumulated and unpaid dividends to the date of redemption; provided that, after any such redemption, at least $75.0 million in aggregate Liquidation Preference of Series A Preferred Stock remains outstanding; and provided further, that any such redemption shall occur within 90 days of the date of closing of such offering of common equity of the Company. 96 LIQUIDATION RIGHTS Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company or reduction or decrease in its capital stock resulting in a distribution of assets to the holders of any class or series of the Company's capital stock (a "reduction or decrease in capital stock"), each Holder of shares of the Series A Preferred Stock will be entitled to payment out of the assets of the Company available for distribution of an amount equal to the Liquidation Preference per share of Series A Preferred Stock held by such Holder, plus accrued and unpaid dividends, if any, to the date fixed for liquidation, dissolution, winding up or reduction or decrease in capital stock, before any distribution is made on any Junior Securities, including, without limitation, common stock of the Company. After payment in full of the Liquidation Preference and all accrued dividends, if any, to which Holders of Series A Preferred Stock are entitled, such Holders will not be entitled to any further participation in any distribution of assets of the Company. However, neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more corporations will be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Company or reduction or decrease in capital stock, unless such sale, conveyance, exchange or transfer shall be in connection with a liquidation, dissolution or winding up of the business of the Company or reduction or decrease in capital stock. The Certificate of Designation will not contain any provision requiring funds to be set aside to protect the Liquidation Preference of the Series A Preferred Stock, although such Liquidation Preference will be substantially in excess of the par value of the shares of the Series A Preferred Stock. CHANGE OF CONTROL Upon the occurrence of a Change of Control, each Holder of shares of Series A Preferred Stock will have the right to require the Company to repurchase all or any part (but not, in the case of any Holder requiring the Company to purchase less than all of the shares of Series A Preferred Stock held by such Holder, any fractional shares) of such Holder's Series A Preferred Stock pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate Liquidation Preference thereof plus accrued and unpaid dividends, if any, thereon to the date of purchase (the "Change of Control Payment"). The Certificate of Designation will provide that within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase all outstanding shares of Series A Preferred Stock pursuant to the procedures required by the Certificate of Designation and described in such notice. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Series A Preferred Stock as a result of a Change of Control. On the Change of Control Payment Date, the Company will, to the extent lawful, (1) accept for payment all shares of Series A Preferred Stock or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all shares of Series A Preferred Stock or portions thereof so tendered and (3) deliver or cause to be delivered to the Transfer Agent the shares of Series A Preferred Stock so accepted together with an Officers' Certificate stating the aggregate Liquidation Preference of the shares of Series A Preferred Stock or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Series A Preferred Stock so tendered the Change of Control Payment for such Series A Preferred Stock, and the Transfer Agent will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new certificate representing the shares of Series A Preferred Stock equal in Liquidation Preference amount to any unpurchased portion of the shares of Series A Preferred Stock surrendered, if any. The Certificate of Designation will provide that, prior to complying with the provisions of this covenant, but in any event within 90 days following a Change of Control, the Company will either repay all outstanding Indebtedness or obtain the requisite consents, if any, under all agreements governing outstanding Indebtedness to permit the repurchase of Series A Preferred Stock required by this covenant. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. 97 The Change of Control provisions described above will be applicable whether or not any other provisions of the Certificate of Designation are applicable. Except as described above with respect to a Change of Control, the Certificate of Designation does not contain provisions that permit the Holders of the Series A Preferred Stock to require that the Company repurchase or redeem the Series A Preferred Stock in the event of a takeover, recapitalization or similar transaction. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Company and its Restricted Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of Series A Preferred Stock to require the Company to repurchase such Series A Preferred Stock as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Restricted Subsidiaries taken as a whole to another Person or group may be uncertain. The New Credit Facility and the PM&C Notes each restrict most of the Company's current Subsidiaries from paying any dividends or making any other distribution to the Company. Thus, in the event a Change of Control occurs, the Company could seek the consent of its Subsidiaries' lenders to the purchase of the Series A Preferred Stock or could attempt to refinance the borrowings that contain such restrictions. If the Company does not obtain such a consent or repay such borrowings, the Company will likely not have the financial resources to purchase Series A Preferred Shares and the Subsidiaries will be restricted in paying dividends to the Company for the purpose of such purchase. In any event, there can be no assurance that the Company's Subsidiaries will have the resources available to make any such dividend or distribution. In such case, the Company's failure to make a Change of Control Offer when required or to purchase tendered shares of Series A Preferred Stock would constitute a Voting Rights Triggering Event under the Certificate of Designation. See "Risk Factors--Substantial Indebtedness and Leverage," "--Limitations on Access to Cash Flow of Subsidiaries; Holding Company Structure," and "--Ranking of Series A Preferred Stock and Exchange Notes." Any future credit agreements or other agreements relating to Indebtedness to which the Company becomes a party may prohibit the Company from purchasing any Series A Preferred Stock prior to its maturity, and may also provide that certain change of control events with respect to the Company would constitute a default thereunder. In the event a Change of Control occurs at a time when the Company is prohibited from purchasing Series A Preferred Stock, the Company could seek the consent of its lenders to the purchase of Series A Preferred Stock or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Series A Preferred Stock. In such case, the Holders of a majority of the outstanding shares of Series A Preferred Stock, voting as a separate class, may be entitled to elect two members to the Board of Directors of the Company. See "Risk Factors--Potential Anti-Takeover Provisions; Change of Control." The Company will not be required to make a Change of Control Offer to the Holders of Series A Preferred Stock upon a Change of Control if a third party makes the Change of Control Offer described above in the manner, at the times and otherwise in compliance with the requirements set forth in the Certificate of Designation and purchases all shares of Series A Preferred Stock validly tendered and not withdrawn under such Change of Control Offer. CERTAIN COVENANTS RESTRICTED PAYMENTS The Certificate of Designation will provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, (i) declare or pay any dividend or make any payment or distribution on account of the Company's Parity Securities or Junior Securities (including, without limitation, any payment in connection with any merger or consolidation involving the Company) or on account of any Qualified Subsidiary Stock or make any payment or distribution to or for the benefit of the direct or indirect holders of the Company's Parity Securities or Junior Securities or the direct or indirect holders of any Qualified Subsidiary Stock in their capacities as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise acquire or retire for value any Parity Securities or Junior Securities of the Company or any direct or indirect parent of the Company or 98 other Affiliate of the Company (other than any such Equity Interests owned by the Company or any of its Restricted Subsidiaries and other than the acquisition of Equity Interests in Subsidiaries of the Company solely in exchange for Equity Interests (other than Disqualified Stock) of the Company); (iii) make any payment on, or purchase, redeem, defease or otherwise acquire or retire for value any Junior Securities, except payments of the Liquidation Preference thereof at final maturity; (iv) make any loan, advance, capital contribution to or other investment in, or guarantee any obligation of, any Affiliate of the Company other than a Permitted Investment; (v) forgive any loan or advance to or other obligation of any Affiliate of the Company (other than a loan or advance to or other obligation of a Wholly Owned Restricted Subsidiary) which at the time it was made was not a Restricted Payment; or (vi) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (vi) above being collectively referred to as "Restricted Payments"), unless, at the time of and immediately after giving effect to such Restricted Payment: (A) no Voting Rights Triggering Event shall have occurred and be continuing or would occur as a consequence thereof, and (B) the Company would be permitted to incur $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio described in the first paragraph of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;" and (C) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the Closing Date, is less than the sum of (i) an amount equal to the Cumulative Operating Cash Flow for the period (taken as one accounting period) from the beginning of the first full month commencing after the Closing Date to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (the "Basket Period") less 1.4 times the Company's Cumulative Total Interest Expense for the Basket Period, plus (ii) 100% of the aggregate net cash proceeds and, in the case of proceeds consisting of assets constituting or used in a Permitted Business, 100% of the fair market value of the aggregate net proceeds other than cash received since the Closing Date (1) by the Company as capital contributions to the Company (other than from a Subsidiary) or (2) from the sale by the Company (other than to a Subsidiary) of its Equity Interests (other than Disqualified Stock), plus (iii) without duplication, to the extent that any Restricted Investment that was made after the Closing Date is sold for cash or otherwise liquidated or repaid for cash, the Net Proceeds received by the Company or a Wholly Owned Restricted Subsidiary of the Company upon the sale of such Restricted Investment, plus (iv) without duplication, to the extent that any Unrestricted Subsidiary is designated by the Company as a Restricted Subsidiary, an amount equal to the fair market value of such Investment at the time of such designation, plus (v) $2.5 million. The foregoing provisions shall not prohibit (1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Certificate of Designation; (2) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company in exchange for, or out of the net proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than any Disqualified Stock); provided that the amount of any such net proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph; (3) the purchase by the Company of any shares of Class B Common Stock of PM&C, par value $.01 per share; (4) the payment by the Company of advances under the Split Dollar Agreement in an amount not to exceed $250,000 in any four-quarter period; (5) the repurchase or redemption from employees of the Company and its subsidiaries (other than the Principal) of Capital Stock of the Company in an amount not to exceed an aggregate of $3.0 million; (6) the payment of dividends on the Series A Preferred Stock in accordance with the terms thereof as in effect on the Closing Date; (7) the issuance of Exchange Notes in exchange for shares of the Series A Preferred Stock; provided that such issuance is permitted by the covenant described below under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of 99 Preferred Stock;" and (8) in the event that the Company elects to issue Exchange Notes in exchange for Series A Preferred Stock, cash payments made in lieu of the issuance of Exchange Notes having a face amount less than $1,000 and any cash payments representing accrued and unpaid dividends in respect thereof, not to exceed $100,000 in the aggregate in any fiscal year. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) proposed to be transferred by the Company or the applicable Restricted Subsidiary, as the case may be, net of any liabilities proposed to be assumed by the transferee and novated pursuant to a written agreement releasing the Company and its Subsidiaries. Not later than the date of making any Restricted Payment, the Company shall deliver to the Board of Directors an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this covenant were computed, which calculations may be based upon the Company's latest available financial statements. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Voting Rights Triggering Event. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries in the Subsidiary so designated shall be deemed to be Restricted Payments at the time of such designation (valued as set forth below) and shall reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments shall be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation. Such designation shall be permitted only if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary would otherwise meet the definition of an Unrestricted Subsidiary. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK The Certificate of Designation will provide that the Company may not, and may not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and shall not issue any Disqualified Stock and shall not permit any of its Subsidiaries to issue any shares of preferred stock (other than Qualified Subsidiary Stock); provided, however, that (a) the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock and (b) a Restricted Subsidiary of the Company may incur Indebtedness (including Acquired Debt) or issue shares of preferred stock (including Disqualified Stock) if, in each case, the Company's Indebtedness to Adjusted Operating Cash Flow Ratio as of the date on which such Indebtedness is incurred or such Disqualified Stock of preferred stock is issued would have been 7.0 to 1 or less, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock or preferred stock had been issued, as the case may be, as of the date of such calculation. The foregoing provisions shall not apply to: (i) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt or the issuance by such Unrestricted Subsidiaries of preferred stock; provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary or any such preferred stock becomes Disqualified Stock of a Restricted Subsidiary, as the case may be, such event shall be deemed to constitute an incurrence of Indebtedness by or an issuance of Disqualified Stock of, as the case may be, a Restricted Subsidiary of the Company; (ii) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness pursuant to one or more Bank Facilities, so long as the aggregate principal amount of all Indebtedness outstanding under all Bank Facilities does not, at the time of incurrence, exceed an amount equal to $50.0 million; (iii) the incurrence by the Company or any of its Restricted Subsidiaries of the Existing Indebtedness; (iv) the incurrence by the Company of Indebtedness under the Exchange Notes; 100 (v) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Wholly Owned Restricted Subsidiaries; provided, however, that (A) any subsequent issuance or transfer of Equity Interests that result in any such Indebtedness being held by a Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company and (B) any sale or other transfer of such Indebtedness to a Person that is not either the Company or a Wholly Owned Restricted Subsidiary of the Company shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be; (vi) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property used in the business of the Company or such Restricted Subsidiary, in an aggregate principal amount not to exceed $5.0 million at any time outstanding; (vii) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Debt in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness that was permitted by the Certificate of Designation to be incurred; and (viii) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness (in addition to Indebtedness permitted by any other clause of this paragraph) in an aggregate principal amount at any time outstanding not to exceed $5.0 million. If an item of Indebtedness is permitted to be incurred on the basis of the first paragraph of this covenant and also on the basis of one or more of clauses (i) through (viii) above, or is permitted to be incurred on the basis of two or more of clauses (i) through (viii) above, then the Company shall classify the basis on which such item of Indebtedness is incurred. If an item of Indebtedness is repaid with the proceeds of an incurrence of other Indebtedness (whether from the same or a different creditor), the Company may classify such other Indebtedness as having been incurred on the same basis as the Indebtedness being repaid or on a different basis permitted under this covenant. For purposes of this paragraph, "Indebtedness" includes Disqualified Stock and preferred stock of Subsidiaries. Accrual of interest and the accretion of accreted value will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. MERGER, CONSOLIDATION OR SALE OF ASSETS The Certification of Designation will provide that the Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Series A Preferred Stock shall be converted into or exchanged for and shall become shares of such successor, transferee or resulting Person, having in respect of such successor, transferee or resulting Person the same powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon, that the Series A Preferred Stock had immediately prior to such transaction; (iii) immediately after such transaction no Voting Rights Triggering Event exists; and (iv) the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio set forth in the first paragraph of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." 101 TRANSACTIONS WITH AFFILIATES The Certificate of Designation will provide that the Company may not, and may not permit any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Holders (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and a majority of the Independent Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5.0 million, an opinion as to the fairness to the Company or such Restricted Subsidiary of such Affiliate Transaction from a financial point of view issued by an investment banking firm of national standing; provided that the Company shall not, and shall not permit any of its Restricted Subsidiaries to, engage in any Affiliate Transaction involving aggregate consideration in excess of $1.0 million at any time that there is not at least one Independent Director on the Company's Board of Directors; and provided further that (w) any employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (x) transactions between or among the Company and/or its Restricted Subsidiaries, (y) the payment of any dividend on, or the issuance of the Exchange Notes in exchange for, the Series A Preferred Stock, provided that such dividends are paid on a pro rata basis and the Exchange Notes are issued in accordance with the Certificate of Designation, and (z) transactions permitted by the provisions of the covenant described under the caption "--Certain Covenants--Restricted Payments," in each case, shall not be deemed Affiliate Transactions. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES The Certificate of Designation will provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) the terms of any Indebtedness permitted by the Certificate of Designation to be incurred by any Subsidiary of the Company, (b) Existing Indebtedness as in effect on the Closing Date, (c) applicable law, (d) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person and its Subsidiaries, or the property or assets of the Person and its Subsidiaries, so acquired or (e) by reason of customary non-assignment provisions in leases and other contracts entered into in the ordinary course of business and consistent with past practices. LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED RESTRICTED SUBSIDIARIES The Certificate of Designation will provide that the Company (i) will not, and will not permit any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey, sell or otherwise dispose of any Capital Stock (other than Qualified Subsidiary Stock) of any Wholly Owned Restricted Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company), unless (a) such transfer, conveyance, sale, lease or other disposition is of all the Capital Stock of such Wholly Owned Restricted Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale, lease or 102 other disposition are applied in accordance with the covenant described under the caption "--Repurchase at the Option of Holders--Asset Sales," and (ii) shall not permit any Wholly Owned Restricted Subsidiary of the Company to issue any of its Equity Interests (other than Qualified Subsidiary Stock and, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Restricted Subsidiary of the Company. REPORTS The Certificate of Designation will provide that, whether or not required by the rules and regulations of the Commission, so long as any shares of Series A Preferred Stock are outstanding, the Company will furnish to the Holders of Series A Preferred Stock (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition to the financial information required by the Exchange Act, each such quarterly and annual report shall be required to contain "summarized financial information" (as defined in Rule 1-02(aa)(1) of Regulation S-X under the Exchange Act) showing Adjusted Operating Cash Flow for the Company and its Restricted Subsidiaries, on a consolidated basis, where Adjusted Operating Cash Flow for the Company is calculated in a manner consistent with the manner described under the definition of "Adjusted Operating Cash Flow" contained herein. The summarized financial information required pursuant to the preceding sentence may, at the election of the Company, be included in the footnotes to audited consolidated financial statements or unaudited quarterly financial statements of the Company and shall be as of the same dates and for the same periods as the consolidated financial statements of the Company and its Subsidiaries required pursuant to the Exchange Act. TRANSFER AND EXCHANGE A Holder may transfer or exchange Series A Preferred Stock in accordance with the Certificate of Designation if the requirements of the Transfer Agent for such transfer or exchange are met. The Transfer Agent may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Certificate of Designation. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, and subject to the DGCL, the Certificate of Designation may be amended with the consent of the Holders of a majority in aggregate Liquidation Preference of the Series A Preferred Stock then outstanding, and any existing Voting Rights Triggering Event or compliance with any provision of the Certificate of Designation may be waived with the consent of the Holders of a majority in aggregate Liquidation Preference of the then outstanding shares of Series A Preferred Stock. Notwithstanding the foregoing, without the consent of each Holder affected, an amendment or waiver may not (with respect to any shares of Series A Preferred Stock held by a non-consenting Holder): (i) alter the voting rights with respect to the Series A Preferred Stock or reduce the number of shares of Series A Preferred Stock whose Holders must consent to an amendment, supplement or waiver, (ii) reduce the Liquidation Preference of or change the Mandatory Redemption Date of any share of Series A Preferred Stock or alter the provisions with respect to the redemption of the Series A Preferred Stock (other than provisions relating to the covenant described above under the caption "--Change of Control"), (iii) reduce the rate of or change the time for payment of dividends on any share of Series A Preferred Stock, (iv) waive the consequences of any failure to pay dividends on the Series A Preferred Stock, (v) make any share of Series A Preferred Stock payable in any form other than that stated in the Certificate of Designation, (vi) make any change in the 103 provisions of the Certificate of Designation relating to waivers of the rights of Holders of Series A Preferred Stock to receive the Liquidation Preference and dividends on the Series A Preferred Stock, (vii) waive a redemption payment with respect to any share of Series A Preferred Stock (other than a payment required by the covenant described above under the caption "--Change of Control") or (viii) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any Holder of Series A Preferred Stock, the Company may (to the extent permitted by Delaware law) amend or supplement the Certificate of Designation to cure any ambiguity, defect or inconsistency, to provide for uncertificated Series A Preferred Stock in addition to or in place of certificated Series A Preferred Stock or to make any change that would provide any additional rights or benefits to the Holders of Series A Preferred Stock or that does not adversely affect the legal rights under the Certificate of Designation of any such Holder. REISSUANCE Shares of the Series A Preferred Stock redeemed or otherwise acquired by the Company will assume the status of authorized but unissued preferred stock and may thereafter be reissued in the same manner as the other authorized but unissued preferred stock, but not as Series A Preferred Stock. DESCRIPTION OF EXCHANGE NOTES The Exchange Notes will, if and when issued, be issued pursuant to an indenture (the "Exchange Note Indenture") between the Company and First Union National Bank, as trustee (the "Exchange Note Trustee"). The terms of the Exchange Notes include those stated in the Exchange Note Indenture and those made part of the Exchange Note Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Exchange Notes will be subject to all such terms, and Holders of Exchange Notes are referred to the Exchange Note Indenture and the Trust Indenture Act for a statement thereof. The following summary of certain provisions of the Exchange Note Indenture does not purport to be complete and is qualified in its entirety by reference to the Exchange Note Indenture, including the definitions therein of certain terms used below. The definitions of certain terms used in the Exchange Note Indenture and in the following summary are set forth below under "--Certain Definitions." The Exchange Notes will be subordinated in right of payment to all existing and future Senior Debt of the Company. In addition, the Exchange Notes will be effectively subordinated to all Indebtedness of the Company's Subsidiaries. Substantially all operations of the Company are conducted through its Subsidiaries and, therefore, the Company is dependent upon the cash flow of its Subsidiaries to meet its obligations, including its obligations under the Exchange Notes. Any right of the Company to receive assets of any of its Subsidiaries will be effectively subordinated to the claims of that Subsidiary's creditors. On a pro forma basis, as of September 30, 1996, after giving effect to this Offering and the use of proceeds therefrom, the Completed Transactions and the Transactions, the aggregate amount of Indebtedness and other obligations of the Company's Subsidiaries (including trade payables, borrowings under the New Credit Facility, Capital Lease Obligations and the PM&C Notes), that would effectively rank senior in right of payment to the obligations of the Company under the Exchange Notes would have been approximately $85.8 million. See "Risk Factors--Substantial Indebtedness and Leverage," "--Limitations on Ability to Pay Dividends; Holding Company Structure," and "--Ranking of Series A Preferred Stock and Exchange Notes." PRINCIPAL, MATURITY AND INTEREST The Exchange Notes will be limited in aggregate principal amount to $100.0 million and will mature on , 2007. Interest on the Exchange Notes will accrue at the rate of % per annum and will be payable semi-annually in arrears on each and (each, an "Interest Payment Date") to Holders of record on the immediately preceding and (each, an "Exchange Note Record Date"). Interest will be payable in cash, except that on each Interest Payment Date occurring prior to , 2002, interest may be paid, at the Company's option, by the issuance of additional Exchange Notes having an aggregate principal amount equal to the amount of such interest. The issuance of such 104 additional Exchange Notes will constitute "payment" of the related interest for all purposes of the Exchange Note Indenture. Interest on the Exchange Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months. The Exchange Notes will be issuable in principal amounts of $1,000 and integral multiples thereof to the extent possible, and will also be issuable in principal amounts less than $1,000 so that each Holder of Series A Preferred Stock will receive certificates representing the entire amount of Exchange Notes to which such Holder's shares of Series A Preferred Stock entitle such Holder; provided that the Company may pay cash in lieu of an Exchange Note in principal amount less than $1,000. SUBORDINATION The payment of principal of, premium, if any, and interest on the Exchange Notes will be subordinated in right of payment, as set forth in the Exchange Note Indenture, to the prior payment in full of all Senior Debt, whether outstanding on the date of the Exchange Note Indenture or thereafter incurred. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, or in an assignment for the benefit of creditors or any marshalling of Company's assets and liabilities, the holders of Senior Debt will be entitled to receive payment in full of all Obligations due in respect of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt, whether or not an allowable claim) before the Holders will be entitled to receive any payment with respect to the Exchange Notes; and until all Obligations with respect to Senior Debt are paid in full, any distribution to which the Holders would be entitled will be made to the holders of Senior Debt (except that, in either case, Holders may receive (i) securities that are subordinated at least to the same extent as the Exchange Notes to Senior Debt and any securities issued in exchange for Senior Debt and (ii) payments made from the trust described below under "--Legal Defeasance and Covenant Defeasance"). The Company also may not make any payment upon or in respect of the Exchange Notes (except as described above) if (i) a default in the payment of the principal of, premium, if any, or interest on Designated Senior Debt occurs and is continuing or (ii) any other default occurs and is continuing with respect to Designated Senior Debt that permits holders of Designated Senior Debt as to which such default relates to accelerate its maturity and the trustee receives a notice of such default (a "Payment Blockage Notice") from the Company or the holders of any Designated Senior Debt. Payments on the Exchange Notes may and shall be resumed (a) in the case of a payment default, upon the date on which such default is cured or waived and (b) in the case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior Debt has been accelerated. No new period of payment blockage may be commenced unless and until (1) 360 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice and (2) all scheduled payments of principal, premium, if any, interest on the Exchange Notes that have come due have been paid in full. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Exchange Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. The Exchange Note Indenture will further require that the Company promptly notify the holders of Senior Debt if payment of the Exchange Notes is accelerated because of an Event of Default. As a result of the subordination provisions described above, in the event of a liquidation or insolvency, Holders may recover less ratably than creditors of the Company who are holders of Senior Debt or other creditors of the Company who are not subordinated to holders of Senior Debt. As of September 30, 1996, after giving pro forma effect to this Offering and the use of proceeds therefrom, the Completed Transactions and the Transactions, the Company would have had approximately $227,000 of Senior Debt. The Exchange Note Indenture will limit, subject to certain financial tests, the amount of additional Indebtedness, including Senior Debt, that the Company and its Subsidiaries may incur. See "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." "Designated Senior Debt" means any Senior Debt permitted under the Exchange Note Indenture the principal amount of which is $10.0 million or more and that has been designated by the Company as "Designated Senior Debt." 105 "Senior Bank Debt" means any Indebtedness of the Company (including letters of credit) outstanding under, and any other Obligations of the Company with respect to, Bank Facilities, to the extent that any such Indebtedness and other Obligations are permitted by the Exchange Note Indenture to be incurred. "Senior Debt" means (a) the Senior Bank Debt (to the extent it constitutes Indebtedness of the Company) and (b) any other Indebtedness of the Company permitted to be incurred by the Company under the terms of the Exchange Note Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Exchange Notes. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (w) any liability for federal, state, local or other taxes owed or owing by the Company, (x) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in violation of the Exchange Note Indenture. OPTIONAL REDEMPTION The Exchange Notes will not be redeemable at the Company's option prior to , 2002. The Exchange Notes may be redeemed, in whole or in part, at the option of the Company on or after , 2002, at the redemption prices specified below (expressed as percentages of the principal amount thereof), in each case, together with accrued and unpaid interest, if any, thereon to the date of redemption, upon not less than 30 nor more than 60 days' notice, if redeemed during the twelve-month period beginning on of the years indicated below: Redemption Year Rate ---- ---- 2002 ............................. % 2003 ............................. % 2004 ............................. % 2005 and thereafter ............... 100.00% Notwithstanding the foregoing, during the first 36 months after the Closing Date, the Company may, on any one or more occasions, use the net proceeds of one or more offerings of its Class A Common Stock to redeem up to 25% of the aggregate principal amount of the Exchange Notes (whether issued in exchange for Series A Preferred Stock or in lieu of cash interest payments) at the redemption price of 110% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption; provided that, after any such redemption, the aggregate principal amount of the Exchange Notes outstanding must equal at least $75.0 million; and provided further, that any such redemption shall occur within 90 days of the date of closing of such offering of common equity of the Company. SELECTION AND NOTICE If less than all of the Exchange Notes are to be redeemed at any time, selection of Exchange Notes for redemption will be made by the Exchange Note Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Exchange Notes are listed, or, if the Exchange Notes are not so listed, on a pro rata basis, by lot or by such method as the Exchange Note Trustee shall deem fair and appropriate. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Exchange Notes to be redeemed at its registered address. If any Exchange Note is to be redeemed in part only, the notice of redemption that relates to such Exchange Note shall state the portion of the principal amount thereof to be redeemed. A new Exchange Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Exchange Note. On and after the redemption date, interest ceases to accrue on Exchange Notes or portions of them called for redemption. REPURCHASE AT THE OPTION OF HOLDERS CHANGE OF CONTROL Upon the occurrence of a Change of Control, each Holder of Exchange Notes will have the right to require the Company to repurchase all or any part (but not, in the case of any Holder requiring the Company to purchase less than all of the Exchange Notes held by such Holder, any Exchange Note in principal amount 106 less than $1,000) of such Holder's Exchange Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of purchase (the "Change of Control Payment"). Within ten days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Exchange Notes pursuant to the procedures required by the Exchange Note Indenture and described in such notice. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Exchange Notes as a result of a Change of Control. On the Change of Control Payment Date, the Company will, to the extent lawful, (1) accept for payment all Exchange Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Exchange Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Exchange Note Trustee the Exchange Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Exchange Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Exchange Notes so tendered the Change of Control Payment for such Exchange Notes, and the Exchange Note Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Exchange Note equal in principal amount to any unpurchased portion of the Exchange Notes surrendered, if any. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The Change of Control provisions described above will be applicable whether or not any other provisions of the Exchange Note Indenture are applicable. Except as described above with respect to a Change of Control, the Exchange Note Indenture does not contain provisions that permit the Holders of the Exchange Notes to require that the Company repurchase or redeem the Exchange Notes in the event of a takeover, recapitalization or similar transaction. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Company and its Restricted Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of Exchange Notes to require the Company to repurchase such Exchange Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Restricted Subsidiaries taken as a whole to another Person or group may be uncertain. The New Credit Facility and the PM&C Notes each restrict most of the Company's current Subsidiaries from paying any dividends or making any other distribution to the Company. Thus, in the event a Change of Control occurs, the Company could seek the consent of its Subsidiaries' lenders to the purchase of the Exchange Notes or could attempt to refinance the borrowings that contain such restrictions. If the Company does not obtain such a consent or repay such borrowings, the Company will likely not have the financial resources to purchase Exchange Notes and the Subsidiaries will be restricted in paying dividends to the Company for the purpose of such purchase. In any event, there can be no assurance that the Company's Subsidiaries will have the resources available to make any such dividend or distribution. In addition, it is expected that the terms of any Senior Debt incurred by the Company would restrict the Company's ability to make a Change of Control Offer or Change of Control Payment. In any such case, the Company's failure to make a Change of Control Offer when required or to purchase tendered Exchange Notes would constitute an Event of Default under the Exchange Note Indenture. See "Risk Factors--Substantial Indebtedness and Leverage," "--Limitations on Acess to Cash Flow of Subsidiaries; Holding Company Structure," and "-- Ranking of Series A Preferred Stock and Exchange Notes." The Exchange Note Indenture will provide that, prior to complying with the provisions of this covenant, but in any event within 90 days following a Change of Control, the Company will either repay all outstanding Senior Debt or obtain the requisite consents, if any, under all agreements covering outstanding Senior Debt to permit the repurchase of Exchange Notes as required by this covenant. Any future credit agreements or other agreements relating to Indebtedness to which the Company becomes a party may prohibit the Company from purchasing any Exchange Note prior to its maturity, and 107 may also provide that certain change of control events with respect to the Company would constitute a default thereunder. In the event a Change of Control occurs at a time when the Company is prohibited from purchasing Exchange Notes, the Company could seek the consent of its lenders to the purchase of Exchange Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Exchange Notes. In such case, the Company's failure to purchase tendered Exchange Notes would constitute an Event of Default under the Exchange Note Indenture. In such circumstances, the subordination provisions in the Exchange Note Indenture would likely restrict payments to the Holders of Exchange Notes. See "Risk Factors--Potential Anti-Takeover Provisions; Change of Control." The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Exchange Note Indenture applicable to a Change of Control Offer made by the Company and purchases all Exchange Notes validly tendered and not withdrawn under such Change of Control Offer. ASSET SALES The Exchange Note Indenture will provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, engage in an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Exchange Note Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 85% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash; provided that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet or in the notes thereto), of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Exchange Notes or any guarantee thereof) that are assumed by the transferee of any such assets and (y) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are immediately converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received), shall be deemed to be cash for purposes of this provision. Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may engage in Asset Swaps (which shall not be deemed to be Asset Sales for purposes of this covenant); provided that, immediately after giving effect to such Asset Swap, the Company would be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio set forth in the first paragraph of the covenant described under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock." Within 180 days after the receipt of any Net Proceeds from an Asset Sale, the Company or the applicable Restricted Subsidiary may, at its option, apply such Net Proceeds (a) to permanently reduce Indebtedness outstanding pursuant to any Senior Debt (and to permanently reduce the commitments thereunder by a corresponding amount), (b) to permanently reduce Indebtedness of any of the Company's Restricted Subsidiaries or (c) to the acquisition of another business, the making of a capital expenditure or the acquisition of other long-term assets, in each case, in a Permitted Business; provided, however, that if the Company or the applicable Restricted Subsidiary enters into a binding agreement to reinvest such Net Proceeds in accordance with this clause (c) within 180 days after the receipt thereof, the provisions of this covenant will be satisfied so long as such binding agreement is consummated within one year after the receipt of such Net Proceeds. If any such legally binding agreement to reinvest such Net Proceeds is terminated, then the Company may, within 90 days of such termination, or within 180 days of such Asset Sale, whichever is later, apply such Net Proceeds as provided in clauses (a), (b) or (c) above (without regard to the proviso contained in clause (c) above). Pending the final application of any such Net Proceeds, the Company or the applicable Restricted Subsidiary may temporarily reduce Indebtedness pursuant to any Bank Facility or otherwise invest such Net Proceeds in any manner that is not prohibited by the Exchange Note Indenture. A reduction of Indebtedness pursuant to any Bank Facility is not "permanent" for purposes of clause (a) of this paragraph if an amount equal to the amount of such reduction is reborrowed and used to make an acquisition described in clause (c) of this paragraph within the time period specified in this covenant. Any Net Proceeds 108 from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." Within five days of each date on which the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company will be required to make an offer to all Holders of Notes and the holders of Pari Passu Debt, to the extent required by the terms thereof (an "Asset Sale Offer") to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus, in each case, accrued and unpaid interest thereon, if any, to the date of purchase, in accordance with the procedures set forth in the Exchange Note Indenture or the agreements governing Pari Passu Debt, as applicable; provided, however, that the Company may only purchase Pari Passu Debt in an Asset Sale Offer that was issued pursuant to an indenture having a provision substantially similar to the Asset Sale Offer provision contained in the Exchange Note Indenture. To the extent that the aggregate amount of Exchange Notes and Pari Passu Debt tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Exchange Notes and Pari Passu Debt surrendered exceeds the amount of Excess Proceeds, the Exchange Note Trustee shall select the Exchange Notes and Pari Passu Debt to be purchased on a pro rata basis, based upon the principal amount thereof surrendered in such Asset Sale Offer. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. CERTAIN COVENANTS RESTRICTED PAYMENTS The Exchange Note Indenture will provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, (i) declare or pay any dividend or make any payment or distribution on account of the Company's Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company) or on account of any Qualified Subsidiary Stock or make any payment or distribution (other than compensation paid to, or reimbursement of expenses of, employees in the ordinary course of business) to or for the benefit of the direct or indirect holders of the Company's Equity Interests or the direct or indirect holders of any Qualified Subsidiary Stock in their capacities as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Company or any direct or indirect parent of the Company or other Affiliate of the Company (other than any such Equity Interests owned by the Company or any of its Restricted Subsidiaries and other than the acquisition of Equity Interests in Subsidiaries of the Company solely in exchange Equity Interests (other than Disqualified Stock) of the Company); (iii) make any payment on, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Exchange Notes, except at final maturity; (iv) make any loan, advance, capital contribution to or other investment in, or guarantee any obligation of, any Affiliate of the Company other than a Permitted Investment; (v) forgive any loan or advance to or other obligation of any Affiliate of the Company (other than a loan or advance to or other obligation of a Wholly Owned Restricted Subsidiary) which at the time it was made was not a Restricted Payment; or (vi) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (vi) above being collectively referred to as "Restricted Payments"), unless, at the time of and immediately after giving effect to such Restricted Payment: (A) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof, and (B) the Company would be permitted to incur $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio described in the first paragraph of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;" and (C) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the Closing Date (excluding Restricted Payments permitted by clause (3) of the next succeeding paragraph), is less than the sum of (i) an amount equal to the Cumulative Operating Cash Flow for the period (taken as one accounting period) from the beginning of the first full month commencing after the Closing Date to the end of the Company's most recently 109 ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (the "Basket Period") less 1.4 times the Company's Cumulative Total Interest Expense for the Basket Period, plus (ii) 100% of the aggregate net cash proceeds and, in the case of proceeds consisting of assets constituting or used in a Permitted Business, 100% of the fair market value of the aggregate net proceeds other than cash received since the Closing Date (1) by the Company as capital contributions to the Company (other than from a Subsidiary) or (2) from the sale by the Company (other than to a Subsidiary) of its Equity Interests (other than Disqualified Stock), plus (iii) without duplication, to the extent that any Restricted Investment that was made after the Closing Date is sold for cash or otherwise liquidated or repaid for cash, the Net Proceeds received by the Company or a Wholly Owned Restricted Subsidiary of the Company upon the sale of such Restricted Investment, plus (iv) without duplication, to the extent that any Unrestricted Subsidiary is designated by the Company as a Restricted Subsidiary, an amount equal to the fair market value of such Investment at the time of such designation, plus (v) $2.5 million. The foregoing provisions shall not prohibit (1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Exchange Note Indenture; (2) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company in exchange for, or out of the net proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than any Disqualified Stock); provided that the amount of any such net proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph; (3) the defeasance, redemption or repurchase of Indebtedness with the proceeds of a substantially concurrent issuance of Permitted Refinancing Debt in accordance with the provisions of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;" (4) the purchase by the Company of any shares of Class B Common Stock of PM&C, par value $.01 per share; (5) the payment by the Company of advances under the Split Dollar Agreement in an amount not to exceed $250,000 in any four-quarter period; (6) the repurchase or redemption from employees of the Company and its subsidiaries (other than the Principal) of Capital Stock of the Company in an amount not to exceed an aggregate of $3.0 million and (7) cash payments made in lieu of the issuance of additional Exchange Notes having a face amount less than $1,000 and any cash payments representing accrued and unpaid dividends in respect thereof, not to exceed $100,000 in the aggregate in any fiscal year. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) proposed to be transferred by the Company or the applicable Restricted Subsidiary, as the case may be, net of any liabilities proposed to be assumed by the transferee and novated pursuant to a written agreement releasing the Company and its Subsidiaries. Not later than the date of making any Restricted Payment, the Company shall deliver to the Exchange Note Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this covenant were computed, which calculations may be based upon the Company's latest available financial statements. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default or an Event of Default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries in the Subsidiary so designated shall be deemed to be Restricted Payments at the time of such designation (valued as set forth below) and shall reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments shall be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation. Such designation shall be permitted only if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary would otherwise meet the definition of an Unrestricted Subsidiary. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK The Exchange Note Indenture will provide that the Company may not, and may not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including 110 Acquired Debt) and shall not issue any Disqualified Stock and shall not permit any of its Subsidiaries to issue any shares of preferred stock (other than Qualified Subsidiary Stock); provided, however, that (a) the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock and (b) a Restricted Subsidiary of the Company may incur Indebtedness (including Acquired Debt) or issue shares of preferred stock (including Disqualified Stock) if, in each case, the Company's Indebtedness to Adjusted Operating Cash Flow Ratio as of the date on which such Indebtedness is incurred or such Disqualified Stock or preferred stock is issued would have been 7.0 to 1 or less, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock or preferred stock had been issued, as the case may be, as of the date of such calculation. The foregoing provisions shall not apply to: (i) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt or the issuance by such Unrestricted Subsidiaries of preferred stock; provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary or any such preferred stock becomes Disqualified Stock of a Restricted Subsidiary, as the case may be, such event shall be deemed to constitute an incurrence of Indebtedness by or an issuance of Disqualified Stock of, as the case may be, a Restricted Subsidiary of the Company; (ii) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness pursuant to one or more Bank Facilities, so long as the aggregate principal amount of all Indebtedness outstanding under all Bank Facilities does not, at the time of incurrence, exceed an amount equal to $50.0 million; (iii) the incurrence by the Company or any of its Restricted Subsidiaries of the Existing Indebtedness; (iv) Indebtedness under the Exchange Notes (including any Exchange Notes issued to pay interest on outstanding Exchange Notes); (v) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Wholly Owned Restricted Subsidiaries; provided, however, that (i) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations with respect to the Exchange Notes and (ii)(A) any subsequent issuance or transfer of Equity Interests that result in any such Indebtedness being held by a Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company and (B) any sale or other transfer of such Indebtedness to a Person that is not either the Company or a Wholly Owned Restricted Subsidiary of the Company shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be; (vi) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property used in the business of the Company or such Restricted Subsidiary, in an aggregate principal amount not to exceed $5.0 million at any time outstanding; (vii) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Debt in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness that was permitted by the Exchange Note Indenture to be incurred; and (viii) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness (in addition to Indebtedness permitted by any other clause of this paragraph) in an aggregate principal amount at any time outstanding not to exceed $5.0 million. If an item of Indebtedness is permitted to be incurred on the basis of the first paragraph of this covenant and also on the basis of one or more of clauses (i) through (viii) above, or is permitted to be incurred on the basis of two or more of clauses (i) through (viii) above, then the Company shall classify the basis on which 111 such item of Indebtedness is incurred. If an item of Indebtedness is repaid with the proceeds of an incurrence of other Indebtedness (whether from the same of a different creditor), the Company may classify such other Indebtedness as having been incurred on the same basis as the Indebtedness being repaid or on a different basis permitted under this covenant. For purposes of this paragraph, "Indebtedness" includes Disqualified Stock and preferred stock of Subsidiaries. Accrual of interest and the accretion of accreted value will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. LIENS The Exchange Note Indenture will provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly create, incur, assume or suffer to exist any Lien on any asset now owned or hereafter acquired, or any income or profits therefrom, or assign or convey any right to receive income therefrom, except Permitted Liens. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES The Exchange Note Indenture will provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) the terms of any Indebtedness permitted by the Exchange Note Indenture to be incurred by any Subsidiary of the Company, (b) Existing Indebtedness as in effect on the Closing Date, (c) the Exchange Note Indenture and the Exchange Notes, (d) applicable law, (e) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person and its Subsidiaries, or the property or assets of the Person and its Subsidiaries, so acquired or (f) by reason of customary non-assignment provisions in leases and other contracts entered into in the ordinary course of business and consistent with past practices. MERGER, CONSOLIDATION OR SALE OF ASSETS The Exchange Note Indenture will provide that the Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the Obligations of the Company under the Exchange Notes and the Exchange Note Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Exchange Note Trustee; (iii) immediately after such transaction no Default or Event of Default exists; and (iv) the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio set forth in the first paragraph of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." 112 TRANSACTIONS WITH AFFILIATES The Exchange Note Indenture will provide that the Company may not, and may not permit any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Holders (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and a majority of the Independent Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5.0 million, an opinion as to the fairness to the Company or such Restricted Subsidiary of such Affiliate Transaction from a financial point of view issued by an investment banking firm of national standing; provided that the Company shall not, and shall not permit any of its Restricted Subsidiaries to, engage in any Affiliate Transaction involving aggregate consideration in excess of $1.0 million at any time that there is not at least one Independent Director on the Company's Board of Directors; and provided further that (w) any employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (x) transactions between or among the Company and/or its Restricted Subsidiaries, (y) the payment of any dividend on, or the issuance of additional Exchange Notes in exchange for, the Series A Preferred Stock, provided that such dividends are paid on a pro rata basis and the additional Exchange Notes are issued in accordance with the Certificate of Designation, and (z) transactions permitted by the provisions of the covenant described under the caption "--Certain Covenants-- Restricted Payments," in each case, shall not be deemed Affiliate Transactions. NO SENIOR SUBORDINATED DEBT The Exchange Note Indenture will provide that, notwithstanding the provisions of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt and senior in any respect in right of payment to the Exchange Notes. LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED RESTRICTED SUBSIDIARIES The Exchange Note Indenture will provide that the Company (i) will not, and will not permit any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey, sell or otherwise dispose of any Capital Stock (other than Qualified Subsidiary Stock) of any Wholly Owned Restricted Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company), unless (a) such transfer, conveyance, sale, lease or other disposition is of all the Capital Stock of such Wholly Owned Restricted Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with the covenant described under the caption "--Repurchase at the Option of Holders--Asset Sales," and (ii) shall not permit any Wholly Owned Restricted Subsidiary of the Company to issue any of its Equity Interests (other than Qualified Subsidiary Stock and, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Restricted Subsidiary of the Company. REPORTS The Exchange Note Indenture will provide that, whether or not required by the rules and regulations of the Commission, so long as any Exchange Notes are outstanding, the Company will furnish to the Holders of Exchange Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, 113 with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition to the financial information required by the Exchange Act, each such quarterly and annual report shall be required to contain "summarized financial information" (as defined in Rule 1-02(aa)(1) of Regulation S-X under the Exchange Act) showing Adjusted Operating Cash Flow for the Company and its Restricted Subsidiaries, on a consolidated basis, where Adjusted Operating Cash Flow for the Company is calculated in a manner consistent with the manner described under the definition of "Adjusted Operating Cash Flow" contained herein. The summarized financial information required pursuant to the preceding sentence may, at the election of the Company, be included in the footnotes to audited consolidated financial statements or unaudited quarterly financial statements of the Company and shall be as of the same dates and for the same periods as the consolidated financial statements of the Company and its Subsidiaries required pursuant to the Exchange Act. EVENTS OF DEFAULT AND REMEDIES The Exchange Note Indenture will provide that each of the following constitutes an Event of Default: (1) default by the Company in the payment of interest on the Exchange Notes when the same becomes due and payable and the Default continues for a period of 30 days (whether or not such payment is prohibited by the subordination provisions of the Exchange Note Indenture); (2) default by the Company in the payment of the principal of or premium, if any, on the Exchange Notes when the same becomes due and payable at maturity, upon redemption or otherwise (whether or not such payment is prohibited by the subordination provisions of the Exchange Note Indenture); (3) failure by the Company to comply with the provisions described under the captions "--Repurchase at the Option of Holders--Change of Control," "--Repurchase at the Option of Holders--Asset Sales," "--Certain Covenants--Restricted Payments, "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" or "--Certain Covenants--Merger, Consolidation or Sale of Assets;" (4) failure by the Company for 60 days after notice to comply with any of its other agreements in the Exchange Note Indenture or the Exchange Notes; (5) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries), whether such Indebtedness or Guarantee now exists, or shall be created hereafter, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (6) a final judgment or final judgments for the payment of money are entered by a court or courts of competent jurisdiction against the Company or any Restricted Subsidiary that would be a Significant Subsidiary and such judgment or judgments remain unpaid, undischarged or unstayed for a period of 60 days, provided that the aggregate of all such undischarged judgments exceeds $5.0 million; and (7) certain events of bankruptcy or insolvency with respect to the Company, any Restricted Subsidiary that would constitute a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary. If any Event of Default occurs and is continuing, the Exchange Note Trustee or the Holders of at least 25% in principal amount of the then outstanding Exchange Notes may declare all the Exchange Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to the Company, any Restricted Subsidiary that would constitute a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding Exchange Notes will become due and payable without further action or notice. Holders of the Exchange Notes may not enforce the Exchange Note Indenture or the Exchange Notes except as provided in the Exchange Note Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Exchange Notes may direct the Exchange Note Trustee 114 in its exercise of any trust or power. The Exchange Note Trustee may withhold from Holders of the Exchange Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. In the case of any Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Exchange Notes pursuant to the optional redemption provisions of the Exchange Note Indenture, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Exchange Notes. If an Event of Default occurs prior to , 2002 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Exchange Notes prior to , 2002, then the premium specified in the Exchange Note Indenture shall also become immediately due and payable to the extent permitted by law upon the acceleration of the Exchange Notes. The Holders of a majority in aggregate principal amount of the Exchange Notes then outstanding by notice to the Exchange Note Trustee may on behalf of the Holders of all of the Exchange Notes waive any existing Default or Event of Default and its consequences under the Exchange Note Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Exchange Notes. The Company is required to deliver to the Exchange Note Trustee annually a statement regarding compliance with the Exchange Note Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Exchange Note Trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Exchange Notes or the Exchange Note Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Exchange Notes by accepting a Exchange Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Exchange Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding Exchange Notes ("Legal Defeasance") except for (i) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, premium, if any, and interest on such Exchange Notes when such payments are due from the trust referred to below, (ii) the Company's obligations with respect to the Exchange Notes concerning issuing temporary Exchange Notes, registration of Exchange Notes, mutilated, destroyed, lost or stolen Exchange Notes and the maintenance of an office or agency for payment and to hold money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Exchange Note Trustee, and the Company's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Exchange Note Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company released with respect to certain covenants that are described in the Exchange Note Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Exchange Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to the Exchange Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Exchange Note Trustee, in trust, for the benefit of the Holders of the Exchange Notes, cash in United States Dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the 115 principal of, premium, if any, interest on the outstanding Exchange Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Exchange Notes are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Exchange Note Trustee an opinion of counsel in the United States reasonably acceptable to the Exchange Note Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Exchange Note Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders of the outstanding Exchange Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Exchange Note Trustee an opinion of counsel in the United States reasonably acceptable to the Exchange Note Trustee confirming that the Holders of the outstanding Exchange Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit (or greater period of time in which any such deposit of trust funds may remain subject to bankruptcy or insolvency laws insofar as those apply to the deposit by the Company); (v) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Exchange Note Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company must have delivered to the Exchange Note Trustee an opinion of counsel to the effect that, as of the date of such opinion, (A) the trust funds will not be subject to rights of holders of Indebtedness other than the Exchange Notes and (B) assuming no intervening bankruptcy of the Company between the date of deposit and the 91st day following the deposit and assuming no Holder of Exchange Notes is an insider of the Company, after the 91st day following the deposit, the trust funds will not be subject to the effects of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally under any applicable United States or state law; (vii) the Company must deliver to the Exchange Note Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Exchange Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (viii) the Company must deliver to the Exchange Note Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. TRANSFER AND EXCHANGE A Holder may transfer or exchange Exchange Notes in accordance with the Exchange Note Indenture. The Registrar and the Exchange Note Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Exchange Note Indenture. The Company is not required to transfer or exchange any Exchange Note selected for redemption. Also, the Company is not required to transfer or exchange any Exchange Note for a period of 15 days before a selection of Exchange Notes to be redeemed. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the Exchange Note Indenture or the Exchange Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Exchange Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Exchange Notes), and any existing 116 default or compliance with any provision of the Exchange Note Indenture or the Exchange Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Exchange Notes (including consents obtained in connection with a purchase of, or tender offer or exchange offer for, Exchange Notes). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Exchange Notes held by a non-consenting Holder): (i) reduce the principal amount of Exchange Notes whose Holders must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any Exchange Note or alter the provisions with respect to the redemption of the Exchange Notes (other than provisions relating to the covenants described above under the caption "--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the time for payment of interest on any Exchange Note, (iv) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Exchange Notes (except a rescission of acceleration of the Exchange Notes by the Holders of a majority in aggregate principal amount of the Exchange Notes and a waiver of the payment default that resulted from such acceleration), (v) make any Exchange Note payable in money other than that stated in the Exchange Notes, (vi) make any change in the provisions of the Exchange Note Indenture relating to waivers of past Defaults or the rights of Holders of Exchange Notes to receive payments of principal of or premium, if any, or interest on the Exchange Notes, (vii) waive a redemption payment with respect to any Exchange Note (other than a payment required by one of the covenants described above under the caption "--Repurchase at the Option of Holders") or (viii) make any change in the foregoing amendment and waiver provisions. In addition, any amendment to the provisions of Article 10 of the Exchange Note Indenture (which relates to subordination), including the related definitions, will require the consent of the Holders of at least 75% in aggregate principal amount of the Exchange Notes then outstanding if such amendment would adversely affect the rights of Holders of Exchange Notes. Notwithstanding the foregoing, without the consent of any Holder of Exchange Notes, the Company and the Exchange Note Trustee may amend or supplement the Exchange Note Indenture or the Exchange Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Exchange Notes in addition to or in place of certificated Exchange Notes, to provide for the assumption of the Company's obligations to Holders of Exchange Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of Exchange Notes or that does not adversely affect the legal rights under the Exchange Note Indenture of any such Holder, or to comply with requirements of the Commission in order to maintain the qualification of the Exchange Note Indenture under the Trust Indenture Act. CONCERNING THE EXCHANGE NOTE TRUSTEE The Exchange Note Indenture contains certain limitations on the rights of the Exchange Note Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Exchange Note Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The Holders of a majority in principal amount of the then outstanding Exchange Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Exchange Note Trustee, subject to certain exceptions. The Exchange Note Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Exchange Note Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Exchange Note Trustee will be under no obligation to exercise any of its rights or powers under the Exchange Note Indenture at the request of any Holder of Exchange Notes, unless such Holder shall have offered to the Exchange Note Trustee security and indemnity satisfactory to it against any loss, liability or expense. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Certificate of Designation and Exchange Note Indenture. Reference is made to the Certificate of Designation and the Exchange Note Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. 117 "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Adjusted Operating Cash Flow" means, for the four most recent fiscal quarters for which internal financial statements are available, Operating Cash Flow of such Person and its Restricted Subsidiaries less DBS Cash Flow for the most recent four-quarter period plus DBS Cash Flow for the most recent quarterly period, multiplied by four. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets (including, without limitation, by way of a sale and leaseback) other than in the ordinary course of business consistent with past practices (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole will be governed by the provisions described above under the caption "--Repurchase at the Option of Holders--Change of Control" and/or the provisions described above under the caption "--Certain Covenants--Merger, Consolidation or Sale of Assets" and not by the provision of the Asset Sale covenant) and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding the foregoing, the following transactions will not be deemed to be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned Restricted Subsidiary of the Company or by a Wholly Owned Restricted Subsidiary of the Company to the Company or to another Wholly Owned Restricted Subsidiary of the Company, (ii) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary of the Company to the Company or to another Wholly Owned Restricted Subsidiary of the Company and (iii) a Restricted Payment that is permitted by the provisions of the covenant described above under the caption "--Certain Covenants--Restricted Payments." "Asset Swap" means an exchange of assets by the Company or a Restricted Subsidiary of the Company for one or more Permitted Businesses or for a controlling equity interest in any Person whose assets consist primarily of one or more Permitted Businesses. "Bank Facilities" means, with respect to the Company or any of its Restricted Subsidiaries, one or more debt facilities or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. 118 "Cash Equivalents" means (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any domestic commercial bank having capital and surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days or on demand for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above and (v) commercial paper having the highest rating at acquisition obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each case maturing within six months after the date of acquisition. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Principal or his Related Parties (as defined below), (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that (A) any "person" (as defined above) becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time, upon the happening of an event or otherwise), directly or indirectly, of more of the Class A Common Stock of the Company than is beneficially owned (as defined above) at such time by the Principal and his Related Parties in the aggregate, (B) the Principal and his Related Parties collectively cease to beneficially own (as defined above) Voting Stock of the Company having at least 30% of the combined voting power of all classes of Voting Stock of the Company then outstanding or (C) the Principal and his affiliates acquire, in the aggregate, beneficial ownership (as defined above) of more than 66 2/3 % of the shares of Class A Common Stock at the time outstanding or (iv) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Closing Date" means the date on which shares of Series A Preferred Stock are first issued. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iii) the cumulative effect of a change in accounting principles shall be excluded and (iv) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Subsidiaries. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the Closing Date or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Cumulative Operating Cash Flow" means, as of any date of determination, Operating Cash Flow for the Company and its Restricted Subsidiaries for the period (taken as one accounting period) from the beginning of the first full month commencing after the Closing Date to the end of the most recently ended fiscal quarter for which internal financial statements are available at such date of determination, plus all cash dividends received by the Company or a Wholly Owned Restricted Subsidiary of the Company from any Unrestricted Subsidiary of the Company or Wholly Owned Restricted Subsidiary of the Company to the extent that such dividends are not included in the calculation of permitted Restricted Payments under paragraph (C) of the covenant described under the caption "--Certain Covenants--Restricted Payments" by virtue of clause (iii) of such paragraph. 119 "Cumulative Total Interest Expense" means, with respect to the Company and its Restricted Subsidiaries, as of any date of determination, Total Interest Expense for the period (taken as one accounting period) from the beginning of the first full month commencing after the Closing Date to the end of the most recently ended fiscal quarter for which internal financial statements are available at such date of determination. "DBS Cash Flow" means income from operations (before depreciation, amortization and Non-Cash Incentive Compensation to the extent deducted in arriving at income from operations) for the Satellite Segment determined on a basis consistent with the segment data contained in the Company's consolidated audited financial statements. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Disqualified Stock" means any Capital Stock (other than the Series A Preferred Stock) that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the mandatory redemption date of the Series A Preferred Stock unless, in any such case, the issuer's obligation to pay, purchase or redeem such Capital Stock is expressly conditioned on its ability to do so in compliance with the provisions of the covenant described under the caption "--Certain Covenants--Restricted Payments." "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Exchange Notes" means the Company's ___% Senior Subordinated Exchange Notes due 2006 issuable in exchange for the Company's Series A Preferred Stock. "Existing Indebtedness" means all Indebtedness of the Company and its Subsidiaries in existence on the Closing Date, until such amounts are repaid. "fair market value" means, with respect to assets or aggregate net proceeds having a fair market value (a) of less than $5.0 million, the fair market value of such assets or proceeds determined in good faith by the Board of Directors of the Company (including a majority of the Independent Directors thereof) and evidenced by a board resolution and (b) equal to or in excess of $5.0 million, the fair market value of such assets or proceeds as determined by an independent appraisal firm with experience in the valuation of the classes and types of assets in question; provided that the fair market value of the assets purchased in an arms'-length transaction by an Affiliate of the Company (other than a Subsidiary) from a third party that is not also an Affiliate of the Company or of such purchaser and contributed to the Company within five Business Days of the consummation of the acquisition of such assets by such Affiliate shall be deemed to be the aggregate consideration paid by such Affiliate (which may include the fair market value of any non-cash consideration to the extent that the valuation requirements of this definition are complied with as to any such non-cash consideration). "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Closing Date. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, coborrowing arrangements, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. 120 "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing any Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Indebtedness issued with original issue discount is the full amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP. "Indebtedness to Adjusted Operating Cash Flow Ratio" means, as of any date of determination, the ratio of (a) the aggregate principal amount of all outstanding Indebtedness of a Person and its Restricted Subsidiaries as of such date on a consolidated basis, plus the aggregate liquidation preference of all outstanding preferred stock (other than Qualified Subsidiary Stock) of the Restricted Subsidiaries of such Person as of such date (excluding any such preferred stock held by such Person or a Wholly Owned Restricted Subsidiary of such Person), plus the aggregate liquidation preference or redemption amount of all Disqualified Stock of such Person (excluding any Disqualified Stock held by such Person or a Wholly Owned Restricted Subsidiary of such Person) as of such date to (b) Adjusted Operating Cash Flow of such Person and its Restricted Subsidiaries for the most recent four-quarter period for which internal financial statements are available determined on a pro forma basis after giving effect to all acquisitions and dispositions of assets (notwithstanding clause (ii) of the definition of "Consolidated Net Income") (including, without limitation, Asset Swaps) made by such Person and its Restricted Subsidiaries since the beginning of such four-quarter period through such date as if such acquisitions and dispositions had occurred at the beginning of such four-quarter period. "Independent Director" means a member of the Board of Directors who is neither an officer nor an employee of the Company or any of its Affiliates. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including Guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP; provided that an acquisition of assets, Equity Interests or other securities by the Company for consideration consisting of common equity securities, or preferred stock which is not Disqualified Stock, of the Company shall not be deemed to be an Investment. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). 121 "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting, investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness in connection with such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Cash Incentive Compensation" means incentive compensation paid to any officer, employee or director of the Company or any of its Subsidiaries in the form of Class A Common Stock of the Company or options to purchase Class A Common Stock of the Company pursuant to the Pegasus Restricted Stock Plan and the Pegasus 1996 Stock Option Plan. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise) or (c) constitutes the lender; and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Operating Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period, (A) plus (i) extraordinary net losses and net losses on sales of assets outside the ordinary course of business during such period, to the extent such losses were deducted in computing such Consolidated Net Income, plus (ii) provision for taxes based on income or profits, to the extent such provision for taxes was included in computing such Consolidated Net Income, and any provision for taxes utilized in computing the net losses under clause (i) hereof, plus (iii) consolidated interest expense of such Person and its Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash charges were deducted in computing such Consolidated Net Income, plus (v) Non-Cash Incentive Compensation to the extent such compensation expense was deducted in computing such Consolidated Net Income and to the extent not included in clause (iv) of this definition and (B) less all non-cash income for such period (excluding any such non-cash income to the extent it represents an accrual of cash income in any future period or amortization of cash income received in a prior period). "Parent" means Pegasus Communications Holdings, Inc, a Delaware corporation. "Pari Passu Debt" means senior Indebtedness of the Company or its Restricted Subsidiaries permitted by the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," other than the Exchange Notes, which is pari passu in right of payment with the Exchange Notes. 122 "Permitted Businesses" means (i) any media or communications business, including but not limited to, any broadcast television station, cable franchise or other business in the television broadcasting, cable or direct-to-home satellite television industries and (ii) any business reasonably related or ancillary to any of the foregoing businesses. "Permitted Investments" means (a) any Investments in the Company or in a Wholly Owned Restricted Subsidiary of the Company; (b) any Investments in Cash Equivalents; (c) Investments by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the Company or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Wholly Owned Restricted Subsidiary of the Company; (d) Investments made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the provisions of the covenant described under the caption "--Repurchase at the Option of Holders--Asset Sales;" and (e) other Investments (measured as of the time made and without giving effect to subsequent changes in value) that do not exceed an amount equal to $5.0 million plus, to the extent any such Investments are sold for cash or are otherwise liquidated or repaid for cash, any gains less any losses realized on the disposition of such Investments. "Permitted Liens" means (i) Liens securing Senior Debt; (ii) Liens securing Indebtedness of a Subsidiary that was permitted to be incurred under the Exchange Note Indenture, (iii) Liens on property of a Person existing at the time such Person is merged into or consolidated with the Company or any Subsidiary of the Company; provided that such Liens were not created in contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Company or any Restricted Subsidiary of the Company; (iv) Liens on property existing at the time of acquisition thereof by the Company or any Subsidiary of the Company; provided that such Liens were not created in contemplation of such acquisition; (v) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (vi) Liens existing on the Closing Date; (vii) Liens to secure Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations permitted by clause (vi) of the second paragraph of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," covering only the assets acquired with such Indebtedness; (viii) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (ix) Liens incurred in the ordinary course of business of the Company or any Subsidiary of the Company with respect to obligations that do not exceed $1.0 million at any one time outstanding and (x) Liens on assets of or Equity Interests in Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries. "Permitted Refinancing Debt" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that (i) the principal amount of such Permitted Refinancing Debt does not exceed the principal amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus (a) the amount of reasonable expenses incurred in connection therewith and (b) the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of such refinancing or deemed by the Company or such Restricted Subsidiary necessary to be paid in order to effectuate such refinancing); (ii) such Permitted Refinancing Debt has a final maturity date not earlier than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Exchange Notes, such Permitted Refinancing Debt has a final maturity date later than the final maturity date of the Exchange Notes, and is subordinated in right of payment to the Exchange Notes on terms at least as favorable to the Holders of Exchange Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. 123 "PM&C" means Pegasus Media & Communications, Inc., a Delaware corporation and a direct Subsidiary of the Company. "PM&C Notes" means PM&C's 12 1/2 % Series B Senior Subordinated Notes due 2005. "Principal" means Marshall W. Pagon. "Qualified Subsidiary Stock" means Capital Stock of a Subsidiary of the Company which by its terms (a) does not mature, or is not mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, and is not redeemable at the option of the Holder thereof, in whole or in part, prior to , 2008 (in each case, whether automatically or upon the happening of any event) (unless, in any such case, the issuer's obligation to pay, purchase or redeem such Capital Stock is expressly conditioned on its ability to do so in compliance with the provisions of the covenant described under the caption "--Certain Covenants--Restricted Payments"), (b) is automatically exchangeable into shares of Capital Stock of the Company that is not Disqualified Stock upon the earlier to occur of (i) the occurrence of a Voting Rights Triggering Event or an Event of Default and (ii) , 2006, (c) has no voting or remedial rights and (d) does not permit the payment of cash dividends prior to , 2007 (unless, in the case of this clause (d), the issuer's ability to pay cash dividends is expressly conditioned on its ability to do so in compliance with the provisions of the covenant described under the caption "--Certain Covenants--Restricted Payments"). "Related Party" with respect to the Principal means (A) any immediate family member of the Principal or (B) any trust, corporation, partnership or other entity, more than 50% of the voting equity interests of which are owned directly or indirectly by, and which is controlled by, the Principal and/or such other Persons referred to in the immediately preceding clause (A). For purposes of this definition, (i) "immediate family member" means spouse, parent, step-parent, child, sibling or step-sibling and (ii) "control" has the meaning specified in the definition of "Affiliate" contained under the caption "--Certain Definitions." In addition, the Principal's estate shall be deemed to be a Related Party until such time as such estate is distributed in accordance with the Principal's will or applicable state law. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Satellite Segment" means the business involved in the marketing of video and audio programming and data information services through transmission media consisting of space-based satellite broadcasting services, the assets related to the conduct of such business held by the Company and its Restricted Subsidiaries on the Closing Date, plus all other assets acquired by the Company or any of its Restricted Subsidiaries that are directly related to such business (excluding, without limitation, the terrestrial television broadcasting business and the assets related thereto and the cable television business and the assets related thereto); provided that any assets acquired by the Company or any of its Restricted Subsidiaries after the Closing Date that are not directly related to such business shall not be included for purposes of this definition. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the Closing Date. "Split Dollar Agreement" means the Split Dollar Agreement between the Company and Nicholas A. Pagon, Holly T. Pagon and Michael B. Jordan, as trustees of an insurance trust established by Marshall W. Pagon, as in effect on the Closing Date. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Total Interest Expense" means, with respect to any Person for any period, the sum of (i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or 124 accrued (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, to the extent such amounts are not included in clause (i) of this definition, and (iii) any interest expense for such period on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets (other than Equity Interests in Unrestricted Subsidiaries securing Indebtedness of Unrestricted Subsidiaries) of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) all cash dividend payments (and non-cash dividend payments in the case of a Person that is a Restricted Subsidiary) during such period on any series of preferred stock of a Restricted Subsidiary of such Person. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent that such Subsidiary (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation made by the Board of Directors at a time when any Exchange Notes are outstanding shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by the provisions of the covenant described under the caption "--Certain Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Certificate of Designation or the Exchange Note Indenture, as the case may be, and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the provisions of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" (treating such Subsidiary as a Restricted Subsidiary for such purpose for the period relevant to such covenant), the Company shall be in default of such covenant); provided, however, that in the event an Unrestricted Subsidiary ceases to meet the requirement set forth in clause (e) of this definition, such Unrestricted Subsidiary shall have 60 days to meet such requirement before such Unrestricted Subsidiary shall cease to be an Unrestricted Subsidiary. The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall be permitted only if (i) such Indebtedness is permitted under the covenant described under the provisions of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" (treating such Subsidiary as a Restricted Subsidiary for such purpose for the period relevant to such covenant) and (ii) no Voting Rights Triggering Event, or no Default or Event of Default, as the case may be, would be in existence following such designation. "Voting Stock" means with respect to any specified Person, Capital Stock with voting power, under ordinary circumstances and without regard to the occurrence of any contingency, to elect the directors or other managers or trustees of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then 125 remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock (other than Qualified Subsidiary Stock) or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person and/or by one or more Wholly Owned Restricted Subsidiaries of such Person. DESCRIPTION OF WARRANTS GENERAL The Warrants will be issued pursuant to a Warrant Agreement (the "Warrant Agreement") between the Company and First Union National Bank, as Warrant Agent (the "Warrant Agent"). The following summary of certain provisions of the Warrant Agreement, including the definitions therein of certain terms used below, does not purport to be complete and is qualified in its entirety by reference to the Warrant Agreement and the warrant certificate attached thereto, the forms of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. Each Warrant, when exercised, will entitle the Holder thereof to receive 1.936 fully paid and non-assessable shares of Class A Common Stock at an exercise price of at least $14.00 per share, subject to adjustment (the "Exercise Price"). The Exercise Price and the number of Warrant Shares are both subject to adjustment in certain cases referred to below. The Warrants will entitle the Holders thereof to purchase in the aggregate 193,600 Warrant Shares, or approximately 2.0% of the Common Stock, on a fully diluted basis as of the closing of this Offering. The Warrants will be exercisable on or after the Separation Date and prior to 5:00 p.m., New York City time, on , 2007 (the "Expiration Date"). The exercise and transfer of the Warrants will be subject to applicable federal and state securities laws. The Warrants may be exercised by surrendering to the Company the warrant certificates evidencing the Warrants to be exercised with the accompanying form of election to purchase properly completed and executed, together with payment of the Exercise Price. Payment of the Exercise Price may be made on or after the Separation Date (A) by tendering shares of Series A Preferred Stock having an aggregate liquidation preference, plus, without duplication, accumulated and unpaid dividends, at the time of tender equal to the Exercise Price, (B) by tendering Exchange Notes having an aggregate principal amount, plus accrued and unpaid dividends, if any, at the time of tender equal to the Exercise Price, (C) by tendering Warrants having a fair market value equal to the Exercise Price, (D) in the form of cash or by certified or official bank check payable to the order of the Company or (E) by any combination of shares of Series A Preferred Stock, Warrants and cash or Exchange Notes, Warrants and cash. Upon surrender of the Warrant certificate and payment of the Exercise Price, the Company will deliver or cause to be delivered, to or upon the written order of such Holder, stock certificates representing the number of whole shares of Class A Common Stock to which such Holder is entitled. If less than all of the Warrants evidenced by a warrant certificate are to be exercised, a new warrant certificate will be used for the remaining number of Warrants. No fractional shares of Class A Common Stock will be issued upon the exercise of the Warrants. The Company will pay to the Holder of the Warrant at the time of exercise an amount in cash equal to the current market value of any such fractional share of Class A Common Stock less a corresponding fraction of the Exercise Price. The Holders of the Warrants will have no right to vote on matters submitted to the stockholders of the Company and will have no right to receive dividends. The Holders of the Warrants will not be entitled to share in the assets of the Company in the event of liquidation, dissolution or winding up of the Company. In the event a bankruptcy or reorganization is commenced by or against the Company, a bankruptcy court may hold that unexercised Warrants are executory contracts which may be subject to rejection by the Company 126 with approval of the bankruptcy court, and the Holders of the Warrants may, even if sufficient funds are available, receive nothing or a lesser amount as a result of any such bankruptcy case than they would be entitled to if they had exercised their Warrants prior to the commencement of any such case. In the event of a taxable distribution to holders of Common Stock that results in an adjustment to the number of shares of Common Stock or other consideration for which a Warrant may be exercised, the Holders of the Warrants may, in certain circumstances, be deemed to have received a distribution subject to United States federal income tax as a dividend. See "Certain United States Federal Income Tax Considerations." ADJUSTMENTS The number of shares of Class A Common Stock purchasable upon exercise of Warrants and payment of the Exercise Price will be subject to adjustment in certain events, including: (i) the issuance by the Company of dividends (and other distributions) on its Common Stock payable in Common Stock, (ii) subdivisions, combinations and reclassifications of Common Stock, (iii) the issuance to all holders of Common Stock of rights, options or warrants entitling them to subscribe for Common Stock or securities convertible into, or exchangeable or exercisable for, Common Stock within sixty (60) days after the record date for such issuance of rights, options or warrants at an offering price (or with an initial conversion, exchange or exercise price plus such offering price) which is less than the current market price per share (as defined in the Warrant Agreement) of Common Stock, (iv) the distribution to all holders of Common Stock of any of the Company's assets (including cash), debt securities, preferred stock or any rights or warrants to purchase any such securities (excluding those rights and warrants referred to in clause (iii) above), (v) the issuance of shares of Common Stock for a consideration per share less than the current market price per share (excluding securities issued in transactions referred to in clauses (i) through (iv) above), (vi) the issuance of securities convertible into or for Common Stock for a conversion or exchange price less than the current market price for a share of Common Stock (excluding securities issued in transactions referred to in clauses (iii) or (iv) and (vii) certain other events that could have the effect of depriving holders of the Warrants of the benefit of all or a portion of the purchase rights evidenced by the Warrants. The events described in clauses (v) and (vi) above are subject to certain exceptions described in the Warrant Agreement, including, without limitation, (A) certain bona fide public offerings and private placements to persons that are not affiliates of the Company and (B) Common Stock (and options exercisable therefor) issued to the Company's employees, officers and directors under bona fide employee benefit plans (other than the Principal and his Related Parties). No adjustment in the Exercise Price will be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the Exercise Price; provided, however, that any adjustment that is not made will be carried forward and taken into account in any subsequent adjustment. In addition, the Company may at any time reduce the Exercise Price to any amount (but not less than the par value of the Common Stock) for any period of time (but not less than twenty (20) business days) deemed appropriate by the Board of Directors of the Company. In the case of certain consolidations or mergers of the Company, or the sale of all or substantially all of the assets of Company to another corporation, each Warrant will thereafter be exercisable for the right to receive the kind and amount of shares of stock or other securities or property to which such Holder would have been entitled as a result of such consolidation, merger or sale had the Warrants been exercised immediately prior thereto. AMENDMENT From time to time, the Company and the Warrant Agent, without the consent of the Holders of the Warrants, may amend or supplement the Warrant Agreement for certain purposes, including curing defects or inconsistencies or making any change that does not materially adversely affect the rights of any Holder. Any amendment or supplement to the Warrant Agreement that has a material adverse effect on the interests of the Holders of the Warrants will require the written consent of the Holders of a majority of the then outstanding Warrants (excluding Warrants held by the Company or any of its Affiliates). The consent of each Holder of the Warrants affected will be required for any amendment pursuant to which the Exercise Price would be increased or the number of Warrant Shares would be decreased (other than pursuant to adjustments provided in the Warrant Agreement). 127 REGISTRATION The Company will file and, subject to applicable federal and state securities laws, has agreed to use its best efforts to make effective by the date of commencement of the Offering a shelf registration statement on the appropriate form covering the issuance of the Warrant Shares upon the exercise of any Warrants. The Company will keep such registration statement effective until 30 days after the Expiration Date. ADDITIONAL INFORMATION Anyone who receives a copy of this Prospectus may obtain a copy of the Company's Amended and Restated Certificate of Incorporation, the Certificate of Designation, the Exchange Note Indenture and the Warrant Agreement without charge by writing to Pegasus Communications Corporation, Suite 454, Radnor Corporate Center, 100 Matsonford Road, Radnor, Pennsylvania 19087, Attention: General Counsel. 128 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"). Of the 5,000,000 shares of Preferred Stock that the Company is authorized to issue, 100,000 shares have been designated as Series A Preferred Stock. After giving effect to this Offering (without giving effect to any Warrant Shares underlying the Warrants) and the Registered Exchange Offer (assuming all holders of the PM&C Class B Shares exchange their shares for shares of Class A Common Stock), 4,663,229 shares of Class A Common Stock, 4,581,900 shares of Class B Common Stock and 100,000 shares of Series A Preferred Stock will be outstanding. In addition, 5,569,714 shares of Class A Common Stock are reserved for issuance with respect to (i) the conversion of shares of Class B Common Stock to Class A Common Stock, (ii) the exercise of the Warrants, (iii) the exercise of the WTLH Warrants, and (iv) the Incentive Program and other employee and/or director options. 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 and the Certificate of Designation, which are filed as exhibits to the registration statement of which this Prospectus forms a part. Reference is made to such exhibits for detailed descriptions of the provisions thereof summarized below or elsewhere in this Prospectus. 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 all holders of the PM&C Class B Shares exchange their shares for shares of Class A Common Stock), 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. 129 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 on the Common Stock. 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. 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. 130 PREFERRED STOCK The Company has authorized 5,000,000 shares of Preferred Stock. The Board of 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. In connection with this Offering, 100,000 shares of Series A Preferred Stock will be issued. See "Description of Securities -- Description of the Series A Preferred Stock" for a detailed description of the Series A Preferred Stock. Shares of Preferred Stock may be issued in connection with the Indiana DBS Acquisition. See "Business -- DBS - -- The Pending Acquisition." Additional issuances of Preferred Stock could adversely affect the voting power of the holders of the Common Stock or Series A Preferred 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, the Series A Preferred Stock, and the Warrants is First Union National Bank. LIMITATION ON DIRECTORS' LIABILITY The Delaware General Corporation Law authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breach of directors' fiduciary duty of care. The duty of care requires that, when acting on behalf of the corporation, directors must exercise an informed business judgment based on all material information reasonably available to them. In the absence of the limitations authorized by the Delaware statute, directors could be accountable to corporations and their stockholders for monetary damages for conduct that does not satisfy their duty of care. Although the statute does not change directors' duty of care, it enables corporations to limit available relief to equitable remedies such as injunction or rescission. Pegasus' Amended and Restated Certificate of Incorporation limits the liability of Pegasus' directors to Pegasus or its stockholders to the fullest extent permitted by the Delaware statute. Specifically, the directors of Pegasus will not be personally liable for monetary damages for breach of a director's fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to Pegasus or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation law or (iv) for any transaction from which the director derived an improper personal benefit. The inclusion of this provision in the Amended and Restated Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited Pegasus and its stockholders. 131 SHARES ELIGIBLE FOR FUTURE SALE After giving effect to the Registered Exchange Offer (assuming acceptance by all holders of the PM&C Class B Shares) and this Offering (without giving effect to any Warrant Shares underlying the Warrants), 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, and 100,000 shares of Series A Preferred Stock, which are being offered hereby. Of these shares, the 3,000,000 shares of Class A Common Stock sold in the Initial Public Offering and all of the Series A Preferred Stock to be sold hereby will be tradeable without restriction (except that the Units will not be separately transferable until the Separation Date) 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 and any securities issued in connection with the DBS Acquisitions are "restricted securities" under the Securities Act. These "restricted securities" and any shares purchased by affiliates of the Company in this Offering may be sold only if they are registered under the Securities Act or pursuant to an applicable exemption from the registration requirements of the Securities Act, including Rule 144 and Rule 701 thereunder. The holders of 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. Such holders have also agreed to certain restrictions on their ability to transfer their Common Stock until , 1997 without the prior written consent of CIBC Wood Gundy Securities Corp. 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) or the average weekly trading volume in the Class A Common Stock on the Nasdaq during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain provisions regarding the manner of sale, notice requirements and the availability of current public information about the Company. A person who is not deemed an affiliate of the Company and who has beneficially owned restricted shares for three years from the date of acquisition of restricted securities from the Company or any affiliate is entitled to sell such shares under Rule 144(k) freely and without restriction or registration under the Securities Act. As used in Rule 144, affiliates of the Company generally include its directors, executive officers and persons directly or indirectly owning 10% or more of the Class A Common Stock. Without consideration of the lock-up agreements described above, none of the restricted securities would be available for immediate sale in the public market in reliance on Rule 144(k) or would be available for immediate sale under Rule 144. The Securities and Exchange Commission (the "Commission") has proposed to amend the holding period required by Rule 144 to permit sales of "restricted securities" after one year rather than two years (and two years rather than three years for non-affiliates who desire to sell such shares under Rule 144(k). If such proposed amendment were enacted, the "restricted securities" would become freely tradeable (subject to any applicable contractual restrictions) at correspondingly earlier dates. Under Rule 701, any employee, officer or director of, or consultant to the Company who prior to the Initial Public Offering purchased shares pursuant to a written compensatory plan or contract and who was 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 Initial 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 Initial Public Offering. As of the date hereof, approximately 270,605 shares of Class A Common Stock would be eligible for sale under Rule 701. 132 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 $14.00 per share. Mr. Weber's option vested upon issuance, is exercisable until November 2000 and, at the time of grant, was issued at an exercise price equal to fair market value at the time Mr. Weber was elected a director. In connection with the acquisition of WTLH, the Parent issued to various trusts controlled by the sellers of WTLH (the "WTLH Trusts") the WTLH Warrants to purchase in the aggregate $1,000,000 of Class A Common Stock of Pegasus at the price to the public of $14.00 per share in the Initial Public Offering, commencing on October 2, 1996 (the date that the registration statement relating to the Initial Public Offering was 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. The letter of intent relating to the Virginia/West Virginia DBS Acquisition contemplates the possible issuance of warrants to purchase 30,000 shares of Class A Common Stock. REGISTRATION RIGHTS Class A Common Stock. In connection with the Michigan/Texas DBS Acquisition, the Company granted certain piggyback registration rights to Harron. These rights expire upon the Class A Common Stock issued to Harron becoming eligible for sale under Rule 144 of the Securities Act. Similar rights have been granted to the holder of the $1.0 million in shares of Class A Common Stock issued in connection with the acquisition of the Portland LMA and the $150,000 of shares of Class A Common Stock issued in connection with the Portland Acquisition. It is anticipated that piggyback registration rights will be granted in connection with the issuance of certain securities in the Indiana DBS Acquisition and the Virginia/West Virginia DBS 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 and that none will choose to rescind their acceptance, 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 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 without rescinding their acceptance, 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 are deemed to beneficially own 4,956,652 shares of Common Stock (including options to purchase 3,385 shares), have agreed 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. Such holders have also agreed to certain restrictions on their ability to transfer their Common Stock until ,1997 without the prior written consent of CIBC Wood Gundy Securities Corp. 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 until April 3, 1997 without the consent of Lehman Brothers Inc. 133 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes the material federal income tax considerations generally applicable to Holders acquiring the Units, the Series A Preferred Stock and the Warrants offered hereby on original issue, but does not purport to be a complete analysis of all potential tax consequences. The discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, Internal Revenue Service ("IRS") rulings and pronouncements and judicial decisions now in effect, all of which are subject to change at any time by legislative, judicial or administrative action. Any such changes may be applied retroactively in a manner that could adversely affect a Holder of the Securities (jointly, the "Securities"). The discussion assumes that the Holders of the Securities will hold them as "capital assets" within the meaning of Section 1221 of the Code. Although the matter is not entirely free from doubt, the Company intends to treat the Series A Preferred Stock as equity and the Exchange Notes as indebtedness for federal income tax purposes, and the balance of the discussion is based on the assumption that such treatment will be respected. The discussion is not binding on the IRS or the courts. The Company has not sought and will not seek any rulings from the IRS with respect to the positions of the Company discussed herein, and there can be no assurance that the IRS will not take a different position concerning the tax consequences of the purchase, ownership or disposition of the Securities or that any such position would not be sustained. The tax treatment of a Holder of the Securities may vary depending on his particular situation or status. Certain Holders (including S corporations, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, taxpayers subject to alternative minimum tax or persons holding the Securities as a part of a "straddle," "hedge" or "conversion transaction") may be subject to special rules not discussed below. The following discussion is limited to the United States federal income tax consequences relevant to a Holder of the Securities that is a citizen or resident of the United States or any state thereof, or a corporation or other entity created or organized under the laws of the United States or any political subdivision thereof, or an estate or trust the income of which is subject to United States federal income tax regardless of source or that is otherwise subject to United States federal income tax on a net income basis in respect of the Securities. The following discussion does not consider all aspects of United States federal income tax that may be relevant to the purchase, ownership, and disposition of the Securities by such Holder in light of his personal circumstances. In addition, the description does not consider the effect of any applicable foreign, state, local or other tax laws or estate or gift tax considerations. ALLOCATION OF ISSUE PRICE BETWEEN SERIES A PREFERRED STOCK AND WARRANTS Each Holder of a Unit will have an aggregate tax basis in the Unit equal to the amount of cash paid by the Holder for such Unit. For federal income tax purposes, a Holder's aggregate tax basis in the Units will be allocated between the Series A Preferred Stock and the Warrants represented by such Units based on their relative fair market values at the time of the issuance. The Company will determine and provide Holders with its estimate of the fair market values of the Series A Preferred Stock and Warrant and the Holders will allocate the basis of the Units between the Series A Preferred Stock and Warrant, in proportion to these relative fair market values. There can be no assurance, however, that the IRS will respect the Company's determination. DISTRIBUTIONS ON SERIES A PREFERRED STOCK Distributions on the Series A Preferred Stock, whether paid in cash or in additional shares of Series A Preferred Stock ("Dividend Shares"), will be taxable to the Holder as ordinary dividend income to the extent that the cash amount or fair market value of the Series A Preferred Stock on the date of distribution does not exceed the Company's current and accumulated earnings and profits (as determined for federal income tax purposes). The amount of the Company's earnings and profits at any particular time depends on the future actions and financial performance of the Company. To the extent that the amount of any distribution on the outstanding Series A Preferred Stock exceeds the Company's current and accumulated earnings and profits (as determined for federal income tax purposes), the distribution will be treated as a return of capital, thus reducing the Holder's adjusted tax basis in such outstanding Series A Preferred Stock. The amount of any such excess distribution that is greater than the holder's adjusted tax basis in the outstanding Series A 134 Preferred Stock will be taxed as capital gain and will be long-term capital gain if the Holder's holding period for such outstanding Series A Preferred Stock exceeds one year. A Holder's initial tax basis in any Dividend Shares distributed by the Company generally will equal the fair market value of such Dividend Shares on their date of distribution. The holding period for such Dividend Shares will commence with their distribution, and will not include the Holder's holding period for outstanding shares of Series A Preferred Stock with respect to which such Dividend Shares were distributed. For purposes of the remainder of this discussion, the term "dividend" refers to a distribution paid out of allocable earnings and profits, unless the context indicates otherwise. To the extent that dividends are treated as ordinary income, dividends received by corporate Holders generally will be eligible for the 70% dividends-received deduction under Section 243 of the Code. There are, however, many exceptions and restrictions relating to the availability of such dividends-received deduction, such as restrictions relating to (i) the holding period of the stock on which the dividends are sought to be deducted, (ii) debt-financed portfolio stock, (iii) dividends treated as "extraordinary dividends" for purposes of Section 1059 of the Code, and (iv) taxpayers that pay alternative minimum tax. Corporate stockholders should consult their own tax advisor regarding the extent, if any, to which such exceptions and restrictions may apply to their particular factual situations. Under Section 1059 of the Code, the tax basis of Series A Preferred Stock that has been held by a corporate shareholder for two years or less (ending on the earliest of the date on which the Company declares, announces or agrees to the payment of an actual or constructive dividend) is reduced (but not below zero) by the non-taxed portion of an "extraordinary dividend" for which a dividends-received deduction is allowed. To the extent that a corporate Holder's tax basis in its Series A Preferred Stock would have been reduced below zero but for the foregoing limitation, such Holder must increase the amount of gain recognized on the ultimate sale or exchange of such Series A Preferred Stock. Generally, an "extraordinary dividend" is a dividend that (i) equals or exceeds 5% of the Holder's basis in the Series A Preferred Stock (treating all dividends having ex-dividend dates within an 85-day period as a single dividend) or (ii) exceeds 20% of the Holder's adjusted basis in the Series A Preferred Stock (treating all dividends having ex-dividend dates within a 365-day period as a single dividend). If an election is made by the Holder, under certain circumstances the fair market value of the Series A Preferred Stock as of the day before the ex-dividend date may be substituted for the Holder's basis in applying these tests. Special rules exist with respect to extraordinary dividends for "qualified preferred dividends," which are any fixed dividends payable with respect to any share of stock which (i) provides for fixed preferred dividends payable not less frequently than annually and (ii) is not in arrears as to dividends at the time the Holder acquires such stock. A qualified preferred dividend does not include any dividend payable with respect to any share if the actual rate of return of such stock for the period the stock has been held by the Holder receiving the dividend exceeds 15%. CORPORATE STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE POSSIBLE APPLICATION OF SECTION 1059 OF THE CODE TO THEIR OWNERSHIP AND DISPOSITION OF PREFERRED STOCK. SERIES A PREFERRED STOCK DISCOUNT The Series A Preferred Stock is subject to mandatory redemption on , 2007 (the "Mandatory Redemption"). In addition, on or after , 2002 and subject to certain restrictions, the Series A Preferred Stock is redeemable at any time at the option of the Company at specified redemption prices (the "Optional Redemption"). See "Description of Securities -- Description of Series A Preferred Stock --Optional Redemption" and " -- Mandatory Redemption." Pursuant to Section 305(c) of the Code, Holders of Series A Preferred Stock may be required to treat a portion of the difference between the Series A Preferred Stock's issue price and its redemption price as constructive distributions of property includible in income on a periodic basis. For purposes of determining whether such constructive distribution treatment applies, the Mandatory Redemption and the Optional Redemption are tested separately. Constructive distribution treatment is required if either (or both) of these tests is satisfied. Section 305(c) of the Code provides that the entire amount of a redemption premium with respect to preferred stock that is subject to mandatory redemption is treated as being distributed to the holders of such 135 preferred stock on an economic accrual basis. Preferred stock generally is considered to have a redemption premium for this purpose if the price at which it must be redeemed (the "Redemption Price") exceeds its issue price (as determined in accordance with an allocation of the issue price of the Units, as discussed above) by more than a de minimis amount. For this purpose, such excess (the "Series A Preferred Stock Discount") will be treated as zero if it is less than 1/4 of 1% of the Redemption Price multiplied by the number of complete years from the date of issuance of the stock until the stock must be redeemed. Series A Preferred Stock Discount is taxable as a constructive distribution to the Holder (treated as a dividend to the extent of the Company's current and accumulated earnings and profits and otherwise subject to the treatment described above for distributions) over the term of the preferred stock using a constant interest rate method similar to that described below for accruing OID. See "--Original Issue Discount" below. Under recently issued regulations (the "Regulations"), Series A Preferred Stock Discount will arise due to the Optional Redemption feature only if, based on all of the facts and circumstances as of the date the Series A Preferred Stock is issued, redemption pursuant to the Optional Redemption is more likely than not to occur. Even if redemption were more likely than not to occur, however, constructive distribution treatment would not result if the redemption premium were solely in the nature of a penalty for premature redemption. For this purpose, a penalty for premature redemption is a premium paid as a result of changes in economic or market conditions over which neither the issuer nor the Holder has legal or practical control, such as changes in prevailing dividend rates. The Regulations provide a safe harbor pursuant to which constructive distribution treatment will not result from an issuer call right if (i) the issuer and the Holder are unrelated, (ii) there are no arrangements that effectively require the issuer to redeem the stock and (iii) exercise of the option to redeem would not reduce the yield of the stock. The Company does not believe that the Optional Redemption would be treated as more likely than not to be exercised under these rules. Dividend Shares received by Holders of the Series A Preferred Stock may bear Series A Preferred Stock Discount depending upon the issue price of such shares (i.e., the fair market value of the Dividend Shares on the date of their issuance). If shares of Series A Preferred Stock (including Dividend Shares) bear Series A Preferred Stock Discount, such shares generally will have different tax characteristics from other shares of Series A Preferred Stock and might trade separately, which might adversely affect the liquidity of such shares. SALE, REDEMPTION AND EXCHANGE OF SERIES A PREFERRED STOCK A redemption of shares of Series A Preferred Stock for cash or in exchange for Exchange Notes would be a taxable event. A redemption of shares of Series A Preferred Stock for cash will generally be treated as a sale or exchange if the Holder does not own, actually or constructively within the meaning of Section 318 of the Code, any stock of the Company other than the redeemed Series A Preferred Stock. If a Holder does own, actually or constructively, other stock of the Company (including Series A Preferred Stock not redeemed and Class A Common Stock to be received upon exercise of the Warrants), a redemption of Series A Preferred Stock may be treated as a dividend to the extent of the Company's current and accumulated earnings and profits (as determined for federal income tax purposes). Such dividend treatment would not be applied if the redemption is "not essentially equivalent to a dividend" with respect to the Holder under Section 302(b)(1) of the Code. A distribution to a Holder will be "not essentially equivalent to a dividend" if it results in a "meaningful reduction" in the holder's stock interest in the Company. For this purpose, a redemption of Series A Preferred Stock that results in a reduction in the proportionate interest in the Company (taking into account any actual ownership of common stock of the Company and any stock constructively owned, including such stock to be received upon the exercise of the Warrant) of a Holder whose relative stock interest in the Company is minimal and who exercises no control over corporate affairs should be regarded as a meaningful reduction in the Holder's stock interest in the Company. If the redemption of the Series A Preferred Stock for cash is not treated as a distribution taxable as a dividend, the redemption would result in capital gain or loss equal to the difference between the amount of cash received and the Holder's adjusted tax basis in the Series A Preferred Stock redeemed, except to the extent that the redemption price includes dividends which have been declared by the Board of Directors of the Company prior to the redemption. Similarly, upon the sale of the Series A Preferred Stock (other than in a redemption or in exchange of the Exchange Notes), the difference between the sum of the amount of cash and the fair market value of other property received and the Holder's adjusted basis in the Series A Preferred Stock would result in capital gain or loss. This gain or loss 136 would be long-term capital gain or loss if the Holder's holding period for the Series A Preferred Stock exceeds one year. Under current law, capital gains recognized by corporations are taxed at a maximum rate of 35% and the maximum rate on net capital gains in the case of individuals is 28%. A redemption of Series A Preferred Stock in exchange for Exchange Notes will be subject to the same general rules as a redemption for cash, except that the holder would have capital gain or loss equal to the difference between the issue price of the Exchange Notes received (as determined for purposes of computing the OID on such Exchange Notes) and the Holders's adjusted tax basis in the Series A Preferred Stock redeemed. See the discussion below under "Original Issue Discount." Additionally, any such gain may be eligible for deferral under the installment sale method as long as neither the Exchange Notes nor the Series A Preferred Stock are readily traded in an established securities market. If a redemption of Series A Preferred Stock is treated as a distribution that is taxable as a dividend, the amount of the distribution will be measured by the amount of cash or the issue price of the Exchange Notes, as the case may be, received by the Holder. The Holder's adjusted tax basis in the redeemed Series A Preferred Stock will be transferred to any remaining stock holdings in the Company. If the Holder does not retain any actual stock ownership in the Company (only having a stock interest constructively), the Holder may lose such basis entirely. Under the "extraordinary dividend" provision of Section 1059 of the Code, a corporate Holder may, under certain circumstances, be required to reduce its basis in its remaining shares of stock of the Company (and possibly recognize gain upon a disposition of such shares) to the extent the Holder claims the 70% dividends-received deduction with respect to the dividend. See the discussion above under "-- Distributions on Series A Preferred Stock." Depending upon a Holder's particular circumstances, the tax consequences of holding Exchange Notes may be less advantageous than the tax consequences of holding Series A Preferred Stock because, for example, payments of interest on the Exchange Notes will not be eligible for any dividends-received deduction that may be available to corporate Holders. ORIGINAL ISSUE DISCOUNT In the event that the Series A Preferred Stock is exchanged for Exchange Notes and the "stated redemption price at maturity" of the Exchange Notes exceeds their "issue price" by more than a de minimis amount, the Exchange Notes will be treated as having OID equal to the entire amount of such excess. OID will generally be considered de minimis as long as it is less than the stated redemption price at maturity of the Exchange Notes multiplied by 1/4 of 1% multiplied by the number of years to maturity. If the Exchange Notes are traded on an established securities market within the sixty-day period ending thirty days after the exchange date, the issue price of the Exchange Notes will be their fair market value as of their issue date. Subject to certain limitations described in the Treasury Regulations, the Exchange Notes will be deemed to be traded on an established securities market if, among other things, price quotations will be readily available from dealers, brokers, or traders. If the Series A Preferred Stock, but not the Exchange Notes issued and exchanged therefor, is traded on an established securities market within the sixty-day period ending thirty days after the exchange, then the issue price of each Exchange Note should be the fair market value of the Series A Preferred Stock exchanged therefor at the time of the exchange. The Series A Preferred Stock generally will be deemed to be traded on an established securities market if it appears on a system of general circulation that provides a reasonable basis to determine fair market value based either on recent price quotations or recent sales transactions. In the event that neither the Series A Preferred Stock nor the Exchange Notes are traded on an established securities market within the applicable period, the issue price of the Exchange Notes will be their stated principal amount - -- namely, their face value -- unless either (i) the Exchange Notes do not bear "adequate stated interest" within the meaning of Section 1274 of the Code, in which case the issue price of such Exchange Notes generally will be their "imputed principal amount," or (ii) the Exchange Notes are issued in a so-called "potentially abusive situation" as defined in the Treasury Regulations under Section 1274 of the Code (including a situation involving a recent sales transaction), in which case the issue price of such Exchange Notes generally will be the fair market value of the Series A Preferred Stock surrendered in exchange therefor. The "stated redemption price at maturity" of the Exchange Notes should equal the total of all payments under the Exchange Notes, other than payments of "qualified 137 stated interest." "Qualified stated interest" generally is stated interest that is unconditionally payable in cash or other property (other than Exchange Notes) at least annually at a single fixed rate. Exchange Notes that are issued when the Company has the option to pay interest for certain periods in additional Exchange Notes should be treated as having been issued without any qualified stated interest. Accordingly, the sum of all interest payable pursuant to the stated interest rate on such Exchange Notes over the entire term should be included (along with stated principal) in the stated redemption price at maturity of such Exchange Notes. On the other hand, if the Exchange Notes are issued after the period for paying interest in additional Exchange Notes has passed, then stated interest would qualify as qualified stated interest and none of such stated interest would be included in the stated redemption price at maturity of the Exchange Notes. TAXATION OF STATED INTEREST AND ORIGINAL ISSUE DISCOUNT ON EXCHANGE NOTES Each Holder of an Exchange Note with OID will be required to include in gross income an amount equal to the sum of the "daily portions" of the OID for all days during the taxable year in which such Holder holds the Exchange Note. The daily portions of OID required to be included in a Holder's gross income in a taxable year will be determined under a constant yield method by allocating to each day during the taxable year in which the Holder holds the Exchange Note a pro rata portion of the OID thereon which is attributable to the "accrual period" in which such day is included. The amount of the OID attributable to each accrual period will be the product of the "adjusted issue price" of the Exchange Note at the beginning of such accrual period multiplied by the "yield to maturity" of the Exchange Note (properly adjusted for the length of the accrual period). The adjusted issue price of an Exchange Note at the beginning of an accrual period is the original issue price of the Exchange Note plus the aggregate amount of OID that accrued in all prior accrual periods, less any cash payments -- other than qualified stated interest payments (which only would apply if the Exchange Notes were issued after , 2002) on the Exchange Note. The "yield to maturity" is the discount rate that, when used in computing the present value of all principal and interest payments to be made under the Exchange Note, produces an amount equal to the issue price of the Exchange Note. An "accrual period" may be of any length and may vary in length over the term of the debt instrument, provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs either on the final day or the first day of an accrual period. An additional Exchange Note (a "Secondary Note") issued in payment of interest with respect to an initially issued Exchange Note (an "Initial Note") will not be considered as a payment made on the Initial Note and will be aggregated with the Initial Note for purposes of computing and accruing OID on the Initial Note. As between the Initial Note and the Secondary Note, the adjusted issue price of the Initial Note would be allocated between the Initial Note and the Secondary Note in proportion to their respective principal amounts. That is, upon the issuance of a Secondary Note with respect to an Initial Note, the Initial Note and the Secondary Note derived from the Initial Note are treated as initially having the same adjusted issue price and inherent amount of OID per dollar of principal amount. The Initial Note and the Secondary Note derived therefrom would be treated as having the same yield to maturity. Similar treatment would be applied when additional Exchange Notes are issued on Secondary Notes. In the event that the Exchange Notes are not issued with OID, because they are issued after , 2002, when the Company does not have the option to pay interest thereon in additional Exchange Notes and the redemption price of the Exchange Notes does not exceed their issue price by more than a de minimis amount, stated interest would be included in income by a Holder in accordance with such holder's usual method of accounting. In all other cases, all stated interest will be treated as payments on the Exchange Notes under the rules discussed above. BOND PREMIUM ON EXCHANGE NOTES If Series A Preferred Stock is exchanged for Exchange Notes that are not treated as having OID, and the issue price of such Exchange Notes exceeds the amount payable at the maturity date (or earlier call date, if appropriate), such excess will be deductible by the Holder of the Exchange Notes as amortizable bond premium over the term of the Exchange Notes (taking into account earlier call dates, as appropriate), under a yield-to-maturity formula, if an election by the Holder under Section 171 of the Code is made or is already in effect. An election under Section 171 of the Code is available only if the Exchange Notes are held as capital assets. This election is revocable only with the consent of the IRS and applies to all obligations owned or 138 acquired by the Holder on or after the first day of the taxable year to which the election applies. To the extent the excess is deducted as amortizable bond premium, the Holder's adjusted tax basis in the Exchange Notes will be reduced. Except as may otherwise be provided in future Treasury Regulations, the amortizable bond premium will be treated as an offset to interest income on the Exchange Notes rather than as a separate deduction item. ACQUISITION PREMIUM ON EXCHANGE NOTES A Holder of an Exchange Note issued with OID who purchases such Exchange Note for an amount that is greater than its then adjusted issue price but equal to or less than the sum of all amounts payable on the Exchange Note after the purchase date (other than payments, if any, of qualified stated interest) will be considered to have purchased such Exchange Note at an "acquisition premium." Under the acquisition premium rules, the amount of OID which such Holder must include in income with respect to such Exchange Note for any taxable year will be reduced by the portion of such acquisition premium properly allocable to such year. MARKET DISCOUNT ON EXCHANGE NOTES Purchasers of Series A Preferred Stock should be aware that the disposition of Exchange Notes may be affected by the market discount provisions of the Code. The market discount rules generally provide, if a holder of a debt instrument purchases it at a "market discount" and thereafter realizes gain upon a disposition or a retirement of the debt instrument, the lesser of such gain or the portion of the market discount that has accrued on a straight-line basis (or on a constant interest rate basis, if such alternative rate of accrual has been elected by the holder under Section 1276(b) of the Code) while the debt instrument was held by such Holder will be taxed as ordinary income at the time of such disposition. "Market discount" with respect to the Exchange Notes will be the amount,if any, by which the "revised issue price" of an Exchange Note (or its stated redemption price at maturity of the Exchange Note has no OID) exceeds the holder's, basis in the Exchange Note immediately after such Holder's acquisition, subject to a de minimis exception. The "revised issue price" of an Exchange Note is its issue price increased by the portion of OID previously includible in the gross income of prior Holders for periods prior to the acquisition of the Exchange Note by the Holder (without regard to any acquisition premium exclusion) and reduced by prior payments other than payments of qualified stated interest. REDEMPTION OR SALE OF EXCHANGE NOTES Generally, any redemption or sale of Exchange Notes by a Holder would result in taxable gain or loss equal to the difference between the sum of amount of cash and the fair market value of other property received (except to the extent that cash received is attributable to accrued, but previously untaxed interest, which portion of the consideration would be taxed as ordinary income) and the Holder's adjusted tax basis in the Exchange Notes. The adjusted tax basis of a Holder who receives an Exchange Note in exchange for Series A Preferred Stock will generally be equal to the issue price of the Exchange Note increased by any OID with respect to the Exchange Note included in the Holder's income prior to sale or redemption of the Exchange Note, reduced by any amortizable bond premium applied against the Holder's income prior to sale or redemption of the Exchange Note and by payments other than payments of qualified stated interest. Except to the extent that an intention to call the Exchange Notes prior to their maturity existed at the time of their original issue as an agreement or understanding between the Company and the original holders of a substantial amount of the Exchange Notes (which is unlikely), such gain or loss would be long-term capital gain or loss if the Holder's holding period for the Exchange Notes exceeded one year. CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND TO CORPORATE HOLDERS Pursuant to Section 163 of the Code and in the event that the Exchange Notes are "applicable high yield discount obligations" ("AHYDOs"), a portion of the OID (if any) accruing on the Exchange Notes may be treated as a dividend generally eligible for the dividends-received deduction in the case of corporate Holders, and the Company would not be entitled to deduct the "disqualified portion" of the OID accruing on the 139 Exchange Notes and would be allowed to deduct the remainder of the OID only when paid in cash. The Exchange Notes will constitute AHYDOs if they (i) have a term of more than five years, (ii) have a yield to maturity equal to or greater than the sum of the applicable federal rate at the time of issuance of the Exchange Notes (the "AFR") plus five percentage points, and (iii) have "significant" OID. A debt instrument is treated as having "significant" OID if the aggregate amount that would be includible in gross income with respect to such debt instrument for periods before the close of any accrual period ending after the date five years after the date of issue exceeds the sum of (i) the aggregate amount of interest to be paid in cash under the debt instrument before the close of such accrual period and (ii) the product of the initial issue price of such debt instrument and its yield to maturity. Because the amount of OID, if any, attributable to the Exchange Notes will be determined at the time such Exchange Notes are issued and the AFR at that point in time is not predictable, it is impossible currently to determine whether Exchange Notes will be treated as AHYDOs. If an Exchange Note is treated as an AHYDO, a Holder would be treated as receiving dividend income to the extent of the lesser of (i) the Company's current and accumulated earnings and profits, and (ii) the "disqualified portion" of the OID of such AHYDO. The "disqualified portion" of the OID is equal to the lesser of (i) the amount of OID or (ii) the portion of the "total return" (i.e., the excess of all payments to be made with respect to the Exchange Note over its issue price) in excess of the AFR plus six percentage points. THE WARRANTS Upon the sale or exchange of a Warrant (including the receipt of cash in lieu of a fractional interest in Class A Common Stock upon exercise of a Warrant), a Holder will recognize gain or loss in an amount equal to the difference between the amount of cash and the fair market value of property received therefor and the Holder's tax basis in the Warrant. A Holder's initial tax basis in a Warrant acquired in this Offering will be that portion of the issue price of the Unit allocable to the Warrant, as described above, subject to adjustment in the events described below. See the discussion above under "-- Allocation of Basis." Such gain or loss will be capital gain or loss if the Class A Common Stock to which the Warrants relate would be a capital asset in the hands of the Warrant holder. Any such capital gain or loss will be long-term capital gain or loss if the Warrant was held for more than one year. Notwithstanding the above, it is possible that a redemption of a Warrant by the Company would not be treated as a sale or exchange or a capital asset. In that event, the Holder of a Warrant could recognize ordinary income or loss on such redemption. The exercise of a Warrant for cash will not result in a taxable event to the holder of the Warrant (except to the extent of cash, if any, received in lieu of fractional interest in Class A Common Stock). Upon such exercise, the holder's tax basis in the Class A Common Stock obtained will be equal to the sum of such Holder's tax basis in the Warrant (described above) and the exercise price of the Warrant; the Holder's holding period with respect to such Class A Common Stock will commence on the day after the date of exercise. The Holder will realize capital gain or loss on the sale or exchange of shares of Class A Common Stock if the Class A Common Stock is a capital asset in the hands of the Holder, and such capital gain or loss will be long-term if the Class A Common Stock was held for more than one year. If a Warrant expires without being exercised, the Holder will recognize a loss in an amount equal to its tax basis in the Warrant. Such loss will be a capital loss if the Class A Common Stock to which the Warrants relate would have been a capital asset in the hands of the Warrant Holder, and such capital loss will be a long-term capital loss if the Warrant was held for more than one year. Adjustments to the conversion ratio of the Warrants, or the failure to make adjustments, may in certain circumstances result in the receipt of taxable constructive dividends by the holder, in which event the Holder's tax, basis in the Warrants would be increased by an amount equal to the constructive dividend. If the exercise price of the Warrants is a nominal amount, it may be possible that the Warrants will be considered to be constructively exercised for federal income tax purposes on the day on which the Warrants first become exercisable or, possibly, on the day of issuance. In that event, (i) no gain or loss will be recognized to a Holder on such deemed exercise or upon actual exercise of the Warrants, (ii) the adjusted basis of the Class A Common Stock deemed received for federal income tax purposes on the constructive exercise of the Warrants will be equal to the adjusted basis in the Warrants until the Warrants are actually 140 exercised (and the exercise price paid) at which time such basis would be increased by the exercise price of the Warrants, and (iii) the holding period of the Class A Common Stock deemed received for federal income tax purposes on the constructive exercise of the Warrants will begin on the day following the day of such constructive exercise. BACKUP WITHHOLDING A Holder of a Security may be subject to backup withholding at the rate of 31% with respect to dividends on the Series A Preferred Stock, interest on the Exchange Notes or sales proceeds of Warrants, Series A Preferred Stock, Exchange Notes and Class A Common Stock, unless such Holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates such exemption or (b) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A holder of a Security who does not provide the Holder's correct taxpayer identification number upon request may be subject to penalties imposed by the IRS. Any amount paid as backup withholding would be creditable against the Holder's federal income tax liability. THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS DOES NOT CONSIDER THE FACTS AND CIRCUMSTANCES OF ANY PARTICULAR PROSPECTIVE PURCHASER'S SITUATION OR STATUS. ACCORDINGLY, EACH PURCHASER OF SERIES A PREFERRED STOCK SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO IT, INCLUDING THOSE UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. UNDERWRITING Under the terms and subject to the conditions contained in the Underwriting Agreement, the form of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part, each of CIBC Wood Gundy Securities Corp. ("CIBC Wood Gundy"), Lehman Brothers Inc. and BT Securities Corporation (collectively, the "Underwriters") have agreed severally, and not jointly, to purchase and Pegasus has agreed to sell, that aggregate number of shares of Units offered hereby set forth opposite its name below : Number Underwriters of Units ------------ -------- CIBC Wood Gundy Securities Corp. .................... Lehman Brothers Inc. ................................ BT Securities Corporation ........................... ----------- Total ............................................. 100,000 =========== Pegasus has been advised by the Underwriters that they propose to offer the Units to the public at the public offering price set forth on the cover page hereof. After the initial offering to the public, the offering price and other selling terms may be changed by the Underwriters. The Underwriting Agreement provides that the obligation of the Underwriters to pay for and accept delivery of the Units are subject to approval of certain legal matters by counsel and to certain other conditions, including the condition that no stop order suspending the effectiveness of the Registration Statement is in effect and no proceedings for such purpose are pending or threatened by the Commission and that there has been no material adverse change or any development involving a prospective material adverse change in the condition of the Company from that set forth in the Registration Statement otherwise than as set forth or contemplated in this Prospectus, and that certain certificates, opinions and letters have been received from the Company and its counsel and independent auditors. The Underwriters are obligated to take and pay for all of the Units if any such Units are taken. The Company and the Underwriters have agreed in the Underwriting Agreement to indemnify each other against certain liabilities, including liabilities under the Securities Act. 141 The Underwriters have informed Pegasus that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. Prior to this Offering, there has been no public market for the Units. The public offering price was negotiated between Pegasus and the Underwriters. Among the factors considered in determining the public offering price of the Units, in addition to the prevailing market conditions, were the Company's historical performance, capital structure, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and consideration of the above factors in relation to market values of the companies in related businesses. An affiliate of CIBC Wood Gundy, one of the Underwriters, is one of the lenders under the New Credit Facility. CIBC Wood Gundy has acted as a financial advisor to the Company in connection with, among other things, the selection of the representatives of the Initial Public Offering. For its financial advisory services, CIBC Wood Gundy received $100,000 in fees. Each of the Underwriters also acted as representatives of the underwriters in the Initial Public Offering and received customary underwriting discounts and commissions in connection therewith. Under Rule 2710(c)(8) of the Conduct Rules of the National Association of Securities Dealers, Inc. (the "NASD"), if more than 10% of the net proceeds of a public offering of equity securities are to be paid to members of the NASD that are participating in the offering, or affiliated or associated persons, the price at which the equity securities are distributed to the public must be no lower than that recommended by a "qualified independent underwriter," as defined in Rule 2720 of the Conduct Rules of the NASD. Because CIBC Inc., an affiliate of CIBC Wood Gundy will receive more than 10% of the net proceeds of this Offering as a result of the repayment of amounts under the New Credit Facility, BT Securities Corporation will act as a qualified independent underwriter ("QIU") in connection with this Offering. BT Securities Corporation will receive no additional compensation for acting as QIU. 142 LEGAL MATTERS The validity of the issuance of the Units offered hereby will be passed upon by Drinker Biddle & Reath, counsel for the Company. Michael B. Jordan, a partner of Drinker Biddle & Reath, is an Assistant Secretary of the Company. Certain legal matters in connection with this Offering will be passed upon for the Underwriters by Latham & Watkins, New York, New York. EXPERTS The Company's combined balance sheets as of December 31, 1994 and 1995 and the related combined statements of operations, statements of changes in total equity and statements of cash flows for each of the two years in the period ended December 31, 1995 included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The Company's combined statement of operations, statement of changes in total equity and statement of cash flows for the year ended December 31, 1993 included in this Prospectus, have been included herein in reliance on the report of Herbein + Company, Inc., independent accountants, given on the authority of that firm as experts in accounting and auditing. The balance sheets of Portland Broadcasting, Inc. as of September 25, 1994 and September 24, 1995 and the related statements of operations, statements of deficiency in assets and statements of cash flows for the fiscal years ended September 26, 1993, September 25, 1994 and September 24, 1995, included in this Prospectus, have been included herein in reliance on the report of Ernst & Young LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. The balance sheets of WTLH, Inc. as of December 31, 1994 and 1995 and the related statements of operations, statements of capital deficiency, and statements of cash flows for each of the two years in the period ended December 31, 1995, included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The combined balance sheets of the DBS Operations of Harron Communications Corp. as of December 31, 1994 and 1995 and the related combined statements of operations, and statements of cash flows for each of the two years in the period ended December 31, 1995 included in this Prospectus, have been included herein in reliance on the report of Deloitte & Touche LLP, independent auditors, given on the authority of that firm as experts in accounting and auditing. The balance sheets of Dom's Tele-Cable, Inc. as of May 31, 1995 and 1996 and the related statements of operations and deficit, and statements of cash flows for each of the three years in the period ended May 31, 1996 included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. In March 1995, the Company, with the recommendation and approval of the Company's sole director, selected Coopers & Lybrand L.L.P. to act as independent accountants for the Company and informed Herbein + Company, Inc., the Company's independent accountants since 1990, of its decision. In connection with its audit for the year ended December 31, 1993 and through its dismissal in March 1995, there were no disagreements with Herbein + Company, Inc. on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures. Herbein + Company, Inc.'s report on the Company's financial statements for the fiscal year ended December 31, 1993 contained no adverse opinions or disclaimers of opinion and were not modified or qualified as to uncertainly, audit scope, or accounting principles. 143 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act with respect to the securities 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 securities 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 Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files reports, proxy statements and other information with the Commission. The Registration Statement, including the exhibits and schedules filed therewith, and any reports, proxy statements and other information filed under the Exchange Act 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. 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. 144 PEGASUS COMMUNICATIONS CORPORATION INDEX TO FINANCIAL STATEMENTS
Page -------- Pegasus Communications Corporation (a newly formed entity which has nominal assets and includes the combined operations of entities under common control) Report of Coopers & Lybrand L.L.P. .................................................................... F-2 Report of Herbein + Company, Inc. ..................................................................... F-3 Combined Balance Sheets as of December 31, 1994, 1995 and September 30, 1996 (unaudited) .............. F-4 Combined Statements of Operations for the years ended December 31, 1993, 1994, 1995 and the nine months ended September 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 the nine months ended September 30, 1996 (unaudited) ................................................. F-6 Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the nine months ended September 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-21 Balance Sheets as of September 25, 1994, September 24, 1995, and December 31, 1995 (unaudited) ........ F-22 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-23 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-24 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-25 Notes to Financial Statements ......................................................................... F-26 WTLH, Inc. (an acquired entity) Report of Coopers & Lybrand L.L.P. .................................................................... F-30 Balance Sheets as of December 31, 1994, 1995 and February 29, 1996 (unaudited) ........................ F-31 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-32 Statements of Capital Deficiency for the years ended December 31, 1994, 1995 and for the two months ended February 29, 1996 (unaudited) .................................................................. F-33 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-34 Notes to Financial Statements ......................................................................... F-35 DBS Operations of Harron Communications Corp. (an acquired business) Report of Deloitte & Touche LLP ....................................................................... F-41 Combined Balance Sheets as of December 31, 1994, 1995 and September 30, 1996 (unaudited) .............. F-42 Combined Statements of Operations for years ended December 31, 1994, 1995 and the nine months ended September 30, 1995 (unaudited) and 1996 (unaudited) .................................................. F-43 Combined Statements of Cash Flows for years ended December 31, 1994, 1995 and the nine months ended September 30, 1995 (unaudited) and 1996 (unaudited) .................................................. F-44 Notes to Combined Financial Statements ................................................................ F-45 Dom's Tele Cable, Inc. (an acquired entity) Report of Coopers & Lybrand L.L.P. .................................................................... F-49 Balance Sheets as of May 31, 1995, 1996 and August 29, 1996 (unaudited) ............................... F-50 Statements of Operations and Deficit for years ended May 31, 1994, 1995, 1996, the three months ended August 31, 1995 and the period June 1 to August 29, 1996 ............................................. F-51 Statements of Cash Flows for the years ended May 31, 1994, 1995, 1996, the three months ended August 31, 1995 and the period June 1 to August 29, 1996 .................................................... F-52 Notes to Financial Statements ......................................................................... F-53
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 November 8, 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, September 30, ------------------------------ 1994 1995 1996 ------------- ------------- -------------- (unaudited) ASSETS Current assets: Cash and cash equivalents ................. $ 1,380,029 $11,974,747 $ 5,668,285 Restricted cash ........................... -- 9,881,198 -- Accounts receivable, less allowance for doubtful accounts at December 31, 1994, 1995 and September 30, 1996 of $348,000, $238,000 and $256,000, respectively ..... 4,000,671 4,884,045 4,467,768 Program rights ............................ 1,097,619 931,664 1,451,077 Inventory ................................. 711,581 1,100,899 233,629 Deferred taxes ............................ 77,232 42,440 77,887 Prepaid expenses and other ................ 629,274 329,895 1,480,774 ------------- ------------- -------------- Total current assets .................... 7,896,406 29,144,888 13,379,420 Property and equipment, net .................... 18,047,416 16,571,538 26,015,359 Intangible assets, net ......................... 47,354,826 48,028,410 80,780,835 Program rights ................................. 1,688,866 1,932,680 2,227,268 Deposits and other ............................. 406,168 92,325 166,498 ------------- ------------- -------------- Total assets ............................ $75,393,682 $95,769,841 $122,569,380 ============= ============= ============== LIABILITIES AND TOTAL EQUITY Current liabilities: Notes payable ............................. $ 285,471 $ 316,188 $ 51,666 Advances payable -- related party ......... 142,048 468,327 -- Current portion of long-term debt ......... 25,578,406 271,934 376,127 Accounts payable .......................... 2,388,974 2,494,738 2,398,242 Accrued interest .......................... -- 5,173,745 3,190,440 Accrued expenses .......................... 1,619,052 1,712,603 4,767,734 Current portion of program rights payable . 956,740 1,141,793 1,581,374 ------------- ------------- -------------- Total current liabilities ............... 30,970,691 11,579,328 12,365,583 ------------- ------------- -------------- Long-term debt, net ............................ 35,765,495 82,308,195 117,240,865 Program rights payable ......................... 1,499,180 1,421,399 1,539,915 Deferred taxes ................................. 216,694 211,902 137,349 ------------- ------------- -------------- Total liabilities ....................... 68,452,060 95,520,824 131,283,712 Commitments and contingent liabilities ......... -- -- -- Total equity (deficiency): Preferred stock ........................... -- -- -- 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 (3,203,594) Partners' deficit ......................... (5,535,017) (9,458,814) (13,393,286) ------------- ------------- -------------- Total equity (deficiency) ............... 6,941,622 249,017 (8,714,332) ------------- ------------- -------------- Total liabilities and equity ............ $75,393,682 $95,769,841 $122,569,380 ============= ============= ==============
See accompanying notes to combined financial statements F-4 PEGASUS COMMUNICATIONS CORPORATION COMBINED STATEMENTS OF OPERATIONS
Years Ended December 31, Nine Months Ended September 30, ------------------------------------------------ ------------------------------- 1993 1994 1995 1995 1996 -------------- -------------- ------------- ------------- -------------- (unaudited) Revenues: Broadcasting revenue, net of agency commissions ......... $ 7,572,051 $13,204,148 $14,862,734 $9,770,738 $14,347,439 Barter programming revenue .... 2,735,500 4,604,200 5,110,662 3,635,100 3,820,000 Basic and satellite service ... 7,537,325 8,455,815 10,002,579 7,362,475 9,964,424 Premium services .............. 1,335,108 1,502,929 1,652,419 1,238,290 1,488,513 Other ......................... 307,388 423,998 519,682 477,751 499,477 -------------- -------------- ------------- ------------- -------------- Total revenues ............... 19,487,372 28,191,090 32,148,076 22,484,354 30,119,853 -------------- -------------- ------------- ------------- -------------- Operating expenses: Barter programming expense .... 2,735,500 4,604,200 5,110,662 3,635,100 3,820,000 Programming ................... 3,139,284 4,094,688 5,475,623 3,883,754 5,862,461 General and administrative .... 2,219,133 3,289,532 3,885,473 3,021,519 4,053,184 Technical and operations ...... 2,070,896 2,791,885 2,740,670 2,024,047 2,425,639 Marketing and selling ......... 2,070,404 3,372,482 3,928,073 2,818,302 3,893,414 Incentive compensation ........ 192,070 432,066 527,663 443,995 605,390 Corporate expenses ............ 1,265,451 1,505,904 1,364,323 1,025,023 1,074,190 Depreciation and amortization . 5,977,678 6,940,147 8,751,489 6,240,180 8,479,427 -------------- -------------- ------------- ------------- -------------- Income (loss) from operations (183,044) 1,160,186 364,100 (607,566) (93,851) Interest expense .............. (4,043,692) (5,360,729) (8,793,823) (5,969,800) (8,929,328) Interest expense - related party ...................... (358,318) (612,191) (22,759) -- -- Interest income ............... -- -- 370,300 184,362 171,513 Other expenses, net ........... (220,319) (65,369) (44,488) (68,633) (76,493) -------------- -------------- ------------- ------------- -------------- Loss before income taxes and extraordinary items ........ (4,805,373) (4,878,103) (8,126,670) (6,461,637) (8,928,159) Provision (benefit) for income taxes ...................... -- 139,462 30,000 30,000 (110,000) -------------- -------------- ------------- ------------- -------------- Loss before extraordinary items (4,805,373) (5,017,565) (8,156,670) (6,491,637) (8,818,159) Extraordinary gain (loss) from extinguishment of debt, net -- (633,267) 10,210,580 6,931,323 (250,603) -------------- -------------- ------------- ------------- -------------- Net income (loss) ............. ($ 4,805,373) ($ 5,650,832) $2,053,910 $439,686 ($9,068,762) ============== ============== ============= ============= ============== Pro forma income (loss) per share; (See Note 14) Loss before extraordinary items .................... $(1.56) $(1.68) Extraordinary gain (loss) .. 1.95 (0.05) ------------- -------------- Net income (loss) .......... $0.39 $(1.73) ============= ============== Weighted average shares .... 5,235,833 5,235,833
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 ....................... (5,028,877) (4,039,885) (9,068,762) Contribution by partner ........ 105,413 105,413 ----------- -------- -------------- -------------- --------------- -------------- Balances at September 30, 1996 (unaudited) ................... 170,000 $1,700 $ 7,880,848 $(3,203,594) $(13,393,286) $ (8,714,332) =========== ======== ============== ============== =============== ==============
See accompanying notes to combined financial statements F-6 PEGASUS COMMUNICATIONS CORPORATION COMBINED STATEMENTS OF CASH FLOWS
Years Ended December 31, Nine Months Ended September 30, ------------------------------------------------- -------------------------------- 1993 1994 1995 1995 1996 -------------- -------------- -------------- -------------- -------------- (unaudited) Cash flows from operating activities: Net income (loss) ..................... ($ 4,805,373) ($ 5,650,832) $ 2,053,910 $ 439,686 ($ 9,068,762) 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) (6,931,323) 250,603 Depreciation and amortization ...... 5,977,678 6,940,147 8,751,489 6,240,180 8,479,427 Program rights amortization ........ 1,342,194 1,193,559 1,263,190 1,140,262 1,063,439 Accretion of bond discount ......... -- -- -- -- 294,066 Gain (loss) on disposal of fixed assets (9,344) 30,524 -- -- -- Bad debt expense ................... 96,932 200,039 146,147 140,309 (92,413) Deferred income taxes .............. -- 139,462 30,000 30,000 (110,000) Payments of programming rights ..... (1,278,650) (1,310,294) (1,233,777) (1,006,527) (1,319,343) Interest paid with refinancing of debt (671,803) -- -- -- -- Change in assets and liabilities: Accounts receivable .............. (853,305) (1,353,448) (815,241) 148,338 (184,324) Inventory ........................ -- (711,581) (389,318) (554,492) 867,270 Prepaid expenses and other ....... (133,745) (250,128) 490,636 (70,821) (1,152,317) Accounts payable & accrued expenses (113,160) 702,240 (826,453) (652,473) 3,495,061 Advances payable -- related party . -- 142,048 326,279 -- -- Accrued interest ................. 1,851,800 2,048,569 5,173,745 2,244,304 (2,292,849) Deposits and other ............... 64,133 39,633 5,843 463 (74,173) -------------- -------------- -------------- -------------- -------------- Net cash provided (used) by operating activities ......................... 1,693,677 2,793,205 4,765,870 1,167,906 155,685 Cash flows from investing activities: Acquisitions ....................... -- -- -- -- (43,050,514) Capital expenditures ............... (884,950) (1,264,212) (2,640,475) (2,063,765) (2,606,717) Purchase of intangible assets ...... -- (943,238) (2,334,656) (1,912,368) (843,210) Cash acquired from acquisitions .... 803,908 -- -- -- -- Other .............................. (25,065) (53,648) (250,000) (1,200) -- -------------- -------------- -------------- -------------- -------------- Net cash used for investing activities . (106,107) (2,261,098) (5,225,131) (3,977,333) (46,500,441) Cash flows from financing activities: Proceeds from long-term debt ....... 15,060,000 35,015,000 81,651,373 82,439,688 247,736 Borrowings on revolving credit facility -- -- 2,591,335 2,591,335 40,400,000 Proceeds from long-term borrowings from related parties .................. 5,574 26,000 20,000 13,000 -- Repayments on revolving credit facility ......................... -- -- (2,591,335) (51,762,444) (8,894,653) Repayments of long-term debt ....... (15,194,664) (33,991,965) (48,095,692) -- -- Restricted cash .................... -- -- (9,881,198) (9,768,877) 9,875,818 Debt issuance costs ................ (843,380) (1,552,539) (3,974,454) (3,640,450) (1,383,670) Capital lease repayments ........... (47,347) (154,640) (166,050) (159,374) (206,937) Distributions to Parent ............ -- -- (12,500,000) (12,500,000) -- Proceeds from the issuance of PM&C Class B Shares ......................... -- -- 4,000,000 4,000,000 -- -------------- -------------- -------------- -------------- -------------- Net cash provided (used) by financing activities ....................... (1,019,817) (658,144) 11,053,979 11,212,878 40,038,294 Net increase (decrease) in cash and cash equivalents ........................... 567,753 (126,037) 10,594,718 8,303,451 (6,306,462) 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 $ 9,683,480 $ 5,668,285 ============== ============== ============== ============== ==============
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 8, 1996, the Company completed an initial public offering (the "Initial Public Offering") in which it sold 3,000,000 shares of its Class A Common Stock to the public at a price of $14.00 per share resulting in net proceeds to the Company of $38.1 million. The Company applied the net proceeds from the Initial 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) $12.0 million to the Ohio DBS Acquisition, (iii) $3.0 million to repay the indebtedness under the Credit Facility, (iv) $1.9 million to make a payment on account of the Portland Acquisition, (v) $1.4 million for the payment of the cash portion of the purchase price of the Management Agreement Acquisition, (vi) $1.4 million for the Towers Purchase, and (vii) $522,000 for general corporate purposes. The Management Agreement Acquisition and the Towers Purchase were accounted for as entities under common control as if a pooling of interest had occurred. 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 at December 31, 1995. These funds were disbursed from the escrow to pay interest on its Series B Senior Subordinated Notes due 2005 (the "Series B Notes") in 1996. 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 September 30, 1996 and for the nine months ended September 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 nine months ended September 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, September 30, 1994 1995 1996 -------------- -------------- -------------- (unaudited) Land ................................. $ 153,459 $ 259,459 $ 862,298 Reception and distribution facilities 22,261,777 22,839,470 28,201,357 Transmitter equipment ................ 7,249,289 7,478,134 10,660,248 Building and improvements ............ 823,428 1,554,743 1,579,571 Equipment, furniture and fixtures .... 938,323 1,333,797 3,990,618 Vehicles ............................. 304,509 571,456 733,558 Other equipment ...................... 655,167 997,352 2,033,713 -------------- -------------- -------------- 32,385,952 35,034,411 48,061,363 Accumulated depreciation ............. (14,338,536) (18,462,873) (22,046,004) -------------- -------------- -------------- Net property and equipment ........... $ 18,047,416 $ 16,571,538 $ 26,015,359 ============== ============== ==============
Depreciation expense amounted to $3,154,394, $4,027,866, $4,140,058, $3,281,839 and $3,649,497 for the years ended December 31, 1993, 1994, 1995 and for the nine months ended September 30, 1995 and 1996, respectively. 5. INTANGIBLES: Intangible assets consist of the following:
December 31, December 31, September 30, 1994 1995 1996 -------------- -------------- -------------- (unaudited) Goodwill ............................. $28,490,035 $ 28,490,035 $ 57,079,813 Deferred franchise costs ............. 13,254,985 13,254,985 15,296,243 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 5,933,781 -------------- -------------- -------------- 54,155,818 58,774,757 96,356,801 Accumulated amortization ............. (6,800,992) (10,746,347) (15,575,966) -------------- -------------- -------------- Net intangible assets .............. $47,354,826 $ 48,028,410 $ 80,780,835 ============== ============== ==============
Amortization expense amounted to $2,823,284, $2,912,281, $4,611,431, $2,958,341 and $4,829,930 for the years ended December 31, 1993, 1994, 1995 and for the nine months ended September 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, September 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 $ 81,489,520 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 seven year revolving credit facility dated August 29, 1996, interest at the Company's option at either the banks prime rate, plus an applicable margin or LIBOR, plus an applicable margin (8.375% at September 30, 1996) -- -- 31,600,000 Mortgage payable, due 2000, interest at 8.75% ............ -- 517,535 503,391 Other .................................................... 995,044 867,140 4,024,081 -------------- -------------- -------------- 61,343,901 82,580,129 117,616,992 Less current maturities .................................. 25,578,406 271,934 376,127 -------------- -------------- -------------- Long-term debt ........................................... $35,765,495 $82,308,195 $117,240,865 ============== ============== ==============
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 $10.0 million senior collateralized five-year revolving credit facility and $22.8 million to fund the acquisition of Dom's Tele-Cable, Inc. ("Dom's"). 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, Nine months ended September 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 $3,635,100 $3,820,000 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 1,335,275 990,203 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 nine months ended September 30, 1995 and 1996, the Company paid cash for interest in the amount of $3,280,520, $3,757,097, $3,620,931, $3,375,887 and $5,866,424, respectively. The Company paid no taxes for the years ended December 31, 1993, 1994, 1995 and for the nine months ended September 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 ======== Pro forma, as if the Initial Public Offering, the exchange of the PM&C Class B Shares for shares of the Company's Class A Common Stock (the "Registered Exchange Offer") and the issuance of Class A Common Stock in transactions occurring concurrently with the Initial Public Offering had happened at September 30, 1996, common stock consists of the following:
Pro Forma September 30, 1996 --------------- Pegasus Class A common stock, $0.01 par value; 30.0 million shares authorized; 4,663,229 issued and outstanding ............................... $46,632 Pegasus Class B common stock, $0.01 par value; 15.0 million shares authorized; 4,581,900 issued and outstanding ............................... 45,819 --------------- Total common stock .......................................................... $92,451 ===============
The pro forma data above assume that the Registered Exchange Offer has been consummated and that all holders of the PM&C Class B Shares accept the offer. If all Holders do not accept this offer, the actual pro forma data would differ from that set forth herein. 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: F-17 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 13. Industry Segments: - (Continued)
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 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 $11.7 million of which $4.2 million was allocated to fixed and tangible assets and $7.5 million to goodwill. On June 20, 1996, PCH acquired the FCC license of WPXT for aggregate consideration of $3.0 million. F-18 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 14. Subsequent Events: - (Continued) Effective March 1, 1996, the Company acquired the principal tangible assets of WTLH, Inc. and certain of its affiliates for approximately $5.0 million 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 $3.1 million 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 $3.1 million. The aggregate purchase price of WTLH, Inc. and the related FCC licenses and Fox affiliation agreement is approximately $8.1 million of which $2.2 million was allocated to fixed and tangible assets and $5.9 million 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. Effective August 29, 1996, the Company acquired all of the assets of Dom's for approximately $25.0 million in cash and $1.4 million in assumed liabilities. Dom's operates cable systems serving ten communities contiguous to the Company's Mayaguez, Puerto Rico cable system. The aggregate purchase price of the principal assets of Dom's amounted to $26.4 million of which $4.7 million was allocated to fixed and tangible assets and $21.7 million to various intangible assets. 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 DISPOSITIONS On November 6, 1996, the Company entered into an agreement with State Cable TV Corp. to sell substantially all assets of its New Hampshire cable system for approximately $7.1 million in cash. The Company anticipates recognizing a gain in the transaction. This transaction is expected to be completed in the first quarter of 1997. On November 8, 1996, the Company acquired, from Horizon Infotech, Inc., a division of Chillicothe Telephone Company, the rights to provide DIRECTV programming in certain rural areas of Ohio and the related assets in exchange for approximately $12.0 million in cash. 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 nine months ended September 30, 1996. The pro forma income (loss) per share has been calculated based upon 5,235,833 shares outstanding and has been retroactively applied. The pro forma average shares consists of the following: F-19 PEGASUS COMMUNICATIONS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) 14. Subsequent Events: - (Continued)
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 $14 per share ..................... 1,400,000 1,400,000 --------- ----------- ----------- 455,398 4,780,435 5,235,833 ========= =========== ===========
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. LONG-TERM DEBT 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 $10.0 million senior collateralized five-year revolving credit facility and $22.8 million to fund the acquisition of Dom's Tele-Cable, Inc. ("Dom's"). G. INITIAL PUBLIC OFFERING On October 8, 1996, the Company completed the Initial Public Offering in which it sold 3,000,000 shares of its Class A Common Stock to the public at a price of $14.00 per share resulting in net proceeds to the Company of $38.1 million. The Company applied the net proceeds from the Initial 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) $12.0 million to the Ohio DBS Acquisition, (iii) $3.0 million to repay the indebtedness under the Credit Facility, (iv) $1.9 million to make a payment on account of the Portland Acquisition, (v) $1.4 million for the payment of the cash portion of the purchase price of the Management Agreement Acquisition, (vi) $1.4 million for the Towers Purchase, and (vii) $522,000 for general corporate purposes. The Management Agreement Acquisition and the Towers Purchase were accounted for as entities under Common Control as if a pooling of interests had occurred. F-20 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-21 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-22 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-23 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-24 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-25 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-26 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-27 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-28 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-29 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-30 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-31 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-32 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-33 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-34 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-35 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-36 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-37 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-38 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-39 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-40 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-41 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. COMBINED BALANCE SHEETS DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996
December 31, September 30, ------------------------------ 1994 1995 1996 ------------- ------------- -------------- (Unaudited) ASSETS CURRENT ASSETS: Cash ........................................... $ 140,311 $ 452,016 $ 433,083 Accounts Receivable, net of allowance for doubtful accounts of $64,100 in 1995 and 1996 71,818 485,803 509,583 Inventory ...................................... 766,945 304,335 15,939 ------------- ------------- -------------- Total current assets ................... 979,074 1,242,154 958,605 ------------- ------------- -------------- PROPERTY AND EQUIPMENT ........................... 14,270 71,777 71,777 Accumulated depreciation ....................... (1,000) (9,565) (20,915) ------------- ------------- -------------- Property and equipment, net ............ 13,270 62,212 50,862 ------------- ------------- -------------- FRANCHISE COSTS .................................. 5,399,321 5,590,167 5,590,167 Accumulated amortization ....................... (224,877) (775,423) (1,200,187) ------------- ------------- -------------- Franchise costs, net ................... 5,174,444 4,814,744 4,389,980 ------------- ------------- -------------- TOTAL ............................................ $6,166,788 $ 6,119,110 $ 5,399,447 ============= ============= ============== LIABILITIES AND DIVISION DEFICIENCY CURRENT LIABILITIES: Accounts payable ............................... $ 272,340 $ 49,290 $ 3,792 Accrued expenses (Note 4) ....................... 121,085 504,339 999,274 ------------- ------------- -------------- Total current liabilities .............. 393,425 553,629 1,003,066 ------------- ------------- -------------- DUE TO AFFILIATE (Note 8) ........................ 6,708,407 8,399,809 7,953,908 ------------- ------------- -------------- Total liabilities ............................ 7,101,832 8,953,438 8,956,974 COMMITMENTS AND CONTINGENCIES DIVISION DEFICIENCY .............................. (935,044) (2,834,328) (3,557,527) ------------- ------------- -------------- TOTAL ............................................ $6,166,788 $ 6,119,110 $ 5,399,447 ============= ============= ==============
See notes to combined financial statements. F-42 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. COMBINED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994 AND 1995, AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
Year Ended Nine Months Ended December 31, September 30, -------------------------------- ---------------------------- 1994 1995 1995 1996 ------------- --------------- ------------ ------------ (Unaudited) REVENUES: Programming ................ $ 95,488 $ 1,677,581 $ 1,039,045 $ 2,659,788 Equipment and other ........ 279,430 835,379 286,125 304,813 ------------- --------------- ------------ ------------ 374,918 2,512,960 1,325,170 2,964,601 ------------- --------------- ------------ ------------ COST OF SALES: Programming ................ 42,464 707,880 436,429 1,349,286 Equipment and other ........ 233,778 901,420 254,474 302,532 ------------- --------------- ------------ ------------ 276,242 1,609,300 690,903 1,651,818 ------------- --------------- ------------ ------------ GROSS PROFIT ................. 98,676 903,660 634,267 1,312,783 ------------- --------------- ------------ ------------ OPERATING EXPENSES: Selling .................... 17,382 463,425 258,284 111,416 General and administrative . 199,683 1,009,633 627,623 908,314 Corporate allocation ....... 103,200 139,700 104,700 114,593 Depreciation and amortization ............ 225,877 559,111 410,683 436,114 ------------- --------------- ------------ ------------ 546,142 2,171,869 1,401,290 1,570,437 ------------- --------------- ------------ ------------ LOSS FROM OPERATIONS ......... (447,466) (1,268,209) (767,023) (257,654) INTEREST EXPENSE ............. 487,578 631,075 460,361 465,545 ------------- --------------- ------------ ------------ NET LOSS ..................... $(935,044) $ (1,899,284) $(1,227,384) $ (723,199) ============= =============== ============ ============
See notes to combined financial statements. F-43 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994 AND 1995, AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
Year Ended Nine Months Ended December 31, September 30, -------------------------------- ------------------------------ 1994 1995 1995 1996 ------------- --------------- -------------- ------------ (Unaudited) OPERATING ACTIVITIES: Net loss .................................. $ (935,044) $ (1,899,284) $(1,227,384) $(723,199) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .......... 225,877 559,111 410,683 436,114 Changes in assets and liabilities: Accounts receivable .................. (71,818) (413,985) (161,579) (23,780) Inventory ............................ (766,945) 462,610 (188,125) 288,396 Accounts payable ..................... 272,340 (223,050) (229,151) (45,498) Accrued expenses ..................... 121,085 383,254 325,711 494,935 ------------- --------------- -------------- ------------ Net cash provided by (used in) operating activities ............ (1,154,505) (1,131,344) (1,069,845) 426,968 ------------- --------------- -------------- ------------ INVESTING ACTIVITIES: Purchase of property and equipment ........ (14,270) (57,507) (55,617) -- Purchase of franchise rights and other .... (190,846) (190,846) -- ------------- --------------- -------------- ------------ Net cash used in investing activities ...................... (14,270) (248,353) (246,463) -- ------------- --------------- -------------- ------------ FINANCING ACTIVITIES -- Advances from (to) affiliate, net ............................ 1,309,086 1,691,402 1,371,725 (445,901) ------------- --------------- -------------- ------------ NET INCREASE (DECREASE) IN CASH ............. 140,311 311,705 55,417 (18,933) CASH, BEGINNING OF PERIOD ................... 140,311 140,311 452,016 ------------- --------------- -------------- ------------ CASH, END OF PERIOD ......................... $ 140,311 $ 452,016 $ 195,728 $ 433,083 ============= =============== ============== ============
See notes to combined financial statements. F-44 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-45 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 September 30, 1996 and the combined statements of operations and cash flows for the nine months ended September 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 September 30, 1996 and for the nine months ended September 30, 1995 and 1996 have been made. The combined results of operations for the nine months ended September 30, 1996 are not necessarily indicative of operating results for the full year. Disclosures About Fair Value of Financial Instruments -- The following disclosure of the estimated fair value of financial instruments is made in accordance with SFAS No. 107, Disclosures About Fair Value of Financial Instruments. Cash, Accounts Receivable, Accounts Payable, and Accrued Expenses -- The carrying amounts of these items approximate their fair values as of December 31, 1994 and 1995 because of their short maturity. Due to Affiliates -- A reasonable estimate of fair value is not practicable to obtain because of the related party nature of this item. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following: Estimated December 31, Years -------------------------- Useful Life 1994 1995 ------------- --------- --------- Furniture and fixtures . 10 $ 8,550 $19,435 Computer equipment ..... 5 5,720 25,839 Automobiles ............ 3 21,005 Other .................. 3 5,498 --------- --------- 14,270 71,777 Accumulated depreciation . (1,000) (9,565) --------- --------- $13,270 $62,212 ========= ========= F-46 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-47 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-48 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 except as to Note 10 for which the date is August 29, 1996 F-49 DOM'S TELE CABLE, INC. BALANCE SHEETS
May 31, May 31, August 29, 1995 1996 1996 ------------- ------------- ------------- (unaudited) ASSETS Property, plant, and equipment net of accumulated depreciation and amortization .................. $ 5,077,102 $ 4,839,293 $ 4,832,871 Cash ............................................ 60,648 146,368 86,277 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 0 Prepaid expenses ................................ 85,536 62,856 120,203 Other assets .................................... 11,086 11,086 11,636 Due from related parties ........................ 212 212 0 Deferred tax asset .............................. 330,200 0 0 ------------- ------------- ------------- Total assets ............................... $ 5,672,660 $ 5,086,129 $ 5,050,987 ============= ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIENCY Liabilities: Notes and loans payable ....................... $ 6,079,357 $ 5,086,232 $ 4,896,800 Accounts payable, trade ....................... 695,519 194,856 192,736 Accrued expenses .............................. 942,227 1,055,337 1,107,822 Unearned revenues ............................. 53,852 41,369 38,248 Income tax payable ............................ 16,840 15,410 35,954 ------------- ------------- ------------- 7,787,795 6,393,204 6,271,560 ------------- ------------- ------------- Commitments and contingencies ................... 477,083 495,352 515,223 Stockholders' Deficiency: Common stock -- $10 par value; authorized, 100,000 shares, issued and outstanding 9,575 shares ..................................... 95,750 95,750 95,750 Accumulated deficit ........................... (2,687,968) (1,898,177) (1,831,546) ------------- ------------- ------------- (2,592,218) (1,802,427) (1,735,796) ------------- ------------- ------------- Total liabilities and stockholders' deficiency ............................... $ 5,672,660 $ 5,086,129 $ 5,050,987 ============= ============= =============
The accompanying notes are an integral part of these financial statements. F-50 DOM'S TELE CABLE, INC. STATEMENTS OF OPERATIONS AND DEFICIT FOR THE YEARS ENDED MAY 31, 1994, 1995 AND 1996, THE THREE MONTHS ENDED AUGUST 31, 1995 AND THE PERIOD JUNE 1 TO AUGUST 29, 1996
May 31, May 31, May 31, August 31, August 29, 1994 1995 1996 1995 1996 --------------- --------------- --------------- -------------- ------------- As Restated (unaudited) (unaudited) Revenues ....................... $ 5,356,652 $ 5,447,228 $ 6,015,072 $ 1,424,132 $ 1,505,942 Operating costs and expenses ... 1,521,390 1,950,762 1,909,206 478,285 513,646 --------------- --------------- --------------- -------------- ------------- Gross profit .............. 3,835,262 3,496,466 4,105,866 945,847 992,296 --------------- --------------- --------------- -------------- ------------- Marketing, general, and administrative expenses . 1,346,487 1,412,951 1,636,322 379,646 671,914 Depreciation and amortization ............ 634,750 491,295 505,042 151,639 102,866 --------------- --------------- --------------- -------------- ------------- 1,981,237 1,904,246 2,141,364 531,285 774,780 --------------- --------------- --------------- -------------- ------------- Operating income ............... 1,854,025 1,592,220 1,964,502 414,562 217,516 Non-operating (income) expenses: Other ........................ -- (50,000) -- -- -- Interest expense ............. 753,047 777,461 827,800 203,271 130,341 --------------- --------------- --------------- -------------- ------------- Income before benefit (provision) for income taxes ..................... 1,100,978 864,759 1,136,702 211,291 87,175 Benefit (provision) for income taxes ..................... 184,000 129,356 (346,911) 0 (20,544) --------------- --------------- --------------- -------------- ------------- Net income ................ 1,284,978 994,115 789,791 211,291 66,631 Deficit at beginning of period . (4,967,061) (3,682,083) (2,687,968) (2,687,968) (1,898,177) --------------- --------------- --------------- -------------- ------------- Deficit at end of period ....... $(3,682,083) $(2,687,968) $(1,898,177) $(2,476,677) $(1,831,546) =============== =============== =============== ============== =============
The accompanying notes are an integral part of these financial statements. F-51 DOM'S TELE CABLE, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MAY 31, 1994, 1995 AND 1996, THE THREE MONTHS ENDED AUGUST 31, 1995 AND THE PERIOD JUNE 1 TO AUGUST 29, 1996
May 31, May 31, May 31, August 31, August 29, 1994 1995 1996 1995 1996 ------------- ------------- ------------- ------------ ----------- As Restated (unaudited) (unaudited) Cash flows from operating activities: Net income .................................. $ 1,284,978 $ 994,115 $ 789,791 $ 211,291 $ 66,631 ------------- ------------- ------------- ------------ ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............ 634,750 491,295 505,042 151,639 102,866 Provision for doubtful accounts .......... 50,595 9,241 110,408 28,270 29,901 Changes in assets and liabilities: (Increase) decrease in accounts receivables, trade ................................. (24,781) (51,864) (28,846) 1,434 (3,587) (Increase) decrease in accounts receivable, other ................... (14,743) 35,866 -- -- -- (Increase) decrease in prepaid expenses (35,218) (4,845) 22,679 (211,647) (57,347) (Increase) in other assets ............. (3,916) -- -- -- (550) (Increase) decrease in due from related parties ............................. (2,887) 3,414 -- 988 12,587 (Increase) decrease in deferred tax asset ............................... (184,000) (146,200) 330,200 330,200 -- Increase (decrease) in accounts payable 238,870 266,705 (500,663) (277,178) (2,120) Increase (decrease) in accrued expenses (186,870) (120,322) 113,110 (271,309) 40,111 Increase (decrease) in income tax payable ............................. -- 16,840 (1,430) (16,840) 20,543 Increase (decrease) in unearned revenues (12,483) (22,908) (12,483) 7,305 (3,121) Increase in contingencies .............. -- 191,083 18,269 245,199 19,871 ------------- ------------- ------------- ------------ ----------- Other .................................. -- -- -- (195,982) -- Total adjustments ................... 459,317 668,305 556,286 (207,921) 159,154 ------------- ------------- ------------- ------------ ----------- Net cash provided by operating activities ........................ 1,744,295 1,662,420 1,346,077 3,370 225,785 ------------- ------------- ------------- ------------ ----------- Cash flows from investing activities: Capital expenditures ........................ (390,172) (249,727) (267,232) (58,715) (96,444) ------------- ------------- ------------- ------------ ----------- Net cash used in investing activities (390,172) (249,727) (267,232) (58,715) (96,444) ------------- ------------- ------------- ------------ ----------- Cash flows from financing activities: Bank overdraft .............................. -- -- -- 102,586 -- Payments of notes payable ................... (1,469,104) (1,443,650) (1,011,925) (107,889) (189,432) Proceeds from issuance of loan payable ...... 40,000 -- 18,800 -- -- ------------- ------------- ------------- ------------ ----------- Net cash used in financing activities (1,429,104) (1,443,650) (993,125) (5,303) (189,432) ------------- ------------- ------------- ------------ ----------- Net increase (decrease) in cash ............... (74,981) (30,957) 85,720 (60,648) (60,091) Cash, beginning of period ..................... 166,586 91,605 60,648 60,648 146,368 ------------- ------------- ------------- ------------ ----------- Cash, end of period ........................... $ 91,605 $ 60,648 $ 146,368 $ -- $ 86,277 ============= ============= ============= ============ =========== Supplemental disclosure of cash flows information: Cash paid during the period for interest ..... $ 713,821 $ 805,421 $ 833,209 $ 203,271 $ 130,341 ============= ============= ============= ============ ===========
The accompanying notes are an integral part of these financial statements. F-52 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-53 DOM'S TELE CABLE, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) YEARS ENDED DECEMBER 31, 1994 AND 1995 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. INTERIM FINANCIAL INFORMATION: The financial statements as of August 29, 1996 and for the three months ended August 31, 1995 and the period June 1 to August 29, 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. 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-54 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-55 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-56 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. On August 29, 1996, all of the Company's assets were acquired by Pegasus Communications Corporation for approximately $25.0 million in cash and $1.4 million in assumed liabilities. 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-57 [Collage of photographs of television personalities] Only one satellite TV service can bring you the entertainment and value your family is looking for -- Pegasus Satellite Television. With 55 different pay-per-view movies every night, exclusive pro and college sports action, and nearly 200 fully-digital channels of the most popular cable programming, no service can match the variety and value of Pegasus Satellite Television. And now, you can get Pegasus Satellite Television and the Digital Satellite System at the lowest prices ever. For the most movies, sports and cable channels available anywhere, it's got to be Pegasus Satellite Television. Pegasus Satellite Television [Pegasus Satellite Televison LOGO] DIRECTV Satellite TV at its Best Hardware and programming sold separately. DIRECTV, DSS and "DIRECTV. Satellite TV at its Best," are official trademarks of DIRECTV, Inc., a unit of Hughes Electronics Corp. (c)1996 NRTC. MKT BROCH 1003 =============================================================================== No dealer, salesperson or other person has been authorized to give any information or to make any representation other than those contained in this Prospectus, and, if given or made, such information or representation must not be relied upon having been authorized by the Company or any Underwriter. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy the Securities by anyone in any jurisdiction in which the person making the offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall create any implication that there has been no change in the affairs of the Company since the date hereof or that information contained herein is correct as of any time subsequent to the date hereof. TABLE OF CONTENTS Page ---- Prospectus Summary .......................... 1 Risk Factors ................................ 20 Use of Proceeds ............................. 29 Dividend Policy ............................. 31 Class A Common Stock Information ............ 29 Capitalization .............................. 31 Pro Forma Combined Financial Information .... 32 Selected Historical and Pro Forma Combined Financial Data ............................. 39 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................. 42 Business .................................... 51 Management and Certain Transactions ......... 81 Ownership and Control ....................... 87 Description of Indebtedness ................. 88 Description of Securities ................... 90 Description of Capital Stock ................ 126 Shares Eligible for Future Sale ............. 129 Certain Federal Income Tax Considerations ... 131 Underwriting ................................ 138 Legal Matters ............................... 140 Experts ..................................... 140 Additional Information ...................... 141 Index to Financial Statements ............... F-1 ------ =============================================================================== =============================================================================== $100,000,000 LOGO 100,000 UNITS % SERIES A CUMULATIVE EXCHANGEABLE PREFERRED STOCK AND WARRANTS TO PURCHASE 193,600 SHARES OF CLASS A COMMON STOCK ---------- PROSPECTUS ---------- CIBC WOOD GUNDY SECURITIES CORP. LEHMAN BROTHERS BT SECURITIES CORPORATION , 1997 ============================================================================== PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses payable by the Registrant in connection with this Registration Statement. All of such expenses are estimates, other than the filing and listing fees payable to the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Filing Fee -- Securities and Exchange Commission ............ $ 30,303.03 Filing Fee -- National Association of Securities Dealers, Inc. ....................................................... $ 10,500.00 Fees and Expenses of Accountants ............................ $ * Fees and Expenses of Counsel ................................ $ * Printing Expenses ........................................... $ * Blue Sky Fees and Expenses .................................. $ * Miscellaneous Expenses ...................................... $ * Total ..................................................... $750,000.00 - ------ *To be added. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant's Amended and Restated Certificate of Incorporation provides that a director of the Registrant shall have no personal liability to the Registrant or to its stockholders for monetary damages for breach of fiduciary duty as a director except to the extent that Section 102(b)(7) (or any successor provision) of the Delaware General Corporation Law, as amended form time to time, expressly provides that the liability of a director may not be eliminated or limited. Article 6 of the Registrant's By-Laws provides that any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Registrant, or is or was serving while a director or officer of the Registrant at the request of the Registrant as a director, officer, employee, agent, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall be indemnified by the Registrant against expenses (including attorneys' fees), judgments, fines, excise taxes and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the full extent permissible under Delaware law. Article 6 also provides that any person who is claiming indemnification under the Registrant's By-Laws is entitled to advances from the Registrant for the payment of expenses incurred by such person in the manner and to the full extent permitted under Delaware law. The Underwriting Agreement provides that the Underwriters are obligated, under certain circumstances, to indemnify directors, officers and controlling persons of the Registrant against certain liabilities under the Securities Act of 1933, as amended. Reference is made to Section 8 of the form of Underwriting Agreement which is filed as Exhibit 1.1 hereto. The Registrant intends to obtain directors' and officers' liability insurance. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The Registrant was incorporated on May 30, 1996. In connection with its incorporation, the Registrant issued 100 shares of Class B Common Stock to its parent, Pegasus Communications Holdings, Inc. on May 30, 1996, in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act. On October 8, 1996, the Registrant issued 852,110 shares in connection with the Michigan/Texas Acquisition, 263,606 shares 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 participated in the Management Share Exchange, 10,714 shares in connection with the Portland Acqusition II-1 and 71,429 shares in connection with the Portland LMA. All of the foregoing issuances were made in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for consideration relating to these issuances. In addition, on October 8, 1996, the Registrant also issued 1,400,000 shares in connection with the Management Agreement Acquisition, 71,429 shares in connection with the Portland Acquisition and 3,380,435 shares issued to the Parent on account of the Parent's contribution of all of the outstanding PM&C Class A Shares to the Registrant. All of the foregoing issuances were made in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for consideration relating to these issuances. On October 8, 1996, the Registrant issued $1.0 million in warrants to purchase Class A Common Stock of the Registrant in connection with the purchase by the Registrant of television station WTLH. This issuance was also made in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for consideration relating to this issuance. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
Exhibit Number Description of Document - ------ ----------------------- 1.1 Form of Underwriting Agreement for Initial Public Offering (which is incorporated by reference to Exhibit 1.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 1.2** Form of Underwriting Agreement. 2.1 Asset Purchase Agreement, dated March 21, 1996, among Dominica Padilla Acosta, Maria Del Carmen Padilla Lopez, Dom's Tele-Cable, Inc. and the Parent relating to the a cquisition 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 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). 2.6 Amendment No. 2 to Exhibit 2.2 (which is incorporated by reference to Exhibit 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 (whic h 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 (whic h is incorporated by reference to Exhibit 6 to Pegasus' Form 8-K dated as of October 8, 1996).
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Exhibit Number Description of Document - ------ ----------------------- 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 refe rence 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 (which is incorporated herein by reference to Pegasus' Registration Statement on Form S-4 (File No. 333-14857). 2.12* Asset Purchase Agreement dated as of November 6, 1996 between State Cable TV Corp. and Pegasus Cable Television, Inc. 3.1 Certificate of Incorporation of Pegasus, as amended (which is incorporated by reference to Exhibit 3.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 3.3** Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof. 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). 4.4** Form of Indenture dated as of , 1997 by and between Pegasus and First Union National Bank, as trustee, relating to the Exchange Notes. 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). 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).
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Exhibit Number Description of Document - ------ ----------------------- 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. 3 3-95042). 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 & Communic ations, 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 Cab le 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 Registr ation 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 H. 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 Ja nuary 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 Ja nuary 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 refere nce 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)
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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 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 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 by reference to Exhibit 10.29 Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 10.30 Pegasus 1996 Stock Option Plan (which is incorporated by reference to Exhibit 10.30 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 12.1* Statement of computation of ratio of earnings to combined fixed charges and preferred stock dividends. 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* 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). 25.1* Statement of Eligibility of Trustee on Form T-1 dated November 21, 1996 relating to the Exchange Notes. 27.1* Financial Data Schedule
- ------ * Filed herewith. ** To be filed by amendment. II-5 (b) Financial Statement Schedules Schedule II. Valuation and Qualifying Accounts All other schedules of Pegasus for which provision is made in the applicable accounting regulations of the Commission are not required, are inapplicable or have been disclosed in the notes to the consolidated financial statements and therefore have been omitted. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, 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 that: 1. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. 2. For the purposes of determining any liability under the Securities Act of 1933, each post- effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of the Trust Indenture Act. 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 24th day of December, 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 -------------------------------- Marshall W. Pagon President, Chief Executive Officer and (Principal Executive Officer) Chairman of the Board December 24, 1996 /s/ Robert N. Verdecchio -------------------------------- Robert N. Verdecchio Senior Vice President, Chief (Principal Financial and Financial Officer and Assistant Accounting Officer) Secretary December 24, 1996 /s/ James J. McEntee, III -------------------------------- James J. McEntee, III Director December 24, 1996 /s/ Mary C. Metzger -------------------------------- Mary C. Metzger Director December 24, 1996 /s/ Donald W. Weber -------------------------------- Donald W. Weber Director December 24, 1996
II-7 REPORT OF INDEPENDENT ACCOUNTANTS In connection with our audits of the combined financial statements of Pegasus Communications Corporation as of December 31, 1994 and 1995, and for each of the two years in the period ended December 31, 1995 which financial statements are included in the Prospectus, we have audited the financial statement schedule listed in Item 16 herein. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Philadelphia, Pennsylvania May 31, 1996 S-1 HERBEIN+COMPANY, INC. To the Board of Directors and Stockholders Pegasus Communications Corporation Radnor, Pennsylvania REPORT OF INDEPENDENT ACCOUNTANTS In connection with our audit of the combined financial statements of Pegasus Communications Corporation for the year ended December 31, 1993, which financial statements are included in the Form S-1 Registration Statement, we have audited the financial statement Schedule II -- Valuation and Qualifying Accounts. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. HERBEIN + COMPANY, INC. Reading, Pennsylvania March 4, 1994 S-2 PEGASUS COMMUNICATIONS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 (DOLLARS IN THOUSANDS)
Balance at Additions Additions Balance at Beginning C harged To Charged To End of Description of Period Expenses Other Accounts Deductions Period Allowance for Uncollectible Accounts Receivable Year 1993 ............ $ 108 $ 156 $245 (a) $ 201 (b) $ 308 Year 1994 ............ $ 308 $ 200 $ -- $ 160 (b) $ 348 Year 1995 ............ $ 348 $ 151 $ -- $ 261 (b) $ 238 Valuation Allowance for Deferred Tax Assets Year 1994 ............ $ 0 $1,756 $ -- $ -- $1,756 Year 1995 ............ $1,756 $8,675 $ -- $3,477 $6,954
(a) Balance at acquisition date. (b) Amounts written off, net of recoveries. S-3 EXHIBIT INDEX
Exhibit Number Description of Document - ----- ----------------------- 1.1 Form of Underwriting Agreement for Initial Public Offering (which is incorporated by reference to Exhibit 1.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 1.2** Form of Underwriting Agreement. 2.1 Asset Purchase Agreement, dated March 21, 1996, among Dominica Padilla Acosta, Maria Del Carmen Padilla Lopez, Dom's Tele-Cable, Inc. and the Parent relating to the a cquisition 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 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). 2.6 Amendment No. 2 to Exhibit 2.2 (which is incorporated by reference to Exhibit 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 (whic h 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 (whic h 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 refe rence 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 (which is incorporated herein by reference to Pegasus' Registration Statement on Form S-4 (File No. 333-14857). 2.12* Asset Purchase Agreement dated as of November 6, 1996 between State Cable TV Corp. and Pegasus Cable Television, Inc. 3.1 Certificate of Incorporation of Pegasus, as amended (which is incorporated by reference to Exhibit 3.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 3.3** Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof.
Exhibit Number Description of Document - ------ ----------------------- 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). 4.4** Form of Indenture dated as of , 1997 by and between Pegasus and [First Union National Bank], as trustee, relating to the Exchange Notes. 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). 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. 3 3-95042).
Exhibit Number Description of Document - ------ ----------------------- 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 & Communic ations, 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 Cab le 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 Registr ation 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 Ch ristopher 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 Ja nuary 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 Ja nuary 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 refere nce 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 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).
Exhibit Number Description of Document - ------ ----------------------- 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 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 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 by reference to Exhibit 10.29 Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 10.30 Pegasus 1996 Stock Option Plan (which is incorporated by reference to Exhibit 10.30 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). 12.1* Statement of computation of ratio of earnings to combined fixed charges and preferred stock dividends. 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* 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). 25.1* Statement of Eligibility of Trustee on Form T-1 dated November 21, 1996 relating to the Exchange Notes. 27.1* Financial Data Schedule
- ------ * Filed herewith. ** To be filed by amendment. EX-2.12 2 EXHIBIT 2.12 Exhibit 2.12 ASSET PURCHASE AGREEMENT dated as of November 6, 1996 between STATE CABLE TV CORP. and PEGASUS CABLE TELEVISION, INC. TABLE OF CONTENTS
Page ARTICLE 1. CERTAIN DEFINITIONS................................................... 1 ARTICLE 2. PURCHASE AND SALE..................................................... 5 Section 2.1 Covenant of Purchase and Sale; Assets................................. 5 Section 2.2 Excluded Assets....................................................... 6 Section 2.3 Assumed and Retained Obligations and Liabilities...................... 7 Section 2.4 Purchase Price........................................................ 8 Section 2.5 Escrow Agreement ..................................................... 9 Section 2.6 Current Items Amount.................................................. 9 Section 2.7 Current Items Amount Calculated.......................................10 ARTICLE 3. RELATED MATTERS.......................................................11 Section 3.1 HSR Act Compliance....................................................11 Section 3.2 Noncompetition Agreement..............................................11 Section 3.3 Bulk Sales............................................................11 Section 3.4 Use of Names and Logos................................................11 Section 3.5 Transfer Taxes; Filing Fees...........................................11 Section 3.6 Allocation of the Purchase Price .....................................11 ARTICLE 4. BUYER'S REPRESENTATIONS AND WARRANTIES................................12 Section 4.1 Organization of Buyer.................................................12 Section 4.2 Authority.............................................................12 Section 4.3 No Conflict; Required Consents........................................12 Section 4.4 Litigation............................................................12 Section 4.5 Taxpayer Number.......................................................12 Section 4.6 Funds.................................................................12 ARTICLE 5. SELLER'S REPRESENTATIONS AND WARRANTIES...............................13 Section 5.1 Organization and Qualification of Seller..............................13 Section 5.2 Authority.............................................................13 Section 5.3 No Conflict; Required Consents........................................13 Section 5.4 Title to Assets; Sufficiency..........................................13 Section 5.5 Franchises, Licenses, and Contracts...................................14 Section 5.6 Employee Benefits.....................................................14 Section 5.7 Employees.............................................................14 Section 5.8 Litigation............................................................15 Section 5.9 Tax Returns; Other Reports............................................15 Section 5.10 Compliance with Legal Requirements....................................16 Section 5.11 System Information....................................................17 Section 5.12 Environmental Matters.................................................18 Section 5.13 Financial and Operational Information.................................18
i Section 5.14 No Adverse Change.....................................................18 Section 5.15 Taxpayer Identification Number........................................19 Section 5.16 Intangibles...........................................................19 Section 5.17 Accounts Receivable...................................................19 Section 5.18 Bonds.................................................................19 Section 5.19 Exclusivity...........................................................19 Section 5.20 Transactions with Affiliates and Employees............................19 ARTICLE 6. COVENANTS.............................................................20 Section 6.1 Certain Affirmative Covenants of Seller Regarding the System..........20 Section 6.2 Approvals from Governmental Authorities...............................21 Section 6.3 Employee Matters......................................................22 Section 6.4 WARN Act..............................................................22 Section 6.5 Certain Negative Covenants Of Seller..................................22 Section 6.6 Confidentiality.......................................................23 Section 6.7 Supplements to Schedules..............................................23 Section 6.8 Notification of Certain Matters.......................................24 Section 6.9 Commercially Reasonable Efforts.......................................24 Section 6.10 Closing Date Financial Statements.....................................24 Section 6.11 Subscriber Billing Services...........................................24 Section 6.12 Release of Certain Liens, Litigation and Other Obligations............25 Section 6.13 Customer Notification.................................................25 Section 6.14 Leased Vehicles; Other Capital Leases ................................25 Section 6.15 Duty of Good Faith and Fair Dealing...................................25 Section 6.16 Rate Matters..........................................................25 ARTICLE 7. CONDITIONS PRECEDENT..................................................26 Section 7.1 Conditions to Buyer's Obligations.....................................26 Section 7.2 Conditions to Seller's Obligations....................................27 ARTICLE 8. CLOSING...............................................................28 Section 8.1 Closing; Time and Place...............................................28 Section 8.2 Seller's Obligations..................................................29 Section 8.3 Buyer's Obligations...................................................30 ARTICLE 9. TERMINATION...........................................................31 Section 9.1 Termination Events....................................................31 Section 9.2 Effect of Termination.................................................31 ARTICLE 10. REMEDIES..............................................................31 Section 10.1 Specific Performance; Remedies Cumulative.............................31 Section 10.2 Attorneys' Fees.......................................................32 Section 10.3 Remedies Limitation...................................................32 Section 10.4 Escrow Deposit .......................................................32
ii ARTICLE 11. INDEMNIFICATION.......................................................33 Section 11.1 Indemnification by Seller.............................................33 Section 11.2 Indemnification by Buyer..............................................33 Section 11.3 Indemnified Third Party Claim.........................................34 Section 11.4 Determination of Indemnification Amounts and Related Matters..........35 Section 11.5 Time and Manner of Certain Claims.....................................35 ARTICLE 12. MISCELLANEOUS PROVISIONS..............................................36 Section 12.1 Expenses..............................................................36 Section 12.2 Brokerage.............................................................36 Section 12.3 Waivers...............................................................36 Section 12.4 Notices...............................................................36 Section 12.5 Entire Agreement; Amendments..........................................37 Section 12.6 Binding Effect; Benefits..............................................37 Section 12.7 Headings, Schedules, and Exhibits ....................................38 Section 12.8 Counterparts..........................................................38 Section 12.9 Publicity.............................................................38 Section 12.10 Governing Law.........................................................38 Section 12.11 Third Parties; Joint Ventures.........................................39 Section 12.12 Construction..........................................................39 Section 12.13 Risk of Loss..........................................................39
iii LIST OF SCHEDULES AND EXHIBITS SCHEDULES Schedule 2.1(a) Tangible Personal Property Schedule 2.1(b) Leased Real Property Schedule 2.1(c) Franchises Schedule 2.1(d) Licenses Schedule 2.1(e) Contracts Schedule 2.2 Excluded Assets Schedule 5.3 Seller's Required Consents Schedule 5.4 Liens Schedule 5.5 Defaults Schedule 5.7 Employment Matters Schedule 5.8 Litigation Schedule 5.10 Rate Regulation Information Schedule 5.11 System Information Schedule 5.13 Financial Statements Schedule 5.18 Bonds Schedule 5.19 Competition Schedule 6.1(i) Required Capital Expenditures EXHIBITS Exhibit 2.5 Escrow Agreement Exhibit 3.2 Noncompetition Agreement Exhibit 7.1(e) Seller's Counsel Opinion Exhibit 7.1(f) Seller's FCC Counsel Opinion Exhibit 7.2(g) Buyer's Counsel Opinion Exhibit 8.2(a) Bill of Sale iv ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT is made and entered into as of November 6, 1996 by and between State Cable TV Corp., a Delaware corporation, whose U.S. Taxpayer Identification Number is 22-2154024 ("Buyer"), and Pegasus Cable Television, Inc., a Massachusetts corporation, whose U.S. Taxpayer Identification Number is 23-2788778 ("Seller"). RECITALS A. Seller owns and operates cable television systems which serve Bethlehem, Franconia, Moultonborough, Ossipee, Tamworth and Tuftonborough, New Hampshire, pursuant to the Franchises (as hereinafter defined) and the Licenses (as hereinafter defined) (the "Systems"). B. Seller is willing to convey to Buyer, and Buyer is willing to purchase from Seller, substantially all of the assets comprising the Systems other than the Excluded Assets (as hereinafter defined), upon the terms and conditions set forth in this Agreement. AGREEMENTS In consideration of the mutual covenants and promises set forth herein, Buyer and Seller agree as follows: ARTICLE 1 CERTAIN DEFINITIONS As used in this Agreement, the following terms, whether in singular or plural forms, shall have the following meanings: "Agreement" means this Asset Purchase Agreement. "Assets" has the meaning given in Section 2.1. "Assumed Obligations and Liabilities" has the meaning given in Section 2.3. "Basic Cable" means the cable television services described as Basic Cable on Schedule 5.11. "Bill of Sale" has the meaning given in Section 8.2(a). "Cable Act" means the Communications Act of 1934, 47 U.S.C. ss.ss. 151 et. seq., as amended by the Cable Communications Policy Act of 1984, Pub. L. No. 98-549, the Cable Consumer Protection and Competition Act of 1992, Pub. L. No. 102-385, and the Telecommunications Act of 1996, Pub. L. No. 104-104, as such statutes may be amended from time to time, and the rules and regulations promulgated thereunder. "CATV" means Community Antenna Television. "Closing" has the meaning given in Section 8.1. "Closing Date" means the date of Closing. "Closing Time" means 11:59 p.m. local time, on the Closing Date unless the Closing Date is January 1, 1997, in which event the Closing Time shall mean 12:00 a.m. local time on January 1, 1997. "Code" shall mean the Internal Revenue Code of 1986, as amended and the regulations thereunder, or any subsequent legislative enactment thereof, as in effect from time to time. "Communications Act" means the Communications Act of 1934, as amended. "Contracts" has the meaning given in Section 2.1(e). "Copyright Act" means the Copyright Act of 1976, as amended. "Current Items Amount" has the meaning given in Section 2.6. "Deposit" has the meaning given in Section 2.5. "Eligible Accounts Receivable" has the meaning given in Section 2.6. "Employee Benefit Plan" means any pension, retirement, profit-sharing, deferred compensation, vacation, severance, bonus, incentive, medical, vision, dental, disability, life insurance or any other employee benefit plan as defined in Section 3(3) of ERISA to which a Person contributes or which a Person sponsors or maintains, or by which a Person is otherwise bound. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Escrow Agreement" has the meaning given in Section 2.5. "Excluded Assets" has the meaning given in Section 2.2. "Expenses" has the meaning given in Section 2.6. "FAA" means the Federal Aviation Administration. "FCC" means the Federal Communications Commission. "Final Adjustment Certificate" has the meaning given in Section 2.7. "Five-Month Average Number of Subscribers" has the meaning given in Section 2.4(b). 2 "Franchises" has the meaning given in Section 2.1(c). "Governmental Authority" means the United States of America, any state, commonwealth, territory, or possession thereof and any political subdivision or quasi-governmental authority of any of the same. "Hazardous Substances" has the meaning given in Section 5.12(d). "Initial Adjustment Certificate" has the meaning given in Section 2.7. "Indemnitee" has the meaning given in Section 11.3(a). "Indemnitor" has the meaning given in Section 11.3(a). "Individual Subscriber" means, as to each System, any active single household subscriber of such System that pays Seller the full monthly price (without discount) for Basic Cable services in accordance with standard rates charged by Seller with respect to such System, that is not pending disconnection for any reason as of the Closing Time, whose payment for service (including installation fees, but exclusive of late charges) is not more than 60 days past due from the due date specified in the bill to which the service relates and who has become a subscriber only pursuant to customary marketing promotions conducted in the ordinary course of business consistent with past practices. "Judgment" means any judgment, writ, order, injunction, award, or decree of any court, judge, justice or magistrate, the FCC or any other Governmental Authority. "Leased Real Property" has the meaning given in Section 2.1(b). "Legal Requirements" means applicable common law and any statute, ordinance, code or other law, rule, regulation, or order enacted, adopted or promulgated by any Governmental Authority, including, without limitation, Judgments and the Franchises. "Licenses" has the meaning given in Section 2.1(d). "Lien" means any security agreement, financing statement filed with any Governmental Authority, conditional sale or other title retention agreement, any lease, consignment or bailment given for purposes of security, any lien, mortgage, indenture, pledge, option, encumbrance, adverse interest, constructive trust or other trust, claim, attachment, exception to or defect in title or other ownership interest (including, but not limited to, reservations, rights of entry, rights of first refusal, possibilities of reverter, encroachments, easement, rights-of-way, restrictive covenants, leases, and licenses) of any kind, which otherwise constitutes an interest in or claim against property, whether arising pursuant to any Legal Requirement, under any Contract or otherwise. "Litigation" means any claim, action, suit, proceeding, arbitration, investigation, hearing, or other similar activity or procedure that could result in a Judgment. 3 "Losses" means any claims, losses, liabilities, damages, penalties, costs, and expenses, including, without limitation, reasonable counsel fees and reasonable costs and expenses incurred in the investigation, defense or settlement of any claims covered by the indemnification provided for in Article 11 hereof, but shall in no event include incidental or consequential damages. "Noncompetition Agreement" has the meaning given in Section 3.2. "Notice" has the meaning given in Section 11.3(a). "Owned Real Property" has the meaning given in Section 2.1(b). "Outside Closing Date" has the meaning given in Section 8.1. "Permitted Lien" means (i) liens for Taxes not yet due and payable or being contested in good faith by appropriate proceedings; (ii) rights reserved to any Governmental Authority to regulate the affected property; (iii) as to leased Assets, interests of the lessors thereof and Liens affecting the interests of the lessors thereof; (iv) inchoate materialmen's, mechanics', workmen's, repairmen's or other like liens arising in the ordinary course of business; and (v) as to any parcel of Owned Real Property or Leased Real Property, any Liens that do not, individually or in the aggregate, affect or impair the value or use thereof as it is currently being used by Seller in the ordinary course of the business or render title thereto unmerchantable or uninsurable. "Person" means any natural person, Governmental Authority, corporation, general or limited partnership, joint venture, trust, association, limited liability company, or unincorporated entity of any kind. "Pole Attachment Agreements" means pole attachment authorizations and agreements held by Seller that relate to a System and were granted by a public utility (or other Person providing similar service), municipality or other Governmental Authority. "Purchase Price" has the meaning given in Section 2.4. "Qualified Intermediary" has the meaning given to it in the rules and regulations promulgated pursuant to section 1031 of the Code. "Securities Act" means the Securities Act of 1933, as amended. "Subscriber Equivalent" means, as to each System, an equivalent to an Individual Subscriber, the number of Subscriber Equivalents served by such System being equal, as of any date and for any month, to the quotient of (i) the aggregate revenues earned by that System for Basic Cable provided by such System during the relevant month, from billings, without duplication, to residential multiple dwelling units (each, an "MDU") and other subscribers that are billed for such service on a bulk basis, and single family households that pay less than such System's regular Basic Cable monthly subscription rate divided by (ii) such System's regular monthly subscription rate for Basic Cable in effect for the relevant month. For purposes of the foregoing, aggregate revenues earned shall not include (i) passed through franchise fees and sales taxes, and 4 other passed-through charges, (ii) nonrecurring charges or credits and (iii) billings to any MDU or bulk account or discounted single family household (a) which is more than 60 days past due from the due date specified in the bill to which services relate or (b) which is pending disconnection for any reason. "Supplemental Documents" means the Bill of Sale (and each other transfer document to be delivered at Closing), the Escrow Agreement and the Noncompetition Agreement. "Systems" has the meaning given in Recital A, and "System" means either of the Systems. "Systems Financial Statements" has the meaning given in Section 5.13. "Taxes" means all levies and assessments imposed by any Governmental Authority, including but not limited to income, sales, use, ad valorem, value added, franchise, severance, net or gross proceeds, withholding, payroll, employment, excise or property taxes, and interest, penalties and other government charges with respect thereto. ARTICLE 2 PURCHASE AND SALE Section 2.1 Covenant of Purchase and Sale; Assets. Subject to the terms and conditions set forth in this Agreement, at Closing Seller shall sell, convey, assign, and transfer to Buyer, and Buyer shall acquire from Seller, for the Purchase Price, free and clear of all Liens (except for Permitted Liens), all rights, title and interests of Seller or any affiliate of Seller in and to all of the assets and properties, real and personal, tangible and intangible, owned or leased, used or held for use by Seller in its operation of the Systems (the "Assets"), including, without limitation, the following: (a) Tangible Personal Property. All tangible personal property, including but not limited to towers, tower equipment, antennae, aboveground and underground cable, distribution systems, headend amplifiers, line amplifiers, feeder line cable, distribution plant, programming signal decoders for each satellite service which scrambles its signal, housedrops, including disconnected housedrops, installed subscriber devices, utility poles (if owned by Seller), local origination equipment, vehicles and trailers, microwave equipment, converters, testing equipment, office equipment, furniture, fixtures, supplies, inventory, and other physical assets, including but not limited to the items described on Schedule 2.1(a). (b) Real Property. All interests in real property owned by Seller ("Owned Real Property") or leased by Seller ("Leased Real Property"), including all improvements thereon owned by Seller, including but not limited to the Leased Real Property described on Schedule 2.1(b). 5 (c) Franchises. All of the existing governmental authorizations for construction, maintenance and operation of the Systems (individually a "Franchise" and collectively the "Franchises") presently held by Seller, as listed on Schedule 2.1(c). (d) Licenses. The intangible CATV channel distribution rights, cable television relay service (CARS), business radio and other licenses, authorizations, or permits issued by the FCC or any other Governmental Authority (excluding the Franchises listed on Schedule 2.1(c)) used in the operation of the Systems and that are in effect as of the date hereof or entered or obtained in the ordinary course of business between the date hereof and the Closing Date (the "Licenses"), including, without limitation, the Licenses described on Schedule 2.1(d). (e) Contracts. The leases, private easements or rights of access, contractual rights to easements, Pole Attachment Agreements or joint line agreements, underground conduit agreements, crossing agreements, MDU agreements, bulk and commercial service agreements, and other contracts, agreements or understandings relating to the System in effect as of the date hereof or entered or obtained in the ordinary course of business between the date hereof and the Closing Date (other than Excluded Assets) (the "Contracts"), including, without limitation, the Contracts described on Schedule 2.1(e). (f) Accounts Receivable. All subscriber, trade and other accounts receivable arising from Seller's operation of the Systems, except for accounts receivable relating to programming agreements and advertising aired prior to Closing Time. (g) Books and Records. All engineering records, files, data, drawings, blueprints, schematics, reports, lists, plans and processes, and all files of correspondence, lists, records, and reports concerning subscribers and prospective subscribers of each System, personnel records relating to employees of each System to be hired by Buyer upon Closing (if any), signal and program carriage, and dealings with Governmental Authorities, including but not limited to all reports filed by or on behalf of Seller with the FCC with respect to each System and statements of account filed by or on behalf of Seller with the U.S. Copyright Office with respect to each System. Section 2.2 Excluded Assets. Notwithstanding the provisions of Section 2.1, the Assets shall not include the following, which shall be retained by Seller (the "Excluded Assets"): (i) programming agreements (other than any programming agreement listed on Schedule 2.1(e) hereof), cable guide agreements, and all retransmission consent agreements that may be in effect on the Closing Date (other than any such retransmission consent agreement listed on Schedule 2.1(e) hereof); (ii) insurance policies and rights and claims thereunder; (iii) bonds, letters of credit, surety instruments, and other similar items; (iv) cash and cash equivalents; (v) any agreement, right, asset or property owned or leased by Seller that is not used or held for use in connection with its operation of the Systems; (vi) all subscriber deposits and advance payments held by Seller as of the Closing Time in connection with the operation of the Systems; (vii) all claims, rights, and interest in and to any refunds of taxes or fees of any nature, or other claims against third parties, relating to the operation of the Systems prior to the Closing Time; (viii) the account books of original entry, general ledgers and financial records used in connection with the Systems, provided, however, that Seller shall provide to Buyer access to any 6 of such books and records as may be in Seller's possession for a reasonable period, not to exceed five (5) years from the Closing Date (seven (7) years if Buyer needs reasonable access because of an Internal Revenue Service inquiry), from time to time upon reasonable notice from Buyer to Seller; (ix) Seller's trademarks, trade names, service marks, service names, logos, and similar proprietary rights; (x) the assets and properties of Seller or its affiliates relating solely to its distribution of DIRECTV as such assets are further described on Schedule 2.2 in reasonable detail; (xi) the assets and properties of Seller or any affiliate of Seller located outside of New Hampshire, whether real or personal, tangible or intangible, owned or leased, used or held for use by Seller in its operation of the Systems, including, but not limited to the billing system software, spectrum analyzer and addressable controller, but excluding the Assets described in Sections 2.1(c), (d), (e), (f) and (g) or described on Schedule 2.1(a); and (xii) any other items described on Schedule 2.2. Section 2.3 Assumed and Retained Obligations and Liabilities. (a) Assumed Obligations and Liabilities. At Closing, Buyer shall assume, pay, discharge, and perform the following (the "Assumed Obligations and Liabilities"): (i) those obligations and liabilities attributable to periods after the Closing Time under or with respect to the Franchises, Licenses or Contracts; (ii) other obligations and liabilities of Seller to the extent that there shall have been a credit in favor of Buyer with respect thereto pursuant to Section 2.6; and (iii) all obligations and liabilities arising out of or relating to Buyer's ownership of the Assets or operation of the Systems after the Closing Time. (b) Retained Obligations and Liabilities. All obligations and liabilities to a Person other than Buyer arising out of or relating to the Assets or the Systems and all other liabilities and obligations of Seller to a Person other than Buyer, other than the Assumed Obligations and Liabilities, shall remain and be the obligations and liabilities solely of Seller (collectively, the "Retained Obligations and Liabilities"). Without limiting the generality of the foregoing, Retained Obligations and Liabilities shall include the following: (i) all obligations and liabilities arising out of or relating to the Litigation and Judgments disclosed on Schedule 5.8 and any other Litigation arising out of facts, circumstances or conditions existing or occurring before the Closing Time, regardless of whether known or unknown, asserted or unasserted, as of the Closing Time; (ii) all obligations and liabilities, unless specifically assumed by the Buyer, arising before the Closing Time with respect to the Franchises, Contracts, and Leased Real Property, and any such obligations or liabilities that arise after the Closing Time to the extent that such obligations and liabilities relate to facts, circumstances or conditions existing or occurring before the Closing Time; (iii) all obligations and liabilities for adjustments of revenues from a System and for any rate refunds, rollback, credit, penalty and/or interest payment required by the FCC or any local franchising authority to the extent such 7 obligations and liabilities relate to the rates charged to customers of a System during any period prior to the Closing Time; (iv) any liability under any claim relating to the period ending as of the Closing Time that is or, but for the consummation of the transactions contemplated hereby, would have been covered under any insurance policy of Seller, and all liability associated with workmen's compensation claims to the extent such liability relates to the period prior to the Closing Time, whether or not reported or due or payable as of the Closing Time; and (v) all obligations and liabilities with respect to the Excluded Assets. Section 2.4 Purchase Price. (a) Purchase Price. The aggregate consideration for the Assets to be paid by Buyer pursuant to this Agreement shall consist of (i) $7,135,000 (the "Purchase Price"), subject to adjustment pursuant to Section 2.4(b) and Section 2.6, which shall be payable to Seller (or, upon Seller's written instructions, to the Qualified Intermediary designated by Seller) at Closing by wire transfer of immediately available funds, and (ii) the assumption by Buyer of the Assumed Obligations and Liabilities. (b) Adjustment to Purchase Price. For purposes of this Agreement, the term "Adjusted Five-Month Average Number of Subscribers" shall mean the remainder of (i) the average aggregate number of Individual Subscribers and Subscriber Equivalents served by the Systems for the five-month billing cycle commencing with the August, 1996 billing cycle and ending with the December, 1996 billing cycle (the "Five-Month Average Number of Subscribers") minus (ii) the difference between the number of Individual Subscribers and Subscriber Equivalents determined for the month of December, 1996 (the "December Subscriber Count") and the number obtained by excluding from the December Subscriber Count all Individual Subscribers, MDUs and bulk accounts, and discounted single family households included in the December Subscriber Count that had not paid in full at least two monthly bills generated in the ordinary course of business for cable television services by the close of business on December 31, 1996, and that do not do so by the close of business on January 31, 1997 (the "Adjusted December Subscriber Count"). If the Adjusted Five-Month Average Number of Subscribers (as estimated by the parties prior to Closing in accordance with this Section 2.4(b)) is less than 4,100, then the Purchase Price shall be reduced by an amount equal to $1,740.24 times the difference between 4,100 and such Adjusted Five- Month Average Number of Subscribers. All determinations (or estimates, as the case may be) of Individual Subscribers, Subscriber Equivalents, the Five-Month Average Number of Subscribers, the December Subscriber Count, the Adjusted December Subscriber Count and the Adjusted Five-Month Average Number of Subscribers shall be subject to verification by Buyer's independent accounting firm (at Buyer's sole expense) and shall be mutually agreed upon by Buyer and Seller at least three business days prior to the Closing Date. If determinations of the December Subscriber Count and of the Adjusted December Subscriber Count, and therefore of the Five-Month Average Number of Subscribers and the Adjusted Five-Month Average Number of Subscribers, must be 8 estimated by the parties prior to the Closing Date and finalized by the parties after the Closing Date, then the parties agree to cooperate with respect to all such pre-Closing estimates and post-Closing determinations and promptly to make the appropriate cash settlement between them if such post-Closing determinations affect the Purchase Price as adjusted at Closing based on the parties' pre-Closing estimates of the December Subscriber Count, the Adjusted December Subscriber Count, the Five-Month Average Number of Subscribers and the Adjusted Five-Month Average Number of Subscribers. Section 2.5 Escrow Amount. Upon execution and delivery of this Agreement by Seller and Buyer, Buyer shall deliver to IBJ Schroder Bank & Trust Company ("Escrow Agent") the sum of $300,000 (the "Deposit"), to be held and applied pursuant to the terms of that certain Escrow Agreement which was executed concurrently herewith by Buyer, Seller and Escrow Agent (the "Escrow Agreement"), the form of which is attached hereto as Exhibit 2.5. Seller and Buyer each shall be liable for one-half of all fees and expenses of the Escrow Agent, and each party shall indemnify and hold the other party harmless from and against all Losses arising as a result of such party's failure to pay timely its share of such fees and expenses. Section 10.4 hereof sets forth the conditions under which the Deposit, together with all interest and income thereon, shall be delivered to Seller or refunded to Buyer. Buyer and Seller agree that, notwithstanding any delivery or refund of the Deposit, each party shall retain all other rights and remedies provided for in Article 10 of this Agreement. Upon the Closing, the amount of the Deposit, together with interest and income thereon, shall be credited against the Purchase Price, but retained by Escrow Agent in accordance with the terms of the Escrow Agreement to secure Seller's performance pursuant to Article 11. Section 2.6 Current Items Amount. In addition to the payment by Buyer of the Purchase Price, Buyer or Seller, as appropriate, shall pay to the other the net amount of the credits and prorations made pursuant to paragraphs 2.6(a), (b), and (c) (the "Current Items Amount"). (a) Eligible Accounts Receivable. Seller shall be entitled to a credit in an amount equal to (i) the face amount of all Eligible Accounts Receivable that are 60 or fewer days past due as of the Closing Time, and (ii) zero percent (O%) of the face amount of Eligible Accounts Receivable that are more than 60 days past due as of the Closing Date. "Eligible Accounts Receivable" shall mean accounts receivable resulting from Seller's provision of cable television service prior to the Closing Time to a System's subscribers. For purposes of making "past due" calculations under this paragraph, the monthly billing statements of Seller shall be deemed to be due and payable on the date specified in the bill to which a past due payment relates. (b) Advance Payments and Deposits. Buyer shall be entitled to a credit in an amount equal to the aggregate of (i) all deposits of subscribers of a System, and all interest, if any, required to be paid thereon as of the Closing Time, for converters, decoders, and similar items, (ii) all payments for services to be rendered by Buyer to subscribers of a System after the Closing Time, or for other services to be rendered by Buyer to other third parties after the Closing Time for cable television commercials, channel leasing, or other services or 9 rentals, but only to the extent the obligations of Seller relating thereto are assumed by Buyer at Closing, and (iii) the economic value of all accrued vacation time as of the Closing Time of the employees of the Systems who become employees of Buyer upon Closing. (c) Expenses. As of the Closing Time, expenses of a recurring nature that are incurred to benefit a System and are incurred in the ordinary course of business (the "Expenses"), including those set forth below, shall be prorated, in accordance with generally accepted accounting principles, so that all such Expenses for periods prior to the Closing Time shall be for the account of Seller, and all such Expenses for periods after the Closing Time shall be for the account of Buyer: (i) all Expenses under the Franchises, the Licenses, and the Contracts; (ii) Taxes levied or assessed against any of the Assets or payable with respect to cable television service and related sales to a System's subscribers; expenses for utilities, municipal assessments, rents and service charges, and other goods or services furnished to a System; (iv) all FCC regulatory fees and all copyright fees based on signal carriage by the Systems; and (v) all other items of Expense relating to a System; provided, however, that Seller and Buyer shall not prorate any items of Expense payable under or with respect to any Excluded Asset, all of which shall remain and be solely for the account of Seller; and provided, further, that there shall be no adjustment or proration for capital expenditures made by Seller. Section 2.7 Current Items Amount Calculated. The Current Items Amount shall be estimated in good faith by Seller, and set forth, together with a detailed statement of the calculation thereof, in a certificate (the "Initial Adjustment Certificate") delivered to Buyer not later than three business days prior to the Closing Date. The Initial Adjustment Certificate shall constitute the basis on which the Current Items Amount paid at Closing is calculated. On or before ninety (90) days after the Closing Date, Buyer shall deliver to Seller a final calculation of the credits and prorations calculated as of the Closing Date, together with such supporting documentation as Seller may reasonably request, in a certificate (the "Final Adjustment Certificate"), which shall evidence in reasonable detail the nature and extent of each adjustment. If Seller does not object to the Final Adjustment Certificate by delivering to Buyer a reasonably detailed written explanation of its objections thereto within twenty (20) days after the Final Adjustment Certificate is delivered (the "Final Adjustment Objection Period"), Seller or Buyer, as appropriate, shall pay to the other an amount equal to the amount by which the Current Items Amount as set forth in the Final Adjustment Certificate differs from the Current Items Amount as estimated in the Initial Adjustment Certificate. If Seller timely objects to the Final Adjustment Certificate within the Final Adjustment Objection Period, Seller and Buyer shall attempt in good faith to resolve such objections within twenty (20) days after Buyer's receipt of Seller's written objections, failing which the parties shall appoint a mutually agreeable independent accounting firm knowledgeable in the cable television business to review the Final Adjustment Certificate and Seller's written objections thereto, and make adjustments to the 10 Final Adjustment Certificate (the "Adjusted Final Adjustment Certificate") within thirty (30) days of its appointment. The fees and expenses of such firm shall be shared equally by the parties. The Adjusted Final Adjustment Certificate shall be final and binding. Seller or Buyer, as appropriate, shall pay to the other within twenty (20) days after resolving Seller's objections or after delivery of the Adjusted Final Adjustment Certificate, as the case may be, an amount equal to the amount by which the Current Items Amount as finally agreed upon by the parties or as set forth in the Adjusted Final Adjustment Certificate, as the case may be, differs from the Current Items Amount as estimated in the Initial Adjustment Certificate. ARTICLE 3 RELATED MATTERS Section 3.1 HSR Act Compliance. Buyer and Seller concur that the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, does not require either party to make any filings or take any other action thereunder in connection with the transactions contemplated hereby insofar as the aggregate consideration payable hereunder by Buyer to Seller shall in no event equal or exceed $15,000,000. Section 3.2 Noncompetition Agreement. At the Closing, Seller shall execute and deliver to Buyer a noncompetition agreement in the form of Exhibit 3.2 (the "Noncompetition Agreement"). Section 3.3 Bulk Sales. Buyer and Seller each waives compliance by the other with bulk sales Legal Requirements applicable to the transactions contemplated hereby. Section 3.4 Use of Names and Logos. Buyer and Seller shall cooperate in the removal promptly after Closing of the trademarks, trade names, service marks, service names, logos, and similar proprietary rights of Seller to the extent incorporated in or on the Assets, provided that Seller shall exercise commercially reasonable efforts to remove all such names, marks, logos, and similar proprietary rights from the Assets on the Closing Date. Section 3.5 Transfer Taxes; Filing Fees. Seller and Buyer each shall be liable for one-half of all sales, use, transfer, and similar Taxes arising from or payable by reason of the transactions contemplated by this Agreement, and each party shall indemnify and hold the other party harmless from and against all Losses arising from Taxes for which it is liable hereunder. Seller and Buyer also each shall be liable for one-half of all filing and application fees payable to a Governmental Authority by reason of or for the purpose of carrying out the transactions described in this Agreement. Section 3.6 Allocation of Purchase Price. Prior to the Closing Date, Buyer and Seller shall each use its best efforts to agree upon the allocation (the "Allocation") of the Purchase Price and the Assumed Obligations and Liabilities to the individual assets or classes of assets (within the meaning of Section 1060 of the Code). Buyer, Seller, and their respective affiliates, shall file all tax returns and schedules thereto, including, without limitation, those returns and forms required by Section 1060 of the Code, consistent with the Allocation unless otherwise required by applicable Legal Requirements. 11 ARTICLE 4 BUYER'S REPRESENTATIONS AND WARRANTIES Buyer represents and warrants to Seller as follows: Section 4.1 Organization of Buyer. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to own and lease the properties and assets it currently owns and leases and to conduct its activities as such activities are currently conducted. Buyer is duly qualified to do business as a foreign corporation and is in good standing in New Hampshire. Section 4.2 Authority. Buyer has all requisite corporate power and authority to execute, deliver, and perform this Agreement and the Supplemental Documents to which Buyer is a party (the "Buyer's Supplemental Documents") and to consummate the transactions contemplated hereby and thereby. The execution, delivery, and performance of this Agreement and the Buyer's Supplemental Documents and the consummation of the transactions contemplated hereby and thereby by Buyer have been duly and validly authorized by all necessary corporate action on the part of Buyer. This Agreement constitutes, and the Buyer's Supplemental Documents, when executed and delivered by Buyer, will constitute, valid and binding obligations of Buyer, enforceable against Buyer in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or the availability of equitable remedies. Section 4.3 No Conflict; Required Consents. The execution, delivery, and performance by Buyer of this Agreement and the Buyer's Supplemental Documents do not and will not: (i) conflict with or violate any provision of the articles of incorporation or bylaws of Buyer; (ii) violate any provision of any Legal Requirement; (iii) conflict with, violate, result in a breach of, or constitute a default under any agreement to which Buyer is a party or by which Buyer or the assets or properties owned or leased by it are bound or affected; or (iv) require any consent, approval, or authorization of, or filing of any certificate, notice, application, report, or other document with, any Governmental Authority or other Person; except, with respect to (ii), (iii) and (iv) of this Section 4.3, for any conflict, violation, breach, default, consent or filing that would not impair the ability of Buyer to perform hereunder. Section 4.4 Litigation. Except for any Litigation as may affect the cable television industry (national or regional) generally, there is no Litigation pending, or to Buyer's knowledge, threatened, by or against or affecting or relating to Buyer or any of its affiliates in any court or before any Governmental Authority or any arbitrator, which, if adversely determined, would restrain or materially hinder or delay the consummation of the transactions contemplated by this Agreement or cause any of such transactions to be rescinded. Section 4.5 Taxpayer Number. Buyer's U.S. Taxpayer Identification Number is as set forth in the introductory paragraph of this Agreement. Section 4.6 Funds. As of the date hereof, Buyer has made binding arrangements with a reputable financial institution to obtain funds necessary to enable Buyer to perform this Agreement in accordance with its terms, as evidenced by Buyer's receipt and execution of a commitment letter dated September 30, 1996, from Buyer's lead lender, a copy of which has been previously provided to Seller. 12 ARTICLE 5 SELLER'S REPRESENTATIONS AND WARRANTIES Seller represents and warrants to Buyer as follows: Section 5.1 Organization and Qualification of Seller. Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of Massachusetts, and has all requisite corporate power and authority to own and lease the properties and assets it currently owns and leases and to conduct its activities as such activities are currently conducted. Seller is duly qualified to do business as a foreign corporation and is in good standing in New Hampshire. Section 5.2 Authority. Seller has all requisite corporate power and authority to execute, deliver, and perform this Agreement and the Supplemental Documents to which Seller is a party (the "Seller's Supplemental Documents") and to consummate the transactions contemplated hereby and thereby. The execution, delivery, and performance of this Agreement and the Seller's Supplemental Documents and the consummation of the transactions contemplated hereby and thereby on the part of Seller have been duly and validly authorized by all necessary corporate action on the part of Seller. This Agreement constitutes, and the Seller's Supplemental Documents, when executed and delivered by Seller, will constitute, valid and binding obligations of Seller, enforceable against Seller in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or the availability of equitable remedies. Section 5.3 No Conflict; Required Consents. Except as described on Schedule 5.3, the execution, delivery, and performance by Seller of its obligations under this Agreement and the Seller's Supplemental Documents do not and will not: (i) conflict with or violate any provision of the articles of incorporation or bylaws of Seller; (ii) violate any provision of any Legal Requirement; (iii) conflict with, violate, result in a breach of, or constitute a default under any contract, agreement or understanding to which Seller is a party or by which Seller or the Assets are bound or affected; (iv) require any consent, approval or authorization of, or filing of any certificate, notice, application, report, or other document with, any Governmental Authority or other Person; or (v) result in the creation or imposition of any Lien or other encumbrance of any nature whatsoever against or upon any of the Assets; except, with respect to (ii), (iii), (iv) and (v) of this Section 5.3, for any conflict, violation, breach, default, consent, filing or imposition of any Lien that would not impair the ability of Seller to perform hereunder or that would not have an adverse effect on the Assets or the financial condition or the business of the Systems. Section 5.4 Title to Assets; Sufficiency. Seller has good and marketable title to (or in the case of Assets that are leased, valid leasehold interests in) and possession of all of the Assets, free and clear of all Liens except for Permitted Liens and the Liens described on Schedule 5.4. Except as set forth on Schedule 5.4, no person (including any Governmental Authority) has 13 any right to acquire an interest in the System or any material Asset (including any right of first refusal or similar right), other than rights of condemnation or eminent domain afforded by law (none of which have been exercised and no proceedings therefor have been commenced). Except for the long amplifier cascade in the System served by the Tuftonborough headend and except as noted in the excerpts from Buyer's engineering due diligence report that were attached in Buyer's facsimile to Seller dated October 7, 1996 (collectively, the "Identified Conditions"), the tangible Assets are in good operating condition and repair, ordinary wear and tear excepted. Except for the Identified Conditions, all items of cable plant and headend equipment included in the Assets have been maintained in a manner consistent with generally accepted standards of good engineering practice and will permit the Systems to operate in accordance with the terms of the Franchises, the Licenses and the Contracts. Except for the Excluded Assets, the Assets constitute all property and rights, real and personal, tangible and intangible, necessary or required to operate the Systems as currently operated and conduct the business of the Systems as currently conducted. Seller owns no Owned Real Property which is used in the operation of the Systems. Section 5.5 Franchises, Licenses, and Contracts. Seller has delivered to Buyer true and complete copies of each of the Franchises, the Licenses, the Contracts listed on Schedule 2.1(e), and all amendments, assignments and consents thereto. Except for the Licenses and Contracts included in the Excluded Assets, Seller is not bound or affected by any other material contract, agreement or understanding which relates to a System. Except for the Franchises and the Licenses, Seller requires no franchise, material license or material permit from any Governmental Authority to enable it to operate the Systems as they are currently operated. To Seller's knowledge, each of the Franchises, Licenses and Contracts is in full force and effect and is valid, binding and enforceable in accordance with its terms. Except as described on Schedule 5.5 and except as may arise due to the Identified Conditions, there has not occurred any material default by Seller nor, to Seller's knowledge, by any other Person under any of the Franchises, Licenses or Contracts. Seller has not received from any Governmental Authority a notice of default under any Franchise or License that would require it (in order to preserve its right to assert that a Governmental Authority has waived a default) to provide written notice to a Governmental Authority of its failure or inability to cure a default under such Franchise or License. Section 5.6 Employee Benefits. Neither Seller nor any Employee Benefit Plan maintained by Seller is in violation of the provisions of ERISA; no reportable event, within the meaning of Sections 4043(c)(1), (2), (3), (5), (6), (7), (10) or (13) of ERISA, has occurred and is continuing with respect to any such Employee Benefit Plan; and no prohibited transaction, within the meaning of Title I of ERISA, has occurred with respect to any such Employee Benefit Plan. Buyer is not required under ERISA, the Code or any collective bargaining agreement to establish, maintain or continue any Employee Benefit Plan maintained by Seller or any affiliate of Seller. Section 5.7 Employees. With respect to Seller's employees serving the Systems: (a) Except as set forth on Schedule 5.7, there are no collective bargaining agreements applicable to any persons employed by Seller that renders services in connection with a System, and Seller has no duty to bargain with any labor organization with respect to any 14 such Person. There are not pending any unfair labor practice charges against Seller, nor is there any demand for recognition, or any other request or demand from a labor organization for representative status with respect to any person employed by Seller that renders services in connection with a System. (b) Seller is in substantial compliance with all applicable Legal Requirements respecting employment conditions and practices, has withheld all amounts required by any applicable Legal Requirements or Contracts to be withheld from the wages or salaries of its System employees, and is not liable for any arrears of wages or any Taxes or penalties for failure to comply with any of the foregoing. (c) Seller has not engaged in any unfair labor practice within the meaning of the National Labor Relations Act and has not violated any Legal Requirement prohibiting discrimination on the basis of race, color, national origin, sex, religion, age, marital status, or handicap in its employment conditions or practices. There are no pending or, to Seller's knowledge, threatened unfair labor practice charges or discrimination complaints relating to race, color, national origin, sex, religion, age, marital status, or handicap against Seller before any Governmental Authority nor, to Seller's knowledge, does any basis therefor exist. (d) There are no existing or, to Seller's knowledge, threatened, labor strikes, disputes, grievances or other labor controversies affecting the Systems. There are no pending or, to Seller's knowledge, threatened representation questions respecting Seller's employees. There are no pending or, to Seller's knowledge, threatened arbitration proceedings under any Contract. To Seller's knowledge, there exists no basis for any of the above. (e) Except as set forth on Schedule 5.7, Seller is not a party to any employment agreement, written or oral, relating to employees of a System which cannot be terminated at will by Seller. (f) Schedule 5.7 sets forth a true and complete list of the names, titles and rates of compensation of all of the employees of the Systems. Section 5.8 Litigation. Except as set forth on Schedule 5.8, there is no Litigation or Judgment pending or, to Seller's knowledge, threatened against Seller and, to Seller's knowledge, except for the Identified Conditions, no facts or circumstances exist which could reasonably be expected to give rise to any such Litigation or Judgment, which will adversely affect the financial condition or operations of the Systems, the Assets or the ability of Seller to perform its obligations under this Agreement, or which seeks or could result in the modification, revocation, termination, suspension, or other limitation of any of the Franchises, Licenses or Contracts. Section 5.9 Tax Returns; Other Reports. Seller has duly filed all federal, state, local, and foreign tax returns and other tax reports relating to the Systems that are required to be filed on or prior to the date hereof, and has paid all Taxes shown thereon to be due and payable. Seller has received no notice of deficiency or assessment of proposed deficiency or assessment from 15 any taxing Governmental Authority pertaining to the Systems. All Taxes with respect to Seller, the Assets, or the business or operation of the Systems that are due and payable have been paid by Seller. Section 5.10 Compliance with Legal Requirements. (a) Except for any noncompliance that may be imputed as a result of the Identified Conditions, Seller has substantially complied and is in substantial compliance with all Legal Requirements applicable to it or to the Systems, including but not limited to the Communications Act, the Cable Act, the Copyright Act, the Occupational Safety and Health Act, and rules and regulations promulgated thereunder. Seller has not received notice from the FCC of any violation of its rules and regulations insofar as they apply to the Systems. (b) Seller has submitted to the FCC all material filings, including, without limitation, cable television registration statements, current annual reports, aeronautical frequency usage notices, and current cumulative leakage index reports, that are required under the rules and regulations of the FCC. As of August 21, 1995 and at all times thereafter, each of the Systems was and is a "Small system" owned by a "small cable company," as defined by Sections 76.901(c) and (e), respectively, of the FCC rules, and thus qualifies for small system rate treatment pursuant to Section 76.934 of the FCC rules. Seller has delivered to Buyer complete and correct copies of all FCC rate-related forms filed by Seller after September 1, 1993, and of all correspondence with any Governmental Authority relating to rate regulation generally or specific rates charged to subscribers with respect to Systems, including copies of any prior or pending complaints filed with the FCC, or any written complaints from the FCC or any franchising authority, with respect to any rates charged to subscribers of the Systems, and any other documentation supporting an exemption from the rate regulation provisions of the 1992 Cable Act claimed by Seller with respect to any of the Systems. Seller has delivered to Buyer copies of all final Rate Orders issued by the FCC or other Governmental Authority applicable to the Systems. Except as set forth on Schedule 5.10, Seller has made "cost of service elections" with respect to each of the Systems. Except as set forth on Schedule 5.10, Seller is, and since 1988 has been, with respect to the Systems, certified as in compliance with the FCC's equal opportunity rules. Each System is in substantial compliance with signal leakage criteria prescribed by the FCC. Each System is in substantial compliance with the must-carry and retransmission consent provisions of the Cable Act and the FCC rules and regulations promulgated thereunder. (c) Seller has deposited with the U.S. Copyright Office all statements of account and other documents and instruments, and paid all royalties, supplemental royalties, fees and other sums to the U.S. Copyright Office under the Copyright Act with respect to the business and operations of the Systems as are required to obtain, hold and maintain the compulsory license for cable television systems prescribed in the Copyright Act. Each System is in substantial compliance with the Copyright Act and the rules and regulations of the U.S. Copyright Office promulgated thereunder, except as to potential copyright liability arising from the performance, exhibition or carriage of any music on such System. Seller has delivered to Buyer complete and 16 correct copies of all current reports and filings for the past three years, made or filed pursuant to copyright rules and regulation with respect to Seller's business of owning the Assets and operating the Systems. To the knowledge of Seller, there is no inquiry, claim, action or demand pending before the U.S. Copyright Office or from any other party that questions the copyright filings or payments made by Seller with respect to the Systems. (d) All necessary FAA approvals have been obtained with respect to the height and location of towers used in connection with the operation of the Systems. (e) Except as set forth on Schedule 5.10, as of the date of this Agreement (i) each of the political entities or authorities that have granted a Franchise to Seller have been certified to regulate the Basic Service Tier (as that term is defined in the FCC's rate regulations) rates charged by Seller at the Systems ("Certified LFAs"), (ii) no Basic Service Tier or equipment rate charged by Seller at the Systems is presently subject to any review, accounting order or other adjudication by any Certified LFA, (iii) there are no rate regulation certification requests or rate complaints pending at the FCC with respect to any of the Systems, and (iv) no "Cable Programming Service Tier" (as such term is defined in the FCC's rate regulations) is offered as of such date by the Systems. Except as disclosed on Schedule 5.10, since December 31, 1995, Seller has not made any changes in the rates, tiers, programming services or channel positions (including the deletion or addition of any channels) for any Basic Service Tier or Cable Programming Service Tier offered by any of the Systems. Section 5.11 Systems Information. Schedule 5.11 sets forth a materially true and accurate description of the following information as of the dates set forth in such Schedule: (i) the approximate number of miles of plant that are included in the Assets; (ii) the number of Individual Subscribers and Subscriber Equivalents; (iii) a description of Basic Cable services available from the Systems and the rates charged by Seller for such services; (iv) the stations and signals carried by the Systems and the channel position of each such signal and station; (v) the MHz capacity of the Systems; (vi) the channel capacity of the Systems; and (vii) the marketing, promotional and advertising programs currently in effect for the Systems and any other such program that had been in effect at any time since January 1, 1996. 17 Section 5.12 Environmental Matters. (a) To Seller's knowledge, none of the Leased Real Property is listed on the National Priorities Lists or the Comprehensive Environmental Response, Compensation, Liability Information System ("CERCLIS"), or is the subject of any "Superfund" evaluation or investigation, or any other investigation or proceeding of any Governmental Authority evaluating whether any remedial action is necessary to respond to any release of Hazardous Substances on or in connection with the Leased Real Property. (b) To Seller's knowledge, no above ground or underground storage tanks or surface impoundments have been or are located in or on the Leased Real Property. (c) To the knowledge of Seller, Seller is in substantial compliance with, and holds all permits, licenses and authorizations required under, all Legal Requirements with respect to pollution or protection of the environment, including Legal Requirements relating to actual or threatened emissions, discharges, or releases of Hazardous Substances into the ambient air, surface water, ground water, land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances, insofar as they relate to the Leased Real Property. Seller has received no notice of, and to Seller's knowledge there are no circumstances relating to, any past or present condition, circumstance, activity, practice or incident (including without limitation, the presence, use, generation, manufacture, disposal, release or threat to release of any Hazardous Substances from or on the Leased Real Property), that could interfere with, prevent continued compliance with, or result in any Losses pursuant to, any Legal Requirement with respect to pollution or protection of the environment, or that is reasonably likely to give rise to any liability, based upon or related to the processing, distribution, use, treatment, storage, disposal, transport, or handling, or the emission, discharge, release, or threatened release into the environment, of any Hazardous Substance on, from or attributable to the Leased Real Property. (d) "Hazardous Substances" has the meaning given in the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C.A. ss.ss. 9601 et seq. ("CERCLA") as amended, and rules and regulations promulgated thereunder). Section 5.13 Financial and Operational Information. Attached as Schedule 5.13 are an unaudited statement of net assets to be acquired of the Systems as of December 31, 1995 and an unaudited statement of operations for the Systems for the twelve-month period then ended, and an unaudited statement of net assets to be acquired of the Systems as of July 31, 1996 and an unaudited statement of operations for the Systems for the seven-month period then ended (the "System Financial Statements"). The System Financial Statements have been prepared by Seller in the ordinary course of business, are based on the books and records of the Systems, were prepared in accordance with generally accepted accounting principles and present fairly the net assets to be acquired and results of operations of the Systems as of the dates and for the periods indicated subject to normal year-end adjustments. Section 5.14 No Adverse Change. Since December 31, 1995, (i) except for the Identified Conditions, there has been no material adverse change in the condition (financial or otherwise), results of operations, revenues, expenses, 18 gross operating profits, business prospects, assets or liabilities (contingent or otherwise) of the Systems taken as a whole; (ii) the Assets and the financial condition and operations of the Systems have not been materially and adversely affected as a result of any fire, explosion, accident, casualty, labor trouble, flood, drought, riot, storm, condemnation, or act of God or public force or otherwise; (iii) Seller has not made any sale, assignment, lease or other transfer of assets or properties of a System other than in the normal and usual course of business; and (iv) Seller has continued the pricing policies and has conducted the promotional, advertising and other business and operational activities with respect to the Systems (including, without limitation, billing, collection, subscriber relations, and joint trenching activities) substantially and materially in the normal and ordinary course of business consistent with past practices and cable television industry practices. Section 5.15 Taxpayer Identification Number. Seller's U.S. Taxpayer Identification Number is as set forth in the introductory paragraph of this Agreement. Section 5.16 Intangibles. Seller neither uses nor holds any copyrights, trademarks, trade names, service marks, service names, logos, licenses, permits or other similar intangible property rights and interests in the operations of the Systems that do not incorporate the name "Pegasus" or variations thereof. In the operation of the Systems, Seller is not aware that it is infringing upon or otherwise acting adversely to any such intangible property rights and interests owned by any other Person or Persons, and there is no claim or action pending, or to Seller's knowledge threatened, with respect thereto. Section 5.17 Accounts Receivable. Seller's accounts receivable from the Systems are actual and bona fide receivables representing obligations for the total dollar amount thereof shown on the books of Seller which resulted from the regular course of Seller's business. Section 5.18 Bonds. Except as set forth on Schedule 5.18, there are no franchise, construction, fidelity, performance, or other bonds or letters of credit posted by Seller in connection with the Systems or the Assets. Section 5.19 Exclusivity. Except as set forth on Schedule 5.19, to the knowledge of Seller, (i) Seller is currently the only Person providing wireline or wireless cable television services or similar video programming or related services within all or part of the geographic area served by the Systems ("competing services"); (ii) no Person other than Seller has been granted a presently valid franchise or has a pending application for a franchise in any of the communities or unincorporated areas presently served by the Systems; and (iii) no Person other than Seller is intending to apply for a franchise to provide or otherwise to offer any competing services. Section 5.20 Transactions with Affiliates and Employees. There is no lease, sublease, indebtedness, contract, agreement, understanding, or other arrangement of any kind entered into by Seller with respect to the Systems with any employee, affiliate or partner of Seller which will be an Assumed Obligation and Liability, except for any employment agreements set forth on Schedule 5.7 and except for the accrued vacation time as of the Closing Time of the System employees of Seller who become employees of Buyer upon Closing. 19 ARTICLE 6 COVENANTS Section 6.1 Certain Affirmative Covenants of Seller Regarding the System. Except as Buyer may otherwise consent in writing, between the date of this Agreement and Closing Seller shall: (a) (i) continue to operate the Systems in the ordinary course of business in accordance with Seller's past practices, (ii) continue to maintain the tangible Assets in their present condition and repair consistent with Seller's past practices, ordinary wear excepted, (iii) continue to perform all of its obligations under all of the Franchises, Licenses and Contracts without material breach or default consistent with Seller's past practices, (iv) continue to operate the Systems in substantial compliance with applicable Legal Requirements consistent with Seller's past practices; (v) continue the pricing, marketing, advertising, promotion and other activities with respect to the Systems (including without limitation billing, collection, subscriber, and joint trenching matters) substantially and materially in the normal and ordinary course of business consistent with cable television industry practices and Seller's past practices; and (vi) use its best efforts to (A) preserve the current business organization of the Systems intact, including preserving existing relationships with Persons having business with the Systems, (B) keep available the services of its employees providing services in connection with the Systems, and (C) maintain inventories of equipment and supplies for the Systems at historic levels; (b) upon reasonable prior notice to Seller, give to Buyer and its counsel, accountants, and other representatives, access during normal business hours to the Systems, the employees of the Systems, the Leased Real Property, the other Assets and Seller's books and records relating to the Systems, provided that such persons who are provided access shall be accompanied by a representative of Seller and that such access shall not disrupt the normal business operations of the Systems and provided further, that no investigation by Buyer shall affect or limit the scope of any representations and warranties of Seller herein or otherwise limit liability for any breach of such representations and warranties of Seller; (c) as soon as practicable after the date of this Agreement, and at its expense, exercise commercially reasonable efforts to obtain in writing as promptly as practicable all approvals, authorizations and consents described on Schedule 5.3 from all Persons that are not Governmental Authorities, and deliver to Buyer copies thereof promptly upon receiving them; provided that "commercially reasonable efforts" for this purpose shall not require Seller to undertake extraordinary or unreasonable measures to obtain such approvals and consents, including, without limitation, the initiation or prosecution of legal proceedings or the payment of fees in excess of normal and usual filing and processing fees; provided, further, that the costs and expenses associated with the performance after the Closing Date of obligations which are required by a third party as a condition of granting its consent or approval and which obligations are accepted by Buyer in 20 writing shall be borne solely by Buyer. In the event that Buyer's cooperation is required to obtain such consents, Buyer shall be responsible for its own out-of-pocket costs in connection therewith; (d) promptly deliver to Buyer copies of any monthly and year-to-date financial statements for the Systems and other reports with respect to the operation of the Systems regularly prepared by Seller at any time from the date hereof until Closing; (e) prepare and deliver to Buyer promptly after each month-end occurring between the date of this Agreement and the Closing Date a reasonably detailed statement calculating the Individual Subscribers and Subscriber Equivalents for the immediately preceding calendar month, such statement to be reasonably satisfactory in form and detail to Buyer; (f) promptly inform Buyer in writing of any material adverse change in the condition (financial or otherwise), operations, assets, liabilities, business or prospects of the Systems taken as a whole; (g) continue to carry and maintain in full force and effect its existing casualty and liability insurance through and including the Closing Date; (h) maintain its books, records and accounts with respect to the Assets and the operation of the Systems in the usual, regular and ordinary manner on a basis consistent with past practices; and (i) make routine capital expenditures necessary to maintain the normal operations of the Systems, (including but not limited to completing any ongoing line extensions, placing conduit or cable in new developments, fulfilling installation requests and continuing work on any existing construction projects) and make the specific capital expenditures described in Schedule 6.1(i) (provided that Seller's failure to have made all such required capital expenditures by the Closing Date shall not be deemed a breach of Seller's covenant if Seller reduces the Purchase Price by an amount equal to the estimated cost of such missing capital expenditures as reflected on Schedule 6.1(i)). Section 6.2 Approvals from Governmental Authorities. As soon as possible, but in no event later than 10 days after the date of this Agreement, Seller and Buyer shall file with any Governmental Authorities from which the approvals, authorizations and consents described in Schedule 5.3 must be obtained, joint applications requesting such approvals, authorizations and consents. Seller and Buyer shall each exercise commercially reasonably efforts in furtherance of the foregoing (including Buyer's cooperation in attending meetings with Governmental Authorities and providing the financial data, information as to operating experience, appropriate insurance and surety bonds and any other information required to timely prepare and submit the applications referenced above), and the parties shall exercise commercially reasonable efforts necessary or appropriate to expedite the processing of the applications and to secure such authorizations, approvals and consents. Seller and Buyer 21 shall furnish each other with any correspondence from or to, and notify each other of any other communications with, Governmental Authorities that relate to such authorizations, approvals and consents, and each party shall have the right to participate in any hearings or proceedings before Governmental Authorities with respect to such authorizations, approvals and consents. Each party shall bear its own expenses in connection with its compliance with the foregoing, except as otherwise provided in Section 3.5. Section 6.3 Employee Matters. Immediately prior to Closing, Seller shall terminate all of its employees who primarily perform services with respect to the operations of the Systems other than such of those employees whom Seller may have agreed to retain as its employees after Closing. Buyer may offer (but is not obligated to offer) employment to any or all of the employees of Seller who primarily perform services with respect to the operation of the Systems as of the Closing Date. Seller shall be responsible for and shall cause to be discharged and satisfied in full all amounts owed to any employee of Seller through the Closing Time, including wages, salaries, accrued vacation (except to the extent Buyer receives a credit therefor pursuant to Section 2.6(b) hereof), any employment, incentive, compensation or bonus agreements, or other benefits or payments on account of termination, and shall indemnify and hold Buyer harmless from any Losses thereunder. Section 6.4 WARN Act. Seller shall comply with the employee notification requirements, if applicable, of the Federal Worker Adjustment and Retraining Notification Act. Section 6.5 Certain Negative Covenants of Seller. Between the date hereof and Closing, Seller shall not solicit or participate in negotiations with (and Seller shall use its best efforts to prevent any affiliate, partner, director, officer, employee or other representative or agent of Seller from negotiating with, soliciting or participating in negotiations with) any third party with respect to the sale of the Assets or the Systems or any transaction inconsistent with those contemplated hereby. Additionally, except as Buyer may otherwise consent in writing, which consent shall not be unreasonably withheld, or except as otherwise permitted by this Agreement, between the date of this Agreement and Closing, Seller shall not (a) modify, terminate, enter into, renew, suspend, or abrogate any Franchise, License or material Contract other than in the ordinary course of business, provided that all such modified, renewed or additional Licenses or Contracts shall not involve either aggregate liabilities exceeding $10,000, or any material non-monetary obligation, (b) sell, assign, lease or otherwise dispose of any of the Assets, unless such Assets are consumed or disposed of in the ordinary course of business or disposed of in conjunction with the acquisition of replacement property of equivalent kind and value, (c) create, assume, or permit to exist any Lien upon any Asset except for Permitted Liens and Liens granted by Seller to its lenders (which Seller agrees shall be listed or deemed listed on Schedule 5.4), (d) change customer rates for any service or charges for remote or installations or add, delete, tier, retier or repackage any cable television programming offered by the Systems except to the extent required under the 1992 Cable Act or any other Legal Requirement, or change billing, collection, installation, disconnection, marketing or promotional practices, (e) seek amendments or modifications to existing Franchises or Contracts or accept or agree to accede to any modification or amendment to, or any condition to the transfer of, any of the Franchises, Contracts or Leased Real Property other than any reasonable 22 modification, amendment or condition that does not adversely affect Buyer, (f) modify, renew, or enter into any retransmission consent agreement that purports to be binding on Buyer after Closing, it being understood that Buyer will consent to said retransmission consent agreement if Buyer presently is carrying the television broadcast station which is subject to the retransmission consent agreement and the terms of the retransmission consent agreement are not more burdensome than the terms of Buyer's retransmission consent agreement for that station, it being further understood that Schedules 2.1(e) and 2.2 will be amended to reflect the foregoing, or (g) enter into any transaction or permit the taking of any action that would result in any of Seller's representations and warranties contained in this Agreement not being true and correct in all material respects when made or at Closing. Section 6.6 Confidentiality. Any non-public information that either party ("Recipient Party") may obtain from the other ("Disclosing Party") in connection with this Agreement with respect to Disclosing Party or the Systems, including without limitation all "Confidential Information" (as such term is defined in the Confidentiality Agreement (the "Confidentiality Agreement") between Buyer and an affiliate of Seller dated July 18, 1996) that may be disclosed by Seller to Buyer, shall be confidential and Recipient Party shall not disclose any such information to any third party (other than its directors, officers, partners and employees, and representatives of its advisers and lenders whose knowledge thereof is necessary in order to facilitate the consummation of the transactions contemplated hereby) or use such information to the detriment of Disclosing Party; provided that (a) Recipient may use and disclose any such information once it has been publicly disclosed (other than by Recipient Party in breach of its obligations under this Section), and (b) to the extent that Recipient Party may become compelled by Legal Requirements to disclose any of such information, Recipient Party may disclose such information if it shall have used all reasonable efforts, and shall have afforded Disclosing Party the opportunity, to obtain an appropriate protective order, or other satisfactory assurance of confidential treatment, for the information compelled to be disclosed. Recipient Party shall require its lenders, advisers, agents, representatives (including attorneys and accountants), directors, officers and employees (collectively, "Representatives") to abide by the terms of this Section 6.6 to the same extent that Recipient Party is required to do so. Recipient Party shall be responsible for any breach of this Section 6.6 by any of its Representatives. If this Agreement is terminated, Recipient Party shall cause to be delivered to Disclosing Party, and retain no copies of, any documents, work papers and other materials obtained by Recipient Party or on its behalf from Disclosing Party, whether so obtained before or after the execution hereof. Recipient Party acknowledges and agrees that a violation of this Section 6.6 may cause irreparable harm to Disclosing Party, and it may be impossible to estimate or determine the damage that may be suffered by Disclosing Party in the event of a breach of this Section 6.6. Accordingly, Recipient Party agrees that Disclosing Party shall be entitled as a matter of right to an injunction restraining any violation of this Section 6.6, such right to an injunction to be cumulative in addition to whatever other remedies at law or otherwise that Disclosing Party may have. Section 6.7 Supplements to Schedules. Each of Seller and Buyer shall, from time to time prior to Closing, supplement the Schedules to this Agreement with additional information that, if existing or known to it on the date of this 23 Agreement, would have been required to be included in one or more Schedules to this Agreement. For purposes of determining the satisfaction of any of the conditions to the obligations of Buyer and Seller in Sections 7.1 and 7.2 and the liability of Seller or of Buyer following Closing for breaches of its representations and warranties under this Agreement, the Schedules to this Agreement shall be deemed to include only (a) the information contained therein on the date of this Agreement and (b) information added to the Schedules by written supplements to such Schedules delivered prior to Closing by the party making such amendment that (i) are accepted in writing by the other party or (ii) reflect actions expressly permitted by this Agreement to be taken prior to Closing. Section 6.8 Notification of Certain Matters. Each party will promptly notify the other party in writing of any fact, event, circumstance, action or omission (i) which, if known at the date of this Agreement, would have been required to be disclosed by it in or pursuant to this Agreement, or (ii) the existence or occurrence of which would cause any of such party's representations or warranties under this Agreement not to be true and accurate in any material respect, and with respect to clause (ii), the notifying party shall use commercially reasonable efforts to remedy the same. Section 6.9 Commercially Reasonable Efforts. Each party shall use commercially reasonable efforts to take all steps within its power, and will cooperate with the other party, to cause to be fulfilled those of the conditions to the other party's obligations to consummate the transactions contemplated by this Agreement that are dependent upon its actions, and will execute and deliver such instruments and take such other commercially reasonable actions as may be necessary to carry out the intent of this Agreement and consummate the transactions contemplated hereby. Section 6.10 Closing Date Financial Statements. Promptly (but in any event within 30 days after Closing), Seller shall deliver to Buyer a true and complete copy of the unaudited statement of the net assets to be acquired of the Systems as of the Closing Date and the unaudited statement of operations of the Systems for the period then ended, in each case in the report format in which the latest System Financial Statements delivered pursuant to Section 5.13 are presented. Section 6.11 Subscriber Billing Services. Seller shall provide to Buyer, upon Buyer's written request, subscriber billing services ("Transitional Billing Services") in connection with the Systems for a period of up to two (2) billing cycles following the Closing Date to allow for conversion of existing billing arrangements. Buyer shall notify Seller in writing at least thirty (30) days prior to the Closing Date as to whether it will require Transitional Billing Services. Buyer shall pay Seller for providing the Transitional Billing Services an aggregate amount equal to $0.65 per bill rendered per billing cycle, payable within fifteen (15) days after completion of each billing cycle and Buyer's receipt of an invoice therefor. Seller shall provide, and shall use its commercially reasonable efforts to cause its billing vendor to provide, to Buyer such materials, billing data, records and other information for the Systems (including in electronic form), and assistance as may be reasonably necessary for Buyer or Buyer's billing vendor to extract and convert the Systems' billing data from the Seller's billing system to Buyer's billing system, during a reasonable period commencing before the Closing Date and ending no later than 24 90 days after the Closing Date. Buyer shall reimburse Seller for all fees and expenses charged to Seller by Seller's billing vendor that are related to such extraction and conversion of billing data. Section 6.12 Release of Certain Liens, Litigation and Other Obligations. Seller shall take all necessary actions, including without limitation the discharging or other satisfaction of related claims and obligations, to cause the termination, release, and removal on or prior to the Closing Date, of (i) all Liens listed or deemed listed on Schedule 5.4, and (ii) all other outstanding liabilities and obligations relating to the Systems other than subscriber deposits and prepaid subscriber fees, in each case without incurring any obligations on the part of Buyer or otherwise adversely affecting Buyer. Section 6.13 Customer Notification. Seller shall notify customers on its bulletin boards about hearings relating to the transactions contemplated hereby and shall update such information to notify customers when the respective franchising authorities have approved the transactions. Section 6.14 Leased Vehicles; Other Capital Leases. Seller will pay the remaining balances on any leases for vehicles or capital leases included in the Assets and will deliver title to such vehicles and other personal property free and clear of all Liens (other than Permitted Liens) to Buyer at Closing. Section 6.15 Duty of Good Faith and Fair Dealing. Each party agrees that it will act in good faith with regard to all matters that are the subject of this Agreement, and will neither intentionally nor knowingly take any action or omit to take any action at any time for the primary purpose of depriving the other party unfairly of any right or benefit that the other party has at such time under this Agreement. Section 6.16 Rate Matters. Seller agrees not to increase the rates charged for the Basic Services Tier charged by Seller for the Basic Cable services available from the Systems or the equipment rate charged by Seller at the Systems except pursuant to the filing of a properly completed FCC Form 1240 or FCC Form 1205, as applicable, filed no earlier than February 1, 1997. Seller agrees not to increase the rates charged for its premium channels prior to March 3, 1997. Seller shall give or cause to be given to Buyer and its counsel, accountants and other representatives, as soon as completed but in any event at least five (5) business days prior to the date of submission to the appropriate Governmental Authority, copies of any such FCC Form 1240 or FCC Form 1205 proposed to be filed by Seller and any other FCC Form required to be filed with any Governmental Authority with respect to rates and prepared with respect to any of the Systems. For a period from Closing to the earliest to occur of the first anniversary of Closing or the filing by Buyer of its first FCC Form 1240 or FCC Form 1205 with respect to the Systems, Seller will cooperate with and assist Buyer by providing, upon reasonable request, all information in Seller's possession relating directly to the rates set forth in Schedule 5.11 or on any FCC Form 1240, FCC Form 1205 or any other FCC Form, that Buyer may reasonably require to justify such rates in response to any inquiry, order or requirements of any Governmental Authority. 25 ARTICLE 7 CONDITIONS PRECEDENT Section 7.1 Conditions to Buyer's Obligations. The obligations of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the following conditions, any one or more of which may be waived by Buyer, in its sole discretion. (a) Accuracy of Representations and Warranties. The representations and warranties of Seller in this Agreement shall be true and accurate in all material respects at and as of Closing with the same effect as if made at and as of Closing, except for changes contemplated under this Agreement and except for representations and warranties made only at and as of a certain date. (b) Performance of Agreements. Seller shall have performed in all material respects all obligations and agreements and complied in all material respects with all covenants in this Agreement to be performed and complied with by it at or before Closing, and no event which would constitute a material breach of the terms of this Agreement on the part of Seller shall have occurred and be continuing. (c) Officer's Certificate. Buyer shall receive a certificate executed by an executive officer of Seller, dated as of Closing, reasonably satisfactory in form and substance to Buyer, certifying that the conditions specified in Sections 7.1(a) and (b) have been satisfied. (d) Legal Proceedings. There shall be no Legal Requirement, and no Judgment shall have been entered and not vacated by any Governmental Authority of competent jurisdiction in any Litigation or arising therefrom, which enjoins, restrains, makes illegal, or prohibits consummation of the transactions contemplated by this Agreement, and there shall be no Litigation pending or threatened that seeks or that, if successful, would have the effect of any of the foregoing. (e) Seller's Counsel Opinion. Buyer shall have received an opinion of Ted S. Lodge, Senior Vice President and General Counsel of Seller, dated as of Closing, in the form of Exhibit 7.1(e). (f) Seller's FCC Counsel Opinion. Buyer shall have received an opinion of Vorys, Sater, Seymour & Pease, special FCC counsel to Seller, dated as of Closing, in the form of Exhibit 7.1(f). (g) Consents. Buyer shall have received evidence, in form and substance reasonably satisfactory to it, that all consents, approvals and authorizations identified on Schedule 5.3 as required consents and marked with an asterisk "*" have been obtained and remain in full force and effect; provided, however, that to the extent such required consents relate to consents by (i) the FCC to assignments of Licenses, this condition shall be deemed met if such consents to assignment have 26 been requested prior to Closing and Buyer is entitled to operate the Systems under such Licenses pursuant to conditional use authorizations until the FCC's consent is received, and (ii) the other party(ies) to a Pole Attachment Agreement or a retransmission consent agreement, this condition shall be deemed met if such other party(ies) and Buyer have agreed to include the Systems under an existing agreement between Buyer and such other party(ies). (h) Evidence of Authorizing Actions. Seller shall have delivered to Buyer evidence reasonably satisfactory to Buyer to the effect that Seller has taken all action necessary to authorize its execution of this Agreement and the consummation of the transactions contemplated hereby. (i) Subscribers. As of Closing, the Adjusted Five-Month Average Number of Subscribers, as determined or estimated by the parties in accordance with Section 2.4(b), shall be at least 3,600. (j) Noncompetition Agreement. Seller shall have delivered to Buyer the Noncompetition Agreement executed by Seller. (k) Lien Releases. Seller shall have delivered evidence satisfactory to Buyer that all Liens affecting or encumbering the Assets that are to be terminated, released and removed prior to or as of the Closing Date have been so terminated, released and removed. (l) No Material Adverse Change. There shall not have been any material adverse change in the condition (financial or otherwise), results of operations, revenues, expenses, gross operating profits, business prospects, assets or liabilities (contingent or otherwise) of the Systems taken as a whole as a result of any change, event or development occurring after the date hereof. (m) Other Documents. All other documents and other items required to be delivered under this Agreement to Buyer at or prior to Closing shall have been delivered or shall be tendered at the Closing. Section 7.2 Conditions to Seller's Obligations. The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the following conditions, any one or more of which may be waived by Seller, in its sole discretion: (a) Accuracy of Buyer's Representations and Warranties. The representations and warranties of Buyer in this Agreement shall be true and accurate in all material respects at and as of Closing with the same effect as if made at and as of Closing, except for changes contemplated under this Agreement and except for representations and warranties made only at and as of a certain date. (b) Performance of Obligations. Buyer shall have performed in all material respects all obligations and agreements and complied in 27 all material respects with all covenants in this Agreement to be performed and complied with by it at or before Closing and no event which would constitute a material breach of the terms of this Agreement on the part of Buyer shall have occurred and be continuing. (c) Officer's Certificate. Seller shall have received a certificate executed by an executive officer of Buyer, dated as of Closing, reasonably satisfactory in form and substance to Seller, certifying that the conditions specified in Sections 7.2(a) and (b) have been satisfied. (d) Legal Proceedings. There shall be no Legal Requirement, and no Judgment shall have been entered and not vacated by any Governmental Authority of competent jurisdiction in any Litigation or arising therefrom, which enjoins, restrains, makes illegal, or prohibits consummation of the transactions contemplated hereby, and there shall be no Litigation pending or threatened that seeks or that, if successful, would have the effect of any of the foregoing. (e) Buyer's Counsel Opinion. Seller shall have received an opinion of Fleischman and Walsh, L.L.P., special transaction counsel to Buyer, dated as of Closing, in the form of Exhibit 7.2(e). (f) Evidence of Authorizing Actions. Buyer shall have delivered to Seller evidence reasonably satisfactory to Seller to the effect that Buyer has taken all action necessary to authorize the execution of this Agreement and the consummation of the transactions contemplated hereby. (g) Subscribers. As of Closing, the Adjusted Five-Month Average Number of Subscribers, as determined or estimated by the parties in accordance with Section 2.4(b), shall be at least 3,600. (h) Other Documents. All other documents and other items required to be delivered under this Agreement to Seller at or prior to Closing shall have been delivered or shall be tendered at the Closing. ARTICLE 8 CLOSING Section 8.1 Closing; Time and Place. Subject to the terms and conditions of this Agreement, the closing of the transactions contemplated by this Agreement ("Closing") shall occur and be effective as of 11:59 p.m. on the last calendar day of the month in which all of the conditions to Closing have been satisfied; provided that if all such conditions have been satisfied in November or December, 1996, then Closing shall occur and be effective as of 12:00 a.m. on January 1, 1997, with the wire transfer of the Purchase Price, as estimated and adjusted pursuant to Sections 2.4(b) and 2.6, to be made on January 2, 1997; and provided further that in no event shall Closing occur later than five months after the filing date of the last FCC Form 394 to be filed by 28 the parties in connection with the assignment of the Franchises contemplated by this Agreement (the "Outside Closing Date"). Seller and Buyer shall, without modifying or expanding their obligations hereunder, exercise their diligent, good faith efforts to cause Closing to occur as of January 1, 1997. To the extent practicable, all documents to be delivered at Closing shall be exchanged by facsimile and by overnight courier for receipt by the other party no later than the business day immediately preceding the Closing Date. If an in-person exchange of documents is required for Closing, then such exchange shall be held at the offices of Seller at 10:00 a.m. on the business day immediately preceding the Closing Date. If Buyer fails to initiate the wire transfer of the Purchase Price, as estimated and adjusted pursuant to Sections 2.4(b) and 2.6, on the date such wire transfer is required to be made, and Seller fails to receive evidence reasonably satisfactory to it that such wire transfer was initiated on such date, then the Closing shall be deemed null and void. Section 8.2 Seller's Obligations. At Closing, Seller shall deliver or cause to be delivered to Buyer the following: (a) Bill of Sale. Executed counterparts of a Bill of Sale and Assignment and Assumption Agreement relating to the Assets in the form attached hereto as Exhibit 8.2(a) (the "Bill of Sale") and such other assignment documentation as Buyer may reasonably request; (b) Officer's Certificate. The certificate described in Section 7.1(c); (c) Evidence of Authorizing Actions. Evidence reasonably satisfactory to Buyer that Seller has taken all action necessary to authorize the execution of this Agreement and the consummation of the transactions contemplated hereby; (d) Opinion of Seller's Counsel. The opinion described in Section 7.1(e); (e) Opinion of Seller's FCC Counsel. The opinion described in Section 7.1(f); (f) Vehicle Titles. Title certificates to all vehicles included among the Assets, endorsed for transfer of title to Buyer, and separate bills of sale and other title transfer documentation therefor, as required by the laws of the State of New Hampshire or such county or other state in which such vehicles are titled; (g) Possession. Actual possession and operating control of the System; (h) Conditions Precedent. To the extent not described above, all items set forth in Section 7.1; (i) Documents and Records. All (i) existing blueprints, schematics, working drawings, plans, specifications, projections, statistics, engineering records, original plant records, System construction and as-built maps relating to the Systems, (ii) customer 29 lists, files and records used by the Seller in connection with the operation of the Systems, including a list of all pending subscriber hook-ups, disconnects and repair orders, supply orders and any other lists pertinent to the operation of the Systems, and (iii) personnel files and records relating to the employees of the Systems who Buyer may have arranged to hire upon Closing. Delivery of the foregoing shall be deemed made to the extent such lists, files and records are located as of the Closing Time at any of the offices included in the Leased Real Property; (j) Lien Searches. Seller shall have delivered to Buyer the results of reasonably comprehensive searches of the public records of jurisdictions in which any of the Assets are located, dated as of a date no earlier than 10 days prior to the Closing Date, of the public records regarding any and all Liens and Judgments affecting, encumbering or otherwise relating to the Systems or the Assets; and (k) Other. Such other documents and instruments as shall be necessary to effect the intent of this Agreement and consummate the transactions contemplated hereby. Section 8.3 Buyer's Obligations. At Closing, Buyer shall deliver or cause to be delivered to Seller the following: (a) Purchase Price. The Purchase Price, as estimated and adjusted in accordance with Section 2.4(b), plus or minus the estimated Current Items Amount required by Section 2.6 of this Agreement; (b) Bill of Sale. Executed counterparts of the Bill of Sale and such other assumption documentation as Seller may reasonably request; (c) Officer's Certificate. The certificate described in Section 7.2(c); (d) Evidence of Authorizations. Evidence reasonably satisfactory to Seller that Buyer has taken all action necessary to authorize the execution of this Agreement and the consummation of the transactions contemplated hereby; (e) Opinion of Buyer's Counsel. The opinion described in Section 7.2(e); (f) Conditions Precedent. To the extent not described above, all items set forth in Section 7.2; and (g) Other. Such other documents and instruments as shall be necessary to effect the intent of this Agreement and consummate the transactions contemplated hereby. 30 ARTICLE 9 TERMINATION Section 9.1 Termination Events. This Agreement may be terminated and the transactions contemplated hereby may be abandoned as follows: (a) at any time, by the mutual agreement of Buyer and Seller; (b) by either Buyer or Seller upon written notice to the other, if the other is in material breach or default of its respective covenants, agreements, or other obligations herein, or if any of its representations herein are not true and accurate in all material respects when made or when otherwise required by this Agreement to be true and accurate, and Buyer or Seller, as the case may be, notifies the other of such breach, default or failure and such breach, default or failure is not cured within 30 days of receipt of notice that such breach, default or failure exists or has occurred; (c) by either Buyer or Seller upon written notice to the other, if any conditions to its obligations set forth in Sections 7.1 and 7.2, respectively, shall not have been satisfied on or before the Outside Closing Date, for any reason other than a breach or default by such party of its respective covenants, agreements, or other obligations hereunder, or any of its representations herein not being true and accurate when made or when otherwise required by this Agreement to be true and accurate; or (d) by Buyer in accordance with Section 12.13. Section 9.2 Effect of Termination. If this Agreement shall be terminated pursuant to Section 9.1, all obligations of the parties hereunder shall terminate, except for the obligations set forth in Sections 6.6, 9.2, Article 10, 12.1, 12.2, and 12.9. Termination of this Agreement pursuant to Section 9.1(b) shall not limit or impair any remedies that Buyer or Seller may have under this Agreement with respect to a breach or default by the other of its covenants, agreements or obligations hereunder. ARTICLE 10 REMEDIES Section 10.1 Specific Performance; Remedies Cumulative. Seller and Buyer acknowledge that, if either is in material breach or default of its covenants, agreements or obligations hereunder, the other would be irreparably damaged by such breach or default and that, in addition to the other remedies that may be available under this Agreement or at law, the other party shall be entitled to specific performance of this Agreement and injunctive relief. All rights and remedies under this Agreement are cumulative of, and not exclusive of, any rights or remedies otherwise available under this Agreement, and the exercise of any of such rights or remedies shall not bar the exercise of any other rights or remedies under this Agreement. 31 Section 10.2 Attorney's Fees. In the event of any Litigation between Seller and Buyer with respect to this Agreement or the transactions contemplated hereby, the party prevailing under such Litigation shall be entitled, as part of the Judgment rendered in such Litigation, to recover from the other party its reasonable attorneys' fees and costs and expenses in such Litigation. Section 10.3 Remedies Limitation. Notwithstanding anything herein to the contrary, the remedies provided in Article 10 and Article 11 are the sole and exclusive remedies that either Buyer or Seller shall have for breach by the other of any representations and warranties of the other or breach of default by the other in the performance of the other's covenants, agreements or obligations under this Agreement. Section 10.4 Escrow Deposit. (a) Delivery Prior to Closing. In the event this Agreement is terminated by the parties in accordance with Section 9.1(a), by Buyer in accordance with Section 9.1(b) or 9.1(d), or by either Buyer or Seller in accordance with Section 9.1(c), then Buyer and Seller promptly shall send a Joint Disbursement Notice (as defined in the Escrow Agreement) to Escrow Agent instructing Escrow Agent to transfer the Escrow Funds (as defined in the Escrow Agreement) to Buyer in accordance with such Joint Disbursement Notice. In the event this Agreement is terminated by Seller in accordance with Section 9.1(b), then Buyer and Seller promptly shall send a Joint Disbursement Notice to Escrow Agent instructing Escrow Agent to transfer the Escrow Funds to Seller in accordance with such Joint Disbursement Notice. (b) Delivery After Closing. In the event that, following Closing, Buyer incurs Losses for which Buyer believes it is entitled to indemnification from Seller in accordance with Article XI, then promptly after Buyer's submission to Seller of a claim for indemnification describing in reasonable detail the nature and, to the extent then reasonably practicable, the extent of the Losses that Buyer believes are indemnifiable by Seller (an "Indemnification Notice"), and provided that there is no dispute as to the applicability of indemnification for such Losses, Buyer and Seller promptly shall send a Joint Disbursement Notice to Escrow Agent instructing Escrow Agent to transfer to Buyer, in accordance with such Joint Disbursement Notice, Escrow Funds as necessary to indemnify Buyer for such indemnifiable Losses. If, by the close of business on the last calendar day of the eighteenth (18th) month after the Closing Date (or on the next business day if such last calendar day is not a business day) (the "Expiration Date"), Seller shall not have received an Indemnification Notice from Buyer, then on the business day next following the Expiration Date, Buyer and Seller shall send a Joint Disbursement Notice to Escrow Agent instructing Escrow Agent to transfer the balance of the Escrow Funds to Seller in accordance with such Joint Disbursement Notice. If, however, Seller has received an Indemnification Notice on or prior to the Expiration Date, then Escrow Agent shall retain control over the 32 Escrow Funds until the parties have resolved Buyer's claims for indemnification, whereupon Buyer and Seller promptly shall send a Joint Disbursement Notice to Escrow Agent instructing Escrow Agent to transfer Escrow Funds to Buyer and/or Seller in accordance with the parties' resolution of such disputes. (c) Other Remedies. The disbursement of the Escrow Funds to Buyer or Seller shall not preclude such party from exercising any other rights or remedies provided for in this Agreement or at law or equity in the event of a breach by the other party of its obligations under this Agreement, including the right to seek damages or indemnification for losses in excess of the Escrow Funds. ARTICLE 11 INDEMNIFICATION Section 11.1 Indemnification by Seller. From and after Closing, Seller shall indemnify and hold harmless Buyer from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Seller in this Agreement not being true and accurate when made or when required by this Agreement to be true and accurate, or any breach or default by Seller in the performance of its covenants, agreements, or obligations under this Agreement, except for Losses that relate to any circumstance, act or omission constituting a breach of any representation or warranty by Seller or failure by Seller to comply with any of its covenants, agreements or obligations hereunder of which Buyer has received notice and which Buyer has expressly waived in writing; (b) any liabilities relating to employees of Seller working for the Systems asserted under any federal, state or local law or regulation or otherwise pertaining to any labor or employment matter to the extent such labor or employment matter arises out of and relates to conditions existing or actions or events occurring prior to the Closing Time; and (c) Seller's failure to perform or satisfy any of the Retained Obligations and Liabilities. Section 11.2 Indemnification by Buyer. From and after Closing, Buyer shall indemnify and hold harmless Seller from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Buyer in this Agreement not being true and accurate when made or when required by this Agreement to be true and accurate, or any breach or default by Buyer in the performance of its covenants, agreements, or obligations under this Agreement, except for Losses that relate to any circumstance, act or omission constituting a breach of any 33 representation or warranty by Buyer or failure by Buyer to comply with any of its covenants, agreements or obligations hereunder of which Seller has received notice and which Seller has expressly waived in writing; (b) the Assumed Obligations and Liabilities; and (c) any liabilities relating to employees of Seller hired by Buyer pursuant to Section 6.3 arising after the Closing Time asserted under any federal, state or local law or regulation or otherwise pertaining to any labor or employment matter arising out of actions or events occurring or conditions arising subsequent to the Closing Time. Section 11.3 Indemnified Third Party Claim. (a) If any Person not a party to this Agreement shall make any demand or claim or file or threaten to file or continue any Litigation with respect to which Buyer or Seller is entitled to indemnification pursuant to Sections 11.1 or 11.2, respectively, then within twenty (20) days after notice (the "Notice") by the party entitled to such indemnification (the "Indemnitee") to the other (the "Indemnitor") of such demand, claim or Litigation, the Indemnitor shall have the option, at its sole cost and expense, to retain counsel for the Indemnitee (which counsel shall be reasonably satisfactory to the Indemnitee), to defend any such Litigation. Thereafter, the Indemnitee shall be permitted to participate in such defense at its own expense, provided that, if the named parties to any such Litigation (including any impleaded parties) include both the Indemnitor and the Indemnitee and if the Indemnitor proposes that the same counsel represent both the Indemnitee and the Indemnitor, and such counsel opines that representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, then the Indemnitee shall have the right to retain its own counsel at the cost and expense of the Indemnitor (to the extent such cost and expense is reasonable), unless the Indemnitor shall acknowledge in writing its indemnity obligation, in which event the retention by Indemnitee of its own counsel shall be at its cost and expense. If the Indemnitor shall fail to respond within twenty (20) days after receipt of the Notice, the Indemnitee may retain counsel and conduct the defense of such Litigation as it may in its sole discretion deem proper, at the sole cost and expense of the Indemnitor (to the extent such cost and expense is reasonable). (b) The Indemnitee shall provide reasonable assistance to the Indemnitor and provide access to its books, records and personnel as the Indemnitor reasonably requests in connection with the investigation or defense of the indemnified Losses. The Indemnitor shall promptly upon receipt of reasonable supporting documentation reimburse the Indemnitee for reasonable out-of-pocket costs and expenses incurred by the latter in providing the requested assistance. (c) With regard to Litigation of third parties for which Buyer or Seller is entitled to indemnification under Sections 11.1 or 11.2, such indemnification shall be paid by the Indemnitor upon: (i) the 34 entry of a Judgment against the Indemnitee and the expiration of any applicable appeal period; (ii) the entry of an unappealable Judgment or final appellate Judgment against the Indemnitee; or (iii) a settlement with the consent of the Indemnitor, which consent shall not be unreasonably withheld, provided that no such consent need be obtained if the Indemnitor fails to respond to the Notice as provided in Section 11.3(a). Notwithstanding the foregoing, provided that there is no dispute as to the applicability of indemnification, reasonable expenses of counsel to the Indemnitee shall be reimbursed on a current basis by the Indemnitor as if such expenses are a liability of the Indemnitor, but only if Indemnitor is obligated to pay such expenses pursuant to Section 11.3(a). Section 11.4 Determination of Indemnification Amounts and Related Matters. (a) In calculating amounts payable to an Indemnitee hereunder, the amount of the indemnified Losses shall be reduced by the amount of any insurance proceeds paid to the Indemnitee for such Losses. (b) Subject to the provisions of Section 11.3, all amounts payable by the Indemnitor to the Indemnitee in respect of any Losses under Sections 11.1 or 11.2 shall be payable by the Indemnitor as incurred by the Indemnitee. (c) Seller will not be liable for indemnification arising under Section 11.1(a) for (i) any Losses of or to Buyer or any other Person entitled to indemnification from Seller or (ii) any Losses incidental to or relating to or resulting from any of the foregoing (the items described in clauses (i) and (ii) collectively being referred to for purposes of this Section 11.4(c) as "Buyer's Damages") unless the amount of Buyer's Damages for which Seller would, but for the provisions of this Section, be liable exceeds, on an aggregate basis, $20,000, in which case Seller will be liable for all such Buyer's Damages, which will be due and payable within 15 days after Seller's receipt of a statement therefor. Seller's liability for indemnifiable Losses that arise out of or result from liabilities and obligations described in Section 11.1(b) or (c) shall not be limited by the immediately preceding sentence even though such Losses also may relate to matters described in Section 11.1(a). Notwithstanding anything herein to the contrary, the maximum liability of Seller under this Agreement shall be $5,000,000. Section 11.5 Time and Manner of Certain Claims. Except as otherwise provided herein, the representations, warranties and covenants of Buyer and Seller in this Agreement shall survive Closing for a period of eighteen months (the "Survival Period") except for representations, warranties and covenants (i) relating to title, Copyright Act matters and Taxes, which shall survive until the expiration of the applicable statute of limitations, (ii) relating to environmental matters, which shall survive until the third anniversary of the Closing Date, and (iii) relating to Confidential Information, which shall survive until the fifth anniversary hereof in the event that Closing does not occur, and Buyer's and Seller's rights to make claims thereon shall likewise expire and be extinguished on such respective dates. Neither Seller nor Buyer shall have any liability under Sections 11.1(a) or 11.2(a), respectively, unless a claim for Losses for which indemnification is sought thereunder is asserted by 35 the party seeking indemnification by written notice to the party from whom indemnification is sought within the Survival Period. Each of Seller and Buyer shall continue to be liable under Sections 11.1(b) and (c) or Sections 11.2(b) and (c), respectively, after the Closing Date without any limitation as to time. ARTICLE 12 MISCELLANEOUS Section 12.1 Expenses. Except as otherwise expressly provided in this Agreement, each party shall pay its own expenses and the fees and expenses of its counsel, accountants, and other experts in connection with this Agreement. Section 12.2 Brokerage. Seller shall indemnify and hold Buyer harmless from and against any and all Losses arising from any employment by it of, or services rendered to Seller by, any finder, broker, agency, or other intermediary, in connection with the transactions contemplated hereby, or any allegation of any such employment or services, and Buyer shall indemnify and hold Seller harmless from and against any and all Losses arising from any employment by it of, or services rendered to Buyer by, any finder, broker, agency, or other intermediary, in connection with the transactions contemplated hereby, or any allegation of any such employment or services. Section 12.3 Waivers. No action taken pursuant to this Agreement, including any investigation by or on behalf of any party hereto, shall be deemed to constitute a waiver by the party taking the action of compliance with any representation, warranty, covenant or agreement contained herein or in any document delivered pursuant hereto. The waiver by any party hereto of any condition or of a breach of another provision of this Agreement shall not operate or be construed as a waiver of any other condition or subsequent breach. The waiver by any party of any of the conditions precedent to its obligations under this Agreement shall not preclude it from seeking redress for breach of this Agreement other than with respect to the condition so waived. Section 12.4 Notices. All notices, requests, demands, applications, services of process, and other communications which are required to be or may be given under this Agreement shall be in writing and shall be deemed to have been duly given if sent by facsimile transmission, delivered by overnight or other courier service, or mailed, certified first class mail, postage prepaid, return receipt requested, to the parties hereto at the following addresses: To Seller: Pegasus Cable Television, Inc. 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, PA 19087 Attn: Howard Verlin Telecopy: 610/341-1835 36 Copies (which shall not constitute notice): Pegasus Cable Television, Inc. 5 Radnor Corporate Center 100 Matsonford Road, Suite 454 Radnor, PA 19087 Attn: Ted S. Lodge, Esq. Telecopy: 610/341-1835 To Buyer: State Cable TV Corp. 261 State Street Augusta, ME 04330 Attn: Michael Angelakis Telecopy: 207/623-5145 Copies (which shall not constitute notice): Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attn: Jeffry L. Hardin Telecopy: 202/265-5706 or to such other address as any party shall have furnished to the other by notice given in accordance with this Section. Such notice shall be effective, (i) if delivered by courier service or by facsimile transmission, upon actual receipt by the intended recipient (with appropriate confirmation thereof), or (ii) if mailed, upon the earlier of five days after deposit with the U.S. Postal Service or the date of delivery as shown on the return receipt therefor. Section 12.5 Entire Agreement; Amendments. This Agreement embodies the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, with respect thereto, including without limitation the Confidentiality Agreement. This Agreement may not be modified orally, but only by an agreement in writing signed by the party or parties against whom any waiver, change, amendment, modification, or discharge may be sought to be enforced. Section 12.6 Binding Effect; Benefits. This Agreement shall inure to the benefit of and will be binding upon the parties hereto and their respective heirs, legal representatives, successors, and permitted assigns. Except as provided below, neither Buyer nor Seller shall directly or indirectly (by transfer of control of a party or otherwise), in whole or in part, assign this Agreement or delegate any of its duties hereunder, or seek consent from any Governmental Authority to assign this Agreement or delegate any of its duties hereunder to any other Person without the prior written consent of the other. Buyer may assign or delegate its rights and obligations under this Agreement without the prior written consent of Seller (a) prior to Closing, to any 37 "affiliate" (as such term is defined in the Securities Act) of Buyer provided such assignment is effectuated prior to the submission of any FCC Form 394 by the parties in connection herewith and provided such affiliate assumes in writing all of the duties and obligations of Buyer hereunder, but no such assignment and assumption shall in any way relieve Buyer of its obligations hereunder and Buyer shall be jointly and severally liable with such affiliate for any non-performance thereof; and (b) after Closing, to any Person that has acquired all or substantially all of the assets or capital stock of Buyer. Buyer acknowledges that it is the intention of the Seller to complete a like-kind exchange under Section 1031 of the Code. Buyer agrees to cooperate in effectuating Seller's intent as long as such cooperation does not delay the Closing or cause additional expense to the Buyer. Buyer agrees that Seller may assign its right to payment of the Purchase Price under this Agreement to a Qualified Intermediary, and Buyer agrees in such case to make payment of the Purchase Price to the Qualified Intermediary. Buyer further agrees to take other appropriate actions or execute documents, as may reasonably be requested by Seller and as may be required in order to effectuate Seller's intent. Seller shall indemnify and hold Buyer harmless from any liability or expense that may arise from any such action by Buyer. Section 12.7 Headings, Schedules, and Exhibits. The section and other headings contained in this Agreement are for reference purposes only and will not affect the meaning or interpretation of this Agreement. Reference to Schedules or Exhibits shall, unless otherwise indicated, refer to the Schedules and Exhibits attached to this Agreement, which shall be incorporated in and constitute a part of this Agreement by such reference. Section 12.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which, when executed, shall be deemed to be an original and all of which together will be deemed to be one and the same instrument. Section 12.9 Publicity. Seller and Buyer shall consult with and cooperate with the other with respect to the content and timing of all press releases and other public announcements, and any oral or written statements to Seller's employees concerning this Agreement and the transactions contemplated hereby. Neither Seller nor Buyer shall make any such release, announcement, or statements without the prior written consent of the other, which shall not be unreasonably withheld or delayed; provided, however, that Seller or Buyer may at any time make any announcement required by Legal Requirements so long as such party, promptly upon learning of such requirement, notifies the other of such requirement and consults with the other in good faith with respect to the wording of such announcement. Notwithstanding the foregoing, Seller may disclose this Agreement and the transactions contemplated hereby in any registration statement and any other filing or report made by Seller pursuant to the Securities Act or the Securities Exchange Act of 1934 and agrees that any disclosure therein of the Agreement and the transactions contemplated hereby shall be consistent with the terms of this Agreement. Seller agrees to provide Buyer with a copy of any such filing or report not less than one (1) day prior to filing. Section 12.10 Governing Law. The validity, performance, and enforcement of this Agreement and all transaction documents, unless expressly provided to the contrary, shall be governed by the laws of the State of Delaware without giving effect to the principles of conflicts of law of such state. In accordance with Title 6, Section 2708 of the Delaware Code Annotated, each party hereby submits to the jurisdiction of the courts of Delaware and agrees to be served 38 with legal process from any of such courts. Each party hereby irrevocably waives, to the fullest extent permitted by law, any objection that it may have, whether now or in the future, to the laying of venue in, or to the jurisdiction of, any and each of such courts for the purpose of any such suit, action, proceeding or judgment and further waives any claim that any such suit, action, proceeding or judgment has been brought in an inconvenient forum. Section 12.11 Third Parties; Joint Ventures. This Agreement constitutes an agreement solely among the parties hereto, and, except as otherwise provided herein, is not intended to and will not confer any rights, remedies, obligations, or liabilities, legal or equitable, including any right of employment, on any Person (including but not limited to any employee or former employee of Seller) other than the parties hereto and their respective successors or assigns, or otherwise constitute any Person a third party beneficiary under or by reason of this Agreement. Nothing in this Agreement, expressed or implied, is intended to or shall constitute the parties hereto partners or participants in a joint venture. Section 12.12 Construction. This Agreement has been negotiated by Buyer and Seller and their respective legal counsel, and legal or equitable principles that might require the construction of this Agreement or any provision of this Agreement against the party drafting this Agreement shall not apply in any construction or interpretation of this Agreement. Section 12.13 Risk of Loss. The risk of any loss or damage to the Assets resulting from fire, theft or any other casualty (except reasonable wear and tear) shall be borne by Seller at all times prior to the Closing Time. In the event that any such loss or damage shall be sufficiently substantial so as to preclude and prevent resumption of normal operations of any material portion of a System within twenty days from the occurrence of the event resulting in such loss or damage, Seller shall immediately notify Buyer in writing of its inability to resume normal operations or to replace or restore the lost or damaged property, and Buyer, at any time within ten days after receipt of such notice, may elect by written notice to Seller either to (a) waive such defect and proceed toward consummation of the transaction contemplated by this Agreement in accordance with the terms hereof, or (b) terminate this Agreement. If Buyer elects to so terminate this Agreement, Buyer and Seller shall stand fully released and discharged of any and all obligations hereunder. [Remainder of this page intentionally left blank.] 39 IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement as of the date first written above. BUYER: STATE CABLE TV CORP. By: [Signature omitted] ------------------------------------------- Michael Angelakis President and Chief Executive Officer SELLER: PEGASUS CABLE TELEVISION, INC. By: [Signature omitted] ------------------------------------------- Name: ------------------------------------- Title: ------------------------------------- [Signature page to Asset Purchase Agreement between State Cable TV Corp. and Pegasus Cable Television, Inc.] 40 Exhibit 2.5 to Asset Purchase Agreement between State Cable TV Corp. and Pegasus Cable Television, Inc. ESCROW AGREEMENT ---------------- This Escrow Agreement (this "Agreement") dated as of November 6, 1996, is made by and among Pegasus Cable Television, Inc., a Massachusetts corporation ("Seller"), State Cable TV Corp., a Delaware corporation ("Buyer"), and IBJ Schroder Bank & Trust Company, a New York Banking Corporation (the "Escrow Agent"). RECITALS A. Concurrently with the execution and delivery of this Agreement, Buyer and Seller have entered into that certain Asset Purchase Agreement dated as of November 6, 1996 (the "Purchase Agreement"), pursuant to which Seller agreed to sell and Buyer agreed to purchase substantially all of the assets comprising the cable television systems which serve Bethlehem, Franconia, Moultonborough, Ossipee, Tamworth and Tuftonborough, New Hampshire, other than certain excluded assets; and B. Pursuant to Section 2.5 of the Purchase Agreement, Buyer agreed to deposit Three Hundred Thousand Dollars ($300,000) with Escrow Agent to be held and applied pursuant to this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants hereinafter set forth, the parties hereto agree as follows: 1. Appointment of Escrow Agent. Buyer and Seller do hereby appoint and designate Escrow Agent as escrow agent for the purposes set forth herein, and Escrow Agent does hereby accept such appointment under the terms and conditions set forth herein. 2. Establishment of the Escrow Funds. Simultaneously with the execution and delivery hereof, Buyer shall deposit by wire transfer Three Hundred Thousand Dollars ($300,000) into an account (the "Escrow Account") designated by Escrow Agent. Escrow Agent shall maintain the Escrow Account and the funds deposited therein (the "Escrow Funds"), subject to the terms and conditions of this Agreement. Upon receipt and deposit in the Escrow Account of the Escrow Funds, Escrow Agent shall immediately notify Buyer and Seller in writing that such funds have been received, deposited into the Escrow Account, and invested by Exhibit 2.5 -- Page 1 Escrow Agent pursuant to Section 3 of this Agreement. On at least a monthly basis, Escrow Agent shall notify Seller and Buyer of the balance of the Escrow Funds, how such Escrow Funds are invested and any increases or decreases to the balance of the Escrow Funds during the previous month. 3. Investment of Escrow Funds. After receipt of the Escrow Funds and pending the disbursement of the Escrow Funds pursuant to this Agreement, Escrow Agent shall invest the Escrow Funds in (i) direct obligations of, or obligations fully guaranteed by, the United States of America or any agency thereof, (ii) certificates of deposit issued by commercial banks having a combined capital surplus and undivided profits of not less than $200,000,000, or (iii) other investments as approved by Buyer and Seller. In the event that Buyer and Seller do not give investment instructions to Escrow Agent, then Escrow Agent shall invest the Escrow Funds in the Escrow Agent's Money Market Account. Any income or interest realized from the investments made by Escrow Agent pursuant hereto shall be deemed to form part of the Escrow Funds and shall be reinvested by Escrow Agent until all of the Escrow Funds are fully disbursed. 4. Disbursement of the Escrow Fund. Escrow Agent shall retain control over the Escrow Funds and shall not disburse any Escrow Funds unless and until it receives either (i) a written notice in the form attached hereto as Exhibit A (a "Joint Disbursement Notice") jointly executed by Buyer and Seller instructing it to make such disbursement or other written instrument signed by each of Buyer and Seller, or (ii) a final and nonappealable judgment, decree or order of a court of competent jurisdiction, whereupon Escrow Agent shall promptly deliver by wire transfer to the account designated in such Joint Disbursement Notice, other written instrument or order the amount of Escrow Funds specified in such Joint Disbursement Notice, other written instrument or order. 5. Escrow Agent's Undertakings and Limitation of Liability. (a) Escrow Agent undertakes to perform only such duties as are expressly set forth herein. It is understood and agreed that the duties of the Escrow Agent are purely ministerial in nature. Escrow Agent shall not have any liability under, nor duty to inquire into the terms and provisions of, any agreement or instructions other than as set forth in this Agreement (whether or not the Escrow Agent has knowledge thereof). (b) Escrow Agent may rely and shall be protected in acting or refraining from acting upon any written notice, instruction or request furnished to it and reasonably believed by it to be genuine and to have been executed and presented by the proper party or parties as provided pursuant to this Agreement. Escrow Agent shall be under no duty to inquire into or investigate the validity, accuracy or content of any such document. Escrow Agent shall have no duty to solicit any payments that may be due to it hereunder. Exhibit 2.5 -- Page 2 (c) Escrow Agent shall not be liable for any action taken or omitted by it in good faith. Escrow Agent may consult with counsel of its choice and shall have full and complete authorization and protection for any action taken or omitted by it hereunder in good faith and in accordance with the opinion of such counsel. (d) Escrow Agent may resign and be discharged from its duties or obligations hereunder by giving notice in writing of such resignation specifying a date when such resignation shall take effect; provided that no resignation by Escrow Agent shall be effective until a bank of comparable standing designated by Seller, or by Escrow Agent if Seller has not designated a replacement escrow agent within five (5) business days after the date of Escrow Agent's notice of resignation, has agreed to serve as escrow agent in accordance with the terms of this Agreement, and provided further that from the date of said resignation until the delivery of the Escrow Funds to the successor escrow agent, Escrow Agent's sole duty hereunder shall be to retain the Escrow Funds and invest and reinvest said Escrow Funds pursuant to the provisions of this Agreement. Escrow Agent shall have the right to withhold an amount equal to the amount due and owing to Escrow Agent, plus any costs and expenses Escrow Agent shall reasonably believe may be incurred by Escrow Agent, in connection with the termination of this Agreement; provided, however, that Escrow Agent shall provide a complete written report accounting for any portion of the Escrow Funds withheld by it pursuant to this paragraph within fifteen (15) business days of the effective date of its resignation. (e) Escrow Agent shall not be responsible for the performance of Buyer or Seller under this Escrow Agreement or any other agreement. (f) Escrow Agent shall not assume any responsibility or liability for the completeness, correctness or accuracy of any transactions between Buyer and Seller or for the sufficiency of the Escrow Funds in connection therewith. 6. Compensation of Escrow Agent. Buyer and Seller hereby agree jointly and severally to (i) pay Escrow Agent upon execution of this Agreement reasonable compensation for the services to be rendered hereunder, as described in Schedule I attached hereto, and (ii) pay or reimburse Escrow Agent upon receipt of a written request from Escrow Agent (including relevant supporting documentation) for all expenses, disbursement and advances, including reasonable attorney's fees, incurred or made by it in connection with the performance or termination of this Agreement. 7. Indemnification. Buyer and Seller hereby agree jointly and severally to indemnify Escrow Agent for, and to hold it harmless against, any loss, cost, damage, liability or expense arising out of or in connection with this Agreement and the carrying out its duties hereunder, including, without limitation, costs of investigation and the reasonable costs and expenses of defending itself against any claim of liability, except in those cases where Escrow Agent has been guilty of gross negligence or willful misconduct. Notwithstanding any provision of this Agreement to the contrary, Escrow Agent shall not be liable for any special, indirect or consequential loss or damage of any kind whatsoever (including, but not limited to, lost profits), Exhibit 2.5 -- Page 3 even if Escrow Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. The provisions of this Section 7 shall survive the termination of this Agreement. 8. Conflict with Terms of Agreement. In the event that Escrow Agent receives instructions, claims or demands from Buyer or Seller that, in its opinion, conflict with any provision of this Agreement, or is otherwise uncertain of its rights and duties hereunder, it shall without liability of any kind be entitled to refrain from taking any action, and its sole obligation in such instances shall be to keep safely the Escrow Funds until it shall be directed otherwise in writing by all of the other parties hereto or by a final and nonappealable judgment, decree or order of a court of competent jurisdiction. Escrow Agent may deposit the Escrow Funds into a court of competent jurisdiction and upon such deposit, Escrow Agent shall be relieved of any further liability or responsibility with respect thereto. 9. Tax Identification Numbers. Buyer and Seller shall each provide Escrow Agent with its Tax Identification Number (TIN) as assigned by the Internal Revenue Service. All interest or other income earned under this Agreement prior to the Closing Date shall be allocated to Buyer as provided herein and shall be reported by Buyer to the Internal Revenue Service as having been so allocated, regardless of whether Buyer or Seller receives the Escrow Funds. All interest or other income earned under this Agreement after the Closing Date shall be allocated to Seller as provided herein and shall be reported by Seller to the Internal Revenue Services as having been so allocated, regardless of whether Buyer or Seller receives the Escrow Funds. 10. Termination. This Agreement shall be terminated (a) upon disbursement or release of all of the Escrow Funds by Escrow Agent, (b) by written mutual consent signed by all parties; (c) by Escrow Agent, pursuant to Section 5(d) hereof; or (d) by payment of the Escrow Fund into a court of competent jurisdiction in accordance with Section 8 hereof. This Agreement shall not be otherwise terminated. 11. Notices. (a) All notices and communications hereunder shall be in writing and shall be deemed to have been given (i) when delivered if delivered in person, (ii) the next business day after being sent via a nationally recognized overnight courier service or telecopier, provided that the notifying party receives electronic confirmation of the notified party's receipt of the telecopied notice, or (iii) three (3) business days after being sent by certified or registered mail, postage prepaid and return receipt requested, to the appropriate party at the address specified below: If to Escrow Agent, to: IBJ Schroder Bank & Trust Company One State Street New York, NY 10004 Attn: Corporate Trust and Agencies Administration Fax No.: 212-858-2952 Exhibit 2.5 -- Page 4 If to Seller to: Pegasus Cable Television, Inc. 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, PA 19087 Attn: Howard Verlin Fax No.: 610/341-1835 With a required copy to: Pegasus Cable Television, Inc. 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, PA 19087 Attn: Ted S. Lodge Fax No.: 610/341-1835 If to Buyer to: State Cable TV Corp. 261 State Street Augusta, ME 04330 Attn: Michael Angelakis Fax No.: 207/623-5145 With a required copy to: Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, DC 20036 Attn: Jeffry L. Hardin Fax No.: (202) 265-5706 or at such other address as any of the above may have furnished to the other parties in writing by registered mail, return receipt requested. In the event that Escrow Agent, in its sole discretion, determines that an emergency exists, Escrow Agent may use such other means of communicating with Seller and/or Buyer as Escrow Agent reasonably deems advisable. (b) All notices sent by Escrow Agent to Buyer shall be copied to Seller and all notices sent by Escrow Agent to Seller shall be copied to Buyer. All notices sent by Seller to Escrow Agent shall be copied to Buyer and all notices sent by Buyer to Escrow Agent shall be copied to Seller. In each case, all copied notices shall be sent to the addresses described in Section 11(a) above and delivered in the same manner as the notice. Exhibit 2.5 -- Page 5 12. Reliance on Instructions. (a) In the event funds transfer instructions are given, whether in writing, by telecopier or otherwise, Escrow Agent is authorized to seek confirmation of such instructions by telephone call-back to the representatives of Buyer and Seller designated on Schedule II hereto, and Escrow Agent may rely upon the confirmation of anyone purporting to be a representative so designated. The persons and telephone numbers for call-backs may be changed only in a writing actually received and acknowledged by Escrow Agent. Buyer and Seller acknowledge that such security procedure is commercially reasonable. (b) It is understood that in any funds transfer Escrow Agent may rely solely upon wire transfer instructions set forth in a Joint Disbursement Notice, Seller's Notice or Buyer's Notice and the account number or similar identifying number provided by Buyer or Seller to identify the beneficiary and the beneficiary's bank. Escrow Agent may apply any portion of the Escrow Fund for any payment order it executes using any such identifying number, even where its use may result in the transfer of Escrow Funds to a person or bank other than the intended beneficiary of such transfer or such beneficiary's bank. 13. Waiver or Amendment. The provisions of this Agreement may be waived, altered, amended or supplemented, in whole or in part, only by a writing signed by all of the parties hereto. 14. Assignment. This Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their respective successors and assigns. Neither this Agreement nor any right or interest hereunder may be assigned in whole or in part by any party without the prior consent of the other parties. 15. 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. 16. Merger or Consolidation of Escrow Agent. Any corporation into which Escrow Agent in its individual capacity may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which Escrow Agent in its individual capacity shall be a party, or any corporation to which substantially all of the corporate trust business of Escrow Agent in its individual capacity may be transferred, shall be Escrow Agent under this Agreement without further act. 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to its policies and principles of conflicts of laws, and any action brought hereunder shall be brought in the courts of the State of New York, located in the County of New York. Each party hereto irrevocably waives any objection on the grounds of venue, forum non conveniens or any similar grounds and irrevocably consents to the jurisdiction of said courts and the service of process from such courts by mail or by any other means permitted by applicable law. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. Exhibit 2.5 -- Page 6 BUYER: STATE CABLE TV CORP. By: ----------------------------------- Michael Angelakis President and Chief Executive Officer SELLER: PEGASUS CABLE TELEVISION, INC. By: --------------------------------- Name: --------------------------- Title: --------------------------- ESCROW AGENT: IBJ SCHRODER BANK & TRUST COMPANY By: -------------------------------- Name: -------------------------- Title: -------------------------- 46499 Execution Page of Escrow Agreement Among State Cable TV Corp., Pegasus Cable Television, Inc., and IBJ Schroder Bank & Trust Company Exhibit 2.5 -- Page 7 EXHIBIT A JOINT DISBURSEMENT NOTICE [DATE] IBJ Schroder Bank & Trust Company One State Street New York, NY 10004 Attn: Corporate Trust and Agencies Administration Ladies and Gentlemen: Pursuant to Section 4 of that certain Escrow Agreement dated as of November 6, 1996, by and among Pegasus Cable Television, Inc. ("Seller"), State Cable TV Corp., ("Buyer"), and IBJ Schroder Bank & Trust Company, Buyer and Seller hereby jointly notify and instruct you to transfer $________________ from the Escrow Funds to [Seller's/Buyer's] account with _________ Bank (ABA No. ______________) (Account No. _________), all as required by said Section 4. Sincerely, PEGASUS CABLE TELEVISION, INC. By: --------------------------------- Name: --------------------------- Title: --------------------------- STATE CABLE TV CORP. By: --------------------------------- Michael Angelakis President and Chief Executive Officer Exhibit 2.5 -- Page 8 SCHEDULE I $________ per annum, or any part thereof, as prorated for partial years. Exhibit 2.5 -- Page 9 SCHEDULE II Telephone Number(s) for Call-Backs and Person(s) Designated to Confirm Funds Transfer Instructions If to Buyer: Name Telephone Number ---- ---------------- 1. Michael Angelakis 207-623-3685 2. ______________________ _____________________ 3. ______________________ _____________________ If to Seller: Name Telephone Number ---- ---------------- 1. Robert N. Verdecchio 610-341-1805 2. William E. Miles 610-341-1838 3. ______________________ ______________________ Telephone call-backs shall be made to each of Buyer and Seller if joint instructions are required pursuant to the Agreement. Exhibit 2.5 -- Page 10 Exhibit 3.2 to Asset Purchase Agreement between State Cable TV Corp. and Pegasus Cable Television, Inc. NONCOMPETITION AGREEMENT ------------------------ THIS NONCOMPETITION AGREEMENT dated as of ____________, 1997, is given and made by Pegasus Cable Television, Inc., a Massachusetts corporation ("Seller"), to and for the benefit of State Cable TV Corp., a Delaware corporation ("Buyer"). RECITALS -------- A. Seller and Buyer have entered into the Asset Purchase Agreement, dated as of November __, 1996 (the "Purchase Agreement"), pursuant to which on the date hereof Buyer has purchased from Seller and Seller has sold to Buyer substantially all of the assets (the "Assets") of Seller's cable television systems which serve Bethlehem, Franconia, Moultonborough, Ossipee, Tamworth and Tuftonborough, New Hampshire (the "Systems"). B. The Purchase Agreement provides that, as a condition to Buyer's performance of its obligations at Closing under the Purchase Agreement, Seller shall execute and deliver to Buyer this Noncompetition Agreement. All capitalized terms used herein but not herein defined shall have the meanings assigned to such terms in the Purchase Agreement. AGREEMENTS ---------- As an inducement for Buyer to perform its obligations under the Purchase Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller hereby agrees, acknowledges, represents, and warrants as follows: 1. For a period of two (2) years from the date hereof, neither Seller nor any of Seller's Affiliates (as defined in the Securities Act) will engage in, or own, manage, operate, or control any entity engaged in, the business of operating a cable television system, multipoint distribution system, multichannel multipoint distribution system, cable satellite master antenna television system, direct broadcast satellite service or distributorship, or any similar multiple channel video system or service within the areas currently served by the Systems or covered by Exhibit 3.2 - Page 1 the Franchises; provided that, notwithstanding the foregoing, nothing herein shall be construed to: (a) prohibit or restrict ownership of a company's securities that are listed on a national securities exchange or the National Association of Securities Dealers Automated Quotation System, which (i) constitutes less than 5% of the outstanding voting stock of such company, (ii) does not constitute control over such company, and (iii) is held solely for investment purposes; or (b) limit Seller in its marketing and distribution of DIRECTV programming pursuant to its existing NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, as amended, except that, with respect to such marketing and distribution, for a period of two (2) years from the date hereof neither Seller nor any of Seller's Affiliates (as defined in the Securities Act) directly or indirectly: (i) will solicit, through the use of direct mailings (including through Val Pack or Tri Mark), door-to-door marketing, telemarketing or other direct or target marketing activities, the residents, owners or managers of homes or multiple dwelling units located within any of the areas covered by the zip codes listed on Attachment A hereto; or (ii) will advertise in any newspaper or other publication listed on Attachment A or on any radio station listed on Attachment A; Provided, that so long as neither Seller nor any Seller Affiliate has directed the Persons described in clauses (A), (B) or (C) below to take any of the activities described in clauses (i) and (ii) of this Section 2(b), then the restrictions set forth in this Section 2(b) will not restrict (A) payment of sales commissions to retailers and/or installers who serve as agents of Seller's Affiliate in its marketing and distribution of DirecTV programming; (B) payment of sales commissions to retailers, distributors and/or other agents who market and distribute DirecTV pursuant to agreements with DirecTV and/or the National Rural Telecommunications Cooperative; (C) cooperative marketing, promotion, advertising and sales commission programs of Seller's Affiliate to the extent that Seller's Affiliate pays marketing, promotion and advertising costs and sales commissions pursuant to a standard dealer program in New England; and (D) solicitation of prospective DirecTV customers who contact Seller's Affiliate as a result of advertising not otherwise prohibited above. 3. This Noncompetition Agreement is necessary for the protection of legitimate business interests of Buyer in purchasing the Assets. 4. The scope of this Noncompetition Agreement in time, geography and types and limits of activities is reasonable. Exhibit 3.2 - Page 2 5. Because of the unique nature of the Assets comprising the System and the confusion to subscribers, the public and regulatory bodies that a breach of this Noncompetition Agreement would create, Buyer will not have an adequate remedy at law if Seller breaches this Noncompetition Agreement. Accordingly, Buyer shall be entitled, upon application to any court of competent jurisdiction, to an injunction prohibiting violations of this Noncompetition Agreement, in addition to any rights or remedies to which Buyer may be entitled at law or in equity. Seller hereby waives, and covenants not to assert in any action or proceeding, any claim or defense that there exists an adequate remedy at law for its breach of this Noncompetition Agreement. 6. If this Noncompetition Agreement is found by any court of competent jurisdiction to be too broad in extent, whether as to activities restricted, the time period of such restrictions or geographic areas in which such activities are restricted, this Noncompetition Agreement shall nevertheless remain effective but shall be deemed amended to the extent considered by such court to be reasonable, and shall be fully enforceable as so amended. 7. The failure of Buyer to insist, in any one or more instances, upon performance of any of the terms or conditions of this Noncompetition Agreement shall not be construed as a waiver of future performance of any such term or condition, and the obligations of Seller, and any other person bound by this Noncompetition Agreement pursuant to Paragraph 1 hereof, with respect thereto shall continue in full force and effect. 8. This Noncompetition Agreement shall inure to the benefit of, and shall be fully enforceable by, Buyer or any Person that has acquired all or substantially all of the assets or capital stock of Buyer. 9. The validity, performance, and enforcement of this Noncompetition Agreement and all transaction documents, unless expressly provided to the contrary, shall be governed by the laws of the State of Delaware without giving effect to the principles of conflicts of law of such state. 10. All notices, requests, demands, applications, services of process, and other communications which are required to be or may be given under this Agreement shall be in writing and shall be deemed to have been duly given if sent by facsimile transmission, delivered by overnight or other courier service, or mailed, certified first class mail, postage prepaid, return receipt requested, to the parties hereto at the following addresses: To Seller: Pegasus Cable Television, Inc. 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, PA 19087 Attn: Howard Verlin Telecopy: 610/341-1835 Exhibit 3.2 - Page 3 Copies (which shall not constitute notice): Pegasus Cable Television, Inc. 5 Radnor Corporate Center 100 Matsonford Road, Suite 454 Radnor, PA 19087 Attn: Ted S. Lodge, Esq. Telecopy: 610/341-1835 To Buyer: State Cable TV Corp. 261 State Street Augusta, ME 04330 Attn: Michael Angelakis Telecopy: 207/623-5145 Copies (which shall not constitute notice): Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attn: Jeffry L. Hardin Telecopy: 202/265-5706 or to such other address as any party shall have furnished to the other by notice given in accordance with this Section. Such notice shall be effective, (i) if delivered by courier service or by facsimile transmission, upon actual receipt by the intended recipient (with appropriate confirmation thereof), or (ii) if mailed, upon the earlier of five days after deposit with the U.S. Postal Service or the date of delivery as shown on the return receipt therefor. 11. This Agreement embodies the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, with respect thereto. This Agreement may not be modified orally, but only by an agreement in writing signed by the party or parties against whom any waiver, change, amendment, modification, or discharge may be sought to be enforced. 12. This Agreement shall inure to the benefit of and will be binding upon the parties hereto and their respective successors and assigns. 13. This Agreement may be executed in any number of counterparts, each of which, when executed, shall be deemed to be an original and all of which together will be deemed to be one and the same instrument. Exhibit 3.2 - Page 4 IN WITNESS WHEREOF, Buyer and Seller have executed this Noncompetition Agreement as of the date first written above. STATE CABLE TV CORP. By: --------------------------------------- Michael Angelakis President and Chief Executive Officer PEGASUS CABLE TELEVISION, INC. By: ---------------------------------------- Name: Title: Exhibit 3.2 - Page 5 ATTACHMENT A TO NONCOMPETITION AGREEMENT Zip Codes Bethlehem 03574 Franconia 03580 Chocorua 03817 Tamworth 03886 So. Tamworth 03883 Melvin Village 03850 Moultonborough 03254 Ctr. Tuftonborough 03816 Ossipee 03864 Ctr. Ossipee 03814 W. Ossipee 03890 Newspapers and Other Publications Mount Washington Valley Mountain Ear Lakes Region Courier White Mountain Shopper Carroll County Independent - Ossipee Center Conway Daily Sun - Conway Granite State News - Wolfeboro Radio Stations WLTN - 96.7 FM, 1400 AM - Grafton WZPK - 103.7 FM - Carroll/Grafton WLNH - 98.3 FM - Carroll Exhibit 3.2 - Page 6 Exhibit 7.1(f) to Asset Purchase Agreement between State Cable TV Corp. and Pegasus Cable Television, Inc. SELLER'S FCC COUNSEL OPINION __________________, 1997 State Cable TV Corp. 261 State Street Augusta, ME 04330 Attention: Michael Angelakis President and Chief Executive Officer Re: Asset Purchase Agreement dated as of November __, 1996 (the "Agreement"), by and between State Cable TV Corp., a Delaware corporation (the "Buyer"), and Pegasus Cable Television, Inc., a Massachusetts corporation (the "Seller"). Ladies and Gentlemen: This letter is rendered to you pursuant to Section 7.1(f) of the Agreement. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Agreement. We have acted as special Federal Communications Commission ("FCC") counsel to Seller. This opinion is limited to certain matters arising under the Communications Act of 1934, as amended by the Cable Communications Policy Act of 1984, the Cable Consumer Protection and Competition Act of 1992 ("1992 Cable Act") and the Telecommunications Act of 1996 ("1996 Act") (hereinafter collectively referred to as the "Act"); the rules and regulations of the FCC promulgated pursuant thereto; the Copyright Act of 1976 (the "Copyright Act"); and the rules and regulations of the U.S. Copyright Office promulgated pursuant thereto, all as applicable to the cable television operations conducted by Seller in the communities listed on Attachment 1 hereto (the "Cable Systems"). For purposes of this opinion, we have examined originals or copies of such documents, certificates, and public records as we have deemed necessary or appropriate. We have also examined the Agreement. We have assumed the genuineness of all signatures, the conformity to original documents of all documents submitted to us as certified or photocopies and the authenticity of the originals of such latter documents. As to various questions of fact in Exhibit 7.1(f) -- Page 1 connection with this opinion, we have relied upon actual examination of the publicly available files of the FCC and the U.S. Copyright Office, our own files, and pertinent statements and representations of representatives of Seller. It is possible that there may be matters pending before the FCC relating to Seller of which we do not have knowledge because such matters have not yet been identified in the appropriate files of the FCC. As of the date of this letter, however, no such matters were found in the appropriate files of the FCC. Based upon, subject to and limited by the foregoing, and except as otherwise set forth on Attachment 2, we are of the opinion that: 1. Seller holds all licenses, permits and authorizations from the FCC required for the operation of the Cable Systems as we have been informed they are currently being operated. Attachment 1 hereto lists all such licenses, permits and authorizations held by Seller, which have been issued by the FCC ("FCC Licenses"). All such FCC Licenses remain in full force and effect. The FCC has authorized the assignment of the FCC Licenses to Buyer. 2. No other FCC authorizations, consents or approvals are required by Seller in order to permit consummation of the transactions contemplated by the Agreement. 3. All communities served by the Cable Systems have been registered with the FCC. These communities, and their FCC community unit identifiers, are listed on Attachment 1. 4. All required notifications have been filed with, and all necessary authorizations have been received from, the FCC with respect to the utilization of any frequencies in the 108- 137 Mhz and 225-400 Mhz bands which we have been advised are currently being utilized on the Cable Systems. The parameters of all such notifications, including Cable Systems location, coordinates, radius, channels utilized, frequency offsets, and maximum peak power, are set forth on Attachment 1. FCC Forms 320 containing a passing Cumulative Signal Leakage Index ("CLI"), as defined by the FCC, have been filed annually for each community since 1990. 5. All required Cable Television Annual Employment Reports (FCC Form 395-A) have been filed for Seller and the Cable Systems for the calendar years 1989 through 1996. Seller's employment units have had less than 6 employees each since 1989. 6. Annual Reports of Cable Television Systems (FCC Forms 325, Schedule A) have been timely filed for each of the Cable Systems in 1994 (covering the reporting year 1993) and in 1995 (covering the reporting year 1994). No Forms 325-A have been sent out by the FCC for 1996 (covering the reporting year 1995). 7. All notifications to the Federal Aviation Administration ("FAA") and all registrations with the FCC required by FCC rules or regulations have been made with respect to the construction and/or alteration of those antenna structures which are being used in connection with the operation of the Cable Systems. The height, location and FAA study Exhibit 7.1(f) -- Page 2 number (where applicable) and FCC registration number of such antenna structures are set forth on Attachment 1. 8. To the best of our knowledge, after due inquiry, there are no outstanding judgments, decrees or orders (including but not limited to rate complaints and "must-carry" complaints) which have been issued by the FCC against Seller or the Cable Systems. Other than proceedings affecting the cable television industry generally, there are no actions or proceedings (including but not limited to rate complaints and "must-carry" complaints) pending before the FCC regarding Seller or the Cable Systems. 9. Seller does not operate any SMATV, MDS or MMDS system within the Cable Systems' franchise areas. 10. All Statements of Account required pursuant to Section 111 of the Copyright Act for the accounting periods beginning with the January 1-June 30, 1993 accounting period and ending with the [January 1-June 30, 1996 or most recent] accounting period, and all required royalty payments, have been filed with the U.S. Copyright Office in connection with the operation of the Cable Systems. There is no actual or threatened litigation by the U.S. Copyright Office or any other person with respect to any copyright filings or royalty fee payments made for the Cable Systems. All correspondence received by Seller or the Cable Systems which questions any of the Statements of Account filed for the Cable Systems or the royalty payments submitted therewith has been fully responded to, and all issues raised therein have been resolved. 11. The execution and delivery by Seller of the Transaction Documents and the consummation by Seller of the Closing do no violate the Act, any rule or regulation thereunder or any other law, rule or regulation administered by the FCC. This opinion is rendered only to you and is solely for your benefit in connection with the Agreement and the transactions contemplated thereby. This opinion may not be relied upon by any other person for any purpose without our prior written consent. Sincerely, Exhibit 7.1(f) -- Page 3 ATTACHMENT 1 A. Communities Served and FCC Code Numbers: B. FCC Licenses: CARS Stations: None Business Radio Stations: None TVRO Earth Stations C. Authorized Aeronautical Frequency Use: System: _____________ Coordinates: __(degree) __' __" N. Lat. __(degree) __' __" W. Long. Radius: ___ Km Channels: Maximum Peak Power: __ dBmV D. Antenna Structures Utilized: (Coordinates, overall height AMSL, and distance to nearest aircraft landing area for each of the following antenna structures are based on horizontal geodetic referencing system NAD27.) Location: _________ Height AGL: ___' Overall Height AMSL: ___' Coordinates: __(degree) __' __" N. Lat. __(degree) __' __" W. Long Distance to Nearest Aircraft Landing Areas: ____ mi. Aero Study No.: ___________ FCC Registration No.: _______ ATTACHMENT 2 [Exceptions to be drafted] Exhibit 7.2(e) to Asset Purchase Agreement between State Cable TV Corp. and Pegasus Cable Television, Inc. BUYER'S COUNSEL OPINION ----------------------- ________________, 1997 Pegasus Cable Television, Inc. 5 Radnor Corporate Center 100 Matsonford Road, Suite 454 Radnor, PA 19087 Ladies and Gentlemen: We have acted as counsel to State Cable TV Corp. ("Buyer"), a Delaware corporation, in connection with that certain Asset Purchase Agreement dated as of November __, 1996 by and between Buyer and Pegasus Cable Television, Inc. ("Seller"), a Massachusetts corporation, ("Purchase Agreement"). The Purchase Agreement and the documents executed and delivered by Buyer pursuant thereto before and at the Closing are referred to herein as the "Transaction Documents." All capitalized terms used but not defined herein have the meanings assigned to them in the Purchase Agreement. In such capacity, we have examined originals or copies certified or otherwise identified to our satisfaction, of the Transaction Documents and of such corporate records and other agreements, documents and instruments, and of such certificates or comparable documents of public officials and officers and representatives of Buyer, and have made such inquiries of such officers and representatives and have considered such matters of law as we have deemed appropriate as the basis for the opinions hereinafter set forth. In all cases, we have assumed the legal capacity of each natural person signing the Transaction Documents and other relevant documents and instruments, the genuineness of signatures, the authenticity of documents submitted to us as originals, the conformity to authentic original documents of documents submitted to us as copies and the accuracy and completeness of all corporate records and other information of Buyer. We have further assumed that the Transaction Documents have been duly authorized, executed and delivered by, and are the legal, valid and binding obligations of, all parties thereto other than Buyer. As to questions of fact material to this opinion, we have relied upon the accuracy of the representations and warranties made by the parties in the Transaction Documents and upon certificates of public officials. Statements made herein "to our knowledge" or with respect to Exhibit 7.2(e) -- Page 1 matters "known to us" are based solely on information actually known to us. We have not undertaken any independent investigation of factual matters. Based upon the foregoing, and subject to the qualifications, limitations and assumptions stated herein, we are of the following opinions: 1. Buyer has been duly incorporated and is a corporation validly existing and in good standing under the laws of the State of Delaware. 2. Buyer has the corporate power to conduct its business as, to the best of our knowledge, it is now conducted. Buyer has the corporate power to execute and deliver the Transaction Documents and to perform its obligations thereunder. The execution, delivery and performance by Buyer of the Transaction Documents have been duly authorized by all necessary corporate action on the part of Buyer. 3. Each of the Transaction Documents has been duly executed and delivered by Buyer and is a legal, valid and binding obligation of Buyer, enforceable against it in accordance with its terms. 4. The execution and delivery by Buyer of the Transaction Documents and the consummation by Buyer of the Closing do not (i) conflict with or violate any provision of the articles of incorporation or bylaws of Buyer; (ii) to our knowledge, violate any provision of any Legal Requirement, including, but not limited to, the Communications Act of 1934, as amended, any rule or regulation thereunder or any other law, rule or regulation administered by the Federal Communications Commission; (iii) to our knowledge, conflict with, violate, result in a breach of, or constitute a default under any agreement to which Buyer is a party or by which Buyer or the assets or properties owned or leased by it are bound or affected; or (iv) to our knowledge, require any consent, approval or authorization of, or filing of any certificate, notice, application, report, or other document with, any Governmental Authority or other Person. 5. Furthermore, we advise you that, to the best of our knowledge, there is no litigation, adversarial proceeding or governmental investigation pending or threatened against Buyer that, if adversely determined, would have a material adverse effect on the ability of Buyer to perform its obligations under the Transaction Documents. The opinions set forth above are subject to the following qualifications and limitations: (a) We express no opinion as to the effect of the application of equitable principles (whether considered in a proceeding at law or in equity) or of bankruptcy, insolvency, reorganization, moratorium and other laws now or hereafter in effect affecting the enforcement of creditors' rights and remedies (including those relating to fraudulent conveyances and transfers). (b) We express no opinion concerning what law will actually govern the Transaction Documents or concerning the enforceability of any choice of law provisions in the Transaction Documents. Exhibit 7.2(e) -- Page 2 (c) Except as set forth in Paragraph 4, we express no opinion concerning the Communications Act of 1934, as amended, any rule or regulation thereunder or any other law, rule or regulation administered by the Federal Communications Commission or any law, rule or regulation administered by franchising authorities in Bethlehem, Franconia, Moultonborough, Ossipee, Tamworth and Tuftonborough, New Hampshire. We are members of the bar of the District of Columbia. We express no opinion concerning the laws of any jurisdiction other than the law of the District of Columbia, the federal law of the United States of America and the General Corporation Law of the State of Delaware. To the extent that any matter with respect to which an opinion is rendered herein is governed by the laws of another jurisdiction, we have, with your permission, assumed that the laws of such other jurisdiction are substantively the same as the laws of the District of Columbia. This opinion is given as of the date hereof and is limited to the law as now in effect and based on facts of which we now have knowledge. We do not undertake to advise you of any change in the law that may occur, or of any fact that may come to our attention, after the date hereof. You may not rely on this opinion for any purpose other than in connection with the transactions contemplated by the Transaction Documents and no person other than you may rely on this opinion for any purpose, without our written consent. Sincerely yours, FLEISCHMAN AND WALSH, L.L.P. Exhibit 7.2(e) -- Page 3 Exhibit 8.2(a) to Asset Purchase Agreement between State Cable TV Corp. and Pegasus Cable Television, Inc. BILL OF SALE AND ASSIGNMENT AND ASSUMPTION AGREEMENT ---------------------------------------------------- THIS BILL OF SALE AND ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Bill of Sale") effective as of [11:59 p.m./12:00 a.m.], ____________________ , 1997, is given by Pegasus Cable Television, Inc., a Massachusetts corporation ("Seller"), to State Cable TV Corp., a Delaware corporation ("Buyer"). RECITALS -------- Seller and Buyer have entered into an Asset Purchase Agreement dated as of November __, 1996 (the "Purchase Agreement"), providing, among other things, for the sale, conveyance, assignment and transfer by Seller to Buyer of substantially all of the assets of Seller's cable television systems which serve Bethlehem, Franconia, Moultonborough, Ossipee, Tamworth and Tuftonborough, New Hampshire (the "Systems"). All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Purchase Agreement. AGREEMENTS ---------- 1. Assignment of Assets. For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Seller hereby sells, conveys, assigns, and transfers to Buyer, free and clear of all Liens (except for Permitted Liens), all rights, title and interests of Seller or any affiliate of Seller in and to all of the assets and properties, real and personal, tangible and intangible, owned or leased, used or held for use by Seller in its operation of the Systems (the "Assets"), including, without limitation, the Assets described below, to have and to hold such Assets to Buyer, its successors and assigns for their use forever: (a) All tangible personal property used or held for use by Seller in its operation of the Systems, including, without limitation, the property described on Schedule 2.1(a) to the Purchase Agreement; (b) All interests in Leased Real Property and all improvements thereon owned by Seller, including, without limitation, the Leased Real Property described on Schedule 2.1(b) to the Purchase Agreement; (c) The Franchises described on Schedule 2.1(c) to the Purchase Agreement; (d) All Licenses, including, without limitation, the Licenses described on Schedule 2.1(d) to the Purchase Agreement; Exhibit 8.2(a) - Page 1 (e) All Contracts, including, without limitation, the Contracts described on Schedule 2.1(e) to the Purchase Agreement; (f) All subscriber, trade and other accounts receivable arising from Seller's operation of the Systems, except for accounts receivable relating to programming agreements and advertising aired prior to Closing; and (g) All engineering records, files, data, drawings, blueprints, schematics, reports, lists, plans and processes, and all files of correspondence, lists, records, and reports concerning subscribers and prospective subscribers of the Systems, personnel records relating to employees of any System who are to be hired by Buyer, signal and program carriage, and dealings with Governmental Authorities, including, but not limited to, all reports filed by or on behalf of Seller with the FCC with respect to the Systems and statements of account filed by or on behalf of Seller with the U.S. Copyright Office with respect to the Systems. Notwithstanding the foregoing, nothing herein shall be construed as the sale, conveyance, or transfer of any of the Excluded Assets, including, but not limited to, (i) the assets and properties of Seller or its affiliates relating solely to its distribution of DIRECTV as such assets are described on Schedule 2.2 of the Purchase Agreement; (ii) the assets and properties of Seller located outside of New Hampshire, whether real or personal, tangible or intangible, owned or leased, used or held for use by Seller in its operation of the Systems, including, but not limited to the billing system software and spectrum analyzer, but excluding the Assets described in Sections 1(c), (d), (e), (f) and (g) of this Bill of Sale and the Assets described on Schedule 2.1(a) of the Purchase Agreement; and (iii) any other items described on Schedule 2.2 of the Purchase Agreement. 2. Assumption of Obligations. Buyer hereby agrees to assume, perform and discharge in a timely manner the Assumed Obligations and Liabilities. As provided therefor under Section 11.2 of the Purchase Agreement, Buyer shall indemnify Seller for and hold Seller harmless from Losses that may arise in connection with Buyer's performance or non-performance of the Assumed Obligations and Liabilities; provided, however, that Buyer shall neither have nor incur any liability, responsibility or obligation with respect to any of the Retained Obligations and Liabilities or Seller's performance or non-performance of any of the same. To the extent provided therefore under Article 11 of the Purchase Agreement, Seller shall indemnify Buyer for and hold Buyer harmless from Losses that may arise in connection with such performance or non-performance by Seller of the Retained Obligations and Liabilities. 3. Additional Instruments. Seller agrees to (a) furnish to Buyer such other and further instruments of conveyance, assignment or transfer, (b) provide such notices, releases, acquittances and other documents, and (c) do or cause to be done all other acts and things that Buyer may reasonably request to cause the Assets to be conveyed hereby to be sold, conveyed, assigned and transferred to Buyer and cause title to such Assets to be vested in Buyer. 4. Relationship to Purchase Agreement. This Bill of Sale is executed and delivered pursuant to the Purchase Agreement, subject to the covenants, representations, warranties, and other provisions thereof. No provision set forth in this Bill of Sale shall be deemed to enlarge, Exhibit 8.2(a) - Page 2 alter or amend the terms or provisions of the Purchase Agreement. In the event of any conflict between the provisions of this Bill of Sale and the provisions of the Purchase Agreement, the provisions of the Purchase Agreement shall control. 5. Nature of Rights and Obligations. The rights, benefits, obligations and liabilities granted or incurred hereunder are personal to the parties hereto and their successors and assigns, and are not intended to be binding upon or inure to the benefit of any other party. 6. Governing Law. The validity, performance, and enforcement of this Bill of Sale shall be governed by the laws of the State of Delaware without giving effect to the principles of conflicts of law of such state. In accordance with Title 6, Section 2708 of the Delaware Code Annotated, each party hereby submits to the jurisdiction of the courts of the State of Delaware and agrees to be served with legal process from any of such courts. Each party hereby irrevocably waives, to the fullest extent permitted by law, any objection that it may have, whether now or in the future, to the laying of venue in, or to the jurisdiction of, any and each of such courts for the purpose of any such suit, action, proceeding, or judgment and further waives any claim that any such suit, action, proceeding, or judgment has been brought in an inconvenient forum. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.] Exhibit 8.2(a) - Page 3 IN WITNESS WHEREOF, Buyer and Seller have executed this Bill of Sale as of the time and date first written above. BUYER STATE CABLE TV CORP. By: --------------------------------------- Michael Angelakis President and Chief Executive Officer SELLER: PEGASUS CABLE TELEVISION, INC. By: ----------------------------------------- Name: ----------------------------------- Title: ----------------------------------- Exhibit 8.2(a) - Page 4 EX-12.1 3 EXHIBIT 12.1 Pegasus Communications Corporation Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Dollars in thousands)
Nine months ended Years Ended December 31, September 30, ---------------------------------------------------------------------------------------------- Pro Forma Pro Forma 1991 1992 1993 1994 1995 1995 1995 1996 1996 ---------------------------------------------------------------------------------------------- Income (loss) before income taxes $(1,016) $(1,686) $(4,805) $(4,878) $(8,127) $(11,328) $(6,461) $(8,928) $(9,644) and extraordinary items Preferred stock dividends -- -- -- -- -- (12,000) -- -- (9,000) ------- ------- ------- ------- ------- -------- ------- ------- -------- Deficiency of earnings $(1,016) $(1,686) $(4,805) $(4,878) $(8,127) $(23,328) $(6,461) $(8,928) $(18,644) ======= ======= ======= ======= ======= ======== ======= ======= ========
EX-21.1 4 EXHIBIT 21.1 EXHIBIT 21.1 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 Ohio, 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 5 EXHIBIT 23.2 HERBEIN + COMPANY INC. CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the reference to our firm under the captions "Experts" and "Selected Historical and Pro Forma Combined Financial Data" in the Form S-1 Registration Statement of Pegasus Communications Corporation filed with the Securities and Exchange Commission relating to the registration of Units, consisting of Series A Cumulative Exchangeable Preferred Stock and Class A Common Stock Warrants, 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 December 20, 1996 EX-23.3 6 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report dated May 31, 1996 except as to Note 14 for which the date is November 8, 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." Coopers & Lybrand L.L.P. Philadelphia, Pennsylvania December 19, 1996 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report dated March 8, 1996 on our audits of the financial statements of WTLH, Inc. Coopers & Lybrand L.L.P. Jacksonville, Florida December 19, 1996 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report, which includes an explanatory paragraph regarding the restatement of depreciation expense, dated August 9, 1996 except as to Note 10 for which the date is August 29, 1996, on our audits of the financial statements of Dom's Tele-Cable, Inc. Coopers & Lybrand L.L.P. San Juan, Puerto Rico December 19, 1996 EX-23.4 7 EXHIBIT 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the use of our report on the balance sheets of Portland Broadcasting, Inc. as of September 25, 1994 and September 24, 1995 and the related statements of operations, deficiency in assets, and cash flows for each of the three fiscal years in the period ended September 24, 1995, dated October 27, 1995, in the Registration Statement Form S-1 and related Prospectus of Pegasus Communications Corporation for the registration of its Series A Cumulative Exchangeable Preferred Stock and Warrants. /s/ Ernst & Young LLP - ------------------------------- ERNST & YOUNG LLP Pittsburgh, Pennsylvania December 20, 1996 EX-23.5 8 EXHIBIT 23.5 CONSENT OF INDEPENDENT ACCOUNTANTS INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Pegasus Communications Corporation on Form S-1 of our report dated April 26, 1996, except for Note 9 as to which the date is 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 the Prospectus. /s/ Deloitte & Touche LLP - --------------------------- DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania December 20, 1996 EX-25 9 EXHIBIT 25.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) FIRST UNION NATIONAL BANK (Exact Name of Trustee as Specified in its Charter) 22-1147033 (I.R.S. Employer Identification No.) 101 NORTHSIDE PLAZA, ELKTON, MARYLAND (Address of Principal Executive Offices) 21921 (Zip Code) FIRST UNION NATIONAL BANK 123 SOUTH BROAD STREET PHILADELPHIA, PA 19109 ATTENTION: CORPORATE TRUST ADMINISTRATION (215) 985-6000 (Name, address and telephone number of Agent for Service) PEGASUS COMMUNICATIONS CORPORATION (Exact Name of Obligor as Specified in its Charter) DELAWARE (State or other jurisdiction of Incorporation or Organization) 51-0374669 (I.R.S. Employer Identification No.) C/O PEGASUS COMMUNICATIONS MANAGEMENT COMPANY SUITE 454,5 RADNOR CORPORATE CENTER,RADNOR,PA (address of Principal Executive Offices) 19087 (Zip Code) DEBT SECURITIES % SENIOR SUBORDINATED EXCHANGE NOTES DUE 2006 1. General information. Furnish the following information as to the trustee: a) Name and address of each examining or supervisory authority to which it is subject: Comptroller of the Currency United States Department of the Treasury Washington, D.C. 20219 Federal Reserve Bank (3rd District) Philadelphia, Pennsylvania 19106 Federal Deposit Insurance Corporation Washington, D.C. 20429 b) Whether it is authorized to exercise corporate trust powers. Yes. 2. Affiliations with obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None. 3. Voting securities of the trustee. Furnish the following information as to each class of voting securities of the trustee: Not applicable - see answer to Item 13. 4. Trusteeships under other indentures. If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligor are outstanding, furnish the following information: Not applicable - see answer to Item 13. 5. Interlocking directorates and similar relationships with the obligor or underwriters. If the trustee or any of the directors or executive officers of the trustee is a director, officer, partner, employee, appointee, or representative of the obligor or of any underwriter for the obligor, identify each such person having any such connection and state the nature of each such connection. Not applicable - see answer to Item 13. 6. Voting securities of the trustee owned by the obligor or its officials. Furnish the following information as to the voting securities of the trustee owned beneficially by the obligor and each director, partner, and executive officer of the obligor: Not applicable - see answer to Item 13. 7. Voting securities of the trustee owned by underwriters or their officials. Furnish the following information as to the voting securities of the trustee owned beneficially by each underwriter for the obligor and each director, partner, and executive officer of each such underwriter: Not applicable - see answer to Item 13. 8. Securities of the obligor owned or held by the trustee. Furnish the following information as to securities of the obligor owned beneficially or held as collateral security for obligations in default by the trustee: Not applicable - see answer to Item 13. 9. Securities of underwriters owned or held by the trustee. If the trustee owns beneficially or holds as collateral security for obligations in default any securities of an underwriter for the obligor, furnish the following information as to each class of securities of such underwriter any of which are so owned or held by the trustee: Not applicable - see answer to Item 13. 10. Ownership or holdings by the trustee of voting securities of certain affiliates or security holders of the obligor. If the trustee owns beneficially or holds as collateral security for obligations in default voting securities of a person who, to the knowledge of the trustee (1) owns 10 percent or more of the voting stock of the obligor or (2) is an affiliate, other than a subsidiary, of the obligor, furnish the following information as to the voting securities of such person: Not applicable - see answer to Item 13. 11. Ownership or holdings by the trustee of any securities of a person owning 50 percent or more of the voting securities of the obligor. If the trustee owns beneficially or holds as collateral security for obligations in default any securities of a person who, to the knowledge of the trustee, owns 50 percent or more of the voting securities of the obligor, furnish the following information as to each class of securities of such person any of which are so owned or held by the trustee: Not applicable - see answer to Item 13. 12. Indebtedness of the obligor to the trustee. Except as noted in the instructions, if the obligor is indebted to the trustee, furnish the following information: Not applicable - see answer to Item 13. 13. Defaults by the obligor. (a) State whether there is or has been a default with respect to the securities under this indenture. Explain the nature of any such default. None. (b) If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligor are outstanding, or is trustee for more than one outstanding series of securities under the indenture, state whether there has been a default under any such indenture or series, identify the indenture or series affected, and explain the nature of any such default. None. 14. Affiliations with the underwriters. If any underwriter is an affiliate of the trustee, describe each such affiliation. Not applicable - see answer to Item 13. 15. Foreign trustee. Identify the order or rule pursuant to which the trustee is authorized to act as sole trustee under indentures qualified or to be qualified under the Act. Not applicable - trustee is a national banking association organized under the laws of the United States. 16. List of Exhibits. List below all exhibits filed as part of this statement of eligibility. 1. Copy of Articles of Association of the trustee as now in effect.** - --- 2. Copy of the Certificate of the Comptroller of the Currency date - --- dated January 11, 1994, evidencing the authority of the trustee to transact business.* 3. Copy of the Certification of Fiduciary Powers of the trustee by the - --- Office of the Comptroller of the Currency dated July 24, 1992.* 4. Copy of existing by-laws of the trustee.** - --- 5. Copy of each indenture referred to in Item 4, if the obligor is in - --- default. -Not Applicable. X 6. Consent of the trustee required by Section 321(b) of the Act. - --- X 7. Copy of report of condition of the trustee at the close of business on - --- September 30, 1996, published pursuant to the requirements of its supervising authority. 8. Copy of any order pursuant to which the foreign trustee is - --- authorized to act as sole trustee under indentures qualified or to be qualified under the Act. - Not Applicable 9. Consent to service of process required of foreign trustees pursuant - --- to Rule 10a-4 under the Act. - Not Applicable - --------------------- *Previously filed with the Securities Exchange Commission on February 11, 1994 as an Exhibit to Form T-1 in connection with Registration Statement Number 22-73340 and ** previously filed with the Securities Exchange Commission on March 6,1996 with Registration Statement Number 333-1102 and incorporated herein by reference NOTE The trustee disclaims responsibility for the accuracy or completeness of information contained in this Statement of Eligibility and Qualification not known to the trustee and not obtainable by it through reasonable investigation and as to which information it has obtained from the obligor and has had to rely or will obtain from the principal underwriters and will have to rely. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, First Union National Bank, a national banking association organized and existing under the laws of the United States of America, has duly caused this Statement of Eligibility and Qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Philadelphia and Commonwealth of Pennsylvania, on the 21st day of November, 1996. FIRST UNION NATIONAL BANK By: /s/ Alan G. Finn -------------------------- Alan G. Finn Assistant Vice President EXHIBIT 6 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, and in connection with the proposed issue of Pegasus Communications Corporation, Senior Exchange Notes due 2006, First Union National Bank, hereby consents that reports of examinations by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. FIRST UNION NATIONAL BANK By: /s/ Alan G. Finn -------------------------------- Alan G. Finn Assistant Vice President Philadelphia, Pennsylvania November 10, 1996 EXHIBIT 7 REPORT OF CONDITION Consolidating domestic and foreign subsidiaries of the First Union National Bank of Elkton in the state of Maryland, at the close of business on September 30, 1996 published in response to call made by Comptroller of the Currency, under title 12, United States Code, Section 161. Charter Number 33869 Comptroller of the Currency Northeastern District. Statement of Resources and Liabilities ASSETS Thousand of Dollars Cash and balance due from depository institutions: Noninterest-bearing balances and currency and coin ............. 1,744,126 Interest-bearing balances ...................................... 32,119 Securities ....................................................... ///////// Hold-to-maturity securities .................................... 471,801 Available-for-sale securities .................................. 2,420,442 Federal funds sold and securities purchased under agreements ..... ////////// to resell in domestic offices of the bank and of it ............ ////////// Edge and Agreement subsidiaries, and in IBFs: .................. ////////// Federal funds sold ............................................. 1,543,706 Securities purchased under agreements to resell ................ 324,410 Loans and lease financing receivables: Loan and leases, net of unearned income.................19,124,413 LESS: Allowance for loan and lease losses..................28,4428 LESS: Allocated transfer risk reserve............................0 Loans and leases, net of unearned income, allowance, and reserve .......................................................... 18,843,971 Assets held in trading accounts .................................. 0 Premises and fixed assets (including capitalized leases) ......... 398,122 Other real estate owned .......................................... 45,179 Investment in unconsolidated subsidiaries and associated ......... ////////// companies ........................................................ 25,832 Customer's liability to this bank on acceptances outstanding ..... 54,463 Intangible assets ................................................ 405,536 Other assets ..................................................... 736,026 Total assets ..................................................... 27,045,733 LIABILITIES Deposits: In domestic offices ......................................... 21,878,186 Noninterest-bearing...............................4,706,658 Interest-bearing.................................17,171,528 In foreign offices, Edge and Agreement subsidiaries, and IBFs .................................................... 228,345 Noninterest-bearing ....................................702 Interest-bearing....................................227,713 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge and Agreement subsidiaries, and IBFs Federal fund purchased ...................................... 92,227 Securities sold under agreements to repurchase .............. 1,010,374 Demand notes issued to the U.S. Treasury ......................... 99,359 Trading liabilities .............................................. 0 Other borrowed money: ............................................ ///////// With original maturity of one year or less .................. 53,992 With original maturity of more than one year ................ 10,453 Mortgage indebtedness and obligations under capitalized leases ... 6,268 Bank's liability on acceptances executed and outstanding ......... 54,756 Subordinated notes and debentures ................................ 175,000 Other liabilities ................................................ 688,684 Total liabilities................................................. 24,297,644 Limited-life preferred stock and related surplus ................. 0 EQUITY CAPITAL Perpetual preferred stock and related surplus .................... 160,540 Common Stock ..................................................... 452,156 Surplus .......................................................... 1,300,080 Undivided profits and capital reserves ........................... 861,789 Net unrealized holding gains (losses) on available-for-sale ...... ///////// securities ...................................................... (26,476) Cumulative foreign currency translation adjustments .............. 0 Total equity capital ............................................. 2,748,089 Total liabilities, limited-life preferred stock and equity ....... ///////// capital......................................................... 27,045,733 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS DEC-31-1996 DEC-31-1996 SEP-30-1996 SEP-30-1996 5,668,285 5,668,285 0 0 4,723,768 4,723,768 256,000 256,000 233,629 233,629 13,379,420 13,379,420 47,711,716 47,711,716 21,696,357 21,696,357 122,569,380 122,569,380 12,365,583 12,365,583 81,489,520 81,489,520 1,700 1,700 0 0 0 0 (8,712,632) (8,712,632) 122,569,380 122,569,380 10,937,614 30,119,853 10,937,614 30,119,853 0 0 11,541,135 30,213,704 (5,047) (95,020) 0 0 3,359,071 8,929,328 (3,957,518) (8,928,159) 22,756 (110,000) (3,980,274) (8,818,159) 0 0 (250,603) (250,603) 0 0 (4,230,877) (9,068,762) (0.82) (1.76) (0.82) (1.76)
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