-----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, HNnhqYde+UpatKNDPOzCcdcn5JOr97nwmmI9ZmmYu4oWwu4bdtW0s/LX+2OwXtbK mdmBCZ0K+QC7qloBBUXgkg== 0000950116-97-000513.txt : 19970320 0000950116-97-000513.hdr.sgml : 19970320 ACCESSION NUMBER: 0000950116-97-000513 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19970319 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: 333-23595 FILM NUMBER: 97559445 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 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1997 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 (Primary Standard Industrial (I.R.S. Employer Jurisdiction of Classification Code Number) Identification Incorporation of Number) Organization) c/o Pegasus Communications Management Company Suite 454, 5 Radnor Corporate Center 100 Matsonford Road Radnor, Pennsylvania 19087 (610) 341-1801 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Marshall W. Pagon, President and Chief Executive Officer c/o Pegasus Communications Management Company Suite 454, 5 Radnor Corporate Center 100 Matsonford Road Radnor, Pennsylvania 19087 (610) 341-1801 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Michael B. Jordan, Esq. Scott A. Blank, Esq. Drinker Biddle & Reath 1100 Philadelphia National Bank Building 1345 Chestnut Street Philadelphia, Pennsylvania 19107-3496 (215) 988-2700 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. ------ If 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. [X] 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
- ------------------------------------------------------------------------------------------------ TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3) - ------------------------------------------------------------------------------------------------ CLASS A COMMON STOCK 366,464 $11.19 $4,100,732 $1,243 - ------------------------------------------------------------------------------------------------
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended, this Registration Statement also covers such additional shares as may hereinafter be offered or issued to prevent dilution resulting from stock splits, stock dividends, or similar transactions. (2) Calculated in accordance with Rule 457(c) based upon the average of the high and low sale prices for the Class A Common Stock as reported on the Nasdaq National Market on March 14, 1997. (3) Paid by wire transfer. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ LOGO PROSPECTUS PEGASUS COMMUNICATIONS CORPORATION 366,464 SHARES OF CLASS A COMMON STOCK ------ This Prospectus relates to 366,464 shares (the "Shares") of Class A Common Stock, par value $.01 per share (the "Class A Common Stock") of Pegasus Communications Corporation ("Pegasus," and together with its direct and indirect subsidiaries, the "Company"), all of which may be sold by certain selling stockholders (the "Selling Stockholders") or for the account of Selling Stockholders by pledgees ("Pledgees") to whom Shares may be pledged by Selling Stockholders to secure loans. The Company will not receive any of the proceeds from the sale of the Shares. The distribution of the Shares covered by this Prospectus may be effected from time to time in one or more transactions (which may involve block transactions) in the Nasdaq National Market at prices prevailing at the time of sale, in negotiated transactions or a combination of such methods of sale, at fixed prices, at market prices prevailing at the time of the sale, at prices related to the prevailing market prices or at negotiated prices. The Selling Stockholders may effect such transactions by selling Shares directly to purchasers or to or through broker-dealers which may act as agents or principals. Such broker-dealers may receive compensation in the form of underwriting discounts, concessions or commissions from the Selling Stockholders and/or the purchaser of the Shares for whom such broker-dealers may act as agent or to whom they may sell as principals or both (which compensation to a particular broker-dealer may be more than or less than customary commissions). Under certain circumstances, the Selling Stockholders and any broker-dealers that act in connection with the sale of their Shares may be deemed to be "Underwriters" within the meaning of Section 2(11) of the Securities Act of 1933, as amended (the "Securities Act") and any underwriting commissions received by them and any profit on the resale of Shares as principal may be deemed to be underwriting discounts and commissions under the Securities Act. ------ See "Risk Factors" beginning on page 14 for a discussion of certain factors that should be considered by prospective purchasers of the Shares. ------ 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. ------ The date of this Prospectus is , 1997. 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 consolidated basis. Unless otherwise indicated, the discussion below refers to and the information in this Prospectus gives effect to certain Completed Transactions. See "Glossary of Defined Terms," which begins on page 10 of this Prospectus Summary, for definitions of certain terms used in this Prospectus, including "Completed Transactions." THE COMPANY The Company is a diversified media and communications company operating in two business segments: multichannel television, consisting of direct broadcast satellite television ("DBS") and cable television ("Cable"), and broadcast television ("TV"). 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. Multichannel Television. The Company provides multichannel television to 92,000 subscribers in twelve states and Puerto Rico in franchise areas that include 1.5 million households and 149,000 businesses: DBS. The Company is the largest independent provider of DIRECTV(R) ("DIRECTV") services with an exclusive DIRECTV service territory that includes approximately 1,396,000 television households and 120,000 business locations in rural areas of Arkansas, Connecticut, Indiana, Massachusetts, Michigan, Mississippi, New Hampshire, New York, Ohio, Texas, Virginia and West Virginia. The Company has approximately 51,300 DIRECTV subscribers in territories that include approximately 1,396,000 television households and approximately 120,000 business locations or a household penetration rate of 3.7%. 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 41,200 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 26,200 subscribers in a franchise area comprising approximately 111,000 households from a single headend. The Company's New England Cable systems currently serve approximately 15,000 subscribers in a franchise area comprising approximately 22,900 households. Broadcast Television. The Company owns and operates five Fox affiliates in midsize television markets. The Company has entered into agreements to program additional television stations in two of these markets in 1997, which stations the Company anticipates will be affiliated with the United Paramount Network ("UPN"). The Company is awaiting certain FCC approvals in one of these markets. 1 After giving effect to the Completed Transactions the Company would have had pro forma net revenues and Operating Cash Flow of $63.3 million and $18.6 million, respectively, for the year ended December 31, 1996. The Company's net revenues and Operating Cash Flow have increased at compound annual growth rates of 87% and 79%, respectively, from 1991 to 1996. MARKET OVERVIEW BROADCAST TELEVISION
Number Ratings Rank Acquisition Station Market of TV -------------------- Oversell Station Date Affiliation Area DMA Households(1) Competitors(2) Prime(3) Access(4) Ratio(5) ---------------- -------------- ------------- --------------- ----- ------------- -------------- --------- --------- -------- Existing Stations: WWLF-56/WILF-53/ WOLF-38(6) ....May 1993 Fox Northeastern PA 49 553,000 3 3 (tie) 1 169% WPXT-51 ........January 1996 Fox Portland, ME 79 344,000 3 2 4 127% WDSI-61 ........May 1993 Fox Chattanooga, TN 82 320,000 4 4 3 174% WDBD-40 ........May 1993 Fox Jackson, MS 91 287,000 3 2 (tie) 2 126% WTLH-49 ........March 1996 Fox Tallahassee, FL 116 210,000 3 2 2 122% 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 6,969 2.4% 13.1% 0.6% New Hampshire ........ 167,531 42,075 125,456 4,210 2.5% 8.1% 0.6% Martha's Vineyard and Nantucket ........... 20,154 1,007 19,147 818 4.1% 61.4% 1.0% Michigan ............. 241,713 61,774 179,939 7,326 3.0% 8.7% 1.1% Texas ................ 149,530 54,504 95,026 5,735 3.8% 7.6% 1.7% Ohio ................. 167,558 32,180 135,378 5,477 3.3% 12.1% 1.2% Indiana .............. 131,025 34,811 96,214 6,479 4.9% 12.6% 2.2% Mississippi .......... 101,799 38,797 63,002 6,705 6.6% 14.6% 1.6% Arkansas ............. 36,458 2,408 34,050 1,734 4.8% 34.4% 2.7% Virginia/West Virginia 92,097 10,015 82,082 5,830 6.3% 45.8% 1.5% ----------- --------- ---------- --------------- ------- ---------- -------- Total .............. 1,396,138 319,036 1,077,102 51,283 3.7% 12.0% 1.2% $41.45 =========== ========= ========== =============== ======= ========== ======== ==========
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 ------------------- ---------- ----------- --------- --------------- --------------- ------------ New England ....... (16) 22,900 22,500 15,000 67% $33.55 Mayaguez .......... 62 38,300 34,000 10,400 31% $31.55 San German(17) .... 50(18) 72,400 47,700 15,800 33% $30.40 ----------- --------- --------------- --------------- ------------ Total Puerto Rico 110,700 81,700 26,200 32% $30.85 ----------- --------- --------------- --------------- ------------ Total ........... 133,600 104,200 41,200 40% $32.45 =========== ========= =============== =============== ============
(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 estimated market data and 1996 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 February 7, 1997. (11) Based upon 1996 revenues and weighted average 1996 subscribers. (12) Based on information obtained from municipal offices. (13) These data are the Company's estimates as of December 31, 1996. (14) A home with one or more television sets connected to a cable system is counted as one basic subscriber. Bulk accounts (such as motels or apartments) are included on a "subscriber equivalent" basis whereby the total monthly bill for the account is divided by the basic monthly charge for a single outlet in the area. This information is as of January 31, 1997. (15) Basic subscribers as a percentage of homes passed by cable. (16) The channel capacities of the New England Cable systems are 36 and 62 and represent 29% and 71% of the Company's New England Cable subscribers in Connecticut and Massachusetts, respectively. (17) Acquired upon consummation of the Cable Acquisition in August 1996. (18) After giving effect to certain system upgrades, this system will be capable of delivering 62 channels. 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. MULTICHANNEL TELEVISION 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 December 31, 1996, there were over 2.3 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. 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 twelve months ended December 31, 1996, the Company has added 5,809 new DIRECTV subscribers in its New England DBS Territory as compared to 3,895 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. 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 4 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. RECENT 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 authorized 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"). Indiana DBS Acquisition. In January 1997, the Company acquired the DIRECTV distribution rights for portions of Indiana and related assets (the "Indiana DBS Acquisition"). Mississippi DBS Acquisition. In February 1997, the Company acquired the DIRECTV distribution rights for portions of Mississippi and related assets (including receivables) (the "Mississippi DBS Acquisition"). 5 Arkansas DBS Acquisition. In March 1997, the Company acquired the DIRECTV distribution rights for portions of Arkansas and related assets (the "Arkansas DBS Acquisition"). Virginia/West Virginia DBS Acquisition. In March 1997, the Company acquired the DIRECTV distribution rights for portions of Virginia and West Virginia and related assets (the "Virginia/West Virginia DBS Acquisition"). Recent Sale New Hampshire Cable Sale. In January 1997, the Company sold its New Hampshire Cable systems (the "New Hampshire Cable Sale"). The New Hampshire Cable Sale resulted in net proceeds to the Company of approximately $7.1 million. PUBLIC OFFERINGS 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"). 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) $1.5 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) $444,000 for general corporate purposes. REGISTERED EXCHANGE OFFER Purchasers of the Notes in PM&C's 1995 Notes offering held all of the PM&C Class B Shares. The Company through a registered exchange offer (the "Registered Exchange Offer") exchanged all of the PM&C Class B Shares for 191,775 shares in the aggregate of Class A Common Stock. The Registered Exchange Offer terminated on December 30, 1996. As a result of the Registered Exchange Offer, PM&C became a wholly owned subsidiary of Pegasus. This Prospectus gives effect to the exchange of all of the PM&C Class B Shares for Class A Common Stock pursuant to the Registered Exchange Offer. UNIT OFFERING Pegasus consummated the Unit Offering on January 27, 1997. The Unit Offering resulted in net proceeds to the Company of approximately $96.0 million. The Company applied the net proceeds from the Unit Offering as follows: (i) $29.6 million to the repayment of indebtedness of PM&C under the New Credit Facility, which represented all indebtedness under the New Credit Facility at the time of the consummation of the Unit Offering, (ii) $15.0 million for the Mississippi DBS Acquisition, (iii) $8.8 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, (v) $2.4 million for the Arkansas DBS Acquisition and (vi) approximately $558,000 to the retirement of the Pegasus Credit Facility and expenses related thereto. RISK FACTORS Prospective purchasers of the Shares 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 Shares. 6 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA The following table sets forth summary historical and pro forma consolidated 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 Consolidated Financial Data" and "Pro Forma Consolidated Financial Information" included elsewhere herein. 7 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, ------------------------------------------------- Pro Forma Income Statement Data: 1994 1995 1996 1996 (1) ---------- --------- ---------- ----------- Net revenues: TV ............................. $17,808 $19,973 $ 28,488 $ 29,156 DBS ............................ 174 1,469 5,829 18,139 Cable .......................... 10,148 10,606 13,496 15,864 Other .......................... 61 100 116 116 ---------- --------- ---------- ----------- Total net revenues ........... 28,191 32,148 47,929 63,275 ---------- --------- ---------- ----------- Location operating expenses: TV ............................. 12,380 13,933 18,726 19,220 DBS ............................ 210 1,379 4,958 15,433 Cable .......................... 5,545 5,791 7,192 8,473 Other .......................... 18 38 28 28 Incentive compensation (2) ........ 432 528 985 910 Corporate expenses ................ 1,506 1,364 1,429 1,543 Depreciation and amortization ..... 6,940 8,751 12,061 19,301 ---------- --------- ---------- ----------- Income (loss) from operations ..... 1,160 364 2,550 (1,633) Interest expense .................. (5,973) (8,817) (12,455) (10,904) Interest income ................... -- 370 232 232 Other expense, net ................ (65) (44) (171) (168) Provision (benefit) for taxes ..... 140 30 (120) (120) Extraordinary gain (loss) from extinguishment of debt ......... (633) 10,211 (250) --(3) ---------- --------- ---------- ----------- Net income (loss) ................. $(5,651) 2,054 (9,974) (12,353) ========== ========= ========== =========== Dividends on Series A Preferred Stock -- -- (12,750) --------- ---------- ----------- Net income (loss) applicable to common shares .................. $(5,651) $ 2,054 $ (9,974) $(25,103) ======= ======= ======== ======== Net income (loss) per share ....... $ (1.12) $ 0.40 $ (1.60) $ (2.58) ======= ======= ======== ======== Weighted average shares outstanding (000's) ............ 5,044 5,140 6,240 9,712 ======= ======= ======== ======== Other Data: Location Cash Flow (4) ............ $10,038 $11,007 $ 17,025 $ 20,121 Operating Cash Flow (4) ........... 8,100 9,115 15,596 18,578 Capital expenditures .............. 1,264 2,640 6,294 8,065
As of December 31, 1996 ----------------------- Pro Forma Actual (1) ---------- ------------ Balance Sheet Data: Cash and cash equivalents ... $ 8,582 $ 48,073 Working capital ............. 6,747 47,238 Total assets ................ 173,680 252,923 Total debt (including current) 115,575 85,976 Total liabilities ........... 133,354 108,604 Redeemable preferred stock .. -- 96,000 Minority interest ........... -- 3,000 Total equity (5) ............ 40,326 149,169
(see footnotes on the following page) 8 Notes to Summary Historical and Pro Forma Consolidated Financial Data (1) Pro forma income statement and other data for the year ended December 31, 1996 give effect to the Completed Transactions, including the Unit Offering and the use of proceeds thereof and the New Hampshire Cable Sale, as if such events had occurred at the beginning of such period. The pro forma balance sheet data as of December 31, 1996 give effect to the Completed Transactions that occurred after 1996 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. (2) Incentive compensation represents compensation expenses pursuant to the Restricted Stock Plan and 401(k) Plans. See "Management and Certain Transactions -- Incentive Program." (3) The pro forma income statement data for the year ended December 31, 1996 does not include the $251,000 writeoff of deferred financing costs that were incurred in 1995 in connection with the creation of the Old Credit Facility. (4) 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. (5) 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 are 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 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. 9 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, the Initial Public Offering, the Registered Exchange Offer, the Unit Offering, the retirement of the Pegasus Credit Facility, the Indiana DBS Acquisition, the New Hampshire Cable Sale, the Mississippi DBS Acquisition, the Arkansas DBS Acquisition and the Virginia/West Virginia DBS Acquisition. DBS Direct broadcast satellite television. DBS Acquisitions The acquisitions of the Indiana, Mississippi, Arkansas and Virginia/West Virginia DBS territories. 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 12 3/4% 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. Pegasus Credit Facility Pegasus' $5.0 million credit facility which was retired concurrently with the completion of the Unit Offering. PM&C Pegasus Media & Communications, Inc., which became a direct subsidiary of Pegasus upon completion of the Initial Public Offering and a wholly owned subsidiary upon completion of the Registered Exchange Offer. 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 were 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 191,775 shares in the aggregate of Class A Common Stock. The Registered Exchange Offer terminated on December 30, 1996 and was accepted by all holders of PM&C Class B Shares. This Prospectus gives effect to the exchange of all of the PM&C Class B Shares for Class A Common Stock. Selling Stockholders Certain members of the Company's management who are selling shares of Class A Common Stock pursuant to this Prospectus. Series A Preferred Stock The 12 3/4% Series A Cumulative Exchangeable Preferred Stock, which was offered in connection with the Unit Offering. Shares The shares of Class A Common Stock being offered hereby, from time to time, by the Selling Stockholders. 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.
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Unit Offering Pegasus' public offering of 100,000 Units consisting of 100,000 shares of Series A Preferred Stock and 100,000 Warrants, which was completed on January 27, 1997. Units The units consisting of Series A Preferred Stock and Warrants offered in the Unit Offering. Virginia/West Virginia The acquisition of DIRECTV distribution rights for certain rural areas DBS Acquisition of Virginia and West Virginia and related assets. Warrant Shares The 193,600 shares of Class A Common Stock, which were registered by the Company in February 1997, and are reserved for issuance in connection with the exercise of the Warrants. Warrants The warrants to purchase shares of Class A Common Stock offered in connection with the Unit Offering. WDBD Station WDBD-TV in the Jackson, Mississippi DMA. WDSI Station WDSI-TV in the Chattanooga, Tennessee DMA. WILF Station WILF-TV in the Northeastern Pennsylvania DMA. WOLF Station WOLF-TV in the Northeastern Pennsylvania DMA. WPXT Station WPXT-TV in the Portland, Maine DMA. WTLH Station WTLH-TV in the Tallahassee, Florida DMA. WWLA Station WWLA-TV to be constructed to serve the Portland, Maine DMA. WWLF Station WWLF-TV in the Northeastern Pennsylvania DMA.
13 RISK FACTORS Prospective investors should consider carefully the following risk factors, in addition to the other information contained in this Prospectus concerning the Company and its business, before purchasing the shares of Class A Common Stock offered hereby. This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that involve certain risk and uncertainties. Discussions containing such forward-looking statements may be found in the material set forth under "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as in the Prospectus generally. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the following risk factors and appearing elsewhere in this Prospectus. These forward-looking statements are made as of the date of this Prospectus and the Company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements. SUBSTANTIAL INDEBTEDNESS AND LEVERAGE The Company is highly leveraged. As of December 31, 1996, on a pro forma basis after giving effect to the Completed Transactions, the Company would have had indebtedness of $86.0 million, total stockholders' equity of $149.2 million including Preferred Stock of $96.0 million and, assuming certain conditions are met, $50.0 million available under the New Credit Facility. For the year ended December 31, 1996, on a pro forma basis after giving effect to the Completed Transactions, the Company's earnings would have been inadequate to cover its combined fixed charges and dividends on Series A Preferred Stock by approximately $25.2 million. 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 January 1, 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 (as defined) 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 the Class A Common Stock. There can be no assurance that future cash flows of the Company will be sufficient to meet all of the Company's obligations and commitments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" "Description of Unit Offering Securities" and "Description of Indebtedness." DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS Pegasus has not paid any cash dividends on its Common Stock. The Company currently intends to retain future earnings to use in its business and, therefore, does not anticipate paying any cash dividends on its Common Stock for the foreseeable future. Under the terms of the Series A Preferred Stock, Pegasus' ability to pay dividends on the Class A Common Stock is subject to certain restrictions. Pegasus is a holding company, and its ability to pay dividends is dependent upon the receipt of dividends from its direct and indirect 14 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. See "Dividend Policy," "Description of Indebtedness," and "Description of Unit Offering Securities." 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 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 15 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. 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 FUNDS A portion of the remaining net proceeds of the Unit Offering is anticipated to be contributed to current or future subsidiaries of Pegasus or to be used to fund acquisitions, such as the Pending 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 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. INABILITY TO MANAGE GROWTH EFFECTIVELY The Company has experienced a period of rapid growth primarily as a result of its acquisition strategy. In order to achieve its business objectives, the Company expects to continue to expand largely through acquisitions, which could place a significant strain on its management, operating procedures, financial resources, employees and other resources. The Company's ability to manage its growth may require it to continue to improve its operational, financial and management information systems, and to motivate and effectively manage its employees. If the Company's management is unable to manage growth effectively, the Company's results of operations could be materially adversely affected. DEPENDENCE ON KEY PERSONNEL The Company's future success may depend to a significant extent upon the performance of a number of the Company's key personnel, including Marshall W. Pagon, Pegasus' President and Chief Executive Officer. See "Management and Certain Transactions." The loss of Mr. Pagon or other key management personnel or the failure to recruit and retain personnel could have a material adverse effect on the Company's business. The Company does not maintain "key-man" insurance and has not entered into employment agreements with respect to any such individuals. 16 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, 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, 17 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, Mr. Pagon will be able to effectively vote 89.9% 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 "Principal and Selling Stockholders" 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 Unit Offering Securities -- Description of Series A Preferred Stock -- Voting Rights." VOLATILITY OF STOCK PRICE There may be significant volatility in the market price of the Class A Common Stock due to factors that may or may not relate to the Company's performance. The market price of the Class A Common Stock may be significantly affected by various factors such as economic forecasts, financial market conditions, reorganizations and acquisitions and quarterly variations in the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 (as defined in the Certificate of Designation and Exchange Note Indenture, as applicable), 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 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 18 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. 19 USE OF PROCEEDS The Company will not realize any of the proceeds of the Shares offered hereby. Any such proceeds will be paid to the Selling Stockholders or Pledgees. DIVIDEND POLICY Pegasus has not paid any cash dividends on its Common Stock. The Company currently intends to retain future earnings for use in its business and, therefore, does not anticipate paying any cash dividends on its Common Stock for the foreseeable future. Under the terms of the Series A Preferred Stock, Pegasus's ability to pay dividends on the Class A Common Stock is subject to certain restrictions. 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 -- Dividend Policy; Restrictions on Payment of Dividends," "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 1996 subsequent to Pegasus' Initial Public Offering on October 3, 1996 and for 1997. These quotations and sales prices do not include retail mark-ups, mark-downs or commissions. 1996 High Low ---- -------- -------- Fourth Quarter ..................... $16.00 $11.25 1997 - ---- First Quarter (through March 14, 1997) ............................. $14.00 $11.00 On March 14, 1997, the last reported sales price for the Class A Common Stock was $11.00 per share. As of March 14, 1997, Pegasus had approximately 105 holders of record (excluding holders whose securities were held in street or nominee name). 20 CAPITALIZATION The following table sets forth the capitalization of the Company (i) as of December 31, 1996 and (ii) on a pro forma basis to reflect the Completed Transactions. See "Selected Historical and Pro Forma Consolidated Financial Data" and "Pro Forma Consolidated Financial Information." The table does not give pro forma effect to the exercise of the Warrants issued in the Unit Offering because the timing of any such exercise is uncertain.
As of December 31, 1996 ------------------------- Actual Pro Forma ---------- ----------- (Dollars in thousands) Cash and cash equivalents ......................................... $ 8,582 $ 48,073 ========== =========== Total debt: New Credit Facility(1) .......................................... 29,600 -- 12 1/2% Series B Senior Subordinated Notes due 2005(2) ......... 81,588 81,588 Note payable due 1998, interest at 10% .......................... 3,050 3,050 Capital leases and other ........................................ 1,338 1,338 ---------- ----------- Total debt ..................................................... 115,576 85,976 ---------- ----------- Series A Preferred Stock, $1,000 liquidation preference per share; 100,000 shares authorized and outstanding pro forma(3) .......... -- 96,000 Minority interest(4) .............................................. -- 3,000 Total stockholders' equity: Class A Common Stock, $0.01 par value, 30,000,000 shares authorized; 5,129,879 shares issued and outstanding pro forma(5) ..................................................... 46 51 Class B Common Stock, $0.01 par value, 15,000,000 shares authorized; 4,581,900 shares issued and outstanding pro forma 46 46 Additional paid-in capital(5) ................................... 57,736 63,331 Retained deficit ................................................ (17,502) (13,259) ---------- ----------- Total stockholders' equity ..................................... 40,326 50,169 ---------- ----------- Total capitalization .............................................. $155,902 $235,145 ========== ===========
- ------ (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 Unit Offering Securities." (4) Represents preferred stock of a subsidiary of Pegasus issued in connection with the Virginia/West Virginia DBS Acquisition. (5) Pro forma shares issued and outstanding include the issuance of 466,667 shares of Class A Common Stock in connection with the Indiana DBS Acquisition. 21 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Pro forma consolidated statement of operations and other data for the years ended December 31, 1995 and 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 closed on January 31, 1997, (vii) the Initial Public Offering, which was consummated on October 8, 1996, (viii) the Unit Offering, which was consummated on January 27, 1997, and (ix) the DBS Acquisitions, which include the Indiana, Mississippi, Arkansas and Virginia/West Virginia DBS Acquisitions (which closed on or as of January 31, 1997, February 14, 1997, March 10, 1997 and March 10, 1997, respectively), 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 consolidated balance sheet as of December 31, 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, which was completed on December 30, 1996, (v) the New Hampshire Cable Sale, which closed on January 31, 1997, (vi) the Initial Public Offering, which was consummated on October 8, 1996, (vii) the DBS Acquisitions, which include the Indiana, Mississippi, Arkansas, and Virginia/West Virginia DBS Acquisitions (which closed on or as of January 31, 1997, February 14, 1997, March 10, 1997 and March 10, 1997, respectively), and (viii) the Unit Offering, which was consummated on January 27, 1997, as if such events had occurred on such date. 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 consolidated financial information should be read in conjunction with the Company's Consolidated 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 consolidated financial information is not necessarily indicative of the Company's future results of operations. See "Risk Factors -- Risks Attendant to Acquisition Strategy." 22 PRO FORMA CONSOLIDATED 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 --
(RESTUBBED TABLE CONTINUED FROM ABOVE)
NH The Cable DBS Unit Pro Adjustments IPO Sub-Total Sale(6) Acquisitions(23) Offering Forma ----------- ---------- --------- ----------- -------------- --------- --------- Income Statement Data: Net revenues TV ............................. $ 139(7) $ -- $ 27,305 $ -- $ -- $ -- $ 27,305 DBS ............................ -- -- 4,924 -- 3,899 -- 8,823 Cable .......................... -- -- 16,383 (1,464) -- -- 14,919 Other .......................... -- -- 100 -- -- -- 100 ----------- ---------- --------- ----------- ------------- --------- --------- Total net revenues ............ 139 -- 48,712 (1,464) 3,899 -- 51,147 Location operating expenses TV ............................. (186)(8) (111)(9) -- 19,210 -- -- -- 19,210 DBS ............................ (341)(10) -- 5,077 -- 3,977 -- 9,054 Cable .......................... (332)(11) -- 8,812 (768) -- -- 8,044 Other .......................... -- -- 38 -- -- -- 38 Incentive compensation ........... -- -- 528 (17) -- -- 511 Corporate expenses ............... (458)(12) -- 1,364 -- -- -- 1,364 Depreciation and amortization .... 5,544 (13) 129 (18) 15,986 (618) 3,367 -- 18,735 ----------- ---------- --------- ----------- ------------- --------- --------- Income (loss) from operations .... (3,977) (129) (2,303) (61) (3,445) -- (5,809) Interest expense ................. (2,893)(14) 2,919 (19) (11,573) -- -- 2,538(20) (9,035) Interest income .................. (241)(15) -- 129 -- -- -- 129 Other income (expense), net ...... 542 (16) -- (58) -- --) -- (58) Provision (benefit) for income taxes .......................... 84 (17) -- 30 -- -- -- 30 ----------- ---------- --------- ----------- ------------- --------- --------- Income (loss) before extraordinary items .......................... (6,653) 2,790 (13,835) (61) (3,445) 2,538(21) (14,803) Dividends on Series A Preferred Stock .......................... -- -- -- -- -- (12,750) (12,750) ----------- ---------- --------- ----------- ------------- --------- --------- Income (loss) applicable to common shares before extraordinary items ............ $(6,653) $2,790 $(13,835) $ (61) $(3,445) $ (10,212) $ (27,553) =========== ========== ========= =========== ============= ========= =========== Income (loss) per share: Loss before extraordinary items $ (5.36) ========= Weighted average shares outstanding ................. 5,139,937 ========= Other Data: Location Cash Flow (22) .......... $ 1,109 $ -- $ 15,575 $ (696) $ (78) $ -- $ 14,801 Operating Cash Flow (22) ......... 1,567 -- 13,855 (696) (78) -- 13,081 Capital expenditures ............. -- -- 3,169 (147) 1,852 -- 4,874
23 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 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 ............................. $ 28,488 $ 247 $404 $ -- $ -- $ -- DBS ............................ 5,829 -- -- 3,075 -- 1,556 Cable .......................... 13,496 -- -- -- 4,056 -- Other .......................... 116 -- -- -- -- -- -------- --------- ------------ ---------- ------ ------- Total net revenues ............ 47,929 247 404 3,075 4,056 1,556 Location operating expenses TV ............................. 18,726 294 243 -- -- -- -- DBS ............................ 4,958 -- -- 2,769 -- 1,525 Cable .......................... 7,192 -- -- -- 2,448 -- Other .......................... 28 -- -- -- -- -- Incentive compensation ........... 985 -- -- -- -- -- Corporate expenses ............... 1,429 12 21 115 88 26 Depreciation and amortization .... 12,061 6 11 449 365 163 -------- --------- ------------ ---------- ------ ------- Income (loss) from operations .... 2,550 (65) 129 (258) 1,155 (158) Interest expense ................. (12,455) (565) (20) (479) (482) -- Interest income .................. 232 -- -- -- -- -- Other income (expense), net ...... (171) 20 (17) -- -- -- Provision (benefit) for income taxes .......................... (120) -- 35 -- 20 -- -------- --------- ------------ ---------- ------ ------- Income (loss) before extraordinary items .......................... (9,724) (610) 57 (737) 653 (158) -------- --------- ------------ ---------- ------ ------- Dividends on Series A Preferred Stock .......................... -- -- -- -- -- -- -------- --------- ------------ ---------- ------ ------- Income (loss) applicable to common shares before extraordinary items ............ $ (9,724) $(610) $ 57 $ (737) $ 653 $ (158) ======== ========= ============ ========== ====== ======= Income (loss) per share: Loss before extraordinary items . Weighted average shares outstanding ................... Other Data: Location Cash Flow (22) .......... $ 17,025 $ (47) $161 $ 306 $1,608 $ 31 Operating Cash Flow (22) ......... 15,596 (59) 140 191 1,520 5 Capital expenditures ............. 6,294 -- -- -- 96 --
(RESTUBBED TABLE CONTINUED FROM ABOVE)
NH The Cable DBS Unit Pro Adjustments IPO Sub-Total Sale(6) Acquisitions(23) Offering Forma ----------- --------- --------- ----------- -------------- --------- --------- Income Statement Data: Net revenues TV ............................. $ 17(7) $ -- $ 29,156 $ -- $ -- $ -- $ 29,156 DBS ............................ -- -- 10,460 -- 7,679 -- 18,139 Cable .......................... -- -- 17,552 (1,688) -- -- 15,864 Other .......................... -- -- 116 -- -- -- 116 ----------- --------- --------- ----------- -------------- --------- --------- Total net revenues ............ 17 -- 57,284 (1,688) 7,679 -- 63,275 Location operating expenses TV ............................. (28)(8) (15)(9) -- 19,220 -- -- -- 19,220 DBS ............................ (297)(10) -- 8,955 -- 6,478 -- 15,433 Cable .......................... (249)(11) -- 9,391 (918) -- -- 8,473 Other .......................... -- -- 28 -- -- -- 28 Incentive compensation ........... -- -- 985 (75) -- -- 910 Corporate expenses ............... (148)(12) -- 1,543 -- -- -- 1,543 Depreciation and amortization .... 3,401(13) 96(18) 16,552 (618) 3,367 -- 19,301 ----------- --------- --------- ----------- -------------- --------- --------- Income (loss) from operations .... (2,647) (96) 610 (77) (2,166) -- (1,633) Interest expense ................. (1,631)(14) 2,190(19) (13,442) -- -- 2,538(20) (10,904) Interest income .................. -- -- 232 -- -- -- 232 Other income (expense), net ...... -- -- (168) -- -- -- (168) Provision (benefit) for income taxes .......................... (55)(17) -- (120) -- -- -- (120) ----------- --------- --------- ----------- -------------- --------- --------- Income (loss) before extraordinary items .......................... (4,223) 2,094 (12,648) (77) (2,166) 2,538(21) (12,353) ----------- --------- --------- ----------- -------------- --------- --------- Dividends on Series A Preferred Stock .......................... -- -- -- -- -- (12,750) (12,750) ----------- --------- --------- ----------- -------------- --------- --------- Income (loss) applicable to common shares before extraordinary items ............ $(4,223) $2,094 $(12,648) $ (77) $(2,166) $(10,212) $ (25,103) =========== ========= ========= =========== ============== ========= ========= Income (loss) per share: Loss before extraordinary items . $ (2.72) ========= Weighted average shares outstanding ................... 9,711,779 ========= Other Data: Location Cash Flow (22) .......... $ 606 $ -- $ 19,690 $ (770) $ 1,201 $ -- $ 20,121 Operating Cash Flow (22) ......... 754 -- 18,147 (770) 1,201 -- 18,578 Capital expenditures ............. -- -- 6,390 (196) 1,871 -- 8,065
24 NOTES TO PRO FORMA CONSOLIDATED 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 retired with the proceeds of the Initial Public Offering. (20) To remove interest expense on the debt retired with the proceeds of the Unit 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) Proforma results of the Indiana, Mississippi, Arkansas, Virginia/West Virginia DBS territories. 25 PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
Acquisitions ---------------------------------------------- NH MS VA/WV IN AR Unit Actual Cable Sale(1) DBS(2) DBS(3) DBS(4) DBS(5) Offering(6) Pro Forma ---------- ------------- ----------- ---------- ---------- ---------- ----------- ----------- Assets: Cash and cash equivalents ......... $ 8,582 $ 7,122 $(15,000) $(8,200) $(8,400) $(2,400) $ 66,369 $ 48,073 Accounts receivable, net 9,472 -- 1,000 -- -- -- -- 10,472 Inventories ............ 698 -- -- -- -- -- -- 698 Prepaid expenses and other current assets 3,431 -- -- -- -- -- -- 3,431 Property and equipment, net ................. 24,115 (1,888) -- -- -- -- -- 22,227 Intangibles ............ 126,236 (960) 14,000 11,200 14,000 2,400 -- 166,876 Other assets ........... 1,462 -- -- -- -- -- -- 1,462 ---------- ------------- ----------- ---------- ---------- ---------- ----------- ----------- Total assets ......... $173,680 $ 4,274 $ -- $ 3,000 $ 5,600 $ -- $ 66,369 $252,923 ========== ============= =========== ========== ========== ========== =========== =========== Liabilities and Equity: Current liabilities .... $ 8,879 $ -- -- -- -- -- $ -- $ 8,879 Notes payable .......... 49 -- -- -- -- -- -- 49 Accrued interest ....... 5,592 -- -- 5,592 Current portion of long-term debt ...... 315 -- -- 315 Current portion of program liabilities . 601 -- -- -- -- -- -- 601 Long-term debt ......... 115,212 -- -- -- -- -- 526 (30,126) 85,612 Long-term program liabilities ......... 1,365 -- -- -- -- -- -- 1,365 Other long-term liabilities ......... 1,341 -- -- -- -- -- -- 1,341 ---------- ------------- ----------- ---------- ---------- ---------- ----------- ----------- Total liabilities ... 133,354 -- -- -- -- -- (29,600) 103,754 Series A Preferred Stock . -- -- -- -- -- -- 96,000 96,000 Minority interest(7) ..... -- -- -- 3,000 -- -- -- 3,000 Class A Common Stock(8) .. 46 -- -- -- 5 -- -- 51 Class B Common Stock ..... 46 -- -- -- -- -- -- 46 Additional paid-in capital 57,736 -- -- -- 5,595 -- -- 63,331 Retained earnings (deficit) .............. (17,502) 4,274 -- -- -- -- (31) (13,259) ---------- ------------- ----------- ---------- ---------- ---------- ----------- ----------- Total equity ........... 40,326 4,274 -- 3,000 5,600 -- 95,969 149,169 ---------- ------------- ----------- ---------- ---------- ---------- ----------- ----------- Total liabilities and equity ............ $173,680 $ 4,274 $ -- $ 3,000 $ 5,600 $ -- $ 66,369 $252,923 ========== ============= =========== ========== ========== ========== =========== ===========
26 NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (1) To record the New Hampshire Cable Sale for $7.1 million, net of commission. (2) To record the Mississippi DBS Acquisition for $15.0 million, all of which is allocated to DBS rights. (3) To record the Virginia/West Virginia DBS Acquisition for total consideration of approximately $10.0 million, consisting of $8.2 million in cash, $3.0 million of preferred stock of a subsidiary of Pegasus and warrants to purchase a total of 283,969 shares of Class A Common Stock, all of which is allocated to DBS rights. (4) To record the Indiana DBS Acquisition for total consideration of approximately $14.4 million, consisting of $8.8 million in cash and 466,667 shares of Class A Common Stock with a value of $5.6 million upon issuance, all of which is allocated to DBS rights. (5) To record the Arkansas DBS Acquisition for $2.4 million in cash, all of which is allocated to DBS rights. (6) To record the net proceeds from the Unit Offering and the intended uses of such proceeds (dollars in thousands).
Source of proceeds: Gross proceeds from the Unit Offering .................... $100,000 ========= Intended uses of proceeds: Repay indebtedness under the New Credit Facility ......... $ 29,600 General corporate purposes ............................... 31,453 Cash pending Mississippi DBS Acquisition ................. 15,000 Cash pending Virginia/West Virginia DBS Acquisition ...... 8,189 Cash pending Indiana DBS Acquisition ..................... 8,800 Cash pending Arkansas DBS Acquisition .................... 2,400 Retirement of Pegasus Credit Facility and related expenses thereto ................................................ 558 Underwriters' discount and transaction costs related to the Unit Offering .......................................... 4,000 ---------- Total intended uses of proceeds ..................... $100,000 ==========
(7) Represents preferred stock of a subsidiary of Pegasus to be issued in connection with the Virginia/West Virginia DBS Acquisition. (8) 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. 27 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data for the years ended December 31, 1992 and 1993 have been derived from the Company's audited Consolidated Financial Statements for such periods. The selected historical consolidated financial data for the years ended December 31, 1994, 1995 and 1996 have been derived from the Company's Consolidated Financial Statements for such periods, which have been audited by Coopers & Lybrand L.L.P., as indicated in their report included elsewhere herein. The information should be read in conjunction with the Consolidated Financial Statements and the notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Pro Forma Consolidated Financial Information," which are included elsewhere herein. 28 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, ----------------------------------------------------------------------------- Pro Forma 1992 1993 (1) 1994 1995 1996 1996(2) ---------- ---------- ---------- --------- ---------- ----------- Income Statement Data: Net revenues: TV ....................... $ -- $10,307 $17,808 $19,973 $ 28,488 $ 29,156 DBS ...................... -- -- 174 1,469 5,829 18,139 Cable .................... 5,279 9,134 10,148 10,606 13,496 15,864 Other .................... 40 46 61 100 116 116 --------- ---------- ---------- --------- ---------- ----------- Total net revenues ..... 5,319 19,487 28,191 32,148 47,929 63,275 --------- ---------- ---------- --------- ---------- ----------- Location operating expenses: TV ....................... -- 7,564 12,380 13,933 18,726 19,220 DBS ...................... -- -- 210 1,379 4,958 15,433 Cable .................... 2,669 4,655 5,545 5,791 7,192 8,473 Other .................... 12 16 18 38 28 28 Incentive compensation (3) .. 36 192 432 528 985 910 Corporate expenses .......... 471 1,265 1,506 1,364 1,429 1,543 Depreciation and amortization 2,541 5,978 6,940 8,751 12,061 19,301 --------- ---------- ---------- --------- ---------- ----------- Income (loss) from operations (410) (183) 1,160 364 2,550 (1,633) Interest expense ............ (1,255) (4,402) (5,973) (8,817) (12,455) (10,904) Interest income ............. -- -- -- 370 232 232 Other expense, net .......... (21) (220) (65) (44) (171) (168) Provision (benefit) for taxes -- -- 140 30 (120) (120) Extraordinary gain (loss) from extinguishment of debt ..................... -- -- (633) 10,211 (250) --(4) --------- ---------- ---------- --------- ---------- ----------- Net income (loss) ........... (1,686) (4,805) (5,651) 2,054 (9,974) (12,353) Dividends on Series A Preferred Stock .......... -- -- -- -- -- (12,750) --------- ---------- ---------- --------- ---------- ----------- Net income (loss) applicable to common shares ......... $(1,686) $(4,805) $(5,651) $ 2,054 $ (9,974) $(25,103) ========== ========== ========= ========== =========== =========== Income (loss) per share: Loss before extraordinary item ..................... $ (0.99) $ (1.59) $ (1.56) $ (2.58) Extraordinary item .......... (0.13) 1.99 (.04) --(4) ------- ------- -------- ---------- Net income (loss) per share . $ (1.12) $ 0.40 $ (1.60) $ (2.58) ======= ======= ======== ======== Weighted average shares outstanding (000's) ...... 5.044 5,140 6,240 9,712 ======= ======= ======== ======== Other Data: Location Cash Flow (5) ...... $ 2,638 $ 7,252 $10,038 $11,007 $ 17,025 $ 20,121 Operating Cash Flow (5) ..... 2,131 5,795 8,100 9,115 14,611 18,578 Capital expenditures ........ 681 885 1,264 2,640 6,294 8,065 Ratio of earnings to combined fixed charges and preferred stock dividends (6) ...................... -- -- -- -- -- --
As of December 31, ----------------------------------------------------------- Pro Forma 1992 1993 1994 1995 1996 1996 (2) --------- ---------- --------- --------- ---------- --------- Balance Sheet Data: Cash and cash equivalents ... $ 938 $ 1,506 $ 1,380 $21,856 $ 8,582 $ 48,073 Working capital (deficiency) (52) (3,844) (23,074) 17,566 6,747 47,238 Total assets ................ 17,418 76,386 75,394 95,770 173,680 252,923 Total debt (including current) ................. 15,045 72,127 61,629 82,896 115,575 85,976 Total liabilities ........... 16,417 78,954 68,452 95,521 133,354 108,604 Redeemable preferred stock .. -- -- -- -- -- 96,000 Minority interest ........... -- -- -- -- -- 3,000 Total equity (deficit) (7) .. 1,001 (2,427) 6,942 249 40,326 149,169
29 (see footnotes on the following page) NOTES TO SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA (1) The Company's operations began in 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, 1996 give effect to the Completed Transactions, including the Unit Offering and the use of proceeds thereof (except for the DBS Acquisitions) and the New Hampshire Cable Sale, as if such events had occurred in the beginning of such periods. The pro forma balance sheet data as of December 31, 1996 give effect to the Completed Transactions that occurred after December 31, 1996, as if such events had occurred on such date. See "Pro Forma Consolidated 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, 1996 does not include the $251,000 writeoff of deferred financing costs that were incurred in 1995 in connection with the creation of the Old Credit Facility. (5) Location Cash Flow is defined as net revenues less location operating expenses. Location operating expenses consist of programming, barter programming, general and administrative, technical and operations, marketing and selling expenses. 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 $1.7 million, $4.8 million, $4.9 million, $8.1 million and $9.8 million, for the years ended December 31, 1992, 1993, 1994, 1995 and 1996, respectively. On a pro forma basis, earnings were insufficient to cover combined fixed charges and preferred stock dividends by approximately $25.2 million for the year ended December 31, 1996. (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 are 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 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. 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and related notes which are included elsewhere herein. This Prospectus contains certain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under "Risk Factors" and elsewhere in this Prospectus. COMPANY HISTORY The Company is a diversified media and communications company operating in two business segments: multichannel television and broadcast television. 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 or will be accounted for using the purchase method of accounting. The following table presents information regarding completed acquisitions, pending acquisitions and the completed 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) $14.8 $12.2 cash, $0.4 assumed liabilities, $1.2 of Class A Common Stock and $1.0 of Class B Common Stock(10) WTLH ................................. March 1996 $ 8.1 $5.0 cash, $3.1 deferred obligation and warrants (which subsequently expired by their terms) Portland LMA ......................... May 1996 $ 1.0 $1.0 of Class A Common Stock(10) Cable Acquisition .................... August 1996 $26.0 $25.0 cash and $1.0 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 Indiana DBS Acquisition .............. January 1997 $14.3 $8.7 cash and $5.6 of Class A Common Stock(11) Mississippi DBS Acquisition .......... February 1997 $15.0 $15.0 cash Arkansas DBS Acquisition ............. March 1997 $ 2.4 $2.4 cash Virginia/West Virginia DBS Acquisition March 1997 $10.0 $8.2 cash, $3.0 of preferred stock of a subsidiary of Pegasus and warrants to purchase a total of 283,969 shares of Class A Common Stock Completed sale: New Hampshire Cable Sale ............. January 1997 $ 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 466,667 shares of Common Stock issued in connection with this acquisition was based on the market price of the Class A Common Stock. 31 CORPORATE STRUCTURE REORGANIZATION The Company's Consolidated 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. As a result of the Registered Exchange Offer, Pegasus obtained all 8,500 of the PM&C Class B Shares in exchange for 191,775 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 $1.5 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 $1.5 million in cash. 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. 32 SUMMARY CONSOLIDATED OPERATING RESULTS (DOLLARS IN THOUSANDS)
Year Ended December 31, ---------------------------------- 1994 1995 1996 -------- --------- --------- Net revenues: TV ................................. $17,808 $19,973 $28,488 DBS ................................ 174 1,469 5,829 Cable: Puerto Rico Cable ................ 3,842 4,007 6,033 New England Cable ................ 6,306 6,599 7,463 ------- ------- ------- Total Cable net revenues ........ 10,148 10,606 13,496 ------- ------- ------- Other .............................. 61 100 116 ------- ------- ------- Total ......................... 28,191 32,148 47,929 ====== ====== ====== Location operating expenses: TV ................................. 12,380 13,933 18,726 DBS ................................ 210 1,379 4,958 Cable: Puerto Rico Cable ................ 2,319 2,450 3,362 New England Cable ................ 3,226 3,341 3,830 ------- ------- ------- Total Cable location operating expenses ......................... 5,545 5,791 7,192 ------- ------- ------- Other .............................. 18 38 28 ------- ------- ------- Total ......................... 18,153 21,141 30,904 ====== ====== ====== Location Cash Flow(1): TV ................................. 5,428 6,040 9,762 DBS ................................ (36) 90 871 Cable: Puerto Rico Cable ................ 1,523 1,557 2,671 New England Cable ................ 3,080 3,258 3,633 ------- ------- ------- Total Cable Location Cash Flow ... 4,603 4,815 6,304 ------- ------- ------- Other .............................. 43 62 88 ------- ------- ------- Total ......................... $10,038 $11,007 $17,025 ======= ======= ======= Other data: Growth in net revenues ............. 45% 14% 49% Growth in Location Cash Flow ....... 38% 10% 55%
- ------ (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. 33 YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 The Company's net revenues increased by approximately $15.8 million or 49% for the year ended December 31, 1996 as compared to the same period in 1995 as a result of (i) a $8.5 million or 43% increase in TV revenues of which $1.5 million or 17% was due to ratings growth which the Company was able to convert into higher revenues and $7.0 million or 83% was the result of acquisitions made in the first quarter of 1996, (ii) a $4.4 million or 297% increase in DBS revenues of which $2.7 million or 63% was due to the increased number of DBS subscribers and $1.7 million or 37% resulting from acquisitions made in the fourth quarter of 1996, (iii) a $2.0 million or 51% increase in Puerto Rico Cable revenues due primarily to acquisitions effective September 1, 1996, (iv) a $864,000 or 13% increase in New England Cable revenues due primarily to rate increases and new combined service packages, and (v) a $16,000 increase in Tower rental income. The Company's total location operating expenses increased by approximately $9.8 million or 46% for the year ended December 31, 1996 as compared to the same period in 1995 as a result of (i) a $4.8 million or 34% increase in TV operating expenses as the net result of a $115,000 or 1% decrease in same station direct operating expenses and a $4.9 million increase attributable to stations acquired in the first quarter of 1996, (ii) a $3.6 million or 260% increase in operating expenses generated by the Company's DBS operations due to an increase in programming costs of $1.4 million, royalty costs of $138,000, marketing expenses of $455,000, customer support charges of $199,000 and other DIRECTV costs such as security, authorization fees and telemetry and tracking charges totaling $237,000, all generated from the increased number of DBS subscribers, and a $1.1 million increase attributable to territories acquired in the fourth quarter of 1996, (iii) a $912,000 or 37% increase in Puerto Rico Cable operating expenses as the net result of a $64,000 or 3% decrease in same system direct operating expenses and a $956,000 increase attributable to the system acquired effective September 1, 1996, (iv) a $489,000 or 15% increase in New England Cable operating expenses due primarily to increases in programming costs associated with the new combined service packages, and (v) a $10,000 decrease in Tower administrative expenses. As a result of these factors, Location Cash Flow increased by $6.0 million or 55% for the year ended December 31, 1996 as compared to the same period in 1995 as a result of (i) a $3.7 million or 62% increase in TV Location Cash Flow of which $1.6 million or 42% was due to an increase in same station Location Cash Flow and $2.1 million or 58% was due to an increase attributable to stations acquired in the first quarter of 1996, (ii) a $781,000 or 868% increase in DBS Location Cash Flow of which $312,000 or 40% was due to an increase in same territory Location Cash Flow and $469,000 or 60% was due to an increase attributable to the territories acquired in the fourth quarter of 1996, , (iii) a $1.1 million or 72% increase in Puerto Rico Cable Location Cash Flow of which $126,000 or 11% was due to an increase in same system Location Cash Flow and $988,000 or 89% was due to the system acquired effective September 1, 1996, (iv) a $375,000 or 11% increase in New England Cable Location Cash Flow, and (v) a $26,000 increase in Tower Location Cash Flow. As a result of these factors, incentive compensation which is calculated from increases in Location Cash Flow increased by approximately $457,000 or 87% for the year ended December 31, 1996 as compared to the same period in 1995 due mainly to the increases in revenues. Corporate expenses increased by $65,000 or 5% for the year ended December 31, 1996 as compared to the same period in 1995 primarily due to the initiation of public reporting requirements for PM&C and Pegasus. Depreciation and amortization expense increased by approximately $3.3 million or 38% for the year ended December 31, 1996 as compared to the same period in 1995 as the Company increased its fixed and intangible assets as a result of five completed acquisitions during 1996. As a result of these factors, income from operations increased by approximately $2.2 million for the year ended December 31, 1996 as compared to the same period in 1995. Interest expense increased by approximately $3.7 million or 42% for the year ended December 31, 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, but having other less favorable terms. 34 The Company reported a net loss of approximately $10.0 million for the year ended December 31, 1996 as compared to net income of approximately $2.0 million for the same period in 1995. The $12.0 million change was the net result of an increase in income from operations of approximately $2.2 million, an increase in interest expense of $3.6 million, a decrease in extraordinary items of $10.5 million from extinguishment of debt, a decrease in the provision for income taxes of $150,000 and an increase in other expenses of approximately $265,000. 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." 35 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 $9.9 million in a restricted cash account that was used to pay interest on the Company's Notes in January and 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 year ended December 31, 1996, net cash provided by operations was approximately $4.3 million which, together with $12.0 million of cash on hand, $9.9 million of restricted cash and $74.7 million of net cash provided by the Company's financing activities was used to fund investing activities of $82.5 million. Investment activities consisted of (i) the Portland Acquisition and the Tallahassee Acquisition for approximately $16.6 million, (ii) the Cable Acquisition for approximately $26.0 million, (iii) the Michigan/Texas DBS Acquisition for approximately $17.9 million, (iv) the Ohio DBS Acquisition for approximately $12.0 million, (v) the purchase of the Pegasus Cable Television of Connecticut, Inc. ("PCT-CT") office facility and headend facility for $201,000, (vi) the fiber upgrade in the PCT-CT Cable system amounting to $323,000, (vii) the purchase of DSS units used as rental and lease units amounting to $832,000, (viii) payments of programming rights amounting to $1.8 million, and (ix) maintenance and other capital expenditures and intangibles totaling approximately $6.7 million. As of December 31, 1996, the Company's cash on hand approximated $8.6 million. During 1995, net cash provided by operations was approximately $6.2 million, which together with $1.4 million of cash on hand and $10.9 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 $6.5 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, (v) payments of programming rights amounting to $1.2 million, and (vi) maintenance and other capital expenditures totalling approximately $2.3 million. During 1994, net cash provided by operations amounted to $4.1 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, to fund debt issuance costs of $1.6 million and to pay programming rights of $1.3 million. 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) $1.5 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. On January 27, 1997, the Company completed the Unit Offering in which it sold 100,000 Units resulting in net proceeds to the Company of $96.0 million. The Company applied or intends to apply the net proceeds from the Unit Offering as follows: (i) $29.6 million to the repayment of indebtedness under the New Credit Facility, which represented all indebtedness under the New Credit Facility at the time of the consummation of the Unit Offering, (ii) $15.0 million for the Mississippi DBS Acquisition, (iii) $8.8 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, (v) $2.4 million for the Arkansas DBS Acquisition and (vi) approximately $558,000 to the retirement of the Pegasus Credit Facility and expenses related thereto. 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 36 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 definitive agreements with respect to any such acquisitions at this time. 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 of the Unit Offering in short-term, investment grade securities. The Company intends to use the net proceeds for working capital, general corporate purposes and to finance future acquisitions. The Company is highly leveraged. As of December 31, 1996, on a pro forma basis after giving effect to the Completed Transactions, the Company would have had Indebtedness of $86.0 million, total stockholders' equity of $149.2 million including Preferred Stock of $96.0 million and, assuming certain conditions are met, $50.0 million available under the New Credit Facility. For the year ended December 31, 1996, on a pro forma basis after giving effect to the Completed Transactions, the Company's earnings would have been inadequate to cover its combined fixed charges and Series A Preferred Stock dividends by approximately $25.2 million. 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" and "Risk Factors -- Dividend Policy; Restrictions on Payment of Dividends." 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 December 31, 1996, $29.6 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. The Company repaid $3.0 million of indebtedness under the New Credit Facility with proceeds from the Initial Public Offering and subsequently borrowed an additional $1.0 million. The Company repaid $29.6 million, representing the outstanding balance under the New Credit Facility at the consummation of the Unit Offering, with proceeds of the Unit Offering. Currently, the Company is able to draw down $50.0 million from the New Credit Facility, subject to certain exceptions. See "Description of Indebtedness -- New Credit Facility." The Pegasus Credit Facility was entered into by Pegasus in January 1997 and retired concurrently with the consummation of the Unit Offering. Under the Pegasus Credit Facility, Pegasus was permitted to borrow up to $5.0 million in connection with the acquisition of DBS businesses until the consummation of the Unit Offering. Prior to the retirement of the Pegasus Credit Facility, $526,000 had been drawn under the Pegasus Credit Facility. The Company believes that it has adequate resources to meet its working capital, maintenance capital expenditure and debt service obligations. The Company believes that the remaining net proceeds of the Unit 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." 37 The Company closely monitors conditions in the capital markets to identify opportunities for the effective and prudent use of financial leverage. In financing its future expansion and acquisition requirements, the Company would expect to avail itself of such opportunities and thereby increase its indebtedness which could result in increased debt service requirements. 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 1997 of $9.6 million in comparison to $2.6 million in 1995 and $6.3 million in 1996 (including $3.1 million incurred in connection with the 1997 capital expenditure plans). 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, inclusive of $3.1 million incurred in 1996 as noted above, 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 -- Dividend Policy; Restrictions on Payment of Dividends." 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 the implementation of the above standards did not have any impact on the Company. In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997, earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. The Company is currently evaluating the impact, if any, adoption of SFAS No. 128 will have on its financial statements. 38 BUSINESS GENERAL The Company is a diversified media and communications company operating in two business segments: multichannel television (DBS and Cable) and broadcast television (TV). 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, the Company would have had pro forma net revenues and Operating Cash Flow of $63.3 million and $18.6 million, respectively, for the year ended December 31, 1996. The Company's net revenues and Operating Cash Flow have increased at a compound annual growth rate of 87% and 79%, respectively, from 1991 to 1996. MULTICHANNEL TELEVISION 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 December 31, 1996, there were over 2.3 million DIRECTV subscribers. DIRECTV expects to have 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 39 used with standard television sets. Each DSS receiver includes a "smart card" which is uniquely addressed to it. The smart card, which can be removed from the receiver, prevents unauthorized reception of DIRECTV services and retains billing information on pay-per-view usage, which information is sent at regular intervals from the DSS receiver telephonically to DIRECTV's authorization and billing system. DSS units also enable 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 $349. 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 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 Arkansas, Connecticut, Indiana, Massachusetts, Michigan, Mississippi, New Hampshire, New York, Ohio, Texas, Virginia and West Virginia. 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, its Ohio DBS service area covers 11 counties in southern Ohio, its Indiana DBS service area covers seven counties in Indiana, its Mississippi service area covers eight counties in Mississippi, its Arkansas service area covers Garland County in central Arkansas, and its Virginia/West Virginia service area covers five counties in southwestern Virginia and the southern portion of West Virginia. 40
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 6,969 2.4% 13.1% 0.6% New Hampshire ........ 167,531 42,075 125,456 4,210 2.5% 8.1% 0.6% Martha's Vineyard and Nantucket ........... 20,154 1,007 19,147 818 4.1% 61.4% 1.0% Michigan ............. 241,713 61,774 179,939 7,326 3.0% 8.7% 1.1% Texas ................ 149,530 54,504 95,026 5,735 3.8% 7.6% 1.7% Ohio ................. 167,558 32,180 135,378 5,477 3.3% 12.1% 1.2% Indiana .............. 131,025 34,811 96,214 6,479 4.9% 12.6% 2.2% Mississippi .......... 101,799 38,797 63,002 6,705 6.6% 14.6% 1.6% Arkansas ............. 36,458 2,408 34,050 1,734 4.8% 34.4% 2.7% Virginia/West Virginia . 92,097 10,015 82,082 5,830 6.3% 45.8% 1.5% ---------- ------- --------- ------ --- ---- --- Total .............. 1,396,138 319,036 1,077,102 51,283 3.7% 12.0% 1.2% $41.45 ========== ======= ========= ====== === ==== === ------
- ------ (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 February 7, 1997. (4) Based upon 1996 revenues and weighted average 1996 subscribers. BUSINESS STRATEGY As the exclusive provider of DIRECTV services in its purchased territories, the Company provides a full range of services, including installation, authorization and financing of equipment for new 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 Pending 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 twelve months ended December 31, 1996, the Company has added 5,809 new DIRECTV subscribers as compared to 3,895 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. 41 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 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. 42 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 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 319,000 television households which are not passed by cable and approximately 649,000 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 43 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 120,000 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 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 its exclusive DIRECTV territories 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. 44 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 ------------------- ---------- ----------- ----------- -------------- -------------- ------------ New England ....... (5) 22,900 22,500 15,000 67% $33.55 Mayaguez .......... 62 38,300 34,000 10,400 31% $31.55 San German(6) ..... 50(7) 72,400 47,700 15,800 33% $30.40 ----------- ----------- -------------- -------------- ------------ Total Puerto Rico 110,700 81,700 26,200 32% $30.85 ----------- ----------- -------------- -------------- ------------ Total ........... 133,600 104,200 41,200 40% $32.45 =========== =========== ============== ============== ============
- ------ (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 December 31, 1996. (3) A home with one or more television sets connected to a cable system is counted as one basic subscriber. Bulk accounts (such as motels or apartments) are included on a "subscriber equivalent" basis whereby the total monthly bill for the account is divided by the basic monthly charge for a single outlet in the area. This information is as of January 31, 1997. (4) Basic subscribers as a percentage of homes passed by cable. (5) The channel capacities of New England Cable systems are 36 and 62 and represent 29% and 71% of the Company's New England Cable subscribers in Connecticut and Massachusetts, 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, this system will be capable of delivering 62 channels. 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 Janaury 31. 1997, the system passed approximately 34,000 homes with 260 miles of plant and had 10,400 basic subscribers, representing a basic penetration rate of 31%. The system currently has a 62-channel capacity and offers 58 channels of programming. The system is fully addressable. San German. The San German Cable System serves a franchised area comprising ten communities and approximately 72,400 households. The system currently serves eight of these communities (two towns are unbuilt) with 480 miles of plant from two headends. At January 31, 1997, the system had 15,800 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 26,200 subscribers and passing approximately 82,000 homes with 740 miles of plant. The Company estimates that the consolidation will result in significant expense savings and will also enable it to increase revenues in the San German Cable System from the addition of pay-per-view movies, additional programming (including Spanish language channels) and improvements in picture quality. The Company also plans to expand the system to pass an additional 8,950 homes in the San German franchise. NEW ENGLAND CABLE SYSTEMS The Company's New England Cable systems consist of five headends serving 13 towns in Connecticut and Massachusetts. At January 31, 1997, these systems had approximately 15,000 basic subscribers. 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 45 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 system was 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 January 1997, the Company consummated the New Hampshire Cable Sale, which resulted in net proceeds to the Company of approximately $7.1 million. The Company's New Hampshire Cable systems consisted of two headends serving six towns. At January 31, 1997, these systems had approximately 3,600 basic subscribers. TV BUSINESS STRATEGY The Company's operating strategy in TV is focused on (i) developing strong local sales forces and sales management to maximize the value of its stations' inventory of advertising spots, (ii) improving the stations' programming, promotion and technical facilities in order to maximize their ratings in a cost-effective manner and (iii) maintaining strict control over operating costs while motivating employees through the use of incentive plans, which rewards Company employees in proportion to annual increases in Location Cash Flow. The Company seeks to maximize demand for each station's advertising inventory and thereby increase its revenue per spot. Each station's local sales force is incentivized to attract first-time television advertisers as well as provide a high level of service to existing advertisers. Sales management seeks to "oversell" the Company's share of the local audience. A television station oversells its audience share if its share of its market's television revenues exceeds its share of the viewing devoted to all stations in the market. Historically, the Company's stations have achieved oversell ratios ranging from 120% to 200%. The Company recruits and develops sales managers and salespeople who are aggressive, opportunistic and highly motivated. In addition, the Company seeks to make cost-effective improvements in its programming, promotion and transmitting and studio equipment in order to enable its stations to increase audience ratings in its targeted demographic segments. In purchasing programming, the Company seeks to avoid competitive program purchases and to take advantage of group purchasing efficiencies resulting from the Company's ownership of multiple stations. The Company also seeks to counter-program its local competitors in order to target specific audience segments which it believes are underserved. 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 46 opportunities for improved performance, and (ii) Fox affiliated stations retain a greater share of their inventory of advertising spots than do stations affiliated with ABC, CBS or NBC, thereby enabling these stations to retain a greater share of any increase in the value of their inventory. The Company is pursuing expansion in its existing markets through LMAs because second stations can be operated with limited additional fixed costs (resulting in high incremental operating margins) and can allow the Company to create more attractive packages for advertisers and program providers. THE STATIONS The following table sets forth general information for each of the Company's stations.
Number Ratings Rank Acquisition Station Market of TV ------------------- Oversell Station Date Affiliation Area DMA Households(1) Competitors(2) Prime(3) Access(4) Ratio(5) ---------------- ----------- ----------- --------------- --- ------------- -------------- --------- --------- -------- Existing Stations: WWLF-56/WILF-53/ WOLF-38(6) .... May 1993 Fox Northeastern PA 49 553,000 3 3 (tie) 1 169% WPXT-51 ........ January 1996 Fox Portland, ME 79 344,000 3 2 4 127% WDSI-61 ........ May 1993 Fox Chattanooga, TN 82 320,000 4 4 3 174% WDBD-40 ........ May 1993 Fox Jackson, MS 91 287,000 3 2 (tie) 2 126% WTLH-49 ........ March 1996 Fox Tallahassee, FL 116 210,000 3 2 2 122% Additional Stations: WOLF-38(6) ..... May 1993 UPN Northeastern PA 49 553,000 3 N/A N/A N/A WWLA-35(7) ..... May 1996 UPN Portland, ME 79 344,000 3 N/A N/A N/A
(1) Represents total homes in a DMA for each TV station as estimated by BIA. (2) Commercial stations not owned by the Company which are licensed to and operating in the DMA. (3) "Prime" represents local station rank in the 18 to 49 age category during "prime time" based on Nielsen estimates for May 1996. (4) "Access" indicates local station rank in the 18 to 49 age category during "prime time access" (6:00 p.m. to 8:00 p.m.) based on Nielsen estimates for May 1996. (5) The oversell ratio is the station's share of the television market net revenue divided by its in-market commercial audience share. The oversell ratio is calculated using estimated market data and 1996 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 $ 46.6 Market Growth ...................... -- 6.0% 14.6% 3.5% 6.0% Station Revenue Growth ............. -- 10.0% 18.4% 11.9% 12.0% 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% 169%
- ---------- (1) Prime and access ratings ranks based on Nielson estimates for May 1996; market revenue, market growth and oversell ratio based on estimated market data for 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 47 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." 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 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 $ 41.1 Market Growth ....................... -- 6.2% 16.6% 4.0% (1.2%) Station Revenue Growth .............. -- 9.1% 18.0% 2.0% (0.5%) Prime Rank (18-49) .................. 4 4 4 2 2 Access Rank (18-49) ................. 4 4 4 3 4 Oversell Ratio ...................... 140% 144% 139% 122 % 127%
------ (1) Prime and access ratings ranks based on Nielson estimates for May 1996; market revenue, market growth and oversell ratio based on estimated market data for 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." 48
Chattanooga, Tennessee DMA Statisitics ------------------------------------------------ 1992 1993 1994 1995 1996(1) ------- ------- ------- ------- ------- Market Revenues (dollars in millions) . $ 29.8 $ 31.0 $ 37.6 $ 38.5 $ 40.8 Market Growth ....................... -- 4.0% 21.3% 2.4% 6.0% Station Revenue Growth .............. -- 7.7% 38.6% 9.1% 4.2% Prime Rank (18-49) .................. 4 4 4 4 4 Access Rank (18-49) ................. 3 4 4 4 3 Oversell Ratio ...................... 132% 119% 129% 125% 174%
------ (1) Prime and access ratings ranks based on Nielson estimates for May 1996; market revenue, market growth and oversell ratio based on estimated market data for 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."
Jackson, Mississippi DMA Statistics -------------------------------------------------- 1992 1993 1994 1995 1996(1) ------- ------- ------- ------- --------- Market Revenues (dollars in millions) $ 26.3 $ 28.4 $ 32.5 $ 36.0 $38.3 Market Growth ....................... -- 8.0% 14.4% 10.8% 6.4% Station Revenue Growth .............. -- 21.8% 17.2% 15.9% 8.5% 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% 126%
------ (1) Prime and access ratings ranks based on Nielson estimates for May 1996; market revenue, market growth and oversell ratio based on estimated market data for 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 $20.0 Market Growth ....................... -- 3.6% 9.9% 5.3% 0.5% Station Revenue Growth .............. -- 2.4% 31.7% 8.5% 7.8% Prime Rank (18-49) .................. 4 3 3 2 2 Access Rank (18-49) ................. 3 3 2 3 2 Oversell Ratio ...................... 118% 100% 117% 100% 122%
------ (1) Prime and access ratings ranks based on Nielson estimates for May 1996; market revenue, market growth and oversell ratio based on estimated market data for 1996. 49 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. 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. 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 50 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, News Corp, Echostar (which has over 430,000 DBS subscribers) and MCI have recently announced a joint venture to pool much of their U.S. satellite capacity and licenses for U.S. orbital slots to create a DBS service under the trade name "Sky." This DBS service is expected to be launched later this year. One of its reported advantages will be the eventual satellite transmission of local broadcast signals to over 75% of the country and the offering of 500 channels. Additional details are unknown at this time. Two other entities plan to initiate DBS service within the next few years, in competition with DIRECTV, Continental Satellite Corporation ("CSC") has been assigned a total of 22 DBS channels. Eleven of these DBS channels can serve the eastern and central United States, and the other eleven can serve the western and central United States. Dominion Video Satellite, Inc. ("Dominion") has been assigned eight DBS channels that can be used to serve the eastern and central United States, and eight DBS channels that can be used to serve the western and central United States. 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. The other current DBS competitors to DIRECTV are USSB, EchoStar and AlphaStar. 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 51 programs in exchange for the right to retain a significant portion of the available advertising time during its network programs. ABC, CBS and NBC currently offer more than 12 hours of programming a day on average, which represents approximately two-thirds of the typical broadcasting day. UPN and WB program up 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). 52 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. 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 53 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 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 adopted a Report and Order on January 24, 1997 extending television license terms to the eight-year maximum provided in the 1996 Act, reserving the right to renew licenses for shorter terms. The effective date for this change is March 7, 1997. 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 WTLH 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 54 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 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 55 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 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. The NRTC has informed the Company that it has adopted a policy requiring, in certain circumstances, any party acquiring DIRECTV distribution rights from an NRTC member of affiliate to post a letter of credit to secure payment of NRTC's billings. Although the policy has not been communicated to the Company in writing, the Company understands from discussions with NRTC representatives that one circumstance in which a letter of credit will be required is that of an acquiring person whose monthly payments to the NRTC (including payments on account of the acquired territory) exceeds a specified amount. It appears from what the Company has been told that the new policy will require the Company to post a letter of credit of approximately $3.3 million in connection with the Indiana, Mississippi, Arkansas and Virginia/West Virginia DBS Acquisitions, and that the required amount will be subject to increase in the future based on increases in NRTC billings and on acquisitions of additional DIRECTV territories by the Company. Although this 56 requirement can be expected to reduce somewhat the Company's acquisition capacity inasmuch as it ties up capital that could otherwise be used to make acquisitions, the Company expects this reduction to be manageable. There can be no assurance, however, that the NRTC will not in the future seek to institute other policies, or to change this policy, in ways that would be material to the Company. 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. The Company currently holds 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. 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 January 31, 1997, 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 28,700 70% -------------------- --------------- ---------------- Total .................... 11 41,200 100%
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 57 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 adopted a Report and Order on January 24, 1997 extending television license terms to the eight-year maximum provided in the 1996 Act, reserving the right to renew licenses for shorter terms. The effective date for this change is March 7, 1997. The FCC may revoke or deny licenses, after a hearing, for serious violations of its regulations. Petitions to deny renewal of a license may be filed on or before the first day of the last month of a license term. Generally, however, in the absence of serious violations of FCC rules or policies, license renewal is expected in the ordinary course. The 1996 Act prohibits the FCC from considering competing applications for the frequency used by the renewal applicant if the FCC finds that the station seeking renewal has served the public interest, convenience and necessity, that there have been no serious violations by the licensee of the Communications Act or the rules and regulations of the FCC, and that there have been no other violations by the licensee of the Communications Act or the rules and regulations of the FCC that, when taken together, would constitute a pattern of abuse. The Company's licenses with respect to TV stations WOLF/WWLF/WILF, WDSI and WDBD are scheduled to expire on August 1, 1999, August 1, 1997 and June 1, 1997, respectively. In addition, the licenses with respect to television stations WTLH and WPXT are scheduled to expire on April 1, 1997 and April 1, 1999, respectively. The Company is not aware of any facts or circumstances that might reasonably be expected to prevent any of its stations from having its current license renewed at the end of its respective term. 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 58 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, 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 59 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. 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 60 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 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 61 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 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. 62 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. 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 63 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. 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 64 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 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 65 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. 66 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 Leased 1,125 foot tower 2/28/04 equipment) Jackson, MS (television station Lease-Purchase (1) 5,600 square foot building; N/A and 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 Leased 400 square feet 9/30/97 (transmitting) (Williamsport Tower) Nescopec Mountain, PA Owned 400 foot tower N/A (transmitting) Williamsport, PA (tower) Owned 175 foot tower N/A Chattanooga, TN (transmitting) Owned 577 foot tower N/A 1201 East Main St., Chattanooga, Owned 16,240 square foot building N/A TN (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, Leased 5,012 square feet 9/30/97 Tallahassee, FL (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 Owned 1,900 square feet N/A (office) Charlton, MA (office, headend Leased 38,223 square feet 5/9/99 site) 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 Leased 1.59 acres 4/4/05 site) 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 Owned 1,200 square feet; 200 foot tower N/A site) 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 Leased 40 foot tower; 121 square meters 2/28/04 site) Cabo Rojo, Puerto Rico (headend Leased 40 foot tower; 121 square meters 11/10/04 site) Hormigueros, Puerto Rico Leased 2,000 square feet monthly (warehouse)
- ------ (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. 67 EMPLOYEES As of December 31, 1996, the Company had 271 full-time and 34 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 31, 1996, the Connecticut DPUC issued a decision approving the new rates. 68 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. ..... 41 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 ........ 55 Vice President James J. McEntee, III(1) 39 Director Mary C. Metzger(2) ..... 51 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 69 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 $1.5 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 $1.5 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 70 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 Suite 454, 5 Radnor Corporate Center, 100 Matsonford Road, 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 provides 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. 71 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, 1996 exceeded $100,000. SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation(1) Compensation -------------------------- -------------- Restricted All Other Annual Stock Other Name Principal Position Year Salary Compensation Awards(3) Compensaton(4) - --------------------- -------------------------------------- ------ ---------- -------------- -------------- -------------- Marshall W. Pagon ... President and Chief Executive Officer 1996 $150,000 -- -- -- 1995 $150,000 -- -- -- 1994 $150,000 -- -- -- Robert N. Verdecchio. Senior Vice President, Chief Financial 1996 $125,000 -- $1,746,794 -- Officer and Assistant Secretary 1995 $122,083 -- $ 133,450 -- 1994 $ 90,000 -- -- -- Howard E. Verlin .... Vice President, Cable and Satellite 1996 $100,000 -- $ 89,166 -- Television, and Secretary 1995 $100,000 -- $ 95,321 -- 1994 $ 65,000 -- -- -- Guyon W. Turner ..... Vice President, Broadcast Television 1996 $130,717 $18,200(2) $1,738,674 -- 1995 $130,486 $18,200(2) $ 95,321 -- 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 for 1994 and 1995 and for January 1, 1996 through October 8, 1996 were paid by the Management Company. After October 8, 1996, the Company's executive officers' salaries were paid by the 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 for 1995 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 resulting in 46,132, 39,952 and 32,952 shares of Class A Common Stock, respectively to Messrs. Verdecchio, Verlin and Turner. In 1996, 123,868, 6,369 and 124,191 shares were granted to Messrs. Verdecchio, Verlin and Turner which vested in accordance with the same vesting schedule. An additional 903 shares were granted to Mr. Verdecchio pursuant to the Restricted Stock Plan. As of December 31, 1996, Messrs. Verdecchio, Verlin and Turner had an aggregate of 170,903, 39,321 and 157,143 shares of Class A Common Stock with an aggregate value as of December 31, 1996 of $2,349,916, $540,664 and $2,160,716, respectively. (4) Amounts listed for fiscal 1996 do not include the Company's contributions under the 401(k) Plans since such contributions have not been determined as of the date of this Prospectus. 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 Restricted Stock Plan and Stock Option Plan (subject to adjustment to reflect stock dividends, stock splits, recapitalizations, and similar changes in the capitalization of Pegasus) and up to 205,000 shares of Class A Common Stock in connection with the 401(k) Plans. 72 The Company believes that the Restricted Stock Plan and 401(k) Plans result in greater increases in stockholder value than result from a conventional stock option program, because these plans create a clear cause and effect relationship between initiatives taken to increase Location Cash Flow and the amount of incentive compensation that results therefrom. Although the Restricted Stock Plan and 401(k) Plans like conventional stock option programs provide compensation to employees as a function of growth in stockholder value, the tax and accounting treatments of these programs are different. For tax purposes, incentive compensation awarded under the Restricted Stock Plan (upon vesting) and the 401(k) Plans is fully tax deductible as compared to conventional stock option grants which generally are only partially tax deductible upon exercise. For accounting purposes, conventional stock option programs generally do not result in a charge to earnings while compensation under the Restricted Stock Plan and the 401(k) Plans do result in a charge to earnings. The Company believes that these differences result in a lack of comparability between the EBITDA of companies that utilize conventional stock option programs and the EBITDA of the Company. The table below lists the specific maximum components of the Restricted Stock Plan and the 401(k) Plans in terms of a $1 increase in annual Location Cash Flow.
Component Amount ------------------------------------------------------------------------------------------- ---------- Restricted Stock grants to general managers based on the increase in annual Location Cash Flow of individual business units ................................................... 6(cents) Restricted Stock grants to department managers based on the increase in annual Location Cash Flow of individual business units ................................................... 6(cents) Restricted Stock grants to corporate managers (other than executive officers) based on the Company-wide increase in annual Location Cash Flow ....................................... 3(cents) Restricted Stock grants to employees selected for special recognition ..................... 5(cents) Restricted Stock grants under the 401(k) Plans for the benefit of all eligible employees and allocated pro-rata based on wages .................................................... 10(cents) --------- Total ................................................................................. 30(cents) =========
As of January 31, 1997, the Company has six 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. 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. 73 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 (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. The Company has authorized and reserved for issuance up to 205,000 shares of Class A Common Stock in connection with the 401(k) Plans. Company contributions to the 401(k) Plans are subject to limitations under applicable laws and regulations. All employee contributions to the 401(k) Plans are fully vested at all times and all Company contributions, if any, vest 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. 74 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information with respect to the beneficial holdings of each Selling Stockholder, 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. The information does not give effect to the Warrant Shares issuable upon exercise of the Warrants. 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 B Pegasus Class A Pegasus Class A Common Stock Common Stock Number of Common Stock Beneficially Owned Beneficially Owned Shares to be Beneficially Owned Before and Prior to Offering Sold in Offering After Offering After Offering ------------------- ---------------- ------------------ ------------------ Beneficial Owner Shares % Shares % Shares % - ------------------------------------ ---------- ------- ---------------- --------- -------- --------- -------- Marshall W. Pagon(1)(2) ........... 4,581,900(3) 47.2% -- 4,581,900 47.2% 4,581,900 100.0% Guyon W. Turner(4) ................ 157,143 3.1% 157,143(5)(8) 0 -- (6)(8) -- -- Robert N. Verdecchio(4) ........... 170,903 3.3% 170,000(7)(8) 903 (6)(8) -- -- Howard E. Verlin(4) ............... 39,321 (6) 39,321(9)(8) 0 -- (6)(8) -- -- James J. McEntee, III ............. 500 (6) -- 500 (6) -- -- Mary C. Metzger ................... 500 (6) -- 500 (6) -- -- Donald W. Weber(10) ............... 5,385 (6) -- 5,385 (6) -- -- Richard D. Summe(11) .............. 284,719 5.6% -- 284,719 5.6% -- -- Harron Communications Corp.(12) 70 East Lancaster Avenue Frazer, PA 19355 ................. 852,110 16.6% -- 852,110 16.6% -- -- Directors and Executive Officers as a Group (8 persons)(13) .......... 4,956,652 51.0% -- 4,552,935 46.9% 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) For information relating to Messrs. Turner, Verdecchio and Verlin's relationship with the Company, see "Management and Certain Transactions." (5) 78,572 of these shares have vested as of the date of this Prospectus; 39,286 shares will vest on December 31, 1997; and 39,285 shares will vest on December 31, 1998. (6) Represents less than 1% of the outstanding shares of the class of Common Stock. (7) 85,000 of these shares have vested as of the date of this Prospectus; 42,500 shares will vest on December 31, 1997; and 42,500 shares will vest on December 31, 1998. (8) Assuming each Selling Stockholder will sell all of his Shares in the Offering. (9) 19,661 of these shares have vested as of the date of this Prospectus; 9,830 shares will vest on December 31, 1997; and 9,830 shares will vest on December 31, 1998. (10) Includes 3,385 shares of Class A Common Stock issuable upon the exercise of the vested portion of outstanding stock options. (11) The address of Richard D. Summe is 11790 E. State Rd. 334, Zionsville, Indiana 46077-9399. (12) 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. (13) 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. 75 DESCRIPTION OF INDEBTEDNESS NEW CREDIT FACILITY Pegasus Media & Communications, 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. and the assets and stock of certain of the Company's license-holding subsidiaries). 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 constitutes 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 Initial 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 (the "Trust Indenture Act"). 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. 76 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. DESCRIPTION OF UNIT OFFERING SECURITIES As used in this "Description of Unit Offering Securities," the term "Company" refers to Pegasus Communications Corporation, excluding its subsidiaries. On January 27, 1997, the Company consummated its offering of 100,000 Units, resulting in net proceeds to the Company of $96.0 million. Each Unit consisted of one share of Series A Preferred Stock and one Warrant to purchase 1.936 shares of Class A Common Stock, which became immediately separable upon issuance. 77 DESCRIPTION OF SERIES A PREFERRED STOCK General. The following is a summary of certain terms of the Series A Preferred Stock. The terms of the Series A Preferred Stock are set forth in the Certificate of Designation, 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, which are filed as exhibits to the registration statement of which this Prospectus forms a part. All terms defined in the Certificate of Designation and not otherwise defined in this subsection are used below with the meanings set forth in the Certificate of Designation. 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") were authorized for issuance in the Unit Offering. On January 1, 2007, 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. Ranking. The Series A Preferred Stock ranks 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 provides 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 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 provides 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 are 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 12 3/4% per annum, payable semi-annually in arrears on January 1 and July 1 of each year, beginning on July 1, 1997. Dividends will be payable in cash, except that on or prior to January 1, 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. Dividends on the Series A Preferred Stock 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 accumulate to the extent they are not paid on the dividend payment date for the period to which they relate. Accumulated unpaid dividends bear interest at a per annum rate 200 basis points in excess of the annual dividend rate on the Series A Preferred Stock. The Certificate of Designation provides 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. Voting Rights. Holders of record of shares of the Series A Preferred Stock have no voting rights, except as required by law and as provided in the Certificate of Designation. The Certificate of Designation provides, under certain circumstances, 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 78 with respect to the Series A Preferred Stock; (c) the failure of the Company to make a Change of Control Offer; (d) the failure of the Company to comply with any of the other covenants or agreements set forth in the Certificate of Designation; 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), then the Company's Board of Directors will be increased by two members, 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. Such voting rights continue until all dividends in arrears on the Series A Preferred Stock are paid in full and all other triggering events have been cured or waived. Optional Redemption. The Series A Preferred Stock may not be redeemed at the option of the Company on or prior to January 1, 2002. The Series A Preferred Stock may be redeemed, in whole or in part, at the option of the Company on or after January 1, 2002, at the redemption prices (expressed as percentages of the liquidation preference thereof), starting at 106.375% during the 12-month period beginning January 1, 2002 and declining annually to 100% on January 1, 2005 and thereafter. In addition, prior to January 1, 2000, 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 112.750% 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 Class A Common Stock of the Company. 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 of such holder's Series A Preferred Stock at an offer price in cash equal to 101% of the aggregate Liquidation Preference thereof plus accrued and unpaid dividends, if any, thereon to the date of purchase. Generally, a Change of Control means the occurrence of any of the following: (i) the disposition of all or substantially all of the Company'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 the Company, (iii) the consummation of any transaction in which a person becomes a beneficial owner of more of the voting stock of the Company 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 the Company are not Continuing Directors. Certain Covenants. The Certificate of Designation contains a number of covenants restricting the operations of the Company and its subsidiaries, which, among other things, limit the ability of the Company and/or its subsidiaries to incur additional Indebtedness, pay dividends or make distributions, issue subsidiary stock, create certain liens, enter into certain consolidations or mergers and enter into certain transactions with affiliates. DESCRIPTION OF EXCHANGE NOTES The Company may, at its option, under certain circumstances exchange, in whole, but not in part, the then outstanding shares of Series A Preferred Stock for 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. 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, which is filed as an exhibit to the registration statement of which this Prospectus forms a part. All terms defined and not otherwise defined in this subsection are used below with the meanings set forth in the Exchange Note Indenture. 79 Principal, Maturity and Interest. The Exchange Notes will be limited in aggregate principal amount to $100.0 million and will mature on January 1, 2007. Interest on the Exchange Notes will accrue at the rate of 12 3/4% per annum and will be payable semi-annually in arrears on January 1 and July 1 of each year. Interest will be payable in cash, except that on each interest payment date occurring prior to January 1, 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 additional Exchange Notes will constitute "payment" of the related interest for all purposes of the Exchange Note Indenture. 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. Optional Redemption. The Exchange Notes will not be redeemable at the Company's option prior to January 1, 2002. The Exchange Notes may be redeemed, in whole or in part, at the option of the Company on or after January 1, 2002, at the redemption prices, in each case, together with accrued and unpaid interest, if any, starting at 106.375% of principal during the 12-month period beginning January 1, 2002 and declining annually to 100% of principal on January 1, 2005 and thereafter. In addition, prior to January 1, 2000, 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 112.750% 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 Class A Common Stock of the Company. 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 of such holder's Exchange Notes 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 definition of "Change of Control" is identical under the Exchange Note Indenture and the Certificate of Designation. See "-- Description of Series A Preferred Stock -- Change of Control." Certain Covenants. The Exchange Note Indenture contains a number of covenants restricting the operations of the Company and its subsidiaries, which, among other things, limit the ability of the Company and/or its subsidiaries to incur additional Indebtedness, pay dividends or make distributions, sell assets, issue subsidiary stock, create certain liens, enter into certain consolidations or mergers and enter into certain transactions with affiliates. Events of Default. Events of Default under the Exchange Note Indenture include the following: (i) 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), (ii) default by the Company in the payment of the principal of or premium, if any, on the Exchange Notes, (iii) failure by the Company to comply with certain provisions of the Exchange Note Indenture (subject, in some but not all cases, to notice and cure periods), (iv) 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, (v) default under certain items of indebtedness by the Company or any of its Restricted Subsidiaries for money borrowed by the Company or any of its Restricted Subsidiaries, (vi) a failure by the Company or any Restricted Subsidiary that would be a Significant Subsidiary to pay final judgments aggregating in excess of $5.0 million, which judgments remain unpaid, undischarged or unstayed for a period of 60 days and (vii) 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. 80 DESCRIPTION OF WARRANTS GENERAL The Warrants were 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. All terms defined and not otherwise defined in this subsection are used below with the meanings set forth in the Warrant Agreement. Each Warrant, when exercised, entitles the holder thereof to receive 1.936 fully paid and non-assessable shares of Class A Common Stock at an exercise price of $15.00 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 entitle the holders thereof to purchase in the aggregate 193,600 Warrant Shares, or approximately 2.0% of the Class A Common Stock, on a fully diluted basis as of the closing of the Unit Offering. The Warrants are exercisable until 5:00 p.m., New York City time, on January 1, 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 interest, 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. 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 81 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). REGISTRATION RIGHTS Pursuant to the Warrant Agreement, the Company has agreed, with certain exceptions, to keep the registration statement relating to the Warrant Shares effective until 30 days after the earlier to occur of (i) January 1, 2007 or (ii) the date when all Warrants have been exercised. 82 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. Without giving effect to the issuance of the 193,600 Warrant Shares issuable upon exercise of the Warrants, 5,129,879 shares of Class A Common Stock, 4,581,900 shares of Class B Common Stock and 100,000 shares of Series A Preferred Stock are outstanding. In addition, 5,700,500 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, and (iii) 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. The outstanding shares of Class A Common Stock equal 52.8% of the total Common Stock outstanding, and the holders of Class B Common Stock have control of approximately 89.9% of the combined voting power of the Common Stock. The holders of the Class B Common Stock, 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, has 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. 83 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. 84 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 the Unit Offering, 100,000 shares of Series A Preferred Stock were issued. See "Description of Securities -- Description of the Series A Preferred Stock" for a detailed description of the Series A Preferred Stock. 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. 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 Virginia/West Virginia DBS Acquisition, warrants were issued to purchase a total of 283,969 shares of Class A Common Stock. REGISTRATION RIGHTS 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 holders of the 71,429 shares of Class A Common Stock issued in connection with the acquisition of the Portland LMA, the 10,714 shares of Class A Common Stock issued in connection with the Portland Acquisition, and the 466,667 shares of Class A Common Stock issued in connection with the Indiana DBS Acquisition. Piggyback registration rights were also granted in connection with the securities issued in the Virginia/West Virginia DBS Acquisition. 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 85 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. 86 PLAN OF DISTRIBUTION The Shares may be sold from time to time to purchasers directly by any of the Selling Stockholders or by persons to whom the Selling Stockholders may pledge Shares to secure loans ("Pledgees"), or, alternatively any of the Selling Stockholders may from time to time offer the Shares through dealers or agents, who may receive compensation in the form of underwriting discounts, concessions or commissions from the Selling Stockholders and/or the purchasers of the Shares for whom they may act as agent. Any discounts, commissions or concessions received by any such dealers or agents and any profits on the sale of Shares by them may be deemed to be underwriting discounts and commissions under the Securities Act. As of the date of this Prospectus, 183,233 Shares in the aggregate have vested in the Selling Stockholders and will be available for immediate sale. The aggregate amount of 91,616 Shares will vest on December 31, 1997 and become available for sale on that date. The remaining 91,615 Shares will not vest until December 31, 1998 and will become available for sale at that time. The Shares may be sold from time to time in one or more transactions at a fixed offering price, which may be changed, at varying prices determined at the time of sale, or at negotiated prices. Such prices will be determined by the Selling Stockholders or Pledgees or by agreement between the Selling Stockholders or Pledgees and/or dealers. The Shares are listed on the Nasdaq National Market and may also be sold in transactions on the Nasdaq National Market. In connection with the offer and sale of the Shares, various state securities laws and regulations require that any such offer and sale should be made only through the use of a broker-dealer registered as such in any state where a Selling Stockholder engages such broker-dealer and in any state where such broker-dealer intends to offer and sell the Shares. Under applicable rules and regulations under the Exchange Act, any person engaged in a distribution of the Shares may not bid for or purchase the Shares until after such person has completed his or her participation in such distribution. In addition to and without limiting the foregoing, the Selling Stockholders and any other person participating in such distribution will be subject to other applicable provisions of the Exchange Act and the rules and regulations thereunder, including without limitation Regulation M, which provisions may affect the timing of purchases and sales of any of the Shares by the Selling Stockholders and any such other person. All of the foregoing may affect the marketability of the Shares and the ability of any person or entity to engage in market making activities with respect to the Shares. The Selling Stockholders and any broker-dealers, agents, underwriters or dealers that participate with the Selling Stockholders in the distribution of the Shares may be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act, and any commissions received by them and any profit on the resale of the Shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. 87 LEGAL MATTERS The validity of the Shares 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. EXPERTS The Company's consolidated balance sheets as of December 31, 1995 and 1996 and the related consolidated statements of operations, statements of changes in total equity and statements of cash flows for each of the three years in the period ended December 31, 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. 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. 88 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, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. 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. 89 PEGASUS COMMUNICATIONS CORPORATION INDEX TO FINANCIAL STATEMENTS
Page -------- Pegasus Communications Corporation (a newly formed entity which has nominal assets and includes the consolidated operations of entities under common control) Report of Coopers & Lybrand L.L.P. .................................................................... F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996 .......................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 ............ F-4 Consolidated Statements of Changes in Total Equity for the years ended December 31, 1994, 1995 and 1996 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 ............ F-6 Notes to Consolidated Financial Statements ............................................................ F-7 Portland Broadcasting, Inc. (an acquired entity) Report of Ernst & Young LLP ........................................................................... F-20 Balance Sheets as of September 25, 1994, September 24, 1995, and December 31, 1995 (unaudited) ........ F-21 Statements of Operations for fiscal year ended September 26, 1993, September 25, 1994, September 24, 1995 and fiscal quarters ended December 25, 1994 (unaudited) and December 31, 1995 (unaudited) ....... F-22 Statements of Deficiency in Assets for the fiscal years ended September 26, 1993, September 25, 1994 and September 24, 1995 and the fiscal quarter ended December 31, 1995 (unaudited) .................... F-23 Statements of Cash Flows for fiscal years ended September 26, 1993, September 25, 1994 and September 24, 1995 and fiscal quarter ended December 1994 (unaudited) and 1995 (unaudited) ..................... F-24 Notes to Financial Statements ......................................................................... F-25 WTLH, Inc. (an acquired entity) Report of Coopers & Lybrand L.L.P. .................................................................... F-29 Balance Sheets as of December 31, 1994, 1995 and February 29, 1996 (unaudited) ........................ F-30 Statements of Operations for the years ended December 31, 1994, 1995 and for the two months ended February 28, 1995 (unaudited) and February 29, 1996 (unaudited) ...................................... F-31 Statements of Capital Deficiency for the years ended December 31, 1994, 1995 and for the two months ended February 29, 1996 (unaudited) .................................................................. F-32 Statements of Cash Flows for the years ended December 31, 1994, 1995 and the two months ended February 28, 1995 (unaudited) and February 29, 1996 (unaudited) ............................................... F-33 Notes to Financial Statements ......................................................................... F-34 DBS Operations of Harron Communications Corp. (an acquired business) Report of Deloitte & Touche LLP ....................................................................... F-40 Combined Balance Sheets as of December 31, 1994, 1995 and September 30, 1996 (unaudited) .............. F-41 Combined Statements of Operations for years ended December 31, 1994, 1995 and the nine months ended September 30, 1995 (unaudited) and 1996 (unaudited) .................................................. F-42 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-43 Notes to Combined Financial Statements ................................................................ F-44 Dom's Tele Cable, Inc. (an acquired entity) Report of Coopers & Lybrand L.L.P. .................................................................... F-48 Balance Sheets as of May 31, 1995, 1996 and August 29, 1996 (unaudited) ............................... F-49 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-50 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-51 Notes to Financial Statements ......................................................................... F-52
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Pegasus Communications Corporation We have audited the accompanying consolidated balance sheets of Pegasus Communications Corporation as of December 31, 1995 and 1996, and the related consolidated statements of operations, changes in total equity, and cash flows for each of the three years in the period ended December 31, 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 require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pegasus Communications Corporation as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 21, 1997 except as to Note 15 for which the date is March 10, 1997 F-2 PEGASUS COMMUNICATIONS CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, -------------------------------- 1995 1996 -------------- -------------- ASSETS Current assets: Cash and cash equivalents ..................................... $11,974,747 $ 8,582,369 Restricted cash ............................................... 9,881,198 -- Accounts receivable, less allowance for doubtful accounts of $238,000 and $243,000, respectively ......................... 4,884,045 9,155,545 Program rights ................................................ 931,664 1,289,437 Inventory ..................................................... 1,100,899 697,957 Deferred taxes ................................................ 42,440 1,290,397 Prepaid expenses and other .................................... 329,895 851,592 -------------- -------------- Total current assets ........................................ 29,144,888 21,867,297 Property and equipment, net ........................................ 16,571,538 24,115,138 Intangible assets, net ............................................. 48,028,410 126,236,128 Program rights ..................................................... 1,932,680 1,294,985 Deposits and other ................................................. 92,325 166,498 -------------- -------------- Total assets ................................................ $95,769,841 $173,680,046 ============== ============== LIABILITIES AND EQUITY Current liabilities: Notes payable ................................................. $ 316,188 $ 48,610 Advances payable -- related party ............................. 468,327 -- Current portion of long-term debt ............................. 271,934 315,223 Accounts payable .............................................. 2,494,738 5,075,981 Accrued interest .............................................. 5,173,745 5,592,083 Accrued expenses .............................................. 1,712,603 3,803,993 Current portion of program rights payable ..................... 1,141,793 601,205 -------------- -------------- Total current liabilities ................................... 11,579,328 15,437,095 -------------- -------------- Long-term debt, net ................................................ 82,308,195 115,211,610 Program rights payable ............................................. 1,421,399 1,365,284 Deferred taxes ..................................................... 211,902 1,339,859 -------------- -------------- Total liabilities ........................................... 95,520,824 133,353,848 Commitments and contingent liabilities ............................. -- -- Total equity: Preferred stock; $0.01 par value; 5.0 million shares authorized -- -- Class A common stock .......................................... 1,615 46,632 Class B common stock .......................................... 85 45,819 Additional paid-in capital .................................... 7,880,848 57,736,011 Retained earnings (deficit) ................................... 1,825,283 (17,502,264) Partners' deficit ............................................. (9,458,814) -- -------------- -------------- Total equity ................................................ 249,017 40,326,198 -------------- -------------- Total liabilities and equity .................................. $95,769,841 $173,680,046 ============== ==============
See accompanying notes to consolidated financial statements F-3 PEGASUS COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, --------------------------------------------------- 1994 1995 1996 --------------- -------------- --------------- Revenues: Basic and satellite service ........................ $ 8,455,815 $10,002,579 $ 16,645,428 Premium services ................................... 1,502,929 1,652,419 2,197,188 Broadcasting revenue, net of agency commissions .... 13,204,148 14,862,734 21,813,409 Barter programming revenue ......................... 4,604,200 5,110,662 6,337,220 Other .............................................. 423,998 519,682 935,387 --------------- -------------- --------------- Total revenues ................................ 28,191,090 32,148,076 47,928,632 --------------- -------------- --------------- Operating expenses: Programming ........................................ 4,094,688 5,475,623 9,889,895 Barter programming expense ......................... 4,604,200 5,110,662 6,337,220 Technical and operations ........................... 2,791,885 2,740,670 3,271,564 Marketing and selling .............................. 3,372,482 3,928,073 5,481,315 General and administrative ......................... 3,289,532 3,885,473 5,923,247 Incentive compensation ............................. 432,066 527,663 985,365 Corporate expenses ................................. 1,505,904 1,364,323 1,429,252 Depreciation and amortization ...................... 6,940,147 8,751,489 12,060,498 --------------- -------------- --------------- Income from operations ........................ 1,160,186 364,100 2,550,277 Interest expense ........................................ (5,360,729) (8,793,823) (12,454,891) Interest expense -- related party ....................... (612,191) (22,759) -- Interest income ......................................... -- 370,300 232,361 Other expenses, net ..................................... (65,369) (44,488) (171,289) --------------- -------------- --------------- Loss before income taxes and extraordinary items ... (4,878,103) (8,126,670) (9,843,543) Provision (benefit) for income taxes .................... 139,462 30,000 (120,000) --------------- -------------- --------------- Loss before extraordinary items .................... (5,017,565) (8,156,670) (9,723,543) Extraordinary gain (loss) from extinguishment of debt, net ................................................... (633,267) 10,210,580 (250,603) --------------- -------------- --------------- Net income (loss) .................................. ($5,650,832) $ 2,053,910 ($ 9,974,146) =============== ============== =============== Income (loss) per share: Loss before extraordinary items .................... ($ 0.99) ($ 1.59) ($ 1.56) Extraordinary (loss) gain .......................... (0.13) 1.99 (0.04) --------------- -------------- -------------- Net income (loss) .................................. ($ 1.12) $ 0.40 ($ 1.60) =============== ============== ============== Weighted average shares outstanding ................ 5,044,042 5,139,937 6,239,663 =============== ============== ==============
See accompanying notes to consolidated financial statements F-4 PEGASUS COMMUNICATIONS CORPORATION CONSOLIDATED 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 January 1, 1994 .... $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) Distributions to Parent ........ (12,500,000) (12,500,000) Exchange of common stock ....... 161,006 1,121 (1,121) Issuance of Class B common stock 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 ....................... (5,934,261) (4,039,885) (9,974,146) Contributions by Parent ........ 579,152 105,413 684,565 Distributions to Parent ........ (2,946,379) (2,946,379) Issuance of Class A common stock due to: Initial Public Offering ...... 3,000,000 30,000 38,153,000 38,183,000 WPXT Acquisition ............. 82,143 821 1,149,179 1,150,000 MI/TX DBS Acquisition ........ 852,110 8,521 11,921,025 11,929,546 Awards ....................... 3,614 36 50,559 50,595 Issuance of Class B common stock due to: WPXT Acquisition ............. 71,429 714 999,286 1,000,000 Conversions of partnerships .... (13,393,286) 13,393,286 Exchange of PM&C Class B ....... 183,292 1,833 (1,833) Exchange of PM&C Class A ....... 4,882,541 48,826 (48,826) ----------- ---------- -------------- --------------- -------------- -------------- Balances at December 31, 1996 .. 9,245,129 $92,451 $ 57,736,011 ($ 17,502,264) $ 40,326,198 =========== ========== ============== =============== ============== ==============
See accompanying notes to consolidated financial statements F-5 PEGASUS COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, --------------------------------------------------- 1994 1995 1996 --------------- -------------- --------------- Cash flows from operating activities: Net income (loss) ................................... ($ 5,650,832) $ 2,053,910 ($ 9,974,146) 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) 250,603 Depreciation and amortization .................... 6,940,147 8,751,489 12,060,498 Program rights amortization ...................... 1,193,559 1,263,190 1,514,122 Accretion on discount of bonds ................... -- 195,454 392,324 Stock incentive compensation ..................... -- -- 50,595 Gain on disposal of fixed assets ................. 30,524 -- -- Bad debt expense ................................. 200,039 146,147 335,856 Deferred income taxes ............................ 139,462 30,000 (120,000) Change in assets and liabilities: Accounts receivable ............................ (1,353,448) (815,241) (4,607,356) Inventory ...................................... (711,581) (389,318) 402,942 Prepaid expenses and other ..................... (250,128) 490,636 (521,697) Accounts payable & accrued expenses ............ 702,240 (826,453) 4,672,633 Advances payable -- related party .............. 142,048 326,279 (468,327) Accrued interest ............................... 2,048,569 5,173,745 418,338 Deposits and other ............................. 39,633 5,843 (74,173) --------------- -------------- --------------- Net cash provided by operating activities ........... 4,103,499 6,195,101 4,332,212 Cash flows from investing activities: Acquisitions ..................................... -- -- (72,567,216) Capital expenditures ............................. (1,264,212) (2,640,475) (6,294,352) Purchase of intangible assets .................... (943,238) (2,334,656) (1,758,727) Payments of programming rights ................... (1,310,294) (1,233,777) (1,830,903) Other ............................................ (53,648) (250,000) -- --------------- -------------- --------------- Net cash used for investing activities .............. (3,571,392) (6,458,908) (82,451,198) Cash flows from financing activities: Proceeds from long-term debt ..................... 35,015,000 81,455,919 -- Repayments of long-term debt ..................... (33,991,965) (48,095,692) (103,639) Borrowings on revolving credit facility .......... -- 2,591,335 41,400,000 Repayments on revolving credit facility .......... -- (2,591,335) (11,800,000) Proceeds from borrowings from related parties .... 26,000 20,000 -- Restricted cash .................................. -- (9,881,198) 9,881,198 Debt issuance costs .............................. (1,552,539) (3,974,454) (304,237) Capital lease repayments ......................... (154,640) (166,050) (267,900) Contributions by Parent .......................... -- -- 684,565 Distributions to Parent .......................... -- (12,500,000) (2,946,379) Proceeds from issuance of common stock ........... -- 4,000,000 42,000,000 Underwriting and IPO costs ....................... -- -- (3,817,000) --------------- -------------- --------------- Net cash provided by (used in) financing activities . (658,144) 10,858,525 74,726,608 Net increase (decrease) in cash and cash equivalents .. (126,037) 10,594,718 (3,392,378) Cash and cash equivalents, beginning of year .......... 1,506,066 1,380,029 11,974,747 --------------- -------------- --------------- Cash and cash equivalents, end of year ................ $ 1,380,029 $ 11,974,747 $ 8,582,369 =============== ============== ===============
See accompanying notes to consolidated financial statements F-6 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY: Pegasus Communications Corporation ("Pegasus" or together with its subsidiaries stated below, the "Company") is a diversified media and communications company, incorporated in May 1996, is a direct 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, L.P. ("MCT"). PBT operates broadcast television ("TV") 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 ("Cable") systems that provide service to individual and commercial subscribers in New England and Puerto Rico, respectively. PST provides direct broadcast satellite ("DBS") service to customers in the New England area. PBA holds a television station license which simulcasts programming from a station operated by PBT. Pegasus Satellite Holdings, Inc. ("PST Holdings") is a DBS holding company whose subsidiaries provide direct broadcast satellite service to customers in certain rural areas of Michigan, Texas and Ohio. 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. On October 8, 1996, in conjunction with the Initial Public Offering, the limited partnerships which owned and operated the Company's Puerto Rico cable operations and owned one of its broadcast licenses, restructured. This reorganization has been accounted for as if a pooling of interests had occurred. On October 31, 1994, the limited partnerships which owned and operated PCH's broadcast television, New England cable and satellite operations, restructured and transferred their assets to PM&C. This reorganization has been accounted for as if a pooling of interests had occurred. Pegasus Towers L.P. ("Towers"), a subsidiary of Pegasus, owns and operates television and radio transmitting towers located in Pennsylvania and Tennessee. Pegasus Communications Management Company ("PCMC"), a subsidiary of Pegasus, provides certain management and accounting services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION: The financial statements include the accounts of Pegasus and all of its subsidiaries or affiliates. All intercompany transactions and balances have been eliminated. 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. Significant estimates relate to barter transactions and the useful lives and recoverability of intangible assets. 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. F-7 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Summary of Significant Accounting Policies: - (Continued) 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 periodically for impairment or 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 agreements .......... 40 years Goodwill ................................ 40 years Other intangibles ....................... 2 to 14 years REVENUE: The Company operates in two industry segments: multichannel television (DBS and Cable) and broadcast television (TV). The Company recognizes revenue in its TV operations when advertising spots are broadcasted. The Company recognizes revenue in its DBS and Cable 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 approximately $71,000, $215,000 and $73,000 in 1994, 1995 and 1996, respectively. For 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. F-8 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Summary of Significant Accounting Policies: - (Continued) ADVERTISING COSTS: Advertising costs are charged to operations in the year incurred and totaled $525,000, $613,000 and $1.1 million for the years ended December 31, 1994, 1995 and 1996, respectively. 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, including interest earned, held in escrow of $9.9 million 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 $1.2 million, $1.3 million and $1.5 million is included in programming expenses for the years ended December 31, 1994, 1995 and 1996, 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 $1.7 million as of December 31, 1996, which are not yet available for showing at December 31, 1996, and accordingly, are not recorded by the Company. At December 31, 1996, the Company has commitments for future program rights of approximately $1,300,000, $815,000, $363,000 and $18,000 in 1997, 1998, 1999 and 2000, respectively. INCOME TAXES: On October 31, 1994, in conjunction with the incorporation of certain entities, the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109") were adopted. 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. F-9 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Summary of Significant Accounting Policies: - (Continued) Concentration of Credit Risk: -- (Continued) 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, 1995 and 1996 the Company had no significant concentrations of credit risk. 3. PROPERTY AND EQUIPMENT: Property and equipment consist of the following: December 31, December 31, 1995 1996 ---- ---- Land ................................. $ 259,459 $ 862,298 Reception and distribution facilities 22,839,470 29,140,040 Transmitter equipment ................ 7,478,134 11,643,812 Building and improvements ............ 1,554,743 1,553,548 Equipment, furniture and fixtures .... 1,333,797 1,509,588 Vehicles ............................. 571,456 766,192 Other equipment ...................... 997,352 2,295,446 ------------ ------------ 35,034,411 47,770,924 Accumulated depreciation ............. (18,462,873) (23,655,786) ------------ ------------ Net property and equipment ........... $ 16,571,538 $ 24,115,138 ============ ============ Depreciation expense amounted to $4,027,866, $4,140,058, and $5,209,382 for the years ended December 31, 1994, 1995 and 1996, respectively. 4. INTANGIBLES: Intangible assets consist of the following: December 31, December 31, 1995 1996 ---- ---- Goodwill ...................... $ 28,490,035 $ 28,490,035 Franchise costs ............... 13,254,985 35,972,374 Broadcast licenses ............ 3,124,461 16,168,683 Network affiliation agreements 1,236,641 2,761,641 Deferred financing costs ...... 3,974,454 4,020,665 DBS rights .................... 4,832,160 45,829,174 Non-compete agreement ......... -- 2,700,000 Organization and other costs .. 3,862,021 7,640,708 ------------ ------------ 58,774,757 143,583,280 Accumulated amortization ...... (10,746,347) (17,347,152) ------------ ------------ Net intangible assets ....... $ 48,028,410 $126,236,128 ============ ============ F-10 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. Intangibles: - (Continued) Amortization expense amounted to $2,912,281, $4,611,431 and $6,851,116 for the years ended December 31, 1994, 1995 and 1996, respectively. 5. LONG-TERM DEBT: Long-term debt consists of the following:
December 31, December 31, 1995 1996 ----------- ------------ 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 $3,412,222 as of December 31, 1995 and 1996, respectively ........... $81,195,454 $ 81,587,778 Senior seven year revolving credit facility, 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 December 31, 1996) ........................... -- 29,600,000 Mortgage payable, due 2000, interest at 8.75% ............ 517,535 498,468 Note payable, due 1998 interest at 10% ................... -- 3,050,000 Capital leases and other ................................. 867,140 790,587 ----------- ------------ 82,580,129 115,526,833 Less current maturities .................................. 271,934 315,223 ----------- ------------ Long-term debt ........................................... $82,308,195 $115,211,610 =========== ============
In October 1994, the Company repaid the outstanding balances under its senior and junior term loan agreements with a portion of the proceeds from a $20.0 million term note agreement ("senior note") and $15.0 million 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, which resulted in an extraordinary loss of $633,267. In July 1995, the Company sold 85,000 units consisting of $85.0 million 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. In November 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 a majority of the wholly owned direct and indirect subsidiaries of PM&C. 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 Company is in compliance with all its financial and operating covenants. The fair value of the Company's Series B Notes approximates $91.8 million as of December 31, 1996. This amount is approximately $10.2 million higher than the carrying amount reported on the balance sheet at December 31, 1996. Fair value is estimated based on the quoted market price for the same or similar instruments. In conjunction with the acquisition of the WTLH Tallahassee, Florida FCC license and Fox affiliation agreement (see Footnote 12), the Company incurred indebtedness of $3.1 million. The fair market value of the note payable approximates the carrying amount. F-11 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Long-Term Debt: - (Continued) In August 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"). Deferred financing fees relating to the $10.0 million revolving credit facility were written off, resulting in an extraordinary loss of $250,603 on the refinancing transaction. The $50.0 million revolving credit facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. The fair market value of the revolving credit facility approximates the carrying amount. At December 31, 1996, maturities of long-term debt and capital leases are as follows: 1997 .......................... $ 315,223 1998 .......................... 3,283,016 1999 .......................... 212,321 2000 .......................... 59,816 2001 .......................... 39,050 Thereafter .................... 111,617,407 ------------- $115,526,833 ============= 6. 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, 1994, 1995 and 1996 was $464,477, $503,118 and $711,690 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: 1995 1996 ---- ---- Equipment, furniture and fixtures $ 375,190 $ 215,112 Vehicles ......................... 196,064 446,372 --------- --------- 571,254 661,484 Accumulated depreciation ......... (190,500) (250,288) --------- --------- Total .......................... $ 380,754 $ 411,196 ========= ========= F-12 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 6. Leases: - (Continued) Future minimum lease payments on noncancellable operating and capital leases at December 31, 1996 are as follows: Operating Capital Leases Leases ------------ ---------- 1997 ............................................ $ 575,000 $211,000 1998 ............................................ 287,000 125,000 1999 ............................................ 221,000 66,000 2000 ............................................ 156,000 42,000 2001 ............................................ 75,000 12,000 Thereafter ...................................... 102,000 -- ------------ ---------- Total minimum payments .......................... $1,416,000 456,000 ============ ========== Less: amount representing interest .............. 74,000 ---------- Present value of net minimum lease payments including current maturities of $187,000 ....... $382,000 ========== 7. 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 in 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 consolidated operations, cash flows or financial position of the Company. 8. INCOME TAXES: The following is a summary of the components of income taxes from operations: 1994 1995 1996 ---------- --------- ------------ Federal -- deferred ....... $104,644 $23,000 $(169,000) State and local ........... 34,818 7,000 49,000 ---------- --------- ------------ Provision for income taxes ................ $139,462 $30,000 $(120,000) ========== ========= ============ F-13 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 8. Income Taxes: - (Continued) The deferred income tax assets and liabilities recorded in the combined balance sheets at December 31, 1995 and 1996, are as follows:
1995 1996 ---- ---- Assets: Receivables .................................... $ 42,440 $ 47,887 Excess of tax basis over book basis from tax gain recognized upon incorporation of subsidiaries ................................ 1,751,053 1,890,025 Loss carryforwards ............................. 9,478,069 14,197,578 Other .......................................... 806,312 870,305 ----------- ------------ Total deferred tax assets ................... 12,077,874 17,005,795 Liabilities: Excess of book basis over tax basis of property, plant and equipment ......................... (1,015,611) (1,754,621) Excess of book basis over tax basis of amortizable intangible assets ............... (4,277,512) (4,616,997) ----------- ------------ Total deferred tax liabilities .............. (5,293,123) (6,371,618) ----------- ------------ Net deferred tax assets ........................ 6,784,751 10,634,177 Valuation allowance ............................ (6,954,213) (10,683,639) ----------- ------------ Net deferred tax liabilities ................... $ (169,462) $ (49,462) =========== ============
The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized due to the expiration of the Company's net operating loss carryforwards and portions of other deferred tax assets related to prior acquisitions. The valuation allowance increased primarily as the result of net operating loss carryforwards generated during 1996 which may not be utilized. At December 31, 1996, the Company has net operating loss carryforwards of approximately $41.8 million which are available to offset future taxable income and expire through 2012. A reconciliation of the federal statutory rate to the effective tax rate is as follows:
1994 1995 1996 ---- ---- ---- U.S. statutory federal income tax rate ............. (34.00%) (34.00%) (34.00)% Net operating loss attributable to the partnerships 29.55 -- -- Foreign net operating income (loss) ................ (18.14) (27.09) (4.11) State net operating loss ........................... (.96) -- -- Valuation allowance ................................ 25.70 61.46 36.92 Other .............................................. .72 -- -- ---------- ---------- ---------- Effective tax rate ................................. 2.87% .37% (1.19)% ========== ========== ==========
F-14 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 9. RELATED PARTY TRANSACTIONS: At December 31, 1995, the Company had a demand note payable to an affiliate, bearing interest at 8%, amounting to $151,815. The note payable was cancelled during 1996. Total interest expense on the affiliated debt was $10,901 and $9,244 for the years ended December 31, 1995 and 1996, respectively. At December 31, 1995, the Company had a demand note payable to an affiliate, bearing interest at prime plus two percent, payable monthly in arrears, amounting to $105,413. The demand note payable was cancelled at the beginning of 1996. The effective interest rate was 10.25% at December 31, 1995. Total interest expense on the affiliated debt was $11,858 for the year ended December 31, 1995. 10. SUPPLEMENTAL CASH FLOW INFORMATION: Significant noncash investing and financing activities are as follows:
Years ended December 31, -------------------------------------------- 1994 1995 1996 ------------- ------------ ------------ Capital contribution and related reduction of debt ......................................... $15,069,173 -- -- Barter revenue and related expense ............ 4,604,200 $5,110,662 $ 6,337,220 Intangible assets and related affiliated debt . -- -- -- Acquisition of program rights and assumption of related program payables ..................... 1,797,866 1,335,275 1,140,072 Acquisition of plant under capital leases ..... 168,960 121,373 312,578 Redemption of minority interests and related receivable ................................... 49,490 246,515 -- Interest converted to principal ............... 867,715 -- -- Capital contribution and related acquisition of intangibles .................................. -- -- 14,079,546 Execution of license agreement option ......... -- -- 3,050,000
For the years ended December 31, 1994, 1995 and 1996, the Company paid cash for interest in the amount of $3.8 million, 3.6 million and $12.0 million, respectively. The Company paid no income taxes for the years ended December 31, 1994, 1995 and 1996. 11. COMMON STOCK: 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 ======== At December 31, 1996, common stock consists of the following: 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 ========= F-15 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 11. Common Stock: - (Continued) 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 5). In 1996, the Company, through a registered exchange offer, exchanged all of the PM&C Class B Shares for 191,775 shares in the aggregate of Class A Common Stock. 12. ACQUISITIONS: In January 1996, PCH acquired 100% of the outstanding stock of Portland Broadcasting, Inc. ("PBI"), which owns the tangible assets of WPXT, Portland, Maine. PCH immediately transferred the ownership of PBI to the Company. The aggregate purchase price of PBI was approximately $11.7 million of which $1.5 million was allocated to fixed and tangible assets and $10.2 million to intangible assets. In June 1996, PCH acquired the FCC license of WPXT for aggregate consideration of $3.0 million. PCH immediately transferred the ownership of the license to the Company. Effective March 1, 1996, the Company acquired the principal tangible assets of WTLH, Inc., Tallahassee, Florida and certain of its affiliates for approximately $5.0 million in cash, except for the FCC license and Fox affiliation agreement. Additionally, the Company entered into a put/call agreement regarding the FCC license and Fox affiliation agreement with the licensee of WTLH. In August 1996, the Company exercised its rights and recorded $3.1 million in intangible assets and long term debt. 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 sellers of WTLH a warrant to purchase $1.0 million of stock at $14.00 per share. The warrant expired in February 1997. Effective August 29, 1996, the Company acquired all of the assets of Dom's for approximately $25.0 million in cash and $1.0 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 $26.0 million of which $4.7 million was allocated to fixed and tangible assets and $21.3 million to various intangible assets. On October 8, 1996, the Company acquired from Harron Communications Corp. 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. Substantially the entire purchase price was allocated to various intangible assets. On November 8, 1996, the Company acquired the rights to provide DIRECTV programming in certain rural areas of Ohio and the related assets, including receivables, in exchange for approximately $12.0 million in cash. Substantially the entire purchase price was allocated to various intangible assets. In accordance with the Purchase Method of accounting, the purchase price has been allocated to the underlying assets and liabilities based on their respective fair values at the date of acquisition. Such allocations have been based on preliminary estimates which may be revised at a later date. F-16 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. Acquisitions: - (Continued) The following unaudited summary, prepared on a pro forma basis, combines the results of operations as if the above stations, cable system and DBS territories had been acquired as of the beginning of the periods presented, after including the impact of certain adjustments, such as the Company's reduced commission rate, payments to related parties, amortization of intangibles, interest expense and related income tax effects. The pro forma information does not purport to be indicative of what would have occurred had the acquisitions been made on those dates or of results which may occur in the future. This pro forma does not include the Arkansas DBS Acquisition, the Indiana DBS acquisition, the Mississippi DBS acquisition, the Virginia/West Virginia DBS acquisition or the New Hampshire Cable Sale, all which did not occur as of December 31, 1996 (see Notes 14 and 15). (unaudited) (in thousands, except earnings per share) Year Ended December 31, ----------------------------- 1995 1996 ---- ---- Net Revenues ............................. $ 48,712 $ 57,111 ======== ======== Operating income (loss) .................. $ (2,174) $ 990 ======== ======== Net loss before extraordinary item ....... $(16,625) $(14,358) ======== ======== Net loss per share before extraordinary item .................................... $ (3.23) $ (2.30) ======== ======== 13. EMPLOYEE BENEFIT PLANS: The Company has two active stock plans available to grant stock options and restricted stock awards to eligible employees, executive officers and non-employee directors of the Company. The 1996 Stock Option Plan was approved by shareholders of the Company in September 1996 and terminates in September 2006. The plan provides for the granting of a maximum of 450,000 (subject to adjustment to reflect stock dividends, stock splits, recapitalizations and similar changes in the capitalization of Pegasus) nonqualified and qualified options to purchase Class A Common Stock of the Company. Executive officers, who are not eligible to receive profit sharing awards under the 1996 Restricted Stock Plan, are eligible to receive nonqualified or qualified stock options under the Stock Option Plan, but no executive officer may be granted more than 275,000 options to purchase Class A Common Stock under the plan. Directors of Pegasus who are not employees of the Company are eligible to receive nonqualified options under the Stock Option Plan. Currently, five executive officers and three non-employee directors are eligible to receive options under the Stock Option Plan. At December 31, 1996, no options have been granted under the Stock Option Plan. The 1996 Restricted Stock Plan was also approved by shareholders of the Company in September 1996 and terminates in September 2006. The plan provides for the granting of a maximum of 270,000 (subject to adjustment to reflect stock dividends, stock splits, recapitalizations and similar changes in the capitalization of Pegasus) restricted stock awards of Class A Common Stock of the Company to eligible employees who have completed at least one year of service. As of December 31, 1996, 3,614 shares of Class A Common Stock have been granted under the Restricted Stock Plan. Restricted stock received under the plan 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. The Company applies APB No. 25 and related interpretations in accounting for its plans. The pro forma impact to both net income and earnings per share from calculating compensation expense consistent with SFAS No. 123, "Accounting for Stock-Based Compensation", was immaterial for the year ended December 31, 1996. F-17 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 13. Employee Benefit Plans: - (Continued) 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. The Company has authorized and reserved for issuance up to 205,000 shares of Class A Common Stock in connection with the 401(k) Plans. Company contributions to the 401(k) Plans are subject to limitations under applicable laws and regulations. All employee contributions to the 401(k) Plans are fully vested at all times and all Company contributions, if any, vest 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. 14. SUBSEQUENT EVENTS: On January 27, 1997 the Company completed the Preferred Stock Offering in which it sold 100,000 shares of 12 3/4 % Series A Cumulative Exchangeable Preferred Stock and 100,000 Warrants to purchase 193,600 shares of Class A Common Stock to the public at a price of $1,000 per share resulting in net proceeds to the Company of $96.0 million. The Company intends to apply the net proceeds from the Preferred Offering as follows: (i) $29.6 million to the repayment of all outstanding Indebtedness under the credit facility, (ii) $15.0 million to the Mississippi DBS acquisition, (iii) $8.8 million for the payment of the cash portion of the purchase price of the Indiana DBS acquisition, (iv) $7.0 million for the payment of the cash portion of the purchase price of the Virginia/West Virginia DBS acquisition, (v) $2.4 million to the Arkansas DBS acquisition and (vi) $558,000 to the retirement of the Pegasus Credit Facility and expenses related thereto. The remaining net proceeds together with available borrowings under the New Credit Facility and proceeds from the New Hampshire Cable Sale, which is described below, will be used for working capital, general corporate purposes and to finance future acquisitions. The Mississippi, Indiana, Arkansas and Virginia/West Virginia DBS acquisitions are described below. On January 31, 1997, the Company acquired, from DBS of Indiana, Inc., the rights to provide DIRECTV programming in certain rural areas of Indiana and the related assets in exchange for approximately $8.9 million in cash and $5.6 million of the Company's Class A common stock. On January 31, 1997, the Company sold substantially all assets of its New Hampshire cable system to State Cable TV Corp. for approximately $7.1 million in cash. The Company anticipates recognizing a gain in the transaction. F-18 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 14. Subsequent Events: - (Continued) On February 14, 1997, the Company acquired, from ClearVision, Inc., the rights to provide DIRECTV programming in certain rural areas of Mississippi and the related assets in exchange for approximately $15.0 million in cash. As of March 10, 1997, the Company acquired the rights to provide DIRECTV programming in certain rural areas of Virginia/West Virginia and the related assets in exchange for approximately $8.2 million in cash and $3.0 million in preferred stock of a subsidiary of Pegasus and warrants to purchase a total of 283,969 shares of the Company's Class A common stock. 15. INDUSTRY SEGMENTS: The Company operates in two industry segments: multichannel television (DBS and Cable) and broadcast television (TV). TV consists of five 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 1994, 1995, and 1996 is as follows (in thousands):
TV Multichannel Television Other Consolidated ---------- ----------------------- -------- -------------- DBS Cable --- ----- 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 and 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 34,395 18,892 95,770 Incentive compensation ... 415 9 104 -- 528 Corporate expenses ....... 782 114 450 18 1,364 Depreciation and amortization .......... 2,591 719 5,364 77 8,751 Capital expenditures ..... 1,403 216 953 69 2,641 1996 Revenues ................. $28,488 $ 5,829 $13,496 $ 116 $ 47,929 Operating income (loss) .. 3,925 (1,239) 190 (326) 2,550 Identifiable assets ...... 61,817 53,090 54,346 4,427 173,680 Incentive compensation ... 691 95 148 51 985 Corporate expenses ....... 756 158 497 18 1,429 Depreciation and amortization .......... 4,000 1,786 5,245 1,029 12,060 Capital expenditures ..... 2,289 855 3,070 80 6,294
F-19 REPORT OF INDEPENDENT AUDITORS Board of Directors Portland Broadcasting, Inc. Portland, Maine We have audited the accompanying balance sheets of Portland Broadcasting, Inc. as of September 25, 1994 and September 24, 1995, and the related statements of operations, deficiency in assets, and cash flows for each of the three fiscal years in the period ended September 24, 1995. These financial statements are the responsibility of Portland Broadcasting, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Portland Broadcasting, Inc. as of September 25, 1994 and September 24, 1995, and the results of its operations and its cash flows for each of the three fiscal years in the period ended September 24, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Notes 3 and 5, the Company has incurred recurring operating losses, has a working capital deficiency and is delinquent in paying certain creditors. These conditions raise substantial doubt about Portland Broadcasting, Inc.'s ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 3. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Ernst & Young LLP Pittsburgh, Pennsylvania October 27, 1995 F-20 PORTLAND BROADCASTING, INC. BALANCE SHEETS
September 25, September 24, December 31, 1994 1995 1995 --------------- --------------- -------------- (unaudited) Assets Current assets: Customer accounts receivable ............... $ 764,709 $ 879,983 $ 903,700 Deferred film costs--current ............... 89,702 121,018 178,320 Other assets ............................... 70,434 14,314 91,619 --------------- --------------- -------------- Total current assets ......................... 924,845 1,015,315 1,173,639 Property, plant, and equipment: Land ....................................... 63,204 63,204 63,204 Building ................................... 111,128 113,401 114,859 Equipment .................................. 2,954,857 3,073,797 3,127,742 --------------- --------------- -------------- 3,129,189 3,250,402 3,305,805 Less accumulated depreciation .............. (2,635,855) (2,716,061) (2,733,461) --------------- --------------- -------------- 493,334 534,341 572,344 Deposits and other assets .................... 35,114 21,523 5,036 --------------- --------------- -------------- $ 1,453,293 $ 1,571,179 $ 1,751,019 =============== =============== ============== Liabilities Current liabilities: Bank overdraft ............................. $ 34,859 $ 23,324 $ -- Accounts payable and accrued expenses ...... 1,244,646 1,117,621 1,424,950 Accrued officers' compensation ............. 588,000 621,750 621,750 Accrued interest ........................... 433,454 992,699 1,106,258 Current portion of long-term debt .......... 6,731,182 6,615,165 6,621,177 Current portion of film contract commitments 1,222,244 1,246,862 1,300,241 Notes payable to affiliated companies ...... 1,452,586 1,509,217 1,503,684 --------------- --------------- -------------- Total current liabilities .................... 11,706,971 12,126,638 12,578,060 Long-term liabilities, less current portion: Long-term debt ............................. 24,417 346,489 302,168 Film contract commitments .................. 154,057 69,638 32,242 --------------- --------------- -------------- 178,474 416,127 334,410 Deficiency in assets: Common stock, no par -- authorized 1,000 shares; issued and outstanding 411 shares 10,662 10,662 10,662 Retained deficit ........................... (10,442,814) (10,982,248) (11,172,113) --------------- --------------- -------------- (10,432,152) (10,971,586) (11,161,451) --------------- --------------- -------------- $ 1,453,293 $ 1,571,179 $ 1,751,019 =============== =============== ==============
See accompanying notes. F-21 PORTLAND BROADCASTING, INC. STATEMENTS OF OPERATIONS
Fiscal year ended Fiscal quarters ended ---------------------------------------------------- -------------------------------- September 26, September 25, September 24, December 25, December 31, 1993 1994 1995 1994 1995 --------------- --------------- --------------- -------------- -------------- (unaudited) (unaudited) Broadcasting revenues: Local ............................. $1,258,595 $1,890,080 $ 2,089,864 $ 614,558 $ 549,286 National and regional ............. 1,928,266 2,303,805 2,894,417 906,756 742,793 Other ............................. 820,325 217,523 352,100 75,729 134,056 --------------- --------------- --------------- -------------- -------------- 4,007,186 4,411,408 5,336,381 1,597,043 1,426,135 Less: Agency commissions ............ 482,321 548,197 663,594 210,120 164,367 Credits and other allowances ....... 76,152 39,769 115,413 17,813 40,612 --------------- --------------- --------------- -------------- -------------- 3,448,713 3,823,442 4,557,374 1,369,110 1,221,156 Station operating costs and expenses: Broadcasting operations ........... 1,137,090 1,211,682 1,374,379 228,391 279,473 Selling, general, and administrative ................. 1,544,980 1,604,265 1,853,808 545,878 703,955 Officer's compensation ............ 84,308 90,000 146,528 33,770 35,000 Depreciation and amortization ..... 410,891 311,945 202,738 47,546 59,183 --------------- --------------- --------------- -------------- -------------- 3,177,269 3,217,892 3,577,453 855,585 1,077,611 --------------- --------------- --------------- -------------- -------------- Income before interest expense and nonoperating (loss) income ........ 271,444 605,550 979,921 513,525 143,545 Interest expense .................... (670,779) (784,763) (1,114,355) -- (196,160) Nonoperating (loss) income .......... 57,432 304,807 (405,000) (172,178) (137,250) --------------- --------------- --------------- -------------- -------------- Net (loss) income ................... $ (341,903) $ 125,594 $ (539,434) $ 341,347 $ (189,865) =============== =============== =============== ============== ==============
See accompanying notes. F-22 PORTLAND BROADCASTING, INC. STATEMENTS OF DEFICIENCY IN ASSETS
Common Retained Deficiency Stock Deficit in Assets --------- --------------- --------------- Balance at September 27, 1992 ........... $10,662 $(10,226,505) $(10,215,843) Net loss .............................. -- (341,903) (341,903) --------- --------------- --------------- Balance at September 26, 1993 ........... 10,662 (10,568,408) (10,557,746) Net income ............................ -- 125,594 125,594 --------- --------------- --------------- Balance at September 25, 1994 ........... 10,662 (10,442,814) (10,432,152) Net loss .............................. -- (539,434) (539,434) --------- --------------- --------------- Balance at September 24, 1995 ........... 10,662 (10,982,248) (10,971,586) Net loss (unaudited) .................. -- (189,865) (189,865) --------- --------------- --------------- Balance at December 31, 1995 (unaudited) $10,662 $(11,172,113) $(11,161,451) ========= =============== ===============
See accompanying notes. F-23 PORTLAND BROADCASTING, INC. STATEMENTS OF CASH FLOWS
Fiscal year ended Fiscal quarter ended ---------------------------------------------------- -------------------------------- September 26, September 25, September 24, December 25, December 31, 1993 1994 1995 1994 1995 --------------- --------------- --------------- -------------- -------------- (unaudited) (unaudited) Operating activities Net (loss) income ....................... $(341,903) $ 125,594 $(539,434) $ 341,347 $(189,865) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization ...... 410,891 311,945 202,738 47,546 59,183 Payments on film contract commitments ...................... (128,875) (127,838) (216,975) (65,790) (68,478) Gain from write-off of trade and film payables .................... (57,432) (304,807) (82,122) -- -- Loss on contingency reserve for film contracts ........................ -- -- 400,000 -- -- Net change in operating assets and liabilities (using) or providing cash: Customer accounts receivable .. (38,612) (93,717) (115,274) (340,036) (23,717) Other assets .................. 4,641 (41,991) 57,756 634 (60,817) Accounts payable and accrued expenses .................... 98,098 (25,402) (138,560) (77,081) 284,005 Accrued officer's compensation 55,000 45,000 33,750 8,438 -- Accrued interest .............. 71,302 187,710 559,245 125,784 113,559 --------------- --------------- --------------- -------------- -------------- Net cash provided by operating activities 73,110 76,494 161,124 40,842 113,870 Investing activities Net purchases of equipment .............. (15,664) (40,811) (88,801) (19,651) (70,028) Financing activities Proceeds from long-term debt ............ -- 87,857 -- -- -- Repayment of long-term debt ............. (56,771) (126,710) (126,357) (15,306) (38,309) Borrowings (repayments) on notes payable to affiliated company and officer ..... (675) 3,170 54,034 (5,885) (5,533) --------------- --------------- --------------- -------------- -------------- Net cash used by financing activities ... (57,446) (35,683) (72,323) (21,191) (43,842) --------------- --------------- --------------- -------------- -------------- Change in cash .......................... -- -- -- -- -- Cash at beginning of period ............. -- -- -- -- -- --------------- --------------- --------------- -------------- -------------- Cash at end of period ................... $ -- $ -- $ -- $ -- $ -- =============== =============== =============== ============== ==============
See accompanying notes. F-24 PORTLAND BROADCASTING, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION Portland Broadcasting, Inc. (the "Company") is principally engaged in television broadcasting. The Company, a wholly owned subsidiary of Bride Communications, Inc. (Bride), operates a television station, WPXT-TV, Channel 51, a FOX network affiliate, in Portland, Maine. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The accounts of the Company are maintained on the accrual basis of accounting. The financial statements include only the accounts of the Company and do not include the accounts of Bride, its parent, or other Bride subsidiaries. DEFERRED FILM COSTS AND FILM CONTRACT COMMITMENTS The Company has contracts with various film distributors from which films are leased for television transmission over various contract periods (generally one to five years). The total obligations due under these contracts are recorded as liabilities and the related film costs are stated at the lower of amortized cost or estimated net realizable value. Deferred film costs are amortized based on an accelerated method over the contract period. The portions of the cost to be amortized within one year and after one year are reported in the balance sheet as current and other assets, respectively, and the payments under these contracts due within one year and after one year are similarly classified as current and long-term liabilities. BANK OVERDRAFT Bank overdraft represents the overdrawn balance of the Company's demand deposit accounts with a financial institution, and is included in the change in accounts payable and accrued expenses for statement of cash flow purposes. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost or value received in exchange for broadcasting. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. In general, estimated useful lives of such assets are 19 years for buildings and range from 5 to 10 years for equipment. BARTER TRANSACTIONS Revenue from barter transactions (advertising provided in exchange for goods and services) is recognized as income when advertisements are broadcast and goods or services received are capitalized or charged to operations when received or used. Included in the statements of operations is broadcasting net revenue from barter transactions of $290,168, $278,935, and $331,233 and station operating costs and expenses from barter transactions of $307,525, $277,806, and $321,667 for 1993, 1994, and 1995, respectively. Included in the balance sheets is equipment capitalized from barter transactions of $4,437, $8,869, and $30,814 during 1993, 1994, and 1995, respectively, and deferred barter expense of $21,581, $26,593, and $7,103 at September 26, 1993, September 25, 1994, and September 24, 1995, respectively. INCOME TAXES The operations of the Company are included in the consolidated federal and state income tax returns filed under Bride Communications, Inc. and subsidiaries. Federal and state income taxes are provided based on the amount that would be payable on a separate company basis. Tax benefits are allocated to loss members in the same year the losses are availed of by the profit members of the consolidated group. Investment tax credits have been accounted for using the flow-through method. F-25 PORTLAND BROADCASTING, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 2. Significant Accounting Policies - (Continued) Deferred income taxes are normally provided on timing differences between financial and tax reporting due to depreciation, allowance for doubtful accounts, and vacation and officer's salary accrual. However, certain net operating loss carryovers have been utilized to eliminate current tax liability. FISCAL YEAR The Company operates on a 52/53 week fiscal year corresponding to the national broadcast calendar. The Company's fiscal year ends on the last Sunday in September. RECLASSIFICATIONS Certain amounts from the prior year have been reclassified to conform to the statement presentation for the current year. These reclassifications have no effect on the statements of operations. 3. GOING CONCERN At September 24, 1995, the Company was delinquent in payment of amounts due to former shareholders, amounts due under film contract commitments, certain of its trade payables, and other contractual obligations. The amounts owing under all such obligations are classified as current liabilities in the accompanying financial statements. Other delinquencies, if declared in default and not cured, could adversely affect the Company's ability to continue operations. During 1995, the senior obligation to a bank was sold by the bank to former shareholders, who also hold other notes receivable from the Company as described in Note 4. At September 24, 1995, the Company continues to be in default on this former bank obligation, which currently has no stated maturity or repayment terms. Management continues to negotiate settlements with its creditors. Settlement arrangements are comprised of extended payment schedules with additional interest charges, and write-off of a percentage of the balance due. The Company may require additional funding in order to sustain its operations. Management is currently pursuing the sale of the net assets of the Company as discussed in Note 8. The Company expects its efforts in this regard to be successful, and has no reason to believe that the net proceeds would not be sufficient to repay its recorded liabilities and recover the stated value of its assets; however, no estimate of the outcome of the Company's negotiations can be determined at this time. If the Company is unable to arrange additional funding as may be required, or successfully complete the sale transaction as further discussed in Note 8, the Company may be unable to continue as a going concern. 4. LONG-TERM LIABILITIES LONG-TERM DEBT Long-term debt consists of the following:
September 25, September 24, 1994 1995 --------------- --------------- Term notes payable to former shareholders: Stock purchase agreement ...................................... $2,789,875 $2,789,875 Bank term note acquired by former shareholders ................ -- 3,347,595 Term note payable to a bank (in default) ........................ 3,441,202 -- Notes payable under noncompete agreements with former shareholders .................................................. 430,228 430,228 Consent judgment, film contract payable ......................... -- 286,645 Capital equipment notes ......................................... 10,138 35,655 Other ........................................................... 84,156 71,656 --------------- --------------- 6,755,599 6,961,654 Less current portion ............................................ 6,731,182 6,615,165 --------------- --------------- $ 24,417 $ 346,489 =============== ===============
F-26 PORTLAND BROADCASTING, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 4. Long-Term Liabilities - (Continued) The term notes payable to former shareholders in connection with a stock purchase agreement were issued by Bride in October 1987 in the amount of $2,010,000. These notes were assigned to the Company by Bride, which was agreed to by the former shareholders. The notes were due in quarterly payments of principal and interest at 10% from August 1989 through November 1992. In accordance with the terms of the notes, accrued interest in the amount of $779,875 was capitalized into the note balance on November 11, 1992, and interest was accrued at 12% thereafter on the adjusted note balance of $2,789,875. Scheduled principal payments of the term notes payable to former shareholders have not been made when due. At September 24, 1995, the entire obligation is reflected as currently payable. The bank term note of $3,347,595 was purchased from the bank by the former shareholders on May 30, 1995. The note provided $3,600,000 for the purpose of paying off existing notes payable, along with accrued interest, and to provide additional working capital. The note was payable in monthly payments of interest only through August 1990, followed by 25 consecutive monthly payments of principal and interest based on a 108-month amortization, followed by one final installment of the balance of principal and interest. Interest continues to be applied on the unpaid balance at a monthly rate equivalent to the Bank of New York Prime plus 3.00% per annum, or 10.75% and 11.75% as of September 25, 1994 and September 24, 1995, respectively. The note is secured by a pledge of the stock of Portland and substantially all tangible and intangible property. The note also contains restrictive covenants with respect to the payment of dividends, distributions, obtaining additional indebtedness, etc. Notes payable under noncompete agreements totaling $430,228 were payable to former shareholders in scheduled quarterly installments through November 1992; however, no installment payments have been made. In March 1995, the Company entered into a consent judgment related to a film contract payable of $300,000. Under the terms of the judgment, the amount is unsecured, and is being repaid over three- or four-year monthly installments including interest at 10%. A balloon payment of $159,324 or $219,368 is due at the end of the third year or fourth year, respectively, the former amount representing a discount of $100,000 from principal. Payments on long-term debt disclosed below assume a four-year repayment schedule. The amount had previously been included in the current portion of film contract commitments at September 25, 1994. Other long-term liabilities relate to a 6% promissory note for $84,156 related to the previous lease agreement for a building. The payment terms are $500 weekly through September 1997, with an additional $15,817 lump sum due at the end of this term. The Company is currently negotiating a new lease for its current facility. Future principal payments of long-term debt are as follows: 1996 -- $6,615,165; 1997 -- $71,662; and 1998 -- $274,827. The Company paid interest of $599,477, $492,441, and $305,942 in 1993, 1994, and 1995, respectively. FILM CONTRACT COMMITMENTS Film contract commitments are payable under license arrangements for program material in monthly installments over periods ranging from one to five years. Annual payments required under these commitments are as follows: 1995, and prior, payments not made when due -- $1,162,578; 1996 -- $84,284; and 1997 -- $69,638. 5. OFFICER'S COMPENSATION Accrued officer's compensation totaling $588,000 and $621,750 was recorded by the Company at September 25, 1994 and September 24, 1995, respectively, pursuant to a resolution approved by the Board of Directors (Board). The Board resolution provides for payments only in the event of sufficient cash flows or pursuant to the sale or liquidation of the Company. In addition, the amount of officer's compensation paid is limited by certain covenants of the note payable to former shareholders acquired from a bank. F-27 PORTLAND BROADCASTING, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 6. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of customers' accounts receivable. Credit is extended based on the Company's evaluation of the customer's financial condition, and the Company does not require collateral. The Company's accounts receivable consist primarily of credit extended to a variety of businesses in the greater Portland area and to national advertising agencies for the purchase of advertising. 7. INCOME TAXES The Company has unused income tax loss carryforwards approximating $6,039,000 for tax purposes expiring between years 2001 and 2008. An investment tax credit carryforward of $89,641 (after reduction required by the Tax Reform Act of 1986) expires in 2001. Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes including the temporary differences between book and tax deductibility of the officer's salary accrual, vacation accrual, bad debt reserve and depreciation. They represent future tax benefits or costs to be recognized when those temporary differences reverse. At September 24, 1995, a valuation allowance of $2,821,579 ($2,643,744 at September 25, 1994) was recorded to offset net deferred tax assets. Significant components of the Company's deferred tax assets and liabilities are as follows: 1994 1995 ------------- ------------- Deferred tax assets: Accrued officer's salary ................. $ 235,200 $ 248,700 Contingent liability ..................... -- 160,000 Accrued interest to shareholders ......... 7,143 387 Bad debt reserve ......................... 13,346 16,800 Accrued vacation ......................... 4,374 7,779 Net operating loss carryforwards ......... 2,415,084 2,405,479 Investment tax credit carryforward ....... 89,641 89,641 ------------- ------------- Total deferred assets ...................... 2,764,788 2,928,786 Valuation allowance for deferred tax assets (2,643,744) (2,821,579) ------------- ------------- Net deferred tax assets .................... 121,044 107,207 Deferred tax liability: Depreciation .............................. 121,044 107,207 ------------- ------------- Net deferred tax assets .................... $ -- $ -- ============= ============= During 1994 and 1995, the Company utilized net operating loss carryforwards of approximately $235,000 and $24,000, realizing a benefit of approximately $89,000 and $5,500, respectively. 8. SUBSEQUENT EVENT On October 16, 1995, the Company entered into an Asset Purchase Agreement for the sale of substantially all assets and liabilities of the Company, with the exception of the station's FCC License. F-28 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of WTLH, Inc. We have audited the accompanying balance sheets of WTLH, Inc. as of December 31, 1994 and 1995, and the related statements of operations, capital deficiency, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WTLH, Inc. as of December 31, 1994 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Jacksonville, Florida March 8, 1996 F-29 WTLH, INC. BALANCE SHEETS
December 31, December 31, February 29, ASSETS 1994 1995 1996 -------------- -------------- -------------- (unaudited) Current assets: Cash ............................................ $ 190,582 $ 337,665 $ 375,813 Accounts receivable, less allowance for doubtful accounts of $8,000 at December 31, 1994 and 1995 and February 29, 1996 ................... 623,317 673,434 588,961 Film rights ..................................... 154,098 200,585 200,585 Prepaid expenses ................................ 6,925 4,475 1,388 Deferred income taxes ........................... 176,753 71,347 72,209 -------------- -------------- -------------- Total current assets ......................... 1,151,675 1,287,506 1,238,956 Equipment, net .................................... 77,283 51,005 50,246 Building and equipment under capital leases, net .. 226,003 692,819 682,514 Film rights ....................................... 216,745 262,022 228,591 Deferred income taxes ............................. 24,291 24,790 24,790 Deposits and other assets ......................... 11,914 8,992 8,992 -------------- -------------- -------------- Total assets ................................. $ 1,707,911 $ 2,327,134 $ 2,234,089 ============== ============== ============== LIABILITIES AND CAPITAL DEFICIENCY Current liabilities: Accounts payable ................................ $ 148,449 $ 175,809 $ 112,539 Accrued interest due affiliates ................. 237,360 180,953 182,456 Other accrued expenses .......................... 76,460 74,489 65,742 Current portion of long-term debt to affiliates . 4,250 0 0 Current portion of capital lease obligations .... 92,247 61,559 65,432 Current portion of film rights payable .......... 169,475 225,211 225,211 -------------- -------------- -------------- Total current liabilities .................... 728,241 718,021 651,380 Long-term liabilities: Long-term debt to affiliates .................... 610,257 531,181 494,893 Obligations under capital leases ................ 187,772 692,619 686,051 Film rights payable ............................. 248,138 280,117 239,335 Subordinated debt ............................... 1,200,000 1,200,000 1,200,000 -------------- -------------- -------------- Total liabilities ............................ 2,974,408 3,421,938 3,271,659 Shareholder deficiency: Common stock, $1 par value, 1,000 shares authorized, 100 shares issued and outstanding 100 100 100 Additional paid-in capital ...................... 900 900 900 Accumulated deficit ............................. (1,145,639) (973,946) (916,712) Receivable from affiliate ....................... (121,858) (121,858) (121,858) -------------- -------------- -------------- Total capital deficiency ..................... (1,266,497) (1,094,804) (1,037,570) -------------- -------------- -------------- Total liabilities and capital deficiency ..... $ 1,707,911 $ 2,327,134 $ 2,234,089 ============== ============== ==============
See accompanying notes to financial statements. F-30 WTLH, INC. STATEMENTS OF OPERATIONS
Years Ended Two Months Ended -------------------------------- -------------------------------- December 31, December 31, February 28, February 29, 1994 1995 1995 1996 -------------- -------------- -------------- -------------- (Unaudited) (Unaudited) Revenues: Broadcasting revenue, net of agency commissions of $587,810, $585,124, $80,559 and $79,300 .............. $2,256,174 $2,313,467 $316,268 $325,964 Barter broadcasting revenue ......... 310,208 470,589 51,701 78,431 -------------- -------------- -------------- -------------- Total revenues ................... 2,566,382 2,784,056 367,969 404,395 -------------- -------------- -------------- -------------- Operating expenses: Technical and operations ............ 278,312 320,215 46,777 33,256 Programming, including amortization of $194,993, $199,260, $31,624 and $33,431 .......................... 242,769 253,959 39,614 42,946 Barter programming .................. 310,208 470,589 51,701 78,431 General and administrative .......... 401,675 440,370 20,537 11,104 Promotion ........................... 237,419 346,529 28,174 26,236 Sales ............................... 279,031 300,903 46,363 51,066 Depreciation ........................ 135,474 107,197 14,985 11,064 Management fee ...................... 55,600 40,500 11,000 21,400 -------------- -------------- -------------- -------------- Total operating expenses ......... 1,940,488 2,280,262 259,151 275,503 -------------- -------------- -------------- -------------- Income from operations ........... 625,894 503,794 108,818 128,892 Interest expense ...................... (135,064) (163,111) (31,162) (19,853) Other expenses, net ................... 0 (63,743) (8,189) (17,089) -------------- -------------- -------------- -------------- Income before income taxes ....... 490,830 276,940 69,467 91,950 Provision for income taxes ............ 190,000 105,247 26,437 34,716 -------------- -------------- -------------- -------------- Net income ....................... $ 300,830 $ 171,693 $ 43,030 $ 57,234 ============== ============== ============== ==============
See accompanying notes to financial statements. F-31 WTLH, INC. STATEMENTS OF CAPITAL DEFICIENCY
Additional Receivable Total Common Paid-In From Capital Stock Capital Deficit Affiliate Deficiency -------- ------------ --------------- ------------- --------------- Balance, December 31, 1993 $100 $900 $(1,446,469) $(121,858) $ (1,567,327) Net income ............... 0 0 300,830 0 300,830 -------- ------------ --------------- ------------- --------------- Balance, December 31, 1994 100 900 (1,145,639) (121,858) (1,266,497) Net income ............... 0 0 171,693 0 171,693 -------- ------------ --------------- ------------- --------------- Balance, December 31, 1995 100 900 (973,946) (121,858) (1,094,804) Net income (unaudited) ... 0 0 57,234 0 57,234 -------- ------------ --------------- ------------- --------------- Balance February 29, 1996 (unaudited) ............. $100 $900 $ (916,712) $(121,858) $ (1,037,570) ======== ============ =============== ============= ===============
See accompanying notes to financial statements. F-32 WTLH, INC. STATEMENTS OF CASH FLOWS
Years Ended Two Months Ended -------------------------------- -------------------------------- December 31, December 31, February 28, February 29, 1994 1995 1995 1996 -------------- -------------- -------------- -------------- (unaudited) (unaudited) Cash flows from operating activities: Net income ................................. $ 300,830 $ 171,693 $ 43,030 $ 57,234 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................ 135,474 107,197 14,985 11,064 Deferred income taxes ................... 186,243 104,907 26,437 (862) Loss on sale of vehicle ................. 0 2,853 0 0 Change in assets and liabilities: Accounts receivable ................... (191,338) (50,117) 188,612 84,473 Film rights ........................... 106,738 (91,764) (91,347) 33,431 Prepaid expenses ...................... 675 2,450 3,954 3,087 Other assets .......................... 276 2,922 11,813 0 Accounts payable ...................... (104,678) 27,360 (28,631) (63,270) Accrued interest due affiliates ....... 27,172 (56,407) (54,121) 1,503 Other accrued expenses ................ (20,109) (1,973) (50,664) (8,747) Film rights payable ................... (84,401) 87,715 (29,672) (40,782) -------------- -------------- -------------- -------------- Net cash provided by operating activities ....................... 356,882 306,836 34,396 77,131 -------------- -------------- -------------- -------------- Cash flows for investing activities: Purchase of property and equipment ......... (34,973) (28,311) (16,672) 0 Proceeds from sale of vehicle .............. 0 2,723 0 0 -------------- -------------- -------------- -------------- Net cash used in investing activities . (34,973) (25,588) (16,672) 0 -------------- -------------- -------------- -------------- Cash flows (for) from financing activities: Principal payments on long-term debt to affiliates .............................. (108,586) (83,324) 0 (36,288) Advances from affiliates ................... 0 0 31,436 0 Payments made under capital leases ......... (16,426) (50,841) 0 (2,695) -------------- -------------- -------------- -------------- Net cash (used in) provided by financing activities ............... (125,012) (134,165) 31,436 (38,983) -------------- -------------- -------------- -------------- Net increase in cash ......................... 196,897 147,083 49,160 38,148 Cash (overdraft) at beginning of year ........ (6,315) 190,582 190,582 337,665 -------------- -------------- -------------- -------------- Cash at end of year .......................... $ 190,582 $ 337,665 $239,742 $375,813 ============== ============== ============== ============== Supplemental Disclosure of Cash Flow Information: Cash paid for interest ..................... $ 103,287 $ 224,404 $ 16,881 12,607 ============== ============== ============== ============== Cash paid for income taxes ................. $ 0 $ 7,757 $ 0 $ 0 ============== ============== ============== ============== Supplemental Schedule of Noncash Investing and Financing Activities: Capital lease obligation incurred for building ................................ $ 0 $ 525,000 $525,000 $ 0 ============== ============== ============== ==============
See accompanying notes to financial statements. F-33 WTLH, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization -- WTLH, Inc. (the Company) was formed in 1988 to own and operate a broadcast television station, WTLH, located in Tallahassee, Florida. The station is a Fox Network affiliate. Unaudited Interim Financial Information -- The unaudited balance sheet as of February 29, 1996 and the unaudited statements of operations and accumulated deficit and cash flows for the two months ended February 28, 1995 and February 29, 1996 (interim financial information) are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of the Company, the interim financial information includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim period. The results of operations for the two month period ending February 29, 1996 are not necessarily indicative of the results for a full year. All disclosures for the two month periods ended February 28, 1995 and February 29, 1996 included herein are unaudited. Property and Equipment -- Equipment is stated at cost less accumulated depreciation. The Company operates in leased facilities with lease terms ranging up to 2014. Real property and equipment leased under capital leases are amortized over the lives of the respective leases using the straight-line method. Maintenance and repairs are expensed as incurred. Depreciation of equipment is computed using principally accelerated methods based upon the following estimated useful lives: Tower and building under lease ......... 20 years Transmitter and studio equipment ....... 5-7 years Computer equipment ..................... 5 years Furniture and fixtures ................. 7 years Other equipment ........................ 5-7 years Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Film Rights -- The Company enters into agreements to show motion pictures and syndicated programs on television. Only the rights and associated liabilities for those films and programs currently available for showing are recorded on the Company's books. These rights are recorded at cost, the gross amount of the contract liability. Program rights are amortized over the license period, which approximates amortization based on the estimated number of showings during the contract period, using the straight-line method except where an accelerated method would produce more appropriate matching of cost with revenue. Payments for the contracts are made pursuant to contractual terms over periods which are generally shorter than the license periods. Programming -- The Company obtains a portion of its programming, including presold advertisements, through its network affiliation agreement with Fox Broadcasting, Inc. ("Fox"), and also through independent producers. The Company does not make any direct payments for network and certain independent producers' programming. For broadcasting network programming, the Company receives payments from Fox, which totaled $38,559, $63,023, $11,302 and $6,955 for the years ended December 31, 1994 and 1995 and the two month period ended February 28, 1995 and February 29, 1996, respectively. For running independent producers' programming, the Company receives no direct payments. Instead, the Company retains a portion of the available advertisement spots to sell on its own account, which are recorded as broadcasting revenue. Management estimates the value, and related programming expense, of the presold advertising included in the F-34 WTLH, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 1. Summary of Significant Accounting Policies: - (Continued) independent producers' programming to be $310,208, $470,589, 51,701 and $78,431 for the years ended December 31, 1994 and 1995 and the two month periods ended February 28, 1995 and February 29, 1996, respectively. These amounts are presented gross as barter broadcasting revenue and barter programming expense in the accompanying financial statements. Income Taxes -- Deferred income tax assets are recognized for the expected future consequences of events that have been included in the financial statements and income tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. 2. PROPERTY AND EQUIPMENT: The major classes of equipment consist of the following:
February 29, 1994 1995 1996 ----------- ----------- ------------- (Unaudited) Transmitter and studio equipment $731,962 $718,958 $718,958 Computer equipment .............. 40,772 25,019 25,019 Furniture and fixtures .......... 27,914 27,914 27,914 Other equipment ................. 56,141 63,827 63,827 ----------- ----------- ------------- 856,789 835,718 835,718 Less accumulated depreciation ... 779,506 784,713 785,472 ----------- ----------- ------------- $ 77,283 $ 51,005 $ 50,246 =========== =========== =============
Building and equipment under capital leases consist of the following:
December 31, December 31, February 29, 1994 1995 1996 -------------- -------------- -------------- (Unaudited) Building ........................ $ 0 $525,000 $525,000 Transmitter and studio equipment 38,400 38,400 38,400 Tower ........................... 210,055 210,055 210,055 Computer equipment .............. 41,300 41,300 41,300 Furniture and fixtures .......... 7,950 7,950 7,950 Vehicle ......................... 8,952 0 0 -------------- -------------- -------------- 306,657 822,705 822,705 Less accumulated depreciation ... 80,654 129,886 140,191 -------------- -------------- -------------- $226,003 $692,819 $682,514 ============== ============== ==============
Depreciation expense amounted to $135,474, $107,197, $13,936 and $10,305 for the years ended December 31, 1994 and 1995 and the two months ended February 28, 1995 and February 29, 1996, respectively. F-35 WTLH, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 3. LONG-TERM DEBT TO AFFILIATES: The following is a summary of long-term debt to affiliates:
December 31, December 31, February 29, 1994 1995 1996 -------------- -------------- -------------- (Unaudited) Note payable to affiliated company through common ownership, interest at 12.97%, due at the earlier of August 12, 1999 or the date the station is refinanced or sold, collateralized by an assignment of outstanding accounts receivable .................................... $453,673 $418,623 $392,335 Note payable to stockholders, interest at 12.97%, due upon sale of the station ............................... 156,584 112,558 102,558 Other ................................................... 4,250 0 0 -------------- -------------- -------------- Total ................................................. 614,507 531,181 494,893 Less current portion .................................. 4,250 0 0 -------------- -------------- -------------- Long-term debt to affiliates .......................... $610,257 $531,181 $494,893 ============== ============== ==============
Scheduled maturities of long-term debt to affiliates, exclusive of $112,558 for sale of the station, are as follows: 1999 .................. $418,623 ========== 4. LEASES: The Company leases a broadcasting tower, a vehicle and computer and other equipment which have been accounted for as capital leases. The following is a summary of capital lease obligations:
December 31, December 31, February 29, 1994 1995 1996 -------------- -------------- -------------- (Unaudited) Lease of a building with stockholders, interest at 10.4%, payable in varying monthly installments through January 1, 2014 ................................................ $ 0 $497,634 $498,314 Lease of a broadcasting tower with an affiliated company through common ownership, interest at 12.97%, payable in varying monthly installments through October 2010 ...... 210,055 210,055 210,055 Lease of equipment, interest at 14.47%, payable in monthly installments of $1,114 through August 1998 ..... 33,283 25,170 23,710 Leases of computer equipment, interest ranging from 12.05% to 17.42%, payable in monthly installments ranging from $166 to $725 through April 1998 ........... 27,653 19,329 17,794 Lease of a vehicle, interest at 9%, payable in monthly installments of $285 through July 1996 ................. 4,776 0 0 Lease of telephone equipment, interest at 14.33%, payable in monthly installments of $227 through January 1997 ... 4,252 1,990 1,610 -------------- -------------- -------------- Total ................................................. 280,019 754,178 751,483 Less current portion .................................. (92,247) (61,559) (65,432) -------------- -------------- -------------- Long-term portion ..................................... $187,772 $692,619 $686,051 ============== ============== ==============
F-36 WTLH, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 4. Leases: - (Continued) The Company also leases its studios, the land surrounding its tower from an affiliated company, three vehicles from its stockholders and various other equipment under non-cancelable operating leases. The leases expire at various dates through 2014. Rent expense under non-cancelable operating leases totaled $141,684, $166,680, $25,522, and $25,900 for the years ended December 31, 1994 and 1995 and the two months ended February 28, 1995 and February 29, 1996, respectively. Future minimum payments as of December 31, 1995 under capital leases and non-cancelable operating leases consist of the following: Capital Operating Year ended December 31: Leases Leases - --------------------------------------------- ----------- ----------- 1996 ....................................... $ 97,613 $151,728 1997 ....................................... 102,767 63,575 1998 ....................................... 94,240 46,495 1999 ....................................... 88,211 35,321 2000 ....................................... 92,428 36,387 Thereafter ................................. 1,473,638 634,110 ----------- ----------- Total lease payments .................. 1,948,897 967,616 Less amount representing interest ..... 1,194,719 0 ----------- ----------- Present value of net minimum lease payments ............................ $ 754,178 $967,616 =========== =========== 5. FILM RIGHTS PAYABLE: Commitments for film rights payable as of December 31, 1995 are as follows for years ending December 31: 1996 ...................... $225,211 1997 ...................... 143,208 1998 ...................... 93,668 1999 ...................... 40,457 2000 ...................... 2,784 -------- $505,328 ======== The Company has entered into agreements totaling $154,500 as of December 31, 1995, which are not yet available for showing at December 31, 1995, and, accordingly, are not recorded on the Company's financial statements. 6. INCOME TAXES: The provision for income taxes is summarized as follows: Year Ended Two Months Ended -------------------------------- ------------------------------ December 31, December 31, February 28, February 29, 1994 1995 1995 1996 -------------- -------------- -------------- ------------ (Unaudited) (Unaudited) Current ... $ 3,757 $ 0 $ 0 $35,578 Deferred .. 186,243 105,247 26,437 (862) -------------- -------------- -------------- ------------ $190,000 $105,247 $26,437 $34,716 ============== ============== ============== ============ F-37 WTLH, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 6. Income Taxes: - (Continued) The differences between the federal statutory tax rate and the Company's effective tax rate are as follows:
Year Ended Two Months Ended -------------------------------- -------------------------------- December 31, December 31, February 28, February 29, 1994 1995 1995 1996 -------------- -------------- -------------- -------------- (Unaudited) (Unaudited) Federal income tax at federal statutory rate 34.0 % 34.0 % 34.0 % 34.0% State income taxes, net of federal income tax benefit .................................... 3.6 3.6 3.6 3.6 Other ....................................... 1.1 0.6 0.4 0.1 -------------- -------------- -------------- -------------- 38.7 % 38.2 % 38.0 % 37.7 % ============== ============== ============== ==============
The components of net deferred tax assets are as follows: December 31, December 31, February 29, 1994 1995 1996 ------------- -------------- ------------ (Unaudited) Current deferred tax assets: ... Net operating loss benefits .. $ 80,714 $14,044 $ 0 Accrued interest due affiliates ................ 92,869 54,293 72,209 Allowance for doubtful accounts .................. 3,170 3,010 0 ------------- -------------- ------------ 176,753 71,347 72,209 Long-term deferred tax assets: Program rights amortization .. 24,291 24,790 24,790 ------------- -------------- ------------ $201,044 $96,137 $96,999 ============= ============== ============ At December 31, 1995, the Company has recorded a deferred tax asset of $96,137, including the benefit of approximately $37,000 in loss carryforwards, which expire in 2006. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. 7. RELATED PARTY TRANSACTIONS: The Company has a $121,858 receivable from an affiliated company for reimbursement of certain costs. The receivable is non interest bearing with no fixed terms of repayment. The receivable has been presented as a reduction of stockholders' equity in the accompanying financial statements. The Company paid $55,600, $151,500 (including $111,000 of payments for lease obligations which have been reclassified for financial statement presentation purposes) $11,000 and $21,400 in management fees to an affiliated company through common ownership for the years ended December 31, 1994 and 1995 and the two months ended February 28, 1995 and February 29, 1996, respectively. The Company made payments to stockholders and affiliates under leases as described in Note 4 aggregating $45,777, $138,236, $20,500 and $23,039 for the years ended December 31, 1994 and 1995 and the two months ended February 28, 1995 and February 29, 1996, respectively. F-38 WTLH, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 8. FINANCIAL INSTRUMENTS: Concentrations of Credit Risk -- Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of accounts receivable and cash. Concentrations of credit risk with respect to receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across different business and geographic regions, of which approximately 60% was related to national accounts. Disclosures About Fair Value of Financial Instruments -- The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and Accounts Receivable: The carrying amount approximates fair value. Long-Term Debt: The fair value of the Company's long-term debt approximates fair value since the debt was settled in full in 1996. See Note 10. 9. SUBORDINATED DEBT: The $1,200,000 subordinated debt is non-interest bearing and is payable to the Company's former stockholder under certain circumstances. The debt is subordinate to up to $1,500,000 of institutional or stockholder loans and is collateralized by all tangible and intangible personal property of the Company. In connection with the sale of the Company (see Note 10) a settlement agreement was entered into that reduced the outstanding liability to $521,100, which was paid in March 1996. 10. SUBSEQUENT EVENT: On March 8, 1996, the principal assets of the Company were sold to Pegasus Media & Communications, Inc. for $5 million in cash, including payments under noncompetition agreements with the owners and an employee of the station. F-39 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Harron Communications Corp. We have audited the accompanying combined balance sheets of the DBS Operations of Harron Communications Corp. (operating divisions of Harron Communications Corp., as more fully described in Note 1 to financial statements) (the "Divisions") as of December 31, 1995 and 1994, and the related combined statements of operations, and cash flows for the years then ended. These financial statements are the responsibility of the Divisions' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the DBS Operations of Harron Communications Corp. at December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements may not necessarily be indicative of the conditions that would have existed or the results of operations had the Divisions been unaffiliated with Harron Communications Corp. As discussed in Notes 1 and 8 to the combined financial statements, Harron Communications Corp. provides financing and certain legal, treasury, accounting, tax, risk management and other corporate services to the Divisions. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania April 26, 1996, except for Note 9 as to which the date is October 8, 1996 F-40 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. COMBINED BALANCE SHEETS DECEMBER 31, 1994 AND 1995, AND 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-41 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-42 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-43 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. NOTES TO COMBINED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994 AND 1995 1. PRESENTATION AND NATURE OF BUSINESS Basis of Presentation -- The DBS Operations of Harron Communications Corp. (the "Divisions") are comprised of the assets and liabilities of two operating divisions of Harron Communications Corp. ("Harron") that provide direct broadcast satellite ("DBS") services. On October 8, 1996, Harron sold its DBS operations to Pegasus Communications Corporation (see Note 9). These divisions have no separate legal existence apart from Harron. The historical combined financial statements of the DBS Operations of Harron Communications Corp. do not necessarily reflect the results of operations or financial position that would have existed if the component DBS operating divisions were independent companies. Harron provides certain legal, treasury, accounting, tax, risk management and other corporate services to the Divisions (see Note 8). There are no significant intercompany transactions or balances between the component divisions. Nature of Business -- The Divisions provide direct broadcast satellite television distribution services and sell the related equipment in rural territories located in Michigan and Texas franchised by the National Rural Telecommunications Cooperative ("NRTC") and DIRECTV. While these franchises are exclusive as they relate to programming provided by DIRECTV, other programming providers may offer DBS services within the Divisions' markets. In 1993, the Divisions purchased their initial franchises with a potential subscriber base of 343,174 homes for approximately $5,395,000. In July 1994, the Divisions added their first DBS subscriber. In 1995, the Divisions purchased an additional franchise with a potential subscriber base of 7,695 homes for approximately $190,000. Total subscribers at December 31, 1995 and 1994 were 6,573 and 1,737 homes, respectively. Under the franchise agreements, DIRECTV operates a satellite through which programming is transmitted. The NRTC provides certain billing and collection services to the Divisions. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounts Receivable -- Accounts receivable consist of amounts due from customers for programming services and equipment purchases and installation. In 1995, the Divisions sold equipment and related installation to approximately 50 customers under contracts with repayment terms of up to 48 months. The Divisions have provided a reserve for estimated uncollectible amounts of $64,100 at December 31, 1995. Bad debt expense in 1994 and 1995 was $0 and $87,400, respectively. Inventory -- Inventory, consisting of DBS systems (primarily, satellite dishes and converter boxes) and related parts and supplies, is stated at the lower of cost (first in - first out method) or market. Because of the nature of the technology involved, the value of inventory held by the Divisions is subject to changing market conditions. Accordingly, inventory has been written down to its estimated net realizable value, and results of operations in 1995 include a corresponding charge of approximately $105,000. In 1995, the Divisions provided demonstration units to certain dealers and others. The cost of demonstration units is expensed when such units are placed in service. In 1995, demonstration units amounting to approximately $32,000 were placed in service. Property and Equipment -- Property and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Franchise Costs -- Franchise acquisition costs are capitalized and are being amortized using the straight-line method over the remaining minimum franchise period (originally 10 years) which approximates the estimated useful life of the satellite operated by DIRECTV. F-44 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) YEARS ENDED DECEMBER 31, 1994 AND 1995 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) The Divisions evaluate the carrying value of long-term assets, including franchise acquisition costs, based upon current anticipated undiscounted cash flows, and recognizes impairment when it is probable that such estimated cash flows will be less than the carrying value of the asset. Measurement of the amount of the impairment, if any, is based upon the difference between the carrying value and the estimated fair value. Revenue Recognition -- Revenue in connection with programming services and associated costs are recognized when such services are provided. Amounts received in advance of the services being provided are recorded as unearned revenue. Revenue in connection with the sale of equipment and installation and associated costs are recognized when the equipment is installed. Income Taxes -- The Divisions are included in the consolidated tax return of Harron. Accordingly, income taxes have been presented in these combined financial statements as though the Divisions filed a separate combined federal income tax return and separate state tax returns. The Divisions account for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes (See Note 5). Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Unaudited Data -- The combined balance sheet as of 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 Years December 31, -------------------------- Useful Life 1994 1995 ------------- --------- --------- Furniture and fixtures . 10 $ 8,550 $19,435 Computer equipment ..... 5 5,720 25,839 Automobiles ............ 3 21,005 Other .................. 3 5,498 --------- --------- 14,270 71,777 Accumulated depreciation . (1,000) (9,565) --------- --------- $13,270 $62,212 ========= ========= F-45 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) YEARS ENDED DECEMBER 31, 1994 AND 1995 4. ACCRUED EXPENSES Accrued expenses consist of the following: December 31, -------------------------------------- 1994 1995 ---------- ---------- Programming ............... $ 33,038 $200,300 Commissions ............... 5,618 84,676 Salaries and benefits ...... 25,000 16,019 Unearned revenue .......... 47,339 165,496 Other ..................... 10,090 37,848 ---------- ---------- $121,085 $504,339 ========== ========== 5. INCOME TAXES The Divisions account for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach for financial accounting and reporting of income taxes. Under this approach, deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax law will be reflected in the tax provision as they occur. Deferred income taxes reflect the net tax effects of (a) temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss carryforwards. For each year presented, there is no provision or benefit for income taxes due to net losses incurred and the effect of recording a 100% valuation allowance on net deferred tax assets. Significant items comprising the Divisions' deferred tax assets and liabilities at December 31, are as follows: 1994 1995 ----------- ------------- Differences between book and tax basis: Intangible assets ................... $ 17,000 $ 85,000 Inventory ........................... 52,000 Other ............................... 24,000 Net operating carryforwards ........... 342,000 978,000 ----------- ------------- Net deferred tax asset ...... 359,000 1,139,000 Valuation allowance ................... (359,000) (1,139,000) ----------- ------------- Net deferred tax balance .............. $ 0 $ 0 =========== ============= The Divisions have recorded a valuation allowance of $359,000 and $1,139,000 at December 31, 1994 and 1995, respectively, against deferred tax assets, reducing these assets to amounts which are more likely than not to be realized. The increase in the valuation allowance of $780,000 from December 31, 1994 is primarily attributable to the increase in the tax benefits associated with the Divisions' net operating loss carryforwards. The benefits of these net operating loss carryforwards are not transferable pursuant to the transaction described in Note 9. F-46 DBS OPERATIONS OF HARRON COMMUNICATIONS CORP. NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) YEARS ENDED DECEMBER 31, 1994 AND 1995 6. DIVISION DEFICIENCY Changes in division deficiency for the years ended December 31, 1994 and 1995 are as follows: Balance, January 1, 1994 ........ $ 0 1994 Net Loss ................. (935,044) ------------- Balance, December 31, 1994 ...... (935,044) 1995 Net loss ................. (1,899,284) ------------- Balance, December 31, 1995........ $(2,834,328) ============= 7. EMPLOYEE SAVINGS PLAN Employees of the Divisions who have completed one year of service, as defined, may contribute from 1% to 15% of their earnings to a 401(k) plan administered by Harron for its employees. The Divisions will match 50% of the employee contributions up to 6% of earnings. The Divisions' expense related to the savings plan was $0 and $1,280 in 1994 and 1995, respectively. 8. RELATED PARTY TRANSACTIONS Amounts due to affiliate represent cash advances for franchise acquisitions, capital expenditures and working capital deficiencies. Interest expense of approximately $488,000 and $631,000 was charged in 1994 and 1995, respectively, and was added to the outstanding balance. The rate of interest is determined by Harron based on its cost of borrowed funds. At December 31, 1995, this rate was approximately 8.3%. Although these advances have no stated repayment terms, Harron has agreed not to seek repayment through March 1997. Approximately $103,200 and $139,700 of Harron's corporate expenses has been charged to the Divisions in 1994 and 1995, respectively. In addition, approximately $26,000 and $143,000 has been charged to the Divisions for Harron's regional support of the Divisions' operations in 1994 and 1995, respectively, and are included in general and administrative expenses. These costs include legal, treasury, accounting, tax, risk management, advertising and building rent and are charged to the Divisions based on management's estimate of the Divisions' allocable share of such costs. Management believes that its allocation method is reasonable. The Divisions' assets have been pledged as collateral for certain loans of Harron that have outstanding balances of approximately $188,000,000 at December 31, 1995. 9. SUBSEQUENT EVENT On October 8, 1996, Harron contributed its DBS operations and related assets to Pegasus Communications Corporation ("Pegasus") in exchange for (a) cash in the amount of $17.9 million and (b) 852,110 shares of Class A Common Stock of Pegasus. On that date, Pegasus consummated an initial public offering of its Class A Common Stock at an initial public offering price of $14 per share. F-47 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Dom's Tele Cable, Inc. We have audited the accompanying balance sheets of Dom's Tele Cable, Inc. as of May 31, 1995 and 1996 and the related statements of operations and deficit and cash flows for the years ended May 31, 1994, 1995 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dom's Tele Cable, Inc. as of May 31, 1995 and 1996, and the results of operations and deficit and its cash flows for the years ended May 31, 1994, 1995 and 1996 in conformity with generally accepted accounting principles. As discussed in Note 11, to the financial statements, the Company has restated the depreciation expense for the year ended May 31, 1994, to properly reflect the calculation of depreciation expense. COOPERS & LYBRAND L.L.P. San Juan, Puerto Rico August 9, 1996 except as to Note 10 for which the date is August 29, 1996 F-48 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-49 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-50 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-51 DOM'S TELE CABLE, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Dom's Tele Cable, Inc. (the "Company") was incorporated pursuant to the provisions of the General Corporations Law of the Commonwealth of Puerto Rico on February 23, 1983. The Company operates a cable television system under a franchise authorization by the Public Service Commission of Puerto Rico and the Federal Communications Commission which includes the towns of San German, Lajas, Cabo Rojo, Sabana Grande, Hormigueros, Guanica, Rincon, Anasco, Las Marias, and Maricao in Puerto Rico. CLASSIFICATION OF ACCOUNTS There is no distinction between current assets and liabilities and non-current assets and liabilities inasmuch such distinction is not practical in the cable industry. REVENUE RECOGNITION Revenues as well as costs and expenses are recognized under the accrual method of accounting; as such revenues are earned as the related costs and expenses are incurred. UNEARNED REVENUES Unearned revenues are recorded when a customer pays for the services before they are delivered or rendered, and are included in income over the contract or service period. INITIAL SUBSCRIBER INSTALLATION COSTS Initial subscriber installation costs, including material, labor and overhead costs of the drop, are capitalized and depreciated over a period no longer than 7 years. HOOKUP REVENUES The excess of revenues over selling costs for initial cable television hookups are deferred and amortized over the estimated average period that subscribers are expected to remain connected to the system, which is estimated at 10 years. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Expenditures for additions and improvements that increase the productive capacity or extend the useful life of the assets are capitalized and expenditures for maintenance and repairs are charged to operations. When properties are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the books, and any gain or loss from disposal is included in operations. Fully depreciated assets are written off against accumulated depreciation. Depreciation of property, and equipment is computed on the straight-line method based upon the following estimated useful lives: Tower and distribution system 18 years Machinery and equipment 5 years Furniture and fixtures 5 years Motor vehicles 5 years Building 30 years Leasehold improvements 5 years F-52 DOM'S TELE CABLE, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) INCOME TAXES Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. FAIR VALUE OF FINANCIAL INSTRUMENTS For cash and accounts receivable, the estimated fair value is the same or approximately the same as the recorded value. RISKS AND UNCERTAINTIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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-53 DOM'S TELE CABLE, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 4. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consists of: May 31, May 31, 1995 1996 ------------- ------------ Building ..................................... $ 122,713 $ 122,713 Tower and distribution ....................... 11,006,704 11,223,338 Furniture and fixtures ....................... 137,498 142,128 Equipment .................................... 394,703 433,743 Leasehold improvements ....................... 32,350 39,279 ------------- ------------ 11,693,968 11,961,201 Less accumulated depreciation and amortization 6,781,354 7,286,396 Land ......................................... 164,488 164,488 ------------- ------------ Property, plant and equipment, net ........... $ 5,077,102 $ 4,839,293 ============= ============ 5. NOTES AND LOANS PAYABLE
May 31, May 31 1995 1996 ------------- ----------- Loan payable in 84 monthly installments which fluctuates from $13,543 up to $67,711 during the term of the loan in accordance with a payment schedule known as the Term Loan, plus interest at .75% over the prevailing prime rate as published from time to time by Citibank N.A. in New York or at 2% over the U.S. Internal Revenue Code Section 936 interest rate for the portion of the loan funded with 936 funds. The loan matures on July 1, 1996.................. $ 974,315 $ 188,874 Loan payable in 83 monthly installments which fluctuates from $15,000 up to $100,000 during the term of the loan in accordance with the payment schedule and one final balloon payment of $3,305,000, known as the Credit Facility Loan, plus interest at .75% over the prevailing prime rate as published from time to time by Citibank N.A. in New York or at 2% over the U.S. Internal Revenue Code Section 936 interest rate for the portion of the loan funded with 936 funds. The loan matures on July 1, 1996................................... 5,080,020 4,880,021 Loan payable to Western Bank of Puerto Rico in 60 equal monthly installments of $1,112, plus interest at 2% over the prevailing prime rate, and collateralized with a motor vehicle. This loan was paid in full on January 19, 1996.......... 25,022 -- Capital lease equipment bearing interest at 7.56% with a residual value of $3,900. This lease agreement is due in 2001.................................. -- 17,337 ------------- ----------- $6,079,357 $5,086,232 ============= ===========
F-54 DOM'S TELE CABLE, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 5. NOTES AND LOANS PAYABLE - (Continued) Aggregate maturities of notes and loans payable are as follows: Years Ending May 31, -------------------- 1997 ............................ $5,072,483 Thereafter ...................... 13,749 ---------- $5,086,232 ========== On October 26, 1995, Philip Credit Corporation sold, assigned and transferred all of its rights, title, and interest, in and to the credit agreement dated June 28, 1988, as amended to Lazard Freres & Co., L.L.C. The credit agreement between the Company is comprised of a Term Loan and a Credit Facility Loan which are collateralized by substantially all of the assets owned by the Company along with a personal guarantee of the Company's stockholder. The credit agreement contains certain restrictive covenants such as: (i) subscriber debt ratio; (ii) subscriber payment; (iii) number of homes in cable system; (iv) number of subscribers; (v) combined plant mileage; and (vi) subscribers' mileage ratio. As of May 31, 1995, and 1996, the Company was not in compliance with certain of the restrictive covenants and is in default on principal payments amounting to approximately $1,500,000 on the Credit Facility Loan. See Note 10. 6. INCOME TAXES The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," as of June 1, 1993. The application of the statement did not affect the Company's financial position and result of operations because the components of the deferred tax primarily relate to net operating loss carryforwards of $1,611,300 for which a valuation allowance of 100% was provided. During 1994, the Company changed its conclusion about the realization of operating loss carryforwards and decided to record $184,000 for the realization of losses during 1995. The Company did not recognize a deferred tax asset for net operating losses to be realized after May 31, 1995 because management expects to have completed the assets sale and liquidation of the Company shortly after May 31, 1996. The components of deferred tax asset were as follows: May 31, May 31, 1995 1996 ----------- ----------- Net operating loss carryforwards $ 712,758 $ 500,677 Valuation allowance ............. (382,558) (500,677) ----------- ----------- $ 330,200 $ -- =========== =========== The comparison of income tax expense at the Puerto Rico statutory rate to the Company's income tax benefit (provision) is as follows:
May 31, May 31, May 31, 1994 1995 1996 ------------- ------------- ----------- As Restated Tax at statutory rate ..................... $ 462,411 $ 363,199 $ 443,314 Adjustment due to: Benefit of net operating loss carryforwards ...................... (456,149) (354,255) (439,187) Alternative minimum tax .............. 0 16,844 16,711 Change in valuation allowances ....... (184,000) (146,200) 330,200 Others, net .......................... (6,262) (8,944) (4,127) ------------- ------------- ----------- $ (184,000) $ (129,356) $ 346,911 ============= ============= ===========
F-55 DOM'S TELE CABLE, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 7. CONCENTRATION OF CREDIT RISK Substantially all of the Company's business activity is with customers located in eight municipalities located in the southwestern area of Puerto Rico and as such the Company is subject to the risks of Puerto Rico and more specifically the economy of such geographic area. 8. CONTINGENCIES The Company is involved in various litigations arising in the normal course of business. Management believes that the outcome of these uncertainties will not have a material adverse effect on its financial statements. The Company has not filed the Copyright Statement of Accounts with the Copyright Office nor has paid royalty fees and interest amounting to approximately $477,083 and $495,352 for May 31, 1995, and 1996, respectively. The Company can be subject to various remedies for copyright infringement and additional penalties for not filing the Copyright Statement of Accounts. Management has accrued $477,083 and $495,352 for May 31, 1995 and 1996, respectively, for royalty fees and interest for the unexpired filing periods, which is three years in accordance with the statute of limitations. Management plans to make the filing and payment concurrently with the proposed sale of the Company. 9. SIGNIFICANT TRANSACTIONS On January 11, 1996, the Company's sole stockholder signed a letter of intent with respect to the liquidation of the Company's operations and the eventual sale of its net assets, in an transaction that should be consummated on or before August 31, 1996. Long-term obligations payable to Lazard Freres & Co., L.L.C., at present, CIBC Wood Gundy Securities Corporation, will be paid from the proceeds of this sale. In the event the planned sale is not made the Company may need to seek additional financing from other sources or restructure its debt. 10. SUBSEQUENT EVENTS Effective on June 1, 1996, the Company was liquidated and a new legal entity was incorporated under the laws of the Commonwealth of Puerto Rico known as DOMAR Inc., to be in accordance with the sale contract agreement entered with the buyer, Pegasus Media & Communications, Inc. On July 1, 1996, Lazard Freres & Co., L.L.C., sold, assigned and transferred all of its rights, title, interest and obligation to CIBC Wood Gundy Securities Corporation. 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-56 =============================================================================== No dealer, salesperson or other person has been authorized to give any information or to make any representation other than those con- tained in this Prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy the Warrant Shares 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 infor- mation contained herein is correct as of any time subsequent to the date hereof. ------ TABLE OF CONTENTS Page -------- Prospectus Summary ............................ 1 Risk Factors .................................. 14 Use of Proceeds ............................... 20 Dividend Policy ............................... 20 Class A Common Stock Information .............. 20 Capitalization ................................ 21 Pro Forma Consolidated Financial Information .. 22 Selected Historical and Pro Forma Consolidated Financial Data ............................... 28 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................... 31 Business ...................................... 39 Management and Certain Transactions ........... 69 Principal and Selling Stockholders ............ 75 Description of Indebtedness ................... 76 Description of Unit Offering Securities ....... 77 Description of Capital Stock .................. 83 Plan of Distribution .......................... 87 Legal Matters ................................. 88 Experts ....................................... 88 Additional Information ........................ 89 Index to Financial Statements ................. F-1 =============================================================================== =============================================================================== LOGO PEGASUS COMMUNICATIONS CORPORATION 366,464 SHARES OF CLASS A COMMON STOCK ------ P R O S P E C T U S ------ , 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. Filing Fee -- Securities and Exchange Commission $ 1,305 Fees and Expenses of Accountants ............... $ 20,000 Fees and Expenses of Counsel ................... $ 30,000 Printing Expenses .............................. $ 30,000 Miscellaneous Expenses ......................... $ 18,695 --------- Total ........................................ $100,000 ========= ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant's Amended and Restated Certificate of Incorporation provides that a director of the Registrant shall have no personal liability to the Registrant or to its stockholders for monetary damages for breach of fiduciary duty as a director except to the extent that Section 102(b)(7) (or any successor provision) of the Delaware General Corporation Law, as amended form time to time, expressly provides that the liability of a director may not be eliminated or limited. Article 6 of the Registrant's By-Laws provides that any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Registrant, or is or was serving while a director or officer of the Registrant at the request of the Registrant as a director, officer, employee, agent, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall be indemnified by the Registrant against expenses (including attorneys' fees), judgments, fines, excise taxes and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the full extent permissible under Delaware law. Article 6 also provides that any person who is claiming indemnification under the Registrant's By-Laws is entitled to advances from the Registrant for the payment of expenses incurred by such person in the manner and to the full extent permitted under Delaware law. The Underwriting Agreement entered into in connection with Registrant's initial public offering provides that the Underwriters are obligated, under certain circumstances, to indemnify directors, officers and controlling persons of the Registrant against certain liabilities under the Securities Act of 1933, as amended. Reference is made to Section 8 of the form of Underwriting Agreement, which is incorporated by reference to Exhibit 1.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057). The Underwriting Agreement entered into in connection with Registrant's offering of Series A Cumulative Exchangeable Preferred Stock and Warrants to purchase 193,600 shares of Class A Common Stock contains similar provisions. See Section 9 of the Form of Underwriting Agreement which is incorporated by reference to Exhibit 1.2 to Pegasus' Registration Statement on Form S-1 (File No. 333-18739). The Registrant has obtained directors' and officers' liability insurance. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The Registrant was incorporated on May 30, 1996. On April 1, 1996, Pegasus Media and Communications, Inc. ("PM&C"), which became a wholly-owned subsidiary of Registrant on October 8, 1996, granted Donald W. Weber, a director of PM&C, an option exercisable for 3,385 shares of Registrant's Class A Common Stock at the exercise price of $14.00 per share, pursuant to an Option Agreement, as amended. In connection with its incorporation, the Registrant issued 100 shares of Class B Common Stock to II-1 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, Registrant issued a total of 3,614 shares of its Class A Common Stock pursuant to its Restricted Stock Plan to certain of its employees. 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 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. On January 31, 1997, the Registrant issued 466,667 shares of Class A Common Stock to the stockholders of DBS of Indiana, Inc. in connection with the merger of DBS of Indiana, Inc. into a subsidiary of Registrant, Pegasus Satellite Television of Indiana, Inc. All of these securities were issued in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act. The consideration received by the Registrant for the securities issued to the DBS of Indiana, Inc. shareholders consisted of the DBS of Indiana, Inc. securities held by such stockholders. As of March 10, 1997, the Registrant issued warrants to purchase a total of 283,969 shares of Class A Common Stock in connection with the Virginia/West Virginia DBS Acquisition. All of these securities were issued in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act. See "Management Discussion and Analysis of Financial Condition and Results of Operations" for consideration relating to these issuances. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
Exhibit Number Description of Document - ------ ------------------------ 2.1 Asset Purchase Agreement, dated March 21, 1996, among Dominica Padilla Acosta, Maria Del Carmen Padilla Lopez, Dom's Tele-Cable, Inc. and the Parent relating to the acquisition of Dom's Tele-Cable, Inc. (which is incorporated herein by reference to Exhibit 2.1 of the Form 10-K for the year ended December 31, 1995 of Pegasus Media & Communications, Inc.). 2.2 Contribution and Exchange Agreement by and between the Parent and Harron dated as of May 30, 1996 (including form of Joinder Agreement, Stockholder's Agreement and Noncompetition Agreement) (which is incorporated 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).
II-2
Exhibit Number Description of Document - ------ ------------------------ 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 2.5 to Pegasus' Registration Statement on Form S-1 (File No. 333-057057). 2.7 Amendment No. 3 to Exhibit 2.2 (which is incorporated by reference to Exhibit 4 to Pegasus' Form 8-K dated October 8, 1996). 2.8 Joinder Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation and Harron Communications Corp. dated as of October 8, 1996 (which is incorporated by reference to Exhibit 5 to Pegasus' Form 8-K dated October 8, 1996). 2.9 Stockholders' Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation and Harron Communications Corporation dated as of October 8, 1996 (which is incorporated by reference to Exhibit 6 to Pegasus' Form 8-K dated as of October 8, 1996). 2.10 Non-Competition Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation and Harron Communications Corp. dated October 8, 1996 (which is incorporated by reference to Exhibit 7 to Pegasus Form 8-K dated as of October 8, 1996) 2.11 Asset Purchase Agreement by and among Pegasus Communications Corporation and Horizon Telcom, Inc., Horizon Infotech, Inc. and Chillicothe Telephone Company dated as of October 23, 1996 (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. (which is incorporated by reference to Exhibit 2.12 to Pegasus' Registration Statement on Form S-1 (File No. 333-18739). 2.13 Agreement and Plan of Merger dated as of January 21, 1997 among Pegasus Communications Corporation, Pegasus Satellite Television of Indiana, Inc. and DBS of Indiana, Inc. and Exhibit 8 thereto (Stockholders Agreement dated as of January 31, 1997) (other exhibits have been omitted but will be provided to the SEC upon request) (which is incorporated by reference to Exhibit 1 to Pegasus' Form 8-K dated January 31, 1997). 2.14 Asset Purchase Agreement by and among Pegasus Communications Corporation and ClearVision, Inc. and its Shareholders, dated as of January 25, 1997 (exhibits have been omitted but will be provided to the SEC upon request) (which is incorporated by reference herein to Exhibit 3 to Pegasus' Form 8-K dated January 31, 1997). 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).
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Exhibit Number Description of Document - ------ ------------------------ 4.4* Indenture by and between Pegasus and First Union National Bank, as trustee, relating to the Exchange Notes (included in Exhibit 3.3 above). 5.1* Opinion of Drinker Biddle & Reath. 10.1 Tax Sharing Agreement, made as of July 7, 1995, among the Parent, Pegasus Media & Communications, Inc., the Guarantors, Pegasus Cable Television of Connecticut, Inc., and Pegasus Communications Portfolio Holdings, Inc. (which is incorporated herein by reference to Exhibit 10.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.2 Management Agreement, dated July 7, 1995, between Pegasus Media & Communications, Inc. and BDI Associates L.P. (which is incorporated herein by reference to Exhibit 10.2 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and D. & K. Broadcast Properties L.P. relating to television station WDBD (which is incorporated herein by reference to Exhibit 10.5 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.4 Agreement and Amendment to Station Affiliation Agreement, dated as of June 11, 1993, between Fox Broadcasting Company and Donatelli & Klein Broadcast relating to television station WDBD (which is incorporated herein by reference to Exhibit 10.6 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.5 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcast Company and Scranton TV Partners Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.8 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.6 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting Company and Scranton TV Partners, Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.9 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.7 Amendment to Fox Broadcasting Company Station Affiliation Agreement Regarding Network Nonduplication Protection, dated December 2, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television stations WOLF, WWLF, and WILF (which is incorporated herein by reference to Exhibit 10.10 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.8 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.11 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.9 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and WDSI Ltd. relating to television station WDSI (which is incorporated herein by reference to Exhibit 10.12 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.10 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WDSI (which is incorporated herein by reference to Exhibit 10.13 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.11 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated herein by reference to Exhibit 10.14 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.12 NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.28 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
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Exhibit Number Description of Document - ------ ------------------------ 10.13 Amendment to NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.29 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.14 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and Pegasus Satellite Television, Inc. (which is incorporated herein by reference to Exhibit 10.30 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.15 Stock Purchase Agreement dated January 25, 1996, among the Parent, Portland Broadcasting, Inc., HMW, Inc., Bride Communications, Inc., John W. Bride, John 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 January 29, 1996). 10.16 Amendment to the Stock Purchase Agreement (which is incorporated herein by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996). 10.17 Time Brokerage Agreement dated as of January 28, 1996, between HMW, Inc. and the Parent (which is incorporated herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996). 10.18 Asset Purchase Agreement, dated October 13, 1995, among WTLH, Inc. ("WTLH"), General Management Consultants, Inc. ("GMC"), TV 57 Live-Oak Gainsville, Inc. ("TV-57"), Paul Lansat, Renee Lansat and Pegasus Broadcast Television, Inc. ("PBT") (which is incorporated herein by reference to Exhibit A to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.19 Agreement of Sale, dated October 13, 1995, between Lansat Communications Inc. ("LCI") and PBT (which is incorporated herein by reference to Exhibit B to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 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).
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Exhibit Number Description of Document - ------ ------------------------ 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). 10.31 Amendment to Option Agreement for Donald W. Weber, dated December 19, 1996 (which is incorporated by reference to Exhibit 10.31 to Pegasus' Registration Statement on Form S-1 (File No. 333-18739). 10.32* Warrant Agreement between Pegasus and First Union National Bank, as Warrant Agent relating to the Warrants. 21.1 Subsidiaries of Pegasus (which is incorporated by reference to Exhibit 21.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-18739). 23.1 Consent of Drinker Biddle & Reath (included in their opinion filed as Exhibits 5.1). 23.2* Consents of Coopers & Lybrand L.L.P. 23.3* Consent of Ernst & Young LLP 23.4* Consent of Deloitte & Touche LLP 24.1* Powers of Attorney (included in Signatures and Powers of Attorney). 27.1* Financial Data Schedule.
- ------ * Filed herewith. (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. During any period in which offers or sales are being made, a post-effective amendment to this registration statement will be filed: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any II-6 deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. 2. 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. 3. 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. (4) It will remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-7 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 18th day of March, 1997. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Marshall W. Pagon -------------------------------------- Marshall W. Pagon Chief Executive Officer and President Each person whose signature appears below hereby constitutes and appoints Marshall W. Pagon, Robert N. Verdecchio and Ted S. Lodge as his attorneys-in-fact and agents, with full power and substitution for him in any and all capacities, to sign any or all amendments or post-effective amendments to this Registration Statement, or any Registration Statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits thereto and other documents in connection therewith or in connection with the registration of the Class A Common Stock under the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission, granting unto each of such attorneys-in-fact the agents full power and authority to do and perform each and ever act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his substitutes may do or cause to be done by virtue hereof.
Signature Title Date --------- ----- ---- /s/ Marshall W. Pagon President, Chief Executive Officer and March 18, 1997 -------------------------------- Chairman of the Board Marshall W. Pagon (Principal Executive Officer) /s/ Robert N. Verdecchio Senior Vice President, Chief March 18, 1997 -------------------------------- Financial Officer and Assistant Robert N. Verdecchio Secretary (Principal Financial and Accounting Officer) /s/ James J. McEntee, III Director March 18, 1997 -------------------------------- James J. McEntee, III /s/ Mary C. Metzger Director March 18, 1997 -------------------------------- Mary C. Metzger /s/ Donald W. Weber Director March 18, 1997 -------------------------------- Donald W. Weber
II-8 REPORT OF INDEPENDENT ACCOUNTANTS In connection with our audits of the consolidated financial statements of Pegasus Communications Corporation as of December 31, 1995 and 1996 and for each of the three years in the period ended December 31, 1996 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 February 21, 1997 except as to Note 15 for which the date is March 10, 1997 S-1 PEGASUS COMMUNICATIONS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS)
Balance at Additions Additions Balance at Beginning Charged To Charged To End of Description of Period Expenses Other Accounts Deductions Period Allowance for Uncollectible Accounts Receivable Year 1994 ............ $ 308 $ 200 $ -- $ 160 (a) $ 348 Year 1995 ............ $ 348 $ 146 $ -- $ 256 (a) $ 238 Year 1996 ............ $ 238 $ 336 $ -- $ 331 (a) $ 243 Valuation Allowance for Deferred Tax Assets Year 1994 ............ $ 0 $1,756 $ -- $ -- $ 1,756 Year 1995 ............ $1,756 $8,675 $ -- $3,477 $ 6,954 Year 1996 ............ $6,954 $7,032 $ -- $3,302 $10,684
(a) Amounts written off, net of recoveries. S-2 EXHIBIT INDEX
Exhibit Number Description of Document - ------ ------------------------ 2.1 Asset Purchase Agreement, dated March 21, 1996, among Dominica Padilla Acosta, Maria Del Carmen Padilla Lopez, Dom's Tele-Cable, Inc. and the Parent relating to the acquisition of Dom's Tele-Cable, Inc. (which is incorporated herein by reference to Exhibit 2.1 of the Form 10-K for the year ended December 31, 1995 of Pegasus Media & Communications, Inc.). 2.2 Contribution and Exchange Agreement by and between the Parent and Harron dated as of May 30, 1996 (including form of Joinder Agreement, Stockholder's Agreement and Noncompetition Agreement) (which is incorporated 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 2.5 to Pegasus' Registration Statement on Form S-1 (File No. 333-057057). 2.7 Amendment No. 3 to Exhibit 2.2 (which is incorporated by reference to Exhibit 4 to Pegasus' Form 8-K dated October 8, 1996). 2.8 Joinder Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation and Harron Communications Corp. dated as of October 8, 1996 (which is incorporated by reference to Exhibit 5 to Pegasus' Form 8-K dated October 8, 1996). 2.9 Stockholders' Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation and Harron Communications Corporation dated as of October 8, 1996 (which is incorporated by reference to Exhibit 6 to Pegasus' Form 8-K dated as of October 8, 1996). 2.10 Non-Competition Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation and Harron Communications Corp. dated October 8, 1996 (which is incorporated by reference to Exhibit 7 to Pegasus Form 8-K dated as of October 8, 1996) 2.11 Asset Purchase Agreement by and among Pegasus Communications Corporation and Horizon Telcom, Inc., Horizon Infotech, Inc. and Chillicothe Telephone Company dated as of October 23, 1996 (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. (which is incorporated by reference to Exhibit 2.12 to Pegasus' Registration Statement on Form S-1 (File No. 333-18739). 2.13 Agreement and Plan of Merger dated as of January 21, 1997 among Pegasus Communications Corporation, Pegasus Satellite Television of Indiana, Inc. and DBS of Indiana, Inc. and Exhibit 8 thereto (Stockholders Agreement dated as of January 31, 1997) (other exhibits have been omitted but will be provided to the SEC upon request) (which is incorporated by reference to Exhibit 1 to Pegasus' Form 8-K dated January 31, 1997). 2.14 Asset Purchase Agreement by and among Pegasus Communications Corporation and ClearVision, Inc. and its Shareholders, dated as of January 25, 1997 (exhibits have been omitted but will be provided to the SEC upon request) (which is incorporated by reference herein to Exhibit 3 to Pegasus' Form 8-K dated January 31, 1997). 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).
Exhibit Number Description of Document - ------ ------------------------ 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 by and between Pegasus and First Union National Bank, as trustee, relating to the Exchange Notes (which is included in Exhibit 3.3 above). 5.1* Opinion of Drinker Biddle & Reath. 10.1 Tax Sharing Agreement, made as of July 7, 1995, among the Parent, Pegasus Media & Communications, Inc., the Guarantors, Pegasus Cable Television of Connecticut, Inc., and Pegasus Communications Portfolio Holdings, Inc. (which is incorporated herein by reference to Exhibit 10.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.2 Management Agreement, dated July 7, 1995, between Pegasus Media & Communications, Inc. and BDI Associates L.P. (which is incorporated herein by reference to Exhibit 10.2 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and D. & K. Broadcast Properties L.P. relating to television station WDBD (which is incorporated herein by reference to Exhibit 10.5 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.4 Agreement and Amendment to Station Affiliation Agreement, dated as of June 11, 1993, between Fox Broadcasting Company and Donatelli & Klein Broadcast relating to television station WDBD (which is incorporated herein by reference to Exhibit 10.6 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.5 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcast Company and Scranton TV Partners Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.8 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 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).
Exhibit Number Description of Document - ------ ------------------------ 10.9 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and WDSI Ltd. relating to television station WDSI (which is incorporated herein by reference to Exhibit 10.12 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.10 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WDSI (which is incorporated herein by reference to Exhibit 10.13 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.11 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated herein by reference to Exhibit 10.14 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.12 NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.28 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.13 Amendment to NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.29 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.14 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and Pegasus Satellite Television, Inc. (which is incorporated herein by reference to Exhibit 10.30 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.15 Stock Purchase Agreement dated January 25, 1996, among the Parent, Portland Broadcasting, Inc., HMW, Inc., Bride Communications, Inc., John W. Bride, John 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 January 29, 1996). 10.16 Amendment to the Stock Purchase Agreement (which is incorporated herein by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996). 10.17 Time Brokerage Agreement dated as of January 28, 1996, between HMW, Inc. and the Parent (which is incorporated herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996). 10.18 Asset Purchase Agreement, dated October 13, 1995, among WTLH, Inc. ("WTLH"), General Management Consultants, Inc. ("GMC"), TV 57 Live-Oak Gainsville, Inc. ("TV-57"), Paul Lansat, Renee Lansat and Pegasus Broadcast Television, Inc. ("PBT") (which is incorporated herein by reference to Exhibit A to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 10.19 Agreement of Sale, dated October 13, 1995, between Lansat Communications Inc. ("LCI") and PBT (which is incorporated herein by reference to Exhibit B to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042). 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).
Exhibit Number Description of Document - ------ ------------------------ 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 to 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). 10.31 Amendment to Option Agreement for Donald W. Weber, dated December 19, 1996 (which is incorporated by reference to Exhibit No. 10.31 to Pegasus' Registration Statement on Form S-1 (File no. 333-18739). 10.32* Warrant Agreement between Pegasus and First Union National Bank, as Warrant Agent, relating to the Warrants. 21.1 Subsidiaries of Pegasus (which is incorporated by reference to Exhibit 21.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-18739). 23.1 Consent of Drinker Biddle & Reath (included in their opinion filed as Exhibits 5.1) 23.2* Consents of Coopers & Lybrand L.L.P. 23.3* Consent of Ernst & Young LLP 23.4* Consent of Deloitte & Touche LLP 24.1* Powers of Attorney (included in Signatures and Powers of Attorney) 27.1* Financial Data Schedule
- ------ * Filed herewith. EX-3.3 2 CERTIFICATE OF DESIGNATION CERTIFICATE OF DESIGNATION, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF 12.75% SERIES A CUMULATIVE EXCHANGEABLE PREFERRED STOCK OF PEGASUS COMMUNICATIONS CORPORATION ------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------- Pegasus Communications Corporation (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, certifies that pursuant to the authority contained in Article Fourth of its Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, a duly constituted committee of the Board of Directors of the Company, acting within the scope of the authority delegated to it by the Board of Directors, by unanimous written consent dated January 22, 1997 duly approved and adopted the following resolution (this "Certificate of Designation") which resolution remains in full force and effect on the date hereof: RESOLVED, that pursuant to the authority vested in the Pricing Committee of the Board of Directors by resolutions duly adopted by the Board of Directors on November 21, 1996, the Pricing Committee of the Board of Directors does hereby designate, create, authorize and provide for the issue of 12.75% Series A Cumulative Exchangeable Preferred Stock due January 1, 2007 (the "Series A Preferred Stock"), par value $0.01 per share, with a liquidation preference of $1,000 per share, consisting of 100,000 shares, having the following voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof as follows: 1. Certain Definitions. Unless the context otherwise requires, the terms defined in this Section 1 shall have, for all purposes of this resolution, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). "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. "Affiliate Transaction" has the meaning set forth in Section 8(d) below. "Applicable Redemption Price" means a price per share equal to the following redemption prices specified below (expressed as percentages of the Liquidation Preference thereof), in each case, together with accumulated and unpaid dividends, if any, to the date of redemption if redeemed during the 12-month period commencing on January 1 of each of the years set forth below: 2002.........................................106.375% 2003.........................................104.250% 2004.........................................102.125% 2005 and thereafter..........................100.000% "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 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 Section 8(a) hereof. "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. 2 "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. "Basket Period" has the meaning set forth in Section 8(a) below. "Board of Directors" means the Board of Directors of the Company or any authorized committee of the Board of Directors. "Business Day" means any day other than a Legal Holiday. "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. "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. "Certificated Securities" has the meaning set forth in Section 14(d) below. "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, (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 3 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 are not Continuing Directors. "Change of Control Offer" has the meaning set forth in Section 7(a) below. "Change of Control Payment" has the meaning set forth in Section 7(a) below. "Change of Control Payment Date" has the meaning set forth in Section 7(d)(ii) below. "Class A Common Stock" means the Class A Common Stock, par value $.01 per share, of the Company. "Closing Date" means the date on which shares of Series A Preferred Stock are first issued. "Commission" means the Securities and Exchange Commission. "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 any Unrestricted Subsidiary of any Wholly Owned Restricted Subsidiary of the Company to the extent that such dividends are not included 4 in the calculation of permitted Restricted Payments under Section 8(a)(i)(3) hereof by virtue of clause (C) of such section. "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. "Depositary" has the meaning set forth in Section 14(a) below. "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. "DGCL" has the meaning set forth in Section 2(b) below. "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 set forth in this Certificate of Designation 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 Section 8(a) hereof. "Dividend Payment Date" has the meaning set forth in Section 2(a) below. "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). "Event of Default" means any Event of Default under the Exchange Note Indenture. "Exchange Act" means the Securities and Exchange Act of 1934, as amended. "Exchange Date" has the meaning set forth in Section 5(b) below. "Exchange Notes" means the Company's 12.75% Senior Subordinated Exchange Notes due 2007 issuable in exchange for the Company's Series A Preferred Stock. "Exchange Note Indenture" means that certain indenture under which the Exchange Notes would be issued and which shall be substantially in the form attached as Annex A hereto. 5 "Exchange Note Trustee" means the trustee under the Exchange Note Indenture. "Executive Officer" means any officer of the Company that would be deemed to be an "executive officer" within meaning of the rules and regulations of the Commission. "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 (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. "Global Shares" has the meaning set forth in Section 14(a) below. "Global Share Holder" has the meaning set forth in Section 14(a) below. "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, co-borrowing 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. "Holder" means the record holder of one or more shares of Series A Preferred Stock, as shown on the books and records of the Transfer Agent. "incur" has the meaning set forth in Section 8(b) below. 6 "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. "Junior Securities" has the meaning set forth in Section 2(c) below. 7 "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. "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). "Liquidation Preference" means $1,000 per share of Series A Preferred Stock. "Mandatory Redemption Date" has the meaning set forth in Section 4(a) below. "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). "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 Communications Restricted Stock Plan and the Pegasus Communications 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 8 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. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary, any Assistant Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Section 10 hereof. "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). "Parity Securities" means any class or series of Capital Stock of the Company of the Company ranking on a parity with the Series A Preferred Stock. "Paying Agent" has the meaning set forth in Section 9(c) below. "Payment Default" has the meaning set forth in Section 6(b) below. 9 "Permitted Businesses" means (a) 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 (b) 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; and (d) 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 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 would, if the Exchange Notes were outstanding at such time, be subordinated in right of payment to the Exchange Notes, such Permitted Refinancing Debt has a final maturity date later than January 1, 2007 and would, if the Exchange Notes were outstanding at such time, be subordinated in right of payment to the Exchange Notes on terms at least as favorable to the holders of such 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. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "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 10 January 1, 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 Section 8(a) hereof), (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 and (ii) January 1, 2006, (c) has no voting or remedial rights and (d) does not permit the payment of cash dividends prior to January 1, 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 Section 8(a) hereof). "Record Date" has the meaning set forth in Section 2(a) below. "Redemption Date" has the meaning set forth in Section 4(d) below. "reduction or decrease in capital stock" has the meaning set forth in Section 3 below. "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." 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 Payment" has the meaning set forth in Section 8(a) below. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Securities Act" means the Securities Act of 1933, as amended. "Senior Securities" means any class or series of capital stock of the Company ranking senior to the Series A Preferred Stock. "Separation Date" means the earliest to occur of (i) April 3, 1997, (ii) in the event of a Change of Control, the date the Company mails notice thereof and (iii) such other date as may be designated by CIBC Wood Gundy Securities Corp. "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. 11 "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 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 and non-cash dividend payments during such period on any series of preferred stock of a Restricted Subsidiary of such Person. "Transfer Agent" means the entity designated from time to time by the Company to act as the registrar and transfer agent for the Series A Preferred Stock. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. "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. 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 this Certificate of Designation 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 Section 8(b)(i) hereof (treating such Subsidiary as a Restricted Subsidiary for such purpose for the period relevant 12 to such covenant set forth in Section 8(b)(i) hereof), 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 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 Section 8(b)(i) hereof (treating such Subsidiary as a Restricted Subsidiary for such purpose for the period relevant to such covenant set forth in Section 8(b)(i) hereof) and (ii) no Voting Rights Triggering Event 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. "Voting Rights Triggering Event" has the meaning set forth in Section 6(b) below. "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 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. 2. Dividends. (a) The Holders of shares of the Series A Preferred Stock shall 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 of 12.75% per annum, payable semi-annually in arrears on each January 1 and July 1 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 December 15 and June 15 (each, a "Record Date"). Dividends shall be payable in cash, except that on each Dividend Payment Date occurring on or prior to January 1, 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 shall constitute "payment" of the related dividend for all purposes of this Certificate of Designation. The first dividend payment shall be payable on July 1, 1997. Dividends payable on the Series A Preferred Stock shall be computed on the basis of a 360-day year consisting of twelve 30-day months and shall be deemed to accumulate on a daily basis. 13 (b) Dividends on the Series A Preferred Stock shall accumulate 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 shall accumulate to the extent they are not paid on the Dividend Payment Date for the period to which they relate. Accumulated unpaid dividends shall bear interest at a per annum rate 200 basis points in excess of the annual dividend rate on the Series A Preferred Stock. The Company shall 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. (c) 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 shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of the full cumulative dividends as herein described. 3. Distributions Upon Liquidation, Dissolution or Winding Up. 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 shall be entitled to payment out of the assets of the Company available for distribution of an amount equal to the Liquidation Preference per share of Series A Preferred Stock held by such Holder, plus accumulated 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 accumulated dividends, if any, to which Holders of Series A Preferred Stock are entitled, such Holders shall 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 shall 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 14 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. 4. Redemption by the Company (a) On January 1, 2007 (the "Mandatory Redemption Date"), the Company shall 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 accumulated and unpaid dividends, if any, to the date of redemption. The Company shall not be required to make sinking fund payments with respect to the Series A Preferred Stock. The Company shall take all actions required or permitted under the DGCL to permit such redemption. (b) The Series A Preferred Stock may not be redeemed at the option of the Company prior to January 1, 2002. The Series A Preferred Stock may be redeemed, in whole or in part, at the option of the Company on or after January 1, 2002, at the Applicable Redemption Price. Notwithstanding the foregoing sentence, 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 112.750% 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 Class A Common Stock of the Company. (c) In case of redemption of less than all of the shares of Series A Preferred Stock at the time outstanding, the shares to be redeemed shall be selected pro rata or by lot as determined by the Company in its sole discretion. (d) Notice of any redemption shall be sent by or on behalf of the Company not less than 30 nor more than 60 days prior to the date specified for redemption in such notice (including the Mandatory Redemption Date, the "Redemption Date"), by first class mail, postage prepaid, to all Holders of record of the Series A Preferred Stock at their last addresses as they shall appear on the books of the Company; provided, however, that no failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of Series A Preferred Stock except as to the Holder to whom the Company has failed to give notice or except as to the Holder to whom notice was defective. 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 shall state: (i) whether such redemption is being made pursuant to the optional or the mandatory redemption provisions hereof; (ii) the Redemption Date; (iii) the Applicable Redemption Price; (iv) the number of shares of Series A Preferred Stock to be redeemed and, if less than all shares held by such Holder are to be redeemed, the number of such shares to be redeemed; (v) the place or places where certificates for such shares are to be surrendered for payment of the Applicable Redemption Price, including any procedures applicable to redemptions to be accomplished through book-entry transfers; and (vi) that dividends on the shares to be redeemed will cease to accumulate on the Redemption Date. Upon the mailing of any such notice of redemption, the Company shall become obligated to redeem at the time of redemption specified thereon all shares called for redemption. 15 (e) If notice has been mailed in accordance with Section 4(d) above and provided that on or before the Redemption Date specified in such notice, all funds necessary for such redemption shall have been set aside by the Company, separate and apart from its other funds in trust for the pro rata benefit of the Holders of the shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Redemption Date, dividends on the shares of the Series A Preferred Stock so called for redemption shall cease to accumulate, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Series A Preferred Stock, and all rights of the Holders thereof as stockholders of the Company (except the right to receive from the Company the Applicable Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Company shall so require and the notice shall so state), such shares shall be redeemed by the Company at the Applicable Redemption Price. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares without cost to the Holder thereof. (f) Any funds deposited with a bank or trust company for the purpose of redeeming Series A Preferred Stock shall be irrevocable except that: (i) the Company shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the Holders of any shares redeemed shall have no claim to such interest or other earnings; and (ii) any balance of monies so deposited by the Company and unclaimed by the Holders of the Series A Preferred Stock entitled thereto at the expiration of two years from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Company, and after any such repayment, the Holders of the shares entitled to the funds so repaid to the Company shall look only to the Company for payment without interest or other earnings. (g) No Series A Preferred Stock may be redeemed except with funds legally available for the purpose. The Company shall take all actions required or permitted under the DGCL to permit any such redemption. (h) Notwithstanding the foregoing provisions of this Section 4, unless the full cumulative dividends on all outstanding shares of Series A Preferred Stock shall have been paid or contemporaneously are declared and paid for all past dividend periods, none of the shares of Series A Preferred Stock shall be redeemed unless all outstanding shares of Series A Preferred Stock are simultaneously redeemed. (i) All shares of Series A Preferred Stock redeemed pursuant to this Section 4 shall be restored to the status of authorized and unissued shares of preferred stock, without designation as to series and may thereafter be reissued as shares of any series of preferred stock other than shares of Series A Preferred Stock. 16 5. Exchange. (a) 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 continuing 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 and no default or event of default would exist under any material instrument governing Indebtedness outstanding at the time, in either case, 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 to the effect that all conditions to be satisfied prior to such exchange have been satisfied. (b) The Exchange Notes shall be issuable in principal amounts of $1,000 and integral multiples thereof to the extent possible, and shall 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 issuing an Exchange Note having a principal amount less than $1,000. Notice of the intention to exchange shall be sent by or on behalf of the Company not more than 60 days nor less than 30 days prior to the date fixed for the exchange (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 the Series A Preferred Stock may be listed or admitted to trading, such notice shall 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 accumulate on the Exchange Date. (c) A Holder delivering Series A Preferred Stock for exchange shall not be required to pay any taxes or duties in respect of the issue or delivery of Exchange Notes on exchange but shall be required to pay any tax or duty that may be payable in respect of any transfer involved in the issue or delivery of the Exchange Notes in a name other than that of the Holder of the Series A Preferred Stock. Certificates representing Exchange Notes shall not be issued or delivered unless all taxes and duties, if any, payable by the Holder have been paid. (d) 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 accumulated 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 shall 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 shall cease, except the right of the Holders to receive upon 17 surrender of their certificates the Exchange Notes and all accumulated and unpaid dividends, if any, thereon to the Exchange Date. (e) As a condition to the exercise of the exchange rights described in this Section 5, the Company shall deliver an opinion to the Exchange Note Trustee as to the due authorization, execution, delivery and enforceability of both the Exchange Notes and the Exchange Note Indenture and as to the compliance by the Company with the provisions hereof. 6. Voting Rights. (a) The Holders of record of shares of the Series A Preferred Stock shall have no voting rights, except as required by law and as hereinafter provided in this Section 6. (b) Upon: (i) the accumulation of accumulated and unpaid dividends on the outstanding Series A Preferred Stock in an amount equal to three (3) full semi-annual dividends (whether or not consecutive); (ii) 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; (iii) the failure of the Company to make a Change of Control Offer on the terms and in accordance with the provisions described below in Section 7 hereof; (iv) the failure of the Company to comply with any of the other covenants or agreements set forth in this Certificate of Designation and the continuance of such failure for 60 consecutive days or more; or (v) 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 (1) 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 (2) 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 (i), (ii), (iii), (iv) and (v) being referred to herein as a "Voting Rights Triggering Event"); then the number of members of the Company's Board of Directors shall 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, shall be entitled to elect two members to the Board of Directors of the Company. 18 (c) Whenever such voting right shall have vested, such right may be exercised initially either at a special meeting of the Holders of Series A Preferred Stock, called as hereinafter provided, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at such annual meetings or by the written consent of the Holders of Series A Preferred Stock. Such right of the Holders of Series A Preferred Stock to elect directors may be exercised until (i) all dividends in arrears shall have been paid in full and (ii) all other Voting Rights Triggering Events have been cured or waived, at which time the right of the Holders of Series A Preferred Stock to elect such number of directors shall cease, the term of such directors previously elected shall thereupon terminate, and the authorized number of directors of the Company shall thereupon return to the number of authorized directors otherwise in effect, but subject always to the same provisions for the renewal and divestment of such special voting rights in the case of any such future dividend arrearage or defaults or any such failure to make redemption payments. (d) At any time when such voting right shall have vested in the Holders of Series A Preferred Stock and if such right shall not already have been initially exercised, a proper officer of the Company shall, upon the written request of Holders of record of 10% or more of the Series A Preferred Stock then outstanding, addressed to the Secretary of the Company, call a special meeting of Holders of Series A Preferred Stock. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of stockholders at the place for holding annual meetings of stockholders of the Company or, if none, at a place designated by the Secretary of the Company. If such meeting shall not be called by the proper officers of the Company within 30 days after the personal service of such written request upon the Secretary of the Company, or within 30 days after mailing the same within the United States, by registered mail, addressed to the Secretary of the Company at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the Holders of record of 10% of the shares of Series A Preferred Stock then outstanding may designate in writing a Holder of Series A Preferred Stock to call such meeting at the expense of the Company, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and shall be held at the place for holding annual meetings of the Company or, if none, at a place designated by such Holder. Any Holder of Series A Preferred Stock that would be entitled to vote at such meeting shall have access to the stock books of the Company for the purpose of causing a meeting of stockholders to be called pursuant to the provisions of this Section. Notwithstanding the provisions of this paragraph, however, no such special meeting shall be called if any such request is received less than 90 days before the date fixed for the next ensuing annual or special meeting of stockholders. (e) If any director so elected by the Holders of Series A Preferred Stock shall cease to serve as a director before his term shall expire, the Holders of Series A Preferred Stock then outstanding may, at a special meeting of the Holders called as provided above, elect a successor to hold office for the unexpired term of the director whose place shall be vacant. (f) The Company shall not, without the affirmative vote or consent of the Holders of a majority of the shares of Series A Preferred Stock then outstanding (with shares held by the Company or any of its Affiliates not being considered to be outstanding for this purpose): (i) authorize, create (by way of reclassification or otherwise) or issue any Parity Securities or any Obligation or security convertible into or evidencing the right to purchase any Parity Securities; 19 (ii) amend or otherwise alter its Certificate of Incorporation in any manner that adversely affects the rights of Holders of Series A Preferred Stock; (iii) amend or otherwise alter this Certificate of Designation (including the provisions of Section 7 hereof) in any manner; or (iv) waive any existing Voting Rights Triggering Event or compliance with any provision of this Certificate of Designation. (g) Without the consent of each Holder affected, an amendment or waiver of the Company's Certificate of Incorporation or of this Certificate of Designation 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 (except as provided above with respect to Section 7 hereof); (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 this Certificate of Designation; (vi) make any change in the provisions of this 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 (except as provided above with respect to Section 7 hereof); or (viii) make any change in the foregoing amendment and waiver provisions. (h) The Company shall not, without the consent of at least two-thirds of the then outstanding shares of Series A Preferred Stock (with shares held by the Company or its Affiliates not being considered to be outstanding for this purpose), authorize, create (by way of reclassification or otherwise) or issue any Senior Securities or any Obligation or security convertible into or evidencing a right to purchase any Senior Securities. 20 (i) The Company in its sole discretion may without the vote or consent of any Holders of the Series A Preferred Stock amend or supplement this Certificate of Designation: (i) to cure any ambiguity, defect or inconsistency; (ii) to provide for uncertificated Series A Preferred Stock in addition to or in place of certificated Series A Preferred Stock; or (iii) to make any change that would provide any additional rights or benefits to the Holders of the Series A Preferred Stock or that does not adversely affect the legal rights under this Certificate of Designation of any such Holder. 7. Change of Control. (a) Upon the occurrence of a Change of Control, each Holder of shares of Series A Preferred Stock shall 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 accumulated and unpaid dividends, if any, thereon to the date of purchase (the "Change of Control Payment"). (b) The Change of Control Offer shall include all instructions and materials necessary to enable Holders to tender their shares of Series A Preferred Stock. (c) The Company shall 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. (d) Within 30 days following any Change of Control, the Company shall mail a notice to each Holder stating: (i) that the Change of Control Offer is being made pursuant to this Section 7 and that all shares of Series A Preferred Stock tendered will be accepted for payment; (ii) the purchase price and the purchase date, which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"); (iii) that any share of Series A Preferred Stock not tendered will continue to accumulate dividends; (iv) that, unless the Company fails to pay the Change of Control Payment, all shares of Series A Preferred Stock accepted for payment pursuant to the Change of Control Offer shall cease to accumulate dividends after the Change of Control Payment Date; 21 (v) that Holders electing to have any shares of Series A Preferred Stock purchased pursuant to a Change of Control Offer will be required to surrender the shares of Series A Preferred Stock, with the form entitled "Option of Holder to Elect Purchase" which shall be included with the Notice of Change of Control completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the number of shares of Series A Preferred Stock delivered for purchase, and a statement that such Holder is withdrawing his election to have such shares purchased; and (vii) the circumstances and relevant facts regarding such Change of Control (including, but not limited to, information with respect to pro forma historical financial information after giving effect to such Change of Control and information regarding the Person or Persons acquiring control). (e) On the Change of Control Payment Date, the Company shall, to the extent lawful, (i) accept for payment all shares of Series A Preferred Stock or portions thereof properly tendered pursuant to the Change of Control Offer, (ii) 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 (iii) 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 shall 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 shall 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 Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. (f) Prior to complying with the provisions of this Section 7, but in any event within 90 days following a Change of Control, the Company shall 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 Section 7. (g) The Company shall 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 this Section 7 applicable to a Change of Control Offer made by the Company and purchases all shares of Series A Preferred Stock validly tendered and not withdrawn under such Change of Control Offer. 22 8. Certain Covenants. (a) Restricted Payments. (i) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, (a) 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); (b) 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 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); (c) 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; (d) 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; (e) 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 that was permitted to be made; or (f) make any Restricted Investment (all such payments and other actions set forth in clauses (a) through (f) above being collectively referred to as "Restricted Payments"), unless, at the time of and immediately after giving effect to such Restricted Payment: (1) no Voting Rights Triggering Event shall have occurred and be continuing or would occur as a consequence thereof; and (2) the Company would be permitted to incur $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio described in Section 8(b)(i) hereof; and (3) 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 (A) 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 (B) 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 (i) by the Company as capital contributions to the Company (other than from a Subsidiary) or (ii) from the sale by the Company (other 23 than to a Subsidiary) of its Equity Interests (other than Disqualified Stock), plus (C) 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 (D) 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 (E) $2.5 million. (ii) The foregoing Section 8(a)(i) 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 this 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 (3)(B) of the preceding paragraph (i); (3) 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; (4) 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; (5) the payment of dividends on the Series A Preferred Stock in accordance with the terms thereof as in effect on the Closing Date; (6) the issuance of Exchange Notes in exchange for shares of the Series A Preferred Stock; provided that such issuance is permitted by Section 8(b) hereof; and (7) 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 accumulated and unpaid dividends in respect thereof, not to exceed $100,000 in the aggregate in any fiscal year. (iii) 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 by the terms hereof and setting forth the basis upon which the calculations required by this Section 8(a) were computed, which calculations may be based upon the Company's latest available financial statements. (iv) 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 Section 8(a)(i) hereof. 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 24 Payment would be permitted at such time and if such Restricted Subsidiary would otherwise meet the definition of an Unrestricted Subsidiary. (b) Incurrence of Indebtedness and Issuance of Preferred Stock. (i) The Company shall not, and shall 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 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: (1) 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 preferred stock (other than Qualified Subsidiary 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 preferred stock (other than Qualified Subsidiary Stock) of, as the case may be, a Restricted Subsidiary of the Company; (2) 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; (3) the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness; (4) the incurrence by the Company of Indebtedness under the Exchange Notes; (5) 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 25 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; (6) 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; (7) 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 this Certificate of Designation to be incurred; and (8) 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. (ii) If an item of Indebtedness is permitted to be incurred on the basis of the first paragraph of Section 8(b)(i) hereof and also on the basis of one or more of clauses (1) through (8) of Section 8(b)(i) hereof, or is permitted to be incurred on the basis of two or more of clauses (1) through (8) of Section 8(b)(i) hereof, 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 Section 8(b)(ii), "Indebtedness" includes Disqualified Stock and preferred stock of Subsidiaries. Accrued interest and accreted discount will not be deemed incurrence of Indebtedness for purposes of this Section 8(b). (c) Merger, Consolidation or Sale of Assets. The Company shall 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 with respect to the Company immediately prior to such transaction; (iii) immediately after such transaction no Voting Rights Triggering Event exists; and (iv) the Company or the entity or 26 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 Section 8(b)(i) hereof. (d) Transactions with Affiliates. The Company shall not, and shall 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 (1) 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 (2) 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 (A) 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, (B) transactions between or among the Company and/or its Restricted Subsidiaries, (C) 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 this Certificate of Designation, and (D) transactions permitted by the provisions of Section 8(a) hereof, in each case, shall not be deemed Affiliate Transactions. (e) Dividend and Other Payment Restrictions Affecting Subsidiaries. The Company shall not, and shall 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)(1) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (A) on its Capital Stock or (B) with respect to any other interest or participation in, or measured by, its profits, or (2) 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 (1) the terms of any Indebtedness permitted by this Certificate of Designation to be incurred by any Subsidiary of the Company, (2) Existing Indebtedness as in effect on the Closing Date, (3) applicable law, (4) 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 27 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 (5) 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. (f) Limitation on Issuance and Sales of Capital Stock of Wholly Owned Restricted Subsidiaries. The Company (i) shall not, and shall 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 such transfer, conveyance, sale, lease or other disposition is of all the Capital Stock of such Wholly Owned Restricted Subsidiary 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. (g) Reports. (i) 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 shall furnish to the Holders of Series A Preferred Stock (1) 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 (2) 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 shall file a copy of all such information and reports with the Commission for public availability (unless the Commission shall 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. (i) The Company shall deliver to the Holders, within 90 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing officers with a view to determining whether the Company has kept, observed, performed 28 and fulfilled its obligations under this Certificate of Designation and further stating, as to each such officer signing such certificate, that to the best of his or her knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Certificate of Designation and is not in default in the performance or observance of any of the terms, provisions and conditions of this Certificate of Designation (or, if any such default shall have occurred, describing all such defaults of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the Liquidation Preference of or dividends, if any, on the Series A Preferred Stock is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. (ii) The Company shall, so long as any of the shares of Series A Preferred Stock are outstanding, deliver to the Holders, forthwith upon any Executive Officer of the Company becoming aware of any default under this Certificate of Designation, an Officers' Certificate specifying such default and what action the Company is taking or proposes to take with respect thereto. (h) Conflicts with By-laws. If any provisions of the Company's By-laws conflict in any way with this Certificate of Designation, the Company shall, so long as any of the shares of Series A Preferred Stock are outstanding, take all necessary actions to amend such By-laws and thereby resolve the conflict. 9. Payment. (a) All amounts payable in cash with respect to the Series A Preferred Stock shall be payable in United States dollars at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, payment of dividends (if any) may be made by check mailed to the Holders of the Series A Preferred Stock at their respective addresses set forth in the register of Holders of Series A Preferred Stock maintained by the Transfer Agent, provided that all cash payments with respect to the Global Shares (as defined below) and shares of Series A Preferred Stock the Holders of which have given wire transfer instructions to the Company shall be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. (b) Any payment on the Series A Preferred Stock due on any day that is not a Business Day need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on such due date. (c) The Company has initially appointed the Transfer Agent to act as the "Paying Agent." The Company may at any time terminate the appointment of any Paying Agent and appoint additional or other Paying Agents, provided that until the Series A Preferred Stock has been delivered to the Company for cancellation, or moneys sufficient to pay the Liquidation Preference and accumulated dividends on the Series A Preferred Stock have been made available for payment and either paid or returned to the Company as provided in this Certificate of Designation, it shall maintain an office or agency in the Borough of Manhattan, The City of New York for surrender of Series A Preferred Stock for conversion. 29 (d) Dividends payable on the Series A Preferred Stock on any redemption date or repurchase date that is a Dividend Payment Date shall be paid to the Holders of record as of the immediately preceding Record Date. (e) All moneys and shares of Series A Preferred Stock deposited with any Paying Agent or then held by the Company in trust for the payment of the Liquidation Preference and dividends on any shares of Series A Preferred Stock which remain unclaimed at the end of two years after such payment has become due and payable shall be repaid to the Company, and the Holder of such shares of Series A Preferred Stock shall thereafter look only to Company for payment thereof. 10. Officers' Certificate. Each Officers' Certificate provided for in this Certificate of Designation shall include: (a) a statement that the officer making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such officer, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such officer, such condition or covenant has been satisfied. 11. Exclusion of Other Rights. Except as may otherwise be required by law, the shares of Series A Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this Certificate of Designation (as such Certificate of Designation may be amended from time to time) and in the Certificate of Incorporation. The shares of Series A Preferred Stock shall have no preemptive or subscription rights. 12. Headings of Subdivisions. The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 13. Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series A Preferred Stock and qualifications, limitations and restrictions thereof set forth in this Certificate of Designation (as it may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Stock and qualifications, 30 limitations and restrictions thereof set forth in this Certificate of Designation (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. 14. Form of Securities. (a) The Series A Preferred Stock shall initially be issued in the form of one or more Global Preferred Shares (the "Global Shares"). The Global Shares shall be deposited on the Closing Date with, or on behalf of, The Depository Trust Company (the "Depositary") and registered in the name of Cede & Co., as nominee of the Depositary (such nominee being referred to as the "Global Share Holder"). (b) So long as the Global Share Holder is the registered owner of any Series A Preferred Stock, the Global Share Holder will be considered the sole Holder under this Certificate of Designation of any shares of Series A Preferred Stock evidenced by the Global Shares. Beneficial owners of shares of Series A Preferred Stock evidenced by the Global Shares shall not be considered the owners or Holders thereof under this Certificate of Designation for any purpose. The Company shall not have any responsibility or liability for any aspect of the records of the Depositary relating to the Series A Preferred Stock. (c) Payments in respect of the Liquidation Preference, dividends on any Series A Preferred Stock registered in the name of the Global Share Holder on the applicable record date shall be payable by the Company to or at the direction of the Global Share Holder in its capacity as the registered Holder under this Certificate of Designation. The Company may treat the persons in whose names Series A Preferred Stock, including the Global Shares, are registered as the owners thereof for the purpose of receiving such payments. The Company does not and will not have any responsibility or liability for the payments of such amounts to beneficial holders of Series A Preferred Stock. (d) Any person having a beneficial interest in a Global Share may, upon request to the Company, exchange such beneficial interest for Series A Preferred Stock in the form of registered definitive certificates ("Certificated Securities"). Upon any such issuance, the Company shall register such Certificated Securities in the name of, and cause the same to be delivered to, such person or persons (or the nominee of any thereof). If (i) the Company notifies the Holders in writing that the Depositary is no longer willing or able to act as a depositary and the Company is unable to locate a qualified successor within 90 days or (ii) the Company, at its option, notifies the Holders in writing that it elects to cause the issuance of Series A Preferred Stock in the form of Certificated Securities, then, upon surrender by the Global Share Holder of its Global Shares, Series A Preferred Stock in such form will be issued to each person that the Global Share Holder and the Depositary identify as being the beneficial owner of the related Series A Preferred Stock. 31 IN WITNESS WHEREOF, the Company has caused this certificate to be duly executed by Robert N. Verdecchio, Chief Financial Officer, and attested by Ted S. Lodge, its assistant secretary, this 27th day of January, 1997. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Robert N. Verdecchio ------------------------------ Robert N. Verdecchio Chief Financial Officer ATTEST: By: /s/ Ted S. Lodge ---------------------- Ted S. Lodge Assistant Secretary Annex A - -------------------------------------------------------------------------------- PEGASUS COMMUNICATIONS CORPORATION 12.75% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2007 ----------------- INDENTURE Dated as of ________________ ____________________ _________________ FIRST UNION NATIONAL BANK as Trustee ----------------- - -------------------------------------------------------------------------------- CROSS-REFERENCE TABLE* Trust Indenture Act Section Indenture Section 310 (a)(1)............................................... 7.10 (a)(2).............................................. 7.10 (a)(3) ............................................. N.A. (a)(4).............................................. N.A. (a)(5).............................................. 7.10 (b) ................................................ 7.03;7.10 (c) ................................................ N.A. 311 (a) ................................................. 7.11 (b) ................................................ 7.11 (c) ................................................ N.A. 312 (a).................................................. 2.05 (b)................................................. 11.03 (c) ................................................ 11.03 313 (a).................................................. 7.06 (b)(1) ............................................. N.A. (b)(2) ............................................. 7.06;7.07 (c) ................................................ 7.06;11.02 (d)................................................. 7.06 314 (a) ................................................. 4.03;11.05 (b) ................................................ N.A (c)(1) ............................................. . 11.04 (c)(2) ............................................. 11.04 (c)(3) ............................................. N.A. (d)................................................. N.A. (e) ............................................... 11.05 (f)................................................. N.A. 315 (a).................................................. 7.01 (b)................................................. 7.05,11.02 (c) ............................................... 7.01 (d)................................................. 7.01 (e)................................................. 6.11 316 (a)(last sentence) .................................. 2.09 (a)(1)(A)........................................... 6.05 (a)(1)(B) .......................................... 6.04 (a)(2) ............................................. N.A. (b) ................................................ 6.07 (c) ................................................ N.A. 317 (a)(1) .............................................. 6.08 (a)(2).............................................. 6.09 (b) ................................................ 2.04 318 (a).................................................. 11.01 (b)................................................. N.A. (c)................................................. 11.01 N.A. means not applicable. *This Cross-Reference Table is not part of the Indenture. TABLE OF CONTENTS Page No. -------- ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01. Definitions............................................... 1 Section 1.02. Other Definitions......................................... 12 Section 1.03. Incorporation by Reference of Trust Indenture Act......... 13 Section 1.04. Rules of Construction..................................... 13 ARTICLE 2 THE EXCHANGE NOTES Section 2.01. Form and Dating........................................... 14 Section 2.02. Execution and Authentication.............................. 14 Section 2.03. Registrar and Paying Agent................................ 14 Section 2.04. Paying Agent to Hold Money in Trust....................... 15 Section 2.05. Holder Lists.............................................. 15 Section 2.06. Transfer and Exchange..................................... 15 Section 2.07. Replacement Exchange Notes................................ 16 Section 2.08. Outstanding Exchange Notes................................ 16 Section 2.09. Treasury Exchange Notes................................... 16 Section 2.10. Temporary Exchange Notes.................................. 17 Section 2.11. Cancellation.............................................. 17 Section 2.12. Defaulted Interest........................................ 17 ARTICLE 3 REDEMPTION AND PREPAYMENT Section 3.01. Notices to Trustee........................................ 18 Section 3.02. Selection of Exchange Notes to Be Redeemed................ 18 Section 3.03. Notice of Redemption...................................... 18 Section 3.04. Effect of Notice of Redemption............................ 19 Section 3.05. Deposit of Redemption or Purchase Price................... 19 Section 3.06. Exchange Notes Redeemed or Purchased in Part.............. 20 Section 3.07. Optional Redemption....................................... 20 Section 3.08. Mandatory Redemption...................................... 20 Section 3.09. Offer to Purchase by Application of Excess Proceeds....... 20 ARTICLE 4 COVENANTS Section 4.01. Payment of Exchange Notes................................. 22 Section 4.02. Maintenance of Office or Agency........................... 23 i Section 4.03. Reports....................................................... 23 Section 4.04. Compliance Certificate........................................ 24 Section 4.05. Taxes......................................................... 24 Section 4.06. Stay, Extension and Usury Laws................................ 24 Section 4.07. Restricted Payments........................................... 25 Section 4.08. Dividend and Other Payment Restrictions Affecting Subsidiaries.................................................. 26 Section 4.09. Incurrence of Indebtedness and Issuance of Preferred Stock.... 27 Section 4.10. Asset Sales................................................... 29 Section 4.11. Transactions with Affiliates.................................. 30 Section 4.12. Liens......................................................... 30 Section 4.13. Offer to Repurchase Upon Change of Control.................... 31 Section 4.14. Continued Existence........................................... 32 Section 4.15. Limitation on Layering........................................ 32 Section 4.16. Limitation on Issuances and Sales of Capital Stock of Wholly Owned Restricted Subsidiaries................................. 32 ARTICLE 5 SUCCESSORS Section 5.01. Merger, Consolidation, or Sale of Assets...................... 33 Section 5.02. Successor Corporation Substituted............................. 33 ARTICLE 6 DEFAULTS AND REMEDIES Section 6.01. Events of Default............................................. 33 Section 6.02. Acceleration.................................................. 36 Section 6.03. Other Remedies................................................ 36 Section 6.04. Waiver of Past Defaults....................................... 36 Section 6.05. Control by Majority........................................... 36 Section 6.06. Limitation on Suits........................................... 37 Section 6.07. Rights of Holders of Exchange Notes to Receive Payment........ 37 Section 6.08. Collection Suit by Trustee.................................... 37 Section 6.09. Trustee May File Proofs of Claim.............................. 37 Section 6.10. Priorities.................................................... 38 Section 6.11. Undertaking for Costs..........................................38 ARTICLE 7 TRUSTEE Section 7.01. Duties of Trustee............................................. 39 Section 7.02. Rights of Trustee............................................. 40 Section 7.03. Individual Rights of Trustee.................................. 40 Section 7.04. Trustee's Disclaimer.......................................... 40 Section 7.05. Notice of Defaults............................................ 41 Section 7.06. Reports by Trustee to Holders of the Exchange Notes........... 41 Section 7.07. Compensation and Indemnity.................................... 41 Section 7.08. Replacement of Trustee........................................ 42 ii Section 7.09. Successor Trustee by Merger, etc...............................43 Section 7.10. Eligibility; Disqualification................................. 43 Section 7.11. Preferential Collection of Claims Against Company............. 43 ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE Section 8.01. Option to Effect Legal Defeasance or Covenant Defeasance...... 43 Section 8.02. Legal Defeasance and Discharge................................ 43 Section 8.03. Covenant Defeasance........................................... 44 Section 8.04. Conditions to Legal or Covenant Defeasance.................... 44 Section 8.05. Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions......................... 45 Section 8.06. Repayment to Company.......................................... 46 Section 8.07. Reinstatement................................................. 46 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER Section 9.01. Without Consent of Holders of Exchange Notes.................. 47 Section 9.02. With Consent of Holders of Exchange Notes..................... 47 Section 9.03. Compliance with Trust Indenture Act........................... 49 Section 9.04. Revocation and Effect of Consents............................. 49 Section 9.05. Notation on or Exchange of Exchange Notes..................... 49 Section 9.06. Trustee to Sign Amendments, etc............................... 49 ARTICLE 10 SUBORDINATION Section 10.01. Agreement to Subordinate......................................49 Section 10.02. Certain Definitions...........................................50 Section 10.03. Liquidation; Dissolution; Bankruptcy..........................50 Section 10.04. Default on Designated Senior Debt.............................50 Section 10.05. Acceleration of Exchange Notes................................51 Section 10.06. When Distribution Must Be Paid Over...........................51 Section 10.07. Notice by Company.............................................52 Section 10.08. Subrogation...................................................52 Section 10.09. Relative Rights...............................................52 Section 10.10. Subordination May Not Be Impaired by Company..................53 Section 10.11. Distribution or Notice to Representative......................53 Section 10.12. Rights of Trustee and Paying Agent............................53 Section 10.13. Authorization to Effect Subordination.........................53 Section 10.14. Amendments....................................................53 iii ARTICLE 11 MISCELLANEOUS Section 11.01. Trust Indenture Act Controls............................... 54 Section 11.02. Notices.................................................... 54 Section 11.03. Communication by Holders of Exchange Notes with Other Holders of Exchange Notes............................ 55 Section 11.04. Certificate and Opinion as to Conditions Precedent......... 55 Section 11.05. Statements Required in Certificate or Opinion.............. 55 Section 11.06. Rules by Trustee and Agents................................ 56 Section 11.07. No Personal Liability of Directors, Officers, Employees and Stockholders........................................... 56 Section 11.08. Governing Law.............................................. 56 Section 11.09. No Adverse Interpretation of Other Agreements.............. 56 Section 11.10. Successors................................................. 56 Section 11.11. Severability............................................... 56 Section 11.12. Counterpart Originals...................................... 56 Section 11.13. Table of Contents, Headings, etc........................... 57 Exhibit A..................................................................A-1 iv INDENTURE dated as of __________________ between Pegasus Communications Corporation, a Delaware corporation (the "Company"), and First Union National Bank, a national banking association, as trustee (the "Trustee"). The Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the 12.75% Senior Subordinated Exchange Notes due 2007 of the Company: ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "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. "Agent" means any Registrar, Paying Agent or co-registrar. "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 in Section 4.13 hereof and/or the provisions described in Section 5.01 hereof and not by the provision of Section 4.10 hereof) 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 Section 4.07 hereof. "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. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Board" or "Board of Directors" means the Board of Directors of the Company or any authorized committee of the Board of Directors. "Business Day" means any day other than a Legal Holiday. "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. "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. "Certificate of Designation" means the Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof setting forth the terms of the Series A Preferred Stock. 2 "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, (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 are not Continuing Directors. "Class A Common Stock" means the Company's Class A Common Stock, par value $.01 per share. "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. "Company" means Pegasus Communications Corporation, a Delaware corporation. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors 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. "Corporate Trust Office of the Trustee" shall be at the first address of the Trustee specified in Section 11.02 hereof or such other address as to which the Trustee may give notice to the Company. "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 3 Subsidiary of the Company from any Unrestricted Subsidiary of the Company or any Unrestricted Subsidiary of any 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 Section 4.07(a) hereof by virtue of clause (iii) of such paragraph. "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. "Depositary" means, with respect to the Exchange Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Exchange Notes, until a successor shall have been appointed and become such pursuant to the applicable provision of this Indenture, and, thereafter, "Depositary" shall mean or include such successor. "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 set forth in the Certificate of Designations 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 Section 4.07 hereof. "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 Act" means the Securities Exchange Act of 1934, as amended. "Exchange Notes" means the Company's 12.75% Senior Subordinated Exchange Notes due 2007 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 (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 4 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, co-borrowing 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. "Holder" means a Person in whose name an Exchange Note is registered. "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 5 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. "Indenture" means this Indenture, as amended or supplemented from time to time. "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. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "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). 6 "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 Communications Restricted Stock Plan and the Pegasus Communications 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. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary, any Assistant Secretary, any Vice-President or any Assistant Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Section 11.05 hereof. "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 7 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). "Opinion of Counsel" means an opinion from legal counsel who is not unsatisfactory to the Trustee, that meets the requirements of Section 11.05 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "Pari Passu Debt" means senior subordinated Indebtedness of the Company permitted by Section 4.09 hereof, other than the Exchange Notes, which is pari passu in right of payment with the Exchange Notes. "Permitted Businesses" means (a) 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 (b) 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 Section 4.10 hereof; 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 this 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 8 Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations permitted by clause (vi) of Section 4.09(b) hereof, 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. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "Preferred Stock," of any Person, means Capital Stock of such Person of any class or series (however designated) that ranks prior, as to payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class or series of such Person. "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 January 1, 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 Section 4.07 hereof), (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 an Event of Default and (ii) January 1, 2006, (c) has 9 no voting or remedial rights and (d) does not permit the payment of cash dividends prior to January 1, 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 Section 4.07 hereof). "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 in this Section 1.01. 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. "Responsible Officer," when used with respect to the Trustee, means any authorized officer within the Corporate Trust Administration department of the Trustee (or any successor group of the Trustee) or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "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. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Series A Preferred Stock" means the Company's 12.75% Series A Cumulative Exchangeable Preferred Stock. "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. 10 "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). "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as amended as in effect on the date of this Indenture. "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 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 and non-cash dividend payments during such period on any series of preferred stock of a Restricted Subsidiary of such Person. "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "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 Section 4.07 hereof. 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 this Indenture 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 11 permitted to be incurred as of such date under the provisions of Section 4.09 hereof (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 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 Section 4.09 hereof (treating such Subsidiary as a Restricted Subsidiary for such purpose for the period relevant to such covenant) and (ii) no Default or Event of Default 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 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. SECTION 1.02. OTHER DEFINITIONS. Defined in Term Section "Affiliate Transaction"..................... 4.11 "Asset Sale Offer" ......................... 4.10 "Basket Period"............................. 4.07 "Change of Control Offer"................... 4.13 "Change of Control Payment"................. 4.13 "Change of Control Payment Date"............ 4.13 "Covenant Defeasance"....................... 8.03 "Custodian"................................. 6.01 "Designated Senior Debt".................... 10.02 "distribution".............................. 10.02 "DTC"....................................... 2.03 "Event of Default".......................... 6.01 "Excess Proceeds"........................... 4.10 "incur"..................................... 4.09 "Legal Defeasance" ......................... 8.02 "Notice of Default"......................... 6.01 "Offer Amount" ............................. 3.09 "Offer Period .............................. 3.09 12 "outstanding"............................... 8.02 "Paying Agent".............................. 2.03 "Payment Blockage Notice"................... 10.04 "Payment Default"........................... 6.01 "Purchase Date" ............................ 3.09 "Registrar"................................. 2.03 "Representative" ........................... 10.02 "Restricted Payments"....................... 4.07 "Senior Bank Debt".......................... 10.02 "Senior Debt"............................... 10.02 SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Exchange Notes; "indenture security Holder" means a Holder of an Exchange Note; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Exchange Notes means the Company and any successor obligor upon the Exchange Notes. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04. RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement of successor sections or rules adopted by the SEC from time to time. 13 ARTICLE 2 THE EXCHANGE NOTES SECTION 2.01. FORM AND DATING. The Exchange Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto. The Exchange Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Exchange Note shall be dated the date of its authentication. The Exchange Notes shall be in all appropriate denominations. The terms and provisions contained in the Exchange Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. SECTION 2.02. EXECUTION AND AUTHENTICATION. Two Officers shall sign the Exchange Notes for the Company by manual or facsimile signature. If an Officer whose signature is on an Exchange Note no longer holds that office at the time an Exchange Note is authenticated, the Exchange Note shall nevertheless be valid. An Exchange Note shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Exchange Note has been authenticated under this Indenture. The Trustee shall, upon a written order of the Company signed by two Officers, authenticate Exchange Notes for original issue up to the aggregate principal amount stated in paragraph 4 of the Exchange Notes. The aggregate principal amount of Exchange Notes outstanding at any time may not exceed such amount except as provided in Section 2.07 hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate the Exchange Notes. An authenticating agent may authenticate Exchange Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency where Exchange Notes may be presented for registration of transfer or for exchange ("Registrar") and an office or agency where Exchange Notes may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Exchange Notes and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name 14 and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company may act as Paying Agent or Registrar. The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Exchange Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent. SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium, if any, or interest on the Exchange Notes, and will notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for the money. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the Company, the Trustee shall serve as Paying Agent for the Exchange Notes. SECTION 2.05. HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA ss. 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Exchange Notes and the Company shall otherwise comply with TIA ss. 312(a). SECTION 2.06. TRANSFER AND EXCHANGE. When Exchange Notes are presented by a Holder to the Registrar with a request to register, transfer or exchange them for an equal principal amount of Exchange Notes of other denominations, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met; provided, however, that any Exchange Note presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar and the Trustee duly executed by the Holder thereof or by his attorney duly authorized in writing. To permit registrations of transfer and exchanges, the Company shall issue and the Trustee shall authenticate Exchange Notes at the Registrar's request, subject to such rules as the Trustee may reasonably require. Neither the Company nor the Registrar shall be required (i) to issue or register the transfer or exchange of Exchange Notes during a period beginning at the opening of business on a Business Day fifteen (15) Business Days before the day of any selection of Exchange Notes for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (ii) to register the transfer of or exchange any Exchange Notes so selected for redemption, in whole or in part, except the 15 unredeemed portion of any Exchange Note being redeemed in part or (iii) to register the transfer or exchange of an Exchange Note between a record date and the next succeeding interest payment date. No service charge shall be made to any Holder for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than such transfer tax or similar governmental charge payable upon exchanges pursuant to Sections 2.10, 3.06 or 9.05 hereof, which shall be paid by the Company). Prior to due presentment for registration of transfer of any Exchange Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Exchange Note is registered as the absolute owner of such Exchange Note for the purpose of receiving payment of principal of, premium, if any, and interest on such Exchange Note and for all other purposes whatsoever, whether or not such Exchange Note is overdue, and neither the Trustee, any Agent, nor the Company shall be affected by notice to the contrary. SECTION 2.07. REPLACEMENT EXCHANGE NOTES. If any mutilated Exchange Note is surrendered to the Trustee, or the Company and the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Exchange Note, the Company shall issue and the Trustee, upon the written order of the Company signed by two Officers of the Company, shall authenticate a replacement Exchange Note if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if an Exchange Note is replaced. The Company may charge for its expenses in replacing an Exchange Note. Every replacement Exchange Note is an additional obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Exchange Notes duly issued hereunder. SECTION 2.08. OUTSTANDING EXCHANGE NOTES. The Exchange Notes outstanding at any time are all the Exchange Notes authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section 2.08 as not outstanding. Except as set forth in Section 2.09 hereof, an Exchange Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Exchange Note. If an Exchange Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Exchange Note is held by a bona fide purchaser. If the principal amount of any Exchange Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, by 10:00 a.m. Eastern Time on a redemption date or maturity date, money sufficient to pay the Exchange Notes payable on that date, then on and after that date such Exchange Notes shall be deemed to be no longer outstanding and shall cease to accrue interest, if any. 16 SECTION 2.09. TREASURY EXCHANGE NOTES. In determining whether the Holders of the required principal amount of Exchange Notes have concurred in any direction, waiver or consent, Exchange Notes owned by the Company or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company, shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Exchange Notes that the Trustee knows are so owned shall be so disregarded. In connection with any such determination, the Company agrees to notify the Trustee of the existence of any Exchange Notes owned by the Company or any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. SECTION 2.10. TEMPORARY EXCHANGE NOTES. Until definitive Exchange Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Exchange Notes upon a written order of the Company signed by two Officers of the Company. Temporary Exchange Notes shall be substantially in the form of Exchange Notes but may have variations that the Company considers appropriate for temporary Exchange Notes and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate Exchange Notes in exchange for temporary Exchange Notes. Holders of temporary Exchange Notes shall be entitled to all of the benefits of this Indenture. SECTION 2.11. CANCELLATION. The Company at any time may deliver Exchange Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Exchange Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Exchange Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy cancelled Exchange Notes (subject to the record retention requirement of the Exchange Act). Certification of the destruction of all cancelled Exchange Notes shall be delivered to the Company unless the Company directs the Trustee to return the Exchange Notes to the Company upon written order signed by two Officers of the Company. The Company may not issue new Exchange Notes to replace Exchange Notes that have been paid or that have been delivered to the Trustee for cancellation. SECTION 2.12. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Exchange Notes, they shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, in each case at the rate provided in the Exchange Notes and in Section 4.01 hereof. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Exchange Note and the date of the proposed payment. The Company shall fix or cause to be fixed each such special record date and payment date, provided that no such special record date shall be less than 10 days prior to the related payment date for such defaulted interest. At least 15 days before the special record date, the Company (or, upon the written request of the Company, the Trustee in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. Notwithstanding the foregoing, such interest may be paid at any time in any other lawful manner not inconsistent with the requirements 17 of any securities exchange on which the Exchange Notes may be listed, and upon such notice as may be required by such exchange. ARTICLE 3 REDEMPTION AND PREPAYMENT SECTION 3.01. NOTICES TO TRUSTEE. If the Company elects to redeem Exchange Notes pursuant to the optional redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 45 days (unless a shorter period may be satisfactory to the Trustee) but not more than 60 days before a redemption date, an Officers' Certificate setting forth (i) the clause of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Exchange Notes to be redeemed and (iv) the redemption price. If the Company is required to make an offer to purchase Exchange Notes pursuant to the provisions of Section 4.13 hereof, it shall furnish to the Trustee an Officers' Certificate setting forth (i) the Section of this Indenture pursuant to which the purchase shall occur, (ii) the purchase date, (iii) the principal amount of Exchange Notes to be purchased, (iv) the purchase price and (v) a statement to the effect that a Change of Control has occurred and the conditions set forth in Section 4.13 hereof have been satisfied, as applicable. SECTION 3.02. SELECTION OF EXCHANGE NOTES TO BE REDEEMED. If less than all of the Exchange Notes are to be redeemed at any time, the Trustee shall select the Exchange Notes to be redeemed among the Holders of the Exchange Notes 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, to be redeemed among the Holders of Exchange Notes on a pro rata basis, by lot or by such method as the Trustee deems fair and appropriate. In the event of partial redemption by lot, the particular Exchange Notes to be redeemed shall be selected, unless otherwise provided herein, not less than 30 nor more than 60 days prior to the redemption date by the Trustee from the outstanding Exchange Notes not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Exchange Notes selected for redemption and, in the case of any Exchange Note selected for partial redemption, the principal amount thereof to be redeemed. Exchange Notes and portions of Exchange Notes selected shall be in amounts of $1,000 or whole multiples of $1,000; except that if all of the Exchange Notes of a Holder are to be redeemed, the entire outstanding amount of Exchange Notes held by such Holder, even if not a multiple of $1,000, shall 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. Except as provided in this Section 3.02, provisions of this Indenture that apply to Exchange Notes called for redemption also apply to portions of Exchange Notes called for redemption. SECTION 3.03. NOTICE OF REDEMPTION. Subject to the provisions of Section 3.09 hereof, at least 30 days but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed, by first class mail, a notice of redemption to each Holder whose Exchange Notes are to be redeemed at its registered address. The notice shall identify the Exchange Notes to be redeemed and shall state: 18 (a) the redemption date; (b) the redemption price; (c) if any Exchange Note is being redeemed in part, the portion of the principal amount of such Exchange Note to be redeemed and that, after the redemption date upon surrender of such Exchange Note, a new Exchange Note or Exchange Notes in principal amount equal to the unredeemed portion shall be issued upon cancellation of the original Exchange Note; (d) the name and address of the Paying Agent; (e) that Exchange Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (f) that, unless the Company defaults in making such redemption payment, interest on Exchange Notes called for redemption ceases to accrue on and after the redemption date; (g) the paragraph of the Exchange Notes and/or Section of this Indenture pursuant to which the Exchange Notes called for redemption are being redeemed; and (h) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Exchange Notes. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense; provided, however, that the Company shall have delivered to the Trustee, at least 30 days prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 3.03 hereof, Exchange Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price. A notice of redemption may not be conditional. SECTION 3.05. DEPOSIT OF REDEMPTION OR PURCHASE PRICE. One Business Day prior to 10:00 a.m. Eastern Time on the redemption date, the Company shall deposit with the Trustee or with the Paying Agent money in immediately available funds sufficient to pay the redemption or purchase price of and accrued interest, if any, on all Exchange Notes to be redeemed or purchased on that date. The Trustee or the Paying Agent shall promptly return to the Company any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption or purchase price of, and accrued interest on, all Exchange Notes to be redeemed or purchased. If Exchange Notes called for redemption or tendered in a Change of Control Offer are paid or if the Company has deposited with the Trustee or Paying Agent money sufficient to pay the redemption or purchase price of, and unpaid and accrued interest, if any, on all Exchange Notes to be redeemed or purchased, on and after the applicable redemption or purchase date, interest, if any, ceases to accrue on the Exchange Notes or the portions of Exchange Notes called for redemption or tendered and not withdrawn in a Change of Control Offer (regardless of whether certificates for such Exchange Notes are 19 actually surrendered). If an Exchange Note is redeemed or purchased on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest, if any, shall be paid to the Person in whose name such Exchange Note was registered at the close of business on such record date. If any Exchange Note called for redemption or subject to a Change of Control Offer shall not be so paid upon surrender for redemption or purchase because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption or purchase date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case, at the rate provided in the Exchange Notes and in Section 4.01 hereof. SECTION 3.06. EXCHANGE NOTES REDEEMED OR PURCHASED IN PART. Upon surrender of an Exchange Note that is redeemed or purchased in part, the Company shall issue and, upon the Company's written request, the Trustee shall authenticate for the Holder at the expense of the Company a new Exchange Note equal in principal amount to the unredeemed or unpurchased portion of the Exchange Note surrendered. SECTION 3.07. OPTIONAL REDEMPTION. (a) The Exchange Notes are not redeemable, in whole or in part, at the Company's option prior to January 1, 2002. The Exchange Notes may be redeemed, in whole or in part, at the option of the Company on or after January 1, 2002, at the redemption prices specified below (expressed as a percentage 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 12-month period beginning on January 1 of the years indicated below: Redemption Year Rate ---- ---- 2002...................................................... 106.375% 2003...................................................... 104.250% 2004...................................................... 102.125% 2005 and thereafter....................................... 100.000% (b) 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 112.750% 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 Class A Common Stock of the Company. SECTION 3.08. MANDATORY REDEMPTION. Except as set forth under Sections 4.10 and 4.13 hereof, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Exchange Notes. 20 SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS. (a) In the event that, pursuant to Section 4.10 hereof, the Company shall be required to commence an Asset Sale Offer, it shall follow the procedures specified below with respect to the Holders of Exchange Notes. (b) The Asset Sale Offer shall remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than five Business Days after the termination of the Offer Period (the "Purchase Date"), the Company shall purchase the principal amount of Exchange Notes required to be purchased pursuant to Section 4.10 hereof (the "Offer Amount") or, if less than the Offer Amount has been tendered, all Exchange Notes tendered in response to the Asset Sale Offer. Payment for any Exchange Notes so purchased shall be made in the same manner as interest payments are made. (c) The Company shall comply with any tender offer rules under the Exchange Act which may then be applicable, including Rule 14e-1, in connection with any offer required to be made by the Company to repurchase the Exchange Notes as a result of an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section 3.09, the Company shall comply with the applicable securities laws or regulations and shall not be deemed to have breached its obligations hereunder by virtue thereof. (d) If the Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest shall be paid to the Person in whose name an Exchange Note is registered at the close of business on such record date, and no additional interest shall be payable to Holders who tender Exchange Notes pursuant to the Asset Sale Offer. (e) Upon the commencement of an Asset Sale Offer, the Company shall send, by first class mail, a notice to the Trustee and each of the Holders, with a copy to the Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Exchange Notes pursuant to the Asset Sale Offer. The Asset Sale Offer shall be made to all Holders. The notice, which shall govern the terms of the Asset Sale Offer, shall state: (i) that the Asset Sale Offer is being made pursuant to this Section 3.09 and Section 4.10 hereof and the length of time the Asset Sale Offer shall remain open; (ii) the Offer Amount, the purchase price and the Purchase Date; (iii) that any Exchange Note not tendered or accepted for payment shall continue to accrue interest; (iv) that, unless the Company defaults in making such payment, any Exchange Note accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest after the Purchase Date; (v) that Holders electing to have an Exchange Note purchased pursuant to an Asset Sale Offer may only elect to have all of such Exchange Note purchased and may not elect to have only a portion of such Exchange Note purchased; (vi) that Holders electing to have an Exchange Note purchased pursuant to any Asset Sale Offer shall be required to surrender the Exchange Note, with the form entitled "Option of Holder 21 to Elect Purchase" on the reverse of the Exchange Note completed, or transfer by book-entry transfer, to the Company, a depositary, if appointed by the Company, or a Paying Agent at the address specified in the notice at least three days before the Purchase Date; (vii) that Holders shall be entitled to withdraw their election if the Company, the Depositary or the Paying Agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Exchange Note the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Exchange Note purchased; (viii) that, if the aggregate principal amount of Exchange Notes surrendered by Holders exceeds the Offer Amount, the Company shall select the Exchange Notes to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Exchange Notes in denominations of $1,000, or integral multiples thereof, shall be purchased, other than in the case of Holders whose Exchange Notes were purchased in whole); and (ix) that Holders whose Exchange Notes were purchased only in part shall be issued new Exchange Notes equal in principal amount to the unpurchased portion of the Exchange Notes surrendered (or transferred by book-entry transfer). (f) On or before the Purchase Date, the Company shall, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Exchange Notes or portions thereof tendered pursuant to the Asset Sale Offer, or if less than the Offer Amount has been tendered, all Exchange Notes tendered, and shall deliver to the Trustee an Officers' Certificate stating that such Exchange Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this Section 3.09. The Company, the Depositary or the Paying Agent, as the case may be, shall promptly (but in any case not later than five days after the Purchase Date) mail or deliver to each tendering Holder of Exchange Notes an amount equal to the purchase price of the Exchange Notes tendered by such Holder of Exchange Notes and accepted by the Company for purchase, and the Company shall promptly issue a new Exchange Note and the Trustee, upon written request from the Company shall authenticate and mail or deliver such new Exchange Note to such Holder of Exchange Notes in a principal amount equal to any unpurchased portion of the Exchange Note surrendered. Any Exchange Note not so accepted shall be promptly mailed or delivered by the Company to the Holder of Exchange Notes thereof. The Company shall publicly announce the results of the Asset Sale Offer on the Purchase Date. (g) Other than as specifically provided in this Section 3.09, any purchase pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. No repurchase of Exchange Notes under this Section 3.09 shall be deemed to be a redemption of Exchange Notes. COVENANTS SECTION 4.01. PAYMENT OF EXCHANGE NOTES. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Exchange Notes on the dates and in the manner provided in the Exchange Notes. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent, if other than the Company, a Subsidiary or an Affiliate of any thereof, holds as of 10:00 a.m. Eastern Time on the due 22 date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest then due. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Exchange Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee, Registrar or co-registrar) where Exchange Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Exchange Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Exchange Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.03 hereof. The Trustee may resign such agency at any time by giving written notice to the Company no later than 30 days prior to the effective date of such resignation. SECTION 4.03. REPORTS. Whether or not required by the rules and regulations of the SEC, so long as any Exchange Notes are outstanding, the Company shall furnish to the Trustee and to the Holders of Notes (a) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "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 (b) all current reports that would be required to be filed with the SEC 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 SEC, the Company shall file a copy of all such information and reports with the SEC for public availability (unless the SEC 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 23 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. SECTION 4.04. COMPLIANCE CERTIFICATE. (a) The Company shall deliver to the Trustee, within 90 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest on the Exchange Notes is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements delivered pursuant to Section 4.03 above shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Article Four or Article Five hereof or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) The Company shall, so long as any of the Exchange Notes are outstanding, deliver to the Trustee, forthwith upon any Officer of the Company becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SECTION 4.05. TAXES. The Company shall pay, and shall cause each of its Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and governmental levies except such as are contested in good faith and by appropriate proceedings or where the failure to effect such payment is not adverse in any material respect to the Holders of the Exchange Notes. SECTION 4.06. STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the 24 covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.07. RESTRICTED PAYMENTS. (a) The Company shall not, and shall 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 capacity 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 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 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 that was permitted to be made; 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 set forth in Section 4.09(a) hereof; 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 (iii) of Section 4.07(b)), 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 25 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. (b) The foregoing provisions shall not prohibit (i) 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 this Indenture; (ii) 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; (iii) 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 Section 4.09 hereof; (iv) 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; (v) 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 (vi) 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 interest in respect thereof, not to exceed $100,000 in the aggregate in any fiscal year. (c) 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 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. (d) 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 will be deemed to be Restricted Payments at the time of such designation (valued as set forth below) and will reduce the amount available for Restricted Payments under the first paragraph of this Section 4.07. All such outstanding Investments will 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 will only be permitted only if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company shall not, and shall 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 26 Subsidiaries, except for such encumbrances or restrictions existing under or by reasons of (a) the terms of any Indebtedness permitted by this Indenture to be incurred by any Subsidiary of the Company, (b) Existing Indebtedness as in effect on the Closing Date, (c) this 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 anticipation 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. SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK. (a) The Company shall not, and shall 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 the Company 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 (i) the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock and (ii) 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. (b) 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 preferred stock (other than Qualified Subsidiary 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 preferred stock (other than Qualified Subsidiary 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; 27 provided, however, that (A) 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 (B)(1) 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 (2) 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 this 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 Section 4.09(a) 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 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 Section 4.09. For purposes of this Section 4.09(b), "Indebtedness" includes Disqualified Stock and preferred stock of Subsidiaries. Accrued interest and accreted discount will not be deemed incurrence of Indebtedness for purposes of this Section 4.09. 28 SECTION 4.10. ASSET SALES. (a) The Company shall not, and shall 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 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. (b) 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 Section 4.10); 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 Section 4.09(a) hereof. (c) 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 (i) to permanently reduce Indebtedness outstanding pursuant to any Senior Debt (and to permanently reduce the commitments thereunder by a corresponding amount), (ii) to permanently reduce Indebtedness of any of the Company's Restricted Subsidiaries or (iii) 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 (iii) within 180 days after the receipt thereof, the provisions of this Section 4.10 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 (i), (ii) or (iii) above (without regard to the proviso contained in clause (iii) 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 this Indenture. A reduction of Indebtedness pursuant to any Bank Facility is not "permanent" for purposes of clause (i) of this Section 4.10(c) if an amount equal to the amount of such reduction is reborrowed and used to make an acquisition described in clause (iii) of this Section 4.10(c) within the time period specified in this Section 4.10(c). Any Net Proceeds 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." (d) Within five days of each date on which the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company shall be required to make an offer to all Holders of Exchange 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 Exchange Notes and Pari Passu Debt 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 29 accordance with the procedures set forth in Section 3.09 hereof 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 similar to this Section 4.10. (e) 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. (f) If the aggregate principal amount of Exchange Notes and Pari Passu Debt surrendered by Holders thereof exceeds the amount of Excess Proceeds, the 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. (g) Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. SECTION 4.11. TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall 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 (a) 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 (b) the Company delivers to the Trustee, on behalf of the Holders, (i) 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 (a) 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 Independent Directors and (ii) 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 and (y) transactions permitted by the provisions of Section 4.07 hereof, in each case, shall not be deemed Affiliate Transactions. SECTION 4.12. LIENS. The Company shall not, and shall 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. 30 SECTION 4.13. OFFER TO REPURCHASE UPON CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control, each Holder of Exchange Notes shall 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 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 principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of purchase (the "Change of Control Payment"). (b) Within 10 days following any Change of Control, the Company shall mail a notice to each Holder, with a copy to the Trustee, stating: (1) a description of the transaction or transactions that constitute the Change of Control; (2) that the Change of Control Offer is being made pursuant to this Section 4.13 and that all Exchange Notes tendered shall be accepted for payment; (3) the purchase price and the purchase date, which shall be no later than 30 Business Days from the date such notice is mailed (the "Change of Control Payment Date"); (4) that any Exchange Note not tendered shall continue to accrue interest; (5) that, unless the Company defaults in the payment of the Change of Control Payment, all Exchange Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (6) that Holders electing to have any Exchange Notes purchased pursuant to a Change of Control Offer shall be required to surrender the Exchange Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Exchange Notes completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (7) that Holders shall be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile, transmission or letter setting forth the name of the Holder, the principal amount of Exchange Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have the Exchange Notes purchased; and (8) that Holders whose Exchange Notes are being purchased only in part shall be issued new Exchange Notes equal in principal amount to the unpurchased portion of the Exchange Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof. The Company shall 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 Exchange Notes in connection with a Change of Control. (c) On or prior to 10:00 a.m. Eastern Time on the Change of Control Payment Date, the Company shall, 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 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 shall promptly mail to each Holder of Exchange Notes so tendered the Change of Control Payment for such Exchange Notes, and the Trustee shall 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. Prior to complying with the provisions of this Section 4.13, but in any event within 90 days following a Change of Control, the Company shall either repay all outstanding Senior Debt or obtain the requisite consents, if any, under all agreements governing outstanding Senior Debt to permit the repurchase of Exchange Notes required by this Section 4.13. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. 31 (d) The Company shall 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 this 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. SECTION 4.14. CONTINUED EXISTENCE. Subject to Article 5 hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence, and the corporate, partnership or other existence of each of its Restricted Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company or any such Restricted Subsidiary and (ii) the rights (charter and statutory), licenses and franchises of the Company and any of its Restrictive Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Restricted Subsidiaries, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Restricted Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Exchange Notes. SECTION 4.15. LIMITATION ON LAYERING. Notwithstanding the provisions of Section 4.09 hereof, 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. SECTION 4.16. LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED RESTRICTED SUBSIDIARIES. The Company (a) shall not, and shall not permit any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey, sell, lease 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 (i) such transfer, conveyance, sale, lease or other disposition is of all the Capital Stock of such Wholly Owned Restricted Subsidiary and (ii) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with Section 4.10 hereof and (b) 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. 32 ARTICLE 5 SUCCESSORS SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS. The Company shall 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 (a) 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; (b) 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 this Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (c) immediately after such transaction no Default or Event of Default exists; (d) 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 shall, 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 Section 4.09(a) hereof. SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.01 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for and may exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation and not to the Company), and may exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; provided, however, that the predecessor Company shall not be relieved from the obligation to pay the principal of and interest on the Exchange Notes except in the case of a sale of all of the Company's assets that meets the requirements of Section 5.01 hereof. 33 ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. Each of the following constitutes an "Event of Default": (i) a 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 Article 10 of this Indenture); (ii) 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 Article 10 of this Indenture); (iii) failure by the Company to comply with the provisions described under Sections 3.09, 4.07, 4.09, 4.10, 4.13 or Article 5 hereof; (iv) failure by the Company for 60 days after notice to comply with any of its other agreements in this Indenture or the Exchange Notes; (v) 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; (vi) 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; (vii) 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 pursuant to or within the meaning of Bankruptcy Law: (a) commences a voluntary case, (b) consents to the entry of an order for relief against it in an involuntary case, (c) consents to the appointment of a Custodian of it or for all or substantially all of its property, 34 (d) makes a general assignment for the benefit of its creditors, or (e) generally is not paying its debts as they become due; or (viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is for relief against 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 in an involuntary case; (b) appoints a Custodian of 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 or for all or substantially all of the property of 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; or (c) orders the liquidation of the Company, any of Restricted Subsidiary that would constitute a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 consecutive days. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. An Event of Default shall not be deemed to have occurred under clause (iii), (v) or (vi) until the Trustee shall have received at the Corporate Trust Office of the Trustee written notice from the Company or any of the Holders or unless a Responsible Officer shall have actual knowledge of such Event of Default. A Default under clause (iv) is not an Event of Default until the Trustee notifies the Company, or the Holders of at least 25% in principal amount of the then outstanding Exchange Notes notify the Company and the Trustee, of the Default and the Company does not cure the Default within 60 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." In the case of any Event of Default pursuant to the provisions of this Section 6.01 occurring by reason of any action (or inaction) willfully 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 Section 3.07 hereof, 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, anything in this Indenture or in the Exchange Notes to the contrary notwithstanding; provided that the Trustee shall not be under any duty to collect such premium on behalf of the Holders until such time as Holders of at least 10% in principal amount of the then outstanding Exchange Notes so notify the Trustee. If an Event of Default occurs prior to January 1, 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 January 1, 2002, then the premium payable for purposes of this paragraph for each of the years beginning on January 1 of the years set forth below shall be as set forth in the following table expressed as a percentage of the amount that 35 would otherwise be due but for the provisions of this sentence, plus accrued interest, if any, to the date of payment: Year Percentage ---- ---------- 1997................................................... 117.000% 1998................................................... 114.875% 1999................................................... 112.750% 2000................................................... 110.625% 2001................................................... 108.500% SECTION 6.02. ACCELERATION. If any Event of Default (other than an Event of Default specified in clause (vii) or (viii) of Section 6.01 hereof) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the then outstanding Exchange Notes by written notice to the Company and the Trustee may declare all the Exchange Notes to be due and payable immediately. Upon any such declaration, the Exchange Notes shall become due and payable immediately. Notwithstanding the foregoing, if an Event of Default specified in clause (vii) or (viii) of Section 6.01 hereof occurs 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 occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of a majority in principal amount of the then outstanding Exchange Notes by written notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, and interest on the Exchange Notes or to enforce the performance of any provision of the Exchange Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Exchange Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of an Exchange Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 6.04. WAIVER OF PAST DEFAULTS. Holders of not less than a majority in aggregate principal amount of the then outstanding Exchange Notes by notice to the Trustee may on behalf of the Holders of all of the Exchange Notes waive an existing Default or Event of Default and its consequences hereunder, except a continuing Default or Event of Default in the payment of the principal of, premium, if any, or interest on, the Exchange Notes (including in connection with an offer to purchase) (provided, however, that the Holders of a majority in aggregate principal amount of the then outstanding Exchange Notes may rescind an acceleration and its consequences, including any related payment default that resulted from such acceleration). Upon any such waiver, such Default shall cease to exist, and any Event of Default arising 36 therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 6.05. CONTROL BY MAJORITY. Holders of a majority in principal amount of the then outstanding Exchange Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture that the Trustee determines may be unduly prejudicial to the rights of other Holders of Exchange Notes or that may involve the Trustee in personal liability. SECTION 6.06. LIMITATION ON SUITS. A Holder of an Exchange Note may pursue a remedy with respect to this Indenture or the Exchange Notes only if: (a) the Holder of an Exchange Note gives to the Trustee written notice of a continuing Event of Default; (b) the Holders of at least 25% in principal amount of the then outstanding Exchange Notes make a written request to the Trustee to pursue the remedy; (c) such Holder of an Exchange Note or Holders of Exchange Notes offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Exchange Notes do not give the Trustee a direction inconsistent with the request. A Holder of an Exchange Note may not use this Indenture to prejudice the rights of another Holder of an Exchange Note or to obtain a preference or priority over another Holder of an Exchange Note. SECTION 6.07. RIGHTS OF HOLDERS OF EXCHANGE NOTES TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of an Exchange Note to receive payment of principal, premium, if any, and interest on the Exchange Note, on or after the respective due dates expressed in the Exchange Note (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.01(i) or (ii) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal of, premium, if any, and interest remaining unpaid on the Exchange Notes and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. 37 SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Exchange Notes allowed in any judicial proceedings relative to the Company (or any other obligor upon the Exchange Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Exchange Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.07 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders of Exchange Notes for amounts due and unpaid on the Exchange Notes for principal, premium, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Exchange Notes for principal, premium, if any, and interest, respectively; and Third: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Exchange Notes pursuant to this Section 6.10. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder of an Exchange Note 38 pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Exchange Notes. ARTICLE 7 TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proven that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), and (c) of this Section. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holders shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. 39 (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02. RIGHTS OF TRUSTEE. (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Exchange Notes and may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Exchange Notes, it shall not be accountable for the Company's use of the proceeds from the Exchange Notes or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Exchange Notes or any other document in connection with the sale of the Exchange Notes or pursuant to this Indenture other than its certificate of authentication. 40 SECTION 7.05. NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if a Responsible Officer of the Trustee has actual knowledge of such Default or Event of Default, the Trustee shall mail to Holders of Exchange Notes a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment of principal of, or interest on, any Note, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Exchange Notes. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE EXCHANGE NOTES. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, and for so long as Exchange Notes remain outstanding, the Trustee shall mail to the Holders of the Exchange Notes a brief report dated as of such reporting date that complies with TIA Section 313(a) (but if no event described in TIA Section 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA Section 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). A copy of each report at the time of its mailing to the Holders of Exchange Notes shall be mailed to the Company and filed with the SEC and each stock exchange on which the Exchange Notes are listed in accordance with TIA Section 313(d). The Company shall promptly notify the Trustee when the Exchange Notes are listed on any stock exchange. SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee from time to time such compensation for its acceptance of this Indenture and services hereunder as the Company and Trustee have separately agreed. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company (including this Section 7.07) and defending itself against any claim (whether asserted by the Company or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent any such loss, liability or expense may be attributable to its negligence or bad faith. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. 41 To secure the Company's payment obligations in this Section, the Trustee shall have a Lien prior to the Exchange Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Exchange Notes. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(vii) or (viii) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA Section 313(b)(2) to the extent applicable. SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Exchange Notes may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Exchange Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least 10% in principal amount of the then outstanding Exchange Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee, after written request by any Holder of an Exchange Note who has been a Holder of an Exchange Note for at least six months, fails to comply with Section 7.10, such Holder of an Exchange Note may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders of the Exchange Notes. 42 The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities and that has a combined capital and surplus of at least $100 million as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to TIA Section 310(b). SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee is subject to TIA Section. 311(a), excluding any creditor relationship listed in TIA Section. 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section. 311(a) to the extent indicated therein. ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE. The Company may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding Exchange Notes upon compliance with the conditions set forth below in this Article 8. SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Company shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from its obligations with respect to all outstanding Exchange Notes on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Exchange Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.05 hereof and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all of its other Obligations under such Exchange Notes and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following provisions which shall 43 survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Exchange Notes to receive solely from the trust fund described in Section 8.04 hereof, and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest, if any, on such Exchange Notes when such payments are due, (b) the Company's obligations with respect to such Exchange Notes under Article 2 and Section 4.02 hereof, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Company's obligations in connection therewith and (d) this Article 8. Subject to compliance with this Article 8, the Company may exercise its option under this Section 8.02 notwithstanding the prior exercise of its option under Section 8.03 hereof. SECTION 8.03. COVENANT DEFEASANCE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, the Company shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be released from its obligations under the covenants contained in Sections 3.09, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16 and 5.01 hereof with respect to the outstanding Exchange Notes on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Exchange Notes shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Exchange Notes shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the "outstanding" Exchange Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and such Exchange Notes shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, Sections 6.01(iv) through 6.01(viii) hereof shall not constitute Events of Default. SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE. The following shall be the conditions to the application of either Section 8.02 or 8.03 hereof to the outstanding Exchange Notes: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) the Company must irrevocably deposit with the 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 principal of, premium, if any, and 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; (b) in the case of an election under Section 8.02 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) since the date of this Indenture, there has been a 44 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; (c) in the case of an election under Section 8.03 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the 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; (d) 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 Sections 6.01(vii) or (viii) hereof 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); (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than this 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; (f) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that, as of the date of such opinion, (i) the trust funds will not be subject to the rights of holders of Indebtedness other than the Exchange Notes and (ii) assuming no intervening bankruptcy of the Company between the date of deposit and the 91st day (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) following the deposit and assuming no Holder of Exchange Notes is an insider of the Company, after the 91st day (or later date until 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) 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; (g) the Company shall have delivered to the 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 or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (h) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with. SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. 45 Subject to Section 8.06 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the outstanding Exchange Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Exchange Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Exchange Notes of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Exchange Notes. Anything in this Article 8 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the request of the Company any money or non-callable Government Securities held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(a) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.06. REPAYMENT TO COMPANY. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Exchange Note and remaining unclaimed for two years after such principal, and premium, if any, or interest has become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Exchange Note shall thereafter, as a secured creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 8.07. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any United States dollars or non-callable Government Securities in accordance with Section 8.02 or 8.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company under this Indenture and the Exchange Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 or 8.03 hereof, as the case may be; provided, however, that, if the Company makes any payment of principal of, premium, if any, or interest on any Exchange Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Exchange Notes to receive such payment from the money held by the Trustee or Paying Agent. 46 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF EXCHANGE NOTES. Notwithstanding Section 9.02 of this Indenture, the Company and the Trustee may amend or supplement this Indenture or the Exchange Notes without the consent of any Holder of an Exchange Note: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Exchange Notes in addition to or in place of certificated Exchange Notes; (c) to provide for the assumption of the Company's obligations to Holders of Exchange Notes in the case of a merger or consolidation pursuant to Article 5 hereof, as applicable; (d) 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 hereunder of any such Holder; or (e) to comply with the requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA. Upon the request of the Company accompanied by a resolution of the Board of Directors of the Company authorizing the execution of any such amended or supplemental Indenture, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee shall join with the Company in the execution of any amended or supplemental Indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental Indenture that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.02. WITH CONSENT OF HOLDERS OF EXCHANGE NOTES. Except as provided below in this Section 9.02, the Company and the Trustee may amend or supplement this Indenture and 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, subject to Sections 6.04 and 6.07 hereof, any existing Default or Event of Default (other than a Default or Event of Default in the payment of the principal of, premium, if any, or interest on the Exchange Notes) or compliance with any provision of this 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 the Exchange Notes). Any amendment to the provisions of Article 10 hereof 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. Upon the request of the Company accompanied by a resolution of the Board of Directors of the Company authorizing the execution of any such amended or supplemental Indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders of Exchange Notes as aforesaid, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the 47 Trustee shall join with the Company in the execution of such amended or supplemental Indenture unless such amended or supplemental Indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such amended or supplemental Indenture. It shall not be necessary for the consent of the Holders of Exchange Notes under this Section 9.02 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders of Exchange Notes affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate principal amount of the Exchange Notes then outstanding may waive compliance in a particular instance by the Company with any provision of this Indenture or the Exchange Notes. However, 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): (a) reduce the principal amount of Exchange Notes whose Holders must consent to an amendment, supplement or waiver; (b) 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 Sections 3.09, 4.10 and 4.13 hereof); (c) reduce the rate of or change the time for payment of interest, including default interest, on any Exchange Note; (d) 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); (e) make any Exchange Note payable in money other than that stated in the Exchange Notes; (f) make any change in the provisions of this 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; (g) waive a redemption payment with respect to any Exchange Note (other than a payment required by the provisions of Section 3.09, 4.10 or 4.13 hereof); or (h) make any change in Section 6.04 or 6.07 hereof or in the foregoing amendment and waiver provisions. 48 SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment or supplement to this Indenture or the Exchange Notes shall be set forth in a amended or supplemental Indenture that complies with the TIA as then in effect. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of an Exchange Note is a continuing consent by the Holder of an Exchange Note and every subsequent Holder of an Exchange Note or portion of an Exchange Note that evidences the same debt as the consenting Holder's Exchange Notes, even if notation of the consent is not made on any Exchange Notes. However, any such Holder of an Exchange Note or subsequent Holder of an Exchange Note may revoke the consent as to its Exchange Notes if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder. SECTION 9.05. NOTATION ON OR EXCHANGE OF EXCHANGE NOTES. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Exchange Notes thereafter authenticated. The Company in exchange for all Exchange Notes may issue and the Trustee shall authenticate new Exchange Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or to issue a new Exchange Notes shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amendment or supplemental Indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company may not sign an amendment or supplemental Indenture until its Board of Directors approves it. If it does, the Trustee may, but need not, sign it. In signing or refusing to sign such amendment or supplemental Indenture, the Trustee shall be entitled to receive and, subject to Section 7.01 hereof, shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel as conclusive evidence that such amendment or supplemental Indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company in accordance with its terms. ARTICLE 10 SUBORDINATION SECTION 10.01. AGREEMENT TO SUBORDINATE. The Company agrees, and each Holder by accepting an Exchange Note agrees, that the Indebtedness evidenced by the Exchange Notes is subordinated in right of payment, to the extent and in the manner provided in this Article 10, to the prior payment in full of all Senior Debt, whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed, and that the subordination is for the benefit of the holders of Senior Debt. 49 SECTION 10.02. CERTAIN DEFINITIONS. "Designated Senior Debt" means any Senior Debt permitted under this Indenture, the principal amount of which is $10.0 million or more and that has been designated by the Company as "Designated Senior Debt." A "distribution" may consist of cash, securities or other property, by set-off or otherwise. "Representative" means the indenture trustee or other trustee, agent or representative for any Senior Debt. "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 this 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 that is permitted to be incurred by the Company under this 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 (i) any liability for federal, state, local or other taxes owed or owing by the Company, (ii) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (iii) any trade payables or (iv) any Indebtedness that is incurred in violation of this Indenture. SECTION 10.03. LIQUIDATION; DISSOLUTION; BANKRUPTCY. 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 the Company's assets and liabilities: (1) holders of Senior Debt shall 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 shall be entitled to receive any payment with respect to the Exchange Notes (except that Holders may receive (i) securities that are subordinated at least to the same extent as the Exchange Notes to (a) Senior Debt and (b) any securities issued in exchange for Senior Debt and (ii) payments made from any defeasance trust created pursuant to Section 8.01 hereof); and (2) until all Obligations with respect to Senior Debt (as provided in subsection (1) above) are paid in full, any distribution to which the Holders would be entitled but for this Article 10 shall be made to holders of Senior Debt (except that Holders may receive (i) securities that are subordinated at least to the same extent as the Exchange Notes to (a) Senior Debt and (b) any securities issued in exchange for Senior Debt and (ii) payments made from any defeasance trust created pursuant to Section 8.01 hereof), as their interests may appear. SECTION 10.04. DEFAULT ON DESIGNATED SENIOR DEBT. (a) The Company may not make any payment or distribution upon or in respect of the Exchange Notes (other than (1) securities that are subordinated at least to the same extent as the Exchange Notes 50 to (A) Senior Debt and (B) any securities issued in exchange for Senior Debt and (2) payments made from any defeasance trust created pursuant to Section 8.01 hereof) until all principal and other Obligations with respect to the Senior Debt have been paid in full if: (i) a default in the payment of the principal of, premium, if any, or interest on Designated Senior Debt occurs and is continuing beyond any applicable grace period in the agreement, indenture or other document governing such Designated Senior Debt; or (ii) a default, other than a default specified in Section 10.04(a)(i) hereof, on Designated Senior Debt occurs and is continuing with respect to Designated Senior Debt that then permits holders of the 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 who may give it pursuant to Section 10.12 hereof. If the Trustee receives any such Payment Blockage Notice, no subsequent Payment Blockage Notice shall be effective for purposes of this Section 10.04 unless and until (I) at least 360 days shall have elapsed since the effectiveness of the immediately prior Payment Blockage Notice and (II) all scheduled payments of principal, premium, if any, and interest on the Exchange Notes that have come due (other than by reason of acceleration) have been paid in full in cash. No default described in this paragraph (ii) that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. (b) The Company may and shall resume payments on the Exchange Notes (i) in the case of a default described in Section 10.04(a)(i) hereof, upon the date on which the default is cured or waived and (ii) in the case of a default referred to in Section 10.04(a)(ii) hereof, the earlier of (A) the date on which such default is cured or waived or (B) 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 if this Article 10 otherwise permits the payment, distribution or acquisition at the time of such payment or acquisition. SECTION 10.05. ACCELERATION OF EXCHANGE NOTES. If payment of the Exchange Notes is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Debt of the acceleration. SECTION 10.06. WHEN DISTRIBUTION MUST BE PAID OVER. In the event that the Trustee or any Holder receives any payment of any Obligations with respect to the Exchange Notes at a time when a Responsible Officer of the Trustee or such Holder, as applicable, has actual knowledge that such payment is prohibited by Section 10.04 hereof, such payment shall be held by the Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Debt as their interests may appear or their Representative under the indenture or other agreement (if any) pursuant to which Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to Senior Debt remaining unpaid to the extent necessary to pay such Obligations in full in accordance with 51 their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. With respect to the holders of Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders or the Company or any other Person money or assets to which any holders of Senior Debt shall be entitled by virtue of this Article 10, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. SECTION 10.07. NOTICE BY COMPANY. The Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of any Obligations with respect to the Exchange Notes to violate this Article 10, but failure to give such notice shall not affect the subordination of the Exchange Notes to the Senior Debt as provided in this Article 10. SECTION 10.08. SUBROGATION. After all Senior Debt is paid in full and until the Exchange Notes are paid in full, Holders shall be subrogated (equally and ratably with all other Pari Passu Debt) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Debt. A distribution made under this Article to holders of Senior Debt that otherwise would have been made to Holders is not, as between the Company and Holders, a payment by the Company on the Senior Debt. SECTION 10.09. RELATIVE RIGHTS. This Article defines the relative rights of Holders and holders of Senior Debt. Nothing in this Indenture shall: (1) impair, as between the Company and Holders, the obligation of the Company, which is absolute and unconditional, to pay principal of and interest on the Exchange Notes in accordance with their terms; (2) affect the relative rights of Holders and creditors of the Company other than their rights in relation to holders of Senior Debt; or (3) prevent the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Debt to receive distributions and payments otherwise payable to Holders. If the Company fails because of this Article to pay principal of or interest on an Exchange Note on the due date, the failure is still a Default or Event of Default. 52 SECTION 10.10. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY. No right of any holder of Senior Debt to enforce the subordination of the Indebtedness evidenced by the Exchange Notes shall be impaired by any act or failure to act by the Company or any Holder or by the failure of the Company or any Holder to comply with this Indenture. SECTION 10.11. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their Representative. Upon any payment or distribution of assets of the Company referred to in this Article 10, the Trustee and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. SECTION 10.12. RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the provisions of this Article 10 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Exchange Notes, unless the Trustee shall have received at its Corporate Trust Office at least five Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Exchange Notes to violate this Article. Only the Company or a Representative may give the notice. Nothing in this Article 10 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 10.13. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of an Exchange Note by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 10, and appoints the Trustee to act as the Holder's attorney-in-fact for any and all such purposes. SECTION 10.14. AMENDMENTS. The provisions of this Article 10 shall not be amended or modified without the written consent of the holders of all Senior Debt. 53 ARTICLE 11 MISCELLANEOUS SECTION 11.01. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA Section 318(c), the imposed duties shall control. SECTION 11.02. NOTICES. Any notice or communication by the Company or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the others' address: If to the Company: Pegasus Communications Corporation c/o Pegasus Communications Management Company 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, PA 19087 Telecopier No.: (610) 341-1835 Attention: Marshall W. Pagon With a copy to: Drinker Biddle & Reath PNB Building, 11th Floor 1345 Chestnut Street Philadelphia, PA 19107 Telecopier No.: (215) 988-2757 Attention: Michael B. Jordan, Esq. If to the Trustee: First Union National Bank of North Carolina 230 S. Tryon Street Charlotte, NC 28288-1153 Telecopier No.: (704) 374-6114 Attention: Client Service Group With a copy to: First Union National Bank 123 South Broad Street PA 1249 Philadelphia, PA 19109 Telecopier No.: (215) 985-7290 Attention: Corporate Trust Administration 54 The Company or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA Section 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 11.03. COMMUNICATION BY HOLDERS OF EXCHANGE NOTES WITH OTHER HOLDERS OF EXCHANGE NOTES. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Exchange Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 11.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 11.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA Section 314(e) and shall include: 55 (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied. SECTION 11.06. RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 11.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND\ STOCKHOLDERS. No past, present or future 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, this 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 an Exchange Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Exchange Notes. SECTION 11.08. GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE AND THE EXCHANGE NOTES. SECTION 11.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 11.10. SUCCESSORS. All agreements of the Company in this Indenture and the Exchange Notes shall bind its respective successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 11.11. SEVERABILITY. In case any provision in this Indenture or in the Exchange Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 56 SECTION 11.12. COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 11.13. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. [Signatures on following page] 57 SIGNATURES IN WITNESS WHEREOF, the parties have executed this Indenture as of the date first written above. Very truly yours, PEGASUS COMMUNICATIONS CORPORATION By: ________________________________ Name: Title: FIRST UNION NATIONAL BANK By: _______________________________ Name: Title: EXHIBIT A (Face of Note) 12.75% Senior Subordinated Exchange Notes due 2007 CUSIP: No. $______________ Pegasus Communications Corporation promises to pay to ________________ or registered assigns, the principal sum of __________________ Dollars on January 1, 2007. Interest Payment Dates: January 1 and July 1 Record Dates: December 15 and June 15 Dated: PEGASUS COMMUNICATIONS CORPORATION By:______________________________ Name: Title: This is one of the Exchange Notes referred to in the within-mentioned Indenture: FIRST UNION NATIONAL BANK, as Trustee By: __________________________________ Authorized Officer A-1 (Back of Note) 121.75% Senior Subordinated Exchange Notes due 2007 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. The terms of the Exchange Notes set forth below are not complete and are qualified in their entirety by reference to the Indenture. 1. INTEREST. Pegasus Communications Corporation, a Delaware corporation (the "Company") promises to pay interest on the principal amount of this Exchange Note at 12.75% per annum from the date hereof until maturity. The Company will pay interest semi-annually on January 1 and July 1 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). Interest will be payable in cash, except that on each Interest Payment Date occurring on or prior to January 1, 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 additional Exchange Notes will constitute "payment" of the related interest for all purposes of the 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 issuance; provided that if there is no existing Default in the payment of interest, and if this Exchange Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at a rate that is 1% per annum in excess of the rate then in effect; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. METHOD OF PAYMENT. The Company will pay interest on the Exchange Notes (except defaulted interest) to the Persons who are registered Holders of Exchange Notes at the close of business on the December 15 or June 15 next preceding the Interest Payment Date, even if such Exchange Notes are cancelled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered Holders on such Interest Payment Date, and may be paid to the registered Holders at the close of business on a special interest payment date to be fixed by the Company for the payment of such defaulted interest, notice whereof shall be given to the registered Holders not less than 15 days prior to such special interest payment date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Exchange Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. The Exchange Notes will be payable as to principal, premium, interest, if any, at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest, if any, may be made by check mailed to the Holders at their addresses set forth in the register of Holders, and provided that payment by wire transfer of immediately available funds will be required with respect to principal of and interest and premium, if any, on, all global Exchange Notes and all other Exchange Notes the Holders of which shall have provided wire transfer instructions to the Company or the Paying Agent. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. A-2 3. PAYING AGENT AND REGISTRAR. Initially, First Union National Bank, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company may act in any such capacity. 4. INDENTURE. The Company issued the Exchange Notes under an Indenture dated as of ______________ (the "Indenture") between the Company and the Trustee. The terms of the Exchange Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"). The Exchange Notes are subject to all such terms, and Holders are referred to the Indenture and the TIA for a statement of such terms. The Exchange Notes are general obligations of the Company limited to $100,000,000 in aggregate principal amount, on outstanding Exchange Notes as set forth in Paragraph 2 hereof. 5. OPTIONAL REDEMPTION. The Exchange Notes are not redeemable at the Company's option prior to January 1, 2002. Thereafter, the Exchange Notes will be subject to redemption at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on January 1 of the years indicated below: Year Redemption Rate ---- --------------- 2002...................................................... 106.375% 2003...................................................... 104.250% 2004...................................................... 102.125% 2005 and thereafter........................................ 100.00% (b) 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 112.750% 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 Class A Common Stock of the Company. 6. MANDATORY REDEMPTION. Except as set forth in Paragraph 7 below, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Exchange Notes. 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, each Holder of Exchange Notes shall 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 less than $1,000) of such Holder's Exchange Notes pursuant to an offer (the "Change of Control Offer") at an offer price 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 A-3 Payment"). Within 10 days following any Change of Control, the Company shall mail a notice to each Holder setting forth the procedures governing the Change of Control Offer as required by the Indenture. (b) If the Company or any Restricted Subsidiary consummates any Asset Sale, within five days of each date on which the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company shall make an offer to all Holders of Exchange 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 Exchange Notes and Pari Passu Debt 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 Section 3.09 of the 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 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 Trustee shall select the Exchange Notes and Pari Passu Debt to be purchased on a pro rata basis, based upon the principal amount thereof tendered in such Asset Sale Offer. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. Holders of Notes that are the subject of an Asset Sale Offer will receive notice of the Asset Sale Offer from the Company prior to any related purchase date setting forth the procedures relating to the offer as required by the Indenture and may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" on the reverse of the Exchange Notes. 8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Exchange Notes are to be redeemed at its registered address. Exchange Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Exchange Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Exchange Notes or portions thereof called for redemption. 9. SUBORDINATION. Each Holder by accepting an Exchange Note agrees that the payment of principal of, premium, if any, and interest on the Exchange Notes is subordinated in right of payment, to the extent and in the manner provided in Article 10 of the Indenture, to the prior payment in full of all Senior Debt (whether outstanding on the date of the Indenture or thereafter incurred), and that the subordination is for the benefit of the holders of Senior Debt. 10. DENOMINATIONS, TRANSFER, EXCHANGE. The Exchange Notes are in registered form without coupons in all appropriate denominations. The transfer of Exchange Notes may be registered and Exchange Notes may be exchanged as provided in the Indenture. The Registrar and the 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 Indenture. The Company need not transfer or exchange any Exchange Note selected for redemption, except for the unredeemed portion of any Exchange Note being redeemed in part. Also, it need not transfer or exchange any Exchange Note for a period of 15 Business Days before a selection of Exchange Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. A-4 11. PERSONS DEEMED OWNERS. The registered Holder of an Exchange Note may be treated as its owner for all purposes. 12. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the 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 then outstanding Exchange Notes, and, subject to Sections 6.04 and 6.07 of the Indenture, any existing default or compliance with any provision of the 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. Without the consent of any Holder of an Exchange Note, the Indenture or the Exchange Notes may be amended or supplemented 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 the Exchange Notes in case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of the Exchange Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, or to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the TIA. Any amendment to the provisions of Article 10 of the Indenture 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. 13. DEFAULTS AND REMEDIES. Events of Default include: (i) a 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 Article 10 of the Indenture); (ii) 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 Article 10 of the Indenture); (iii) failure by the Company to comply with the provisions described under Sections 3.09, 4.07, 4.09, 4.10, 4.13 or Article 5 of the Indenture; (iv) failure by the Company for 60 days after notice to comply with any of its other agreements in the Indenture or the Exchange Notes; (v) 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; (vi) 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; (vii) 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 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, all outstanding Exchange Notes will become due and payable without further action or notice. Holders may not enforce the Indenture or the Exchange Notes except as provided in the Indenture. Subject to certain limitations, A-5 Holders of a majority in principal amount of the then outstanding Exchange Notes may direct the Trustee in its exercise of any trust or power. The 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. The Holders of a majority in aggregate principal amount of the Exchange Notes then outstanding by notice to the 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 Indenture except a continuing Default or Event of Default in the payment of interest and premium, if any, on, or the principal of, the Exchange Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. 15. TRUSTEE DEALINGS WITH THE COMPANY. Subject to Section 7.03 of the Indenture, the Trustee, in its individual or any other capacity, may become the owner or pledgee of Exchange Notes and may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee. 16. NO RECOURSE AGAINST OTHERS. No past, present or future 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, the 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 an Exchange Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Exchange Notes. 17. AUTHENTICATION. This Exchange Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 18. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 19. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Exchange Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Exchange Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to: Pegasus Communications Corporation c/o Pegasus Communications Management Company 5 Radnor Corporate Center Suite 454 100 Matsonford Road Radnor, Pennsylvania 19087 Attention: Marshall W. Pagon A-6 ASSIGNMENT FORM To assign this Exchange Note, fill in the form below: (I) or (we) assign and transfer this Exchange Note to ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint _______________________________________________________ to transfer this Exchange Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date:_______________________ Your Signature: _______________________________ (Sign exactly as your name appears on the face of this Exchange Note) Signature Guarantee:___________________________ A-7 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Exchange Note purchased by the Company pursuant to Section 4.10 or 4.13 of the Indenture, check the box below: [ ] Section 4.10 [ ] Section 4.13 If you want to elect to have only part of the Exchange Note purchased by the Company pursuant to Section 4.10 or Section 4.13 of the Indenture, state the amount you elect to have purchased: $____________ Date:_______________________ Your Signature:____________________________ (Sign exactly as your name appears on the Exchange Note) Tax Identification No.:____________________ Signature Guarantee:_______________________ A-8 EX-5.1 3 EXHIBIT 5.1 DRINKER BIDDLE & REATH Philadelphia National Bank Building 1345 Chestnut Street Philadelphia, PA 19107-3496 Telephone: (215) 988-2700 Fax: (215) 988-2757 March 18, 1997 Pegasus Communications Corporation c/o Pegasus Communications Management Company 100 Matsonford Road Suite 454, 5 Radnor Corporate Center Radnor, PA 19087 Re: Registration Statement on Form S-1 ---------------------------------- Ladies and Gentlemen: As counsel to Pegasus Communications Corporation, a Delaware corporation (the "Company"), we have assisted in the preparation and filing of the Company's Registration Statement on Form S-1 (the "Registration Statement"), filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), covering 366,464 shares of Class A common stock of the Company (the "Class A Common Stock") (including such additional shares as may hereinafter be offered or issued to prevent dilution resulting from stock splits, stock dividends or similar transactions to be sold by the Selling Stockholders named in the Registration Statement). In this connection, we have examined the originals or copies, certified or otherwise identified to our satisfaction, of the Certificate of Incorporation and By-laws of the Company, as amended, minutes and resolutions of the Company's Board of Directors and such other documents and corporate records relating to the Company and the issuance of the Shares as we have deemed appropriate for the purpose of rendering this opinion. We express no opinion concerning the laws of any jurisdiction other than the federal law of the United States and the Delaware General Corporation Law. In all examinations of documents, instruments and other papers, we have assumed the genuineness of all signatures on original and certified documents and the conformity with original and certified documents of all copies submitted to us as conformed, photostatic or other copies. As to matters of fact which have not been independently established, we have relied upon representations of officers of the Company. Pegasus Communications Corporation March 18, 1997 Page 2 On the basis of the foregoing, it is our opinion that the Shares have been duly authorized and validly issued and are fully paid and nonassessable by the Company. We hereby consent to the reference to our firm under the caption "Legal Matters" in the prospectus included in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. This does not constitute a consent under Section 7 of the Securities Act as we have not certified any part of the Registration Statement and do not otherwise come within the categories of persons whose consent is required under Section 7 or the rules and regulations of the Securities and Exchange Commission. Very truly yours, /s/ DRINKER BIDDLE & REATH --------------------------------- DRINKER BIDDLE & REATH EX-10.32 4 WARRANT AGREEMENT - -------------------------------------------------------------------------------- WARRANT AGREEMENT Dated as of January 27, 1997 by and between PEGASUS COMMUNICATIONS CORPORATION and FIRST UNION NATIONAL BANK, as Warrant Agent - -------------------------------------------------------------------------------- WARRANT AGREEMENT TABLE OF CONTENTS*** Page SECTION 1. Appointment of Warrant Agent......................................1 SECTION 2. Issuance of Warrants..............................................1 SECTION 3. Warrant Certificates..............................................1 SECTION 4. Execution of Warrant Certificates.................................2 SECTION 5. Transfers of Warrants Prior to the Separation of Warrants and Notes; Separation of Warrants and Notes.......................2 SECTION 6. Registration and Countersignature.................................3 SECTION 7. Registration of Transfers and Exchanges...........................4 (a) Transfer and Exchange of Definitive Warrants.....................4 (b) Exchange or Transfer of a Definitive Warrant for a Beneficial Interest in a Global Warrant.....................................4 (c) Transfer and Exchange of Global Warrants.........................4 (d) Exchange of a Beneficial Interest in a Global Warrant for a Definitive Warrant...............................................4 (e) Restrictions on Transfer and Exchange of Global Warrants.........5 (f) Countersigning of Definitive Warrants in Absence of Depositary...5 (g) Cancellation of Global Warrant...................................5 (h) Obligations with Respect to Transfers and Exchanges of Warrants..5 SECTION 8. Terms of Warrants; Exercise of Warrants...........................5 SECTION 9. Reports...........................................................7 SECTION 10. Payment of Taxes..................................................8 SECTION 11. Mutilated or Missing Warrant Certificates.........................8 SECTION 12. Reservation of Warrant Shares.....................................8 SECTION 13. Obtaining Stock Exchange Listings.................................9 - ------------------------ *** This Table of Contents does not constitute a part of this Agreement or have any bearing upon the interpretation of any of its terms or provisions. (i) SECTION 14. Adjustment of Exercise Price and Number of Warrant Shares Issuable.........................................................9 (a) Adjustment for Change in Capital Stock...........................9 (b) Adjustment for Rights Issue.....................................10 (c) Adjustment for Other Distributions..............................11 (d) Adjustment for Common Stock Issue...............................11 (e) Adjustment for Convertible Securities Issue.....................13 (f) Adjustment for Certain Cash Dividends...........................14 (g) Adjustment for Tender Offer.....................................15 (h) Current Market Price............................................16 (i) Consideration Received..........................................16 (j) When De Minimis Adjustment May Be Deferred......................17 (k) When No Adjustment Required.....................................17 (l) Notice of Adjustment............................................17 (m) Voluntary Reduction.............................................17 (n) Notice of Certain Transactions..................................18 (o) Reorganization of the Company...................................18 (p) The Company Determination Final.................................19 (q) Warrant Agent's Disclaimer......................................19 (r) When Issuance or Payment May Be Deferred........................19 (s) Adjustment in Number of Shares..................................19 (t) Form of Warrants................................................20 SECTION 15. No Dilution or Impairment........................................20 SECTION 16. Fractional Interests.............................................20 SECTION 17. Notices to Warrant Holders.......................................20 SECTION 18. Merger, Consolidation or Change of Name of Warrant Agent.........22 SECTION 19. Warrant Agent....................................................22 SECTION 20. Registration Rights..............................................24 SECTION 21. Change of Warrant Agent..........................................26 SECTION 22. Notices to the Company and Warrant Agent.........................26 SECTION 23. Supplements and Amendments.......................................27 SECTION 24. Successors.......................................................27 SECTION 25. Termination......................................................28 SECTION 26. Governing Law; Jurisdiction......................................28 (ii) SECTION 27. Benefits of this Agreement.......................................28 SECTION 28. Counterparts.....................................................28 SECTION 29. Further Assurances...............................................28 EXHIBIT A..................................................................A - 1 (iii) WARRANT AGREEMENT, dated as of January 27, 1997, between Pegasus Communications Corporation, a Delaware corporation (the "Company"), and First Union National Bank, as warrant agent (the "Warrant Agent"). WHEREAS, the Company has entered into an underwriting agreement (the "Underwriting Agreement"), dated January 22, 1997 with CIBC Wood Gundy Securities Corp., Lehman Brothers Inc. and BT Securities Corporation (the "Underwriters") in which the Company has agreed to sell to the Underwriters 100,000 units (the "Units") consisting of $100,000,000 principal amount of the Company's 12.75% Series A Cumulative Exchangeable Preferred Stock (the "Preferred Stock") and 100,000 warrants, as hereinafter described (the "Warrants"), to purchase up to an aggregate of 193,600 shares of Class A Common Stock, par value $0.01 per share (the "Common Stock"), of the Company (the Common Stock issuable upon exercise of the Warrants being referred to herein as the "Warrant Shares"). The Preferred Stock will be governed by the Company's Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof relating to the Preferred Stock (the "Certificate of Designation") and shall be exchangeable, in full but not in part, for the Company's 12.75% Senior Subordinated Exchange Notes due 2007 (the "Exchange Notes"). The transfer agent for the Preferred Stock will be First Union National Bank (the "Transfer Agent") unless and until a successor is selected by the Company pursuant to the Certificate of Designation. The Exchange Notes, if and when issued, will be issued pursuant to an indenture (the "Exchange Note Indenture") between the Company and First Union National Bank, as trustee (the "Exchange Note Trustee"). Each Warrant entitles the holder of the Warrant upon exercise to receive from the Company, as adjusted as provided herein, 1.936 fully paid and nonassessable shares of Common Stock of the Company in exchange for the Exercise Price (as hereinafter defined), as provided herein; WHEREAS, the Warrants and the Preferred Stock will be sold in units and shall not be separately transferable until the earliest to occur of (i) April 3, 1997, (ii) in the event a Change of Control (as defined in the Certificate of Designation) occurs, the date the Company mails notice thereof to holders of the Preferred Stock or the Exchange Notes, as applicable, and (iii) such other date as may be designated by CIBC Wood Gundy Securities Corp. (the "Separation Date"); and WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in connection with the issuance of Warrant Certificates (as hereinafter defined) and other matters as provided herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company in accordance with the instructions set forth hereinafter in this Agreement, and the Warrant Agent hereby accepts such appointment. SECTION 2. Issuance of Warrants. Warrants shall be originally issued in connection with the issuance of the Units and shall not be separately transferable from the Preferred Stock until on or after the Separation Date as provided in Section 5 hereof. SECTION 3. Warrant Certificates. The Warrants will be issued in global form (the "Global Warrants"), substantially in the form of Exhibit A (including the text accompanying footnotes 1 and 2 thereto but excluding such footnotes), and in definitive form (the "Definitive Warrants"), substantially in the form of Exhibit A (not including footnotes 1 and 2 thereto or the text accompanying such footnotes). Each Definitive Warrant shall represent such of the outstanding Warrants as shall be specified therein and each Global Warrant shall provide that it shall represent the aggregate amount of outstanding Warrants from time to time endorsed thereon and that the aggregate amount of outstanding Warrants represented thereby may from time to time be reduced or increased, as appropriate. Any endorsement of a Global Warrant to reflect the amount of any increase or decrease in the amount of outstanding Warrants represented thereby shall be made by the Warrant Agent and the depositary with respect to the Global Warrants (the "Depositary") in accordance with instructions given by the holder thereof. The Depository Trust Company shall act as the Depositary until a successor shall be appointed by the Company and the Warrant Agent. Upon request, a holder may receive from the Depositary and the Warrant Agent separate Definitive Warrants as set forth in Section 7 below. Any certificates (the "Warrant Certificates") evidencing the Global Warrants or the Definitive Warrants to be delivered pursuant to this Agreement shall be substantially in the form set forth in Exhibit A attached hereto. SECTION 4. Execution of Warrant Certificates. Warrant Certificates shall be signed on behalf of the Company by its Chairman of the Board, Chief Executive Officer, Chief Financial Officer, President or Vice President and Secretary or an Assistant Secretary. Each such signature upon the Warrant Certificates may be in the form of a facsimile signature of the present or any future Chairman of the Board, Chief Executive Officer, Chief Financial Officer, President or Vice President and Secretary or Assistant Secretary and may be imprinted or otherwise reproduced on the Warrant Certificates and for that purpose the Company may adopt and use the facsimile signature of any person who shall have been Chairman of the Board, Chief Executive Officer, Chief Financial Officer, President or Vice President and Secretary or Assistant Secretary, notwithstanding the fact that at the time the Warrant Certificates shall be countersigned and delivered or disposed of he or she shall have ceased to hold such office. The seal of the Company shall be impressed, affixed, imprinted or otherwise reproduced on the Warrant Certificates. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer before the Warrant Certificates so signed shall have been countersigned by the Warrant Agent, or disposed of by the Company, such Warrant Certificates nevertheless may be countersigned and delivered or disposed of as though such person had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be a proper officer of the Company to sign such Warrant Certificate, although at the date of the execution of this Warrant Agreement any such person was not such officer. Warrant Certificates shall be dated the date of countersignature by the Warrant Agent. SECTION 5. Transfers of Warrants Prior to the Separation of Warrants and Notes; Separation of Warrants and Notes. Notwithstanding the provisions of Section 7 hereof, on or after the Separation Date, the registered holder of a Warrant Certificate containing a Warrant Legend (as hereinafter defined) may surrender such Warrant Certificate accompanied by a written instrument or instruments of transfer in form satisfactory to the Warrant Agent, duly executed by the registered holder or holders thereof or by the duly appointed legal representative thereof or by a duly authorized attorney to the Warrant Agent, at its corporate trust office in First Union National Bank of North Carolina, 230 S. Tryon Street, Charlotte, NC 28288-1153 (the "Warrant Agent Office") for the exchange of such Warrant containing a Warrant Legend, in whole or in part, for a new Warrant Certificate or Warrant Certificates not containing the first paragraph of the Warrant Legend (such surrender and exchange being referred to herein as a "Separation" and the related Warrants being referred to as "Separated"). Until the Separation Date, no Warrant may be sold, assigned or otherwise transferred to any person unless simultaneously with such transfer, the Warrant Agent receives confirmation from the Transfer Agent for the Preferred Stock or the Exchange Note Trustee, as applicable, that the holder thereof has requested a transfer to the same transferee of one Warrant (subject to adjustment under 2 Section 14 hereof) for each $1,000 in aggregate liquidation preference of Preferred Stock or $1,000 aggregate principal amount of Exchange Notes, as applicable, so transferred. In connection with the foregoing, upon original issuance (if prior to the Separation Date) and, thereafter, until Separation, the Warrant Certificates will bear the following legend (the "Warrant Legend"): THE WARRANTS EVIDENCED BY THIS CERTIFICATE ARE NOT TRANSFERABLE SEPARATELY FROM THE COMPANY'S 12.75% SERIES A CUMULATIVE EXCHANGEABLE PREFERRED STOCK (THE "PREFERRED STOCK") ORIGINALLY SOLD AS A UNIT WITH SUCH WARRANTS UNTIL THE EARLIEST TO OCCUR OF (I) APRIL 3, 1997, (II) IN THE EVENT A CHANGE OF CONTROL (AS DEFINED IN THE CERTIFICATE OF DESIGNATION RELATING TO THE PREFERRED STOCK) OCCURS, THE DATE THE COMPANY MAILS NOTICE THEREOF AND (III) SUCH OTHER DATE AS MAY BE DESIGNATED BY CIBC WOOD GUNDY SECURITIES CORP. (THE "SEPARATION DATE"). THE CLASS A COMMON STOCK, PAR VALUE $0.01, OF THE COMPANY (THE "COMMON STOCK") FOR WHICH THIS WARRANT IS EXERCISABLE MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES ABSENT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM REGISTRATION REQUIREMENTS. ACCORDINGLY, NO WARRANT HOLDER SHALL BE ENTITLED TO EXERCISE SUCH HOLDER'S WARRANTS AT ANY TIME UNLESS, AT THE TIME OF EXERCISE, (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT RELATING TO THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT (THE "WARRANT SHARES") HAS BEEN FILED WITH, AND DECLARED EFFECTIVE BY, THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), AND NO STOP ORDER SUSPENDING THE EFFECTIVENESS OF SUCH REGISTRATION STATEMENT HAS BEEN ISSUED BY THE SEC OR (ii) THE ISSUANCE OF THE WARRANT SHARES IS PERMITTED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. SECTION 6. Registration and Countersignature. The Warrant Agent, on behalf of the Company, shall number and register the Warrant Certificates in a register as they are issued by the Company. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. The Warrant Agent shall, upon written instructions of the Chairman of the Board, Chief Executive Officer, President, Vice President or the Chief Financial Officer of the Company, initially countersign and deliver Warrants entitling the holders thereof to purchase not more than the number of Warrant Shares referred to above in the first recital hereof and shall countersign and deliver Warrants as otherwise provided in this Agreement. The Company and the Warrant Agent may deem and treat the registered holder(s) of the Warrant Certificates as the absolute owner(s) thereof (notwithstanding any notation of ownership or other writing thereon made by anyone), for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. SECTION 7. Registration of Transfers and Exchanges. 3 (a) Transfer and Exchange of Definitive Warrants. When Definitive Warrants are presented to the Warrant Agent with a request: (i) to register the transfer of the Definitive Warrants; or (ii) to exchange such Definitive Warrants for an equal number of Definitive Warrants of other authorized denominations, the Warrant Agent shall register the transfer or make the exchange as requested if its requirements for such transactions are met; provided, however, that the Definitive Warrants presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Warrant Agent, duly executed by the holder thereof or by his attorney, duly authorized in writing. Upon any such registration of transfer, a new Definitive Warrant shall be issued to the transferee(s) and the surrendered Definitive Warrant shall be cancelled by the Warrant Agent. Cancelled Definitive Warrants shall thereafter be disposed of in a manner satisfactory to the Company. (b) Exchange or Transfer of a Definitive Warrant for a Beneficial Interest in a Global Warrant. A Definitive Warrant may be exchanged for a beneficial interest in a Global Warrant upon satisfaction of the requirements set forth below. Upon receipt by the Warrant Agent of a Definitive Warrant, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Warrant Agent, together with written instructions directing the Warrant Agent to make, or to direct the Depositary to make, an endorsement on the Global Warrant to reflect an increase in the number of Warrants represented by the Global Warrant, then the Warrant Agent shall cancel such Definitive Warrant and cause, or direct the Depositary to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Warrant Agent, the number of Warrants represented by the Global Warrant to be increased accordingly. If no Global Warrants are then outstanding, the Company shall issue and the Warrant Agent shall countersign a new Global Warrant representing the appropriate number of Warrants and Warrant Shares. (c) Transfer and Exchange of Global Warrants. The transfer and exchange of Global Warrants or beneficial interests therein shall be effected through the Depositary, in accordance with this Warrant Agreement and the procedures of the Depositary therefor. (d) Exchange of a Beneficial Interest in a Global Warrant for a Definitive Warrant. (i) Any person having a beneficial interest in a Global Warrant may upon request exchange such beneficial interest for a Definitive Warrant. Upon receipt by the Warrant Agent of written instructions or such other form of instructions as is customary for the Depositary from the Depositary or its nominee on behalf of any person having a beneficial interest in a Global Warrant then the Warrant Agent shall cause, in accordance with the standing instructions and procedures existing between the Depositary and Warrant Agent, the number of Warrants represented by the Global Warrant to be reduced and, following such reduction, the Company shall execute and the Warrant Agent shall countersign and deliver to the transferee a Definitive Warrant. (ii) Definitive Warrants issued in exchange for a beneficial interest in a Global Warrant pursuant to this Section 7(d) shall be registered in such names as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Warrant Agent. The Warrant Agent shall deliver such Definitive Warrants to the persons in whose names such Warrants are so registered. 4 (e) Restrictions on Transfer and Exchange of Global Warrants. Notwithstanding any other provisions of this Warrant Agreement (other than the provisions set forth in subsection (f) of this Section 7), a Global Warrant may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (f) Countersigning of Definitive Warrants in Absence of Depositary. If at any time: (i) the Depositary for the Global Warrants notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Warrants and a successor Depositary for the Global Warrants is not appointed by the Company within 90 days after delivery of such notice; or (ii) the Company, in its sole discretion, notifies the Warrant Agent in writing that it elects to cause the issuance of Definitive Warrants under this Warrant Agreement, then the Company shall execute, and the Warrant Agent, upon written instructions signed by two officers of the Company, shall countersign and deliver Definitive Warrants, in an aggregate number equal to the number of Warrants represented by Global Warrants, in exchange for such Global Warrants. (g) Cancellation of Global Warrant. At such time as all beneficial interests in Global Warrants have either been exchanged for Definitive Warrants, redeemed, repurchased or cancelled, all Global Warrants shall be returned to or retained and cancelled by the Warrant Agent. (h) Obligations with Respect to Transfers and Exchanges of Warrants. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Warrant Agent is hereby authorized to countersign, in accordance with the provisions of Section 6 and this Section 7, Definitive Warrants and Global Warrants as required pursuant to the provisions of this Section 7. (ii) All Definitive Warrants and Global Warrants issued upon any registration of transfer or exchange of Definitive Warrants or Global Warrants shall be the valid obligations of the Company, entitled to the same benefits under this Warrant Agreement, as the Definitive Warrants or Global Warrants surrendered upon such registration of transfer or exchange. (iii) Prior to due presentment for registration of transfer of any Warrant, the Warrant Agent and the Company may deem and treat the person in whose name any Warrant is registered as the absolute owner of such Warrant and neither the Warrant Agent nor the Company shall be affected by notice to the contrary. (iv) No service charge shall be made to a holder for any registration, transfer or exchange. SECTION 8. Terms of Warrants; Exercise of Warrants. Subject to the terms of this Agreement, each Warrant holder shall have the right, which may be exercised on or after the Separation Date until 5:00 p.m., New York, New York time on January 1, 2007 (the "Expiration Date"), to exercise each Warrant and receive from the Company the number of fully paid and nonassessable Warrant Shares which the holder may at the time be entitled to receive on exercise of such Warrants and payment of the Exercise Price then in effect for such Warrant Shares; provided, however, that no Warrant holder shall be entitled to exercise such holder's Warrants at any time unless, at the time of exercise, (i) a registration 5 statement under the Securities Act of 1933, as amended (the "Securities Act"), relating to the Warrant Shares has been filed with, and declared effective by, the Securities and Exchange Commission (the "SEC"), and no stop order suspending the effectiveness of such registration statement has been issued by the SEC or (ii) the issuance of the Warrant Shares is permitted pursuant to an exemption from the registration requirements of the Securities Act. Each Warrant, when exercised, will entitle the holder thereof to purchase 1.936 fully paid and nonassessable shares of Common Stock at the Exercise Price. Any Warrant not exercised prior to the Expiration Date shall become void and all rights thereunder and all rights in respect thereof under this Agreement shall cease as of such time. No adjustments as to dividends will be made upon exercise of the Warrants. The Warrants may be exercised by surrendering to the Warrant Agent 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 (A) by tendering shares of Preferred Stock having an aggregate Liquidation Preference (as defined in the Certificate of Designation), plus, without duplication, accumulated and unpaid dividends, if any, at the time of tender equal to the Exercise Price, (B) by tendering Exchange Notes having an aggregate principal amount, plus accrued and unpaid interest, 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 Preferred Stock, Warrants and cash or Exchange Notes, Warrants and cash. For purposes of clause (C) above, the fair market value of the Warrants shall be determined as follows: (A) if the Common Stock is publicly traded and listed on the Nasdaq National Market or a national securities exchange, the fair market value shall be equal to the number of shares represented by such Warrant multiplied by the greater of (1) the difference between (a) the average closing price as quoted on the Nasdaq National Market of the Common Stock for each of the ten trading days immediately prior to the exercise date (or, if the Common Stock is listed on a national securities exchange, the average closing price as reported on such national securities exchange during such ten trading day period) and (b) the Exercise Price, and (2) zero; or (B) if the Common Stock is not publicly traded, or otherwise is not listed on a national securities exchange, the fair market value of the Warrants shall be equal to the value per share as determined in good faith by the Board of Directors of the Company (the "Board of Directors"). In the event that Warrants, Preferred Stock or Exchange Notes are surrendered by a Warrant holder in payment of the Exercise Price, the Warrant Agent shall notify the Company of such, which notice shall also include the amount of the Exercise Price and the amount of cash, if any, received by the Warrant Agent as partial payment of the Exercise Price. Within a reasonable time of receiving such notice, the Company shall advise the Warrant Agent whether the Warrant Agent has received payment in full of the Exercise Price. In addition, the Warrant Agent shall provide such Preferred Stock to the Transfer Agent and such Exchange Notes to the Exchange Note Trustee, who shall notify the Warrant Agent whether such Preferred Stock or Exchange Notes, as applicable, are in good form. After receiving a determination from the Company that the Warrant Agent has received full and proper payment of the Exercise Price and confirmation from the Transfer Agent and the Exchange Note Trustee that such Preferred Stock or Exchange Notes, as applicable, are in good form, the Warrant Agent shall deliver the shares of Preferred Stock to the Transfer Agent and the Exchange Notes to the Exchange Note Trustee for cancellation. Subject to the provisions of Section 10 hereof, upon such surrender of Warrants and payment of the Exercise Price, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the holder and in such name or names as the Warrant holder may designate, a certificate or certificates for the number of full Warrant Shares issuable upon the exercise 6 of such Warrants together with cash, if any, as provided in Section 16 hereof; provided, however, that if any consolidation, merger or lease or sale of assets is proposed to be effected by the Company as described in subsection (o) of Section 14 hereof, or a tender offer or an exchange offer for shares of Common Stock of the Company shall be made, upon such surrender of Warrants and payment of the Exercise Price as aforesaid, the Successor Guarantor (as hereinafter defined), the Company or the Warrant Agent, as applicable, shall, as soon as possible, but in any event not later than two business days thereafter, issue and cause to be delivered the full number of Warrant Shares issuable upon the exercise of such Warrants in the manner described in this sentence together with cash, if any, as provided in Section 16 hereof. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such Warrant Shares as of the date of the surrender of such Warrants and payment of the Exercise Price. No fractional shares shall be issued upon exercise of any Warrants in accordance with Section 16 hereof. 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 Common Stock less a corresponding fraction of the Exercise Price. The Warrants shall be exercisable, at the election of the holders thereof, either in full or from time to time in part (in whole shares) and, in the event that a certificate evidencing Warrants is exercised in respect of fewer than all of the Warrant Shares issuable on such exercise at any time prior to the Expiration Date, a new certificate evidencing the remaining Warrant or Warrants will be issued, and the Warrant Agent is hereby irrevocably authorized to countersign and to deliver the required new Warrant Certificate or Certificates pursuant to the provisions of this Section and of Section 4 of this Agreement, and the Company, whenever required by the Warrant Agent, will supply the Warrant Agent with Warrant Certificates duly executed on behalf of the Company for such purpose. All Warrant Certificates surrendered upon exercise of Warrants shall be cancelled by the Warrant Agent. Such cancelled Warrant Certificates shall be held by the Warrant Agent until termination of its duties hereunder, at which time it shall deliver such cancelled Warrants to any successor Warrant Agent, if applicable, otherwise to the Company. Upon receipt by the Company, such cancelled Warrant Certificates shall then be disposed of by the Company in accordance with applicable law. The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently pay to the Company all monies or surrender to the Transfer Agent all shares of Preferred Stock or to the Exchange Note Trustee all Exchange Notes received by the Warrant Agent for the purchase of the Warrant Shares through the exercise of such Warrants. The Warrant Agent shall keep copies of this Agreement and any notices given or received hereunder available for inspection by the holders during normal business hours at its office. The Company shall supply the Warrant Agent from time to time with such numbers of copies of this Agreement as the Warrant Agent may request. SECTION 9. Reports. Whether or not required by the rules and regulations of the SEC, so long as any Warrants are outstanding, the Company shall furnish to the Warrant Agent and mail to the holders of Warrants (i) all quarterly and annual financial information that would be required to be contained in a filing with the SEC 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 SEC 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 SEC, the Company will file a copy of all such information and reports with the SEC for public availability (unless the SEC will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. 7 SECTION 10. Payment of Taxes. No service charge shall be made to any holder of a Warrant for any exercise, exchange or registration of transfer of Warrant Certificates, and the Company will pay all documentary stamp taxes attributable to the initial issuance of Warrant Shares upon the exercise of Warrants or to any Separation; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for Warrant Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such Warrant Certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 11. Mutilated or Missing Warrant Certificates. If any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company may in its discretion issue and the Warrant Agent may countersign, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and in substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence satisfactory to the Company and the Warrant Agent of such loss, theft or destruction of such Warrant Certificate and indemnity and security therefor, if requested, also satisfactory to them. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company or the Warrant Agent may prescribe. SECTION 12. Reservation of Warrant Shares. The Company will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or authorized and issued Common Stock held in its treasury, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the maximum number of shares of Common Stock which may then be deliverable upon the exercise of all outstanding Warrants. The Company or the transfer agent for the Common Stock (the "Common Stock Transfer Agent") and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase represented by the Warrants will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Agreement on file with the Common Stock Transfer Agent and with every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrants. The Warrant Agent is hereby irrevocably authorized to requisition from time to time from such Common Stock Transfer Agent the stock certificates required to honor outstanding Warrants upon exercise thereof in accordance with the terms of this Agreement. The Company will supply such Common Stock Transfer Agent with duly executed certificates for such purposes and will provide or otherwise make available any cash which may be payable as provided in Section 16 hereof. The Company will furnish such Common Stock Transfer Agent a copy of all notices of adjustments and certificates related thereto, transmitted to each holder pursuant to Section 17 hereof. Before taking any action which would cause an adjustment pursuant to Section 14 hereof to reduce the Exercise Price below the then par value (if any) of the Warrant Shares, the Company will take all corporate action necessary, in the opinion of its counsel (which may be counsel employed by the Company), in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. The Company covenants that all Warrant Shares which may be issued upon exercise of Warrants will be, upon payment of the Exercise Price and issuance thereof, fully paid, nonassessable, 8 free of preemptive rights and free from all taxes, liens, charges and security interests with respect to the issue thereof. SECTION 13. Obtaining Stock Exchange Listings. The Company shall also from time to time take all action necessary so that the Warrant Shares, immediately upon their issuance upon the exercise of Warrants, will be listed on the Nasdaq National Market or such other principal securities exchanges, interdealer quotation systems and markets within the United States of America, if any, on which other shares of Common Stock are then listed or quoted. SECTION 14. Adjustment of Exercise Price and Number of Warrant Shares Issuable. The Exercise Price and the number of Warrant Shares issuable upon the exercise of each Warrant are subject to adjustment from time to time upon the occurrence of the events enumerated in this Section 14. For purposes of this Section 14, "Common Stock" means the Common Stock and any other stock of the Company, however designated, that has the right (subject to any prior rights of any class or series of preferred stock) to participate in any distribution of the assets or earnings of the Company without limit as to per share amount. (a) Adjustment for Change in Capital Stock. If the Company: (1) pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock; (2) subdivides its outstanding shares of Common Stock into a greater number of shares; (3) combines its outstanding shares of Common Stock into a smaller number of shares; (4) makes a distribution on its Common Stock in shares of its capital stock other than Common Stock; or (5) issues by reclassification of its Common Stock any shares of its capital stock, then the Exercise Price and the number and kind of shares of capital stock of the Company issuable upon the exercise of a Warrant (as in effect immediately prior to such action) shall be proportionately adjusted so that the holder of any Warrant thereafter exercised may receive the aggregate number and kind of shares of capital stock of the Company which he would have owned immediately following such action if such Warrant had been exercised immediately prior to such action. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. If after an adjustment a holder of a Warrant upon exercise may receive shares of two or more classes or series of capital stock of the Company, the Company shall determine the allocation of the adjusted Exercise Price between the classes or series of capital stock. After such allocation, the exercise privilege and the Exercise Price of each class or series of capital stock shall thereafter be subject to adjustment on terms comparable to those applicable to Common Stock in this Section 14. 9 Such adjustment shall be made successively whenever any event listed above shall occur. (b) Adjustment for Rights Issue. If the Company distributes any rights, options or warrants to all holders of its Common Stock entitling them for a period expiring within 60 days after the record date mentioned below to purchase shares of Common Stock or securities convertible into, or exchangeable or exercisable for, Common Stock at a price per share (or with an initial conversion, exchange or exercise price) less than the current market price per share on that record date, the Exercise Price shall be adjusted in accordance with the following formula: O + N x P ------ E' = E x M ---------- O + N where: E' = the adjusted Exercise Price. E = the current Exercise Price. O = the number of shares of Common Stock outstanding on the record date. N = the number of additional shares of Common Stock offered. P = the offering price per share of the additional shares. M = the current market price per share of Common Stock on the record date. The adjustment pursuant to this subsection (b) shall be made successively whenever any such rights, options or warrants are issued and shall become effective immediately after the record date for the determination of stockholders entitled to receive the rights, options or warrants. If at the end of the period during which such rights, options or warrants are exercisable, not all rights, options or warrants shall have been exercised, the Exercise Price shall be immediately readjusted to what it would have been if "N" in the above formula had been the number of shares actually issued. (c) Adjustment for Other Distributions. If the Company distributes to all holders of its Common Stock any of its assets (including cash), debt securities, preferred stock or any rights or warrants to purchase debt securities, assets or other securities of the Company, the Exercise Price shall be adjusted in accordance with the following formula: 10 E' = E x M - F ----- M where: E' = the adjusted Exercise Price. E = the current Exercise Price. M = the current market price per share of Common Stock on the record date mentioned below. F = the fair market value on the record date of the assets, securities, rights or warrants applicable to one share of Common Stock. The Board of Directors shall determine the fair market value. The adjustment pursuant to this subsection (c) shall be made successively whenever any such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive the distribution. Notwithstanding the foregoing, if "F" in the above formula equals or exceeds "M" in the above formula, then "M" in the above formula shall be equal to the fair market value per share of the Common Stock on the record date as determined in good faith by the Board of Directors and described in a Board resolution which shall be filed with the Warrant Agent. This subsection (c) does not apply to rights, options or warrants referred to in subsection (b) of this Section 14. (d) Adjustment for Common Stock Issue. If the Company issues shares of Common Stock for a consideration per share less than the current market price per share of Common Stock on the date the Company fixes the offering price of such additional shares, the Exercise Price shall be adjusted in accordance with the following formula: P --- E' = E x O + M ---------- A where: E' = the adjusted Exercise Price. E = the then current Exercise Price. O = the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares. P = the aggregate consideration received for the issuance of such additional shares. M = the current market price per share of Common Stock on the date of issuance of such additional shares. 11 A = the number of shares of Common Stock outstanding immediately after the issuance of such additional shares. The adjustment pursuant to subsection (d) shall be made successively whenever any such issuance is made, and shall become effective immediately after such issuance. This subsection (d) does not apply to: (1) any of the transactions described in subsections (a), (b) and (c) of this Section 14; (2) the exercise of Warrants or other warrants outstanding on the date of this Agreement, or the conversion or exchange of other securities convertible or exchangeable for Common Stock; (3) Common Stock issued to the Company's employees, officers or directors (other than to Marshall W. Pagon (the "Principal") or (x) any immediate family member of the Principal or (y) 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 (x)) under bona fide employee benefit plans adopted by the Board of Directors and approved by the holders of Common Stock when required by law, if such Common Stock would otherwise be covered by this subsection (d); (4) Common Stock issuable upon the exercise of rights or warrants issued to the holders of Common Stock; (5) Common Stock issued to shareholders of any person which merges into the Company in proportion to their stock holdings of such person immediately prior to such merger, upon such merger; (6) Common Stock issued in a bona fide public offering pursuant to a firm commitment underwriting; (7) Common Stock issued in a bona fide private placement through a placement agent which is a member firm of the National Association of Securities Dealers, Inc. to Persons that are not Affiliates (as defined in the Certificate of Designation) of the Company (except to the extent that any discount from the current market price attributable to restrictions on transferability of the Common Stock, as determined in good faith by the Board of Directors and described in a Board resolution which shall be filed with the Warrant Agent, shall exceed 20% of the then current market price); or 12 (8) Common Stock issued to Affiliates of the Company simultaneous with, and resulting in at least the same net proceeds per share of Common Stock to the Company as, an issuance referred to in paragraphs (6) or (7) of this Section 14(d). (e) Adjustment for Convertible Securities Issue. If the Company issues any securities convertible into or exchangeable for Common Stock (other than securities issued in transactions described in subsections (a)(4), (a)(5), (b) and (c) of this Section 14) for a consideration, per share of Common Stock initially deliverable upon conversion or exchange of such securities, less than the current market price per share on the date of issuance of such securities, the Exercise Price shall be adjusted in accordance with the following formula: P --- E' = E x O + M ---------- O + D where: E' = the adjusted Exercise Price. E = the then current Exercise Price. O = the number of shares of Common Stock outstanding immediately prior to the issuance of such securities. P = the aggregate consideration received for the issuance of such securities. M = the current market price per share on the date of issuance of such securities. D = the maximum number of shares of Common Stock deliverable upon conversion of or in exchange for such securities at the initial conversion or exchange rate. The adjustment pursuant to this subsection (e) shall be made successively whenever any such issuance is made, and shall become effective immediately after such issuance. If all of the Common Stock deliverable upon conversion or exchange of such securities has not been issued when such securities are no longer outstanding, then the Exercise Price shall promptly be readjusted to the Exercise Price which would then be in effect had the adjustment upon the issuance of such securities been made on the basis of the actual number of shares of Common Stock issued upon conversion or exchange of such securities. This subsection (e) does not apply to: (1) convertible securities issued to shareholders of any person which merges into the Company, or with a subsidiary of the Company, in proportion to their stock holdings of such person immediately prior to such merger, upon such merger; (2) convertible securities issued in a bona fide public offering pursuant to a firm commitment underwriting; 13 (3) convertible securities issued in a bona fide private placement through a placement agent which is a member firm of the National Association of Securities Dealers, Inc. (except to the extent that any discount from the current market price attributable to restrictions on transferability of Common Stock issuable upon conversion, as determined in good faith by the Board of Directors and described in a Board resolution which shall be filed with the Warrant Agent, shall exceed 20% of the then current market price); (4) convertible securities issued to Affiliates of the Company simultaneous with, and resulting in at least the same net proceeds per share of Common Stock to the Company as, an issuance referred to in paragraphs (2) or (3) of this Section 14(e); or (5) stock options issued to the Company's employees, officers or directors (other than to the Principal or (x) any immediate family member of the Principal or (y) 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 (x)) under bona fide employee benefit plans adopted by the Board of Directors and approved by the holders of Common Stock when required by law, if such stock options would otherwise be covered by this subsection (e). (f) Adjustment for Certain Cash Dividends. If the Company distributes to all holders of its Common Stock cash in an aggregate amount that, together with (i) the aggregate amount of any other distributions to all holders of Common Stock made exclusively in cash within the 12 months preceding the record date for such distribution and in respect of which no Exercise Price adjustment pursuant to subsection (c) or this subsection (f) has been made previously and (ii) the aggregate of any cash plus the fair market value (as determined in good faith by the Board of Directors and described in a Board resolution) as of such record date of consideration payable in respect of any tender offer by the Company or a subsidiary of the Company for all or any portion of Common Stock consummated within the 12 months preceding such record date and in respect of which no Exercise Price adjustment pursuant to subsection (g) of this Section has been made previously, exceeds 7.50% of the product of the current market price on such record date times the number of shares of Common Stock outstanding on such date, the Exercise Price shall be adjusted in accordance with the following formula: E' = E x M - C ----- M where: E' = the adjusted Exercise Price. E = the then current Exercise Price. M = the current market price per share of Common Stock on the record date. C = the amount of cash to be distributed applicable to one share of Common Stock. Notwithstanding the foregoing, if "C" in the above formula equals or exceeds "M" in the above formula, then "M" in the above formula shall be equal to the fair market value per share of the 14 Common Stock on the record date as determined in good faith by the Board of Directors and described in a Board resolution which shall be filed with the Warrant Agent. This subsection (f) does not apply to any cash that is distributed as part of a distribution referred to in subsection (c) of this Section or in connection with a transaction to which subsections (d) or (o) of this Section applies. (g) Adjustment for Tender Offer. If the Company or any subsidiary of the Company consummates a tender offer for all or any portion of Common Stock and purchases shares pursuant to such tender offer for an aggregate consideration having a fair market value (as determined in good faith by the Board of Directors and described in a Board resolution) as of the last time (the "Expiration Time") that tenders may be made pursuant to such tender offer (as it shall have been amended) that, together with (i) the aggregate of the cash plus the fair market value (as determined in good faith by the Board of Directors and described in a Board resolution) of the consideration paid in respect of any other tender offer by the Company or a subsidiary of the Company for all or any portion of Common Stock consummated within the 12 months preceding the Expiration Time and in respect of which no Exercise Price adjustment pursuant to this subsection (g) has been made previously and (ii) the aggregate amount of any distributions to all holders of Common Stock made exclusively in cash within the 12 months preceding the Expiration Time and in respect of which no Exercise Price adjustment pursuant to Subsection (c) of this Section has been made previously, exceeds 7.50% of the product of the current market price immediately prior to the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time, the Exercise Price shall be adjusted in accordance with the following formula: E' = E x (M x O) - F ----------- M x (O - N) where: E' = the adjusted Exercise Price. E = the then current Exercise Price. M = the current market price per share of Common Stock immediately prior to the Expiration Time. O = the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time. F = the fair market value of the aggregate consideration paid for all shares of Common Stock purchased pursuant to the tender offer. N = the number of shares of Common Stock accepted for payment in such tender offer. If the number of shares accepted for payment in such tender offer or the aggregate consideration payable therefor have not been finally determined by the opening of business on the day following the Expiration Time, the adjustment required by this subsection (g) shall, pending such final determination, be made based upon the preliminary announced results of such tender offer, and, after such final determination shall have been made, the adjustment required by this subsection (g) shall be 15 based upon the number of shares accepted for payment in such tender offer and the aggregate consideration payable therefor as so finally determined. Notwithstanding the foregoing, if "F" in the above formula equals or exceeds "(M x O)" in the above formula, then "M" in the above formula shall be equal to the fair market value per share of the Common Stock immediately prior to the Expiration Time as determined in good faith by the Board of Directors and described in a Board resolution which shall be filed with the Warrant Agent. The Company shall not and shall cause its subsidiaries not to allow the number of shares of Common Stock accepted for payment pursuant to any such tender offer to equal the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time. In no event shall any adjustment made pursuant to this subsection (g) be made which would increase the Exercise Price. (h) Current Market Price. In subsections (b), (c), (d), (e), (f) and (g) of this Section 14 and in Section 16 the current market price per share of Common Stock on any date is the average of the Quoted Prices of the Common Stock for 30 consecutive trading days commencing 45 trading days before the date in question. The "Quoted Price" of the Common Stock is the last reported sales price of the Common Stock as reported by the Nasdaq National Market or if the Common Stock is listed on a securities exchange, the last reported sales price of the Common Stock on such exchange which shall be for consolidated trading if applicable to such exchange, or if not so reported or listed, the last reported bid price of the Common Stock. In the absence of one or more such quotations, the Board of Directors shall determine the current market price on such basis as it in good faith considers appropriate. (i) Consideration Received. For purposes of any computation respecting consideration received pursuant to subsections (d), (e), (f) and (g) of this Section 14, the following shall apply: (1) in the case of the issuance of shares of Common Stock for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made for any commissions, discounts or other expenses incurred by the Company for any underwriting of the issue or otherwise in connection therewith; (2) in the case of the issuance of shares of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board of Directors (irrespective of the accounting treatment thereof), whose determination shall be conclusive, and described in a Board resolution which shall be filed with the Warrant Agent; and (3) in the case of the issuance of securities convertible into or exchangeable for shares of Common Stock, the aggregate consideration received therefor shall be deemed to be the consideration received by the Company for the issuance of such securities plus the additional minimum consideration, if any, to be received by the Company upon the conversion or exchange thereof (the consideration in each case to be determined in the same manner as provided in clauses (1) and (2) of this subsection). 16 (j) When De Minimis Adjustment May Be Deferred. No adjustment in the Exercise Price need be made unless the adjustment would require an increase or decrease of at least 1% in the Exercise Price. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 14 shall be made to the nearest cent or to the nearest 1/1000th of a share, as the case may be. (k) When No Adjustment Required. No adjustment need be made for a transaction referred to in subsections (a), (b), (c), (d) or (e) of this Section 14 if Warrant holders are to participate in the transaction on a basis and with notice that the Board of Directors determines to be fair and appropriate in light of the basis and notice on which holders of Common Stock participate in the transaction. No adjustment need be made for rights to purchase Common Stock pursuant to any of the Company's plan for reinvestment of dividends or interest. No adjustment need be made for a change in the par value, or from par value to no par value, or from no par value to par value, of the Common Stock. To the extent the Warrants become convertible into cash, no adjustment need be made thereafter as to the cash. Interest will not accrue on the cash. Notwithstanding any other provision of this Section 14, no adjustment to the Exercise Price shall reduce the Exercise Price below the then par value per share of the Common Stock, and any such purported adjustment shall instead reduce the Exercise Price to such par value. The Company hereby covenants not to take any action to increase the par value per share of the Common Stock. (l) Notice of Adjustment. Whenever the Exercise Price or the number of Warrants issuable upon exercise of each Warrant is adjusted, the Company shall provide the notices required by Section 17 hereof. (m) Voluntary Reduction. The Company from time to time may, as the Board of Directors deems appropriate, reduce the Exercise Price by any amount for any period of time if the period is at least 20 days and if the reduction is irrevocable during the period; provided, however, that in no event may the Exercise Price be less than the par value of a share of Common Stock. Whenever the Exercise Price is reduced, the Company shall mail to Warrant holders a notice of the reduction. The Company shall mail the notice at least 15 days before the date the reduced Exercise Price takes effect. The notice shall state the reduced Exercise Price and the period it will be in effect. A reduction of the Exercise Price pursuant to this Section 14(m), other than a reduction which the Company has irrevocably committed will be in effect for so long as any Warrants are 17 outstanding, does not change or adjust the Exercise Price otherwise in effect for purposes of subsections (a), (b), (c), (d), (e), (f) or (g) of this Section 14. (n) Notice of Certain Transactions. If: (1) The Company takes any action that would require an adjustment in the Exercise Price pursuant to subsections (a), (b), (c), (d), (e), (f) or (g) of this Section 14 and if the Company does not arrange for Warrant holders to participate pursuant to subsection (k) of this Section 14; (2) The Company takes any action that would require a supplemental Warrant Agreement pursuant to subsection (o) of this Section 14; or (3) there is a liquidation or dissolution of the Company, the Company shall mail to Warrant holders and the Warrant Agent a notice stating the proposed record date for a dividend or distribution or the proposed effective date of a subdivision, combination, reclassification, consolidation, merger, transfer, lease, liquidation or dissolution. The Company shall mail the notice at least 15 days before such date. Failure to mail the notice or any defect in it shall not affect the validity of the transaction. (o) Reorganization of the Company. (1) If the Company consolidates or merges with or into, or transfers or leases all or substantially all its assets to, any person, upon consummation of such transaction the Warrants shall automatically become exercisable for the kind and amount of securities, cash or other assets which the holder of a Warrant would have owned immediately after the consolidation, merger, transfer or lease if the holder had exercised the Warrant immediately before the record date (or, if none, the effective date) of the transaction. Concurrently with the consummation of such transaction, the corporation formed by or surviving any such consolidation or merger if other than the Company, or the person to which such sale or conveyance shall have been made (any such person, the "Successor Guarantor"), shall enter into a supplemental Warrant Agreement so providing and further providing for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided for in this Section 14. The Successor Guarantor shall mail to Warrant holders a notice describing the supplemental Warrant Agreement. If the issuer of securities deliverable upon exercise of Warrants under the supplemental Warrant Agreement is an affiliate of the formed, surviving, transferee or lessee corporation, that issuer shall join in the supplemental Warrant Agreement. (2) Notwithstanding paragraph (1) of this Section 14(o), in the case of any merger, reverse stock split, or other transaction in which the publicly held Common Stock shall be converted into the right to receive a consideration consisting solely of cash, (A) this Warrant Agreement and each Warrant shall terminate and (B) each holder of a Warrant, without having to take any action other than the surrendering of such Warrant to the Company, shall receive an amount equal to the amount (if any) by which the price per share payable to, or which would be received by, any public holder of Common Stock in connection with such transaction exceeds the Exercise Price effective at that time. 18 (3) If this subsection (o) applies, subsections (a), (b), (c), (d), (e), (f) and (g) of this Section 14 do not apply. (p) The Company Determination Final. Any determination that the Company or the Board of Directors must make pursuant to subsection (a), (c), (d), (e), (f), (g), (h), (i) or (k) of this Section 14 is conclusive. (q) Warrant Agent's Disclaimer. The Warrant Agent has no duty to determine when an adjustment under this Section 14 should be made, how it should be made or what it should be. The Warrant Agent has no duty to determine whether any provisions of a supplemental Warrant Agreement under subsection (o) of this Section 14 are correct. The Warrant Agent makes no representation as to the validity or value of any securities or assets issued upon exercise of Warrants. The Warrant Agent shall not be responsible for the Company's failure to comply with this Section 14. (r) When Issuance or Payment May Be Deferred. In any case in which this Section 14 shall require that an adjustment in the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event (i) issuing to the holder of any Warrant exercised after such record date the Warrant Shares and other capital stock of the Company, if any, issuable upon such exercise over and above the Warrant Shares and other capital stock of the Company, if any, issuable upon such exercise on the basis of the Exercise Price and (ii) paying to such holder any amount in cash in lieu of a fractional share pursuant to Section 16 hereof; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional Warrant Shares, other capital stock and cash upon the occurrence of the event requiring such adjustment. (s) Adjustment in Number of Shares. Upon each adjustment of the Exercise Price pursuant to this Section 14, each Warrant outstanding prior to the making of the adjustment in the Exercise Price shall thereafter evidence the right to receive upon payment of the adjusted Exercise Price that number of shares of Common Stock (calculated to the nearest thousandth) obtained from the following formula: N'= N x E --- E' where: N' = the adjusted number of Warrant Shares issuable upon exercise of a Warrant by payment of the adjusted Exercise Price. N = the number of Warrant Shares previously issuable upon exercise of a Warrant by payment of the Exercise Price prior to adjustment. E' = the adjusted Exercise Price. E = the Exercise Price prior to adjustment. 19 (t) Form of Warrants. Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon the exercise of the Warrants, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the Warrants initially issuable pursuant to this Agreement. SECTION 15. No Dilution or Impairment. (a) If any event shall occur as to which the provisions of Section 14 are not strictly applicable but the failure to make any adjustment would adversely affect the purchase rights represented by the Warrants in accordance with the essential intent and principles of such Section 14, then, in each such case, the Company shall appoint an investment banking firm of recognized national standing, or any other financial expert that does not (or whose directors, officers, employees, affiliates or stockholders do not) have a direct or material indirect financial interest in the Company or any of its subsidiaries, who has not been, and, at the time it is called upon to give independent financial advice to the Company, is not (and none of its directors, officers, employees, affiliates or stockholders are) a promoter, director or officer of the Company or any of its subsidiaries, which shall give their opinion upon the adjustment, if any, on a basis consistent with the essential intent and principles established in Section 14, necessary to preserve, without dilution, the purchase rights, represented by the Warrants. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the holders of the Warrants and shall make the adjustments described therein. (b) The Company will not, by amendment of its certificate of incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrants, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of the Warrants against dilution or other impairment. Without limiting the generality of the foregoing, the Company (1) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock on the exercise of the Warrants from time to time outstanding and (2) will not take any action which results in any adjustment of the Exercise Price if the total number of Warrant Shares issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of Common Stock then authorized by the Company's certificate of incorporation and available for the purposes of issue upon such exercise. A consolidation, merger, reorganization or transfer of assets involving the Company covered by Section 14(o) shall not be prohibited by or require any adjustment under this Section 15. SECTION 16. Fractional Interests. The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the same holder, the number of full Warrant Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 16, be issuable on the exercise of any Warrants (or specified portion thereof), the Company shall notify the Warrant Agent in writing of the amount to be paid in lieu of the fraction of a Warrant Share and concurrently pay or provide to the Warrant Agent for payment to the Warrant holder an amount in cash equal to the product of (i) such fraction of a Warrant Share and (ii) the difference of the current market price of a share of Common Stock over the Exercise Price. SECTION 17. Notices to Warrant Holders. Upon any adjustment of the Exercise Price or the number of Warrant Shares issuable upon the exercise of each Warrant pursuant to Section 14 hereof, the Company shall within 15 days thereafter (i) cause to be filed with the Warrant Agent a 20 certificate of a firm of independent public accountants of recognized standing selected by the Board of Directors (who may be the regular auditors of the Company) setting forth the Exercise Price after such adjustment and setting forth in reasonable detail the method of calculation and the facts upon which such calculations are based and setting forth the number of Warrant Shares (or portion thereof) issuable after such adjustment in the Exercise Price, upon exercise of a Warrant and payment of the adjusted Exercise Price, which certificate shall be conclusive evidence of the correctness of the matters set forth therein, and (ii) cause to be given to each of the registered holders of the Warrant Certificates at such registered holder's address appearing on the Warrant register written notice of such adjustments by first-class mail, postage prepaid. Where appropriate, such notice may be given in advance and included as a part of the notice required to be mailed under the other provisions of this Section 17. In case: (a) the Company shall authorize the issuance to all holders of shares of Common Stock of rights, options or warrants to subscribe for or purchase shares of Common Stock or of any other subscription rights or warrants; or (b) the Company shall authorize the distribution to all holders of shares of Common Stock of evidences of its indebtedness or assets (other than cash dividends or cash distributions payable out of consolidated earnings or earned surplus or dividends payable in shares of Common Stock or distributions referred to in subsection (a) of Section 14 hereof); or (c) of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance or transfer of the properties and assets of the Company substantially as an entirety, or of any reclassification or change of Common Stock issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or a tender offer or exchange offer for shares of Common Stock; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) a Change of Control (as defined in the Certificate of Designation) occurs; or (f) the Company proposes to take any action (other than actions of the character described in Section 14(a)) which would require an adjustment of the Exercise Price pursuant to Section 14; then the Company shall cause to be filed with the Warrant Agent and shall cause to be given to each of the registered holders of the Warrant Certificates at his address appearing on the Warrant register, at least 15 days (or 10 days in any case specified in clauses (a) or (b) above) prior to the applicable record date hereinafter specified, or promptly in the case of events for which there is no record date, by first-class mail, postage prepaid, a written notice stating (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such rights, options, warrants or distribution are to be determined, or (ii) the initial expiration date set forth in any tender offer or exchange offer for shares of Common Stock, or (iii) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective or consummated, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. The failure to give the notice 21 required by this Section 17 or any defect therein shall not affect the legality or validity of any distribution, right, option, warrant, consolidation, merger, conveyance, transfer, lease, dissolution, liquidation or winding up, or the vote upon any action. Nothing contained in this Agreement or in any of the Warrant Certificates shall be construed as conferring upon the holders thereof the right to vote or to consent or to receive notice as shareholders in respect of the meetings of shareholders or the election of Directors of the Company or any other matter, or any rights whatsoever as shareholders of the Company. SECTION 18. Merger, Consolidation or Change of Name of Warrant Agent. Any corporation into which the Warrant Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor warrant agent under the provisions of Section 21 hereof. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement, and in case at that time any of the Warrant Certificates shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent; and in case at that time any of the Warrant Certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor to the Warrant Agent; and in all such cases such Warrant Certificates shall have the full force and effect provided in the Warrant Certificates and in this Agreement. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent whose name has been changed may adopt the countersignature under its prior name, and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name, and in all such cases such Warrant Certificates shall have the full force and effect provided in the Warrant Certificates and in this Agreement. SECTION 19. Warrant Agent. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrants, by their acceptance thereof, shall be bound: (a) The statements contained herein and in the Warrant Certificates shall be taken as statements of the Company. The Warrant Agent assumes no responsibility for the correctness of any of the same except such as describe the Warrant Agent or action taken or to be taken by it. The Warrant Agent assumes no responsibility with respect to the distribution of the Warrant Certificates except as herein otherwise provided. (b) The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrant Certificates to be complied with by the Company. (c) The Warrant Agent may consult at any time with counsel satisfactory to it (who may be counsel for the Company) and the Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant Certificate in respect of any action 22 taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion or the advice of such counsel. (d) The Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant Certificate for any action taken in reliance on any Warrant Certificate, certificate of shares of Common Stock, notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. The Warrant Agent shall not be bound by any notice or demand, or any waiver, modification, termination or revision of this Agreement or any of the terms hereof, unless evidenced by a writing between the Company and the Warrant Agent. (e) The Company agrees to pay to the Warrant Agent reasonable compensation for all services rendered by the Warrant Agent in the execution of this Agreement and the performance of its responsibilities hereunder, to reimburse the Warrant Agent for all expenses, taxes (including withholding taxes) and governmental charges and other charges of any kind and nature incurred by the Warrant Agent in the execution, delivery and performance of its responsibilities under this Agreement and to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution, delivery and performance of its responsibilities under this Agreement except as a result of its gross negligence or bad faith. (f) The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expense unless the Company or one or more registered holders of Warrant Certificates shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred, but this provision shall not affect the power of the Warrant Agent to take such action as it may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrant Certificates or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent and any recovery of judgment shall be for the ratable benefit of the registered holders of the Warrants, as their respective rights or interests may appear. (g) Except as prohibited by law, the Warrant Agent, and any stockholder, director, officer or employee of the Warrant Agent, may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (h) The Warrant Agent shall act hereunder solely as agent for the Company, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own gross negligence or bad faith. (i) The Warrant Agent shall not at any time be under any duty or responsibility to any holder of any Warrant Certificate to make or cause to be made any 23 adjustment of the Exercise Price or number of the Warrant Shares or other securities or property deliverable as provided in this Agreement, or to determine whether any facts exist which may require any of such adjustments, or with respect to the nature or extent of any such adjustments, when made, or with respect to the method employed in making the same. The Warrant Agent shall not be accountable with respect to the validity or value or the kind or amount of any Warrant Shares or of any securities or property which may at any time be issued or delivered upon the exercise of any Warrant or with respect to whether any such Warrant Shares or other securities will when issued be validly issued and fully paid and nonassessable, and makes no representation with respect thereto. (j) In the absence of bad faith on its part, the Warrant Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Warrant Agent and conforming to the requirements of this Warrant Agreement. However, the Warrant Agent shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Agreement. (k) The Warrant Agent may rely and shall be fully protected in relying upon any document believed by it to be genuine and to have been signed or presented by the proper person. SECTION 20. Registration Rights. (a) The Company shall prepare and cause to be filed with the SEC pursuant to Rule 415 under the Securities Act (the "Shelf Registration") a shelf registration statement on the appropriate form (the "Registration Statement") relating to the offer and sale by the Company of the Warrant Shares to the holders of Warrants upon exercise of the Warrants and resales of the Warrant Shares by the holders thereof. (b) The Company shall use its reasonable best efforts to cause such Registration Statement to be declared effective by the SEC on or prior to the date of commencement of the Offering (as defined in the Underwriting Agreement). (c) The Company shall use its reasonable best efforts to keep the Registration Statement continuously effective under the Securities Act in order to permit the prospectus included therein to be lawfully delivered by the Company to the holders exercising the Warrants until 30 days after the Expiration Date or such shorter period that will terminate when all the Warrants have been exercised; provided that, except as provided below with respect to any Black Out Period (as defined below), the Company shall be deemed not to have used its best efforts to keep the Registration Statement effective during the requisite period if it voluntarily takes any action that would result in its not being able to offer and sell the Warrant Shares upon exercise of the Warrants during that period, unless such action is required by applicable law. Notwithstanding the foregoing, the Company shall not be required to amend or supplement the Registration Statement, any related prospectus or any document incorporated therein by reference, for a period (a "Black Out Period") not to exceed, for so long as this Agreement is in effect, an aggregate of 60 days in any calendar year, in the event that (i) an event occurs and is continuing as a result of which the Registration Statement, any related prospectus or any document incorporated therein by reference as then amended or supplemented would, in the Company's good faith judgment, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (ii)(A) the Company determines in its good faith judgment that the disclosure of such 24 event at such time would have a material adverse effect on the business, operations or prospects of the Company or (B) the disclosure otherwise relates to a material business transaction which has not yet been publicly disclosed; provided that no Black Out Period may be in effect during the six months prior to the Expiration Date. (d) The Company shall cause the Registration Statement and the related prospectus and any amendment or supplement thereto, as of the effective date of the Registration Statement, amendment or supplement, (i) to comply in all material respects with the applicable requirements of the Securities Act and the rules and regulations of the SEC and (ii) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (e) The Company shall give prompt written notice to the holders of the Warrants and the Warrant Agent of (1) the effectiveness of the Registration Statement or any post-effective amendment thereto, (2) the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation or threatening of any proceedings for that purpose, (3) the receipt by the Company or its legal counsel of any notification with respect to the suspension of the qualification of the Warrant Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (4) the happening of any event that requires the Company to make changes in the Registration Statement or the prospectus in order to make the statements therein not misleading and (5) the commencement and termination of any Black Out Period. (f) The Company shall use its reasonable best efforts to prevent the issuance or obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible time. (g) Upon the occurrence of any event contemplated by Section 20(e)(4) or (5) of this Agreement (subject to the last sentence of Section 20(c) of this Agreement) the Company shall promptly prepare a post-effective amendment to the Registration Statement or a supplement to the related prospectus or file any other required document so that, as thereafter delivered to holders of the Warrants, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and will contain the current information required by the Securities Act. (h) Not later than the effective date of the Registration Statement, the Company will provide a CUSIP number for the Warrant Shares and provide the Warrant Agent with printed certificates for the Warrant Shares. (i) The Company will comply with all rules and regulations of the SEC to the extent and so long as they are applicable to the Shelf Registration. (j) The Company shall register or qualify or cooperate with the holders in connection with the registration or qualification of the Warrant Shares for offer and sale by the Company upon exercise of the Warrants under the securities or blue sky laws of such states of the United States as any holder reasonably requests and do any and all other acts or things necessary or advisable to enable such offer and sale in such jurisdictions; provided that the Company shall not be required to (i) qualify to do business in any jurisdiction in which it is not then so qualified or (ii) take any action which would subject it to general service of process or to taxation in any jurisdiction in which it is not then so subject. 25 (k) The Company shall bear all expenses incurred by it in connection with the performance of its obligations under this Section 20. (l) The Company acknowledges and agrees that any remedy at law for breach of any provision of this Section 20 will be inadequate and that, in addition to any other remedies that the holder may have, the holders shall be entitled to the remedy of specific performance to ensure the Company performs its obligations under this Section 20. The election of any one or more remedies by the holders hereunder shall not constitute a waiver of the right to pursue other available remedies. SECTION 21. Change of Warrant Agent. If the Warrant Agent shall become incapable of acting as Warrant Agent or shall resign as provided below, the Company shall appoint a successor to such Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such incapacity by the Warrant Agent or by the registered holders of a majority of Warrants, then the registered holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Pending appointment of a successor to such Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent after the effective date of its resignation or after the date it becomes incapable of acting as Warrant Agent shall be carried out by the Company. After appointment, the successor to the Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed; but the former Warrant Agent shall, conditioned upon receiving a receipt therefore and a release from the Company of its obligations hereunder, deliver and transfer to the successor to the Warrant Agent any property at the time held by it hereunder and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the appointment of a successor to the Warrant Agent. The Warrant Agent may resign at any time and be discharged from the obligations hereby created by so notifying the Company in writing at least 30 days in advance of the proposed effective date of its resignation. If no successor Warrant Agent accepts the engagement hereunder by such time, the Company shall act as Warrant Agent and, at such time, the former Warrant Agent shall, conditioned upon receiving a receipt therefore and a release from the Company of its obligations hereunder, deliver and transfer to the Company any property at the time held by it hereunder and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. SECTION 22. Notices to the Company and Warrant Agent. Any notice or demand authorized by this Agreement to be given or made by the Warrant Agent or by the registered holder of any Warrant Certificate to or on the Company shall be sufficiently given or made when and if deposited in the mail, registered, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent), as follows: Pegasus Communications Corporation c/o Pegasus Communications Management Company Suite 454, 5 Radnor Corporate Center, 100 Matsonford Road, Radnor, Pennsylvania 19087 Telecopier No.: (610) 341-1835 Attention: Marshall W. Pagon 26 with a copy to: Drinker Biddle & Reath 1345 Chestnut Street, Suite 1100 Philadelphia, Pennsylvania 19107 Telecopier No. : (215) 988-2757 Attention: Michael B. Jordan, Esq. Any notice pursuant to this Agreement to be given by the Company or by the registered holder(s) of any Warrant Certificate to the Warrant Agent shall be sufficiently given when and if deposited in the mail, registered, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) to the Warrant Agent at the Warrant Agent Office as follows: First Union National Bank of North Carolina 230 S. Tryon Street Charlotte, NC 28288-1153 Telecopier No.: (704) 374-6114 Attention: Frances Bean, Vice President with a copy to: Silverman Coopersmith Hillman & Frimmer, P.C. Two Penn Center Plaza - Suite 910 Philadelphia, PA 19102 Telecopier No.: (215) 636-3999 Attention: Rick Frimmer, Esq. Notice may also be given by facsimile transmission (effective when receipt is acknowledged) or by overnight delivery service (effective the next business day). SECTION 23. Supplements and Amendments. The Company and the Warrant Agent may from time to time supplement or amend this Agreement without the consent of any holders of Warrant Certificates in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable and which shall not in any way materially adversely affect the interests of the holders of Warrant Certificates. Any amendment or supplement to this Agreement that has a material adverse effect on the interests of holders of the Warrants shall require the written consent of registered 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 a Warrant affected shall be required for any amendment pursuant to which the Exercise Price would be increased or the number of Warrant Shares purchasable upon exercise of Warrants would be decreased (other than in accordance with Section 14, 15 or 16 hereof). SECTION 24. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder, including, without limitation, any Successor Guarantor under Section 14(o) of this Agreement. 27 SECTION 25. Termination. This Agreement shall terminate at 5:00 p.m., New York, New York time on January 1, 2007. Notwithstanding the foregoing, this Agreement will terminate on such earlier date on which all outstanding Warrants have been exercised. SECTION 26. Governing Law; Jurisdiction. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the internal laws of said State. The parties hereto irrevocably consent to the jurisdiction of the courts of the State of New York and any federal court located in such state in connection with any action, suit or proceeding arising out of or relating to this Agreement. SECTION 27. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrant Agent and the registered holders of the Warrant Certificates any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent and the registered holders of the Warrant Certificates. SECTION 28. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. SECTION 29. Further Assurances. From time to time on and after the date hereof, the Company shall deliver or cause to be delivered to the Warrant Agent such further documents and instruments and shall do and cause to be done such further acts as the Warrant Agent shall reasonably request (it being understood that the Warrant Agent shall have no obligation to make such request) to carry out more effectively the provisions and purposes of this Agreement, to evidence compliance herewith or to assure itself that it is protected hereunder. [Signature Page Follows] 28 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Robert N. Verdecchio ----------------------------- Robert N. Verdecchio Chief Financial Officer FIRST UNION NATIONAL BANK By: /s/ Frances S. Beam ----------------------- Authorized Signatory EXHIBIT A Form of Initial Warrant Certificate [Face] EXERCISABLE ON OR AFTER THE SEPARATION DATE (AS DEFINED HEREIN). THE WARRANTS EVIDENCED BY THIS CERTIFICATE ARE NOT TRANSFERABLE SEPARATELY FROM THE COMPANY'S 12.75% SERIES A CUMULATIVE EXCHANGEABLE PREFERRED STOCK (THE "PREFERRED STOCK") ORIGINALLY SOLD AS A UNIT WITH SUCH WARRANTS UNTIL THE EARLIEST TO OCCUR OF (I) APRIL 3, 1997, (II) IN THE EVENT A CHANGE OF CONTROL (AS DEFINED IN THE CERTIFICATE OF DESIGNATION RELATING TO THE PREFERRED STOCK) OCCURS, THE DATE THE COMPANY MAILS NOTICE THEREOF AND (III) SUCH OTHER DATE AS MAY BE DESIGNATED BY CIBC WOOD GUNDY SECURITIES CORP. (THE "SEPARATION DATE"). THE CLASS A COMMON STOCK, PAR VALUE $0.01, OF THE COMPANY (THE "COMMON STOCK") FOR WHICH THIS WARRANT IS EXERCISABLE MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES ABSENT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM REGISTRATION REQUIREMENTS. ACCORDINGLY, NO WARRANT HOLDER SHALL BE ENTITLED TO EXERCISE SUCH HOLDER'S WARRANTS AT ANY TIME UNLESS, AT THE TIME OF EXERCISE, (I) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT RELATING TO THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT (THE "WARRANT SHARES") HAS BEEN FILED WITH, AND DECLARED EFFECTIVE BY, THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), AND NO STOP ORDER SUSPENDING THE EFFECTIVENESS OF SUCH REGISTRATION STATEMENT HAS BEEN ISSUED BY THE SEC OR (II) THE ISSUANCE OF THE WARRANT SHARES IS PERMITTED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. No. ___________ _________ Warrants Warrant Certificate Pegasus Communications Corporation This Warrant Certificate certifies that _________, or its registered assigns, is the registered holder of Warrants expiring January 1, 2007 (the "Warrants"), to purchase shares of the Class A Common Stock, par value $.01 (the "Common Stock"), of Pegasus Communications Corporation, a Delaware corporation (the "Company"). Each Warrant entitles the registered holder upon exercise at any time from 9:00 a.m. on the Separation Date referred to below until 5:00 p.m. New York, New York time on January 1, 2007, to receive from the Company 1.936 fully paid and nonassessable shares of Common Stock (the "Warrant Shares") at the initial exercise price (the "Exercise Price") of $15.00 per share (A) by tendering shares of Preferred Stock having an aggregate Liquidation Preference (as defined in the Certificate of Designation), plus, without duplication, accumulated and unpaid dividends, if any, 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 in the amount of the Exercise Price or (E) by any combination of shares of Preferred Stock, Warrants and cash or Exchange Notes, Warrants and cash, equal to the exercise price, and upon surrender of this Warrant Certificate and such A - 1 payment of the Exercise Price at the office or agency of the Warrant Agent (as hereinafter defined), but only subject to the conditions set forth herein and in the Warrant Agreement referred to below. The Exercise Price and number of Warrant Shares issuable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events set forth in the warrant agreement (the "Warrant Agreement"), dated as of January 27, 1997, between the Company and First Union National Bank, as warrant agent (the "Warrant Agent"). All capitalized terms not defined herein shall have the meanings assigned to such terms in the Warrant Agreement. No Warrant may be exercised before the Separation Date. No Warrant may be exercised after 5:00 p.m., New York, New York Time on January 1, 2007 and to the extent not exercised by such time such Warrants shall become void. Reference is hereby made to the further provisions of this Warrant Certificate set forth on the following pages hereof and such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Warrant Certificate shall not be valid unless countersigned by the Warrant Agent. This Warrant Certificate shall be governed and construed in accordance with the internal laws of the State of New York. A - 2 IN WITNESS WHEREOF, Pegasus Communications Corporation has caused this Warrant Certificate to be signed by its Chief Financial Officer and by its Assistant Secretary and has caused a facsimile of its corporate seal to be affixed hereunto or imprinted hereon. Dated: January 27, 1997 Pegasus Communications Corporation By:_______________________________ Robert N. Verdecchio Chief Financial Officer By:_______________________________ Ted S. Lodge Assistant Secretary (seal) Countersigned: First Union National Bank, as Warrant Agent By:__________________________ Authorized Signatory A - 3 Form of Warrant Certificate [Reverse] [Unless and until it is exchanged in whole or in part for Warrants in definitive form, this Warrant may not be transferred except as a whole by the depositary to a nominee of the depositary or by a nominee of the depositary to the depositary or another nominee of the depositary or by the depositary or any such nominee to a successor depositary or a nominee of such successor depositary. The Depository Trust Company ("DTC") (55 Water Street, New York, New York) shall act as the depositary until a successor shall be appointed by the Company and the Warrant Agent. Unless this certificate is presented by an authorized representative of DTC to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.]1 The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring January 1, 2007 entitling the holder upon exercise to receive shares of Common Stock of the Company, and are issued or to be issued pursuant to the Warrant Agreement duly executed and delivered by the Company to the Warrant Agent, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Warrant Agent, the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. Warrants may be exercised at any time from 9:00 a.m. on or after the earliest to occur of (i) April 3, 1997, (ii) in the event a Change of Control (as defined in the Certificate of Designation) occurs, the date the Company mails notice thereof to holders of the Preferred Stock or the Exchange Notes, as applicable, and (iii) such other date as may be designated by CIBC Wood Gundy Securities Corp. (the "Separation Date") and until 5:00 p.m., New York, New York time on January 1, 2007. The holder of Warrants evidenced by this Warrant Certificate may exercise them by surrendering this Warrant Certificate, with the form of election to purchase set forth hereon properly completed and executed, together with payment of the Exercise Price (A) by tendering shares of Preferred Stock having an aggregate Liquidation Preference (as defined in the Certificate of Designation), plus, without duplication, accumulated and unpaid dividends, if any, at the time of tender equal to the Exercise Price, (B) by tendering Exchange Notes having an aggregate principal amount, plus accrued and unpaid interest, 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 in the amount of the Exercise Price or (E) by any combination of shares of Preferred Stock, Warrants and cash or Exchange Notes, Warrants and cash, equal to the Exercise Price, at the office of the Warrant Agent. In the event that upon any exercise of Warrants evidenced hereby the number of Warrants exercised shall be less than the total number of Warrants evidenced hereby, there shall be issued to the holder hereof or his assignee a new Warrant Certificate evidencing the number of Warrants not exercised. No adjustment shall be made for any dividends on any Common Stock issuable upon exercise of this Warrant. - ------------------- 1. This paragraph is to be included only if the Warrant is in global form. A - 4 The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price set forth on the face hereof may, subject to certain conditions, be adjusted. If the Exercise Price is adjusted, the Warrant Agreement provides that the number of shares of Common Stock issuable upon the exercise of each Warrant shall be adjusted. No fractions of a share of Common Stock will be issued upon the exercise of any Warrant, but the Company will pay the cash value thereof determined as provided in the Warrant Agreement. The Warrant Agreement provides that the Company shall be bound by certain registration obligations with respect to the Common Stock issuable upon exercise of the Warrants, as set forth in the Warrant Agreement. Warrant Certificates, when surrendered at the office of the Warrant Agent by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged, in the manner and subject to the limitations provided in the Warrant Agreement, but without payment of any service charge, for another Warrant Certificate or Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants. Upon due presentation for registration of transfer of this Warrant Certificate at the office of the Warrant Agent, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company and the Warrant Agent may deem and treat the registered holder(s) thereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, of any distribution to the holder(s) hereof, and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Neither the Warrants nor this Warrant Certificate entitles any holder hereof to any rights of a stockholder of the Company. A - 5 Form of Election to Purchase (To Be Executed Upon Exercise Of Warrant) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to receive __________ shares of Common Stock and herewith (check item) tenders payment for such shares to the order of Pegasus Communications Corporation in the amount of $_______ (the "Purchase Price") in accordance with the terms hereof. [ ] Shares of Preferred Stock having an aggregate Liquidation Preference, plus, without duplication, accumulated and unpaid dividends, equal to the Purchase Price. [ ] Exchange Notes having an aggregate principal amount, plus accrued and unpaid interest, equal to the Purchase Price. [ ] Warrants having a fair market value (as defined in the Warrant Agreement) equal to the Purchase Price. [ ] Cash or certified or official bank check payable to the order of the Company in an amount equal to the Purchase Price. [ ] (A) Shares of Preferred Stock, plus, without duplication, accumulated and unpaid dividends, (B) Warrants having a fair market value (as defined in the Warrant Agreement) and (C) cash, in an aggregate amount equal to the Purchase Price. [ ] (A) Exchange Notes, plus accumulated and unpaid interest, (B) Warrants having a fair market value (as defined in the Warrant Agreement) and (C) cash, in an aggregate amount equal to the Purchase Price. The undersigned requests that a certificate for such shares be registered in the name of , whose address is____________________________________ ______________________________________ and that such shares be delivered to whose address is ________________________________. If said number of shares is less than all of the shares of Common Stock purchasable hereunder, the undersigned requests that a new Warrant Certificate representing the remaining balance of such shares be registered in the name of _____________________, whose address is __________________, and that such Warrant Certificate be delivered to ________________, whose address is _____________________. Date: ____________________ Your Signature:________________________________ (Sign exactly as your name appears on the face of this Warrant) Signature Guarantee: A - 6 SCHEDULE OF EXCHANGES OF GLOBAL WARRANTS2 The following exchanges of a part of this Global Warrant for definitive Warrants have been made:
Number of Warrants Amount of decrease Amount of increase in in this Global in Number of Number of Warrants Warrant following Signature of Warrants in this in this Global such decrease or authorized officer of Date of Exchange Global Warrant Warrant increase Warrant Agent - --------------------------------------------------------------------------------------------------------------------------------
- ---------------------- 2. This is to be included only if the Warrant is in global form. A - 7 EX-23.2 5 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report dated February 21, 1997 except as to Note 15 for which the date is March 10, 1997, on our audits of the consolidated 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 Consolidated Financial Information." /s/ Coopers & Lybrand, L.L.P. - -------------------------------- Coopers & Lybrand L.L.P. Philadelphia, Pennsylvania March 18, 1997 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. /s/ Coopers & Lybrand, L.L.P. - ------------------------------- Coopers & Lybrand L.L.P. Jacksonville, Florida March 18, 1997 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. /s/ Coopers & Lybrand L.L.P. - --------------------------------- Coopers & Lybrand L.L.P. San Juan, Puerto Rico March 18, 1997 EX-23.3 6 EXHIBIT 23.3 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 and related Prospectus of Pegasus Communications Corporation for the registration of its Class A Common Stock. /s/ Ernst & Young LLP - ------------------------------- ERNST & YOUNG LLP Pittsburgh, Pennsylvania March 18, 1997 EX-23.4 7 EXHIBIT 23.4 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 March 18, 1997 EX-27 8 FINANCIAL DATA SCHEDULE
5 This Schedule contains summary financial information extracted from balance sheets and income statements of Pegasus Communications Corporation and is qualified in its entirety by reference to such financial statements. 0001015629 Pegasus Communications Corporation 1 U. S. Dollars YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 8,582,369 0 9,398,545 243,000 697,957 21,867,297 47,770,924 23,655,786 173,680,046 15,437,095 81,587,778 0 0 92,451 40,233,747 173,680,046 47,928,632 47,928,632 0 45,378,355 (61,072) 0 (12,454,891) (9,843,543) (120,000) (9,723,543) 0 (250,603) 0 (9,974,146) (1.60) (1.60)
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